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EX-31.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 - BIO RAD LABORATORIES INCex31193014.htm
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EX-32.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 906 - BIO RAD LABORATORIES INCex32293014.htm
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EX-32.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 906 - BIO RAD LABORATORIES INCex32193014.htm


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

FORM 10-Q
(Mark One)
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2014
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from______________to __________

Commission file number 1-7928

BIO-RAD LABORATORIES, INC.
(Exact name of registrant as specified in its charter)
Delaware
 
94-1381833
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
1000 Alfred Nobel Drive, Hercules, California
 
94547
(Address of principal executive offices)
 
(Zip Code)
(510) 724-7000
(Registrant's telephone number, including area code)
No Change
(Former name, former address and former fiscal year, if changed since last report.)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
Yes    x
     No     o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232,405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 
Yes    x
     No     o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):
Large accelerated filer
x
 
Accelerated filer
o
Non-accelerated filer
o
(Do not check if smaller reporting company)
Smaller reporting company
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Yes    o
     No     x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Title of Class
 
Shares Outstanding at October 28, 2014
Class A Common Stock, Par Value $0.0001 per share
 
23,862,625
Class B Common Stock, Par Value $0.0001 per share
 
5,097,303
 




BIO-RAD LABORATORIES, INC.

FORM 10-Q SEPTEMBER 30, 2014

TABLE OF CONTENTS


2



PART I – FINANCIAL INFORMATION
Item 1.          Financial Statements
BIO-RAD LABORATORIES, INC.
Condensed Consolidated Balance Sheets
(In thousands, except share data)
 
September 30, 2014
 
December 31, 2013
ASSETS:
 (Unaudited)
 
 
Cash and cash equivalents
$
424,593

 
$
331,551

Short-term investments
277,985

 
277,369

Accounts receivable, net
354,401

 
422,660

Inventories:
 
 
 
Raw materials
119,667

 
105,708

Work in process
135,524

 
129,894

Finished goods
260,856

 
280,643

Total inventories
516,047

 
516,245

Prepaid expenses, taxes and other current assets
191,419

 
209,654

Total current assets
1,764,445

 
1,757,479

Property, plant and equipment, at cost
1,088,124

 
1,059,828

Less: accumulated depreciation and amortization
(667,227
)
 
(645,427
)
Property, plant and equipment, net
420,897

 
414,401

Goodwill, net
513,454

 
517,770

Purchased intangibles, net
273,527

 
266,188

Other investments
364,129

 
377,870

Other assets
49,572

 
55,082

Total assets
$
3,386,024

 
$
3,388,790

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY:
 
 
 
Accounts payable
$
126,640

 
$
148,510

Accrued payroll and employee benefits
148,283

 
130,658

Notes payable and current maturities of long-term debt
1,471

 
1,786

Income and other taxes payable
24,399

 
33,555

Accrued legal settlements
49,450

 
30,000

Other current liabilities
153,540

 
142,963

Total current liabilities
503,783

 
487,472

Long-term debt, net of current maturities
435,739

 
435,615

Other long-term liabilities
269,772

 
278,981

Total liabilities
1,209,294

 
1,202,068

 
 
 
 
Stockholders’ equity:
 
 
 
Class A common stock, shares issued 23,862,747 and 23,680,749 at 2014 and 2013, respectively; shares outstanding 23,862,625 and 23,680,627 at 2014 and 2013, respectively
2

 
2

Class B common stock, shares issued 5,098,220 and 5,096,780 at 2014 and 2013, respectively; shares outstanding 5,097,303 and 5,095,863 at 2014 and 2013, respectively
1

 
1

Additional paid-in capital
259,865

 
239,986

Class A treasury stock at cost, 122 shares at 2014 and 2013
(12
)
 
(12
)
Class B treasury stock at cost, 917 shares at 2014 and 2013
(89
)
 
(89
)
Retained earnings
1,655,925

 
1,606,117

Accumulated other comprehensive income
261,038

 
340,717

Total stockholders’ equity
2,176,730

 
2,186,722

Total liabilities and stockholders’ equity
$
3,386,024

 
$
3,388,790

The accompanying notes are an integral part of these condensed consolidated financial statements. 

3



BIO-RAD LABORATORIES, INC.
Condensed Consolidated Statements of Operations
(In thousands, except per share data)
(Unaudited)

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
 
 
 
 
 
 
 
 
Net sales
$
530,644

 
$
505,066

 
$
1,576,820

 
$
1,530,059

Cost of goods sold
242,068

 
220,850

 
715,713

 
674,330

Gross profit
288,576

 
284,216

 
861,107

 
855,729

Selling, general and administrative expense
202,550

 
202,238

 
600,663

 
583,486

Research and development expense
52,786

 
52,920

 
161,046

 
155,104

Income from operations
33,240

 
29,058

 
99,398

 
117,139

Interest expense
7,710

 
31,611

 
17,131

 
54,252

Foreign currency exchange losses, net
3,667

 
3,330

 
6,118

 
5,723

Other (income) expense, net
(613
)
 
(667
)
 
(9,662
)
 
(10,711
)
Income (loss) before income taxes
22,476

 
(5,216
)
 
85,811

 
67,875

Provision for income taxes
(10,967
)
 
(1,883
)
 
(36,003
)
 
(20,200
)
Net income (loss) including noncontrolling interests 
11,509

 
(7,099
)
 
49,808

 
47,675

Net income attributable to noncontrolling interests

 

 

 
(21
)
Net income (loss) attributable to Bio-Rad
$
11,509

 
$
(7,099
)
 
$
49,808

 
$
47,654

 
 
 
 
 
 
 
 
Basic earnings per share:
 
 
 
 
 
 
 
Net income (loss) per basic share attributable to Bio-Rad
$
0.40

 
$
(0.25
)
 
$
1.73

 
$
1.67

Weighted average common shares - basic
28,884

 
28,603

 
28,834

 
28,545

 
 
 
 
 
 
 
 
Diluted earnings per share:
 
 
 
 
 
 
 
Net income (loss) per diluted share attributable to Bio-Rad
$
0.39

 
$
(0.25
)
 
$
1.71

 
$
1.65

Weighted average common shares - diluted
29,141

 
28,603

 
29,097

 
28,870



The accompanying notes are an integral part of these condensed consolidated financial statements. 


4



BIO-RAD LABORATORIES, INC.
Condensed Consolidated Statements of Comprehensive Income (Loss)
(In thousands)
(Unaudited)

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
Net income (loss) including noncontrolling interests
$
11,509

 
$
(7,099
)
 
$
49,808

 
$
47,675

Other comprehensive (loss) income:
 
 
 
 
 
 
 
Foreign currency translation adjustments
(77,956
)
 
40,668

 
(70,322
)
 
5,078

Foreign other post-employment benefits adjustments, net of income taxes
716

 
(246
)
 
895

 
45

Net unrealized holding (losses) gains on available-for-sale (AFS) investments, net of income taxes
(13,007
)
 
8,510

 
(10,252
)
 
36,835

Other comprehensive (loss) income, net of income taxes
(90,247
)
 
48,932

 
(79,679
)
 
41,958

Comprehensive (loss) income
(78,738
)
 
41,833

 
(29,871
)
 
89,633

Comprehensive (income) attributable to noncontrolling interests

 

 

 
(185
)
Comprehensive (loss) income attributable to Bio-Rad
$
(78,738
)
 
$
41,833

 
$
(29,871
)
 
$
89,448




The accompanying notes are an integral part of these condensed consolidated financial statements.


5




BIO-RAD LABORATORIES, INC.
Condensed Consolidated Statements of Cash Flows
(In thousands, unaudited)
 
Nine Months Ended
 
September 30,
 
2014
 
2013
Cash flows from operating activities:
 
 
 
Cash received from customers
$
1,613,723

 
$
1,531,251

Cash paid to suppliers and employees
(1,352,654
)
 
(1,335,844
)
Interest paid
(10,757
)
 
(50,188
)
Income tax payments
(31,105
)
 
(59,720
)
Investment proceeds and miscellaneous receipts, net
11,363

 
12,926

Excess tax benefits from share-based compensation
(766
)
 
(808
)
Proceeds from forward foreign exchange contracts, net
3,292

 
969

Net cash provided by operating activities
233,096

 
98,586

Cash flows from investing activities:
 
 
 
Capital expenditures
(80,865
)
 
(78,938
)
Proceeds from dispositions of property, plant and equipment
381

 
1,252

Payments for acquisitions, net of cash received, and long-term investments
(43,645
)
 
(68,510
)
Payments for purchases of intangible assets
(15,488
)
 
(500
)
Payments for purchases of marketable securities and investments
(159,607
)
 
(325,036
)
Proceeds from sales of marketable securities and investments
58,691

 
277,389

Proceeds from maturities of marketable securities and investments
99,466

 
234,707

Net cash (used in) provided by investing activities
(141,067
)
 
40,364

Cash flows from financing activities:
 
 
 
Net payments on line-of-credit arrangements and notes payable
(362
)
 
(18
)
Payments on long-term borrowings
(181
)
 
(300,178
)
Payments of contingent consideration

 
(25,474
)
Proceeds from issuance of common stock
8,365

 
9,397

Payments of debt issuance costs for credit agreement
(524
)
 

Excess tax benefits from share-based compensation
766

 
808

Net cash provided by (used in) financing activities
8,064

 
(315,465
)
Effect of foreign exchange rate changes on cash
(7,051
)
 
4,920

Net increase (decrease) in cash and cash equivalents
93,042

 
(171,595
)
Cash and cash equivalents at beginning of period
331,551

 
463,388

Cash and cash equivalents at end of period
$
424,593

 
$
291,793

Reconciliation of net income including noncontrolling interests to net cash provided by operating activities:
 
 
 
Net income including noncontrolling interests
$
49,808

 
$
47,675

Adjustments to reconcile net income including noncontrolling interests to net cash provided by operating activities:
 
 
 
Depreciation and amortization
110,129

 
105,181

Share-based compensation
10,714

 
9,894

Losses on dispositions of securities
329

 
408

Excess tax benefits from share-based compensation
(766
)
 
(808
)
Changes in fair value of contingent consideration
(8,378
)
 
(1,347
)
Decrease in accounts receivable
51,149

 
14,803

Increase in inventories
(28,881
)
 
(61,580
)
Decrease (increase) in other current assets
354

 
(5,748
)
Increase in accounts payable and other current liabilities
39,743

 
19,272

Decrease in income taxes payable
(593
)
 
(30,710
)
Net decrease/increase in other long-term assets/liabilities
9,488

 
1,546

Net cash provided by operating activities
$
233,096

 
$
98,586

The accompanying notes are an integral part of these condensed consolidated financial statements.

