Fair Value Measurements | 9 Months Ended |
Dec. 31, 2013 |
Fair Value Disclosures [Abstract] | ' |
Fair Value Measurements | ' |
Fair value measurements |
Financial assets and liabilities |
The estimated fair values of financial instruments are determined based on relevant market information. These estimates involve uncertainty and cannot be determined with precision. The Company’s financial instruments consist primarily of cash, cash equivalents, marketable securities, and common stock warrants. In addition, contingent earn-out liabilities resulting from business combinations are recorded at fair value. The following methods and assumptions are used to estimate the fair value of each class of financial assets or liabilities that is valued on a recurring basis. |
Cash and cash equivalents. This includes all cash and liquid investments with an original maturity of three months or less from the date acquired. The carrying amount approximates fair value because of the short maturity of these instruments. Cash equivalents consist of money market funds with original maturity dates of less than three months for which the fair value is based on quoted market prices. The Company’s cash and cash equivalents are held at major commercial banks. |
Marketable securities. The Company’s marketable securities, consisting of U.S. government-sponsored enterprise obligations and various state tax-exempt notes and bonds, are classified as available-for-sale and are carried at fair market value based on quoted market prices. |
Common stock warrants. The Company holds warrants to purchase common stock in an entity that provides technology tools and support services to health care providers, including the Company’s members. The warrants are exercisable for up to 6,015,000 shares of the entity if and as certain performance criteria are met. The warrants meet the definition of a derivative and are carried at fair value in other non-current assets on the accompanying consolidated balance sheets. Gains or losses from changes in the fair value of the warrants are recognized in other income, net on the accompanying consolidated statements of income. See Note 10, “Other non-current assets,” for additional information. The fair value of the warrants is determined using a Black-Scholes-Merton model. Key inputs into this methodology are the estimate of the underlying value of the common shares of the entity that issued the warrants and the estimate of level of performance criteria that will be achieved. The entity that issued the warrants is privately held and the estimate of performance criteria to be met is specific to the Company. These inputs are unobservable and are considered key estimates made by the Company. |
Contingent earn-out liabilities. This class of financial liabilities represents the Company’s estimated fair value of the contingent earn-out liabilities related to acquisitions based on probability assessments of certain performance achievements during the earn-out periods. Contingent earn-out liabilities are included in other long-term liabilities on the accompanying consolidated balance sheets. See Note 3, “Acquisitions,” for additional information. |
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Measurements |
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 or liability in an orderly transaction between market participants at the measurement date. The valuation can be determined using widely accepted valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost). As a basis for applying a market-based approach in fair value measurements, GAAP establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels: |
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• | Level 1—Quoted prices in active markets for identical assets or liabilities. | | | | | | | | | | | | | | |
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• | Level 2—Observable market-based inputs other than Level 1 inputs, such as quoted prices for similar assets or liabilities in active markets; quoted prices for similar or identical assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data. | | | | | | | | | | | | | | |
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• | Level 3—Unobservable inputs that are supported by little or no market activity, such as discounted cash flow methodologies. | | | | | | | | | | | | | | |
Assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurements. The Company reviews the fair value hierarchy classification on a quarterly basis. Changes in the observability of valuation inputs may result in a reclassification of levels for certain securities within the fair value hierarchy. There were no significant transfers between Level 1, Level 2, or Level 3 during the nine months ended December 31, 2013 or 2012. |
The Company’s financial assets and liabilities subject to fair value measurements on a recurring basis and the necessary disclosures are as follows (in thousands): |
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| Fair value | | Fair value measurement as of December 31, 2013 |
as of December 31, | using fair value hierarchy |
| 2013 | | Level 1 | | Level 2 | | Level 3 |
Financial assets | | | | | | | |
Cash and cash equivalents (1) | $ | 52,717 | | | $ | 52,717 | | | $ | — | | | $ | — | |
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Available-for-sale marketable securities (2) | 138,742 | | | — | | | 138,742 | | | — | |
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Common stock warrants (3) | 550 | | | — | | | — | | | 550 | |
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Financial liabilities | | | | | | | |
