5. Fair Value Measurements

The Company uses a three-level fair value hierarchy that categorizes assets and liabilities measured at fair value based on the observability of the inputs utilized in the valuation. The fair value hierarchy gives the highest priority to the quoted prices in active markets for identical assets and liabilities and lowest priority to unobservable inputs.

Level 1 - Financial assets and liabilities whose values are based on unadjusted quoted market prices for identical assets and liabilities in an active market that the Company has the ability to access.

Level 2 - Financial assets and liabilities whose values are based on quoted prices in markets that are not active or model inputs that are observable for substantially the full term of the asset or liability.

Level 3 - Financial assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement.

Items Measured at Fair Value on a Recurring Basis

Derivative instruments - The Company uses derivative financial instruments, “derivatives”, to mitigate the market risk that occurs from its exposure to changes in interest and foreign exchange rates. The Company does not enter into derivatives for trading or other speculative purposes. The Company’s use of derivatives is in accordance with the strategies contained in the Company’s overall financial risk policy. The derivatives outstanding as of June 30, 2018 were foreign exchange swaps. All swaps principally match the terms and maturity of the underlying debt and no swaps have a maturity beyond six months. All derivatives are recognized in the Unaudited Condensed Consolidated Financial Statements at fair value. Certain derivatives are from time to time designated either as fair value hedges or cash flow hedges in line with the hedge accounting criteria. For certain other derivatives hedge accounting is not applied either because non-hedge accounting treatment creates the same accounting result or the hedge does not meet the hedge accounting requirements, although entered into applying the same rationale concerning mitigating market risk that occurs from changes in interest and foreign exchange rates. The Company’s derivatives are classified as Level 2 of the fair value hierarchy and there were no transfers between the levels during this or comparable periods.

During the first quarter of 2018, forward contracts designated as cash flow hedges of certain external purchasing were terminated. The loss associated with such termination was not material.

Financial Statement Presentation

The Company enters into master netting agreements, International Swaps and Derivatives Association (ISDA) agreements with all derivative counterparties. The netting agreements allow for netting of exposures in the event of default or breach of the counterparty agreement. The fair values in the Condensed Consolidated Balance Sheets have been presented on a gross basis. Derivative financial instruments designated and non-designated as hedging instruments are included in the Company’s Condensed Consolidated Balance Sheets as of June 30, 2018 and December 31, 2017, as follows:

	June 30, 2018
			Fair Value Measurements
	Nominal Value		Derivative Asset (Other current/non current assets)		Derivative Liability (Other current/non current liabilities)
Derivatives not designated as hedging instruments
Foreign exchange swaps, less than 6 months	$	105	$	-	$	-
Total derivatives not designated as hedging instruments	$	105	$	-	$	-

	December 31, 2017
			Fair Value Measurements
	Nominal Value		Derivative Asset (Other current/non current assets)		Derivative Liability (Other current/non current liabilities)
Derivatives designated as hedging instruments
Foreign exchange forward contracts, less than 1 year (cash flow hedge)	$	67	$	-	$	1
Total derivatives designated as hedging instruments	$	67	$	-	$	1

Gains and losses on derivative financial instruments for the three and six months ended June 30, 2018 and 2017 are as follows:

	Three months ended
	June 30, 2018						June 30, 2017
	Foreign exchange forward contracts			Foreign exchange swaps			Foreign exchange forward contracts			Foreign exchange swaps
Foreign currency risk - Cost of sales:
Recorded into gain (loss)	$	-		$	(2	)	$	-		$	2
Recorded gains (loss) into AOCI net of tax		-			-			(2	)		-
Less: reclassified from AOCI into gain (loss)		(1	)		-			2			-
	$	1		$	(2	)	$	(4	)	$	2

	Six months ended
	June 30, 2018					June 30, 2017
	Foreign exchange forward contracts			Foreign exchange swaps		Foreign exchange forward contracts			Foreign exchange swaps
Foreign currency risk - Cost of sales:
Recorded gains (loss) into AOCI net of tax	$	-		$	-	$	(3	)	$	-
Less: Reclassified from AOCI gain (loss)		(1	)		-		3			-
	$	1		$	-	$	(6	)	$	-

Contingent consideration - The fair value of the contingent consideration relating to the M/A-COM acquisition on August 17, 2015 is re-measured on a recurring basis. The fair value measurements are generally determined using unobservable inputs and are classified within Level 3 of the fair value hierarchy. The Company adjusted the fair value of the earn-out liability to $14 million in the first quarter of 2017 based on actual revenue levels to date as well as changes in the estimated probability of different revenue scenarios for the remaining contractual earn-out period. Income of approximately $13 million was recognized within Other income in the Unaudited Condensed Consolidated Statements of Operations in the first quarter of 2017 due to the decrease in the contingent consideration liability. The remaining fair value of the earn-out liability of $14 million as of December 31, 2017 was fully released to and recognized within Other income in the first quarter of 2018, driven by changes in the estimated probability of different revenue scenarios for the remaining contractual earn-out period such that management no longer believes that there are any scenarios under which the earn-out criteria could be met. Management has updated its analysis as of June 30, 2018 and continues to believe that the fair value of the contingent consideration is $0 million.

Items Measured at Fair Value on a Non-Recurring Basis

Certain assets and liabilities are measured at fair value on a nonrecurring basis. The fair value measurements are generally determined using unobservable inputs and are classified within Level 3 of the fair value hierarchy. These assets include long-lived assets, intangible assets and investments in affiliates, which may be written down to fair value as a result of impairment.The Company has determined that the fair value measurements included in each of these assets and liabilities rely primarily on Company-specific inputs and the Company’s assumptions about the use of the assets and settlements of liabilities, as observable inputs are not available. The Company has determined that each of these fair value measurements reside within Level 3 of the fair value hierarchy. To determine the fair value of long-lived assets, the Company utilizes the projected cash flows expected to be generated by the long-lived assets, then discounts the future cash flows over the expected life of the long-lived assets.

The tables below present information about certain of the Company’s long-lived assets measured at fair value on a nonrecurring basis as of June 30, 2018 and December 31, 2017.

	June 30, 2018				December 31, 2017
	Fair value measurements		Impairment		Fair value measurements		Impairment
(Dollars in millions)	Level 3		Losses		Level 3		Losses
Goodwill ¹⁾	$	291	$	-	$	292	$	(234	)
Intangible assets, net ²⁾		109		-		122		(12	)

In the fourth quarter of 2017, the Company recognized an impairment charge of the full goodwill related to ANBS, resulting in an impairment loss of $234 million, which was included in earnings for the period. The primary driver of the goodwill impairment was due to the lower expected long-term operating cash flow performance of the business unit as of the measurement date. The remaining goodwill balance as of June 30, 2018 and December 31, 2017 was not measured at fair value on a nonrecurring basis as impairment indicators did not exist.

In the first quarter of 2017, the Company recognized an impairment charge to amortization of intangibles of $12 million related to a contract with an OEM customer of M/A-COM products, which was included in earnings for the period. As of December 31, 2017, the intangible value related to this customer contract was fully amortized. The remaining intangibles balance as of June 30, 2018 and December 31, 2017 was not measured at fair value on a nonrecurring basis as impairment indicators did not exist.