10Q 6.30.13


 
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 June 30, 2013
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 July 30, 2013
Class A Common Stock, Par Value $0.0001 per share
 
23,502,240
Class B Common Stock, Par Value $0.0001 per share
 
5,088,454
 




BIO-RAD LABORATORIES, INC.

FORM 10-Q JUNE 30, 2013

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)
 
June 30, 2013
 
December 31, 2012
ASSETS:
 (Unaudited)
 
 
Cash and cash equivalents
$
366,999

 
$
463,388

Short-term investments
467,433

 
457,685

Accounts receivable, net
395,974

 
398,739

Inventories:
 
 
 
Raw materials
101,160

 
93,009

Work in process
127,383

 
124,737

Finished goods
256,124

 
230,624

Total inventories
484,667

 
448,370

Prepaid expenses, taxes and other current assets
187,963

 
161,750

Total current assets
1,903,036

 
1,929,932

Property, plant and equipment, at cost
1,032,393

 
1,012,034

Less: accumulated depreciation and amortization
(613,863
)
 
(595,096
)
Property, plant and equipment, net
418,530

 
416,938

Goodwill, net
501,496

 
495,418

Purchased intangibles, net
277,305

 
260,939

Other assets
382,454

 
333,526

Total assets
$
3,482,821

 
$
3,436,753

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY:
 
 
 
Accounts payable
$
129,119

 
$
130,867

Accrued payroll and employee benefits
118,782

 
135,955

Notes payable and current maturities of long-term debt
1,693

 
1,750

Income and other taxes payable
25,898

 
32,299

Accrued royalties
19,999

 
29,718

Other current liabilities
135,753

 
139,331

Total current liabilities
431,244

 
469,920

Long-term debt, net of current maturities
732,800

 
732,414

Other long-term liabilities
247,835

 
223,149

Total liabilities
1,411,879

 
1,425,483

 
 
 
 
Stockholders’ equity:
 
 
 
Bio-Rad stockholders’ equity:
 
 
 
Class A common stock, shares issued 23,500,882 and 23,332,532 at 2013 and 2012, respectively; shares outstanding 23,500,760 and 23,332,410 at 2013 and 2012, respectively
2

 
2

Class B common stock, shares issued 5,089,371 and 5,149,771 at 2013 and 2012, respectively; shares outstanding 5,088,454 and 5,148,854 at 2013 and 2012, respectively
1

 
1

Additional paid-in capital
225,785

 
212,244

Class A treasury stock at cost, 122 shares at 2013 and 2012
(12
)
 
(12
)
Class B treasury stock at cost, 917 shares at 2013 and 2012
(89
)
 
(89
)
Retained earnings
1,577,861

 
1,523,688

Accumulated other comprehensive income
267,394

 
274,901

Total Bio-Rad stockholders’ equity
2,070,942

 
2,010,735

Noncontrolling interests

 
535

Total stockholders’ equity
2,070,942

 
2,011,270

Total liabilities and stockholders’ equity
$
3,482,821

 
$
3,436,753

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

3



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

 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2013
 
2012
 
2013
 
2012
 
 
 
 
 
 
 
 
Net sales
$
525,321

 
$
510,422

 
$
1,024,993

 
$
996,699

Cost of goods sold
225,220

 
222,522

 
453,480

 
430,217

Gross profit
300,101

 
287,900

 
571,513

 
566,482

Selling, general and administrative expense
195,331

 
162,256

 
381,248

 
333,549

Research and development expense
53,224

 
52,336

 
105,165

 
105,259

Income from operations
51,546

 
73,308

 
85,100

 
127,674

Interest expense
11,664

 
12,401

 
22,641

 
25,597

Foreign exchange losses, net
865

 
1,619

 
2,393

 
3,060

Other (income) expense, net
(8,644
)
 
(6,731
)
 
(10,044
)
 
(13,181
)
Income before income taxes
47,661

 
66,019

 
70,110

 
112,198

Provision for income taxes
(12,987
)
 
(17,454
)
 
(15,916
)
 
(32,689
)
Net income including noncontrolling interests 
34,674

 
48,565

 
54,194

 
79,509

Net income attributable to noncontrolling interests

 
(222
)
 
(21
)
 
(161
)
Net income attributable to Bio-Rad
$
34,674

 
$
48,343

 
$
54,173

 
$
79,348

 
 
 
 
 
 
 
 
Basic earnings per share:
 
 
 
 
 
 
 
Net income per share basic attributable to Bio-Rad
$
1.22

 
$
1.71

 
$
1.90

 
$
2.81

Weighted average common shares - basic
28,538

 
28,250

 
28,516

 
28,226

 
 
 
 
 
 
 
 
Diluted earnings per share:
 
 
 
 
 
 
 
Net income per share diluted attributable to Bio-Rad
$
1.20

 
$
1.69

 
$
1.88

 
$
2.78

Weighted average common shares - diluted
28,868

 
28,610

 
28,843

 
28,582



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


4



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

 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2013
 
2012
 
2013
 
2012
Net income including noncontrolling interests
$
34,674

 
$
48,565

 
$
54,194

 
$
79,509

Other comprehensive income:
 
 
 
 
 
 
 
Foreign currency translation adjustments
(1,198
)
 
(46,019
)
 
(35,959
)
 
(11,650
)
Reclassification of realized portion of cumulative translation adjustments due to liquidation, for the three and six months ended June 30, 2012, net of income taxes of $0.

 
70

 

 
70

Other post-employment benefits adjustments, all net of income taxes of $0.
(18
)
 
175

 
291

 
181

Net unrealized holding (losses) gains on available-for-sale (AFS) investments, net of income taxes of $(0.5) million and $2.2 million for the three months ended June 30, 2013 and 2012, respectively, and $16.6 million and $18.2 million for the six months ended June 30, 2013 and 2012, respectively.
(819
)
 
3,774

 
28,472

 
31,196

Reclassification adjustments for net holding gains on AFS investments included in Net income including noncontrolling interests, net of income taxes of $(0.1) million for the three months ended June 30, 2012 and $(0.1) million and $(2.5) million for the six months ended June 30, 2013 and 2012, respectively. There was no tax impact for the three months ended June 30, 2013.
(8
)
 
(170
)
 
(147
)
 
(4,254
)
Other comprehensive (loss) income, net of income taxes
(2,043
)
 
(42,170
)
 
(7,343
)
 
15,543

Comprehensive income
32,631

 
6,395

 
46,851

 
95,052

Comprehensive income attributable to noncontrolling interests

 
(207
)
 
(185
)
 
(159
)
Comprehensive income attributable to Bio-Rad
$
32,631

 
$
6,188

 
$
46,666

 
$
94,893



Reclassification adjustments are calculated using the specific identification method.
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)
 
Six Months Ended
 
June 30,
 
2013
 
2012
Cash flows from operating activities:
 
 
 
Cash received from customers
$
1,006,345

 
$
1,008,515

Cash paid to suppliers and employees
(910,801
)
 
(835,174
)
Interest paid
(24,681
)
 
(24,101
)
Income tax payments
(42,102
)
 
(47,619
)
Investment proceeds and miscellaneous receipts, net
10,926

 
7,830

Excess tax benefits from share-based compensation
(499
)
 
(549
)
Net cash provided by operating activities
39,188

 
108,902

Cash flows from investing activities:
 
 
 
Capital expenditures
(58,598
)
 
(75,697
)
Proceeds from dispositions of property, plant and equipment
1,088

 
114

Payments for acquisitions, net of cash received, and long-term investments
(79,383
)
 
(18,589
)
Payments for purchases of intangible assets
(500
)
 
(1,233
)
Payments for purchases of marketable securities and investments
(276,835
)
 
(402,808
)
Proceeds from sales of marketable securities and investments
98,588

 
48,971

Proceeds from maturities of marketable securities and investments
167,574

 
209,200

Proceeds from foreign currency exchange contracts, net
4,992

 
3,204

Net cash used in investing activities
(143,074
)
 
(236,838
)
Cash flows from financing activities:
 
 
 
Net (payments for) borrowings from line-of-credit arrangements and notes payable
(18
)
 
226

Payments on long-term borrowings
(123
)
 
(367
)
Proceeds from issuance of common stock
6,580

 
6,212

Purchase of treasury stock

 
(101
)
Excess tax benefits from share-based compensation
499

 
549

Net cash provided by financing activities
6,938

 
6,519

Effect of foreign exchange rate changes on cash
559

 
3,673

Net decrease in cash and cash equivalents
(96,389
)
 
(117,744
)
Cash and cash equivalents at beginning of period
463,388

 
574,231

Cash and cash equivalents at end of period
$
366,999

 
$
456,487

Reconciliation of net income including noncontrolling interests to net cash provided by operating activities:
 
 
 
Net income including noncontrolling interests
$
54,194

 
$
79,509

Adjustments to reconcile net income including noncontrolling interests to net cash provided by operating activities excluding the effects of acquisitions:
 
 
 
Depreciation and amortization
68,211

 
62,749

Share-based compensation
6,781

 
6,326

Foreign currency exchange contracts, net
(4,992
)
 
(3,204
)
Gains on dispositions of securities
(103
)
 
(6,379
)
Excess tax benefits from share-based compensation
(499
)
 
(549
)
Changes in fair value of contingent consideration
(1,301
)
 
(7,547
)
(Increase) decrease in accounts receivable
(6,477
)
 
19,928

Increase in inventories
(37,093
)
 
(15,295
)
Increase in other current assets
(5,808
)
 
(8,714
)
Decrease in accounts payable and other current liabilities
(10,836
)
 
(6,454
)
Decrease in income taxes payable
(29,349
)
 
(14,891
)
Other
6,460

 
3,423

Net cash provided by operating activities
$
39,188

 
$
108,902

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.  Results for the interim period are not necessarily indicative of the results for the entire year.  The condensed consolidated balance sheet at December 31, 2012 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, 2012.

