Fair Value of Financial Instruments

9 Months Ended

Sep. 30, 2014

Fair Value of Financial Instruments

Fair Value of Financial Instruments

4.Fair Value of Financial Instruments

The Company applies the following hierarchy to determine the fair value of financial instruments, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement. The levels in the hierarchy are defined as follows:

Level 1:  Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2:  Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

Level 3:  Inputs to the valuation methodology are unobservable and significant to the fair value measurement.

The valuation techniques that may be used by the Company to determine the fair value of Level 2 and Level 3 financial instruments are the market approach, the income approach and the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. The income approach uses valuation techniques to convert future amounts to a single present value based on current market expectations about those future amounts, including present value techniques, option-pricing models and the excess earnings method. The cost approach is based on the amount that would be required to replace the service capacity of an asset (replacement cost).

The following tables set forth the Company’s financial instruments that are measured at fair value on a recurring basis and presents them within the fair value hierarchy using the lowest level of input that is significant to the fair value measurement at September 30, 2014 and December 31, 2013 (in millions):

September 30, 2014	Total		Quoted Prices in Active Markets Available (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Cash equivalents	$	114.8	$	114.8	$	—	$	—
Short-term investments	113.1		113.1		—		—
Restricted cash	1.8		1.8		—		—
Embedded derivatives in purchase and delivery contracts	0.3		—		0.3		—
Long-term restricted cash	3.8		3.8		—		—
Total assets recorded at fair value	$	233.8	$	233.5	$	0.3	$	—
Liabilities:
Contingent consideration	$	15.8	$	—	$	—	$	15.8
Foreign exchange contracts	7.2		—		7.2		—
Embedded derivatives in purchase and delivery contracts	0.3		—		0.3		—
Fixed price commodity contracts	0.1		—		0.1		—
Total liabilities recorded at fair value	$	23.4	$	—	$	7.6	$	15.8

December 31, 2013	Total		Quoted Prices in Active Markets Available (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Cash equivalents	$	6.8	$	6.8	$	—	$	—
Restricted cash	2.7		2.7		—		—
Foreign exchange contracts	2.3		—		2.3		—
Embedded derivatives in purchase and delivery contracts	0.2		—		0.2		—
Fixed price commodity contracts	0.1		—		0.1		—
Long-term restricted cash	4.0		4.0		—		—
Total assets recorded at fair value	$	16.1	$	13.5	$	2.6	$	—
Liabilities:
Contingent consideration	$	7.0	$	—	$	—	$	7.0
Embedded derivatives in purchase and delivery contracts	0.4		—		0.4		—
Total liabilities recorded at fair value	$	7.4	$	—	$	0.4	$	7.0

The Company’s financial instruments consist primarily of cash equivalents, short-term investments, restricted cash, derivative instruments consisting of forward foreign exchange contracts, commodity contracts, derivatives embedded in certain purchase and sale contracts, accounts receivable, short-term borrowings, accounts payable, contingent consideration and long-term debt. The carrying amounts of the Company’s cash equivalents and restricted cash, accounts receivable, short-term borrowings and accounts payable approximate fair value due to their short-term nature. Derivative assets and liabilities are measured at fair value on a recurring basis. The Company’s long-term debt consists principally of a private placement arrangement entered into in 2012 with various fixed interest rates based on the maturity date.  The fair value of the long-term fixed interest rate debt, which has been classified as Level 2, was $249.3 million and $244.1 million at September 30, 2014 and December 31, 2013, respectively, based on market and observable sources with similar maturity dates.

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, and did not elect the fair value option for any financial assets or liabilities, which originated during the three or nine months ended September 30, 2014.

As part of certain acquisitions, including one during the three months ended September 30, 2014, 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 targets and specific milestones in certain years as specified in the purchase and sale agreements.  The Company initially valued the contingent consideration using the discounted cash flow method. Total contingent consideration liabilities were $15.8 million as of September 30, 2014 and $7.0 million as of December 31, 2013. There were no changes to the fair value of the contingent consideration recognized in earnings for the three months ended September 30, 2014, and $0.1 million was recorded to Other Charges in the condensed consolidated statement of income and comprehensive income for the nine months ended September 30, 2014. The following table sets forth the changes in contingent consideration liabilities for the nine months ended September 30, 2014 (in millions):

Balance at December 31, 2013	$	7.0
Current period additions	9.2
Current period adjustments	0.1
Current period settlements	(0.5		)
Balance at September 30, 2014	$	15.8

During the second quarter of 2014, the Company commenced a program to enter into time deposits with varying maturity dates ranging from one to six months, as well as call deposits 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 condensed consolidated balance sheet based on the call and maturity dates.

Short-term investments are classified as available-for-sale and are reported at fair value, with unrealized gains (losses) excluded from earnings and reported, net of tax, in accumulated other comprehensive income within the accompanying condensed consolidated balance sheet. There were no unrealized gains (losses) recorded during the three and nine months ended September 30, 2014. 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 three and nine months ended September 30, 2014.