10Q 9.30.13 R


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

FORM 10-Q
(Mark One)
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 November 4, 2013
Class A Common Stock, Par Value $0.0001 per share
 
23,605,496
Class B Common Stock, Par Value $0.0001 per share
 
5,089,371
 




BIO-RAD LABORATORIES, INC.

FORM 10-Q SEPTEMBER 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)
 
September 30, 2013
 
December 31, 2012
ASSETS:
 (Unaudited)
 
 
Cash and cash equivalents
$
291,793

 
$
463,388

Short-term investments
270,027

 
457,685

Accounts receivable, net
383,471

 
398,739

Inventories:
 
 
 
Raw materials
105,246

 
93,009

Work in process
132,111

 
124,737

Finished goods
286,146

 
237,374

Total inventories
523,503

 
455,120

Prepaid expenses
131,357

 
92,489

Other current assets
74,392

 
69,261

Total current assets
1,674,543

 
1,936,682

Property, plant and equipment, at cost
1,065,684

 
1,012,034

Less: accumulated depreciation and amortization
(640,608
)
 
(595,096
)
Property, plant and equipment, net
425,076

 
416,938

Goodwill, net
513,705

 
495,418

Purchased intangibles, net
276,054

 
260,939

Other investments
354,733

 
293,613

Other assets
36,297

 
39,913

Total assets
$
3,280,408

 
$
3,443,503

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY:
 
 
 
Accounts payable
$
131,899

 
$
130,867

Accrued payroll and employee benefits
133,218

 
135,955

Notes payable and current maturities of long-term debt
1,705

 
1,750

Income and other taxes payable
32,424

 
34,779

Accrued royalties
19,860

 
29,718

Other current liabilities
143,779

 
139,331

Total current liabilities
462,885

 
472,400

Long-term debt, net of current maturities
435,541

 
732,414

Other long-term liabilities
257,742

 
223,149

Total liabilities
1,156,168

 
1,427,963

 
 
 
 
Stockholders’ equity:
 
 
 
Bio-Rad stockholders’ equity:
 
 
 
Class A common stock, shares issued 23,578,766 and 23,332,532 at 2013 and 2012, respectively; shares outstanding 23,578,644 and 23,332,410 at 2013 and 2012, respectively
2

 
2

Class B common stock, shares issued 5,087,888 and 5,149,771 at 2013 and 2012, respectively; shares outstanding 5,086,971 and 5,148,854 at 2013 and 2012, respectively
1

 
1

Additional paid-in capital
232,031

 
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
1,575,981

 
1,528,327

Accumulated other comprehensive income
316,326

 
274,532

Total Bio-Rad stockholders’ equity
2,124,240

 
2,015,005

Noncontrolling interests

 
535

Total stockholders’ equity
2,124,240

 
2,015,540

Total liabilities and stockholders’ equity
$
3,280,408

 
$
3,443,503

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

3



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

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2013
 
2012
 
2013
 
2012
 
 
 
 
 
 
 
 
Net sales
$
505,066

 
$
498,697

 
$
1,530,059

 
$
1,495,396

Cost of goods sold
220,850

 
224,927

 
674,330

 
654,784

Gross profit
284,216

 
273,770

 
855,729

 
840,612

Selling, general and administrative expense
202,238

 
160,134

 
583,486

 
492,913

Research and development expense
52,920

 
47,795

 
155,104

 
150,637

Income from operations
29,058

 
65,841

 
117,139

 
197,062

Interest expense
31,611

 
11,901

 
54,252

 
37,498

Foreign exchange losses, net
3,330

 
448

 
5,723

 
3,508

Other (income) expense, net
(667
)
 
(1,511
)
 
(10,711
)
 
(14,692
)
(Loss) income before income taxes
(5,216
)
 
55,003

 
67,875

 
170,748

Provision for income taxes
(1,883
)
 
(12,383
)
 
(20,200
)
 
(48,375
)
Net (loss) income including noncontrolling interests 
(7,099
)
 
42,620

 
47,675

 
122,373

Net (income) loss attributable to noncontrolling interests

 
13

 
(21
)
 
(148
)
Net (loss) income attributable to Bio-Rad
$
(7,099
)
 
$
42,633

 
$
47,654

 
$
122,225

 
 
 
 
 
 
 
 
Basic (loss) earnings per share:
 
 
 
 
 
 
 
Net (loss) income per basic share attributable to Bio-Rad
$
(0.25
)
 
$
1.51

 
$
1.67

 
$
4.33

Weighted average common shares - basic
28,603

 
28,312

 
28,545

 
28,255

 
 
 
 
 
 
 
 
Diluted (loss) earnings per share:
 
 
 
 
 
 
 
Net (loss) income per diluted share attributable to Bio-Rad
$
(0.25
)
 
$
1.49

 
$
1.65

 
$
4.27

Weighted average common shares - diluted
28,603

 
28,645

 
28,870

 
28,609



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
 
Nine Months Ended
 
September 30,
 
September 30,
 
2013
 
2012
 
2013
 
2012
Net (loss) income including noncontrolling interests
$
(7,099
)
 
$
42,620

 
$
47,675

 
$
122,373

Other comprehensive income:
 
 
 
 
 
 
 
Foreign currency translation adjustments
41,037

 
14,218

 
5,078

 
2,568

Reclassification of realized portion of cumulative translation adjustments due to liquidation, for the nine months ended September 30, 2012, net of income taxes of $0.

