Note 12 Fair Value Measurements and Other Financial Instruments

Fair Value Measurements

In determining fair value of financial instruments, we utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible and consider counterparty credit risk in our assessment of fair value. We determine fair value of our financial instruments based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels:

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Level 1 Inputs: Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date.

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Level 2 Inputs: Other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability.

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Level 3 Inputs: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at measurement date.

The following table details the fair value hierarchy of our financial instruments:

	September 30, 2016
(In millions)	Total Fair Value			Level 1		Level 2			Level 3
Cash equivalents	$	76.3		$	76.3	$	—		$	—
Compensating balance deposits	$	55.0		$	55.0	$	—		$	—
Derivative financial and hedging instruments net asset (liability):
Foreign currency forward contracts and options	$	1.8		$	—	$	1.8		$	—
Interest rate and currency swaps	$	23.1		$	—	$	23.1		$	—
Cross-currency swaps	$	(29.2	)	$	—	$	(29.2	)	$	—

	December 31, 2015
(In millions)	Total Fair Value			Level 1		Level 2			Level 3
Cash equivalents	$	56.3		$	48.3	$	8.0		$	—
Compensating balance deposits	$	56.5		$	56.5	$	—		$	—
Derivative financial and hedging instruments net asset (liability):
Foreign currency forward contracts	$	(16.5	)	$	—	$	(16.5	)	$	—
Interest rate and currency swaps	$	44.0		$	—	$	44.0		$	—
Cross-currency swaps	$	(12.0	)	$	—	$	(12.0	)	$	—

Cash Equivalents

Our cash equivalents at September 30, 2016 and December 31, 2015 consisted of commercial paper (fair value determined using Level 2 inputs) and bank time deposits (Level 1). Since these are short-term highly liquid investments with original maturities of three months or less at the date of purchase, they present negligible risk of changes in fair value due to changes in interest rates.

Compensating Balance Deposits

We have compensating balance deposits related to certain short-term and long-term borrowings. These represent bank certificates of deposits with maturities of greater than 3 months.

Derivative Financial Instruments

Our foreign currency forward contracts, foreign currency options, euro-denominated debt, interest rate and currency swaps and cross-currency swaps are recorded at fair value on our Condensed Consolidated Balance Sheets using a discounted cash flow analysis that incorporates observable market inputs. These market inputs include foreign currency spot and forward rates, and various interest rate curves, and are obtained from pricing data quoted by various banks, third party sources and foreign currency dealers involving identical or comparable instruments (Level 2).

Counterparties to these foreign currency forward contracts have at least an investment grade rating. Credit ratings on some of our counterparties may change during the term of our financial instruments. We closely monitor our counterparties’ credit ratings and, if necessary, will make any appropriate changes to our financial instruments. The fair value generally reflects the estimated amounts that we would receive or pay to terminate the contracts at the reporting date.

Other Financial Instruments

The following financial instruments are recorded at fair value or at amounts that approximate fair value: (1) trade receivables, net, (2) certain other current assets, (3) accounts payable and (4) other current liabilities. The carrying amounts reported on our Condensed Consolidated Balance Sheets for the above financial instruments closely approximate their fair value due to the short-term nature of these assets and liabilities.

Other liabilities that are recorded at carrying value on our Condensed Consolidated Balance Sheets include our senior notes, except for our euro-denominated debt as discussed above. We utilize a market approach to calculate the fair value of our senior notes. Due to their limited investor base and the face value of some of our senior notes, they may not be actively traded on the date we calculate their fair value. Therefore, we may utilize prices and other relevant information generated by market transactions involving similar securities, reflecting U.S. Treasury yields to calculate the yield to maturity and the price on some of our senior notes. These inputs are provided by an independent third party and are considered to be Level 2 inputs.

We derive our fair value estimates of our various other debt instruments by evaluating the nature and terms of each instrument, considering prevailing economic and market conditions, and examining the cost of similar debt offered at the balance sheet date. We also incorporated our credit default swap rates and currency specific swap rates in the valuation of each debt instrument, as applicable.

These estimates are subjective and involve uncertainties and matters of significant judgment, and therefore we cannot determine them with precision. Changes in assumptions could significantly affect our estimates.

