Document


 

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

__________________________________

FORM 6-K
 
__________________________________

REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13a-16 OR 15d-16 OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2017
Commission File Number 0-28564
 
__________________________________
QIAGEN N.V.
__________________________________
Hulsterweg 82
5912 PL Venlo
The Netherlands
__________________________________

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F:
Form 20-F x           Form 40-F  o
Indicate by check mark whether the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):  o
Indicate by check mark whether the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):  o


 


Table of Contents

QIAGEN N.V.
Form 6-K
TABLE OF CONTENTS
 
Item
 
Page 
 
 
 
 

2
Table of Contents

OTHER INFORMATION
For the three- and six-month periods ended June 30, 2017, QIAGEN N.V. prepared its quarterly report under United States generally accepted accounting principles (U.S. GAAP). This quarterly report is furnished herewith as Exhibit 99.1 and incorporated by reference herein.
 

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
QIAGEN N.V.
 
 
 
BY:
/s/ Roland Sackers      
 
Roland Sackers
 
Chief Financial Officer
 
 
Date:
July 28, 2017
 

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EXHIBIT INDEX
 
Exhibit
No. 
 
Exhibit
 
 
 
 
99.1
 
U.S. GAAP Quarterly Report for the Period Ended June 30, 2017


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Exhibit 99.1
QIAGEN N.V. AND SUBSIDIARIES
U.S. GAAP QUARTERLY REPORT FOR THE PERIOD ENDED JUNE 30, 2017
TABLE OF CONTENTS
 
Financial Information
 
 
 
Condensed Consolidated Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

1
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QIAGEN N.V. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
 
 
Note 
 
June 30,
2017
 
December 31,
2016
 
 
 
(unaudited)
 
 
Assets
 
 
 
 
 
Current assets:
 
 
 
 
 
Cash and cash equivalents
 
 
$
542,841

 
$
439,180

Short-term investments
 
 
66,006

 
92,999

Accounts receivable, net of allowance for doubtful accounts of $7,326 and $7,614 in 2017 and 2016, respectively
 
 
278,392

 
278,244

Income taxes receivable
 
 
31,489

 
23,795

Inventories, net
(11)
 
155,667

 
136,552

Prepaid expenses and other current assets
 
 
84,859

 
66,799

Total current assets
 
 
1,159,254

 
1,037,569

Long-term assets:
 
 
 
 
 
Property, plant and equipment, net of accumulated depreciation of $515,191 and $451,160 in 2017 and 2016, respectively
 
 
465,547

 
436,655

Goodwill
(6)
 
1,995,807

 
1,925,518

Intangible assets, net of accumulated amortization of $1,040,697 and $948,072 in 2017 and 2016, respectively
(6)
 
546,841

 
557,159

Deferred income taxes
 
 
66,078

 
68,384

Other long-term assets (of which $13,645 and $13,067 in 2017 and 2016 due from related parties, respectively)
(5, 7, 16)
 
322,595

 
282,909

Total long-term assets
 
 
3,396,868

 
3,270,625

Total assets
 
 
$
4,556,122

 
$
4,308,194


The accompanying notes are an integral part of these condensed consolidated financial statements.

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Table of Contents

QIAGEN N.V. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except par value)
 
 
Note 
 
June 30,
2017
 
December 31,
2016
 
 
 
(unaudited)
 
 
Liabilities and equity
 
 
 
 
 
Current liabilities:
 
 
 
 
 
Accounts payable
 
 
$
48,500

 
$
51,218

Accrued and other current liabilities (of which $3,132 and $3,926 in 2017 and 2016 due to related parties, respectively)
(16)
 
241,603

 
230,305

Income taxes payable
 
 
10,678

 
26,906

Total current liabilities
 
 
300,781

 
308,429

Long-term liabilities:
 
 
 
 
 
Long-term debt
(9)
 
1,383,830

 
1,067,096

Deferred income taxes
 
 
41,613

 
40,621

Other long-term liabilities (of which $3,132 and $5,889 in 2017 and 2016 due to related parties, respectively)
(7, 16)
 
324,524

 
284,952

Total long-term liabilities
 
 
1,749,967

 
1,392,669

Commitments and contingencies
(14)
 
 
 
 
Equity:
 
 
 
 
 
Preference shares, 0.01 EUR par value, authorized—450,000 shares, no shares issued and outstanding
 
 
—

 
—

Financing preference shares, 0.01 EUR par value, authorized—40,000 shares, no shares issued and outstanding
 
 
—

 
—

Common Shares, 0.01 EUR par value, authorized—410,000 shares, issued—230,829 and 239,707 shares in 2017 and in 2016, respectively
(12)
 
2,702

 
2,812

Additional paid-in capital
(12)
 
1,569,404

 
1,794,665

Retained earnings
 
 
1,241,764

 
1,263,464

Accumulated other comprehensive loss
(12)
 
(244,791
)
 
(333,839
)
Less treasury shares at cost— 2,595 and 5,147 shares in 2017 and in 2016, respectively
(12)
 
(63,705
)
 
(120,006
)
Total equity
 
 
2,505,374

 
2,607,096

Total liabilities and equity
 
 
$
4,556,122

 
$
4,308,194


The accompanying notes are an integral part of these condensed consolidated financial statements.
 

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QIAGEN N.V. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except share data)
 
 
Three months ended
 
June 30,
 
2017
 
2016
 
(unaudited)
Net sales
$
348,990

 
$
334,412

Cost of sales
124,433

 
123,600

Gross profit
224,557

 
210,812

Operating expenses:
 
 
 
Research and development
38,787

 
42,008

Sales and marketing
103,867

 
98,727

General and administrative, integration and other
49,857

 
30,497

Acquisition-related intangible amortization
9,681

 
9,739

Total operating expenses
202,192

 
180,971

Income from operations
22,365

 
29,841

Other income (expense):
 
 
 
Interest income
1,718

 
1,502

Interest expense
(10,581
)
 
(9,408
)
Other (expense) income, net
(1,111
)
 
1,017

Total other expense, net
(9,974
)
 
(6,889
)
Income before income taxes
12,391

 
22,952

Income taxes
(1,560
)
 
1,686

Net income
13,951

 
21,266

Net income attributable to the owners of QIAGEN N.V.
$
13,951

 
$
21,266

Basic earnings per common share attributable to the owners of QIAGEN N.V.
$
0.06

 
$
0.09

Diluted earnings per common share attributable to the owners of QIAGEN N.V.
$
0.06

 
$
0.09

 
 
 
 
Weighted-average shares outstanding
 
 
 
Basic
227,963

 
234,760

Diluted
232,681

 
238,667


The accompanying notes are an integral part of these condensed consolidated financial statements.
 

