FAIR VALUE

The Company groups its financial assets and liabilities measured at fair value on a recurring basis in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:


•	Level 1 - Quoted prices in active markets for identical assets or liabilities.


•	Level 2 - Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets with insufficient volume or infrequent transactions (less active markets), or model-driven valuations in which all significant inputs are observable or can be derived principally from, or corroborated with, observable market data.


•	Level 3 - Fair value is derived from valuation techniques in which one or more significant inputs are unobservable, including assumptions and judgments made by the Company.

Assets and Liabilities Measured and Recorded at Fair Value on a Recurring Basis

The Company measures certain assets and liabilities at fair value on a recurring basis such as its financial instruments and derivatives. There have been no transfers between Level 1, 2 or 3 assets or liabilities during the three and nine months ended July 1, 2016.

Level 3 assets include an auction rate security that is classified as available for sale and recorded in other current assets. It is scheduled to mature in 2017. Due to the illiquid market for this security the Company has classified the carrying value as a Level 3 asset with the difference between the par and carrying value being categorized as a temporary loss and recorded in accumulated other comprehensive loss.

On August 1, 2014, the Company entered into a joint venture with Panasonic Corporation (“Panasonic”) with respect to the design, manufacture and sale of Panasonic filter products. The Company had the right to acquire Panasonic’s interest in the joint venture following the two-year anniversary of the acquisition (the “purchase option”). As a result of the purchase option, the Company consolidated the joint venture’s operations in their entirety as of July 1, 2016.

On June 24, 2016, the Company formally notified Panasonic that it intended to exercise the purchase option and on August 1, 2016, the Company exercised the purchase option and paid Panasonic cash of $76.5 million. As a result of exercising the purchase option, the Company owns 100% of FilterCo. As of July 1, 2016, the amount of the purchase option was fixed however; it contained a foreign exchange adjustment (“foreign exchange collar”). In the event the exchange rate between the United States dollar and the Japanese yen fluctuates outside of a predetermined range upon the exercise of the purchase option, the total amount the Company owes to Panasonic could change. This feature was intended for the parties to share in foreign exchange exposure outside of this predetermined range. The Company calculated the present value of this obligation as of August 1, 2014, the date the joint venture was formed, and included that amount in its preliminary determination of goodwill using unobservable inputs and management judgment, therefore categorizing the obligation as a Level 3 liability. The difference between the calculated present value and the fixed settlement amount was accreted to earnings ratably over the purchase option period. The carrying value of this liability is included in other current liabilities on the consolidated balance sheet as of July 1, 2016.

The Company held currency call and put options (“foreign currency options”) that as of July 1, 2016, were intended to hedge the potential cash exposure related to fluctuations in the exchange rate between the United States dollar and Japanese yen related to the foreign exchange collar. The Company netted the fair value of the foreign currency options and the fair value of the foreign exchange collar separately as either a current asset or liability with the total change in fair value being recorded to earnings each period. The Company measured the fair value of these derivatives using current spot rates and assumptions such as yield curves and option volatilities. As of July 1, 2016, these derivatives were netted on the consolidated balance sheet and classified as Level 3 assets and liabilities accordingly. The net change in fair value had a de minimis impact on the consolidated results. The foreign currency options expired unexercised on July 29, 2016, as the call and put were out of the money.

As of July 1, 2016, assets and liabilities recorded at fair value on a recurring basis consisted of the following (in millions):



	As of July 1, 2016								As of October 2, 2015
			Fair Value Measurements								Fair Value Measurements
	Total		Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3
Assets
Money market funds	$	318.6	$	318.6	$	—	$	—	$	464.6	$	464.6	$	—	$	—
Auction rate security	2.3		—		—		2.3		2.3		—		—		2.3
Foreign currency derivative assets	0.1		—		—		0.1		3.3		—		—		3.3
Total	$	321.0	$	318.6	$	—	$	2.4	$	470.2	$	464.6	$	—	$	5.6
Liabilities
Purchase obligation recorded for business combinations	$	76.4	$	—	$	—	$	76.4	$	75.4	$	—	$	—	$	75.4
Foreign currency derivative liabilities	—		—		—		—		2.8		—		—		2.8
Contingent consideration liability recorded for business combinations	8.2		—		—		8.2		0.5		—		—		0.5
Total	$	84.6	$	—	$	—	$	84.6	$	78.7	$	—	$	—	$	78.7

The following table summarizes changes to the fair value of the Level 3 assets (in millions):



	Auction rate security		Foreign currency derivative
Balance as of October 2, 2015	$	2.3	$	3.3
Changes in fair value included in earnings	—		(3.2		)
Balance as of July 1, 2016	$	2.3	$	0.1

The following table summarizes changes to the fair value of the Level 3 liabilities (in millions):



	Purchase obligation		Foreign currency derivative			Contingent consideration
Balance as of October 2, 2015	$	75.4	$	2.8		$	0.5
Increases to Level 3 liabilities	—		—			7.7
Changes in fair value included in earnings	1.0		(2.8		)	—
Balance as of July 1, 2016	$	76.4	$	—		$	8.2

The increase in Level 3 liabilities relates to contingent consideration associated with two separate business combinations completed during the three and nine months ended July 1, 2016. For further information regarding business combinations see Note 11 to Item 1 of this quarterly report on Form 10-Q.

Assets Measured and Recorded at Fair Value on a Nonrecurring Basis

The Company’s non-financial assets and liabilities, such as goodwill, intangible assets, and other long-lived assets resulting from business combinations are measured at fair value using income approach valuation methodologies at the date of acquisition and subsequently re-measured if there are indicators of impairment. There were no indicators of impairment identified during the three and nine months ended July 1, 2016.