Memorex 2007 Annual Report Download - page 104

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income taxes, respectively. The related tax benefit was $1.2 million and $0.9 million for the years ended December 31,
2007 and 2006, respectively. As of December 31, 2007, there was $5.6 million of total unrecognized compensation
expense related to restricted stock granted under our Stock Plans. That expense is expected to be recognized over a
weighted average period of 2.47 years.
Note 14 — Derivatives and Hedging Activities
We maintain a foreign currency exposure management policy that allows the use of derivative instruments, principally
foreign currency forward, option contracts and option combination strategies to manage risks associated with foreign
exchange rate volatility. Generally, these contracts are entered into to fix the U.S. dollar amount of the eventual cash flows.
The derivative instruments range in duration at inception from less than one to 14 months. We do not hold or issue
derivative financial instruments for speculative or trading purposes, and we are not a party to leveraged derivatives.
We are exposed to the risk of nonperformance by our counter-parties in foreign currency forward and option
contracts, but we do not anticipate nonperformance by any of these counter-parties. We actively monitor our exposure to
credit risk through the use of credit approvals and credit limits, and by using major international banks and financial
institutions as counter-parties.
Cash Flow Hedges
We attempt to mitigate the risk that forecasted cash flows denominated in foreign currencies may be adversely
affected by changes in currency exchange rates through the use of option, forward and combination option contracts. We
formally document all relationships between hedging instruments and hedged items, as well as our risk management
objective and strategy for undertaking the hedge items. This process includes linking all derivatives to forecasted
transactions.
We also formally assess, both at the hedge’s inception and on an ongoing basis, whether the derivatives used in
hedging transactions are highly effective in offsetting changes in the cash flows of hedged items. Gains and losses related
to cash flow hedges are deferred in accumulated other comprehensive income (loss) with a corresponding asset or liability.
When the hedged transaction occurs, the gains and losses in accumulated other comprehensive income (loss) are
reclassified into the Consolidated Statement of Operations in the same line as the item being hedged. If at any time it is
determined that a derivative is not highly effective as a hedge, we discontinue hedge accounting prospectively, with
deferred gains and losses being recognized in current period operations.
As of December 31, 2007 and 2006, cash flow hedges ranged in duration from one to 12 months and had a total
notional amount of $219.1 million and $245.5 million, respectively. Hedge costs, representing the premiums paid on expired
options net of hedge gains and losses, of $2.1 million, $1.2 million and $0.5 million were reclassified into the Consolidated
Statements of Operations in 2007, 2006 and 2005, respectively. The amount of net deferred gains on foreign currency
cash flow hedges included in accumulated other comprehensive income (loss) in shareholders’ equity as of December 31,
2007 was $0.3 million, pre-tax, which depending on market factors is expected to reverse in the Consolidated Balance
Sheet or be reclassified into operations in 2008.
Other Hedges
We enter into foreign currency forward contracts, generally with durations of less than two months, to manage the
foreign currency exposure related to our monetary assets and liabilities denominated in foreign currencies. We record the
estimated fair value of these forwards within other current assets or other current liabilities in the Consolidated Balance
Sheets, and all changes in their fair value are immediately recognized in the Consolidated Statements of Operations. As of
December 31, 2007 and 2006, we had a notional amount of forward contracts of $102.3 million and $67.8 million,
respectively, to hedge our recorded balance sheet exposures.
75
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)