FAIR VALUE MEASUREMENT, FINANCIAL INSTRUMENTS AND RISK MANAGEMENT

Fair Value Measurement

We utilize the market approach to measure fair value for our financial assets and liabilities. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.

The fair value hierarchy is intended to increase consistency and comparability in fair value measurements and related disclosures. The fair value hierarchy is based on inputs to valuation techniques that are used to measure fair value that are either observable or unobservable. Observable inputs reflect assumptions market participants would use in pricing an asset or liability based on market data obtained from independent sources while unobservable inputs reflect a reporting entity’s pricing based upon their own market assumptions.

The fair value hierarchy consists of the following three levels:


Level 1	Inputs are quoted prices in active markets for identical assets or liabilities.


Level 2	Inputs are quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable and market-corroborated inputs which are derived principally from or corroborated by observable market data.


Level 3	Inputs are derived from valuation techniques in which one or more significant inputs or value drivers are unobservable.

Because our derivatives are not listed on an exchange, we value these instruments using a valuation model with pricing inputs that are observable in the market or that can be derived principally from or corroborated by observable market data. Our methodology also incorporates the impact of both ours and the counterparty’s credit standing.

The following tables represent our assets and liabilities measured at fair value on a recurring basis as of September 28, 2014 and December 29, 2013 and the basis for that measurement:



(amounts in thousands)	Total Fair Value Measurement September 28, 2014		Quoted Prices In Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Foreign currency forward exchange contracts	$	374	$	—	$	374	$	—
Total assets	$	374	$	—	$	374	$	—

Foreign currency forward exchange contracts	$	298	$	—	$	298	$	—
Total liabilities	$	298	$	—	$	298	$	—



(amounts in thousands)	Total Fair Value Measurement December 29, 2013		Quoted Prices In Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Foreign currency forward exchange contracts	$	—	$	—	$	—	$	—
Total assets	$	—	$	—	$	—	$	—

Foreign currency forward exchange contracts	$	18	$	—	$	18	$	—
Total liabilities	$	18	$	—	$	18	$	—

We believe that the fair values of our current assets and current liabilities (cash, accounts receivable, accounts payable, and other current liabilities) approximate their reported carrying amounts. The carrying values and the estimated fair values of non-current financial assets and liabilities that qualify as financial instruments and are not measured at fair value on a recurring basis at September 28, 2014 and December 29, 2013 are summarized in the following table:



	September 28, 2014				December 29, 2013
(amounts in thousands)	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Long-term debt (including current maturities and excluding capital leases and factoring)⁽¹⁾
Senior secured credit facility	$	85,000	$	85,000	$	90,000	$	90,000


⁽¹⁾	The carrying amounts are reported on the consolidated balance sheet under the indicated captions.

Long-term debt is carried at the original offering price, less any payments of principal. The carrying amount of the Senior Secured Credit Facility approximates fair value due to the variable rate nature of its interest at current market rates. The related fair value measurement has generally been classified as Level 2.

Nonrecurring Fair Value Measurements

Severance costs included in our restructuring charges are calculated using internal estimates and are therefore classified as Level 3 in the fair value hierarchy. Refer to Note 11 of the Consolidated Financial Statements.

Accrued restructuring costs for lease termination liabilities of $12 thousand were valued using a discounted cash flow model during the nine months ended September 28, 2014. We recorded a $13 thousand release related to fair value adjustments to existing lease termination liabilities of $64 thousand during the nine months ended September 28, 2014. Accrued restructuring costs for lease termination liabilities of $0.2 million were valued using a discounted cash flow model during the nine months ended September 29, 2013. We recorded $0.1 million in additional expense related to fair value adjustments to existing lease termination liabilities of $0.4 million during the nine months ended September 29, 2013. Significant assumptions used in determining the amount of the estimated liability include the estimated liabilities for future rental payments on vacant facilities as of their respective cease-use dates and the discount rate utilized to determine the present value of the future expected cash flows. If our assumptions regarding early terminations and the timing and amounts of sublease payments prove to be inaccurate, we may be required to record additional losses or gains in the Consolidated Financial Statements. Given that the restructuring charges were valued using our internal estimates using a discounted cash flow model, we have classified the accrued restructuring costs as Level 3 in the fair value hierarchy. Refer to Note 11 of the Consolidated Financial Statements.

In connection with our restructuring plans, we have recorded impairment losses in restructuring expense during the nine months ended September 28, 2014 of $0.2 million due to the impairment of certain long-lived assets for which the carrying value of those assets may not be recoverable based upon our estimated cash flows. Assets with carrying amounts of $0.2 million were written down to their fair values of $21 thousand. In connection with our restructuring plans, we recorded impairment losses in restructuring expense during the nine months ended September 29, 2013 of $0.7 million due to the impairment of certain long-lived assets for which the carrying value of those assets may not be recoverable based upon our estimated cash flows. Assets with carrying amounts of $1.1 million were written down to their fair values of $0.4 million. Given that the impairment losses were determined using internal estimates of future cash flows or upon non-identical assets using significant unobservable inputs, we have classified the remaining fair value of long-lived assets as Level 3 in the fair value hierarchy. Refer to Note 11 of the Consolidated Financial Statements.

Financial Instruments and Risk Management

We manufacture products in the U.S., Europe, and the Asia Pacific region for both the local marketplace and for export to our foreign subsidiaries. The foreign subsidiaries, in turn, sell these products to customers in their respective geographic areas of operation, generally in local currencies. This method of sale and resale gives rise to the risk of gains or losses as a result of currency exchange rate fluctuations on inter-company receivables and payables. Additionally, the sourcing of product in one currency and the sales of product in a different currency can cause gross margin fluctuations due to changes in currency exchange rates.

