Derivative Financial Instruments

6 Months Ended

Jun. 30, 2011

Derivative Financial Instruments [Abstract]

DERIVATIVE FINANCIAL INSTRUMENTS

(7) DERIVATIVE FINANCIAL INSTRUMENTS

     Derivative instruments are accounted for at fair value. The accounting for changes in the fair value of a derivative depends on the intended use and designation of the derivative instrument. For a derivative instrument designated as a fair value hedge, the gain or loss on the derivative is recognized in earnings in the period of change in fair value together with the offsetting gain or loss on the hedged item. For a derivative instrument designated as a cash flow hedge, the effective portion of the derivative’s gain or loss is initially reported as a component of Other Comprehensive Income (“OCI”) and is subsequently recognized in earnings when the hedged exposure affects earnings. The ineffective portion of the gain or loss is recognized in current period results of operations. Gains and losses from changes in fair values of derivatives that are not designated as hedges for accounting purposes are recognized in current period results of operations.

     Using derivative instruments means assuming counterparty credit risk. Counterparty credit risk relates to the loss we could incur if a counterparty were to default on a derivative contract. We deal with investment grade counterparties and monitor the overall credit risk and exposure to individual counterparties. We do not anticipate nonperformance by any counterparties. The amount of counterparty credit exposure is the unrealized gains, if any, on such derivative contracts. We do not require, nor do we post, collateral or security on such contracts.

Hedging Strategy

     We are exposed to certain risks relating to our ongoing business operations. As a result, we enter into derivative transactions to manage certain of these exposures that arise in the normal course of business. The primary risks managed by using derivative instruments are foreign currency exchange rate and interest rate risks. Fluctuations in these rates and prices can affect our operating results and financial condition. We manage the exposure to these market risks through operating and financing activities and through the use of derivative financial instruments. We do not enter into derivative financial instruments for trading or speculative purposes.

     We periodically enter into foreign currency forward contracts which are designated as fair value hedges and are highly effective, as the terms of the forward contracts are the same as the purchase commitments under the related contract. Any gains or losses resulting from changes in fair value are recognized in income with an offsetting adjustment to income for changes in the fair value of the hedged item such that there is no net impact in the consolidated statements of operations. As of June 30, 2011, we had no open foreign currency forward contracts.

     We entered into an interest rate swap with the objective of reducing our exposure to interest rate risk for $100.0 million of our $200.0 million Facility Agreement variable-rate debt. At June 30, 2011, our interest rate derivative instrument has an outstanding notional amount of $100.0 million and is designated as a cash flow hedge. The terms of this swap, including reset dates and floating rate indices, match those of our underlying variable-rate debt and no ineffectiveness has been recorded.

Early Hedge Settlement

     During December 2009, we cash settled certain interest rate swap contracts prior to their scheduled settlement dates. As a result of these transactions, we paid $6.4 million in cash, which represented the fair value of these contracts at the date of settlement. Unrecognized losses of $1.0 million are recorded as of June 30, 2011 in accumulated OCI related to these interest rate swap contracts. This balance will be amortized into interest expense through December 31, 2012 based on forecasted payments as of the settlement date.

     The following table quantifies the fair values, on a gross basis, of all our derivative contracts and identifies the balance sheet location as of June 30, 2011 and December 31, 2010 (dollars in thousands):

Asset Derivatives

Liability Derivatives

June 30, 2011

December 31,2010

June 30, 2011

December 31, 2010

Balance

Balance

Balance

Balance

Derivatives designed as

Sheet

Fair

Sheet

Fair

Sheet

Fair

Sheet

Fair

hedging instruments

Location

Value

Location

Value

Location

Value

Location

Value

Interest rate swaps

—

—

Cash flow hedges

$

5,552

Cash flow hedges

$

6,807

$

—

$

—

$

5,552

$

6,807

     The following tables quantify the amount of gain or loss recognized during the three and six months ended June 30, and identify the consolidated statement of operations location:

							Location of Gain or (Loss)	Amount of Gain or (Loss)
	Amount of Gain or (Loss)						Reclassified from	Reclassified from
Derivatives in cash flow	Recognized in OCI on						Accumulated OCI into	Accumulated OCI into
hedging relationships	Derivative						Income	Income
	Six Months Ended June 30,							Six Months Ended June 30,
	2011			2010				2011			2010
	(in thousands)							(in thousands)
Interest rate contracts	$	(676	)	$	(3,202	)	Interest expense	$	(1,540	)	$	(1,317	)
	Three Months Ended June 30,							Three Months Ended June 30,
	2011			2010				2011			2010
	(in thousands)							(in thousands)
Interest rate contracts	$	(578	)	$	(1,552	)	Interest expense		$(787	)		$(657	)