FAIR VALUE

Our financial instruments include cash and cash equivalents, accounts receivable, marketable securities, accounts payable, an interest rate swap agreement and contingent consideration. The carrying amount of cash and cash equivalents, accounts receivable, and accounts payable approximates fair value due to the immediate or short-term maturities. The marketable securities and interest rate swap agreement have been recorded at their fair value based on a valuation received from an independent third party. The contingent consideration has been recorded at fair value using the income approach.

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. This policy establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The policy describes three levels of inputs that may be used to measure fair value which are provided in the table below.



Level 1	Quoted prices in active markets for identical assets or liabilities. Level 1 assets include money market funds that are traded in an active exchange market.



Level 2	Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices 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. When quoted market prices are unobservable, we obtain pricing information from an independent pricing vendor. The pricing vendor uses various pricing models for each asset class that are consistent with what other market participants would use. The inputs and assumptions to the model of the pricing vendor are derived from market observable sources including: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, benchmark securities, bids, offers, and other market-related data. The pricing vendor considers all available market observable inputs in determining the evaluation for a security. Thus, certain securities may not be priced using quoted prices, but rather determined from market observable information. Included in Level 2 assets is our interest rate swap agreement which is valued using a mid-market valuation model.



Level 3	Unobservable inputs that are supported by little or no market activity and are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. This category includes the auction rate securities where independent pricing information was not able to be obtained and the contingent consideration related to the acquisition of Vortex, Microsulis and Clinical Devices. Our investments in auction-rate securities were classified as Level 3 as quoted prices were unavailable since these auction rate securities issued by New York state and local government authorities failed auction. Due to limited market information, we utilized a discounted cash flow (“DCF”) model to derive an estimate of fair value for contingent considerations for all periods presented. The assumptions used in preparing the DCF model included estimates with respect to the discount rate, amount and timing of future interest and principal payments and forward projections. Assumptions associated with the auction rate securities include the interest rate benchmarks, the probability of full repayment of the principal considering the credit quality and guarantees in place, and the rate of return required by investors to own such securities given the current liquidity risk.

The following tables provide information by level for assets and liabilities that are measured at fair value on a recurring basis as of November 30, 2015 and May 31, 2015 (in thousands of dollars):



	Fair Value Measurements using inputs considered as:						Fair Value at November 30, 2015
	Level 1		Level 2		Level 3		Fair Value at November 30, 2015
Financial Assets
Marketable securities
U.S. government agency obligations	$	—	$	—	$	1,639	$	1,639
Total	—		—		1,639		1,639
Total Financial Assets	$	—	$	—	$	1,639	$	1,639
Financial Liabilities
Interest rate swap agreements	$	—	$	97	$	—	$	97
Contingent liability for acquisition earn out	—		—		37,849		37,849
Total Financial Liabilities	$	—	$	97	$	37,849	$	37,946


	Fair Value Measurements using inputs considered as:						Fair Value at May 31, 2015
	Level 1		Level 2		Level 3		Fair Value at May 31, 2015
Financial Assets
Marketable securities
U.S. government agency obligations	$	—	$	—	$	1,689	$	1,689
Total	—		—		1,689		1,689
Total Financial Assets	$	—	$	—	$	1,689	$	1,689
Financial Liabilities
Interest rate swap agreements	$	—	$	257	$	—	$	257
Contingent liability for acquisition earn out	—		—		47,384		47,384
Total Financial Liabilities	$	—	$	257	$	47,384	$	47,641

There were no transfers in and out of Level 1, 2 and 3 measurements for the three and six months ended November 30, 2015 and 2014.

The table below presents the changes in fair value components of Level 3 instruments in the six months ended November 30, 2015 (in thousands of dollars):



	Financial Assets			Financial Liabilities
	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)			Fair Value Measurements Using Significant Unobservable Inputs (Level 3)

Balance, May 31, 2015	$	1,689		$	47,384
Change in present value of contingent consideration (1)	—			661
Currency (gain) loss from remeasurement	—			(96		)
Included in other comprehensive income (loss)	(25		)	—
Proceeds from sale or maturity of marketable securities	(25		)	—
Contingent consideration payments	—			(10,100		)
Balance, November 30, 2015	$	1,639		$	37,849

(1) Change in present value of contingent consideration is included in earnings and comprised of changes in estimated earn out payments based on projections of company performance and the amortization of the present value discount.

Contingent Liabilities for Acquisition Earn Outs

Certain of our business combinations involve the potential for the payment of future contingent consideration upon the achievement of certain product development milestones or various other performance conditions. Payment of the additional consideration is generally contingent on the acquired company reaching certain performance milestones, including attaining specified revenue levels or product development targets. Contingent consideration is recorded at the estimated fair value of the contingent payments on the acquisition date. The fair value of the contingent consideration is remeasured at the estimated fair value at each reporting period with the change in fair value recognized as income or expense within change in fair value of contingent consideration in the consolidated statements of income. We measure the initial liability and remeasure the liability on a recurring basis using Level 3 inputs as defined under authoritative guidance for fair value measurements.

The fair value of our liability for contingent consideration is determined using a discounted cash flow model applied to projected net sales, using probabilities of achieving projected net sales and projected payment dates. Projected net sales are based on our internal projections and extensive analysis of the target market and the sales potential. Increases or decreases in any valuation inputs in isolation may result in a significantly lower or higher fair value measurement in the future.

The recurring Level 3 fair value measurements of the contingent consideration liabilities include the following significant unobservable inputs as of November 30, 2015 (in thousands of dollars):



	Fair value at		Valuation
	Nov 30, 2015		Technique	Unobservable Input	Range
Revenue based payments	$	35,249	Discounted cash flow	Discount rate	4%
				Probability of achieving sales	75-100%
				Projected fiscal year of payment	2017 - 2023
Milestone based payments	2,600		Discounted cash flow	Discount rate	16%
				Probability of achieving milestone	75-100%
				Projected fiscal year of payment	2017
Total	$	37,849

At November 30, 2015, the estimated potential amount of undiscounted future contingent consideration that we expect to pay as a result of all completed acquisitions is approximately $43.5 million. The milestones, including sales projections, associated with the contingent consideration must be reached in future periods ranging from fiscal years 2016 to 2023 in order for the associated consideration to be paid.