Financial Derivatives and Hedging Activities

9 Months Ended

Sep. 30, 2011

Financial Derivatives and Hedging Activities [Abstract]

FINANCIAL DERIVATIVES AND HEDGING ACTIVITIES

14. 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 June 2011, we began to use currency forward contracts as cash flow hedges to manage our exposure to fluctuations in the EUR-USD exchange rate on certain forecasted raw material purchases expected to be made over a maximum of twelve months. Currency forward contracts involve fixing the EUR-USD exchange rate 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 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	Sept. 30, 2011		Dec 31, 2010
Derivative	Buy Notional
Sell / Buy
Euro / U.S. dollar		13,234		—

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	Sept. 30, 2011		Dec. 31, 2010
Derivative	Sell Notional
Sell / Buy
Euro / U.S. dollar	€	36,000	€	57,000
Euro / British Pound		—		3,000
Philippine peso / U.S. dollar		PHP247,000		PHP247,000

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 the periods indicated and the line items in the accompanying consolidated balance sheet where the instruments are recorded:

In thousands	Sept. 30, 2011		Dec. 31, 2010		Sept. 30, 2011			Dec. 31, 2010
Balance sheet caption		Prepaid and Other Current Assets				Other Current Liabilities
Designated as hedging:
Forward foreign currency exchange contracts	$	922	$	—	$	—		$	—
Not designated as hedging:
Forward foreign currency exchange contracts		417		—		(136	)		(581	)

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 income statement where the results are recorded:

	Three months ended September 30					Nine months ended September 30
In thousands	2011		2010			2011			2010
Designated as hedging:
Forward foreign currency exchange contracts:
Effective portion – cost of products sold	$	26	$	—		$	26		$	—
Ineffective portion – other – net		106		—			107			—
Not designated as hedging:
Forward foreign currency exchange contracts:
Other – net		3,366		(9,486	)		(2,476	)		(5,524	)

The impact of activity not designated as hedging was substantially all offset by the remeasurement of the underlying on-balance sheet item. However, the amounts reported for 2010 include a $3.4 million loss on a series of forward foreign currency contracts to hedge the Concert acquisition’s Canadian dollar purchase price recorded in the accompanying consolidated statement of income as non-operating income (expense) under the caption “Other-net.”

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 below:

Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, including quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates); and inputs that are derived principally from or corroborated by observable market data by correlation or other means.

Level 3 - Inputs that are both significant to the fair value measurement and unobservable.

The fair values of the foreign exchange forward contracts are considered to be Level 2. Foreign currency forward contracts are valued using readily available 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, pre-tax, recorded as a component of accumulated other comprehensive income is as follows:

In thousands	2011			2010
Balance at January 1,	$	—		$	—
Deferred gains on cash flow hedges	$	975			—
Reclassified to earnings		(26	)		—
Balance at September 30,	$	949		$	—

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 will vary depending on 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.