Fair Value Measurements

9 Months Ended

Sep. 30, 2018

Fair Value Measurements. Our financial assets and (liabilities) carried at fair value measured on a recurring basis as of September 30, 2018 and December 31, 2017, consisted of the following (in thousands):


			Fair Value Measurements Using
	Total Fair		Quoted prices in		Significant other		Significant
	Value at		active markets		observable inputs		unobservable inputs
Description	September 30, 2018		(Level 1)		(Level 2)		(Level 3)

Interest rate contracts ⁽¹⁾	$	8,284	$	—	$	8,284	$	—
Foreign currency contract assets, current and long-term ⁽²⁾	$	1,334	$	—	$	1,334	$	—
Foreign currency contract liabilities, current and long-term ⁽³⁾	$	(771)	$	—	$	(771)	$	—

			Fair Value Measurements Using
	Total Fair		Quoted prices in		Significant other		Significant
	Value at		active markets		observable inputs		unobservable inputs
Description	December 31, 2017		(Level 1)		(Level 2)		(Level 3)

Interest rate contracts ⁽¹⁾	$	5,749	$	—	$	5,749	$	—
Foreign currency contract assets, current and long-term ⁽²⁾	$	621	$	—	$	621	$	—
Foreign currency contract liabilities, current and long-term ⁽³⁾	$	(1,391)	$	—	$	(1,391)	$	—

(1) The fair value of the interest rate contracts is determined using Level 2 fair value inputs and is recorded as other assets or other long-term obligations in the consolidated balance sheets.

(2) The fair value of the foreign currency contract assets (including those designated as hedging instruments and those not designated as hedging instruments) is determined using Level 2 fair value inputs and is recorded as prepaid expenses and other assets or other long-term assets in the consolidated balance sheets.

(3) The fair value of the foreign currency contract liabilities (including those designated as hedging instruments and those not designated as hedging instruments) is determined using Level 2 fair value inputs and is recorded as accrued expenses or other long-term obligations in the consolidated balance sheets.

Certain of our business combinations involve the potential for the payment of future contingent consideration, generally based on a percentage of future product sales or upon attaining specified future revenue milestones. See Note 5 for further information regarding these acquisitions. The contingent consideration liability is re-measured at the estimated fair value each reporting period with the change in fair value recognized within operating expenses in the accompanying consolidated statements of income. We measure the initial liability and re-measure the liability on a recurring basis using Level 3 inputs as defined under authoritative guidance for fair value measurements. Changes in the fair value of our contingent consideration liability during the three and nine-month periods ended September 30, 2018 and 2017, consisted of the following (in thousands):


	Three Months Ended September 30,						Nine Months Ended September 30,
	2018		2017		2018		2017
Beginning balance	$	10,912	$	5,572	$	10,956	$	683
Contingent consideration liability recorded as the result of acquisitions (see Note 5)	—		5,500		—		10,400
Fair value adjustments recorded to income during the period	(828)		20		(741)		39
Contingent payments made	(53)		(15)		(184)		(45)
Ending balance	$	10,031	$	11,077	$	10,031	$	11,077

As of September 30, 2018, approximately $9.8 million in contingent consideration liability was included in other long-term obligations and approximately $280,000 was included in accrued expenses in our consolidated balance sheet. As of December 31, 2017, approximately $10.7 million in contingent consideration liability was included in other long-term obligations and $289,000 was included in accrued expenses in our consolidated balance sheet. The cash paid to settle the contingent consideration liability recognized at fair value as of the acquisition date (including measurement-period adjustments) has been reflected as a cash outflow from financing activities in the accompanying consolidated statements of cash flows.

During the year ended December 31, 2016, we sold a cost method investment for cash and for the right to receive additional payments based on various contingent milestones. We determined the fair value of the contingent payments using Level 3 inputs defined under authoritative guidance for fair value measurements, and we recorded a contingent receivable asset, which as of September 30, 2018 and December 31, 2017 had a value of approximately $308,000 and $760,000, respectively. We record any changes in fair value to operating expenses as part of our cardiovascular segment in our consolidated statements of income. During the three and nine months ended September 30, 2018, we recorded a loss on the contingent receivable asset of approximately $167,000 and $299,000, respectively and received payments of approximately $0 and $153,000, respectively. As of September 30, 2018, the contingent receivable asset was included in other receivables as a current asset in our consolidated balance sheet. As of December 31, 2017, approximately $319,000 was included in other long-term assets and approximately $441,000 was included in other receivables as a current asset in our consolidated balance sheet.

The recurring Level 3 measurement of our contingent consideration liability and contingent receivable includes the following significant unobservable inputs at September 30, 2018 and December 31, 2017 (amounts in thousands):

Contingent consideration asset or liability

Fair Value at
September 30, 2018

Valuation technique

Unobservable inputs

Range

Revenue-based payments

10,031

Discounted cash flow

Discount rate

9.9% - 15%

contingent liability

Projected year of payments

2018-2037

Contingent receivable

308

Discounted cash flow

Discount rate

10%

asset

Weighted-average probability of milestone payment

35%

Projected year of payments

2018-2019

Contingent consideration asset or liability

Fair Value at December 31, 2017

Valuation technique

Unobservable inputs

Range

Revenue-based payments

10,956

Discounted cash flow

Discount rate

9.9% - 15%

contingent liability

Probability of milestone payment

100%

Projected year of payments

2018-2037

Contingent receivable

760

Discounted cash flow

Discount rate

10%

asset

Weighted-average probability of milestone payment

75%

Projected year of payments

2018-2019

The contingent consideration liability and contingent receivable are re-measured to fair value each reporting period using projected revenues, discount rates, probabilities of payment, and projected payment dates. Projected contingent payment amounts are discounted back to the current period using a discounted cash flow model. Projected revenues are based on our

most recent internal operational budgets and long-range strategic plans. An increase (decrease) in either the discount rate or the time to payment, in isolation, may result in a significantly lower (higher) fair value measurement. A decrease in the probability of any milestone payment may result in lower fair value measurements. Our determination of the fair value of the contingent consideration liability and contingent receivable could change in future periods based upon our ongoing evaluation of these significant unobservable inputs. We intend to record any such change in fair value to operating expenses in our consolidated statements of income.

During the three and nine-month periods ended September 30, 2018, we had losses of approximately $0 and $86,000, respectively, compared to losses of approximately $67,000 and $86,000 for the three and nine-month periods ended September 30, 2017, respectively, related to the measurement of non-financial assets at fair value on a nonrecurring basis subsequent to their initial recognition (see Note 13).

We believe the carrying amount of cash and cash equivalents, receivables, and trade payables approximate fair value because of the immediate, short-term maturity of these financial instruments. Our long-term debt re-prices frequently due to variable rates and entails no significant changes in credit risk and, as a result, we believe the fair value of long-term debt approximates carrying value. The fair value of assets and liabilities whose carrying value approximates fair value is determined using Level 2 inputs, with the exception of cash and cash equivalents, which are Level 1 inputs.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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