FAIR VALUE AND DERIVATIVE INSTRUMENTS

Fair Value

The inputs to the valuation techniques used to measure fair value are classified into the following categories:

Level 1 — Quoted prices in active markets for identical assets and liabilities.

Level 2 — Observable inputs other than quoted prices in active markets for similar assets and liabilities.

Level 3 — Inputs for which significant valuation assumptions are unobservable in a market and therefore value is based on the best available data, some of which is internally developed and considers risk premiums that a market participant would require.

The following table presents the carrying amount, fair values, and classification level within the fair value hierarchy of financial instruments measured or disclosed at fair value on a recurring basis (in thousands):



	September 30, 2014				December 31, 2013				Level of Fair Value Hierarchy
	Carrying Amount		Fair Value		Carrying Amount		Fair Value		Level of Fair Value Hierarchy
Assets:
Cash and cash equivalents	$	15,005	$	15,005	$	34,722	$	34,722	Level 1
Restricted cash	3,567		3,567		4,124		4,124		Level 1
Foreign currency forward contracts	384		384		285		285		Level 2
Liabilities:
Variable interest rate debt	17,540		17,540		26,635		26,635		Level 2
Contingent consideration	—		—		7,500		7,500		Level 3
Foreign currency forward contracts	578		578		872		872		Level 2

The fair value of cash and cash equivalents and restricted cash are based on the fair values of identical assets in active markets. Due to the short period to maturity or the nature of the underlying liability, the fair value of notes payable to bank and variable interest rate debt approximates their respective carrying amounts. The contingent consideration represents the contingent liabilities associated with the earn-out provisions from the 2012 acquisition of Usach. The fair value of the contingent consideration is based on the present value of the estimated aggregated payment amount. The fair value of foreign currency forward contracts is measured using internal models based on observable market inputs such as spot and forward rates. Based on the Company’s continued ability to enter into forward contracts, the markets for the fair value instruments are considered to be active. As of September 30, 2014 and December 31, 2013, there were no significant transfers in and/or out of Level 1 and Level 2.

The following table presents a reconciliation of the changes during the period ended September 30, 2014 for items categorized within Level 3 of the fair value hierarchy (in thousands):



	Contingent Consideration
Balance at December 31, 2013	$	7,500
Current period settlements (payments)	(7,500		)
Balance at September 30, 2014	$	—

Derivative Instruments

Foreign currency forward contracts are utilized to mitigate the impact of currency fluctuations on assets and liabilities denominated in foreign currencies as well as on forecasted transactions denominated in foreign currencies. These contracts are considered derivative instruments and are recognized as either assets or liabilities and measured at fair value. For contracts that are designated and qualify as cash flow hedges, the gain or loss on the contracts is reported as a component of other comprehensive income (“OCI”) and reclassified from accumulated other comprehensive income (“AOCI”) into the “Sales” or “Cost of sales” line item on the Consolidated Statements of Operations when the underlying hedged transaction affects earnings, or “Other (income) expense, net” when the hedging relationship is deemed to be no longer effective. As of September 30, 2014 and December 31, 2013, the notional amounts of the derivative financial instruments designated to qualify for cash flow hedges were $26.2 million and $37.0 million, respectively. The Company expects less than $0.1 million of net losses, net of income tax effect, to be reclassified from AOCI to earnings within the next 12 months.

As of September 30, 2014 and December 31, 2013, the notional amounts of the derivative financial instruments not qualifying or otherwise designated as hedges were $34.5 million and $45.5 million, respectively. For the three months ended September 30, 2014 and 2013, gains of $0.4 million and losses of $0.3 million, respectively, were recorded related to this type of derivative financial instruments. For the nine months ended September 30, 2014 and 2013, losses of $0.1 million and $1.7 million, respectively, were recorded related to this type of derivative financial instruments. For contracts that are not designated as hedges, the gain or loss on the contract is recognized in current earnings in the “Other (income) expense, net” line item on the Consolidated Statements of Operations.

The following table presents the fair value on the Consolidated Balance Sheets of the foreign currency forward contracts (in thousands):



	September 30, 2014			December 31, 2013
Foreign currency forwards designated as hedges:
Other current assets	$	202		$	144
Accrued expenses	(209		)	(249		)
Foreign currency forwards not designated as hedges:
Other current assets	182			141
Accrued expenses	(369		)	(623		)
Foreign currency forwards, net	$	(194	)	$	(587	)