Contingent earn-out liabilities (4) | 12,800 | | | — | | | — | | | 12,800 | |
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| Fair value | | Fair value measurement as of March 31, 2013 |
as of March 31, | using fair value hierarchy |
| 2013 | | Level 1 | | Level 2 | | Level 3 |
Financial assets | | | | | | | |
Cash and cash equivalents (1) | $ | 57,829 | | | $ | 57,829 | | | $ | — | | | $ | — | |
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Available-for-sale marketable securities (2) | 156,839 | | | — | | | 156,839 | | | — | |
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Common stock warrants (3) | 550 | | | — | | | — | | | 550 | |
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Financial liabilities | | | | | | | |
Contingent earn-out liabilities (4) | 15,200 | | | — | | | — | | | 15,200 | |
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-1 | Fair value is based on quoted market prices. | | | | | | | | | | | | | | |
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-2 | Fair value is determined using quoted market prices of the assets. For further detail, see Note 5, “Marketable securities.” The Company changed the classification of its marketable securities from Level 1 to Level 2 within the fair value hierarchy as of December 31, 2013. The investments affected by this change are U.S. government-sponsored securities and tax exempt obligations of states that do not have observable prices in active markets. The Company concluded that these investments are more appropriately classified as Level 2 within the fair value hierarchy. The March 31, 2013 classification has been changed to conform. The impact of this change is immaterial and has no effect on the previously reported consolidated statements of income, stockholders' equity, cash flows or balance sheets. | | | | | | | | | | | | | | |
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-3 | The fair value of the common stock warrants as of December 31, 2013 and March 31, 2013 was calculated to be $0.49 per share using a Black-Scholes-Merton model. The significant assumptions as of December 31, 2013 were as follows: risk-free interest rate of 1.7%; expected term of 5.46 years; expected volatility of 40.95%; dividend yield of 0.0%; weighted average share price of $1.12 per share; and expected warrants to become exercisable of approximately 1,117,000 shares. The significant assumptions as of March 31, 2013 were as follows: risk-free interest rate of 1.0%; expected term of 6.22 years; expected volatility of 39.38%; dividend yield of 0.0%; weighted average share price of $1.00 per share; and expected warrants to become exercisable of approximately 1,400,000 shares. | | | | | | | | | | | | | | |
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-4 | This fair value measurement is based on unobservable inputs that are supported by little or no market activity and reflect the Company’s own assumptions in measuring fair value using the income approach. In developing these estimates, the Company considered certain performance projections, historical results, and general macroeconomic environment and industry trends. | | | | | | | | | | | | | | |
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Common stock warrants |
The Company’s fair value estimate of the common stock warrants received in connection with its June 2009 investment was zero as of the investment date. Changes in the fair value of the common stock warrants subsequent to the investment date are recognized in earnings in the periods during which the estimated fair value changes. The change in the fair value of the common stock warrants during the nine months ended December 31, 2012 was attributable primarily to a slight decrease in the estimated performance targets that will be achieved. The following table represents a reconciliation of the change in the fair value of the common stock warrants for the three and nine months ended December 31, 2013 and 2012 (in thousands): |
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| Three Months Ended | | Nine Months Ended |
December 31, | December 31, |
| 2013 | | 2012 | | 2013 | | 2012 |
Beginning balance | $ | 550 | | | $ | 340 | | | $ | 550 | | | $ | 450 | |
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Fair value change in common stock warrants (1) | — | | | — | | | — | | | (110 | ) |
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Ending balance | $ | 550 | | | $ | 340 | | | $ | 550 | | | $ | 340 | |
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-1 | Amounts were recognized in other income, net on the accompanying consolidated statements of income. | | | | | | | | | | | | | | |
Contingent earn-out liabilities |
The Company entered into an earn-out agreement in connection with its acquisition of Southwind Health Partners, L.L.C. and Southwind Navigator, LLC (together, “Southwind”) on December 31, 2009. The additional contingent payments, which have no maximum, become due and payable to the former owners of the Southwind business if certain milestones are met over the evaluation periods beginning at the acquisition date and extending through December 31, 2014. The fair value of the Southwind earn-out liability is impacted by changes in estimates regarding expected operating results, changes in the valuation of the Company’s stock price, and an applied discount rate, which was 15% as of December 31, 2013. The Company’s fair value estimate of the Southwind earn-out liability was $5.6 million as of the date of acquisition. On October 31, 2012, the Company transferred 112,408 shares of its common stock to the former owners of Southwind to satisfy the component of the contingent obligation payable in the Company’s common stock, which reduced the related earn-out liability by $5.4 million. As of December 31, 2013, $14.7 million had been earned and paid in cash and shares to the former owners of the Southwind business. As of December 31, 2013, based on current facts and circumstances, the estimated aggregate fair value of the remaining contingent obligation was $10.3 million, which will be paid at various intervals, if earned, over evaluation periods which extend through December 31, 2014. |
