Fair Value of Financial Instruments

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in a transaction between market participants as of the measurement date. Fair value is measured using the fair value hierarchy and related valuation methodologies as defined in the authoritative literature. This guidance provides a fair value framework that requires the categorization of assets and liabilities into three levels based upon the assumptions (inputs) used to price the assets or liabilities. Level 1 provides the most reliable measure of fair value, whereas Level 3 generally requires significant management judgment.

The three levels are defined as follows:


Level 1 -	Quoted prices in active markets for identical assets and liabilities.


Level 2 -	Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-derived valuations, in which all significant inputs are observable in active markets.


Level 3 -	Significant unobservable inputs reflecting management's own assumptions about the inputs used in pricing the asset or liability.

The Company’s financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, debt, interest rate swaps and foreign currency derivatives. Cash and cash equivalents, accounts receivable and accounts payable carrying values as of December 31, 2019 and December 31, 2018 approximate fair value due to the short-term maturities of these financial instruments. The carrying amounts of long-term debt and the revolving line of credit approximate fair value as of December 31, 2019 and December 31, 2018 due to the short term nature of the underlying variable rate LIBOR agreements. The Company had Level 2 fair value measurements at December 31, 2019 and December 31, 2018 relating to the Company’s interest rate swaps and foreign currency derivatives.

Derivative and hedging activities

Foreign currency derivatives

The Company conducted business in foreign countries and paid certain expenses in foreign currencies; therefore, the Company was exposed to foreign currency exchange risk between the U.S. Dollar and foreign currencies, which could impact the Company’s operating income and cash flows. To mitigate risk associated with foreign currency exchange, the Company entered into forward contracts to exchange a fixed amount of U.S. Dollars for a fixed amount of foreign currency, which will be used to fund future foreign currency cash flows. At inception, all forward contracts are formally documented as cash flow hedges and are measured at fair value each reporting period.

Derivatives are formally assessed both at inception and at least quarterly thereafter, to ensure that derivatives used in hedging transactions are highly effective in offsetting changes in cash flows of the hedged item. If it is determined that a derivative ceases to be a highly effective hedge, or if the anticipated transaction is no longer probable of occurring, hedge accounting is discontinued, and any future mark-to-market adjustments are recognized in earnings. The effective portion of gain or loss is reported in other comprehensive income and the ineffective portion is reported in earnings. The impacts of these contracts were largely offset by gains and losses resulting from the impact of changes in exchange rates on transactions denominated in the foreign currency. As of December 31, 2019, the Company had no ineffective portion related to the cash flow hedges.

Interest Rate Swaps

The Company entered into interest rate swap contracts to fix the interest rate on an initial aggregate amount of $35,000,000 thereby reducing exposure to interest rate changes. The Company pays a fixed rate of 2.49% to the counterparty and receives 30 day LIBOR for both cash flow hedges. At inception, all interest rate swaps were formally documented as cash flow hedges and are measured at fair value each reporting period. See Note 10 - Debt, for additional information.

Financial statements impacts

The following tables detail amounts related to our derivatives designated as hedging instruments as of December 31, 2019:



	Fair Values of Derivatives Instruments
	Asset Derivatives			Liability Derivatives
	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Foreign exchange contracts	Prepaid expense other current assets	$	452,000	Accrued liabilities other	$	—
Notional contract values		15,358,000			—
Interest rate swaps	Other non-current assets	—		Other non-current liabilities	706,000
Notional swap values		$	—		$	29,750,000

As of December 31, 2019, the Company had foreign exchange contracts related to the Mexican Peso and the Candian Dollar with exchange rates ranging from 19.53 to 20.58 and 1.32, respectively

The following tables detail amounts related to our derivatives designated as hedging instruments as of December 31, 2018:



	Fair Values of Derivatives Instruments
	Asset Derivatives		Liability Derivatives
	Balance Sheet Location	Fair Value	Balance Sheet Location	Fair Value
Foreign exchange contracts	Prepaid expense other current assets	—	Accrued liabilities other	$	750,000
Notional contract values		—		$	27,588,000
Interest rate swaps	Other non-current assets	—	Other non-current liabilities	$	65,000
Notional swap values		—		$	32,375,000

As of December 31, 2018, the Company had foreign exchange contracts related to the Mexican Peso and the Canadian Dollar with exchange rates ranging from 19.52 to 20.47 and 1.28 to 1.33, respectively.

The following tables summarize the amount of unrealized / realized gain and loss recognized in Accumulated Comprehensive Income (AOCI) for the years ended December 31, 2019, 2018 and 2017:



Derivatives in subtopic 815-20 Cash Flow Hedging Relationship	Amount of Unrealized Gain or (Loss) Recognized in Accumulated other Comprehensive Income on Derivative			Location of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income^(A)	Amount of Realized Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income
	2019	2018	2017		2019	2018	2017
Foreign exchange contracts	$1,499,000	$(385,000)	$517,000	Cost of goods sold	$272,000	$68,000	$445,000
Foreign exchange contracts	$1,499,000	$(385,000)	$517,000	Selling, general and administrative expense	$25,000	$—	$67,000
Interest rate swaps	$(708,000)	$(223,000)	$—	Interest Expense	$(67,000)	$(159,000)	$—

^(A)The foreign currency derivative activity reclassified from Accumulated Other Comprehensive Income is allocated to cost of goods sold and selling, general and administrative expense based on the percentage of Mexican Peso spend.

Non-recurring fair value measurements

See Note 8- Horizon Plastics Acquisition, for non-recurring fair value measurements for the year ended December 31, 2018.