 

 

 
70

Other post-employment benefits adjustments, all net of income taxes of $0.
(246
)
 
35

 
45

 
216

Net unrealized holding gains on available-for-sale (AFS) investments, net of income taxes of $4.8 million and $12.2 million for the three months ended September 30, 2013 and 2012, respectively, and $21.4 million and $30.4 million for the nine months ended September 30, 2013 and 2012, respectively.
8,216

 
21,023

 
36,688

 
52,219

Reclassification adjustments for net holding losses (gains) on AFS investments included in Net income including noncontrolling interests, net of income taxes of $0.2 million and $(0.4) million for the three months ended September 30, 2013 and 2012, respectively, and $0.1 million and $(2.9) million for the nine months ended September 30, 2013 and 2012, respectively.
294

 
(719
)
 
147

 
(4,973
)
Other comprehensive income, net of income taxes
49,301

 
34,557

 
41,958

 
50,100

Comprehensive income
42,202

 
77,177

 
89,633

 
172,473

Comprehensive loss (income) attributable to noncontrolling interests

 
4

 
(185
)
 
(155
)
Comprehensive income attributable to Bio-Rad
$
42,202

 
$
77,181

 
$
89,448

 
$
172,318



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)
 
Nine Months Ended
 
September 30,
 
2013
 
2012
Cash flows from operating activities:
 
 
 
Cash received from customers
$
1,531,251

 
$
1,512,991

Cash paid to suppliers and employees
(1,331,426
)
 
(1,227,911
)
Interest paid
(50,188
)
 
(35,929
)
Income tax payments
(59,720
)
 
(77,411
)
Investment proceeds and miscellaneous receipts, net
12,926

 
9,429

Excess tax benefits from share-based compensation
(808
)
 
(925
)
Net cash provided by operating activities
102,035

 
180,244

Cash flows from investing activities:
 
 
 
Capital expenditures
(83,356
)
 
(112,366
)
Proceeds from dispositions of property, plant and equipment
1,252

 
231

Payments for acquisitions, net of cash received, and long-term investments
(68,510
)
 
(38,479
)
Payments for purchases of intangible assets
(500
)
 
(1,724
)
Payments for purchases of marketable securities and investments
(325,036
)
 
(547,529
)
Proceeds from sales of marketable securities and investments
277,389

 
89,371

Proceeds from maturities of marketable securities and investments
234,707

 
271,150

Proceeds from (payments for) forward foreign exchange contracts, net
969

 
(1,418
)
Net cash provided by (used in) investing activities
36,915

 
(340,764
)
Cash flows from financing activities:
 
 
 
Net payments on line-of-credit arrangements and notes payable
(18
)
 
(213
)
Payments on long-term borrowings
(300,178
)
 
(496
)
Payments of contingent consideration
(25,474
)
 

Proceeds from issuance of common stock
9,397

 
8,958

Purchase of treasury stock

 
(101
)
Excess tax benefits from share-based compensation
808

 
925

Net cash (used in) provided by financing activities
(315,465
)
 
9,073

Effect of foreign exchange rate changes on cash
4,920

 
3,673

Net decrease in cash and cash equivalents
(171,595
)
 
(147,774
)
Cash and cash equivalents at beginning of period
463,388

 
574,231

Cash and cash equivalents at end of period
$
291,793

 
$
426,457

Reconciliation of net income including noncontrolling interests to net cash provided by operating activities:
 
 
 
Net income including noncontrolling interests
$
47,675

 
$
122,373

Adjustments to reconcile net income including noncontrolling interests to net cash provided by operating activities excluding the effects of acquisitions:
 
 
 
Depreciation and amortization
105,181

 
94,885

Share-based compensation
9,894

 
9,248

Forward foreign exchange contracts, net
(969
)
 
1,418

Losses (gains) on dispositions of securities
408

 
(7,515
)
Excess tax benefits from share-based compensation
(808
)
 
(925
)
Changes in fair value of contingent consideration
(1,347
)
 
(15,984
)
Decrease in accounts receivable
14,803

 
24,880

Increase in inventories
(57,162
)
 
(18,979
)
Increase in other current assets
(5,748
)
 
(4,367
)
Increase (decrease) in accounts payable and other current liabilities
19,272

 
(5,916
)
Decrease in income taxes payable
(30,710
)
 
(26,719
)
Net increase in other long-term liabilities
1,546

 
7,845

Net cash provided by operating activities
$
102,035

 
$
180,244

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

6



BIO-RAD LABORATORIES, INC

Notes to Condensed Consolidated Financial Statements
(Unaudited)

1.BASIS OF PRESENTATION AND USE OF ESTIMATES

Basis of Presentation

In this report, “Bio-Rad,” “we,” “us,” "the Company" and “our” refer to Bio-Rad Laboratories, Inc. and its subsidiaries.  The accompanying unaudited condensed consolidated financial statements of Bio-Rad have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) and reflect all adjustments which are, in the opinion of management, necessary to fairly state the results of the interim periods presented.  All such adjustments are of a normal recurring nature, with the exception to the adjustments noted below.  Results for the interim period are not necessarily indicative of the results for the entire year.  The condensed consolidated balance sheet at December 31, 2012 has been derived from the audited consolidated financial statements (and taking into account the corrections and reclassification discussed below) 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, AND RECLASSIFICATION OF CERTAIN AMOUNTS

Inventory Costing

During the third quarter of 2013, we identified errors in the consolidated financial statements for the years 2008 through 2012 (and for all interim periods therein) and in the unaudited interim condensed consolidated financial statements for the three month periods ended March 31, 2013 and June 30, 2013, related to the valuation of finished goods inventory in our Life Science segment. We were expensing inventory in amounts greater than actual costs for non-sales transactions, such as expensed inventory used for demonstration purposes and product samples.

The effect of correcting these errors in 2008, 2009, 2010, 2011, 2012, and for the three and nine months ended September 30, 2012 consolidated financial statements were increases to net income of $0.6 million, $0.8 million, $0.7 million, $0.8 million, $1.3 million, $0.3 million and $1.0 million, respectively.



