Bio-Rad Laboratories Annual Report 2004

FY2004 Annual Report · Bio-Rad Laboratories

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Bio-Rad Laboratories
2004 Annual Report
People: The Power of Our Success

Biological science and health care are the new frontiers of the twenty-first
century, full of untold possibilities for improving our lives.

Breakthroughs in these areas are occurring with
greater frequency than ever before—

not only through advances in technology, but through the efforts of
people who help us better understand the nature of life itself.

The efforts of many, multiplied by their passion for science, make
change constant, the pace exhilarating and the future limitless.

With thousands of employees worldwide, Bio-Rad is dedicated to serving
biological researchers and medical institutions around the globe.

In fact, our people have been serving humanity for more than half a century by building
one of the world's leading life science and clinical diagnostics companies.

06 Bio-Rad

The Power of Our Success

The

power of

our success

is people,

A force

more than

50 years

in the

making.

Bio-Rad 07

Bio-Rad employees are the heart and soul of

the company. Through their ingenuity, hard

work and dedication, Bio-Rad has become a

global leader in providing complete solutions

for life science research and clinical diagnostics

customers. At Bio-Rad we focus on building

environments that inspire teamwork, creativity

and professional growth. We welcome the

spirit of innovation and encourage our people

to pursue new paths of discovery as they seek

to find solutions for the pressing scientific

needs of today. That’s what makes Bio-Rad

special. Whether it’s creating tools to optimize

the laboratory research process, developing

sophisticated diagnostics technology, or

manufacturing instrumentation and chemical

reagents for biopharmaceutical discovery,

Bio-Rad and its employees are doing useful

things for society through their commitment

to customer service, innovation and to

providing the highest quality products and

services available.

Commitment

Kwasi Mensah, Plant Operations Manager, Life Science
“The key to our success is people, people who share the same
vision and a strong level of commitment to teamwork, cooperation
and delivering the highest quality products to our customers.”

10 Bio-Rad

Life Science

We are already five years into the “Biotechnology Century”. While much has been
accomplished in the years preceding the mapping of the human genome, the
process of turning this genomic data into useful scientific information remains a
daunting task. The most significant challenge faced by life science researchers
today is unlocking the mysteries behind the functions and interactions of thou-
sands of genes and their concomitant proteins and understanding their roles in
cellular function. Unlocking these mysteries will result in revolutionary discoveries
in the form of new medicines, safer food and the advancement of medical
diagnostics. Simplifying this discovery process and giving researchers access
to the tools and support they need to maximize their productivity will drive the
success of their efforts. This is the mission of Bio-Rad’s Life Science Group:
providing customers with complete technological solutions and support to
accelerate the discovery process.

Finding New Ways to Accelerate Scientific Discovery
In 2004, Bio-Rad’s global life science team made important strides to meet the
growing demands of the biological research industry. Scientists’ need for faster
results and comprehensive solutions drove sales in the areas of multiplex array
technology and DNA amplification instruments and reagents. Overall, group
sales for the year increased by more than 10 percent, reaching $505 million.
Performance in the Life Science Group was also augmented by the acquisition of
MJ Research, a company whose thermal cycling instrumentation and reagents
have expanded Bio-Rad’s portfolio of innovative gene expression technology.

Committed to Scientific Collaboration
In a climate where researchers are asked to produce more with less, a collabora-
tive approach to scientific discovery is essential between supplier and customer.
This goes beyond a company’s ability to provide the necessary tools; it is also
about providing customers with the highest quality service and support available.
With thousands of customers around the world, it takes a team effort to support
an extensive and diverse product line. Through their commitment to service and
technological innovation, the dedicated employees of Bio-Rad’s Life Science
Group are helping to accelerate scientific discovery.

Sales
(in millions)

5
0
5
6 $
5
4
2 $
0
4
$

Segment Profit
(in millions)

6
7
$

3
7
$

1
3
$

Innovation

Russ Frost, Ph.D., Research & Development
Operations Manager, Protein Separations Division, Life Science
“Our work is always interesting, challenging and diverse, and it’s
inspiring to work with first rate scientists and engineers for a company
that encourages individuals at all levels to make a difference.”

