Quarterly report pursuant to Section 13 or 15(d)

Note 4 - Fair Value Measurements

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Note 4 - Fair Value Measurements
3 Months Ended
Sep. 30, 2020
Notes to Financial Statements  
Fair Value Measurement and Measurement Inputs, Recurring and Nonrecurring [Text Block]

Note 4. Fair Value Measurements:

 

The Company’s financial instruments include cash and cash equivalents, available for sale investments, derivative instruments, accounts receivable, accounts payable, contingent consideration obligations, 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

 
   

September

30, 

2020

   

Level 1

   

Level 2

   

Level 3

 

Assets

                               

Equity securities (1)

  $ 83,491     $ 76,043     $ 7,448     $ -  

Certificates of deposit (2)

    34,495       34,495       -       -  

Total assets

  $ 117,986     $ 110,538     $ 7,448     $ -  
                                 

Liabilities

                               

Contingent consideration

  $ 5,987     $ -     $ -     $ 5,987  

Derivative instruments - cash flow hedges

    14,523       -       14,523       -  

Total liabilities

  $ 20,510     $ -     $ 14,523     $ 5,987  

 

   

Total

carrying

value as of

   

Fair Value Measurements Using

Inputs Considered as

 
   

June 30,

2020

   

Level 1

   

Level 2

   

Level 3

 

Assets

                               

Equity securities (1)

  $ 87,842     $ 79,846     $ 7,996     $ -  

Certificates of deposit (2)

    36,426       36,426       -       -  

Total assets

  $ 124,268     $ 116,272     $ 7,996     $ -  
                                 

Liabilities

                               

Contingent consideration

  $ 6,137     $ -     $ -     $ 6,137  

Derivative instruments - cash flow hedges

    17,331       -       17,331       -  

Total liabilities

  $ 23,468     $ -     $ 17,331     $ 6,137  

 

 

(1)

Included in available-for-sale investments on the balance sheet.   The cost basis in the Company's investment in ChemoCentryx Inc (CCXI) at September 30, 2020 and June 30, 2020 was $6.6 million. The Company has a warrant to purchase additional CCXI equity shares which was valued at $7.4 and $8.0 million as of September 30, 2020 and  June 30 2020, respectively.

 

(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 5 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 an initial $380 million of notional principal amount, with the notional amount decreasing by $100 million in   October 2020, $80 million in  October 2021, and $200 million in  October 2022. The change in the fair value of the designated hedged 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 reclassified $2.1 million, net of taxes, out of other comprehensive income into interest expense during the quarter ended September 30, 2020. In  June 2020, the Company de-designated $80 million of the notional amount set to expire in   October 2020. The change in fair value of the de-designated notional hedged amount was not material as of September 30, 2020. The net loss associated with the de-designated portion of the derivative instrument was not reclassified into earnings based on the amount of probable variable interest payments to occur within a two month time period of the forecasted hedged transaction. 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 QT Holdings Corporation (Quad) and B-MoGen Biotechnologies Inc. (B-MoGen) acquisitions the Company is required to make contingent consideration payments of up to $51.0 million and $38.0 million, respectively. The contingent consideration payments are subject to Quad 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 $10.8 million ($5.3 million for Quad and $5.5 million for B-MoGen).  The preliminary fair value of the development milestone payments was estimated by discounting to present value the probability-weighted contingent payments expected to be made. Assumptions used in these calculations were probability of success, duration of the earn-out, and discount rate. The preliminary fair value for the revenue milestone payments was determined using a Monte Carlo simulation based model discounted to present value.  Assumptions used in these calculations included units sold, expected revenue, 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.

 

The following table presents a reconciliation of the liability measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the quarter ended September 30, 2020 (in thousands):

 

   

Quarter Ended

 
   

September 30,

2020

 

Fair value at the beginning of period

  $ 6,137  

Change in fair value of contingent consideration

    (150 )

Payments

    -  

Fair value at the end of period

  $ 5,987  

 

The use of different assumptions, applying different judgment to matters that inherently are subjective and changes in future market conditions could result in different estimates of fair value of our securities or contingent consideration, currently and in the future. If market conditions deteriorate, we may incur impairment charges for securities in our investment portfolio. We may also incur changes to our contingent consideration liability as discussed below.

 

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.