Note 13. Fair Value Measurements

We present fair value measurements and disclosures applicable to both our financial and nonfinancial assets and liabilities that are measured and reported on a fair value basis. Fair value is an exit price representing the expected amount we would receive to sell an asset or pay to transfer a liability in an orderly transaction with market participants at the measurement date. We have followed consistent methods and assumptions to estimate the fair values as more fully described in our 2015 Annual Report.

Our financial instruments that are subject to fair value disclosure consist of cash and cash equivalents, accounts receivable, accounts payable, derivatives and long-term debt. At September 30, 2016, the carrying values of all of these financial instruments, except the long-term debt with fixed interest rates, approximated fair value. The fair value of floating-rate debt approximates the carrying amount because the interest rates paid are based on short-term maturities. The fair value of our fixed-rate long-term debt is estimated based on the Bloomberg algorithm, which takes into account similar sized and industry debt (a Level 2 category fair value measurement). As of September 30, 2016, the fair value of our fixed-rate debt was $263.8 million, and $258.6 net of debt issuance costs.

Fair value principles prioritize valuation inputs across three broad levels. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument. Level 3 inputs are unobservable inputs based on the assumptions used to measure assets and liabilities at fair value. An asset or liability’s classification within the various levels is determined based on the lowest level input that is significant to the fair value measurement.

Recurring Fair Value Measurements

The following table summarizes the assets and liabilities measured at fair value on a recurring basis for our interest rate swap derivative financial instrument:


				Fair Value Measurements at September 30, 2016
				Quoted Prices in
				Active Markets		Significant Other			Significant
	September 30,			for Identical		Observable Inputs			Unobservable
Description	2016			Assets (Level 1)		(Level 2)			Inputs (Level 3)
Derivative asset - current	$	22		$	—	$	22		$	—
Derivative asset - noncurrent		198			—		198			—
Derivative liability - current		(1,956	)		—		(1,956	)		—
Derivative liability - noncurrent		(2,164	)		—		(2,164	)		—

	$	(3,900	)	$	—	$	(3,900	)	$	—


				Fair Value Measurements at December 31, 2015
				Quoted Prices in
				Active Markets		Significant Other			Significant
	December 31,			for Identical		Observable Inputs			Unobservable
Description	2015			Assets (Level 1)		(Level 2)			Inputs (Level 3)
Derivative asset - current	$	388		$	—	$	388		$	—
Derivative asset - noncurrent		368			—		368			—
Derivative liability - current		(2,098	)		—		(2,098	)		—
Derivative liability - noncurrent		(1,673	)		—		(1,673	)		—

	$	(3,015	)	$	—	$	(3,015	)	$	—

Our policy is to manage interest expense using a mix of fixed and variable rate debt. To manage this mix effectively, we may enter into interest rate swaps in which we agree to exchange the difference between fixed and variable interest amounts calculated by reference to an agreed upon notional principal amount.

Our $150 million interest rate swap went into effect on December 29, 2015, at which time our interest rate was effectively 6.966%. The objective of the hedge was to eliminate the variability of cash flows in interest payments on the first $150 million of variable interest rate debt (the Term Loan B). The variable rate benchmark was the three month LIBOR rate for both the Term Loan B and the interest rate swap. The changes in cash flows of the interest rate swap were expected to exactly offset the changes in cash flows of the Term Loan B. The hedged risk was the interest rate risk exposure to changes in the interest payments, attributable to changes in the benchmark three-month LIBOR interest rates (subject to a 1.0% LIBOR index floor) from December 29, 2015 through December 31, 2018. As disclosed in Note 6. Long-Term Debt, the LIBOR floor index was lowered to 0.75% on September 30, 2016, and our intent regarding future interest rate resets changed. Three-month LIBOR was above the floor, and it was more economical to use one-month LIBOR. Based upon these facts we chose to discontinue Hodge Accounting. Therefore, we assessed the amounts deferred in accumulated other comprehensive income (“AOCI”) as the forecasted transactions would not be probable that the company would use the three-month LIBOR through the remainder of the derivative duration. As a result, all amounts of AOCI were reclassified to earnings. Prospectively, we will account for the interest rate swap on a mark-to-market basis. The change in reporting will have no impact on our reported cash flows, although future results of operations on a GAAP basis will be affected by the potential volatility of mark-to-market gains and losses which fluctuate with changes in interest rates.

The inputs for determining fair value of the interest rate swap are classified as Level 2 inputs. Level 2 fair value is based on estimates using standard pricing models. These standard pricing models use inputs which are derived from or corroborated by observable market data such as interest rate yield curves, index forward curves, discount curves, and volatility surfaces. Counterparties to these derivative contracts are highly rated financial institutions which we believe carry only a minimal risk of nonperformance.

We have elected to present the derivative contracts on a gross basis in the Condensed Consolidated Balance Sheet included within other current assets and other non-current assets and other current liabilities and other non-current liabilities. Had we chosen to present the derivative contract on a net basis, we would have a derivative in a net liability position of $3.9 million as of September 30, 2016. We do not have any cash collateral due under such agreements.

As of September 30, 2016, we reported no gains or losses in AOCI related to the interest rate swaps. In connection with lowering the LIBOR index floor from 1.0% to 0.75% within the $150 million interest rate swap, we received a $0.3 million payment that increased the net liability position on the $150 million interest rate swap. The payment was reported as a reduction to derivative asset (other current assets) on the Condensed Consolidated Balance Sheets. Additionally, during the nine months ended September 30, 2016 when the interest rate swap was accounted for in accordance with hedge accounting, the periodic settlements and related reclassification of other comprehensive income was $1.4 million of net hedging losses on the interest rate swap in the interest expense line on the Condensed Consolidated Statements of Net Income. We recognized $0.6 million of interest rate swap settlements for the third quarter of 2016 in the Derivative payments on interest rate swap line on the Condensed Consolidated Statements of Net Income. If there are no changes in the interest rates for the next twelve months, we expect to make $1.9 million in cash payments related to the interest rates swap. See the following “Derivatives’ Hedging Relationships” section of this Note 13 for more information regarding the impact of the interest rate swaps on our Condensed Consolidated Financial Statements.

Derivatives’ Hedging Relationships


	Amount							Pre-tax amount of gain/(loss)
	recognized in Other					Location of gain/(loss)		reclassified from
	Comprehensive Income					reclassified from		AOCI into Net Income
	(effective portion)					AOCI into		(effective portion)
	September 30,		December 31,			Net Income (effective		September 30,		December 31,
Derivatives’ Cash Flow Hedging Relationships	2016		2015			portion)		2016		2015
Forward starting interest rate swap contract	$	—	$	(3,015	)		Interest Expense	$	1,393	$	—

	$	—	$	(3,015	)			$	1,393	$	—

As of September 30, 2016, we did not own derivative instruments that were classified as fair value hedges or trading securities. In addition, as of September 30, 2016, we did not own derivative instruments containing credit risk contingencies.