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BIO > SEC Filings for BIO > Form 10-Q on 8-Nov-2012All Recent SEC Filings

Show all filings for BIO RAD LABORATORIES INC

Form 10-Q for BIO RAD LABORATORIES INC


8-Nov-2012

Quarterly Report


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, 2011 and this report for the three and nine months ended September 30, 2012.

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

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

We sell more than 8,000 products and services to a diverse client base comprised of scientific research, healthcare, education and government customers worldwide. We manufacture and supply our customers with a range of reagents, apparatus and equipment to separate complex chemical and biological materials and to identify, analyze and purify components. Because our customers require standardization for their experiments and test results, much of our revenues are recurring.

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 2012 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, Singapore Dollar and British Sterling. As a result, our consolidated net sales expressed in dollars benefit when the U.S. dollar weakens and suffer when the dollar strengthens. When the U.S. dollar strengthens, we benefit from lower cost of sales from our own international manufacturing sites as well as non-U.S. suppliers and from lower international operating expenses.


In 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 fair values of the net assets acquired 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 product portfolio 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 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 and 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. 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 the next two years and is recorded in Prepaid expenses, taxes and other current assets and Other assets in the accompanying Condensed Consolidated Balance Sheet. We believe this acquisition will allow us to secure the supply of critical raw materials and lower our overall costs in the Clinical Diagnostics segment.

During the first quarter of 2012, we identified an error in the consolidated financial statements for the years 2007 through 2011, related to a foreign supplemental tax associated with social benefits. We incorrectly interpreted and applied the local statutes to our circumstances. We accrued $6.1 million for these foreign supplemental taxes, including penalties and interest, during the first quarter of 2012, which has been paid. The foreign supplemental tax, and the related penalties and interest, are not deductible for income tax purposes, and as such this error does not have an impact on Bio-Rad's tax provision.

Additionally, we identified two other errors pertaining to prior periods, both related to income taxes, as follows:

• an overstatement of income tax expense in the first quarter of 2011 in the amount of $1.6 million, due to a delay in recognizing a reduction in a foreign tax rate; and

• an understatement of income tax expense over the years 2008 to 2011 in the amount of $0.9 million, due to claiming a tax deduction in excess of a statutory limit.

The effect of the errors on the 2007, 2008, 2009, 2010 and 2011 consolidated financial statements would have been charges of $1.1 million, $1.5 million, $1.3 million and $1.6 million, and a $0.1 million benefit, respectively.

We 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-month period ended March 31, 2012, their correction would not be material to any individual prior period or for the year ending December 31, 2012, nor did it 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 have corrected these errors in the results of operations for the three-month period ended March 31,


2012 as follows: (i) $4.1 million charge to Cost of goods sold; (ii) $1.2 million charge to Interest expense; (iii) $0.8 million charge to Other (income) expense, net; and (iv) an income tax benefit of $0.7 million.

In October 2011, we acquired all the issued and outstanding stock of QuantaLife, Inc. (QuantaLife). The fair value of the consideration as of the acquisition date was $179.4 million, which was comprised of $150.3 million paid in cash at the closing date, a $5.0 million holdback of cash until the completion of certain post-closing matters, and $24.1 million in contingent consideration potentially payable to QuantaLife shareholders. As of September 30, 2012, the fair value of the contingent consideration was $8.1 million and could potentially reach $42 million upon the achievement of the remaining sales and development milestones. The operating results of this business are included in the results of operations of our Life Science segment from the acquisition date. This transaction was accounted for as the acquisition of a business. Integrating the acquired QuantaLife business into Bio-Rad is expected to expand our current portfolio of products for the amplification and study of DNA and we believe it will complement Bio-Rad's existing business.

The determination of the fair value of net assets acquired of QuantaLife was based upon valuation information, estimates and assumptions available at October 4, 2011. During the second quarter of 2012, we finalized the determination of fair value for certain acquired tax attributes and adjusted the preliminary carrying values of goodwill and certain other assets and liabilities in order to reflect final information received, resulting in an overall reduction of goodwill of $0.6 million. These measurement period adjustments had no impact on our condensed consolidated results of operations for the three and nine months ended September 30, 2012. The final fair values of the net assets acquired were determined to be $105.5 million of goodwill, $94.7 million of intangible assets and $20.8 million of net tangible liabilities.

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

                                               Three Months Ended          Nine Months Ended
                                                 September 30,               September 30,
                                               2012          2011         2012           2011
Net sales                                     100.0 %        100.0 %      100.0 %        100.0 %
Cost of goods sold                             45.2           42.7         43.8           43.1
Gross profit                                   54.8           57.3         56.2           56.9
Selling, general and administrative expense    32.1           34.2         33.0           34.2
Research and development expense                9.8            8.8         10.3            8.9
Net income attributable to Bio-Rad              8.5            8.9          8.1            7.8

Critical Accounting Policies and Estimates

As previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2011, 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, 2012 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, 2011. For a full discussion of these policies and estimates, please refer to our Form 10-K for the period ended December 31, 2011.


