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 fair value of debt approximates the carrying value of debt.

Derivative Instruments and Hedging Activities

On December 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, 2016 and 2015 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 2016 and 2015.

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 (income), 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, 2017 and 2016, the Company held foreign currency forward contracts with an underlying notional amount of $1,486 and $1,601, respectively, to reduce the exposure related to the Company’s euro-denominated intercompany loans. These contracts expires in June 2018. The euro-denominated foreign currency forward contract was not designated as a hedging instrument. For the years ended December 31, 2017, 2016, and 2015, the Company recognized a loss of $174 and gains of $57 and $336, respectively, in the consolidated statements of operations as a component of other expense (income), net related to the euro-denominated contract.

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 expired ratably on a monthly basis from January 2016 through December 2016. There were no contracts entered into as of December 31, 2017 or 2016.

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 expired ratably on a monthly basis from January 2016 through December 2016. There were no contracts entered into as of December 31, 2017 or 2016.

The Company evaluated the effectiveness of the U.S. dollar-denominated foreign currency forward contracts held as of December 31, 2015 and during 2016 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, 2017 of $9,143 which expire ratably on a monthly basis from January 2018 through December 2018, compared to $5,699 at December 31, 2016.

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

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



			Accrued expenses and
	Notional amounts (A)		other current liabilities
	December 31,	December 31,	December 31,	December 31,
	2017	2016	2017	2016
Derivatives designated as hedging instruments:
Cash flow hedges:
Forward currency contracts	$ 9,143	$ 5,699	$ 221	$ 28
Derivatives not designated as hedging instruments:
Forward currency contracts	$ 1,486	$ 1,601	$ 48	$ 3

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

Gross amounts recorded for the cash flow hedges in other comprehensive loss in shareholders’ equity and in net income 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 (A)
		2017		2016	2015		2017		2016	2015
Derivatives designated as cash flow hedges:
Forward currency contracts	$	441	$	(582)	(671)	$	634	$	(164)	(1,060)

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

The net deferred loss of $221 on the cash flow hedge derivatives will be reclassified from other comprehensive income (loss) to the consolidated statements of operations in 2018. The Company has measured the ineffectiveness of the forward currency contracts and any amounts recognized in the consolidated financial statements were immaterial for the years ended December 31, 2017, 2016 and 2015.

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 following table presents our liabilities that 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 inputs used.


								December 31, 2017		December 31, 2016
			Fair values estimated using
				Level 1		Level 2		Level 3
		Fair value		inputs		inputs		inputs		Fair value
Financial liabilities carried at fair value:
Forward currency contracts	$	269	$	-	$	269	$	-	$	31
Earn-out consideration		20,746		-		-		20,746		-
Total financial liabilities carried at fair value	$	21,015	$	-	$	269	$	20,746	$	31

The following table sets forth a summary of the change in fair value of the Company’s Level 3 financial liabilities related to earn-out consideration that are measured at fair value on a recurring basis.


		Orlaco		PST		Total
Balance at December 31, 2016	$	-	$	-	$	-
Fair value on acquisition date		3,243		10,180		13,423
Change in fair value		4,853		2,632		7,485
Foreign currency adjustments		541		(703)		(162)
Balance at December 31, 2017	$	8,637	$	12,109	$	20,746

The earn-out considerations related to Orlaco and PST are recorded within other long-term liabilities on the consolidated balance sheet. The change in fair value of the earn-out considerations are recorded within SG&A expense on the consolidated statements of operations.

The increase in fair value of earn-out consideration related to the Orlaco acquisition is primarily due to actual performance exceeding forecasted performance as well as the reduced time from the period presented to the payment date and foreign currency movements. The increase in fair value of earn-out consideration for PST was due to an increase in expected performance and the reduced time from the period presented to the payment date, which was partially offset by foreign currency. The fair value of the Orlaco and PST earn-out consideration is based on forecasted EBITDA during the performance periods.

There were no transfers in or out of Level 3 from other levels in the fair value hierarchy for the year ended December 31, 2017.

Except for the fair value of assets acquired and liabilities assumed related to the Orlaco acquisition discussed in Note 2, no non-recurring fair value adjustments were required for nonfinancial assets for the years ended December 31, 2017 and 2016.