Quarterly report pursuant to Section 13 or 15(d)

Fair Value Measurements

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Fair Value Measurements
 6 Months Ended
Jun. 30, 2024
Fair Value Disclosures [Abstract]  
Fair Value Measurements Fair Value Measurements
U.S. GAAP defines the fair value of a financial instrument as the amount that would be received from the sale of an asset in an orderly transaction between market participants at the measurement date. The Company is responsible for the determination of fair value and the supporting methodologies and assumptions. The Company uses various pricing sources and third parties to provide and validate the values utilized.
The degree of judgment used in measuring the fair value of financial instruments is generally inversely correlated with the level of observable valuation inputs. Financial instruments with quoted prices in active markets generally have more pricing observability and less judgment is used in measuring fair value. Financial instruments for which no quoted prices are available have less observability and are measured at fair value using valuation models or other pricing techniques that require more judgment.
Assets recorded at fair value are measured and classified in accordance with a fair value hierarchy consisting of the three “levels” based on the observability of inputs available in the marketplace used to measure the fair values as discussed below:
•Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
•Level 2: Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability; or
•Level 3: Unobservable inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model. Management estimates include certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.
Recurring Fair Value Measurements
The Company values its investments including commercial paper and floating net asset value money market funds recorded in cash, cash equivalents, and restricted cash, investments in marketable debt securities, available-for-sale, assets held in the rabbi trust, deferred compensation liability, contingent and deferred consideration and investments in convertible notes at fair value on a recurring basis.
Fair values for investments included in cash, cash equivalents, and restricted cash and marketable debt securities, available-for-sale were determined for each individual security in the investment portfolio and all securities are Level 1 or 2 measurements as appropriate.
Fair values for assets held in the rabbi trust and related deferred compensation liability were determined based on the cash surrender value of the Company-owned variable life insurance policies and underlying investments in the trust, and are Level 2 and Level 1 measurements, respectively.
Contingent consideration in connection with acquisitions, is carried at fair value and determined on a contract-by-contract basis, calculated using unobservable inputs based on a probability of achieving EBITDA and other performance requirements, and is a Level 3 measurement. Deferred consideration in connection with acquisitions is carried at fair value
and calculated using a discounted cash flow estimate with the only remaining condition on such payments being the passage of time, and is a Level 2 measurement.
We have elected to account for our investments in convertible notes, included in other assets, under the fair value option, with changes in fair value recognized in other income, net in the condensed consolidated statements of operations. We estimate the fair value of each convertible note at each balance sheet date using a scenario-based framework that incorporates various scenarios weighted based on the expected likelihood of occurrence. Within each scenario, a discounted cash flow approach was utilized, taking the expected settlement for the event, and discounting it based on the expected timing and a discount rate. Each of the assumptions in the model were considered significant assumptions. We noted that a change in the expected probability, expected payoff, timing, or discount rate, would result in a change to the fair value ascribed to the convertible notes. As these are significant inputs not observable in the market, the valuation is classified as a Level 3 measurement.
Assets and liabilities carried at fair value on a recurring basis consisted of the following (in thousands):
June 30, 2024 December 31, 2023
Fair Value Level 1 Level 2 Level 3 Fair Value Level 1 Level 2 Level 3
Assets:
Assets held in rabbi trust $ 11,686  $ —  $ 11,686  $ —  $ 10,838  $ —  $ 10,838  $ — 
Convertible notes $ 5,664  $ —  $ —  $ 5,664  $ 5,081  $ —  $ —  $ 5,081 
Cash equivalents (1):
             