7



Research and Development (R&D) Credit

During the third quarter of 2013, we revised the classification of certain amounts for all periods presented from “Provision for income taxes” to “Research and development expense” in our Consolidated Statements of Operations to conform to the current year presentation. The amounts reclassified pertain to a refundable French R&D tax credit, which after the reclassification reduces Research and development expense. The effect of the reclassifications from Provision for income taxes to Research and development expense for 2010, 2011, 2012, and for the three and nine months ended September 30, 2012 was $5.8 million, $8.8 million, $4.8 million, $1.2 million and $3.6 million, respectively.

Following are the amounts in thousands that should have been reported for the Consolidated Statements of Operations giving effect to the errors and the reclassification described above:

 
Three Months Ended
 
Nine Months Ended
 
Year Ended December 31,
 
September 30, 2012
 
September 30, 2012
 
2012
2011
2010
 
 
 
 
 
 
 
 
Cost of goods sold
$
224,927

 
$
654,784

 
$
914,077

$
894,700

$
835,310

Selling, general and administrative expense
$
160,134

 
$
492,913

 
$
681,778

$
695,984

$
634,413

Research and development expense
$
47,795

 
$
150,637

 
$
209,204

$
177,604

$
166,486

Provision for income taxes
$
12,383

 
$
48,375

 
$
64,729

$
67,034

$
39,533


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 Consolidated Statements of Comprehensive Income giving effect to the errors described above:


8



 
Three Months Ended
 
Nine Months Ended
 
Year Ended December 31,
 
September 30, 2012
 
September 30, 2012
 
2012
2011
2010
 
 
 
 
 
 
 
 
Net unrealized holding gains on AFS investments, net of income tax; understated by $1,438, $9,946, $10,090 and $770 for the three and nine months ended September 30, 2012, and for the years ended 2012 and 2010, respectively, and overstated by $208 for the year ended 2011.
$21,023
 
$52,219
 
$65,448
$12,663
$15,495
Income taxes on net unrealized holding gains on AFS investments; understated by $836, $5,790, $5,874 and $448 for the three and nine months ended September 30, 2012, and for the years ended 2012 and 2010, respectively, and overstated by $121 for the year ended 2011.
$12,240
 
$30,405
 
$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 $1,438, $9,946, $10,090 and $770 for the three and nine months ended September 30, 2012, and for the years ended 2012 and 2010, respectively, and overstated by $208 for the year ended 2011.
$(719)
 
$(4,973)
 
$(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 $836, $5,790, $5,874 and $448 for the three and nine months ended September 30, 2012, and for the years ended 2012 and 2010, respectively, and overstated by $121 for the year ended 2011.
$(418)
 
$(2,895)
 
$(2,937)
$61
$(224)

Management evaluated the materiality of the errors from a qualitative and quantitative perspective. Based on such evaluation, we have concluded that while the accumulation of these errors was significant to the three months ended September 30, 2013, their correction would not be material to any individual prior period, nor did they have an effect on the trend of financial results, taking into account the requirements of the Securities and Exchange Commission (SEC) Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (SAB 108). Accordingly, we will correct these errors prospectively when the 2013 Consolidated Statements of Income and 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.


9




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 include final information received, and 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

10



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 allows 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 September 30, 2013 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
$

 
$
14.0

 
$

 
$
14.0

Foreign time deposits
11.4

 

 

 
11.4

Money market funds
0.2

 

 

 
0.2

Total cash equivalents
11.6

 
14.0

 

 
25.6

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

 
120.3

 

 
120.3

Foreign brokered certificates of deposit

 
8.9

 

 
8.9

U.S. government sponsored agencies

 
42.3

 

 
42.3

Foreign government obligations

 
6.9

 

 
6.9

Municipal obligations

 
10.6

 

 
10.6

Marketable equity securities
303.5

 

 

 
303.5

Asset-backed securities

 
51.6

 

 
51.6

Total available-for-sale investments
303.5

 
240.6

 

 
544.1

Forward foreign exchange contracts (c)

 
0.9

 

 
0.9

Total financial assets carried at fair value
$
315.1

 
$
255.5

 
$

 
$
570.6

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

 
$
1.1

 
$

 
$
1.1

Contingent consideration (e)

 

 
25.2

 
25.2

Total financial liabilities carried at fair value
$

 
$
1.1

 
$
25.2

 
$
26.3



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):


12



 
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):
 
September 30,
2013
 
December 31, 2012
Short-term investments
$
270.0

 
$
457.7

Other investments
274.1

 
218.0

Total
$
544.1

 
$
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):


13



 
September 30, 2013
 
December 31, 2012
Other current liabilities
$
6.9

 
$
27.3

Other long-term liabilities
18.3

 
25.3

   Total
$
25.2

 
$
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. 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. However, we do not expect that the sales milestones will be met and therefore the remaining contingent consideration of $0.7 million was credited to Selling, general and administrative expense during the third quarter of 2013. 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 revalued to its estimated fair value of $25.2 million and $44.6 million as of September 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. The development milestones have been achieved and payments totaling $20 million were made in 2013. This form of payment guarantees that the seller transitions the manufacturing of the product to Bio-Rad. Based on the most recent valuation, the sales milestones could potentially range from $0 to a maximum of 60.0%, 51.32% and 50.38% 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 valuations and updated quarterly for the nine months ended September 30, 2013 (in millions):

 
 
January 1
$
52.6

Payment of development milestone - QuantaLife
(6.0
)
Payment of development milestone - Cell sorting system
(20.0
)
Decrease in estimated fair value of contingent consideration included in Selling, general and administrative expense - QuantaLife
(2.0
)
Increase in estimated fair value of contingent consideration included in Selling, general and administrative expense - Cell sorting system
0.6

September 30
$
25.2



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

14



 
 
 
Range
 
Valuation Technique
Unobservable Input
From
To
Cell sorting system
Probability-weighted income approach
Sales milestones:
 
 
 
 
Credit adjusted discount rates
1.1%
2.0%
 
 
Projected volatility of growth rate
15.0%
N/A
 
 
Market price of risk
1.3%
N/A

To estimate the fair value of Level 2 debt securities as of September 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 September 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 daily reasonableness testing of the S&P Capital IQ prices to custodian reported prices. Prices outside a tolerable variance of approximately 1% are investigated and resolved.
 
