Hedging Transactions and Derivative Financial Instruments

12 Months Ended

Dec. 31, 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 previously hedged our interest rate risk through use of an interest rate swap, which expired as of June 30, 2016. 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.

• Interest Rates - The fair value of any interest rate swap instruments is derived by comparing the present value of the interest rate forward curve against the present value of the swap rate, relative to the notional amount of the swap. The net value represents the estimated amount we would receive or pay to terminate such agreements. Settlement amounts for an “in the money” swap would be adjusted down to compensate the counterparty for cost of funds, and the adjustment would be directly related to the counterparty’s credit ratings.

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 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 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 consolidated statements of operations during the current period. As of December 31, 2016, we did not have any contracts that are designated and qualify for hedge accounting treatment. As of December 31, 2015 and 2014, we had contracts outstanding that qualify for hedge accounting treatment and there was no hedge ineffectiveness.

Foreign Currency

In 2016, we entered into Hungarian Forint, Japanese Yen, and Korean Won foreign currency forward contracts to mitigate certain global transactional exposures. These contracts do not qualify for hedge accounting treatment. As a result, the fair value adjustments for these contracts are recorded in other income (expense), net in our consolidated statements of operations.

As of December 31, 2016 the notional values of these foreign currency forward contracts were:

Notional Values of Foreign Currency Derivatives
USD/KRW	₩	10,537,789,000
EUR/JPY	¥	309,000,000
EUR/HUF	Ft	169,000,000

Commodity

As of December 31, 2016, we had twenty-eight outstanding contracts to hedge our exposure related to the purchase of copper by our Power Electronics Solutions and Advanced Connectivity Solutions operating segments. These contracts are held with financial institutions and minimize our risk associated with a potential rise in copper prices. These contracts are intended to provide coverage over the forecasted 2017 monthly copper exposure and do not qualify for hedge accounting treatment. As a result, any fair value adjustments required on these contracts are recorded in “Other income (expense), net” in our consolidated statements of operations. 

As of December 31, 2016, the notional values of our copper contracts outstanding were:

Notional Value of Copper Derivatives
January 2017 - March 2017	122 metric tons per month
April 2017 - June 2017	122 metric tons per month
July 2017 - September 2017	122 metric tons per month
October 2017 - December 2017	122 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 Statements of Comprehensive Income (Loss):

(Dollars in thousands)		The Effect of Current Derivative Instruments on the Financial Statements for the year ended December 31, 2016			Fair Values of Derivative Instruments as of December 31, 2016
Foreign Exchange Contracts	Location	Gain/(Loss)			Other Assets (Liabilities)
Contracts not designated as hedging instruments	Other income (expense), net	$	(170	)	$	(170	)
Copper Derivative Instruments
Contracts not designated as hedging instruments	Other income (expense), net	$	625		$	1,277

(Dollars in thousands)		The Effect of Current Derivative Instruments on the Financial Statements for the year ended December 31, 2015			Fair Values of Derivative Instruments as of December 31, 2015
Foreign Exchange Contracts	Location	Gain/(Loss)			Other Assets (Liabilities)
Contracts not designated as hedging instruments	Other income (expense), net	$	(78	)	$	(78	)
Copper Derivative Instruments
Contracts not designated as hedging instruments	Other income (expense), net	$	(666	)	$	193
Interest Rate Swap Instrument
Contracts designated as hedging instruments	Other income (expense), net	$	126		$	(18	)