Providing Complete Laboratory Solutions

01 Bio-PlexTM Suspension Array System
This multiplex immunoassay platform
helps simplify the drug discovery
process by allowing scientists to
rapidly screen for multiple targets,
or biomarkers, ultimately aiding in
the understanding of cellular commu-
nication pathways. It is used by the
pharmaceutical, biotechnology and
health care industries for both human
and animal therapeutic research.

02 Crime Scene Investigator

PCR BasicsTM Kit
More than a million students in
the U.S., Asia and Europe have
learned modern biological research
techniques through Bio-Rad’s
Biotechnology ExplorerTM Program.
The “CSI” kit enables students to
simulate the same powerful forensic
genotyping, or DNA profiling tech-
niques used in real crime scene
investigations and other applications.

03 ExperionTM Automated
Electrophoresis System
This next-generation RNA and
protein separation system combines
Bio-Rad’s expertise in electrophoresis
with innovative LabChip® technology
from Caliper Life Sciences. The sys-
tem provides research laboratories
and quality control screening facilities
with a powerful alternative to tradi-
tional electrophoresis.

04 EXQuestTM Spot Cutter

05 GMO InvestigatorTM Kit

06 MiniOpticonTM Real Time PCR

The new EXQuestTM Spot Cutter is
one component of Bio-Rad’s suite of
products used for protein expression
analysis. The robotic instrument is
designed to sample electrophoresis
gels, or blots. Samples are then
processed in a mass spectrometer
for protein identification.

With this PCR-based kit, biology
students can test their favorite store-
bought corn, soy and papaya based
food products for the presence of
genetically modified organisms
(GMOs). The kit tests for the presence
of GMO-associated sequences
present in most genetically modified
crops approved for distribution in
the U.S., Asia and Europe.

Detection System
This compact PCR (Polymerase
Chain Reaction)-based amplification
technology is used for quantitation and
qualitative analysis of nucleic acids,
procedures commonly employed
in gene expression analysis. It is also
used for viral load determination,
genotyping, gene target identification
and other research applications.

07 PowerPacTM Supplies

08 siLentFectTM Lipid for RNAi

As a leading provider of power
supplies, Bio-Rad has created its
newest line of power systems, the
PowerPacTM family of products,
which are important tools in nearly
every electrophoresis system used
today. These new components
employ the latest technology to
provide laboratories with added
safety, ease-of-use and reliability.

Bio-Rad is a leading provider of
specialized intracellular delivery
agents like siLentFectTM Lipid, which
delivers small interfering RNA (siRNA)
into cultured mammalian cells. It is
used to accelerate the drug discovery
process and facilitate the rapid
translation of known genomic data
into therapeutic compounds to treat
diseases like cancer.

09 TeSeETM PRECESS 48TM Homogenizer
This instrument was designed in a
cooperative research and develop-
ment partnership. It is an important
part of Bio-Rad’s TSE (Transmissible
Spongiform Encephalopathy) tests’
sample preparation process which
contributes to the accuracy and sensi-
tivity of the tests, two characteristics
that distinguish the company’s tests
from other rapid tests.

Quality

Scott Sargent, Chemist, Clinical Diagnostics
“Working in the production laboratory is very rewarding.
I often think it might be one of my family members being
tested by a product we make here at Bio-Rad.”

16 Bio-Rad

Clinical Diagnostics

“Doing more with less” is the resonating theme in the clinical laboratory today. This
is driven by the need to reduce health care costs, compensate for the shortage of
personnel, and mitigate the increasing costs of technology. Bio-Rad’s Clinical
Diagnostics Group is uniquely positioned to provide clinical laboratories with the
solutions they need to address these and other demands to enhance their work-
flow, efficiency and value.

Technological advances are beginning to yield promising results for clinical diag-
nostics and will continue to facilitate improved drug discovery and treatment for
diseases like diabetes, cancer and AIDS. As a partner in these efforts, Bio-Rad
plays an important role in the early identification of disease and in the effective-
ness of therapeutic treatment by providing hospitals and clinical laboratories with
the highest quality products and services to ensure the accurate and speedy
diagnosis of disease.

