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Derivatives and Other Financial Instruments and Hedging Activities
 3 Months Ended
Mar. 31, 2012
Derivatives and Other Financial Instruments and Hedging Activities [Abstract]  
Derivatives and Other Financial Instruments and Hedging Activities

Note 14. Derivatives and Other Financial Instruments and Hedging Activities

The Company is exposed to certain risks arising from business operations and economic factors. The Company uses derivative financial instruments to manage market risks and reduce its exposure to fluctuations in interest rates and foreign currencies. All hedging transactions are authorized and executed under clearly defined policies and procedures, which prohibit the use of financial instruments for trading purposes.

On February 8, 2010, the Company entered into a series of foreign exchange forward contracts (put options and call options) with a third-party financial institution (the “2010 FX Forward Contracts”) that provided for a floor and ceiling price on payments related to the Company’s new medical line under construction in Suzhou, China (the “New Suzhou Medical Line”). The objective of the 2010 FX Forward Contracts was to hedge the changes in fair value of a firm commitment to purchase equipment attributable to changes in foreign currency rates between the Euro and U.S. dollar through the date of acceptance of the equipment. The original notional amount of the 2010 FX Forward Contracts, which were set to expire on various dates through fiscal 2012, was €25.6 million, which would have resulted in a U.S. dollar equivalent range of $34.6 million to $36.2 million. Cash settlements under the 2010 FX Forward Contracts coincided with the payment dates on the equipment purchase contract.

In August 2010, the Company executed an amendment to the underlying equipment purchase contract which resulted in a €0.7 million reduction of one of the scheduled payments. Accordingly, the Company modified the notional amounts of the 2010 FX Forward Contracts which coincided with the date of the amended payment to maintain the synchronization of the 2010 FX Forward Contracts with the underlying contract payments, as amended. As a result, the 2010 FX Forward Contracts remained highly effective and continued to qualify for hedge accounting treatment, in accordance with ASC 815. The revised notional amount of €24.9 million resulted in a U.S. dollar equivalent range of $33.6 million to $35.1 million.

On January 19, 2011, the Company terminated and settled the 2010 FX Forward Contracts for $0.5 million and entered into new foreign exchange forward contracts with a third party institution (the “January 2011 FX Forward Contracts”) to purchase fixed amounts of Euros on specified future dates, coinciding with the payment amounts and dates of the New Suzhou Medical Line equipment purchase contract. Through the date of terminating the 2010 FX Forward Contracts, the Company continued to recognize the asset associated with the unrecognized firm commitment and the liability associated with the 2010 FX Forward Contracts. The impact of the 2010 FX Forward Contracts on Foreign currency and other loss, net in the Consolidated Statements of Operations was a gain of $0.03 million for the one month ended January 28, 2011. The objective of the January 2011 FX Forward Contracts is to minimize foreign currency exchange risk on certain future cash commitments related to the New Suzhou Medical Line.

On July 8, 2011, the Company completed commercial acceptance of the New Suzhou Medical Line. The Company recorded a liability for the remaining balance due. In accordance with ASC 815, the hedge designation of the January 2011 FX Forward Contracts was removed at that time. Through the date the hedge was undesignated and the liability recorded, the Company continued to recognize the asset associated with the unrecognized firm commitment and the associated liability. The Company carried the January 2011 FX Forward Contracts at fair value and recorded gains and losses in Foreign currency and other loss, net in the Consolidated Statements of Operations.

The Company remitted the final payment related to the New Suzhou Medical Line equipment purchase contract on March 23, 2012. The January 2011 FX Forward Contracts expired simultaneously with that final payment. The impact of the January 2011 FX Forward Contracts on Foreign currency and other loss, net was a loss of $0.1 million for the three months ended March 31, 2012.

On June 30, 2011, the Company entered into a series of foreign exchange forward contracts with a third-party institution (the “June 2011 FX Forward Contracts”) to purchase fixed amounts of Euros on specified future dates, coinciding with the payment amounts and dates of the equipment purchase agreement for the Company’s new hygiene line under construction in Suzhou, China (the “New China Hygiene Line”). The objective of the June 2011 FX Forward Contracts is to minimize foreign currency exchange risk on certain future cash commitments related to the New China Hygiene Line.

In January 2012, the Company executed an amendment to the underlying equipment purchase contract which resulted in a change to the payment schedule but did not change the total payment amount of the equipment purchase contract. Accordingly, the Company modified the notional amounts of the June 2011 FX Forward Contracts which coincided with the dates of the amended payments to maintain the synchronization of the June 2011 FX Forward Contracts with the underlying contract payments, as amended. As a result, the June 2011 FX Forward Contracts remain highly effective and continue to qualify for hedge accounting treatment in accordance with ASC 815. As of March 31, 2012, the remaining notional amount of the June 2011 FX Forward Contracts was €25.3 million, which is the equivalent of $36.4 million.

