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Fair Value Measurements

3 Months Ended

Mar. 31, 2021

Note 5. 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, 2021 and 2020.

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, 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”)	$	1,379	$	—	$	1,379	$	—
Derivative assets - freestanding instruments (FX)	863		—		863		—
Derivative assets - capped call derivatives	84,852		—		—		84,852
Convertible notes receivable	2,758		—		—		2,758
	$	89,852	$	—	$	2,242	$	87,610

Liabilities:
Derivative liabilities - designated as cash flow hedges (FX)	$	724	$	—	$	724	$	—
Derivative liabilities - freestanding instruments (interest rate swaps)	36		—		36		—
Derivative liabilities - freestanding instruments (FX)	705		—		705		—
Derivative liabilities - embedded exchange feature	148,091		—		—		148,091
Derivative liabilities - other	1,123		—		—		1,123
Contingent consideration arrangements	99,271		—		—		99,271
	$	249,950	$	—	$	1,465	$	248,485


	Fair Value as of December 31, 2020		Fair Value Measurements Using Inputs Considered as:
			Level 1		Level 2		Level 3
Assets:
Derivative assets - designated as cash flow hedges (FX)	$	2,893	$	—	$	2,893	$	—
Derivative assets - freestanding instruments (FX)	55		—		55		—
Derivative assets - capped call derivatives	72,302		—		—		72,302
Convertible notes receivable	2,775		—		—		2,775
	$	78,025	$	—	$	2,948	$	75,077

Liabilities:
Derivative liabilities - designated as cash flow hedges (FX)	$	14	$	—	$	14	$	—
Derivative liabilities - freestanding instruments (interest rate swaps)	74		—		74		—
Derivative liabilities - freestanding instruments (FX)	4,073		—		4,073		—
Derivative liabilities - embedded exchange feature	121,756		—		—		121,756
Derivative liabilities - other	4,290		—		—		4,290
Contingent consideration arrangements	103,818		—		—		103,818
	$	234,025	$	—	$	4,161	$	229,864

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		Other Derivative Liabilities		Contingent Consideration Liability Arrangements
As of December 31, 2020	$	72,302	$	2,775	$	121,756	$	4,290	$	103,818

Payments (1)	—		—		—		—		(5,000)
Changes in fair value	12,550		(17)		26,335		(3,167)		453

Total at March 31, 2021	84,852		2,758		148,091		1,123		99,271
Less current portion at March 31, 2021	—		2,495		—		931		9,424
Long-term portion at March 31, 2021	$	84,852	$	263	$	148,091	$	192	$	89,847

(1)During the three months ended March 31, 2021, we paid $5.0 million under the contingent consideration arrangement for the acquisition of Miami Instruments, LLC (“Miami Instruments”).

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 6. 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 with passage of time, 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 losses in the condensed consolidated statements of income (loss).

The stock price volatility as of March 31, 2021 was 34%. As of March 31, 2021, a 10% lower volatility, holding other inputs constant, would result in approximate fair value for the embedded exchange feature derivative of $131.7 million and a 10% higher volatility, holding other inputs constant, would result in approximate fair value of $165.6 million. As of March 31, 2021, a 10% lower volatility, holding other inputs constant would result in approximate fair value for the capped call derivatives of $88.9 million and a 10% higher volatility, holding other inputs constant, would result in approximate fair value of $78.5 million.

Contingent Consideration Arrangements

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


	March 31, 2021		December 31, 2020
ImThera Medical, Inc. (“ImThera”)	$	89,426	$	89,436
CardiacAssist, Inc., doing business as TandemLife (“TandemLife”)	8,942		8,809
Miami Instruments	903		5,573

	$	99,271	$	103,818

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, 2021:


ImThera Acquisition	Valuation Technique	Unobservable Input	Inputs
Regulatory milestone-based payment	Discounted cash flow	Discount rate	6.7%
		Probability of payment	85%
		Projected payment year	2024

Sales-based earnout	Monte Carlo simulation	Risk-adjusted discount rate	12.0%	-	12.7%
		Credit risk discount rate	7.0%	-	7.8%
		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, 2021:

TandemLife Acquisition

Valuation Technique

Unobservable Input

Inputs

Regulatory milestone-based payment

Discounted cash flow

Discount rate

4.9%

Probability of payment

70%

Projected payment year

2021

- 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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