Making Unique and Powerful Contributions to the Health Care Industry
Bio-Rad’s unique contribution to the health care industry is the result of its focus on
developing specialty products and services that are used to diagnose diseases that
might otherwise go undetected. These products help diagnose unusual genetic
disorders, detect rare viral strains, confirm the quality of test results, and more.

Creating Revolutionary Technology for Improved Patient Care
Bio-Rad has made significant advancements in creating new tests and systems
that will revolutionize the diagnostics industry. The company’s new BioPlex®2200
immunoassay platform, for example, is the first completely automated system
that can generate multiple results from a single patient sample.

The Clinical Diagnostics research and development team is continuously looking
for new ways to improve technology and refine clinical diagnostic testing methods.
An example of this is the new dual assay program designed to run on the D-10TM
Hemoglobin Testing System. Demand for this and other important products
fueled growth in the Clinical Diagnostics segment in 2004, increasing sales by
12 percent to a new high of $576 million.

Sales
(in millions)

5
1
5
$

5
5
4
$

6
7
5
$

Segment Profit
(in millions)

0
6
$

2
4
$

Service

Anja Thiel, Technical Support Manager, Clinical Diagnostics
“Our customers work around the clock, and when they call us,
we’ll do whatever it takes to help—even if it means getting off the
phone and on a plane to give them the support they need.”

Providing Advanced Diagnostic Solutions

01 BioPlex® 2200

Immunoassay Platform
This revolutionary system is the
first fully-automated, fully-integrated
random access platform that can
generate multiple results from a single
patient sample. Initial tests will target
autoimmune disease diagnostics and
future assays in development are
designed for serology, infectious
disease, cardiac, vascular integrity
and toxicology.

02 D-10TM Hemoglobin
Testing System
To increase the versatility of its
D-10TM System, Bio-Rad recently
launched a new dual assay program
designed to simultaneously detect
and monitor both diabetes and
beta-thalassemia. With this new
program, clinical labs can upgrade
their hemoglobinopathy testing
services and meet newly mandated
medical guidelines.

03 EliteTM Automated

Microplate Workstation
This fully automated multitasking
microplate workstation is used to
process blood virus tests which
include HIV-1, HIV-1/HIV-2 Plus O,
and Hepatitis and C screening
and confirmation tests. Hospitals
and other high volume clinical
laboratories can use the system
to process thousands of patient
samples a day.

04 LiquichekTM Hematology and
Sedimentation Rate Controls
To ensure consistent and reliable test
results, clinical laboratories rely on
these quality control products to
monitor and evaluate the performance
of hematological tests that measure
complete blood count (CBC) and
erythrocyte sedimentation rates.

05 MonolisaTM HCV Ag-Ab Ultra Assay
Early detection is an important first
step in the effective treatment of
Hepatitis C (HCV), a liver infection
affecting an estimated 150 million peo-
ple worldwide. This unique and highly
sensitive test is the first of its kind able
to simultaneously detect the presence
of HCV core antigen and anti-HCV
antibodies, and can detect the virus
at much lower levels of infection than
simple HCV antibody assays.

06 MultispotTM HIV-1/HIV-2 Rapid Test
This unique rapid test is the only
single use assay approved by the
FDA for the detection and differentia-
tion of HIV-1 and HIV-2 antibodies.
It is an important addition to the
company’s HIV product line, which
now includes kits for screening,
confirmation and differentiation of
HIV-1 and HIV-2 antibodies.

07 PlateliaTM Aspergillus Test

08 QC OnCall TM System

Patients whose immune systems
have been compromised by bone
marrow or organ transplants, HIV
or cancer are often at risk for Invasive
Aspergillosis, a fungal infection that
can be fatal to its victims. Through
early detection, using Bio-Rad’s
Aspergillus test, these patients
can quickly receive appropriate
treatment and avoid unnecessary
consequences.

Integrated health care requires
integrated information. Bio-Rad’s
advanced data management and
quality control systems feature tools
that allow clinical laboratories to have
greater confidence in the quality of
patient test results and compare their
performance to the world’s largest
inter-laboratory database.

