Hedging Transactions and Derivative Financial Instruments

9 Months Ended

Sep. 30, 2020

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Hedging Transactions and Derivative Financial Instruments

We are exposed to certain risks related to our ongoing business operations. The primary risks being managed through our use of derivative instruments are foreign currency exchange rate risk, commodity pricing risk (primarily related to copper) and interest rate risk. We do not use derivative 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, which are collectively a function of five primary variables: price of the underlying instrument, time to expiration, strike price, interest rate and volatility. 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 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.

•Interest Rates – The fair value of 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 the agreements. Settlement amounts for an “in the money” swap would be adjusted down to compensate the counterparties for cost of funds, and the adjustment is directly related to the counterparties’ 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 condensed 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 as cash flow hedges (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) in the condensed consolidated statements of 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. As of September 30, 2019, only our interest rate swap qualified for hedge accounting treatment as a cash flow hedge, and the hedge was highly effective.

Foreign Currency

During the three months ended September 30, 2020, we entered into U.S. dollar, euro, 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. As a result, any fair value adjustments required on these contracts are recorded in “Other (expense) income, net” in our condensed consolidated statements of operations in the period in which the adjustment occurred.

As of September 30, 2020, the notional values of the remaining foreign currency forward contracts were as follows:


Notional Values of Foreign Currency Derivatives
USD/CNH	$	30,138,505
EUR/USD	€	9,430,781
KRW/USD	₩	11,684,000,000

Commodity

As of September 30, 2020, we had 21 outstanding contracts to hedge exposure related to the purchase of copper in our Power Electronics Solutions (PES) and Advanced Connectivity Solutions (ACS) operating segments. These contracts are held with financial institutions and are intended to offset rising copper prices and do not qualify for hedge accounting treatment. As a result, any fair value adjustments required on these contracts are recorded in “Other (expense) income, net” in our condensed consolidated statements of operations in the period in which the adjustment occurred.

As of September 30, 2020, the volume of our copper contracts outstanding was as follows:


Volume of Copper Derivatives
October 2020 - December 2020			201 metric tons per month
January 2021 - March 2021			256 metric tons per month
April 2021 - June 2021			256 metric tons per month
July 2021 - September 2021			222 metric tons per month

Interest Rates

In March 2017, we entered into an interest rate swap to hedge the variable interest rate on $75.0 million of our $450.0 million revolving credit facility. This transaction was designated as a cash flow hedge and qualified for hedge accounting treatment. We terminated the interest rate swap on September 30, 2020. As a result, we settled the interest rate swap for $2.4 million on October 2, 2020, representing the fair value of the interest rate swap on the date of termination. Both Rogers and the counterparties released each other from all obligation under the interest rate swap agreement, including the obligation to exchange, at specified intervals, the difference between fixed and floating interest amounts calculated by reference to the agreed upon notional principal amount of $75.0 million. As a result of the termination of the interest rate swap, there is an offsetting decrease in the forecasted interest expense, net over the remaining term of the now-terminated interest rate swap, which was set to expire in February 2022. For additional information regarding our revolving credit facility, refer to “Note 9 – Debt.”

Effects on Financial Statements

The impacts from our derivative instruments on the statement of operations and statements of comprehensive income (loss) were as follows:


		Three Months Ended				Nine Months Ended
(Dollars in thousands)	Financial Statement Line Item	September 30, 2020		September 30, 2019		September 30, 2020		September 30, 2019
Foreign Currency Contracts
Contracts not designated as hedging instruments	Other (expense) income, net	$	(823)	$	181	$	(1,378)	$	(406)
Copper Derivative Contracts
Contracts not designated as hedging instruments	Other (expense) income, net	$	1,238	$	(543)	$	1,067	$	(1,008)
Interest Rate Swap
Contract designated as hedging instrument	Other comprehensive income (loss)	$	2,771	$	(240)	$	1,254	$	(1,985)