DERIVATIVE FINANCIAL INSTRUMENTS

As a matter of policy, the Company uses derivatives for risk management purposes, and does not use derivatives for speculative purposes. From time to time, the Company may enter into foreign currency forward contracts to hedge foreign currency cash flow transactions. For cash flow hedges, a gain or loss is recorded in the Consolidated Statements of Operations upon settlement of the hedge. All of the Company’s hedges that are designated as hedges for accounting purposes were highly effective; therefore, no notable amounts of hedge ineffectiveness were recorded in the Company’s Consolidated Statements of Operations for the outstanding hedged balance. During the first six months of 2017 and 2016, the Company recorded less than $0.1 million as a gain on the consolidated statements of operations in the other income (expense) line item upon settlement of cash flow hedges. At June 30, 2017, the Company’s cash flow hedges were in a net deferred loss position of $0.1 million due to unfavorable movements in short-term interest rates relative to the hedged position. The loss was recorded in accrued expenses and other comprehensive income on the Consolidated Balance Sheets and on the foreign currency translation adjustment and derivative transactions line of the Consolidated Statements of Equity. The Company presents derivative instruments in the consolidated financial statements on a gross basis. The gross and net difference of derivative instruments are considered to be immaterial to the financial position presented in the financial statements.

The Company engages in regular inter-company trade activities and receives royalty payments from its wholly-owned Canadian entities, paid in Canadian dollars, rather than the Company’s functional currency, U.S. dollars. The Company utilizes foreign currency forward exchange contracts to mitigate the currency risk associated with the anticipated future payments from its Canadian entities.

In October 2015, the Company entered into an interest rate swap agreement for a notional amount of $262.5 million, which is set to expire in October 2020. The notional amount of this swap mirrored the amortization of a $262.5 million portion of the Company’s $350.0 million term loan drawn from the Credit Facility. The swap requires the Company to make a monthly fixed rate payment of 1.46% calculated on the amortizing $262.5 million notional amount and provides for the Company to receive a payment based upon a variable monthly LIBOR interest rate calculated by amortizing the $262.5 million same notional amount. The receipt of the monthly LIBOR-based payment offsets a variable monthly LIBOR-based interest cost on a corresponding $262.5 million portion of the Company’s term loan from the Credit Facility. This interest rate swap is used to partially hedge the interest rate risk associated with the volatility of monthly LIBOR rate movement and is accounted for as a cash flow hedge.

The following table provides a summary of the fair value amounts of our derivative instruments, all of which are Level 2 inputs as defined below (in thousands):



Designation of Derivatives	Balance Sheet Location	June 30, 2017		December 31, 2016
Derivatives Designated as Hedging Instruments:
Interest Rate Swaps	Other non-current assets	$	1,346	$	1,061
	Total Assets	$	1,346	$	1,061

Forward Currency Contracts	Accrued expenses	$	50	$	57
	Total Liabilities	$	50	$	57

Derivatives Not Designated as Hedging Instruments:
Forward Currency Contracts	Prepaid expenses and other current assets	$	26	$	26
	Total Assets	$	26	$	26

Forward Currency Contracts	Accrued expenses	$	—	$	—
	Total Liabilities	$	—	$	—

	Total Derivative Assets	$	1,372	$	1,087
	Total Derivative Liabilities	50		57
	Total Net Derivative Asset	$	1,322	$	1,030

FASB ASC 820, Fair Value Measurements (“FASB ASC 820”), defines fair value, establishes a framework for measuring fair value and expands disclosure requirements about fair value measurements for interim and annual reporting periods. The guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1 – defined as quoted prices in active markets for identical instruments; Level 2 – defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3 – defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. In accordance with FASB ASC 820, the Company determined that the instruments summarized below are derived from significant observable inputs, referred to as Level 2 inputs.

The following tables represent assets and liabilities measured at fair value on a recurring basis and the basis for that measurement (in thousands):



	Total Fair Value at June 30, 2017		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Forward Currency Contracts	$	26	$	—	$	26	$	—
Interest Rate Swap	1,346		—		1,346		—
Total	$	1,372	$	—	$	1,372	$	—

Liabilities:
Forward Currency Contracts	$	50	$	—	$	50	$	—
Total	$	50	$	—	$	50	$	—



	Total Fair Value at December 31, 2016		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Forward Currency Contracts	$	26	$	—	$	26	$	—
Interest Rate Swap	1,061		—		1,061		—
Total	$	1,087	$	—	$	1,087	$	—

Liabilities:
Forward Currency Contracts	$	57	$	—	$	57	$	—
Total	$	57	$	—	$	57	$	—

The following table summarizes the Company’s derivative positions at June 30, 2017:



	Position	Notional Amount		Weighted Average Remaining Maturity In Years	Average Exchange Rate
Canadian Dollar/USD	Sell	$	1,662,500	0.3	1.30
Canadian Dollar/British Pound	Sell	£	2,700,000	0.3	1.69
USD/EURO	Sell	€	3,400,000	0.3	1.15
USD/British Pound	Sell	£	4,595,000	0.3	1.31
EURO/British Pound	Sell	£	4,700,000	0.3	0.88
Interest Rate Swap		$	239,531,250	3.3

The Company had no transfers between Level 1, 2 or 3 inputs during the quarter ended June 30, 2017. Certain financial instruments are required to be recorded at fair value. Changes in assumptions or estimation methods could affect the fair value estimates; however, the Company does not believe any such changes would have a material impact on its financial condition, results of operations or cash flows. Other financial instruments including cash and cash equivalents and short-term borrowings, including notes payable, are recorded at cost, which approximates fair value, which is based on Level 2 inputs as previously defined.