Derivatives

9 Months Ended

Sep. 30, 2011

Derivatives [Abstract]

Derivatives

Derivatives—Derivatives and Hedging, ASC 815, requires companies to recognize all derivative instruments in the consolidated balance sheet as either assets or liabilities at fair value. The accounting for changes in fair value of a derivative is dependent upon whether or not the derivative has been designated and qualifies for hedge accounting treatment and the type of hedging relationship. For derivatives designated and qualifying as hedging instruments, the Company must designate the hedging instrument, based upon the exposure being hedged, as a fair value hedge, cash flow hedge, or a hedge of a net investment in a foreign operation.

Cash Flow Hedging Strategy

The Company uses derivative instruments in an attempt to manage its exposure to commodity price risk, foreign currency exchange risk and interest rate risk. Foreign exchange contracts are used to manage the price risk associated with forecasted sales denominated in foreign currencies and the price risk associated with forecasted purchases of inventory over the next twelve months. Interest rate swaps are, at times, utilized to manage interest rate risk associated with the Company's fixed and floating-rate borrowings.

The Company recognizes its derivative instruments as assets or liabilities in the consolidated balance sheet measured at fair value. A majority of the Company's derivative instruments are designated and qualify as cash flow hedges. Accordingly, the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. The remaining gain or loss on the derivative instrument in excess of the cumulative change in the fair value of the hedged item, if any, is recognized in current earnings during the period of change.

During the first nine months of 2011, the Company entered into interest rate swap agreements to effectively convert a portion of floating rate revolving credit facility debt to fixed rate debt to avoid the risk of changes in market interest rates. Specifically, interest rate swap agreements for notional amounts of $18,000,000 and $22,000,000 through September 2013, $20,000,000 and $25,000,000 through May 2013 and $15,000,000 through February 2013 were entered into that fix the LIBOR component of the interest rate on that portion of the revolving credit facility debt at rates of 0.625%, 0.46%, 1.08%, 0.73% and 1.05%, respectively, for effective aggregate rates of 2.375%, 2.21%, 2.83%, 2.48% and 2.80%, respectively. The realized gains and or losses on interest rate swaps are reflected in interest expense on the consolidated statement of earnings. The Company did not recognize any ineffectiveness during the three or nine months ended September 30, 2011 related to interest rates swap agreements. The Company was not a party to any interest rate swap agreements during 2010.

To protect against increases/decreases in forecasted foreign currency cash flows resulting from inventory purchases/sales over the next year, the Company utilizes foreign currency forward contracts to hedge portions of its forecasted purchases/sales denominated in foreign currencies. The gains and losses are included in cost of products sold and selling, general and administrative expenses on the consolidated statement of earnings. If it is later determined that a hedged forecasted transaction is unlikely to occur, any gains or losses on the forward contracts associated with the forecasted transactions that are no longer probable of occurring would be reclassified from other comprehensive income into earnings. The Company does not expect any material amount of hedge ineffectiveness related to forward contract cash flow hedges during the next twelve months.

The Company has historically not recognized any material amount of ineffectiveness related to forward contract cash flow hedges because the Company generally limits it hedges to between 60% and 90% of total forecasted transactions for a given entity's exposure to currency rate changes and the transactions hedged are recurring in nature. Furthermore, the majority of the hedged transactions are related to intercompany sales and purchases for which settlement occurs on a specific day each month. Forward contracts with a total notional amount in USD of $50,813,000 and $139,418,000 matured during the three and nine months ended September 30, 2011, respectively, compared to forward contracts with a total notional amount in USD of $42,210,000 and $124,292,000 which matured during the three and nine months ended September 30, 2010, respectively.

