Fair Value of Financial Instruments

6 Months Ended

Mar. 31, 2014

Note 6 — Fair Value of Financial Instruments

The valuation techniques required to determine fair value are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect internal market assumptions. The two types of inputs create the following fair value hierarchy:

· Level 1 - Quoted prices for identical instruments in active markets.

· Level 2 - Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.

· Level 3 - Significant inputs to the valuation model are unobservable.

The fair value of cash equivalents and short term borrowings approximates their cost. The fair value of our available for sale marketable securities is determined based on quoted market prices for identical securities. Derivative financial instruments are measured at fair value, the material portions of which are based on active or inactive markets for identical or similar instruments or model-derived valuations whose inputs are observable. Where model-derived valuations are appropriate, we use the applicable credit spread as the discount rate. Credit risk related to derivative financial instruments is considered minimal and is managed by requiring high credit standards for counterparties and through periodic settlements of positions.

The fair value of our contingent consideration obligation to the Seller of NEK is revalued to its fair value each period and any recorded increase or decrease is recorded into selling, general and administrative expense. Any changes in the assumed timing and amount of the probability of payment scenarios could impact the fair value. At September 30, 2013, the estimated fair value of the liability for contingent consideration was $3.5 million. We paid the Seller $1.1 million during the six months ended March 31, 2014 upon the resolution of certain of the contingencies and at March 31, 2014 the estimated fair value of the remaining contingent consideration is $2.4 million. We have estimated the fair value of the contingent consideration using a probability-weighted discounted cash flow model. We have estimated that the probability of payment of any amounts less than the maximum possible additional cash consideration of $2.4 million is remote, and we have estimated that all contingent consideration amounts will be due within sixteen months of the acquisition date. As such, we have estimated that the fair value of the additional cash consideration approximates the maximum possible contingent payments to the Seller of $2.4 million. There was no change in the fair value of the contingent consideration between the date of the acquisition of NEK and March 31, 2014 other than for payments of amounts to the Seller; therefore, there has been no change in contingent consideration recorded in operations. Significant judgment is employed in determining the appropriateness of these assumptions as of the acquisition date and each subsequent period. Accordingly, changes in the assumptions described above can materially impact the amount of contingent consideration expense we record in any period.

The following table presents assets and liabilities measured and recorded at fair value on our balance sheets on a recurring basis (in thousands):

	March 31, 2014
	Level 1		Level 2		Level 3		Total
Assets
Cash equivalents	$	28,797	$	—	$	—	$	28,797
Marketable securities	—		—		—		—
Current derivative assets	—		6,282		—		6,282
Noncurrent derivative assets	—		8,588		—		8,588
Total assets measured at fair value	$	28,797	$	14,870	$	—	$	43,667
Liabilities
Current derivative liabilities	$	—	$	6,084	$	—	$	6,084
Noncurrent derivative liabilities	—		8,286		—		8,286
Contingent consideration to Seller of NEK	—		—		2,368		2,368
Total liabilities measured at fair value	$	—	$	14,370	$	2,368	$	16,738

	September 30, 2013
	Level 1		Level 2		Level 3		Total
Assets
Cash equivalents	$	125,512	$	—	$	—	$	125,512
Marketable securities	4,055		—		—		4,055
Current derivative assets	—		1,597		—		1,597
Noncurrent derivative assets	—		6,096		—		6,096
Total assets measured at fair value	$	129,567	$	7,693	$	—	$	137,260
Liabilities
Current derivative liabilities	$	—	$	2,360	$	—	$	2,360
Noncurrent derivative liabilities	—		5,366		—		5,366
Contingent consideration to Seller of NEK	—		—		3,485		3,485
Total liabilities measured at fair value	$	—	$	7,726	$	3,485	$	11,211

We did not have any significant non-financial assets or liabilities measured at fair value after initial recognition on a non-recurring basis during the three and six months ended March 31, 2014 or 2013.

We carry financial instruments, including cash equivalents, accounts receivable, accounts payable and accrued liabilities at cost, which we believe approximates fair value because of the short-term maturity of these instruments.

Long-term debt and short-term borrowings are carried at amortized cost. The fair value of long-term debt is calculated by discounting the value of the note based on market interest rates for similar debt instruments, which is a Level 2 technique. The following table presents the estimated fair value and carrying value of our long-term debt (in millions):

	March 31,		September 30,
	2014		2013
Fair value	$	97.1	$	95.8
Carrying value	$	102.7	$	102.9

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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