Fair Value of Financial Instruments

9 Months Ended

Jun. 30, 2014

Note 6 — Fair Value of Financial Instruments

The valuation techniques required to determine fair value are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect internal market assumptions. The two types of inputs create the following fair value hierarchy:

· Level 1 - Quoted prices for identical instruments in active markets.

· 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 whose inputs are observable or whose significant value drivers are observable.

· Level 3 - Significant inputs to the valuation model are unobservable.

The fair value of cash equivalents and short term borrowings approximates their cost. The fair value of our available for sale marketable securities is determined based on quoted market prices for identical securities. Derivative financial instruments are measured at fair value, the material portions of which are based on active or inactive markets for identical or similar instruments or model-derived valuations whose inputs are observable. Where model-derived valuations are appropriate, we use the applicable credit spread as the discount rate. Credit risk related to derivative financial instruments is considered minimal and is managed by requiring high credit standards for counterparties and through periodic settlements of positions.

At September 30, 2013, the estimated fair value of the liability for contingent consideration payable to the seller of NEK was $3.5 million, which was equal to the maximum possible contingent payment. We paid the Seller $3.5 million during the nine months ended June 30, 2014 upon the resolution of the related contingencies and the liability was reduced to zero. Prior to the payment of the contingent consideration we had estimated the fair value of the contingent consideration using a probability-weighted discounted cash flow model. There was no change in the fair value of the contingent consideration liability between the date of the acquisition of NEK and June 30, 2014 other than for payments of the contingent consideration amount to the Seller; therefore, there has been no change in contingent consideration recorded in operations.

The following table presents assets and liabilities measured and recorded at fair value on our balance sheets on a recurring basis (in thousands):

	June 30, 2014
	Level 1		Level 2		Level 3		Total
Assets
Cash equivalents	$	51,075	$	—	$	—	$	51,075
Current derivative assets	—		8,223		—		8,223
Noncurrent derivative assets	—		5,793		—		5,793
Total assets measured at fair value	$	51,075	$	14,016	$	—	$	65,091
Liabilities
Current derivative liabilities	$	—	$	8,811	$	—	$	8,811
Noncurrent derivative liabilities	—		5,832		—		5,832
Total liabilities measured at fair value	$	—	$	14,643	$	—	$	14,643

	September 30, 2013
	Level 1		Level 2		Level 3		Total
Assets
Cash equivalents	$	125,512	$	—	$	—	$	125,512
Marketable securities	4,055		—		—		4,055
Current derivative assets	—		1,597		—		1,597
Noncurrent derivative assets	—		6,096		—		6,096
Total assets measured at fair value	$	129,567	$	7,693	$	—	$	137,260
Liabilities
Current derivative liabilities	$	—	$	2,360	$	—	$	2,360
Noncurrent derivative liabilities	—		5,366		—		5,366
Contingent consideration to Seller of NEK	—		—		3,485		3,485
Total liabilities measured at fair value	$	—	$	7,726	$	3,485	$	11,211

We did not have any significant non-financial assets or liabilities measured at fair value after initial recognition on a non-recurring basis during the three and nine months ended June 30, 2014 or 2013.

We carry financial instruments, including cash equivalents, accounts receivable, accounts payable and accrued liabilities at cost, which we believe approximates fair value because of the short-term maturity of these instruments.

Long-term debt and short-term borrowings are carried at amortized cost. The amortized cost of short-term borrowings approximates fair value. The fair value of long-term debt is calculated by discounting the value of the note based on market interest rates for similar debt instruments, which is a Level 2 technique. The following table presents the estimated fair value and carrying value of our long-term debt (in millions):

	June 30,		September 30,
	2014		2013
Fair value	$	101.0	$	95.8
Carrying value	$	102.7	$	102.9

- 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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