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Fair Value of Financial Instruments
 6 Months Ended
Jun. 30, 2011
Fair Value of Financial Instruments
(4)  Fair Value of Financial Instruments

Financial Instruments

A financial instrument is cash or a contract that imposes an obligation to deliver, or conveys a right to receive cash or another financial instrument.  The carrying values of cash and cash equivalents, accounts receivable and accounts payable are considered to be representative of fair value because of the short maturity of these instruments.  The estimated fair value of the Company’s senior secured notes at June 30, 2011 and December 31, 2010, per quoted market sources, was $189,767 and $187,798, respectively.  The face amount of this financial instrument as of June 30, 2011 and December 31, 2010 was $175,000.

Derivative Instruments and Hedging Activities

On June 30, 2011, the Company had open foreign currency forward contracts, fixed price commodity contracts and an interest rate swap.  These contracts are used strictly for hedging and not for speculative purposes.  Management believes that its use of these instruments to reduce risk is in the Company’s best interest.  The counterparties to these financial instruments are financial institutions with investment grade credit ratings.

The Company conducts business internationally and therefore is exposed to foreign currency exchange rate risk.  The Company uses derivative financial instruments as cash flow and fair value hedges to mitigate its exposure to fluctuations in foreign currency exchange rates by reducing the effect of such fluctuations on foreign currency denominated intercompany transactions and other foreign currency exposures.  The currencies currently hedged by the Company include the euro and Swedish krona.  These contracts expire on September 30, 2011.  These foreign currency forward contracts are accounted for as fair value hedges, but do not qualify for hedge accounting and are marked to market, with gains and losses recognized in the Company’s condensed consolidated statements of operations as a component of other expense (income), net.  For the six months ended June 30, 2011, the Company recognized a $2,654 loss related to euro and Swedish krona contracts.  The Company’s foreign currency forward contracts substantially offset gains and losses on the underlying foreign currency denominated transactions. During the year ended December 31, 2010, the Company held contracts intended to reduce exposure to the Mexican peso.  These contracts were executed to hedge forecasted transactions, and therefore the contracts were accounted for as cash flow hedges.  The Mexican peso-denominated foreign currency forward contracts expired monthly throughout 2010.

To mitigate the risk of future price volatility and, consequently, fluctuations in gross margins, the Company entered into fixed price commodity contracts with a financial institution to fix the cost of a portion of the Company’s copper purchases.  In March 2011, the Company entered into fixed price commodity contracts for 1,200 pounds of copper, which represents a portion of the Company’s copper purchases in the period from April 2011 to December 2011.  In May 2011, the Company entered into two additional fixed price commodity contracts.  The first contract was for 938 pounds of copper which covers the period from June 2011 to December 2011.  The other commodity contract was for 2,000 pounds of copper and covers the period from January 2012 to December 2012.  Both of these contracts represent a portion of the Company’s copper purchases.  Because these contracts were executed to hedge a portion of forecasted transactions, the contracts are accounted for as cash flow hedges.  The unrealized gain or loss for the effective portion of the hedges is deferred and reported in the Company’s condensed consolidated balance sheets as a component of accumulated other comprehensive income.  Using regression analysis, the Company has concluded that these cash flow hedges are highly effective. The effectiveness of the transactions has been and will be measured on an ongoing basis using regression analysis.

On October 4, 2010, the Company entered into a fixed-to-floating interest rate swap agreement (the “Swap”) with a notional amount of $45,000 to hedge its exposure to fair value fluctuations on a portion of its senior secured notes.  The Swap was designated as a fair value hedge of the fixed interest rate obligation under the Company’s $175,000 9.5% senior secured notes due October 15, 2017.  Under the Swap, the Company pays a variable interest rate equal to the six-month London Interbank Offered Rate (“LIBOR”) plus 7.19% and it receives a fixed interest rate of 9.5%.  The Swap requires semi-annual settlements on April 15 and October 15, beginning on April 15, 2011.  The difference between amounts to be received and paid under the Swap is recognized as a component of interest expense, net on the condensed consolidated statements of operations.  The Swap reduced interest expense by $380 for the six months ended June 30, 2011.  The critical terms of the Swap are aligned with the terms of the senior secured notes, including maturity of October 15, 2017, resulting in no hedge ineffectiveness.  The unrealized gain or loss for the effective portion of the hedge is deferred and reported in the Company’s condensed consolidated balance sheets as an asset or liability, as applicable, with the offset to the carrying value of the senior secured notes.

