Hedging Transactions and Derivative Financial Instruments (Notes)

12 Months Ended

Dec. 31, 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 consolidated 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 cash flow 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 consolidated 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 earnings during the current period.  There was no material ineffectiveness for the year ended December 31, 2013 or 2012.

We currently have twenty outstanding contracts to hedge our 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 our risk associated with a potential rise in copper prices.  These contracts cover the 2014 and 2015 monthly copper exposure and do not qualify for hedge accounting treatment; therefore, any mark-to-market adjustments required on these contracts are recorded in the "Other income, net" line item in our consolidated statements of income (loss). 

In 2013, we entered into Euro, Japanese Yen, U.S Dollar and Hungarian Florint currency forward contracts. We entered into these foreign currency forward contracts to mitigate certain global balance sheet exposures. Our Japanese Yen currency forward contracts in Germany qualify for hedge accounting. Those contracts that do not qualify for hedge accounting treatment, have any mark-to-market. adjustments on these contracts recorded in the "Other income, net" line item in our consolidated statements of income (loss).

In 2012, we entered into an interest rate swap derivative instrument to hedge the 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 December 31, 2013, the term loan debt represents $77.5 million of our total outstanding debt.  At December 31, 2013, the rate charged on this debt is the 1 month LIBOR at 0.1875% plus a spread of 2.0%.

Notional Value of Copper Derivatives
January 2014 - March 2014	30 metric tons per month
January 2014 - April 2014	30 metric tons per month
January 2014 - June 2014	75 metric tons per month
April 2014 - June 2014	35 metric tons per month
July 2014 - September 2014	40 metric tons per month
May 2014 - December 2014	30 metric tons per month
July 2014 - December 2014	80 metric tons per month
October 2014 - December 2014	15 metric tons per month
January 2014 - December 2014	45 metric tons per month
January 2015 - March 2015	106 metric tons per month

Notional Values of Foreign Currency Derivatives
YEN/USD	¥	300,000,000
USD/KRW	$	2,000,000
USD/EUR	$	3,500,000
HUF/EUR	280,000,000
JPY/EUR	¥	160,100,000

(Dollars in thousands)	The Effect of Current Derivative Instruments on the Financial Statements for the year ended December 31, 2013				Fair Values of Derivative Instruments as of December 31, 2013
Foreign Exchange Contracts	Location of gain (loss)	Amount of gain (loss)			Other Assets (Liabilities)
Contracts not designated as hedging instruments	Other income, net	$	(79	)	$	(79	)
Contracts designated as hedging instruments	Other comprehensive income (loss)	(24		)	2
Copper Derivative Instruments
Contracts not designated as hedging instruments	Other income, net	(373		)	984
Interest Rate Swap Instrument
Contracts designated as hedging instruments	Other comprehensive income (loss)	(296		)	(296		)

(Dollars in thousands)	The Effect of Current Derivative Instruments on the Financial Statements for the year ended December 31, 2012				Fair Values of Derivative Instruments as of December 31, 2012
Foreign Exchange Contracts	Location of gain (loss)	Amount of gain (loss)			Other Assets (Liabilities)
Contracts not designated as hedging instruments	Other income, net	$	342		$	15
Copper Derivative Instruments
Contracts not designated as hedging instruments	Other income, net	(366		)	267
Interest Rate Swap Instrument
Contracts designated as hedging instruments	Other comprehensive income (loss)	(361		)	(361		)

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.