Note 7 - Fair Value of Financial Instruments

9 Months Ended

Sep. 30, 2015

Fair Value of Financial Instruments

The Company’s financial instruments include cash and cash equivalents, short-term trade receivables, derivative instruments, accounts payable and debt instruments. For short-term instruments, other than those required to be reported at fair value on a recurring basis and for which additional disclosures are included below, management concluded the historical carrying value is a reasonable estimate of fair value because of the short period of time between the origination of such instruments and their expected realization.

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is an exit price concept that assumes an orderly transaction between willing market participants. Valuation techniques must maximize the use of observable inputs and minimize the use of unobservable inputs. To measure fair value, the Company applies a fair value hierarchy that is based on three levels of input, of which the first two are considered observable and the last unobservable, as follows:

Level 1

– Quoted prices in active markets for identical assets and liabilities.

Level 2

– Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3

– Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

During the nine months ended September 30, 2015, there were no transfers of financial assets between Levels 1, 2 or 3 fair value measurements. There have been no changes in the methodologies used at September 30, 2015 since December 31, 2014. Following is a description of the valuation methodologies used for assets and liabilities measured at fair value as of September 30, 2015 and December 31, 2014:

Metals swaps and embedded customer derivatives

– Determined by using Level 2 inputs that include the price of nickel indexed to the LME and the price of Hot-Rolled Coil Steel indexed to the NYMEX. The fair value is determined based on quoted market prices and reflects the estimated amounts the Company would pay or receive to terminate the nickel swaps.

Interest rate swaps

– Based on the present value of the expected future cash flows, considering the risks involved, and using discount rates appropriate for the maturity date. Market observable Level 2 inputs are used to determine the present value of future cash flows.

The following table presents information about the Company’s assets and liabilities that were measured at fair value on a recurring basis and indicates the fair value hierarchy of the valuation techniques utilized by the Company:

	Value of Items Recorded at Fair Value
	As of September 30, 2015
(in thousands)	Level 1		Level 2		Level 3		Total
Assets:
Metals swaps	$	-	$	876	$	-	$	876
Total assets at fair value	$	-	$	876	$	-	$	876

Liabilities:
Embedded customer derivative	$	-	$	876	$	-	$	876
Interest rate swap (CTI)		-		128		-		128
Fixed interest rate swap (ABL)		-		213		-		213
Total liabilities recorded at fair value	$	-	$	1,217	$	-	$	1,217

	Value of Items Recorded at Fair Value
	As of December 31, 2014
(in thousands)	Level 1		Level 2		Level 3		Total
Assets:
Embedded customer derivative	$	-	$	487	$	-	$	487
Total assets at fair value	$	-	$	487	$	-	$	487

Liabilities:
Metals swaps	$	-	$	487	$	-	$	487
Interest rate swap (CTI)		-		178		-		178
Fixed interest rate swap (ABL)		-		386		-		386
Total liabilities recorded at fair value	$	-	$	1,051	$	-	$	1,051

The fair value of the IRB is determined using Level 1 inputs. The carrying value and the fair value of the IRB that qualify as financial instruments were $2.7 million and $3.5 million at September 30, 2015 and December 31, 2014, respectively.

The fair value of the revolver is determined using Level 2 inputs. The carrying value of the revolver was $185.2 million at September 30, 2015. The carrying value of the revolver was $244.1 million at December 31, 2014. The Level 2 fair value of the Company's long-term debt was estimated using prevailing market interest rates on debt with similar credit worthiness, terms and maturities.

The following table presents information about the Company’s assets and liabilities that were not measured at fair value on a recurring basis and indicates the fair value hierarchy of the valuation techniques utilized by the Company:

	Value of Items Not Recorded at Fair Value
	As of September 30, 2015
(in thousands)	Level 1		Level 2		Level 3		Total
Liabilities:
IRB	$	2,690	$	-	$	-	$	2,690
Revolver		-		185,180		-		185,180
Total liabilities not recorded at fair value	$	2,690	$	185,180	$	-		187,870

The value of the items not recorded at fair value represent the carrying value of the liabilities.

	Value of Items Not Recorded at Fair Value
	As of December 31, 2014
(in thousands)	Level 1		Level 2		Level 3		Total
Liabilities:
IRB	$	3,530	$	-	$	-	$	3,530
Revolver		-		244,090		-		244,090
Total liabilities not recorded at fair value	$	3,530	$	244,090	$	-	$	247,620

The value of the items not recorded at fair value represent the carrying value of the liabilities.

- 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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