Fair Value Measurements

6 Months Ended

Jun. 28, 2019

Fair Value Disclosures [Abstract]

Fair Value Measurements

6. Fair Value Measurements

ASC 820, “Fair Value Measurements,” establishes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the third is considered unobservable:

• Level 1: Quoted prices for identical assets or liabilities in active markets which the Company can access

• Level 2: Observable inputs other than those described in Level 1

• Level 3: Unobservable inputs

Current Assets and Liabilities

The Company’s cash equivalents are highly liquid investments with original maturities of three months or less, which represent an asset the Company measures at fair value on a recurring basis. The Company determines the fair value of cash equivalents using a market approach based on quoted prices in active markets. The fair values of cash, accounts receivable, income taxes receivable, accounts payable, income taxes payable and accrued expenses and other current liabilities approximate their carrying values because of their short-term nature.

Foreign Currency Contracts

The Company addresses market risks from changes in foreign currency exchange rates through a risk management program that includes the use of derivative financial instruments to mitigate certain balance sheet foreign currency transaction exposures. The Company uses foreign currency forward contracts as a part of its strategy to manage exposures related to foreign currency denominated monetary assets and liabilities. The fair value of these foreign currency forward contracts is reported either in other current assets or in other current liabilities as of the end of the period.

Contingent Considerations

On April 16, 2019, the Company acquired Ingenia-CAT, S.L. (“Ingenia”). Under the purchase and sale agreement for the Ingenia acquisition, the shareholders of Ingenia are eligible to receive contingent consideration based on the achievement of certain revenue targets from April 2019 through March 2022. The undiscounted range of possible contingent consideration is zero to €8.0 million. If the revenue targets are achieved, the contingent consideration would be payable in cash in three installments from 2020 to 2022. The estimated fair value of the contingent consideration of €5.8 million ($6.6 million) was determined based on the Monte Carlo valuation method and was recorded as part of the purchase price as of the acquisition date. Subsequent changes in the estimated fair value of the contingent consideration liability are recorded in the consolidated statement of operations in restructuring and acquisition related costs until the liability is fully settled. There have been no changes to the fair value of the contingent consideration since the acquisition date.

On December 14, 2016, the Company acquired certain video signal processing and management technologies used in medical visualization solutions. Under the purchase and sale agreement, the former owners are eligible to receive contingent consideration based on the achievement of certain revenue targets from 2018 to 2021 by the Company from products using such technologies. The undiscounted range of possible contingent consideration is zero to €5.5 million ($6.6 million). If such targets are achieved, the contingent consideration would be payable in cash in four installments from 2019 to 2022. As the acquired assets did not meet the definition of a business, the fair value of the contingent consideration is recognized when probable and estimable and is capitalized as part of the cost of the acquired assets. Subsequent changes in the estimated fair value of this contingent liability are recorded as adjustments to the carrying value of the asset acquired and amortized over the remaining useful life of the underlying asset. Based on revenue performance as of June 28, 2019 and the most recent revenue projections for the remainder of 2019 and fiscal years 2020 and 2021, the fair value of the contingent consideration was adjusted to $3.9 million as of June 28, 2019.

Summary by Fair Value Hierarchy

The following table summarizes the fair values of the Company’s assets and liabilities measured at fair value on a recurring basis as of June 28, 2019 (in thousands):

			Quoted Prices in				Significant Other
			Active Markets for		Significant Other		Unobservable
			Identical Assets		Observable Inputs		Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)
Assets
Cash equivalents	$	3,184	$	3,184	$	—	$	—
Prepaid expenses and other current assets:
Foreign currency forward contracts		47		—		47		—
	$	3,231	$	3,184	$	47	$	—
Liabilities
Accrued expenses and other current liabilities:
Contingent consideration - Current	$	3,091	$	—	$	—	$	3,091
Foreign currency forward contracts		31		—		31		—
Other liabilities:
Contingent consideration - Long-term		7,436		—		—		7,436
	$	10,558	$	—	$	31	$	10,527

The following table summarizes the fair values of the Company’s assets and liabilities measured at fair value on a recurring basis as of December 31, 2018 (in thousands):

			Quoted Prices in				Significant Other
			Active Markets for		Significant Other		Unobservable
			Identical Assets		Observable Inputs		Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)
Assets
Cash equivalents	$	4,288	$	4,288	$	—	$	—
Prepaid expenses and other current assets:
Foreign currency forward contracts		15		—		15		—
	$	4,303	$	4,288	$	15	$	—
Liabilities
Accrued expenses and other current liabilities:
Foreign currency forward contracts	$	182	$	—	$	182	$	—
Other liabilities:
Contingent consideration - Long-term		3,376		—		—		3,376
	$	3,558	$	—	$	182	$	3,376

Changes in the fair value of Level 3 contingent consideration during the six months ended June 28, 2019 were as follows (in thousands):

	Contingent Consideration
Balance at December 31, 2018	$	3,376
Acquisition of Ingenia		6,569
Fair value adjustments		547
Effect of foreign exchange rates		35
Balance at June 28, 2019	$	10,527

The following table provides quantitative information associated with the fair value measurement of the Company’s Level 3 liabilities:

Liability	June 28, 2019 Fair Value (in thousands)	Valuation Technique	Unobservable Inputs	Percentage Applied
Contingent consideration (Ingenia)	$6,604	Monte Carlo method	Historical and projected revenues from April 2019 through March 2022	N/A
			Revenue volatility	31.3%
			Cost of debt	1.0%
			Revenue discount rate	14.3%
Contingent consideration (Other)	$3,923	Discounted cash flow method	Historical and projected revenues for fiscal years 2018 to 2021	N/A
			Discount rate	22.8%

Increases or decreases in the unobservable inputs noted above would result in a higher or lower fair value measurement.

See Note 10 to Consolidated Financial Statements for a discussion of the estimated fair value of the Company’s outstanding debt.