Fair Value Measurements

3 Months Ended

Oct. 31, 2019

Fair Value Disclosures [Abstract]

Fair Value Measurements

Fair Value Measurements

Fair Value Hierarchy

We apply the provisions of ASC 820, “Fair Value Measurements and Disclosures,” (“ASC 820”), for our financial assets and liabilities that are re-measured and reported at fair value each reporting period and our nonfinancial assets and liabilities that are re-measured and reported at fair value on a non-recurring basis. We define fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

Assets and Liabilities Measured and Recorded at Fair Value on a Recurring Basis

Our financial assets that are re-measured at fair value on a recurring basis include money market funds that are classified as cash and cash equivalents in the consolidated condensed consolidated balance sheets. These money market funds are classified within Level 1 of the fair value hierarchy and are valued using quoted market prices for identical assets.

For the Hu-Friedy acquisition, additional purchase price payments ranging from zero to $50,000 are contingent upon the achievement of certain commercial milestones through March 31, 2021. We estimated the aggregate fair value of the two contingent consideration arrangements to be $35,100 at the date of acquisition, and was reported separately in our condensed consolidated balance sheet. The initial value assigned to the contingent consideration arrangements was determined on the basis of forecasted sales of Hu-Friedy products over the next twelve to eighteen months. The fair value was determined by employing a Monte Carlo simulation in a risk neutral framework, with the underlying simulated variable of net sales and the related achievement of certain gross margin percentages. The model also included assumptions on the market price of risk, which was calculated as the weighted average cost of capital less the long-term risk free-rate. We are required to reassess the fair value of contingent payments on a periodic basis. Although we believe our assumptions are reasonable, different assumptions or changes in the future may result in different estimated amounts.

For the Aexis acquisition, additional purchase price payments ranging from zero to $1,850 are contingent upon the achievement of certain purchase order targets through March 21, 2020. We estimated the original fair value of the contingent consideration using the weighted probabilities of the possible contingent payments. At the date of acquisition, we estimated the original fair value of the contingent consideration to be $1,292. We are required to reassess the fair value of contingent payments on a periodic basis. The significant inputs used in these estimates include numerous possible scenarios for the payments based on the contractual terms of the contingent consideration, for which probabilities are assigned to each scenario. Given the short term nature of the financial instrument, the contingent consideration is not discounted to present value. Although we believe our assumptions are reasonable, different assumptions or changes in the future may result in different estimated amounts.

The fair values of our financial instruments measured on a recurring basis were categorized as follows:

	October 31, 2019
	Level 1		Level 2		Level 3		Total
Cash and cash equivalents:
Money markets	$	104	$	—	$	—	$	104
Prepaid and other current assets:
Interest rate swap	—		1,119		—		1,119
Other Assets:
Interest rate swap	—		3,812		—		3,812
Total assets	$	104	$	4,931	$	—	$	5,035
Accrued expenses:
Contingent consideration	—		—		1,668		1,668
Other long-term liabilities:
Contingent consideration	—		—		35,100		35,100
Total liabilities	$	—	$	—	$	36,768	$	36,768

	July 31, 2019
	Level 1		Level 2		Level 3		Total
Cash and cash equivalents:
Money markets	$	104	$	—	$	—	$	104
Prepaid expenses and other current assets:
Interest rate swap	—		486		—		486
Other Assets:
Interest rate swap	—		2,826		—		2,826
Total assets	$	104	$	3,312	$	—	$	3,416
Other long-term liabilities:
Contingent consideration	—		—		1,411		1,411
Total liabilities	$	—	$	—	$	1,411	$	1,411

A reconciliation of our liabilities that are measured and recorded at fair value on a recurring basis using significant unobservable inputs (Level 3) is as follows:

	Aexis Contingent Consideration		Hu-Friedy Contingent Consideration		Total
Balance, July 31, 2019	$	1,411	$	—	$	1,411
Fair value adjustments included in general and administrative expenses	257		—		257
Acquisitions and settlements, net	—		35,100		35,100
Balance, October 31, 2019	$	1,668	$	35,100	$	36,768

Disclosure of Fair Value of Financial Instruments

At October 31, 2019 and July 31, 2019, the carrying amounts for cash and cash equivalents (excluding money markets), accounts receivable and accounts payable approximated fair value due to the short maturity of these instruments. At October 31, 2019 and July 31, 2019, the carrying value of our outstanding borrowings under our credit facility approximated the fair value of these obligations as the respective borrowing rates reflect prevailing market interest rates.