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3. Fair Value Measurements

3 Months Ended

Mar. 31, 2020

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 March 31, 2020 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	$	—	$	65.5	$	—	$	65.5
Asset-backed securities	—		0.1		—		0.1
Time deposits	26.4		10.0		—		36.4
Money market funds	96.5		—		—		96.5
Total cash equivalents (a)	122.9		75.6		—		198.5
Restricted investment	5.6		—		—		5.6
Equity securities (b)	5,448.4		—		—		5,448.4
Available-for-sale investments:
Corporate debt securities	—		198.4		—		198.4
U.S. government sponsored agencies	—		100.9		—		100.9
Foreign government obligations	—		5.6		—		5.6
Other foreign obligations	—		2.1		—		2.1
Municipal obligations	—		14.4		—		14.4
Asset-backed securities	—		71.8		—		71.8
Total available-for-sale investments (c)	—		393.2		—		393.2
Forward foreign exchange contracts (d)	—		0.7		—		0.7
Total financial assets carried at fair value	$	5,576.9	$	469.5	$	—	$	6,046.4

Financial liabilities carried at fair value:
Forward foreign exchange contracts (e)	$	—	$	1.3	$	—	$	1.3
Contingent consideration (f)	—		—		3.5		3.5
Total financial liabilities carried at fair value	$	—	$	1.3	$	3.5	$	4.8

Financial assets and liabilities carried at fair value and measured on a recurring basis as of December 31, 2019 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	$	—	$	42.9	$	—	$	42.9
Time deposits	31.2		10.0		—		41.2
Asset-backed securities	—		0.1		—		0.1
Money market funds	69.9		—		—		69.9
Total cash equivalents (a)	101.1		53.0		—		154.1
Restricted investment	5.6		—		—		5.6
Equity securities (b)	4,664.4		—		—		4,664.4
Available-for-sale investments:
Corporate debt securities	—		204.5		—		204.5
U.S. government sponsored agencies	—		106.1		—		106.1
Foreign government obligations	—		4.7		—		4.7
Other foreign obligations	—		3.1		—		3.1
Municipal obligations	—		11.6		—		11.6
Asset-backed securities	—		72.9		—		72.9
Total available-for-sale investments (c)	—		402.9		—		402.9
Forward foreign exchange contracts (d)	—		0.9		—		0.9
Total financial assets carried at fair value	$	4,771.1	$	456.8	$	—	$	5,227.9

Financial liabilities carried at fair value:
Forward foreign exchange contracts (e)	$	—	$	1.0	$	—	$	1.0
Contingent consideration (f)	—		—		4.9		4.9
Total financial liabilities carried at fair value	$	—	$	1.0	$	4.9	$	5.9


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


(b)	Equity securities are included in the following accounts in the Condensed Consolidated Balance Sheets (in millions):



	March 31, 2020		December 31, 2019
Short-term investments	$	40.1	$	51.0
Other investments	5,408.3		4,613.4
Total	$	5,448.4	$	4,664.4

The year-to-date unrealized gains on our equity securities as of March 31, 2020 were $827.7 million and were primarily due to our investment in Sartorius AG and are recorded in our Condensed Consolidated Statements of Income.

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 37% of the outstanding voting shares (excluding treasury shares) of Sartorius as of March 31, 2020. 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.


(c)	Available-for-sale investments are included in the following accounts in the Condensed Consolidated Balance Sheets (in millions):



	March 31, 2020		December 31, 2019
Short-term investments	$	393.1	$	402.8
Other investments	0.1		0.1
Total	$	393.2	$	402.9

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

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

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



	March 31, 2020		December 31, 2019
Other current liabilities	$	3.5	$	3.3
Other long-term liabilities	—		1.6
Total	$	3.5	$	4.9

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 Labs. 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. In the first quarter of 2020, we paid $1.3 million per the purchase agreement. Since 2016 we have decreased the cumulative valuation of the sales milestones by net $13.9 million. The contingent consideration was accrued at its estimated fair value of $2.9 million as of March 31, 2020.

During the fourth quarter of 2019, we recognized a contingent consideration liability for earn-out targets related to our acquisition of a foreign distributor. The first earn-out payment of $0.7 million was paid by the acquisition date and the remaining payment is due in the second quarter of 2020. The maximum earn-out payment due is $1.4 million. The contingent consideration was accrued at its estimated fair value of $0.6 million as of March 31, 2020.

The following table provides a reconciliation of the Level 3 contingent consideration liabilities measured at estimated fair value (in millions):



December 31, 2019	$	4.9
Analytical flow cytometer platform:
Payment of sales milestone	(1.3		)
Decrease in estimated fair value of contingent consideration included in Selling, general and administrative expense	(0.1		)

Foreign distributor earn-outs:
Change in estimated fair value of contingent consideration included in Selling, general and administrative expense	—
March 31, 2020	$	3.5

To estimate the fair value of Level 2 debt securities as of March 31, 2020, our primary pricing provider uses Reuters as the primary pricing source. Our pricing process allows us to select a hierarchy of pricing sources for securities held. If Reuters does not price a Level 2 security that we hold, then the pricing provider will utilize our custodian supplied pricing as the secondary pricing source.

For all commercial paper as of March 31, 2020, our primary pricing provider uses Reuters in the hierarchy to determine pricing.

