Financial instruments | 9 Months Ended |
Sep. 30, 2013 |
Financial Instruments [Abstract] | |
Financial Instruments Disclosure | 4. Financial instruments |
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Foreign currency risk |
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We manufacture and sell our products primarily in North America, South America, Asia, Europe and Africa. As a result our financial results could be significantly affected by factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets in which we manufacture and sell our products. We generally try to use natural hedges within our foreign currency activities, including the matching of revenues and costs, to minimize foreign currency risk. Where natural hedges are not in place, we consider managing certain aspects of our foreign currency activities through the use of foreign exchange contracts. We primarily utilize forward exchange contracts with maturities generally within fifteen months to hedge against currency rate fluctuations, and are designated as hedges. |
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As of September 30, 2013, and December 31, 2012, we had the following outstanding foreign currency contracts that were entered into to hedge forecasted purchases and revenues, respectively: |
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(In thousands) | Currency denomination | | | | | | | | | | |
| September 30, | | | December 31, | | | | | | | | | | |
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Foreign currency contract | 2013 | | | 2012 | | | | | | | | | | |
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South Korean Won Forward | $ | 45,735 | | | $ | 55,546 | | | | | | | | | | |
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Mexican Peso Contracts | $ | 54,985 | | | $ | 66,674 | | | | | | | | | | |
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Brazilian Real Forward | $ | 11,698 | | | $ | 18,055 | | | | | | | | | | |
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Hungarian Forint Forward | € | 10,921 | | | € | 13,565 | | | | | | | | | | |
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Great Britain Pound Forward | £ | 2,750 | | | £ | 1,370 | | | | | | | | | | |
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Accumulated unrealized net gains of $1,172,000 and $3,426,000 were recorded in accumulated other comprehensive income (loss) (AOCI) as of September 30, 2013, and December 31, 2012, respectively. As of September 30, 2013, gains of $1,216,000 are expected to be reclassified to the consolidated statement of operations within the next twelve months. Any ineffectiveness during the three and nine month periods ended September 30, 2013 and 2012, respectively, was immaterial. |
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Interest rate risk |
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During 2010, we entered into an interest rate swap agreement in respect to 50% of the outstanding principal balance of our Term B Loan under which we swapped a variable LIBOR rate with a floor of 1.75% to a fixed rate of 3.345%. Due to the significant value of terminated swaps which were rolled into this Term B Loan swap, this Term B Loan interest rate swap was an undesignated hedge and changes in the fair value were recorded as interest expense-net in the accompanying consolidated statements of operations. |
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On March 27, 2013, we terminated our undesignated Term B Loan interest rate swap and transferred the value into a new undesignated interest rate swap agreement of $72,000,000 of the outstanding principal loan balance under which we swap a variable LIBOR rate with a floor of 1.25% to a fixed rate of 4.045% with an effective date of December 30, 2016 and expiration date of December 31, 2019. The notional value of this interest rate swap is $72,000,000, and is reduced by $187,500 quarterly from the effective date. Due to the significant value of the terminated swaps which were transferred into this new swap, this interest rate swap is an undesignated hedge and changes in the fair value are recorded as interest expense-net in the accompanying consolidated statements of operations. |
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On March 27, 2013, we also entered into a designated interest rate swap agreement for $72,000,000 of the outstanding principal balance of our long term debt. Under the terms of the new interest rate swap agreement, we swap a variable LIBOR rate with a floor of 1.25% to a fixed rate of 2.75% with an effective date of December 30, 2016 and expiration date of December 31, 2019. The notional value of this interest rate swap is $72,000,000, and is reduced by $187,500 quarterly from the effective date. This interest rate swap has been designated as a cash flow hedging instrument. Accumulated unrealized gains of $922,000, excluding the tax effect, were recorded in accumulated other comprehensive income (loss) (AOCI) as of September 30, 2013, and there were none recorded as of December 31, 2012. As of September 30, 2013, no gains are expected to be reclassified to the consolidated statement of operations within the next twelve months. Any ineffectiveness during the three and nine month periods ended September 30, 2013, and 2012 was immaterial. |
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The interest rate swaps reduce our overall interest rate risk. However, due to the remaining outstanding borrowings on the Amended and Restated Term B Loan and other borrowing facilities that continue to have variable interest rates, management believes that interest rate risk to us could be material if there are significant adverse changes in interest rates. |
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Commodity price risk |
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Our production processes are dependent upon the supply of certain components whose raw materials are exposed to price fluctuations on the open market. The primary purpose of our commodity price forward contract activity is to manage the volatility associated with forecasted purchases. We monitor our commodity price risk exposures regularly to maximize the overall effectiveness of our commodity forward contracts. The principal raw material hedged is copper. Forward contracts are used to mitigate commodity price risk associated with raw materials, generally related to purchases forecast for up to twenty-four months in the future. Additionally, we purchase certain commodities during the normal course of business which result in physical delivery and are excluded from hedge accounting. |
