Fair Value of Financial Instruments

9 Months Ended

Sep. 30, 2016

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in a transaction between market participants as of the measurement date. Fair value is measured using the fair value hierarchy and related valuation methodologies as defined in the authoritative literature. This guidance provides a fair value framework that requires the categorization of assets and liabilities into three levels based upon the assumptions (inputs) used to price the assets or liabilities. Level 1 provides the most reliable measure of fair value, whereas Level 3 generally requires significant management judgment.

The three levels are defined as follows:


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


Level 2 -	Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-derived valuations, in which all significant inputs are observable in active markets.


Level 3 -	Significant unobservable inputs reflecting management's own assumptions about the inputs used in pricing the asset or liability.

The Company’s financial instruments consist of debt, interest rate swaps, foreign currency derivatives, accounts receivable, and accounts payable. The carrying amount of these financial instruments approximated their fair value. During 2016, the Company had two Level 2 fair value measurements, which related to the Company’s interest rate swap and foreign currency derivatives.

Interest rate swap

The Company utilized interest rate swap contracts to manage its targeted mix of fixed and floating rate debt, and these swaps are valued using observable benchmark rates at commonly quoted intervals for the full term of the swaps (market approach). The interest rate swap, discussed in detail in Note 8, was deemed immaterial to the financial statements.

There were no non-recurring fair value measurements for the nine months ended September 30, 2016.

Derivative and hedging activities

The Company conducts business in Mexico and pays certain expenses in Mexican Pesos. The Company is exposed to foreign currency exchange risk between the U.S. dollar and the Mexican Peso, which could impact the Company’s operating income and cash flows. To mitigate risk associated with foreign currency exchange, the Company entered into forward contracts to exchange a fixed amount of U.S. dollars for a fixed amount of Mexican Pesos, which will be used to fund future peso cash flows. At inception, all forward contracts are formally documented as cash flow hedges and are measured at fair value each reporting period. Derivatives are formally assessed both at inception and at least quarterly thereafter, to ensure that derivatives used in hedging transactions are highly effective in offsetting changes in cash flows of the hedged item. If it is determined that a derivative ceases to be a highly effective hedge, or if the anticipated transaction is no longer probable of occurring, hedge accounting is discontinued, and any future mark-to-market adjustments are recognized in earnings. The effective portion of gain or loss is reported in other comprehensive income and the ineffective portion is reported in earnings. The impacts of these contracts were largely offset by gains and losses resulting from the impact of changes in exchange rates on transactions denominated in the Mexican Peso. As of September 30, 2016, the Company had no ineffective portion related to the cash flow hedges.

Financial statements impacts

The following tables detail amounts related to our derivatives designated as hedging instruments as of September 30, 2016:



	Fair Values of Derivatives Instruments
	Asset Derivatives			Liability Derivatives
	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Foreign exchange contracts	Prepaid expense other current assets	$	67,000	Accrued liabilities other	$	—
Notional contract values		$	5,772,000		$	—

The Company had no derivatives designated as hedging instruments as of December 31, 2015.

The following tables summarize the amount of unrealized / realized gain and loss recognized in Accumulated Comprehensive Income (AOCI) for the three months ended September 30, 2016 and 2015:



Derivatives in subtopic 815-20 Cash Flow Hedging Relationship	Amount of Unrealized Gain or (Loss) Recognized in Accumulated other Comprehensive Income on Derivative				Location of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income^(A)	Amount of Realized Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income
	2016		2015			2016		2015
Foreign exchange contracts	$	67,000	$	—	Cost of goods sold	$	—	$	—
Foreign exchange contracts	$	67,000	$	—	Sales, general and administrative expense	$	—	$	—

The following tables summarize the amount of unrealized / realized gain and loss recognized in Accumulated Comprehensive Income (AOCI) for the nine months ended September 30, 2016 and 2015:



Derivatives in subtopic 815-20 Cash Flow Hedging Relationship	Amount of Unrealized Gain or (Loss) Recognized in Accumulated other Comprehensive Income on Derivative				Location of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income^(A)	Amount of Realized Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income
	2016		2015			2016		2015
Foreign exchange contracts	$	67,000	$	—	Cost of goods sold	$	—	$	—
Foreign exchange contracts	$	67,000	$	—	Sales, general and administrative expense	$	—	$	—

^(A)The foreign currency derivative activity reclassified from Accumulated Other Comprehensive Income is allocated to cost of goods sold and sales, general and administrative expense based on the percentage of Mexican Peso spend.

- 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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