9. Financial Instruments and Fair Value Measurements

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 with a face value of $175,000 (fixed rate debt) at December 31, 2013 was $190,100, and was determined using market quotes classified as Level 2 input within the fair value hierarchy. The Company redeemed all of the senior secured notes during 2014.

Derivative Instruments and Hedging Activities

On December 31, 2014, the Company had open foreign currency forward contracts and fixed price commodity contracts. 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.

Foreign Currency Exchange Rate Risk

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 manage its exposure to fluctuations in foreign currency exchange rates by reducing the effect of such fluctuations on foreign currency denominated intercompany transactions, inventory purchases and other foreign currency exposures. The foreign currencies hedged by the Company during 2014 and 2013 include the euro 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 consolidated statements of operations as a component of other expense, net.

These forward contracts were executed to hedge forecasted transactions and were accounted for as cash flow hedges. As such, the effective portion of the unrealized gain or loss was deferred and reported in the Company’s consolidated balance sheets as a component of accumulated other comprehensive loss. The cash flow hedges were highly effective. The effectiveness of the transactions has been and will be measured on an ongoing basis using regression analysis and forecasted future purchases of the euro, Swedish krona and Mexican peso.

The Company’s foreign currency forward contracts are designed to offset some of the gains and losses realized on the underlying foreign currency denominated transactions as follows:

Euro-denominated Foreign Currency Forward Contracts

At December 31, 2014 and 2013, the Company held a foreign currency forward contract with an underlying notional amount of $3,523 and $13,335, respectively, to reduce the exposure related to the Company’s euro-denominated intercompany loans. This contract expires in March 2015. The euro-denominated foreign currency forward contract was not designated as a hedging instrument. For the year ended December 31, 2014, the Company recognized a gain of $1,205 in the consolidated statements of operations as a component of other expense, net related to the euro-denominated contract. For the years ended December 31, 2013 and 2012, the Company recognized a loss of $638 and $492, respectively, related to foreign currency forward contracts.

U.S. dollar-denominated Foreign Currency Forward Contracts – Cash Flow Hedge

The Company entered into on behalf of one of its European Electronics subsidiaries whose functional currency is the euro, U.S. dollar-denominated currency contracts with a notional amount at December 31, 2014 of $4,266 which expires ratably on a monthly basis from January 2015 through December 2015, compared to $0 at December 31, 2013.

The Company entered into on behalf of one of its European Electronics subsidiaries whose functional currency is the Swedish krona, U.S. dollar-denominated currency contracts with a notional amount at December 31, 2014 of $11,718 which expires ratably on a monthly basis from January 2015 through December 2015, compared to $0 at December 31, 2013.

Mexican peso-denominated Foreign Currency Forward Contracts – Cash Flow Hedge

The Company holds Mexican peso-denominated foreign currency contracts with notional amounts at December 31, 2014 of $10,282 which expire ratably on a monthly basis from January 2015 through December 2015, compared to $45,000 at December 31, 2013.

As a result of the sale of the Wiring business, the Company forecasted that it would purchase Mexican pesos to fulfill only two of the five hedge contracts outstanding as of June 30, 2014 for the period October 2014 through December 2014. As the purchase of Mexican pesos related to three of the five hedge contracts was not probable, these three hedges attributed to the Wiring business were de-designated as of June 30, 2014 and the associated unrecognized $320 gain at that date was reclassified from accumulated other comprehensive loss and recorded in discontinued operations in the Company’s consolidated statements of operations in the quarter and year of de-designation. On August 4, 2014, the three de-designated hedges were terminated and settled resulting in a nominal gain.

Commodity Price Risk - Cash Flow Hedge

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 as copper is a raw material used in the Company’s products.

The Company has fixed price commodity contracts at December 31, 2014 with an aggregate notional amount of 317 pounds, which expire on a monthly basis over the period from January through March 2015, compared to an aggregate notional amount of 1,582 pounds at December 31, 2013. All of these contracts represented a portion of the Company’s forecasted copper purchases when they were entered into. These contracts were executed to hedge a portion of forecasted transactions, except for the 317 pounds outstanding at December 31, 2014, and have been designated and 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 while the ineffective portion, if any, is reported in the condensed consolidated statements of operations. The effectiveness of the transactions is measured on an ongoing basis using regression analysis and forecasted future copper purchases. Based upon the results of the regression analysis, the Company has concluded that these cash flow hedges are highly effective.

The Company evaluated the effectiveness of the copper fixed price commodity contracts at each reporting date in 2014. As a result of the sale of the Wiring business, the Company forecasted that it would not purchase the quantities of copper to fulfill these hedge contracts for the period January 2015 through March 2015. As the purchase of copper quantities related to these hedge contracts was not probable, the contracts primarily associated with the Wiring segment not expected to be fulfilled were de-designated at June 30, 2014 with the associated unrecognized $77 gain reclassified from accumulated other comprehensive loss and recorded in discontinued operations in the Company’s consolidated statements of operations in the quarter and year of de-designation.