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 Associated with the Presentation and Disclosure of the Statements of Comprehensive Income

During the first quarter of 2013, we identified errors in the Consolidated Statements of Comprehensive Income for 2012, 2011 and 2010, and in the unaudited interim Condensed Consolidated Statements of Comprehensive Income for all three quarters of 2012, which affected two line items within this financial statement. Specifically, we incorrectly calculated the 1) net unrealized holding gains on available-for-sale (AFS) investments, net of tax, and 2) reclassification adjustments for net holding gains/losses on AFS investments included in net income including noncontrolling interests, net of tax.

Following are the amounts in thousands that should have been reported for the Statements of Comprehensive Income for the two affected line items, including the associated income taxes (note: income taxes were originally reported in millions but have been presented below in thousands):


7



 
Three Months Ended
Six Months Ended
Year Ended December 31,
 
June 30, 2012
June 30, 2012
2012
2011
2010
 
 
 
 
 
 
Net unrealized holding gains on AFS investments, net of income tax; understated by $340, $8,508, $10,090 and $770 for the three and six months ended June 30, 2012, and for the years ended 2012 and 2010, respectively, and overstated by $208 for the year ended 2011.
$3,774
$31,196
$65,448
$12,663
$15,495
Income taxes on net unrealized holding gains on AFS investments; understated by $198, $4,955, $5,874 and $448 for the three and six months ended June 30, 2012, and for the years ended 2012 and 2010, respectively, and overstated by $121 for the year ended 2011.
$2,198
$18,165
$38,108
$7,373
$9,022
Reclassification adjustments for net holding (gains) losses on AFS investments included in Net income including noncontrolling interests, net of income tax; understated by $340, $8,508, $10,090 and $770 for the three and six months ended June 30, 2012, and for the years ended 2012 and 2010, respectively, and overstated by $208 for the year ended 2011.
$(170)
$(4,254)
$(5,045)
$104
$(385)
Income taxes on reclassification adjustments for net holding gains/losses on AFS investments included in Net income including noncontrolling interests; understated by $198, $4,955, $5,874 and $448 for the three and six months ended June 30, 2012, and for the years ended 2012 and 2010, respectively, and overstated by $121 for the year ended 2011.
$(99)
$(2,477)
$(2,937)
$61
$(224)

These errors had no effect on Other comprehensive income, net of tax, for any period presented. They did not affect any other caption or total in our other unaudited condensed or annual consolidated financial statements.

Management evaluated the materiality of these errors from a qualitative and quantitative perspective, taking into account the requirements of the Securities and Exchange Commission (SEC) Staff Accounting Bulletin No. 99, Materiality. Management has concluded that these errors are not material and, therefore, will correct these errors prospectively when the Consolidated Statements of Comprehensive Income are included in future filings.

Recent Accounting Standards Updates

In February 2013, the Financial Accounting Standards Board (FASB) issued guidance requiring that companies present either in a single note or parenthetically on the face of the financial statements, the effect of significant amounts reclassified from each component of accumulated other comprehensive income based on its source and the income statement line items affected by the reclassification. If a component is not required to be reclassified to net income in its entirety, companies would instead cross reference to the related footnote for additional information. We adopted this guidance as of January 1, 2013 and present it in a single note.


8




2.ACQUISITIONS

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.

During the second quarter of 2013, we finalized the determination of fair values of certain acquired intangible assets and adjusted the preliminary carrying values of goodwill and certain other assets and liabilities to reflect final information received, including an update to the weighted average tax rate applied to our valuation model and changes in the determination of fair values of certain assets acquired and liabilities assumed. These factors that existed as of the acquisition date resulted in an overall increase to intangible assets of $1.7 million, a reduction of goodwill of $2.1 million and an increase to net tangible assets of $0.4 million. These measurement period adjustments did not have a material impact on our previously reported condensed consolidated financial statements and, therefore, we have not retrospectively adjusted those financial statements.

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 may be deductible for income tax purposes.

In August 2012, we acquired from Propel Labs, Inc. a new cell sorting system, an automated, easy-to-use benchtop cell sorting flow cytometer. The new system will be sold exclusively under the Bio-Rad brand as the S3TM Cell Sorter. This asset acquisition was accounted for as a business combination as the new cell sorting system 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.

The fair value of the consideration as of the acquisition date was $49.6 million, which included $5.0 million paid in cash at the closing date and $44.6 million in contingent consideration potentially payable to Propel Labs' shareholders. The contingent consideration was based on a probability-weighted income approach related to the achievement of certain development and sales milestones. The contingent consideration for the development milestones was valued at $19.9 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 valued at $24.7 million based on a statistically significant number of simulations for each potential outcome. (See Note 3 for further discussion of the contingent consideration valuation and underlying assumptions.)

The fair values of the net assets acquired from Propel Labs, Inc. as of the acquisition date were determined to be $17.4 million of goodwill, $32.1 million of definite-lived intangible assets and $0.1 million of net tangible assets. We expect the goodwill recorded to be deductible for income tax purposes. The acquired cell sorting system fits well into Bio-Rad's existing Life Science segment product offerings and may offer researchers greater access to this technology.

In July 2012, we acquired all of the outstanding shares of DiaMed Benelux for 4.6 million Euros (approximately $5.6 million) in cash. This acquisition was accounted for as a business combination as DiaMed Benelux 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

9



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 acquired net tangible liabilities with a fair value of $2.3 million and the fair values of the assets acquired as of the acquisition date were determined to be $3.0 million of goodwill and $4.9 million of definite-lived intangible assets. The goodwill recorded will not be deductible for income tax purposes. DiaMed Benelux became the exclusive distributor of certain Bio-Rad immunohematology products in the Benelux market as a result of the 2007 acquisition of DiaMed Holding AG. This distributor acquisition is consistent with our stated objective to control the distribution of our own products and services.

In January 2012, we purchased, for cash, certain assets from a raw material supplier for approximately $12.5 million. This asset acquisition was accounted for as a business combination as the certain assets acquired 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 the Clinical Diagnostics segment's results of operations from the acquisition date. The fair value of the assets acquired was determined to be $6.3 million of net tangible assets, $5.1 million of intangible assets and $1.1 million of goodwill. We expect the goodwill recorded to be deductible for income tax purposes. In addition, we paid $2.0 million for employment agreements as an incentive to certain employees of the acquired business to remain with Bio-Rad. Such amount will be expensed over two years from the acquisition date and was recorded in Prepaid expenses, taxes and other current assets, and Other assets in the accompanying Condensed Consolidated Balance Sheet. We believe this acquisition will allow us to secure the supply of critical raw materials and lower our overall costs in the Clinical Diagnostics segment.

We do not consider any of these business combinations in 2013 and 2012, individually, or when aggregated, to be material and therefore have not disclosed the pro forma results of operations as required for material business combinations.


