7. Fair Value Measurements

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or the most advantageous market for the asset transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. We use a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value:

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Level 1 – Quoted prices in active markets for identical assets or liabilities.

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Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

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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.

The following tables provide the assets and liabilities carried at fair value and measured on a recurring basis at January 31, 2016 and July 31, 2015:


	Fair Value Measurements at January 31, 2016
(in millions)	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets
Cash and cash equivalents	$	120.1	$	120.1	$	—	$	—
Plan assets for deferred compensation		4.9		4.9		—		—

Total assets at fair value	$	125.0	$	125.0	$	—	$	—

Liabilities
Contingent consideration	$	13.3	$	—	$	—	$	13.3
Foreign currency forward contracts		0.5		—		0.5		—

Total liabilities at fair value	$	13.8	$	—	$	0.5	$	13.3


	Fair Value Measurements at July 31, 2015
(in millions)	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets
Cash and cash equivalents	$	123.8	$	123.8	$	—	$	—
Plan assets for deferred compensation		4.3		4.3		—		—

Total assets at fair value	$	128.1	$	128.1	$	—	$	—

Liabilities
Contingent consideration	$	2.0	$	—	$	—	$	2.0
Foreign currency forward contracts		0.5		—		0.5		—

Total liabilities at fair value	$	2.5	$	—	$	0.5	$	2.0

Assets held in the deferred compensation plan will be used to pay benefits under our non-qualified deferred compensation plan. The investments primarily consist of mutual funds which are publicly traded on stock exchanges. Accordingly, the fair value of these assets is categorized as Level 1 within the fair value hierarchy.

The fair value of the liabilities arising from our foreign currency forward contracts is determined by valuation models based on market observable inputs, including forward and spot prices for currencies. Accordingly, the fair value of these liabilities is categorized as Level 2 within the fair value hierarchy.

The fair value of our contingent consideration obligation is based on significant unobservable inputs, including management estimates and assumptions, and is measured based on the probability-weighted present value of the payments expected to be made. Accordingly, the fair value of this liability is categorized as Level 3 within the fair value hierarchy.

In April 2010, we entered into an agreement with PocketSonics, Inc., or PocketSonics, a privately held ultrasound technology company based in Charlottesville, Virginia, which granted us an exclusive license to certain ultrasound technology owned or controlled by PocketSonics and a ten percent (10%) equity interest in PocketSonics. On September 20, 2013, we acquired all of the remaining stock of PocketSonics. The purchase price included base consideration of $11.1 million paid in cash at closing, fair value of contingent consideration of $1.9 million, and revaluation of our initial equity investment. Please refer to Note 3. Business Combination in our Annual Report on Form 10-K for fiscal year 2015, as filed with the SEC on September 25, 2015, for more information on the acquisition of PocketSonics. The fair value of the contingent payments associated with the acquisition of PocketSonics was calculated utilizing 100% probability for the earn out associated with the Section 510(k) clearance obtained from the Food and Drug Administration, or FDA, on April 9, 2014 and the anticipation of commercial sales, as defined in the purchase agreement, in the fiscal year ending July 31, 2016, or fiscal year 2016. Each quarter we revalue the contingent consideration obligations associated with the acquisition of PocketSonics to its then current fair value and record changes in the fair value to the Consolidated Statements of Operations. Changes in contingent consideration result from changes in the assumptions regarding probabilities of the estimated timing of launch, volume sales target, payments and the discount rate used to estimate the fair value of the liability. The assumptions used in estimating fair value require significant judgment. The use of different assumptions and judgments could result in a materially different estimate of fair value. There was no change in the fair value of our contingent consideration obligation of $2.0 million associated with the acquisition of PocketSonics during the three and six months ended January 31, 2016. As of January 31, 2016 and July 31, 2015, the fair value of the contingent consideration obligation associated with the acquisition of PocketSonics was reported in Other current liabilities and Other long-term liabilities, respectively, in the Consolidated Balance Sheets.

Associated with our acquisition of Oncura, during the initial post-close period, as we continue to obtain information to complete our valuation, any changes in the acquisition date fair value of the contingent payment obligation will be recorded against goodwill. The fair value of the contingent payment obligation is valued using a Monte Carlo simulation. After the post-close purchase accounting period, the fair value of the contingent payment obligation of Oncura will be revalued each quarter to its then fair value and we will record changes in the fair value as contingent consideration expense within the our Consolidated Statement of Operations within general and administrative operating expenses. Changes in contingent consideration expense result from changes in the assumptions regarding probabilities of the estimated future volume sales and gross margin targets and the discount rate used to estimate the fair value of the liability. The assumptions used in estimating the fair value require significant judgment. The use of different assumptions and judgments could result in a different estimate of fair value. There was an $11.3 million increase in the fair value of our contingent consideration obligation during the three and six months ended January 31, 2016 related to the acquisition of Oncura. As of January 31, 2016, the fair value of the contingent consideration obligation associated with the Oncura acquisition was reported in Other long-term liabilities, in the Consolidated Balance Sheets.