Three Months Ended September 30, 2012 Compared to Three Months Ended September 30, 2011

Results of Operations -- Sales, Margins and Expenses

Net sales (sales) for the third quarter of 2012 were $498.7 million compared to $516.5 million in the third quarter of 2011, a decrease of 3.5%. Excluding the impact of foreign currency, third quarter 2012 sales increased by approximately 3.6% compared to the same period in 2011. The foreign exchange impact of the Euro alone on a comparative basis declined approximately 13% from the third quarter of 2011. Currency neutral sales growth was reflected in most regions, primarily in the Pacific Rim, the U.S. and the emerging markets of eastern Europe, while currency neutral sales in western Europe decreased.

The Life Science segment sales for the third quarter of 2012 were $167.0 million, a decrease of 2.6% compared to the same period last year. On a currency neutral basis, sales increased 2.2% compared to the third quarter in 2011. The sales increase was primarily driven by sales in the QuantaLife product line. The currency neutral sales increase in the Life Science segment was driven primarily by North America, Latin America and in the Pacific Rim, while total sales in Europe and Japan decreased.

The Clinical Diagnostics segment sales for the third quarter of 2012 were $328.4 million, a decrease of 3.8% compared to the same period last year. On a currency neutral basis, sales increased 4.5% compared to the third quarter in 2011. 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, the Pacific Rim and the U.S., while currency neutral sales in western Europe decreased.

Consolidated gross margins were 54.8% for the third quarter of 2012 compared to 57.3% for the third quarter of 2011. Life Science segment gross margins for the third quarter of 2012 decreased by approximately 6.0% from the same period last year primarily due to a $3.8 million soil remediation expense associated with a manufacturing plant and amortization expense of $2.2 million related to the QuantaLife acquisition. Clinical Diagnostics segment gross margins for the third quarter of 2012 decreased by approximately 0.7% from the same period last year primarily due to an unfavorable product mix, and an increase in non-standard costs and warranty costs.

Selling, general and administrative expenses (SG&A) represented 32.1% of sales for the third quarter of 2012 compared to 34.2% of sales for the third quarter of 2011. Decreases in SG&A expense relative to sales were primarily driven by an adjustment to the fair value of the QuantaLife contingent consideration of $8.5 million, decreases in the bad debt provision reflecting collection of international receivables, and third party commissions compared to the prior year period, and lower expenses due to currency as the dollar strengthened against our major currencies. The decrease in the contingent consideration liability for QuantaLife was primarily due to not achieving short-term sales milestones as a result of recent weakening in funding to the research and development markets and a longer sales cycle for this new technology, causing a revision in sales forecasts for the remaining sales milestone contractual period ending in March 2014.

Research and development expense increased to $49.0 million or 9.8% of sales in the third quarter of 2012 compared to $45.4 million or 8.8% of sales in the third quarter of 2011. Life Science segment research and development expense increased in the third quarter of 2012 from the prior year quarter primarily due to research and development expense associated with QuantaLife, and efforts concentrated in chromatography and genomics. Clinical Diagnostics segment research and development expense decreased in the third quarter of 2012 from the prior year period primarily due to currency effects. On-going development continues across a broad range of products.


Results of Operations - Non-operating

Interest expense for the third quarter of 2012 decreased by $0.4 million to $11.9 million compared to $12.3 million for the third quarter of 2011 primarily due to higher interest capitalized associated with the implementation of a global single instance Enterprise Resource Planning (ERP) platform.

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. Lower foreign currency exchange losses, net for the quarter ended September 30, 2012 compared to the prior year period were primarily attributable to entering into a larger forward foreign currency exchange contract than required in 2011, which resulted in a $3.0 million loss. In addition, a concentrated effort to lower exposures by paying down intercompany balances where possible, reduced volatility in the estimation process of shipments and payments, and lower costs to hedge also aided in reducing foreign currency exchange losses.

Other (income) expense, net for the third quarter of 2012 increased to $1.5 million income compared to $0.5 million income for the third quarter of 2011 primarily due to higher realized gains on the sale of equity investments.

Our effective tax rate was 21% and 18% for the third quarter of 2012 and 2011, respectively. The third quarter of 2012 reflected significant tax benefits related to the release of tax liabilities and an adjustment to the fair value of the QuantaLife contingent consideration. 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. The effective tax rate for the third quarter of 2011 also reflected a tax benefit from nontaxable dividend income in Luxembourg. The third quarter of 2012 effective tax rate does not include tax benefits from U.S. federal research credits that expired in 2011 and nontaxable dividend income that terminated in 2011. For the three months ended September 30, 2012 and 2011, our foreign taxes resulted primarily from taxable income earned in France and Switzerland. Switzerland has a statutory tax rate of approximately 19%, which is significantly lower than our U.S. statutory tax rate of 36.8%, including state taxes. Our effective tax rates for the third quarter of 2012 and 2011 are significantly 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.

