Fair Value Measurements

12 Months Ended

Jun. 30, 2017

Fair Value Disclosures [Abstract]

Fair Value Measurements

(5) Fair Value Measurements

GAAP defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly fashion between market participants at the measurement date. GAAP establishes a fair value hierarchy for those instruments measured at fair value that distinguishes between assumptions based on market data (observable inputs) and the Company’s assumptions (unobservable inputs). The hierarchy consists of three levels:

Level 1 – Quoted market prices in active markets for identical assets or liabilities;

Level 2 – Inputs other than Level 1 inputs that are either directly or indirectly observable; and

Level 3 – Unobservable inputs that are not corroborated by market data.

On a recurring basis, Aceto measures at fair value certain financial assets and liabilities, which consist of cash equivalents, investments and foreign currency contracts. The Company classifies cash equivalents and investments within Level 1 if quoted prices are available in active markets. Level 1 assets include instruments valued based on quoted market prices in active markets which generally include corporate equity securities publicly traded on major exchanges. Time deposits are very short-term in nature and are accordingly valued at cost plus accrued interest, which approximates fair value, and are classified within Level 2 of the valuation hierarchy. The Company uses foreign currency futures contracts to minimize the risk caused by foreign currency fluctuation on its foreign currency receivables and payables by purchasing futures with one of its financial institutions. Futures are traded on regulated U.S. and international exchanges and represent commitments to purchase or sell a particular foreign currency at a future date and at a specific price. Aceto’s foreign currency derivative contracts are classified within Level 2 as the fair value of these hedges is primarily based on observable futures foreign exchange rates. At June 30, 2017, the Company had foreign currency contracts outstanding that had a notional amount of $62,187. Unrealized losses on hedging activities for the years ended June 30, 2017, 2016, and 2015, amounted to $515, $10 and $703, respectively, and are included in interest and other income, net, in the consolidated statements of income. The contracts have varying maturities of less than one year.

In conjunction with its existing credit agreement (see Note 9), the Company entered into an interest rate swap on March 21, 2017 for an additional interest cost of 2.005% on a notional amount of $100,000, which has been designated as a cash flow hedge. The expiration date of this interest rate swap is December 21, 2021. The remaining balance of this derivative as of June 30, 2017 is $95,000. The unrealized loss to date associated with this derivative, which is recorded in accumulated other comprehensive loss in the consolidated balance sheet at June 30, 2017, is $581. Aceto’s interest rate swaps are classified within Level 2 as the fair value of this hedge is primarily based on observable interest rates.

At June 30, 2017, the Company had $2,952 of contingent consideration, $2,807 of which related to the acquisition of certain products and related assets of Citron and Lucid, which was completed in December 2016 (see Note 3) and $145 of contingent consideration related to a previously acquired company in France. At June 30, 2016, the Company had $132 of contingent consideration related to a previously acquired company in France. The contingent consideration was calculated using the present value of a probability weighted income approach.

During the fourth quarter of each year, the Company evaluates goodwill for impairment at the reporting unit level using a market participant approach using Level 3 inputs. Additionally, on a nonrecurring basis, the Company uses fair value measures when analyzing asset impairment.

Changes in contingent consideration during 2017 and 2016 are as follows:

Balance as of June 30, 2015	$	2,622
Reversal of fair value of liability-PACK		(833	)
Reversal of fair value of liability-France		(241	)
Payments		(1,500	)
Accrued interest expense		85
Change in foreign currency exchange rate		(1	)
Balance as of June 30, 2016	$	132
Acquisitions		2,580
Accrued interest expense		237
Change in foreign currency exchange rate		3
Balance as of June 30, 2017	$	2,952

Long-lived assets and certain identifiable intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  If it is determined such indicators are present and the review indicates that the assets will not be fully recoverable, based on undiscounted estimated cash flows over the remaining amortization periods, their carrying values are reduced to estimated fair value.  Measurements based on undiscounted cash flows are considered to be Level 3 inputs.

In November 2015, the Company issued $143,750 aggregate principal amount of Notes (see Note 9). Since Aceto has the option to settle the potential conversion of the Notes in cash, the Company separated the embedded conversion option feature from the debt feature and accounts for each component separately, based on the fair value of the debt component assuming no conversion option. The calculation of the fair value of the debt component required the use of Level 3 inputs, and was determined by calculating the fair value of similar non-convertible debt, using a theoretical borrowing rate of 6.5%. The value of the embedded conversion option was determined using an expected present value technique (income approach) to estimate the fair value of similar non-convertible debt and included utilization of convertible investors’ credit assumptions and high yield bond indices. The carrying amount of the Notes approximate a fair value of $133,000 at June 30, 2017 and $134,400 at June 30, 2016 giving effect for certain factors, including the term of the Notes, current stock price of Aceto stock and effective interest rate. A portion of the offering proceeds was used to simultaneously enter into privately negotiated convertible note hedge transactions with option counterparties, which are affiliates of certain of the initial purchasers in the offering of the Notes and privately negotiated warrant transactions with the option counterparties (see Note 9). The Company calculated the fair value of the bond hedge based on the price that was paid to purchase the call. The Company also calculated the fair value of the warrant based on the price at which the affiliate purchased the warrants from the Company. Since the convertible note hedge and warrant are both indexed to the Company’s common stock and otherwise would be classified as equity, Aceto recorded both elements as equity, resulting in a net reduction to capital in excess of par value of $13,489.

The carrying values of all financial instruments classified as a current asset or current liability are deemed to approximate fair value because of the short maturity of these instruments. The fair values of the Company’s notes receivable and short-term and long-term bank loans were based upon current rates offered for similar financial instruments to the Company.

The following tables summarize the valuation of the Company’s financial assets and liabilities which were determined by using the following inputs at June 30, 2017 and 2016:

	Fair Value Measurements at June 30, 2017 Using
	Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Cash equivalents:
Time deposits		-	$	5,781		-	$	5,781
Investments:
Time deposits		-		2,046		-		2,046
Foreign currency contracts-assets (1)		-		486		-		486
Foreign currency contracts-liabilities (2)		-		137		-		137
Derivative liability for interest rate swap(3)				581				581
Contingent consideration (4)		-		-	$	2,952		2,952

(1) Included in “Other receivables” in the accompanying Consolidated Balance Sheet as of June 30, 2017.

(2) Included in “Accrued expenses” in the accompanying Consolidated Balance Sheet as of June 30, 2017.

(3) Included in “Long-term liabilities” in the accompanying Consolidated Balance Sheet as of June 30, 2017.

(4) $145 included in “Accrued expenses” and $2,807 included in “Long-term liabilities” in the accompanying Consolidated Balance Sheet as of June 30, 2017.

	Fair Value Measurements at June 30, 2016 Using
	Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Cash equivalents:
Time deposits		-	$	6,249		-	$	6,249
Investments:
Time deposits		-		881		-		881
Foreign currency contracts-assets (5)		-		160		-		160
Foreign currency contracts-liabilities (6)		-		169		-		169
Contingent consideration (7)		-		-	$	132		132

(5) Included in “Other receivables” in the accompanying Consolidated Balance Sheet as of June 30, 2016.

(6) Included in “Accrued expenses” in the accompanying Consolidated Balance Sheet as of June 30, 2016.

(7) Included in “Long-term liabilities” in the accompanying Consolidated Balance Sheet as of June 30, 2016.