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Note 4 - Fair Value Measurements
 6 Months Ended
Dec. 31, 2021
Notes to Financial Statements  
Fair Value Disclosures [Text Block]

4)      Fair Value Measurements

 

The financial instruments shown below are presented at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available, valuation models may be applied.

 

Assets and liabilities recorded at fair value in the consolidated balance sheet are categorized based upon the level of judgment associated with the inputs used to measure their fair values. Hierarchical levels directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities and the methodologies used in valuation are as follows:

 

Level 1 – Quoted prices (unadjusted) in active markets for identical assets and liabilities. The Company’s deferred compensation plan assets consist of shares in various mutual funds (investments are participant-directed) which invest in a broad portfolio of debt and equity securities. These assets are valued based on publicly quoted market prices for the funds’ shares as of the balance sheet dates.

 

Level 2 – Inputs, other than quoted prices in an active market, that are observable either directly or indirectly through correlation with market data. For foreign exchange forward contracts and interest rate swaps, the Company values the instruments based on the market price of instruments with similar terms, which are based on spot and forward rates as of the balance sheet dates. The Company has considered the creditworthiness of counterparties in valuing all assets and liabilities.

 

Level 3 – Unobservable inputs based upon the Company’s best estimate of what market participants would use in pricing the asset or liability.

 

There were no transfers of assets or liabilities between any levels of the fair value measurement hierarchy at December 31, 2021 and June 30, 2021. The Company’s policy is to recognize transfers between levels as of the date they occur.

 

Cash and cash equivalents, accounts receivable, accounts payable, and debt are carried at cost, which approximates fair value.

 

The fair values of financial instruments were as follows (in thousands):

 

   

December 31, 2021

  
   

Total

    

Level 1

    

Level 2

    

Level 3

  

Assets

                                

Marketable securities - deferred compensation plan

   $ 3,809     $ 3,809     $ -     $ -  

Foreign exchange contracts

     9       -       9       -  

Interest rate swaps

     1,006       -       1,006       -  
                                 

Liabilities

                                

Foreign exchange contracts

   $ 40     $ -       40     $ -  

Interest rate swaps

     1,057       -       1,057       -  

Contingent acquisition payments (a)

     2,167       -       -       2,167  

 

   

June 30, 2021

  
   

Total

    

Level 1

    

Level 2

    

Level 3

  

Assets

                                

Marketable securities - deferred compensation plan

   $ 2,988     $ 2,988     $ -     $ -  

Foreign exchange contracts

     255       -       255       -  
                                 

Liabilities

                                

Foreign exchange contracts

   $ 1,222     $ -     $ 1,222     $ -  

Interest rate swaps

     3,096       -       3,096       -  

Contingent acquisition payments (a)

     3,333       -       -       3,333  

 

(a) The fair value of contingent consideration arrangements is determined based on the Company's evaluation as to the probability and amount of any contingent consideration that has been earned to date.

 

The financial liabilities based upon Level 3 inputs include contingent consideration arrangements relating to the acquisitions of Renco Electronics and GS Engineering. The Company is contractually obligated to pay contingent consideration payments to the Sellers of these businesses based on the achievement of certain criteria.

 

The Company is contractually obligated to pay contingent consideration to the sellers of GS Engineering in the event that certain revenue and gross margin targets are achieved during the five years following acquisition. The targets set in the GS Engineering stock purchase agreement were not met for the first or second year, which concluded in the fourth quarter of fiscal years 2020 and 2021, respectively. As of December 31, 2021, the Company could be required to pay up to $12.8 million for contingent consideration arrangements if the revenue and gross margin targets are met in fiscal years 2022 through 2024.

 

The Company is also obligated to pay contingent consideration to the sellers of Renco Electronics in the event that certain earnings targets are achieved during the three years following acquisition. Contingent acquisition payments are scheduled to be paid in periods through fiscal year 2024. During the first quarter of fiscal year 2022, the Company paid $1.2 million to the sellers as Renco exceeded the earnings targets during the first year of the measurement period. As of December 31, 2021, the Company could be required to pay up to an additional $2.2 million for contingent consideration arrangements if the earnings targets are met. 

 

The Company has determined the fair value of the liabilities for the contingent consideration based on a probability-weighted discounted cash flow analysis. This fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement within the fair value hierarchy. The fair value of the contingent consideration liability associated with future payments was based on several factors, the most significant of which are the financial performance of the acquired businesses and the risk-adjusted discount rate for the fair value measurement.

 

The Company will update its assumptions each reporting period based on new developments and record such amounts at fair value based on the revised assumptions until the agreements expire.