Fair Value of Financial Instruments

We enter into derivative instruments for risk management purposes only. We operate internationally and, in the normal course of business, are exposed to fluctuations in interest rates, foreign exchange rates and commodity prices. These fluctuations can increase the costs of financing, investing and operating the business. We use forward contracts, a type of derivative instrument, to manage certain foreign currency exposures.

By nature, all financial instruments involve market and credit risks. We enter into forward contracts with major investment grade financial institutions and have policies to monitor the credit risk of those counterparties. While there can be no assurance, we do not anticipate any material non-performance by any of these counterparties.

Foreign Currency Forward Contracts. We hedge certain forecasted intercompany transactions denominated in foreign currencies through the use of forward contracts. We account for these forward contracts as cash flow hedges. To the extent these forward contracts meet hedge accounting criteria, changes in their fair value are not included in current earnings but are included in accumulated other comprehensive loss. These changes in fair value will be recognized into earnings as a component of sales or cost of sales when the forecasted transaction occurs. The notional contract amounts for forward contracts outstanding at September 30, 2013 which have been accounted for as cash flow hedges totaled $162.2 million. Net realized gains recognized for forward contracts accounted for as cash flow hedges approximated $1.0 million and $0.1 million for the three months ended September 30, 2012 and 2013, respectively, and $3.2 million and $0.6 million for the nine months ended September 30, 2012 and 2013, respectively. Net unrealized losses on forward contracts outstanding, net of tax, which have been accounted for as cash flow hedges and which have been included in other comprehensive income, totaled $1.0 million at September 30, 2013. It is expected these unrealized losses will be recognized in the consolidated statements of comprehensive income in 2013 and 2014.

We also enter into forward contracts to exchange foreign currencies for United States dollars in order to hedge our currency transaction exposures on intercompany receivables denominated in foreign currencies. These forward contracts settle each month at month-end, at which time we enter into new forward contracts. We have not designated these forward contracts as hedges and have not applied hedge accounting to them. The notional contract amounts for forward contracts outstanding at September 30, 2013 which have not been designated as hedges totaled $41.1 million. Net realized losses recognized in connection with those forward contracts not accounted for as hedges approximated $(1.2) million and $(1.1) million for the three months ended September 30, 2012 and 2013, respectively, offsetting gains on our intercompany receivables of $1.0 million and $0.9 million for the three months ended September 30, 2012 and 2013, respectively. Net realized losses recognized in connection with those forward contracts not accounted for as hedges approximated $(1.6) million and $(0.3) million for the nine months ended September 30, 2012 and 2013, respectively, offsetting gains (losses) on our intercompany receivables of $0.7 million and $(0.7) million for the nine months ended September 30, 2012 and 2013, respectively. These gains and losses have been recorded in selling and administrative expense in the consolidated statements of operations.

We record these forward foreign exchange contracts at fair value; the following tables summarize the fair value for forward foreign exchange contracts outstanding at December 31, 2012 and September 30, 2013:



December 31, 2012	Asset Balance Sheet Location	Fair Value			Liabilities Balance Sheet Location	Fair Value		Net Fair Value
Derivatives designated as hedged instruments:

Foreign exchange contracts	Other current liabilities	$	(457	)	Other current liabilities	$	2,249	$	1,792

Derivatives not designated as hedging instruments:

Foreign exchange contracts	Other current liabilities	—			Other current liabilities	150		150

Total derivatives		$	(457	)		$	2,399	$	1,942



September 30, 2013	Asset Balance Sheet Location	Fair Value			Liabilities Balance Sheet Location	Fair Value		Net Fair Value
Derivatives designated as hedged instruments:

Foreign exchange contracts	Other current liabilities	$	(716	)	Other current liabilities	$	2,356	$	1,640

Derivatives not designated as hedging instruments:

Foreign exchange contracts	Other current liabilities	(9		)	Other current liabilities	33		24

Total derivatives		$	(725	)		$	2,389	$	1,664

Our forward foreign exchange contracts are subject to a master netting agreement and qualify for netting in the consolidated balance sheets. Accordingly, at December 31, 2012 and September 30, 2013 we have recorded the net fair value of $1.9 million and $1.7 million, respectively, in other current liabilities.

Fair Value Disclosure. Financial Accounting Standards Board (“FASB”) guidance defines fair value and establishes a framework for measuring fair value and related disclosure requirements. This guidance applies when fair value measurements are required or permitted. The guidance indicates, among other things, that a fair value measurement assumes that the transaction to sell an asset or transfer a liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. Fair value is defined based upon an exit price model.

As of September 30, 2013, we do not have any significant non-recurring measurements of non-financial assets and non-financial liabilities.

Valuation Hierarchy. A valuation hierarchy was established for disclosure of the inputs to the valuations used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets in markets that are not active, inputs other than quoted prices that are observable for the asset or liability, including interest rates, yield curves and credit risks, or inputs that are derived principally from or corroborated by observable market data through correlation. Level 3 inputs are unobservable inputs based on our own assumptions used to measure assets and liabilities at fair value. A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.

Valuation Techniques. Assets and liabilities carried at fair value and measured on a recurring basis as of September 30, 2013 consist of forward foreign exchange contracts. The Company values its forward foreign exchange contracts using quoted prices for similar assets. The most significant assumption is quoted currency rates. The value of the forward foreign exchange contract assets and liabilities were determined within Level 2 of the valuation hierarchy and are listed in the table above.

The carrying amounts reported in our balance sheets for cash and cash equivalents, accounts receivable, accounts payable and long-term debt approximate fair value.