(5) 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 September 30, 2016, 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 2016 and 2015 included 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 2016 and 2015.

These forward contracts were executed to hedge forecasted transactions and have been 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 condensed 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 condensed consolidated statement of operations as a component of other income, net.

The Company's foreign currency forward contracts offset a portion of the gains and losses on the underlying foreign currency denominated transactions as follows:

Euro-denominated Foreign Currency Forward Contract

At September 30, 2016 and December 31, 2015, the Company held a foreign currency forward contract with underlying notional amounts of $1,711 and $1,647, respectively, to reduce the exposure related to the Company's euro-denominated intercompany loans. This contract expires in December 2016. The euro-denominated foreign currency forward contract was not designated as a hedging instrument. The Company recognized a gain of $1 and a loss of $9 for the three months ended September 30, 2016 and 2015, respectively, in the condensed consolidated statements of operations as a component of other income, net related to the euro-denominated contract. For the nine months ended September 30, 2016 and 2015, the Company recognized a loss of $38 and a gain of $307, respectively, related to this contract.

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

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 September 30, 2016 of $2,655 which expire ratably on a monthly basis from October 2016 through December 2016, compared to a notional amount of $10,007 at December 31, 2015.

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 September 30, 2016 of $608 which expire ratably on a monthly basis from October 2016 through December 2016, compared to a notional amount of $2,421 at December 31, 2015.

The Company evaluated the effectiveness of the U.S. dollar-denominated foreign currency forward contracts held as of September 30, 2016 and December 31, 2015 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 forward contracts with notional amounts at September 30, 2016 of $2,417 which expire ratably on a monthly basis from October 2016 through December 2016, compared to a notional amount of $9,780 at December 31, 2015.

The Company evaluated the effectiveness of the Mexican peso-denominated foreign currency forward contracts held as of September 30, 2016 and December 31, 2015 and concluded that the hedges were effective.

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



		Notional	Prepaid expenses		Accrued expenses and
	amounts (A)		and other current assets		other current liabilities
	September 30,	December 31,	September 30,	December 31,	September 30,	December 31,
	2016	2015	2016	2015	2016	2015
Derivatives designated as hedging instruments:
Cash flow hedges:
Forward currency contracts	$5,680	$22,208	$163	$474	$246	$84

Derivatives not designated as hedging instruments:
Forward currency contracts	$1,711	$1,647	$-	$-	$13	$9


(A)	Notional amounts represent the gross contract in U.S. dollars of the derivatives outstanding.

Amounts recorded for the cash flow hedges in other comprehensive income (loss) and in net income for the three months ended September 30 are as follows:


		Loss recorded				Loss reclassified from
		in other comprehensive				other comprehensive income
		income (loss)				(loss) into net income
		2016		2015		2016		2015
Derivatives designated as cash flow hedges:
Forward currency contracts	$	(129)	$	(578)	$	(65)	$	(342)
Total derivatives designated as cash flow hedges	$	(129)	$	(578)	$	(65)	$	(342)

Amounts recorded for the cash flow hedges in other comprehensive income (loss) and in net income for the nine months ended September 30 are as follows:


		Loss recorded				Loss reclassified from
		in other comprehensive				other comprehensive income
		income (loss)				(loss) into net income
		2016		2015		2016		2015
Derivatives designated as cash flow hedges:
Forward currency contracts	$	(656)	$	(681)	$	(183)	$	(652)
Total derivatives designated as cash flow hedges	$	(656)	$	(681)	$	(183)	$	(652)

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

The net deferred loss of $83 on the cash flow hedge derivatives will be reclassified from other comprehensive income (loss) to the condensed consolidated statements of operations through December 2016.

Fair Value Measurements

The Company’s assets and liabilities are measured at fair value on a recurring basis and are categorized using the three levels of the fair value hierarchy based on the reliability of the inputs used. Fair values estimated using Level 1 inputs consist of quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. Fair values estimated using Level 2 inputs, other than quoted prices, 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 contracts, inputs include foreign currency exchange rates. Fair values estimated using Level 3 inputs consist of significant unobservable inputs.

The Company did not have any financial assets or liabilities fair valued using Level 1 or Level 3 inputs at September 30, 2016 or December 31, 2015. The fair value of financial assets using Level 2 inputs related to forward currency contracts were $163 and $474 at September 30, 2016 and December 31, 2015, respectively. The fair value of financial liabilities using Level 2 inputs related to forward currency contracts were $259 and $93 at September 30, 2016 and December 31, 2015, respectively.