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QIAGEN N.V. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except share data)
 
 
 
 
 
 
Six months ended
 
June 30,
 
2017
 
2016
 
(unaudited)
Net sales
$
656,696

 
$
632,791

Cost of sales
236,294

 
237,206

Gross profit
420,402

 
395,585

Operating expenses:
 
 
 
Research and development
76,618

 
81,584

Sales and marketing
196,205

 
192,101

General and administrative, integration and other
82,105

 
56,010

Acquisition-related intangible amortization
19,358

 
19,536

Total operating expenses
374,286

 
349,231

Income from operations
46,116

 
46,354

Other income (expense):
 
 
 
Interest income
3,628

 
3,018

Interest expense
(20,743
)
 
(18,744
)
Other (expense) income, net
(127
)
 
2,334

Total other expense, net
(17,242
)
 
(13,392
)
Income before income taxes
28,874

 
32,962

Income taxes
(2,728
)
 
(3,968
)
Net income
31,602

 
36,930

Net loss attributable to noncontrolling interest
—

 
(47
)
Net income attributable to the owners of QIAGEN N.V.
$
31,602

 
$
36,977

Basic earnings per common share attributable to the owners of QIAGEN N.V.
$
0.14

 
$
0.16

Diluted earnings per common share attributable to the owners of QIAGEN N.V.
$
0.14

 
$
0.16

 
 
 
 
Weighted-average shares outstanding
 
 
 
Basic
228,968

 
234,423

Diluted
233,781

 
238,515





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QIAGEN N.V. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
 
 
 
 
Three Months Ended
 
 
 
June 30,
 
 
 
2017
 
2016
 
 
 
(unaudited)
Net income
 
 
$
13,951

 
$
21,266

Other comprehensive income (loss) to be reclassified to profit or loss in subsequent periods:
 
 
 
 
 
(Losses) gains on cash flow hedges
(7)
 
(13,851
)
 
11,570

Reclassification adjustments on cash flow hedges
(7)
 
12,978

 
(5,094
)
Cash flow hedges
 
 
(873
)
 
6,476

Net investment hedge
(7)
 
(6,228
)
 
—

Losses on marketable securities
 
 
(3,714
)
 
(845
)
Foreign currency translation adjustments
 
 
59,719

 
(37,123
)
Other comprehensive income (loss), before tax
 
 
48,904

 
(31,492
)
Income tax relating to components of other comprehensive income (loss)
 
 
1,501

 
(1,471
)
Total other comprehensive income (loss), after tax
 
 
50,405

 
(32,963
)
Comprehensive income (loss)
 
 
64,356

 
(11,697
)
Comprehensive loss attributable to the noncontrolling interest
 
 
—

 
(87
)
Comprehensive income (loss) attributable to the owners of QIAGEN N.V.
 
 
$
64,356

 
$
(11,610
)

 
 
 
 
 
 
 
 
 
Six Months Ended
 
 
 
June 30,
 
 
 
2017
 
2016
 
 
 
(unaudited)
Net income
 
 
$
31,602

 
$
36,930

Other comprehensive income (loss) to be reclassified to profit or loss in subsequent periods:
 
 
 
 
 
Losses on cash flow hedges
(7)
 
(13,841
)
 
(4,825
)
Reclassification adjustments on cash flow hedges
(7)
 
15,678

 
3,870

Cash flow hedges
 
 
1,837

 
(955
)
Net investment hedge
(7)
 
(6,228
)
 
—

Losses on marketable securities
 
 
(38
)
 
(1,189
)
Foreign currency translation adjustments, before tax
 
 
94,061

 
12,906

Other comprehensive income, before tax
 
 
89,632

 
10,762

Income tax relating to components of other comprehensive (loss) income
 
 
(584
)
 
73

Total other comprehensive income, after tax
 
 
89,048

 
10,835

Comprehensive income
 
 
120,650

 
47,765

Comprehensive income attributable to the noncontrolling interest
 
 
—

 
503

Comprehensive income attributable to the owners of QIAGEN N.V.
 
 
$
120,650

 
$
47,262


The accompanying notes are an integral part of these condensed consolidated financial statements.

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QIAGEN N.V. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(in thousands)
 
 
 
 
Common Shares
 
Additional Paid-In Capital
 
Retained
Earnings
 
Accumulated Other Comprehensive Income (Loss)
 
Treasury Shares
 
Equity Attributable to the Owners of QIAGEN N.V.
 
Non-controlling Interest
 
Total
Equity
(unaudited)
Note 
 
Shares
 
Amount
 
 
 
 
Shares
 
Amount
 
 
 
BALANCE AT DECEMBER 31, 2016
 
 
239,707

 
$
2,812

 
$
1,794,665

 
$
1,263,464

 
$
(333,839
)
 
(5,147
)
 
$
(120,006
)
 
$
2,607,096

 
$
—

 
$
2,607,096

Net income
 
 
—

 
—

 
—

 
31,602

 
—

 
—

 
—

 
31,602

 
—

 
31,602

Capital repayment
(12)
 
(8,878
)
 
(110
)
 
(244,319
)
 
—

 
—

 
191

 
—

 
(244,429
)
 
—

 
(244,429
)
Unrealized loss, net on hedging contracts
(7)
 
—

 
—

 
—

 
—

 
(16,609
)
 
—

 
—

 
(16,609
)
 
—

 
(16,609
)
Realized loss, net on hedging contracts
(7)
 
—

 
—

 
—

 
—

 
11,759

 
—

 
—

 
11,759

 
—

 
11,759

Unrealized loss, net on marketable securities
(5)
 
—

 
—

 
—

 
—

 
(168
)
 
—

 
—

 
(168
)
 
—

 
(168
)
Translation adjustment, net
(12)
 
—

 
—

 
—

 
—

 
94,066

 
—

 
—

 
94,066

 
—

 
94,066

Issuance of common shares in connection with stock plan
 
 
—

 
—

 
—

 
(53,302
)
 
—

 
2,361

 
56,301

 
2,999

 
—

 
2,999

Share-based compensation
(15)
 
—

 
—

 
19,058

 
—

 
—

 
—

 
—

 
19,058

 
—

 
19,058

BALANCE AT
JUNE 30, 2017
 
 
230,829

 
$
2,702

 
$
1,569,404

 
$
1,241,764

 
$
(244,791
)
 
(2,595
)
 
$
(63,705
)
 
$
2,505,374

 
$
—

 
$
2,505,374

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
BALANCE AT DECEMBER 31, 2015
 
 
239,707

 
$
2,812

 
$
1,765,595

 
$
1,209,197

 
$
(259,156
)
 
(6,702
)
 
$
(152,412
)
 
$
2,566,036

 
$
2,034

 
$
2,568,070

Acquisition of QIAGEN Marseille S.A. shares from non-controlling interests
 
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(2,624
)
 
(2,624
)
Acquisition of Exiqon A/S
 
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
5,519

 
5,519

Net income (loss)
 
 
—

 
—

 
—

 
36,977

 
—

 
—

 
—

 
36,977

 
(47
)
 
36,930

Unrealized loss, net on hedging contracts
 
 
—

 
—

 
—

 
—

 
(3,619
)
 
—

 
—

 
(3,619
)
 
—

 
(3,619
)
Realized loss, net on hedging contracts
 
 
—

 
—

 
—

 
—

 
2,902

 
—

 
—

 
2,902

 
—

 
2,902

Unrealized loss, net on marketable securities
 
 
—

 
—

 
—

 
—

 
(1,189
)
 
—

 
—

 
(1,189
)
 
—

 
(1,189
)
Translation adjustment, net
 
 
—

 
—

 
—

 
—

 
12,191

 
—

 
—

 
12,191

 
550

 
12,741

Issuance of common shares in connection with stock plan
 
 
—

 
—

 
—

 
(19,506
)
 
—

 
995

 
20,544

 
1,038

 
—

 
1,038

Share-based compensation
 
 
—

 
—

 
13,880

 
—

 
—

 
—

 
—

 
13,880

 
—

 
13,880

Excess tax benefit of employee stock plans
 
 
—

 
—

 
74

 
—

 
—

 
—

 
—

 
74

 
—

 
74

BALANCE AT
JUNE 30, 2016
 
 
239,707

 
$
2,812

 
$
1,779,549

 
$
1,226,668

 
$
(248,871
)
 
(5,707
)
 
$
(131,868
)
 
$
2,628,290

 
$
5,432

 
$
2,633,722


The accompanying notes are an integral part of these condensed consolidated financial statements.
 

