Hedging Transactions and Derivative Financial Instruments

6 Months Ended

Jun. 30, 2013

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Hedging Transactions and Derivative Financial Instruments

Hedging Transactions and Derivative Financial Instruments

The guidance for the accounting and disclosure of derivatives and hedging transactions requires companies to recognize all of their derivative instruments as either assets or liabilities at fair value in the statements of financial position.  The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies for special hedge accounting treatment as defined under the applicable accounting guidance.  For derivative instruments that are designated and qualify for hedge accounting treatment (i.e., hedging the exposure to variability in expected future cash flows that is attributable to a particular risk), the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income (loss).  This gain or loss is reclassified into earnings in the same line item of the statements of income (loss) associated with the forecasted transaction and in the same period or periods during which the hedged transaction affects earnings.  The remaining gain or loss on the derivative instrument in excess of the cumulative change in the present value of the future cash flows of the hedged item (i.e., the ineffective portion) if any, is recognized in the statements of income (loss) during the current period.  For the three and six month periods ended June 30, 2013 and 2012 there were no hedge ineffectiveness.

We currently have four outstanding contracts to hedge exposure related to the purchase of copper at our German subsidiary, Curamik, and U.S. operations in Arizona.  These contracts are held with financial institutions and minimize the risk associated with a potential rise in copper prices.   They cover the 2013 and 2014 monthly copper exposure and do not qualify for hedge accounting treatment; therefore, any mark-to-market adjustment on these contracts is recorded in the "Other income, net" line item in our condensed consolidated statements of income (loss). 

In 2012, we entered into Euro currency forward contracts to mitigate the exposure in the U.S. for pending Euro-denominated purchases. These contracts do not qualify for hedge accounting treatment therefore, any mark-to-market adjustment on these contracts are recorded in the "Other income, net" line item in our condensed consolidated statements of income (loss). 

Through the first half of 2013, we entered into Japanese Yen, Euro, U.S Dollar and Hungarian Forint currency forward contracts to mitigate certain global balance sheet exposures. These contracts do not qualify for hedge accounting treatment therefore, any mark-to-market adjustment on these contracts are recorded in the "Other income, net" line item in our condensed consolidated statements of income (loss). 

Also in 2012, we entered into an interest rate swap derivative instrument to hedge the variable LIBOR portion of the interest rate on 65% of the term loan debt then outstanding, effective July 2013. This transaction has been designated as a cash flow hedge and qualifies for hedge accounting treatment.  At June 30, 2013, the term loan debt represents $85.0 million of our total outstanding debt of $93.0 million.  At June 30, 2013, the rate charged on this debt is the 1 month LIBOR at 0.25% plus a spread of 2.00%.

Notional Value of Copper Derivatives			Notional Values of Foreign Currency Derivatives
January 2013 - December 2013	55	metric tons per month	YEN/USD	¥300,000,000
July 2013 - November 2013	40	metric tons per month	USD/EUR	$900,000
December 2013 - March 2014	30	metric tons per month	HUF/EUR	290,000,000
January 2014 - April 2014	30	metric tons per month

(Dollars in thousands)		The Effect of Current Derivative Instruments on the Financial Statements for the period ended June 30, 2013
		Amount of gain (loss)
Foreign Exchange Contracts	Location of gain (loss)	Three months ended			Six months ended
Contracts not designated as hedging instruments	Other income, net	$	(14	)	$	(9	)
Copper Derivative Instruments
Contracts not designated as hedging instruments	Other income, net	(162		)	(345		)
Interest Rate Swap Instrument
Contracts designated as hedging instruments	Other comprehensive income (loss)	121			112

(Dollars in thousands)		The Effect of Current Derivative Instruments on the Financial Statements for the period ended June 30, 2012
		Amount of gain (loss)
Foreign Exchange Contracts	Location of gain (loss)	Three months ended			Six months ended
Contracts not designated as hedging instruments	Other income, net	$	—		$	81
Copper Derivative Instruments
Contracts designated as hedging instruments	Other comprehensive income (loss)	(66		)	189

Concentration of Credit Risk

By using derivative instruments, we are subject to credit and market risk.  If a counterparty fails to fulfill its performance obligations under a derivative contract, our credit risk will equal the fair value of the derivative instrument. Generally, when the fair value of a derivative contract is positive, the counterparty owes the Company, thus creating a receivable risk for the Company. We minimize counterparty credit (or repayment) risk by entering into derivative transactions with major financial institutions with investment grade credit ratings.