Quarterly report pursuant to Section 13 or 15(d)

Fair Value Measurements

v3.10.0.1
Fair Value Measurements
9 Months Ended
Sep. 30, 2018
Fair Value Disclosures [Abstract]  
Fair Value Measurements
Fair Value Measurements
We record certain assets and financial liabilities at fair value on a recurring basis. We determine fair values based on the price we would receive to sell an asset or pay to transfer a liability in an orderly transaction between market participants at the measurement date and in the principal or most advantageous market for that asset or liability.
The prescribed fair value hierarchy is as follows:
Level 1 - Inputs are quoted prices in active markets for identical assets or liabilities.
Level 2 - Inputs are quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable; and market-corroborated inputs which are derived principally from or corroborated by observable market data.
Level 3 - Inputs are derived from valuation techniques in which one or more of the significant inputs or value drivers are unobservable.
The categorization of an asset or liability within the fair value hierarchy is based on the inputs described above and does not necessarily correspond to our perceived risk of that asset or liability. Moreover, the methods used by us may produce a fair value calculation that is not indicative of the net realizable value or reflective of future fair values. Furthermore, although we believe our valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments and non-financial assets and liabilities could result in a different fair value measurement at the reporting date.
Assets and liabilities measured at fair value on a recurring basis:
Interest rate swap agreements: The fair value of our interest rate swap agreements are determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of the swap agreements. This analysis reflects the contractual terms of the swap agreements, including the period to maturity, and uses observable market-based inputs, including interest rate curves. We incorporate credit valuation adjustments to appropriately reflect both our own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements.
Although we have determined that the majority of the inputs used to value our swap agreements fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with our swap agreements utilize Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by us and our counterparties. We have assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our swap agreements’ positions and have determined that the credit valuation adjustments are not significant to the overall valuation of our swap agreements. As a result, we determined that our valuation of the swap agreements in its entirety is classified in Level 2 of the fair value hierarchy.
Contingent consideration obligations: The fair value of the contingent consideration obligations include inputs not observable in the market and thus represent a Level 3 measurement. Contingent consideration obligations consist of potential obligations related to our acquisition activity. The amount to be paid under these obligations is contingent upon the achievement of stipulated operational or financial targets by the business subsequent to acquisition. The fair value for certain of our contingent consideration obligations is estimated using a probability weighted discount model which considers the achievement of the conditions upon which the respective contingent obligation is dependent. The probability of achieving the specified conditions is generally assessed by applying a Monte Carlo weighted-average model. Inputs into the valuation model include a discount rate specific to the acquired entity, a measure of the estimated volatility, and the risk free rate of return, which for the period ended December 31, 2017 was 16.3%, 24.0% and 1.6%, respectively. We also estimate the fair value of our contingent obligations based on management’s assessment of the probability of achievement of operational or financial targets. The fair value estimates consider the projected future operating or financial results for the factor upon which the respective contingent obligation is dependent. The fair value estimates are generally sensitive to changes in these projections. We develop the projected future operating results based on an analysis of historical results, market conditions, and the expected impact of anticipated changes in our overall business and/or product strategies.
The following tables disclose the assets and liabilities measured at fair value on a recurring basis as of September 30, 2018 and December 31, 2017, by the fair value hierarchy levels as described above:
 
Fair value at September 30, 2018
 
Total
 
Level 1
 
Level 2
 
Level 3
 
(in thousands)
Assets:
 
 
 
 
 
 
 
Interest rate swap agreements
$
1,286

 
$

 
$
1,286

 
$

Liabilities:
 
 
 
 
 
 
 
Contingent consideration related to the acquisition of:
 
 
 
 
 
 
 
Axiometrics

 

 

 

LeaseLabs
7,000

 

 

 
7,000

Total liabilities measured at fair value
$
7,000

 
$

 
$

 
$
7,000

 
Fair value at December 31, 2017
 
Total
 
Level 1
 
Level 2
 
Level 3
 
(in thousands)
Assets:

 
 
 
 
 
 
Interest rate swap agreements
$
1,329

 
$

 
$
1,329

 
$

Liabilities:
 
 
 
 
 
 
 
Contingent consideration related to the acquisition of:
 
 
 
 
 
 
 
AssetEye
247

 

 

 
247

Axiometrics
167

 

 

 
167

Total liabilities measured at fair value
$
414

 
$

 
$

 
$
414


There were no transfers between Level 1 and Level 2, or between Level 2 and Level 3 measurements during the nine months ended September 30, 2018.
Changes in the fair value of Level 3 measurements were as follows for the nine months ended September 30, 2018 and 2017:
 
Nine Months Ended September 30,
 
2018
 
2017
 
(in thousands)
Balance at beginning of period
$
414

 
$
541

Initial contingent consideration fair value
7,000

 
812

Settlements through cash payments
(247
)
 

Net gain on change in fair value
(167
)
 
(755
)
Balance at end of period
$
7,000

 
$
598


Gains and losses recognized on the change in fair value of our Level 3 measurements are reflected in the line “General and administrative” in the accompanying Condensed Consolidated Statements of Operations.
Financial Instruments
The financial assets and liabilities that are not measured at fair value in our Condensed Consolidated Balance Sheets include cash and cash equivalents, restricted cash, accounts receivable, investments, accounts payable and accrued expenses, acquisition-related deferred cash and stock obligations, obligations under the Term Loans, obligations under the Revolving Facility, and the Convertible Notes.
The carrying values of cash and cash equivalents; restricted cash; accounts receivable; and accounts payable and accrued expenses reported in our Condensed Consolidated Balance Sheets approximates fair value due to the short term nature of these instruments. Acquisition-related deferred cash and stock obligations are recorded on the date of acquisition at their estimated fair value, based on the present value of the anticipated future cash flows. The difference between the amount of the deferred cash and stock obligation to be paid and its estimated fair value on the date of acquisition is accreted over the obligation period. As a result, the carrying value of acquisition-related deferred cash and stock obligations approximates their fair value.
Revolving Facility: There was no principal outstanding under the Revolving Facility at September 30, 2018. Due to its short-term nature and market-indexed interest rates, we concluded that the carrying value of the Revolving Facility approximated its fair value at December 31, 2017.
Term Loans: The fair value of the Term Loans was estimated by discounting future cash flows using prevailing market interest rates on debt with similar creditworthiness, terms, and maturities. We concluded that this fair value measurement should be categorized within Level 2.
Convertible Notes: We estimated the fair value of the Convertible Notes based on quoted market prices as of the last trading day for the nine months ended September 30, 2018; however, the Convertible Notes have only a limited trading volume and as such, this fair value estimate is not necessarily the value at which the Convertible Notes could be retired or transferred. We concluded this measurement should be classified within Level 2.
The fair value and carrying value of the Term Loans and Convertible Notes were as follows at September 30, 2018 and December 31, 2017:
 
September 30, 2018
 
December 31, 2017
 
Fair Value
 
Carrying Value
 
Fair Value
 
Carrying Value
 
(in thousands)
Term Loans
$
298,049

 
$
307,637

 
$
303,806

 
$
317,377

Convertible Notes
$
564,241

 
$
289,868

 
$
430,301

 
$
281,199


The carrying value of the Term Loans and Convertible Notes are reflected net of unamortized discount and issuance costs in our Condensed Consolidated Balance Sheets.