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QIAGEN N.V. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 
 
 
Six months ended
 
 
 
June 30,
 
Note 
 
2017
 
2016
Cash flows from operating activities:
 
 
(unaudited)
Net income
 
 
$
31,602

 
$
36,930

Adjustments to reconcile net income to net cash provided by operating activities, net of effects of businesses acquired:
 
 
 
 
 
Depreciation and amortization
 
 
111,348

 
103,289

Non-cash impairments
(5)
 
3,122

 
—

Amortization of debt discount and issuance costs
 
 
10,432

 
10,152

Share-based compensation expense
(15)
 
19,058

 
12,408

Excess tax benefits from share-based compensation
 
 
—

 
(74
)
Deferred income taxes
 
 
(2,101
)
 
(7,999
)
Gain (loss) on marketable securities
 
 
1,055

 
(1,360
)
Changes in fair value of contingent consideration
 
 
—

 
(5,501
)
Other items, net including fair value changes in derivatives
 
 
(4,384
)
 
(142
)
Net changes in operating assets and liabilities:
 
 
 
 
 
Accounts receivable
 
 
13,480

 
25,720

Inventories
 
 
(18,750
)
 
(5,805
)
Prepaid expenses and other
 
 
(7,259
)
 
2,887

Other long-term assets
 
 
(1,676
)
 
4,617

Accounts payable
 
 
(4,404
)
 
(9,053
)
Accrued and other current liabilities
 
 
2,856

 
(16,623
)
Income taxes
 
 
(24,425
)
 
2,175

Other long-term liabilities
 
 
(438
)
 
(3,853
)
Net cash provided by operating activities

 
129,516

 
147,768

Cash flows from investing activities:
 
 
 
 
 
Purchases of property, plant and equipment
 
 
(37,907
)
 
(39,840
)
Proceeds from sale of equipment
 
 
42

 
20

Purchases of intangible assets
(6)
 
(18,116
)
 
(7,167
)
Purchases of investments
 
 
(584
)
 
(21,287
)
Cash paid for acquisitions, net of cash acquired
 
 
(49,678
)
 
(90,490
)
Purchases of short-term investments
 
 
(36,209
)
 
(355,051
)
Proceeds from sales of short-term investments
 
 
65,234

 
409,103

Other investing activities
 
 
(2,296
)
 
(2,424
)
Net cash used in investing activities
 
 
(79,514
)
 
(107,136
)
Cash flows from financing activities:
 
 
 
 
 
Proceeds from long-term debt, net of issuance costs
(9)
 
300,155

 
—

Capital repayment
(12)
 
(243,945
)
 
—

Principal payments on capital leases
 
 
(674
)
 
(556
)
Excess tax benefits from share-based compensation
 
 
—

 
74

Proceeds from issuance of common shares
 
 
2,999

 
1,038

Other financing activities
 
 
(10,187
)
 
(5,519
)
Net cash provided by (used in) financing activities
 
 
48,348

 
(4,963
)
Effect of exchange rate changes on cash and cash equivalents
 
 
5,311

 
2,477

Net increase in cash and cash equivalents
 
 
103,661

 
38,146

Cash and cash equivalents, beginning of period
 
 
439,180

 
290,011

Cash and cash equivalents, end of period
 
 
$
542,841

 
$
328,157


The accompanying notes are an integral part of these condensed consolidated financial statements.  

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QIAGEN N.V. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

1.
Corporate Information
QIAGEN N.V. is a public limited liability company ('naamloze vennootschap') under Dutch law with a registered office at Hulsterweg 82, 5912 PL Venlo, The Netherlands. QIAGEN N.V., a Netherlands holding company, and subsidiaries (we, our or the Company) is the leading global provider of Sample to Insight solutions to transform biological materials into valuable molecular insights. Our sample technologies isolate and process DNA, RNA and proteins from blood, tissue and other materials. Assay technologies make these biomolecules visible and ready for analysis. Bioinformatics software and knowledge bases interpret data to report relevant, actionable insights. Automation solutions tie these together in seamless and cost-effective molecular testing workflows. We provide these workflows to four major customer classes: Molecular Diagnostics (human healthcare), Applied Testing (forensics, veterinary testing and food safety), Pharma (pharmaceutical and biotechnology companies) and Academia (life sciences research). We market our products in more than 130 countries.

2.
Basis of Presentation and Accounting Policies     
Basis of Presentation
The condensed consolidated financial statements include the accounts of QIAGEN N.V., its wholly-owned subsidiaries and any partially owned subsidiaries that the Company has the ability to control. All significant intercompany accounts and transactions have been eliminated in consolidation. All amounts are presented in U.S. dollars, unless otherwise indicated. Investments in companies where we exercise significant influence over the operations but do not have control, and where we are not the primary beneficiary, are accounted for using the equity method. All other investments are accounted for under the cost method. When there is a portion of equity in an acquired subsidiary not attributable, directly or indirectly, to the Company, we record the fair value of the noncontrolling interests at the acquisition date and classify the amounts attributable to noncontrolling interests separately in equity in the condensed consolidated financial statements. Any subsequent changes in the Company's ownership interest while the Company retains its controlling financial interest in its subsidiary are accounted for as equity transactions.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) for interim financial information and generally in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to the Securities and Exchange Commission (SEC) rules and regulations. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary for a fair presentation have been included.
On January 6, 2017, we acquired OmicSoft Corporation, located in Cary, North Carolina (U.S.) and on June 28, 2016, we acquired Exiqon A/S, located in Vedbaek, Denmark. Accordingly, at the acquisition dates, all the assets acquired and liabilities assumed were recorded at their respective fair values and our consolidated results of operations include the operating results from the acquired companies from the acquisition dates.
Certain prior year amounts for the six-month period ended June 30, 2016 have been revised to reflect a change in attribution method of share-based compensation. See further discussion in the Revision of Previously Issued Financial Statements for Change in Attribution Method section of Note 20 - Share-Based Compensation as disclosed in our Annual Report on Form 20-F for the year ended December 31, 2016.
We operate as one operating segment in accordance with the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 280, Segment Reporting. We have a common basis of organization and our products and services are offered globally. Our chief operating decision maker (CODM) makes decisions based on the Company as a whole. Accordingly, we operate and make decisions as one reporting unit.
The results of operations for an interim period are not necessarily indicative of results that may be expected for any other interim period or for the full year. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's Annual Report on Form 20-F for the year ended December 31, 2016.
Summary of Significant Accounting Policies
The interim condensed consolidated financial statements were prepared based on the same accounting policies as those applied and described in the consolidated financial statements as of December 31, 2016 including the adoption of new standards and interpretations as of January 1, 2017.
Adoption of New Accounting Standards

