Fair Value Measurements and Financial Instruments

Fair Value Measurements

Fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based upon assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, a three-tier fair value hierarchy is utilized, 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 quoted prices 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.

Items Measured at Fair Value on a Recurring Basis

Estimates of the fair value of foreign currency and interest rate derivative instruments are determined using exchange traded prices and rates. The Company also considers the risk of non-performance in the estimation of fair value and includes an adjustment for non-performance risk in the measure of fair value of derivative instruments. In certain instances where market data is not available, the Company uses management judgment to develop assumptions that are used to determine fair value. Fair value measurements and the fair value hierarchy level for the Company’s assets and liabilities measured or disclosed at fair value on a recurring basis as of September 30, 2017 and December 31, 2016 was as follows:



	September 30, 2017			December 31, 2016			Input
Forward foreign exchange contracts - other current assets	$	888		$	764		Level 2
Forward foreign exchange contracts - accrued liabilities	(1,140		)	(535		)	Level 2
Interest rate swaps - accrued liabilities	(1,090		)	(2,458		)	Level 2
Interest rate swaps - other liabilities	—			(661		)	Level 2

Items Measured at Fair Value on a Nonrecurring Basis

In addition to items that are measured at fair value on a recurring basis, the Company measures certain assets and liabilities at fair value on a nonrecurring basis, which are not included in the table above. As these nonrecurring fair value measurements are generally determined using unobservable inputs, these fair value measurements are classified within Level 3 of the fair value hierarchy. For further information on assets and liabilities measured at fair value on a nonrecurring basis see Note 2. “Acquisitions,” Note 3. “Restructuring” and Note 5. “Property, Plant and Equipment.”

Items Not Carried At Fair Value

Fair values of the Company’s debt instruments were as follows:



	September 30, 2017		December 31, 2016
Aggregate fair value	$	746,746	$	735,850
Aggregate carrying value ⁽¹⁾	737,450		740,000

⁽¹⁾ Excludes unamortized debt issuance costs and unamortized original issue discount.

Fair values were based on quoted market prices and are classified within Level 1 of the fair value hierarchy.

Derivative Instruments and Hedging Activities

The Company is exposed to fluctuations in foreign currency exchange rates, interest rates and commodity prices. The Company enters into derivative instruments primarily to hedge portions of its forecasted foreign currency denominated cash flows and designates these derivative instruments as cash flow hedges in order to qualify for hedge accounting. Gains or losses on derivative instruments resulting from hedge ineffectiveness are reported in earnings.

The Company formally documents its hedge relationships, including the identification of the hedging instruments and the hedged items, as well as its risk management objectives and strategies for undertaking the cash flow hedges. The Company also formally assesses whether a cash flow hedge is highly effective in offsetting changes in the cash flows of the hedged item. Derivatives are recorded at fair value in other current assets, other assets, accrued liabilities and other long-term liabilities. For a cash flow hedge, the effective portion of the change in fair value of the derivative is recorded in accumulated other comprehensive income (loss) (“AOCI”) in the consolidated balance sheet and reclassified into earnings when the underlying hedged transaction is realized. The realized gains and losses are recorded on the same line as the hedged transaction in the consolidated statements of net income.

The Company is exposed to credit risk in the event of nonperformance by its counterparties on its derivative financial instruments. The Company mitigates this credit risk exposure by entering into agreements directly with major financial institutions with high credit standards that are expected to fully satisfy their obligations under the contracts.

Cash Flow Hedges

Forward Foreign Exchange Contracts—The Company uses forward contracts to mitigate the potential volatility to earnings and cash flow arising from changes in currency exchange rates that impact the Company’s foreign currency transactions. The principal currencies hedged by the Company include various European currencies, the Canadian Dollar, the Mexican Peso, and the Brazilian Real. As of September 30, 2017, the notional amount of these contracts was $107,053 and consisted of hedges of transactions up to September 2018.

Interest rate swaps - The Company uses interest rate swap transactions to manage cash flow variability associated with its variable rate Term Loan Facility. The interest rate swap contracts, which fix the interest payments of variable rate debt instruments, are used to manage exposure to fluctuations in interest rates. As of September 30, 2017, the notional amount of these contracts was $150,000, with maturities through September 2018. The fair market value of all outstanding interest rate swap contracts is subject to change due to fluctuations in interest rates.

Pretax amounts related to the Company’s cash flow hedges that were recognized in AOCI were as follows:



	Gain (Loss) Recognized in AOCI
	Three Months Ended September 30,					Nine Months Ended September 30,
	2017			2016		2017			2016
Forward foreign exchange contracts	$	(763	)	$	854	$	1,860		$	(3,384	)
Interest rate swaps	22			131		(27		)	(2,123		)
Total	$	(741	)	$	985	$	1,833		$	(5,507	)

Pretax amounts related to the Company’s cash flow hedges that were reclassified from AOCI were as follows:



		Gain (Loss) Reclassified from AOCI to Income (Effective Portion)						Gain (Loss) Reclassified from AOCI to Income (Ineffective Portion)
		Three Months Ended September 30,
	Classification	2017			2016			2017		2016
Forward foreign exchange contracts	Cost of products sold	$	915		$	(769	)	$	—	$	—
Interest rate swaps	Interest expense, net of interest income	(570		)	(803		)	107		—
Total		$	345		$	(1,572	)	$	107	$	—



		Gain (Loss) Reclassified from AOCI to Income (Effective Portion)						Gain (Loss) Reclassified from AOCI to Income (Ineffective Portion)
		Nine Months Ended September 30,
	Classification	2017			2016			2017		2016
Forward foreign exchange contracts	Cost of products sold	$	2,371		$	(2,380	)	$	—	$	—
Interest rate swaps	Interest expense, net of interest income	(2,048		)	(2,393		)	284		—
Total		$	323		$	(4,773	)	$	284	$	—

The amount of losses to be reclassified from AOCI into income in the next twelve months related to the interest rate swap is expected to be approximately $1,090.