Note 6 - Fair Value Measurements

9 Months Ended

Sep. 30, 2023

Notes to Financial Statements

Fair Value Disclosures [Text Block]

6. FAIR VALUE MEASUREMENTS

Fair value is defined as an exit price, representing the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants based upon the best use of the asset or liability at the measurement date.  Entities are required to use a fair value hierarchy which maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value.  There are three levels of inputs that may be used to measure fair value:

Level 1 – Observable inputs such as quoted market prices in active markets;

Level 2 – Inputs other than quoted prices in active markets that are either directly or indirectly observable; and

Level 3 – Unobservable inputs about which little or no market data exists, therefore requiring an entity to develop its own assumptions.

As of September 30, 2023 and December 31, 2022, our equity securities primarily consisted of investments held in a rabbi trust which are intended to fund the Company’s Supplemental Executive Retirement Plan (“SERP”) obligations.  These securities are measured at fair value using quoted prices in active markets for identical assets (Level 1) inputs and amounted to $0.4 million at  September 30, 2023 and $0.1 million at December 31, 2022. 

Throughout 2023 and 2022, the Company entered into a series of foreign currency forward contracts, the fair value of which was ($0.7) million at  September 30, 2023 and $0.4 million at  December 31, 2022.  The estimated fair value of foreign currency forward contracts is based on quotes received from the applicable counterparty, and represents the estimated amount we would receive or pay to settle the contracts, taking into consideration current exchange rates which can be validated through readily observable data from external sources (Level 2).

The Company is a party to two interest rate swap agreements as further described in Note 10, "Derivative Instruments and Hedging Activities".  The fair value of the interest rate swap agreements was $5.5 million at each of  September 30, 2023 and December 31, 2022, which was based on market data, and represents the estimated amount we would receive or pay to settle the agreements, taking into consideration current and projected future interest rates as well as the creditworthiness of the parties, all of which can be validated through readily observable data from external sources.

The Company does not have any financial assets measured at fair value on a recurring basis categorized as Level 3, and there were no transfers in or out of Level 1, Level 2 or Level 3 during the nine months ended September 30, 2023 or  September 30, 2022.  There were no changes to the Company’s valuation techniques used to measure asset fair values on a recurring or nonrecurring basis during the nine months ended September 30, 2023 or  September 30, 2022.

There were no financial assets accounted for at fair value on a nonrecurring basis as of  September 30, 2023 or December 31, 2022.

The Company has other financial instruments, such as cash and cash equivalents, accounts receivable, accounts payable and accrued expenses, which are not measured at fair value on a recurring basis but are recorded at amounts that approximate fair value due to their liquid or short-term nature.  The fair value of the Company’s long-term debt is estimated using a discounted cash flow method based on interest rates that are currently available for debt issuances with similar terms and maturities.  At  September 30, 2023 and December 31, 2022, the estimated fair value of total debt was $60.0 million and $95.0 million, respectively, compared to a carrying amount of $60.0 million and $95.0 million, respectively.  The Company did not have any other financial liabilities within the scope of the fair value disclosure requirements as of September 30, 2023.

Nonfinancial assets and liabilities, such as goodwill, indefinite-lived intangible assets, long-lived assets and the net liability related to the put/call options pursuant to the innolectric investment agreement, are accounted for at fair value on a nonrecurring basis.  These items are tested for impairment upon the occurrence of a triggering event or in the case of goodwill, on at least an annual basis.  Based on the Company's assessment, it was concluded that no triggering events occurred during the nine months ended September 30, 2023 or September 30, 2022.  

During the second quarter of 2023, the Company completed its preliminary valuation of the innolectric equity method investment including the valuations of the put and call options noted in the related investment agreement. To estimate the fair value of the put and call options conditional on certain thresholds related to innolectric's EBITDA, a variation of the income approach, known as the real options method was used, where innolectric’s EBITDA and equity were simulated in a risk-neutral framework using Geometric Brownian Motion.