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Fair Value Measurements

9 Months Ended

Mar. 31, 2020

6.	Fair Value Measurements

A three-tier fair value hierarchy is utilized to prioritize the inputs used in measuring fair value. The hierarchy gives the highest priority to quoted prices in active markets (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels are defined as follows:

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Level 1 Inputs - unadjusted quoted prices in active markets for identical assets or liabilities;

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Level 2 Inputs - 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; and

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Level 3 Inputs - unobservable inputs reflecting the Company’s own assumptions in measuring the asset or liability at fair value.

The following table presents the Company’s fair value hierarchy for its financial assets and liabilities measured at fair value on a recurring basis at March 31, 2020 (in thousands). The Company had one fair value item at June 30, 2019, a level 3 acquisition-related contingent consideration obligation of $6.3 million.

March 31, 2020	Level 1		Level 2		Level 3		Total
Assets
Foreign currency derivatives	$	—	$	231	$	—	$	231
Total assets measured at fair value	$	—	$	231	$	—	$	231
Liabilities
Foreign currency derivatives	$	—	$	97	$	—	$	97
Interest rate swaps	$	—	$	958	$	—	$	958
Acquisition-related contingent consideration obligations	$	—	$	—	$	2,940	$	2,940
Total liabilities measured at fair value	$	—	$	1,055	$	2,940	$	3,995

Level 1 Assets and Liabilities:

The Company has no Level 1 assets or liabilities at March 31, 2020 or June 30, 2019.

Level 2 Assets and Liabilities:

The fair value of derivative instruments under our foreign currency contracts is estimated based on valuations provided by alternative pricing sources supported by observable inputs which is considered Level 2.

As of March 31, 2020, forward foreign currency contracts had a notional principal amount of $13.3 million and for the three and nine months ended March 31, 2020, there were gains of $0.1 million. These contracts have maturities of less than 30 days. Changes in the fair value of these foreign exchange forward contracts are included in other income or expense. See Note 14, Derivatives and Hedging, for additional information.

The fair values of the interest rate swaps are based upon inputs corroborated by observable market data which is considered Level 2. As of March 31, 2020, the Company had entered into multiple interest rate swap contracts with the total notional amount of $200 million. Changes in fair value of these contracts are recorded as a component of accumulated other comprehensive income (loss). As of March 31, 2020, these contracts had an unrealized loss of $1.0 million. See Note 14, Derivatives and Hedging, for additional information.

The fair value of the borrowings under the 2019 Credit Agreement (as defined below) is estimated based on valuations provided by alternative pricing sources supported by observable inputs which is considered Level 2. Due to the recent establishment of the 2019 Credit Agreement, the fair value approximates the face amount of the Company’s indebtedness of $425.5 million and $180.5 million as of March 31, 2020, and June 30, 2019, respectively.

Level 3 Assets and Liabilities:

At March 31, 2020 and June 30, 2019, the Company reflected one liability measured at fair value of $2.9 million and $6.3 million, respectively, for contingent consideration related to a certain acquisition completed in fiscal 2018. The fair value measurement of the contingent consideration obligation is determined using Level 3 inputs. These fair value measurements represent Level 3 measurements as they are based on significant inputs not observable in the market. Significant judgment is employed in determining the appropriateness of these assumptions as of the acquisition date and for each subsequent period. Accordingly, changes in assumptions could have a material impact on the amount of contingent consideration expense the Company records in any given period. Changes in the value of the contingent consideration obligations is recorded in general and administrative expenses in the accompanying condensed consolidated statements of operations.

The change in the acquisition-related contingent consideration obligations is as follows (in thousands):

	Nine Months Ended
	March 31, 2020
Beginning balance		6,298
Payments		(3,448	)
Accretion on discount		90
Ending balance	$	2,940

There were no transfers of assets or liabilities between Level 1, Level 2 and Level 3 during the three and nine months ended March 31, 2020, or 2019. There were no impairments recorded for the three and nine months ended March 31, 2020, or 2019.

The Company determines the basis of the cost of a security sold or the amount reclassified out of accumulated other comprehensive income into earnings using the specific identification method. Realized gains or losses recognized on the sale of investment securities were not significant for the three and nine months ended March 31, 2020,or 2019.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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