3.FAIR VALUE MEASUREMENTS

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

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


Financial assets and liabilities carried at fair value and measured on a recurring basis as of June 30, 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 (a):
 
 
 
 
 
 
 
Commercial paper
$

 
$
43.9

 
$

 
$
43.9

Foreign government obligations

 
4.5

 

 
4.5

Foreign time deposits
10.0

 

 

 
10.0

Money market funds
4.8

 

 

 
4.8

Total cash equivalents
14.8

 
48.4

 

 
63.2

Available-for-sale investments (b):
 
 
 
 
 
 
 
Corporate debt securities

 
236.7

 

 
236.7

Foreign brokered certificates of deposit

 
9.3

 

 
9.3

U.S. government sponsored agencies

 
84.2

 

 
84.2

Foreign government obligations

 
9.5

 

 
9.5

Municipal obligations

 
14.3

 

 
14.3

Marketable equity securities
290.6

 

 

 
290.6

Asset-backed securities

 
86.0

 

 
86.0

Total available-for-sale investments
290.6

 
440.0

 

 
730.6

Forward foreign exchange contracts (c)

 
1.3

 

 
1.3

Total financial assets carried at fair value
$
305.4

 
$
489.7

 
$

 
$
795.1

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

 
$
1.2

 
$

 
$
1.2

Contingent consideration (e)

 

 
37.8

 
37.8

Total financial liabilities carried at fair value
$

 
$
1.2

 
$
37.8

 
$
39.0



Financial assets and liabilities carried at fair value and measured on a recurring basis as of December 31, 2012 are classified in the hierarchy as follows (in millions):


11



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

 
$
52.8

 
$

 
$
52.8

Foreign time deposits
10.1

 

 

 
10.1

U.S. government sponsored agencies

 
1.3

 

 
1.3

Money market funds
5.5

 

 

 
5.5

Total cash equivalents
15.6

 
54.1

 

 
69.7

Available-for-sale investments (b):
 
 
 
 
 
 
 
Corporate debt securities

 
240.6

 

 
240.6

Foreign brokered certificates of deposit

 
0.4

 

 
0.4

U.S. government sponsored agencies

 
92.7

 

 
92.7

Foreign government obligations

 
5.6

 

 
5.6

Municipal obligations

 
12.1

 

 
12.1

Marketable equity securities
242.1

 

 

 
242.1

Asset-backed securities

 
82.2

 

 
82.2

Total available-for-sale investments
242.1

 
433.6

 

 
675.7

Forward foreign exchange contracts (c)

 
1.1

 

 
1.1

Total financial assets carried at fair value
$
257.7

 
$
488.8

 
$

 
$
746.5

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

 
$
0.8

 
$

 
$
0.8

Contingent consideration (e)

 

 
52.6

 
52.6

Total financial liabilities carried at fair value
$

 
$
0.8

 
$
52.6

 
$
53.4



(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):
 
June 30, 2013
 
December 31, 2012
Short-term investments
$
467.4

 
$
457.7

Other assets
263.2

 
218.0

Total
$
730.6

 
$
675.7


(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):


12



 
June 30, 2013
 
December 31, 2012
Other current liabilities
$
13.1

 
$
27.3

Other long-term liabilities
24.7

 
25.3

   Total
$
37.8

 
$
52.6


During the fourth quarter of 2011 we recognized a contingent consideration liability upon our acquisition of QuantaLife related to potential future payments due upon the achievement of certain sales and development milestones. The contingent consideration was initially recognized at its estimated fair value of $24.1 million, based on a probability-weighted income approach. The contingent consideration was recognized at its estimated fair value of $0.7 million and $8.0 million as of June 30, 2013 and December 31, 2012, respectively. As of the acquisition date of October 4, 2011, total contingent consideration could have originally reached a maximum of $48 million upon the achievement of all sales milestones and a development milestone. As of June 30, 2013, the first five short-term sales milestones had not been met and therefore the contingent consideration can now only reach a maximum of $20 million upon the achievement of all the remaining sales milestones. The development milestone was met as of December 31, 2012, resulting in a payment of $6.0 million in January 2013.

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 contingent consideration was recognized at its estimated fair value of $37.1 million and $44.6 million as of June 30, 2013 and December 31, 2012, respectively. 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 valued at $12.4 million and $24.7 million, respectively, as of June 30, 2013. Contingent consideration associated with development milestones could potentially reach a maximum of $20 million, of which $7.5 million was paid in 2013. We consider it more than likely that the remaining development milestones will be achieved. This form of payment guarantees that the seller transitions the manufacturing of the product to Bio-Rad. The sales milestones could potentially range from $0 to a maximum of 60.0%, 56.7% and 54.4% of annual cell sorting system purchase orders, with payment to occur upon the anniversary of the completion of a certain number of cell sorting systems for three consecutive years, respectively. These maximum payout ratios begin at annual cell sorting system purchase orders in excess of $20 million, $30 million and $45 million for the three consecutive years, respectively.

The following table provides a reconciliation of the Level 3 contingent consideration liabilities measured at estimated fair value based on original third party valuations and updated quarterly for the six months ended June 30, 2013 (in millions):

January 1
$
52.6

Payment of development milestone - QuantaLife
(6.0
)
Payment of development milestone - Cell sorting system
(7.5
)
Decrease in estimated fair value of contingent consideration included in Selling, general and administrative expense - QuantaLife
(1.3
)
June 30
$
37.8



The following table provides quantitative information about Level 3 inputs for fair value measurement of our contingent consideration liabilities as of June 30, 2013. Significant increases or decreases in these inputs in isolation could result in a significantly lower or higher fair value measurement.

13



 
 
 
Range
 
Valuation Technique
Unobservable Input
From
To
QuantaLife
Probability-weighted income approach
Sales milestones:
 
 
 
 
Credit adjusted discount rates
0.67%
1.03%
 
 
Probability of achieving sales
25.0%
75.0%
Cell sorting system
Probability-weighted income approach
Sales milestones:
 
 
 
 
Credit adjusted discount rates
1.0%
1.7%
 
 
Projected volatility of sales
18.0%
N/A
 
 
Market price of risk
1.4%
N/A
 
 
Development milestones:
 
 
 
 
Probability
100%
N/A
 
 
Risk-adjusted discount rate
1.0%
N/A

To estimate the fair value of Level 2 debt securities as of June 30, 2013, our primary pricing provider simplified its process during the first quarter of 2013 by eliminating certain pricing sources and established S&P Capital IQ as the primary pricing source. The new 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 June 30, 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 reasonableness testing of the S&P Capital IQ prices on a daily basis by comparing them to the prices reported by our custodian.
 
To estimate the fair value of Level 2 debt securities as of December 31, 2012, our primary pricing service relied on inputs from multiple industry-recognized pricing sources to determine the price for each investment. In addition, our pricing service performed reasonableness testing of their prices on a daily basis by comparing them to the prices reported by our custodians as well as prior day prices. If the price difference fell outside of predetermined tolerable levels, they investigated the cause and resolved the pricing issue. Based on a review of the results of this analysis, we utilized our primary pricing service for all Level 2 debt securities as none of these securities tested outside of the tolerable levels.

As of December 31, 2012, our primary pricing service inputs for Level 2 U.S. government sponsored agencies, municipal obligations, corporate and foreign government bonds, asset-backed securities and related cash equivalents consisted of market prices from a variety of industry standard data providers, security master files from large financial institutions and other third-party sources.  These multiple market prices were used by our primary pricing service as inputs into a distribution-curve based algorithm to determine the daily market value.

As of December 31, 2012, our primary pricing service inputs for Level 2 corporate debt securities (commercial paper), bank deposits and related cash equivalents consisted of dynamic and static security characteristics information obtained from several independent sources of security data.  The dynamic inputs such as credit rating, factor and variable-rate, were updated daily.  The static characteristics included inputs such as day count and first coupon upon initial security creation. These securities were typically priced utilizing mathematical calculations reliant on these observable inputs. Other available-for-sale foreign government obligations were based on indicative bids from market participants.

14





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

 
June 30, 2013
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Estimated
Fair
Value
Short-term investments:
 
 
 
 
 
 
 
Corporate debt securities
$
237.1

 
$
0.5

 
$
(0.9
)
 
$
236.7

Foreign brokered certificates of deposit
9.3

 

 

 
9.3

Municipal obligations
14.5

 

 
(0.2
)
 
14.3

Asset-backed securities
86.1

 
0.1

 
(0.5
)
 
85.7

U.S. government sponsored agencies
84.2

 
0.1

 
(0.1
)
 
84.2

Foreign government obligations
9.5

 

 

 
9.5

Marketable equity securities
25.0

 
2.8

 
(0.1
)
 
27.7

 
465.7

 
3.5

 
(1.8
)
 
467.4

Long-term investments:
 
 
 
 
 
 
 
Marketable equity securities
54.5

 
208.5

 
(0.1
)
 
262.9

Asset-backed securities
0.4

 

 
(0.1
)
 
0.3

 
54.9

 
208.5

 
(0.2
)
 
263.2

Total
$
520.6

 
$
212.0

 
$
(2.0
)
 
$
730.6



 
December 31, 2012
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Estimated
Fair
Value
Short-term investments:
 
 
 
 
 
 
 
Corporate debt securities
$
239.3

 
$
1.4

 
$
(0.1
)
 
$
240.6

Foreign brokered certificates of deposit
0.4

 

 

 
0.4

Municipal obligations
12.0

 
0.1

 

 
12.1

Asset-backed securities
81.6

 
0.4

 
(0.1
)
 
81.9

U.S. government sponsored agencies
92.5

 
0.3

 
(0.1
)
 
92.7

Foreign government obligations
5.4

 

 

 
5.4

Marketable equity securities
24.1

 
0.7

 
(0.2
)
 
24.6

 
455.3

 
2.9

 
(0.5
)
 
457.7

Long-term investments:
 
 
 
 
 
 
 
Marketable equity securities
54.5

 
163.0

 

 
217.5

Asset-backed securities
0.4

 

 
(0.1
)
 
0.3

Foreign government obligations
0.2

 

 

 
0.2

 
55.1

 
163.0

 
(0.1
)
 
218.0

Total
$
510.4

 
$
165.9

 
$
(0.6
)
 
$
675.7


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


15



 
June 30, 2013
 
December 31, 2012
Fair value of investments in a loss position 12 months or more
$
1.4

 
$
0.3

Fair value of investments in a loss position less than 12 months
$
179.0

 
$
99.0

Gross unrealized losses for investments in a loss position 12 months or more
$
0.1

 
$
0.1

Gross unrealized losses for investments in a loss position less than 12 months
$
1.9

 
$
0.5


The unrealized losses on these securities are due to a number of factors, including changes in interest rates, changes in economic conditions and changes in market outlook for various industries, among others.  Because Bio-Rad has the ability and intent to hold these investments with unrealized losses until a recovery of fair value, or for a reasonable period of time sufficient for a forecasted recovery of fair value, which may be maturity, we do not consider these investments to be other-than-temporarily impaired at June 30, 2013 or December 31, 2012.