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The following new FASB Accounting Standards Updates (ASU) were effective for the first quarter of 2017:
ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory requires in scope inventory, including inventory measured using first-in, first out (FIFO) or average cost, to be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. ASU 2015-11 became effective for us on January 1, 2017 and did not have a material impact on our consolidated financial statements.
ASU 2016-07, Investments - Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting eliminates the requirement to retroactively adopt the equity method of accounting when an investment qualifies for use of the equity method as a result of an increase in the level of ownership or degree of influence. The new guidance became effective for us beginning on January 1, 2017 and had no impact on our consolidated financial statements.
ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting is intended to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The new guidance became effective for us on January 1, 2017. The impact of the adoption of ASU 2016-09 is limited to the recording of any windfall or shortfall benefit directly to the tax provision and the reclassification of certain items in our statement of cash flows, which have adopted on a prospective basis. We will continue estimating stock-based compensation award forfeitures in determining the amount of compensation cost to be recognized each period. We expect an increase to our cash flows from operating activities and a decrease to cash flows from financing activities. As a result of this adoption, we expect volatility in our effective tax rate as any windfall or shortfall tax benefits related to our share-based compensation will be recorded directly into our results of operations. During the first half of 2017, $4.8 million of excess tax benefit was recognized directly to the tax provision.
New Accounting Standards Not Yet Adopted
The following new FASB Accounting Standards Updates, which are not yet adopted, have been grouped by their required effective dates:
First Quarter of 2018
ASU 2014-09, Revenue from Contracts with Customers (Topic 606) affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (e.g., insurance contracts or lease contracts). In August 2015, the FASB issued Accounting Standards Update No. 2015-14 (ASU 2015-14), Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date which defers the effective date of ASU 2014-09 to interim and annual reporting periods beginning after December 15, 2017. The FASB has continued to issue accounting standards updates to clarify and provide implementation guidance related to Revenue from Contracts with Customers, including ASU 2016-08 Revenue from Contract with Customers: Principal versus Agent Considerations, ASU 2016-10 Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing, and ASU 2016-12 Revenue from Contracts with Customers: Narrow-Scope Improvements and Practical Expedients. An entity should apply the amendments either retrospectively to each prior reporting period presented and the entity may elect certain practical expedients (the full retrospective method of adoption); or, retrospectively with the cumulative effect of initially applying this ASU recognized at the date of initial application (the modified retrospective method of adoption). We have not experienced significant issues in our implementation process and based on the analysis to date, we currently do not expect the adoption to have a material impact on our existing revenue accounting policies or on the recognition of revenue from product sales. However, we continue to evaluate the impact the guidance may have in connection with collaboration and license agreements and other revenue sources. We anticipate adopting this standard on its effective date, January 1, 2018. We have not yet determined the method of adoption, but assuming the impact is not material, we expect to adopt the new standard using the modified retrospective method with an adjustment to beginning retained earnings for the cumulative effect of the change.
ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities will impact certain aspects of recognition, measurement, presentation and disclosure of financial instruments. The new guidance makes targeted improvements to existing U.S. GAAP by:
•
requiring equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income;
•
requiring public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes;
•
requiring separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements;
•
eliminating the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; and
•
requiring a reporting organization to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk (also referred to as “own credit”) when

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the organization has elected to measure the liability at fair value in accordance with the fair value option for financial instruments.
The amendments will become effective for our financial statements beginning in the first quarter of 2018. The implementation of the amendments is expected to increase the volatility of net income; however the extent of any volatility will be dependent upon the significance of the equity investments at the time of adoption. At June 30, 2017, we had a net unrealized loss of $0.3 million net of tax, and at December 31, 2016, we had a net unrealized loss, net of tax, of $0.2 million from equity investments recorded in equity, respectively. At adoption of this standard, the cumulative amounts recorded in other accumulated comprehensive income will be reclassified to retained earnings, and gains or losses in future periods will be recognized in net income.
ASU No. 2016-15, Statement of Cash Flows (Topic 320): Classification of Certain Cash Receipts and Cash Payments (a consensus of the FASB Emerging Issues Task Force), addresses eight classification issues related to the statement of cash flows:
•
debt prepayment or debt extinguishment costs;
•
settlement of zero-coupon bonds;
•
contingent consideration payments made after a business combination;
•
proceeds from the settlement of insurance claims;
•
proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies;
•
distributions received from equity method investees;
•
beneficial interests in securitization transactions; and
•
separately identifiable cash flows and application of the predominance principle.
ASU 2016-15 will become effective for us for annual and interim periods in fiscal years beginning after December 15, 2017. Early adoption is permitted, including adoption in an interim period. We will be required to apply this ASU using a retrospective transition method to each period presented other than for issues where application would be impracticable in which case we will be permitted to apply the amendments for those issues prospectively as of the earliest date practicable. We are currently evaluating the potential impact of ASU 2016-15 on our consolidated financial statements.
ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory, aims to improve the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. This amendment requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The amendments in this update should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. This update is effective for annual periods beginning after December 15, 2017, and interim periods within those fiscal years with early adoption permitted, including adoption in an interim period. We are currently evaluating the impact the adoption of this new standard will have on our financial position and results of operations.
ASU 2016-18, Statement of Cash Flows (Topic 320): Restricted Cash, requires entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. As a result, entities will no longer present transfers between cash and cash equivalents and restricted cash and restricted cash equivalents in the statement of cash flows. The amendments in this update should be applied using a retrospective transition method to each period presented. This update is effective for annual periods beginning after December 15, 2017, and interim periods within those fiscal years with early adoption permitted, including adoption in an interim period. We are currently evaluating the impact the adoption of this new standard will have on our financial position and results of operations.
ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, clarifies and provides a more robust framework to use in determining when a set of assets and activities is a business. The amendments in this update should be applied prospectively on or after the effective date. This update is effective for annual periods beginning after December 15, 2017, and interim periods within those periods. Early adoption is permitted for acquisition or deconsolidation transactions occurring before the issuance date or effective date and only when the transactions have not been reported in issued or made available for issuance financial statements. We are currently evaluating the impact the adoption of this new standard will have on our financial position and results of operations.
ASU 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting, clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. The guidance is effective prospectively for annual periods beginning on or after December 15, 2017. We will adopt the standard on January 1, 2018.
First Quarter of 2019
ASU 2016-02, Leases (Topic 842) aims to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. ASU 2016-02 will become effective for us beginning in the first quarter of 2019 and requires modified retrospective application for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. We do not plan to early adopt this standard and

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we anticipate that the adoption of this standard will require changes to our systems and processes. We expect this standard to increase total assets and total liabilities, however, we are currently evaluating the potential size of the impact that ASU 2016-02 may have on our consolidated financial statements.
First Quarter of 2020
ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. provides financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. To achieve this objective, the amendments in ASU 2016-13 replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The new guidance will become effective for us beginning on January 1, 2020. We are currently evaluating the potential impact ASU 2016-13 may have on our consolidated financial statements.
ASU 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, removes Step 2 of the goodwill impairment test. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. ASU 2017-04 is effective for us for annual periods beginning January 1, 2020 and early adoption is permitted. The new guidance is required to be applied on a prospective basis. We are currently evaluating the impact the adoption of this new standard will have on our financial position and results of operations.

3.
Acquisitions
Acquisitions have been accounted for as business combinations, and the acquired companies’ results have been included in the accompanying condensed consolidated statements of income from their respective dates of acquisition. Our acquisitions have historically been made at prices above the fair value of the acquired net assets, resulting in goodwill, due to expectations of synergies of combining the businesses. These synergies include use of our existing infrastructure, such as sales force, shared service centers, distribution channels and customer relations; to expand sales of an acquired business' products; use of the infrastructure of the acquired businesses to cost-effectively expand sales of our products; and elimination of duplicative facilities, functions and staffing.
2017 Acquisition
On January 6, 2017, we acquired OmicSoft Corporation, a leading provider of omics data management solutions located in Cary, North Carolina (U.S.). This acquisition was not significant to the overall consolidated financial statements and as of June 30, 2017, the allocation of the purchase price remains preliminary.
2016 Acquisition
During the second quarter of 2016, we acquired a majority shareholding in Exiqon A/S (Exiqon), a publicly traded Danish company headquartered in Vedbaek, Denmark, which is a leading provider of RNA analysis solutions with a proprietary Locked Nucleic Acid (LNA) technology. The acquisition will expand our leadership position in Sample to Insight solutions for RNA analysis. On June 28, 2016, we paid DKK 627.4 million ($95.2 million) for approximately 94.52% of the outstanding Exiqon common shares. On the acquisition date, the fair value of the remaining shares was $5.5 million. The fair value of this noncontrolling share was based on reference to quoted market values of Exiqon stock. Since the acquisition date, we have acquired the remaining Exiqon shares for $5.5 million in cash, which is included in other financing activities in the accompanying condensed consolidated statements of cash flows, and as of June 30, 2017, we held 100% of Exiqon's shares.
The changes between the final purchase price allocation as of June 30, 2017 and the preliminary purchase price allocation as of June 30, 2016 include a $9.4 million increase in developed technology, a $9.2 million increase in deferred tax asset on tax loss carry forwards, a $2.8 million decrease in customer relationships, a $1.2 million increase of long-term deferred tax liability, a $0.4 million increase in prepaid expenses and other current assets and a $0.3 million increase of other opening balance sheet liabilities. The corresponding impact for these adjustments was a decrease to goodwill of $14.7 million. These changes were not material to the condensed consolidated financial statements.



