Fair Value of Financial Instruments

12 Months Ended

Dec. 31, 2019

Fair Value of Financial Instruments

Fair Value of Financial Instruments

Note 5—Fair Value of Financial Instruments

The Company measures the following financial assets and liabilities at fair value on a recurring basis. The following tables set forth the Company’s financial instruments and presents them within the fair value hierarchy using the lowest level of input that is significant to the fair value measurement at December 31, 2019 and 2018 (dollars in millions):

			Quoted Prices		Significant
			in Active		Other		Significant
			Markets		Observable		Unobservable
			Available		Inputs		Inputs
December 31, 2019	Total		(Level 1)		(Level 2)		(Level 3)
Assets:
Interest rate and cross currency swap agreements	$	10.1	$	—	$	10.1	$	—
Foreign exchange contracts		0.9		—		0.9		—
Embedded derivatives in purchase and delivery contracts		0.1		—		0.1		—
Fixed price commodity contracts		0.3		—		0.3		—
Total assets recorded at fair value	$	11.4	$	—	$	11.4	$	—
Liabilities:
Contingent consideration	$	15.8	$	—	$	—	$	15.8
Hybrid instrument liability		10.6		—		—		10.6
Interest rate and cross currency swap agreements		16.9		—		16.9		—
Foreign exchange contracts		0.4		—		0.4		—
Embedded derivatives in purchase and delivery contracts		0.6		—		0.6		—
Total liabilities recorded at fair value	$	44.3	$	—	$	17.9	$	26.4

			Quoted Prices		Significant
			in Active		Other		Significant
			Markets		Observable		Unobservable
			Available		Inputs		Inputs
December 31, 2018	Total		(Level 1)		(Level 2)		(Level 3)
Assets:
Foreign exchange contracts	$	0.2	$	—	$	0.2	$	—
Embedded derivatives in purchase and delivery contracts		—		—		—		—
Fixed price commodity contracts		0.4		—		0.4		—
Total assets recorded at fair value	$	0.6	$	—	$	0.6	$	—
Liabilities:
Contingent consideration	$	15.1	$	—	$	—	$	15.1
Hybrid instrument liability		12.9		—		—		12.9
Foreign exchange contracts		2.8		—		2.8		—
Embedded derivatives in purchase and delivery contracts		0.9		—		0.9		—
Fixed price commodity contracts		0.5		—		0.5		—
Total liabilities recorded at fair value	$	32.2	$	—	$	4.2	$	28.0

Derivative financial instruments are classified within level 2 because there is not an active market for each derivative contract. However, the inputs used to calculate the value of the instruments are obtained from active markets.

The fair value of the long-term fixed interest rate debt, which has been classified as Level 2, was $517.4 million and $228.8 million at December 31, 2019 and 2018, respectively, based on market and observable sources with similar maturity dates.

The Company measures certain assets and liabilities at fair value with changes in fair value recognized in earnings.

Excluded from the table above are restricted cash and short-term investments related to time and call deposits. The Company has a program to enter into time deposits with varying maturity dates ranging from one to twelve months, as well as call deposits for which the Company has the ability to redeem the invested amounts over a period of 95 days. The Company has classified these investments within cash and cash equivalents or short-term investments within the consolidated balance sheets based on call and maturity dates and these are not subject to fair value measurement. The following tables set forth the balances of restricted cash and short-term investments as of December 31, 2019 and 2018 (dollars in millions):

	2019		2018
Restricted Cash	$	3.6	$	3.9
Cash Equivalents		9.0		—
Short-term Investments		6.6		—

On a quarterly basis, the Company reviews its short-term investments to determine if there have been any events that could create an impairment. None were noted for the years ended December 31, 2019 and 2018.

As part of certain acquisitions, the Company recorded contingent consideration liabilities that have been classified as Level 3 in the fair value hierarchy. The contingent consideration represents the estimated fair value of future payments to the former shareholders of certain acquired companies based on the applicable acquired company achieving annual revenue and gross margin targets in certain years as specified in the relevant purchase and sale agreement. The Company initially values the contingent considerations by using a Monte Carlo simulation or an income approach method. The Monte Carlo method models future revenue and costs of goods

sold projections and discounts the average results to present value. The income approach method involves calculating the earnout payment based on the forecasted cash flows, adjusting the future earnout payment for the risk of reaching the projected financials, and then discounting the future payments to present value by the counterparty risk. The counterparty risk considers the risk of the buyer having the cash to make the earnout payments and is commensurate with a cost of debt over an appropriate term.

The following table sets forth the changes in contingent consideration liabilities for the years ended December 31, 2019 and 2018 (dollars in millions):

Balance at December 31, 2017	$	12.7
Current period additions		9.9
Current period adjustments		(1.9)
Current period settlements		(5.5)
Foreign currency effect		(0.1)
Balance at December 31, 2018		15.1
Current period additions		5.4
Current period adjustments		2.3
Current period settlements		(6.7)
Foreign currency effect		(0.3)
Balance at December 31, 2019	$	15.8

As part of the Mestrelab acquisition, the Company entered into an agreement with the noncontrolling interest holders that provides the Company with the right to purchase, and the noncontrolling interest holders with the right to sell, the remaining 49% of Mestrelab for cash at a contractually defined redemption value. These rights (an embedded derivative) are exercisable beginning in 2022 and can be accelerated, at a discounted redemption value, upon certain events related to post combination services. As the option is tied to continued employment, the Company classified the hybrid instrument (noncontrolling interest with an embedded derivative) as a long-term liability on the consolidated balance sheet. Subsequent to the acquisition, the carrying value of the hybrid instrument is remeasured to fair value with changes recorded to stock-based compensation expense in proportion to the requisite service period vested. The hybrid instrument is classified as Level 3 in the fair value hierarchy.

The following table sets forth the changes in hybrid instrument liability for the year ended December 31, 2019 and 2018 (dollars in millions):

Balance at December 31, 2017	$	—
Current period additions		12.9
Balance at December 31, 2018		12.9
Current period additions		(2.3)
Balance at December 31, 2019	$	10.6