Forward foreign exchange contracts: As part of distributing our products, we regularly enter into intercompany transactions.  We enter into forward foreign currency 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 related primarily to 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 June 30, 2013 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 unaudited interim Condensed Consolidated Statements of Income. The cash flows related to these contracts are classified as Cash flows from investing activities in the unaudited interim Condensed Consolidated Statements of Cash Flows.

The following is a summary of our forward foreign currency exchange contracts (in millions):
 
June 30,
 
2013
 
 
Contracts maturing in July through September 2013 to sell foreign currency:
 
Notional value
$
88.3

Unrealized gain
$
0.5

Contracts maturing in July through September 2013 to purchase foreign currency:
 
Notional value
$
408.1

Unrealized loss
$
(0.4
)

The following is a summary of the amortized cost and estimated fair value of our debt securities at June 30, 2013 by contractual maturity date (in millions):

 
Amortized
Cost
 
Estimated Fair
Value
Mature in less than one year
$
172.8

 
$
172.9

Mature in one to five years
194.8

 
194.7

Mature in more than five years
73.5

 
72.4

Total
$
441.1

 
$
440.0



16



The estimated fair value of financial instruments in the table below has been determined using quoted prices in active markets for identical instruments or other 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 assets include some financial instruments that have fair values based on market quotations.  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 our financial instruments and the level of the fair value hierarchy within which the fair value measurement is categorized are as follows (in millions):

 
June 30, 2013
 
December 31, 2012
 
Carrying 
Amount 
 
Estimated 
Fair 
Value 
 
Fair Value Hierarchy Level
 
Carrying 
Amount 
 
Estimated 
Fair 
Value 
 
Fair Value Hierarchy Level
Other assets
$
342.7

 
$
638.1

 
1
 
$
293.6

 
$
497.8

 
1
Total long-term debt, excluding leases and current maturities
$
720.4

 
$
731.7

 
2
 
$
720.0

 
$
778.4

 
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 June 30, 2013.  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.  In addition, the ordinary voting stock of Sartorius is thinly traded. Therefore, we account for this investment using the cost method.  The carrying value of this investment is included in Other assets in our Condensed Consolidated Balance Sheets.


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, 2013:
 
 
 
 
 
Goodwill
$
193.6

 
$
330.0

 
$
523.6

Accumulated impairment losses
(27.2
)
 
(1.0
)
 
(28.2
)
Goodwill, net
166.4

 
329.0

 
495.4

 
 
 
 
 
 
Acquisitions
14.9

 

 
14.9

Currency fluctuations
(0.3
)
 
(8.5
)
 
(8.8
)
 
 
 
 
 
 
Balances as of June 30, 2013:
 
 
 
 
 
Goodwill
208.2

 
321.5

 
529.7

Accumulated impairment losses
(27.2
)
 
(1.0
)
 
(28.2
)
Goodwill, net
$
181.0

 
$
320.5

 
$
501.5



17



In conjunction with the acquisition of 100% of the outstanding shares of AbD Serotec (see Note 2), we have recorded $14.9 million of goodwill and $44.0 million of definite-lived intangible assets: $33.0 million of developed product technology, $8.8 million of licenses, $1.3 million of customer relationships/lists, $0.4 million of tradenames and $0.5 million of other purchased intangibles. These amounts reflect certain immaterial measurement period adjustments recorded during the three months ended June 30, 2013.

Other than goodwill, we have no significant intangible assets with indefinite lives.  Information regarding our identifiable purchased intangible assets with definite lives is as follows (in millions):
 
June 30, 2013
 
Average
Remaining
Life (years)
 
Purchase
Price
 
Accumulated
Amortization
 
Net
Carrying
Amount
Customer relationships/lists
1-12
 
$
100.7

 
$
(40.9
)
 
$
59.8

Know how
2-12
 
186.3

 
(75.4
)
 
110.9

Developed product technology
1-14
 
105.1

 
(29.7
)
 
75.4

Licenses
1-13
 
44.2

 
(20.5
)
 
23.7

Tradenames
1-10
 
7.3

 
(4.5
)
 
2.8

Covenants not to compete
7-9
 
4.9

 
(0.5
)
 
4.4

Other
1
 
0.6

 
(0.3
)
 
0.3

 
 
 
$
449.1

 
$
(171.8
)
 
$
277.3


 
December 31, 2012
 
Average
Remaining
Life (years)
 
Purchase
Price
 
Accumulated
Amortization
 
Net
Carrying
Amount
Customer relationships/lists
1-12
 
$
102.8

 
$
(38.4
)
 
$
64.4

Know how
1-13
 
189.3

 
(67.1
)
 
122.2

Developed product technology
1-10
 
74.6

 
(25.1
)
 
49.5

Licenses
1-8
 
35.6

 
(18.7
)
 
16.9

Tradenames
1-10
 
7.4

 
(4.3
)
 
3.1

Covenants not to compete
1-10
 
4.9

 
(0.2
)
 
4.7

Other
1
 
0.1

 

 
0.1

 
 
 
$
414.7

 
$
(153.8
)
 
$
260.9


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

 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2013
 
2012
 
2013
 
2012
 
 
 
 
 
 
 
 
Amortization expense
$
11.1

 
$
10.7

 
$
22.2

 
$
21.5



18




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, 2013
$
16.4

Provision for warranty
3.8

Actual warranty costs
(4.7
)
June 30, 2013
$
15.5



6. LONG-TERM DEBT

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

 
June 30, 2013
 
December 31, 2012
 
 
 
 
8.0% Senior Subordinated Notes due 2016
$
297.3

 
$
296.9

4.875% Senior Notes due 2020
423.1

 
423.0

Capital leases and other debt
12.6

 
12.7

 
733.0

 
732.6

Less current maturities
(0.2
)
 
(0.2
)
Long-term debt
$
732.8

 
$
732.4


Amended and Restated Credit Agreement (Credit Agreement)

In June 2010, Bio-Rad entered into a $200.0 million Credit Agreement. Borrowings under the Credit Agreement are on a revolving basis and can be used for acquisitions, for working capital and for other general corporate purposes. We had no outstanding borrowings under the Credit Agreement as of June 30, 2013 or December 31, 2012. The Credit Agreement expires on June 21, 2014.

The Credit Agreement is secured by substantially all of our personal property assets, the assets of our domestic subsidiaries and 65% of the capital stock of certain of our foreign subsidiaries.  It is guaranteed by all of our existing and future material domestic subsidiaries.  The Credit Agreement and the Senior Subordinated Notes due 2016 require 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, create liens and prepay subordinated debt.  We were in compliance with all of these ratios and covenants as of June 30, 2013.


19




7.NONCONTROLLING INTERESTS

Activity in noncontrolling interests is as follows (in millions):

January 1, 2013
$
0.5

Net income attributable to noncontrolling interests

Purchase of noncontrolling interests
(0.6
)
Currency fluctuations
0.1

June 30, 2013
$


In February 2013, we acquired the remaining outstanding shares of Distribuidora de Analitica para Medicina Iberica S.A. (DiaMed Spain) from the remaining noncontrolling shareholder for approximately 0.6 million Euros or $0.9 million in cash. This acquisition was accounted for as an equity transaction, which reduced Bio-Rad's noncontrolling interests and additional paid-in capital by $0.6 million and $0.3 million, respectively.


