Fair Value Measurements

3 Months Ended

Apr. 05, 2020

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash equivalents, derivatives, marketable securities and accounts receivable. The Company believes it had no significant concentrations of credit risk as of April 5, 2020.

The Company uses the market approach technique to value its financial instruments and there were no changes in valuation techniques during the three months ended April 5, 2020. The Company’s financial assets and liabilities carried at fair value are primarily comprised of marketable securities, derivative contracts used to hedge the Company’s currency risk, and acquisition-related contingent consideration. The Company has not elected to measure any additional financial instruments or other items at fair value.

Valuation Hierarchy: The following summarizes the three levels of inputs required to measure fair value. For Level 1 inputs, the Company utilizes quoted market prices as these instruments have active markets. For Level 2 inputs, the Company utilizes quoted market prices in markets that are not active, broker or dealer quotations, or utilizes alternative pricing sources with reasonable levels of price transparency. For Level 3 inputs, the Company utilizes unobservable inputs based on the best information available, including estimates by management primarily based on information provided by third-party fund managers, independent brokerage firms and insurance companies. A financial asset’s or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement. In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible.

The following tables show the assets and liabilities carried at fair value measured on a recurring basis as of April 5, 2020 and December 29, 2019 classified in one of the three classifications described above:



				Fair Value Measurements at April 5, 2020 Using:
	Total Carrying Value at April 5, 2020			Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
	(In thousands)
Marketable securities	$	2,888		$	2,888	$	—		$	—
Foreign exchange derivative assets	4,105			—		4,105			—
Foreign exchange derivative liabilities	(1,316		)	—		(1,316		)	—
Contingent consideration	(22,777		)	—		—			(22,777		)



				Fair Value Measurements at December 29, 2019 Using:
	Total Carrying Value at December 29, 2019			Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
	(In thousands)
Marketable securities	$	2,906		$	2,906	$	—		$	—
Foreign exchange derivative assets	451			—		451			—
Foreign exchange derivative liabilities	(1,538		)	—		(1,538		)	—
Contingent consideration	(35,481		)	—		—			(35,481		)

Level 1 and Level 2 Valuation Techniques: The Company’s Level 1 and Level 2 assets and liabilities are comprised of investments in equity and fixed-income securities as well as derivative contracts. For financial assets and liabilities that utilize Level 1 and Level 2 inputs, the Company utilizes both direct and indirect observable price quotes, including common stock price quotes, foreign exchange forward prices and bank price quotes. Below is a summary of valuation techniques for Level 1 and Level 2 financial assets and liabilities.

Marketable securities: Include equity and fixed-income securities measured at fair value using the quoted market prices in active markets at the reporting date.

Foreign exchange derivative assets and liabilities: Include foreign exchange derivative contracts that are valued using quoted forward foreign exchange prices at the reporting date. The Company’s foreign exchange derivative contracts are subject to master netting arrangements that allow the Company and its counterparties to net settle amounts owed to each other. Derivative assets and liabilities that can be net settled under these arrangements have been presented in the Company's condensed consolidated balance sheet on a net basis and are recorded in other assets. As of both April 5, 2020 and December 29, 2019, none of the master netting arrangements involved collateral.

Level 3 Valuation Techniques: The Company’s Level 3 liabilities are comprised of contingent consideration related to acquisitions. For liabilities that utilize Level 3 inputs, the Company uses significant unobservable inputs. Below is a summary of valuation techniques for Level 3 liabilities.

Contingent consideration: Contingent consideration is measured at fair value at the acquisition date using projected milestone dates, discount rates, probabilities of success and projected revenues (for revenue-based considerations). Projected risk-adjusted contingent payments are discounted back to the current period using a discounted cash flow model.

During fiscal year 2015, the Company acquired certain assets and assumed certain liabilities from Vanadis Diagnostics AB. Under the terms of the acquisition, the initial purchase consideration was $32.0 million, net of cash and the Company will be obligated to make potential future milestone payments, based on completion of a proof of concept, regulatory approvals and product sales, of up to $93.0 million ranging from 2016 to 2019. The fair value of the contingent consideration as of the acquisition date was estimated at $56.9 million. During the first quarter of fiscal year 2020, the Company updated the fair value of the contingent consideration and recorded a liability of $18.5 million as of April 5, 2020. The key assumptions used to determine the fair value of the contingent consideration as of April 5, 2020 included projected milestone dates within fiscal year 2020, discount rates ranging from 4.3% to 7.7% and conditional and cumulative probabilities of success of each individual milestone ranging from 90% to 100%. A significant delay in the product development (including projected regulatory milestone) achievement date in isolation could result in a significantly lower fair value measurement; a significant acceleration in the product development (including projected regulatory milestone) achievement date in isolation would not have a material impact on the fair value measurement; a significant change in the discount rate in isolation would not have a material impact on the fair value measurement; and a significant change in the probabilities of success in isolation could result in a significant change in fair value measurement.