The Company entered into an earn-out agreement in connection with its acquisition of PivotHealth, LLC (“PivotHealth”) on August 1, 2011. The additional contingent cash payments, which have no guaranteed minimum or maximum, will become due and payable to the former owner of the PivotHealth business if certain revenue targets are achieved over evaluation periods beginning at the acquisition date and extending through December 31, 2014. The Company’s fair value estimate of the PivotHealth earn-out liability was $2.9 million as of the date of acquisition. The estimated aggregate fair value of the contingent obligation for PivotHealth as of December 31, 2013 was $0. The fair value of the PivotHealth earn-out liability is impacted by changes in estimates regarding expected operating results as of December 31, 2013. |
The Company’s fair value estimate of the 360Fresh earn-out liability, which is payable in cash, was $2.5 million as of the date of acquisition. The estimated aggregate fair value of the contingent obligation for 360Fresh as of December 31, 2013 was $2.5 million. The fair value of the 360Fresh earn-out liability is impacted by changes in estimates regarding expected operating results and a discount rate, which was 19.0% as of December 31, 2013. See Note 3, “Acquisitions,” for additional information regarding the 360Fresh acquisition and related earn-out liability. |
Changes in the fair value of the contingent earn-out liabilities subsequent to the acquisition date, including changes arising from events that occurred after the acquisition date, such as changes in the Company’s estimate of performance achievements, discount rates, and stock price, are recognized in earnings in the periods during which the estimated fair value changes. The following table represents a reconciliation of the change in the contingent earn-out liabilities for the three and nine months ended December 31, 2013 and 2012 (in thousands): |
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| Three Months Ended | | Nine Months Ended |
December 31, | December 31, |
| 2013 | | 2012 | | 2013 | | 2012 |
Beginning balance | $ | 13,200 | | | $ | 21,500 | | | $ | 15,200 | | | $ | 20,200 | |
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Fair value change in Southwind contingent earn-out liability (1) | 400 | | | 500 | | | 800 | | | 3,300 | |
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Fair value change in Cielo MedSolutions, LLC contingent earn-out liability (1) | — | | | 300 | | | — | | | 400 | |
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Fair value change in PivotHealth contingent earn-out liability (1) | — | | | 100 | | | (1,000 | ) | | (300 | ) |
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Fair value change in 360Fresh contingent earn-out liability (1) | (400 | ) | | — | | | — | | | — | |
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Southwind earn-out payment | (400 | ) | | (9,400 | ) | | (2,200 | ) | | (10,600 | ) |
Cielo earn-out payment | — | | | (1,700 | ) | | — | | | (1,700 | ) |
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Addition of 360Fresh contingent earn-out liability | — | | | 2,500 | | | — | | | 2,500 | |
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Ending balance | $ | 12,800 | | | $ | 13,800 | | | $ | 12,800 | | | $ | 13,800 | |
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-1 | Amounts were recognized in cost of services on the accompanying consolidated statements of income. | | | | | | | | | | | | | | |
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Non-recurring fair value measurements |
During the nine months ended December 31, 2013, the Company recognized a gain of $4.0 million on the conversion of notes receivable from Evolent Health, Inc. into Series B convertible preferred stock of Evolent Health LLC. See Note 8, “Investments in and advances to unconsolidated entities,” for additional information. The amount of the gain was based on the excess of the fair value of the Series B convertible preferred stock received over the carrying value of the notes receivable exchanged. The fair value of the Series B convertible preferred stock used to calculate the gain was determined by reference to the per share price of issuances of the Series B convertible preferred stock by Evolent Health LLC to a third party at the same time as the Company exchanged its notes receivable. As this transaction was not made in an active market, this measure is considered a Level 2 fair value measurement. |
Non-financial assets and liabilities |
Certain assets and liabilities are not measured at fair value on an ongoing basis but instead are measured at fair value on a non-recurring basis, so that such assets and liabilities are subject to fair value adjustments in certain circumstances (e.g., when there is evidence of impairment). During the nine months ended December 31, 2013 and 2012, no fair value adjustments or material fair value measurements were required for non-financial assets or liabilities. |