5. FAIR VALUE MEASUREMENTS

Assets and liabilities measured at fair value on a recurring basis

The carrying value of cash and cash equivalents, accounts receivable, accounts payable, other current liabilities and short-term debt approximate their fair value because of the short term maturity of these instruments.

The fair value of the contingent consideration relating to the M/A-COM acquisition on August 17, 2015 is re-measured on a recurring basis. The Company has determined that this contingent consideration resides within Level 3 of the fair value hierarchy. The Company adjusted the fair value of the earn-out liability to $14 million in the first quarter of 2017 based on actual revenue levels as well as changes in the estimated probability of different revenue scenarios for the remaining contractual earn-out period. Income of $13 million was recognized within Other income (expense), net in the Consolidated Statements of Income in the first quarter of 2017 due to the decrease in the contingent consideration liability. The remaining fair value of the earn-out liability of $14 million as of December 31, 2017 was fully released and recognized within Other income (expense) in the first quarter of 2018, driven by changes in the estimated probability of different revenue scenarios for the remaining contractual earn-out period such that management no longer believes that there are any scenarios under which the earn-out criteria could be met.

The Company uses derivative financial instruments, “derivatives”, as part of its debt management to mitigate the market risk that occurs from its exposure to changes in interest and foreign exchange rates. The Company does not enter into derivatives for trading or other speculative purposes. The Company’s use of derivatives is in accordance with the strategies contained in the Company’s overall financial policy. The derivatives outstanding at March 31, 2018 were foreign exchange swaps. All swaps principally match the terms and maturity of the underlying debt and no swaps have a maturity beyond six months. All derivatives are recognized in the consolidated financial statements at fair value. Certain derivatives are from time to time designated either as fair value hedges or cash flow hedges in line with the hedge accounting criteria. For certain other derivatives hedge accounting is not applied either because non-hedge accounting treatment creates the same accounting result or the hedge does not meet the hedge accounting requirements, although entered into applying the same rationale concerning mitigating market risk that occurs from changes in interest and foreign exchange rates. During the quarter, forward contracts designated as cash flow hedges of certain external purchasing were terminated. The loss associated with such termination was not material.

The degree of judgment utilized in measuring the fair value of the instruments generally correlates to the level of pricing observability. Pricing observability is impacted by a number of factors, including the type of asset or liability, whether the asset or liability has an established market and the characteristics specific to the transaction. Instruments with readily active quoted prices or for which fair value can be measured from actively quoted prices generally will have a higher degree of pricing observability and a lesser degree of judgment utilized in measuring fair value. Conversely, assets rarely traded or not quoted will generally have less, or no, pricing observability and a higher degree of judgment utilized in measuring fair value.

Under existing GAAP, there is a disclosure framework hierarchy associated with the level of pricing observability utilized in measuring assets and liabilities at fair value. The three broad levels defined by the hierarchy are as follows:

Level 1 - Quoted prices are available in active markets for identical assets or liabilities as of the reported date.

Level 2 - Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these assets and liabilities include items for which quoted prices are available but traded less frequently, and items that are fair valued using other financial instruments, the parameters of which can be directly observed.

Level 3 - Assets and liabilities that have little to no pricing observability as of the reported date. These items do not have two-way markets and are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation.

The Company’s derivatives are all classified as Level 2 of the fair value hierarchy and there were no transfers between the levels during this or comparable periods.

The tables below present information about the Company’s derivative financial assets and liabilities measured at fair value on a recurring basis. The carrying value is the same as the fair value as these instruments are recognized in the consolidated financial statements at fair value. Although the Company is party to close-out netting agreements (ISDA agreements) with all derivative counterparties, the fair values in the tables below and in the Condensed Consolidated Balance Sheet at March 31, 2018 and in the Consolidated Balance Sheet at December 31, 2017, have been presented on a gross basis. The amounts subject to netting agreements that the Company chose not to offset are presented below. According to the close-out netting agreements, transaction amounts payable to a counterparty on the same date and in the same currency can be netted.

	March 31, 2018
				Fair Value Measurements
Description	Nominal volume			Derivative asset			Derivative liability			Balance sheet location
Derivatives designated as hedging instruments
Foreign exchange forward contracts, less than 1 year (cash flow hedge)	$	—		$	—		$	—		Other current assets/ Other current liabilities
Total derivatives designated as hedging instruments	$	—		$	—		$	—
Derivatives not designated as hedging instruments
Foreign exchange swaps, less than 6 months	$	671.7	¹⁾	$	4.4	²⁾	$	3.5	³⁾	Other current assets/ Other current liabilities
Total derivatives not designated as hedging instruments	$	671.7		$	4.4		$	3.5

¹⁾	Net nominal amount after deducting for offsetting swaps under ISDA agreements is $655.4 million.

²⁾	Net amount after deducting for offsetting swaps under ISDA agreements is $4.3 million.

³⁾	Net amount after deducting for offsetting swaps under ISDA agreements is $3.4 million.

	December 31, 2017
				Fair Value Measurements
Description	Nominal volume			Derivative asset			Derivative liability			Balance sheet location
Derivatives designated as hedging instruments ¹⁾
Foreign exchange forward contracts, less than 1 year (cash flow hedge)	$	66.6		$	0.4		$	1.3		Other current assets/ Other current liabilities
Foreign exchange forward contracts, less than 2 years (cash flow hedge)		—			—			—		Other non-current assets/ Other non-current liabilities
Total derivatives designated as hedging instruments	$	66.6		$	0.4		$	1.3
Derivatives not designated as hedging instruments
Foreign exchange swaps, less than 6 months	$	468.2	²⁾	$	2.4	³⁾	$	0.3	⁴⁾	Other current assets/ Other current liabilities
Total derivatives not designated as hedging instruments	$	468.2		$	2.4		$	0.3

¹⁾	There is no netting since there are no offsetting contracts.