Our major market risk exposures are movements in foreign currency and interest rates. We have historically not used financial instruments to minimize our exposure to currency fluctuations on our net investments in and cash flows derived from our foreign subsidiaries. We have used third-party borrowings in foreign currencies to hedge a portion of our net investments in and cash flows derived from our foreign subsidiaries. A reduction in our third-party foreign currency borrowings will result in an increase of foreign currency fluctuations on our net investments in and cash flows derived from our foreign subsidiaries.

We enter into forward exchange contracts to reduce the risks of currency fluctuations on short-term inter-company receivables and payables. These contracts are entered into with major financial institutions, thereby minimizing the risk of credit loss. We will consider using interest rate derivatives to manage interest rate risks when there is a disproportionate ratio of floating and fixed-rate debt. We do not hold or issue derivative financial instruments for speculative or trading purposes. We are subject to other foreign exchange market risk exposure resulting from anticipated non-financial instrument foreign currency cash flows which are difficult to reasonably predict, and have therefore not been included in the table of fair values. All listed items described are non-trading.

The following table presents the fair values of derivative instruments included within the Consolidated Balance Sheets as of September 28, 2014 and December 29, 2013:



	September 28, 2014						December 29, 2013
	Asset Derivatives			Liability Derivatives			Asset Derivatives			Liability Derivatives
(amounts in thousands)	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Derivatives not designated as hedging instruments
Foreign currency forward exchange contracts	Other current assets	$	374	Other current liabilities	$	298	Other current assets	$	—	Other current liabilities	$	18
Total derivatives not designated as hedging instruments		374			298			—			18
Total derivatives		$	374		$	298		$	—		$	18

The following tables represent the amounts affecting the Consolidated Statement of Operations for the three and nine months ended September 28, 2014 and September 29, 2013:



	Quarter							Quarter
	(13 weeks) Ended							(13 weeks) Ended
	September 28, 2014							September 29, 2013
(amounts in thousands)	Amount of Gain (Loss) Recognized in Other Comprehensive Income on Derivatives		Location of Gain (Loss) Reclassified From Accumulated Other Comprehensive Income into Income	Amount of Gain (Loss) Reclassified From Accumulated Other Comprehensive Income into Income		Amount of Forward Points Recognized in Other Gain (Loss), net		Amount of Gain (Loss) Recognized in Other Comprehensive Income on Derivatives		Location of Gain (Loss) Reclassified From Accumulated Other Comprehensive Income into Income	Amount of Gain (Loss) Reclassified From Accumulated Other Comprehensive Income into Income			Amount of Forward Points Recognized in Other Gain (Loss), net
Derivatives designated as cash flow hedges:
Foreign currency revenue forecast contracts	$	—	Cost of sales	$	—	$	—	$	—	Cost of sales	$	(9	)	$	—



	Nine months							Nine months
	(39 weeks) Ended							(39 weeks) Ended
	September 28, 2014							September 29, 2013
(amounts in thousands)	Amount of Gain (Loss) Recognized in Other Comprehensive Income on Derivatives		Location of Gain (Loss) Reclassified From Accumulated Other Comprehensive Income into Income	Amount of Gain (Loss) Reclassified From Accumulated Other Comprehensive Income into Income		Amount of Forward Points Recognized in Other Gain (Loss), net		Amount of Gain (Loss) Recognized in Other Comprehensive Income on Derivatives		Location of Gain (Loss) Reclassified From Accumulated Other Comprehensive Income into Income	Amount of Gain (Loss) Reclassified From Accumulated Other Comprehensive Income into Income			Amount of Forward Points Recognized in Other Gain (Loss), net
Derivatives designated as cash flow hedges:
Foreign currency revenue forecast contracts	$	—	Cost of sales	$	—	$	—	$	—	Cost of sales	$	(161	)	$	11

Quarter

Nine months

(13 weeks) Ended

(39 weeks) Ended

September 28, 2014

September 29, 2013

September 28, 2014

September 29, 2013

(amounts in thousands)

Amount of

Gain (Loss)

Recognized in

Income on

Derivatives

Location of

Gain (Loss)

Recognized in

Income on

Derivatives

Amount of

Gain (Loss)

Recognized in

Income on

Derivatives

Location of

Gain (Loss)

Recognized in

Income on

Derivatives

Amount of
Gain (Loss)
Recognized in
Income on
Derivatives

Location of
Gain (Loss)
Recognized in
Income on
Derivatives

Amount of
Gain (Loss)
Recognized in
Income on
Derivatives

Location of
Gain (Loss)
Recognized in
Income on
Derivatives

Derivatives not designated as hedging instruments:

Foreign exchange forwards and options

380

Other gain

(loss), net

(491

)

Other gain

(loss), net

315

Other gain
(loss), net

(224

)

Other gain
(loss), net

We selectively purchase currency forward exchange contracts to reduce the risks of currency fluctuations on short-term inter-company receivables and payables. These contracts guarantee a predetermined exchange rate at the time the contract is purchased. This allows us to shift the effect of positive or negative currency fluctuations to a third-party. Transaction gains or losses resulting from these contracts are recognized at the end of each reporting period. We use the fair value method of accounting, recording realized and unrealized gains and losses on these contracts. These gains and losses are included in other gain (loss), net on our Consolidated Statements of Operations. As of September 28, 2014, we had currency forward exchange contracts with notional amounts totaling approximately $11.9 million. The fair values of the forward exchange contracts were reflected as a $0.4 million asset and $0.3 million liability included in other current assets and other current liabilities in the accompanying Consolidated Balance Sheets. The contracts are in the various local currencies covering primarily our operations in the U.S. and Western Europe. Historically, we have not purchased currency forward exchange contracts where it is not economically efficient, specifically for our operations in South America and Asia, with the exception of Japan.