Fair Value Measurements

6 Months Ended

Jun. 30, 2023

Fair Value MeasurementsAuthoritative guidance on fair value measurements provides a framework for measuring fair value and establishes a fair value hierarchy that prioritizes the inputs used to measure fair value, giving the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 inputs) and the lowest priority to unobservable inputs (Level 3 inputs). The carrying value of cash and cash equivalents, receivables, accounts payable and accrued expenses approximates fair value based on the short-term nature of these accounts.

The following table sets forth our liabilities that are measured at fair value on a recurring basis by level within the fair value hierarchy:


	Fair Value at June 30, 2023
	Level 1		Level 2		Level 3		Total
Liabilities:
Earn-out liability	$	—	$	—	$	23,983	$	23,983
Put option liability	—		—		1,746		1,746

The earn-out liability related to the FlexSteel acquisition (see Note 2) is measured at fair value using Level 3 unobservable inputs at the end of each reporting period with changes in its estimated fair value recorded in earnings until the liability is settled. The fair value is determined based on the evaluation of the probability and amount of earn-out that may be achieved based on expected future performance of FlexSteel using a Monte Carlo simulation model. The Monte Carlo simulation model uses assumptions including revenue volatilities, risk free rates, credit discount rates and revenue discount rates. Significant changes in any of those assumptions could have a material effect on the estimated fair value of the earn-out payment. The following table sets forth the range of inputs for the significant assumptions utilized to determine the fair value of the earn-out payment as of June 30, 2023:


	June 30, 2023
Risk-free interest rate	4.06%	to	5.53%
Expected revenue volatility	27.60%
Revenue discount rate	11.00%	to	11.10%
Credit discount rate	10.80%	to	10.97%

The put option liability represents the guaranteed payment on restricted stock purchased in conjunction with the FlexSteel acquisition (see Note 10). This liability is measured at fair value at the end of each reporting period until the liability is settled with changes in fair value from grant date recognized ratably over the one-year vesting period. The fair value is determined using the Black-Scholes option pricing method that utilizes a selected volatility calculated based on weighting historical and implied volatility indications. As the selected volatility involves judgement and is a significant input to estimating the fair value of the put option, it is classified as a Level 3 input. Significant changes in the volatility could have a material effect on the estimated fair value of the put option liability. The following table sets forth the inputs for the significant assumptions utilized to determine the fair value of the put option liability as of June 30, 2023:


						June 30, 2023
Risk-free interest rate						5.37%
Expected volatility						46.48%
Dividend yield						1.03%

The following table presents a summary of the changes in fair value of our liabilities measured using Level 3 inputs:


	Earn-out		Put Option
Opening Balance	$	5,960	$	510
Changes in fair value (1)	18,023		1,236
Balance at June 30, 2023	$	23,983	$	1,746

(1)We recognized $18.0 million of remeasurement expense associated with the change in the fair value of the earn-out liability during the six months ended June 30, 2023. During the three months ended March 31, 2023, $0.1 million of gain for the change in fair value was presented in other income (expense), net in the consolidated statements of operations. During the three months ended June 30, 2023, $18.1 million of expense for the change in fair value was separately presented as a component of operating income. For the put option liability, we recognized $0.4 million of expense associated with the change in fair value in SG&A in the consolidated statements of income during the six months ended June 30, 2023.

The fair value of our foreign currency forwards was less than $0.1 million as of June 30, 2023 and was determined using market observable inputs including forward and spot prices (Level 2 inputs).

- 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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