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3. Fair Value Measurements
 9 Months Ended
Sep. 30, 2017
Fair Value Disclosures [Abstract]  
Fair Value Measurements 3.FAIR VALUE MEASUREMENTS

We determine the fair value of an asset or liability based on the assumptions that market participants would use in pricing the asset or liability in an orderly transaction between market participants at the measurement date.  The identification of market participant assumptions provides a basis for determining what inputs are to be used for pricing each asset or liability.  A fair value hierarchy has been established which gives precedence to fair value measurements calculated using observable inputs over those using unobservable inputs. This hierarchy prioritizes the inputs into three broad levels as follows:

•
Level 1: Quoted prices in active markets for identical instruments
•
Level 2: Other significant observable inputs (including quoted prices in active markets for similar instruments)
•
Level 3: Significant unobservable inputs (including assumptions in determining the fair value of certain investments)

Financial assets and liabilities carried at fair value and measured on a recurring basis as of September 30, 2017 are classified in the hierarchy as follows (in millions):

 
Level 1
 
Level 2
 
Level 3
 
Total
Financial Assets Carried at Fair Value:
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Commercial paper
$
—

 
$
23.6

 
$
—

 
$
23.6

Time deposits
71.6

 
—

 
—

 
71.6

Money market funds
24.4

 
—

 
—

 
24.4

Total cash equivalents (a)
96.0

 
23.6

 
—

 
119.6

Restricted investment:
4.6

 
—

 
—

 
4.6

Available-for-sale investments:
 
 
 
 
 
 
 
Corporate debt securities
—

 
200.6

 
—

 
200.6

U.S. government sponsored agencies
—

 
70.9

 
—

 
70.9

Foreign government obligations
—

 
3.0

 
—

 
3.0

Municipal obligations
—

 
14.3

 
—

 
14.3

Marketable equity securities
973.2

 
—

 
—

 
973.2

Asset-backed securities
—

 
57.8

 
—

 
57.8

Total available-for-sale investments (b)
973.2

 
346.6

 
—

 
1,319.8

Forward foreign exchange contracts (c)
—

 
0.5

 
—

 
0.5

Total financial assets carried at fair value
$
1,073.8

 
$
370.7

 
$
—

 
$
1,444.5

 
 
 
 
 
 
 
 
Financial Liabilities Carried at Fair Value:
 
 
 
 
 
 
 
Forward foreign exchange contracts (d)
$
—

 
$
1.2

 
$
—

 
$
1.2

Contingent consideration (e)
—

 
—

 
23.1

 
23.1

Total financial liabilities carried at fair value
$
—

 
$
1.2

 
$
23.1

 
$
24.3



Financial assets and liabilities carried at fair value and measured on a recurring basis as of December 31, 2016 are classified in the hierarchy as follows (in millions):

 
Level 1
 
Level 2
 
Level 3
 
Total
Financial Assets Carried at Fair Value:
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Commercial paper
$
—

 
$
14.1

 
$
—

 
$
14.1

Foreign time deposits
11.8

 
—

 
—

 
11.8

Domestic time deposits
—

 
20.0

 
—

 
20.0

U.S. government sponsored agencies
—

 
1.1

 
—

 
1.1

Money market funds
5.9

 
—

 
—

 
5.9

Total cash equivalents (a)
17.7

 
35.2

 
—

 
52.9

Restricted investment:
4.6

 
—

 
—

 
4.6

Available-for-sale investments:
 
 
 
 
 
 
 
Corporate debt securities
—

 
179.4

 
—

 
179.4

U.S. government sponsored agencies
—

 
82.5

 
—

 
82.5

Foreign government obligations
—

 
4.4

 
—

 
4.4

Brokered certificates of deposit
—

 
3.6

 
—

 
3.6

Municipal obligations
—

 
15.4

 
—

 
15.4

Marketable equity securities
767.8

 
—

 
—

 
767.8

Asset-backed securities
—

 
62.5

 
—

 
62.5

Total available-for-sale investments (b)
767.8

 
347.8

 
—

 
1,115.6

Forward foreign exchange contracts (c)
—

 
0.6

 
—

 
0.6

Total financial assets carried at fair value
$
790.1

 
$
383.6

 
$
—

 
$
1,173.7

 
 