6



BIO-RAD LABORATORIES, INC

Notes to Condensed Consolidated Financial Statements
(Unaudited)

1.BASIS OF PRESENTATION AND USE OF ESTIMATES

Basis of Presentation

In this report, “Bio-Rad,” “we,” “us,” "the Company" and “our” refer to Bio-Rad Laboratories, Inc. and its subsidiaries.  The accompanying unaudited condensed consolidated financial statements of Bio-Rad have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) and reflect all adjustments which are, in the opinion of management, necessary to fairly state the results of the interim periods presented.  All such adjustments are of a normal recurring nature, with the exception to the adjustments noted below. Results for the interim period are not necessarily indicative of the results for the entire year.  The condensed consolidated balance sheet at December 31, 2013 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements. The condensed consolidated financial statements should be read in conjunction with the notes to the consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2013.

We evaluate subsequent events and the evidence they provide about conditions existing at the date of the balance sheet as well as conditions that arose after the balance sheet date but through the date the financial statements are issued.  The effects of conditions that existed at the balance sheet date are recognized in the financial statements. Events and conditions arising after the balance sheet date but before the financial statements are issued are evaluated to determine if disclosure is required to keep the financial statements from being misleading.  To the extent such events and conditions exist, disclosures are made regarding the nature of events and the estimated financial effects for those events and conditions.

Use of Estimates

The preparation of the condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingencies at the date of the financial statements as well as the reported amounts of revenues and expenses during the reporting periods. Bio-Rad bases its estimates on historical experience and on various other market-specific and other relevant assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ materially from those estimates.

CORRECTION OF IMMATERIAL ERRORS

Balance Sheet and Statement of Cash Flows

During the current quarter we identified errors in the Consolidated Balance Sheet at December 31, 2013 and the Consolidated Statements of Cash Flows for the years ending December 31, 2012 and 2013 (and for all interim periods therein) and in the Unaudited Condensed Consolidated Financial Statements for the three months ended March 31, 2014 and June 30, 2014 related to the recorded amounts of Net inventory and Net property, plant and equipment. We inappropriately reduced Inventory by all of the intercompany profit on intercompany transactions related to certain equipment when a portion of that profit should have reduced capital additions included in Property, plant and equipment. The equipment in question is a Bio-Rad product provided to customers in reagent rental agreements, whereby Bio-Rad retains ownership of the equipment and charges the customer for test kits purchased for use with this equipment. Depreciation was calculated correctly, and there is no impact to Net income (loss) for any historic period.

7




The effect of correcting these errors was to increase Net inventory and lower Property, plant and equipment, net at December 31, 2013 by $15.0 million. As a result of these changes, $5.3 million of Prepaid income taxes were reclassified from short-term to long-term. The reclassification within the Statement of Cash Flows was to decrease Net cash provided by operating activities and increase Net cash provided by investing activities by $4.4 million for the nine months ended September 30, 2013. There is no change to the net increase or decrease in Cash and cash equivalents for any historic period.

During the nine month-period ended September 30, 2013, we reported Payments for/proceeds from forward foreign exchange contracts as cash flows from investing activities in error. Cash flows from forward foreign exchange contracts should have been classified as cash flows from operating activities. We have adjusted the amounts previously reported in our Form 10-Q for the nine-month period ended September 30, 2013 in conjunction with the filing of this 10-Q by reducing cash inflows from investing activities by $1.0 million and increasing cash inflows from operating activities by $1.0 million.

Recent Accounting Standards Updates

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers.” ASU 2014-09 supersedes the revenue recognition requirements in “Revenue Recognition (Topic 605),” and requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period and is to be applied retrospectively, with early application not permitted. We are currently evaluating the impact of the adoption of this accounting standard update on our consolidated financial statements.


2.ACQUISITIONS

GnuBIO, Inc.

In April 2014, we acquired 100% of the issued and outstanding stock of GnuBIO, Inc. (GnuBIO). This acquisition was accounted for as a business combination as GnuBIO represents an integrated set of activities and assets capable of being conducted and managed for the purpose of providing a return and therefore constitutes a business in accordance with GAAP. The amount of acquisition-related costs was minimal as Bio-Rad primarily represented itself during the acquisition process. This business acquisition is included in our Clinical Diagnostics segment's results of operations from the acquisition date. We believe that GnuBIO's innovative DNA workflow is well-suited for the clinical diagnostics sequencing market and will leverage our leadership role in the area of droplet digital PCR.

The excess of purchase consideration over the fair value of net tangible and identifiable intangible assets acquired was recorded as goodwill. The fair values assigned to tangible and identifiable intangible assets acquired and liabilities assumed are based on management’s estimates and assumptions. The deferred tax liability established was primarily a result of the difference in the book basis and tax basis related to the identifiable intangible assets. The estimated fair values of assets acquired and liabilities assumed, specifically deferred taxes, may be subject to change as additional information is received and certain tax returns are finalized. Thus the provisional measurements of fair value set forth below are subject to change. We expect to finalize the allocation once all relevant information is obtained by management, but will not extend beyond one year from the closing date of acquisition.


8



The preliminary fair values of the net assets acquired from GnuBIO as of the acquisition date were determined to be $46.4 million of indefinite-lived intangible assets (specifically in-process research and development or "IPR&D"), $15.2 million of goodwill and $11.2 million of net tangible liabilities. We do not expect the goodwill recorded to be deductible for income tax purposes.

Accounting guidance requires that the fair value of IPR&D acquired in a business combination be recorded on the balance sheet as of the acquisition date. Intangible assets related to IPR&D projects are considered to be indefinite-lived until completion or abandonment of the related project. During the period the assets are considered indefinite-lived, they will not be amortized but will be tested for impairment on an annual basis and between annual tests if we become aware of any events occurring or changes in circumstances that would indicate a reduction in the fair value of the projects below their respective carrying amounts. We perform our annual impairment tests at December 31. If and when it is determined that identified intangible assets are impaired, an impairment charge would be recorded. If and when development is considered complete, the associated assets would be deemed finite-lived and would then be amortized based on their respective remaining estimated useful lives.

The fair value of the consideration as of the acquisition date was $50.4 million, which includes $39.7 million paid in cash at the closing date and $10.7 million in contingent consideration potentially payable to GnuBIO's shareholders. The contingent consideration was based on a probability-weighted income approach that could reach $70.0 million upon the achievement of all development/regulatory and sales milestones. The contingent consideration for the development/regulatory milestones was valued at $10.7 million, based on assumptions regarding the probability of achieving the milestones, with such amounts discounted to present value. The contingent consideration for the sales milestones was determined to be negligible, using the risk-neutral probability of being in the money based on a Black-Scholes framework. The contingent consideration was recognized at its estimated fair value of $7.2 million as of September 30, 2014. See Note 3 for further discussion of the contingent consideration valuation and underlying assumptions.

AbD Serotec

In January 2013, we acquired 100% of the outstanding shares of AbD Serotec, a division of MorphoSys AG, for total consideration of $62.2 million (net of cash received of $7.3 million). This acquisition was accounted for as a business combination as AbD Serotec represented an integrated set of activities and assets that was capable of being conducted and managed for the purpose of providing a return and therefore constitutes a business in accordance with GAAP. The amount of acquisition-related costs was minimal as Bio-Rad primarily represented itself during the acquisition process. This business acquisition is included in our Life Science segment's results of operations from the acquisition date. We believe that with AbD Serotec's comprehensive catalog of antibodies, we are able to offer our customers total assay solutions that can be validated on many of our research platforms for western blotting, multiplex protein expression, ELISA and cell sorting.

The final fair values of the net assets acquired consist of definite-lived intangible assets of $44.0 million, goodwill of $14.9 million and net tangible assets of $3.3 million. A portion of the goodwill recorded is deductible for income tax purposes.


