Note 10 — Fair value measurement

Fair value is defined as the exit 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 fair value guidance establishes a three-level hierarchy, which maximizes the use of observable inputs and minimizes the use of unobservable inputs used in measuring fair value. The levels within the hierarchy are as follows:

Level 1 inputs — quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

Level 2 inputs — inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. If the asset or liability has a specified (contractual) term, a Level 2 input must be observable for substantially the full term of the asset or liability. Level 2 inputs include:

1.	Quoted prices for similar assets or liabilities in active markets.

2.	Quoted prices for identical or similar assets or liabilities in markets that are not active.

3.	Inputs other than quoted prices that are observable for the asset or liability.

4.	Inputs that are derived principally from or corroborated by observable market data by correlation or other means.

Level 3 inputs — unobservable inputs for the asset or liability. Unobservable inputs may be used to measure fair value only when observable inputs are not available. Unobservable inputs reflect the Company’s assumptions about the assumptions market participants would use in pricing the asset or liability in achieving the fair value measurement objective of an exit price perspective. An exit price is the price that would be received to sell an asset or paid to transfer a liability.

The following tables provide information regarding the financial assets and liabilities carried at fair value measured on a recurring basis as of December 31, 2013 and 2012:

	Total carrying value at December 31, 2013		Quoted prices in active markets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
	(Dollars in thousands)
Investments in marketable securities	$	6,150	$	6,150	$	—	$	—
Contingent consideration liabilities		20,313		—		—		20,313

	Total carrying value at December 31, 2012		Quoted prices in active markets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
	(Dollars in thousands)
Investments in marketable securities	$	4,785	$	4,785	$	—	$	—
Derivative assets		1,279		—		1,279		—
Derivative liabilities		598		—		598		—
Contingent consideration liabilities		51,196		—		—		51,196

There were no transfers of financial assets or liabilities carried at fair value among Level 1, Level 2 or Level 3 within the valuation hierarchy during the twelve months ended December 31, 2013 or 2012.

The following table provides information regarding changes in Level 3 financial liabilities related to contingent consideration in connection with various Company acquisitions, including those described in Note 3 to the consolidated financial statements during the twelve months ended December 31, 2013 and 2012:

	Contingent consideration
	2013			2012
	(Dollars in thousands)
Beginning balance – January 1	$	51,196		$	9,676
Initial estimate upon acquisition		—			58,895
Payment		(18,880	)		(18,426	)
Revaluations		(11,982	)		1,055
Translation adjustment		(21	)		(4	)
Ending balance – December 31	$	20,313		$	51,196

The Company reduced contingent consideration liabilities and selling, general and administrative expense by $12.3 million for the year ended December 31, 2013 after determining that certain conditions for the payment of certain contingent consideration would not be satisfied.

See Note 8 to the consolidated financial statements for a discussion of the fair value of the Company’s long-term debt.

Valuation Techniques Used to Determine Fair Value

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 forward rate contracts to manage currency transaction exposure. The fair value of the foreign currency forward contracts represents the amount required to enter into offsetting contracts with similar remaining maturities based on quoted market prices. The Company has taken into account the creditworthiness of the counterparties in measuring fair value. See Note 9 to the consolidated financial statements for additional information.

The Company’s financial liabilities valued based upon Level 3 inputs are comprised of contingent consideration arrangements pertaining to the Company’s acquisitions. The Company accounts for contingent consideration in accordance with applicable accounting guidance pertaining to business combinations. In connection with several of its acquisitions, the Company agreed to pay contingent consideration upon the achievement of specified objectives, including receipt of regulatory approvals, achievement of sales targets and, in some instances, the passage of time (collectively, “milestone payments”), and therefore recorded contingent consideration liabilities at the time of the acquisitions. The Company is required to reevaluate the fair value of contingent consideration each reporting period based on new developments and record changes in fair value until such consideration is satisfied through payment upon the achievement of the specified objectives or is no longer payable due to failure to achieve the specified objectives.

It is estimated that milestone payments will occur in 2014 and may extend until 2018 or later. As of December 31, 2013, the range of undiscounted amounts the Company could be required to pay for contingent consideration arrangements is between zero and $77 million. The Company determines the fair value of the liabilities for the contingent consideration based on a probability-weighted discounted cash flow analysis. This fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement within the valuation hierarchy. The fair value of the contingent consideration liability associated with future milestone payments is based on several factors including:

·	estimated cash flows projected from the success of market launches;

·	the estimated time and resources needed to complete the development of acquired technologies;

·	the uncertainty of obtaining regulatory approvals within the required time periods; and

·	the risk adjusted discount rate for fair value measurement.

The following table provides information regarding the valuation techniques and inputs used in determining the fair value of the contingent consideration liabilities categorized as Level 3 measurements:

	Valuation Technique	Unobservable Input	Range (Weighted Average)
Contingent consideration	Discounted cash flow	Discount rate		1% - 10% (6%)
		Probability of payment		0 - 100% (31%)

As of December 31, 2013, of the $20.3 million of total recorded liabilities for contingent consideration, the Company has recorded approximately $4.1 million in Current portion of contingent consideration and the remaining $16.2 million in Other liabilities.