INSULET CORP - 10-Q filing on 2016-11-04

Fair Value Measurements

9 Months Ended

Sep. 30, 2016

The Company adopted the FASB Accounting Standards Codification (“ASC”) 820, Fair Value Measurements and Disclosures (“ASC 820”) related to the fair value measurement of certain of its assets and liabilities. ASC 820 defines fair value as the 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 on the measurement date. A single estimate of fair value results from a complex series of judgments about future events and uncertainties and relies heavily on estimates and assumptions. When estimating fair value, depending on the nature and complexity of the asset or liability, the Company may use one or all of the following approaches:


•	Market approach, which is based on market prices and other information from market transactions involving identical or comparable assets or liabilities.


•	Cost approach, which is based on the cost to acquire or construct comparable assets less an allowance for functional and/or economic obsolescence.


•	Income approach, which is based on the present value of the future stream of net cash flows.

To measure fair value, the Company uses the following fair value hierarchy based on three levels of inputs, as described in ASC 820, of which the first two are considered observable and the last unobservable:

Level 1 — quoted prices in active markets for identical assets or liabilities

Level 2 — observable inputs other than quoted prices in active markets for identical assets or liabilities

Level 3 — unobservable inputs in which there is little or no market data available, which require the reporting entity to develop its own assumptions

Certain of the Company’s financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and other liabilities are carried at cost, which approximates their fair value because of the short-term maturity of these financial instruments.

The following table provides a summary of assets that are measured at fair value as of September 30, 2016, and December 31, 2015, aggregated by the level in the fair value hierarchy within which those measurements fall (in thousands):



	Fair Value Measurements
	Total		Level 1		Level 2		Level 3
September 30, 2016
Recurring fair value measurements:
Cash equivalents:
Money market mutual funds	$	200,355	$	200,355	$	—	$	—
Corporate bonds	1,900		—		1,900		—
Certificates of deposit	445		445		—		—
Total cash equivalents	$	202,700	$	200,800	$	1,900	$	—
Short-term investments:
U.S. government and agency bonds	$	29,032	$	15,018	$	14,014	$	—
Corporate bonds	25,540		—		25,540		—
Certificates of deposit	12,721		12,721		—		—
Total short-term investments	$	67,293	$	27,739	$	39,554	$	—

December 31, 2015
Recurring fair value measurements:
Cash equivalents:
Money market mutual funds	$	98,223	$	98,223	$	—	$	—
Non-recurring fair value measurements:
Long-term assets of discontinued operations ⁽¹⁾	$	1,788	$	—	$	—	$	1,788

⁽¹⁾

Long-term assets of discontinued operations relate to the asset group of the Neighborhood Diabetes business which consists of definite lived intangible assets and property and equipment. During the fourth quarter of 2015, the Company recognized an impairment charge on this asset group totaling $9.1 million, which represented the difference between the fair value of the asset group and the carrying value. As a result of the impairment, the asset group was recorded at fair value as of December 31, 2015. The fair value for the asset group was determined using the direct cash flows expected to be received from the disposition of the asset group, which was completed in February 2016 (level 3 input).

Debt

The estimated fair value of debt is based on the Level 2 quoted market prices for the same or similar issues and includes the impact of the conversion features.

The carrying amounts, net of unamortized discounts and issuance costs, and the estimated fair values of the Company's convertible debt as of September 30, 2016, and December 31, 2015, are as follows (in thousands):



	September 30, 2016				December 31, 2015
	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
2% Convertible Senior Notes	$	59,058	$	73,832	$	171,698	$	207,882

1.25% Convertible Senior Notes	$	269,904	$	339,163	$	—	$	—