Derivatives and Other Financial Instruments and Hedging Activities

9 Months Ended

Sep. 29, 2012

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivatives and Other Financial Instruments and Hedging Activities

rivatives and Other Financial Instruments and Hedging Activities

The Company is exposed to certain risks arising from business operations and economic factors. The Company selectively uses derivative financial instruments to manage certain market risks and reduce its exposure to fluctuations in interest rates and foreign currencies. All hedging transactions are authorized, entered into with high-quality counterparties and executed under clearly defined policies and procedures, which prohibit the use of financial instruments for trading purposes.

The Company records all derivative instruments as either assets or liabilities on the balance sheet at their fair value in accordance with ASC 815, “Derivatives and Hedging” (“ASC 815”). Changes in the fair value of a derivative are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, depending on the type of hedge transaction. Ineffective portions, if any, of all hedges are recognized in earnings.

The Company documents all relationships between hedging instruments and hedged items, as well as the risk management objective and strategy for undertaking various hedge transactions and the methodologies that will be used for measuring effectiveness and ineffectiveness. This process includes linking all derivatives that are designated as cash flow or fair value hedges to specific assets and liabilities on the balance sheet or to specific firm commitments. The Company then assesses, both at the hedge’s inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are expected to be highly effective in offsetting changes in fair values or cash flows of hedged items. Such assessments are conducted in accordance with the originally documented risk management strategy and methodology for that particular hedging relationship.

For cash flow hedges, the effective portion of recognized derivative gains and losses reclassified from other comprehensive income is classified consistent with the classification of the hedged item. For example, derivative gains and losses associated with hedges of interest rate payments are recognized in Interest expense, net in the Consolidated Statements of Operations.

For fair value hedges, changes in the value of the derivatives, along with the offsetting changes in the fair value of the underlying hedged exposure are recorded in earnings each period in Foreign currency and other (gain) loss, net in the Consolidated Statements of Operations.

On February 8, 2010, the Company entered into a series of foreign exchange forward contracts (put options and call options) with a third-party financial institution (the “2010 FX Forward Contracts”) that provided for a floor and ceiling price on payments related to the Company’s new healthcare line under construction in Suzhou, China (the “New China Healthcare Line”). The objective of the 2010 FX Forward Contracts was to hedge the changes in fair value of a firm commitment to purchase equipment attributable to changes in foreign currency rates between the Euro and U.S. dollar through the date of acceptance of the equipment.

On January 19, 2011, the Company terminated and settled the 2010 FX Forward Contracts for $0.5 million and entered into new foreign exchange forward contracts with a third-party institution (the “January 2011 FX Forward Contracts”) to purchase fixed amounts of Euros on specified future dates, coinciding with the payment amounts and dates of the New China Healthcare Line equipment purchase contract. Through the date of terminating the 2010 FX Forward Contracts, the Company continued to recognize the asset associated with the unrecognized firm commitment and the liability associated with the 2010 FX Forward Contracts. The impact of the 2010 FX Forward Contracts on Foreign currency and other loss, net in the Consolidated Statements of Operations was a gain of $0.03 million for the one month ended January 28, 2011. The objective of the January 2011 FX Forward Contracts was to minimize foreign currency exchange risk on certain future cash commitments related to the New China Healthcare Line.

On July 8, 2011, the Company completed commercial acceptance of the New China Healthcare Line. The Company recorded a liability for the remaining balance due. In accordance with ASC 815, the hedge designation of the January 2011 FX Forward Contracts was removed at that time. Through the date the hedge was undesignated and the liability recorded, the Company continued to recognize the asset associated with the unrecognized firm commitment and the associated liability. The Company carried the January 2011 FX Forward Contracts at fair value and recorded gains and losses in Foreign currency and other loss, net in the Consolidated Statements of Operations.

The Company remitted the final payment related to the New China Healthcare Line equipment purchase contract on March 23, 2012. The January 2011 FX Forward Contracts expired simultaneously with that final payment. The impact of the January 2011 FX Forward Contracts on Foreign currency and other loss, net was a loss of $0.1 million for the nine months ended September 29, 2012.

On June 30, 2011, the Company entered into a series of foreign exchange forward contracts with a third-party institution (the “June 2011 FX Forward Contracts”) to purchase fixed amounts of Euros on specified future dates, coinciding with the payment amounts and dates of the equipment purchase agreement for the Company’s new hygiene line under construction in Suzhou, China (the “New China Hygiene Line”). The objective of the June 2011 FX Forward Contracts is to minimize foreign currency exchange risk on certain future cash commitments related to the New China Hygiene Line.

