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 June 30, 2020 and December 31, 2019 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 June 30, 2020 and December 31, 2019 due to the short term nature of the underlying variable rate LIBOR agreements. The Company had Level 2 fair value measurements at June 30, 2020 and December 31, 2019 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 June 30, 2020, 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 approximately 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 11, "Debt", for additional information.

Financial Statement Impacts

The following tables detail amounts related to our derivatives designated as hedging instruments:



	Fair Value of Derivative Instruments
	June 30, 2020
	Asset Derivatives			Liability Derivatives
	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Foreign exchange contracts	Prepaid expense other current assets	$	—	Accrued other liabilities	$	419,000
Notional contract values		$	—		$	3,958,000
Interest rate swaps	Prepaid expense other current assets	$	—	Accrued other liabilities	$	1,428,000
Notional swap values		$	—		$	28,000,000

	December 31, 2019
	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 other liabilities	$	—
Notional contract values		$	15,358,000		$	—
Interest rate swaps	Prepaid expense other current assets	$	—	Accrued other liabilities	$	706,000
Notional swap values		$	—		$	29,750,000

The following tables summarize the amount of unrealized and realized gain (loss) recognized in Accumulated Other Comprehensive Income (Loss) ("AOCI") for the three months ended June 30, 2020 and 2019:



Derivatives in subtopic 815-20 Cash Flow Hedging Relationship	Amount of Unrealized Gain (Loss) Recognized in Accumulated Other Comprehensive Income (Loss) on Derivative					Location of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income (Loss)^(A)	Amount of Realized Gain (Loss) Reclassified from Accumulated Other Comprehensive Income (Loss)
	2020		2019				2020			2019
Foreign exchange contracts	$	1,213,000	$	354,000		Cost of goods sold	$	(364,000	)	$	(79,000	)
Foreign exchange contracts	$	1,213,000	$	354,000		Selling, general and administrative expense	$	(47,000	)	$	(4,000	)
Interest rate swaps	$	205,000	$	(470,000	)	Interest expense	$	(144,000	)	$	(1,000	)

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

The following tables summarize the amount of unrealized and realized gain (loss) recognized in Accumulated Other Comprehensive Income (Loss) ("AOCI") for the six months ended June 30, 2020 and 2019:



Derivatives in subtopic 815-20 Cash Flow Hedging Relationship	Amount of Unrealized Gain (Loss) Recognized in Accumulated Other Comprehensive Income (Loss) on Derivative						Location of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income (Loss)^(A)	Amount of Realized Gain (Loss) Reclassified from Accumulated Other Comprehensive Income (Loss)
	2020			2019				2020			2019
Foreign exchange contracts	$	(532,000	)	$	841,000		Cost of goods sold	$	(306,000	)	$	(55,000	)
Foreign exchange contracts	$	(532,000	)	$	841,000		Selling, general and administrative expense	$	(34,000	)	$	8,000
Interest rate swaps	$	(528,000	)	$	(722,000	)	Interest expense	$	(194,000	)	$	—