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.

Derivative Instruments and Hedging Activities

On December 31, 2015, the Company had open foreign currency forward contracts which 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 currencies hedged by the Company during 2015, 2014 and 2013 include the euro and Mexican peso. In addition, the Company hedged the U.S. dollar against the Swedish krona and euro on behalf of its European subsidiaries in 2015 and 2014.

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 currency.

In certain instances, the foreign currency forward contracts do not qualify for hedge accounting or are not designated as hedges, and therefore are marked to market with gains and losses recognized in the Company’s consolidated statements of operations as a component of other expense, net.

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, 2015 and 2014, the Company held a foreign currency forward contract with an underlying notional amount of $1,647 and $3,523, respectively, to reduce the exposure related to the Company’s euro-denominated intercompany loans. This contract expires in March 2016. The euro-denominated foreign currency forward contract was not designated as a hedging instrument. For the year ended December 31, 2015, the Company recognized a gain of $336 in the consolidated statements of operations as a component of other expense, net related to the euro-denominated contract. The Company recognized a gain of $1,205 and a loss of $638 related to foreign currency forward contracts for the years ended December 31, 2014 and 2013, respectively.

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 Swedish krona, U.S. dollar-denominated currency contracts with a notional amount at December 31, 2015 of $10,007 which expire ratably on a monthly basis from January 2016 through December 2016, compared to $11,718 at December 31, 2014.

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, 2015 of $2,421 which expire ratably on a monthly basis from January 2016 through December 2016, compared to $4,266 at December 31, 2014.

The Company evaluated the effectiveness of the U.S. dollar-denominated foreign currency forward contracts held as of December 31, 2015 and 2014 and concluded that the hedges were effective.

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, 2015 of $9,780 which expire ratably on a monthly basis from January 2016 through December 2016, compared to $10,282 at December 31, 2014.

The Company evaluated the effectiveness of the Mexican peso-denominated foreign currency forward contracts held as of June 30, 2014. 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 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 contracts 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.

The Company evaluated the effectiveness of the Mexican peso-denominated foreign currency forward contracts held as of December 31, 2015 and 2014 and concluded that the hedges were effective.

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. Copper is a raw material used in a number of the Company’s products.

The Company did not have any fixed price commodity contracts at December 31, 2015 compared to an aggregate notional amount of 317 pounds at December 31, 2014.

The unrealized gain or loss for the effective portion of the hedges were deferred and reported in the Company’s consolidated balance sheets as a component of accumulated other comprehensive loss while the ineffective portion, if any, was reported in the consolidated statements of operations. The effectiveness of the transactions is measured on an ongoing basis using regression analysis and forecasted future copper purchases.

The Company evaluated the effectiveness of the copper fixed price commodity contracts as of June 30, 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 the two contracts for the period August 2014 through March 2015. As the purchase of copper quantities related to these contracts was not probable, the contracts primarily associated with the Wiring segment not expected to be fulfilled were de-designated at June 30, 2014, and the associated unrecognized $77 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.

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 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 notes due October 15, 2017. The critical terms of the Swap were aligned with the terms of the senior 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 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 in 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, net in the consolidated statement of operations in the fourth quarter of 2014.

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

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


			Prepaid expenses
		Notional	and other current assets /		Accrued expenses and
	amounts (A)		other long-term assets		other current liabilities
		December 31,		December 31,		December 31,
	2015	2014	2015	2014	2015	2014
Derivatives designated as hedging instruments
Cash Flow Hedges:
Forward currency contracts	$22,208	$26,266	$474	$479	$84	$478

Derivatives not designated as hedging instruments
Forward currency contracts	$1,647	$3,523	$ -	$ -	$9	$13
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 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 loss
		comprehensive loss						into net income (loss)
		2015		2014		2013		2015		2014		2013
Derivatives designated as cash flow hedges:
Forward currency contracts	$	(671)	$	(46)	$	683	$	(1,060)	$	(310)	$	2,746
Fixed price commodity contracts		-		(408)		(1,008)		-		(256)		(820)
Total derivatives designated as cash flow hedges	$	(671)	$	(454)	$	(325)	$	(1,060)	$	(566)	$	1,926

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

The net deferred gain of $390 on the cash flow hedge derivatives will be reclassified from other comprehensive loss to the consolidated statements of operations in 2016. 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, 2015, 2014 and 2013.

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,
					2015	2014
			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:

Forward currency contracts		$ 474	$ -	$ 474	$ -	$ 479


Total financial assets carried at fair value		$ 474	$ -	$ 474	$ -	$ 479

Financial liabilities carried at fair value:
Forward currency contracts		$ -	$ -	$ -	$ -	$ 491
Fixed price commodity contracts		93	-	93	-	69

Total financial liabilities carried at fair value		$ 93	$ -	$ 93	$ -	$ 560

(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, 2015 or 2014.
(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 and fixed price commodity contracts, inputs include foreign currency exchange rates and commodity indexes.
(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, 2015 or 2014.

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 non-recurring fair value adjustments were required for nonfinancial assets for the year ended December 31, 2015.