8.    ACCUMULATED OTHER COMPREHENSIVE INCOME

Changes to Accumulated other comprehensive income components are shown in the following table:
 
Foreign currency translation adjustments
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
Balance at
January 1, 2013
$
173.3

$
(8.1
)
$
109.7

$
274.9

$
(0.2
)
$
274.7

Other comprehensive (loss) income, net of income taxes before reclassifications
(36.0
)
0.3

28.5

(7.2
)

(7.2
)
Amounts reclassified from Accumulated other comprehensive income
(0.2
)

(0.1
)
(0.3
)
0.2

(0.1
)
Net Other comprehensive (loss) income, net of income taxes
(36.2
)
0.3

28.4

(7.5
)
0.2

(7.3
)
Balance at
June 30, 2013
$
137.1

$
(7.8
)
$
138.1

$
267.4

$

$
267.4

 
 
 
 
 
 
 


Reclassifications from Accumulated other comprehensive income for the period ended June 30, 2013 are summarized in the following table:

20



Details about Accumulated other comprehensive income components
 
Amount reclassified from Accumulated other comprehensive income
 
Affected line item in the statement where net income is presented
 
 
 
 
 
Net holding gains on available-for-sale investments
 
$
(0.2
)
 
Other (income) expense, net
 
 
0.1

 
Income tax expense
 
 
 
 
$
(0.1
)
 
Net of income taxes
 
 
 
 
 
 
 
 
 

9.    EARNINGS PER SHARE

Basic earnings per share is computed by dividing net income attributable to Bio-Rad by the weighted average number of common shares outstanding for that period.  Diluted earnings 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 per share calculation if the effect of including such securities would be anti-dilutive.

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
 
Six Months Ended
 
June 30,
 
June 30,
 
2013
 
2012
 
2013
 
2012
Basic weighted average shares outstanding
28,538

 
28,250

 
28,516

 
28,226

Effect of potentially dilutive stock options and restricted stock awards
330

 
360

 
327

 
356

Diluted weighted average common shares
28,868

 
28,610

 
28,843

 
28,582

Anti-dilutive shares
92

 
91

 
92

 
93



10.    OTHER INCOME AND EXPENSE

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

 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2013
 
2012
 
2013
 
2012
Interest and investment income
$
(7.8
)
 
$
(5.9
)
 
$
(9.1
)
 
$
(6.9
)
Net realized gains on investments

 
(1.0
)
 
(0.2
)
 
(7.4
)
Miscellaneous other expense items, net
(0.8
)
 
0.2

 
(0.7
)
 
1.1

Other (income) expense, net
$
(8.6
)
 
$
(6.7
)
 
$
(10.0
)
 
$
(13.2
)


21




11.    INCOME TAXES

Our effective income tax rate was 27% and 26% for the three months ended June 30, 2013 and 2012, respectively. Our effective income tax rate was 23% and 29% for the first half of 2013 and 2012, respectively. The effective tax rate for the first half of 2013 reflected a significant tax benefit related to the 2012 U.S. federal research credit, which was retroactively reinstated on January 2, 2013. The effective income tax rates for the second quarter and first half of 2013 and 2012 were lower than the U.S. statutory rate primarily due to tax benefits from differences between U.S. and foreign statutory tax rates, and research and development tax credits. Our foreign taxes for all periods resulted primarily from taxable income earned in France and Switzerland. Switzerland's statutory tax rate is significantly lower than the U.S. statutory tax rate of 35%. Also, our effective tax rates for all periods were reduced by French tax incentives related to our research and development activities.
    
We file federal, state and foreign income tax returns in many jurisdictions in the United States and abroad. Our income tax returns are audited by federal, state and foreign tax authorities. We are currently under examination by the Internal Revenue Service (IRS) for the 2009 and 2010 tax years and by various state and foreign jurisdictions. 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 periodically evaluate our exposures associated with our tax filing positions.

As of June 30, 2013, 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 $2.4 million. Substantially all such amounts will impact our effective income tax rate.

We record liabilities 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.


12.    SEGMENT INFORMATION

Information regarding industry segments for the three months ended June 30, 2013 and 2012 is as follows (in millions):
 
 
Life
Science
 
Clinical
Diagnostics
 
Other
Operations
 
 
 
 
 
 
 
Segment net sales 
2013
$
170.4

 
$
351.5

 
$
3.4

 
2012
$
162.4

 
$
344.0

 
$
4.0

 
 
 
 
 
 
 
Segment (loss) profit
2013
$
(7.6
)
 
$
48.5

 
$
0.1

 
2012
$
5.4

 
$
55.4

 
$
0.8


Information regarding industry segments for the six months ended June 30, 2013 and 2012 is as follows (in millions):

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Life
Science
 
Clinical
Diagnostics
 
Other
Operations
 
 
 
 
 
 
 
Segment net sales 
2013
$
326.6

 
$
691.4

 
$
7.0

 
2012
$
317.2

 
$
671.2

 
$
8.3

 
 
 
 
 
 
 
Segment (loss) profit
2013
$
(20.4
)
 
$
84.6

 
$
0.2

 
2012
$
1.5

 
$
101.2

 
$
1.6



Segment results are presented in the same manner as we present our operations internally to make operating decisions and assess performance.  Net corporate operating expense 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.  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 before taxes (in millions):

 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2013
 
2012
 
2013
 
2012
Total segment profit
$
41.0

 
$
61.6

 
$
64.4

 
$
104.3

Foreign exchange losses, net
(0.9
)
 
(1.6
)
 
(2.4
)
 
(3.1
)
Net corporate operating, interest and other expense not allocated to segments
(1.0
)
 
(0.7
)
 
(1.9
)
 
(2.2
)
Other income (expense), net
8.6

 
6.7

 
10.0

 
13.2

Consolidated income before taxes
$
47.7

 
$
66.0

 
$
70.1

 
$
112.2



13.    LEGAL PROCEEDINGS

Based on an internal investigation, we identified conduct in certain of our overseas operations that may have violated the anti-bribery provisions of the United States Foreign Corrupt Practices Act (FCPA) and is likely to have violated the FCPA's books and records and internal controls provisions and our own internal policies.  In May 2010, we voluntarily disclosed these matters to the U.S. Department of Justice (DOJ) and the Securities and Exchange Commission (SEC), each of which commenced an investigation.  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.  We provided additional information to the DOJ and the SEC as the Audit Committee's investigation progressed. We continue to cooperate with the DOJ and SEC investigations and to provide information to them.

The DOJ and SEC investigations are continuing and we are presently unable to predict the duration, scope or results of these investigations or whether either agency will commence any legal actions.  The DOJ and the SEC have a broad range of civil and criminal sanctions under the FCPA and other laws and regulations including, but not limited to, injunctive relief, disgorgement, fines, penalties, modifications to business practices including the termination or modification of existing business relationships, the imposition of compliance programs and the retention of a monitor to oversee compliance with the FCPA.  We are unable to estimate the outcome of this matter. However, the imposition of any of these sanctions or remedial measures could have a material adverse effect on our business or financial condition.  We have not to date determined whether any of the activities in question violated the laws of the foreign jurisdictions in which they took place.


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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.

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, 2012 and this report for the three and six months ended June 30, 2013.

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 primary 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 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.  


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We are impacted by the support of many governments for both research and healthcare. The current global economic outlook is becoming increasingly uncertain as the need to control government social spending by many governments limits opportunities for growth. Approximately 33% of our year-to-date 2013 consolidated net sales are derived from the United States and approximately 67% are derived from international locations, with Europe being our largest region.  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 suffer 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.

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. These amounts reflect certain immaterial measurement period adjustments recorded during the second quarter of 2013. 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.

In August 2012, we acquired from Propel Labs, Inc. a new cell sorting system, an automated, easy-to-use benchtop cell sorting flow cytometer. This asset 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 fair value of the consideration as of the acquisition date was $49.6 million, which included $5.0 million paid in cash at the closing date and $44.6 million in contingent consideration related to the achievement of certain development and sales milestones valued at $19.9 million and $24.7 million, respectively, that could potentially be payable to Propel Labs' shareholders. The contingent consideration was recognized at its estimated fair value of $37.1 million as of June 30, 2013. The fair values of the net assets acquired from Propel Labs, Inc. as of the acquisition date were determined to be $17.4 million of goodwill, $32.1 million of definite-lived intangible assets and $0.1 million of net tangible assets. The acquired cell sorting system fits well into Bio-Rad's existing Life Science segment product offerings and may offer researchers greater access to this technology.

In July 2012, we acquired all of the outstanding shares of DiaMed Benelux for 4.6 million Euros (approximately $5.6 million) in cash. 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. We acquired net tangible liabilities with a fair value of $2.3 million and the fair values of the assets acquired as of the acquisition date were determined to be $3.0 million of goodwill and $4.9 million of definite-lived intangible assets. DiaMed Benelux became the exclusive distributor of certain Bio-Rad immunohematology products in the Benelux market as a result of our 2007 acquisition of DiaMed Holding AG. This distributor acquisition is consistent with our stated objective to control the distribution of our own products and services.

