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Fair Value Measurements

3 Months Ended

Mar. 31, 2023

Fair Value Measurements

Fair Value Measurements

Note 6. Fair Value Measurements

We measure fair value based on the prices 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. Fair value measurements are based on a three-tier hierarchy that prioritizes the inputs used to measure fair value. These tiers include the following:

Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities that are accessible at the measurement date. The fair value hierarchy gives the highest priority to Level 1 inputs.

Level 2: Observable prices that are based on inputs not quoted on active markets but corroborated by market data. These inputs include quoted prices for similar assets or liabilities; quoted market prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3: Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.

In determining fair value, we utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible, as well as consider counterparty credit risk in the assessment of fair value.

We did not elect the fair value option, as allowed, to account for financial assets and liabilities that were not previously carried at fair value. Therefore, material financial assets and liabilities that are not carried at fair value, such as trade accounts receivable and payable, are reported at their historical carrying values.

The carrying values of our assets that are required to be measured at fair value on a recurring basis as of March 31, 2023 and 2022 approximate fair value because of our ability to immediately convert these instruments into cash with minimal expected change in value which are classified in the table below in one of the three categories of the fair value hierarchy described above (in thousands):


		Fair Value Measurements
		Level 1			Level 2			Level 3			Total
March 31, 2023
Assets:
Money market mutual fund		$	2,538		$	—		$	—		$	2,538
Mutual funds			101,287			—			—			101,287
U.S. Treasury notes			190,833			—			—			190,833
Corporate debt securities			191,956			—			—			191,956
		$	486,614		$	—		$	—		$	486,614
Liabilities:
Convertible Senior Notes		$	—		$	407,349		$	—		$	407,349
Contingent consideration			—			—			4,774			4,774
		$	—		$	407,349		$	4,774		$	412,123


		Fair Value Measurements
		Level 1			Level 2			Level 3			Total
December 31, 2022
Assets:
Money market mutual fund		$	1,843		$	—		$	—		$	1,843
Mutual funds			99,777			—			—			99,777
U.S. Treasury notes			190,718			—			—			190,718
Corporate debt securities			196,233			—			—			196,233
		$	488,571		$	—		$	—		$	488,571
Liabilities:
Convertible Senior Notes		$	—		$	406,708		$	—		$	406,708
Contingent consideration			—			—			4,677			4,677
		$	—		$	406,708		$	4,677		$	411,385

Our equity securities and available-for-sale debt securities, including U.S. treasury notes and U.S. treasury bills are valued using inputs observable in active markets for identical securities and are therefore classified as Level 1 within the fair value hierarchy.

We did not have any financial liabilities measured at fair value on a recurring basis as of March 31, 2023.

We carry the Convertible Senior Notes (see Note 9) at face value less the unamortized discount and issuance costs on our consolidated balance sheets and present fair value for disclosure purposes only. We estimate the fair value of the Convertible Senior Notes using the net present value of the payments, discounted at an interest rate that is consistent with market and risk-adjusted interest rates, which is a Level 2 input.

The following table presents the estimated fair values and the carrying values (in thousands):


		March 31, 2023						December 31, 2022
		Carrying Value			Fair Value			Carrying Value			Fair Value
2026 Convertible Senior Notes		$	393,236		$	303,534		$	392,621		$	290,132
2025 Convertible Senior Notes		$	14,113		$	12,820		$	14,087		$	12,373

Under the terms of the CTSA acquisition, contingent consideration may be payable in cash based on the achievement of a certain EBITDA target for 2024, with no maximum limit as to the contingent consideration achievable. Under the terms of the F-airGate, Cell&Co, and Polar Expres acquisitions, contingent consideration may be payable in cash based on the achievement of certain future revenue and/or EBITDA targets during each annual period following the acquisition dates for a total of four years, up to a maximum of $6.1 million (undiscounted) in the aggregate. The fair value of the contingent consideration was measured at the end of each reporting period using Level 3 inputs. The fair value of the contingent consideration for the F-airGate and Polar Expres acquisitions was determined using a probability-weighted discounted cash flow model. The fair value of the contingent consideration for the CTSA and

Cell&Co acquisitions was valued based on unobservable inputs using a Monte Carlo simulation. These inputs included the estimated amount and timing of projected future revenue, a discount rate, a risk-free rate, asset volatility and revenue volatility. Significant increases (decreases) in any of those inputs in isolation would result in a significantly higher (lower) fair value measurement. The contingent consideration was determined to have an aggregate fair value of $4.8 million and $4.7 million which is reflected as contingent consideration liability in the accompanying consolidated balance sheets as of March 31, 2023 and December 31, 2022, respectively. Certain assumptions used in estimating the fair value of the contingent consideration are uncertain by nature. Actual results may differ materially from estimates.

The losses recognized in earnings and the change in net assets related to the contingent consideration at March 31, 2023 were as follows (in thousands):


		Fair Value			Losses			Foreign			Fair Value
		December 31,			recognized in			Currency			March 31,
		2022			earnings			Adjustment			2023
2021 Acquisitions		$	902		$	46		$	(7)		$	941
2022 Acquisitions			3,775			—			58			3,833
		$	4,677		$	46		$	51		$	4,774

The losses recognized in earnings have been reported in operating expenses in the consolidated statement of operations for the three months ended March 31, 2023.

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.

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