Note 11 - Fair Value of Financial Instruments

Derivative financial instruments are utilized by the Company to reduce foreign currency exchange risks. The Company has established policies and procedures for risk assessment and the approval, reporting and monitoring of derivative financial instrument activities. The Company does not enter into financial instruments for trading or speculative purposes. The derivative financial instruments include fair value and cash flow hedges of foreign currency exposures. Exchange rate fluctuations on the foreign currency-denominated intercompany loans and obligations are offset by the change in values of the fair value foreign currency hedges. The Company presently hedges exposures in the Euro, Canadian dollar, British pound sterling, Swiss franc, Swedish kronar, Mexican peso and Chinese yuan generally for transactions expected to occur within the next 12 months. The notional amount of these foreign currency derivative instruments at December 31, 2013 and 2014 was $148,036 and $170,750, respectively. The counterparties to each of these agreements are major commercial banks. Management believes that the probability of losses related to credit risk on derivative financial instruments is unlikely.

The Company uses foreign currency forward contracts as hedges of the fair value of certain non-U.S. dollar denominated asset and liability positions, primarily accounts receivable and debt. Gains and losses resulting from the impact of currency exchange rate movements on these forward contracts are recognized in the accompanying Consolidated Statements of Income in the period in which the exchange rates change and offset the foreign currency gains and losses on the underlying exposure being hedged.

Foreign currency forward contracts are also used to hedge variable cash flows associated with forecasted sales and purchases denominated in currencies that are not the functional currency of certain entities. The forward contracts have maturities of less than twelve months pursuant to the Company’s policies and hedging practices. These forward contracts meet the criteria for and have been designated as cash flow hedges. Accordingly, the effective portion of the change in fair value of such forward contracts (approximately $398 and $5,719 as of December 31, 2013 and 2014, respectively) are recorded as a separate component of stockholders’ equity in the accompanying consolidated balance sheets and reclassified into earnings as the hedged transaction affects earnings.

The Company assesses hedge ineffectiveness quarterly using the hypothetical derivative methodology. In doing so, the Company monitors the actual and forecasted foreign currency sales and purchases versus the amounts hedged to identify any hedge ineffectiveness. Any hedge ineffectiveness is recorded as an adjustment in the accompanying Consolidated Statements of Income in the period in which the ineffectiveness occurs. The Company also performs regression analysis comparing the change in value of the hedging contracts versus the underlying foreign currency sales and purchases, which confirms a high correlation and hedge effectiveness.

The derivative instruments are subject to master netting arrangements with the counterparties to the contracts. The following table presents the location and amounts of derivative instrument fair values in the Consolidated Balance Sheets:


	Year ended December 31
Assets/(Liabilities)	2013			2014

Designated as hedging instruments:
Gross amounts recognized	$	2,702		$	6,483
Gross amounts offset		(2,232	)		(504	)

Net amounts		470			5,979

Not designated as hedging instruments:
Gross amounts recognized		(121	)		—
Gross amounts offset		—			—

Net amounts		(121	)		—


Other current assets	$	349		$	5,979

The following table presents the location and amount of gains and losses on derivative instruments in the Consolidated Statements of Income:


Derivatives Designated as Cash Flow Hedges	Amount of Gain (Loss) Recognized in Other Comprehensive Income on Derivative (Effective Portion)			Amount of Gain Reclassified from Cumulative Other Comprehensive Loss into Income (Effective Portion)		Amount of Gain (Loss) Recognized in Income on Derivative (Ineffective Portion)
Year ended Dec. 31, 2012	$	(1,770	)	$	5,699	$	256
Year ended Dec. 31, 2013	$	2,943		$	1,085	$	(122	)
Year ended Dec. 31, 2014	$	9,020		$	3,699	$	(188	)


Derivatives not Designated as Hedging Instruments	Location of Gain (Loss) Recognized in Income on Derivatives	Amount of Gain (Loss) Recognized in Income on Derivatives
Year ended Dec. 31, 2012	Other income (expense)	$	590
Year ended Dec. 31, 2013	Other income (expense)	$	(366	)
Year ended Dec. 31, 2014	Other income (expense)	$	121

For effective designated foreign exchange hedges, the Company reclassifies the gain (loss) from Other Comprehensive Income into Net Sales and the ineffective portion is recorded directly into Other – net.

