Fair value measurement

12 Months Ended

Dec. 31, 2017

Fair value is the price that would be received from the sale of an asset or paid to transfer a liability, using assumptions that market participants would use in pricing an asset or liability. The FASB's fair value guidance establishes a three-level hierarchy of the inputs (i.e., assumptions that market participants would use in pricing an asset or liability) used to measure fair value. The categorization within the valuation hierarchy is based on the lowest level of input that is significant to the entire fair value measurement.

The levels of inputs within the hierarchy used to measure fair value are as follows:

Level 1 — inputs to the fair value measurement that are quoted prices (unadjusted) in active markets for identical assets or liabilities.

Level 2 — inputs to the fair value measurement that include quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability; and inputs that are derived principally from or corroborated by observable market data by correlation or other means.

Level 3 — inputs to the fair value measurement that are unobservable inputs for the asset or liability.

The following tables provide information regarding the Company's financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2017 and 2016:



	Basis of fair value measurement
	December 31, 2017		(Level 1)		(Level 2)		(Level 3)
	(Dollars in thousands)
Investments in marketable securities	$	9,045	$	9,045	$	—	$	—
Derivative assets	1,221		—		1,221		—
Derivative liabilities	1,426		—		1,426		—
Contingent consideration liabilities	272,136		—		—		272,136



	Basis of fair value measurement
	December 31, 2016		(Level 1)		(Level 2)		(Level 3)
	(Dollars in thousands)
Investments in marketable securities	$	7,660	$	7,660	$	—	$	—
Derivative assets	1,157		—		1,157		—
Derivative liabilities	2,257		—		2,257		—
Contingent consideration liabilities	7,102		—		—		7,102

There were no transfers of financial assets or liabilities among Level 1, Level 2 or Level 3 within the fair value hierarchy during the years ended December 31, 2017 or 2016.

Valuation Techniques

The Company’s financial assets valued based upon Level 1 inputs are comprised of investments in marketable securities held in trust, which are available to satisfy benefit obligations under Company benefit plans and other arrangements. The investment assets of the trust are valued using quoted market prices.

The Company’s financial assets and liabilities valued based upon Level 2 inputs are comprised of foreign currency forward contracts. The Company uses foreign currency forward contracts to manage foreign currency transaction exposure as well as exposure to foreign currency denominated monetary assets and liabilities. The Company measures the fair value of the foreign currency forward contracts by calculating the amount required to enter into offsetting contracts with similar remaining maturities, based on quoted market prices, and taking into account the creditworthiness of the counterparties.

The Company’s financial liabilities valued based upon Level 3 inputs are comprised of contingent consideration arrangements pertaining to the Company’s acquisitions. See Note 8 for a discussion of the fair value of the Company’s borrowings.

Contingent consideration

As of December 31, 2017, the Company estimates that contingent consideration payments will occur in 2018 through 2029 and the maximum amount of undiscounted payments the Company could make under contingent consideration arrangements is $401.8 million. The contingent consideration liabilities, which primarily consist of revenue-based milestones, are remeasured to fair value each reporting period using assumptions including estimated revenues (based on internal operational budgets and long-range strategic plans), discount rates, probability of payment and project payment dates.

The contingent consideration fair value measurement is based on significant inputs not observable in the market and therefore constitute Level 3 inputs within the fair value hierarchy. The Company determines the fair value of the contingent consideration liability related to the NeoTract acquisition using a Monte Carlo simulation valuation approach, which simulates future revenues during the earn out-period using management's best estimates. The Company determines the value of its other contingent consideration liabilities based on a probability-weighted discounted cash flow analysis. Increases in projected revenues and probabilities of payment may result in significantly higher fair value measurements; decreases in these items may have the opposite effect. Increases in the discount rates and the period prior to payment may result in significantly lower fair value measurements; decreases in these items may have the opposite effect.

The table below provides additional information regarding the valuation technique and inputs used in determining the fair value of contingent consideration recognized in connection with the NeoTract acquisition, which is described in Note 3.

The following table provides information regarding changes in the Company's contingent consideration liabilities for the years ended December 31, 2017 and 2016:



	Contingent consideration
	2017			2016
	(Dollars in thousands)
Beginning balance – January 1	$	7,102		$	20,829
Initial estimate upon acquisition	261,733			—
Payments	(335		)	(7,282		)
Revaluations	3,575			(6,445		)
Translation adjustment	61			—
Ending balance – December 31	$	272,136		$	7,102

- 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.

+ References + Details

Valuation Technique

Unobservable Input

Contingent consideration

Monte Carlo simulation

Revenue volatility

Risk free rate

Cost of debt structure

Projected year of payment