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Financial Instruments and Fair Value Measurements
 3 Months Ended
Mar. 31, 2017
Financial Instruments and Fair Value Measurements [Abstract]  
Financial Instruments and Fair Value Measurements



(6) 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 March 31, 2017, 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 2017 and 2016 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.

 

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 expense, 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 March 31, 2017 and December 31, 2016, the Company held a foreign currency forward contract with underlying notional amounts of $1,630 and $1,601, respectively, to reduce the exposure related to the Company's euro-denominated intercompany loans. The current contract expires in June 2017. The euro-denominated foreign currency forward contract was not designated as a hedging instrument.  The Company recognized a loss of $19 and $82 for the three months ended March 31, 2017 and 2016, respectively, in the condensed consolidated statements of operations as a component of other expense, net related to the euro-denominated contract.

 









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

 

The Company holds Mexican peso-denominated foreign currency forward contracts with notional amounts at March 31, 2017 of $4,248 which expire ratably on a monthly basis from April 2017 through December 2017, compared to a notional amount of $5,699 at December 31, 2016. 



The Company evaluated the effectiveness of the Mexican peso-denominated foreign currency forward contracts held as of March 31, 2017 and December 31, 2016 and concluded that the hedges were highly effective.



 

 



 

 

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





 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



 

 

Prepaid expenses

 

Accrued expenses and



Notional amounts (A)

 

and other current assets

 

other current liabilities



March 31,

 

December 31,

 

March 31,

December 31,

 

March 31,

December 31,



 2017 

 

 2016 

 

 2017  2016 

 

 2017  2016 

Derivatives designated as hedging instruments:

 

 

 

 

 

 

 

 

Cash flow hedges:

 

 

 

 

 

 

 

 

 

Forward currency contracts

 $4,248 

 

 $5,699 

 

 $459  $0 

 

 $0  $28 

Derivatives not designated as hedging instruments:

 

 

 

 

 

 

Forward currency contracts

 $1,630 

 

 $1,601 

 

 $0  $0 

 

 $0  $3 





    

 

(A)

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



Gross amounts recorded for the cash flow hedges in other comprehensive income and in net income for the three months ended March 31 are as follows: 







 

 

 

 

 

 

 

 



 

 

 

Gain (loss) reclassified from



 

Gain (loss) recorded in other

 

other comprehensive income



 

comprehensive income

 

into net income



 

 2017 

 

 2016 

 

 2017 

 

 2016 

Derivatives designated as cash flow hedges:

 

 

 

 

 

 

 

 

Forward currency contracts

$

 516 

$

 (494)

$

 29 

$

 (44)





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



The net deferred gain of $459 on the cash flow hedge derivatives will be reclassified from other comprehensive income to the condensed consolidated statements of operations through December 2017.  



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. 



Except for the earn-out liability discussed in Note 3, the Company did not have any financial assets or liabilities fair valued using Level 1 or Level 3 inputs at March 31, 2017 or December 31, 2016. The fair value of financial assets using Level 2 inputs related to forward currency contracts were $459 and $0 at March 31, 2017 and December 31, 2016, respectively.  The fair value of financial liabilities using Level 2 inputs related to forward currency contracts were $0 and $31 at March 31, 2017 and December 31, 2016, respectively. The fair value of the earn-out liability related to Orlaco using Level 3 inputs was approximately $4,200 at March 31, 2017.



Except for the fair value of assets acquired and liabilities assumed related to the Orlaco acquisition discussed in Note 3, there were no non-recurring fair value measurements for the periods presented.