Fair Value Measurements

6 Months Ended

Jun. 30, 2022

Fair Value Measurements

Fair Value Measurements

4. Fair Value Measurements

Interest Rate Risk Management and Derivative Instruments

We have interest rate swap agreements in place to reduce our exposure to variable interest rates on our revolving credit facility. The notional amount covered by these interest rate swaps was $80.0 million as of June 30, 2022, and the termination date is September 30, 2022.

We use derivative instruments to manage exposure to market risk, including interest rate risk. Unsettled amounts under our interest rate swaps are recorded in the Consolidated Balance Sheet at fair value in “Other Receivables” or “Other Current Liabilities.” Gains and losses on our interest rate swaps are recorded in the Consolidated Income Statement in “Interest Expense.” For the three months ended June 30, 2022 and June 30, 2021, we recognized a net gain of $0.1 million and a net loss of $0.1 million, respectively, related to our interest rate swaps. For the six months ended June 30, 2022 and June 30, 2021, we recognized a net loss of less than $0.1 million and $0.2 million, respectively, related to our interest rate swaps. We currently do not have any derivatives that are accounted for as hedges under ASC 815.

Fair Value Measurements

We classify and disclose assets and liabilities carried at fair value in one of the following three categories:

● Level 1—quoted prices in active markets for identical assets and liabilities;

● Level 2—observable market-based inputs or unobservable inputs that are corroborated by market data; and

● Level 3—significant unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

The following table summarizes the fair values, and levels within the fair value hierarchy in which the fair value measurements are included, for assets and liabilities measured on a recurring basis as of June 30, 2022 and December 31, 2021 (in thousands):

	Fair Value Measurements at June 30, 2022
	Level 1		Level 2		Level 3		Total
Cash and cash equivalents	$	69,129	$	—	$	—	$	69,129
Life insurance—cash surrender value	$	—	$	6,518	$	—	$	6,518
Contingent earn-out obligations	$	—	$	—	$	26,676	$	26,676
	Fair Value Measurements at December 31, 2021
	Level 1		Level 2		Level 3		Total
Cash and cash equivalents	$	58,776	$	—	$	—	$	58,776
Life insurance—cash surrender value	$	—	$	6,643	$	—	$	6,643
Contingent earn-out obligations	$	—	$	—	$	34,114	$	34,114

Cash and cash equivalents consist primarily of highly rated money market funds at a variety of well-known institutions with original maturities of three months or less. The original cost of these assets approximates fair value due to their short-term maturity. The carrying value of our borrowings associated with the revolving credit facility approximate its fair value due to the variable rate on such debt.

We have life insurance policies covering 116 employees with a combined face value of $80.6 million. The policies are invested in several investment vehicles, and the fair value measurement of the cash surrender balance associated with these policies is determined using Level 2 inputs within the fair value hierarchy and will vary with investment performance. The cash surrender value of these policies was $6.5 million as of June 30, 2022 and $6.6 million as of December 31, 2021. These assets are included in “Other Noncurrent Assets” in our Consolidated Balance Sheets.

We value contingent earn-out obligations using a probability weighted discounted cash flow method. This fair value measurement is based on significant unobservable inputs in the market and thus represents a Level 3 measurement within the fair value hierarchy. This analysis reflects the contractual terms of the purchase agreements (e.g., minimum and maximum payments, length of earn-out periods, manner of calculating any amounts due, etc.) and utilizes assumptions with regard to future cash flows and operating income, probabilities of achieving such future cash flows and operating income and a weighted average cost of capital. Significant changes in any of these assumptions could result in a significantly higher or lower potential liability. The contingent earn-out obligations are measured at fair value each reporting period, and changes in estimates of fair value are recognized in earnings. As of June 30, 2022, cash flows were discounted using a weighted average cost of capital ranging from 11.0% - 17.0%.

The table below presents a reconciliation of the fair value of our contingent earn-out obligations that use significant unobservable inputs (Level 3) (in thousands):

	Six Months Ended		Year Ended
	June 30, 2022		December 31, 2021
Balance at beginning of period	$	34,114	$	25,979
Issuances		—		19,949
Settlements		(3,465)		(3,994)
Adjustments to fair value		(3,973)		(7,820)
Balance at end of period	$	26,676	$	34,114