Fair Value Measurements

6 Months Ended

Dec. 31, 2018

Fair Value Disclosures [Abstract]

Fair Value Measurements

(8) 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 December 31, 2018, the Company had foreign currency contracts outstanding that had a notional amount of $61,904. Unrealized losses on hedging activities for the three and six months ended December 31 2018, was $362 and $693, respectively. Unrealized (losses) gains on hedging activities for the three and six months ended December 31, 2017 was ($34) and $261, respectively, and are included in interest and other income, net, in the consolidated statements of operations. The contracts have varying maturities of less than one year.

In conjunction with its existing credit agreement (see Note 6), 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 remaining notional balance of this derivative as of December 31, 2018 is $80,000. The expiration date of this interest rate swap was December 21, 2021. The unrealized gain to date associated with this derivative, which is recorded in accumulated other comprehensive loss in the consolidated balance sheet at December 31, 2018, is $1,135. Aceto’s interest rate swaps are classified within Level 2 as the fair value of this hedge is primarily based on observable interest rates. In January 2019, the Company terminated the interest rate swap agreement resulting in a cash receipt of $1,145.

At June 30, 2018, the Company had $683 of contingent consideration which related to the acquisition of certain products and related assets of Citron and Lucid, which was completed in December 2016. In the second quarter of fiscal 2019, the Company reversed $724 of contingent consideration due to management’s evaluation and assessment of the financial performance of these products. As a result, there is no remaining balance as of December 31, 2018.

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. During the three and six months ended December 31, 2018 and 2017, there were no indicators of impairment. During the fiscal year ended June 30, 2018, the Company recognized a pre-tax non-cash goodwill impairment charge of $235,110 related to the Rising reporting unit.

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 Level 3 inputs.  During the three and six months ended December 31, 2018 and 2017 there was no loss of any major customers or a discontinuation of any major product and as such, there was no impairment.

In connection with the acquisition of certain products and related assets of Citron and Lucid, the Company will issue 5,122 shares of Aceto common stock beginning on December 21, 2019. The fair value of the future issuance of these shares was determined to be $90,400 at the time of the product acquisition after taking into effect that the shares won’t be issued until the third and fourth anniversary of the closing and the present value calculation of dividends.

In November 2015, the Company issued $143,750 aggregate principal amount of Notes (see Note 6). 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 Notes approximate a full fair value of $109,000 at December 31, 2018 giving effect to certain factors, including the term of the Notes, current stock price of Aceto stock and effective interest rate.

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 December 31, 2018 and June 30, 2018:

	Fair Value Measurements at December 31, 2018 Using
	Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Cash equivalents:
Time deposits		-	$	4,620		-	$	4,620
Investments:
Time deposits		-		1,013		-		1,013
Foreign currency contracts-assets (1)		-		97		-		97
Foreign currency contracts-liabilities (2)		-		462		-		462
Derivative asset for interest rate swap (3)		-		1,135		-		1,135

(1) Included in “Other receivables” in the accompanying Condensed Consolidated Balance Sheet as of December 31, 2018.

(2) Included in “Accrued expenses” in the accompanying Condensed Consolidated Balance Sheet as of December 31, 2018.

(3) Included in “Other receivables” in the accompanying Condensed Consolidated Balance Sheet as of December 31, 2018.

	Fair Value Measurements at June 30, 2018 Using
	Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Cash equivalents:
Time deposits		-	$	3,218		-	$	3,218
Investments:
Time deposits		-		3,030		-		3,030
Foreign currency contracts-assets (4)		-		362		-		362
Foreign currency contracts-liabilities (5)		-		304		-		304
Derivative asset for interest rate swap (6)		-		1,839		-		1,839
Contingent consideration (7)		-		-	$	683		683

(4) Included in “Other receivables” in the accompanying Consolidated Balance Sheet as of June 30, 2018.

(5) Included in “Accrued expenses” in the accompanying Consolidated Balance Sheet as of June 30, 2018.

(6) Included in “Other Assets” in the accompanying Consolidated Balance Sheet as of June 30, 2018.

(7) Included in “Long-term liabilities” in the accompanying Consolidated Balance Sheet as of June 30, 2018.