Hedging Transactions and Derivative Financial Instruments

6 Months Ended

Jun. 30, 2015

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 condensed consolidated statements of income 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 during the current period. For the six month periods ended June 30, 2015 and 2014, there was no hedge ineffectiveness.

We currently have twenty-three outstanding contracts to hedge exposure related to the purchase of copper in our Power Electronics Solutions and Advanced Connectivity Solutions operations. These contracts are held with financial institutions and minimize the risk associated with a potential rise in copper prices. These contracts provide some coverage over the 2015 and 2016 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 (expense), net line item in our condensed consolidated statements of income. 

During the six months ended June 30, 2015, we entered into Euro, Japanese Yen, Hungarian Forint, Korean Yuan and Chinese Yuan currency forward contracts. We entered into these foreign currency forward contracts to mitigate certain global balance sheet exposures. Certain contracts qualify for hedge accounting treatment, while others do not. Mark-to-market adjustments are recorded in the other income (expense), net line item in our condensed consolidated statements of income for those contracts that do not qualify for hedge accounting treatment. For those contracts that do qualify for hedge accounting treatment mark-to-market adjustments are recorded in other comprehensive income.

In July 2012, we entered into an interest rate swap to hedge the variable interest rate on our term loan debt. As of June 30, 2015, the remaining notional amount of the interest rate swap covers $32.5 million of our term loan debt. This transaction has been designated as a cash flow hedge and qualifies for hedge accounting treatment. At June 30, 2015, our term loan debt of $55.0 million and revolving line of credit borrowings of $125.0 million represent our total outstanding debt. At June 30, 2015, the rate charged on this debt was the 1 month London interbank offered rate ("LIBOR") at 0.1875% plus a spread of 1.625%.

The copper and foreign currency contracts that we have entered into as of June 30, 2015 are listed below:

Notional Value of Copper Derivatives			Notional Values of Foreign Currency Derivatives
July 2015 - September 2015	135	metric tons per month	CNY/EUR	¥2,281,000
October 2015 - December 2015	123	metric tons per month	USD/EUR	$7,647,120
January 2016 - March 2016	150	metric tons per month	EUR/USD	€1,650,000
April 2016 - June 2016	105	metric tons per month	JPY/USD	¥180,000,000
July 2016 - September 2016	75	metric tons per month	HUF/EUR	155,000,000
October 2016 - December 2016	30	metric tons per month	JPY/EUR	¥200,000,000
			CNY/USD	¥127,000,000
			USD/KRW	$4,000,000

(Dollars in thousands)		The Effect of Current Derivative Instruments on the Financial Statements for the period ended June 30, 2015
		Amount of gain (loss)
Foreign Exchange Contracts	Location of gain (loss)	Three months ended			Six months ended
Contracts designated as hedging instruments	Other comprehensive income (loss)	$	(335	)	$	(100	)
Contracts not designated as hedging instruments	Other income (expense), net	(125		)	(398		)
Copper Derivative Instruments
Contracts not designated as hedging instruments	Other income (expense), net	(157		)	(449		)
Interest Rate Swap Instrument
Contracts designated as hedging instruments	Other comprehensive income (loss)	35			51

(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

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.