 
 
 
 
 
 
Financial Liabilities Carried at Fair Value:
 
 
 
 
 
 
 
Forward foreign exchange contracts (d)
$
—

 
$
1.3

 
$
—

 
$
1.3

Contingent consideration (e)
—

 
—

 
38.5

 
38.5

Total financial liabilities carried at fair value
$
—

 
$
1.3

 
$
38.5

 
$
39.8


(a)
Cash equivalents are included in Cash and cash equivalents in the Condensed Consolidated Balance Sheets.

(b)
Available-for-sale investments are included in the following accounts in the Condensed Consolidated Balance Sheets (in millions):
 
September 30,
2017
 
December 31, 2016
Short-term investments
$
387.5

 
$
383.2

Other investments
932.3

 
732.4

Total
$
1,319.8

 
$
1,115.6



(c)
Forward foreign exchange contracts in an asset position are included in Other current assets in the Condensed Consolidated Balance Sheets.

(d)
Forward foreign exchange contracts in a liability position are included in Other current liabilities in the Condensed Consolidated Balance Sheets.

(e)
Contingent consideration liability is included in the following accounts in the Condensed Consolidated Balance Sheets (in millions):

 
September 30, 2017
 
December 31, 2016
Other current liabilities
$
4.1

 
$
14.5

Other long-term liabilities
19.0

 
24.0

   Total
$
23.1

 
$
38.5



In 2012, we recognized a contingent consideration liability for certain milestones of $44.6 million upon our acquisition of a cell sorting system from Propel. Since 2012, we have paid $32.0 million upon reaching the milestones and have reduced the valuation of the milestones by $12.6 million. The remaining liability of $3.1 million was paid in February 2017.

During the first quarter of 2016, we recognized a contingent consideration liability upon our acquisition of a high performance analytical flow cytometer platform from Propel. At the acquisition date, the amount of contingent consideration was determined based on a probability-weighted income approach related to the achievement of sales milestones, ranging from 39% to 20% for the calendar years 2017 through 2020. The sales milestones could potentially range from $0 to an unlimited amount through December 31, 2020. In the third quarter of 2017, we paid $0.6 million upon reaching the first milestone and since 2016 we have increased the valuation of the sales milestones by $0.4 million. The contingent consideration was accrued at its estimated fair value of $23.1 million as of September 30, 2017.

The following table provides a reconciliation of the Level 3 cell sorting system and analytical flow cytometer platform contingent consideration liabilities measured at estimated fair value (in millions):

January 1, 2017
$
28.5

Cell sorting system:
 
Payment of sales milestone
(3.1
)
 
 
Analytical flow cytometer platform:
 
Decrease in estimated fair value of contingent consideration included in Selling, general and administrative expense
(1.7
)
Payment of sales milestone
(0.6
)
September 30, 2017
$
23.1



The following table provides quantitative information about Level 3 inputs for fair value measurement of our analytical flow cytometer platform contingent consideration liability as of September 30, 2017. Significant increases or decreases in these inputs in isolation could result in a significantly lower or higher fair value measurement.
 
 
 
 
 
Valuation Technique
Unobservable Input
 
Analytical flow cytometer platform
Probability-weighted income approach
Sales milestones:
 
 
 
Discount rate
10.5
%
 
 
Cost of debt
4.3
%
 
 
 
 



In 2014, we recognized a contingent consideration liability upon our acquisition of GnuBIO, Inc. The contingent consideration for the milestones was valued at $10.7 million at the acquisition date based on assumptions regarding the probability of achieving the milestones, with such amounts discounted to present value. The contingent consideration was revalued to a fair value of $10.0 million as of December 31, 2016 and was reversed to selling, general and administrative expenses during the first quarter of 2017 due to reaching a favorable outcome with GnuBIO, Inc.

