Marcus & Millichap, Inc. Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

Fair Value Measurements

Fair Value Measurements

9 Months Ended

Sep. 30, 2019

10.	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 the value of the investments carried at fair value and the supporting methodologies and assumptions. The Company uses various pricing sources and third parties to 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:

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

Recurring Fair Value Measurements

The Company values its investments including commercial paper and floating NAV money market funds recorded in cash and cash equivalents, investments in marketable securities,

available-for-sale,

assets held in the rabbi trust, acquired MSR contracts, deferred compensation liability and contingent consideration at fair value on a recurring basis. Fair values for investments included in cash and cash equivalents and marketable securities,

available-for-sale

were determined for each individual security in the investment portfolio and all these securities are Level 1 or 2 measurements as appropriate.

Fair values for assets held in the rabbi trust and r

lated 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 a probability weighted discounted cash flow model based on the probability of achieving EBITDA and other service requirements, and is a Level 3 measurement.

The Company values MSRs at fair value upon acquisition of a servicing contract. MSRs do not trade in an active, open market with readily observable prices, and are a Level 3 measurement.

Assets and liabilities carried at fair value on a recurring basis consisted of the following (in thousands):


	September 30, 2019								December 31, 2018
	Fair Value		Level 1		Level 2		Level 3		Fair Value		Level 1		Level 2		Level 3
Assets:
Assets held in rabbi trust	$	9,102	$	—	$	9,102	$	—	$	8,268	$	—	$	8,268	$	—

Cash equivalents (1) :
Commercial paper and other	$	12,480	$	—	$	12,480	$	—	$	1,599	$	1,599	$	—	$	—
Money market funds		167,321		167,321		—		—		163,126		163,126		—		—

	$	179,801	$	167,321	$	12,480	$	—	$	164,725	$	164,725	$	—	$	—

Marketable securities, available-for-sale:
Short-term investments:
U.S. treasuries	$	109,399	$	109,399	$	—	$	—	$	121,180	$	121,180	$	—	$	—
U.S. government sponsored entities		—		—		—		—		3,505		—		3,505		—
Corporate debt securities		15,076		—		15,076		—		11,951		—		11,951		—
Asset-backed securities and other		—		—		—		—		800		—		800		—

	$	124,475	$	109,399	$	15,076	$	—	$	137,436	$	121,180	$	16,256	$	—

Long-term investments:
U.S. treasuries	$	30,456	$	30,456	$	—	$	—	$	45,010	$	45,010	$	—	$	—
U.S. government sponsored entities		1,413		—		1,413		—		1,507		—		1,507		—
Corporate debt securities		30,842		—		30,842		—		31,837		—		31,837		—
Asset-backed securities and other		8,074		—		8,074		—		4,855		—		4,855		—

	$	70,785	$	30,456	$	40,329	$	—	$	83,209	$	45,010	$	38,199	$	—

Liabilities:
Contingent consideration (2)	$	2,864	$	—	$	—	$	2,864	$	2,875	$	—	$	—	$	2,875

Deferred compensation liability	$	8,192	$	8,192	$	—	$	—	$	7,893	$	7,893	$	—	$	—

(1)	Included in cash and cash equivalents on the accompanying condensed consolidated balance sheets.

(2)

As of September 30, 2019, contingent consideration has a maximum undiscounted payment of $4.2 million.

Assuming the achievement of the applicable performance criteria, the Company anticipates these earn-out payments will be made over the next three to seven-year period. A reconciliation of contingent consideration measured at fair value on a recurring basis consisted of the following (in thousands):


	September 30, 2019			December 31, 2018
Beginning balance	$	2,875		$	—
Contingent consideration in connection with acquisitions		—			2,674
Change in fair value of contingent consideration		(11	)		201
Payments of contingent consideration		—			—

Ending balance	$	2,864		$	2,875

There were no transfers in or out of Level 1, Level 2 and Level 3 during the nine months ended September 30, 2019.

Nonrecurring Fair Value Measurements

The Company reviews the carrying value of MSRs, intangibles, goodwill and other assets for indications of impairment quarterly. 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. In accordance with U.S. GAAP, from time to time, the Company measures certain assets at fair value on a nonrecurring basis. MSRs are initially recorded at fair value based on internal models and are a Level 3 measurement. The Company’s MSRs do not trade in an active, open market with readily observable prices. The Company has elected the amortization method for the subsequent measurement of MSRs. The estimated fair value of the Company’s MSRs were developed using discounted cash flow models that calculate the present value of estimated future net servicing income. The model considers contractual provisions and assumptions of market participants including specified servicing fees, prepayment assumptions, delinquency rates, late charges, other ancillary revenue, costs to service and other economic factors. The Company periodically reassesses and adjusts, when necessary, the underlying inputs and assumptions used in the model to reflect observable market conditions and assumptions that a market participant would consider in valuing an MSR asset. MSRs are carried at the lower of amortized cost or fair value. The fair value of the MSRs approximated the carrying value at September 30, 2019 and December 31, 2018. See Note 7 – “Selected Balance Sheet Data – Other Assets – MSRs” for additional information.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

+ References + Details