²⁾	Net nominal amount after deducting for offsetting swaps under ISDA agreements is $468.2 million.

³⁾	Net amount after deducting for offsetting swaps under ISDA agreements is $2.4 million.

⁴⁾	Net amount after deducting for offsetting swaps under ISDA agreements is $0.3 million.

Derivatives designated as hedging instruments

The forward contracts designated as cash flow hedges were terminated during the first quarter of 2018. The derivatives designated as hedging instruments outstanding at December 31, 2017 were foreign exchange forward contracts, classified as cash flow hedges.

For the three months ended March 31, 2018 and March 31, 2017, the cumulative gains and losses recognized in OCI on the cash flow hedges were a loss of $0.0 million (net of taxes) and a loss of $1.0 million (net of taxes), respectively.

For the three months ended March 31, 2018 and March 31, 2017, the gains and losses reclassified from OCI and recognized in the Consolidated Statements of Income were a loss of $0.5 million (net of taxes) and a gain of $1.5 million (net of taxes), respectively. Any ineffectiveness in the first three months of 2018 and 2017 was not material.

The estimated net amount of the existing gains or losses at March 31, 2018 that is expected to be reclassified from OCI and recognized in the Consolidated Statements of Income within the next twelve months is a loss of $0.4 million (net of taxes).

Derivatives not designated as hedging instruments

Derivatives not designated as hedging instruments relate to economic hedges and are marked to market with all amounts recognized in the Consolidated Statements of Income. The derivatives not designated as hedging instruments outstanding at March 31, 2018 and December 31, 2017 were foreign exchange swaps.

For the three months ended March 31, 2018 and March 31, 2017, the gains and losses recognized in other non-operating items, net were a loss of $1.5 million and a loss of $1.4 million, respectively, for derivative instruments not designated as hedging instruments.

For the three months ended March 31, 2018 and March 31, 2017, the gains and losses recognized as interest expense were immaterial.

Fair Value of Debt

The fair value of long-term debt is determined either from quoted market prices as provided by participants in the secondary market or for long-term debt without quoted market prices, estimated using a discounted cash flow method based on the Company’s current borrowing rates for similar types of financing. The fair value and carrying value of debt is summarized in the table below. The Company has determined that each of these fair value measurements of debt reside within Level 2 of the fair value hierarchy.

	March 31,		March 31,		December 31,		December 31,
	2018		2018		2017		2017
	Carrying		Fair		Carrying		Fair
Long-term debt	value¹⁾		value		value¹⁾		value
U.S. Private placement	$	1,310.1	$	1,365.1	$	1,310.5	$	1,379.9
Other long-term debt		15.1		15.1		11.2		11.2
Total	$	1,325.2	$	1,380.2	$	1,321.7	$	1,391.1
Short-term debt
Overdrafts and other short-term debt	$	58.7	$	58.7	$	19.5	$	19.5
Short-term portion of long-term debt		25.3		25.3		0.2		0.2
Total	$	84.0	$	84.0	$	19.7	$	19.7

¹⁾	Debt as reported in balance sheet.

Assets and liabilities measured at fair value on a nonrecurring basis

In addition to assets and liabilities that are measured at fair value on a recurring basis, the Company also has assets and liabilities in its balance sheet that are measured at fair value on a nonrecurring basis including certain long-lived assets, including equity method investments, goodwill and other intangible assets, typically as it relates to impairment.

The Company has determined that the fair value measurements included in each of these assets and liabilities rely primarily on Company-specific inputs and the Company’s assumptions about the use of the assets and settlements of liabilities, as observable inputs are not available. The Company has determined that each of these fair value measurements reside within Level 3 of the fair value hierarchy. To determine the fair value of long-lived assets, the Company utilizes the projected cash flows expected to be generated by the long-lived assets, then discounts the future cash flows over the expected life of the long-lived assets.

The tables below present information about certain of the Company’s long-lived assets measured at fair value (level 3) on a nonrecurring basis.

	March 31, 2018				December 31, 2017
(Dollars in millions)	Fair value measurements Level 3		Impairment losses		Fair value measurements Level 3		Impairment losses
Goodwill ¹⁾	$	1,691.5	$	—	$	1,688.8	$	(234.2	)
Intangible assets, net ²⁾		161.8		—		164.8		(12.0	)

1) In the fourth quarter of 2017, the Company recognized an impairment charge of the full goodwill related to ANBS, resulting in an impairment loss of $234.2 million, which was included in earnings for the period. The primary driver of the goodwill impairment was due to the lower expected long-term operating cash flow performance of the business unit as of the measurement date. The remaining goodwill balance as of March 31, 2018 and December 31, 2017 was not measured at fair value on a nonrecurring basis as impairment indicators did not exist.

2) In the first quarter of 2017, the Company recognized an impairment charge to amortization of intangibles of $12 million related to a contract with an OEM customer of M/A-COM products, which was included in earnings for the period. At December 31, 2017 the intangible value related to this customer contract was fully amortized. The remaining intangibles balance as of March 31, 2018 and December 31, 2017 was not measured at fair value on a nonrecurring basis as impairment indicators did not exist.