The notional amounts and fair values of derivative instruments in the condensed consolidated balance sheets are as follows:

               
Prepaid expenses
    
Other long-
  
   
Notional amounts (A)
    
and other current assets
    
term liabilities
  
   
June 30,
    
December 31,
    
June 30,
    
December 31,
    
June 30,
    
December 31,
  
   
2011
    
2010
    
2011
    
2010
    
2011
    
2010
  
                                     
Derivatives designated as hedging instruments:
              
`
                    
Cash Flow Hedge:
                                    
Fixed price commodity contracts
   $ 14,740     $ -     $ 704     $ -     $ -     $ -  
Fair Value Hedge:
                                                
Interest rate swap contract
     45,000       45,000       -       -       1,809       3,017  
      59,740       45,000       704       -       1,809       3,017  
                                                 
Derivatives not designated as hedging instruments:
                                                
Forward currency contracts
     28,803       26,917       -       108       12       -  
Total derivatives
   $ 88,543     $ 71,917     $ 704     $ 108     $ 1,821     $ 3,017  

(A)    Notional amounts represent the gross contract / notional amount of the derivatives outstanding.

Amounts recorded in other comprehensive income in shareholders’ equity and in net income for the three months ended June 30, 2011 were as follows:

   
Amount of gain
recorded
in other
comprehensive
income
    
Amount of loss
reclassified from
other comprehensive
income into net
income
  
Location of loss
reclassified from other
comprehensive income
into net income
               
Derivatives designated as cash flow hedges:
              
Commodity contracts
   $ 560     $ 24  
Cost of goods sold

Amounts recorded in other comprehensive income in shareholder’s equity and in net income for the six months ended June 30, 2011 were as follows:

   
Amount of gain
recorded in other
comprehensive
income
    
Amount of loss
reclassified from
other comprehensive
income into net
income
  
Location of loss
reclassified from other
comprehensive income
into net income
               
Derivatives designated as cash flow hedges:
              
Commodity contracts
   $ 680     $ 24  
Cost of goods sold

These derivatives will be reclassified from other comprehensive income to the condensed consolidated statement of operations through December of 2012.  The Company has measured the ineffectiveness of the commodity contracts and any amounts recognized in the condensed consolidated financial statements were immaterial for the three and six months ended June 30, 2011.

The following table presents our assets and liabilities that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy.  The fair value hierarchy has three levels based on the reliability of the inputs used to determine fair value.  The Company does not have any assets or liabilities that have a fair value estimated using level 3 inputs.

   
June 30,
    
December 31,
  
   
2011
    
2010
  
         
Fair value estimated using
        
   
Fair value
    
Level 1 inputs (A)
    
Level 2 inputs (B)
    
Fair value
  
                         
Financial assets carried at fair value:
                        
                         
Forward currency contracts
   $ -     $ -     $ -     $ 108  
Available for sale security
     221       221       -       274  
Fixed price commodity contracts
     704       -       704       -  
Total financial assets carried at fair value
   $ 925     $ 221     $ 704     $ 382  
                                 
Financial liabilities carried at fair value:
                                
                                 
Forward currency contracts
   $ 12     $ -     $ 12     $ -  
Interest rate swap contract
     1,809       -       1,809       3,017  
Total financial liabilities carried at fair value
   $ 1,821     $ -     $ 1,821     $ 3,017  

(A)
Fair values estimated using Level 1 inputs, which consist of quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.  The available for sale security is an equity security that is publically traded.
 
(B)
Fair values estimated using Level 2 inputs, other than quoted prices, that are observable for the asset or liability, either directly or indirectly and include among other things, quoted prices for similar assets or liabilities in markets that are active or inactive as well as inputs other than quoted prices that are observable.  For fixed price commodity, forward currency and interest rate swap contracts, inputs include commodity indexes, foreign currency exchange rates and the six-month forward LIBOR, respectively.