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We had twenty-nine commodity price hedge contracts outstanding at September 30, 2013, and thirty-six commodity price hedge contracts outstanding at December 31, 2012, with combined notional quantities of 5,423 and 6,566 metric tons of copper, respectively. These contracts mature within the next fifteen months. These contracts were designated as cash flow hedging instruments. Accumulated unrealized losses of $2,985,000 and $1,288,000, excluding the tax effect, were recorded in AOCI as of September 30, 2013, and December 31, 2012, respectively. As of September 30, 2013, losses of $3,129,000 are expected to be reclassified to the accompanying consolidated statement of operations within the next 12 months. Hedge ineffectiveness during the three and nine month periods ended September 30, 2013, and 2012, was immaterial. |
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Other |
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We present our derivative positions and any related material collateral under master netting agreements on a net basis. For derivatives designated as cash flow hedges, changes in the time value are excluded from the assessment of hedge effectiveness. Unrealized gains and losses associated with ineffective hedges, determined using the change in fair value method, are recognized in the accompanying consolidated statements of operations. Derivative gains and losses included in AOCI for effective hedges are reclassified into the accompanying consolidated statements of operations upon recognition of the hedged transaction. |
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Any derivative instrument designated initially, but no longer effective as a hedge, or initially not effective as a hedge, is recorded at fair value and the related gains and losses are recognized in the accompanying consolidated statements of operations. Our undesignated hedges are primarily our interest rate swaps whose fair value at inception of the instrument due to the rollover of existing interest rate swaps resulted in ineffectiveness. The following table discloses the fair values and balance sheet locations of our derivative instruments: |
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| Asset derivatives | | Liability derivatives | |
(In thousands) | Balance sheet location | September 30, 2013 | | | December 31, 2012 | | Balance sheet location | September 30, 2013 | | | December 31, 2012 | |
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Derivatives designated as hedging instruments: | | | | | | | | | | | |
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Commodity contracts | Prepaid expenses and | $ | 110 | | | $ | 427 | | Other current liabilities | $ | 3,284 | | | $ | 2,009 | |
other current assets | and accrued expenses |
Commodity contracts | Other noncurrent assets | 145 | | | 267 | | Other noncurrent liabilities | — | | | — | |
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Foreign currency contracts | Prepaid expenses and | 2,697 | | | 5,537 | | Other current liabilities | 49 | | | 26 | |
other current assets | and accrued expenses |
Foreign currency contracts | Other noncurrent assets | 44 | | | 127 | | Other noncurrent liabilities | 57 | | | 310 | |
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Interest rate swap contracts | Other noncurrent assets | 922 | | | — | | Other noncurrent liabilities | — | | | — | |
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Total derivatives designated as hedging instruments | $ | 3,918 | | | $ | 6,358 | | | $ | 3,390 | | | $ | 2,345 | |
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Derivatives not designated as hedging instruments: | | | | | | | | | | | |
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Interest rate swap contracts | Prepaid expenses and | $ | — | | | $ | — | | Other current liabilities | $ | — | | | $ | 2,218 | |
other current assets | and accrued expenses |
Interest rate swap contracts | Other noncurrent assets | — | | | — | | Other noncurrent liabilities | 1,232 | | | — | |
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Total derivatives not designated as hedging instruments | $ | — | | | $ | — | | | $ | 1,232 | | | $ | 2,218 | |
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The following tables disclose the effect of our derivative instruments on the accompanying consolidated statement of operations for the three months ended September 30, 2013 (in thousands): |
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Derivatives designated as cash flow hedging instruments | Amount of gain (loss) recognized in OCI on derivatives (effective portion) | | Location of gain (loss) reclassified from AOCI into income (effective portion) | Amount of gain (loss) reclassified from AOCI into income (effective portion) | | Location of gain (loss) recognized in income on derivatives (ineffective portion and amount excluded from effectiveness testing) | Amount of gain (loss) recognized in income on derivatives (ineffective portion and amount excluded from effectiveness testing) | | | | | | |
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Commodity contracts | $ | 2,863 | | Cost of goods sold | $ | (1,591 | ) | Cost of goods sold | $ | 28 | | | | | | |
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Foreign currency contracts | 4,494 | | Cost of goods sold | 2,068 | | Cost of goods sold | — | | | | | | |
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Interest rate swap contracts | (102 | ) | Interest expense–net | — | | Interest expense–net | — | | | | | | |
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| $ | 7,255 | | | $ | 477 | | | $ | 28 | | | | | | |
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Derivatives not designated as hedging instruments | Location of gain (loss) recognized in income on derivatives | Amount of gain (loss) recognized in income on derivatives | | | | | | | | | | | | | |
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Interest rate swap | Interest expense–net | $ | (137 | ) | | | | | | | | | | | | |
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The following tables disclose the effect of our derivative instruments on the accompanying consolidated statement of operations for the three months ended September 30, 2012 (in thousands): |
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Derivatives designated as cash flow hedging instruments | Amount of gain (loss) recognized in OCI on derivatives (effective portion) | | Location of gain (loss) reclassified from AOCI into income (effective portion) | Amount of gain (loss) reclassified from AOCI into income (effective portion) | | Location of gain (loss) recognized in income on derivatives (ineffective portion and amount excluded from effectiveness testing) | Amount of gain (loss) recognized in income on derivatives (ineffective portion and amount excluded from effectiveness testing) | | | | | | |