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.


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


15



 
September 30, 2013
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Estimated
Fair
Value
Short-term investments:
 
 
 
 
 
 
 
Corporate debt securities
$
120.4

 
$
0.3

 
$
(0.4
)
 
$
120.3

Foreign brokered certificates of deposit
8.9

 

 

 
8.9

Municipal obligations
10.7

 

 
(0.1
)
 
10.6

Asset-backed securities
51.5

 

 
(0.2
)
 
51.3

U.S. government sponsored agencies
42.2

 
0.1

 

 
42.3

Foreign government obligations
6.9

 

 

 
6.9

Marketable equity securities
25.1

 
4.7

 
(0.1
)
 
29.7

 
265.7

 
5.1

 
(0.8
)
 
270.0

Long-term investments:
 
 
 
 
 
 
 
Marketable equity securities
54.5

 
219.3

 

 
273.8

Asset-backed securities
0.4

 

 
(0.1
)
 
0.3

 
54.9

 
219.3

 
(0.1
)
 
274.1

Total
$
320.6

 
$
224.4

 
$
(0.9
)
 
$
544.1



 
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):


16



 
September 30,
2013
 
December 31, 2012
Fair value of investments in a loss position 12 months or more
$
2.1

 
$
0.3

Fair value of investments in a loss position less than 12 months
$
92.3

 
$
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
$
0.8

 
$
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 September 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 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 September 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 Operations.

The following is a summary of our forward foreign exchange contracts (in millions):
 
September 30,
 
2013
 
 
Contracts maturing in October through December 2013 to sell foreign currency:
 
Notional value
$
75.1

Unrealized loss
$
(0.4
)
Contracts maturing in October through December 2013 to purchase foreign currency:
 
Notional value
$
401.4

Unrealized gain
$
0.2


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

 
Amortized
Cost
 
Estimated Fair
Value
Mature in less than one year
$
86.1

 
$
86.2

Mature in one to five years
113.0

 
113.0

Mature in more than five years
41.9

 
41.4

Total
$
241.0

 
$
240.6



17



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 investments 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):

 
September 30, 2013
 
December 31, 2012
 
Carrying 
Amount 
 
Estimated 
Fair 
Value 
 
Fair Value Hierarchy Level
 
Carrying 
Amount 
 
Estimated 
Fair 
Value 
 
Fair Value Hierarchy Level
Other investments
$
354.7

 
$
635.0

 
1
 
$
293.6

 
$
497.8

 
1
Total long-term debt, excluding leases and current maturities
$
423.2

 
$
440.0

 
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 September 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 investments 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
0.2

 
3.2

 
3.4

 
 
 
 
 
 
Balances as of September 30, 2013:
 
 
 
 
 
Goodwill
208.7

 
333.2

 
541.9

Accumulated impairment losses
(27.2
)
 
(1.0
)
 
(28.2
)
Goodwill, net
$
181.5

 
$
332.2

 
$
513.7



18



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.

Other than goodwill, we have no intangible assets with indefinite lives.  Information regarding our identifiable purchased intangible assets with definite lives is as follows (in millions):
 
September 30, 2013
 
Average
Remaining
Life (years)
 
Purchase
Price
 
Accumulated
Amortization
 
Net
Carrying
Amount
Customer relationships/lists
1-11
 
$
105.2

 
$
(44.6
)
 
$
60.6

Know how
2-12
 
193.3

 
(83.2
)
 
110.1

Developed product technology
1-13
 
108.4

 
(33.3
)
 
75.1

Licenses
1-12
 
44.7

 
(21.4
)
 
23.3

Tradenames
1-10
 
7.6

 
(5.0
)
 
2.6

Covenants not to compete
7-9
 
4.9

 
(0.6
)
 
4.3

Other
 
0.6

 
(0.5
)
 
0.1

 
 
 
$
464.7

 
$
(188.6
)
 
$
276.1


 
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
 
Nine Months Ended
 
September 30,
 
September 30,
 
2013
 
2012
 
2013
 
2012
 
 
 
 
 
 
 
 
Amortization expense
$
11.3

 
$
10.7

 
$
33.5

 
$
32.2



19




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
10.6

Actual warranty costs
(12.1
)
September 30, 2013
$
14.9



6. LONG-TERM DEBT

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

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

 
$
296.9

4.875% Senior Notes due 2020
423.2

 
423.0

Capital leases and other debt
12.5

 
12.7

 
435.7

 
732.6

Less current maturities
(0.2
)
 
(0.2
)
Long-term debt
$
435.5

 
$
732.4


Senior Subordinated Notes due 2016

In May 2009, Bio-Rad sold $300.0 million principal amount of Senior Subordinated Notes due 2016 (8.0% Notes). The sale yielded net cash proceeds of $294.8 million. In September 2013, we redeemed all of the 8.0% Notes for $312.0 million, including a call premium of $12.0 million, and expensed the remaining original issuance bond discount of $2.5 million and unamortized bond issuance costs of $1.1 million. This total loss on extinguishment is $15.6 million and is included in Interest expense in our Condensed Consolidated Statements of Operations.