Nine Months Ended September 30, 2012 Compared to Nine Months Ended September 30, 2011

Results of Operations -- Sales, Margins and Expenses

Net sales (sales) for the first nine months of 2012 were $1.50 billion compared to $1.52 billion in the first nine months of 2011, a sales decrease of 1.8%.
Excluding the impact of foreign currency, the first nine months of 2012 sales increased by approximately 2.7% compared to the same period in 2011. Currency neutral sales growth was achieved in most regions, primarily in the Pacific Rim and the emerging markets of eastern Europe, while currency neutral sales declined in western Europe.

The Life Science segment sales for the first nine months of 2012 were $484.2 million, a decrease of 2.4% compared to the same period last year. On a currency neutral basis, sales increased 0.7% compared to the first nine months in 2011. The sales increase was primarily in laboratory separation and process chromatography, as well as increased sales from the QuantaLife product line. The Life Science segment currency neutral sales increased in the Pacific Rim.


The Clinical Diagnostics segment sales for the first nine months of 2012 were $999.6 million, a decrease of 1.7% compared to the same period last year. On a currency neutral basis, sales increased 3.7% compared to the first nine months in 2011. Clinical Diagnostics product lines generating growth were quality controls, diabetes, microbiology, blood virus and BioPlex® 2200 system. In 2011, sales were impacted by a one-time blood typing equipment sale of approximately $8 million. Currency neutral sales growth was achieved in most regions, primarily in the Pacific Rim, the Americas and the emerging markets of eastern Europe, while currency neutral sales declined in western Europe.

Consolidated gross margins were 56.2% for the first nine months of 2012 compared to 56.9% for the first nine months of 2011. Life Science segment gross margins for the first nine months of 2012 decreased from the same period last year by approximately 2.4%, primarily due to amortization expense of $6.7 million related to the QuantaLife acquisition and a $3.8 million soil remediation expense associated with a manufacturing plant. Clinical Diagnostics segment gross margins for the first nine months of 2012 were unchanged from the same period last year.

Selling, general and administrative expenses (SG&A) represented 33.0% of sales for the first nine months of 2012 compared to 34.2% of sales for the first nine months of 2011. Decreases in SG&A expense relative to sales were primarily driven by year-to-date adjustments to the fair value of the QuantaLife contingent consideration of $16.0 million, a decrease in the bad debt provision compared to the prior year period, primarily in Spain of approximately $7.3 million due to large payments in 2012 by public agencies that represented Spanish balances greater than 180 days old, a decline in third party commissions compared to the prior year period and lower expenses due to currency as the dollar strengthened against our major currencies. The decrease in the contingent consideration liability for QuantaLife was primarily due to not achieving the first two short-term sales milestones as a result of recent weakening in funding to the research and development markets and a longer sales cycle for this new technology, causing a revision in sales forecasts for the remaining sales milestone contractual period ending in March 2014.

Research and development expense increased to $154.3 million or 10.3% of sales in the first nine months of 2012 compared to $136.3 million or 8.9% of sales in the first nine months of 2011. Life Science segment research and development expense increased in the first nine months of 2012 from the same period last year primarily due to research and development expense associated with QuantaLife, and efforts concentrated in chromatography and genomics. Clinical Diagnostics segment research and development expense increased in the first nine months of 2012 from the prior year period primarily due to increased and broad investment in enhanced product offerings in blood typing, quality controls, diabetes and blood virus product lines.

Results of Operations - Non-operating

Interest expense for the first nine months of 2012 decreased by $3.7 million to $37.5 million compared to $41.1 million for the first nine months of 2011 primarily due to the refinancing of a portion of our debt that was completed in January 2011, lowering our overall borrowing costs. The interest rates on our current borrowings are fixed for our $300.0 million of 8.0% Senior Subordinated Notes through 2016 at 8.0% and for our $425.0 million of 4.875% Senior Notes through 2020 at 4.875%.

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. Lower foreign currency exchange losses, net for the first nine months of 2012 compared to the prior year period were primarily attributable to entering into a larger forward foreign currency exchange contract than required in 2011, which resulted in a $3.0 million loss. In addition, a concentrated effort to lower exposures by paying down intercompany balances where possible, reduced volatility in the estimation process of shipments and payments, and lower costs to hedge also aided in reducing foreign currency exchange losses.


Other (income) expense, net for the first nine months of 2012 increased to $14.7 million income compared to $5.9 million income for the first nine months of 2011 primarily due to higher realized gains on the sale of equity investments.

Our effective tax rate was 26% and 27% for the first nine months of 2012 and 2011, respectively. The first nine months of 2012 reflected significant tax benefits related to the release of tax liabilities and an adjustment to the fair value of the QuantaLife contingent consideration. 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. The effective tax rate for the first nine months of 2011 also reflected a tax benefit from nontaxable dividend income in Luxembourg. The effective tax rate for the first nine months of 2012 does not include tax benefits from U.S. federal research credits that expired in 2011 and nontaxable dividend income that terminated in 2011. For the first nine months of 2012 and 2011, our foreign taxes resulted primarily from taxable income earned in France and Switzerland. Switzerland has a statutory tax rate of approximately 19%, which is significantly lower than our U.S. statutory tax rate of 36.8%, including state taxes. Our effective tax rates for the first nine months of 2012 and 2011 are significantly 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 . . .

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