Commercial paper $ 24,391  $ —  $ 24,391  $ —  $ 27,998  $ —  $ 27,998  $ — 
Money market funds 65,888  65,888  —  —  68,364  68,364  —  — 
$ 90,279  $ 65,888  $ 24,391  $ —  $ 96,362  $ 68,364  $ 27,998  $ — 
Marketable debt securities, available-for-sale:                
Short-term investments:                
U.S. treasuries $ 45,489  $ 45,489  $ —  $ —  $ 91,840  $ 91,840  $ —  $ — 
Corporate debt 74,318  —  74,318  —  77,041  —  77,041  — 
$ 119,807  $ 45,489  $ 74,318  $ —  $ 168,881  $ 91,840  $ 77,041  $ — 
Long-term investments:                
U.S. treasuries $ 776  $ 776  $ —  $ —  $ 9,852  $ 9,852  $ —  $ — 
U.S. government sponsored entities 968  —  968  —  1,040  —  1,040  — 
Corporate debt 40,564  —  40,564  —  44,565  —  44,565  — 
ABS and other 11,392  —  11,392  —  12,002  —  12,002  — 
$ 53,700  $ 776  $ 52,924  $ —  $ 67,459  $ 9,852  $ 57,607  $ — 
Liabilities:                
Contingent consideration $ 5,513  $ —  $ —  $ 5,513  $ 5,482  $ —  $ —  $ 5,482 
Deferred consideration $ 759  $ —  $ 759  $ —  $ 1,571  $ —  $ 1,571  $ — 
Deferred compensation liability $ 9,456  $ 9,456  $ —  $ —  $ 8,356  $ 8,356  $ —  $ — 
(1)
 Included in cash, cash equivalents, and restricted cash on the accompanying condensed consolidated balance sheets.
There were no transfers in or out of Level 3 during the six months ended June 30, 2024 and 2023.
During the six months ended June 30, 2024, the Company considered current and future interest rates and the probability of achieving EBITDA and other performance targets in its determination of fair value for the contingent consideration. The Company is uncertain as to the extent of the volatility in the unobservable inputs in the foreseeable
future. Deferred consideration in connection with acquisitions is carried at fair value and calculated using a discounted cash flow estimate with the only remaining condition on such payments being the passage of time.
As of June 30, 2024 and December 31, 2023, contingent and deferred consideration had a maximum undiscounted payment to be settled in cash or stock of $13.2 million and $14.7 million, respectively. Assuming the achievement of the applicable performance criteria and time requirements, the Company anticipates these payments will be made over the next one to three-year period. Changes in fair value are included in selling, general and administrative expense in the condensed consolidated statements of operations.
A reconciliation of contingent consideration measured at fair value on a recurring basis consisted of the following (in thousands):
Six Months Ended
June 30,
2024 2023
Beginning balance $ 5,482  $ 7,067 
Change in fair value of contingent consideration(1)
31  511 
Payments of contingent consideration —  (1,060)
Ending balance $ 5,513  $ 6,518 
(1)
 Includes immaterial impact of foreign currency translation.
Quantitative information about the valuation technique and significant unobservable inputs used in the valuation of the Company’s Level 3 financial liabilities measured at fair value on a recurring basis consisted of the following (dollars in thousands):
Fair Value at
June 30, 2024		 Valuation Technique Unobservable inputs
Range (Weighted Average)(1)
Contingent
consideration
 $ 5,513  Discounted cash flow Expected life of cash flows
0.3-3.3
 (0.9)
Discount rate
5.3%-6.7%
(6.4%)
Probability of achievement
10.8%-100.0%
(97.0%)
Fair Value at
December 31, 2023		 Valuation Technique Unobservable inputs
Range (Weighted Average)(1)
Contingent
consideration
 $ 5,482  Discounted cash flow Expected life of cash flows
0.8-3.8 years
 (1.4 years)
Discount rate
5.3%-6.4%
(6.1%)
Probability of achievement
11.1%-100.0%
(96.5%)
(1)
 Unobservable inputs were weighted by the relative fair value of the instruments.
The fair value of the convertible notes considered (i) the contractual maturity which may be extended at the option of the holders, (ii) a weighted average premium at settlement of 113% upon a subsequent financing, equity financing or a change in control, and (iii) a weighted average discount rate of 15.4%. During the three months ended June 30, 2024, the fair value of the convertible notes increased by approximately $391,000. During the six months ended June 30, 2024, the fair value of the convertible notes increased by approximately $583,000 primarily due to accrued interest and the reduction in the estimated time to settlement from a weighted average of 1.8 years to 0.9 years.
Nonrecurring Fair Value Measurements
In accordance with U.S. GAAP, from time to time, the Company measures certain assets at fair value on a nonrecurring basis. The Company reviews the carrying value of intangibles, goodwill and other assets for indications of
impairment at least annually. When indications of potential impairment are identified, the Company may be required to determine the fair value of those assets and record an adjustment for the carrying amount in excess of the fair value determined. Any fair value determination would be based on valuation approaches, which are appropriate under the circumstances and utilize Level 2 and Level 3 measurements as required.