Quarterly report pursuant to Section 13 or 15(d)

FAIR VALUE DISCLOSURES

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FAIR VALUE DISCLOSURES
 9 Months Ended
Sep. 29, 2012
FAIR VALUE DISCLOSURES [Abstract]  
FAIR VALUE DISCLOSURES
NOTE 8--FAIR VALUE OF FINANCIAL INSTRUMENTS
 
The Company determines the fair values of its financial instruments for disclosure purposes by maximizing the use of observable inputs and minimizing the use of unobservable inputs when measuring fair value. Fair value disclosures for assets and liabilities are grouped in three levels.  The levels prioritize the inputs used to measure the fair value of the assets or liabilities.  These levels are:
 
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Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities.
 
 
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Level 2 – Inputs other than quoted prices that are observable for assets and liabilities, either directly or indirectly.  These inputs include quoted prices for similar assets or liabilities in active markets or quoted prices for identical or similar assets or liabilities in markets that are less active.
 
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Level 3 – Unobservable inputs that are supported by little or no market activity for assets or liabilities and includes certain pricing models, discounted cash flow methodologies and similar techniques.
 
As of September 29, 2012 and December 31, 2011, the carrying amount for cash and cash equivalents, accounts receivable, accounts payable and borrowings under the Company’s line of credit and term loan, which are based on variable interest rates, approximates their fair value.
 
Cash surrender value of life insurance policies and the interest rate swap discussed in Note 10 are classified as Level 2 financial instruments.  The fair value of the life insurance policies was determined by the underwriting insurance company’s valuation models and represents the guaranteed value the Company would receive upon surrender of these policies.  The interest rate swap was priced using discounted cash flow techniques which are corroborated by using non-binding market prices.  Significant inputs to the discounted cash flow model include projected future cash flows based on projected one-month LIBOR, and the average margin for companies with similar credit ratings and similar maturities.  These are classified as Level 2 as they are not actively traded and are valued using pricing models that use observable market inputs.
 
 
The contingent consideration (“earn-out”) payments, discussed below in Note 9, are classified as Level 3.  The amount of the total earn-out liability to the prior owners was determined using management’s best estimate of earnings before interest, taxes, depreciation and amortization (“EBITDA”) for the three-year earn-out period which will determine the amount of the ultimate payment to be made.  Factors, such as volume increases, selling price increases and inflation were used to develop a base projection. The Company believes additional costs will be required to improve employee turnover, safety, internal controls, etc.  These estimated costs were deducted in order to determine projected EBITDA.  The Company’s current cost of borrowing was used to determine the present value of these expected payments.  Each quarter-end, the Company will re-evaluate their assumptions and adjust to the estimated present value of the expected payments to be made.
 
There were no transfers of assets or liabilities between Level 1 and Level 2 in the nine month period ended September 29, 2012 or year ended December 31, 2011.