Financial Instruments, Hedging Activities and Fair Value Measurements

12 Months Ended

Dec. 31, 2018

FINANCIAL INSTRUMENTS, HEDGING ACTIVITIES AND FAIR VALUE MEASUREMENTS

Fair value of financial instruments

Equity securities with readily determinable fair values - Balances of equity securities are recorded within other assets, with any changes in fair value recorded within other expense, net. The fair values of available for sale securities are based upon Level 1 inputs when the securities are actively traded with quoted market prices.

Long-term borrowings - The estimated fair values of these notes are based on recent trades, as reported by a third-party pricing service. Due to the infrequency of trades, these inputs are considered to be Level 2 inputs.

Derivative instruments - The Company’s interest rate caps, interest rate swaps and cross-currency swaps are valued using broker quotations, or market transactions in either the listed or over-the-counter markets. As such, these derivative instruments are considered to be Level 2 inputs.

Fair value of contingent consideration

The fair value of contingent consideration associated with acquisitions completed in current and prior years are valued at each balance sheet date, until amounts become payable, with adjustments recorded within selling, general and administrative expenses on the consolidated statement of operations. During the year ended December 31, 2017, the Company recorded gains of $3.0 million associated with the changes to fair value. The Company paid the remaining $8.9 million contingent consideration in the year ended December 31, 2018. Due to the significant unobservable inputs used in the valuations, these liabilities are categorized within Level 3 of the fair value hierarchy.

The table below presents the fair values of our financial instruments measured on a recurring basis by level within the fair value hierarchy at December 31, 2018 and December 31, 2017.



	December 31, 2018								December 31, 2017
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Assets:
Prepaid expenses and other current assets:
Interest rate caps ⁽¹⁾	$	—	$	4.5	$	—	$	4.5	$	—	$	—	$	—	$	—
Cross-currency swaps ⁽²⁾	—		14.1		—		14.1		—		—		—		—
Foreign currency forward contracts⁽³⁾	—		—		—		—		—		—		—		—
Other assets:
Interest rate caps ⁽¹⁾	—		1.4		—		1.4		—		1.2		—		1.2
Interest rate swaps ⁽¹⁾	—		—		—		—		—		—		—		—
Cross-currency swaps ⁽²⁾	—		—		—		—		—		—		—		—
Investment in equity securities	0.7		—		—		0.7		4.3		—		—		4.3
Liabilities:
Other accrued liabilities:
Interest rate caps ⁽¹⁾	—		—		—		—		—		2.6		—		2.6
Foreign currency forward contracts⁽³⁾	—		—		—		—		—		0.7		—		0.7
Other liabilities:
Interest rate swaps ⁽¹⁾	—		2.9		—		2.9		—		—		—		—
Cross-currency swaps ⁽²⁾	—		8.8		—		8.8		—		—		—		—
Contingent consideration	—		—		—		—		—		—		8.9		8.9
Long-term borrowings: ⁽⁴⁾
2024 Dollar Senior Notes	—		474.9		—		474.9		—		524.4		—		524.4
2024 Euro Senior Notes	—		381.1		—		381.1		—		427.7		—		427.7
2025 Euro Senior Notes	—		497.5		—		497.5		—		571.8		—		571.8
2024 Dollar Term Loans	—		2,276.1		—		2,276.1		—		1,967.4		—		1,967.4
2023 Euro Term Loans	—		—		—		—		—		475.5		—		475.5

(1) Cash flow hedge

(2) Net investment hedge

(3) Derivatives not designated as hedging instruments

(4) Amounts not reflected on the Consolidated Balance Sheet

We selectively use derivative instruments to reduce market risk associated with changes in foreign currency exchange rates and interest rates. The use of derivatives is intended for hedging purposes only, and we do not enter into derivative instruments for speculative purposes. A description of each type of derivative used to manage risk is included in the following paragraphs.

Derivative Instruments Qualifying and Designated as Cash Flow and Net Investment Hedges

Interest Rate Caps Designated as Cash Flow Hedges

During the year ended December 31, 2017, we entered into four 1.5% interest rate caps with aggregate notional amounts totaling $850.0 million to hedge the variable interest rate exposures on our 2024 Dollar Term Loans. Three of these interest rate caps, comprising $600.0 million of the notional value, expire December 31, 2019 and had a deferred premium of $8.6 million at inception. The fourth interest rate cap, comprising the remaining $250.0 million of the notional value, expires December 31, 2021 and had a deferred premium of $8.1 million at inception. All deferred premiums are paid quarterly over the term of the respective interest rate caps. These interest rate caps are marked to market at each reporting date and any unrealized gains or losses are included in AOCI and reclassified to interest expense in the same period or periods during which the hedged transactions affect earnings.

Interest Rate Swaps Designated as Cash Flow Hedges

During the three months ended June 30, 2018, we entered into three interest rate swaps with aggregate notional amounts totaling $475.0 million to hedge interest rate exposures related to variable rate borrowings under the Senior Secured Credit Facilities. Under the terms of the interest rate swap agreements, the Company is required to pay the counter-parties a stream of fixed interest payments at a rate of 2.72% and in turn, receives variable interest payments based on 3-month LIBOR from the counter-parties. The interest rate swaps are designated as cash flow hedges and expire on March 31, 2023. These interest rate swaps are marked to market at each reporting date and any unrealized gains or losses are included in AOCI and reclassified to interest expense in the same period or periods during which the hedged transactions affect earnings.

