Innovex International, Inc. Fair Value Disclosure
4. Fair Value Measurements
As of December 31, 2023, the Company’s Level 3 instruments consist of contingent purchase consideration liabilities related to the acquisition of Great North (Note 3). The fair value of such earn-out liabilities is generally determined using a Monte Carlo Simulation that includes significant inputs that are not observable. Significant inputs include management's estimate of revenue and other market inputs, including expected revenue volatility (6.7%) and a revenue discount rate (8.4%). The fair value of certain earn-out liabilities is derived using the estimated probability of success of achieving the earn-out periods discounted to present value. The fair value of contingent consideration liabilities is remeasured at each reporting period at the estimated fair value based on the inputs on the date of remeasurement, with the change in fair value recognized in “Change in fair value of earn-out liability” on the consolidated statements of income.
The Company’s contingent consideration measured at fair value for the periods presented are as follows (in thousands):
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December 31, 2023 |
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December 31, 2022 |
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Total |
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Level 1 |
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Level 2 |
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Level 3 |
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Total |
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Level 1 |
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Level 2 |
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Level 3 |
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Liability: |
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Contingent consideration (1) |
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$ |
1,208 |
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- |
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- |
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$ |
1,208 |
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$ |
- |
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- |
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- |
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- |
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Total liabilities |
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$ |
1,208 |
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$ |
- |
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$ |
- |
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$ |
1,208 |
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$ |
- |
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$ |
- |
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$ |
- |
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$ |
- |
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(1) As of December 31, 2023, contingent consideration includes certain amounts in other long-term liabilities on the Company’s consolidated balance sheets.
The following table provides a reconciliation of changes in the fair value of the Company’s earn-out liabilities associated with the Company’s acquisition measured at fair value for the twelve months ended December 31, 2023, 2022, and 2021 (in thousands):
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Twelve Months Ended |
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2023 |
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2022 |
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2021 |
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Beginning period balance |
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$ |
- |
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$ |
- |
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$ |
- |
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Additions to contingent consideration |
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3,571 |
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- |
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- |
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Payments of contingent consideration |
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- |
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- |
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- |
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Fair value adjustment of earn-out liabilities |
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(2,341 |
) |
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- |
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- |
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Currency translation adjustment |
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(22 |
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- |
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- |
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Ending period balance |
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$ |
1,208 |
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$ |
- |
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$ |
- |
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About Fair Value Disclosures
Fair value disclosures classify all assets and liabilities measured at fair value into a three-level hierarchy: Level 1 (quoted market prices), Level 2 (observable inputs like yield curves), and Level 3 (unobservable inputs requiring management estimates). The proportion of Level 3 assets directly reflects how much of the balance sheet depends on internal models rather than market evidence.
Key signals: a growing Level 3 balance relative to total fair-value assets increases valuation uncertainty and earnings volatility risk. Watch for transfers between levels — assets moving from Level 2 to Level 3 often signal deteriorating market liquidity. Unrealized gains and losses on Level 3 positions flow through earnings or other comprehensive income, so large swings deserve scrutiny. For financial institutions, examine the sensitivity disclosures that show how Level 3 valuations change under alternative assumptions. Compare the fair value of debt against its carrying amount to gauge hidden leverage.