Foreign exchange forward contracts qualifying and designated for hedge accounting treatment were as follows (in thousands USD):

	September 30, 2011					December 31, 2010
	Notional Amount		Unrealized Gain (Loss)			Notional Amount		Unrealized Gain (Loss)
USD / AUD	$	768	$	(39	)	$	3,072	$	(223	)
USD / CAD		8,552		(1	)		32,974		(14	)
USD / CNY		4,062		74			0		0
USD / EUR		8,286		(538	)		32,419		927
USD / GBP		1,053		(30	)		4,212		86
USD / NZD		4,644		106			9,577		202
USD / SEK		2,604		9			10,395		95
USD / MXP		6,857		(417	)		0		0
EUR / AUD		329		(8	)		0		0
EUR / CHF		1,248		(148	)		8,768		54
EUR / GBP		6,394		177			18,068		(577	)
EUR / SEK		2,721		54			8,045		92
EUR / NOK		1,062		(22	)		0		0
EUR / NZD		2,079		80			2,630		5
GBP / CHF		465		33			770		(3	)
GBP / SEK		576		23			2,014		(43	)
GBP / DKK		337		11			1,016		(27	)
CHF / SEK		115		(13	)		6,937		(3	)
DKK / CHF		143		(17	)		514		1
DKK / NOK		446		(10	)		0		0
DKK / SEK		2,072		32			1,465		18
NOK / SEK		183		(5	)		0		0
	$	54,996	$	(649	)	$	142,876	$	590

Fair Value Hedging Strategy

In 2011 and 2010, the Company did not utilize any derivatives designated as fair value hedges. However, the Company has in the past utilized fair value hedges in the form of forward contracts to manage the foreign exchange risk associated with certain firm commitments and has entered into interest rate swaps to effectively convert fixed-rate debt to floating-rate debt in an attempt to avoid paying higher than market interest rates. For derivative instruments designated and qualifying as fair value hedges, the gain or loss on the derivative instrument as well as the offsetting gain or loss on the hedged item associated with the hedged risk are recognized in the same line item associated with the hedged item in earnings.

Derivatives Not Qualifying or Designated for Hedge Accounting Treatment

The Company utilizes foreign currency forward or option contracts that do not qualify for hedge accounting treatment in an attempt to manage the risk associated with the conversion of earnings in foreign currencies into U.S. Dollars. While these derivative instruments do not qualify for hedge accounting treatment in accordance with ASC 815, these derivatives do provide the Company with a means to manage the risk associated with currency translation. These instruments are recorded at fair value in the consolidated balance sheet and any gains or losses are recorded as part of earnings in the current period. An immaterial gain was recorded by the Company for the nine months ended September 30, 2011, related to these derivatives not qualifying for hedge accounting treatment, while no such derivatives existed for the three and nine months ended September 30, 2010.

The Company also utilizes foreign currency forward contracts that are not designated as hedges in accordance with ASC 815 although they could qualify for hedge accounting treatment. These contracts are entered into to eliminate the risk associated with the settlement of short-term intercompany trading receivables and payables between Invacare Corporation and its foreign subsidiaries. The currency forward contracts are entered into at the same time as the intercompany receivables or payables are created so that upon settlement, the gain/loss on the settlement is offset by the gain/loss on the foreign currency forward contract. No material net gain or loss was realized by the Company for the three or nine month periods ended September 30, 2011 and 2010, respectively, related to these forward contracts and the associated short-term intercompany trading receivables and payables.

Foreign exchange forward contracts not qualifying or designated for hedge accounting treatment entered into and outstanding as of September 30, 2011 and 2010 were as follows (in thousands USD):

	September 30, 2011					September 30, 2010
	Notional Amount		Gain (Loss)			Notional Amount		Gain (Loss)
CAD / USD	$	0	$	0		$	10,414	$	281
CHF / USD		915		2			0		0
CHF / GBP		0		0			0		0
NZD / USD		0		0			13,403		18
NOK / USD		6,252		(262	)		1,327		35
SEK / USD		0		0			13,380		426
DKK / USD		0		0			4,233		161
DKK / NOK		74		(2	)		0		0
EUR / GBP		0		0			839		(59	)
EUR / SEK		9		0			72		(5	)
EUR / CAD		26,500		37			0		0
EUR / USD		0		0			16,948		789
EUR / NOK		118		(3	)		0		0
	$	33,868	$	(228	)	$	60,616	$	1,646

