Financial Instruments Measured at Fair Value

12 Months Ended

Dec. 31, 2015

Financial Instruments Measured At Fair Value [Text Block]

Financial Instruments Measured at Fair Value

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The company utilizes a fair value hierarchy, which maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. The fair value hierarchy has three levels of inputs that may be used to measure fair value:


Level 1	Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.


Level 2	Quoted prices in markets that are not active; or other inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability.


Level 3	Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable.

The following table presents assets (liabilities) measured at fair value on a recurring basis at December 31, 2015:



	Level 1		Level 2			Level 3			Total
Available-for-sale securities	41,178		—			—			41,178
Interest rate swaps	—		711			—			711
Foreign exchange contracts	—		(738		)	—			(738		)
Contingent consideration	—		—			(3,889		)	(3,889		)
	$	41,178	$	(27	)	$	(3,889	)	$	37,262

The following table presents assets (liabilities) measured at fair value on a recurring basis at December 31, 2014:



	Level 1		Level 2		Level 3			Total
Cash and cash equivalents	$	99,000	$	—	$	—		$	99,000
Available-for-sale securities	38,109		—		—			38,109
Interest rate swaps	—		378		—			378
Foreign exchange contracts	—		694		—			694
Contingent consideration	—		—		(6,202		)	(6,202		)
	$	137,109	$	1,072	$	(6,202	)	$	131,979

The following table summarizes the Level 3 activity for the year ended December 31, 2015:



Balance as of December 31, 2014	$	(6,202	)
Fair value of initial contingent consideration	—
Change in fair value of contingent consideration included in earnings	(1,128		)
Payment of contingent consideration (a)	3,000
Foreign currency translation adjustment	441
Balance as of December 31, 2015	$	(3,889	)


(a)	Contingent consideration payment relates to an acquisition completed prior to 2015.

The change in the fair value of contingent consideration is included in "Restructuring, integration, and other charges" in the company's consolidated statements of operations.

Assets and liabilities that are measured at fair value on a nonrecurring basis relate primarily to our trade names. The company tests these assets for impairment if indicators of potential impairment exist.

During 2014, in connection with the company's global re-branding initiative to brand certain of its businesses under the Arrow name, the company made the decision to discontinue the use of a trade name of one of its businesses within the global ECS business segment. As no future cash flows will be attributed to the impacted trade name, the entire book value was written-off, resulting in a non-cash impairment charge of $78,000 ($47,911 net of related taxes or $.49 and $.48 per share on a basic and diluted basis, respectively) as of December 31, 2014 in the company's consolidated statements of operations. Fair value was determined using unobservable (Level 3) inputs. The impairment charge did not impact the company’s consolidated cash flows, liquidity, capital resources, and covenants under its existing revolving credit facility, asset securitization program, and other outstanding borrowings. No impairment existed as of December 31, 2014 with respect to the company's other identifiable intangible assets.

During 2015, 2014, and 2013 there were no transfers of assets (liabilities) measured at fair value between the three levels of the fair value hierarchy.

Available-For-Sale Securities

The company has an 8.4% equity ownership interest in Marubun Corporation ("Marubun") and a portfolio of mutual funds with quoted market prices, all of which are accounted for as available-for-sale securities.

During 2014, the company sold its 1.9% equity ownership interest in WPG Holdings Co., Ltd. ("WPG") for proceeds of $40,542 and accordingly recorded a gain on sale of investment of $29,743 ($18,269 net of related taxes or $.19 and $.18 per share on a basic and diluted basis, respectively).

The fair value of the company's available-for-sale securities is as follows at December 31:



	2015				2014
	Marubun		Mutual Funds		Marubun		Mutual Funds
Cost basis	$	10,016	$	17,389	$	10,016	$	16,233
Unrealized holding gain	8,708		5,065		6,174		5,686
Fair value	$	18,724	$	22,454	$	16,190	$	21,919

The fair values of these investments are included in "Other assets" in the company's consolidated balance sheets, and the related unrealized holding gains or losses are included in "Accumulated other comprehensive income (loss)" in the shareholders' equity section in the company's consolidated balance sheets.

Derivative Instruments

The company uses various financial instruments, including derivative instruments, for purposes other than trading. Certain derivative instruments are designated at inception as hedges and measured for effectiveness both at inception and on an ongoing basis. Derivative instruments not designated as hedges are marked-to-market each reporting period with any unrealized gains or losses recognized in earnings.