The table below shows the carrying amounts and estimated fair values of our total debt:

	September 30, 2016				December 31, 2015
	Carrying		Fair		Carrying		Fair
(In millions)	Amount		Value		Amount⁽²⁾		Value
Term Loan A Facility due July 2017	$	249.8	$	249.8	$	249.7	$	249.7
Term Loan A Facility due July 2019⁽¹⁾		1,104.1		1,104.1		1,103.8		1,103.8
6.50% Senior Notes due December 2020		423.0		485.0		422.7		473.7
4.875% Senior Notes due December 2022		419.4		446.3		418.9		426.5
5.25% Senior Notes due April 2023		419.5		451.8		419.0		436.2
4.50% Senior Notes due September 2023⁽¹⁾		444.8		491.6		432.9		452.7
5.125% Senior Notes due December 2024		420.1		450.7		419.7		427.6
5.50% Senior Notes due September 2025		396.3		430.9		396.1		410.2
6.875% Senior Notes due July 2033		445.3		484.0		445.2		462.7
Other foreign loans⁽¹⁾		222.5		222.8		165.7		165.8
Other domestic loans		116.7		116.9		81.6		81.9
Total debt	$	4,661.5	$	4,933.9	$	4,555.3	$	4,690.8

⁽¹⁾	Includes borrowings denominated in currencies other than U.S. dollars.

⁽²⁾

As of January 1, 2016, we have adopted ASU 2015-03 and ASU 2015-15 which resulted in $35.9 million of unamortized debt issuance costs being reclassified from other assets to long-term debt as of December 31, 2015. See Note 2, “Recently Issued Accounting Standards” for additional information related to this adoption.

As of September 30, 2016, we did not have any non–financial assets and liabilities, aside from contingent consideration liabilities related to acquisitions and certain equity compensation, that were carried at fair value on a recurring basis in the Condensed Consolidated Financial Statements or for which a fair value measurement was required. Included among our non-financial assets and liabilities that are not required to be measured at fair value on a recurring basis are inventories, net property and equipment, goodwill, intangible assets and asset retirement obligations. Refer to Note 16 “Stockholders’ Equity” for share based compensation and below for contingent consideration.

Contingent Consideration

As part of the Intellibot acquisition in 2015, the Company recorded contingent consideration which is classified as a liability which includes earnout fees to be paid out in cash to the seller over a 10 year period based on various percentages of net sales of the Intellibot business over the 10 year period. Since it is classified as a liability, we must remeasure to fair value each reporting period. The fair value of the liability as of September 30, 2016 was $9.2 million, mostly included in non-current liabilities on the Condensed Consolidated Balance Sheet. The $0.6 million change in fair value for the nine months ended September 30, 2016 was recognized in selling, general and administrative expenses. The valuation of the contingent consideration is based on a probability weighted projection of payments over the remaining 9 year period using the deterministic method. These projections are based on our internal forecast of the business performance and since this is an unobservable input used in the fair value measurement it would be considered a Level 3 input (as defined above). In addition, the probability weighted earnout payments were present valued using factors to consider the risk associated with achievement of the sales forecast and the credit risk associated with the payments.

Credit and Market Risk

Financial instruments, including derivatives, expose us to counterparty credit risk for nonperformance and to market risk related to changes in interest or currency exchange rates. We manage our exposure to counterparty credit risk through specific minimum credit standards, establishing credit limits, diversification of counterparties, and procedures to monitor concentrations of credit risk.

We do not expect any of our counterparties in derivative transactions to fail to perform as it is our policy to have counterparties to these contracts that have at least an investment grade rating. Nevertheless, there is a risk that our exposure to losses arising out of derivative contracts could be material if the counterparties to these agreements fail to perform their obligations. We will replace counterparties if a credit downgrade is deemed to increase our risk to unacceptable levels.

We regularly monitor the impact of market risk on the fair value and cash flows of our derivative and other financial instruments considering reasonably possible changes in interest and currency exchange rates and restrict the use of derivative financial instruments to hedging activities. We do not use derivative financial instruments for trading or other speculative purposes and do not use leveraged derivative financial instruments.

We continually monitor the creditworthiness of our diverse base of customers to which we grant credit terms in the normal course of business and generally do not require collateral. We consider the concentrations of credit risk associated with our trade accounts receivable to be commercially reasonable and believe that such concentrations do not leave us vulnerable to significant risks of near-term severe adverse impacts. The terms and conditions of our credit sales are designed to mitigate concentrations of credit risk with any single customer. Our sales are not materially dependent on a single customer or a small group of customers.