Hedging Transactions and Derivative Financial Instruments

9 Months Ended

Sep. 30, 2016

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Hedging Transactions and Derivative Financial Instruments

Hedging Transactions and Derivative Financial Instruments

We are exposed to certain risks related to our ongoing business operations. The primary risks being managed through the use of derivative instruments are foreign currency exchange rate risk and commodity pricing risk (primarily related to copper). We do not use derivative financial instruments for trading or speculative purposes. The valuation of derivative contracts used to manage each of these risks is described below:

• Foreign Currency - The fair value of any foreign currency option derivative is based upon valuation models applied to current market information such as strike price, spot rate, maturity date and volatility, and by reference to market values resulting from an over-the-counter market or obtaining market data for similar instruments with similar characteristics.

• Commodity - The fair value of copper derivatives is computed using a combination of intrinsic and time value valuation models. The intrinsic valuation model reflects the difference between the strike price of the underlying copper derivative instrument and the current prevailing copper prices in an over-the-counter market at period end. The time value valuation model incorporates the constant changes in the price of the underlying copper derivative instrument, the time value of money, the underlying copper derivative instrument's strike price and the remaining time to the underlying copper derivative instrument's expiration date from the period end date. Overall, fair value is a function of five primary variables: price of the underlying instrument, time to expiration, strike price, interest rate, and volatility.

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 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 operations 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 condensed consolidated statements of operations during the current period. As of September 30, 2016, we did not have any contracts that are designated and qualify for hedge accounting treatment. We had such contracts outstanding as of September 30, 2015, and for the nine months ended September 30, 2015, there was no hedge ineffectiveness.

Foreign Currency

During the quarter ended September 30, 2016, we entered into Hungarian Forint, Euro, Japanese Yen, and Korean Won forward contracts. We entered into these foreign currency forward contracts to mitigate certain global transactional exposures. These contracts do not qualify for hedge accounting treatment; therefore mark-to-market adjustments are recorded in the other income (expense), net line item in our condensed consolidated statements of operations for these contracts.

As of September 30, 2016 the notional values of these foreign currency forward contracts were:

Notional Values of Foreign Currency Derivatives
USD/EUR	$	500,000
KRW/USD	₩	9,739,900,000
JPY/EUR	¥	286,000,000
JPY/USD	¥	24,000,000
HUF/EUR	Ft	228,000,000

Commodity

We currently have twenty-nine 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 forecasted 2016 and 2017 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 operations.  The notional values of our copper contracts outstanding as of September 30, 2016 were:

Notional Value of Copper Derivatives
October 2016 - December 2016	117	metric tons per month
January 2017 - March 2017	111	metric tons per month
April 2017 - June 2017	103	metric tons per month
July 2017 - September 2017	106	metric tons per month
October 2017 - December 2017	83	metric tons per month

Interest Rates

In July 2012, we entered into an interest rate swap to hedge the variable interest rate on our term loan debt. This swap expired as of June 30, 2016.

Effects on Statements of Operations and of Comprehensive Income (Loss):

(Dollars in thousands)		The Effect of Current Derivative Instruments on the Financial Statements for the period ended September 30, 2016						Fair Values of Derivative Instruments as of September 30, 2016
		Gain (Loss)						Other Assets (Liabilities)
Foreign Exchange Contracts	Location	Quarter Ended			Nine Months Ended
Contracts not designated as hedging instruments	Other income (expense), net	$	29		$	29		$	29
Copper Derivatives
Contracts not designated as hedging instruments	Other income (expense), net	$	(94	)	$	(163	)	$	490

(Dollars in thousands)		The Effect of Current Derivative Instruments on the Financial Statements for the period ended September 30, 2015						Fair Values of Derivative Instruments as of September 30, 2015
		Gain (Loss)						Other Assets (Liabilities)
Foreign Exchange Contracts	Location	Quarter Ended			Nine Months Ended
Contracts designated as hedging instruments	Other comprehensive income (loss)	$	10		$	(87	)	$	106
Contracts not designated as hedging instruments	Other income (expense), net	$	(315	)	$	(123	)	$	(185	)
Copper Derivatives
Contracts not designated as hedging instruments	Other income (expense), net	$	(245	)	$	(694	)	$	383
Interest Rate Swap
Contracts designated as hedging instruments	Other comprehensive income (loss)	$	36		$	85		$	(58	)