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 September 30, 2013 or December 31, 2012. The Credit Agreement expires on June 21, 2014.


20



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 requires Bio-Rad to comply with certain financial ratios and covenants, among other things.  These ratios and covenants include a leverage ratio test and an interest coverage test, as well as restrictions on our ability to declare or pay dividends, incur debt, guarantee debt, enter into transactions with affiliates, merge or consolidate, sell assets, make investments, create liens and prepay subordinated debt.  We were in compliance with all of these ratios and covenants as of September 30, 2013.


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

September 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
$
172.9

$
(8.1
)
$
109.7

$
274.5

$
(0.2
)
$
274.3

Other comprehensive income, net of income taxes before reclassifications
5.1


36.7

41.8


41.8

Amounts reclassified from Accumulated other comprehensive income
(0.2
)

0.2


0.2

0.2

Net Other comprehensive income, net of income taxes
4.9


36.9

41.8

0.2

42.0

Balance at September 30, 2013
$
177.8

$
(8.1
)
$
146.6

$
316.3

$

$
316.3

 
 
 
 
 
 
 



21



Reclassifications from Accumulated other comprehensive income for the period ended September 30, 2013 are summarized in the following table:
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 losses on available-for-sale investments
 
$
0.2

 
Other (income) expense, net
 
 

 
Income tax expense
 
 
 
 
$
0.2

 
Net of income taxes
 
 
 
 
 
 
 
 
 

9.    (LOSS) EARNINGS PER SHARE

Basic (loss) earnings per share is computed by dividing net (loss) income attributable to Bio-Rad by the weighted average number of common shares outstanding for that period.  Diluted (loss) 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 (loss) earnings per share calculation if the effect of including such securities would be anti-dilutive. For the three months ended September 30, 2013, net loss per basic share was the same as net loss per diluted share because all potentially dilutive shares were anti-dilutive due to the net loss for the period.

The weighted average number of common shares outstanding used to calculate basic and diluted (loss) earnings per share, and the anti-dilutive shares that are excluded from the diluted earnings per share calculation are as follows (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2013
 
2012
 
2013
 
2012
Basic weighted average shares outstanding
28,603

 
28,312

 
28,545

 
28,255

Effect of potentially dilutive stock options and restricted stock awards

 
333

 
325

 
354

Diluted weighted average common shares
28,603

 
28,645

 
28,870

 
28,609

Anti-dilutive shares
416

 
94

 
95

 
106



22




10.    OTHER INCOME AND EXPENSE

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

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2013
 
2012
 
2013
 
2012
Interest and investment income
$
(1.1
)
 
$
(1.0
)
 
$
(10.2
)
 
$
(7.9
)
Net realized losses (gains) on investments
0.5

 
(1.1
)
 
0.2

 
(8.5
)
Miscellaneous other (income) expense items, net
(0.1
)
 
0.6

 
(0.7
)
 
1.7

Other (income) expense, net
$
(0.7
)
 
$
(1.5
)
 
$
(10.7
)
 
$
(14.7
)


11.    INCOME TAXES
 
Our effective income tax rate was (36)% and 23% for the three months ended September 30, 2013 and 2012, respectively. The effective tax rate for the third quarter of 2013 was higher than expected due to discrete items related primarily to tax liabilities for unrecognized tax benefits and audit settlements in our foreign jurisdictions. The effective tax rate for the third quarter of 2013 was negative because of the pretax loss incurred in the third quarter of 2013. The effective tax rate for the third quarter of 2012 was 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 effective income tax rate was 30% and 28% for the nine months ended September 30, 2013 and 2012, respectively. The effective tax rate for the first nine months of 2013 reflected a significant tax benefit related to the 2012 U.S. federal research credit, which was retroactively reinstated on January 2, 2013, as well as discrete items related primarily to our foreign operations. The effective income tax rates for the first nine months 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 September 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 $1.4 million. Substantially all such amounts will impact our effective income tax rate.

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


23



In September of 2013, the U.S. Department of the Treasury and the Internal Revenue Service released final regulations regarding the deductibility and capitalization of expenditures related to tangible property. Compliance with these final regulations will be required with companies’ federal income tax returns for tax years beginning on or after January 1, 2014, although early adoption is available. We are currently assessing these rules and the impact to the financial statements, if any. We do not anticipate that these regulations will have a material impact on our consolidated results of operations, cash flows or financial position.


12.    SEGMENT INFORMATION

Information regarding industry segments for the three months ended September 30, 2013 and 2012 is as follows (in millions):
 
 
Life
Science
 
Clinical
Diagnostics
 
Other
Operations
 
 
 
 
 
 
 
Segment net sales 
2013
$
162.9

 
$
338.8

 
$
3.4

 
2012
$
167.0

 
$
328.4

 
$
3.3

 
 
 
 
 
 
 
Segment (loss) profit
2013
$
(8.5
)
 
$
43.0

 
$

 
2012
$
6.8

 
$
48.2

 
$


Information regarding industry segments for the nine months ended September 30, 2013 and 2012 is as follows (in millions):
 
 
Life
Science
 
Clinical
Diagnostics
 
Other
Operations
 
 
 
 
 
 
 
Segment net sales 
2013
$
489.5

 
$
1,030.2

 
$
10.4

 
2012
$
484.2

 
$
999.6

 
$
11.6

 
 
 
 
 
 
 
Segment (loss) profit
2013
$
(28.9
)
 
