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Fair Value of Financial Instruments
9 Months Ended
Sep. 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 September 30, 2011 and December 31, 2010, per quoted market sources, was $175,548 and $187,798, respectively.  The face amount of this financial instrument as of September 30, 2011 and December 31, 2010 was $175,000.

Derivative Instruments and Hedging Activities

On September 30, 2011, the Company had open foreign currency forward contracts, fixed price commodity contracts and an interest rate swap.  These contracts are used solely 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, Swedish krona and Mexican peso.  In certain instances, the foreign currency forward contracts do not qualify for hedge accounting and are marked to market, with gains and losses recognized in the Company’s condensed consolidated statement of operations as a component of other (income) expense, net.  The Company’s foreign currency forward contracts substantially offset gains and losses on the underlying foreign currency denominated transactions.  As of September 30, 2011, the Company held foreign currency forward contracts to reduce the exposure related to the Company’s Euro-denominated and Swedish krona-denominated intercompany loans.  These contracts expire on December 30, 2011.  For the nine months ended September 30, 2011, the Company recognized a $628 loss related to euro and Swedish krona contracts.  The Company also holds contracts intended to reduce exposure to the Mexican peso.  In August of 2011, the Company entered into three foreign currency forward contracts related to the Mexican peso.  The first contract was for $28,223 of Mexican peso equivalents and expires monthly from August 2011 to December 2011.  The second contract is for $30,000 of Mexican peso equivalents and expires monthly from January 2012 to December 2012.  And the third contract is for $10,000 of Mexican peso equivalents and expires monthly from January 2012 to December 2012.  These contracts were executed to hedge forecasted transactions, and therefore the contracts are accounted for as cash flow hedges. The effective portion of the unrealized gain or loss is deferred and reported in the Company’s condensed consolidated balance sheets as a component of accumulated other comprehensive (loss) income.  The Company’s expectation is that the cash flow hedges will be highly effective in the future.  The effectiveness of the transactions has been and will be measured on an ongoing basis using regression analysis.

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 and covers the period from April 2011 to December 2012.  In May 2011, the Company entered into two 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.  In August of 2011, the Company entered into two additional commodity contracts.  The first contract was for 801 pounds of copper and covers the period from October 2011 to December 2011.  The second contract was for 3,500 pounds of copper and covers the period from January 2012 through December of 2012.  In September of 2011, the Company entered into an additional fixed price commodity contract.  This contract was for 1,000 pounds of copper and covers the period from January 2012 to December 2012.  All 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 (loss) 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 $564 for the nine months ended September 30, 2011.  The critical terms of the Swap are identical to 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:

               
Accrued expenses and other
  
         
Prepaid expenses
    
current liabilities /
  
   
Notional amounts (A)
    
and other current assets
    
Other long-term liabilities
  
   
September 30,
    
December 31,
    
September 30,
    
December 31,
    
September 30,
    
December 31,
  
   
2011
    
2010
    
2011
    
2010
    
2011
    
2010
  
                                     
Derivatives designated as hedging instruments:
              
`
                    
Cash Flow Hedge:
                                    
Forward currency contracts
   $ 56,763     $ -     $ -     $ -     $ 6,388     $ -  
Fixed price commodity contracts
     32,497       -       -       -       6,701       -  
Fair Value Hedge:
                                                
Interest rate swap contract
     45,000       45,000       -       -       1,034       3,017  
      134,260       45,000       -       -       14,123       3,017  
                                                 
Derivatives not designated as hedging instruments:
                                                
Forward currency contracts
     27,139       26,917       24       108       -       -  
Total derivatives
   $ 161,399     $ 71,917     $ 24     $ 108     $ 14,123     $ 3,017  

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

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

   
Amount of loss
recorded
in other
comprehensive
(loss) income
    
Amount of loss
reclassified from
other comprehensive
(loss) income into net
income
  
Location of loss
reclassified from other
comprehensive (loss)
income into net income
               
Derivatives designated as cash flow hedges:
              
Forward currency contracts
   $ 7,369     $ 981  
Cost of goods sold
Commodity contracts
     7,468       63  
Cost of goods sold
Total derivatives designated as cash flow hedges
   $ 14,837     $ 1,044    

Amounts recorded in other comprehensive (loss) income in shareholder’s equity and in net income for the nine months ended September 30, 2011 were as follows:

   
Amount of loss
recorded in other
comprehensive
(loss) income
    
Amount of loss
reclassified from
other comprehensive
(loss) income into net
income
  
Location of loss
reclassified from other
comprehensive (loss)
income into net income
               
Derivatives designated as cash flow hedges:
              
Forward currency contracts
   $ 7,369     $ 981  
Cost of goods sold
Commodity contracts
     6,788       87  
Cost of goods sold
Total derivatives designated as cash flow hedges
   $ 14,157     $ 1,068    
 

These derivatives will be reclassified from other comprehensive (loss) income to the condensed consolidated statement of operations through December of 2012.  The Company has measured the ineffectiveness of the forward currency and commodity contracts and any amounts recognized in the condensed consolidated financial statements were immaterial for the three and nine months ended September 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.

               
September 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
   $ 24     $ -     $ 24     $ 108  
Available for sale security
     -       -       -       274  
Total financial assets carried at fair value
   $ 24     $ -     $ 24     $ 382  
                                 
Financial liabilities carried at fair value:
                                
                                 
Forward currency contracts
   $ 6,388     $ -     $ 6,388     $ -  
Interest rate swap contract
     1,034       -       1,034       3,017  
Fixed price commodity contracts
     6,701               6,701       -  
Total financial liabilities carried at fair value
   $ 14,123     $ -     $ 14,123     $ 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.