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:

9




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, 2014 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
$

 
$
8.4

 
$

 
$
8.4

Foreign time deposits
14.9

 

 

 
14.9

Money market funds
2.5

 

 

 
2.5

Total cash equivalents (a)
17.4

 
8.4

 

 
25.8

Available-for-sale investments:
 
 
 
 
 
 
 
Corporate debt securities

 
132.6

 

 
132.6

Foreign brokered certificates of deposit

 
5.2

 

 
5.2

U.S. government sponsored agencies

 
46.0

 

 
46.0

Foreign government obligations

 
4.4

 

 
4.4

Municipal obligations

 
7.8

 

 
7.8

Marketable equity securities
308.6

 

 

 
308.6

Asset-backed securities

 
50.1

 

 
50.1

Total available-for-sale investments (b)
308.6

 
246.1

 

 
554.7

Forward foreign exchange contracts (c)

 
1.0

 

 
1.0

Total financial assets carried at fair value
$
326.0

 
$
255.5

 
$

 
$
581.5

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

 
$
0.3

 
$

 
$
0.3

Contingent consideration (e)

 

 
23.1

 
23.1

Total financial liabilities carried at fair value
$

 
$
0.3

 
$
23.1

 
$
23.4



Financial assets and liabilities carried at fair value and measured on a recurring basis as of December 31, 2013 are classified in the hierarchy as follows (in millions):


10



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

 
$
7.0

 
$

 
$
7.0

Foreign time deposits
11.1

 

 

 
11.1

U.S. government sponsored agencies

 
1.2

 

 
1.2

Money market funds
1.2

 

 

 
1.2

Total cash equivalents (a)
12.3

 
8.2

 

 
20.5

Available-for-sale investments:
 
 
 
 
 
 
 
Corporate debt securities

 
132.5

 

 
132.5

Foreign brokered certificates of deposit

 
8.9

 

 
8.9

U.S. government sponsored agencies

 
39.1

 

 
39.1

Foreign government obligations

 
5.6

 

 
5.6

Municipal obligations

 
11.0

 

 
11.0

Marketable equity securities
325.2

 

 

 
325.2

Asset-backed securities

 
48.6

 

 
48.6

Total available-for-sale investments (b)
325.2

 
245.7

 

 
570.9

Forward foreign exchange contracts (c)

 
0.6

 

 
0.6

Total financial assets carried at fair value
$
337.5

 
$
254.5

 
$

 
$
592.0

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

 
$
1.1

 
$

 
$
1.1

Contingent consideration (e)

 

 
20.8

 
20.8

Total financial liabilities carried at fair value
$

 
$
1.1

 
$
20.8

 
$
21.9



(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,
2014
 
December 31, 2013
Short-term investments
$
278.0

 
$
277.4

Other investments
276.7

 
293.5

Total
$
554.7

 
$
570.9


(c)
Forward foreign exchange contracts in an asset position are included in Prepaid expenses, taxes and 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):


11



 
September 30, 2014
 
December 31, 2013
Other current liabilities
$
9.6

 
$
6.1

Other long-term liabilities
13.5

 
14.7

   Total
$
23.1

 
$
20.8


During the third quarter of 2012, we recognized a contingent consideration liability upon our acquisition of a new cell sorting system from Propel Labs, Inc. The fair value of the contingent consideration was based on a probability-weighted income approach related to the achievement of certain development and sales milestones. The development milestone was achieved and paid in 2013. In the third quarter of 2014, the first sales milestone was reached with cell sorting system purchase orders resulting in a commitment to pay $2.4 million during the fourth quarter of 2014. Based on the most recent valuation, the sales milestones could potentially range from $0 to a maximum of 51.32% and 50.38% of annual cell sorting system purchase orders for September 2014 and September 2015, respectively, with payment to occur upon the anniversary of the completion of a certain number of cell sorting systems for two consecutive years, respectively. These maximum payout ratios begin at annual cell sorting system purchase orders in excess of $30 million and $45 million for the two consecutive years, respectively. The contingent consideration was revalued by a reduction of $4.9 million in 2014 to Selling, general and administrative expense to its estimated fair value of $15.9 million as of September 30, 2014.

During the second quarter of 2014, we recognized a contingent consideration liability upon our acquisition of GnuBIO. At the acquisition date, the contingent consideration was based on a probability-weighted income approach that could reach $70.0 million upon the achievement of all development/regulatory and sales milestones. The contingent consideration for the development/regulatory 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. During the third quarter of 2014, the development/regulatory milestones were revalued to a fair value of $7.2 million as of September 30, 2014. The contingent consideration for the sales milestones at the acquisition date was determined to be negligible, using the risk-neutral probability of being in the money based on a Black-Scholes framework.

The following table provides a reconciliation of the Level 3 contingent consideration liability measured at estimated fair value based on original valuations and updated quarterly for the nine months ended September 30, 2014 (in millions):

 
2014
January 1
$
20.8

Decrease in estimated fair value of contingent consideration included in Selling, general and administrative expense - Cell sorting system
(4.9
)
Acquisition of GnuBIO
10.7

Decrease in estimated fair value of contingent consideration included in Selling, general and administrative expense - GnuBIO
(3.5
)
September 30
$
23.1



The following table provides quantitative information about Level 3 inputs for fair value measurement of our contingent consideration liability as of September 30, 2014. Significant increases or decreases in these inputs in isolation could result in a significantly lower or higher fair value measurement.

12



 
 
 
Range
 
Valuation Technique
Unobservable Input
From
To
Cell sorting system
Probability-weighted income approach
Sales milestones:
 
 
 
 
Credit adjusted discount rates
0.82%
1.29%
 
 
Projected volatility of growth rate
20%
NA
 
 
Market price of risk
1.90%
N/A
GnuBIO
Probability-weighted income approach
Development/regulatory milestones:
 
 
 
 
Cumulative milestones probability
50.0%
28.1%
 
 
Discount Rate
0.10%
0.54%
 
 
 
 
 
 
 
Sales milestones:
 
 
 
 
Cumulative milestones probability
0.00089%
0.00000%
 
 
Discount Rate
0.98%
2.22%

To estimate the fair value of Level 2 debt securities as of September 30, 2014 and December 31, 2013, our primary pricing provider uses S&P Capital IQ 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 S&P Capital IQ as the primary pricing source and then our custodian as the secondary pricing source. If S&P Capital IQ 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, 2014 and December 31, 2013, 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 addition to the above, our primary pricing provider performed daily reasonableness testing of the S&P Capital IQ prices to custodian reported prices. Prices outside a tolerable variance of approximately 1% are investigated and resolved.

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


13



 
September 30, 2014
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Estimated
Fair
Value
Short-term investments:
 
 
 
 
 
 
 
Corporate debt securities
$
132.3

 
$
0.4

 
$
(0.1
)
 
$
132.6

Foreign brokered certificates of deposit
5.2

 

 

 
5.2

Municipal obligations
7.9

 

 
(0.1
)
 
7.8

Asset-backed securities
49.8

 

 
(0.1
)
 
49.7

U.S. government sponsored agencies
46.0

 
0.1

 
(0.1
)
 
46.0

Foreign government obligations
4.4

 

 

 
4.4

Marketable equity securities
26.7

 
5.7

 
(0.1
)
 
32.3

 
272.3

 
6.2

 
(0.5
)
 
278.0

Long-term investments:
 
 
 
 
 
 
 
Marketable equity securities
54.5

 
221.8

 

 
276.3

Asset-backed securities
0.4

 

 

 
0.4

 
54.9

 
221.8

 

 
276.7

Total
$
327.2

 
$
228.0

 
$
(0.5
)
 
$
554.7



 
December 31, 2013
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Estimated
Fair
Value
Short-term investments:
 
 
 
 
 
 
 
Corporate debt securities
$
132.6

 
$
0.3

 
$
(0.4
)
 
$
132.5

Foreign brokered certificates of deposit
8.9

 

 

 
8.9

Municipal obligations
11.1

 

 
(0.1
)
 
11.0

Asset-backed securities
48.4

 
0.1

 
(0.2
)
 
48.3

U.S. government sponsored agencies
39.1

 
0.1

 
(0.1
)
 
39.1

Foreign government obligations
5.6

 

 

 
5.6

Marketable equity securities
26.6

 
5.4

 

 
32.0

 
272.3

 
5.9

 
(0.8
)
 
277.4

Long-term investments:
 
 
 
 
 
 
 
Marketable equity securities
54.5

 
238.7

 

 
293.2

Asset-backed securities
0.4

 

 
(0.1
)
 
0.3

 
54.9

 
238.7

 
(0.1
)
 
293.5

Total
$
327.2

 
$
244.6

 
$
(0.9
)
 
$
570.9


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


14



 
September 30,
2014
 
December 31, 2013
Fair value of investments in a loss position 12 months or more
$
12.6

 
$
2.3

Fair value of investments in a loss position less than 12 months
$
56.8

 
$
73.9

Gross unrealized losses for investments in a loss position 12 months or more
$
0.2

 
$
0.1

Gross unrealized losses for investments in a loss position less than 12 months
$
0.3

 
$
0.8


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, 2014 or at December 31, 2013.

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, 2014 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 exchange losses, net in the Condensed Consolidated Statements of Operations.

The following is a summary of our forward foreign exchange contracts (in millions):
 
September 30,
 
2014
Contracts maturing in October through December 2014 to sell foreign currency:
 
Notional value
$
89.4

Unrealized gain
$
0.3

Contracts maturing in October through December 2014 to purchase foreign currency:
 
Notional value
$
345.0

Unrealized gain
$
0.3


The following is a summary of the amortized cost and estimated fair value of our debt securities at September 30, 2014 by contractual maturity date (in millions):

 
Amortized
Cost
 
Estimated Fair
Value
Mature in less than one year
$
96.0

 
$
96.1

Mature in one to five years
110.5

 
110.6

Mature in more than five years
39.5

 
39.4

Total
$
246.0

 
$
246.1


15




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, 2014
 
December 31, 2013
 
Carrying 
Amount 
 
Estimated 
Fair 
Value 
 
Fair Value Hierarchy Level
 
Carrying 
Amount 
 
Estimated 
Fair 
Value 
 
Fair Value Hierarchy Level
Other investments
$
81.6

 
$
367.9

 
2
 
$
77.5

 
$
382.9

 
2
Total long-term debt, excluding leases and current maturities
$
423.4

 
$
452.3

 
2
 
$
423.2

 
$
433.0

 
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, 2014.  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.

16





4.GOODWILL AND OTHER PURCHASED INTANGIBLE ASSETS

Changes to goodwill by segment were as follows (in millions):
 
Life
Science
 
Clinical
Diagnostics
 
Total
Balances as of January 1, 2014:
 
 
 
 
 
Goodwill
$
209.0

 
$
337.0

 
$
546.0

Accumulated impairment losses
(27.2
)
 
(1.0
)
 
(28.2
)
Goodwill, net
181.8

 
336.0

 
517.8

 
 
 
 
 
 
Acquisitions

 
15.2

 
15.2

Currency fluctuations
(0.9
)
 
(18.6
)
 
(19.5
)
 
 
 
 
 
 
Balances as of September 30, 2014:
 
 
 
 
 
Goodwill
208.1

 
333.6

 
541.7

Accumulated impairment losses
(27.2
)
 
(1.0
)
 
(28.2
)
Goodwill, net
$
180.9

 
$
332.6

 
$
513.5


In conjunction with the acquisition of GnuBIO (see Note 2), we have preliminarily recorded $15.2 million of goodwill and $46.4 million of in-process research and development, an indefinite-lived intangible asset. These amounts may change upon completion of the allocation.

