Annual report pursuant to Section 13 and 15(d)

Note 5 - Fair Value Measurements

v3.19.2
Note 5 - Fair Value Measurements
12 Months Ended
Jun. 30, 2019
Notes to Financial Statements  
Fair Value Measurement and Measurement Inputs, Recurring and Nonrecurring [Text Block]
Note
5.
Fair Value Measurements:
 
The Company’s financial instruments include cash and cash equivalents, available for sale investments, accounts receivable, accounts payable, contingent consideration obligations, derivative instruments, and long-term debt.
 
Fair value is defined as the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. This standard also establishes a hierarchy for inputs used in measuring fair value. This standard maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs market participants would use in valuing the asset or liability based on market data obtained from independent sources. Unobservable inputs are inputs that reflect our assumptions about the factors market participants would use in valuing the asset or liability based upon the best information available in the circumstances.
 
The categorization of financial assets and liabilities within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The hierarchy is broken down into
three
levels. Level
1
inputs are quoted prices in active markets for identical assets or liabilities. Level
2
inputs include 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, and inputs (other than quoted prices) that are observable for the asset or liability, either directly or indirectly. Level
3
inputs are unobservable for the asset or liability and their fair values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least
one
significant model assumption or input is unobservable. Level
3
may
also include certain investment securities for which there is limited market activity or a decrease in the observability of market pricing for the investments, such that the determination of fair value requires significant judgment or estimation.
 
The following tables provide information by level for financial assets and liabilities that are measured at fair value on a recurring basis (in thousands):
 
 
   
Total carrying
value as of
   
Fair Value Measurements Using
Inputs Considered as
 
   
June 30, 201
9
   
Level 1
   
Level 2
   
Level 3
 
Assets
                               
Equity securities
(1)
  $
38,219
    $
38,219
    $
-
    $
-
 
Certificates of deposit
(2)
   
26,928
     
26,928
     
-
     
-
 
Total Assets
  $
65,147
    $
65,147
    $
-
    $
-
 
                                 
Liabilities
                               
Contingent consideration
  $
12,600
    $
-
    $
-
    $
12,600
 
    Derivative instruments - cash flow hedges    
12,458
     
-
     
12,458
     
-
 
    Total Liabilities   $
25,058
    $
-
    $
12,458
    $
12,600
 
 
 
   
Total carrying
value as of
   
Fair Value Measurements Using
Inputs Considered as
 
   
June 30, 201
8
   
Level 1
   
Level 2
   
Level 3
 
Assets
                               
Equity securities
(1)
  $
54,286
    $
54,286
    $
-
    $
-
 
Certificates of deposit
(2)
   
5,478
     
5,478
     
-
     
-
 
Total Assets
  $
59,764
    $
59,764
    $
-
    $
-
 
                                 
Liabilities
                               
Contingent consideration
  $
-
    $
-
    $
-
    $
-
 
 
 
(
1
)
 Included in available-for-sale investments on the balance sheet. The cost basis in the Company's investment in CCXI at
June 30, 2019
and
June 30, 2018 
was
$18.8
million.
 
(
2
)
 Included in available-for-sale investments on the balance sheet.  The certificate of deposits have contractual maturity dates within
one
year.
 
Fair value measurements of available for sale securities
 
Our available for sale securities are measured at fair value using quoted market prices in active markets for identical assets and are therefore classified as Level
1
assets.
 
Fair value measurements of derivative instruments
 
In
October 2018,
the Company entered into forward starting swaps designated as cash flow hedges on outstanding debt. The forward starting swaps reduce the variability of cash flow payments for the Company by converting the variable interest rate on the Company’s long-term debt described in Note
6
to that of a fixed interest rate. Accordingly, as part of the forward starting swaps, the Company will exchange, at specified intervals, the difference between floating and fixed interest amounts based on
$380
million of notional principal amount. The change in the fair value of the instrument is reported as a component of other comprehensive income and reclassified into interest expense over the corresponding term of the cash flow hedge. The Company did
not
reclassify any amounts out of other comprehensive income into interest expense during the fiscal year ended
June 30, 
2019.
 The liability related to the derivative instrument was recorded within Other long-term liabilities on the Consolidated Balance Sheet. The instrument was valued using observable market inputs in active markets and therefore classified as a Level
2
liability.
 
Fair value measurements of contingent consideration
 
In connection with the ExosomeDx, Quad, and B-Mogen acquisitions the Company is required to make contingent consideration payments of up to
$325.0
million,
$51.0
million, and
$38.0
million respectively. The contingent consideration payments are subject to ExosomeDx achieving certain EBITA thresholds, Quad meeting certain product development milestones and revenue thresholds, and B-Mogen meeting certain product development milestones and revenue thresholds. The preliminary fair value of the liabilities for the contingent payments recognized upon the acquisition as part of the purchase accounting opening balance sheet totaled
$14.6
 million (
$3.8
 million for ExosomeDx,
$5.3
 million for Quad, and
$5.5
 million for B-Mogen) as discussed in Note
4.
  The preliminary fair value of the development milestone payments was estimated by discounting the probability-weighted contingent payments expected to be made to present value. Assumptions used in these calculations were probability of success, duration of the earn-out, and discount rate.   The preliminary fair value for the EBITA and revenue milestone payments was determined using a Monte Carlo simulation-based model discounted to present value.  Assumptions used in these calculations are units sold, expected revenue, expected expenses, discount rate and various probability factors. The ultimate settlement of contingent consideration could deviate from current estimates based on the actual results of these financial measures. This liability is considered to be a Level
3
financial liability that is re-measured each reporting period. The change in fair value of contingent consideration for these acquisitions is included in general and administrative expense.
 
In fiscal
2018,
the Company made
$88.5
million in cash payments towards the ACD, CyVek and Zephyrus contingent consideration liabilities after it determined certain sales and revenue thresholds were met. Of the
$88.5
million in total payments,
$61.9
million is classified as financing on the statement of cash flows. The remaining
$26.6
million is recorded as operating on the statement of cash flows as it represents the consideration liability that exceeds the amount of the contingent consideration liability recognized at the acquisition date.
 
The following table presents a reconciliation of the liability measured at fair value on a recurring basis using significant unobservable inputs (Level
3
) (in thousands):
 
   
June 30,
 
   
201
9
   
201
8
 
                 
Fair value at the beginning of period
  $
-
    $
68,400
 
Purchase price contingent consideration (Note 4)
   
14,600
     
-
 
Payments
   
-
 
   
(88,500
)
Change in fair value of contingent consideration
   
(2,000
)    
20,100
 
Contingent consideration payable
  $
12,600
    $
-
 
 
 
Fair value measurements of other financial instruments
– The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practicable to estimate fair value.
 
Cash and cash equivalents, certificates of deposit, accounts receivable, and accounts payable – The carrying amounts reported in the consolidated balance sheets approximate fair value because of the short-term nature of these items.
 
Long-term debt – The carrying amounts reported in the consolidated balance sheets for the amount drawn on our line-of-credit facility approximates fair value because our interest rate is variable and reflects current market rates.