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Fair Value of Financial Instruments
 9 Months Ended
Sep. 30, 2020
Fair Value Disclosures [Abstract]  
Fair Value of Financial Instruments

Note 8.     Fair Value of Financial Instruments

U.S. GAAP defines fair value as the price that would be received to sell an asset or transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. Management considers debt to approximate fair value. The authoritative guidance discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost). These valuation techniques are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. As the basis for evaluating such inputs, a three-tier value hierarchy prioritizes the inputs used in measuring fair value as follows:

Level 1:

Observable inputs such as quoted prices for identical assets or liabilities in active markets.

Level 2:

Observable inputs other than quoted prices that are directly or indirectly observable for the asset or liability, including quoted prices for similar assets or liabilities in active markets; quoted prices for similar or identical assets or liabilities in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.

Level 3:

Unobservable inputs that reflect the reporting entity’s own assumptions.

Recurring Fair Value Measurements: The Company’s financial assets and liabilities adjusted to fair value at least quarterly are derivative instruments, which are primarily included in other noncurrent liabilities, and contingent consideration, which is primarily included in contingent consideration and compensation liabilities on the condensed consolidated balance sheets.

The following tables summarize the fair values and levels within the fair value hierarchy in which the measurements fall for assets and liabilities measured on a recurring basis as of September 30, 2020 and December 31, 2019:

 

 

 

Fair Value Measurements at September 30, 2020

 

Assets (liabilities)

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Derivatives

 

$

—

 

 

$

(39

)

 

$

—

 

 

$

(39

)

Contingent consideration obligations

 

 

—

 

 

 

—

 

 

 

(6

)

 

 

(6

)

 

 

$

—

 

 

$

(39

)

 

$

(6

)

 

$

(45

)

 

 

 

Fair Value Measurements at December 31, 2019

 

Assets (liabilities)

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Derivatives

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

Contingent consideration obligations

 

 

—

 

 

 

—

 

 

 

(7

)

 

 

(7

)

 

 

$

—

 

 

$

—

 

 

$

(7

)

 

$

(7

)

 

The Company determines the fair value of its interest rate swaps (“Derivatives”) using standard pricing models and market-based assumptions for all inputs, such as yield curves and quoted spot and forward exchange rates. Accordingly, the Company’s derivative instruments are classified as Level 2. The Company accounts for derivatives in accordance with U.S. GAAP, refer to Note 9 – “Derivatives” for additional information on the authoritative guidance, the Company’s hedging programs, and derivative financial instruments.

The value of the contingent consideration obligations is determined using a probability-weighted discounted cash flow method. This fair value measurement is based on unobservable inputs in the market and thus represents a Level 3 measurement within the fair value hierarchy. This analysis reflects the contractual terms of the purchase agreements (e.g., potential payment amounts, length of measurement periods, manner of calculating any amounts due, etc.) and utilizes assumptions with regard to future cash flows, probabilities of achieving such future cash flows and a discount rate. Depending on the contractual terms of the purchase agreement, the probability of achieving future cash flows or earnings generally represent the only significant unobservable inputs. The contingent consideration obligations are measured at fair value each reporting period and changes in estimates of fair value are recognized in earnings.

The table below presents a reconciliation of the fair value of the Company’s contingent consideration obligations that use unobservable inputs (Level 3), as well as other information about the contingent consideration obligations:

 

 

 

Nine Months Ended

September 30, 2020

 

Balance as of December 31, 2019

 

$

7

 

Issuances

 

 

—

 

Settlements

 

 

(3

)

Adjustments to fair value

 

 

2

 

Balance as of September 30, 2020

 

$

6

 

Number of open contingent consideration arrangements

   at the end of period

 

 

3

 

Maximum potential payout at end of period

 

$

7

 

 

At September 30, 2020, the remaining open contingent consideration arrangements are set to expire at various dates through March 2023. Level 3 unobservable inputs were used to calculate the fair value adjustments shown in the table above. The fair value adjustments, and the related unobservable inputs, were not considered significant for the three and nine months ended September 30, 2020.