To estimate the fair value of Level 2 debt securities as of September 30, 2017 and December 31, 2016, our primary pricing provider uses Securities Evaluations as the primary pricing source. Our pricing process allows us to select a hierarchy of pricing sources for securities held. The chosen pricing hierarchy for our Level 2 securities, other than certificates of deposit and commercial paper, is Securities Evaluations as the primary pricing source and then our custodian as the secondary pricing source. If Securities Evaluations does not price a Level 2 security that we hold, then the pricing provider will utilize our custodian supplied pricing.

For commercial paper as of September 30, 2017 and December 31, 2016, pricing is determined by a straight-line calculation, starting with the purchase price on the date of purchase and increasing to par at maturity. Interest bearing certificates of deposit and commercial paper are priced at par. In the event that an additional lot of the same commercial paper issue has been purchased within the same account, then the price of all holdings of that issue in that account will be the price of the most recent lot purchased.

Our pricing provider performs daily reasonableness testing of the Securities Evaluations prices. Price changes of 5% or greater are investigated and resolved. In addition, we perform a quarterly testing of the Securities Evaluations prices to custodian reported prices. Price differences outside a tolerable variance of approximately 1% are investigated and resolved.

Available-for-sale investments consist of the following (in millions):

 
September 30, 2017
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Estimated
Fair
Value
Short-term investments:
 
 
 
 
 
 
 
Corporate debt securities
$
200.3

 
$
0.5

 
$
(0.2
)
 
$
200.6

Municipal obligations
14.4

 
—

 
(0.1
)
 
14.3

Asset-backed securities
57.7

 
—

 
(0.1
)
 
57.6

U.S. government sponsored agencies
71.2

 
0.1

 
(0.4
)
 
70.9

Foreign government obligations
3.0

 
—

 
—

 
3.0

Marketable equity securities
32.8

 
8.3

 
—

 
41.1

 
379.4

 
8.9

 
(0.8
)
 
387.5

Long-term investments:
 
 
 
 
 
 
 
Marketable equity securities
54.5

 
877.6

 
—

 
932.1

Asset-backed securities
0.2

 
—

 
—

 
0.2

 
54.7

 
877.6

 
—

 
932.3

Total
$
434.1

 
$
886.5

 
$
(0.8
)
 
$
1,319.8



 
December 31, 2016
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Estimated
Fair
Value
Short-term investments:
 
 
 
 
 
 
 
Corporate debt securities
$
179.7

 
$
0.2

 
$
(0.5
)
 
$
179.4

Brokered certificates of deposit
3.6

 
—

 
—

 
3.6

Municipal obligations
15.5

 
—

 
(0.1
)
 
15.4

Asset-backed securities
62.2

 
0.1

 
(0.1
)
 
62.2

U.S. government sponsored agencies
83.1

 
0.1

 
(0.7
)
 
82.5

Foreign government obligations
4.4

 
—

 
—

 
4.4

Marketable equity securities
32.4

 
3.7

 
(0.4
)
 
35.7

 
380.9

 
4.1

 
(1.8
)
 
383.2

Long-term investments:
 
 
 
 
 
 
 
Marketable equity securities
54.5

 
677.6

 
—

 
732.1

Asset-backed securities
0.3

 
—

 
—

 
0.3

 
54.8

 
677.6

 
—

 
732.4

Total
$
435.7

 
$
681.7

 
$
(1.8
)
 
$
1,115.6



The unrealized gains of our long-term marketable equity securities are primarily due to our investment in Sartorius AG preferred shares.

The following is a summary of investments with gross unrealized losses and the associated fair value (in millions):

 
September 30,
2017
 
December 31, 2016
Fair value of investments in a loss position 12 months or more
$
21.4

 
$
11.8

Fair value of investments in a loss position less than 12 months
$
143.3

 
$
160.5

Gross unrealized losses for investments in a loss position 12 months or more
$
0.4

 
$
0.3

Gross unrealized losses for investments in a loss position less than 12 months
$
0.4

 
$
1.5



The unrealized losses on these securities are due to a number of factors, including changes in interest rates, changes in economic conditions and changes in market outlook for various industries, among others.  Because Bio-Rad has the ability and intent to hold these investments with unrealized losses until a recovery of fair value, or for a reasonable period of time sufficient for a forecasted recovery of fair value, which may be maturity, we do not consider these investments to be other-than-temporarily impaired at September 30, 2017 or at December 31, 2016.

