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Derivative Instruments And Hedging Activities
 12 Months Ended
Dec. 31, 2011
Derivative Instruments And Hedging Activities [Abstract]  
Derivative Instruments And Hedging Activities

NOTE 8—DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

The Company uses certain financial derivatives to mitigate its exposure to volatility in foreign currency exchange rates and interest rates. The Company uses these derivative instruments to hedge exposures in the ordinary course of business and does not invest in derivative instruments for speculative purposes.

Foreign currency forward contracts are utilized at times to hedge the foreign currency exposure on sales made in the UK in British Sterling. The Company's UK sales are denominated in British Sterling, while its purchases of inventory from the Company are paid in US dollars. These contracts are not designated as hedging instruments and accordingly changes in their fair value are recognized in selling, general and administrative expense in the consolidated statement of operations. Interest rate swap agreements are utilized to reduce the impact of changes in interest rates on certain debt. These agreements were designated as cash flow hedges and, therefore, changes in the fair value of the swap are recorded in accumulated other comprehensive loss.

In February 2009, the Company entered into a series of 10 monthly forward contracts that began on March 31, 2009, whereby the Company paid a bank 130,000 British Sterling and the bank paid the Company $214,000 each month. This series of contracts ended on December 31, 2009. No foreign exchange forward contracts were outstanding during 2011 and 2010.

In June 2006, the Company entered into a forward starting interest rate swap agreement with Citizens which commenced on June 29, 2007 to hedge the LIBOR-based Citizens Owatonna real estate loan. The notional amount of the swap amortizes based on the same amortization schedule as the Citizens Loan Agreement and the hedged item (one-month LIBOR) is the same as the basis for the interest rate on the loan. The swap effectively converts the rate from a floating rate based on LIBOR to a fixed rate which prior to April 1, 2009 equaled 6.95%, from April 1, 2009 to June 30, 2009 equaled 8.00% and from June 30, 2009 to March 15, 2012 equaled 8.25% or 8.75% based on a performance grid. From March 15, 2012, the fixed rate equals 8.25%. The swap and interest payments on the debt settle monthly. The real estate loan and the swap both mature on July 2, 2014. There was no initial cost of the interest rate swap. The Company designates the interest rate swap as a hedging instrument and, accordingly, the changes in the fair value of this swap are recorded as a component of accumulated other comprehensive loss.

In November 2007, the Company entered into a forward starting interest rate swap agreement with Wells Fargo, which commenced on March 3, 2008, intended to hedge the initial LIBOR-based Wells Fargo term loan. The notional amount of the swap amortized based on the same amortization schedule as the initial Wells Fargo term loan and the hedged item (one-month LIBOR) was the same as the basis for the interest rate on the loan. The swap effectively converted the rate from a floating rate based on LIBOR to a fixed rate which prior to April 1, 2009 equaled 5.76% or 6.01% based on a performance grid, from April 1, 2009 to June 30, 2009 equaled 6.81% and after June 30, 2009 equaled 8.06%. The Company determined the interest rate swap qualified as a derivative hedging instrument and, accordingly, changes in the fair value of this swap were recorded as a component of accumulated other comprehensive loss. The interest rate swap was terminated in June 2010 in connection with the prepayment of the Wells Fargo term loans. There was no initial cost of the interest rate swap, and upon termination the Company paid $71,000 in settlement of the interest rate swap.

The following table presents the fair values of derivatives included within the consolidated balance sheets:

 

     Asset Derivatives      Liability Derivatives
     Fair Value             Fair Value       
     December 31,
2011		      December 31,
2010		      Balance
Sheet
Location		      December 31,
2011		      December 31,
2010		      Balance
Sheet
Location
Derivatives designated as hedging instruments                  

Interest rate swap agreement

    $ —       $ —       $ —       $ 1,307,000      $ 1,527,000      Other
Liabilities

The following table presents the amounts affecting the consolidated statements of operations and accumulated other comprehensive loss for the years ended December 31, 2011, 2010, and 2009, respectively.

 

Derivatives in

Cash Flow Hedging

Relationship

    Amount of Gain (Loss) Recognized in
Other Comprehensive
Loss, net of tax
Year Ended December 31,		  
   2011      2010     2009  

Interest rate swap agreements

    $ 189,000      $ (53,000 )   $ 453,000  

 

Derivatives in

Cash Flow Hedging

Relationship

    Amount of Gain (Loss) Reclassified from
Accumulated Other Comprehensive
Loss Into Income
Year Ended December 31,		  
   2011     2010     2009  

Interest rate swap agreements

    $ (308,000 )   $ (760,000 )   $ (811,000 )

 

Derivatives Not Designated as

Hedging Instruments

    Amount of Gain (Loss) Recognized in
Income on Derivatives
Year Ended December 31,		    

Location of Gain (Loss)

Recognized in Income on

Derivatives

   2011            2010            2009    

Foreign currency forward contracts

    $ —         $ —         $ (462,000 )   Selling, general and administrative
expenses

See Note 9—Fair Value of Financial Instruments for a description of how the above financial instruments are valued.

The Company is exposed to credit-related losses in the event of non-performance by counterparties to these financial instruments. The counterparties to all derivative transactions are major financial institutions with investment grade credit ratings, and although no assurances can be given, the Company does not expect any of the counterparties to fail to meet its obligations. The credit exposure related to these financial instruments is represented by the fair value of contracts with a positive fair value at the reporting date. Therefore, the Company had no exposure to its counterparties as of December 31, 2011.

 

For the cash flow hedges referred to above, the amounts in accumulated other comprehensive loss are reclassified into earnings as the underlying hedged item affects earnings. The amount expected to be reclassified into pre-tax earnings in the next 12 months is $281,000. The timing of actual amounts reclassified into earnings is dependent on future movement in interest rates.