Interest Rate Swaps

The company occasionally enters into interest rate swap transactions that convert certain fixed-rate debt to variable-rate debt or variable-rate debt to fixed-rate debt in order to manage its targeted mix of fixed- and floating-rate debt. The company uses the hypothetical derivative method to assess the effectiveness of its interest rate swaps on a quarterly basis. The effective portion of the change in the fair value of interest rate swaps designated as fair value hedges is recorded as a change to the carrying value of the related hedged debt, and the effective portion of the change in fair value of interest rate swaps designated as cash flow hedges is recorded in the shareholders' equity section in the company's consolidated balance sheets in "Accumulated other comprehensive income (loss)." The ineffective portion of the interest rate swaps, if any, is recorded in "Interest and other financing expense, net" in the company's consolidated statements of operations.

In January 2015, the company entered into four seven-year forward-starting interest rate swaps (the "2015 swaps") which locked in an average treasury rate of 1.98% on a total aggregate notional amount of $200,000. These 2015 swaps were designated as cash flow hedges and managed the risk associated with changes in treasury rates and the impact of future interest payments on the anticipated debt issuances to replace the company's 3.375% notes due to mature in November 2015. In February 2015, the company received $896 in connection with the termination of the 2015 swaps upon issuance of the seven-year notes due in 2022. The fair value of the 2015 swaps is recorded in the shareholders' equity section in the company's consolidated balance sheets in "Accumulated other comprehensive income (loss)" and is being reclassified into income over the seven-year term of the notes due in 2022. For the year ended December 31, 2015, the company reclassified into income $98 relating to the 2015 swaps.

In April 2014, the company entered into an interest rate swap, with a notional amount of $50,000. This swap modifies the company's interest rate exposure by effectively converting a portion of the fixed 6.00% notes to a floating rate, based on the six-month U.S. dollar LIBOR plus a spread (an effective interest rate of 4.43% at December 31, 2015), through its maturity. The swap is classified as a fair value hedge and had a fair value of $583 at December 31, 2015.

In April 2014, the company entered into an interest rate swap, with a notional amount of $50,000. This swap modifies the company's interest rate exposure by effectively converting a portion of the fixed 6.875% senior debentures to a floating rate, based on the six-month U.S. dollar LIBOR plus a spread (an effective interest rate of 5.96% at December 31, 2015), through its maturity. The swap is classified as a fair value hedge and had a fair value of $128 at December 31, 2015.

In September 2011, the company entered into a ten-year forward-starting interest rate swap (the "2011 swap") which locked in a treasury rate of 2.63% on an aggregate notional amount of $175,000. This swap managed the risk associated with changes in treasury rates and the impact of future interest payments. The 2011 swap related to the interest payments for anticipated debt issuances to replace the company's 6.875% senior notes due to mature in July 2013. The 2011 swap is classified as a cash flow hedge. During 2013, the company paid $7,700 to terminate the 2011 swap upon issuance of the ten-year notes due in 2023. The fair value of the 2011 swap is recorded in the shareholders' equity section in the company's consolidated balance sheets in "Accumulated other comprehensive income (loss)" and is being reclassified into income over the ten-year term of the notes due in 2023. For the 2011 swap, the company reclassified into income $(690), $(656), and $(245) in 2015, 2014, and 2013, respectively.

In December 2010, the company entered into interest rate swaps, with an aggregate notional amount of $250,000. The swaps modified the company's interest rate exposure by effectively converting the fixed 3.375% notes due in November 2015 to a floating rate, based on the three-month U.S. dollar LIBOR plus a spread, through its maturity. In September 2011, these interest rate swap agreements were terminated for proceeds of $11,856, net of accrued interest. The proceeds of the swap terminations, less accrued interest, were reflected as a premium to the underlying debt and were being amortized as a reduction to interest expense over the remaining term of the underlying debt. In March 2015, the unamortized premium was included in the loss on prepayment of debt recorded as a result of the redemption of the 3.375% notes due November 2015 (see Note 6).

In June 2004 and November 2009, the company entered into interest rate swaps, with an aggregate notional amount of $275,000. The swaps modified the company's interest rate exposure by effectively converting a portion of the fixed 6.875% senior notes due in July 2013 to a floating rate, based on the six-month U.S. dollar LIBOR plus a spread, through its maturity. In September 2011, these interest rate swap agreements were terminated for proceeds of $12,203, net of accrued interest. The proceeds of the swap terminations, less accrued interest, were reflected as a premium to the underlying debt and were amortized as a reduction to interest expense over the term of the underlying debt.