In January 2012, we purchased, for cash, certain assets from a raw material supplier for approximately $12.5 million. This asset 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 fair value of the assets acquired at the acquisition date was determined to be $6.3 million of net tangible assets, $5.1 million of intangible assets and $1.1 million of goodwill. In addition, we paid $2.0 million for employment agreements as an incentive to certain employees of the acquired business to remain with Bio-Rad. Such amount will be expensed over two years from the acquisition date and was recorded in Prepaid expenses, taxes and other current assets, and Other assets in our Condensed Consolidated Balance Sheet. We believe this acquisition will allow us to secure the supply of critical raw materials and lower our overall costs in the Clinical Diagnostics segment.

During the fourth quarter of 2011 we recognized a contingent consideration liability upon our acquisition of QuantaLife related to potential future payments due upon the achievement of certain sales and development milestones. The contingent consideration was initially recognized at its estimated fair value of $24.1 million, based

25



on a probability-weighted income approach. The contingent consideration was recognized at its estimated fair value of $0.7 million and $8.0 million as of June 30, 2013 and December 31, 2012, respectively. As of the acquisition date of October 4, 2011, total contingent consideration could have originally reached a maximum of $48 million upon the achievement of all sales milestones and a development milestone. As of June 30, 2013, the first five short-term sales milestones had not been met and therefore the contingent consideration can now only reach a maximum of $20 million upon the achievement of all the remaining sales milestones. The development milestone was met as of December 31, 2012, resulting in a payment of $6 million in January 2013.

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

 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2013
 
2012
 
2013
 
2012
Net sales
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
Cost of goods sold
42.9

 
43.6

 
44.2

 
43.2

Gross profit
57.1

 
56.4

 
55.8

 
56.8

Selling, general and administrative expense
37.2

 
31.8

 
37.2

 
33.5

Research and development expense
10.1

 
10.3

 
10.3

 
10.6

Net income attributable to Bio-Rad
6.6

 
9.5

 
5.3

 
8.0


Critical Accounting Policies and Estimates

As previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2012, 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 six months ended June 30, 2013 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, 2012.  For a full discussion of these policies and estimates, please refer to our Form 10-K for the period ended December 31, 2012 filed with the SEC.


Three Months Ended June 30, 2013 Compared to
Three Months Ended June 30, 2012

Results of Operations -- Sales, Margins and Expenses

Net sales (sales) for the second quarter of 2013 were $525.3 million compared to $510.4 million in the second quarter of 2012, an increase of 2.9%.  Excluding the impact of foreign currency, second quarter 2013 sales increased by approximately 4.0% compared to the same period in 2012.  Currency neutral sales growth was reflected in all three major regions, the Americas, Asia and Europe, especially in Asia that was led by China.

The Life Science segment sales for the second quarter of 2013 were $170.4 million, an increase of 4.9% compared to the same period last year.  On a currency neutral basis, sales increased 6.2% compared to the second quarter in 2012. The sales increase was primarily attributable to sales in the newly acquired AbD Serotec and our Droplet Digital™ PCR product line. Currency neutral sales grew in all three major regions, with the strongest growth in Europe.

26




The Clinical Diagnostics segment sales for the second quarter of 2013 were $351.5 million, an increase of 2.2% compared to the same period last year.  On a currency neutral basis, sales increased 3.2% compared to the second quarter in 2012.  Clinical Diagnostics had growth across most product lines on a currency neutral basis, most notably from diabetes, BioPlex® 2200 system and quality controls. Currency neutral sales growth was primarily in China, Asia Pacific and Latin America, while currency neutral sales in Western Europe declined.

Consolidated gross margins were 57.1% for the second quarter of 2013 compared to 56.4% for the second quarter of 2012.  Life Science segment gross margins for the second quarter of 2013 decreased by approximately 0.2 percentage points from the same period last year primarily due to acquisition accounting related step-up inventory and purchased intangibles amortization expense of $2.4 million related to the AbD Serotec and cell sorting system acquisitions, partially offset by lower royalty expense. The amortization expense related to these acquisitions will continue to negatively impact Life Science segment gross margins in comparison to the prior year periods for the remainder of the year. Clinical Diagnostics segment gross margins for the second quarter of 2013 increased by approximately 1.2 percentage points from the same period last year. The increase was primarily due to favorable product mix. Gross margins were partially offset by approximately 0.34% due to the excise tax on the sales of certain medical devices in the U.S. that went into effect in 2013. We accounted for this tax as a period cost in Cost of goods sold. Clinical Diagnostics segment gross margins in comparison to the prior year periods will continue to be negatively affected by the excise tax on the sales of certain medical devices in the U.S. for the remainder of the year.

Selling, general and administrative expenses (SG&A) represented 37.2% of sales for the second quarter of 2013 compared to 31.8% of sales for the second quarter of 2012.  Increases in SG&A expense relative to sales were primarily driven by:
employee-related expenses, our largest cost, associated with an increase in headcount that included acquisitions, and sales and sales support personnel in emerging markets,
a 2012 lower revaluation to the fair value of the QuantaLife contingent consideration of $8.1 million,
an increase in outside services as we placed in service during the second quarter of 2013 the first phase of a global single instance Enterprise Resource Planning (ERP) platform, moving to expense in the post-implementation/operation stage from capitalizing in the application development stage in the prior year period,
the second quarter of 2012 benefited from lower bad debt expense, primarily in Spain due to a large sum of payments by public agencies, causing us to revise our estimate for the allowance for doubtful accounts, and
an increase in software amortization due to the first phase of the ERP platform being placed in service.
  
Research and development expense increased to $53.2 million or 10.1% of sales in the second quarter of 2013 compared to $52.3 million or 10.3% of sales in the second quarter of 2012.  Life Science segment research and development expense decreased in the second quarter of 2013 from the prior year quarter primarily due to projects nearing completion. Clinical Diagnostics segment research and development expense increased in the second quarter of 2013 from the prior year period primarily due to a broadening of on-going development across a wider range of products.

Results of Operations – Non-operating

Interest expense for the second quarter of 2013 decreased by $0.7 million to $11.7 million compared to $12.4 million for the second quarter of 2012 primarily as a result of interest on back royalties in the second quarter of 2012.

Foreign currency exchange gains and losses consist 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 June 30, 2013 decreased compared to the prior year period primarily attributable to a favorable result of the estimating process inherent in the timing of shipments and payments, and lower costs to hedge.

27




Other (income) expense, net for the second quarter of 2013 increased to $8.6 million income compared to $6.7 million income for the second quarter of 2012 primarily due to higher dividend income from our holdings in Sartorius AG.

Our effective tax rate was 27% and 26% for the second quarter of 2013 and 2012, respectively. The effective tax rates for both periods were lower than the U.S. statutory rate primarily due to tax benefits from differences between U.S. and foreign statutory tax rates, and research and development tax credits. For the three months ended June 30, 2013 and 2012, our foreign taxes resulted primarily from taxable income earned in France and Switzerland. Switzerland's statutory tax rate is significantly lower than the U.S. statutory tax rate of 35%. Also, our effective tax rates for the second quarter of 2013 and 2012 were reduced by French tax incentives related to our research and development activities.

We file federal, state and foreign income tax returns in many jurisdictions in the United States and abroad. Our income tax returns are audited by federal, state and foreign tax authorities. We are currently under examination by the Internal Revenue Service (IRS) for the 2009 and 2010 tax years and by various state and foreign jurisdictions. 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 periodically evaluate our exposures associated with our tax filing positions.

As of June 30, 2013, 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 $2.4 million. Substantially all such amounts will impact our effective income tax rate.

We record liabilities 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.
  
Our effective tax rate may be impacted in the future, either favorably or unfavorably, by many factors including, but not limited to, changes to statutory tax rates, changes in tax laws or regulations, tax audits and settlements, and the generation of tax credits.


Six Months Ended June 30, 2013 Compared to
Six Months Ended June 30, 2012

Results of Operations -- Sales, Margins and Expenses

Net sales (sales) for the first half of 2013 were $1,025.0 million compared to $996.7 million for the first half of 2012, an increase of 2.8%.  Excluding the impact of foreign currency, the first half of 2013 sales increased by approximately 3.8% compared to the same period in 2012.  Currency neutral sales growth was reflected in most regions, primarily in the Pacific Rim, the Americas and the emerging markets of Eastern Europe, while currency neutral sales in Western Europe decreased.

The Life Science segment sales for the first half of 2013 were $326.6 million, an increase of 3.0% compared to the same period last year.  On a currency neutral basis, sales increased 4.4% compared to the first half of 2012. The sales increase was primarily driven by sales from the newly acquired AbD Serotec and our Droplet Digital™ PCR product line. Currency neutral sales increased in most regions except for a slight decrease in Asia.

The Clinical Diagnostics segment sales for the first half of 2013 were $691.4 million, an increase of 3.0% compared to the same period last year.  On a currency neutral basis, sales increased 3.8% compared to the first half

28



of 2012.  Clinical Diagnostics had growth across most product lines on a currency neutral basis, most notably from quality controls, diabetes and BioPlex® 2200 system. Currency neutral sales growth was primarily in Eastern Europe, China, Asia Pacific and the U.S., while currency neutral sales in Western Europe declined.

