Hedging Transactions and Derivative Financial Instruments

6 Months Ended

Jun. 30, 2014

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 six month periods ended June 30, 2013 and 2014, there was no hedge ineffectiveness.

We currently have twenty outstanding contracts to hedge exposure related to the purchase of copper by our Power Electronics Solutions and Printed Circuit Materials operating segments.  These contracts are held with financial institutions and minimize the 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 is recorded in the "Other income, net" line item in our condensed consolidated statements of income. 

During the six months ended June 30, 2014, we entered into Japanese Yen, Euro, U.S Dollar and Hungarian Forint currency forward contracts. We entered into these foreign currency forward contracts to mitigate certain global balance sheet exposures. These contracts do not qualify for hedge accounting treatment; therefore, any mark-to-market adjustments required on these contracts is recorded in the "Other income, net" line item in our condensed consolidated statements of income. 

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, 2014, the term loan debt of $70.0 million represents all of our total outstanding debt.  At June 30, 2014, the rate charged on this debt is the 1 month LIBOR at 0.1875% plus a spread of 2.00%.

The copper and foreign currency contracts that we have entered into as of June 30, 2014 are listed below:

Notional Value of Copper Derivatives			Notional Values of Foreign Currency Derivatives
July 2014 - September 2014	20	metric tons per month	YEN/USD	¥215,000,000
May 2014 - December 2014	30	metric tons per month	HUF/EUR	220,000,000
January 2014 - December 2014	5	metric tons per month	USD/EUR	$1,250,000
July 2014 - December 2014	15	metric tons per month	YEN/EUR	¥400,000,000
July 2014 - December 2014	5	metric tons per month	CNY/USD	110,000,000
October 2014 - December 2014	15	metric tons per month
July 2014 - September 2014	20	metric tons per month
January 2015 - March 2015	8	metric tons per month
January 2014 - December 2014	10	metric tons per month
January 2015 - March 2015	52	metric tons per month
January 2015 - March 2015	46	metric tons per month
April 2015 - June 2015	95	metric tons per month
July 2014 - September 2014	70	metric tons per month
July 2014 - December 2014	35	metric tons per month
January 2014 - December 2014	10	metric tons per month
July 2014 - December 2014	25	metric tons per month
October 2014 - December 2014	20	metric tons per month
January 2015 - March 2015	40	metric tons per month
January 2015 - March 2015	10	metric tons per month
April 2015 - June 2015	55	metric tons per month

(Dollars in thousands)		The Effect of Current Derivative Instruments on the Financial Statements for the period ended June 30, 2014
		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 (expense), net	$	(87	)	$	(153	)
Copper Derivative Instruments
Contracts not designated as hedging instruments	Other income (expense), net	15			(663		)
Interest Rate Swap Instrument
Contracts designated as hedging instruments	Other comprehensive income (loss)	13			39

(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 (expense), net	$	(14	)	$	(9	)
Copper Derivative Instruments
Contracts not designated as hedging instruments	Other income (expense), net	(162		)	(345		)
Interest Rate Swap Instrument
Contracts designated as hedging instruments	Other comprehensive income (loss)	121			112

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 only financial institutions with investment grade credit ratings.