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SEC Filings

10-Q
LIQUIDITY SERVICES INC filed this Form 10-Q on 05/08/2015
Entire Document
 

Table of Contents

 

Liquidity Services, Inc. and Subsidiaries

Notes to the Unaudited Consolidated Financial Statements — (Continued)

 

9.                                      Fair Value Measurement

 

The Company measures and records in the accompanying consolidated financial statements certain liabilities at fair value on a recurring basis. Authoritative guidance issued by the FASB establishes a fair value hierarchy for those instruments measured at fair value that distinguishes between assumptions based on market data (observable inputs) and the Company’s assumptions (unobservable inputs).  The hierarchy consists of three levels:

 

Level 1

 

Quoted market prices in active markets for identical assets or liabilities;

Level 2

 

Inputs other than Level 1 inputs that are either directly or indirectly observable; and

Level 3

 

Unobservable inputs developed using estimates and assumptions developed by the Company, which reflect those that a market participant would use.

 

As of March 31, 2015 and September 30, 2014, the Company had no Level 1 or Level 2 assets or liabilities that were recorded at fair value on a recurring basis. As of March 31, 2015 and September 30, 2014, the Company’s liability for contingent consideration related to the acquisition of assets and liabilities of National Electronic Service Association (“NESA”) of zero is the only liability measured at fair value on a recurring basis and is classified as Level 3 within the fair value hierarchy.  Under the terms of the agreement, the earn-out is based on EBITDA earned by NESA during the 36-48 months after closing.  EBITDA growth used in the calculation is capped at 20% of prior period.  The Company’s estimate for the total payout ranges from zero to a maximum $37.7 million.  The Company’s estimate of the fair value of the earn-out as of the date of acquisition was $18.0 million.  Based upon revised projections and as a result of unfavorable developments in the business, the Company determined that the fair value of the earn-out as of June 30, 2014 was zero and reversed the liability of $18.6 million.  The Company continues to believe that the fair value of the earn-out is zero as of March 31, 2015.  The changes in liabilities measured at fair value for which the Company has used Level 3 inputs to determine fair value for the year ended September 30, 2014 and the six months ended March 31, 2015 are as follows ($ in thousands):

 

 

 

Level 3
Liabilities

 

Balance at September 30, 2013

 

$

18,390

 

Acquisition contingent consideration

 

 

Settlements

 

 

Change in fair value of contingent consideration

 

(18,390

)

Balance at September 30, 2014

 

 

Acquisition contingent consideration

 

 

Settlements

 

 

Change in fair value of contingent consideration

 

 

Balance at March 31, 2015

 

$

 

 

When valuing its Level 3 liabilities, the Company gives consideration to operating results, financial condition, economic and/or market events, and other pertinent information that would impact its estimate of the expected earn-out payment. The valuation procedures are primarily based on management’s projection of EBITDA for the acquired businesses and the applications of a discount to the expected earn out payments to estimate fair value. Discount rates range from 2.0% to 6.0% and are based on the Company’s cost of borrowing. Changes in the discount rate are not expected to have a material impact on the fair value of these liabilities. Because of the inherent uncertainty, this estimated value may differ significantly from the value that would have been used had a ready market for the liability existed, and it is reasonably possible that the difference could be material. Changes in fair value of the Company’s Level 3 liabilities are recorded in Acquisition Costs in the Consolidated Statements of Operations.

 

The Company’s financial assets not measured at fair value are cash and cash equivalents (which includes cash and commercial paper with original maturities of less than 90 days).  The Company believes the carrying value approximates fair value due to the short term maturity of these instruments.

 

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