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(in thousands)
 
Exiqon acquisition
 
 
 
Purchase Price:
 
 
Cash consideration
 
$
95,163

Fair value of remaining shares
 
5,519

 
 
$
100,682

 
 
 
Final Allocation:
 
 
Cash and cash equivalents
 
$
4,824

Accounts receivable
 
3,581

Inventory
 
1,553

Prepaid expenses and other current assets
 
1,853

Accounts payable
 
(1,289
)
Accruals and other current liabilities
 
(11,587
)
Debt assumed
 
(6,068
)
Other long term liabilities
 
(197
)
Deferred tax asset on tax loss carry forwards
 
10,016

Fixed and other long term assets
 
2,870

Developed technology
 
18,500

Customer relationships
 
3,800

Tradenames
 
1,400

Goodwill
 
76,807

Deferred tax liability on fair value of identifiable intangible assets acquired
 
(5,381
)
 
 
$
100,682

The weighted average amortization period for the intangible assets is 11.1 years. The goodwill acquired is not deductible for tax purposes.
Revenue and earnings in the reporting periods since the acquisition date have not been significant. No pro forma financial information has been provided herein as the acquisition of Exiqon did not have a material impact to net sales, net income or earnings per share on a pro forma basis.

4.
Restructuring
2016 Restructuring
During the fourth quarter of 2016, we implemented initiatives to support faster sales momentum while improving efficiency and accountability. The objective with these actions is to ensure that we grow sustainably and consistently in the coming years. Measures include simplifying our geographic presence with site reductions, focusing resources to shared service centers, and streamlining selected organizational structures. During 2017, we expanded the scope of these programs, to focus on capturing greater benefits from shared service centers and digitization. We expect to complete the program in 2017 at a total cost of approximately $100 million, of which $96.4 million has been incurred to date including $17.4 million in the six-month period ended June 30, 2017.

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The following table summarizes the cash components of the restructuring activity.
(in thousands)
Personnel Related
 
Facility Related
 
Contract and Other Costs
 
Total
Costs incurred in 2016
$
21,252

 
$
7,165

 
$
8,315

 
$
36,732

Payments
(2,742
)
 
(601
)
 
(2,391
)
 
(5,734
)
Facility deferred rent reclassified to restructuring liability
—

 
1,326

 
—

 
1,326

Foreign currency translation adjustment
(30
)
 
(8
)
 
19

 
(19
)
Liability at December 31, 2016
18,480

 
7,882

 
5,943

 
32,305

Costs incurred in 2017
9,083

 
1,807

 
8,832

 
19,722

Release of excess accrual
(366
)
 
(1,268
)
 
—

 
(1,634
)
Payments
(15,454
)
 
(6,540
)
 
(8,834
)
 
(30,828
)
Facility deferred rent reclassified to restructuring liability
—

 
241

 
—

 
241

Foreign currency translation adjustment
715

 
42

 
105

 
862

Liability at June 30, 2017
$
12,458

 
$
2,164

 
$
6,046

 
$
20,668

Of the net charges recorded in 2017, $0.9 million is recorded in cost of sales, $1.8 million is recorded in research and development, including a $0.7 million reduction in costs as a result of forfeitures of share-based compensation in connection with terminations, $8.5 million is recorded in sales and marketing and $6.2 million is recorded in general and administrative, integration and other.
At June 30, 2017, a restructuring accrual of $19.8 million was included in accrued and other current liabilities and $0.9 million was included in other long-term liabilities in the accompanying condensed consolidated balance sheet. At December 31, 2016, $27.6 million of the liability was included in accrued and other current liabilities and $4.7 million was included in other long-term liabilities in the accompanying condensed consolidated balance sheet.
Since 2016, we have incurred cumulative costs totaling $96.4 million related to this restructuring program that have been recorded as follows:
(in thousands)
Personnel Related
 
Facility Related
 
Contract and Other Costs
 
Asset Impairments & Disposals
 
Total
Cost of sales
$
1,970

 
$
205

 
$
171

 
$
10,490

 
$
12,836

Research and development
4,081

 
3,487

 
204

 
20,370

 
28,142

Sales and marketing
19,257

 
3,264

 
9,886

 
1,046

 
33,453

General and administrative, integration and other
1,893

 
747

 
6,885

 
1,547

 
11,072

Other expense
—

 
—

 
—

 
10,946

 
10,946

Total cumulative costs
$
27,201

 
$
7,703

 
$
17,146

 
$
44,399

 
$
96,449


5.
Investments
We have made strategic investments in certain companies that are accounted for using the equity- or cost-method of accounting. The method of accounting for an investment depends on the level of influence. We monitor changes in circumstances that may require a reassessment of the level of influence. We periodically review the carrying value of these investments for impairment, considering factors such as the most recent stock transactions and book values from the recent financial statements. The fair value of cost and equity-method investments is estimated when there are identified events or changes in circumstances that may have an impact on the fair value of the investment. Additionally, we hold investments in marketable equity securities that have readily determinable fair values that are classified as available-for-sale. These investments are reported at fair value, with unrealized gain and losses recorded in accumulated other comprehensive income (loss) in equity.
Equity Method Investments
As of June 30, 2017 and December 31, 2016, we had a total of equity-method investments in non-publicly traded companies of $13.5 million and $10.8 million, respectively, which are included in other long-term assets in the accompanying condensed consolidated balance sheets.
In connection with the 2016 restructuring activities discussed in Note 4, we transferred the research and development activities of our instrumentation business to a new company, Hombrechtikon Systems Engineering AG (HSE), in which we acquired a 19% interest for a total obligation of $9.8 million as of December 31, 2016 payable over three years. As of June 30, 2017, a $6.2 million obligation

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remains with $3.1 million included in accrued and other current liabilities and $3.1 million included in other long-term liabilities in the accompanying condensed consolidated balance sheets. HSE is a variable interest entity and we are not the primary beneficiary as we do not hold the power to direct the activities that most significantly impact the economic performance of HSE. Therefore, HSE is not consolidated. As of June 30, 2017, the investment has a carrying value of $1.6 million, which is included in other long-term assets in the condensed consolidated balance sheets, representing our maximum exposure to loss.
During the second quarter of 2017, we sold our interest in an equity-method investee, which had no book value, for $3.5 million and recorded a corresponding gain in other (expense) income, net in the accompanying condensed consolidated statement of income.
Cost Method Investments
As of June 30, 2017 and December 31, 2016, we had a total of cost-method investments in non-publicly traded companies with carrying amounts of $35.3 million and $38.2 million, respectively, which are included in other long-term assets in the accompanying condensed consolidated balance sheets. During the second quarter of 2017, we recorded an impairment charge of $3.1 million in other (expense) income, net in the accompanying condensed consolidated statement of income, following changes in the investee's circumstances that indicated the carrying value was no longer recoverable. Accordingly, the investment was fully impaired.
Marketable Equity Securities
During 2016, we made an investment in shares of HTG Molecular Diagnostics, Inc., a publicly traded company, that is classified as a long-term marketable security. At June 30, 2017, we held 833,333 shares with a cost basis of $2.0 million. As of June 30, 2017 and December 31, 2016, the fair market value of these shares was $2.2 million and $1.9 million, respectively. Additionally, we hold 320,712 shares of Curetis N.V. with a cost basis of $2.3 million. As of June 30, 2017 and December 31, 2016, the fair market value of these shares was $1.8 million and $2.2 million, respectively, included in other long-term assets in the accompanying condensed consolidated balance sheets.