$
130.6

 
$
0.3

 
2012
$
9.4

 
$
151.8

 
$
1.8



Segment results are presented in the same manner as we present our operations internally to make operating decisions and assess performance.  Net corporate operating, interest and other expense for segment results consists of receipts and expenditures that are not the primary responsibility of segment operating management and therefore are not allocated to the segments for performance assessment by our chief operating decision maker.  For both the three and nine months ended September 30, 2013, this includes the accrual of $20.0 million in connection with our initial efforts to resolve the SEC and DOJ investigations relating to the FCPA that was recorded in the third quarter of 2013 (see Note 13) and the $15.6 million loss on extinguishment of our 8.0% Senior Subordinated Notes (see Note 6). Interest expense, excluding the loss on extinguishment of the bonds, 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 (loss) income before taxes (in millions):


24



 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2013
 
2012
 
2013
 
2012
Total segment profit
$
34.5

 
$
55.0

 
$
102.0

 
$
163.0

Foreign exchange losses, net
(3.3
)
 
(0.4
)
 
(5.7
)
 
(3.5
)
Net corporate operating, interest and other expense not allocated to segments
(37.1
)
 
(1.1
)
 
(39.1
)
 
(3.5
)
Other income (expense), net
0.7

 
1.5

 
10.7

 
14.7

Consolidated (loss) income before income taxes
$
(5.2
)
 
$
55.0

 
$
67.9

 
$
170.7



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.  While we have recently begun discussions with the DOJ and SEC concerning a resolution of these matters, we are unable to estimate a range of reasonably possible
outcomes of this matter that differs from our aggregate accrual recorded in the third quarter of 2013 of $20.0 million, including interest. 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.

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.


25



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 the financial statements for the three and nine months ended September 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 reportable segments, Life Science and Clinical Diagnostics, with the mission to provide scientists with specialized tools needed for biological research and clinical diagnostics.  

We sell more than 8,000 products and services to a diverse client base comprised of scientific research, healthcare, education and government customers worldwide. We 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.  

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.


26



In September 2013, we redeemed all of the $300.0 million 8.0% Senior Subordinated Notes for $312.0 million, including a call premium of $12.0 million, and expensed the remaining original issuance bond discount of $2.5 million and unamortized bond issuance costs of $1.1 million, all of which are included in Interest expense in our Condensed Consolidated Statements of Operations.

During the third quarter of 2013, we accrued an aggregate of $20.0 million associated with our initial efforts to resolve the investigations by the U.S. Department of Justice (DOJ) and Securities and Exchange Commission (SEC) relating to the United States Foreign Corrupt Practices Act (FCPA), of which $16.0 million was expensed to Selling, general and administrative expenses and $4.0 was expensed to Interest expense.

During the third quarter of 2013, we identified errors in the consolidated financial statements for the years 2008 through 2012 (and for all interim periods therein) and in the unaudited interim condensed consolidated financial statements for the three month periods ended March 31, 2013 and June 30, 2013, related to the valuation of finished goods inventory in our Life Science segment. We were expensing inventory in amounts greater than actual costs for non-sales transactions, such as expensed inventory used for demonstration purposes and product samples.

The effect of correcting these errors on the 2008, 2009, 2010, 2011, 2012, and for the three and nine months ended September 30, 2012 consolidated financial statements were increases to net income of $0.6 million, $0.8 million, $0.7 million, $0.8 million, $1.3 million, $0.3 million and $1.0 million, respectively.

During the third quarter of 2013, we revised the classification of certain amount for all periods presented from “Provision for income taxes” to “Research and development expense” in our Consolidated Statements of Operations to conform to the current year presentation. The amounts reclassified pertain to refundable French R&D tax credit, which after the reclassification reduces Research and development expense. The effect of the reclassifications from Provision for income taxes to Research and development expense for 2010, 2011, 2012, and for the three and nine months ended September 30, 2012 were $5.8 million, $8.8 million, $4.8 million, $1.2 million and $3.6 million, respectively.

Management evaluated the materiality of the errors from a qualitative and quantitative perspective. Based on such evaluation, we have concluded that while the accumulation of these errors was significant to the three months ended September 30, 2013, their correction would not be material to any individual prior period, nor did they have an effect on the trend of financial results, taking into account the requirements of the Securities and Exchange Commission (SEC) Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (SAB 108). Accordingly, we will correct these errors prospectively when the 2013 Consolidated Statements of Income and Comprehensive Income are included in future filings.

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 include 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 revalued to its estimated fair value of $25.2 million as of September 30, 2013. The

27



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 allows 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 on a probability-weighted income approach. 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. However, we do not expect that the sales milestones will be met and therefore the remaining contingent consideration of $0.7 million was credited to Selling, general and administrative expense during the third quarter of 2013. The development milestone was met as of December 31, 2012, resulting in a payment of $6.0 million in January 2013.

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

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2013
 
2012
 
2013
 
2012
Net sales
100.0
 %
 
100.0
%
 
100.0
%
 
100.0
%
Cost of goods sold
43.7

 
45.1

 
44.1

 
43.8

Gross profit
56.3

 
54.9

 
55.9

 
56.2

Selling, general and administrative expense
40.0

 
32.1

 
38.1

 
33.0

Research and development expense
10.5

 
9.6

 
10.1

 
10.1

Net (loss) income attributable to Bio-Rad
(1.4
)
 
8.5

 
3.1

 
8.2


28




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 nine months ended September 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 September 30, 2013 Compared to
Three Months Ended September 30, 2012

Results of Operations -- Sales, Margins and Expenses

Net sales (sales) for the third quarter of 2013 were $505.1 million compared to $498.7 million in the third quarter of 2012, an increase of 1.3%.  Excluding the impact of foreign currency, third quarter 2013 sales increased by approximately 1.8% compared to the same period in 2012.  Currency neutral sales growth was reflected in the Americas, while currency neutral sales in Asia and Europe declined.