09 VARIANTTMnbs Newborn
Screening System
Every year, millions of babies benefit
from the early detection and treatment
of disease made possible only
through effective newborn screening.
Bio-Rad, a leading provider of new-
born screening products, has
launched the new VARIANTTMnbs
System which is used to detect
Sickle hemoglobin (Hb S) and other
abnormal hemoglobin variants.

20 Bio-Rad

Shareholder’s Letter

2004 was another year of considerable progress for Bio-Rad. Thanks to the
magic of modern accounting, which required us to restate 2003 financial results
to reflect the 2004 disposition of a business, Bio-Rad once again crossed
the $1 billion sales mark. Year over year revenue growth topped 11%, totaling
$1.1 billion in sales. It was also a year in which we made considerable invest-
ments in our future, including new product development, facilities expansions and
upgrades to our IT infrastructure. These factors resulted in net income being
somewhat lower than 2003, but we feel very positive about the longer-term
returns on these investments.

In 2004 we introduced a number of major new products, most notably the
Bioplex®2200. This is a revolutionary new immunoassay analyzer for the clinical
diagnostic laboratory, which offers significant advantages in throughput and
analytical capabilities. We are also excited about the new ExperionTM system,
introduced to the life science research market for the automated analysis of
proteins and RNA.

During 2004 we welcomed two new operations into the Bio-Rad family. In March,
we added the Hematronix line of quality controls to our portfolio. These products
are used in hematology labs to insure the accuracy of patient test results and are
highly complimentary to our existing quality control product line. In August, we
joined forces with MJ Research, which is well-known in the research market for its
innovative instrumentation for thermal cycling, a popular technique for making
copies of DNA. These acquisitions are in keeping with Bio-Rad’s corporate strat-
egy of building on its existing businesses and competencies, thereby enhancing
our position in the markets we serve. Looking forward, one of our objectives for
2005 is to fully integrate these operations into Bio-Rad and realize the full poten-
tial that these businesses bring to us.

The year also saw the divestiture of our confocal microscopy business. While
the technology is very powerful and exciting, it became apparent that its cus-
tomers would be better served if this operation was part of an integrated
microscopy company.

Bio-Rad 21

Operationally, we completed the relocation of a number of manufacturing loca-
tions into larger, more efficient facilities and transitioned the Life Science Group
to our enterprise IT system. These represented significant investments in our
future, and will give us the capacity and infrastructure for continued growth.
Another “investment” during the year was a massive effort to come into compli-
ance with the provisions of Sarbanes-Oxley. The thousands of internal hours and
several million dollars in costs were necessary expenditures, but we look forward
to being able to redirect some of these resources back to products and customers
in the coming year.

Toward the end of the year, we took advantage of historically low interest rates and
favorable market conditions to issue $200 million in long-term bonds. All in all, we
now have the building blocks in place to provide for Bio-Rad’s longer-term growth.

For 2005, we have a number of areas of focus. At the top of our list is the intro-
duction of a number of new products scheduled throughout the year. We are also
very focused on building on the success of some of our major 2004 product
releases. In addition to completing the full integration of Hematronix and MJ
Research, we are pursuing a number of improvements in the areas of distribution
and operational effectiveness, and continue to search for acquisitions to add to
and enhance the Company’s overall capabilities.

We would like to thank our employees for their contributions and commitment
to furthering science. To our shareholders, we appreciate your interest in the
Company as we look forward to another rewarding year.

David Schwartz
Chairman of the Board

Norman Schwartz
President

22 Bio-Rad

Milestones

Acquisitions
and Divestitures
Acquisition: The Clinical
Diagnostics Group
expanded its quality
systems operations
with the acquisition of
Hematronix, Inc., a
quality control and soft-
ware services business.
This acquisition further
enhances Bio-Rad’s
leading position in labo-
ratory quality systems.

Acquisition: As a result
of the acquisition of
MJ Research, Bio-Rad’s
Life Science Group
now offers the most
comprehensive range
of amplification products
available.

Growth
New manufacturing
facilities built in Northern
California will enable the
Company to increase
production capacity and
enhance working envi-
ronments to better meet
the growing demands of
the life science research
industry.