In January 2012, the Company executed an amendment to the underlying equipment purchase contract which resulted in a change to the payment schedule but did not change the total payment amount of the equipment purchase contract. Accordingly, the Company modified the notional amounts of the June 2011 FX Forward Contracts which coincided with the dates of the amended payments to maintain the synchronization of the June 2011 FX Forward Contracts with the underlying contract payments, as amended. As a result, the June 2011 FX Forward Contracts remain highly effective and continue to qualify for hedge accounting treatment in accordance with ASC 815. As of September 29, 2012, the remaining notional amount of the June 2011 FX Forward Contracts was €18.5 million, which is the equivalent of $26.5 million.

The Company has historically used interest-rate derivative instruments to manage its exposure related to movements in interest rates with respect to its debt instruments. On February 12, 2009, to mitigate its interest rate exposure as required by the Company’s predecessor credit facility, the Company entered into the 2009 Interest Rate Swap which was designated as a cash flow hedge and became effective on June 30, 2009. As of September 17, 2009, in accordance with the applicable guidance, the Company concluded that 92% of the 2009 Interest Rate Swap was no longer effective; accordingly, 92% of $3.9 million related to the 2009 Interest Rate Swap and included in Accumulated Other Comprehensive Income was frozen and was to be reclassified to earnings as future interest payments were made throughout the term of the 2009 Interest Rate Swap, which was set to expire on June 30, 2011. This portion of the notional amount no longer met the criteria for cash flow hedge accounting treatment in accordance with ASC 815. Concurrent with the Acquisition, the Company settled the 2009 Interest Rate Swap liability, since the Company repaid its predecessor credit facility.

The impact of the accounting associated with the 2009 Interest Rate Swap on Interest expense, net in the Consolidated Statements of Operations was an increase of $0.2 million for the one month period ended January 28, 2011.

The following table summarizes the aggregate notional amount and estimated fair value of the Company’s derivative instruments as of September 29, 2012 and December 31, 2011 (in thousands):

	As of September 29, 2012					As of December 31, 2011
	Notional		Fair Value			Notional		Fair Value
Foreign currency hedges:
Foreign exchange contracts (1)	$	26,488	$	(2,664	)	$	40,265	$	(3,807	)
Foreign exchange contracts — undesignated (2)	—		—			3,680		(147		)
Net value	$	26,488	$	(2,664	)	$	43,945	$	(3,954	)

___________________ 

(1) As disclosed above, the Company entered into the June 2011 FX Forward Contracts on June 30, 2011.

(2) As disclosed above, the January 2011 FX Forward Contracts were undesignated as a hedge on July 8, 2011 due to commercial acceptance of the New China Healthcare Line and subsequent recording of the remaining liability. The January 2011 FX Forward Contracts expired in March 2012 in conjunction with the final payment of the equipment purchase contract for the New China Healthcare Line.

The following tables summarize the effect on income by derivative instruments in cash flow hedging relationships for the following periods (in thousands):

	Amount of Gain (Loss) Recognized in Accumulated OCI on Derivative (Effective Portion)
	Successor				Predecessor
	Three Months Ended September 29, 2012	Three Months Ended October 1, 2011	Nine Months Ended September 29, 2012	Eight Months Ended October 1, 2011	One Month Ended January 28, 2011
Derivatives in Cash Flow Hedging Relationship
Derivatives designated as hedging instruments:
Interest rate contracts	N/A	N/A	N/A	N/A	$	(3	)

	Amount of Gain (Loss) Reclassified from Accumulated OCI into Income (1)
	Successor				Predecessor
	Three Months Ended September 29, 2012	Three Months Ended October 1, 2011	Nine Months Ended September 29, 2012	Eight Months Ended October 1, 2011	One Month Ended January 28, 2011
Derivatives in Cash Flow Hedging Relationship
Derivatives not designated as hedging instruments	N/A	N/A	N/A	N/A	$	(187	)

 ___________________

(1) Amount of Gain (Loss) (Effective Portion) Reclassified from Accumulated Other Comprehensive Income into Income is located in Interest Expense, net in the Consolidated Statements of Operations.

See Note 12, “Fair Value of Financial Instruments and Non-Financial Assets and Liabilities” for additional disclosures related to the Company’s derivative instruments.