The Life Science segment sales for the third quarter of 2013 were $162.9 million, a decrease of 2.5% compared to the same period last year.  On a currency neutral basis, sales decreased 1.2% compared to the third quarter in 2012. The currency neutral sales decrease was primarily attributable to Laboratory Separations and Gene Expression products, partially offset by sales in the newly acquired AbD Serotec and our Droplet Digital™ PCR product line. Currency neutral sales declined in all three major regions, with the greatest decline in Asia. Sequestration and global government austerity programs have slowed U.S., European and Japanese market growth.

The Clinical Diagnostics segment sales for the third quarter of 2013 were $338.8 million, an increase of 3.2% compared to the same period last year.  On a currency neutral basis, sales also increased 3.2% compared to the third 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 and Latin America, while currency neutral sales in Western Europe declined.

Consolidated gross margins were 56.3% for the third quarter of 2013 compared to 54.9% for the third quarter of 2012.  Life Science segment gross margins for the third quarter of 2013 increased by approximately 3.3 percentage points from the same period last year primarily due to a $3.8 million soil remediation expense associated with a manufacturing plant that occurred in the third quarter of 2012, and a $2.9 million credit related to a correction for the first half of this year for the valuation of finished goods inventory. Gross margins growth for the third quarter of 2013 was partially offset by costs related to inventory sold with a higher cost due to purchase accounting, and purchased intangibles amortization expense of $2.0 million related to the AbD Serotec and cell sorting system acquisitions. The amortization expense related to the AbD Serotec acquisition 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 third quarter of 2013 increased by approximately 0.5 percentage points from the same period last year. The increase was primarily due to favorable product mix and a $0.6 million competitiveness tax credit that was recorded in the third quarter of 2013. Gross margins were partially offset by

29



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. 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 40.0% of sales for the third quarter of 2013 compared to 32.1% of sales for the third quarter of 2012.  Increases in SG&A expense relative to sales were primarily driven by:
an accrual of $16.0 million in connection with our initial efforts to resolve the SEC and DOJ investigations relating to the FCPA that was recorded in the third quarter of 2013,
an increase of $10.8 million of employee-related expenses, our largest cost, associated with an increase in headcount that included acquisitions,
the favorable impact of a 2012 revaluation to the fair value of the QuantaLife contingent consideration of $8.5 million,
an increase in professional services of $4.3 million primarily related to the first phase of a global single instance Enterprise Resource Planning (ERP) system being placed in service, and legal and accounting services, and
an increase in software amortization of $2.7 million due to the first phase of the ERP system being placed in service.

Research and development expense (R&D) increased to $52.9 million or 10.5% of sales in the third quarter of 2013 compared to $47.8 million or 9.6% of sales in the third quarter of 2012.  Life Science segment R&D increased in the third quarter of 2013 from the prior year quarter primarily due to the AbD Serotec and cell sorting system acquisitions. Clinical Diagnostics segment R&D increased in the third quarter of 2013 from the prior year period primarily due to lower refundable French R&D tax credits, and a broadening of on-going development across a wider range of products.

Results of Operations – Non-operating

Interest expense for the third quarter of 2013 increased by $19.7 million to $31.6 million compared to $11.9 million for the third quarter of 2012 primarily due to the early redemption of our $300.0 million principal amount of Senior Subordinated Notes (8.0% Notes) on September 30, 2013, resulting in a $15.6 million loss. We recorded the loss on extinguishment within Interest expense. The redemption of the 8.0% Notes included a call premium of $12.0 million, the expensing of $2.5 million of the remaining original issuance bond discount and the expensing of unamortized debt issuance costs of $1.1 million. In addition, Interest expense included an accrual of $4.0 million of interest expense associated with our initial efforts to resolve the DOJ and SEC investigations relating to the FCPA that was recorded in the third quarter of 2013.

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 September 30, 2013 increased compared to the prior year period primarily attributable to an unfavorable result of the estimating process inherent in the timing of shipments and payments, and higher transaction costs.

Other (income) expense, net for the third quarter of 2013 decreased to $0.7 million income compared to $1.5 million income for the third quarter of 2012 primarily due to realized gains on the sale of equity investments in the third quarter of 2012 compared to realized losses in the third quarter of 2013. Sales of investments in the third quarter of 2013 were used to provide cash to redeem all of the $300.0 million 8.0% Senior Subordinated Notes.

Our effective tax rate was (36)% and 23% for the third quarter of 2013 and 2012, respectively. The effective tax rate for the third quarter of 2013 was higher than expected due to discrete items related primarily to tax liabilities for unrecognized tax benefits and audit settlements in our foreign jurisdictions. The effective tax rate for the third quarter is negative because of pretax loss incurred in the third quarter. The effective tax rate for the third quarter of

30



2012 was 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 September 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 third 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 September 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 $1.4 million. Substantially all such amounts will impact our effective income tax rate.

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

In September of 2013, the U.S. Department of the Treasury and the Internal Revenue Service released final regulations regarding the deductibility and capitalization of expenditures related to tangible property. Compliance with these final regulations will be required with companies’ federal income tax returns for tax years beginning on or after January 1, 2014, although early adoption is available. We are currently assessing these rules and the impact to the financial statements, if any. We do not anticipate that these regulations will have a material impact on our consolidated results of operations, cash flows or financial position.


