Annual report pursuant to Section 13 and 15(d)

Fair Value Measurements

v2.3.0.15
Fair Value Measurements
 12 Months Ended
Sep. 30, 2011
Fair Value Measurements  
Fair Value Measurements

14.             Fair Value Measurements

 

Fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date.  The authoritative guidance establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available.  Observable inputs are from sources independent of the Company.  Unobservable inputs reflect the Company’s assumptions about the factors market participants would use in valuing the asset or liability developed based upon the best information available in the circumstances.  The categorization of financial assets and liabilities within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.  The hierarchy is broken down into three levels:

 

 Level 1:

Inputs are quoted prices in active markets for identical assets or liabilities.

 Level 2:

Inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs (other than quoted prices) that are observable for the asset or liability, either directly or indirectly.

 Level 3:

Inputs are unobservable for the asset or liability.

 

See the section below titled “Valuation Techniques” for further discussion of how Hillenbrand determines fair value for investments.

 

 

 

Carrying
Value at
September 30,

 

Fair Value at September 30, 2011
Using Inputs Considered as:

 

 

 

2011

 

Level 1

 

Level 2

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

115.5

 

$

115.5

 

$

—

 

$

—

 

Equity investments

 

3.6

 

2.6

 

—

 

1.0

 

Investments in rabbi trust

 

5.2

 

5.2

 

—

 

—

 

Derivative instruments

 

0.4

 

—

 

0.4

 

—

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Revolving credit facility

 

283.0

 

—

 

277.9

 

—

 

$150 senior unsecured notes

 

148.5

 

157.6

 

—

 

—

 

 

 

 

Carrying
Value at
September 30,

 

Fair Value at September 30, 2010
Using Inputs Considered as:

 

 

 

2010

 

Level 1

 

Level 2

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

98.4

 

$

98.4

 

$

—

 

$

—

 

Auction rate securities

 

11.9

 

—

 

11.9

 

—

 

Forethought Note

 

144.8

 

—

 

—

 

127.0

 

Equity investments

 

3.0

 

—

 

—

 

3.0

 

Investments in rabbi trust

 

5.7

 

5.7

 

—

 

—

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Revolving credit facility

 

255.0

 

—

 

241.8

 

—

 

$150 senior unsecured notes

 

148.4

 

158.0

 

—

 

—

 

Derivative instruments

 

0.1

 

—

 

0.1

 

—

 

 

The following table reconciles the change in the Company’s Level 3 financial assets:

 

 

 

Fair Value Measurements
Using Significant Unobservable Inputs

 

 

 

Auction
Rate
Securities

 

Put right

 

Forethought
Note

 

Equity
Investments

 

Balance at September 30, 2009

 

$

47.2

 

$

1.7

 

$

109.0

 

$

3.0

 

Total realized and unrealized gains or (losses):

 

 

 

 

 

 

 

 

 

Included in earnings, net

 

(1.4

)

(1.7

)

—

 

—

 

Included in other comprehensive income

 

1.5

 

—

 

—

 

—

 

Change in fair value, disclosure only

 

—

 

—

 

28.0

 

—

 

Purchases, issuances and settlements

 

(35.4

)

—

 

(10.0

)

—

 

Transfers in and/or (out) of Level 3

 

(11.9

)

—

 

—

 

—

 

Balance at September 30, 2010

 

$

—

 

$

—

 

$

127.0

 

$

3.0

 

Total realized and unrealized gains or (losses):

 

 

 

 

 

 

 

 

 

Included in earnings, net

 

 

 

 

 

—

 

—

 

Included in other comprehensive income

 

 

 

 

 

—

 

—

 

Change in fair value, disclosure only

 

 

 

 

 

24.2

 

—

 

Purchases, issuances and settlements

 

 

 

 

 

(151.2

)

—

 

Transfers in and/or (out) of Level 3

 

 

 

 

 

—

 

(2.0

)

Balance at September 30, 2011

 

 

 

 

 

$

—

 

$

1.0

 

 

Valuation Techniques

 

·

We estimate the fair value of derivative financial instruments based on the amount that we would receive or pay to terminate the agreements at the reporting date.

 

 

·

Prior to July 1, 2010, we utilized a valuation model based on Level 3 inputs for the auction rate securities (ARS). We utilized a discounted cash flow approach using assumptions including estimates of interest rates, timing and amount of cash flows, credit-spread related yield and illiquidity premiums, and expected holding periods of the ARS.  In the fourth quarter of fiscal 2010, we began to value the ARS based upon secondary market prices on observed transactions. We moved to this approach as we believed the pricing in the secondary market at that time represented the highest and best use valuation of the ARS. We sold all ARS in fiscal year 2011.

 

 

·

We estimated the fair value of the Forethought Note based upon comparison to debt securities trading in an active market with similar characteristics of yield, duration, and credit risk adjusted for liquidity considerations. Based upon market data available to us, we estimated that the fair value of the note and accrued interest was approximately $127.0 based upon an estimated yield to maturity of approximately 14% as of September 30, 2010. This was approximately $17.8 below its carrying value at September 30, 2010.

 

We received $151.2 in fiscal year 2011, representing full payment of principal and interest contractually due in 2014.  No gain or loss resulted from the transaction.

 

 

·

The carrying amount of equity investments (included as a component of Investments within the consolidated balance sheet) was $3.6 and $3.0 at September 30, 2011 and 2010, and approximates fair value. The fair value was determined using either quoted prices in an active market or using present value or other techniques appropriate for a particular financial instrument. These techniques involve some degree of management judgment and as a result are not necessarily indicative of the amounts we would realize in a current market exchange.

 

 

·

The fair value of the investments in the rabbi trust were based on quoted prices in active markets. The trust assets consist of particant-directed investments in publicly traded mutual funds.

 

 

 

 

·

The fair value of the revolving credit facility is estimated based on internally developed models, using current market interest rate data for similar issues as there is no active market for our revolving credit facility.

 

 

·

The fair value of the 10-year, 5.5% fixed rate senior unsecured notes was based on quoted prices in an active market.

 

 

·

The private equity limited partnerships were excluded from the tables above. The carrying amount of these assets (included as a component of Investments within the consolidated balance sheet) was $13.8 and $15.2 at September 30, 2011 and 2010. The fair value of these equity method investments is not readily available.