Revolutionizing
Biological Education
More than one million
high school students
in the United States,
Asia and Europe have
learned about modern
biology techniques
by using Bio-Rad’s
Biotechnology ExplorerTM
education products.

New Technology
A longtime pioneer in
electrophoresis technol-
ogy, Bio-Rad recently
launched the new
ExperionTM Automated
Electrophoresis System,
a novel approach to
RNA and protein analy-
sis and separation that
will revolutionize the
way electrophoresis
is performed.

Ten novel phosphopro-
tein assays designed for
use on the Company’s
Bio-Plex® multi-analyte
detection system will
play an essential role
in the advancement of
scientific discovery by
enabling researchers
to increase their under-
standing of how genes
and cells function and
interact.

Divestiture: The sale
of Bio-Rad’s Cell
Science product line
marked the Company’s
departure from the con-
focal and multi-photon
microscopy business
and demonstrates its
renewed commitment to
the core businesses of
life science research
and clinical diagnostics.

New Business
Bio-Rad’s rapid TeSeETM
test was selected by
the USDA for use in the
nation’s enhanced BSE
surveillance program.
Approximately 300,000
cattle will be screened
in this program.

In the fourth quarter,
Bio-Rad was awarded
a multi-million dollar
tender in Russia for HIV
and Hepatitis tests and
testing systems. This
makes Bio-Rad the
largest supplier of blood
screening products to
that country.

Bio-Rad 23

Financial Highlights

Five-Year Record

2000

2001

2002

2003

2004

(dollars in millions, except per share data)

Net Sales
Gross Profit
Research Expenditures
Net Income
Return On Sales
Book Value Per Share
Basic Earnings Per Share
Cash Flow From Operations

(1) Excludes $14.6 of purchased in-process R&D

2004 Sales by Region

39%
Americas

15%
Pacific
Rim

46%
Europe

$ 700.7
$ 367.6
$ 65.7
$ 31.1
4.4%
$ 10.00
$ 1.27
$ 24.2

$ 789.6
$ 443.7
$ 73.9
$ 44.2
5.6%
$ 11.43
$ 1.79
$ 99.5

$ 865.0
$ 499.6
$ 79.8
$ 67.9
7.8%
$ 15.17
$ 2.70
$ 105.8

$ 979.6
$ 556.2
$ 91.3
$ 76.2
7.8%
$ 19.41
$ 3.00
$ 127.6

$ 1090.0
$ 610.1
$ 108.3(1)
$

68.2
6.3%
$ 23.10
$
2.65
$ 123.1

Net Sales
(in millions)

0
.
5
6
8
$

6
.
9
8
7
$

7
.
0
0
7
$

0
.
0
9
0
1
$

6
.
9
7
9
$

Basic Earnings
Per Share

1
.
3
2
1
$

0
0
.
3
$

0
7
.
2
$

5
6
.
2
$

9
7
.
1
$

7
2
.
1
$

Cash Flow From
Operations
(in millions)

6
.
7
2
1
$

8
.
5
0
1
$

5
.
9
9
$

2
.
4
2
$

24 Bio-Rad

Sales History

$1 billion

$900 million

$800 million

$700 million

$600 million

$500 million

$400 million

$300 million

$200 million

$100 million

1959

1964

1969

1974

1979

1984

1989

1994

1999

2004

Bio-Rad 25

Summary of Operations and Selected Financial Data

(in thousands, except per share data)

2004

2003

2002

2001

2000

Year Ended December 31,

Net sales

Cost of goods sold

Gross profit
Selling, general and administrative expense
Product research and development expense
Purchased in-process research and

development expense

Goodwill amortization
Loss (gain) on divestitures
Interest expense
Foreign exchange losses
Other (income) expense, net(1)
Income from continuing operations before
taxes and cumulative effect of change in
accounting principle

Provision for income taxes

Income from continuing operations before

cumulative effect of change in
accounting principle

Cumulative effect of change in accounting

principle(2)

Income from continuing operations
Discontinued operations

Gain (loss) from discontinued operations

(net of tax)

Gain on divestiture (net of tax)

