FAIR VALUE MEASUREMENT, FINANCIAL INSTRUMENTS AND RISK MANAGEMENT

Fair Value Measurement

We utilize the market approach to measure fair value for our financial assets and liabilities. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.

The fair value hierarchy is intended to increase consistency and comparability in fair value measurements and related disclosures. The fair value hierarchy is based on inputs to valuation techniques that are used to measure fair value that are either observable or unobservable. Observable inputs reflect assumptions market participants would use in pricing an asset or liability based on market data obtained from independent sources while unobservable inputs reflect a reporting entity’s pricing based upon their own market assumptions.

The fair value hierarchy consists of the following three levels:


Level 1	Inputs are quoted prices in active markets for identical assets or liabilities.


Level 2	Inputs are quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable and market-corroborated inputs which are derived principally from or corroborated by observable market data.


Level 3	Inputs are derived from valuation techniques in which one or more significant inputs or value drivers are unobservable.

Because our derivatives are not listed on an exchange, we value these instruments using a valuation model with pricing inputs that are observable in the market or that can be derived principally from or corroborated by observable market data. Our methodology also incorporates the impact of both ours and the counterparty’s credit standing.

The following tables represent our assets and liabilities measured at fair value on a recurring basis as of June 28, 2015 and December 28, 2014 and the basis for that measurement:



	June 28, 2015
(amounts in thousands)	Total Fair Value Measurement June 28, 2015		Quoted Prices In Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Foreign currency forward exchange contracts	$	19	$	—	$	19	$	—
Total assets	$	19	$	—	$	19	$	—

Foreign currency forward exchange contracts	$	37	$	—	$	37	$	—
Total liabilities	$	37	$	—	$	37	$	—



	December 28, 2014
(amounts in thousands)	Total Fair Value Measurement December 28, 2014		Quoted Prices In Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Foreign currency forward exchange contracts	$	55	$	—	$	55	$	—
Total assets	$	55	$	—	$	55	$	—

Foreign currency forward exchange contracts	$	23	$	—	$	23	$	—
Total liabilities	$	23	$	—	$	23	$	—

We believe that the fair values of our current assets and current liabilities (cash, accounts receivable, accounts payable, and other current liabilities) approximate their reported carrying amounts. The carrying values and the estimated fair values of non-current financial assets and liabilities that qualify as financial instruments and are not measured at fair value on a recurring basis at June 28, 2015 and December 28, 2014 are summarized in the following table:



	June 28, 2015				December 28, 2014
(amounts in thousands)	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Long-term debt (including current maturities and excluding capital leases and factoring)⁽¹⁾
2013 Senior secured credit facility	$	65,000	$	65,000	$	65,000	$	65,000


⁽¹⁾	The carrying amounts are reported on the Consolidated Balance Sheets under the indicated captions.

Long-term debt is carried at the original offering price, less any payments of principal. The carrying amount of the Senior Secured Credit Facility approximates fair value due to the variable rate nature of its interest at current market rates. The related fair value measurement has generally been classified as Level 2 in the fair value hierarchy.

Nonrecurring Fair Value Measurements

In connection with our restructuring plans, we recorded impairment losses in restructuring expense during the six months ended June 29, 2014 of $0.2 million due to the impairment of certain long-lived assets for which the carrying value of those assets may not be recoverable based upon our estimated cash flows. Assets with carrying amounts of $0.2 million were written down to their fair values of $21 thousand. Given that the impairment losses were determined using internal estimates of future cash flows or upon non-identical assets using significant unobservable inputs, we have classified the remaining fair value of long-lived assets as Level 3 in the fair value hierarchy. Refer to Note 11 of the Consolidated Financial Statements.

Financial Instruments and Risk Management

We manufacture products in the U.S., Europe, and the Asia Pacific region for both the local marketplace and for export to our foreign subsidiaries. The foreign subsidiaries, in turn, sell these products to customers in their respective geographic areas of operation, generally in local currencies. This method of sale and resale gives rise to the risk of gains or losses as a result of currency exchange rate fluctuations on inter-company receivables and payables. Additionally, the sourcing of product in one currency and the sales of product in a different currency can cause gross margin fluctuations due to changes in currency exchange rates.

