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Fair Value Measurements
 12 Months Ended
Dec. 31, 2012
Fair Value Disclosures [Abstract]  
Fair Value Measurements
FAIR VALUE MEASUREMENTS

Our financial assets and (liabilities) carried at fair value measured on a recurring basis as of December 31, 2012 and 2011, 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
 
December 31, 2012
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
 
 
 
 
 
 
 
 
Interest rate swap (1)
 
$
(1,788
)
 
$
—

 
$
(1,788
)
 
$
—

 
 
 
 
 
 
 
 
 
 
 
 
 
Fair Value Measurements Using
 
 
Total Fair
 
Quoted prices in
 
Significant other
 
Significant
 
 
Value at
 
active markets
 
observable inputs
 
Unobservable inputs
Description
 
December 31, 2011
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
 
 
 
 
 
 
 
 
Marketable securities (2)
 
$
2,798

 
$
2,798

 
$
—

 
$
—

 
 
 
 
 
 
 
 
 



(1)    The fair value of the interest rate swap is determined based on forward yield curves.

(2)    Our marketable securities, which consist entirely of available-for-sale equity securities, are valued using market prices in active markets. Level 1 instrument valuations are obtained from real-time quotes for transactions in active exchange markets involving identical assets.

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 2 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 selling, general, and administrative 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 liability during the years ended December 31, 2012 and 2011 consisted of the following (in thousands):

 
2012
 
2011
Beginning balance
$
1,290

 
$
—

Contingent consideration liability recorded as the result of acquisitions (see Note 2)
4,704

 
1,270

Initial purchase price adjustments finalized over the period (see Note 2)
280

 
—

Fair value adjustments recorded to expense during the period
480

 
20

Contingent payments made
(57
)
 
—

Ending balance
$
6,697

 
$
1,290




The recurring Level 3 measurement of our contingent consideration liability includes the following significant unobservable inputs at December 31, 2012 and 2011 (amount in thousands):
Contingent consideration liability
 
Fair value at December 31, 2012
 
Valuation technique
 
Unobservable inputs
 
Range
Revenue-based payments
 
$
6,370

 
Discounted cash flow

 
Discount rate
 
10% - 14.5%
 
 
 
 
 
Probability of milestone payment
 
90%
 
 
 
 
 
 
Projected year of payments
 
2013-2028
 
 
 
 
 
 
 
 
 
Other payments
 
327

 
Discounted cash flow

 
Discount rate
 
4.5%
 
 
 
 
 
Probability of milestone payment
 
100%
 
 
 
 
 
 
Projected year of payments
 
2013-2015
 
 
 
 
 
 
 
 
 
Contingent consideration liability
 
Fair value at December 31, 2011
 
Valuation technique
 
Unobservable inputs
 
Range
Revenue-based payments
 
$
1,290

 
Discounted cash flow

 
Discount rate
 
10% - 14.5%
 
 
 
 
 
Probability of milestone payment
 
90%
 
 
 
 
 
 
Projected year of payments
 
2012-2028

 
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 selling, general, and administrative expenses in our consolidated statements of income. As of December 31, 2012, approximately $5.9 million was included in other long-term obligations and $723,000 was included in accrued expenses in our consolidated balance sheet. As of December 31, 2011, the entire balance was included in other long-term obligations 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 years ended December 31, 2012, 2011 and 2010, we had losses of approximately $55,000, $103,000, and $8.5 million, respectively, related to the measurement of non-financial assets at fair value on a nonrecurring basis subsequent to their initial recognition. Of the total loss in 2010, approximately $8.3 million was related to the impairment of our goodwill related to our endoscopy reporting unit (see Note 4). The fair value of these non-financial assets was measured using Level 3 inputs. As of December 31, 2010, there was no goodwill remaining in our consolidated financial statements related to the endoscopy reporting unit.

During the quarter ended December 31, 2012, we recognized an impairment charge of approximately $2.4 million, which is included in other expense in the accompanying consolidated statement of income, related to an investment in a privately-held company accounted for at cost. As of December 31, 2012, there was no remaining cost included in our consolidated balance sheet related to this investment.

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 (Level 1).