Total income (loss) from discontinued operations
Net income
Basic earnings per share:

Continuing operations before cumulative
effect of change in accounting principle
Cumulative effect of change in accounting

principle(2)

Discontinued operations
Basic earnings per share
Diluted earnings per share:

Continuing operations before cumulative
effect of change in accounting principle
Cumulative effect of change in accounting

principle(2)

Discontinued operations
Diluted earnings per share

$1,090,012
479,939
610,073
378,264
108,344

$979,631
423,401
556,230
317,524
91,273

$865,006
365,451
499,555
281,579
79,788

$789,639
345,964
443,675
257,684
73,922

$700,664
333,092
367,572
238,947
65,742

14,620
—
—
20,219
2,394
(11,095)

—
—
—
31,006
4,080
(3,012)

—
—
—
28,207
5,441
(678)

—
7,746
5,150
24,088
2,097
10,031

—
8,109
(21,845)
30,612
420
689

97,327
(31,035)

115,359
(38,055)

105,218
(36,692)

62,957
(20,132)

44,898
(13,423)

66,292

77,304

68,526

42,825

31,475

—
66,292

—
77,304

—
68,526

—
42,825

(710)
30,765

(1,487)
3,437
1,950
68,242

(1,133)
—
(1,133)
$ 76,171

(663)
—
(663)
$ 67,863

1,354
—
1,354
$ 44,179

335
—
335
$ 31,100

2.58

3.04

2.73

1.74

1.29

—
0.07
2.65

—
(0.04)
3.00

2.51

2.94

—
(0.03)
2.70

2.63

—
0.05
1.79

1.68

—
0.07
2.58

—
(0.04)
2.90
—
$992,596
$225,835

—
(0.02)
2.61
—
$720,703
$105,768

—
0.06
1.74
—
$684,028
$188,423

(0.03)
0.01
1.27

1.29

(0.03)
0.01
1.27
—
$646,278
$203,360

Cash dividends paid per common share
Total assets
Long-term debt, net of current maturities

—
$1,392,002
$ 425,979

(1)See Note 11 to the consolidated financial statements for components of Other (income) expense, net. Included in 2001 is a $9.4 million writedown of an investment.

(2)Cumulative effect of accounting change per SEC Staff Accounting Bulletin 101, on Revenue Recognition.

26 Bio-Rad

Consolidated Balance Sheets

(in thousands)

Assets

Current assets:

Cash and cash equivalents

Short-term investments

Accounts receivable less allowance of $13,406 in 2004 and $12,978 in 2003

Inventories, net:

Raw materials

Work in process

Finished goods

Total inventories

Deferred tax assets

Prepaid expenses and other current assets

Total current assets

Property, plant and equipment:

Land and improvements

Buildings and leasehold improvements

Equipment

Total property, plant and equipment

Accumulated depreciation

Property, plant and equipment, net

Goodwill

Purchased intangibles, net

Long-term deferred tax assets

Other assets
Total Assets

December 31,

2004

2003

$ 195,734

$ 65,395

165,899

261,243

44,950

48,206

112,356

205,512

34,492

48,344

83,247

234,085

38,783

38,798

112,677

190,258

31,056

51,357

911,224

655,398

9,959

119,433

321,215

450,607

9,882

105,963

273,121

388,966

(248,283)

(209,843)

202,324

113,276

58,638

26,544

79,996

179,123

69,503

12,251

21,218

55,103

$1,392,002

$ 992,596

The accompanying notes are an integral part of these statements.

Bio-Rad 27

December 31,

2004

2003

71,194

$ 53,995

79,061

9,055

402

15,835

50,000

39,317

50,511

315,375

425,979

24,772

28,988

71,650

10,215

208

20,833

—

34,168

48,183

239,252

225,835

14,803

16,899

795,114

496,789

—

49,628

489,254

58,003

596,888

42,164

421,012

32,628

495,807

$1,392,002

$992,596

(in thousands except share data)

Liabilities and Stockholders’ Equity

Current liabilities:

Accounts payable

Accrued payroll and employee benefits

Notes payable

Current maturities of long-term debt

Sales, income and other taxes payable

Litigation accrual

Accrued royalties

Other current liabilities

Total current liabilities

Long-term debt, net of current maturities

Deferred tax liabilities

Other long-term liabilities

Total liabilities

Commitments and contingent liabilities

Stockholders’ equity:

Preferred stock, $0.0001 par value, 7,500,000 shares authorized;

none outstanding

Class A common stock, $0.0001 par value, 80,000,000 shares authorized;

outstanding—20,997,568 at 2004; 50,000,000 shares authorized;

outstanding—20,709,127 at 2003

Class B common stock, $0.0001 par value, 20,000,000 shares authorized;

outstanding 2004—4,836,540; 2003—4,834,290

Additional paid-in capital

Retained earnings

Accumulated other comprehensive income:

Currency translation and other

Total stockholders’ equity

Total Liabilities and Stockholders’ Equity

The accompanying notes are an integral part of these statements.

28 Bio-Rad

Consolidated Statements of Income

(in thousands, except per share data)

Net sales

Cost of goods sold

Gross profit

Selling, general and administrative expense

Product research and development expense

Purchased in-process research and development expense

Interest expense

Foreign exchange losses

Other income, net

Income from continuing operations before taxes

Provision for income taxes

Income from continuing operations

Discontinued operations

Loss from discontinued operations net of tax benefits

of $532 in 2004, $538 in 2003 and $150 in 2002

Gain on divestiture net of tax expense of $2,295

Total income (loss) from discontinued operations

Net income

Basic earnings per share:

Continuing operations

Discontinued operations

Net income

Weighted average common shares

Diluted earnings per share:

Continuing operations

Discontinued operations

Net income

Year Ended December 31,

2004

2003

2002

$1,090,012

$979,631

$865,006

479,939

610,073

378,264

108,344

14,620

20,219

2,394

(11,095)

97,327

(31,035)

66,292

423,401

556,230

317,524

91,273

—

31,006

4,080

(3,012)

115,359

(38,055)

77,304

365,451

499,555

281,579

79,788

—

28,207

5,441

(678)

105,218

(36,692)

68,526

(1,487)

3,437

1,950

(1,133)

—

(1,133)

(663)

—

(663)

68,242

$ 76,171

$ 67,863

2.58

0.07

2.65

25,724

2.51

0.07

2.58

3.04

(0.04)

3.00

25,416

2.94

(0.04)

2.90

2.73

(0.03)

2.70

25,104

2.63

(0.02)

2.61

Weighted average common shares

26,489

26,310

26,021

The accompanying notes are an integral part of these statements.

Bio-Rad 29

Year Ended December 31,

2004

2003

2002

$ 1,081,645

$ 996,384

$ 858,121

(912,286)

(800,633)

(682,814)

(19,543)

(33,637)

8,933

(2,019)

(17,088)

(51,280)

1,928

(1,671)

(25,832)

(43,016)

112

(813)

Consolidated Statements of Cash Flows

(in thousands)

Cash flows from operating activities:

Cash received from customers

Cash paid to suppliers and employees

Interest paid

Income tax payments

Miscellaneous receipts

Discontinued operations

Net cash provided by operating activities

123,093

127,640

105,758

Cash flows from investing activities:

Capital expenditures, net

Payments for acquisitions and investments

Proceeds from divestiture

Payments for purchase of intangible assets

Purchases of marketable securities and investments

Sales of marketable securities and investments

Foreign currency economic hedges, net

Net cash used in investing activities

Cash flows from financing activities:

Net borrowings (payments) on notes payable

Long-term borrowings

Payments on long-term debt

Debt retirement costs on 115⁄8% bonds

Debt issuance costs on 7.5% bonds

Debt issuance costs on 6.125% bonds

Proceeds from issuance of common stock

Reissuance of treasury stock

(60,493)

(58,983)

19,775

(10,000)

(69,003)

(16,375)

(42,224)

(8,568)

—

(2,257,694)

(600,000)

2,174,538

6,539

510,135

(14,998)

(186,318)

(190,241)

—

(1,887)

493

(2,270)

(54,456)

(9,580)

435

200,000

249,335

5,031

44,025

(1,781)

(132,012)

(133,517)

—

(2,876)

7,464

—

(9,467)

(5,431)

—

5,309

—

3,047

2,287

Net cash provided by (used in) financing activities

193,227

108,169

(79,127)

Effect of exchange rate changes on cash

Net increase (decrease) in cash and cash equivalents

Cash and cash equivalents at beginning of year

Cash and cash equivalents at end of year

337

130,339

65,395

(7,906)

37,662

27,733

8,429

(19,396)

47,129

$ 195,734

$ 65,395

$ 27,733

The accompanying notes are an integral part of these statements.