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Commodity contracts | $ | 958 | | Cost of goods sold | $ | (1,637 | ) | Cost of goods sold | $ | 29 | | | | | | |
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Foreign currency contracts | 5,316 | | Cost of goods sold | (580 | ) | Cost of goods sold | — | | | | | | |
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| $ | 6,274 | | | $ | (2,217 | ) | | $ | 29 | | | | | | |
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Derivatives not designated as hedging instruments | Location of gain (loss) recognized in income on derivatives | Amount of gain (loss) recognized in income on derivatives | | | | | | | | | | | | | |
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Interest rate swap contracts | Interest expense–net | $ | (86 | ) | | | | | | | | | | | | |
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The following tables disclose the effect of our derivative instruments on the accompanying consolidated statement of operations for the nine months ended September 30, 2013 (in thousands): |
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Derivatives designated as cash flow hedging instruments | Amount of gain (loss) recognized in OCI on derivatives (effective portion) | | Location of gain (loss) reclassified from AOCI into income (effective portion) | Amount of gain (loss) reclassified from AOCI into income (effective portion) | | Location of gain (loss) recognized in income on derivatives (ineffective portion and amount excluded from effectiveness testing) | Amount of gain (loss) recognized in income on derivatives (ineffective portion and amount excluded from effectiveness testing) | | | | | | |
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Commodity contracts | $ | (4,071 | ) | Cost of goods sold | $ | (2,374 | ) | Cost of goods sold | $ | (58 | ) | | | | | |
Foreign currency contracts | 1,988 | | Cost of goods sold | 4,887 | | Cost of goods sold | — | | | | | | |
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Interest rate swap contracts | 922 | | Interest expense–net | — | | Interest expense–net | — | | | | | | |
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| $ | (1,161 | ) | | $ | 2,513 | | | $ | (58 | ) | | | | | |
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Derivatives not designated as hedging instruments | Location of gain (loss) recognized in income on derivatives | Amount of gain (loss) recognized in income on derivatives | | | | | | | | | | | | | |
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Interest rate swap | Interest expense–net | $ | 986 | | | | | | | | | | | | | |
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The following tables disclose the effect of our derivative instruments on the accompanying consolidated statement of operations for the nine months ended September 30, 2012 (in thousands): |
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Derivatives designated as cash flow hedging instruments | Amount of gain (loss) recognized in OCI on derivatives (effective portion) | | Location of gain (loss) reclassified from AOCI into income (effective portion) | Amount of gain (loss) reclassified from AOCI into income (effective portion) | | Location of gain (loss) recognized in income on derivatives (ineffective portion and amount excluded from effectiveness testing) | Amount of gain (loss) recognized in income on derivatives (ineffective portion and amount excluded from effectiveness testing) | | | | | | |
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Commodity contracts | $ | 1,143 | | Cost of goods sold | $ | (3,341 | ) | Cost of goods sold | $ | 18 | | | | | | |
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Foreign currency contracts | 9,698 | | Cost of goods sold | (3,627 | ) | Cost of goods sold | — | | | | | | |
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| $ | 10,841 | | | $ | (6,968 | ) | | $ | 18 | | | | | | |
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Derivatives not designated as hedging instruments | Location of gain (loss) recognized in income on derivatives | Amount of gain (loss) recognized in income on derivatives | | | | | | | | | | | | | |
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Interest rate swap contracts | Interest expense–net | $ | (408 | ) | | | | | | | | | | | | |
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Concentrations of credit risk |
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Financial instruments, which potentially subject us to concentrations of credit risk, consist primarily of accounts receivable and cash investments. We require placement of cash in financial institutions evaluated as highly creditworthy. Our customer base includes global light and commercial vehicle manufacturers and a large number of retailers, distributors and installers of automotive aftermarket parts. Our credit evaluation process and the geographical dispersion of sales transactions help to mitigate credit risk concentration. |
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Accounts receivable factoring arrangements |
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We have entered into factoring agreements with various domestic and European financial institutions to sell our accounts receivable under nonrecourse agreements. These are treated as a sale. The transactions are accounted for as a reduction in accounts receivable as the agreements transfer effective control over and risk related to the receivables to the buyers. We do not service any domestic accounts after the factoring has occurred. We do not have any servicing assets or liabilities. We utilize factoring arrangements as an integral part of financing for us. The cost of factoring such accounts receivable is reflected in the accompanying consolidated statements of operations as interest expense-net with other financing costs. The cost of factoring such accounts receivable for the three months ended September 30, 2013, and 2012, was $1,437,000, and $1,689,000, respectively. The cost of factoring such accounts receivable for the nine months ended September 30, 2013 and 2012, was $4,316,000, and $4,107,000, respectively. Gross amounts factored under these facilities as of September 30, 2013, and December 31, 2012, were $227,992,000, and $183,547,000, respectively. Any change in the availability of these factoring arrangements could have a material adverse effect on our financial condition. |