Fair Value of Financial Instruments

9 Months Ended

Sep. 30, 2020

The fair value of an asset or liability represents the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between unrelated market participants.

The Company reports the fair value of assets and liabilities using a three level measurement hierarchy that prioritizes the inputs used to measure fair value. The three levels of inputs used to measure fair value are as follows:

•Level 1—Inputs are unadjusted, quoted prices in active markets for identical assets. The Company has the ability to access these prices as of the measurement date. Level 1 assets include: cash held at banks; certificates of deposit; money market funds; investment grade corporate debt securities; and U.S. government agency and municipal debt securities.

•Level 2—Level 2 securities are valued using third-party pricing sources that apply relevant inputs and data in their models to estimate fair value. Inputs are 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; inputs other than quoted prices but that are observable for the asset or liability (e.g., interest rates; yield curves); and inputs that are derived principally from or corroborated by observable market data, by correlation, or by other means (i.e., market corroborated inputs). Level 2 assets include: investment grade corporate debt securities; U.S. government agency and municipal debt securities; other fixed income securities; and SERP (Supplemental Executive Retirement Plan) assets. The fair value of the restricted marketable securities is recorded in Other assets on the condensed consolidated balance sheets.

•Level 3—Unobservable inputs that reflect the Company’s own assumptions. These are based on the best information available, including the Company’s own data.

There were no level 3 assets as of September 30, 2020 or December 31, 2019.

Financial Assets Recorded at Fair Value

The Company’s financial assets that are required to be measured at fair value on a recurring basis are as follows (dollars in thousands):


			Fair Value Measurements at September 30, 2020 (unaudited)
	Total Fair Value at September 30, 2020		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)
Assets:
Cash and cash equivalents
Cash	$	188,974	$	188,974	$	—
Money market funds	15,319		15,319		—
Marketable securities
Corporate debt securities	147,657		—		147,657

Long term marketable securities
Corporate debt securities	388,185		258		387,927

Other noncurrent assets
Marketable securities - restricted (SERP)	464		2		462
Total assets at fair value	$	740,599	$	204,553	$	536,046


			Fair Value Measurements at December 31, 2019
	Total Fair Value at December 31, 2019		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)
Assets:
Cash and cash equivalents
Cash	$	78,912	$	78,912	$	—
Money market funds	102,469		102,469		—
Marketable securities
Corporate debt securities	165,527		—		165,527
Municipal debt securities	165		—		165
Long term marketable securities
Corporate debt securities	571,828		254		571,574
U.S. government agency and municipal debt securities	19,945		—		19,945
Other noncurrent assets
Marketable securities - restricted (SERP)	418		3		415
Total assets at fair value	$	939,264	$	181,638	$	757,626

The carrying amounts of other financial instruments, including accounts receivable, accounts payable, and accrued expenses, approximate fair value due to their short-term maturities.

Unrestricted available-for-sale marketable securities held by the Company are as follows, (dollars in thousands):


	September 30, 2020		December 31, 2019
	(unaudited)
Corporate and U.S. government agency and municipal debt securities
Amortized cost	$	522,920	$	747,598
Gross unrealized gains	13,835		10,031
Gross unrealized losses	(913)		(164)
Total fair value	$	535,842	$	757,465

The contractual maturities of the unrestricted available-for-sale marketable securities held by the Company are as follows, (dollars in thousands):


	September 30, 2020
	(unaudited)
Less than 1 year	$	147,657
1 year to 2 years	142,272
2 years to 3 years	136,095
3 years to 4 years	109,818
Greater than 4 years	—
Total	$	535,842

As of September 30, 2020, there was no impairment due to credit loss on any available-for-sale marketable securities.

Financial Liabilities Recorded at Fair Value

As of September 30, 2020, the Company had Level 3 liabilities related to the contingent consideration from the USWM Acquisition. The contingent consideration liabilities are measured at fair value on a recurring basis, using the same methodology as of the acquisition date; i.e., using the Monte Carlo simulation for the sales-based milestones, and the income approach for the other milestones. Refer to Note 3 for further discussion of significant inputs and assumptions used for the valuation of the contingent consideration as of the acquisition date.

The inputs and assumptions may not be observable in the market. These reflect the assumptions the Company believes would be made by a market participant. Changes in any of those inputs together, or in isolation, may result in significantly lower or higher fair value measurement.

The following table provides a reconciliation of the beginning and ending balances related to the contingent consideration from the USWM Acquisition (dollars in thousands):


	September 30, 2020
	(unaudited)
Balance at December 31, 2019	$	—
Initial estimate of contingent consideration	115,700
Change in fair value recognized in earnings	200
Balance at September 30, 2020	$	115,900

The change in estimated fair value of contingent consideration related to the USWM Acquisition during the three months ended September 30, 2020 is primarily due to changes in estimates associated with the amount and timing of projected cash flows.

Financial Liabilities Recorded at Carrying Value

The following table sets forth the carrying value and fair value of the Company’s financial liabilities that are not carried at fair value (dollars in thousands):


	September 30, 2020				December 31, 2019
	(unaudited)
	Carrying Value		Fair Value (Level 2)		Carrying Value		Fair Value (Level 2)
Convertible notes, net	$	357,521	$	372,816	$	345,170	$	366,023

The fair value has been estimated based on actual trading information as well as quoted prices, both provided by bond traders.

- 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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