Fair Value Measurements

6 Months Ended

Jun. 30, 2013

Note 6. Fair Value Measurements

The Company has various financial instruments that must be measured at fair value on a recurring basis, including marketable debt and equity securities held by Astec Insurance Company (“Astec Insurance”), the Company’s captive insurance company, and marketable equity securities held in an unqualified Supplemental Executive Retirement Plan (“SERP”). The obligations of the Company associated with the financial assets held in the SERP also constitute a liability of the Company for financial reporting purposes. The Company’s subsidiaries also occasionally enter into foreign currency exchange contracts to mitigate exposure to fluctuations in currency exchange rates.

The carrying amount of cash and cash equivalents, trade receivables, other receivables, revolving debt and accounts payable approximates their fair value because of the short-term nature of these instruments. Investments are carried at their fair value based on quoted market prices for identical or similar assets or, where no quoted prices exist, other observable inputs for the asset. The fair values of foreign currency exchange contracts are based on quotations from various banks for similar instruments using models with market based inputs.

Financial assets and liabilities are categorized based upon the level of judgment associated with the inputs used to measure their fair value. The inputs used to measure the fair value are identified in the following hierarchy:

Level 1 -	Unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2 -	Unadjusted quoted prices in active markets for similar assets or liabilities; or unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active; or inputs other than quoted prices that are observable for the asset or liability.
Level 3 -	Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.

As indicated in the tables below (which excludes the Company’s pension assets), the Company has determined that all its financial assets and liabilities as of June 30, 2013 and December 31, 2012 are level 1 and level 2 in the fair value hierarchy as defined above (in thousands):

	June 30, 2013
	Level 1		Level 2		Total
Financial Assets:
Trading equity securities:
SERP money market fund	$	997	$	-	$	997
SERP mutual funds		1,904		-		1,904
Preferred stocks		714		-		714
Mutual funds		14,901		-		14,901
Trading debt securities:
Corporate bonds		3,670		1,168		4,838
Municipal bonds		506		1,233		1,739
Floating rate notes		303		272		575
U.S. Treasury bonds and bills		470		-		470
Other		-		980		980
Short-term derivative financial instruments		-		1,001		1,001
Total financial assets	$	23,465	$	4,654	$	28,119

Financial Liabilities:
SERP liabilities	$	-	$	6,949	$	6,949
Total financial liabilities	$	-	$	6,949	$	6,949

	December 31, 2012
	Level 1		Level 2		Total
Financial Assets:
Trading equity securities:
SERP money market fund	$	996	$	-	$	996
SERP mutual funds		1,835		-		1,835
Preferred stocks		720		-		720
Trading debt securities:
Corporate bonds		3,342		909		4,251
Municipal bonds		1,449		957		2,406
Floating rate notes		749		-		749
U.S. treasury bonds		200		-		200
Other		-		409		409
Total financial assets	$	9,291	$	2,275	$	11,566

Financial Liabilities:
SERP liabilities	$	-	$	6,674	$	6,674
Short-term derivative financial instruments		-		145		145
Total financial liabilities	$	-	$	6,819	$	6,819

The Company reevaluates the volume of trading activity for each of its investments at the end of each quarter and adjusts the level within the fair value hierarchy as needed. Due to a reduction in trading activity $594,000 of investments included in Level 1 at December 31, 2012 were transferred to Level 2 at June 30, 2013.

The trading equity investments noted above are valued at their fair value based on their quoted market prices, and the debt securities are valued based upon a mix of observable market prices and model driven prices derived from a matrix of observable market prices for assets with similar characteristics obtained from a nationally recognized third party pricing service. Additionally, a significant portion of the SERP’s investments in trading equity securities are in money market and mutual funds. As these money market and mutual funds are held in a SERP, they are also included in the Company’s liability under its SERP. The other mutual funds totaling $14,901,000 at June 30, 2013 shown above are being used to invest the Company’s excess cash on a short-term basis and are thus included in short-term investments on the accompanying balance sheets.

Trading debt securities are comprised of marketable debt securities held by Astec Insurance. Astec Insurance has an investment strategy that focuses on providing regular and predictable interest income from a diversified portfolio of high-quality fixed income securities. As of June 30, 2013 and December 31, 2012, $1,087,000 and $1,334,000, respectively, of trading debt securities were due to mature within twelve months and, accordingly, are included in short-term investments in the accompanying balance sheets. The financial liabilities related to the SERP shown above are included in other long-term liabilities in the accompanying balance sheets.

Net unrealized gains or losses incurred during the three-month periods ended June 30, 2013 and 2012 on investments still held as of the end of each reporting period amounted to losses of $251,000 and $90,000, respectively. Net unrealized gains or losses incurred during the six-month periods ended June 30, 2013 and 2012 on investments still held as of the end of each reporting period amounted to a loss of $114,000 and a gain of $162,000, respectively.

- 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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