NOTE 4 - 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

Cash and cash equivalents generally consist of cash, certificates of deposit and fixed deposits and money market funds with original maturities of three months or less. Certificates of deposit and fixed deposits whose original maturity is greater than three months and is one year or less are classified as short-term investments.

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 stock embedded derivative are based upon Level 3 unobservable inputs reflecting management’s own assumptions about the inputs used in pricing the liability – refer to “Note 5, Derivative Financial Instruments.”

Cash Surrender Value

We have an unfunded salary continuation plan, which was closed to new participants effective February 3, 2011. We purchased life insurance policies on certain participants to provide, in part, for future liabilities. Refer to Note 18, “Retirement Plans.” 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 tables categorize items measured at fair value at December 31, 2018 and 2017:


			Fair Value Measurement at Reporting Date Using
December 31, 2018			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
(Dollars in thousands)
Assets
Certificates of deposit	$	750	$	—	$	750	$	—
Cash surrender value		8,057		—		8,057		—
Derivative contracts		4,218		—		4,218		—

Total		13,025		—		13,025		—

Liabilities
Derivative contracts		8,836		—		8,836
Embedded derivative liability		3,134		—		—		3,134

Total	$	11,970	$	—	$	8,836	$	3,134


			Fair Value Measurement at Reporting Date Using
December 31, 2017			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (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 2018 and 2017 in level 3 fair value measurement of the embedded derivative liability relating to the redeemable preferred stock issued May 22, 2017 in connection with the acquisition of our European operations:


January 1, 2017 – December 31, 2018
(Dollars in thousands)
Beginning fair value – January 1, 2017	$	—

Change in fair value of redeemable preferred stock embedded derivative liability		4,685

Ending fair value – December 31, 2017		4,685
Change in fair value of redeemable preferred stock embedded derivative liability		(3,480	)
Effect of redeemable preferred stock modification		1,929

Ending fair value – December 31, 2018		3,134

Debt Instruments

The carrying values of the Company’s debt instruments vary from their fair values. The fair values were determined by reference to transacted prices of these securities (Level 2 input based on the GAAP fair value hierarchy). The estimated fair value, as well as the carrying value, of the Company’s debt instruments are shown below (in thousands):


	December 31, 2018		December 31, 2017
(Dollars in thousands)
Estimated aggregate fair value	$	624,943	$	704,005
Aggregate carrying value ⁽¹⁾		684,922		707,864

⁽¹⁾	Long-term debt excluding the impact of unamortized debt issuance costs.