Information regarding our identifiable purchased intangible assets with definite and indefinite lives is as follows (in millions):
 
September 30, 2014
 
Average
Remaining
Life (years)
 
Purchase
Price
 
Accumulated
Amortization
 
Net
Carrying
Amount
Customer relationships/lists
3-11
 
$
93.2

 
$
(43.1
)
 
$
50.1

Know how
1-11
 
188.3

 
(100.3
)
 
88.0

Developed product technology
5-13
 
106.5

 
(42.3
)
 
64.2

Licenses
1-12
 
44.2

 
(24.9
)
 
19.3

Tradenames
1-10
 
4.2

 
(2.5
)
 
1.7

Covenants not to compete
5-8
 
4.9

 
(1.1
)
 
3.8

Other
 
0.5

 
(0.5
)
 

     Total definite-lived intangible assets
 
 
441.8

 
(214.7
)
 
$
227.1

In-process research and development
 
 
46.4

 

 
$
46.4

     Total purchased intangible assets
 
 
$
488.2

 
$
(214.7
)
 
$
273.5



17



 
December 31, 2013
 
Average
Remaining
Life (years)
 
Purchase
Price
 
Accumulated
Amortization
 
Net
Carrying
Amount
Customer relationships/lists
1-11
 
$
99.8

 
$
(41.1
)
 
$
58.7

Know how
2-12
 
194.6

 
(89.3
)
 
105.3

Developed product technology
1-13
 
109.5

 
(36.2
)
 
73.3

Licenses
1-12
 
44.9

 
(22.4
)
 
22.5

Tradenames
1-9
 
4.3

 
(2.1
)
 
2.2

Covenants not to compete
5-9
 
4.9

 
(0.7
)
 
4.2

Other
 
0.6

 
(0.6
)
 

     Total purchased intangible assets
 
 
$
458.6

 
$
(192.4
)
 
$
266.2


Amortization expense related to purchased intangible assets is as follows (in millions):

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
 
 
 
 
 
 
 
 
Amortization expense
$
10.9

 
$
11.1

 
$
32.8

 
$
33.5



5.PRODUCT WARRANTY LIABILITY

We warrant certain equipment against defects in design, materials and workmanship, generally for a period of one year.  Upon delivery of that equipment, we establish, as part of Cost of goods sold, a provision for the expected costs of such warranty based on historical experience, specific warranty terms and customer feedback.  A review is performed on a quarterly basis to assess the adequacy of our warranty accrual.

Components of the warranty accrual, included in Other current liabilities and Other long-term liabilities in the Condensed Consolidated Balance Sheets, were as follows (in millions):

January 1, 2014
$
15.6

Provision for warranty
15.7

Actual warranty costs
(15.9
)
September 30, 2014
$
15.4



18





6.    LONG-TERM DEBT

The principal components of long-term debt are as follows (in millions):

 
September 30,
2014
 
December 31, 2013
4.875% Senior Notes due 2020, net of discount
$
423.4

 
$
423.2

Capital leases and other debt
12.6

 
12.6

 
436.0

 
435.8

Less current maturities
(0.3
)
 
(0.2
)
Long-term debt
$
435.7

 
$
435.6



Senior Notes due 2020

In December 2010, Bio-Rad sold $425.0 million principal amount of Senior Notes due 2020 (4.875% Notes).  The sale yielded net cash proceeds of $422.6 million at an effective rate of 4.946%.  The 4.875% Notes pay a fixed rate of interest of 4.875% per year.  We have the option to redeem any or all of the 4.875% Notes at any time at a redemption price of 100% of the principal amount (plus a specified make-whole premium as defined in the indenture governing the 4.875% Notes) and accrued and unpaid interest thereon to the redemption date.  Our obligations under the 4.875% Notes are not secured and rank equal in right of payment with all of our existing and future unsubordinated indebtedness.  Certain covenants apply at each year end to the 4.875% Notes including limitations on the following: liens, sale and leaseback transactions, mergers, consolidations or sales of assets and other covenants. There are no restrictive covenants relating to total indebtedness, interest coverage, stock repurchases, recapitalizations, dividends and distributions to shareholders or current ratios.

Credit Agreement

In June 2014, Bio-Rad entered into a $200.0 million unsecured Credit Agreement, replacing the Amended and Restated Credit Agreement of June 2010, which expired on June 21, 2014. Borrowings under the Credit Agreement are on a revolving basis and can be used to make permitted acquisitions, for working capital and for other general corporate purposes. We had no outstanding borrowings under the Credit Agreement as of September 30, 2014, however $5.0 million was utilized for domestic standby letters of credit that reduced our borrowing availability. The Credit Agreement matures in June 2019. If we had borrowed against our Credit Agreement, the borrowing rate would have been 1.5% at September 30, 2014 .

The Credit Agreement requires Bio-Rad to comply with certain financial ratios and covenants, among other things. These ratios and covenants include a leverage ratio test and an interest coverage test, as well as restrictions on our ability to declare or pay dividends, incur debt, guarantee debt, enter into transactions with affiliates, merge or consolidate, sell assets, make investments and create liens.  We were in compliance with all of these ratios and covenants as of September 30, 2014.

19





7.    ACCUMULATED OTHER COMPREHENSIVE INCOME

Accumulated other comprehensive income included in our Condensed Consolidated Balance Sheets consists of the following components (in millions):
 
Foreign currency translation adjustments
Foreign Other post-employment benefits adjustments
Net unrealized holding gains on available-for-sale investments
Bio-Rad Accumulated other comprehensive income
Non-controlling interests
Total Accumulated other comprehensive income
Balances as of January 1, 2014:
$
189.4

$
(8.1
)
$
159.4

$
340.7

$

$
340.7

Other comprehensive (loss) income, before reclassifications
(70.3
)
0.6

(16.3
)
(86.0
)

(86.0
)
Amounts reclassified from Accumulated other comprehensive income

0.4


0.4


0.4

Income tax effects

(0.1
)
6.0

5.9


5.9

Other comprehensive (loss) income, net of income taxes
(70.3
)
0.9

(10.3
)
(79.7
)

(79.7
)
Balances as of September 30, 2014:
$
119.1

$
(7.2
)
$
149.1

$
261.0

$

$
261.0


 
Foreign currency translation adjustments
Foreign Other post-employment benefits adjustments
Net unrealized holding gains on available-for-sale investments
Bio-Rad Accumulated other comprehensive income
Non-controlling interests
Total Accumulated other comprehensive income
Balances as of January 1, 2013:
$
172.9

$
(8.1
)
$
109.7

$
274.5

$
(0.2
)
$
274.3

Other comprehensive income, before reclassifications
5.1


58.1

63.2


63.2

Amounts reclassified from Accumulated other comprehensive income
(0.2
)

0.2


0.2

0.2

Income tax effects


(21.4
)
(21.4
)

(21.4
)
Other comprehensive income, net of income taxes
4.9


36.9

41.8

0.2

42.0

Balances as of September 30, 2013:
$
177.8

$
(8.1
)
$
146.6

$
316.3

$

$
316.3



The amounts reclassified out of Accumulated other comprehensive income into the Condensed Consolidated Statements of Operations, with presentation location, were as follows:

20



 
Income before taxes impact (in millions)
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
 
 
September 30,
 
September 30,
 
 
Components of Comprehensive income
 
2014
 
2013
 
2014
 
2013
 
Location
Amortization of foreign other post-employment benefit items
 
$
(0.2
)
 
$

 
$
(0.4
)
 
$
(0.2
)
 
Selling, general and administrative expense
Net holding losses on available-for-sale investments
 
$

 
$
(0.4
)
 
$

 
$
(0.2
)
 
Other (income) expense, net

Reclassification adjustments are calculated using the specific identification method.


8.    EARNINGS (LOSS) PER SHARE

Basic earnings (loss) per share is computed by dividing net income (loss) attributable to Bio-Rad by the weighted average number of common shares outstanding for that period.  Diluted earnings (loss) per share takes into account the effect of dilutive instruments, such as stock options and restricted stock, and uses the average share price for the period in determining the number of potential common shares that are to be added to the weighted average number of shares outstanding.  Potential common shares are excluded from the diluted earnings (loss) per share calculation if the effect of including such securities would be anti-dilutive. For the three months ended September 30, 2013, net loss per basic share was the same as net loss per diluted share because all potentially dilutive shares were anti-dilutive due to the net loss for the period.

The weighted average number of common shares outstanding used to calculate basic and diluted earnings per share, and the anti-dilutive shares that are excluded from the diluted earnings per share calculation are as follows (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
Basic weighted average shares outstanding
28,884

 
28,603

 
28,834

 
28,545

Effect of potentially dilutive stock options and restricted stock awards
257

 

 
263

 
325

Diluted weighted average common shares
29,141

 
28,603

 
29,097

 
28,870

Anti-dilutive shares
117

 
416

 
111

 
95



21




9.    OTHER INCOME AND EXPENSE, NET

Other (income) expense, net includes the following components (in millions):

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
Interest and investment income
$
(0.8
)
 
$
(1.1
)
 
$
(10.0
)
 
$
(10.2
)
Net realized losses on investments

 
0.5

 

 
0.2

Miscellaneous other expense (income) items, net
0.2

 
(0.1
)
 
0.3

 
(0.7
)
Other (income) expense, net
$
(0.6
)
 
$
(0.7
)
 
$
(9.7
)
 
$
(10.7
)


10.    INCOME TAXES
 
Our effective income tax rate was 49% and (36)% for the three months ended September 30, 2014 and 2013, respectively. Our effective income tax rate was 42% and 30% for the first nine months of 2014 and 2013, respectively. The effective tax rate for the third quarter of 2014 was higher primarily due to losses incurred in foreign jurisdictions for which no income tax benefit is expected and due to nondeductible penalties. The effective tax rate for the third quarter of 2013 was higher than expected due to discrete items related primarily to tax liabilities for unrecognized tax benefits and audit settlements in our foreign jurisdictions. The effective tax rate for the third quarter of 2013 was negative because of the pretax loss incurred in the third quarter of 2013.

