Hedging Transactions and Derivative Financial Instruments

9 Months Ended

Sep. 30, 2011

Hedging Transactions and Derivative Financial Instruments

Note 3 – 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 in the statement of financial position at fair value.  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.  This gain or loss is reclassified into earnings in the same line item of the condensed consolidated statement 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, the ineffective portion, if any, is recognized in the condensed consolidated statement of operations during the current period. 

At September 30, 2011, we have three contracts in place to hedge our exposure related to the purchasing of copper at our German subsidiary, Curamik.  These contracts are held with financial institutions and minimize our risk associated with a potential rise in copper prices. One of these contract covers our monthly exposure in 2011 and does not qualify for hedge accounting treatment (therefore, any mark-to-market adjustments are recorded in Other income, net in the condensed consolidated statement of operations).  The remaining two contracts cover our 2012 monthly copper exposure and do qualify for hedge accounting treatment (therefore, any mark-to-market adjustments on this contract are recorded in Other comprehensive income in the equity section of our condensed consolidated statement of financial position.

We also have five contracts related to minimizing our foreign currency exposures on our condensed consolidated statements of financial position.  These contracts do not qualify for hedge accounting treatment, and any mark-to-market adjustments are recorded in condensed consolidated statement of operations in Other income, net at September 30, 2011

Notional Values of Foreign Currency Derivatives			Notional Value of Copper Derivatives
Euro	€	4,800	Copper	145 metric tons
U.S. Dollar	$	10,000
Japanese Yen	¥	230,000

(Dollars in thousands)	The Effect of Current Derivative Instruments on the Financial Statements for the nine-month period ended September 30, 2011			Fair Values of Derivative Instruments as of September 30, 2011
Foreign Exchange Option Contracts	Location of loss	Amount of loss		Other Assets (Liabilities)
Contracts not designated as hedging instruments	Other income, net	$	353	$	744
Copper Derivative Instruments
Contracts designated as hedging instruments	Other comprehensive income		972		(972	)
Contracts not designated as hedging instruments	Other income, net		404		(404	)

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.