Nine Months Ended September 30, 2013 Compared to
Nine Months Ended September 30, 2012

Results of Operations -- Sales, Margins and Expenses

Net sales (sales) for the first nine months of 2013 were $1.53 billion compared to $1.50 billion for the first nine months of 2012, an increase of 2.3%.  Excluding the impact of foreign currency, the first nine months of 2013 sales increased by approximately 3.1% 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 nine months of 2013 were $489.5 million, an increase of 1.1% compared to the same period last year.  On a currency neutral basis, sales increased 2.5% compared to the first nine months of 2012. The sales increase was primarily driven by sales from the newly acquired AbD Serotec, our Droplet Digital™ PCR and cell biology product lines. Currency neutral sales increased in the Americas, while Europe was relatively unchanged and Asia declined. Global government austerity programs have slowed U.S., European and Japanese market growth.

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The Clinical Diagnostics segment sales for the first nine months of 2013 were $1.03 billion, an increase of 3.1% compared to the same period last year.  On a currency neutral basis, sales increased 3.6% compared to the first nine months 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 Americas, while currency neutral sales in Western Europe declined.

Consolidated gross margins were 55.9% for the first nine months of 2013 compared to 56.2% for the same period last year. Life Science segment gross margins for the first nine months of 2013 decreased by approximately 0.2 percentage points from the same period last year. The decrease was primarily due to costs related to inventory sold with a higher cost due to purchase accounting, and purchased intangibles amortization expense of $6.3 million related to the AbD Serotec and cell sorting system acquisitions, partially offset by a $3.8 million soil remediation expense associated with a manufacturing plant that occurred in the third quarter of 2012. The amortization expense related to the AbD Serotec acquisition 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 nine months of 2013 decreased by approximately 0.2 percentage points from the same period last year. The decrease was primarily due to some large low margin government tenders, a less favorable product mix, and an increase in obsolescence charges. 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 lower gross margins were partially offset by a foreign supplemental tax associated with social benefits of $4.1 million that occurred in the first nine months of 2012, and a $0.6 million French Competitiveness Tax Credit that was recorded in the third quarter of 2013.

Selling, general and administrative expenses (SG&A) represented 38.1% of sales for the first nine months of 2013 compared to 33.0% of sales for the first nine months of 2012.  Increases in SG&A expense relative to sales were primarily driven by:
an increase of $37.9 million of employee-related expenses, our largest cost, associated with an increase in headcount that included acquisitions,
the favorable impact of a 2012 revaluation to the fair value of the QuantaLife contingent consideration of $16.0 million,
an accrual of $16.0 million in connection with our initial efforts to resolve the SEC and DOJ investigations relating to the FCPA that was recorded in the third quarter of 2013,
an increase in professional services of $15.9 million primarily related to the first phase of a global single instance ERP system being placed in service, and legal and accounting services,
an increase of $6.6 million as the first nine months 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 of $6.1 million in software amortization due to the first phase of the ERP platform being placed in service.

R&D increased to $155.1 million or 10.1% of sales in the first nine months of 2013 compared to $150.6 million or 10.1% of sales in the first nine months of 2012.  Life Science segment R&D decreased in the first nine months of 2013 from the prior year period primarily due to projects nearing completion. Clinical Diagnostics segment R&D increased in the first nine months of 2013 from the prior year period primarily due to lower refundable French R&D tax credits, and a broadening of on-going development across a wider range of products.

Results of Operations – Non-operating

Interest expense for the first nine months of 2013 increased by $16.8 million to $54.3 million compared to $37.5 million for the first nine months of 2012 primarily due to the early redemption of our 8.0% Notes on September 30, 2013, resulting in a $15.6 million loss. We recorded the loss on extinguishment within Interest expense. The redemption of the 8.0% Notes included a call premium of $12.0 million, the expensing of $2.5 million of the remaining original issuance bond discount and the expensing of unamortized debt issuance costs of $1.1 million. In

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addition, Interest expense included an accrual of $4.0 million of interest expense associated with our initial efforts to resolve the DOJ and SEC investigations relating to the FCPA that was recorded in the third quarter of 2013. The increase was partially offset by 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 nine months 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 nine months of 2013 increased compared to the same period last year primarily attributable to an unfavorable result of the estimating process inherent in the timing of shipments and payments, and higher transaction costs.

Other (income) expense, net for the first nine months of 2013 decreased to $10.7 million income compared to $14.7 million income for the first nine months of 2012 primarily due to higher realized gains associated with the sale of equity investments in the first nine months of 2012 compared to realized losses in the first nine months of 2013. Sales of investments in the third quarter of 2013 were used to provide cash to redeem all of the $300.0 million 8.0% Senior Subordinated Notes.

Our effective tax rate was 30% and 28% for the nine months ended September 30, 2013 and 2012. The first nine months of 2013 reflected a significant tax benefit related to the 2012 U.S. federal research credit, which was retroactively reinstated on January 2, 2013, as well as discrete items related primarily to tax liabilities for unrecognized tax benefits and audit settlements in our foreign jurisdictions. 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 nine months 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 nine months 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 September 30, 2013.  The Credit Agreement expires on June 21, 2014.

At September 30, 2013, we had $561.8 million in cash, cash equivalents and short-term investments, of which approximately 38% 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

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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 $219.7 million available for borrowing as of September 30, 2013, of which $11.3 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 September 30, 2013 and December 31, 2012, we had accounts receivable, net of allowance for doubtful accounts, in Spain, Italy, Greece and Portugal of $66.7 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 $102.0 million and $180.2 million for the nine months ended September 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,
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,
2012 benefited from an approximately $20 million payment for multiple years of Spanish receivables,
an increase in interest paid primarily due to the early redemption of the $300.0 million of 8.0% Senior Subordinated Notes on September 30, 2013, and
a payment settlement for a royalties audit of $12 million in the second quarter of 2013,
slightly offset by lower income tax payments and higher customer receipts.

Cash Flows from Investing Activities

Net cash provided by investing activities was $36.9 million compared to net cash used in investing activities was $340.8 million for the nine months ended September 30, 2013 and