XML 150 R27.htm IDEA: XBRL DOCUMENT v2.4.0.6
Financial Derivatives and Hedging Activities
 12 Months Ended
Dec. 31, 2012
Financial Derivatives and Hedging Activities [Abstract]  
FINANCIAL DERIVATIVES AND HEDGING ACTIVITIES
18. FINANCIAL DERIVATIVES AND HEDGING ACTIVITIES

As part of our overall risk management practices, we enter into financial derivatives primarily designed to either i) hedge foreign currency risks associated with forecasted transactions – “cash flow hedges”; or ii) mitigate the impact that changes in currency exchange rates have on intercompany financing transactions and foreign currency denominated receivables and payables – “foreign currency hedges.”

Derivatives Designated as Hedging Instruments – Cash Flow Hedges    In 2011, we began to use currency forward contracts as cash flow hedges to manage our exposure to fluctuations in the currency exchange rates on certain forecasted production costs expected to be incurred over a maximum of twelve months. Currency forward contracts involve fixing the EUR-USD exchange rate or USD-CAD for delivery of a specified amount of foreign currency on a specified date.

We designate certain currency forward contracts as cash flow hedges of forecasted raw material purchases or other production costs with exposure to changes in foreign currency exchange rates. The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges of foreign exchange risk is deferred as a component of accumulated other comprehensive income in the accompanying consolidated balance sheet and is subsequently reclassified into cost of products sold in the period that inventory produced using the hedged transaction affects earnings. The ineffective portion of the change in fair value of the derivative is recognized directly to earnings and reflected in the accompanying consolidated statement of income as non-operating income (expense) under the caption “Other-net.”

We had the following outstanding derivatives that were used to hedge foreign exchange risks associated with forecasted transactions and designated as hedging instruments:

 

                 

In thousands

     2012       2011  

Derivative

     Buy Notional  

Sell / Buy

                

Euro / U.S. dollar

     27,003       22,730  

U.S. dollar / Canadian dollar

     12,369       11,019  

These contracts have maturities of twelve months or less.

Derivatives Not Designated as Hedging Instruments – Foreign Currency Hedges    We also enter into forward foreign exchange contracts to mitigate the impact changes in currency exchange rates have on balance sheet monetary assets and liabilities. None of these contracts are designated as hedges for financial accounting purposes and, accordingly, changes in value of the foreign exchange forward contracts and in the offsetting underlying on-balance-sheet transactions are reflected in the accompanying statement of operations under the caption “Other – net.”

 

                 

In thousands

     2012       2011  

Derivative

     Sell Notional  

Sell / Buy

                

Euro / U.S. dollar

     13,000       25,500  

Euro / British Pound

     4,000       –  

Canadian dollar / U.S. dollar

     2,000       –  

U.S. dollar / Euro

     2,000          

Philippine peso / U.S. dollar

     –       150,000  

These contracts have maturities of one month from the date originally entered into.

Fair Value Measurements

The following table summarizes the fair values of derivative instruments as of December 31 for the year indicated and the line items in the accompanying consolidated balance sheet where the instruments are recorded:

 

                                 

In thousands

     2012       2011       2012       2011  

Balance sheet caption

    
 		 Prepaid and Other
Current Assets		   
  		    
 		 Other
Current Liabilities		   
  

Designated as hedging:

                                

Forward foreign currency exchange contracts

   $ 107       $1,520       $751       –  

Not designated as hedging:

                                

Forward foreign currency exchange contracts

   $ 159       $338       $16     $ 15  

The amounts set forth in the table above represent the net asset or liability giving effect to rights of offset with each counterparty.

The following table summarizes the amount of income or loss from derivative instruments recognized in our results of operations for the periods indicated and the line items in the accompanying consolidated statements of income where the results are recorded:

 

                         

In thousands

     2012       2011       2010  

Designated as hedging:

                        

Forward foreign currency exchange contracts:

                        

Effective portion – cost of products sold

   $ 2,183     $ 174     $ –  

Ineffective portion – other – net

     311       165       –  

Not designated as hedging:

                        

Forward foreign currency exchange contracts:

                        

Other – net

   $ (696 )    $ (686 )    $ (1,047 ) 

The impact of activity not designated as hedging was substantially all offset by the remeasurement of the underlying on-balance sheet item.

The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are described in Note 2.

The fair values of the foreign exchange forward contracts are considered to be Level 2. Foreign currency forward contracts are valued using foreign currency forward and interest rate curves. The fair value of each contract is determined by comparing the contract rate to the forward rate and discounting to present value. Contracts in a gain position are recorded in the consolidated balance sheet under the caption “Prepaid and other current assets” and the value of contracts in a loss position is recorded under the caption “Other current liabilities.”

A rollforward of fair value amounts recorded as a component of accumulated other comprehensive income is as follows:

 

                 

In thousands

     2012       2011  

Balance at Jan. 1

   $ 1,649     $ –  

Deferred (loss) gains on cash flow hedges

     (65 )      1,823  

Reclassified to earnings

     (2,183 )      (174 ) 

Balance at Dec. 31

   $ (599 )    $ 1,649  

We expect substantially all of the amounts recorded as a component of accumulated other comprehensive income will be realized in results of operations within the next twelve months and the amount ultimately recognized will vary depending on actual market rates.

Credit risk related to derivative activity arises in the event a counterparty fails to meet its obligations to us. This exposure is generally limited to the amounts, if any, by which the counterparty’s obligations exceed our obligation to them. Our policy is to enter into contracts only with financial institutions which meet certain minimum credit ratings.