The fair values of the Company's derivative instruments were as follows (in thousands):

	September 30, 2011					December 31, 2010
	Assets		Liabilities			Assets		Liabilities
Derivatives designated as hedging instruments under ASC 815
Foreign currency forward contracts	$	900	$	(1,549	)	$	2,518	$	(1,928	)
Interest rate swap contracts		0		(533	)		0		0
Derivatives not designated as hedging instruments under ASC 815
Foreign currency forward contracts		199		(427	)		366		(1	)
Total derivatives	$	1,099	$	(2,509	)	$	2,884	$	(1,929	)

The fair values of the Company's foreign currency forward assets and liabilities and interest rate swaps are included in Other Current Assets and Accrued Expenses, respectively in the Consolidated Balance Sheets.

The effect of derivative instruments on the Statement of Earnings and Other Comprehensive Income (OCI) was as follows (in thousands):

Derivatives in ASC 815 cash flow hedge relationships	Amount of Gain (Loss) Recognized in  OCI on Derivatives (Effective Portion)			Amount of Gain (Loss)  Reclassified from Accumulated OCI into Income (Effective Portion)			Amount of Gain (Loss) Recognized in Income on Derivatives (Ineffective Portion and Amount Excluded from Effectiveness Testing)
Quarter ended September 30, 2011:
Foreign currency forward contracts	$	(354	)	$	(104	)	$	0
Interest rate swap contracts		(117	)		0			0
	$	(471	)	$	(104	)	$	0
Nine months ended September 30, 2011:
Foreign currency forward contracts	$	(1,192	)	$	(47	)	$	3
Interest rate swap contracts		(533	)		0			0
	$	(1,725	)	$	(47	)	$	3
Quarter ended September 30, 2010:
Foreign currency forward contracts	$	(2,429	)	$	1,065		$	(29	)
Nine months ended September 30, 2010:
Foreign currency forward contracts	$	(1,091	)	$	1,844		$	(68	)

Derivatives not designated as hedging instruments under ASC 815	Amount of Gain (Loss) Recognized in Income on Derivatives
Quarter ended September 30, 2011:
Foreign currency forward contracts	$	(814	)
Nine months ended September 30, 2011:
Foreign currency forward contracts	$	(228	)
Quarter ended September 30, 2010:
Foreign currency forward contracts	$	1,901
Nine months ended September 30, 2010:
Foreign currency forward contracts	$	1,389

The gains or losses recognized as the result of the settlement of cash flow hedge foreign currency forward contracts are recognized in net sales for hedges of inventory sales or cost of product sold for hedges of inventory purchases. For the three and nine months ended September 30, 2011, net sales were increased by $1,212,000 and $2,466,000, respectively, and cost of product sold was increased by $1,316,000 and $2,513,000 resulting in net realized losses of $104,000 and $47,000, respectively. For the three and nine months ended September 30, 2010, net sales were increased by $187,000 and $734,000, respectively, and cost of product sold was decreased by $878,000 and $1,110,000 resulting in net realized gains of $1,065,000 and $1,844,000, respectively. As the result of swap agreements outstanding in 2011, losses of $135,000 and $253,000 were recorded for the three and nine months ended September 30, 2011 which were recorded in interest expense. No swap agreements were outstanding in 2010.

Losses of $814,000 and $228,000 were recognized in selling, general and administrative (SG&A) expenses for the three and nine months ended September 30, 2011, respectively, compared to gains of $1,901,000 and $1,389,000 for the three and nine months ended September 30, 2010 on foreign currency forward contracts not designated as hedging instruments, which were substantially offset by foreign currency gains/losses also recorded in SG&A expenses on the intercompany trade payables for which the derivatives were entered into to offset. In addition, gains of $0 and $3,000 were recognized for the three and nine months ended September 30, 2011, respectively, compared to losses of $29,000 and $68,000 for the three and nine months ended September 30, 2010, respectively, related to derivatives no longer qualifying for hedge accounting treatment as the forecasted transactions hedged by those derivatives were no longer probable of occurring and as a result, the hedging relationship was ineffective.