The Company had historically used interest-rate derivative instruments to manage its exposure related to movements in interest rates with respect to its debt instruments. On February 12, 2009, to mitigate its interest rate exposure as required by the Company’s predecessor credit facility, the Company entered into the 2009 Interest Rate Swap which, at the time of entering into the agreement, effectively converted the variable LIBOR-based interest payments associated with $240.0 million of the Term Loan to fixed amounts at a LIBOR rate of 1.96%. The 2009 Interest Rate Swap became effective on June 30, 2009 and was due to expire on June 30, 2011. The 2009 Interest Rate Swap had replaced an expiring interest rate swap agreement. Cash settlements were to be made monthly and the floating rate was to be reset monthly, coinciding with the reset dates of the Company’s predecessor credit facility. Concurrent with the Acquisition, the Company settled the 2009 Interest Rate Swap liability, since the Company repaid its predecessor credit facility.

In accordance with ASC 815, the Company designated the 2009 Interest Rate Swap as a cash flow hedge of the variability of interest payments with changes in fair value of the 2009 Interest Rate Swap recorded in Accumulated other comprehensive income in the Consolidated Balance Sheets. As of September 17, 2009, in conjunction with the amendment and in accordance with ASC 815-30, the Company concluded that 92% (which represents the approximate percentage of the Tranche 1 Term Loan debt considered extinguished by such amendment of the predecessor credit facility) of the 2009 Interest Rate Swap was no longer effective; accordingly, 92% of $3.9 million related to the 2009 Interest Rate Swap and included in Accumulated Other Comprehensive Income was frozen and was to be reclassified to earnings as future interest payments were made throughout the term of the 2009 Interest Rate Swap. This portion of the notional amount no longer met the criteria for cash flow hedge accounting treatment in accordance with ASC 815.

The impact of the accounting associated with the 2009 Interest Rate Swap on Interest expense, net in the Consolidated Statements of Operations was an increase of $0.2 million for the one month period ended January 28, 2011.

The following table summarizes the aggregate notional amount and estimated fair value of the Company’s derivative instruments as of March 31, 2012 and December 31, 2011 (in thousands):

 

                                 
    As of March 31, 2011     As of December 31, 2011  
    Notional     Fair Value     Notional     Fair Value  

Foreign currency hedges:

                                

Foreign exchange contracts (1)

   $ 36,390     $ (2,581 )    $ 40,265     $ (3,807 ) 

Foreign exchange contracts — undesignated (2)

     —         —         3,680       (147 ) 
   

 

 

    

 

 

    

 

 

    

 

 

  

Net value

   $ 36,390     $ (2,581 )    $ 43,945     $ (3,954 ) 
   

 

 

    

 

 

    

 

 

    

 

 

  

 

(1) As disclosed above, the Company entered into the June 2011 FX Forward Contracts on June 30, 2011.
(2)

As disclosed above, the Company settled the 2010 FX Forward Contracts on January 19, 2011 and simultaneously entered into the January 2011 FX Forward Contracts. The January 2011 FX Forward Contracts were undesignated as a hedge on July 8, 2011 due to commercial acceptance of the New Suzhou Medical Line and subsequent recording of the remaining liability. The January 2011 FX Forward Contracts expired in March 2012 in conjunction with the final payment of the equipment purchase contract for the New Suzhou Medical Line.

The following tables summarize the effect on income by derivative instruments in cash flow hedging relationships for the following periods (in thousands):

 

                             
    Amount of Gain (Loss) Recognized in Accumulated
OCI on Derivative (Effective Portion)		  
        Successor                      Predecessor           
    Three
Months
Ended
March 31,
2012		     Two
Months
Ended
April  2,
2011		          One Month
Ended
January 28,
2011		  

Derivatives in Cash Flow Hedging Relationship

                            

Derivatives designated as hedging instruments: Interest rate contracts

     N/A       N/A         $ (3 ) 

 

                             
    Amount of Gain (Loss) Reclassified from
Accumulated OCI into Income (1)		  
    Successor          Predecessor  
    Three
Months
Ended
March 31,
2012		     Two
Months
Ended
April 2,
2011		          One Month
Ended
January 28,
2011		  

Derivatives in Cash Flow Hedging Relationship

                            

Derivatives not designated as hedging instruments

     N/A       N/A         $ (187 ) 

 

(1) Amount of Gain (Loss) (Effective Portion) Reclassified from Accumulated Other Comprehensive Income into Income is located in Interest Expense, net in the Consolidated Statements of Operations.

See Note 15, “Fair Value of Financial Instruments and Non-Financial Assets and Liabilities” for additional disclosures related to the Company’s derivative instruments.