NOTE 8 – FAIR VALUE MEASUREMENTS

Fair Values

Fair value is the price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.

ASC 820, “Fair Value Measurement,” establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

In many cases, a valuation technique used to measure fair value includes inputs from multiple levels of the fair value hierarchy. The lowest level of significant input determines the placement of the entire fair value measurement in the hierarchy. During the periods presented, there were no transfers between fair value hierarchical levels.

Assets Measured at Fair Value on a Nonrecurring Basis

Certain assets, specifically other intangible and long-lived assets, are measured at fair value on a nonrecurring basis in periods subsequent to initial recognition. Assets measured at fair value on a nonrecurring basis as of December 31, 2018 and 2017 are categorized based on the lowest level of significant input to the valuation. Undiscounted cash flows, a Level 3 input, are utilized in determining estimated fair values. The assets are measured at fair value when our impairment assessment indicates a carrying value for each of the assets in excess of the asset’s estimated fair value. During each of the years ended December 31, 2018, 2017 and 2016, we did not record any impairments on these assets required to be measured at fair value on a nonrecurring basis.

Estimated Fair Value of Financial Instruments

Accounts receivable, accounts payable and accrued liabilities as of December 31, 2018 and 2017 approximate fair value due to the short-term maturities of these financial instruments. The carrying amounts of our long-term debt, including the Senior Secured Credit Facilities as of December 31, 2018 and 2017, approximate fair value due to the variable rate nature of the agreements. The carrying amounts of the obligations associated with our capital leases and vehicle and equipment notes approximate fair value as of December 31, 2018 and 2017. All debt classifications represent Level 2 fair value measurements.

Derivative financial instruments are measured at fair value based on observable market information and appropriate valuation methods. Contingent consideration liabilities arise from future earnout payments to the sellers associated with certain acquisitions and are based on predetermined calculations of certain future results. These future payments are estimated by considering various factors, including business risk and projections. The contingent consideration liabilities are measured at fair value by discounting estimated future payments to their net present value using the appropriate weighted average cost of capital (WACC). The fair values of financial assets and liabilities that are recorded at fair value in the Consolidated Balance Sheets and not described above were as follows (in thousands):


	As of December 31, 2018								As of December 31, 2017
	Total		Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3
Financial assets:
Cash equivalents	$	69,807	$	69,807	$	—	$	—	$	55,634	$	55,634	$	—	$	—
Derivative financial instruments		1,765		—		1,765		—		618		—		618		—

Total financial assets	$	71,572	$	69,807	$	1,765	$	—	$	56,252	$	55,634	$	618	$	—


Financial liabilities:
Derivative financial instruments	$	2,275	$	—	$	2,275	$	—	$	—	$	—	$	—	$	—
Contingent consideration		5,098		—		—		5,098		1,834		—		—		1,834

Total financial liabilities	$	7,373	$	—	$	2,275	$	5,098	$	1,834	$	—	$	—	$	1,834

The change in fair value of the contingent consideration was as follows (in thousands):


Contingent consideration liability—January 1, 2018	$	1,834
Preliminary purchase price		3,683
Fair value adjustments		(586	)
Accretion in value		569
Amounts paid to sellers		(402	)

Contingent consideration liability—December 31, 2018	$	5,098

The accretion in value of contingent consideration liabilities is included within administrative expenses on the Consolidated Statements of Operations and Comprehensive Income.

The carrying values and associated fair values of financial assets and liabilities that are not recorded at fair value in the Consolidated Balance Sheets and not described above include investments which represent a Level 2 fair value measurement and are as follows (in thousands):


	As of December 31, 2018				As of December 31, 2017
	Carrying Value		Fair Value		Carrying Value		Fair Value
Financial assets:
Investments	$	10,060	$	10,053	$	30,053	$	30,038

See Note 4, Investments, for more information on cash equivalents and investments included in the table above. Also see Note 9, Derivatives and Hedging Activities, for more information on derivative financial instruments.