Fair Value Measurements

Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required to be recorded at fair value, we consider the principal or most advantageous market in which we would transact and consider assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance. Generally accepted accounting principles prescribe a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Three levels of inputs that may be used to measure fair value:


•	Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities;

•

Level 2: inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities 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; 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.

A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.

Money market funds, time deposits and corporate notes/bonds are classified within Level 1 of the fair value hierarchy because they are valued based on quoted market prices in active markets.

Certificates of deposit, commercial paper and certain U.S. government agency securities are classified within Level 2 of the fair value hierarchy. These instruments are valued based on quoted prices in markets that are not active or based on other observable inputs consisting of market yields, reported trades and broker/dealer quotes.

The principal market in which we execute our foreign currency contracts is the institutional market in an over-the-counter environment with a relatively high level of price transparency. The market participants usually are large financial institutions. Our foreign currency contracts’ valuation inputs are based on quoted prices and quoted pricing intervals from public data sources and do not involve management judgment. These contracts are typically classified within Level 2 of the fair value hierarchy.

The fair value of our contingent consideration arrangements is determined based on our evaluation as to the probability and amount of any earn-out that will be achieved based on expected future performances by the acquired entities. These arrangements are classified within Level 3 of the fair value hierarchy.

Our significant financial assets and liabilities measured at fair value on a recurring basis as of July 1, 2017 and September 30, 2016 were as follows:



	July 1, 2017
	Level 1		Level 2		Level 3		Total
	(in thousands)
Financial assets:
Cash equivalents	$	60,118	$	—	$	—	$	60,118
Marketable securities
Certificates of deposit	—		441		—		441
Corporate notes/bonds	47,354		—		—		47,354
U.S. government agency securities	—		2,394		—		2,394
Forward contracts	—		4,802		—		4,802
	$	107,472	$	7,637	$	—	$	115,109
Financial liabilities:
Contingent consideration related to acquisitions	$	—	$	—	$	7,862	$	7,862
Forward contracts	—		4,525		—		4,525
	$	—	$	4,525	$	7,862	$	12,387



	September 30, 2016
	Level 1		Level 2		Level 3		Total
	(in thousands)
Financial assets:
Cash equivalents	$	60,139	$	—	$	—	$	60,139
Marketable securities
Certificates of deposit	—		681		—		681
Commercial paper	—		11,925		—		11,925
Corporate notes/bonds	34,601		—		—		34,601
U.S. government agency securities	—		2,409		—		2,409
Forward contracts	—		260		—		260
	$	94,740	$	15,275	$	—	$	110,015
Financial liabilities:
Contingent consideration related to acquisitions	$	—	$	—	$	19,570	$	19,570
Forward contracts	—		3,170		—		3,170
	$	—	$	3,170	$	19,570	$	22,740

Changes in the fair value of Level 3 contingent consideration liability associated with our acquisitions of ColdLight and Kepware were as follows:



	Contingent Consideration
	(in thousands)
	ColdLight			Kepware			Total
Balance, October 1, 2016	$	2,500		$	17,070		$	19,570
Change in present value of contingent consideration	—			392			392
Payment of contingent consideration	(2,500		)	(9,600		)	(12,100		)
Balance, July 1, 2017	$	—		$	7,862		$	7,862



	Contingent Consideration
	(in thousands)
	ThingWorx			ColdLight			Kepware		Total
Balance, October 1, 2015	$	9,000		$	4,000		$	—	$	13,000
Addition to contingent consideration	—			—			16,900		16,900
Change in present value of contingent consideration	—			1,000			97		1,097
Payment of contingent consideration	(9,000		)	(2,500		)	—		(11,500		)
Balance, July 2, 2016	$	—		$	2,500		$	16,997	$	19,497

In the Consolidated Balance Sheet as of July 1, 2017, $7.9 million of the contingent consideration liability is included in accrued expenses and other current liabilities.

Of the $12.1 million payments in the first nine months of 2017, $11.1 million represents the fair value of the liabilities recorded at the acquisition date and is included in financing activities in the Consolidated Statements of Cash Flows. Of the $11.5 million payments in the first nine months of 2016, $10.6 million represents the fair value of the liabilities recorded at the acquisition date and is included in financing activities in the Consolidated Statements of Cash Flows.