Note 12. Fair Value Measurements

We present fair value measurements and disclosures applicable to both our financial and nonfinancial assets and liabilities that are measured and reported on a fair value basis. Fair value is an exit price representing the expected amount we would receive to sell an asset or pay to transfer a liability in an orderly transaction with market participants at the measurement date. We have followed consistent methods and assumptions to estimate the fair values as more fully described in the 2016 Annual Report.

Our financial instruments that are subject to fair value disclosure consist of cash and cash equivalents, accounts receivable, accounts payable, derivatives and long-term debt. At March 31, 2017, the carrying values of all of these financial instruments, except the long-term debt with fixed interest rates, approximated fair value. The fair value of floating-rate debt approximates the carrying amount because the interest rates paid are based on short-term maturities. The fair value of our fixed-rate long-term debt is estimated based on the Bloomberg algorithm, which takes into account similar sized and industry debt (a Level 2 category fair value measurement). As of March 31, 2017, the fair value of our fixed-rate debt was $250.1 million, and $245.4 net of debt issuance costs.

Fair value principles prioritize valuation inputs across three broad levels. 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 or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument. Level 3 inputs are unobservable inputs based on the assumptions used to measure assets and liabilities at fair value. An asset or liability’s classification within the various levels is determined based on the lowest level input that is significant to the fair value measurement.

Recurring Fair Value Measurements

The following table summarizes the assets and liabilities measured at fair value on a recurring basis for our interest rate swap derivative financial instrument:


				Fair Value Measurements at March 31, 2017
Description	March 31, 2017			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
Derivative asset - current	$	4		$	—	$	4		$	—
Derivative asset - noncurrent		7			—		7			—
Derivative liability - current		(1,485	)		—		(1,485	)		—
Derivative liability - noncurrent		(636	)		—		(636	)		—

	$	(2,110	)	$	—	$	(2,110	)	$	—


				Fair Value Measurements at December 31, 2016
Description	December 31, 2016			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
Derivative asset - current	$	69		$	—	$	69		$	—
Derivative asset - noncurrent		6			—		6			—
Derivative liability - current		(1,903	)		—		(1,903	)		—
Derivative liability - noncurrent		(1,028	)		—		(1,028	)		—

	$	(2,856	)	$	—	$	(2,856	)	$	—

Our policy is to manage interest expense using a mix of fixed and variable rate debt. To manage this mix effectively, we may enter into interest rate swaps in which we agree to exchange the difference between fixed and variable interest amounts calculated by reference to an agreed upon notional principal amount.

Our $150 million interest rate swap went into effect on December 29, 2015, at which time our interest rate was effectively 6.966%. The objective of the hedge was to eliminate the variability of cash flows in interest payments on the first $150 million of variable interest rate debt (the Term Loan B). The variable rate benchmark was the three month LIBOR rate for both the Term Loan B and the interest rate swap. The changes in cash flows of the interest rate swap were expected to exactly offset the changes in cash flows of the Term Loan B. The hedged risk was the interest rate risk exposure to changes in the interest payments, attributable to changes in the benchmark three month LIBOR interest rates (subject to a 1.0% LIBOR index floor) from December 29, 2015 through December 31, 2018. As amended, the LIBOR floor index was lowered to 0.75% on September 30, 2016, and our intent regarding future interest rate resets changed. Three-month LIBOR was above the floor, and it was more economical to use one month LIBOR. Therefore, our intentions called into question the probability of the amounts deferred in accumulated other comprehensive income (“AOCI”) as the forecasted transactions would not be probable. As a result, we chose to discontinue hedge accounting, reclassified all amounts in AOCI to earnings, and began to account for the interest rate swap on a mark-to-market basis during 2016. The change in reporting will have no impact on our reported cash flows, although future results of operations on a generally accepted accounting principles basis will be affected by the potential volatility of mark-to-market gains and losses which fluctuate with changes in interest rates.

The inputs for determining fair value of the interest rate swap are classified as Level 2 inputs. Level 2 fair value is based on estimates using standard pricing models. These standard pricing models use inputs which are derived from or corroborated by observable market data such as interest rate yield curves, index forward curves, discount curves, and volatility surfaces. Counterparties to these derivative contracts are highly rated financial institutions which we believe carry only a minimal risk of nonperformance.

We have elected to present the derivative contracts on a gross basis in the Consolidated Balance Sheet included within other current assets and other non-current assets and other current liabilities and other non-current liabilities. To the extent we presented the derivative contract on a net basis, we would have a derivative in a net liability position of $2.1 million as of March 31, 2017. We do not have any cash collateral due under such agreements.

As of March 31, 2017, we reported no gains or losses in AOCI related to the interest rate swaps. Additionally, during 2016 when the interest rate swap was accounted for in accordance with hedge accounting, the periodic settlements and related reclassification of other comprehensive income was $1.4 million of net hedging losses on the interest rate swap in the interest expense line on the Consolidated Statements of Operations. We recognized $0.5 million of interest rate swap settlements for the first quarter of 2017 in Derivative losses on change in interest rate swap fair value line on the Consolidated Statement of Operations. If there are no changes in the interest rates for the next twelve months, we expect $1.5 million in cash payments related to the interest rates swap. See the following “Derivatives’ Hedging Relationships” section of this Note for more information regarding the impact of the interest rate swaps on our Condensed Consolidated Financial Statements.

Derivatives’ Hedging Relationships


	Amount recognized in Other Comprehensive Income (effective portion)				Location of gain/(loss) reclassified from AOCI into		Pre-tax amount of gain/(loss) reclassified from AOCI in Net Income (effective portion)
	March 31,		December 31,		Net Income (effective		March 31,		December 31,
Derivatives’ Cash Flow Hedging Relationships	2017		2016		portion)		2017		2016
Forward starting interest rate swap contract	$	—	$	—		Interest Expense	$	—	$	(1,393	)

	$	—	$	—			$	—	$	(1,393	)

As of March 31, 2017, we did not own derivative instruments that were classified as fair value hedges or trading securities. In addition, as of March 31, 2017, we did not own derivative instruments containing credit risk contingencies.