FAIR VALUE OF FINANCIAL INSTRUMENTS

12 Months Ended

Sep. 30, 2015

NOTE 3—FAIR VALUE OF FINANCIAL INSTRUMENTS

The valuation techniques required to determine fair value are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect internal market assumptions. The two types of inputs create the following fair value hierarchy:

Level 1 - Quoted prices for identical instruments in active markets.

Level 2 - Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.

Level 3 - Significant inputs to the valuation model are unobservable.

The fair value of certain of our cash equivalents are based upon quoted prices for identical instruments in active markets. The fair value of our other cash equivalents and our available for sale marketable securities is based upon a discounted cash flow model and approximate cost. The marketable securities in the rabbi trust are carried at fair value, which is based upon quoted market prices for identical securities. Derivative financial instruments are measured at fair value, the material portions of which are based on active or inactive markets for identical or similar instruments or model-derived valuations whose inputs are observable. Where model-derived valuations are appropriate, we use the applicable credit spread as the discount rate. Credit risk related to derivative financial instruments is considered minimal and is managed by requiring high credit standards for counterparties and through periodic settlements of positions.

The fair value of our contingent consideration liability to the seller of DTECH is revalued to its fair value each period and any increase or decrease is recorded into selling, general and administrative expense. Any changes in the assumed timing and amount of the probability of payment scenarios could impact the fair value. The fair value of the contingent consideration was estimated using a real options approach. Each annual payment was modeled using a portfolio of long and short digital options written on the underlying earnings metric (revenue or gross profit). The strike price for each option is the respective earnings threshold as specified in the agreement, and the spot price is calibrated to the revenue and gross profit forecast by calculating the present value of the corresponding projected earnings metric using a risk-adjusted discount rate. The volatility for the underlying earnings metrics was estimated to be 22% based on analysis of comparable guideline public companies. The risk-free rate was selected based on the quoted yields for U.S. Treasury securities with terms matching the earn-out payment period. The inputs to this model are significant unobservable inputs and therefore represent Level 3 measurements within the fair value hierarchy. Significant judgment is employed in determining the appropriateness of these assumptions as of the acquisition date and each subsequent period. Accordingly, changes in the assumptions described above can materially impact the amount of contingent consideration expense we record in any period. From December 16, 2014, the date of acquisition of DTECH, through September 30, 2015 the following table summarizes the change in fair value of our Level 3 contingent consideration liability (in thousands):

Balance as of December 16, 2014	$	3,900
Total remeasurement recognized in earnings	3,607

Balance as of September 30, 2015	$	7,507

The following table presents assets and liabilities measured and recorded at fair value on our balance sheets on a recurring basis (in thousands):

	September 30, 2015								September 30, 2014
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Total
Assets
Cash equivalents	$	68,194	$	—	$	—	$	68,194	$	46,183	$	10,150	$	56,333
Marketable securities	—		30,533		—		30,533		—		25,557		25,557
Current derivative assets	—		11,543		—		11,543		—		7,389		7,389
Noncurrent derivative assets	—		13,909		—		13,909		—		5,920		5,920
Marketable securities in rabbi trust	992		—		—		992		—		—		—

Total assets measured at fair value	69,186		55,985		—		125,171		46,183		49,016		95,199

Liabilities
Current derivative liabilities	—		9,370		—		9,370		—		6,645		6,645
Noncurrent derivative liabilities	—		13,909		—		13,909		—		5,878		5,878
Current contingent consideration to seller of DTECH	—		—		5,000		5,000		—		—		—
Noncurrent contingent consideration to seller of DTECH	—		—		2,507		2,507		—		—		—

Total liabilities measured at fair value	$	—	$	23,279	$	7,507	$	30,786	$	—	$	12,523	$	12,523

In fiscal 2015, we determined that $10.2 million of cash equivalents and $25.6 million of marketable securities were erroneously classified as Level 1 measurements within the table presenting assets and liabilities recorded at fair value on a recurring basis as of September 30, 2014. We have determined the affected assets should have been classified as Level 2 measurements within the disclosure. Based upon a quantitative and qualitative assessment of this error we have determined that this error was not material to our Consolidated Financial Statements, and we have corrected the classification in the September 30, 2014 footnote disclosure in the accompanying Consolidated Financial Statements.

We carry certain financial instruments, including accounts receivable, short-term borrowings, accounts payable and accrued liabilities at cost, which we believe approximates fair value because of the short-term maturity of these instruments.

The fair value of long-term debt is calculated by discounting the value of the note based on market interest rates for similar debt instruments, which is a Level 2 technique. The following table presents the estimated fair value and carrying value of our long-term debt (in millions):

September 30,	2015		2014

Fair value	$	125.8	$	99.9
Carrying value	126.7		102.4

Due to the impairment of goodwill for the CGD Services reporting unit at July 1, 2013, the goodwill for CGD Services was measured at its estimated fair value at July 1, 2013. We estimated the fair value of the goodwill primarily based on the discounted projected cash flows of the underlying CGD Services operations and based upon market multiples from publicly traded comparable companies, which are Level 3 fair value measurement techniques. See Note 7 for a further discussion of the 2013 goodwill impairment. We did not have any significant non-financial assets or liabilities measured at fair value on a non-recurring basis in 2015, 2014, or 2013 except for the CGD Services goodwill at July 1, 2013 and the fair value of assets and liabilities acquired in business acquisitions.

- 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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