3. Financial Instruments and Fair Value Measurements

The Company maintains an investment policy that requires a diversified investment portfolio in terms of types, maturities, and credit exposure, and invests with institutions that have high credit quality. Annually, the Company reassesses the investment policy to ensure it is reflective of current markets and conditions. The Company does not currently hold financial instruments for speculative purposes.

The composition of marketable securities is as follows:

(in thousands, except years)	Contractual Maturity (in years)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
June 30, 2016:
Classified as current assets
Corporate notes	Less than 1	$	37,130	$	9	$	(14	)	$	37,125
Commercial paper	Less than 1		10,453		—		—			10,453
Securities of government-sponsored entities	Less than 1		6,494		9		—			6,503
Short-term marketable securities			54,077		18		(14	)		54,081
Classified as non-current assets
Securities of government-sponsored entities	1 to 2		2,597		6		—			2,603
Corporate notes	1 to 2		11,044		13		(6	)		11,051
Long-term marketable securities			13,641		19		(6	)		13,654
Total marketable securities at June 30, 2016		$	67,718	$	37	$	(20	)	$	67,735

December 31, 2015:
Classified as current assets
Certificates of deposit	Less than 1	$	6,615	$	—	$	—		$	6,615
Corporate notes	Less than 1		108,739		5		(173	)		108,571
Commercial paper	Less than 1		21,991		—		—			21,991
Securities of government-sponsored entities	Less than 1		28,284		—		(38	)		28,246
Short-term marketable securities			165,629		5		(211	)		165,423
Classified as non-current assets
Certificates of deposit	1 to 2		12,392		—		—			12,392
Corporate notes	1 to 2		43,857		—		(109	)		43,748
Securities of government-sponsored entities	1 to 2		56,412		—		(220	)		56,192
Long-term marketable securities			112,661		—		(329	)		112,332
Total marketable securities at December 31, 2015		$	278,290	$	5	$	(540	)	$	277,755

As of June 30, 2016, the Company had no investments that were in a significant unrealized loss position and no impairment charges were recorded during the periods presented. Realized gains and losses and interest income related to marketable securities were immaterial during all periods presented.

Foreign Currency and Derivative Financial Instruments

The Company translates the financial statements of its foreign subsidiaries using end-of-period exchange rates for assets and liabilities and average exchange rates during each reporting period for results of operations.

Some of the Company’s reporting entities conduct a portion of their business in currencies other than the entity’s functional currency. These transactions give rise to receivables and payables that are denominated in currencies other than the entity’s functional currency. The value of these receivables and payables is subject to changes in currency exchange rates from the point at which the transactions are originated until the settlement in cash. Both realized and unrealized gains and losses in the value of these receivables and payables are included in the determination of net income. Net foreign currency exchange gains (losses), which include gains and losses from derivative instruments, were $(0.3) million and $(0.2) million for the three and six months ended June 30, 2016, respectively, and $(0.3) million and $0.1 million for the three and six months ended June 30, 2015, respectively, and are included in other (loss) income, net, in the Consolidated Statements of Operations.

The Company maintains a foreign currency risk management strategy that uses derivative instruments to protect against fluctuations in earnings and cash flows that may rise from volatility in currency exchange rates. The Company uses foreign currency forward exchange contracts to hedge the currency exchange rate exposure from short-term intercompany receivables and payables denominated in a currency other than the reporting entity’s functional currency. Realized and unrealized gains or losses on forward contracts are included in the determination of net income as the forward contracts are not designated for hedge accounting under ASC Topic 815, Derivatives and Hedging. The foreign currency forward contracts effectively lock in the exchange rate at which the specific intercompany receivables and payables will be settled, so that gains or losses on the forward contracts offset the gains or losses from changes in the value of the underlying receivables and payables. The forward contracts are generally settled monthly. As of June 30, 2016 and December 31, 2015, notional principal amount of $18.5 million and $8.5 million, respectively, in foreign currency forward contracts was outstanding to hedge currency risk relative to the Company’s foreign receivables and payables.

The following table summarizes the fair values of derivative instruments at June 30, 2016 and December 31, 2015:

	Asset Derivatives					Liability Derivatives
		Fair Value					Fair Value
	Balance Sheet	June 30,		December 31,		Balance Sheet	June 30,		December 31,
(in thousands)	Location	2016		2015		Location	2016		2015
Derivative instruments not designated as cash flow hedges
Forward exchange contracts	Other current assets	$	—	$	46	Other current liabilities	$	99		—
Total derivatives		$	—	$	46		$	99		—

The following table summarizes the effect of derivative instruments on the Consolidated Statements of Operations for the three and six months ended June 30, 2016 and June 30, 2015:

Three Months Ended

June 30, 2016

June 30, 2015

Location of

Amount of

Location of

Amount of

(Gain)/Loss

Recognized in

(in thousands)

Income

Derivative instruments not designated as cash flow hedges

Forward exchange contracts

Other (income)

expense

(11

)

Other (income)

expense

502

Total derivatives

(11

)

502

Six Months Ended

June 30, 2016

June 30, 2015

Location of

Amount of

Location of

Amount of

(Gain)/Loss

Recognized in

(in thousands)

Income

Derivative instruments not designated as cash flow hedges

Forward exchange contracts

Other (income)

expense

168

Other (income)

expense

(1,664

)

Total derivatives

168

(1,664

)

Fair Value Measurements

The Company measures certain assets and liabilities in accordance with authoritative guidance which requires fair value measurements be classified and disclosed in one of the following three categories:

Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities.

