(16) Financial Instruments

Fair Value

The carrying amounts of cash and cash equivalents, trade receivables and trade payables approximate fair value because of the short maturity of these financial instruments.

The fair value of the Company’s 5.05% senior notes due 2020 is based on quoted market prices of similar notes (level 2). The fair value of the Company’s borrowings outstanding under the Credit Agreement, Facility Agreement, and the Company’s variable rate debt approximates its carrying value. The carrying amount and the estimated fair market value of the Company’s long-term debt, including the current portion, are as follows:


	December 31,
	2017		2016
	(in millions)
Carrying amount	$	499.5	$	653.6
Estimated fair value	$	501.1	$	658.3

Financial Instruments

The Company measures certain financial assets and liabilities at fair value on a recurring basis, including deferred compensation plan assets and related liabilities, redeemable financial instruments, and derivatives. The fair values of these certain financial assets and liabilities were determined using the following inputs at December 31, 2017 and December 31, 2016:


	Fair Value Measurement at December 31, 2017 Using:
			Quoted Prices in Active		Significant Other		Significant
			Markets for Identical		Observable		Unobservable
			Assets		Inputs		Inputs
	Total		(Level 1)		(Level 2)		(Level 3)
	(in millions)
Assets
Plan asset for deferred compensation(1)	$	3.2	$	3.2	$	—	$	—
Interest rate swaps (1)	$	5.6	$	—	$	5.6	$	—
Total assets	$	8.8	$	3.2	$	5.6	$	—
Liabilities
Plan liability for deferred compensation(2)	$	3.2	$	3.2	$	—	$	—
Redeemable financial instrument(3)	$	2.9	$	—	$	—	$	2.9
Total liabilities	$	6.1	$	3.2	$	—	$	2.9


	Fair Value Measurements at December 31, 2016 Using:
			Quoted Prices in Active		Significant Other		Significant
			Markets for Identical		Observable		Unobservable
			Assets		Inputs		Inputs
	Total		(Level 1)		(Level 2)		(Level 3)
	(in millions)
Assets
Plan asset for deferred compensation(1)	$	3.0	$	3.0	$	—	$	—
Interest rate swaps (1)	$	4.6	$	—	$	4.6	$
Total assets	$	7.6	$	3.0	$	4.6	$	—
Liabilities
Plan liability for deferred compensation(2)	$	3.0	$	3.0	$	—	$	—
Redeemable financial instrument(3)		5.8		—		—		5.8
Total liabilities	$	8.8	$	3.0	$	—	$	5.8

(1)

Included on the Company’s consolidated balance sheet in other assets (other, net).

(2)

Included on the Company’s consolidated balance sheet in accrued compensation and benefits.

(3)

Included on the Company’s consolidated balance sheet in other current liabilities as of December 31, 2017 and in other noncurrent liabilities as of December 31, 2016 and relates to a mandatorily redeemable equity instrument as part of the Apex acquisition in 2015.

The table below provides a summary of the changes in fair value of all financial assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the period December 31, 2016 to December 31, 2017.


							Total realized and unrealized
	Balance						(gains) losses included in:				Balance
	December 31,						Net earnings		Comprehensive		December 31,
	2016		Settlements		Purchases		adjustments		income		2017
	(in millions)
Redeemable financial instrument	$	5.8		(2.9)	$	—		—	$	—	$	2.9

In connection with the acquisition of Apex, a liability of $5.5 million was recognized on November 30, 2015 as the estimate of the acquisition date fair value of the mandatorily redeemable equity instrument. The Company acquired an additional 10% ownership in the first quarter of 2017 for approximately $2.9 million and now owns 90% of Apex outstanding shares. The remaining liability is classified as Level 3 under the fair value hierarchy as it is based on the commitment to purchase the remaining 10% of Apex shares within the next year, which is not observable in the market.

Cash equivalents consist of instruments with remaining maturities of three months or less at the date of purchase and consist primarily of money market funds, for which the carrying amount is a reasonable estimate of fair value.

The Company uses financial instruments from time to time to enhance its ability to manage risk, including foreign currency and commodity pricing exposures, which exist as part of its ongoing business operations. The use of derivatives exposes the Company to counterparty credit risk for nonperformance and to market risk related to changes in currency exchange rates and commodity prices. The Company manages its exposure to counterparty credit risk through diversification of counterparties. The Company’s counterparties in derivative transactions are substantial commercial banks with significant experience using such derivative instruments. The impact of market risk on the fair value and cash flows of the Company’s derivative instruments is monitored and the Company restricts the use of derivative financial instruments to hedging activities. The Company does not enter into contracts for trading purposes nor does the Company enter into any contracts for speculative purposes. The use of derivative instruments is approved by senior management under written guidelines.

