Fair Value of Financial Instruments

12 Months Ended

Dec. 31, 2017

Note 4—Fair Value of Financial Instruments

The Company measures the following financial assets and liabilities at fair value on a recurring basis. The following tables set forth the Company's financial instruments and presents them within the fair value hierarchy using the lowest level of input that is significant to the fair value measurement at December 31, 2017 and 2016 (in millions):

December 31, 2017	Total		Quoted Prices in Active Markets Available (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Foreign exchange contracts	$	4.5	$	—	$	4.5	$	—
Embedded derivatives in purchase and delivery contracts		0.9		—		0.9		—
Fixed price commodity contracts		0.8		—		0.8		—

Total assets recorded at fair value	$	6.2	$	—	$	6.2	$	—


Liabilities:
Contingent consideration	$	12.7	$	—	$	—	$	12.7
Foreign exchange contracts		0.1		—		0.1		—
Embedded derivatives in purchase and delivery contracts		2.9		—		2.9		—

Total liabilities recorded at fair value	$	15.7	$	—	$	3.0	$	12.7

December 31, 2016	Total		Quoted Prices in Active Markets Available (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Embedded derivatives in purchase and delivery contracts	$	4.0	$	—	$	4.0	$	—
Fixed price commodity contracts		0.2		—		0.2		—

Total assets recorded at fair value	$	4.2	$	—	$	4.2	$	—


Liabilities:
Contingent consideration	$	16.6	$	—	$	—	$	16.6
Foreign exchange contracts		1.4		—		1.4		—
Embedded derivatives in purchase and delivery contracts		0.3		—		0.3		—

Total liabilities recorded at fair value	$	18.3	$	—	$	1.7	$	16.6

Derivative financial instruments are classified within level 2 because there is not an active market for each derivative contract. However, the inputs used to calculate the value of the instruments are obtained from active markets.

The fair value of the long-term fixed interest rate debt, which has been classified as Level 2, was $231.3 million and $253.3 million at December 31, 2017 and 2016, respectively, based on market and observable sources with similar maturity dates.

The Company measures certain assets and liabilities at fair value with changes in fair value recognized in earnings. Fair value treatment may be elected either upon initial recognition of an eligible asset or liability or, for an existing asset or liability, if an event triggers a new basis of accounting. The Company did not elect to remeasure any of its existing financial assets or liabilities during the years ended December 31, 2017 and 2016.

Excluded from the table above are cash equivalents, restricted cash and short-term investments as the cost approximates current fair value. The Company has a program to enter into time deposits and call deposit and money market funds. The time and call deposits have varying maturity dates ranging from one to twelve month for which the Company has the ability to redeem the invested amounts over a period of 31 to 95 days. The Company has classified these investments within cash and cash equivalents or short-term investments within the consolidated balance sheets based on call and maturity dates. There are no cash equivalents, $4.0 million and $3.4 million of restricted cash and $114.2 million and $157.9 million of short-term investments outstanding as of December 31, 2017 and 2016, respectively. On a quarterly basis, the Company reviews its short-term investments to determine if there have been any events that could create an impairment. None were noted for the years ended December 31, 2017 and 2016.

As part of certain acquisitions in 2017, 2016, and 2015, the Company recorded contingent consideration liabilities that have been classified as Level 3 in the fair value hierarchy. The contingent consideration represents the estimated fair value of future payments to the former shareholders of applicable acquired companies based on achieving annual revenue and gross margin targets in certain years as specified in the purchase and sale agreements. The Company initially values the contingent considerations by using a Monte Carlo simulation or an income approach method. The Monte Carlo method models future revenue and costs of goods sold projections and discounts the average results to present value. The income approach method involves calculating the earnout payment based on the forecasted cash flows, adjusting the future earnout payment for the risk of reaching the projected financials, and then discounting the future payments to present value by the counterparty risk. The counterparty risk considers the risk of the buyer having the cash to make the earnout payments and is commensurate with the cost of debt over an appropriate term.

Changes to the fair value of the contingent consideration recognized in earnings for the years ended December 31, 2017 and December 31, 2016 were $2.3 million and $6.9 million, respectively, These amounts were recorded to other charges, net in the consolidated statements of income and comprehensive income for increases of contingent consideration representing expected achievement of financial targets. The following table sets forth the changes in contingent consideration liabilities for the years ended December 31, 2017 and 2016 (in millions):

Balance at December 31, 2015	$	4.6
Current period additions		5.1
Current period adjustments		6.9

Balance at December 31, 2016		16.6
Current period additions		5.0
Current period adjustments		2.3
Current period settlements		(11.7	)
Foreign currency effect		0.5

Balance at December 31, 2017	$	12.7

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

+ References + Details