Note 5 – Fair Value Measurements

The company applies fair value accounting for all financial assets and liabilities and non-financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis, while other assets and liabilities are measured at fair value on a nonrecurring basis, such as when we have an asset impairment. Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:

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

Level 2 – Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 – Inputs that are generally unobservable and typically reflect management’s estimate of assumptions that market participants would use in pricing the asset or liability.

The carrying amounts for cash and cash equivalents, investments in certificates of deposit, accounts receivable, accounts payable and accrued expenses approximate their fair values due to the short period of time until maturity.

Cash and Cash Equivalents

Included in cash and cash equivalents are highly liquid investments that are readily convertible to known amounts of cash, and which are subject to an insignificant risk of change in value due to interest rates, quoted price or penalty on withdrawal. A debt security is classified as a cash equivalent if it meets these criteria and if it has a remaining time to maturity of three months or less from the date of acquisition. Amounts on deposit and available upon demand, or negotiated to provide for daily liquidity without penalty, are classified as cash and cash equivalents. Time deposits, certificates of deposit and money market accounts that meet the above criteria are reported at par value on our balance sheet and are excluded from the table below.

Derivative Financial Instruments

Our derivatives are over-the-counter customized derivative transactions and are not exchange traded. We estimate the fair value of these instruments using industry-standard valuation models such as a discounted cash flow. These models project future cash flows and discount the future amounts to a present value using market-based expectations for interest rates, foreign exchange rates, commodity prices and the contractual terms of the derivative instruments. The discount rate used is the relevant interbank deposit rate (e.g., LIBOR) plus an adjustment for non-performance risk. In certain cases, market data may not be available, and we may use broker quotes and models (e.g., Black-Scholes) to determine fair value. This includes situations where there is lack of liquidity for a particular currency or commodity or when the instrument is longer dated. The fair value measurements of the redeemable preferred shares embedded derivatives are based upon Level 3 unobservable inputs reflecting management’s own assumptions about the inputs used in pricing the liability – refer to Note 6,” Derivative Financial Instruments.”

Cash Surrender Value

The cash surrender value of the life insurance policies is the sum of money the insurance company will pay to the company in the event the policy is voluntarily terminated before its maturity or the insured event occurs. Over the term of the life insurance contracts, the cash surrender value changes as a result of premium payments and investment income offset by investment losses, charges and miscellaneous fees. The amount of the asset recorded for the investment in the life insurance contracts is equal to the cash surrender value which is the amount that will be realized under the contract as of the balance sheet date if the insured event occurs.

The following table categorizes items measured at fair value at March 31, 2018:


			Fair Value Measurement at Reporting Date Using
			Quoted Prices		Significant Other		Significant
			in Active Markets		Observable		Unobservable
			for Identical Assets		Inputs		Inputs
March 31, 2018			(Level 1)		(Level 2)		(Level 3)
(Dollars in thousands)
Assets
Certificates of deposit	$	750		—		750		—
Cash surrender value		8,136		—		8,136		—
Derivative contracts		12,433		—		12,433		—

Total		21,319		—		21,319		—

Liabilities
Derivative contracts		7,937		—		7,937		—
Embedded derivative liability		3,787		—		—		3,787

Total	$	11,724		—		7,937		3,787

The following table categorizes items measured at fair value at December 31, 2017:


			Fair Value Measurement at Reporting Date Using
			Quoted Prices		Significant Other		Significant
			in Active Markets		Observable		Unobservable
			for Identical Assets		Inputs		Inputs
December 31, 2017			(Level 1)		(Level 2)		(Level 3)
(Dollars in thousands)
Assets
Certificates of deposit	$	750	$	—	$	750	$	—
Cash surrender value		8,040		—		8,040		—
Derivative contracts		6,342		—		6,342		—

Total		15,132		—		15,132		—

Liabilities
Derivative contracts		16,106		—		16,106		—
Embedded derivative liability		4,685		—		—		4,685

Total	$	20,791	$	—	$	16,106	$	4,685

The following table summarizes the changes during the first quarter of 2018 in level 3 fair value measurement of the embedded derivative liability relating to the redeemable preferred shares issued in connection with the acquisition of Uniwheels:


Three Months Ended March 31,	2018
(Dollars in thousands)
Change in fair value:
Beginning fair value – December 31, 2017	$	4,685
Change in fair value of redeemable preferred stock embedded derivative liability		(898	)

Ending fair value at March 31, 2018	$	3,787