The effective income tax rate for the first nine months of 2014 does not include a benefit of the U.S. federal research credit as it has not been extended beyond 2013. In addition, the effective tax rate for the first nine months of 2014 includes adjustments principally related to state taxes. The effective tax rate for the first nine months of 2013 reflected a significant tax benefit related to the 2012 U.S. federal research credit, which was retroactively reinstated on January 2, 2013.

Our foreign taxes for all periods resulted primarily from income earned in France and Switzerland. Many jurisdictions in which we operate including Switzerland, Russia, the U.K. and Singapore have statutory tax rates that are significantly lower than the U.S. statutory tax rate of 35%.
    
We file federal and state income tax returns in the United States and foreign income tax returns in many jurisdictions abroad. Our income tax returns are audited by federal, state and foreign tax authorities. We are currently under examination by many of these tax authorities. There are differing interpretations of tax laws and regulations, and as a result, significant disputes may arise with these tax authorities involving issues of the timing and amount of deductions and allocations of income among various tax jurisdictions. We evaluate our exposures associated with our tax filing positions on a quarterly basis.

We record liabilities for unrecognized tax benefits related to uncertain tax positions. We do not believe any currently pending uncertain tax positions will have a material adverse effect on our condensed consolidated financial statements, although an adverse resolution of one or more of these uncertain tax positions in any period may have a material impact on the results of operations for that period.

As of September 30, 2014, based on the expected outcome of certain examinations or as a result of the expiration of statute of limitations for certain jurisdictions, we believe that within the next 12 months it is reasonably possible that our previously unrecognized tax benefits could decrease by approximately $5.9 million. Substantially all such amounts will impact our effective income tax rate.


22




11.    SEGMENT INFORMATION

Information regarding industry segments for the three months ended September 30, 2014 and 2013 is as follows (in millions):
 
 
Life
Science
 
Clinical
Diagnostics
 
Other
Operations
 
 
 
 
 
 
 
Segment net sales 
2014
$
172.8

 
$
354.7

 
$
3.1

 
2013
$
162.9

 
$
338.8

 
$
3.4

 
 
 
 
 
 
 
Segment net (loss) profit
2014
$
(10.6
)
 
$
47.8

 
$
0.1

 
2013
$
(8.5
)
 
$
43.0

 
$


Information regarding industry segments for the nine months ended September 30, 2014 and 2013 is as follows (in millions):
 
 
Life
Science
 
Clinical
Diagnostics
 
Other
Operations
 
 
 
 
 
 
 
Segment net sales 
2014
$
504.6

 
$
1,062.0

 
$
10.2

 
2013
$
489.5

 
$
1,030.2

 
$
10.4

 
 
 
 
 
 
 
Segment net (loss) profit
2014
$
(24.5
)
 
$
130.3

 
$
0.4

 
2013
$
(28.9
)
 
$
130.6

 
$
0.3


Segment results are presented in the same manner as we present our operations internally to make operating decisions and assess performance.  Net corporate operating, interest and other expense for segment results consists of receipts and expenditures that are not the primary responsibility of segment operating management and therefore are not allocated to the segments for performance assessment by our chief operating decision maker.  The three and nine months ended September 30, 2014 included additional accrual adjustments of $12.1 million and $20.1 million, respectively, in connection with reaching our final settlement with the SEC and DOJ investigations relating to the United States Foreign Corrupt Practices Act (FCPA) (see Note 12). The three and nine months ended September 30, 2013 included the accrual of $20.0 million in connection with our initial efforts to resolve the SEC and DOJ investigations relating to the FCPA and a $15.6 million loss on extinguishment of our 8.0% Senior Subordinated Notes. Interest expense is charged to segments based on the carrying amount of inventory and receivables employed by that segment.  The following reconciles total segment profit to consolidated income (loss) before taxes (in millions):

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
Total segment profit
$
37.3

 
$
34.5

 
$
106.2

 
$
102.0

Foreign currency exchange losses, net
(3.7
)
 
(3.3
)
 
(6.1
)
 
(5.7
)
Net corporate operating, interest and other expense not allocated to segments
(11.7
)
 
(37.1
)
 
(24.0
)
 
(39.1
)
Other income (expense), net
0.6

 
0.7

 
9.7

 
10.7

Consolidated income (loss) before income taxes
$
22.5

 
$
(5.2
)
 
$
85.8

 
$
67.9



23




12.    LEGAL PROCEEDINGS

As previously disclosed, in May 2010 we voluntarily disclosed to the U.S. Department of Justice (DOJ) and the Securities and Exchange Commission (SEC) certain likely or potential violations of the United States Foreign Corrupt Practices Act (FCPA). The Audit Committee of our Board of Directors (Audit Committee) assumed direct responsibility for reviewing these matters and hired experienced independent counsel to conduct an investigation and provide legal advice.   The SEC and DOJ each commenced its own investigation.  During and following the completion of the Audit Committee’s investigation, we provided information to the DOJ and SEC and cooperated with their investigations.
Effective November 3, 2014, we entered into a non-prosecution agreement (NPA) with the DOJ and consented to the entry of an Order by the SEC (SEC Order), which actions resolve both the DOJ and the SEC investigations. The NPA concerns violations of the FCPA’s books and records and internal control provisions related to Russia during 2005-2010. Pursuant to the NPA, we agreed to pay a penalty of $14.4 million and to certain compliance, reporting and cooperation obligations, and the DOJ agreed that it will not criminally prosecute us for any crimes related to conduct disclosed to the DOJ, provided that we perform our obligations under the NPA for two years.
The SEC Order concerns violations of the FCPA’s books and records, internal controls, and anti-bribery provisions related to Russia, and violations of the FCPA’s books and records and internal controls provisions related to Vietnam and certain of our Thailand operations during 2005-2010. Pursuant to the SEC Order, we will pay $40.7 million in disgorgement and interest, make certain reports to the SEC on our anti-corruption compliance and remediation efforts over the next two years, and cease and desist any violations of the FCPA.
In the NPA and the SEC Order, the DOJ and the SEC, respectively, took into account our initial voluntary self-disclosure of the potential FCPA violations, our own extensive investigation and cooperation with their investigations and our extensive and significant remediation efforts to date. Neither the NPA nor the SEC Order requires the appointment of an independent external monitor to oversee our activities or our compliance with applicable laws.
As a result of the settlements with the DOJ and the SEC, we recorded an aggregate accrual as of September 30, 2014 of $55.1 million, which includes $5.6 million of accrued interest and an additional $12.1 million that we accrued during the third quarter of 2014. We will pay the aggregate settlement amounts in the fourth quarter of 2014.

On April 13, 2011, a shareholder derivative lawsuit was filed against each of our directors in the Superior Court for Contra Costa County, California.  The case, which also names the Company as a nominal defendant, is captioned City of Riviera Beach General Employees' Retirement System v. David Schwartz, et al., Case No. MSC11-00854. In the complaint, the plaintiff alleges that our directors breached their fiduciary duties by failing to ensure that we had sufficient internal controls and systems for compliance with the FCPA.  Purportedly seeking relief on our behalf, the plaintiff seeks an award of unspecified compensatory and punitive damages, costs and expenses (including attorneys' fees), and a declaration that our directors have breached their fiduciary duties. We and the individual defendants filed a demurrer requesting dismissal of the complaint in this case, as well as a motion to stay this matter pending resolution of the above-referenced investigations by the DOJ and SEC. Following a hearing on September 30, 2011, the court sustained our demurrer and dismissed the complaint, without prejudice, and granted the plaintiff additional time to file an amended complaint.   The court denied our motion to stay this matter because it dismissed the complaint. The parties have agreed to a stipulated dismissal of this case, without prejudice, and to a tolling of the statute of limitations pending the resolution of the DOJ and SEC investigations, which has now occurred.

In May of 2014, the General Inspection Team of the Shanghai Administration for Industry and Commerce (the “Shanghai AIC”), which is the local counterpart of China’s State Administration for Industry and Commerce, commenced an investigation of certain of our business practices in China. Specifically, the Shanghai AIC was investigating whether certain of our selling arrangements may have violated China’s Anti-Unfair-Competition Law and other relevant laws and regulations. The investigation was concluded in September of 2014. As a result of the

24



investigation, our selling subsidiary in China was subject to an administrative penalty and disgorgement of profits of $0.3 million for providing free products pursuant to contractual obligations with customers during years 2012 and 2013, which was deemed to be in violation of the Anti-Unfair-Competition Law. We had discontinued this practice in China in 2013, prior to the commencement of the Shanghai AIC investigation in May 2014. In addition, China’s Bureau of Market Supervision and Administration, through its local counterpart in Pudong New District, Shanghai (“Bureau”) has begun a review of our importation practices with respect to certain of our products. At this time, we cannot predict whether the review will culminate into a formal investigation. We are cooperating with the Bureau’s review. This authority has the power to impose fines, penalties, seek disgorgement of profits and cause us to modify our business practices in China. However, the review has not concluded and therefore, we are not in a position to assess whether it will affect our business or operating results in China.

In addition, we are party to various other claims, legal actions and complaints arising in the ordinary course of business.  We do not believe, at this time, that any ultimate liability resulting from any of these other matters will have a material adverse effect on our results of operations, financial position or liquidity.  However, we cannot give any assurance regarding the ultimate outcome of these other matters and their resolution could be material to our operating results for any particular period, depending on the level of income for the period.


