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Financial Instruments and Contingent Consideration

3 Months Ended

Mar. 31, 2024

Financial Instruments and Contingent Consideration

NOTE 14. FINANCIAL INSTRUMENTS AND CONTINGENT CONSIDERATION

We do not hold or issue financial instruments for trading purposes. The estimated fair values of our financial instruments and contingent consideration are as follows:


	March 31, 2024						December 31, 2023
	Carrying amount			Estimated fair value			Carrying amount			Estimated fair value
Assets (liabilities), net:
Total long-term debt, including current portion	$	(581.4	)	$	(581.4	)	$	(586.8	)	$	(586.8	)
Interest rate swap contracts		1.0			1.0			(0.4	)		(0.4	)
Acquisition-related contingent consideration		(1.3	)		(1.3	)		(1.6	)		(1.6	)

The carrying amounts of cash and cash equivalents, customer receivables and accounts payable approximate fair value because of the short-term maturity of these instruments. The fair value estimates of long-term debt are based on data for our Term Loan A debt from a major financial institution. The fair value estimates for interest rate swap contracts are estimated with the assistance of third-party valuation experts and verified by obtaining quotes from major financial institutions. We engaged an independent, third-party valuation specialist to determine the fair value estimate for acquisition-related contingent consideration payable based on performance, which were primarily measured using a Monte Carlo simulation.

As of March 31, 2024 and December 31, 2023, acquisition-related contingent consideration liabilities represented additional cash consideration payable related to our acquisitions of Insolcorp and BOK that will be paid upon the final achievement of certain financial and performance milestones. As of March 31, 2024, $0.6 million of acquisition-related contingent consideration was classified as accounts payable and other accrued expenses, while $0.7 million was classified as other long-term liabilities on our Condensed Consolidated Balance Sheet. As of December 31, 2023, $1.6 million was classified as other long-term liabilities on our Condensed Consolidated Balance Sheet.

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 most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Three levels of inputs may be used to measure fair value:

Level 1 — Quoted prices in active markets for identical assets or liabilities;

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

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 certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

The fair value measurement of assets and liabilities measured at fair value on a recurring basis and reported on the Condensed Consolidated Balance Sheets is summarized below:


	March 31, 2024					December 31, 2023
	Fair value based on					Fair value based on
	Other observable inputs		Other unobservable inputs			Other observable inputs			Other unobservable inputs
	Level 2		Level 3			Level 2			Level 3
Assets (liabilities), net:
Interest rate swap contracts	$	1.0	$	-		$	(0.4	)	$	-
Acquisition-related contingent consideration		-		(1.3	)		-			(1.6	)

Acquisition-related contingent consideration of $1.3 million and $1.6 million as of March 31, 2024 and December 31, 2023, respectively, was measured with the use of significant unobservable inputs, which included financial projections over respective earn-out periods, the volatility of the underlying financial metrics and estimated discount rates. All changes in acquisition-related contingent consideration liabilities subsequent to the initial acquisition-date measurements were recorded as a component of operating income on our Condensed Consolidated Statements of Earnings and Comprehensive Income.

The following table summarizes the weighted-average of the significant unobservable inputs as of March 31, 2024:


	BOK			Insolcorp
Unobservable input
Volatility		24.5	%		20.1	%
Discount rates		4.9	%		4.7	%

The changes in fair value of the acquisition-related contingent consideration liabilities for the three months ended March 31, 2024 and 2023 were as follows:


	Three Months Ended
	March 31,
	2024			2023
Fair value of contingent consideration as of beginning of period	$	1.6		$	15.2
Cash consideration paid		-			(15.2	)
Gain related to change in fair value of contingent consideration		(0.3	)		-
Fair value of contingent consideration as of end of period	$	1.3		$	-

During the three months ended March 31, 2024, the change in fair value was primarily due to changes in financial projections over each entity’s earn-out periods and due to changes in valuation inputs.

During the three months ended March 31, 2023, we paid $15.2 million of additional cash consideration, which represented the final achievement of certain financial and performance milestones through December 31, 2022 for the July 2020 acquisition of TURF Design, Inc. The additional cash consideration paid was classified as cash flows from financing activities in our Condensed Consolidated Statements of Cash Flows, up to the acquisition date fair value. The portion of additional cash consideration paid in excess of the acquisition date fair value were classified as cash flows from operating activities in our Condensed Consolidated Statements of Cash Flows.

- 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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