The fair values of contingent consideration are calculated on a quarterly basis based on a collaborative effort of the Company’s regulatory, research and development, operations, finance and accounting groups, as appropriate. Potential valuation adjustments are made as additional information becomes available, including the progress towards achieving proof of concept, regulatory approvals and revenue targets as compared to initial projections, the impact of market competition and market landscape shifts from non-invasive prenatal testing products, with the impact of such adjustments being recorded in the Company's consolidated statements of operations.

As of April 5, 2020, the Company may have to pay contingent consideration, related to acquisitions with open contingency periods, of up to $57.1 million. The expected maximum earnout period for the acquisitions with open contingency periods does not exceed 2.8 years from April 5, 2020, and the remaining weighted average expected earnout period at April 5, 2020 was 1 year.

A reconciliation of the beginning and ending Level 3 net liabilities for contingent consideration is as follows:



	Three Months Ended
	April 5, 2020			March 31, 2019
	(In thousands)
Balance at beginning of period	$	(35,481	)	$	(69,661	)
Amounts paid and foreign currency translation	379			18,414
Reclassified to other current liabilities for a milestone achieved	—			20,000
Change in fair value (included within selling, general and administrative expenses)	12,325			(3,102		)
Balance at end of period	$	(22,777	)	$	(34,349	)

The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximate fair value due to the short-term maturities of these assets and liabilities. If measured at fair value, cash and cash equivalents would be classified as Level 1.

As of April 5, 2020, the Company’s senior unsecured revolving credit facility had a carrying value of $304.0 million, net of $3.2 million of unamortized debt issuance costs. As of December 29, 2019, the Company’s senior unsecured revolving credit facility had a carrying value of $322.0 million, net of $3.4 million of unamortized debt issuance costs. The interest rate on the Company’s senior unsecured revolving credit facility is reset at least monthly to correspond to variable rates that reflect currently available terms and conditions for similar debt. The Company had no change in credit standing during the first three months of fiscal year 2020. Consequently, the carrying value approximates fair value and were classified as Level 2.

The Company's 2026 Notes, with a face value of €500.0 million, had an aggregate carrying value of $532.9 million, net of $3.2 million of unamortized original issue discount and $3.2 million of unamortized debt issuance costs as of April 5, 2020. The 2026 Notes had an aggregate carrying value of $552.2 million, net of $3.5 million of unamortized original issue discount and $3.3 million of unamortized debt issuance costs as of December 29, 2019. The 2026 Notes had a fair value of €500.1 million and €518.5 million as of April 5, 2020 and December 29, 2019, respectively. The fair value of the 2026 Notes is estimated using market quotes from brokers and is based on current rates offered for similar debt.

The Company's 2021 Notes, with a face value of €300.0 million, had an aggregate carrying value of $322.6 million, net of $0.1 million of unamortized original issue discount and $0.9 million of unamortized debt issuance costs as of April 5, 2020.

The 2021 Notes had an aggregate carrying value of $334.2 million, net of $0.1 million of unamortized original issue discount and $1.1 million of unamortized debt issuance costs as of December 29, 2019. The 2021 Notes had a fair value of €299.4 million and €301.9 million as of April 5, 2020 and December 29, 2019, respectively. The fair value of the 2021 Notes is estimated using market quotes from brokers and is based on current rates offered for similar debt.

The Company's 2029 Notes, with a face value of $850.0 million, had an aggregate carrying value of $839.9 million, net of $2.7 million of unamortized original issue discount and $7.4 million of unamortized debt issuance costs as of April 5, 2020. The 2029 Notes had an aggregate carrying value of $839.9 million, net of $2.7 million of unamortized original issue discount and $7.4 million of unamortized debt issuance costs as of December 29, 2019. The 2029 Notes had a fair value of $801.1 million and $872.3 million as of April 5, 2020 and December 29, 2019, respectively. The fair value of the 2029 Notes is estimated using market quotes from brokers and is based on current rates offered for similar debt.

As of April 5, 2020, the 2021 Notes, 2026 Notes and 2029 Notes were classified as Level 2.

The Company’s other debt facilities had an aggregate carrying value of $20.8 million and $25.7 million as of April 5, 2020 and December 29, 2019, respectively. As of April 5, 2020, these consisted of bank loans in the aggregate amount of $20.7 million bearing fixed interest rates between 1.1% and 20.0% and a bank loan in the amount of $0.1 million bearing a variable interest rate based on the Euribor rate plus a margin of 1.5%. The Company had no change in credit standing during the first three months of fiscal year 2020. Consequently, the carrying value approximates fair value and were classified as Level 2.

As of April 5, 2020, there has not been any significant impact to the fair value of the Company’s derivative liabilities due to credit risk. Similarly, there has not been any significant adverse impact to the Company’s derivative assets based on the evaluation of its counterparties’ credit risks.

- 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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