FAIR VALUE MEASUREMENTS

Fair value is the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:


•	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 in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities 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; or


•	Level 3: unobservable inputs that are supported by little or no market activity and that are significant to the fair values of the assets or liabilities.

During the first quarter of 2017, we recognized an earn-out liability upon the acquisition of HIS from Pfizer. Pfizer may be entitled up to $225 million in cash if certain performance targets for the combined company for the three years ending December 31, 2019 are achieved. The initial fair value of the earn-out was determined by employing a Monte Carlo simulation in a risk neutral framework. The underlying simulated variable was adjusted EBITDA. The adjusted EBITDA volatility estimate was based on a study of historical asset volatility for a set of comparable public companies. The model includes other assumptions including the market price of risk, which was calculated as the weighted average cost of capital ("WACC") less the long term risk free rate. The initial value assigned to the contingent consideration was a result of forecasted product demand of our HIS business, as discussed further in Note 2: Acquisition, Strategic Transaction and Integration Expenses. At each reporting date subsequent to the acquisition we remeasure the earn-out using the same methodology above and recognize any changes in value. If the probability of achieving the performance target significantly changes from what we initially anticipated, the change could have a significant impact on our financial statements in the period recognized. Our contingent earn-out liability is separately stated in our consolidated balance sheets.

The following table provides a reconciliation of the Level 3 earn-out liability measured at estimated fair value based on an initial valuation and updated quarterly for the year ended December 31, 2017 (in thousands):



	Earn-out Liability
Contingent earn-out liability, December 31, 2016	$	—
Acquisition date fair value estimate of earn-out	19,000
Change in fair value of contingent earn-out (included in income from operations as a separate line item)	8,000
Contingent earn-out liability, December 31, 2017	$	27,000

The fair value of the earn-out at December 31, 2017 changed from the fair value calculated at acquisition due to a change in the forecast of the underlying target, adjusted EBITDA, and due to changes in other assumptions used in the Monte Carlo simulation, as detailed in the below table.

The following table provides quantitative information about Level 3 inputs for fair value measurement of our earn-out liability as of the acquisition date and December 31, 2017. Significant increases or decreases in these inputs in isolation could result in a significant impact on our fair value measurement:



Simulation Input	As of December 31, 2017		At Acquisition February 3, 2017
Adjusted EBITDA Volatility	26.00	%	29.00	%
WACC	8.75	%	10.00	%
20-year risk free rate	2.58	%	2.82	%
Market price of risk	5.99	%	6.93	%
Cost of debt	4.08	%	4.16	%

The fair value of our investments, which consisted of corporate bonds, is estimated using observable market based inputs such as quoted prices, interest rates and yield curves or Level 2 inputs.

The fair value of our Level 2 forward currency contract is estimated using observable market inputs such as known notional value amounts, spot and forward exchange rates. These inputs relate to liquid, heavily traded currencies with active markets which are available for the full term of the derivative.

The assets related to our Dominican Republic manufacturing facilities are classified as assets held-for-sale. These assets are separately stated in our consolidated balance sheet. The fair value of these Level 3 assets was determined as part of the HIS business valuation and was based on a market approach using comparable building and land sales data and the analysis of market conditions.

There were no transfers between levels in 2017.

Our assets and liabilities measured at fair value on a recurring basis consisted of the following (Level 1, 2 and 3 inputs as defined above) (in thousands):



	Fair value measurements at December 31, 2017
	Total carrying value		Quoted prices in active markets for identical assets (level 1)		Significant other observable inputs (level 2)		Significant unobservable inputs (level 3)
Assets:
Available for sale securities:
Short-term	$	10,061	$	—	$	10,061	$	—
Long-term	14,579		—		14,579		—
Total Assets	$	24,640	$	—	$	24,640	$	—

Liabilities:

Earn-out liability	$	27,000	$	—	$	—	$	27,000
Foreign exchange forwards:
Accrued liabilities	187		—		187		—
Other long-term liabilities	402		—		402		—
Total Liabilities	$	27,589	$	—	$	589	$	27,000

Our assets measured at fair value on a nonrecurring basis consisted of the following (Level 1, 2 and 3 inputs as defined above (in thousands):



	Fair value measurements at December 31, 2017 using
	Total carrying value		Quoted prices in active markets for identical assets (level 1)		Significant other observable inputs (level 2)		Significant unobservable inputs (level 3)
Assets:
Assets held-for-sale	$	12,489	$	—	$	—	$	12,489
Total Assets	$	12,489	$	—	$	—	$	12,489