Interest Rate Risk - Fair Value Hedge

The Company had 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. The critical terms of the Swap were 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 was deferred and reported in the Company’s consolidated balance sheets as an asset or liability, as applicable, with the offset to the carrying value of the senior secured notes.

Under the Swap, the Company paid a variable interest rate equal to the six-month London Interbank Offered Rate (“LIBOR”) plus 7.2% and it received a fixed interest rate of 9.5%. The Swap required semi-annual settlements on April 15 and October 15. The difference between amounts received and paid under the Swap was recognized as a component of interest expense, net on the consolidated statements of operations.

In connection with the Company’s notice of redemption issued on September 15, 2014 to redeem all remaining outstanding senior notes, the interest rate fair value hedge was de-designated on that date. On October 23, 2014, the Company terminated the interest rate swap resulting in a gain of $371 recorded in other expense (income), net on the consolidated statement of operations in the fourth quarter of 2014.

The Swap reduced interest expense by $641, $810 and $736 for the years ended December 31, 2014, 2013 and 2012, respectively.

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


			Prepaid expenses
			and other current assets /		Accrued expenses and
	Notional Amounts (A)		other long-term assets		other current liabilities
	December 31,		December 31,		December 31,
	2014	2013	2014	2013	2014	2013
Derivatives designated as hedging instruments
Cash Flow Hedges:
Forward currency contracts	$ 26,267	$ 45,000	$ 479	$ -	$ 478	$ 263
Fixed price commodity contracts	-	1,582	-	$ 152	-	-

Fair Value Hedge:
Interest rate swap contract	-	$ 45,000	-	$ 793	-	-

Derivatives not designated as hedging instruments
Forward currency contracts	$ 3,523	$ 13,335	-	-	$ 13	$ 18
Fixed price commodity contracts	317	-	-	-	$ 69	-

(A)	Notional amounts represent the gross contract / notional amount of the derivatives outstanding. The fixed price commodity contract notional amounts are in pounds.

Amounts recorded for the cash flow hedges in other comprehensive income (loss) in shareholders’ equity and in net income (loss) for the years ended December 31 were as follows:


								Gain (loss) reclassified from
		Gain (loss) recorded in other						other comprehensive income
		comprehensive income (loss)						(loss) into net income
		2014		2013		2012		2014		2013		2012
Derivatives designated as cash flow hedges:
Forward currency contracts	$	(46)	$	683	$	5,717	$	(310)	$	2,746	$	(241)
Fixed price commodity contracts		(408)		(1,008)		1,389		(256)		(820)		(2,515)
Total derivatives designated as cash flow hedges	$	(454)	$	(325)	$	7,106	$	(566)	$	1,926	$	(2,756)

Gains and losses reclassified from comprehensive income (loss) into net income (loss) were recognized in cost of goods sold in the Company’s consolidated statements of operations.

The net deferred gains of $1 on the cash flow hedge derivatives will be reclassified from other comprehensive income (loss) to the consolidated statements of operations in 2015. The Company has measured the ineffectiveness of the forward currency and commodity contracts and any amounts recognized in the consolidated financial statements were immaterial for the years ended December 31, 2014, 2013 and 2012.

Fair Value Measurements

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.


					December 31,	December 31,
					2014	2013
			Fair value estimated using
		Fair value	Level 1 inputs (A)	Level 2 inputs (B)	Level 3 inputs (C)	Fair value
Financial assets carried at fair value:
Interest rate swap contract		$ -	$ -	$ -	$ -	$ 793
Forward currency contracts		479	-	479	-	-
Fixed price commodity contracts		-	-	-	-	152

Total financial assets carried at fair value		$ 479	$ -	$ 479	$ -	$ 945

Financial liabilities carried at fair value:
Forward currency contracts		$ 491	$ -	$ 491	$ -	$ 281
Fixed price commodity contracts		69	-	69	-	-

Total financial liabilities carried at fair value		$ 560	$ -	$ 560	$ -	$ 281

(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 Company did not have any fair value estimates using Level 1 inputs at December 31, 2014 or 2013.
(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 forward currency, fixed price commodity and interest rate swap contracts, inputs include foreign currency exchange rates, commodity indexes and the six-month forward LIBOR.
(C)	Fair values estimated using Level 3 inputs consist of significant unobservable inputs. The Company did not have any recurring fair value estimates using Level 3 inputs at December 31, 2014 or 2013.

The Company recorded a non-recurring fair value adjustment of $51,458 related to the PST goodwill during the year ended December 31, 2014. The Company utilized Level 3 inputs to estimate the fair value adjustment for nonfinancial assets. For additional information, see the discussion of Goodwill and Other Intangible Assets in Note 2. No adjustments to fair value were required for nonfinancial assets for the years ended December 31, 2013 or 2012.