(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 March 31, 2017, the Company had foreign currency contracts outstanding that had a notional amount of $65,861. Unrealized (losses) gains on hedging activities for the nine months ended March 31, 2017 and 2016 was ($230) and $226, 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 the Credit Agreement, 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 March 31, 2017 is $97,500. The unrealized loss to date associated with this derivative, which is recorded in accumulated other comprehensive income in the consolidated balance sheet at March 31, 2017, is $249. 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 March 31, 2017, the Company had $2,830 of contingent consideration, $2,697 of which related to the acquisition of certain products and related assets of Citron and Lucid, which was completed in December 2016 (see Note 2) and $133 of contingent consideration related to a previously acquired company in France.

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

Changes in the Company's goodwill during 2017 are as follows:

	Human Health Segment		Pharmaceutical Ingredients Segment			Performance Chemicals Segment			Total Goodwill
Balance as of June 30, 2016	$	66,039	$	1,651		$	181		$	67,871
Citron and Lucid product acquisition		173,907		-			-			173,907
Changes in foreign currency exchange rates		-		(30	)		(7	)		(37	)
Balance as of March 31, 2017	$	239,946	$	1,621		$	174		$	241,741

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 connection with the acquisition of certain products and related assets of Citron and Lucid (see Note 2), the Company will issue 5,122 shares of Aceto common stock beginning on December 21, 2019. The preliminary 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 $132,800 at March 31, 2017 giving effect for 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 March 31, 2017 and June 30, 2016:

	Fair Value Measurements at March 31, 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		-	$	5,490		-	$	5,490

Investments:
Time deposits		-		1,966		-		1,966

Foreign currency contracts - assets (1)				27				27
Foreign currency contracts - liabilities (2)		-		262		-		262
Derivative liability for interest rate swap (3)				249		-		249
Contingent consideration (4)		-		-	$	2,830		2,830

(1)

Included in “Other receivables” in the accompanying Condensed Consolidated Balance Sheet as of March 31, 2017.

(2)

Included in “Accrued expenses” in the accompanying Condensed Consolidated Balance Sheet as of March 31, 2017.

(3)

Included in “Long-term liabilities” in the accompanying Condensed Consolidated Balance Sheet as of March 31, 2017.

(4)

Included in “Long-term liabilities” in the accompanying Condensed Consolidated Balance Sheet as of March 31, 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 Condensed Consolidated Balance Sheet as of June 30, 2016.

(6)

Included in “Accrued expenses” in the accompanying Condensed 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.