As part of distributing our products, we regularly enter into intercompany transactions.  We enter into forward foreign exchange contracts to manage foreign exchange risk of future movements in foreign exchange rates that affect foreign currency denominated intercompany receivables and payables.  We do not use derivative financial instruments for speculative or trading purposes.  We do not seek hedge accounting treatment for these contracts.  As a result, these contracts, generally with maturity dates of 90 days or less and denominated primarily in currencies of industrial countries, are recorded at their fair value at each balance sheet date.  The notional principal amounts provide one measure of the transaction volume outstanding as of September 30, 2017 and do not represent the amount of Bio-Rad's exposure to loss. The estimated fair value of these contracts was derived using the spot rates from Reuters on the last business day of the quarter and the points provided by counterparties.  The resulting gains or losses offset exchange gains or losses on the related receivables and payables, both of which are included in Foreign currency exchange losses, net in the Condensed Consolidated Statements of Income.

The following is a summary of our forward foreign exchange contracts (in millions):
 
September 30,
 
2017
Contracts maturing in October through December 2017 to sell foreign currency:
 
Notional value
$
48.0

Unrealized loss
$
0.1

Contracts maturing in October through December 2017 to purchase foreign currency:
 
Notional value
$
374.4

Unrealized loss
$
0.7



The following is a summary of the amortized cost and estimated fair value of our debt securities at September 30, 2017 by contractual maturity date (in millions):

 
Amortized
Cost
 
Estimated Fair
Value
Mature in less than one year
$
142.0

 
$
142.0

Mature in one to five years
156.7

 
156.6

Mature in more than five years
48.1

 
48.0

Total
$
346.8

 
$
346.6



The estimated fair value of financial instruments that are not recognized at fair value in the Condensed Consolidated Balance Sheets and are included in Other investments, are presented in the table below. Fair value has been determined using significant observable inputs, including quoted prices in active markets for similar instruments.  Estimates are not necessarily indicative of the amounts that could be realized in a current market exchange as considerable judgment is required in interpreting market data used to develop estimates of fair value. The use of different market assumptions or estimation techniques could have a material effect on the estimated fair value.  Other investments include financial instruments, the majority of which have fair value based on similar, actively traded stock adjusted for various discounts, including a discount for marketability.  Long-term debt, excluding leases and current maturities, has an estimated fair value based on quoted market prices for the same or similar issues.

The estimated fair value of the financial instruments discussed above and the level of the fair value hierarchy within which the fair value measurement is categorized are as follows (in millions):

 
September 30, 2017
 
December 31, 2016
 
Carrying 
Amount 
 
Estimated 
Fair 
Value 
 
Fair Value Hierarchy Level
 
Carrying 
Amount 
 
Estimated 
Fair 
Value 
 
Fair Value Hierarchy Level
Other investments
$
94.5

 
$
1,253.3

 
2
 
$
92.8

 
$
984.2

 
2
Total long-term debt, excluding leases and current maturities
$
422.9

 
$
456.2

 
2
 
$
422.5

 
$
454.2

 
2


We own shares of ordinary voting stock of Sartorius AG (Sartorius), of Goettingen, Germany, a process technology supplier to the biotechnology, pharmaceutical, chemical and food and beverage industries.  We own over 35% of the outstanding voting shares (excluding treasury shares) of Sartorius as of September 30, 2017.  The Sartorius family trust and Sartorius family members hold a controlling interest of the outstanding voting shares. We do not have any representative or designee on Sartorius’ Board of Directors, nor do we have the ability to exercise significant
influence over the operating and financial policies of Sartorius.  We account for this investment using the cost method.  The carrying value of this investment is included in Other investments in our Condensed Consolidated Balance Sheets. As the stock is thinly traded and in conjunction with the valuation method discussed above, we have classified the estimated fair value as Level 2. The Level 2 classification is appropriate given the valuation method employed, which incorporates an observable input of the fair value of the Sartorius’ actively traded preferred stock.