NOTE 6. FAIR VALUE MEASUREMENTS

Financial Instruments

The financial instruments recorded in our Condensed Consolidated Balance Sheets include cash and cash equivalents (including money market funds), restricted cash and cash equivalents, accounts receivable, marketable securities, equity and cost method investments, accounts payable and accrued expenses, acquisition-related contingent consideration and debt obligations. Included in cash and cash equivalents and restricted cash and cash equivalents are money market funds representing a type of mutual fund required by law to invest in low-risk securities (for example, U.S. government bonds, U.S. Treasury Bills and commercial paper). Money market funds pay dividends that generally reflect short-term interest rates. Due to their short-term maturity, the carrying amounts of non-restricted and restricted cash and cash equivalents (including money market funds), accounts receivable, accounts payable and accrued expenses approximate their fair values.

The following table presents current and noncurrent restricted cash and cash equivalent balances at March 31, 2019 and December 31, 2018 (in thousands):



	March 31, 2019		December 31, 2018
Restricted cash and cash equivalents—current portion (1)	$	332,547	$	305,368
Restricted cash and cash equivalents—noncurrent portion (2)	22,357		22,356
Restricted cash and cash equivalents—total (3)	$	354,904	$	327,724

__________


(1)	These amounts are reported in our Condensed Consolidated Balance Sheets as Restricted cash and cash equivalents.


(2)	These amounts are reported in our Condensed Consolidated Balance Sheets as Other assets.

(3)

Approximately $327.4 million and $299.7 million of our restricted cash and cash equivalents are held in qualified settlement funds (QSFs) for mesh-related matters at March 31, 2019 and December 31, 2018, respectively. The remaining amount of restricted cash and cash equivalents at March 31, 2019 primarily relates to other litigation-related matters. See Note 13. Commitments and Contingencies for further information.

Fair value guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include:


•	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 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.


•	Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Marketable Securities

Equity securities consist of investments in the stock of publicly traded companies, the values of which are based on quoted market prices and thus represent Level 1 measurements within the above-defined fair value hierarchy. These securities are not held to support current operations and are therefore classified as noncurrent assets. Equity securities are included in Marketable securities in our Condensed Consolidated Balance Sheets at March 31, 2019 and December 31, 2018.

Acquisition-Related Contingent Consideration

The fair value of contingent consideration liabilities is determined using unobservable inputs; hence these instruments represent Level 3 measurements within the above-defined fair value hierarchy. These inputs include the estimated amount and timing of projected cash flows, the probability of success (achievement of the contingent event) and the risk-adjusted discount rate used to present value the probability-weighted cash flows. Subsequent to the acquisition date, at each reporting period, the contingent consideration liability is remeasured at current fair value with changes recorded in earnings. Changes in any of these estimated inputs used as of the date of this report could have resulted in significant adjustments to fair value. See Recurring Fair Value Measurements below for additional information on acquisition-related contingent consideration.

Recurring Fair Value Measurements

The Company’s financial assets and liabilities measured at fair value on a recurring basis at March 31, 2019 and December 31, 2018 were as follows (in thousands):



	Fair Value Measurements at March 31, 2019 using:
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Assets:
Money market funds	$	641,012	$	—	$	—	$	641,012
Equity securities	969		—		—		969
Total	$	641,981	$	—	$	—	$	641,981
Liabilities:
Acquisition-related contingent consideration—current	$	—	$	—	$	28,305	$	28,305
Acquisition-related contingent consideration—noncurrent	—		—		39,537		39,537
Total	$	—	$	—	$	67,842	$	67,842



	Fair Value Measurements at December 31, 2018 using:
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Assets:
Money market funds	$	137,215	$	—	$	—	$	137,215
Equity securities	738		—		—		738
Total	$	137,953	$	—	$	—	$	137,953
Liabilities:
Acquisition-related contingent consideration—current	$	—	$	—	$	36,514	$	36,514
Acquisition-related contingent consideration—noncurrent	—		—		80,189		80,189
Total	$	—	$	—	$	116,703	$	116,703

At March 31, 2019 and December 31, 2018, money market funds include $69.1 million and $86.9 million, respectively, in QSFs to be disbursed to mesh-related or other product liability claimants. Amounts in QSFs are considered restricted cash equivalents. See Note 13. Commitments and Contingencies for further discussion of our product liability cases. At March 31, 2019 and December 31, 2018, the differences between the amortized cost and the fair value of our money market funds and equity securities, as well as the related gross unrealized gains or losses, were not material, individually or in the aggregate.

Fair Value Measurements Using Significant Unobservable Inputs

The following table presents changes to the Company’s liability for acquisition-related contingent consideration, which was measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended March 31, 2019 and 2018 (in thousands):



	Three Months Ended March 31,
	2019			2018
Beginning of period	$	116,703		$	190,442
Amounts settled	(11,591		)	(27,767		)
Changes in fair value recorded in earnings	(37,501		)	6,835
Effect of currency translation	231			(223		)
End of period	$	67,842		$	169,287

At March 31, 2019, the fair value measurements of the contingent consideration obligations were determined using risk-adjusted discount rates ranging from approximately 9.5% to 15.0% (weighted average rate of approximately 11.7%). Changes in fair value recorded in earnings related to acquisition-related contingent consideration are included in our Condensed Consolidated Statements of Operations as Acquisition-related and integration items. Amounts recorded for the current and noncurrent portions of acquisition-related contingent consideration are included in Accounts payable and accrued expenses and Other liabilities, respectively, in our Condensed Consolidated Balance Sheets.

The following table presents changes to the Company’s liability for acquisition-related contingent consideration during the three months ended March 31, 2019 by acquisition (in thousands):



	Balance as of December 31, 2018		Changes in Fair Value Recorded in Earnings			Amounts Settled and Other			Balance as of March 31, 2019
Auxilium acquisition	$	14,157	$	388		$	—		$	14,545
Lehigh Valley Technologies, Inc. acquisitions	34,700		(400		)	(5,000		)	29,300
VOLTAREN® Gel acquisition (1)	56,240		(37,784		)	(6,260		)	12,196
Other	11,606		295			(100		)	11,801
Total	$	116,703	$	(37,501	)	$	(11,360	)	$	67,842

__________


(1)	The change in fair value recorded in earnings includes the impact of certain competitive events occurring during the three months ended March 31, 2019.

Nonrecurring Fair Value Measurements

The Company’s financial assets and liabilities measured at fair value on a nonrecurring basis during the three months ended March 31, 2019 were as follows (in thousands):



	Fair Value Measurements during the Three Months Ended March 31, 2019 (1) using:						Total Expense for the Three Months Ended March 31, 2019
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Expense for the Three Months Ended March 31, 2019
Assets:
Intangible assets, excluding goodwill (Note 9)	$	—	$	—	$	41,839	$	(78,700	)
Certain property, plant and equipment	—		—		—		(748		)
Total	$	—	$	—	$	41,839	$	(79,448	)

__________


(1)	The fair value amounts are presented as of the date of the fair value measurement as these assets are not measured at fair value on a recurring basis. Such measurements generally occur in connection with our quarter-end financial reporting close procedures.

Additionally, the Company recorded aggregate pre-tax non-cash goodwill impairment charges during the three months ended March 31, 2019 of $86.0 million. Refer to Note 9. Goodwill and Other Intangibles for further description, including the valuation methodologies utilized.