Fair Value Measurements

12 Months Ended

Dec. 31, 2016

Fair Value Disclosures [Abstract]

Fair Value Measurements

7. Fair Value Measurements

ASC 820, “Fair Value Measurement,” establishes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the third is considered unobservable:

Level 1: Quoted prices for identical assets or liabilities in active markets which the Company can access.

Level 2: Observable inputs other than those described in Level 1.

Level 3: Unobservable inputs.

Cash equivalents

The Company’s cash equivalents are investments in money market accounts, which represent the only asset the Company measures at fair value on a recurring basis. The Company determines the fair value of our cash equivalents using a market approach based on quoted prices in active markets. The fair values of cash, accounts receivable, income taxes receivable, accounts payable, income taxes payable and accrued expenses and other current liabilities approximate their carrying values because of their short-term nature.

Contingent consideration

On December 18, 2015, the Company acquired all assets and certain liabilities of Skyetek. Under the purchase and sale agreement for the Skyetek acquisition, the owners of Skyetek are eligible to receive contingent consideration based on the achievement of certain sales order commitment targets from October 2015 through June 2017. If such targets are achieved, the contingent consideration will be payable in 2017. The Company recognized an estimated fair value of $0.2 million as part of the purchase price as of the acquisition date. Subsequent changes in the estimated fair value of this contingent liability will be recorded in the consolidated statement of operations in restructuring, acquisition and divestiture related costs until the liability is fully settled. There have been no changes to the fair value of the contingent consideration since the acquisition date.

On November 11, 2015, the Company acquired Lincoln Laser. Under the purchase and sale agreement for the Lincoln Laser acquisition, the shareholders of Lincoln Laser are eligible to receive contingent consideration based on the achievement of certain revenue targets for fiscal year 2016. The estimated fair value of the contingent consideration of $2.3 million was determined based on the Monte Carlo valuation method and was recorded as part of the purchase price as of the acquisition date. Subsequent changes in the estimated fair value of this contingent liability will be recorded in the consolidated statement of operations in restructuring, acquisition and divestiture related costs until the liability is fully settled. Based on the actual operating results for fiscal year 2016, the fair value of the contingent consideration for Lincoln Laser was $1.4 million as of December 31, 2016.

On February 19, 2015, the Company acquired Applimotion. Under the purchase and sale agreement for the Applimotion acquisition, the former shareholders of Applimotion are eligible to receive contingent consideration based on the achievement of certain revenue targets for fiscal years 2015 to 2017. If such targets are achieved, the contingent consideration will be payable in cash in two installments in 2017 and 2018, respectively. The estimated fair value of the contingent consideration of $1.0 million was determined based on the Monte Carlo valuation method and was recorded as part of the purchase price as of the acquisition date. Subsequent changes in the estimated fair value of this contingent liability will be recorded in the consolidated statement of operations in restructuring, acquisition and divestiture related costs until the liability is fully settled. Under the Monte Carlo valuation method, the fair value of the contingent consideration for Applimotion was $3.6 million as of December 31, 2016.

The following table summarizes the fair values of our assets and liabilities measured at fair value on a recurring basis as of December 31, 2016 (in thousands):

			Quoted Prices in				Significant Other
			Active Markets for		Significant Other		Unobservable
			Identical Assets		Observable Inputs		Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)
Assets
Cash equivalents	$	9,569	$	9,569	$	—	$	—
Liabilities
Contingent consideration - Current	$	2,775	$	—	$	—	$	2,775
Contingent consideration - Long-term		2,381		—		—		2,381
	$	5,156	$	—	$	—	$	5,156

The following table summarizes the fair values of our assets and liabilities measured at fair value on a recurring basis as of December 31, 2015 (in thousands):

			Quoted Prices in				Significant Other
			Active Markets for		Significant Other		Unobservable
			Identical Assets		Observable Inputs		Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)
Assets
Cash equivalents	$	4,657	$	4,657	$	—	$	—
Liabilities
Contingent consideration - Long-term	$	3,889	$	—	$	—	$	3,889

Changes in the fair value of our Level 3 contingent consideration for the years ended December 31, 2016 and 2015 were as follows (in thousands):

	Contingent Consideration
Balance at December 31, 2014	$	—
Acquisition of Applimotion		965
Fair value adjustment of Applimotion		430
Acquisition of Lincoln Laser		2,344
Acquisition of Skyetek		150
Balance at December 31, 2015	$	3,889
Fair value adjustment of Applimotion		2,178
Fair value adjustment of Lincoln Laser		(911	)
Balance at December 31, 2016	$	5,156

The following table provides quantitative information associated with the fair value measurement of the Company’s Level 3 liabilities:

Liability	December 31, 2016 Fair Value (in thousands)	Valuation Technique	Unobservable Inputs	Percentage Applied
Contingent consideration (Applimotion) (1)	$3,573	Monte Carlo simulation	Historical and projected revenues for fiscal years 2015 to 2017 Revenue volatility Cost of debt WACC	N/A 41.3% 3.49% 11.0%
Contingent consideration (Lincoln Laser) (2)	$1,433	N/A	Historical revenues	100%

(1) Based on Applimotion’s fiscal 2015 and 2016 revenue results, the Company will pay $1.2 million contingent consideration in the first quarter of 2017.

(2) The Company will pay $1.4 million as the final Lincoln Laser contingent consideration payment in the first quarter of 2017.

As of December 31, 2016, the significant unobservable inputs used in the Monte Carlo simulation to fair value the Applimotion contingent consideration included forecasted revenue, revenue volatility and discount rate. Increases or decreases in the inputs would result in a higher or lower fair value measurement.

Except for the assets and liabilities acquired from the Applimotion, Lincoln Laser and Skyetek acquisitions, as disclosed in Note 3, there were no assets and liabilities that were measured at fair value on a non-recurring basis during 2016. See Note 10 for discussion of the estimated fair value of the Company’s outstanding debt and Note 12 for discussion of the estimated fair value of the Company’s pension plan assets.