Foreign Exchange Contracts

The company enters into foreign exchange forward, option, or swap contracts (collectively, the "foreign exchange contracts") to mitigate the impact of changes in foreign currency exchange rates. These contracts are executed to facilitate the hedging of foreign currency exposures resulting from inventory purchases and sales and generally have terms of no more than six months. Gains or losses on these contracts are deferred and recognized when the underlying future purchase or sale is recognized or when the corresponding asset or liability is revalued. The company does not enter into foreign exchange contracts for trading purposes. The risk of loss on a foreign exchange contract is the risk of nonperformance by the counterparties, which the company minimizes by limiting its counterparties to major financial institutions. The fair value of the foreign exchange contracts are estimated using market quotes. The notional amount of the foreign exchange contracts at December 31, 2015 and 2014 was $382,025 and $401,048, respectively.

The fair values of derivative instruments in the consolidated balance sheets are as follows at December 31:



	Asset (Liability) Derivatives
		Fair Value
	Balance Sheet Location	2015			2014
Derivative instruments designated as hedges:
Interest rate swaps designated as fair value hedges	Other liabilities	$	—		$	(3	)
Interest rate swaps designated as fair value hedges	Other assets	711			381
Foreign exchange contracts designated as cash flow hedges	Other current assets	896			960
Foreign exchange contracts designated as cash flow hedges	Accrued expenses	(572		)	(376		)
Total derivative instruments designated as hedging instruments		1,035			962
Derivative instruments not designated as hedges:
Foreign exchange contracts	Other current assets	1,729			2,404
Foreign exchange contracts	Accrued expenses	(2,791		)	(2,294		)
Total derivative instruments not designated as hedging instruments		(1,062		)	110
Total		$	(27	)	$	1,072

The effect of derivative instruments on the consolidated statements of operations is as follows for the years ended December 31:



	Gain (Loss) Recognized in Income
	2015		2014			2013
Fair value hedges:
Interest rate swaps (a)	$	—	$	—		$	—
Total	$	—	$	—		$	—
Derivative instruments not designated as hedges:
Foreign exchange contracts (b)	$	1,825	$	(793	)	$	(144	)
Total	$	1,825	$	(793	)	$	(144	)



	Cash Flow Hedges
	Interest Rate Swaps (c)			Foreign Exchange Contracts (d)
2015
Effective portion:
Gain (loss) recognized in other comprehensive income	$	827		$	(1,001	)
Gain (loss) reclassified into income	$	(592	)	$	2,930
Ineffective portion:
Gain recognized in income	$	69		$	—

2014
Effective portion:
Gain recognized in other comprehensive income	$	—		$	412
Loss reclassified into income	$	(656	)	$	(402	)
Ineffective portion:
Gain (loss) recognized in income	$	—		$	—

2013
Effective portion:
Gain (loss) recognized in other comprehensive income	$	3,132		$	(243	)
Gain (loss) reclassified into income	$	(537	)	$	439
Ineffective portion:
Gain recognized in income	$	292		$	—


(a)	The amount of gain (loss) recognized in income on derivatives is recorded in "Interest and other financing expense, net" in the company's consolidated statements of operations.


(b)	The amount of gain (loss) recognized in income on derivatives is recorded in "Cost of sales" in the company's consolidated statements of operations.


(c)	Both the effective and ineffective portions of any gain (loss) reclassified or recognized in income are recorded in "Interest and other financing expense, net" in the company's consolidated statements of operations. The gain (loss) amounts reclassified into income relate to the termination of swaps.


(d)	Both the effective and ineffective portions of any gain (loss) reclassified or recognized in income are recorded in "Cost of sales" in the company's consolidated statements of operations.

Contingent Consideration

The company estimates the fair value of contingent consideration as the present value of the expected contingent payments, determined using the weighted probability of possible payments. The company reassesses the fair value of contingent consideration on a quarterly basis. At December 31, 2015, contingent consideration of $3,889 was included in "Accrued Expenses" in the company's consolidated balance sheet in connection with two acquisitions prior to 2015. There was no contingent consideration recorded in connection with the 2015 acquisitions. For the acquisitions prior to 2015, payment of a portion of the respective purchase price is contingent upon the achievement of certain operating results, with a maximum possible payout of $8,400 in 2016. A twenty percent increase or decrease in projected operating performance over the remaining performance period would not result in a material change in the fair value of the contingent consideration recorded as of December 31, 2015.

Other

The carrying amount of cash and cash equivalents, accounts receivable, net, and accounts payable approximate their fair value due to the short maturities of these financial instruments.

- Definition

This item represents the complete disclosure regarding the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments, assets, and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the Company is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risk is are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information AND This element can be used to disclose the entity's entire derivative instruments and hedging activities disclosure as a single block of text. Describes an entity's risk management strategies, derivatives in hedging activities and non-hedging derivative instruments, the assets, obligations, liabilities, revenues and expenses arising there from, and the amounts of and methodologies and assumptions used in determining the amounts of such items.

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