5. ASSET IMPAIRMENT CHARGES

When circumstances, such as adverse market conditions, indicate that the carrying value of a long-lived asset may be impaired, the Company performs an analysis to review the recoverability of the asset’s carrying value. The Company makes estimates of the undiscounted cash flows (excluding interest charges) from the expected future operations of the asset. These estimates consider factors such as expected future operating income, operating trends and prospects, as well as the effects of demand, competition and other factors. If the analysis indicates that the carrying value is not recoverable from future cash flows, an impairment loss is recognized to the extent that the carrying value exceeds the estimated fair value. The estimated fair value of assets is determined using appraisal techniques which assume the highest and best use of the asset by market participants, considering the use of the asset that is physically possible, legally permissible, and financially feasible at the measurement date. Any impairment losses are recorded as operating expenses, which reduce net income.

In the third quarter of 2015, the overall outlook for the sapphire market continued to be depressed as industry analysts reported significant worldwide over capacity and pricing of sapphire products reached historical lows. The Company at that time evaluated its long-lived assets using a cost and market approach to determine the current fair market value. Based on this analysis, an impairment to these assets was indicated, as the recoverable amount of undiscounted cash flows did not exceed the carrying amount of these assets. At December 31, 2015, the Company recorded an asset impairment charge on U.S. and Malaysia machinery, equipment and facilities of $39.6 million.

In September 2016, due to the continual decline of prices that has made the prospects of becoming profitable in the LED substrate market unlikely for the foreseeable future, the Company announced its decision to limit its focus to the optical and industrial sapphire markets and to exit the LED market. This resulted in closing of the Malaysia facility. In the fourth quarter of 2016, the Company developed a plan to scale down the remaining operations and sell additional assets that would not be needed. In this regard, the Company identified excess U.S. machinery, equipment and facilities. The Company engaged an independent valuation company to assist in the determination of the fair market value of assets to provide an updated valuation of the U.S. and Malaysia machinery and equipment. The Company evaluated its U.S. asset portfolio for the assets continuing to be used in operations using a cost and market approach to determine the current fair market value. The Company evaluated its Malaysia asset portfolio and excess U.S. assets based on assuming an orderly liquidation plan which considers economic obsolescence and sales of comparable equipment, as it is the Company’s intention to sell these assets. Based on this review, the Company recorded for the year ended December 31, 2016 an asset impairment charge on U.S. and Malaysia machinery and equipment of $12.3 million.

The Company is actively pursuing the sale of a 134,400 square foot manufacturing and office facility in Batavia, Illinois, a parcel of extra land the Company owns in Batavia, Illinois, and a 65,000 square foot facility in Penang, Malaysia. Since the expected sale price is below the book value of these properties, for the year ended December 31, 2016, an impairment charge of $14.3 million was recorded. These properties have a combined book value of $14.8 million and, since it is the Company’s intention to complete the sale within the next twelve-month period, these properties were reclassified as current assets held for sale at December 31, 2016.

At December 31, 2016, the Company reviewed the current fair market value of the Malaysia assets and concluded no additional adjustments were needed. The Company will continue to assess its long-lived assets to ensure the carrying amount of these assets is still appropriate given any changes in the asset usage, marketplace and other factors used in determining the current fair market value.

The table below summarizes the non-financial assets that were measured and recorded at fair value on a non-recurring basis as of December 31, 2016 and loss recorded during the twelve months ended December 31, 2016 on those assets:


	Carrying value at December 31, 2016		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Loss for twelve months ended December 31, 2016
	(in thousands)

Long lived assets held and used	$	7,110	$	—	$	7,110	$	—	$	12,264
Long lived assets held for sale		14,761		—		14,761		—		14,290

Total nonrecurring for value measurements	$	21,871	$	—	$	21,871	$	—	$	26,554

The table below summarizes the non-financial assets that were measured and recorded at fair value on a non-recurring basis as of December 31, 2015 and loss recorded during the twelve months ended December 31, 2015 on those assets:


	Carrying value at December 31, 2015		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Loss for twelve months ended December 31, 2015
	(in thousands)

Long lived assets held and used	$	57,569	$	—	$	57,569	$	—	$	39,597