Hedging Transactions and Derivative Financial Instruments

6 Months Ended

Jun. 30, 2012

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 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 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 comprehensive (loss) 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 comprehensive income (loss) during the current period. 

As of the end of the second quarter of 2012, we have two contracts in place to hedge our exposure related to the purchase 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.  These two contracts cover our 2012 monthly copper exposure and qualify for hedge accounting treatment; therefore, any mark-to-market adjustments on these contracts are recorded in accumulated other comprehensive income (loss) in the equity section of our condensed consolidated statements of financial position. At June 30, 2012, the term loan debt represents $95.0 million of our outstanding facility.  The interest rate swap results in the variable portion of the interest rate for this portion of the debt being fixed at 0.075% for the period from July 2013 to June 2016. (At June 30, 2012, the rate charged on this debt is 0.25% on the variable portion of the rate plus a spread of 2.25%.)

In July 2012, we entered into an interest rate swap derivative instrument to hedge the variable portion of the interest rate on 65% of the term loan debt, effective July 2013. This transaction has been designated as a cash flow hedge.  

Notional Value of Copper Derivatives
Copper	70 metric tons per month

(Dollars in thousands)	The Effect of Current Derivative Instruments on the Financial Statements for the six-month period ended June 30, 2012				Fair Values of Derivative Instruments as of June 30, 2012
Foreign Exchange Option Contracts	Location of gain (loss)	Amount of gain (loss)			Other Assets (Liabilities)
Contracts not designated as hedging instruments	Other income, net	$	81		$	-
Copper Derivative Instruments
Contracts designated as hedging instruments	Other comprehensive income (loss)		(82	)		(82	)

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 of investment grade credit rating.