Fair Value Measurements

9 Months Ended

Sep. 30, 2016

Fair Value Measurements. Our financial assets and (liabilities) carried at fair value measured on a recurring basis as of September 30, 2016 and December 31, 2015, 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, 2016			(Level 1)		(Level 2)			(Level 3)

Interest rate contracts (1)	$	(982	)	$	—	$	(982	)	$	—

				Fair Value Measurements Using
	Total Fair			Quoted prices in		Significant other			Significant
	Value at			active markets		observable inputs			unobservable inputs
Description	December 31, 2015			(Level 1)		(Level 2)			(Level 3)

Interest rate contracts (1)	$	2		$	—	$	2		$	—
Foreign currency contracts (2)	$	(278	)	$	—	$	(278	)	$	—

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

(2) The fair value of the foreign currency contracts is determined using Level 2 fair value inputs and is recorded as accrued expenses 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 at 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, 2016 and 2015 consisted of the following (in thousands):



	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
Beginning balance	898			1,949			$	1,024		$	1,886
Contingent consideration liability recorded as the result of acquisitions (see Note 5)	—			270			—			270
Fair value adjustments recorded to income during the period	(193		)	(58		)	(136		)	185
Contingent payments made	(16		)	(14		)	(199		)	(194		)
Ending balance	$	689		$	2,147		$	689		$	2,147

The recurring Level 3 measurement of our contingent consideration liability and contingent receivable includes the following significant unobservable inputs at September 30, 2016 and December 31, 2015 (amounts in thousands):



Contingent consideration liability (asset)	Fair value at September 30, 2016			Valuation technique	Unobservable inputs	Range
Revenue-based payments	$	689		Discounted cash flow	Discount rate	9.9% - 15%
				Discounted cash flow	Probability of milestone payment	100%
					Projected year of payments	2016-2028

Contingent receivable	$	(477	)	Discounted cash flow	Discount rate	10%
				Discounted cash flow	Probability of milestone payment	51%
					Projected year of payments	2016-2019
Contingent consideration liability	Fair value at December 31, 2015			Valuation technique	Unobservable inputs	Range
Revenue-based payments	$	874		Discounted cash flow	Discount rate	5% - 15%
				Discounted cash flow	Probability of milestone payment	100%
					Projected year of payments	2016-2028

Other payments	$	150		Discounted cash flow	Discount rate	—%
				Discounted cash flow	Probability of milestone payment	100%
					Projected year of payments	2016

The contingent consideration liability is 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. Increases (decreases) in discount rates and the time to payment may result in lower (higher) fair value measurements. A decrease in the probability of any milestone payment may result in lower fair value measurements. 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.

Our determination of the fair value of the contingent consideration liability 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 as part of our cardiovascular segment in our consolidated statements of income. As of September 30, 2016, approximately $608,000 was included in other long-term obligations and $81,000 was included in accrued expenses in our consolidated balance sheet. As of December 31, 2015, approximately $775,000 was included in other long-term obligations and $249,000 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 first quarter of 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 the inputs indicated in the table above, and we recorded a contingent receivable asset, which as of September 30, 2016 had a value of approximately $477,000. 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-month periods ended September 30, 2016, we recorded a loss on the contingent receivable of approximately $99,000 and $234,000, respectively. As of September 30, 2016, approximately $337,000 was included in other long-term assets and approximately $140,000 was included in other receivables as a current asset in our consolidated balance sheet.

During the three and nine-month periods ended September 30, 2016, we had losses of approximately $0 and $90,000, compared to $85,000 and $99,000, respectively, for the three and nine-month periods ended September 30, 2015, related to the measurement of non-financial assets at fair value on a nonrecurring basis subsequent to their initial recognition.

The carrying amount of cash and cash equivalents, receivables, and trade payables approximates fair value because of the immediate, short-term maturity of these financial instruments. The carrying amount of long-term debt approximates fair value, as determined by borrowing rates estimated to be available to us for debt with similar terms and conditions. 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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