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FAIR VALUE
 6 Months Ended
Jun. 30, 2012
FAIR VALUE  
FAIR VALUE

(15)                          FAIR VALUE

 

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In the absence of active markets for the identical assets or liabilities, such measurements involve developing assumptions based on market observable data and, in the absence of such data, internal information that is consistent with what market participants would use in a hypothetical transaction that occurs at the measurement date. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our market assumptions. Preference is given to observable inputs. These two types of inputs create the following fair value hierarchy:

 

·                  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 whose inputs are observable or whose significant value drivers are observable.

 

·                  Level 3 — Significant inputs to the valuation model are unobservable.

 

There were no changes during the three and six months ended June 30, 2012 and July 2, 2011 to the valuation techniques we use to measure asset and liability fair values on a recurring basis.  There were no transfers between the three levels of the fair value hierarchy for the three and six months ended June 30, 2012 and July 2, 2011.

 

The following section describes the valuation methodologies we use to measure different financial instruments at fair value on a recurring basis.

 

Derivative Financial Instruments

 

Our financial derivative assets and liabilities include FX forward contracts, FX embedded derivatives and commodity contracts, which are valued using valuation models that measure fair value using observable market inputs such as forward rates, interest rates, our own credit risk and our counterparties’ credit risks. Based on these inputs, the derivative assets and liabilities are classified within Level 2 of the valuation hierarchy. We have not made any adjustments to the inputs obtained from the independent sources. Based on our continued ability to enter into forward contracts, we consider the markets for our fair value instruments active. We primarily use the income approach, which uses valuation techniques to convert future amounts to a single present amount.

 

As of June 30, 2012, there had been no significant impact to the fair value of our derivative liabilities due to our own credit risk, as the related instruments are collateralized under our senior credit facilities. Similarly, there has been no significant impact to the fair value of our derivative assets based on our evaluation of our counterparties’ credit risk.

 

Investments in Equity Securities

 

Our available-for-sale securities include equity investments that are traded in active international markets. They are measured at fair value using closing stock prices from active markets and are classified within Level 1 of the valuation hierarchy. These assets had a fair market value of $6.6 and $5.2 at June 30, 2012 and December 31, 2011, respectively, and were recorded in “Assets of discontinued operations” within our condensed consolidated balance sheets.

 

Certain of our investments in equity securities that are not readily marketable are accounted for under the fair value option, with such values determined by multidimensional pricing models. These models consider market activity based on modeling of securities with similar credit quality, duration, yield and structure. A variety of inputs are used, including benchmark yields, reported trades, non-binding broker/dealer quotes, issuer spread and reference data including market research publications. Market indicators, industry and economic events are also considered. We have not made any adjustments to the inputs obtained from the independent sources. At June 30, 2012 and December 31, 2011, these assets had a fair value of $8.0 and $7.8, respectively, which are estimated using various valuation models, including the Monte-Carlo simulation model, and were recorded in “Assets of discontinued operations” within our condensed consolidated balance sheets.

 

Assets and liabilities measured at fair value on a recurring basis include the following as of June 30, 2012:

 

 

 

Fair Value Measurements Using

 

 

 

Level 1

 

Level 2

 

Level 3

 

Current assets — FX embedded derivatives and FX forward contracts

 

$

—

 

$

1.9

 

$

—

 

Current assets — Investment in equity securities and available-for-sale securities

 

6.6

 

—

 

8.0

 

Current liabilities — FX forward contracts, FX embedded derivatives and commodity contracts

 

—

 

3.9

 

—

 

Long-term liabilities — FX embedded derivatives

 

—

 

14.2

 

—

 

 

Assets and liabilities measured at fair value on a recurring basis include the following as of December 31, 2011:

 

 

 

Fair Value Measurements Using

 

 

 

Level 1

 

Level 2

 

Level 3

 

Current assets — FX embedded derivatives

 

$

—

 

$

1.2

 

$

—

 

Current assets — Investment in equity securities and available-for-sale securities

 

5.2

 

—

 

7.8

 

Current liabilities — FX forward contracts, FX embedded derivatives and commodity contracts

 

—

 

1.9

 

—

 

Long-term liabilities — FX embedded derivatives

 

—

 

14.8

 

—

 

 

The table below presents a reconciliation of our investment in equity securities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the six months ended June 30, 2012 and July 2, 2011, including net unrealized gains (losses) included in earnings.

 

 

 

Six months ended

 

 

 

June 30, 2012

 

July 2, 2011

 

Balance at beginning of period

 

$

7.8

 

$

8.5

 

Purchases

 

—

 

—

 

Gains (losses) included in income from discontinued operations

 

0.2

 

(0.7

)

Balance at end of period

 

$

8.0

 

$

7.8

 

 

During the second quarter of 2011, we determined that the fair value of our SPX Heat Transfer Inc. reporting unit was less than the carrying value of its net assets (see Note 7).  The fair value of SPX Heat Transfer Inc. was based upon weighting the income and market approaches, utilizing estimated cash flows and a terminal value discounted at a rate of return that reflected the relative risk of the cash flows, as well as valuation multiples derived from comparable publicly-traded companies that were applied to the historical and projected operating results of SPX Heat Transfer Inc. (unobservable inputs — Level 3).  We estimated the implied fair value of SPX Heat Transfer Inc.’s goodwill, which resulted in an impairment charge related to such goodwill of $17.2 during the second quarter of 2011.  In addition, we recorded an impairment charge in the second quarter of 2011 of $7.5 related to the indefinite-lived intangible assets of SPX Heat Transfer Inc., with the fair value of these intangible assets determined based on a projection of cash flows for the assets discounted at a rate of return that reflected the relative risk of the cash flows (unobservable inputs — Level 3).

 

The estimated fair values of other financial liabilities (excluding capital leases) not measured at fair value on a recurring basis as of June 30, 2012 and December 31, 2011 were as follows:

 

 

 

June 30, 2012

 

December 31, 2011

 

 

 

Carrying
Amount

 

Fair Value

 

Carrying
Amount

 

Fair Value

 

Senior Notes

 

$

1,100.0

 

$

1,206.8

 

$

1,100.0

 

$

1,198.0

 

Term Loans

 

800.0

 

800.0

 

800.0

 

800.0

 

Other indebtedness

 

239.1

 

239.1

 

75.1

 

75.1

 

 

The following methods and assumptions were used in estimating the fair value of these financial instruments:

 

·                  The fair value of the senior notes and term loans was determined using Level 2 inputs within the fair value hierarchy and was based on quoted market prices for the same or similar instruments or on current rates offered to us for debt with similar maturities, subordination and credit default expectations.

 

·                  The fair value of our short-term debt approximates carrying value due primarily to the short-term nature of those instruments.

 

Certain of our non-financial assets and liabilities are subject to impairment analysis, including long-lived assets, indefinite-lived intangible assets and goodwill. We review the carrying amounts of such assets whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable or at least annually for indefinite-lived intangible assets and goodwill. Any resulting asset impairment would require that the instrument be recorded at its fair value. As of June 30, 2012, with the exception of non-financial assets and liabilities that were acquired as part of new business acquisitions, we did not have any non-financial assets or liabilities that are required to be measured at fair value on a recurring or non-recurring basis. See Note 3 for further details on our recent acquisitions.

 

The carrying amount of cash and equivalents and receivables reported in our condensed consolidated balance sheets approximates fair value due to the short maturity of those instruments.