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This discussion should be read in conjunction with the information contained in both our Consolidated Financial Statements for the year ended December 31, 2013 and the financial statements for the three and nine months ended September 30, 2014.

Other than statements of historical fact, statements made in this report include forward looking statements, such as statements with respect to our future financial performance, operating results, plans and objectives that involve risk and uncertainties.  Forward-looking statements generally can be identified by the use of forward-looking terminology, such as “believe,” “expect,” “may,” “will,” “intend,” “estimate,” “continue,” or similar expressions or the negative of those terms or expressions.  Such statements involve risks and uncertainties, which could cause actual results to vary materially from those expressed in or indicated by the forward-looking statements.  We have based these forward looking statements on our current expectations and projections about future events.  However, actual results may differ materially from those currently anticipated depending on a variety of risk factors including among other things: changes in general domestic and worldwide economic conditions; our ability to successfully develop and market new products; our reliance on and access to necessary intellectual property; our ability to successfully integrate any acquired business; our substantial leverage and ability to service our debt; competition in and government regulation of the industries in which we operate; and the monetary policies of various countries. We caution you not to place undue reliance on forward-looking statements, which reflect an analysis only and speak only as of the date hereof.  We undertake no obligation to publicly update or revise any forward looking statements, whether as a result of new information, future events, or otherwise except as required by Federal Securities law.

Overview.  We are a multinational manufacturer and worldwide distributor of our own life science research and clinical diagnostics products.  Our business is organized into two reportable segments, Life Science and Clinical Diagnostics, with the mission to provide scientists with specialized tools needed for biological research and clinical diagnostics.  

We sell more than 8,000 products and services to a diverse client base comprised of scientific research, healthcare, education and government customers worldwide. We do not disclose quantitative information about our different products and services as it is impractical to do so based primarily on the numerous products and services that we sell and the global markets that we serve.

We manufacture and supply our customers with a range of reagents, apparatus and equipment to separate complex chemical and biological materials and to identify, analyze and purify components.  Because our customers require standardization for their experiments and test results, much of our revenues are recurring.  

25




We are impacted by the support of many governments for both research and healthcare. The current global economic outlook remains uncertain as the need to control government social spending by many governments limits opportunities for growth. Approximately 33% of our year-to-date 2014 consolidated net sales are derived from the United States and approximately 67% are derived from international locations, with Europe being our largest region overall.  Our international sales are largely denominated in local currencies such as Euros, Swiss Franc, Japanese Yen, China Yuan and British Sterling.  As a result, our consolidated net sales expressed in dollars benefit when the U.S. dollar weakens and suffers when the dollar strengthens.  When the U.S. dollar strengthens, we benefit from lower cost of sales from our own international manufacturing sites as well as non-U.S. suppliers, and from lower international operating expenses.

As previously disclosed, in May 2010 we voluntarily disclosed to the U.S. Department of Justice (DOJ) and the Securities and Exchange Commission (SEC) certain likely or potential violations of the United States Foreign Corrupt Practices Act (FCPA). Effective November 3, 2014, we entered into a non-prosecution agreement (NPA) with the DOJ and consented to the entry of an Order by the SEC (SEC Order), which actions resolve both the DOJ and SEC investigations. As a result of the settlements with the DOJ and the SEC, we recorded an aggregate accrual as of September 30, 2014 of $55.1 million, which includes $5.6 million of accrued interest and an additional $12.1 million that we accrued during the third quarter of 2014. We will pay the aggregate settlement amounts in the fourth quarter of 2014.

In April 2014, we acquired 100% of the issued and outstanding stock of GnuBIO, Inc. (GnuBIO). This acquisition was accounted for as a business combination and is included in our Clinical Diagnostics segment's results of operations from the acquisition date. The excess of purchase consideration over the fair value of net tangible and identifiable intangible assets acquired was recorded as goodwill. The fair values assigned to tangible and identifiable intangible assets acquired and liabilities assumed are based on management’s estimates and assumptions. The deferred tax liability established was primarily a result of the difference in the book basis and tax basis related to the identifiable intangible assets. The estimated fair values of assets acquired and liabilities assumed, specifically deferred taxes, may be subject to change as additional information is received and certain tax returns are finalized. Thus the provisional measurements of fair value set forth below are subject to change. We expect to finalize the allocation once all relevant information is obtained by management, but will not extend beyond one year from the closing date of acquisition.

The preliminary fair values of the net assets acquired from GnuBIO as of the acquisition date were determined to be $46.4 million of indefinite-lived intangible assets (specifically in-process research and development), $15.2 million of goodwill and $11.2 million of net tangible liabilities. The fair value of the consideration as of the acquisition date was $50.4 million, which includes $39.7 million paid in cash at the closing date and $10.7 million in contingent consideration potentially payable to GnuBIO's shareholders. The contingent consideration was based on a probability-weighted income approach that could reach $70.0 million upon the achievement of all development/regulatory and sales milestones. The contingent consideration for the development/regulatory milestones was valued at $10.7 million, based on assumptions regarding the probability of achieving the milestones, with such amounts discounted to present value. During the third quarter of 2014, the development/regulatory milestones were revalued to a fair value of $7.2 million as of September 30, 2014. The contingent consideration for the sales milestones at the acquisition date was determined to be negligible, using the risk-neutral probability of being in the money based on a Black-Scholes framework. We believe that GnuBIO's innovative DNA workflow is well-suited for the clinical diagnostics sequencing market and will leverage our leadership role in the area of droplet digital PCR.

In January 2013, we acquired 100% of the outstanding shares of AbD Serotec, a division of MorphoSys AG, for total consideration of $62.2 million (net of cash received of $7.3 million). This acquisition was accounted for as a business combination and is included in our Life Science segment's results of operations from the acquisition date. The final fair values of the net assets acquired consist of definite-lived intangible assets of $44.0 million, goodwill of $14.9 million and net tangible assets of $3.3 million. We believe that with AbD Serotec's comprehensive catalog

26



of antibodies, we are able to offer our customers total assay solutions that can be validated on many of our research platforms for western blotting, multiplex protein expression, ELISA and cell sorting.

During the current quarter we identified errors in the Consolidated Balance Sheet at December 31, 2013 and the Consolidated Statements of Cash Flows for the years ending December 31, 2012 and 2013 (and for all interim periods therein) and in the Unaudited Condensed Consolidated Financial Statements for the three months ended March 31, 2014 and June 30, 2014 related to the recorded amounts of Net inventory and Net property, plant and equipment. We inappropriately reduced Inventory by all of the intercompany profit on intercompany transactions related to certain equipment when a portion of that profit should have reduced capital additions included in Property, plant and equipment. The equipment in question is a Bio-Rad product provided to customers in reagent rental agreements, whereby Bio-Rad retains ownership of the equipment and charges the customer for test kits purchased for use with this equipment. Depreciation was calculated correctly, and there is no impact to Net income (loss) for any historic period.

The effect of correcting these errors was to increase net inventory and lower Property, plant and equipment, net at December 31, 2013 by $15.0 million. As a result of these changes, $5.3 million of Prepaid income taxes were reclassified from short-term to long-term. The reclassification within the Statement of Cash Flows was to decrease Net cash provided by operating activities and increase Net cash provided by investing activities by $4.4 million for the nine months ended September 30, 2013. There is no change to the net increase or decrease in Cash and cash equivalents for any historic period.

During the nine-month period ended September 30, 2013, we reported payments for/proceeds from forward foreign exchange contracts as cash flows from investing activities in error. Cash flows from forward foreign exchange contracts should have been classified as cash flows from operating activities. We have adjusted the amounts previously reported in our Form 10-Q for the nine month-period ended September 30, 2013 in conjunction with the filing of this 10-Q by reducing cash inflows from investing activities by $1.0 million and increasing cash inflows from operating activities by $1.0 million.

During the third quarter of 2012, we recognized a contingent consideration liability upon our acquisition of a new cell sorting system from Propel Labs, Inc. The fair value of the contingent consideration was based on a probability-weighted income approach related to the achievement of certain development and sales milestones. The development milestone was achieved and paid in 2013. In the third quarter of 2014, the first sales milestone was reached with cell sorting system purchase orders resulting in a commitment to pay $2.4 million during the fourth quarter of 2014. Based on the most recent valuation, the sales milestones could potentially range from $0 to a maximum of 51.32% and 50.38% of annual cell sorting system purchase orders for September 2014 and September 2015, respectively, with payment to occur upon the anniversary of the completion of a certain number of cell sorting systems for two consecutive years, respectively. These maximum payout ratios begin at annual cell sorting system purchase orders in excess of $30 million and $45 million for the two consecutive years, respectively. The contingent consideration was revalued by a reduction of $4.9 million in 2014 to Selling, general and administrative expense to its estimated fair value of $15.9 million as of September 30, 2014.

The following shows cost of goods sold, gross profit, expense items and net income (loss) as a percentage of net sales:


27



 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
Net sales
100.0
%
 
100.0
 %
 
100.0
%
 
100.0
%
Cost of goods sold
45.6

 
43.7

 
45.4

 
44.1

Gross profit
54.4

 
56.3

 
54.6

 
55.9

Selling, general and administrative expense
38.2

 
40.0

 
38.1

 
38.1

Research and development expense
9.9

 
10.5

 
10.2

 
10.1

Net income (loss) attributable to Bio-Rad
2.2

 
(1.4
)
 
3.2

 
3.1



Critical Accounting Policies and Estimates

As previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2013, we have identified accounting for income taxes, valuation of goodwill and long-lived assets, valuation of inventories, warranty reserves, valuation of investments, allowance for doubtful accounts and litigation accruals as the accounting policies and estimates critical to the operations of Bio-Rad.

An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, if different estimates reasonably could have been used, or if changes in the estimate that are reasonably likely to occur could materially impact the financial statements.  Management believes that there have been no significant changes during the nine months ended September 30, 2014 to the items that we disclosed as our critical accounting policies and estimates in Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013.  For a full discussion of these policies and estimates, please refer to our Form 10-K for the period ended December 31, 2013 filed with the SEC.


