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Financial Instruments and Derivative Instruments | 9 Months Ended
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Oct. 02, 2016
Financial Instruments and Derivative Instruments |
Financial Instruments and Derivative Instruments | 5.Financial Instruments and Derivative 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 October 2, 2016 and December 31, 2015:
|  | Fair Value Measurements at October 2, 2016 Using: |
|  |  |  | Quoted Prices in Active Markets for Identical Assets |  | Significant Other Observable Inputs |  | Significant Unobservable Inputs |
|  | Total |  | (Level 1) |  | (Level 2) |  | (Level 3) |
|  | (in millions) |
Assets |  |  |  |  |  |  |  |  |
Plan assets for deferred compensation(1) |  | $ | 3.2 |  | $ | 3.2 |  | $ | — |  | $ | — |
Total assets |  | $ | 3.2 |  | $ | 3.2 |  | $ | — |  | $ | — |
Liabilities |  |  |  |  |  |  |  |  |
Plan liabilities for deferred compensation(2) |  | $ | 3.2 |  | $ | 3.2 |  | $ |  |  | $ |  |
Redeemable financial instrument(3,4) |  | 6.9 |  | — |  | — |  | 6.9 |
Interest rate swaps (5) |  | 0.6 |  | — |  | 0.6 |  | — |
Total liabilities |  | $ | 10.7 |  | $ | 3.2 |  | $ | 0.6 |  | $ | 6.9 |
|  | Fair Value Measurements at December 31, 2015 Using: |
|  |  |  | Quoted Prices in Active Markets for Identical Assets |  | Significant Other Observable Inputs |  | Significant Unobservable Inputs |
|  | Total |  | (Level 1) |  | (Level 2) |  | (Level 3) |
|  | (in millions) |
Assets |  |  |  |  |  |  |  |  |
Plan asset for deferred compensation(1) |  | $ | 3.3 |  | $ | 3.3 |  | $ | — |  | $ | — |
Total assets |  | $ | 3.3 |  | $ | 3.3 |  | $ | — |  | $ | — |
Liabilities |  |  |  |  |  |  |  |  |
Plan liability for deferred compensation(2) |  | $ | 3.3 |  | $ | 3.3 |  | $ | — |  | $ | — |
Redeemable financial instrument(3) |  | 5.7 |  | — |  | — |  | 5.7 |
Total liabilities |  | $ | 9.0 |  | $ | 3.3 |  | $ | — |  | $ | 5.7 |
| (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 in the Company’s consolidated balance sheet in other noncurrent liabilities as of October 2, 2016 and December 31, 2015 and relates to a mandatorily redeemable equity instrument as part of the Apex acquisition in 2015.
| (4) |  | Included in the Company’s consolidated balance sheet in other noncurrent liabilities as of October 2, 2016 and relates to a mandatorily redeemable equity instrument as part of the AERCO Korea acquisition.
| (5) |  | Included on the Company’s consolidated balance sheet in other noncurrent liabilities.
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, 2015 to October 2, 2016.
|  | Balance |  |  |  |  |  | Total realized and unrealized (gains) losses included in: |  | Balance |
|  | December 31, 2015 |  | Settlements |  | Purchases |  | Net earnings adjustments |  | Comprehensive income |  | October 2, 2016 |
|  | (in millions) |
Redeemable financial instrument |  | $ | 5.7 |  | — |  | $ | 0.8 |  | — |  | $ | 0.4 |  | $ | 6.9 |
In connection with the acquisition of AERCO Korea in the first quarter of 2016, a liability of $0.8 million was recognized as the estimate of the acquisition date fair value of the mandatorily redeemable equity instrument. This liability is classified as Level 3 under the fair value hierarchy as it is based on the commitment to purchase the remaining 10% of AERCO Korea shares by December 31, 2017, which is not observable in the market. In connection with the acquisition of Apex in the fourth quarter of 2015, a liability of $5.5 million was recognized as the estimate of the acquisition date fair value of the mandatorily redeemable equity instrument. This liability is classified as Level 3 under the fair value hierarchy as it is based on the commitment to purchase the remaining 20% of Apex shares within the next three years, which is not observable in the market. The Company uses financial instruments from time to time to enhance its ability to manage risk, including foreign currency, interest rates 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, interest 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 new 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 $230 million has been drawn as of October 2, 2016. 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 on May 12, 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 July 27, 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 Term Loan, the Company entered into two interest rate swaps. 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 three and nine months ended October 2, 2016, a gain of $1.3 million and a loss of $0.6 million, respectively, was recorded in Accumulated Other Comprehensive Loss to recognize the change in the fair value of interest rate swaps that qualify as a cash flow hedge. Non-Designated Cash Flow Hedge The Company has exposure to a number of foreign currency rates, including the Canadian dollar, the euro, the Chinese yuan and the British Pound Sterling. To manage this risk, the Company generally uses a layering methodology whereby at the end of any quarter, the Company has generally entered into forward exchange contracts which hedge approximately 50% of the projected intercompany purchase transactions for the next twelve months. These forward exchange contracts are not designated as cash flow or fair value hedges. The Company entered into one forward exchange contract to manage the foreign currency rate exposure between the Canadian dollar and the euro regarding an intercompany loan. This forward contract is marked-to-market with changes in the fair value recorded to earnings. Changes in fair value were immaterial for the three months and nine months ended October 2, 2016. The Company did not have any forward contracts in the first nine months of 2015. Fair Value 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 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 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:
|  | October 2, |  | December 31, |
|  | 2016 |  | 2015 |
|  | (in millions) |
Carrying amount |  | $ | 602.9 |  | $ | 575.3 |
Estimated fair value |  | $ | 609.5 |  | $ | 584.1 |

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- Definition The entire disclosure for financial instruments. This disclosure includes, but is not limited to, fair value measurements of short and long term marketable securities, international currencies forward contracts, and auction rate securities. Financial instruments may include hedging and non-hedging currency exchange instruments, derivatives, securitizations and securities available for sale at fair value. Also included are investment results, realized and unrealized gains and losses as well as impairments and risk management disclosures. + References No definition available. + Details
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