Fair Value Measurement (Notes)

12 Months Ended

Dec. 31, 2021

FAIR VALUE MEASUREMENTS

Fair value is the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:

•Level 1: quoted prices in active markets for identical assets or liabilities;

•Level 2: inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; or

•Level 3: unobservable inputs that are supported by little or no market activity and that are significant to the fair values of the assets or liabilities.

Contingent earn-out liabilities

In the fourth quarter of 2019, we recognized an earn-out liability related to the acquisition of Pursuit (see Note 2: Acquisitions). Pursuit's former equity holders were entitled up to $50.0 million in additional cash consideration contingent upon the achievement of certain sales and gross profit targets for specific customers. The earn-out was calculated as a percentage of gross profit achieved during the earn-out period against a pre-determined target gross profit, not to exceed $50.0 million. During the earn-out period, we used a Monte Carlo simulation model to determine the fair value of the earn-out liability. The Monte Carlo simulation model utilized multiple input variables to determine the value of the earn-out liability including historical volatility, a risk-free interest rate, counter party credit risk and projected future gross profit (see the simulation input table below related to Pursuit). The historical volatility was based on the median of ICU and a certain peer group. The risk-free interest rate was equal to the yield, as of the valuation date, of the zero-coupon U.S. Treasury bill that was commensurate with the term of the earn-out. The counter party credit risk was based on a synthetic credit rating of B1. As of June 30, 2021, the

earn-out measurement period ended. Based on the actual sales and gross profit achieved during the measurement period, we calculated the actual earn-out amount to be $26.3 million. The $26.3 million earn-out calculation was finalized and accepted by Pursuit's former equity holders and was paid out in the fourth quarter of 2021.

In August 2021, we entered into an agreement with one of our international distributors whereby that distributor would not compete with us in a specific territory for a three-year period that will end in September 2024. The terms of the agreement include a contingent earn-out payment. The contingent earn-out payment shall not exceed $6.0 million, which will be earned based on certain revenue targets over a twelve-month measurement period determined by the highest four consecutive quarters commencing over a two-year period starting on the closing date of the agreement and provided that the distributor is in compliance with its obligations under the agreement. As of December 31, 2021, the fair value of the contingent earn-out was estimated at $2.6 million. The estimated fair value of the contingent earn-out is calculated using a probability-weighted cash flow model based on historical revenue streams and the likelihood that the revenue targets will be met.

During November 2021, we acquired a small foreign infusion systems supplier. Total consideration for the acquisition includes a potential earn-out payment of up to $2.5 million, consisting of (i) a cash payment of $1.0 million contingent on the achievement of certain revenue targets for the annual period ending December 31, 2022 and, separately, (ii) a cash payment of $1.5 million contingent on certain product-related regulatory certifications obtained by May 26, 2024. The initial estimated fair value of the contingent consideration related to this acquisition is immaterial.

Our contingent earn-out liabilities are separately stated on our consolidated balance sheets.

The following table provides a reconciliation of our Level 3 earn-out liabilities measured at estimated fair value based on an initial valuation and updated quarterly for the years ended December 31, 2021, 2020 and 2019 (in thousands):


	Earn-out Liability
Contingent earn-out liability, January 1, 2019	$	47,400
Acquisition date fair value estimate of earn-out(1)	17,300
Change in fair value of contingent earn-out (included in income from operations as a separate line item)(2)	(47,400)
Contingent earn-out liability, December 31, 2019	$	17,300

Change in fair value of contingent earn-out (included in income from operations as a separate line item)(3)	9,000
Contingent earn-out liability, December 31, 2020	$	26,300
Contingent earn-out — non-compete arrangement	2,589

Transfer of Pursuit earn-out liability into Level 2(4)	(26,300)
Contingent earn-out liability, December 31, 2021	$	2,589

_______________________________

(1) Relates to our acquisition of Pursuit (see Note 2: Acquisitions).

(2) The change in the fair value of the HIS earn-out related to our 2017 acquisition of HIS from Pfizer which was based on actual results as compared to the earn-out performance targets. This adjustment reduced the HIS earn-out to zero.

(3) The fair value of the Pursuit earn-out increased during 2020 primarily due to changes in the probabilities within the valuation model.

(4) The Pursuit earn-out was transferred out of Level 3 and into Level 2 in the third quarter of 2021 when the amount of the actual payment was known, and subsequently settled during the fourth quarter of 2021.

The following table provides quantitative information about Level 3 inputs for fair value measurement of the Pursuit earn-out liability as of the acquisition date to December 31, 2020:

Pursuit Earn-out


	As of December 31, 2020		At Acquisition November 2, 2019
Simulation Input
Revenue/Gross Profit Volatility	25.00	%	20.00	%
Discount Rate	12.50	%	15.00	%
Risk-free rate	0.09	%	1.55	%
Counter Party Risk	3.10	%	6.00	%

Investments, Foreign Currency Contracts and Interest Rate Contracts

The fair value of our investments, which consist of corporate bonds, is estimated using observable market-based inputs such as quoted prices, interest rates and yield curves or Level 2 inputs.

The fair value of our Level 2 forward currency contracts is estimated using observable market inputs such as known notional value amounts, spot and forward exchange rates. These inputs relate to liquid, heavily traded currencies with active markets which are available for the full term of the derivative.

The fair value of our Level 2 forward-starting interest rate swaps is estimated using a pricing model that reflects the terms of the contracts, including the period to maturity, and relies on observable market inputs such as known notional value amounts and USD interest rate curves.

Other than the Pursuit earn-out liability described above, there were no transfers between levels in 2021 or 2020.

Our assets and liabilities measured at fair value on a recurring basis consisted of the following (Level 1, 2 and 3 inputs as defined above) (in thousands):


	Fair value measurements as of December 31, 2021
	Total carrying value		Quoted prices in active markets for identical assets (level 1)		Significant other observable inputs (level 2)		Significant unobservable inputs (level 3)
Assets:
Available-for-sale debt securities:
Short-term	$	14,420	$	—	$	14,420	$	—
Long-term	4,620		—		4,620		—
Foreign exchange forwards:
Prepaid expenses and other current assets	1,061		—		1,061		—


Total Assets	$	20,101	$	—	$	20,101	$	—

Liabilities:
Contingent earn-out liability - LT	$	2,589	$	—	$	—	$	2,589



Forward-starting interest rate swaps:
Other long-term liabilities	1,480		—		1,480		—
Total Liabilities	$	4,069	$	—	$	1,480	$	2,589


	Fair value measurements as of December 31, 2020
	Total carrying value		Quoted prices in active markets for identical assets (level 1)		Significant other observable inputs (level 2)		Significant unobservable inputs (level 3)
Assets:
Available-for-sale debt securities:
Short-term	$	14,687	$	—	$	14,687	$	—
Long-term	12,974		—		12,974		—
Foreign exchange forwards:
Prepaid expenses and other current assets	3,555		—		3,555		—

Total Assets	$	31,216	$	—	$	31,216	$	—

Liabilities:
Earn-out liability	$	26,300	$	—	$	—	$	26,300



Total Liabilities	$	26,300	$	—	$	—	$	26,300

- 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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