Our pricing provider performs daily reasonableness testing of the Reuters prices. Price changes of 5% or greater compared to the previous day are investigated and resolved. In addition, we perform a quarterly testing of the Reuters 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):



	March 31, 2020
	Amortized Cost		Unrealized Gains		Unrealized Losses			Allowances for Credit Losses		Fair Value
Short-term investments:
Corporate debt securities	$	199.2	$	0.9	$	(1.7	)	$	—	$	198.4
Municipal obligations	14.3		0.1		—			—		14.4
Asset-backed securities	72.2		0.2		(0.7		)	—		71.7
U.S. government sponsored agencies	98.1		2.8		—			—		100.9
Foreign government obligations	5.6		—		—			—		5.6
Other foreign obligations	2.1		—		—			—		2.1
	391.5		4.0		(2.4		)	—		393.1
Long-term investments:
Asset-backed securities	0.1		—		—			—		0.1
	0.1		—		—			—		0.1
Total	$	391.6	$	4.0	$	(2.4	)	$	—	$	393.2

The following is a summary of the amortized cost and estimated fair value of our debt securities at March 31, 2020 by contractual maturity date (in millions):



	Amortized Cost		Estimated Fair Value
Mature in less than one year	$	163.8	$	163.9
Mature in one to five years	167.3		167.6
Mature in more than five years	60.5		61.7
Total	$	391.6	$	393.2

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



	December 31, 2019
	Amortized Cost		Unrealized Gains		Unrealized Losses			Estimated Fair Value
Short-term investments:
Corporate debt securities	$	203.2	$	1.4	$	(0.1	)	$	204.5
Municipal obligations	11.5		0.1		—			11.6
Asset-backed securities	72.7		0.2		(0.1		)	72.8
U.S. government sponsored agencies	105.6		0.7		(0.2		)	106.1
Foreign government obligations	4.7		—		—			4.7
Other foreign obligations	3.1		—		—			3.1
	400.8		2.4		(0.4		)	402.8
Long-term investments:
Asset-backed securities	0.1		—		—			0.1
	0.1		—		—			0.1
Total	$	400.9	$	2.4	$	(0.4	)	$	402.9

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



	March 31, 2020
	Less than 12 months				Greater than 12 months				Total
Description of securities:	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Corporate debt securities	$	106.0	$	1.7	$	—	$	—	$	106.0	$	1.7
Asset-backed securities	55.2		0.6		3.7		0.1		58.9		0.7
Total	$	161.2	$	2.3	$	3.7	$	0.1	$	164.9	$	2.4



	December 31, 2019
	Less than 12 months				Greater than 12 months				Total
Description of securities:	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Corporate debt securities	$	46.5	$	0.1	$	2.1	$	—	$	48.6	$	0.1
Asset-backed securities	17.9		—		7.0		0.1		24.9		0.1
U.S government sponsored agencies	27.5		0.2		10.8		—		38.3		0.2
Total	$	91.9	$	0.3	$	19.9	$	0.1	$	111.8	$	0.4

The unrealized losses of $2.4 million as of March 31, 2020 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.

As outlined in Note 1, we adopted ASU 2016-13 as of January 1, 2020. ASU 2016-13 replaces the incurred loss approach with an expected loss model for instruments measured at amortized cost and requires entities to record allowances for available-for-sale debt securities rather than reduce the carrying amount as done under the former other-than-temporary impairment model.

After further evaluation, we have concluded that all payments related to our available-for-sale investments are expected to be made in full and on time at par value. The diminution of value in the intervening period is due to market conditions such as illiquidity and interest rate movements and not due to significant, inherent credit concerns surrounding the issuer.

The factors we considered in our evaluation included the extent to which the fair value is less than the amortized cost basis, adverse conditions specifically related to the debt security, an industry or geographic area, and any changes in the rating of a security by a rating agency. Credit loss impairments are limited to the amount that the fair value of an instrument is less than its amortized cost basis.

Given the nature of the securities in our available-for-sale investments portfolio, based on our expectation that all of the securities in the portfolio will pay on time and in full, and based on the limited extent to which the fair value of the securities in our available-for-sale investments portfolio are below the amortized cost basis, we do not anticipate any credit impairment losses in the portfolio at this time. As a result, we have no allowances for credit losses on our available-for-sale investments portfolio as of March 31, 2020.

Included in Other current assets are $1.9 million and $2.0 million of interest receivable as of March 31, 2020 and December 31, 2019, respectively, primarily associated with securities in our available-for-sale investments portfolio. Associated interest on these securities is typically payable semi-annually. Due to the short-term nature of our interest receivable asset, we have made an accounting policy election not to measure an allowance for credit losses for accrued interest receivable. We consider any uncollected interest receivable that is overdue greater than one year to be impaired for purposes of write-off, and we have not experienced any such credit losses.

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 March 31, 2020 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):



	March 31,
	2020
Contracts maturing in April through June 2020 to sell foreign currency:
Notional value	$	58.6
Unrealized gain	$	0.2
Contracts maturing in April through June 2020 to purchase foreign currency:
Notional value	$	237.1
Unrealized loss	$	(0.9	)

The estimated fair value of our current maturities of long-term debt, excluding leases, as of March 31, 2020 and December 31, 2019 that is not recognized at fair value in the Condensed Consolidated Balance Sheets has an estimated fair value based on quoted market prices for the same or similar issues.

The estimated fair value of our long-term debt discussed above and the level of the fair value hierarchy within which the fair value measurement is categorized are as follows (in millions):



	March 31, 2020					December 31, 2019
	Carrying Amount		Estimated Fair Value		Fair Value Hierarchy Level	Carrying Amount		Estimated Fair Value		Fair Value Hierarchy Level
Total current maturities long-term debt, excluding leases	$	424.5	$	422.9	2	$	424.4	$	435.5	2

Included in Other Investments in the Condensed Consolidated Balance Sheet are investments without readily determinable fair value measured at cost with adjustments for observable price changes in price or impairments. The carrying value of these investments was $0.5 million and $0.3 million as of March 31, 2020 and December 31, 2019, respectively.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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