4. Fair Value Measurements

The accounting guidance on fair value measurements defines fair value, establishes a framework for measuring fair value under U.S. GAAP, and expands disclosures about fair value measurements. The guidance is applicable for all financial assets and financial liabilities and for all nonfinancial assets and nonfinancial liabilities recognized or disclosed at fair value in the consolidated financial statements on a recurring basis. Fair value is defined as the exchange price that would be received from selling an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and also considers assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions and risk of nonperformance.

Fair Value Hierarchy

Accounting guidance on fair value measurements requires that assets and liabilities carried at fair value be classified and disclosed in one of the following three categories:

Level 1 — Quoted (unadjusted) prices in active markets for identical assets or liabilities.

The Company did not have any Level 1 assets as of September 30, 2017 or 2016.

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 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 asset or liability.

The Company’s Level 2 assets as of September 30, 2017 and 2016 consisted of money market funds, commercial paper instruments and corporate bond securities. Fair market values for these assets are based on quoted vendor prices and broker pricing where all significant inputs are observable. To ensure the accuracy of quoted vendor prices and broker pricing, the Company performs regular reviews of investment returns to industry benchmarks and sample tests of individual securities to validate quoted vendor prices with other available market data.

Level 3 — Unobservable inputs to the valuation methodology that are supported by little or no market activity and that are significant to the measurement of the fair value of the assets or liabilities. Level 3 assets and liabilities include those whose fair value measurements are determined using pricing models, discounted cash flow methodologies or similar valuation techniques, as well as significant management judgment or estimation.

Included in Level 3 liabilities as of September 30, 2017 is a $14.9 million contingent consideration liability, of which $13.1 million is noncurrent. Included in Level 3 liabilities as of September 30, 2016 is a $14.5 million contingent consideration liability, of which $13.6 million is noncurrent. The contingent consideration liabilities are subject to achievement of revenue and value-creating milestones in future periods. There were no Level 3 assets as of September 30, 2017 or 2016.

In valuing assets and liabilities, the Company is required to maximize the use of quoted market prices and minimize the use of unobservable inputs. The Company did not significantly change its valuation techniques from prior periods. The carrying value of cash, accounts receivable, accounts payable and accrued liabilities approximates fair value as of September 30, 2017 and 2016 due to the short maturity nature of these instruments.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

In instances where the inputs used to measure fair value fall into different levels of the fair value hierarchy, the fair value measurement has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular item to the fair value measurement in its entirety requires judgment, including the consideration of inputs specific to the asset or liability.

The following table presents information about the Company’s assets and liabilities measured at fair value on a recurring basis as of September 30, 2017 (in thousands):

	Quoted Prices in Active Markets for Identical Instruments (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)			Total Fair Value as of September 30, 2017
Assets
Cash equivalents	$	—	$	6,639	$	—		$	6,639
Available-for-sale securities		—		31,802				$	31,802
Total assets	$	—	$	38,441	$	—		$	38,441

Liabilities
Contingent consideration	$	—	$	—	$	(14,864	)	$	(14,864	)
Total liabilities	$	—	$	—	$	(14,864	)	$	(14,864	)

The following table presents information about the Company’s assets and liabilities measured at fair value on a recurring basis as of September 30, 2016 (in thousands):

	Quoted Prices in Active Markets for Identical Instruments (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)			Total Fair Value as of September 30, 2016
Assets
Cash equivalents	$	—	$	22,160	$	—		$	22,160
Available-for-sale securities		—		21,954				$	21,954
Total assets	$	—	$	44,114	$	—		$	44,114

Liabilities
Contingent consideration	$	—	$	—	$	(14,517	)	$	(14,517	)
Total liabilities	$	—	$	—	$	(14,517	)	$	(14,517	)

The following table summarizes the changes in the contingent consideration liability for fiscal 2017 and 2016:

(Dollars in thousands)
Contingent consideration liability at September 30, 2015	$	—
Additions		12,584
Fair value adjustments		70
Settlements		—
Interest accretion		1,422
Foreign currency translation		441
Contingent consideration liability at September 30, 2016		14,517
Additions		—
Fair value adjustments		(2,350	)
Settlements		—
Interest accretion		2,223
Foreign currency translation		474
Contingent consideration liability at September 30, 2017	$	14,864

There were no transfers of assets or liabilities to or from amounts measured using Level 3 fair value measurements during fiscal 2017 or 2016.

Valuation Techniques

The valuation techniques used to measure the fair value of assets are as follows:

Cash equivalents — These assets are classified as Level 2 and are carried at historical cost which is a reasonable estimate of fair value because of the relatively short time between origination of the instrument and its expected realization.

Available-for-sale securities — These assets are classified as Level 2 and include commercial paper instruments and corporate bonds. These securities are valued based on quoted vendor prices in active markets underlying the securities.

Contingent consideration — The contingent consideration liabilities were determined based on discounted cash flow analyses that included revenue estimates, probability of strategic milestone achievement and a discount rate, which are considered significant unobservable inputs as of the acquisition dates and September 30, 2017. In fiscal 2017, for the revenue-based milestones, the Company discounted forecasted revenue by 14.0% to 23.5%, which represents the Company’s weighted average cost of capital for each transaction, adjusted for the short-term nature of the cash flows. The resulting present value of revenue was used as an input into an option pricing approach, which also considered the Company’s risk of non-payment of the revenue-based milestones. Non-revenue milestones were projected to have a 25% to 100% probability of achievement and related payments were discounted using the Company’s estimated cost of debt for the remaining contingency periods, or 2.7% to 3.0%. In fiscal 2016, for the revenue-based milestones, the Company discounted forecasted revenue by 14.1% to 22.8%, which represents the Company’s weighted average cost of capital for each transaction, adjusted for the short-term nature of the cash flows. The resulting present value of revenue was used as an input into an option pricing approach, which also considered the Company’s risk of non-payment of the revenue-based milestones. Non-revenue milestones were projected to have a 25% to 100% probability of achievement and related payments were discounted using the Company’s estimated cost of debt for the remaining contingency periods, or 5.6% to 6.7%. To the extent that actual results differ from these estimates, the fair value of the contingent consideration liabilities could change significantly. The €12 million (approximately $14.2 million as of September 30, 2017) contingent consideration related to the Creagh Medical acquisition is denominated in Euros and is not hedged. The Company recorded foreign currency losses of $0.5 million and $0.4 million, respectively, in fiscal 2017 and 2016 related to this contingent consideration as this obligation was marked to year-end exchange rates.

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

The Company’s investments in non-marketable securities of private companies are accounted for using the cost method as the Company does not exert significant influence over the investees’ operating or financial activities. These investments are measured at fair value on a non-recurring basis when they are deemed to be other-than-temporarily impaired. In determining whether a decline in value of non-marketable equity investments in private companies has occurred and is other-than-temporary, an assessment is made by considering available evidence, including the general market conditions in the investee’s industry, the investee’s product development status and subsequent rounds of financing and the related valuation and/or the Company’s participation in such financings. The Company also assesses the investee’s ability to meet business milestones and the financial condition and near-term prospects of the individual investee, including the rate at which the investee is using its cash and the investee’s need for possible additional funding at a potentially lower valuation. The valuation methodology for determining the decline in value of non-marketable equity securities is based on inputs that require management judgment and are Level 3 inputs.

In the fourth quarter of fiscal 2015, the Company recognized an other-than-temporary impairment loss of $1.5 million on its investment in CeloNova. These impairment charges were based on Level 3 inputs further discussed in Note 2 to the consolidated financial statements. No other-than-temporary impairment losses were recognized during fiscal 2017 or 2016.