Consolidated gross margins were 55.8% for the first half of 2013 compared to 56.8% for the same period last year. Life Science segment gross margins for the first half of 2013 decreased by approximately 2.0 percentage points from the same period last year primarily due to acquisition accounting related step-up inventory and purchased intangibles amortization expense of $4.2 million related to the AbD Serotec and cell sorting system acquisitions. The amortization expense related to these acquisitions will continue to negatively impact Life Science segment gross margins in comparison to the prior year periods for the remainder of the year. Clinical Diagnostics segment gross margins for the first half of 2013 decreased by approximately 0.6 percentage points from the same period last year. The decrease was primarily due to some large low margin tenders, a less favorable product mix, and an increase in obsolescence charges, license expense and warranty costs. Gross margins also decreased by approximately 0.35% due to the excise tax on the sales of certain medical devices in the U.S. that went into effect in 2013, which we accounted for as a period cost in Cost of goods sold. Clinical Diagnostics segment gross margins in the first half of 2012 included a foreign supplemental tax associated with social benefits of $4.1 million.

Selling, general and administrative expenses (SG&A) represented 37.2% of sales for the first half of 2013 compared to 33.5% of sales for the first half of 2012.  Increases in SG&A expense relative to sales were primarily driven by:
employee-related expenses, our largest cost, associated with an increase in headcount that included acquisitions and sales and sales support personnel in emerging markets,
an increase in outside services as we placed in service during the second quarter of 2013 the first phase of a global single instance ERP platform, moving to expense in the post-implementation/operation stage from capitalizing in the application development stage in the prior year period,
a 2012 lower revaluation to the fair value of the QuantaLife contingent consideration of $7.5 million,
the first half of 2012 benefited from lower bad debt expense, primarily in Spain due to a large sum of payments by public agencies, causing us to revise our estimate for the allowance for doubtful accounts, and
an increase in software amortization due to the first phase of the ERP platform being placed in service.

Research and development expense was unchanged at $105.2 million or 10.3% of sales in the first half of 2013 compared to $105.3 million or 10.6% of sales in the first half of 2012.  Life Science segment research and development expense decreased in the first half of 2013 from the prior year period primarily due to projects nearing completion. Clinical Diagnostics segment research and development expense increased in the first half of 2013 from the prior year period primarily due to a broadening of on-going development across a wider range of products.

Results of Operations – Non-operating

Interest expense for the first half of 2013 decreased by $3.0 million to $22.6 million compared to $25.6 million for the first half of 2012 primarily due to estimated interest expense of $1.2 million included in the first quarter of 2012 that was associated with a foreign supplemental tax related to social benefits, and interest on back royalties in the first half of 2012.

Foreign currency exchange gains and losses consist 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 half of 2013 decreased compared to the same period last year primarily attributable to lower costs to hedge, partially offset by an unfavorable result of the estimating process inherent in the timing of shipments and payments.

Other (income) expense, net for the first half of 2013 decreased to $10.0 million income compared to $13.2 million income for the first half of 2012 primarily due to higher realized gains associated with the sale of equity investments in the first half of 2012.


29



Our effective tax rate was 23% and 29% for the first half of 2013 and 2012, respectively. The first half of 2013 reflected a significant tax benefit related to the 2012 U.S. federal research credit, which was retroactively reinstated on January 2, 2013. The effective tax rates for both periods were lower than the U.S. statutory rate primarily due to tax benefits from differences between U.S. and foreign statutory tax rates, and research and development tax credits. For the first half of 2013 and 2012, our foreign taxes resulted primarily from taxable income earned in France and Switzerland. Switzerland's statutory tax rate is significantly lower than the U.S. statutory tax rate of 35%. Also, our effective tax rates for the first half of 2013 and 2012 were reduced by French tax incentives related to our research and development activities.
  
Our effective tax rate may be impacted in the future, either favorably or unfavorably, by many factors including, but not limited to, changes to statutory tax rates, changes in tax laws or regulations, tax audits and settlements, and the generation of tax credits.


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 expenditure, 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 Amended and Restated Credit Agreement (Credit Agreement) that we entered into in June 2010.  Borrowings under the Credit Agreement are on a revolving basis and can be used to make acquisitions, for working capital and for other general corporate purposes.  We had no outstanding borrowings under the Credit Agreement as of June 30, 2013.  The Credit Agreement expires on June 21, 2014.

At June 30, 2013, we had $834.4 million in cash, cash equivalents and short-term investments, of which approximately 23% 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-development 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 domestic and international lines of credit, we had $219.2 million available for borrowing as of June 30, 2013, of which $11.2 million is reserved for standby letters of credit issued by our banks to guarantee 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.

The continuing slow economic growth in developed nations, including sequestration in the U.S., may adversely affect our future results of operations. 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 June 30, 2013 and December 31, 2012, we had accounts

30



receivable, net of allowance for doubtful accounts, in Spain, Italy, Greece and Portugal of $68.1 million and $64.8 million, respectively.

The instability in credit markets along with inadequate capitalization in some parts of the financial services industry could impact both our ability and 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 $39.2 million and $108.9 million for the six months ended June 30, 2013 and 2012, respectively.  The decrease in cash flows primarily resulted from:
higher cash paid to suppliers and employees, mostly due to higher bonus payments than the prior year and an increase in headcount that included acquisitions and sales and sales support personnel in emerging markets,
an increase in outside services as we placed in service during the second quarter of 2013 the first phase of a global single instance ERP platform, moving to expense in the post-implementation/operation stage from capitalizing in the application development stage in the prior year period,
a slowdown in domestic collections in relation to the ERP transition,
2012 benefited from an approximately $20 million payment of Spanish receivables, and
a settlement for a royalties audit of $12 million,
slightly offset by lower income tax payments.

Cash Flows from Investing Activities

Capital expenditures totaled $58.6 million and $75.7 million for the six months ended June 30, 2013 and 2012, 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 lower for the six months ended June 30, 2013 compared to the same period last year as we placed in service the first phase of a global single instance ERP platform and moved to expense for the post-implementation/operation stage from capitalization for the application development stage in the prior year period. However, as we continue to implement more phases of the ERP platform and expand our e-commerce platform, we expect capital expenditures to increase and continue to remain historically higher for the next four years or more. The estimated global implementation cost for the single instance ERP platform could reach up to $200 million and is estimated to take approximately four or more years to fully implement.  

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.

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. These amounts reflect certain immaterial measurement period adjustments recorded during the second quarter of 2013. 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.


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In January 2012, we purchased, for cash, certain assets from a raw material supplier for approximately $12.5 million. This asset acquisition was accounted for as a business combination and is included in the Clinical Diagnostics segment's results of operations from the acquisition date. The fair value of the assets acquired at the acquisition date was determined to be $6.3 million of net tangible assets, $5.1 million of intangible assets and $1.1 million of goodwill. In addition, we paid $2.0 million for employment agreements as an incentive to certain employees of the acquired business to remain with Bio-Rad. Such amount will be expensed over two years from the acquisition date and was recorded in Prepaid expenses, taxes and other current assets, and Other assets in our accompanying Condensed Consolidated Balance Sheet. We believe this acquisition will allow us to secure the supply of critical raw materials and lower our overall costs in the Clinical Diagnostics segment.
 
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.

Cash Flows from Financing Activities

Net cash provided by financing activities was $6.9 million and $6.5 million for the six months ended June 30, 2013 and 2012, respectively. Cash provided by financing activities was higher in 2013 primarily due to higher proceeds from the issuance of common stock. 

We have outstanding Senior Notes of $425 million and Senior Subordinated Notes of $300 million, which are not due until 2020 and 2016, respectively. We have the option to redeem any or all of the Senior Subordinated Notes of $300 million at any time on or after September 15, 2013. Redemption without replacing this borrowing would result in less cash, cash equivalents and short-term borrowings, which would still be sufficient to meet normal operating costs, and funding for research and development of new products, as well as routine outflows of capital expenditure, interest and taxes.

The Credit Agreement that was entered into in June 2010, is secured by substantially all of our personal property assets, the assets of our domestic subsidiaries and 65% of the capital stock of certain foreign subsidiaries. It is guaranteed by all of our existing and future material domestic subsidiaries and expires in June 2014.

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 June 30, 2013. The Credit Agreement and the indenture governing our 8.0% Senior Subordinated Notes due 2016 limit our ability to repurchase our stock. In accordance with the terms of awards under the 2007 Incentive Award Plan, in June 2012, we withheld 122 shares of our Class A common stock and 917 shares of our Class B common stock to satisfy tax obligations due upon the vesting of restricted stock of certain of our employees, which is considered a repurchase of our stock. We had no other repurchases of our stock during the first six months of 2013 or 2012.
 

