Derivative Instruments and Hedging Strategies

12 Months Ended

Sep. 30, 2013

Derivative Instruments And Hedging Strategies [Abstract]

Derivative Instruments and Hedging Strategies

21. Derivative Instruments and Hedging Strategies

Our operations are exposed to market risks from changes in foreign currency exchange rates and interest rates. In the normal course of business, these risks are managed through a variety of strategies, including the use of derivatives.

Interest Rate Risk

The Company is exposed to interest rate risk associated with fluctuations in the interest rates on its variable interest rate debt. In order to manage this risk, the Company enters into interest rate swap agreements, when appropriate, based upon market conditions.

Foreign Currency Exposure

Although the U.S. Dollar is Sirona's reporting currency, it conducts its business in many currencies, and its functional currencies vary depending on the country of operation, which exposes the Company to market risk associated with foreign currency exchange rate movements. The Company's policy generally is to hedge major foreign currency transaction exposure through foreign exchange forward contracts.

Cash Flow Hedges

Interest Rate

The Company uses interest rate swaps to convert a portion of its debt's variable interest rate to a fixed interest rate. Interest rate swaps have been established for 100% of the interest for the Facility A Term Loan under the New Senior Facilities Agreement until November 2016. The interest rate swaps fix the LIBOR element of interest payable on 100% of the principal amount of the Facility A Term Loan for defined three month interest periods over the entire term of the loan. The defined interest rates fixed for each three month interest period range from 1.270% to 1.285%. Settlement of the swaps is required on a quarterly basis. These swaps are designated as hedging instruments under ASC 815. The Company enters into interest rate swap contracts infrequently as they are only used to manage interest rate risk on long-term debt instruments and not for speculative purposes.

Under the Prior Senior Facilities Agreement, interest rate swaps were established for 66.6% of the interest until March 2010. These swaps expired on March 31, 2010 and were not renewed. The interest rate swaps fixed the LIBOR or EURIBOR element of interest payable on 66.7% of the principal amount of the loans for defined twelve and thirteen month interest periods over the lifetime of the swaps, respectively. The defined interest rates fixed for each twelve or thirteen month interest period ranged from 3.50% to 5.24%. Settlement of the swaps was required on a quarterly basis. These swaps were considered to be economic hedges and not designated as hedging instruments under ASC 815.

Foreign Currency

The Euro is the functional currency for many of Sirona's subsidiaries, including its primary sales and manufacturing operations in Germany. During the periods under review, exchange rates fluctuated significantly, thereby impacting Sirona's financial results. In order to hedge portions of the transactional exposure to fluctuations in exchange rates, based on forecasted and firmly committed cash flows, Sirona enters into foreign currency forward (different from functional currency) contracts (currently: USD, AUD, and JPY). These forward foreign currency contracts are intended to reduce short-term effects of changes in exchange rates. The Company enters into forward contracts that are considered to be economic hedges but which arenot considered hedging instruments under ASC 815. As of September 30, 2013 and 2012, these contracts had notional amounts totaling $ 38.1 million and $ 34.3, respectively. These agreements are relatively short-term (generally six months).

The fair value carrying amount of the Company's derivative instruments at September 30, 2013 is described in Note 22 Fair Value Measurements.

The following tables summarize the impact of gains and losses from the fair value changes of the Company's derivative instruments reported in our consolidated statement of income for the fiscal years ended September 30, 2013 and 2012:

Derivatives Designated as Cash Flow Hedging
		Year ended September 30, 2013		Year ended September 30, 2012		Year ended September 30, 2011
		Amount of (Gain)/Loss Recognized in Accumulated Other Comprehensive Income		Amount of (Gain)/Loss Recognized in Accumulated Other Comprehensive Income		Amount of (Gain)/Loss Recognized in Accumulated Other Comprehensive Income
		$'000s
Interest rate swap contracts	$	(970)	$	2,096	$	-

			Year ended September 30, 2013		Year ended September 30, 2012		Year ended September 30, 2011
	Location of (Gain)/Loss Recognized in Income on Derivative		Ineffective portion Recognized in Income		Ineffective portion Recognized in Income		Ineffective portion Recognized in Income
			$'000s
Interest rate swap contracts	(Gain)/loss on derivative instruments, net	$	-	$	2	$	-

Derivatives Not Designated as Hedging
			Year ended September 30, 2013		Year ended September 30, 2012		Year ended September 30, 2011
	Location of (Gain)/Loss Recognized in Income on Derivative		Amount of (Gain)/Loss Recognized in Income on Derivative		Amount of (Gain)/Loss Recognized in Income on Derivative		Amount of (Gain)/Loss Recognized in Income on Derivative
			$'000s
Foreign exchange contracts	(Gain)/loss on derivative instruments, net		(421)		(1,963)		3,302
Total		$	(421)	$	(1,963)	$	3,302