Three Months Ended September 30, 2014 Compared to
Three Months Ended September 30, 2013

Results of Operations -- Sales, Margins and Expenses

Net sales (sales) for the third quarter of 2014 were $530.6 million compared to $505.1 million in the third quarter of 2013, an increase of 5.1%.  Excluding the impact of foreign currency, third quarter 2014 sales increased by approximately 4.3% compared to the same period in 2013.  Currency neutral sales growth was primarily in Eastern Europe, the U.S. and China, partially offset by decreased sales in Japan and Latin America.

The Life Science segment sales for the third quarter of 2014 were $172.8 million, an increase of 6.1% compared to the same period last year.  On a currency neutral basis, sales increased 5.5% compared to the third quarter in 2013. The currency neutral sales increase was realized primarily in our Droplet Digital™ PCR, cell biology products and protein separations product lines, partially offset by a sales decline in process chromatography. The currency neutral sales increase was primarily in Europe, North America and Latin America, which were partially offset by a sales decrease in Asia.

The Clinical Diagnostics segment sales for the third quarter of 2014 were $354.7 million, an increase of 4.7% compared to the same period last year.  On a currency neutral basis, sales increased 3.9% compared to the third quarter in 2013.  The Clinical Diagnostics segment had growth primarily in immunohematology and toll manufacturing product lines on a currency neutral basis. Currency neutral sales growth was primarily in Eastern Europe and China, with the U.S. being relatively flat and a decline in Western Europe and Latin America.


28



Consolidated gross margins were 54.4% for the third quarter of 2014 compared to 56.3% for the third quarter of 2013.  Life Science segment gross margins for the third quarter of 2014 decreased by approximately 3.2 percentage points from the same period last year primarily due to a $2.9 million credit related to a correction from the first half of 2013 associated with inventory valuation. The decrease also reflected approximately $1.7 million of current quarter costs associated with the closing of a small manufacturing plant. Clinical Diagnostics segment gross margins for the third quarter of 2014 decreased by approximately 1.3 percentage points from the same period last year. The decrease was primarily due to continued pricing pressure compared to the same period in 2013. The decrease also reflected approximately $1.4 million associated with closing and consolidating two small manufacturing plants.

Selling, general and administrative expenses (SG&A) represented 38.2% of sales for the third quarter of 2014 compared to 40.0% of sales for the third quarter of 2013.  Decreases in SG&A expense relative to sales were primarily driven by an accrual of $9.7 million in the third quarter of 2014 compared to an accrual of $16.0 million in the third quarter of 2013 in connection with reaching our final settlement with the SEC and DOJ investigations relating to the FCPA, a decrease in contingent consideration of an overall amount of $3.0 million mostly related to the GnuBIO valuation decrease of $3.5 million, and decreases in various expenses, such as lower bad debt expense, marketing and advertising expenses, and travel. These decreases were partially offset by an increase in employee-related expenses, reflecting increases in incentive compensation and related fringe benefits, commissions and temporary help associated with the implementation of the second phase of our enterprise resource planning system (ERP), as well as professional fees and third party commissions.

Research and development expense (R&D) decreased to $52.8 million or 9.9% of sales in the third quarter of 2014 compared to $52.9 million or 10.5% of sales in the third quarter of 2013.  Life Science segment R&D decreased in the third quarter of 2014 from the prior year quarter primarily due to the timing of projects. Clinical Diagnostics segment R&D increased in the third quarter of 2014 from the prior year period primarily due to continued investments in new instrument platforms and assays, and diagnostic applications using the recently acquired droplet digital PCR technology. In addition, R&D increased due to the acquisition of GnuBIO last quarter.

Results of Operations – Non-operating

Interest expense for the third quarter of 2014 decreased by $23.9 million to $7.7 million compared to $31.6 million for the third quarter of 2013 primarily due to the absence of interest expense of $6.2 million and $15.6 million associated with a call premium, and expensing the remaining original bond discount and unamortized debt issuance costs associated with the $300.0 million principal amount of Senior Subordinated Notes (8.0% Notes), which were redeemed on September 30, 2013. In addition, interest expense in connection with reaching our final settlement with the SEC and DOJ investigations relating to the FCPA was $2.4 million in the third quarter of 2014 compared to $4.0 million in the third quarter of 2013.

Foreign currency exchange gains and losses consist primarily of foreign currency transaction gains and losses on intercompany net receivables and payables and the change in fair value of our forward foreign exchange contracts used to manage our foreign currency exchange risk.  Foreign currency exchange losses, net for the quarter ended September 30, 2014 increased compared to the prior year period primarily due to an increase in hedging costs.

Other (income) expense, net for the third quarter of 2014 was relatively flat at $0.6 million income compared to $0.7 million income for the third quarter of 2013 reflecting net realized losses on investments in the third quarter of 2013 that were used to provide cash to redeem all the $300.0 million 8.0% Senior Subordinated Notes.

Our effective income tax rate was 49% and (36)% for the three months ended September 30, 2014 and 2013, respectively. The effective tax rate for the third quarter of 2014 was higher primarily due to losses incurred in foreign jurisdictions for which no income tax benefit is expected and due to nondeductible penalties. The effective tax rate for the third quarter of 2013 was higher than expected due to discrete items related primarily to tax liabilities for unrecognized tax benefits and audit settlements in our foreign jurisdictions. The effective tax rate for the third quarter of 2013 was negative because of the pretax loss incurred in the third quarter of 2013. The effective

29



income tax rate for the three months ended September 30, 2014 does not include a benefit of the U.S. federal research credit as it has not been extended beyond 2013.

Our foreign taxes for all periods resulted primarily from income earned in France and Switzerland. Many jurisdictions in which we operate including Switzerland, Russia, the U.K. and Singapore have statutory tax rates that are significantly lower than the U.S. statutory tax rate of 35%.

Changes in factors outside of our control, such as changes in tax laws or rates, changes in the interpretation of tax laws or changes in the jurisdictional mix of our earnings, could adversely affect our financial position and results of operations.


Nine Months Ended September 30, 2014 Compared to
Nine Months Ended September 30, 2013

Results of Operations -- Sales, Margins and Expenses

Net sales (sales) for the first nine months of 2014 were $1.58 billion compared to $1.53 billion in the first nine months of 2013, an increase of 3.1%.  Excluding the impact of foreign currency, the first nine months of 2014 sales increased by approximately 2.7% compared to the same period in 2013.  Currency neutral sales growth was primarily reflected in Eastern Europe, the U.S. and China, with Western Europe relatively flat and Japan decreasing less than 2%.

The Life Science segment sales for the first nine months of 2014 were $504.6 million, an increase of 3.1% compared to the same period last year.  On a currency neutral basis, sales increased 2.9% compared to the first nine months of 2013. The currency neutral sales increase was reflected across most product lines, except for protein separations products. Currency neutral sales growth was primarily in Europe and Latin America, partially offset by decreased sales in Asia.

The Clinical Diagnostics segment sales for the first nine months of 2014 were $1.06 billion, an increase of 3.1% compared to the same period last year.  On a currency neutral basis, sales increased 2.7% compared to the first nine months of 2013.  Clinical Diagnostics had growth across most product lines on a currency neutral basis. Currency neutral sales growth was primarily in Eastern Europe and China, with the U.S. increasing less than 1% and Western Europe and Latin America declined.

Consolidated gross margins were 54.6% for the first nine months of 2014 compared to 55.9% for the first nine months of 2013.  Life Science segment gross margins for the first nine months of 2014 decreased by approximately 0.1 percentage point from the same period last year primarily due to approximately $1.7 million associated with closing a small manufacturing plant. The decrease in gross margins were partially offset by higher margins mostly for process chromatography, Droplet Digital™ PCR and food testing products. Clinical Diagnostics segment gross margins for the first nine months of 2014 decreased by approximately 1.9 percentage points from the same period last year. The decrease was primarily due to continued pricing pressure compared to the same period in 2013. The decrease also reflected approximately $1.4 million associated with closing and consolidating two small manufacturing plants, and increased scrap for obsolescence products.

Selling, general and administrative expenses (SG&A) represented 38.1% of sales for the first nine months of 2014 compared to 38.1% of sales for the first nine months of 2013.  SG&A expense relative to sales were essentially flat primarily driven by:
an increase of employee-related expenses, including related fringe benefits, temporary help associated with our ERP implementation and commissions,
an accrual of $19.5 million for the first nine months of 2014 compared to an accrual of $16.0 million in the first nine months of 2013 in connection with reaching our final settlement with the SEC and DOJ investigations relating to the FCPA,

30



an increase in third party commissions, and
an increase in software costs primarily associated with the ERP implementation.

Partially offsetting these increased costs were:
an overall decrease of $7.0 million reflecting the valuations of contingent considerations for the cell sorting system with an overall decrease of $5.5 million compared to 2013, a decrease for GnuBIO of $3.5 million in 2014, offset by a decrease in 2013 of $2.0 million for the Droplet Digital™ PCR,
a decrease in bad debt expense of $4.7 million, primarily in Russia, due to a distributor bad debt in 2013 and improved collections in the U.S. after implementing the first phase of a new ERP system, and
lower external marketing and advertising expenses.

Research and development expense (R&D) increased to $161.0 million or 10.2% of sales in the first nine months of 2014 compared to $155.1 million or 10.1% of sales in the first nine months of 2013.  Life Science segment R&D increased in the first nine months of 2014 from the prior year period, with concentrated efforts in Droplet Digital™ PCR and laboratory separations. Clinical Diagnostics segment R&D increased in the first nine months of 2014 from the prior year period primarily due to continued investments in diagnostic applications using the recently acquired droplet digital PCR technology, and new instrument platforms and assays.

