8. Fair value

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. We use a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value:

Level 1 – Quoted prices in active markets for identical assets or liabilities.

Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The following table provides the assets and liabilities carried at fair value measured on a recurring basis at July 31, 2017 and 2016:

Cash, Cash Equivalents, and Marketable Securities

The following tables summarize the company’s cash, cash equivalent and marketable securities by significant investment categories recorded as cash and cash equivalents, short-term marketable securities, and long-term marketable securities as of July 31, 2017, and cash and cash equivalents as of July 31, 2016:

	Fair Value Measurement as of July 31, 2017
(in millions)	Adjusted Cost		Unrealized Gains		Unrealized Losses			Fair Value		Cash and Cash Equivalents		Marketable Securities
Cash	$	46.7	$	-	$	-		$	46.7	$	46.7	$	-
Level 1:
Money market funds		38.4		-		-			38.4		38.4		-
Subtotal	$	85.1	$	-	$	-		$	85.1	$	85.1	$	-
Level 2:
U.S. Treasury securities	$	10.0	$	-	$	-		$	10.0	$	10.0	$	-
U.S. agency securities		7.0		-		-			7.0		7.0		-
Non-U.S. government securities		3.9		-		-			3.9		-		3.9
Commercial paper		30.1		-		-			30.1		27.2		2.9
Corporate securities		28.0		-		(0.01	)		28.0		-		28.0
Asset-backed securities		10.2		-		-			10.2		-		10.2
Subtotal	$	89.2	$	-	$	(0.01	)	$	89.2	$	44.2	$	45.0
Total	$	174.3	$	-	$	(0.01	)	$	174.3	$	129.3	$	45.0

	Fair Value Measurement as of July 31, 2016
(in millions)	Adjusted Cost		Unrealized Gains		Unrealized Losses		Fair Value		Cash and Cash Equivalents
Cash	$	52.7	$	-	$	-	$	52.7	$	52.7
Level 1:
Money market funds		66.0		-		-		66.0		66.0
Total	$	118.7	$	-	$	-	$	118.7	$	118.7

During the year ended July 31, 2017, we did not recognize any other-than-temporary impairment losses. The contractual maturities of the Company’s long-term marketable securities generally range from one to five years. During the year ended July 31, 2016, we did not have investments in marketable securities.

Plan assets for deferred compensation	As of		As of
	July 31,		July 31,
(in millions)	2017		2016
Level 1:
Plan assets for deferred compensation		4.7		5.9
Total	$	4.7	$	5.9

Assets held in the deferred compensation plans will be used to pay benefits under our non-qualified deferred compensation plans. The investments primarily consist of mutual funds which are publicly traded on stock exchanges. Accordingly, the fair value of these assets is categorized as Level 1 within the fair value hierarchy.

Foreign currency forward contracts	As of		As of
	July 31,		July 31,
(in millions)	2017		2016
Level 2:
Foreign currency forward contracts asset		0.6		-
Foreign currency forward contracts liability		-	0.3
Total	$	0.6	$	0.3

The fair value of the liabilities arising from our foreign currency forward contracts is determined by valuation models based on market observable inputs, including forward and spot prices for currencies. Accordingly, the fair value of these liabilities is categorized as Level 2 within the fair value hierarchy.

Contingent consideration	As of		As of
	July 31,		July 31,
(in millions)	2017		2016
Level 3:
Contingent consideration liability		-		12.2
Total	$	-	$	12.2

The fair value of our contingent consideration obligation is based on significant unobservable inputs, including management estimates and assumptions, and is measured based on the probability-weighted present value of the payments expected to be made. Accordingly, the fair value of this liability is categorized as Level 3 within the fair value hierarchy.

The fair value of the contingent payments associated with the acquisition of PocketSonics, Inc., or PocketSonics, was calculated utilizing 100% probability for the earn out associated with the Section 510(k) clearance obtained from the Food and Drug Administration, or FDA, on April 9, 2014 and the first commercial shipment as defined in the purchase agreement, in the fiscal year ending July 31, 2016, or fiscal year 2016. Each quarter we revalue the contingent consideration obligations associated with the acquisition of PocketSonics to its then current fair value and record changes in the fair value to the Consolidated Statements of Operations. Changes in contingent consideration result from changes in the assumptions regarding probabilities of the estimated timing of launch, volume sales target, payments and the discount rate used to estimate the fair value of the liability. The assumptions used in estimating fair value require significant judgment. The use of different assumptions and judgments could result in a materially different estimate of fair value. There was no change in the fair value of our contingent consideration obligation in fiscal year 2017. We paid out the $2.0 million contingent liability in the third quarter of fiscal 2017. Please refer to Note 3. Business combination in our Annual Report on Form 10-K for fiscal year 2016, as filed with the SEC on September 27, 2016 for more information on the acquisition of PocketSonics.

The fair value of the contingent payment obligation associated with the acquisition of Oncura was valued using a Monte Carlo simulation. The fair value of the contingent payment obligation of Oncura will be revalued each quarter to its then fair value and we will record changes in the fair value as contingent consideration expense within our Consolidated Statement of Operations within general and administrative operating expenses. Changes in contingent consideration expense result from changes in the assumptions regarding probabilities of the estimated future sales volume and gross margin targets and the discount rate used to estimate the fair value of the liability. The assumptions used in estimating the fair value require significant judgment. The use of different assumptions and judgments could result in a different estimate of fair value. There was a $10.2 million decrease in the fair value of our contingent consideration obligation in fiscal 2017, due to revisions in our forecasted revenues of the Oncura business, which reduced the amount of contingent consideration we expect to pay. As of July 31, 2017, the fair value of the contingent consideration obligation associated with the Oncura acquisition was $0.0 million. For more information on the acquisition of Oncura, please refer to Note 3. Business combination.

The following are reconciliations of the changes in the fair value of contingent consideration in fiscal years 2017 and 2016:

	For the Year ended
	July 31,
(in millions)	2017			2016
Beginning Balance	$	12.2		$	2.0
Acquisition - Oncura		-			10.1
Change in fair value		(10.2	)		0.1
Payments		(2.0	)		-
Ending Balance	$	-		$	12.2