FINANCIAL INSTRUMENTS

12 Months Ended

Dec. 31, 2012

NOTE E – FINANCIAL INSTRUMENTS

Interest Rate Swaps

We are exposed to certain risks relating to our ongoing business operations. Prior to June 1, 2012 when our interest rate swaps expired, we managed our interest rate risk using interest rate swaps associated with outstanding borrowings under our credit agreement as our interest rates are floating rates based on LIBOR. Our interest rate swaps were intended to convert a portion of our floating rate debt to a fixed rate. We do not use interest rate swaps for speculative or trading purposes. At December 31, 2012, we held no interest rate swaps or other derivative financial instruments. Our interest rate swaps were recorded as either assets or liabilities at fair value on our consolidated balance sheets. We entered into interest rate swaps that were designed to hedge our interest rate risk but are not designated as “hedging instruments”, as defined under guidance issued by the Financial Accounting Standards Board (“FASB”). Changes in the fair value of these instruments were recognized as adjustments to interest expense in our consolidated statements of comprehensive earnings.

A roll forward of the notional value of our interest rate swaps for the two years ended December 31, 2012 is as follows (in thousands):

Balance, December 31, 2010	$	11,000
Matured contracts		(3,333	)
Balance, December 31, 2011	$	7,667
Matured contracts		(7,667	)
Balance, December 31, 2012	$	—

The location and fair value of our interest rate swaps in our consolidated balance sheets were as follows (in thousands):

			December 31,
Type	Maturity	Balance Sheet Location	2012		2011
Interest rate swaps	June 2012	Other current liabilities	$	—	$	57

The following table includes information about gains and losses recognized on our interest rate swaps in our consolidated statements of comprehensive earnings (in thousands):

									Location of
	Year Ended December 31,								(Gain) Loss
	2012			2011				2010	Recognized in Income
Periodic settlements	$	60		$	145		$	192	Interest expense
Change in fair value	$	(57	)	$	(130	)	$	107	Interest expense

Cash, Cash Equivalents and Marketable Securities

The carrying value of our cash and cash equivalents approximates fair value due to the relatively short period to maturity of the instruments. Marketable securities, which consisted primarily of high-credit quality corporate and municipal obligations, were classified as available-for-sale and were reported at fair value based upon quoted market prices with unrealized gains or losses excluded from earnings and included in other comprehensive earnings (loss), net of applicable taxes. The cost of marketable securities sold is determined using the specific identification method. We evaluate individual securities to determine whether a decline in fair value below the amortized cost basis is other-than-temporary. We consider, among other factors, the length of the time and the extent to which the market value has been less than cost, the financial condition and near-term prospects of the issuer, including any specific events which may influence the operations of the issuer and our intent and ability to retain our investment in the issuer for a period of time sufficient to allow for any anticipated recovery in market value. Declines in value that are other-than-temporary are charged to earnings.

Available-for-sale securities consisted of the following (in thousands):

	December 31,
	2012									2011
	Amortized Cost			Gross Unrealized Gain			Estimated Fair Value			Amortized Cost			Gross Unrealized Gain (Loss)				Estimated Fair Value
U.S. Treasury and other U.S. government securities		$	4,577		$	4		$	4,581		$	4,308		$	6			$	4,314
State and municipal securities			218			1			219			689			4				693
Corporate and other securities			6,489			30			6,519			6,654			(36	)			6,618
Total		$	11,284		$	35		$	11,319		$	11,651		$	(26	)		$	11,625

The estimated fair value of marketable securities by contractual maturity at December 31, 2012 is as follows (in thousands):

Due in one year or less	$	4,436
Due after one year through five years		6,883
Total	$	11,319

Financial Instruments Measured at Fair Value on a Recurring Basis

We measure fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. In accordance with guidance issued by the FASB, we use a three-level fair value hierarchy to prioritize the inputs used to measure fair value. The hierarchy maximizes the use of observable inputs and minimizes the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:

•

Level 1 — Quoted prices in active markets for identical assets or liabilities.

•

Level 2 — Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

•

Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

We had the following assets (liabilities) measured at fair value on a recurring basis:

	Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)		Total
December 31, 2012
Money market funds	$	477	$	—		$	—	$	477
Marketable securities		11,319		—			—		11,319
Total assets	$	11,796	$	—		$	—	$	11,796

December 31, 2011
Money market funds	$	8,483	$	—		$	—	$	8,483
Marketable securities		11,625		—			—		11,625
Total assets	$	20,108	$	—		$	—	$	20,108

Interest rate swaps liability	$	—	$	(57	)	$	—	$	(57	)

Our interest rate swaps were contracts with our financial institution and were not contracts that could be traded in a ready market. We estimated the fair value of our interest rate swaps based on, among other things, discounted cash flows based upon current market expectations about future amounts, yield curves, and mid-market pricing. Accordingly, we classified our interest rate swap agreements as Level 2.

Financial Instruments Not Measured at Fair Value

Our financial instruments not measured at fair value consist of cash and cash equivalents, accounts receivable, and accounts payable, the carrying value of each approximating fair value due to the nature of these accounts. Our financial instruments not measured at fair value also include borrowings under our Credit Agreement. We estimate the fair value of outstanding borrowings under our Credit Agreement based on the current market rates applicable to borrowers with credit profiles similar to us. We estimate that the carrying value of our borrowings approximates fair value at December 31, 2012.

Other Fair Value Measurements

There were no nonfinancial assets or nonfinancial liabilities measured at fair value at December 31, 2012 or 2011.

Concentrations

We are potentially subject to financial instrument concentration of credit risk through our cash and cash equivalents, marketable securities and trade accounts receivable. To mitigate these risks, we have policies, which require minimum credit ratings, and restrict the amount of credit exposure with any one counterparty for short-term investments and marketable securities. We maintain our cash and cash equivalents with a limited number of financial institutions. We periodically evaluate the credit standing of these financial institutions. Trade accounts receivable are subject to risks related to the medical device industry generally, and the wound closure, vascular access, specialty needle and prostate cancer treatment markets specifically. These industries are in turn largely dependent upon the health care market generally, which can be affected by, among other things, innovation and advances in treatments and procedures, insurance and government reimbursement policies, preferences of physicians and other health care providers, demographics and patient requirements, and government regulation. The significant portion of our trade accounts receivable is with customers based in the United States. We have certain customers which comprise ten percent or more of our trade accounts receivable and net revenue. See Note O.