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Fair Value Measurements

6 Months Ended

Jun. 30, 2020

NOTE 5. FAIR VALUE MEASUREMENTS

Financial Instruments

The financial instruments recorded in our Condensed Consolidated Balance Sheets include cash and cash equivalents, restricted cash and cash equivalents, accounts receivable, equity method investments, accounts payable and accrued expenses, acquisition-related contingent consideration and debt obligations. Included in cash and cash equivalents and restricted cash and cash equivalents are money market funds representing a type of mutual fund required by law to invest in low-risk securities (for example, U.S. government bonds, U.S. Treasury Bills and commercial paper). Money market funds pay dividends that generally reflect short-term interest rates. Due to their short-term maturity, the carrying amounts of non-restricted and restricted cash and cash equivalents (including money market funds), accounts receivable, accounts payable and accrued expenses approximate their fair values.

The following table presents current and noncurrent restricted cash and cash equivalent balances at June 30, 2020 and December 31, 2019 (in thousands):


	June 30, 2020		December 31, 2019
Restricted cash and cash equivalents—current portion (1)	$	180,730	$	247,457
Restricted cash and cash equivalents—noncurrent portion (2)	18,400		18,400
Restricted cash and cash equivalents—total (3)	$	199,130	$	265,857

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(1)These amounts are reported in our Condensed Consolidated Balance Sheets as Restricted cash and cash equivalents.

(2)These amounts are reported in our Condensed Consolidated Balance Sheets as Other assets.

(3)Approximately $175.8 million and $242.8 million of our restricted cash and cash equivalents are held in Qualified Settlement Funds (QSFs) for mesh-related matters at June 30, 2020 and December 31, 2019, respectively. The remaining restricted cash and cash equivalents primarily relates to other litigation-related matters. See Note 12. Commitments and Contingencies for further information.

Fair value guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include:

•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 for similar assets or liabilities; quoted prices 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.

•Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Acquisition-Related Contingent Consideration

The fair value of contingent consideration liabilities is determined using unobservable inputs; hence, these instruments represent Level 3 measurements within the above-defined fair value hierarchy. These inputs include the estimated amount and timing of projected cash flows, the probability of success (achievement of the contingent event) and the risk-adjusted discount rate used to present value the probability-weighted cash flows. Subsequent to the acquisition date, at each reporting period, the contingent consideration liability is remeasured at current fair value with changes recorded in earnings. The estimates of fair value are uncertain and changes in any of the estimated inputs used as of the date of this report could have resulted in significant adjustments to fair value. See the “Recurring Fair Value Measurements” section below for additional information on acquisition-related contingent consideration.

Recurring Fair Value Measurements

The Company’s financial assets and liabilities measured at fair value on a recurring basis at June 30, 2020 and December 31, 2019 were as follows (in thousands):


	Fair Value Measurements at June 30, 2020 using:
	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total
Assets:
Money market funds	$	638,966	$	—	$	—	$	638,966
Liabilities:
Acquisition-related contingent consideration—current	$	—	$	—	$	9,142	$	9,142
Acquisition-related contingent consideration—noncurrent	$	—	$	—	$	32,915	$	32,915


	Fair Value Measurements at December 31, 2019 using:
	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total
Assets:
Money market funds	$	427,033	$	—	$	—	$	427,033
Liabilities:
Acquisition-related contingent consideration—current	$	—	$	—	$	6,534	$	6,534
Acquisition-related contingent consideration—noncurrent	$	—	$	—	$	23,123	$	23,123

At June 30, 2020 and December 31, 2019, money market funds include $40.4 million and $70.2 million, respectively, in QSFs to be disbursed to mesh-related or other product liability claimants. Amounts in QSFs are considered restricted cash equivalents. See Note 12. Commitments and Contingencies for further discussion of our product liability cases. At June 30, 2020 and December 31, 2019, the differences between the amortized cost and the fair value of our money market funds were not material, individually or in the aggregate.

Fair Value Measurements Using Significant Unobservable Inputs

The following table presents changes to the Company’s liability for acquisition-related contingent consideration, which is measured at fair value on a recurring basis using significant unobservable inputs (Level 3), for the three and six months ended June 30, 2020 and 2019 (in thousands):


	Three Months Ended June 30,						Six Months Ended June 30,
	2020		2019		2020		2019
Beginning of period	$	38,939	$	67,842	$	29,657	$	116,703
Amounts settled	(3,221)		(9,574)		(5,682)		(21,165)
Changes in fair value recorded in earnings	6,045		(5,507)		18,507		(43,008)
Effect of currency translation	294		169		(425)		400
End of period	$	42,057	$	52,930	$	42,057	$	52,930

At June 30, 2020, the fair value measurements of the contingent consideration obligations were determined using risk-adjusted discount rates ranging from approximately 10.0% to 15.0% (weighted average rate of approximately 12.2%, weighted based on relative fair value). Changes in fair value recorded in earnings related to acquisition-related contingent consideration are included in our Condensed Consolidated Statements of Operations as Acquisition-related and integration items, net. Amounts recorded for the current and noncurrent portions of acquisition-related contingent consideration are included in Accounts payable and accrued expenses and Other liabilities, respectively, in our Condensed Consolidated Balance Sheets.

The following table presents changes to the Company’s liability for acquisition-related contingent consideration during the six months ended June 30, 2020 by acquisition (in thousands):


	Balance as of December 31, 2019		Changes in Fair Value Recorded in Earnings		Amounts Settled and Other		Balance as of June 30, 2020
Auxilium acquisition	$	13,207	$	2,119	$	(702)	$	14,624
Lehigh Valley Technologies, Inc. acquisitions	6,800		15,600		(3,500)		18,900

Other	9,650		788		(1,905)		8,533
Total	$	29,657	$	18,507	$	(6,107)	$	42,057

Nonrecurring Fair Value Measurements

The Company’s financial assets and liabilities measured at fair value on a nonrecurring basis during the six months ended June 30, 2020 were as follows (in thousands):


	Fair Value Measurements during the Six Months Ended June 30, 2020 (1) using:								Total Expense for the Six Months Ended June 30, 2020
	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs

Intangible assets, excluding goodwill (2)	$	—	$	—	$	24,377	$	(63,751)
Certain property, plant and equipment	—		—		—		(1,248)
Total	$	—	$	—	$	24,377	$	(64,999)

__________

(1)The fair value amounts are presented as of the date of the fair value measurement as these assets are not measured at fair value on a recurring basis. Such measurements generally occur in connection with our quarter-end financial reporting close procedures.

(2)These fair value measurements were determined using risk-adjusted discount rates ranging from approximately 10.0% to 12.0% (weighted average rate of approximately 11.1%, weighted based on relative fair value). The Company also performed fair value measurements in connection with its goodwill impairment tests. Refer to Note 8. Goodwill and Other Intangibles for additional information on goodwill and other intangible asset impairment tests, including information about the valuation methodologies utilized.

- 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.

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