FAIR VALUE MEASUREMENT OF FINANCIAL INSTRUMENTS

12 Months Ended

Sep. 30, 2020

FAIR VALUE MEASUREMENT OF FINANCIAL INSTRUMENTS

NOTE 14 FAIR VALUE MEASUREMENT OF FINANCIAL INSTRUMENTS

We have certain assets and liabilities that are required to be measured and disclosed at fair value. Fair value is defined as the exchange price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. We use the fair value hierarchy established in ASC 820-10 to measure fair value to prioritize the inputs:


•	Level 1 — Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity can access at the measurement date.


•	Level 2 — Observable inputs, other than quoted prices included in Level 1, such as quoted prices for similar assets or liabilities in active markets; quoted prices for similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.


•	Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

The assets held in a Non-Qualified Supplemental Savings Plan are carried at fair value and totaled $19.8 million and $15.7 million at September 30, 2020 and 2019, respectively. The assets are comprised of mutual funds that are measured using Level 1 inputs.

Short-term investments include securities classified as trading securities. Both realized and unrealized gains and losses on trading securities are included in other income (expense) in the Consolidated Statements of Operations. The securities are recorded at fair value.

Our non-financial assets, such as intangible assets, goodwill and property, plant and equipment, are recorded at fair value when acquired in a business combination or when an impairment charge is recognized. If measured at fair value in the Consolidated Balance Sheets, these would generally be classified within Level 2 or 3 of the fair value hierarchy.

The majority of cash equivalents are invested in highly-liquid money-market mutual funds invested primarily in direct or indirect obligations of the U.S. Government and in federally insured deposit accounts. The carrying amount of cash and cash equivalents approximates fair value due to the short maturity of those investments.

The carrying value of other current assets, accrued liabilities and other liabilities approximated fair value at September 30, 2020 and 2019.

The following table summarizes our assets and liabilities measured at fair value presented in our Consolidated Balance Sheet:



	September 30, 2020
(in thousands)	Fair Value		Level 1		Level 2		Level 3
Recurring fair value measurements:
Short-term investments:
Certificates of deposit	$	1,370	$	—	$	1,370	$	—
Corporate and municipal debt securities	$	78,156	$	—	$	78,156	$	—
U.S. government and federal agency securities	$	7,817	$	7,817	$	—	$	—
Other	1,992		1,992		—		—
Total short-term investments	89,335		9,809		79,526		—
Cash and cash equivalents	487,884		487,884		—		—
Investments	11,766		7,274		3,992		500
Other current assets	45,577		45,577		—		—
Other assets	3,286		3,286		—		—
Total assets measured at fair value	$	637,848	$	553,830	$	83,518	$	500

Liabilities:
Contingent earnout liability	$	9,123	$	—	$	—	$	9,123

At September 30, 2020, our financial instruments measured at fair value utilizing Level 1 inputs include cash equivalents, U.S. Agency issued debt securities, equity securities with active markets, and money market funds that are classified as restricted assets. The current portion of restricted amounts are included in prepaid expenses and other, and the noncurrent portion is included in other assets. For these items, quoted current market prices are readily available.

At September 30, 2020, assets measured at fair value using Level 2 inputs include certificates of deposit, municipal bonds and corporate bonds measured using broker quotations that utilize observable market inputs.

Our financial instruments measured using Level 3 unobservable inputs primarily consist of potential earnout payments primarily associated with our business acquisitions in fiscal year 2019.

The following table presents a reconciliation of changes in the fair value of our financial liabilities classified as Level 3 fair value measurements in the fair value hierarchy for fiscal years 2020 and 2019:



(in thousands)	2020			2019
Net liabilities at beginning of period	$	18,373		$	11,160
Additions	1,500			18,373
Total gains or losses:
Included in earnings	(2,500		)	(11,160		)
Settlements ₍₁₎	(8,250		)	—
Net liabilities at end of period	$	9,123		$	18,373


(1)	Settlements represent earnout payments that have been earned or paid during the period.

The following table provides quantitative information (in thousands) about our Level 3 unobservable inputs related to our financial liabilities at September 30, 2020:



Fair Value	Valuation Technique	Unobservable Input	Unobservable Input		Range	Weighted Average ₍₁₎
$1,000	Monte Carlo simulation	Discount rate	1.6	%
		Revenue Volatility	46.2	%
		Risk free rate	1.2	%
$8,123	Probability Analysis	Discount rate	1.0	%
		Payment amounts			$5,250 - $7,000	$	6,400
		Probabilities			40% - 60%	53		%


(1)	The weighted average of the payment amounts and the probabilities (Level 3 unobservable inputs), associated with the contingent consideration valued using probability analysis, were weighted by the relative undiscounted fair value of payment amounts and of probability payment amounts, respectively.

The above significant unobservable inputs are subject to change based on changes in economic and market conditions. The use of significant unobservable inputs creates uncertainty in the measurement of fair value as of the reporting date. The significant unobservable inputs used in the fair value measurement of the contingent consideration using Monte Carlo simulation are (i) discount rate, (ii) revenue volatility and (iii) risk-free rate. Significant increases or decreases in the discount rate and risk-free rate in isolation would result in a significantly lower or higher fair value measurement. Significant changes in revenue volatility in isolation would result in a significantly lower or higher fair value measurement. The significant unobservable inputs used in the fair value measurement of the contingent consideration using probability analysis are (i) discount rate, (ii) payment amounts and (iii) probabilities. Significant increases or decreases in the discount rate in isolation would result in a significantly lower or higher fair value measurement. Significant increases or decreases in the payment amounts or probabilities in isolation would result in a significantly higher or lower fair value measurement. It is not possible for us to predict the effect of future economic or market conditions on our estimated fair values.

The following information presents the supplemental fair value information about long-term fixed-rate debt at September 30, 2020 and 2019:



	September 30,
(in millions)	2020		2019
Carrying value of long-term fixed-rate debt	$	480.7	$	479.4
Fair value of long-term fixed-rate debt	$	534.5	$	526.4

The fair value for the $534.5 million fixed-rate debt was based on broker quotes at September 30, 2020. The notes are classified within Level 2 of the fair value hierarchy as they are not actively traded in markets.

The estimated fair value of our investments, reflected on our Consolidated Balance Sheets as Investments, is primarily based on Level 1 inputs. As a result of the change in the fair value of our investments, we recorded a loss of $8.7 million for the fiscal year ended September 30, 2020. In September 2019, we sold our remaining 1.6 million shares in Valaris, previously known as Ensco Rowan plc, for total proceeds of approximately $12.0 million.

- Definition

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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