FAIR VALUE MEASUREMENTS AND FINANCIAL INSTRUMENTS

3 Months Ended

Mar. 31, 2020

Fair Value Disclosures [Abstract]

FAIR VALUE MEASUREMENTS AND FINANCIAL INSTRUMENTS

FAIR VALUE MEASUREMENTS AND FINANCIAL INSTRUMENTS

Fair value measurements are estimated based on valuation techniques and inputs categorized as follows:

• Level 1 — Quoted prices in active markets for identical assets or liabilities;

• Level 2 — Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and

• Level 3 — Unobservable inputs that are supported by little or no market activity and that are financial instruments whose values are determined using discounted cash flow methodologies, pricing models, or similar techniques, as well as instruments for which the determination of fair value requires significant judgment or estimation.

If the inputs used to measure the financial assets and liabilities fall within more than one level described above, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following fair value hierarchy table presents the components and classification of the Company’s financial assets and liabilities measured at fair value on a recurring basis:

	March 31, 2020								December 31, 2019
(in millions)	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Cash equivalents	$	37	$	12	$	25	$	—	$	2,696	$	2,646	$	50	$	—
Restricted cash	$	1,011	$	1,011	$	—	$	—	$	1	$	1	$	—	$	—
Cross-currency swaps	$	55	$	—	$	55	$	—	$	—	$	—	$	—	$	—
Foreign currency exchange contracts	$	1	$	—	$	1	$	—	$	—	$	—	$	—	$	—
Liabilities:
Acquisition-related contingent consideration	$	312	$	—	$	—	$	312	$	316	$	—	$	—	$	316
Cross-currency swaps	$	—	$	—	$	—	$	—	$	13	$	—	$	13	$	—
Foreign currency exchange contracts	$	6	$	—	$	6	$	—	$	—	$	—	$	—	$	—

Cash equivalents consist of highly liquid investments, primarily money market funds, with maturities of three months or less when purchased, and are reflected in the Consolidated Balance Sheets at carrying value, which approximates fair value due to their short-term nature.

As of March 31, 2020, Restricted cash includes $1,010 million of payments into an escrow fund under the terms of a settlement agreement regarding certain U.S. securities litigation, subject to final court approval, and is reflected in the Consolidated Balance Sheets at carrying value, which approximates fair value due to its short-term nature. These payments will remain in escrow until final approval of the settlement as discussed in Note 18, "LEGAL PROCEEDINGS".

There were no transfers into or out of Level 3 during the three months ended March 31, 2020.

Cross-currency Swaps

During the three months ended September 30, 2019, the Company entered into cross-currency swaps, with aggregate notional amounts of $1,250 million, to mitigate fluctuation in the value of a portion of its euro-denominated net investment in its consolidated financial statements from adverse movements in exchange rates. The euro-denominated net investment being hedged is the Company’s investment in certain euro-denominated subsidiaries. The Company had no derivative instruments during the three months ended March 31, 2019.

The Company’s cross-currency swaps qualify for and have been designated as an accounting hedge of the foreign currency exposure of a net investment in a foreign operation and are remeasured at each reporting date to reflect changes in their fair values. The fair value is determined via a mark-to-market analysis, using observable (Level 2) inputs. These inputs may include: (i) the foreign currency exchange spot rate between the euro and U.S. dollar, (ii) the risk-free interest rate and (iii) the credit risk rating for each applicable counterparty. The net change in fair value of cross-currency swaps, is reported as a gain or loss in the Consolidated Statements of Comprehensive Loss as part of Foreign currency translation adjustment to the extent they are effective and remain in Accumulative Comprehensive Income until either the sale or complete, or substantially complete, liquidation of the subsidiary. No portion of the cross-currency swaps were ineffective for the three months ended March 31, 2020. The Company uses the spot method of assessing hedge effectiveness. The Company has elected to amortize amounts excluded from the assessment of effectiveness over the term of its cross-currency swaps as Interest expense in the Consolidated Statements of Operations.

