Fair Value Measurements

12 Months Ended

Jan. 26, 2020

Instruments Measured at Fair Value on a Recurring Basis

Financial assets and liabilities measured and recorded at fair value on a recurring basis were presented within the Company's Balance Sheets as follows:



	Fair Value as of January 26, 2020								Fair Value as of January 27, 2019
(in thousands)	Total		(Level 1)		(Level 2)		(Level 3)		Total		(Level 1)		(Level 2)		(Level 3)
Financial assets:
Convertible debt	$	10,700	$	—	$	—	$	10,700	$	3,105	$	—	$	—	$	3,105
Derivative financial instruments	—		—		—		—		69		—		69		—
Total financial assets	$	10,700	$	—	$	—	$	10,700	$	3,174	$	—	$	69	$	3,105

Financial liabilities:
AptoVision Earn-out	$	—	$	—	$	—	$	—	$	2,161	$	—	$	—	$	2,161
Cycleo Earn-out	2,108		—		—		2,108		4,514		—		—		4,514
Total financial liabilities	$	2,108	$	—	$	—	$	2,108	$	6,675	$	—	$	—	$	6,675

During fiscal years 2020 and 2019, the Company had no transfers of financial assets or liabilities between Level 1, Level 2 or Level 3. As of January 26, 2020, and January 27, 2019, the Company had not elected the fair value option for any financial assets and liabilities for which such an election would have been permitted.

The foreign currency forward contracts are valued using readily available foreign currency forward and interest rate curves (Level 2 inputs). The fair value of each contract is determined by comparing the contract rate to the forward rate and discounting to the present value. Contracts in a gain position are recorded in "Other current assets” in the Balance Sheets and the value of contracts in a loss position are recorded in "Accrued liabilities” in the Balance Sheets. See Note 19 for further discussion of the Company’s derivative instruments.

The convertible debt investments are valued utilizing a combination of estimates of the discounted cash flows associated with the debt and the fair value of the equity into which the debt may be converted (Level 3 inputs).

The AptoVision Earn-out liability (see Note 14) is valued utilizing estimates of annual sales, adjusted earnings, and product development targets (Level 3 inputs) through July 2020. These estimates represent inputs for which market data is not available and are developed using the best information available about the assumptions that market participants would use when pricing the liability.

The Cycleo Earn-out liability (see Note 14) is valued utilizing estimates of annual sales and operating income (Level 3 inputs) through April 2020. These estimates represent inputs for which market data is not available and are developed using the best information available about the assumptions that market participants would use when pricing the liability.

The Company measures contingent earn-out liabilities at fair value on a recurring basis using significant unobservable inputs classified within Level 3 of the fair value hierarchy. The significant unobservable inputs used in the fair value measurements are sales projections over the earn-out period, and the probability outcome percentages assigned to each scenario. Significant increases or decreases to either of these inputs in isolation would result in a significantly higher or lower liability, with a higher liability capped by the contractual maximum of the contingent earn-out obligation. Ultimately, the liabilities will be equivalent to the amount paid, and the difference between the fair value estimate and amount paid will be recorded in earnings. For the AptoVision Earn-out and Cycleo Earn-out, these companies have business profiles comparable to a start-up company. Accordingly, their respective sales projections are subject to significant revisions. This characteristic can result in volatile changes to the measurement of fair value for a given earn-out.

The Company reviews and re-assesses the estimated fair value of earn-out obligations on a recurring basis, and the updated fair value could differ materially from the previous estimates. Adjustments to the estimated fair values related to contingent consideration are reported in changes in fair value of contingent earn-out obligations, while changes in all other unobservable inputs are reported in operating income.

The following table presents a reconciliation of changes in the earn-out liability during the fiscal year ended January 26, 2020:



(in thousands)	AptoVision			Cycleo			Total
Balance at January 27, 2019	$	2,161		$	4,514		$	6,675
Changes in fair value of contingent earn-out obligations	(2,161		)	(184		)	(2,345		)
Changes in fair value of non-contingent earn-out obligations	—			(578		)	(578		)
Payments	—			(1,644		)	(1,644		)
Balance at January 26, 2020	$	—		$	2,108		$	2,108

Instruments Not Recorded at Fair Value on a Recurring Basis

Some of the Company’s financial instruments are not measured at fair value on a recurring basis, but are recorded at amounts that approximate fair value due to their liquid or short-term nature. Such financial assets and financial liabilities include: cash and cash equivalents including money market deposits, net receivables, certain other assets, accounts payable, accrued expenses, accrued personnel costs, and other current liabilities. The Company’s long-term debt is recorded at cost, but is measured at fair value for disclosure purposes. As the long-term debt bears interest at a floating rate based on an index plus a spread, management determined that the carrying amount of the long-term debt approximates fair value.

Assets and Liabilities Recorded at Fair Value on a Non-Recurring Basis

The Company reduces the carrying amounts of its goodwill, intangible assets, long-lived assets, and non-marketable equity securities to fair value when held for sale or determined to be impaired.

For the Company's investments in non-marketable equity interests, the Company evaluates these investments for impairment when there are indicators of impairment which can be caused by changes in circumstances that may have a significant adverse effect on the fair value of its cost method or equity method investments. As discussed in Note 4, during fiscal year 2020, the Company tested its investments for impairment, which resulted in a $0.5 million write-down of a cost method investment and a $0.7 million other-than-temporary impairment of a convertible debt investment. During fiscal year 2019, the Company tested a cost method investment for impairment, which resulted in a $30.0 million write-down of the investment. In determining that the fair value of the Company’s investment is zero, the Company used a discounted cash flow model. The valuation model is most sensitive to the weighted-average cost of capital assumption, which was determined to be approximately 38.8%, given the nature of the investment.

- 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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