Our major market risk exposures are movements in foreign currency and interest rates. We have historically not used financial instruments to minimize our exposure to currency fluctuations on our net investments in and cash flows derived from our foreign subsidiaries. We have used third-party borrowings in foreign currencies to hedge a portion of our net investments in and cash flows derived from our foreign subsidiaries. A reduction in our third-party foreign currency borrowings will result in an increase of foreign currency fluctuations on our net investments in and cash flows derived from our foreign subsidiaries.

We enter into forward exchange contracts to reduce the risks of currency fluctuations on short-term inter-company receivables and payables. These contracts are entered into with major financial institutions, thereby minimizing the risk of credit loss. We will consider using interest rate derivatives to manage interest rate risks when there is a disproportionate ratio of floating and fixed-rate debt. We do not hold or issue derivative financial instruments for speculative or trading purposes. We are subject to other foreign exchange market risk exposure resulting from anticipated non-financial instrument foreign currency cash flows which are difficult to reasonably predict, and have therefore not been included in the table of fair values. All listed items described are non-trading.

The following table presents the fair values of derivative instruments included within the Consolidated Balance Sheets as of June 28, 2015 and December 28, 2014:



	June 28, 2015						December 28, 2014
	Asset Derivatives			Liability Derivatives			Asset Derivatives			Liability Derivatives
(amounts in thousands)	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Derivatives not designated as hedging instruments
Foreign currency forward exchange contracts	Other current assets	$	19	Other current liabilities	$	37	Other current assets	$	55	Other current liabilities	$	23
Total derivatives not designated as hedging instruments		19			37			55			23
Total derivatives		$	19		$	37		$	55		$	23

The following table represents the amounts affecting the Consolidated Statements of Operations for the three and six months ended June 28, 2015 and June 29, 2014:

Quarter

Six months

(13 weeks) Ended

(26 weeks) Ended

June 28, 2015

June 29, 2014

June 28, 2015

June 29, 2014

(amounts in thousands)

Amount of

Gain (Loss)

Recognized in

Income on

Derivatives

Location of

Gain (Loss)

Recognized in

Income on

Derivatives

Amount of

Gain (Loss)

Recognized in

Income on

Derivatives

Location of

Gain (Loss)

Recognized in

Income on

Derivatives

Amount of
Gain (Loss)
Recognized in
Income on
Derivatives

Location of
Gain (Loss)
Recognized in
Income on
Derivatives

Amount of
Gain (Loss)
Recognized in
Income on
Derivatives

Location of
Gain (Loss)
Recognized in
Income on
Derivatives

Derivatives not designated as hedging instruments:

Foreign exchange forwards and options

564

Other gain

(loss), net

(36

)

Other gain

(loss), net

275

Other gain
(loss), net

(66

)

Other gain
(loss), net

We selectively purchase currency forward exchange contracts to reduce the risks of currency fluctuations on short-term inter-company receivables and payables. These contracts guarantee a predetermined exchange rate at the time the contract is purchased. This allows us to shift the effect of positive or negative currency fluctuations to a third-party. Transaction gains or losses resulting from these contracts are recognized at the end of each reporting period. We use the fair value method of accounting, recording realized and unrealized gains and losses on these contracts. These gains and losses are included in Other Gain (Loss), net on our Consolidated Statements of Operations. As of June 28, 2015, we had currency forward exchange contracts with notional amounts totaling approximately $5.4 million. The fair values of the forward exchange contracts were reflected as a $19 thousand asset and a $37 thousand liability included in Other Current Assets and Other Current Liabilities in the accompanying Consolidated Balance Sheets. The contracts are in the various local currencies covering primarily our operations in the U.S. and Western Europe. Historically, we have not purchased currency forward exchange contracts where it is not economically efficient, specifically for our operations in South America and Asia, with the exception of Japan.