FAIR VALUE

6 Months Ended

Jun. 30, 2019

We utilize fair value measures for both financial and non-financial assets and liabilities.

Items measured at fair value on a recurring basis

Fair value measurements are established using a three level valuation hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into the following categories:


•	Level 1: Quoted prices for identical assets or liabilities in active markets.

•

Level 2: Inputs other than quoted prices included in Level 1 that are observable for the asset or liability either directly or indirectly. Short-term investments in this category are valued using discounted cash flow techniques with all significant inputs derived from or corroborated by observable market data. Derivative assets and liabilities in this category are valued using models that consider various assumptions and information from market-corroborated sources. The models used are primarily industry-standard models that consider items such as quoted prices, market interest rate curves applicable to the instruments being valued as of the end of each period, discounted cash flows, volatility factors, current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace.


•	Level 3: Unobservable inputs that are not corroborated by market data.

The areas in which we utilize fair value measures of financial assets and liabilities are presented in the table below.



	As of June 30, 2019
	Level 1		Level 2		Level 3		Total
Assets:
Cash equivalents:
Bank time deposits with original maturities of three months or less	$	—	$	191.1	$	—	$	191.1
Derivative assets ¹ (Note 15)	—		2.2		—		2.2
Diversified investments associated with the Executive Stock Unit Program (ESUP) ¹	38.4		—		—		38.4
Total assets	$	38.4	$	193.3	$	—	$	231.7
Liabilities:
Derivative liabilities ¹ (Note 15)	$	—	$	1.4	$	—	$	1.4
Liabilities associated with the ESUP ¹	38.5		—		—		38.5
Total liabilities	$	38.5	$	1.4	$	—	$	39.9



	As of December 31, 2018
	Level 1		Level 2		Level 3		Total
Assets:
Cash equivalents:
Bank time deposits with original maturities of three months or less	$	—	$	159.1	$	—	$	159.1
Derivative assets ¹ (Note 15)	—		1.2		—		1.2
Diversified investments associated with the ESUP ¹	32.7		—		—		32.7
Total assets	$	32.7	$	160.3	$	—	$	193.0
Liabilities:
Derivative liabilities ¹ (Note 15)	$	—	$	4.7	$	—	$	4.7
Liabilities associated with the ESUP ¹	33.7		—		—		33.7
Total liabilities	$	33.7	$	4.7	$	—	$	38.4

¹Includes both current and long-term amounts.

There were no transfers between Level 1 and Level 2 for any of the periods presented.

The fair value for fixed rate debt (Level 2) was approximately $29.6 greater than carrying value of $1,584.6 at June 30, 2019 and was approximately $35.3 less than carrying value of $1,090.5 at December 31, 2018.

Items measured at fair value on a non-recurring basis

The primary areas in which we use fair value measurements of non-financial assets and liabilities are allocating purchase price to the assets and liabilities of acquired companies as discussed in Note 10, and evaluating long-term assets (including goodwill) for potential impairment. Determining fair values for these items requires significant judgment and includes a variety of methods and models that utilize significant Level 3 inputs.

Long-lived assets, acquisitions and the second step (when necessary) of a goodwill impairment test utilize the following methodologies in determining fair value: (i) Buildings and machinery are valued at an estimated replacement cost for an asset of comparable age and condition. Market pricing of comparable assets is used to estimate replacement cost where available. (ii) The most common identified intangible assets are customer relationships, tradenames and developed technology. Customer relationships are valued using an excess earnings method, using various inputs such as the estimated customer attrition rate, future earnings forecast, the amount of contributory asset charges, and an appropriate discount rate. Tradenames and developed technology are valued using a relief-from-royalty method, with various inputs such as comparable market royalty rates for items of similar value, future earnings forecast, and an appropriate discount rate. (iii) Inventory is valued at current replacement cost for raw materials, with a step-up for work in process and finished goods items that reflects the amount of ultimate profit earned as of the valuation date. (iv) Other working capital items are generally recorded at face value, unless there are known conditions that would impact the ultimate settlement amount of the particular item.

Goodwill Impairment Reviews

We test goodwill for impairment at the reporting unit level (the business groups that are one level below the operating segments) when triggering events occur, or at least annually. We perform our annual goodwill impairment review in the second quarter. The 2019 and 2018 goodwill impairment reviews indicated no goodwill impairments.

The fair values of our reporting units in relation to their respective carrying values and significant assumptions used are presented in the tables below. If actual results differ materially from estimates used in these calculations, we could incur future impairment charges.



2019
Fair Value over Carrying Value divided by Carrying Value	June 30, 2019 Goodwill Value		10-year Compound Annual Growth Rate Range for Sales	Terminal Values Long-term Growth Rate for Debt-Free Cash Flow		Discount Rate Ranges
Less than 50% ¹	$	59.2	1.4% - 5.8%	3	%	8.0% - 9.5%
50% - 100% ²	722.8		5.0%	3	%	8.5%
101% - 300%	393.3		1.3% - 5.5%	3	%	7.5% - 8.0%
301% - 600%	223.1		.2% - 11.1%	3	%	8.5%
	$	1,398.4	.2% - 11.1%	3	%	7.5% - 9.5%



2018
Fair Value over Carrying Value divided by Carrying Value	June 30, 2018 Goodwill Value		10-year Compound Annual Growth Rate Range for Sales	Terminal Values Long-term Growth Rate for Debt-Free Cash Flow		Discount Rate Ranges
Less than 100% ³	$	181.3	4.7% - 5.2%	3	%	9.0% - 9.5%
101% - 300%	504.6		1.8% - 5.0%	3	%	8.5% - 10.0%
301% - 600%	153.1		5.7% - 12.4%	3	%	9.0% - 10.0%
	$	839.0	1.8% - 12.4%	3	%	8.5% - 10.0%

¹ This category includes two reporting units:

•The fair value of our Machinery reporting unit exceeded its carrying value by 12% at June 30, 2019. This unit has $33.4 of goodwill.

•The fair value of our Hydraulic Cylinders reporting unit exceeded its carry value by 29% at June 30, 2019. This reporting unit was acquired in the first quarter of 2018 and has performed as expected. Goodwill of $25.8 is associated with this unit.

²This category includes one reporting unit. The fair value of our Bedding reporting unit exceeded its carrying value by 50% at June 30, 2019 as compared to 198% at June 30, 2018. This decrease was due to the January 2019 ECS acquisition (as discussed in Note 10). At our testing date, the carrying value approximated fair value for the ECS business.

³The fair value of all reporting units in this category exceeded their carrying values by 90% at June 30, 2018, except for the Hydraulic Cylinders reporting unit (acquired in the first quarter of 2018), to which carrying value approximated 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.

+ References + Details