Financial Instruments

6 Months Ended

Jun. 30, 2011

Financial Instruments [Abstract]

FINANCIAL INSTRUMENTS

NOTE 7 — FINANCIAL INSTRUMENTS

The fair value of assets and liabilities is determined by reference to the estimated price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). The relevant FASB standard outlines a valuation framework and creates a fair value hierarchy in order to increase the consistency and comparability of fair value measurements and related disclosures.

Financial assets and liabilities are measured using inputs from the three levels of the fair value hierarchy. The three levels are as follows:

Level 1—Inputs are unadjusted quoted prices in active markets for identical assets or liabilities. The Company currently has no Level 1 assets or liabilities that are measured at a fair value on a recurring basis.

Level 2—Inputs include quoted prices for similar assets and 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 (i.e., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs). Most of the Company’s assets and liabilities fall within Level 2 and include foreign exchange contracts (when applicable) and an interest rate swap agreement. The fair value of foreign currency and interest rate swap agreements are based on third-party market maker valuation models that discount cash flows resulting from the differential between the contract rate and the market-based forward rate or curve capturing volatility and establishing intrinsic and carrying values.

Level 3—Unobservable inputs that reflect the Company’s assessment about the assumptions that market participants would use in pricing the asset or liability. The Company currently has no Level 3 assets or liabilities that are measured at a fair value on a recurring basis.

This hierarchy requires the Company to minimize the use of unobservable inputs and to use observable market data, if available, when determining fair value. Observable inputs are based on market data obtained from independent sources, while unobservable inputs are based on the Company’s market assumptions. Unobservable inputs require significant management judgment or estimation. In some cases, the inputs used to measure an asset or liability may fall into different levels of the fair value hierarchy. In those instances, the fair value measurement is required to be classified using the lowest level of input that is significant to the fair value measurement. In accordance with the applicable standard, the Company is not permitted to adjust quoted market prices in an active market.

In accordance with the fair value hierarchy described above, the following table shows the fair value of the Company’s current interest rate swap agreement as of June 30, 2011 and December 31, 2010 (in thousands):

				Fair Value Measurements as of June 30, 2011
	June 30, 2011			Level 1		Level 2			Level 3
Interest Rate Swap Agreement	$	(56	)	$	—	$	(56	)	$	—

				Fair Value Measurements as of December 31, 2010
	December 31, 2010			Level 1		Level 2			Level 3
Interest Rate Swap Agreement	$	(87	)	$	—	$	(87	)	$	—

The fair values of the Company’s interest rate swap agreement of $56,000 and $87,000 at June 30, 2011 and December 31, 2010, respectively, are included in the Company’s accrued expenses on the balance sheet for the relevant period. Changes between the cost of such agreement and its fair value resulted in unrealized gains of $15,000 and $31,000 for the three and six months ended June 30, 2011, respectively, which were recorded as a component of comprehensive (loss). An unrealized gain of $16,000 for a previous interest swap agreement was recorded as a component of comprehensive income, for the three and six months ended June 30, 2010.

Cash and cash equivalents, trade accounts receivable, inventory, income tax receivable, trade accounts payable, accrued expenses and short-term debt (prior to the amendment and restatement described in Note 13) are reflected in the consolidated balance sheets at carrying value, which approximates fair value due to the short-term nature of these instruments.

The carrying value of the Company’s term loan borrowings approximates fair value because interest rates under the term loan borrowings are variable, based on prevailing market rates.

There were no material changes to the Company’s valuation techniques during the six months ended June 30, 2011 compared to those used in prior periods.

Derivative Instruments

The Company was required by its lenders (until the execution of the amendment and restatement of the Credit Agreement as of August 8, 2011) to maintain in effect interest rate swap agreements that protect against potential fluctuations in interest rates with respect to a minimum of 50% of the outstanding amount of the $80.0 million Term Loan (such swap agreement has not been terminated even though it is no longer required by the New Credit Agreement). The Company’s objective is to offset the variability of cash flows in the interest payments on a portion of the total outstanding variable rate debt. The Company applies hedge accounting based upon the criteria established by accounting guidance for derivative instruments and hedging activities, including designation of its derivatives as fair value hedges or cash flow hedges and assessment of hedge effectiveness. The Company records its derivatives in its consolidated balance sheets at fair value. The Company does not use derivative instruments for trading purposes.

Cash Flow Hedges

To comply with a requirement in the Credit Agreement (until the execution of the amendment and restatement of the Credit Agreement as of August 8, 2011) to offset variability in cash flows related to the interest rate payments on the Term Loan, the Company used an interest rate swap designated as a cash flow hedge. The interest rate swap converted the variable rate on a portion of the Term Loan to a specified fixed interest rate by requiring payment of a fixed rate of interest in exchange for the receipt of a variable rate of interest at the LIBOR U.S. dollar three month index rate. The duration of the contract is less than twelve months.

The interest rate swap is recorded at fair value on the Company’s consolidated balance sheets. Accumulated other comprehensive income reflects the difference between the overall change in fair value of the interest rate swap since inception of the hedge and the amount of ineffectiveness reclassified into earnings.

The Company assesses hedge effectiveness both at inception of the hedge and at regular intervals at least quarterly throughout the life of the derivative. These assessments determine whether derivatives designated as qualifying hedges continue to be highly effective in offsetting changes in the cash flows of hedged transactions. The Company measures hedge ineffectiveness by comparing the cumulative change in cash flows of the hedge contract with the cumulative change in cash flows of the hedged transaction. The Company recognizes any ineffective portion of the hedge in its Consolidated Statement of Operations as a component of Other, net. The impact of hedge ineffectiveness on earnings was not significant during the three and six months ended June 30, 2011. Each period, the hedging relationship will be evaluated to determine whether it is expected that the hedging relationship will continue to be highly effective based on the updated analysis. In addition, the Company will consider the likelihood of the counterparty’s compliance with the contractual terms of the hedging derivative that could require the counterparty to make payments (counterparty default risk).

During the six months ended June 30, 2011, the Company did not discontinue any cash flow hedges. However, although the interest rate swap remains in effect, the Company has discontinued hedge accounting thereon as of the date of execution of the New Credit Agreement as of August 8, 2011 (described in Note 13), after which all changes in fair value of the interest rate swap will be recorded directly in earnings.

As of June 30, 2011, an unrealized net loss of $56,000 for the Company’s current interest rate swap agreement was recorded as a component of accumulated other comprehensive income. Of this amount, $54,000 is expected to be reclassified into earnings following execution of the New Credit Agreement.

Non-Qualifying Derivative Instruments

A previous interest rate swap contract, utilized to offset exposure of the Company’s Term Loan to interest rate risk, (as required by the Credit Agreement), terminated on April 30, 2010. This contract converted the variable rate on a portion of the Term Loan to a specified fixed interest rate by requiring payment of a fixed rate of interest in exchange for the receipt of a variable rate of interest at the LIBOR USD three month index rate. This contract was not designated as a hedge and was adjusted to fair value at regular intervals, with any resulting gains or losses recorded immediately in earnings.

Changes between cost and fair value of this previous interest rate swap resulted in income of $170,000 and $678,000 for the three and six months ended June 30, 2010, respectively, and such amount is included in interest expense in the unaudited consolidated statements of operations for such period.