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Fair Value Measurements
9 Months Ended
Mar. 31, 2016
Fair Value Disclosures [Abstract]  
Fair Value Measurements

(7) 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 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 March 31, 2016, the Company had foreign currency contracts outstanding that had a notional amount of $56,185. Unrealized gains (losses) on hedging activities for the nine months ended March 31, 2016 and 2015 was $226 and ($2,517), respectively, and are included in interest and other income, net, in the condensed consolidated statements of income. The contracts have varying maturities of less than one year.

 

In conjunction with the Credit Agreement, dated as of April 30, 2014, the Company entered into an interest rate swap on April 30, 2014 for an additional interest cost of 1.63% on a notional amount of $25,750, which had been designated as a cash flow hedge. The expiration date of this interest rate swap was April 30, 2019. In November 2015, the Company terminated the interest rate swap agreement resulting in a termination payment of $420, which is included in interest expense in the condensed consolidated statements of income for the nine months ended March 31, 2016. Pursuant to the requirements of the Credit Agreement, dated December 31, 2010, the Company was required to deliver Hedging Agreements (as defined in the agreement) fixing the interest rate on not less than $20,000 of the term loan at that time. Accordingly, in March 2011, the Company entered into an interest rate swap for an additional interest cost of 1.91% on a notional amount of $20,000, which had been designated as a cash flow hedge and which expired on December 31, 2015. Aceto’s interest rate swaps were previously classified within Level 2 as the fair value of this hedge was primarily based on observable interest rates.

 

As of March 31, 2016 and June 30, 2015, the Company had $0 and $783, respectively, of contingent consideration related to the PACK acquisition, which was completed in April 2014 and $133 and $359, respectively, of contingent consideration related to the acquisition of a company in France, which occurred in December 2013. In addition, as of June 30, 2015, the Company had $1,480, of contingent consideration that was recorded at fair value in the Level 3 category, which related to the acquisition of Rising that was completed during fiscal 2011. The Rising contingent consideration was paid in September 2015. The contingent consideration was calculated using the present value of a probability weighted income approach.

 

During the fourth quarter of each fiscal year, the Company evaluates goodwill and indefinite-lived intangibles for impairment at the reporting unit level using a cash flow model using Level 3 inputs. Additionally, on a nonrecurring basis, the Company uses fair value measures when analyzing asset impairment. 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 5). 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. 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 5). 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 March 31, 2016 and June 30, 2015:

 

    Fair Value Measurements at March 31, 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     -     $ 6,390       -     $ 6,390  
                                 
Investments:                                
Time deposits     -       2,394       -       2,394  
                                 
Foreign currency contracts-assets (1)     -       359       -       359  
Foreign currency contracts-liabilities (2)     -       138       -       138  
Contingent consideration (3)     -       -     $ 133       133  

 

(1) Included in “Other receivables” in the accompanying Condensed Consolidated Balance Sheet as of March 31, 2016.
(2) Included in “Accrued expenses” in the accompanying Condensed Consolidated Balance Sheet as of March 31, 2016.
(3) Included in “Long-term liabilities” in the accompanying Condensed Consolidated Balance Sheet as of March 31, 2016.

 

    Fair Value Measurements at June 30, 2015 Using  
       
    Quoted Prices 
in Active 
Markets
(Level 1)
    Significant 
Other
Observable 
Inputs (Level 2)
    Significant
Unobservable
Inputs
 (Level 3)
    Total  
                         
Cash equivalents:                                
Time deposits     -     $ 6,376       -     $ 6,376  
                                 
Investments:                                
Time deposits     -       3,416       -       3,416  
                                 
Foreign currency contracts-assets (4)     -       119       -       119  
Foreign currency contracts-liabilities (5)     -       767       -       767  
Derivative liability for interest rate swap (6)     -       338       -       338  
Contingent consideration (7)     -       -     $ 2,622       2,622  

  

(4) Included in “Other receivables” in the accompanying Condensed Consolidated Balance Sheet as of June 30, 2015.
(5) Included in “Accrued expenses” in the accompanying Condensed Consolidated Balance Sheet as of June 30, 2015.
(6) $13 included in “Accrued expenses” and $325 included in “Long-term liabilities” in the accompanying Consolidated Balance Sheet as of June 30, 2015.
(7) $1,480 included in “Accrued expenses” and $1,142 included in “Long-term liabilities” in the accompanying Consolidated Balance Sheet as of June 30, 2015.