6.
Intangible Assets
The following table sets forth the intangible assets by major asset class as of June 30, 2017 and December 31, 2016:
 
 
June 30, 2017
 
December 31, 2016
(in thousands) 
 
Gross
Carrying
Amount
 
Accumulated
Amortization 
 
Gross
Carrying
Amount 
 
Accumulated
Amortization 
Amortized Intangible Assets:
 
 
 
 
 
 
 
 
Patent and license rights
 
$
396,287

 
$
(258,190
)
 
$
373,609

 
$
(233,406
)
Developed technology
 
760,467

 
(514,638
)
 
708,825

 
(469,312
)
Customer base, non-compete agreements and trademarks
 
430,784

 
(267,869
)
 
422,797

 
(245,354
)
 
 
$
1,587,538

 
$
(1,040,697
)
 
$
1,505,231

 
$
(948,072
)
Unamortized Intangible Assets:
 
 
 
 
 
 
 
 
Goodwill
 
$
1,995,807

 
 
 
$
1,925,518

 
 
The changes in intangible assets in 2017 are summarized as follows:
(in thousands)
 
Intangibles
 
Goodwill
Balance at December 31, 2016
 
$
557,159

 
$
1,925,518

Additions
 
12,101

 
—

Acquisitions
 
28,400

 
26,364

Amortization
 
(71,269
)
 
—

Disposals
 
(69
)
 
—

Foreign currency translation adjustments
 
20,519

 
43,925

Balance at June 30, 2017
 
$
546,841

 
$
1,995,807

Cash paid for purchases of intangible assets during the six-month period ended June 30, 2017 totaled $18.1 million, of which $10.6 million is related to current year payments for licenses that were accrued as of December 31, 2016 and $2.0 million is related to prepayments recorded in other long term assets in the accompanying condensed consolidated balance sheet as of June 30, 2017. Intangible asset additions of $12.1 million includes $5.5 million of cash paid during the six-month period ended June 30, 2017, $3.9 million of additions which were accrued as of June 30, 2017 together with $2.7 million of additions which were previously recorded as prepayments.

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The changes in the carrying amount of goodwill for the six months ended June 30, 2017 resulted from the acquisition of OmicSoft as further discussed in Note 3, "Acquisitions" and changes in foreign currency translation.
For the three- and six-month periods ended June 30, 2017 and 2016, amortization expense on intangible assets totaled approximately $35.9 million and $71.3 million, and $34.1 million and $67.9 million, respectively. Amortization of intangibles for the next five years is expected to be approximately:
Year 
 
Annual
Amortization
(in millions)
2018
 
$
106.8

2019
 
$
85.1

2020
 
$
69.6

2021
 
$
49.7

2022
 
$
38.6


7.
Derivatives and Hedging
In the ordinary course of business, we use derivative instruments, including swaps, forwards and/or options, to manage potential losses from foreign currency exposures and interest bearing assets or liabilities. The principal objective of such derivative instruments is to minimize the risks and/or costs associated with our global financial and operating activities. We do not utilize derivative or other financial instruments for trading or other speculative purposes. We recognize all derivatives as either assets or liabilities on the balance sheet on a gross basis, measure those instruments at fair value and recognize the change in fair value in earnings in the period of change, unless the derivative qualifies as an effective hedge that offsets certain exposures. We have agreed with almost all of our counterparties with whom we had entered into cross-currency swaps, interest rate swaps or foreign exchange contracts, to enter into bilateral collateralization contracts under which we will receive or provide cash collateral, as the case may be, for the net position with each of these counterparties. As of June 30, 2017, we had an asset of $3.5 million recorded in prepaid and other assets in the accompanying condensed consolidated balance sheet. As of December 31, 2016, we had a liability position of $7.0 million recorded in accrued and other current liabilities and $1.2 million recorded in prepaid and other current assets in the accompanying condensed consolidated balance sheet.
In June 2017, we entered into a foreign currency non-derivative hedging instrument that is designated and qualifies as net investment hedge. The objective of the hedge is to protect part of the net investment in foreign operations against adverse changes in the exchange rate between the Euro and the functional currency of the U.S. dollar. The non-derivative hedging instrument is the German private corporate bond ("Schuldschein") was issued in the total amount of $301.2 million as described in Note 9 "Debt." Of the $301.2 million, which is held in both U.S. dollars and Euro, €230.0 million is designated as the hedging instrument against a portion of our Euro net investments in our foreign operations. The relative changes in both the hedged item and hedging instrument are calculated by applying the change in spot rate between two assessment dates against the respective notional amount. The effective portion of the hedge is recorded in the cumulative translation adjustment account within other accumulated comprehensive income (loss). Based on the spot rate method, the unrealized loss recorded in equity as of June 30, 2017 is $6.2 million. Since we are using the debt as the hedging instrument, which is also remeasured based on the spot rate method, there is no hedge ineffectiveness related to the net investment hedge as of June 30, 2017.
As of June 30, 2017 and December 31, 2016, we held derivative instruments that are designated and qualify as cash flow hedges, where the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income (loss) and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings. In 2017 and in 2016, we did not record any hedge ineffectiveness related to any cash-flow hedges in earnings. Based on their valuation as of June 30, 2017, we expect approximately $6.2 million of derivative losses included in accumulated other comprehensive loss will be reclassified into income during the next 12 months. The cash flows derived from derivatives are classified in the condensed consolidated statements of cash flows in the same category as the condensed consolidated balance sheet account of the underlying item.
As of June 30, 2017 and December 31, 2016, we held derivative instruments that qualify for hedge accounting as fair value hedges. For derivative instruments that are designated and qualify as a fair value hedge, the effective portion of the gain or loss on the derivative is reflected in earnings. This earnings effect is offset by the change in the fair value of the hedged item attributable to the risk being hedged that is also recorded in earnings. In 2017 and in 2016, there was no ineffectiveness. The cash flows derived from derivatives are classified in the condensed consolidated statements of cash flows in the same category as the condensed consolidated balance sheet account of the underlying item.

