(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 September 30, 2018, 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 2018 and 2017 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 2018.

These forward contracts were executed to hedge forecasted transactions and certain transactions 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 (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, 2018 and December 31, 2017, the Company held foreign currency forward contracts with underlying notional amounts of $920 and $1,486, respectively, to reduce the exposure related to the Company’s euro-denominated intercompany loans. The current contract expires in June 2019. The euro-denominated foreign currency forward contract was not designated as a hedging instrument. The Company recognized a gain of $10 and a loss of $36 for the three months ended September 30, 2018 and 2017, respectively, in the condensed consolidated statements of operations as a component of other expense (income), net related to the euro-denominated contract. For the nine months ended September 30, 2018 and 2017, the Company recognized a gain of $52 and a loss of $164, 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, 2018 of $2,000 which expire ratably on a monthly basis from October 2018 through December 2018. There were no such contracts at December 31, 2017.

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, 2018 of $500 which expire ratably on a monthly basis from October 2018 through December 2018. There were no such contracts at December 31, 2017.

The Company evaluated the effectiveness of the U.S. dollar-denominated foreign currency forward contracts held as of September 30, 2018 and concluded that the hedges were highly 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, 2018 of $4,612 which expire ratably on a monthly basis from October 2018 through December 2018, compared to a notional amount of $9,143 at December 31, 2017.

The Company evaluated the effectiveness of the Mexican peso-denominated foreign currency forward contracts held as of September 30, 2018 and December 31, 2017 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
	September 30,	December 31,	September 30,	December 31,	September 30,	December 31,
	2018	2017	2018	2017	2018	2017
Derivatives designated as hedging instruments:
Cash flow hedges:
Forward currency contracts	$ 7,112	$ 9,143	$ 665	$ -	$ -	$ 221
Derivatives not designated as hedging instruments:
Forward currency contracts	$ 920	$ 1,486	$ 4	$ -	$ -	$ 48


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

Gross 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:


						Gain reclassified from
		Gain recorded in other				other comprehensive income
		comprehensive income (loss)				(loss) into net income (A)
		2018		2017		2018		2017
Derivatives designated as cash flow hedges:
Forward currency contracts	$	637	$	56	$	558	$	268

Gross 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:


						Gain reclassified from
		Gain recorded in other				other comprehensive income
		comprehensive income (loss)				(loss) into net income (A)
		2018		2017		2018		2017
Derivatives designated as cash flow hedges:
Forward currency contracts	$	1,819	$	717	$	933	$	452

(A) Gains reclassified from other comprehensive income (loss) into net income recognized in cost of goods sold in the Company's condensed consolidated statements of operations were $495 and $834 for the three and nine months ended September 30, 2018, respectively. Gains reclassified from other comprehensive income (loss) into net income recognized in design and development (“D&D”) in the Company's condensed consolidated statements of operations were $63 and $99 for the three and nine months ended September 30, 2018, respectively. Gains reclassified from other comprehensive income (loss) were recognized in cost of goods sold for the three and nine months ended September 30, 2017.

The net deferred gain of $665 on the cash flow hedge derivatives will be reclassified from other comprehensive income (loss) to the condensed consolidated statements of operations through December 2018.

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 assets and 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.


								September 30, 2018		December 31, 2017
			Fair values estimated using
				Level 1		Level 2		Level 3
		Fair value		inputs		inputs		inputs		Fair value
Financial assets carried at fair value:
Forward currency contracts	$	669	$	-	$	669	$	-	$	-
Total financial assets carried at fair value	$	669	$	-	$	669	$	-	$	-

Financial liabilities carried at fair value:
Forward currency contracts	$	-	$	-	$	-	$	-	$	269
Earn-out consideration		20,002		-		-		20,002		20,746
Total financial liabilities carried at fair value	$	20,002	$	-	$	-	$	20,002	$	21,015

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, 2017	$	8,637	$	12,109	$	20,746
Change in fair value		369		1,549		1,918
Foreign currency adjustments		(300)		(2,362)		(2,662)
Balance at September 30, 2018	$	8,706	$	11,296	$	20,002


		Orlaco		PST		Total
Balance at December 31, 2016	$	-	$	-	$	-
Fair value on acquisition date		3,243		10,180		13,423
Change in fair value		3,926		719		4,645
Foreign currency adjustments		408		(181)		227
Balance at September 30, 2017	$	7,577	$	10,718	$	18,295

The earn-out consideration obligations related to Orlaco and PST are recorded within other current liabilities and other long-term liabilities, respectively, in the condensed consolidated balance sheet as of September 30, 2018.

The fair value for the Orlaco earn-out consideration is based on a Monte Carlo simulation utilizing forecasted earnings before interest, taxes, depreciation and amortization (“EBITDA”) for the 2017 and 2018 earn-out period as well as a growth rate reduced by the market required rate of return. The Company will be required to pay the PST earn-out consideration, which is not capped, based on PST’s financial performance in either 2020 or 2021. The fair value of the PST earn-out consideration is based on discounted cash flows utilizing forecasted EBITDA in 2020 and 2021 using the key inputs of forecasted sales and expected operating income reduced by the market required rate of return.

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 current period end to the payment date offset by foreign currency translation. The Orlaco earn-out consideration reached the capped amount of €7,500 as of the quarter ended March 31, 2018. The net decrease in fair value of earn-out consideration for PST was due to foreign currency translation partially offset by the reduced time from the current period end to the payment date. The fair value adjustments of Orlaco and PST earn-out considerations are recorded in SG&A in the condensed consolidated statements of operations. The foreign currency impact for the PST earn-out considerations is included in other expense (income), net in the condensed consolidated statements of operations.

There were no transfers in or out of Level 3 from other levels in the fair value hierarchy for the nine months ended September 30, 2018.

Except for the fair value of assets acquired and liabilities assumed related to the Orlaco acquisition discussed in the Company’s 2017 Form 10-K, there were no non-recurring fair value measurements for the periods presented.