Derivative Instruments and Hedging Activities

9 Months Ended

Sep. 29, 2012

Derivative Instruments and Hedging Activities [Abstract]

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

NOTE 8 — DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

The Company uses certain financial derivatives to mitigate its exposure to volatility in interest rates. The Company uses these derivative instruments to hedge exposures in the ordinary course of business and does not invest in derivative instruments for speculative purposes.

Interest rate swap agreements are utilized to reduce the impact of changes in interest rates on certain debt. These agreements were designated as cash flow hedges, therefore, the unrealized gains and losses are recorded in accumulated other comprehensive loss.

In June 2006, the Company entered into a forward starting interest rate swap agreement with Citizens which commenced on June 29, 2007 to hedge the LIBOR-based Citizens Owatonna real estate loan. The notional amount of the swap amortizes based on the same amortization schedule as the Citizens Owatonna real estate loan and the hedged item (one-month LIBOR) is the same as the basis for the interest rate on the loan. The swap effectively converts the rate from a floating rate based on LIBOR to a fixed rate which from June 30, 2009 to March 15, 2012 equaled 8.25% or 8.75% based on a performance grid and from March 15, 2012 equals 8.25%. The swap and interest payments on the debt settle monthly. The real estate loan and the swap both mature on July 2, 2014. There was no initial cost of the interest rate swap. The Company designates the interest rate swap as a derivative hedging instrument and, accordingly, changes in the fair value of this swap are recorded as a component of accumulated other comprehensive loss.

The following table presents the fair values of derivatives included within the consolidated balance sheets:


	Asset Derivatives						Liability Derivatives
	Fair Value						Fair Value
	September 29, 2012		December 31, 2011		Balance Sheet Location		September 29, 2012		December 31, 2011		Balance Sheet Location
Derivatives designated as hedging instruments:
Interest rate swap agreement	$	—	$	—		—	$	978,000	$	1,307,000	Other Liabilities

The following table presents the amounts affecting the consolidated statements of operations and accumulated other comprehensive income (loss) for the three and nine months ended September 29, 2012 and September 24, 2011, respectively:


	Amount of Gain Recognized in Other Comprehensive Income (Loss), net of tax
Derivatives in Cash Flow Hedging Relationship	Three Months Ended						Nine Months Ended
Derivatives in Cash Flow Hedging Relationship	September 29, 2012			September 24, 2011			September 29, 2012			September 24, 2011
Interest rate swap agreement	$	101,000		$	7,000		$	305,000		$	49,000

	Amount of Loss Reclassified from Accumulated Other Comprehensive Loss into Income
Derivatives in Cash Flow Hedging Relationship	Three Months Ended						Nine Months Ended
Derivatives in Cash Flow Hedging Relationship	September 29, 2012			September 24, 2011			September 29, 2012			September 24, 2011
Interest rate swap agreement	$	(145,000	)	$	(150,000	)	$	(437,500	)	$	(459,000	)

See Note 9 – Fair Value of Financial Instruments for a description of how the above financial instruments are valued.

The Company is exposed to credit-related losses in the event of non-performance by counterparties to these financial instruments. The counterparties to all derivative transactions are major financial institutions with investment grade credit ratings, and although no assurances can be given, the Company does not expect any of the counterparties to fail to meet its obligations. The credit exposure related to these financial instruments is represented by the fair value of contracts with a positive fair value at the reporting date. Therefore, the Company had no exposure to its counterparties as of September 29, 2012.

For the cash flow hedges referred to above, the amounts in accumulated other comprehensive loss are reclassified into earnings as the underlying hedged item affects earnings. Based on current interest rates, the amount expected to be reclassified into pre-tax earnings in the next twelve months is $227,000. The timing of actual amounts reclassified into earnings is dependent on future movement in interest rates.

- Definition

The entire disclosure for the entity's entire derivative instruments and hedging activities. Describes an entity's risk management strategies, derivatives in hedging activities and non-hedging derivative instruments, the assets, obligations, liabilities, revenues and expenses arising therefrom, and the amounts of and methodologies and assumptions used in determining the amounts of such items.

+ References

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+ Details

CYBEX INTERNATIONAL INC 10-Q