NOTE 10. 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 accounts for risk premiums that a market participant would require.

The following table presents the carrying amount, fair values and classification of our financial instruments measured on a recurring basis:

	June 30, 2013
	Total			Level 1		Level 2			Level 3
	(in thousands)
Cash and cash equivalents	$	18,716		$	18,716	$	—		$	—
Restricted cash	2,845			2,845		—			—
Notes payable to bank	(17,060		)	—		(17,060		)	—
Variable interest rate debt	(29,906		)	—		(29,006		)	—
Contingent purchase price payment	(7,000		)	—		—			(7,000		)
Foreign currency forward contracts, net	(403		)	—		(403		)	—

	December 31, 2012
	Total			Level 1		Level 2			Level 3
	(in thousands)
Cash and cash equivalents	$	26,855		$	26,855	$	—		$	—
Restricted cash	2,634			2,634		—			—
Notes payable to bank	(11,500		)	—		(11,500		)	—
Variable interest rate debt	(8,489		)	—		(8,489		)	—
Contingent purchase price payment	(7,484		)	—		—			(7,484		)
Foreign currency forward contracts, net	(205		)	—		(205		)	—

The fair value of cash and cash equivalents and restricted cash are based on the fair values of identical assets in active markets. The fair value of notes payable to bank and variable interest rate debt are based on the present value of expected future cash flows. 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 purchase price payment represents the contingent liabilities associated with the earn-out provisions from the 2012 acquisition of Usach and 2010 acquisition of Jones & Shipman. During the first quarter of 2013, the contingent purchase price payment related to the Jones & Shipman acquisition was paid. The fair value of the contingent purchase price payment 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 our continued ability to enter into forward contracts, we consider the markets for our fair value instruments to be active. As of June 30, 2013 and December 31, 2012, there were no transfers in and out of Level 1, Level 2 or Level 3.

As described in Note 2, Acquisition, the Company completed the acquisition of Forkardt in May 2013. The fair value measurements for the acquired intangible assets were calculated using discounted cash flow analysis which rely upon significant unobservable Level 3 inputs which include the following:

Unobservable inputs		Range
Discount rate		19.0% - 20.0%
Royalty rate		2.0% - 3.0%
Long term growth rate		3.0%

Derivative Instruments

We utilize foreign currency forward contracts 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 “Sales” or “Other expense” line items on the Consolidated Statements of Operations when the hedged transaction affects earnings. As of June 30, 2013, we do not expect material amount of the gain or loss will be reclassified from AOCI into “Sales” or “Other expense” in the next 12 months. For contracts that are not designated as hedges, the gain and loss on the contract is recognized in current earnings as “Other expense” line item on the Consolidated Statements of Operations.

As of June 30, 2013 and December 31, 2012, the notional amounts of the derivative financial instruments not qualifying or otherwise designated as hedges were $48.2 million and $60.5 million, respectively. For the three and six months ended June 30, 2013, we recorded losses of $0.7 million and $1.3 million, respectively, related to this type of derivative financial instruments. For three months and six months ended June 30, 2012, we recorded an immaterial loss and $0.2 million gain related to this type of derivative financial instruments.

Derivative financial instruments qualifying and designated as hedges are as follows:

	June 30, 2013				December 31, 2012
	Notional Amount		Unrealized Loss		Notional Amount		Unrealized Loss
	(in thousands)
Foreign currency forwards	$	41,212	$	115	$	49,750	$	22

The following table presents the fair value on our Consolidated Balance Sheets of the foreign currency forward contracts:

	June 30,			December 31,
	2012			2012
	(in thousands)
Foreign currency forwards designated as hedges:
Other current assets	$	257		$	191
Accrued expenses	(372		)	(213		)
Foreign currency forwards not designated as hedges:
Other current assets	166			284
Accrued expenses	(454		)	(467		)
Foreign currency forwards, net	$	(403	)	$	(205	)