Interest Rate Swaps

On February 12, 2016, the Company entered into a Credit Agreement (the “Credit Agreement”) pursuant to which it received a funding commitment under a Term Loan of $300 million, of which the entire $300 million has been drawn on, and a Revolving Commitment (“Revolver”) of $500 million, of which $147 million has been drawn as of December 31, 2017. Both facilities mature on February 12, 2021. For each facility, the Company can choose either an Adjusted LIBOR or Alternative Base Rate (“ABR”). Upon intended election of Adjusted LIBOR as the interest rate, the Term Loan has quarterly interest payments that began in May 2016, quarterly principal repayments commencing on March 31, 2017, with a balloon payment of principal on maturity date. The Revolver has quarterly interest payments that began on in July 2016.

Accordingly, the Company’s earnings and cash flows are exposed to interest rate risk from changes in Adjusted LIBOR. In order to manage the Company’s exposure to changes in cash flows attributable to fluctuations in LIBOR-indexed interest payments related to the Company’s floating rate debt, the Company entered into two interest rate swaps on February 12, 2016. For each interest rate swap, the Company receives the three-month USD-LIBOR subject to a 0% floor, and pays a fixed rate of 1.31375% on a notional amount of $225.0 million. The swaps mature on February 12, 2021. The Company formally documents the hedge relationships at hedge inception to ensure that its interest rate swaps qualify for hedge accounting. On a quarterly basis, the Company assesses whether the interest rate swaps are highly effective in offsetting changes in the cash flow of the hedged item. The Company does not hold or issue interest rate swaps for trading purposes. The swaps are designated as cash flow hedges. For the years ended December 31, 2017 and 2016, a net of tax gain of $0.6 million and $2.9 million, respectively, was recorded in Accumulated Other Comprehensive Income to recognize the effective portion of the fair value of interest rate swaps that qualify as a cash flow hedge. The Company did not enter into any interest rate swaps during 2017.

Non-Designated Cash Flow Hedge

The Company’s foreign subsidiaries transact most business, including certain intercompany transactions, in foreign currencies. Such transactions are principally purchases or sales of materials and are denominated in European currencies or the U.S. or Canadian dollar. The Company uses foreign currency forward exchange contracts from time to time to manage the risk related to intercompany loans, intercompany purchases that occur during the course of a year, and certain open foreign currency denominated commitments to sell products to third parties. The Company entered into one forward contract in the fourth quarter of 2016 and one forward contract in the first quarter of 2017 to manage the foreign currency rate exposure in 2016 and 2017. These forward contracts were entered into to manage the foreign currency rate exposure between the Hong Kong Dollar and the euro regarding two intercompany loans. These forward contracts are marked-to-market with changes in the fair value recorded to earnings. The Company recognized a loss of $2.9 million related to forward exchange contracts in 2017 and recognized a gain on this forward contract in 2016 of $0.3 million. The Company did not have any forward contracts in 2015. These forward contracts were not renewed in September 2017 as the intercompany loans for which the Company was hedging the foreign currency rate exposure were settled.

Leases

The Company leases certain manufacturing facilities, sales offices, warehouses, automobiles, and equipment. Generally, the leases carry renewal provisions and require the Company to pay maintenance costs. Future minimum lease payments under capital leases and non‑cancelable operating leases as of December 31, 2017 are as follows:


	Capital Leases		Operating Leases
	(in millions)
2018	$	1.4	$	11.4
2019		1.3		9.5
2020		1.2		7.5
2021		0.2		3.5
2022		—		1.8
Thereafter		—		3.2
Total	$	4.1	$	36.9
Less amount representing interest (at rates ranging from 4.3% to 7.0%)		0.3
Present value of net minimum capital lease payments		3.8
Less current installments of obligations under capital leases		1.3
Obligations under capital leases, excluding current installments	$	2.5

Carrying amounts of assets under capital lease include:


		December 31,
		2017	2016
		(in millions)
Buildings	$	15.3	$	13.4
Machinery and equipment		1.7		1.5
		17.0		14.9
Less accumulated depreciation		(6.8)		(5.4)
	$	10.2	$	9.5