12.

Derivative Financial Instruments

Market risks relating to the Company’s operations result primarily from changes in interest rates and changes in foreign currency exchange rates. The Company is exposed to market risk related to changes in interest rates and selectively uses derivative financial instruments, including forward contracts and swaps, to manage these risks. During 2016, the Company entered into several forward contracts to purchase pounds sterling (GBP) to hedge two deferred payments due in connection with the acquisition of Plastique. In addition, the Company’s Canadian subsidiary Morgan Schaffer enters into foreign exchange contracts to manage foreign currency risk as a portion of their revenue is denominated in U.S. dollars. The Company expects hedging gains or losses to be essentially offset by losses or gains on the related underlying exposures. The amounts ultimately recognized may differ for open positions, which remain subject to ongoing market price fluctuations until settlement. For derivative instruments designated as cash flow hedges, the gain or loss on the derivative is deferred in accumulated other comprehensive income until recognized in earnings with the underlying hedged item. The fair value of the foreign currency derivative is classified in accrued expenses on the Company’s Consolidated Balance Sheets. The forward contracts listed below will be recognized within the next twelve months except for 700 GBP which will be recognized in 2019. The following is a summary of the notional transaction amounts and fair values for the Company’s outstanding derivative financial instruments as of September 30, 2017.

	Notional Amount	Fair Value
(In thousands)	(Currency)	(US$)
Forward contracts	1,859 GBP		(173)
Forward contracts	3,250 USD		149
Forward contracts	200 EUR		(5)

Fair value of financial instruments

The Company’s forward contracts are classified within Level 2 of the valuation hierarchy in accordance with FASB Accounting Standards Codification (ASC) 825, as presented below as of September 30, 2017:

(In thousands)

Level 1

Level 2

Level 3

Total

Liabilities:

Forward contracts

–

(29)

–

(29)

Valuation was based on third party evidence of similarly priced derivative instruments. There are no master netting arrangements with financial parties.