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Interest Rate Derivatives
We use interest rate derivative contracts to align our portfolio of interest bearing assets and liabilities with our risk management objectives. These contracts are measured and reported at fair value on a recurring basis, within Level 2 of the fair value hierarchy. During 2015, we entered into five cross currency interest rate swaps through 2025 for a total notional amount of €180.0 million which qualify for hedge accounting as cash flow hedges. We determined that no ineffectiveness exists related to these swaps. As of June 30, 2017, the €180.0 million notional swap amount had a fair value of $12.5 million recorded in other long-term liabilities and a related interest receivable of $1.4 million which is recorded in prepaid expenses and other current assets, respectively, in the accompanying condensed consolidated balance sheet. As of December 31, 2016, this swap had a fair value of $1.4 million and accrued and unpaid interest of $1.7 million which are recorded in other long-term assets and prepaid expenses and other current assets, respectively, in the accompanying condensed consolidated balance sheet.
During 2014, we entered into interest rate swaps, which effectively fixed the fair value of $200.0 million of our fixed rate private placement debt and qualify for hedge accounting as fair value hedges. We determined that no ineffectiveness exists related to these swaps. As of June 30, 2017, the $200.0 million notional swap amount had a fair value of $3.2 million and accrued and unpaid interest of $0.4 million which are recorded in other long-term assets and prepaid expenses and other current assets, respectively, in the accompanying condensed consolidated balance sheet. As of December 31, 2016, this swap had a fair value of $3.1 million and accrued and unpaid interest of $0.6 million which are recorded in other long-term assets and prepaid expenses and other current assets, respectively, in the accompanying condensed consolidated balance sheet.
Call Options
We entered into Call Options during 2014 which, along with the sale of the Warrants, represent the Call Spread Overlay entered into in connection with the Cash Convertible Notes and which are more fully described in Note 9, “Debt.” We used $105.2 million of the proceeds from the issuance of the Cash Convertible Notes to pay the premium for the Call Options, and simultaneously received $68.9 million, (net of issuance costs) from the sale of the Warrants, for a net cash outlay of $36.3 million for the Call Spread Overlay. The Call Options are intended to offset cash payments in excess of the principal amount due upon any conversion of the Cash Convertible Notes.
Aside from the initial payment of a premium of $105.2 million for the Call Options, we will not be required to make any cash payments under the Call Options. We will however be entitled to receive under the terms of the Call Options an amount of cash generally equal to the amount by which the market price per share of our common stock exceeds the exercise price of the Call Options during the relevant valuation period. The exercise price under the Call Options is equal to the conversion price of the Cash Convertible Notes.
The Call Options, for which our common stock are the underlying security, are a derivative asset that requires mark-to-market accounting treatment due to the cash settlement features until the Call Options settle or expire. The Call Options are measured and reported at fair value on a recurring basis, within Level 2 of the fair value hierarchy. For further discussion of the inputs used to determine the fair value of the Call Options, refer to Note 8, “Fair Value Measurements.” The fair value of the Call Options at June 30, 2017 and December 31, 2016 was approximately $224.0 million and $185.8 million, respectively, which is recorded in other long-term assets in the accompanying condensed consolidated balance sheet.
The Call Options do not qualify for hedge accounting treatment. Therefore, the change in fair value of these instruments is recognized immediately in our condensed consolidated statements of income in other income, net. For the six months ended June 30, 2017 and June 30, 2016, the change in the fair value of the Call Options resulted in gains of $38.3 million and losses of $94.3 million, respectively. Because the terms of the Call Options are substantially similar to those of the Cash Convertible Notes' embedded cash conversion option, discussed below, we expect the effect on earnings from those two derivative instruments to mostly offset each other.
Cash Convertible Notes Embedded Cash Conversion Option
The embedded cash conversion option within the Cash Convertible Notes is required to be separated from the Cash Convertible Notes and accounted for separately as a derivative liability, with changes in fair value reported in our condensed consolidated statements of income in other income, net until the cash conversion option settles or expires. For further discussion of the Cash Convertible Notes, refer to Note 9, “Debt.” The initial fair value liability of the embedded cash conversion option was $105.2 million, which simultaneously reduced the carrying value of the Cash Convertible Notes (effectively an original issuance discount). The embedded cash conversion option is measured and reported at fair value on a recurring basis, within Level 2 of the fair value hierarchy. For further discussion of the inputs used to determine the fair value of the embedded cash conversion option, refer to Note 8, “Fair Value Measurements.” The fair value of the embedded cash conversion option at June 30, 2017 and December 31, 2016 was approximately $225.1 million and $187.5 million, respectively, and is included in other long-term liabilities in the accompanying condensed consolidated balance sheet. For the six months ended June 30, 2017 and June 30, 2016, the change in the fair value of the embedded cash conversion option resulted in losses of $37.6 million and gains of $95.2 million, respectively, recognized in our condensed consolidated statements of income in other income, net.
Foreign Currency Derivatives

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As a globally active enterprise, we are subject to risks associated with fluctuations in foreign currencies in our ordinary operations. This includes foreign currency-denominated receivables, payables, debt, and other balance sheet positions including intercompany items. We manage balance sheet exposure on a group-wide basis using foreign exchange forward contracts, foreign exchange options and cross-currency swaps.
Undesignated Derivative Instruments
We are party to various foreign exchange forward, option and swap arrangements which had, at June 30, 2017, an aggregate notional value of $382.2 million and fair value of $4.7 million included in prepaid and other assets and $4.1 million included in accrued and other current liabilities, which expire at various dates through February 2018. We were party to various foreign exchange forward and swap arrangements which had, at December 31, 2016, an aggregate notional value of $347.6 million and fair values of $3.2 million included in prepaid and other assets and $6.1 million included in accrued and other current liabilities, which expire at various dates through December 2017. The transactions have been entered into to offset the effects from balance sheet exposure to foreign currency exchange risk. Changes in the fair value of these arrangements have been recognized in other income, net.
Fair Values of Derivative Instruments
The following table summarizes the fair value amounts of derivative instruments reported in the condensed consolidated balance sheets as of June 30, 2017 and December 31, 2016:
 
 
Derivatives in Asset Positions Fair value
 
Derivatives in Liability Positions Fair value 
(in thousands)
 
6/30/2017
 
12/31/2016
 
6/30/2017
 
12/31/2016
Derivative instruments designated as hedges
 
 
 
 
 
 
 
 
Interest rate contracts(1)
 
$
4,978

 
$
6,655

 
$
(12,473
)
 
$
—

Total derivative instruments designated as hedges
 
$
4,978

 
$
6,655

 
$
(12,473
)
 
$
—

Undesignated derivative instruments
 
 
 
 
 
 
 
 
Call spread overlay
 
$
224,006

 
$
185,750

 
$
(225,131
)
 
$
(187,546
)
Foreign exchange contracts
 
4,673

 
3,154

 
(4,069
)
 
(6,089
)
Total undesignated derivative instruments
 
$
228,679

 
$
188,904

 
$
(229,200
)
 
$
(193,635
)
_________________
(1) The fair value amounts for the interest rate contracts include accrued interest.

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Gains and Losses on Derivative and Non-derivative Instruments
The following tables summarize the locations and gains and losses on derivative and non-derivative instruments for the three- and six-month periods ended June 30, 2017 and 2016:
Three months ended June 30, 2017 (in thousands) 
 
Gain/(loss)
recognized in AOCI
 
Location of
gain / loss in
income statement
 
(Gain) loss
reclassified
from AOCI into
income
 
Gain (loss) recognized in income
Non-derivative instruments
 
 
 
 
 
 
 
 
Net investment hedge
 
$
(6,228
)
 
Other (expense) income, net
 
—

 
n/a

 
 
 
 
 
 
 
 
 
Cash flow hedges
 
 
 
 
 
 
 
 
Interest rate contracts
 
$
(13,851
)
 
Other (expense) income, net
 
$
12,978

 
n/a

 
 
 
 
 
 
 
 
 
Fair value hedges
 
 
 
 
 
 
 
 
Interest rate contracts
 
$
—

 
Other (expense) income, net
 
$
—

 
$
742

 
 
 
 
 
 
 
 
 
Undesignated derivative instruments
 
 
 
 
 
 
 
 
Call spread overlay
 
n/a

 
Other (expense) income, net
 
n/a

 
$
138

Foreign exchange contracts
 
n/a

 
Other (expense) income, net
 
n/a

 
744

 
 
 
 
 
 
 
 
$
882

 
 
 
 
 
 
 
 
 
Three months ended June 30, 2016 (in thousands) 
 
Gain/(loss)
recognized in AOCI
 
Location of
gain / loss in
income statement
 
(Gain) loss
reclassified
from AOCI into
income
 
Gain (loss) recognized in income
Cash flow hedges
 
 
 
 
 
 
 
 
Interest rate contracts
 
$
11,570

 
Other (expense) income, net
 
$
(5,094
)
 
n/a

 
 
