Fair Value of Financial Instruments

6 Months Ended

Jun. 30, 2018

4. FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company applies fair value accounting guidelines for all financial assets and liabilities and non-financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). Under these guidelines, fair value is defined as the price that would be received for the sale of an asset or paid to transfer a liability (i.e. an exit price) in an orderly transaction between market participants at the measurement date. The guidance establishes a three-tier fair value hierarchy that prioritizes the inputs used in measuring fair value as follows:

Level 1 - Quoted prices in active markets for identical assets or liabilities.

Level 2 - Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets or liabilities in inactive markets.

Level 3 - Unobservable inputs that are supported by little, infrequent, or no market activity and reflect the Company’s own assumptions about inputs used in pricing the asset or liability.

The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

The fair value of the Company’s cash and cash equivalents, accounts receivable, other current assets, accounts payable, accrued expenses and other current liabilities approximate their carrying value, due to their short-term nature. Contingent consideration and newly acquired intangible assets are measured at fair value using level 3 inputs. Forward foreign exchange contracts are measured at fair value based on quoted foreign exchange forward rates at the reporting date.

The following tables provide information regarding the Company’s assets and liabilities measured at fair value on a recurring basis at June 30, 2018 and December 30, 2017.

	June 30, 2018
			Quoted Market		Significant Other Observable		Significant Unobservable
	Total		Prices (Level 1)		Inputs (Level 2)		Inputs (Level 3)
Assets
Forward foreign exchange contracts	$	120	$	—	$	120	$	—
Total	$	120	$	—	$	120	$	—
Liabilities
Forward foreign exchange contracts	$	167	$	—	$	167	$	—
Contingent consideration		34,535		—		—		34,535
Total	$	34,702	$	—	$	167	$	34,535

	December 30, 2017
			Quoted Market		Significant Other Observable		Significant Unobservable
	Total		Prices (Level 1)		Inputs (Level 2)		Inputs (Level 3)
Liabilities
Contingent consideration	$	33,882	$	—	$	—	$	33,882
Total	$	33,882	$	—	$	—	$	33,882

Forward foreign exchange contracts

The Company’s forward contracts are not designated as hedging instruments for accounting purposes.

During the six months ended June 30, 2018, the Company entered into a forward foreign exchange currency contract, for the purchase of €370,000, to economically hedge transactional exposure associated with the acquisition of Faster, which was denominated in euros. The Company recognized a loss during the six months ended June 30, 2018, of $2,535, which was reported in foreign currency loss (gain), net for the period.

At June 30, 2018, the Company had forward foreign exchange contracts to buy euros with a notional amount of $10,050. These contracts are at various exchange rates and expire at various dates through February 2019. The fair value of the derivative instruments are included in other current assets and other current liabilities line items in the Consolidated Balance Sheet. The Company recognized a net loss on these contracts during the quarter ended June 30, 2018, of $958, which was reported in foreign currency loss (gain), net for the period.

Contingent consideration

A summary of the changes in the estimated fair value of contingent consideration related to the acquisition of Enovation Controls at June 30, 2018 is as follows:

Balance at December 30, 2017	$	33,882
Change in estimated fair value		149
Accretion in value		504
Balance at June 30, 2018	$	34,535

The fair value of the contingent consideration arrangement was estimated using a risk-adjusted probability analysis. During the six months ended June 30, 2018, adjustments to the fair value of contingent consideration were recorded based on Enovation Controls’ results of operations during the period and management’s revision of revenue and EBITDA forecasts.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial 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 entity 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 risks 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.

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