Results of Operations – Non-operating

Interest expense for the first nine months of 2014 decreased by $37.1 million to $17.1 million compared to $54.3 million for the first nine months of 2013 primarily due to the absence of interest expense of $18.7 million and $15.6 million associated with a call premium, and expensing the remaining original bond discount and unamortized debt issuance costs associated with the $300.0 million principal amount of Senior Subordinated Notes (8.0% Notes), which were redeemed on September 30, 2013. In addition, interest expense in connection with reaching our final settlement with the SEC and DOJ investigations relating to the FCPA was $0.6 million for the first nine months of 2014 compared to $4.0 million for the first nine months of 2013.

Foreign currency exchange gains and losses consist primarily of foreign currency transaction gains and losses on intercompany net receivables and payables and the change in fair value of our forward foreign exchange contracts used to manage our foreign currency exchange risk.  Foreign currency exchange losses, net for the first nine months of 2014 increased compared to the prior year period primarily attributable to an increase in hedging costs, particularly in relation to the Brazilian Real, partially offset by a favorable impact for the estimating process inherent in the timing of shipments and payments.

Other (income) expense, net for the first nine months of 2014 decreased to $9.7 million income compared to $10.7 million income for the first nine months of 2013 primarily due to net realized losses on investments in 2013 that were used to provide cash to redeem all the $300.0 million 8.0% Senior Subordinated Notes, and miscellaneous expense in 2014 compared to miscellaneous income in 2013.

Our effective income tax rate was 42% and 30% for the first nine months of 2014 and 2013, respectively. The effective tax rate for the first nine months of 2014 was higher primarily due to losses incurred in foreign jurisdictions for which no income tax benefit is expected. The effective tax rate for the first nine months of 2014 does not include a benefit of the U.S. federal research credit as it has not been extended beyond 2013. In addition, the effective tax rate for the first nine months of 2014 includes adjustments principally related to state taxes. The effective tax rate for the first nine months of 2013 reflected a significant tax benefit related to the 2012 U.S. federal research credit, which was retroactively reinstated on January 2, 2013.

Our foreign taxes for all periods resulted primarily from income earned in France and Switzerland. Many jurisdictions in which we operate including Switzerland, Russia, the U.K. and Singapore have statutory tax rates that are significantly lower than the U.S. statutory tax rate of 35%.


31



Changes in factors outside of our control, such as changes in tax laws or rates, changes in the interpretation of tax laws or changes in the jurisdictional mix of our earnings, could adversely affect our financial position and results of operations.


Liquidity and Capital Resources

Bio-Rad operates and conducts business globally, primarily through subsidiary companies established in the markets in which we trade.  Goods are manufactured in a small number of locations, and are then shipped to local distribution facilities around the world.  Our product mix is diversified, and certain products compete largely on product efficacy, while others compete on price.  Gross margins are generally sufficient to exceed normal operating costs, and funding for research and development of new products, as well as routine outflows of capital expenditures, interest and taxes.  In addition to the annual positive cash flow from operating activities, additional liquidity is readily available via the sale of short-term investments and access to our $200.0 million unsecured Credit Agreement that we entered into in June 2014.  Borrowings under the Credit Agreement are on a revolving basis and can be used to make permitted acquisitions, for working capital and for other general corporate purposes. We had no outstanding borrowings under the Credit Agreement as of September 30, 2014, however $5.0 million was utilized for domestic standby letters of credit that reduced our borrowing availability.  The Credit Agreement matures in June 2019.

At September 30, 2014, we had $702.6 million in cash, cash equivalents and short-term investments, of which approximately 36% was held in our foreign subsidiaries. We believe that our holdings of cash, cash equivalents and short-term investments in the U.S. and in our foreign subsidiaries are sufficient to meet both the current and long-term needs of our global operations. The amount of funds held in the United States can fluctuate due to the timing of receipts and payments in the ordinary course of business and due to other reasons, such as business expansion activities. As part of our ongoing liquidity assessments, we regularly monitor the mix of domestic and foreign cash flows (both inflows and outflows). Repatriation of overseas funds will result in additional U.S. federal and state income tax payments. In general, it is our practice and intention to indefinitely reinvest the cash generated by our foreign subsidiaries in our foreign subsidiaries' operations.

Under our domestic and international lines of credit, we had $211.1 million available for borrowing as of September 30, 2014, which was reduced by $7.7 million that was utilized for standby letters of credit issued by our banks to support our obligations, mostly to meet the deductible amount under insurance policies for our benefit. Management believes that this availability, together with cash flow from operations, will be adequate to meet our current objectives for operations, research and development, capital additions for manufacturing and distribution, plant and equipment, information technology systems and an acquisition of reasonable proportion to our existing total available capital.

While economic growth is somewhat improving, instability still exists in developed nations and in the U.S., which may adversely affect our future results of cash flows. Demand for our products and services could change more dramatically than in previous years based on activity, funding, reimbursement constraints and support levels from government, universities, hospitals and private industry, including diagnostic laboratories.  The need for certain sovereign nations with large annual deficits to curtail spending could lead to slower growth of, or even a decline in, our business. Sovereign nations either delaying payment for goods and services or renegotiating their debts could impact our liquidity. The situation in these sovereign nations is continuously evolving and we have no greater knowledge of the situation other than what is publicly reported. As of September 30, 2014 and December 31, 2013, we had accounts receivable, net of allowance for doubtful accounts, in Spain, Italy, Greece and Portugal of $47.3 million and $66.0 million, respectively. Approximately $5.4 million of the decrease from December 31, 2013 was from currency, in addition to customer payments, most notably from Spain of approximately $11 million from public agencies in the first quarter of 2014.

While the credit markets are somewhat improving in the U.S. and internationally, instability still exists, along with low levels of capitalization in some parts of the financial services industry that could impact both our ability and

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our customer's ability to access the necessary capital for acquisition, equipment and technology modernization, and the financing of inventories and receivables.  Without this crucial intermediary function, manufacturers and end users may have to renegotiate existing arrangements, reduce activity levels or seek other business partners.


Cash Flows from Operations

Net cash provided by operations was $233.1 million and $98.6 million for the nine months ended September 30, 2014 and 2013, respectively.  The increase in cash flows primarily resulted from:
higher cash received from customers primarily due to improved collections, in particular from Spain of approximately $11 million from public agencies in the first quarter of 2014, and in the U.S. after implementing the first phase of a new ERP system,
the absence of interest paid of $25.0 million and $12.0 million associated with a call premium primarily due to the early redemption of the $300.0 million of 8.0% Senior Subordinated Notes on September 30, 2013, and
a decrease in income taxes paid primarily due to a $20 million federal income tax quick refund related to 2013 that was received in the second quarter of 2014, and a $5 million federal income tax extension payment in 2013, partially offset by
more cash paid to suppliers and employees.

Cash Flows from Investing Activities

Net cash used in investing activities was $141.1 million compared to net cash provided by investing activities of $40.4 million for the nine months ended September 30, 2014 and 2013, respectively. Purchases of marketable securities and investments, and proceeds from sales of marketable securities and investments were both lower than the prior year period primarily due to sales of securities to provide cash to redeem the $300.0 million 8.0% Senior Subordinated Notes and therefore expect purchases to decline markedly year over year due to reduced amounts of cash to invest. In addition, we purchased longer dated securities to take advantage of higher returns on investments and therefore we experienced an additional decline in maturities and redemptions of securities. Purchases of intangible assets were higher in 2014 primarily due to the purchases of licenses. Net cash used in investing activities was partially offset by a lower amount paid for the acquisition of GnuBIO compared to the acquisition of AbD Serotec in 2013.

Our investment objective is to maintain liquidity to meet anticipated operational and other corporate requirements in which capital is preserved and increased through investing in low risk, high quality securities with commensurate returns, consistent with our risk tolerance level.

We continue to review possible acquisitions to expand both our Life Science and Clinical Diagnostics segments. We routinely meet with the principals or brokers of the subject companies.  It is not certain at this time that any of these discussions involving material or significant acquisitions will advance to completion.

Capital expenditures totaled $80.9 million and $78.9 million for the nine months ended September 30, 2014 and 2013, respectively.  Capital expenditures represent the addition and replacement of production machinery and research equipment, ongoing manufacturing and facility additions for expansion, regulatory, environmental and compliance. Also included in capital expenditures are investments in business systems and data communication upgrades and enhancements.  All periods include equipment placed with Clinical Diagnostics segment customers who then contract to purchase our reagents for use. Capital expenditures were higher for the nine months ended September 30, 2014 compared to the same period last year as we have started the second phase of a global single instance ERP platform and are beginning to capitalize costs and expect capitalized costs to continue to increase throughout the remainder of the year. As we continue to implement more phases of the ERP platform and expand our e-commerce platform, we expect capital expenditures to continue to remain historically higher for the next four years or more. The current estimated global implementation cost for the single instance ERP platform could exceed $300 million and is estimated to take approximately four or more years to fully implement.  

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Cash Flows from Financing Activities

Net cash provided by financing activities was $8.1 million compared to net cash used in financing activities of $315.5 million for the nine months ended September 30, 2014 and 2013, respectively. Net cash used in financing activities for the nine months ended September 30, 2013 was primarily due to the early redemption of the $300.0 million of 8.0% Senior Subordinated Notes on September 30, 2013, as well as $19.9 million paid to Propel Labs' shareholders in contingent consideration associated with the 2012 acquisition, and $5.6 million paid to QuantaLife in contingent consideration associated with the 2011 acquisition.

We have outstanding Senior Notes of $425 million, which are not due until 2020. As indicated above, we redeemed all of the Senior Subordinated Notes of $300 million on September 30, 2013. We believe the current cash is sufficient to meet normal operating costs, and funding for research and development of new products, as well as routine outflows of capital expenditures, interest and taxes.

The Board of Directors has authorized the repurchase of up to $18.0 million of Bio-Rad's common stock, of which $3.3 million has yet to be repurchased as of September 30, 2014. The Credit Agreement may limit our ability to repurchase our stock. We had no repurchases of our stock during the