 
 
 
 
 
 
 
Fair value hedges
 
 
 
 
 
 
 
 
Interest rate contracts
 
$
—

 
Other (expense) income, net
 
$
—

 
$
1,918

 
 
 
 
 
 
 
 
 
Undesignated derivative instruments
 
 
 
 
 
 
 
 
Call spread overlay
 
n/a

 
Other (expense) income, net
 
n/a

 
$
239

Foreign exchange contracts
 
n/a

 
Other (expense) income, net
 
n/a

 
(1,795
)
 
 
 
 
 
 
 
 
$
(1,556
)

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Six months ended June 30, 2017 (in thousands) 
 
Gain/(loss)
recognized in AOCI
 
Location of
(gain) loss in
income statement
 
(Gain) loss
reclassified
from AOCI into
income
 
Gain (loss) recognized in income
Non-derivative instruments
 
 
 
 
 
 
 
 
Net investment hedge
 
$
(6,228
)
 
Other (expense) income, net
 
—

 
n/a

 
 
 
 
 
 
 
 
 
Cash flow hedges
 
 
 
 
 
 
 
 
Interest rate contracts
 
$
(13,841
)
 
Other (expense) income, net
 
$
15,678

 
n/a

 
 
 
 
 
 
 
 
 
Fair value hedges
 
 
 
 
 
 
 
 
Interest rate contracts
 
$
—

 
Other (expense) income, net
 
$
—

 
$
110

 
 
 
 
 
 
 
 
 
Undesignated derivative instruments
 
 
 
 
 
 
 
 
Call spread overlay
 
n/a

 
Other (expense) income, net
 
n/a

 
$
671

Foreign exchange contracts
 
n/a

 
Other (expense) income, net
 
n/a

 
6,534

 
 
 
 
 
 
 
 
$
7,205

 
 
 
 
 
 
 
 
 
Six months ended June 30, 2016 (in thousands) 
 
Gain/(loss)
recognized in AOCI
 
Location of
(gain) loss in
income statement
 
(Gain) loss
reclassified
from AOCI into
income
 
Gain (loss) recognized in income
Cash flow hedges
 
 
 
 
 
 
 
 
Interest rate contracts
 
$
(4,825
)
 
Other (expense) income, net
 
$
3,870

 
n/a

 
 
 
 
 
 
 
 
 
Fair value hedges
 
 
 
 
 
 
 
 
Interest rate contracts
 
$
—

 
Other (expense) income, net
 
$
—

 
$
7,739

 
 
 
 
 
 
 
 
 
Undesignated derivative instruments
 
 
 
 
 
 
 
 
Call spread overlay
 
n/a

 
Other (expense) income, net
 
n/a

 
$
894

Foreign exchange contracts
 
n/a

 
Other (expense) income, net
 
n/a

 
(3,125
)
 
 
 
 
 
 
 
 
$
(2,231
)
The amounts noted in the table above for accumulated other comprehensive income (AOCI) do not include any adjustment for the impact of deferred income taxes.

8.
Fair Value Measurements
Assets and liabilities are measured at fair value according to a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value as follows:
Level 1. Observable inputs, such as quoted prices in active markets;
Level 2. Inputs, other than the quoted price in active markets, that are observable either directly or indirectly; and
Level 3. Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
Our assets and liabilities measured at fair value on a recurring basis consist of marketable securities as discussed in Note 5 and short-term investments, which are classified in Level 1 and Level 2 of the fair value hierarchy, derivative contracts used to hedge currency and interest rate risk, derivative financial instruments entered into in connection with the Cash Convertible Notes discussed in Note 9, which are classified in Level 2 of the fair value hierarchy, and contingent consideration accruals which are classified in Level 3 of the fair value hierarchy and are shown in the tables below. There have been no transfers between levels.

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In determining fair value for Level 2 instruments, we apply a market approach, using quoted active market prices relevant to the particular instrument under valuation, giving consideration to the credit risk of both the respective counterparty to the contract and the Company. To determine our credit risk, we estimated our credit rating by benchmarking the price of outstanding debt to publicly-available comparable data from rated companies. Using the estimated rating, our credit risk was quantified by reference to publicly-traded debt with a corresponding rating. The Level 2 derivative financial instruments include the Call Options asset and the embedded conversion option liability. See Note 9, "Debt", and Note 7, "Derivatives and Hedging," for further information. The derivatives are not actively traded and are valued based on an option pricing model that uses observable market data for inputs. Significant market data inputs used to determine fair values as of June 30, 2017 included our common stock price, the risk-free interest rate, and the implied volatility of our common stock. The Call Options asset and the embedded cash conversion option liability were designed with the intent that changes in their fair values would substantially offset, with limited net impact to our earnings. Therefore, the sensitivity of changes in the unobservable inputs to the option pricing model for such instruments is substantially mitigated.
Our Level 3 instruments include contingent consideration liabilities. We value contingent consideration liabilities using unobservable inputs, applying the income approach, such as the discounted cash flow technique, or the probability-weighted scenario method. Contingent consideration arrangements obligate us to pay the sellers of an acquired entity if specified future events occur or conditions are met such as the achievement of technological or revenue milestones. We use various key assumptions, such as the probability of achievement of the milestones (0% to 100%) and the discount rate (between 2.2% and 7.7%), to represent the non-performing risk factors and time value when applying the income approach. We regularly review the fair value of the contingent consideration and reflect any change in the accrual in the condensed consolidated statements of income in the line items commensurate with the underlying nature of milestone arrangements.
The following table presents our hierarchy for our financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2017 and December 31, 2016:
 
 
As of June 30, 2017
 
As of December 31, 2016
(in thousands)
 
Level 1
 
Level 2
 
Level 3
 
Total 
 
Level 1
 
Level 2
 
Level 3
 
Total 
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Short-term investments
 
$
4,005

 
$
62,001

 
$
—

 
$
66,006

 
$
3,699

 
$
89,300

 
$
—

 
$
92,999

Marketable securities
 
4,028

 
—

 
—

 
4,028

 
4,064

 
—

 
—

 
4,064

Call option
 
—

 
224,006

 
—

 
224,006

 
—

 
185,750

 
—

 
185,750

Foreign exchange contracts
 
—

 
4,673

 
—

 
4,673

 
—

 
3,154

 
—

 
3,154

Interest rate contracts
 
—

 
4,978

 
—

 
4,978

 
—

 
6,655

 
—

 
6,655

 
 
$
8,033

 
$
295,658

 
$
—

 
$
303,691

 
$
7,763

 
$
284,859

 
$
—

 
$
292,622

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
 
$
—

 
$
(4,069
)
 
$
—

 
$
(4,069
)
 
$
—

 
$
(6,089
)
 
$
—

 
$
(6,089
)
Interest rate contracts
 
—

 
(12,473
)
 
—

 
(12,473
)
 
—

 
—

 
—

 
—

Cash conversion option
 
—

 
(225,131
)
 
—

 
(225,131
)
 
—

 
(187,546
)
 
—

 
(187,546
)
Contingent consideration
 
—

 
—

 
(10,053
)
 
(10,053
)
 
—

 
—

 
(8,754
)
 
(8,754
)
 
 
$
—

 
$
(241,673
)
 
$
(10,053
)
 
$
(251,726
)
 
$
—

 
$
(193,635
)
 
$
(8,754
)
 
$
(202,389
)
For liabilities with Level 3 inputs, the following table summarizes the activity for the six months ended June 30, 2017:
(in thousands)
 
Contingent Consideration
Beginning Balance at December 31, 2016
 
$
(8,754
)
Additions from acquisitions
 
(4,000
)
Additions
 
(799
)
Payments
 
3,500

Ending balance at June 30, 2017