Cross-Currency Swaps Designated as Net Investment Hedges

During the three months ended June 30, 2018, we entered into three fixed-for-fixed cross-currency swaps with aggregate notional amounts totaling $475.0 million to hedge the variability of exchange rate impacts between the U.S. Dollar and Euro. Under the terms of the cross-currency swap agreements, we notionally exchanged $475.0 million at a weighted average interest rate of 4.47% for €387.2 million at a weighted average interest rate of 1.95%. The cross-currency swaps were designated as net investment hedges and were set to expire on March 31, 2023. These cross-currency swaps were marked to market at each reporting date and any unrealized gains or losses are included in unrealized currency translation adjustments, within AOCI.

During the three months ended December 31, 2018, we settled three fixed-for-fixed cross-currency swaps previously executed in 2018 resulting in cash proceeds of $22.5 million. Concurrently, we notionally exchanged $475.0 million at a weighted average interest rate of 4.47% for €416.6 million at a weighted average interest rate of 1.44%. The cross-currency swaps are designated as net investment hedges and expire on March 31, 2023. These cross-currency swaps are marked to market at each reporting date and any unrealized gains or losses are included in unrealized currency translation adjustments, within AOCI.

The following table presents the location and fair values using Level 2 inputs of derivative instruments that qualify and have been designated as cash flow and net investment hedges included in accumulated other comprehensive (loss) income:



	Year Ended December 31,
	2018			2017
Accumulated other comprehensive (loss) income:
Interest rate caps (cash flow hedges)	$	(3.4	)	$	2.0
Interest rate swaps (cash flow hedges)	3.0			—
Cross-currency swaps (net investment hedges)	(27.7		)	—
Total accumulated other comprehensive (loss) income	$	(28.1	)	$	2.0

Gains and losses on the derivative representing hedge components excluded from the assessment of effectiveness are recognized over the life of the hedge on a systematic and rational basis.

The following tables set forth the locations and amounts recognized during the year ended December 31, 2018, 2017 and 2016 for these cash flow and net investment hedges.



		For the Year Ended December 31,
		2018						2017					2016
Derivatives in Cash Flow and Net Investment Hedges	Location of (Gain) Loss Recognized in Income on Derivatives	Net Amount of (Gain) Loss Recognized in OCI on Derivatives			Amount of (Gain) Loss Recognized in Income			Net Amount of (Gain) Loss Recognized in OCI on Derivatives		Amount of (Gain) Loss Recognized in Income			Net Amount of (Gain) Loss Recognized in OCI on Derivatives		Amount of (Gain) Loss Recognized in Income
Interest rate caps	Interest expense, net	$	(7.3	)	$	(1.9	)	$	1.8	$	(2.7	)	$	2.0	$	7.1
Interest rate swaps	Interest expense, net	4.3			1.3			—		—			—		—
Cross-currency swaps	Interest expense, net	(37.1		)	(9.4		)	—		—			—		—

Over the next 12 months, we expect gains of $0.1 million pertaining to cash flow hedges to be reclassified from accumulated other comprehensive income into earnings, related to our interest rate caps and interest rate swaps.

Derivative Instruments Not Designated as Cash Flow Hedges

We periodically enter into foreign currency forward and option contracts to reduce market risk and hedge our balance sheet exposures and cash flows for subsidiaries with exposures denominated in currencies different from the functional currency of the relevant subsidiary. These contracts have not been designated as hedges and all gains and losses are marked to market through other (income) expense, net in the consolidated statement of operations.

During the year ended December 31, 2013, we purchased a €300.0 million 1.5% interest rate cap on our Euro Term Loans for a premium of $3.1 million. The interest rate cap was not designated as a hedge and the changes in the fair value of the derivative instrument were recorded in current period earnings in interest expense. The hedge matured on September 29, 2017.

During the year ended December 31, 2017, we purchased a 1.25% interest rate cap with a notional amount of €388.0 million to hedge the variable interest rate exposures on our 2023 Euro Term Loans. We paid a premium equal to $0.6 million for the interest rate cap which is effective beginning September 30, 2017 through December 31, 2019. Changes in the fair value of the derivative instrument are recorded in current period earnings and are included in interest expense.

Fair value gains and losses of derivative contracts, as determined using Level 2 inputs, that have not been designated for hedge accounting treatment are recorded in earnings as follows:



Derivatives Not Designated as Hedging Instruments under ASC 815	Location of (Gain) Loss Recognized in Income on Derivatives	Year Ended December 31,
	Location of (Gain) Loss Recognized in Income on Derivatives	2018			2017		2016
Foreign currency forward contracts	Other expense, net	$	(7.9	)	$	11.2	$	4.3
Interest rate cap	Interest expense, net	—			0.6		—
		$	(7.9	)	$	11.8	$	4.3