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Fair Value Measures and Disclosures (Notes) | 9 Months Ended
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Sep. 30, 2020
Fair Value Disclosures [Abstract] |
Fair Value Disclosures | Fair Value Measurement 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. There are three levels of inputs that may be used to measure fair value: •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. Earn-out Liability In 2017, we recognized an earn-out liability upon the acquisition of HIS from Pfizer. Pfizer was entitled up to $225 million in cash if certain performance targets for the combined company for the three years ending December 31, 2019 were achieved. The initial fair value of the earn-out was determined by employing a Monte Carlo simulation in a risk neutral framework. The underlying simulated variable was adjusted EBITDA. The adjusted EBITDA volatility estimate was based on a study of historical asset volatility for a set of comparable public companies. The model included other assumptions including the market price of risk, which was calculated as the weighted average cost of capital ("WACC") less the long term risk free rate. The initial value assigned to the contingent consideration was a result of forecasted product demand of our HIS business. At each reporting date subsequent to the acquisition we remeasured the earn-out using the same methodology above and recognized any changes in value. As of December 31, 2019, we determined that we did not meet the necessary performance targets that would require payout of any of the HIS earn-out liability. As of the date of this filing, Pfizer has disputed our determination that the performance targets requiring payout of the HIS earn-out liability were not met. If we do not reach agreement on this issue with Pfizer, the dispute will be resolved by binding arbitration, that will likely be concluded within the next three to six months. In the fourth quarter of 2019, we recognized an earn-out liability related to the acquisition of Pursuit Vascular, Inc. ("Pursuit"). Pursuit's former equity holders are 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 will be 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. We used a Monte Carlo simulation model to determine the fair value of the earn-out liability. The Monte Carlo simulation model utilizes 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 below simulation input table related to Pursuit. The historical volatility was based on the median of ICU and a certain peer group. The risk-free interest rate is equal to the yield, as of the valuation date, of the zero-coupon U.S. Treasury bill that is commensurate with the term of the earn-out. The counter party credit risk is based on a synthetic credit rating of B1. If the probabilities in the model significantly change from what we initially and subsequently anticipate, the change could have a significant impact on our financial statements in the period recognized. Our contingent earn-out liability is separately stated in our condensed consolidated balance sheets. The following tables provide a reconciliation of the Level 3 earn-out liabilities measured at estimated fair value (in thousands):
|  | Pursuit
|  | Earn-out Liability
Accrued balance, January 1, 2020 |  | $ | 17,300 |
Change in fair value of earn-out (included in income from operations as a separate line item) |  | — |
Accrued balance, March 31, 2020 |  | $ | 17,300 |
Change in fair value of earn-out (included in income from operations as a separate line item) |  | 2,700 |
Accrued balance, June 30, 2020 |  | $ | 20,000 |
Change in fair value of earn-out (included in income from operations as a separate line item) |  | 4,300 |
Accrued balance, September 30, 2020 |  | $ | 24,300 |
|  | HIS
|  | Earn-out Liability
Accrued balance, January 1, 2019 |  | $ | 47,400 |
Change in fair value of earn-out (included in income from operations as a separate line item) |  | (7,700) |
Accrued balance, March 31, 2019 |  | $ | 39,700 |
Change in fair value of earn-out (included in income from operations as a separate line item) |  | (39,500) |
Accrued balance, June 30, 2019 |  | $ | 200 |
Change in fair value of earn-out (included in income from operations as a separate line item) |  | (200) |
Accrued balance, September 30, 2019 |  | $ | — |
The fair value of the Pursuit earn-out increased at September 30, 2020 from the fair value calculated at December 31, 2019 primarily due to changes in the probabilities within the valuation model. The following tables provide quantitative information about Level 3 inputs for fair value measurement of our earn-out liabilities: Pursuit Earn-out
Simulation Input |  | As of September 30, 2020 |  | At Acquisition November 2, 2019
Revenue/Gross Profit Volatility |  | 35.00 | % |  | 20.00 | %
Discount Rate |  | 12.50 | % |  | 15.00 | %
Risk Free Rate |  | 0.12 | % |  | 1.55 | %
Counter Party Risk |  | 4.50 | % |  | 6.00 | %
HIS Earn-out
Simulation Input |  | As of December 31, 2018
Adjusted EBITDA Volatility |  | 30.00 | %
WACC |  | 8.25 | %
20-year risk free rate |  | 2.87 | %
Market price of risk |  | 5.24 | %
Cost of debt |  | 5.25 | %
Investments and Foreign Currency Contracts The fair value of our investments is estimated using observable market-based inputs such as quoted prices, interest rates and yield curves or Level 2 inputs, which consisted of corporate bonds. The fair value of our Level 2 forward currency contracts are 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. 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 at September 30, 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 securities: |  |  |  |  |  |  |
Short-term | $ | 12,544 |  |  | $ | — |  |  | $ | 12,544 |  |  | $ | — |
Foreign exchange forwards: |  |  |  |  |  |  |
Prepaid expenses and other current assets | 1,090 |  |  | — |  |  | 1,090 |  |  | — |
Other assets | 216 |  |  | — |  |  | 216 |  |  | — |
Total Assets | $ | 13,850 |  |  | $ | — |  |  | $ | 13,850 |  |  | $ | — |
Liabilities: |  |  |  |  |  |  |
Earn-out liability | $ | 24,300 |  |  | $ | — |  |  | $ | — |  |  | $ | 24,300 |
Foreign exchange forwards: |  |  |  |  |  |  |
Accrued liabilities | 6 |  |  | — |  |  | 6 |  |  | — |
Total Liabilities | $ | 24,306 |  |  | $ | — |  |  | $ | 6 |  |  | $ | 24,300 |
| Fair value measurements at December 31, 2019
| 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 securities: |  |  |  |  |  |  |
Short-term | $ | 23,967 |  |  | $ | — |  |  | $ | 23,967 |  |  | $ | — |
Foreign exchange forwards: |  |  |  |  |  |  |
Prepaid expenses and other current assets | 2,366 |  |  | — |  |  | 2,366 |  |  | — |
Total Assets | $ | 26,333 |  |  | $ | — |  |  | $ | 26,333 |  |  | $ | — |
Liabilities: |  |  |  |  |  |  |
Earn-out liability | $ | 17,300 |  |  | $ | — |  |  | $ | — |  |  | $ | 17,300 |
Total Liabilities | $ | 17,300 |  |  | $ | — |  |  | $ | — |  |  | $ | 17,300 |

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- 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. + References Reference 1: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=117815213&loc=d3e19207-110258 + Details
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