Fair Value Measurements

3 Months Ended

Mar. 31, 2022

Fair Value Disclosures [Abstract]

Fair Value Measurements

Note 4. Fair Value Measurements

We review the fair value hierarchy classification on a quarterly basis. Changes in the ability to observe valuation inputs may result in a reclassification of levels for certain securities within the fair value hierarchy. There were no transfers between Level 1, Level 2, or Level 3 during the three months ended March 31, 2022 and 2021.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following tables provide information by level for assets and liabilities that are measured at fair value on a recurring basis (in thousands):

	Fair Value as of March 31, 2022		Fair Value Measurements Using Inputs Considered as:
			Level 1		Level 2		Level 3
Assets:
Derivative assets - designated as cash flow hedges (foreign currency exchange rate “FX”)	$	262	$	—	$	262	$	—
Derivative assets - freestanding instruments (FX)	21		—		21		—
Derivative assets - capped call derivatives	96,717		—		—		96,717
Convertible notes receivable	2,770		—		—		2,770
	$	99,770	$	—	$	283	$	99,487
Liabilities:
Derivative liabilities - designated as cash flow hedges (FX)	$	1,946	$	—	$	1,946	$	—
Derivative liabilities - freestanding instruments (FX)	183		—		183		—
Derivative liabilities - embedded exchange feature	170,660		—		—		170,660
Contingent consideration arrangements	94,609		—		—		94,609
	$	267,398	$	—	$	2,129	$	265,269

	Fair Value as of December 31, 2021		Fair Value Measurements Using Inputs Considered as:
			Level 1		Level 2		Level 3
Assets:
Derivative assets - designated as cash flow hedges (foreign currency exchange rate “FX”)	$	243	$	—	$	243	$	—
Derivative assets - freestanding instruments (FX)	61		—		61		—
Derivative assets - capped call derivatives	106,629		—		—		106,629
Convertible notes receivable	2,767		—		—		2,767
	$	109,700	$	—	$	304	$	109,396
Liabilities:
Derivative liabilities - designated as cash flow hedges (FX)	$	1,286	$	—	$	1,286	$	—
Derivative liabilities - freestanding instruments (FX)	427		—		427		—
Derivative liabilities - embedded exchange feature	181,700		—		—		181,700
Contingent consideration arrangements	98,382		—		—		98,382
	$	281,795	$	—	$	1,713	$	280,082

The following table provides a reconciliation of the beginning and ending balances of our recurring fair value measurements, using significant unobservable inputs (Level 3) (in thousands):

	Capped Call Derivative Asset		Convertible Notes Receivable		Embedded Exchange Feature Derivative Liability		Contingent Consideration Liability Arrangements
As of December 31, 2021	$	106,629	$	2,767	$	181,700	$	98,382
Changes in fair value	(9,912)		3		(11,040)		(3,773)
Total at March 31, 2022	96,717		2,770		170,660		94,609
Less current portion at March 31, 2022	—		2,495		—		11,268
Long-term portion at March 31, 2022	$	96,717	$	275	$	170,660	$	83,341

Embedded Exchange Feature and Capped Call Derivatives

In June 2020, the Company issued $287.5 million in cash exchangeable senior notes and entered into related capped call transactions. The cash exchangeable senior notes include an embedded exchange feature that is bifurcated from the cash exchangeable senior notes. Please refer to “Note 5. Financing Arrangements” for further details. The embedded exchange feature derivative is measured at fair value using a binomial lattice model and discounted cash flows that utilize observable and unobservable market data. The capped call derivative is measured at fair value using the Black-Scholes model utilizing observable and unobservable market data, including stock price, remaining contractual term, expected volatility, risk-free interest rate and expected dividend yield, as applicable.

The embedded exchange feature and capped call derivatives are classified as Level 3 as the Company uses historical volatility and implied volatility from options traded to determine expected stock price volatility which is an unobservable input that is significant to the valuation. In general, an increase in our stock price or stock price volatility would increase the fair value of the embedded exchange feature and capped call derivatives which would result in an increase in expense. As time to the expiration of the derivatives decreases, the fair value of the derivatives would decrease. The future impact on net income depends on how significant inputs such as stock price, stock price volatility and time to the expiration of the derivatives change in relation to other inputs. Changes in the fair value of the embedded exchange feature derivative and capped call derivatives are recognized in foreign exchange and other gains/(losses) in the condensed consolidated statements of income (loss).

The stock price volatility as of March 31, 2022 was 36%. As of March 31, 2022, a 10% lower volatility, holding other inputs constant, would result in approximate fair value for the embedded exchange feature derivative of $154.5 million and a 10% higher volatility, holding other inputs constant, would result in approximate fair value of $188.2 million. As of March 31, 2022, a 10% lower volatility, holding other inputs constant, would result in approximate fair value for the capped call derivatives of $107.4 million and a 10% higher volatility, holding other inputs constant, would result in approximate fair value of $87.4 million.

Contingent Consideration Arrangements

The following table provides the fair value of our Level 3 contingent consideration arrangements by acquisition (in thousands):

	March 31, 2022		December 31, 2021
ImThera	$	83,341	$	86,830
TandemLife	11,268		11,552
	$	94,609	$	98,382

The ImThera business combination involved contingent consideration arrangements composed of potential cash payments upon the achievement of a certain regulatory milestone and a sales-based earnout associated with sales of products. The sales-based earnout is valued using projected sales from our internal strategic plan. Both arrangements are Level 3 fair value measurements and include the following significant unobservable inputs as of March 31, 2022:

ImThera Acquisition	Valuation Technique	Unobservable Input	Inputs
Regulatory milestone-based payment	Discounted cash flow	Discount rate	5.3%
		Probability of payment	85%
		Projected payment year	2024
Sales-based earnout	Monte Carlo simulation	Risk-adjusted discount rate	13.9%
		Credit risk discount rate	5.5%	-	6.2%
		Revenue volatility	32.5%
		Probability of payment	85%
		Projected years of earnout	2025	-	2028

The TandemLife business combination involved a contingent consideration arrangement composed of potential cash payments upon the achievement of certain regulatory milestones. The arrangement is a Level 3 fair value measurement and includes the following significant unobservable inputs as of March 31, 2022:

TandemLife Acquisition	Valuation Technique	Unobservable Input	Inputs
Regulatory milestone-based payment	Discounted cash flow	Discount rate	4.9%
		Probability of payment	90%
		Projected payment year	2023