Fair value measurements (Note)

6 Months Ended

Jul. 02, 2016

FAIR VALUE MEASUREMENTS

Fair value is the price that would be received upon sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The following fair value hierarchy is used in selecting inputs, with the highest priority given to Level 1, as these are the most transparent or reliable.


Level 1:	Quoted prices for identical instruments in active markets.


Level 2:	Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs are observable in active markets.


Level 3:	Valuations derived from valuation techniques in which one or more significant inputs are not observable.

The following table summarizes the valuation of our financial instruments carried at fair value and measured at fair value on a recurring basis by the above pricing categories (in millions):



		Fair Value
	Fair Value Hierarchy	July 2, 2016		December 31, 2015
Measured at fair value on a recurring basis:
Assets:
Investment securities	Level 1	$	40.0	$	14.9

Foreign currency forward contracts	Level 2	$	4.3	$	4.8
Funds associated with Israeli post-employment benefits	Level 2	16.3		17.2
Total level 2 assets		$	20.6	$	22.0

Liabilities:
Interest rate swap agreements	Level 2	$	—	$	0.3
Foreign currency forward contracts	Level 2	2.8		3.9
Total level 2 liabilities		$	2.8	$	4.2

Contingent consideration	Level 3	$	44.9	$	17.9

There were no transfers between Level 1, 2, and 3 during the three and six months ended July 2, 2016 and June 27, 2015. Our policy regarding the recording of transfers between levels is to record any such transfers at the end of the reporting period. See Note 7 for information on our investment securities. See Note 8 for a discussion of derivatives.

Israeli post-employment benefits represent amounts we have deposited in funds managed by financial institutions designated by management to cover post-employment benefits for our Israeli employees as required by Israeli law. The funds are recorded in Other non-current assets and values are determined using prices for recently traded financial instruments with similar underlying terms, as well as directly or indirectly observable inputs, such as interest rates and yield curves, that are observable at commonly quoted intervals.

Contingent consideration represents milestone payment obligations obtained through product acquisitions, which are valued using estimates based on probability-weighted outcomes, sensitivity analysis, and discount rates reflective of the risk involved. The estimates are updated quarterly and the liabilities are adjusted to fair value depending on a number of assumptions, including the competitive landscape and regulatory approvals that may impact the future sales of a product.

The table below presents a reconciliation for liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) (in millions). Net realized losses in the table were recorded in Administrative expense.



	Three Months Ended						Six Months Ended
	July 2, 2016			June 27, 2015			July 2, 2016			June 27, 2015
Contingent Consideration
Beginning balance:	$	48.0		$	12.4		$	17.9		$	12.4
Net realized (gains) losses	(0.1		)	0.9			—			0.9
Purchases or additions	1.0			—			30.5			—
Impairments	(3.8		)	(13.3		)	(3.8		)	(13.3		)
Foreign currency effect	(0.2		)	—			0.3			—
Ending balance:	$	44.9		$	—		$	44.9		$	—

Certain assets are required to be recorded at fair value on a non-recurring basis when events and circumstances indicate that the carrying value may not be recoverable. The following table summarizes the valuation of our financial instruments carried at fair value by the above pricing categories (in millions):



		Fair Value
	Fair Value Hierarchy	July 2, 2016		December 31, 2015
Measured at fair value on a non-recurring basis:
Assets:
Goodwill⁽¹⁾	Level 3	$	1,792.6	$	—
Indefinite-lived intangible assets⁽²⁾	Level 3	$	1,082.0	$	1,031.8
Assets held for sale, net	Level 3	70.1		37.5
Total level 3 assets		$	2,944.7	$	1,069.3

(1)

Goodwill with a carrying amount of $1,955.9 million was written down to its implied fair value of $1,792.6 million, resulting in total impairment charges of $163.3 million for the six months ended July 2, 2016, which are included in Impairment charges (credits) on the Condensed Consolidated Statements of Operations. The implied fair value is as of April 2, 2016, the date of the goodwill impairment test.


(2)	Intangible assets estimated fair value at July 2, 2016 is as of April 2, 2016, the date the impairment was taken.

The non-recurring fair values included in the table above represent only those assets whose carrying values were adjusted to fair value during the reporting period. See Note 3 for a more detailed discussion of the impaired goodwill and indefinite-lived intangible assets and the valuation methods used, and Note 9 for information on the impaired assets held for sale, net.

As of July 2, 2016 and December 31, 2015, our fixed rate long-term debt consisted of public bonds, a private placement note, and retail bonds. As of July 2, 2016, the public bonds and private placement note had a carrying value of $5.1 billion and a fair value of $5.2 billion, based on quoted market prices (Level 1). As of December 31, 2015, the public bonds and private placement note had a carrying value of $3.9 billion and fair value of $3.8 billion, based on quoted market prices (Level 1). As of July 2, 2016, our retail bonds had a carrying value of $818.6 million (excluding a premium of $67.5 million) and a fair value of $885.3 million. As of December 31, 2015, our retail bonds had a carrying value of $798.3 million (excluding a premium of $82.5 million) and a fair value of $859.8 million. The fair value of our related bonds for both periods was based on interest rates offered for borrowings of a similar nature and remaining maturities (Level 2).

The carrying amounts of our other financial instruments, consisting of cash and cash equivalents, accounts receivable, accounts payable, short-term debt and variable rate long-term debt, approximate their fair value.

- 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.

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