The Company has categorized its financial instruments, based on the priority of the inputs to the valuation technique, into the three-level fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure the financial instruments fall within the different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.

Financial assets and liabilities recorded on the Consolidated Balance Sheets are categorized based on the inputs to the valuation techniques as follows:

Level 1. Financial assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market that the Company has the ability to access.

Level 2. Financial assets and liabilities whose values are based on quoted prices in markets that are not active or model inputs that are observable either directly or indirectly for substantially the full term of the asset or liability. Level 2 inputs include the following.

Quoted prices for similar assets or liabilities in active markets;

Quoted prices for identical or similar assets or liabilities in non-active markets;

Pricing models whose inputs are observable for substantially the full term of the asset or liability; and

Pricing models whose inputs are derived principally from or corroborated by observable market data through correlation or other means for substantially the full term of the asset or liability.

Level 3. Financial assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect management’s own assumptions about the assumptions a market participant would use in pricing the asset or liability.

The valuation of foreign exchange forward contracts was determined using widely accepted valuation techniques. This analysis reflected the contractual terms of the derivatives, including the period to maturity, and used observable market-based inputs, including forward points. The Company incorporated credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. Although the Company determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as current credit ratings, to evaluate the likelihood of default by itself and its counterparties. However, as of December 31, 2013 and December 31, 2014, the Company assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and determined that the credit valuation adjustments were not significant to the overall valuation of its derivatives. As a result, the Company determined that its derivative valuations in their entirety were classified in Level 2 of the fair value hierarchy.

The following table presents the Company’s fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of December 31, 2013 and 2014:


	December 31, 2013
	Total Assets (Liabilities)			Quoted Prices in Active Markets for Identical Assets Level (1)			Significant Other Observable Inputs Level (2)		Significant Unobservable Inputs Level (3)

Foreign Exchange Contracts	$	349		$	—		$	349	$	—

Stock-based Liabilities	$	(12,462	)	$	(12,462	)	$	—	$	—

December 31, 2014

Total
Assets
(Liabilities)

Quoted Prices
in Active Markets
for Identical
Assets
Level (1)

Significant
Other
Observable
Inputs
Level (2)

Significant
Unobservable
Inputs
Level (3)

Foreign Exchange Contracts

5,979

—

5,979

—

Stock-based Liabilities

(19,079

)

(19,079

)

—

The following table presents the movement in the Level 3 fair value measurements for the year ended December 31, 2014.


	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Redeemable noncontrolling shareholder interest
	Year Ended December 31, 2014
Beginning Balance	$	—
Transfer into Level 3 - Redeemable noncontrolling shareholder interest		(152,250	)
Adjustment for CCT valuation amount		(956	)
Sale of interest in subsidiary		153,206

Ending Balance	$	—

The fair value of the Company’s debt was based upon prices of similar instruments in the marketplace. The carrying amounts and fair values of the Company’s financial instruments were as follows:


	December 31, 2013						December 31, 2014
	Carrying Amount			Fair Value Measurements Using Quoted Prices in Active Markets for Identical Instruments Level (1)			Carrying Amount			Fair Value Measurements Using Quoted Prices in Active Markets for Identical Instruments Level (1)
Cash and cash equivalents	$	397,731		$	397,731		$	551,652		$	551,652
Notes receivable		86,965			86,965			4,546			4,546
Restricted cash		2,759			2,759			653			653
Notes payable		(22,105	)		(22,105	)		(64,551	)		(64,551	)
Current portion of long-term debt		(17,868	)		(17,868	)		(2,115	)		(2,115	)
Long-term debt		(320,959	)		(334,759	)		(298,931	)		(325,431	)