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Hedging Transactions and Derivative Financial Instruments | 3 Months Ended
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Mar. 31, 2018
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 our use of derivative instruments are foreign currency exchange rate risk and commodity pricing risk (primarily related to copper). During the first quarter of 2017, we entered into an interest rate swap to hedge interest rate risk. 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 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 counterparty 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 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). 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 March 31, 2018, only our interest rate swap qualified for hedge accounting treatment as a cash flow hedge. For the three months ended March 31, 2018 and 2017, the hedge was highly effective. Foreign Currency During the quarter ended March 31, 2018, we entered into Korean Won, Japanese Yen, Euro, Hungarian Forint and Chinese Renminbi 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 income (expense), net” in our condensed consolidated statements of operations. As of March 31, 2018 the notional values of these foreign currency forward contracts were:
Notional Values of Foreign Currency Derivatives
KRW/USD |  | ₩ | 2,477,560,000 |
JPY/EUR |  | ¥ | 310,000,000 |
EUR/USD |  | € | 8,081,989 |
EUR/HUF |  | € | 608,174 |
USD/CNY |  | $ | 10,637,837 |
Commodity We currently have twenty-four outstanding contracts to hedge exposure related to the purchase of copper in our Power Electronics Solutions (PES) and Advanced Connectivity Solutions (ACS) 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 2018 and 2019 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 condensed consolidated statements of operations in the period in which the adjustment occurs. The notional values of our copper contracts outstanding as of March 31, 2018 were:
Volume of Copper Derivatives
April 2018 - June 2018 | 153 metric tons per month
July 2018 - September 2018 | 153 metric tons per month
October 2018 - December 2018 | 153 metric tons per month
January 2019 - March 2019 | 162 metric tons per month
April 2019 - June 2019 | 56 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 has been designated as a cash flow hedge and qualifies for hedge accounting treatment. See Note 12, “Debt” for further discussion regarding the credit facility. 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 March 31, 2018 |  | Fair Values of Derivative Instruments as of March 31, 2018
|  |  |  | Gain (Loss) |  | Other Assets (Liabilities)
Foreign Exchange Contracts |  | Location |  | Quarter Ended |  |
Contracts not designated as hedging instruments |  | Other income (expense), net |  | $ | (64 | ) |  | $ | (329 | )
Copper Derivatives |  |  |  |  |  |
Contracts not designated as hedging instruments |  | Other income (expense), net |  | $ | (822 | ) |  | $ | 1,105 |
Interest Rate Swap |  |  |  |  |  |
Contract designated as hedging instrument |  | Other comprehensive income (loss) |  | $ | 989 |  |  | $ | 1,030 |
(Dollars in thousands) |  |  |  | The Effect of Current Derivative Instruments on the Financial Statements for the period ended March 31, 2017 |  |  | Fair Values of Derivative Instruments as of March 31, 2017
|  |  |  | Gain (Loss) |  | Other Assets (Liabilities)
Foreign Exchange Contracts |  | Location |  | Quarter Ended |  |  |
Contracts not designated as hedging instruments |  | Other income (expense), net |  | $ | 21 |  |  |  | $ | 21 |
Copper Derivatives |  |  |  |  |  |  |
Contracts not designated as hedging instruments |  | Other income (expense), net |  | $ | 215 |  |  |  | $ | 1,342 |
Interest Rate Swap |  |  |  |  |  |  |
Contracts designated as hedging instruments |  | Other comprehensive income (loss) |  | $ | (180 | ) |  |  | $ | (180 | )

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- Definition The entire disclosure for derivative instruments and hedging activities including, but not limited to, risk management strategies, non-hedging derivative instruments, assets, liabilities, revenue and expenses, and methodologies and assumptions used in determining the amounts. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -URI http://asc.fasb.org/topic&trid=2229140 + Details
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