FAIR VALUE AND DERIVATIVE INSTRUMENTS

9 Months Ended

Sep. 30, 2012

FAIR VALUE AND DERIVATIVE INSTRUMENTS

FAIR VALUE AND DERIVATIVE INSTRUMENTS

NOTE 8.  FAIR VALUE AND DERIVATIVE INSTRUMENTS

Fair Value

The inputs to the valuation techniques used to measure fair value are classified into the following categories:

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

Level 2 — Observable inputs other than quoted prices in active markets for similar assets and liabilities.

Level 3 — Inputs for which significant valuation assumptions are unobservable in a market and therefore value is based on the best available data, some of which is internally developed and accounts for risk premiums that a market participant would require.

The following table presents our financial instruments measured or disclosed at fair value on a recurring basis:

	September 30, 2012
	Total			Level 1		Level 2			Level 3
	(in thousands)
Cash and cash equivalents	$	21,507		$	21,507	$	—		$	—
Restricted cash	5,088			5,088		—			—
Notes payable to bank	(14,150		)	—		(14,150		)	—
Variable interest rate debt	(8,516		)	—		(8,516		)	—
Foreign currency forward contracts, net	68			—		68			—

	December 31, 2011
	Total			Level 1		Level 2			Level 3
	(in thousands)
Cash and cash equivalents	$	21,736		$	21,736	$	—		$	—
Restricted cash	4,575			4,575		—			—
Notes payable to bank	(12,969		)	—		(12,969		)	—
Variable interest rate debt	(8,568		)	—		(8,568		)	—
Foreign currency forward contracts, net	(1,053		)	—		(1,053		)	—

The fair value of cash and cash equivalents and restricted cash are based on the fair values of identical assets in active markets.  The fair value of notes payable to bank and variable interest rate debt are based on the present value of expected future cash flows. Due to the short period to maturity or the nature of the underlying liability, the fair value of notes payable to bank and variable interest rate debt approximates their respective carrying amounts. The fair value of foreign currency forward contracts is measured using internal models based on observable market inputs such as spot and forward rates.

Derivative Instruments

We utilize foreign currency forward contracts to mitigate the impact of currency fluctuations on assets and liabilities denominated in foreign currencies as well as on forecasted transactions denominated in foreign currencies. These contracts are considered derivative instruments and are recognized as either assets or liabilities and measured at fair value.

For contracts that are designated and qualify as cash flow hedges, the gain or loss on the contracts is reported as a component of other comprehensive income (“OCI”). When the hedged transaction affects earnings, the gain or loss is reclassified from accumulated other comprehensive income (“AOCI”) into “Sales” or “Cost of sales” line items on the Consolidated Statements of Operations based on the underlying exposure. During the three months ended September 30, 2012, the amount of net gain on these contracts was $0.1 million, compared to a net loss of $2.1 million recorded in OCI for the three months ended September 30, 2011. During the nine months ended September 30, 2012, we recorded a net gain of $0.5 million into OCI related to these contracts, compared to a net loss of $2.1 million for the nine months ended September 30, 2011.  As of September 30, 2012, we expect that $0.1 million loss will be reclassified from AOCI into earnings in the next 12 months.

Notional amounts and unrealized losses related to derivative financial instruments qualifying and designated as hedges are as follows:

	September 30, 2012				December 31, 2011
	Notional Amount		Unrealized Loss		Notional Amount		Unrealized Loss
	(in thousands)
Foreign currency forwards	$	52,461	$	103	$	48,802	$	1,017

For contracts that are not designated as hedges, the gain and loss on the contract is recognized in current earnings as “Other expense” in the Consolidated Statements of Operations. As of September 30, 2012 and December 31, 2011, the notional amounts of the derivative financial instruments not qualifying or otherwise designated as hedges were $54.5 million and $47.6 million, respectively. During the three months ended September 30, 2012, the loss related to this type of derivative financial instruments was immaterial.  During the three months ended September 30, 2011, we recorded a loss of $1.0 million related to this type of derivative financial instruments. During the nine months ended September 30, 2012 and 2011, we recorded a gain of $0.2 million and a loss of $1.3 million, respectively, related to this type of derivative financial instruments.

The following table presents the fair value on our Consolidated Balance Sheets of the foreign currency forward contracts:

	September 30,			December 31,
	2012			2011
	(in thousands)
Foreign currency forwards designated as hedges:
Other current assets	$	358		$	334
Accrued expenses	(461		)	(1,351		)
Foreign currency forwards not designated as hedges:
Other current assets	403			315
Accrued expenses	(232		)	(351		)
Foreign currency forwards, net	$	68		$	(1,053	)