The fair value of the Company’s cross-currency swaps asset as of March 31, 2020 was $55 million. Included in Other non-current assets are $52 million of cross-currency swaps and included in Prepaid expenses and other current assets is $3 million of earned interest within the Consolidated Balance Sheets. The following table presents the effect of hedging instruments on the Consolidated Statements of Comprehensive Loss and the Consolidated Statements of Operations for the three months ended March 31, 2020:

(in millions)	Gain recognized in Other Comprehensive Loss		Gain excluded from assessment of hedge effectiveness		Location of gain in income of excluded component
Cross-currency swaps	$	73	$	6	Interest expense

Settlement of the Company's cross-currency swaps occur in February and August each year. During the three months ended March 31, 2020, the Company received $11 million in settlements which are reported as investing activities in the Consolidated Statements of Cash Flows.

Foreign Currency Exchange Contracts

During the three months ended March 31, 2020, the Company entered into foreign currency exchange contracts, with an aggregate notional amount of $163 million. The Company had no foreign currency exchange contracts during 2019.

The Company's foreign currency exchange contracts are remeasured at each reporting date to reflect changes in their fair values determined using forward rates, which are observable market inputs, multiplied by the notional amount. The Company's foreign currency exchange contracts are economically hedging the foreign exchange exposure on certain of the Company’s intercompany balances. These contracts have not been designated as an accounting hedge, and therefore the net change in their fair value is reported as a gain or loss in the Consolidated Statements of Operations as part of Foreign exchange and other.

The fair value of the Company's foreign currency exchange contracts as of March 31, 2020 was $5 million. Included in Accrued and other current liabilities are $6 million and included in Prepaid expenses and other current assets are $1 million of foreign currency exchange contracts within the Consolidated Balance Sheets. During the three months ended March 31, 2020, the net change in fair value was a loss of $5 million. Settlements of the Company's foreign currency exchange contracts are reported as operating activities in the Consolidated Statements of Cash Flows.

Acquisition-related Contingent Consideration Obligations

The fair value measurement of contingent consideration obligations arising from business combinations is determined via a probability-weighted discounted cash flow analysis, using unobservable (Level 3) inputs. These inputs may include: (i) the estimated amount and timing of projected cash flows, (ii) the probability of the achievement of the factor(s) on which the contingency is based and (iii) the risk-adjusted discount rate used to present value the probability-weighted cash flows. Significant increases or decreases in any of those inputs in isolation could result in a significantly higher or lower fair value measurement. At March 31, 2020, the fair value measurements of acquisition-related contingent consideration were determined using risk-adjusted discount rates ranging from 5% to 25%, and a weighted average risk-adjusted discount rate of 7%. The weighted average risk-adjusted discount rate was calculated by weighting each contract's relative fair value at March 31, 2020.

The following table presents a reconciliation of contingent consideration obligations measured on a recurring basis using significant unobservable inputs (Level 3) for the three months ended March 31, 2020 and 2019:

(in millions)	2020					2019
Balance, beginning of period			$	316					$	339
Adjustments to Acquisition-related contingent consideration:
Accretion for the time value of money	$	6				$	6
Fair value adjustments due to changes in estimates of other future payments	7					(27		)
Acquisition-related contingent consideration			13						(21		)
Payments			(17		)				(9		)
Balance, end of period			312						309
Current portion included in Accrued and other current liabilities			44						45
Non-current portion			$	268					$	264

Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis

The following table presents the components and classification of the Company’s financial assets and liabilities measured at fair value on a non-recurring basis:

	March 31, 2020								December 31, 2019
(in millions)	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Other non-current assets:
Non-current assets held for sale	$	—	$	—	$	—	$	—	$	39	$	—	$	—	$	39

Non-current assets held for sale of $39 million included in the Consolidated Balance Sheets as of December 31, 2019 were remeasured to their estimated fair values less costs to sell determined using a discounted cash flow analysis which utilized Level 3 unobservable inputs. As discussed in Note 4, "ACQUISITION, LICENSING AGREEMENTS AND ASSETS HELD FOR SALE", due to changing business dynamics, the Company decided not to sell these assets during the three months ended March 31, 2020.

Fair Value of Long-term Debt

The fair value of long-term debt as of March 31, 2020 and December 31, 2019 was $24,462 million and $27,520 million, respectively, and was estimated using the quoted market prices for the same or similar debt issuances (Level 2).