Recent Accounting Standards Updates

In February 2013, the Financial Accounting Standards Board (FASB) issued guidance requiring that companies present either in a single note or parenthetically on the face of the financial statements, the effect of significant amounts reclassified from each component of accumulated other comprehensive income based on its source and the income statement line items affected by the reclassification. If a component is not required to be reclassified to net income in its entirety, companies would instead cross reference to the related footnote for additional information. We adopted this guidance as of January 1, 2013 and present it in a single note.


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Item 3. Quantitative and Qualitative Disclosures about Market Risk

During the six months ended June 30, 2013, there have been no material changes from the disclosures about market risk provided in our Annual Report on Form 10-K for the year ended December 31, 2012.


Item 4. Controls and Procedures

Disclosure Controls and Procedures

At December 31, 2012, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures.  Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that, although our disclosure controls and procedures were generally effective in timely alerting them to material information relating to us and our consolidated subsidiaries required to be disclosed in the reports we file and submit under the Securities Exchange Act of 1934, as amended (the Exchange Act), our disclosure controls and procedures were not effective at the reasonable assurance level due to a material weakness in our internal control over financial reporting (a “material weakness”) as such term is defined in Rule 13a-15(f) under the Exchange Act. We describe that material weakness below.

We discovered the material weakness in connection with the assessment of the effectiveness of internal control over financial reporting and the preparation of our financial statements as of December 31, 2012. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. The key elements constituting the material weakness were significant deficiencies in controls over our financial reporting as of December 31, 2012, which continue as of June 30, 2013, with respect to our accounting close, revenue recognition, reagent rental and expenditure processes. These significant deficiencies, when aggregated, constitute a material weakness as of June 30, 2013. A significant deficiency is defined as a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of our financial reporting (a “significant deficiency”).

The four significant deficiencies that we identified at December 31, 2012 in our internal control over financial reporting that remain at June 30, 2013 are as follows:

Inadequate Accounting Close Process including:
Our failure to review and adjust a contingency accrual with respect to royalties owed to a third party in a timely manner;
Inadequate supporting documentation for certain key transactions and account reconciliations at some of our foreign locations; and
Our lack of adequate financial statement review at our German subsidiary.

Inadequate Revenue Recognition Process including:
The unauthorized issuance of distributor contracts at our Chinese subsidiary;
Our lack of controls over pricing and our ineffective methods of analyzing credit risk; and
In some instances, the lack of sufficient documentation for the timing of revenue recognition.


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Inadequate Reagent Rental Process at Certain of Our International Subsidiaries including:
Our failure to provide management review of reagent rental agreements;
Our failure to monitor ongoing compliance with agreement terms; and
Our lack of timely reconciliations of our reagent rental equipment.

Inadequate Expenditure Controls at our German Subsidiary including:
Our lack of compliance with controls for vendor management and transaction approvals; and
Insufficient segregation of duties.

In addition, during the quarter ended March 31, 2013, management identified errors in the reporting of the Consolidated Statements of Other Comprehensive Income for the years ended in 2010, 2011 and 2012 and in the unaudited interim Condensed Consolidated Statements of Comprehensive Income for all three quarters of 2012, which affected two line items (see “Correction of Immaterial Errors Associated with the Presentation and Disclosure of the Statements of Comprehensive Income” in Note 1 to the Condensed Consolidated Financial Statements). While these errors resulted in no change in Other comprehensive income, net of tax, we determined that they were the result of a control deficiency in our financial reporting process that constituted a significant deficiency in our internal control over financial reporting. Remediation for this item continues and will be included in our enhanced spreadsheet controls, which is currently part of our overall remediation efforts. We have made changes in our financial reporting process in order to correctly calculate these values.

With the oversight of senior management and our audit committee, we have begun taking steps and plan to take additional measures to remediate the underlying causes of the material weakness, primarily through the development and implementation of improved controls, processes and procedures. While our remediation efforts are in process, they have not been completed. Accordingly, our management has concluded that the material weakness still exists as of June 30, 2013.

We cannot assure you that we will be able to remediate these significant deficiencies and the resulting material weakness or that additional significant deficiencies or material weaknesses in our internal control over financial reporting will not be identified in the future. Any failure to maintain or implement new or improved internal controls, or any difficulties that we may encounter in their maintenance or implementation, could result in additional significant deficiencies or material weaknesses, result in material misstatements in our financial statements and cause us to fail to meet our reporting obligations, which in turn could cause the trading price of our common stock to decline.

Changes to Internal Control Over Financial Reporting

Other than the changes discussed above, we identified no changes in our internal control over financial reporting that occurred during our quarter ended June 30, 2013 that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting. We are utilizing the Committee of Sponsoring Organizations of the Treadway Commission (COSO) 1992 Framework on internal control.



PART II – OTHER INFORMATION

Item 1. Legal Proceedings

See Note 13, “Legal Proceedings” in the Notes to Condensed Consolidated Financial Statements of Part 1, Item 1 of this Form 10-Q.

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Item 1A. Risk Factors

The ongoing investigation by government agencies of possible violations by us of the United States Foreign Corrupt Practices Act and similar laws could have a material adverse effect on our business.

Based on an internal investigation, we identified conduct in certain of our overseas operations that may have violated the anti-bribery provisions of the United States Foreign Corrupt Practices Act (FCPA) and is likely to have violated the FCPA's books and records and internal controls provisions and our own internal policies.  In May 2010, we voluntarily disclosed these matters to the U.S. Department of Justice (DOJ) and the Securities and Exchange Commission (SEC), each of which commenced an investigation.  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.  We provided additional information to the DOJ and the SEC as the Audit Committee's investigation progressed. We continue to cooperate with the DOJ and SEC investigations and to provide information to them.

The DOJ and SEC investigations are continuing and we are presently unable to predict the duration, scope or results of these investigations or whether either agency will commence any legal actions.  The DOJ and the SEC have a broad range of civil and criminal sanctions under the FCPA and other laws and regulations including, but not limited to, injunctive relief, disgorgement, fines, penalties, modifications to business practices including the termination or modification of existing business relationships, the imposition of compliance programs and the retention of a monitor to oversee compliance with the FCPA.  We are unable to estimate the outcome of this matter. However, the imposition of any of these sanctions or remedial measures could have a material adverse effect on our business, including our results of operations, cash balance and credit rates. We have not to date determined whether any of the activities in question violated the laws of the foreign jurisdictions in which they took place.

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.

We have not completed our actions to remediate previously identified significant deficiencies in our internal control over financial reporting that, when aggregated, constitute a material weakness in our internal control over financial reporting as of June 30, 2013. Our failure to establish and maintain effective internal control over financial reporting could result in our failure to meet our reporting obligations and cause investors to lose confidence in our reported financial information, which in turn could cause the trading price of our common stock to decline.

In connection with our assessment of the effectiveness of internal control over financial reporting and the preparation of our financial statements for the year ended December 31, 2012, our management identified four significant deficiencies in our internal control over financial reporting which continue as of June 30, 2013. These significant deficiencies, when aggregated, continue to constitute a material weakness in our internal control over financial reporting as of June 30, 2013. A significant deficiency is defined as a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness, yet important

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enough to merit attention by those responsible for oversight of our financial reporting. A material weakness is defined as a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.

The four significant deficiencies that we identified are the result of: (i) an inadequate accounting close process, including our failure to review and adjust a contingency accrual with respect to royalties owed to a third party in a timely manner, inadequate supporting documentation for certain key transactions and account reconciliations at some of our foreign locations, and our lack of adequate financial statement review at our German subsidiary; (ii) an inadequate revenue recognition process, including the unauthorized execution of distributor contracts at our Chinese subsidiary, our lack of controls over pricing and our ineffective methods of analyzing credit risk, and in some instances, the lack of sufficient documentation for the timing of revenue recognition; (iii) an inadequate reagent rental process at certain of our international subsidiaries, including our failure to provide management review of reagent rental agreements, our failure to monitor ongoing compliance with agreement terms, and our lack of timely reconciliations of our reagent rental equipment; and (iv) inadequate expenditure controls at our German subsidiary, including our lack of compliance with controls for vendor management and transaction approvals, and insufficient segregation of duties.

In addition, during the quarter ended March 31, 2013, management identified errors in the reporting of the Consolidated Statements of Other Comprehensive Income for the years ended in 2010, 2011 and 2012 and in the unaudited interim Condensed Consolidated Statements of Comprehensive Income for all three quarters of 2012, which affected two line items (see “Correction of Immaterial Errors Associated with the Presentation and Disclosure of the Statements of Comprehensive Income” in Note 1 to the Condensed Consolidated Financial Statements). While these errors resulted in no change in Other comprehensive income, net of tax, we determined that they were the result of a control deficiency in our financial reporting process that constituted a significant deficiency in our internal control over financial reporting. Remediation for this item continues and will be included in our enhanced spreadsheet controls, which is currently part of our overall remediation efforts. We have made changes in our financial reporting process in order to correctly calculate these values.

We