Level 2: Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.

Level 3: Unobservable inputs are used when little or no market data is available.

Assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurements. The Company reviews the fair value hierarchy classification on a quarterly basis. Changes in the ability to observe valuation inputs may result in a reclassification of levels for certain assets or liabilities within the fair value hierarchy.

The fair values of the Company’s assets and liabilities, including cash equivalents, marketable securities, restricted investments, derivatives, and contingent consideration liabilities are measured at fair value on a recurring basis, and are determined under the fair value categories in accordance with the authoritative guidance as follows:

			Quoted Price in		Significant Other		Significant
			Active Market		Observable Inputs		Unobservable
(in thousands)	Total		(Level 1)		(Level 2)		Inputs (Level 3)
June 30, 2016:
Money market funds	$	113,976	$	113,976	$	—	$	—
Corporate notes		48,176		—		48,176		—
Commercial paper		10,453		—		10,453		—
Securities of government-sponsored entities		9,106		—		9,106		—
Total assets	$	181,711	$	113,976	$	67,735	$	—

December 31, 2015:
Money market funds	$	68,425	$	68,425	$	—	$	—
Certificates of deposit		19,007		19,007		—		—
Corporate notes		152,319		—		152,319		—
Commercial paper		21,991		—		21,991		—
Securities of government-sponsored entities		115,929		—		115,929		—
Total assets	$	377,671	$	87,432	$	290,239	$	—

The Company did not have any transfers of assets and liabilities between the levels of the fair value measurement hierarchy during the three and six months ended June 30, 2016 or June 30, 2015, respectively.

The carrying amounts of certain financial instruments such as cash equivalents, accounts receivable, prepaid expenses, other current assets, accounts payable, accrued expenses, and other current liabilities as of June 30, 2016 and December 31, 2015 approximate their related fair values due to the short-term maturities of these instruments. The carrying values of the Company’s capital lease obligations approximate their related fair values as of June 30, 2016 and December 31, 2015.

The fair value, based on a quoted market price (Level 1), of the Company’s outstanding Senior Convertible Notes due 2017 at June 30, 2016 and December 31, 2015 were approximately $182.2 million and $551.4 million, respectively. The fair value, based on a quoted market price (Level 1), of the Company’s outstanding Senior Convertible Notes due 2021 was $769.4 million at June 30, 2016. See Note 6 to the Unaudited Consolidated Financial Statements for further discussion on the carrying value of the Company’s Senior Convertible Notes.

Contingent Consideration Liability

The following table sets forth the changes in the estimated fair value of the Company’s liabilities measured on a recurring basis using significant unobservable inputs (Level 3):

	Six Months Ended June 30,
(in thousands)	2016		2015
Fair value measurement at beginning of period	$	—	$	644
Contingent consideration liability recorded upon acquisition		21,439		—
Change in fair value measurement		339		(36	)
Changes resulting from foreign currency fluctuations		32		—
Contingent consideration paid or settled		—		(608	)
Fair value measurement at end of period	$	21,810	$	—

The fair value of contingent consideration liabilities assumed in business combinations is recorded as part of the purchase price consideration of the acquisition, and is determined using a discounted cash flow model or probability simulation model. The significant inputs of such models are not observable in the market, such as certain financial metric growth rates, volatility rates, projections associated with the applicable milestone, the interest rate, the related probabilities and payment structure in the contingent consideration arrangement. Fair value adjustments to contingent consideration liabilities are recorded through operating expenses in the Consolidated Statement of Operations. Contingent consideration arrangements assumed by an asset purchase will be measured and accrued when such contingency is resolved.

During the first quarter of 2016, the Company recorded $21.4 million in contingent consideration liabilities as part of the purchase consideration of the acquisitions completed during the quarter. At June 30, 2016, the contingent consideration liabilities were $21.8 million, and were recorded in the Consolidated Balance Sheet commensurate with the respective payable terms. See Note 5 to the Unaudited Consolidated Financial Statements for further discussion on contingent consideration liabilities assumed in business combinations.

Non-financial assets and liabilities measured on a nonrecurring basis

Certain non-financial assets and liabilities are measured at fair value, usually with Level 3 inputs including discounted cash flow method or cost method, on a nonrecurring basis in accordance with authoritative guidance. In general, non-financial assets, including intangible assets and property and equipment, are measured at fair value when there is an indication of impairment and are recorded at fair value only when any impairment is recognized. Any impairment charges recognized in the Consolidated Statements of Operations were immaterial for the periods presented.