Fair value measurement

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. Under GAAP, there is 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, 2018 and 2017:



	Basis of fair value measurement
	December 31, 2018		(Level 1)		(Level 2)		(Level 3)
	(Dollars in thousands)
Investments in marketable securities	$	8,671	$	8,671	$	—	$	—
Derivative assets	16,050		—		16,050		—
Derivative liabilities	8,581		—		8,581		—
Contingent consideration liabilities	304,248		—		—		304,248



	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

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, 2018 or 2017.

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 and cross-currency interest rate swap agreements. The Company uses foreign currency forward contracts and cross-currency interest rate swap agreements 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 and cross-currency swap agreements 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 9 for a discussion of the fair value of the Company’s borrowings.

Contingent consideration

Contingent consideration liabilities, which primarily consist of revenue-based goals, 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 projected 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 liabilities using a Monte Carlo simulation (which involves a simulation of future revenues during the earn out-period using management's best estimates) or a probability-weighted discounted cash flow analysis. Increases in projected revenues, estimated cash flows 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 in periods prior to payment may result in significantly lower fair value measurements and decreases in the discount rates 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.



Contingent Consideration Liability	Valuation Technique	Unobservable Input	Range
Milestone-based payment
	Discounted cash flow	Discount rate	4.3% - 6.2%
		Projected year of payment	2019 - 2023
Revenue-based
	Monte Carlo simulation	Revenue volatility	16.1% - 25.0%
		Risk free rate	Cost of debt structure
		Projected year of payment	2019 - 2022

	Discounted cash flow	Discount rate	10.0% - 10.5%
		Projected year of payment	2019 - 2029

The following table provides information regarding changes in the Company's contingent consideration liabilities for the years ended December 31, 2018 and 2017:



	Contingent consideration
	2018			2017
	(Dollars in thousands)
Beginning balance – January 1	$	272,136		$	7,102
Initial estimate upon acquisition	54,696			261,733
Payments	(75,335		)	(335		)
Revaluations	52,977			3,575
Translation adjustment	(226		)	61
Ending balance – December 31	$	304,248		$	272,136