30 Bio-Rad

Consolidated Statements of Changes in Stockholders’ Equity

(in thousands)

Common Stock, $0.0001 par value:

Balance at beginning of year

Issuance of common stock

Balance at end of year

Additional Paid-In Capital:

Balance at beginning of year

Issuance of common stock

Tax benefit from exercise of stock options

Balance at end of year

Treasury Stock:

Balance at beginning of year

Reissuance of treasury stock

Balance at end of year

Retained Earnings:

Balance at beginning of year

Net income

Reissuance of treasury stock at more than cost

Balance at end of year

Accumulated Other Comprehensive Income (Loss):

Balance at beginning of year

Other comprehensive income

Balance at end of year

Total Stockholders’ Equity

Comprehensive Income, net of tax:

Net income

Currency translation adjustments

Year Ended December 31,

2004

2003

2002

—

42,164

6,250

1,214

49,628

—

36,141

5,309

714

42,164

—

32,171

3,047

923

36,141

(1,863)

1,863

—

421,012

68,242

—

344,841

76,171

—

276,554

67,863

424

489,254

421,012

344,841

32,628

25,375

58,003

2,102

30,526

32,628

(22,987)

25,089

2,102

$596,888

$495,807

$383,087

$ 68,242

$ 76,171

$ 67,863

18,573

28,620

25,241

Net unrealized holding gains (losses) net of tax of $3,870 in 2004,

$1,053 in 2003 and $(32) in 2002

8,096

2,137

Reclassification adjustments for gains included in net income

net of tax of $623 in 2004, $108 in 2003 and $47 in 2002

(1,294)

(231)

(59)

(93)

Total Comprehensive Income

$ 93,617

$106,697

$ 92,952

The accompanying notes are an integral part of these statements.

Bio-Rad 31

Notes to Consolidated Financial Statements

1. Significant Accounting Policies

Basis of Presentation The consolidated financial statements include the accounts of Bio-Rad Laboratories, Inc. and

all subsidiaries (Bio-Rad or the Company) after elimination of intercompany balances and transactions. The prepa-

ration of financial statements in conformity with accounting principles generally accepted in the United States of

America requires management to make estimates and assumptions that affect the amounts reported in the financial

statements and accompanying notes. Actual results could differ from those estimates.

Changes in Presentation Certain prior year amounts have been reclassified to conform to current year presentation.

The Company’s consolidated statements of income for the years ended December 31, 2003 and 2002 reflect the

reclassification of discontinued operations during 2004 (see Note 5). The Company’s consolidated balance sheet as

of December 31, 2003 reflects the reclassification of $83.2 million of auction rate securities and variable rate notes

from cash and cash equivalents to short-term investments during 2004 (see Note 3). Additionally, the Company has

reclassified $21.2 million of deferred tax assets from short-term to long-term in 2003 to properly reflect the classifi-

cation based on the underlying nature of the item creating the tax asset.

Cash and Cash Equivalents Cash and cash equivalents consist of cash and highly liquid investments with original

maturities of three months or less which are readily convertible into cash. Cash equivalents are stated at cost, which

approximates fair market value.

Short-Term Investments Short-term investments consist of corporate, state and municipal securities with readily

determinable fair market values and original maturities in excess of three months. Investments with maturities

beyond one year may be classified as short-term based on their highly liquid nature and because such marketable

securities represent the investment of cash that is available for current operations. The Company’s investments are

classified as “available-for-sale” and accordingly are reported at fair value, with unrealized gains and losses, if

material, reported as a component of stockholder’s equity. Unrealized losses are charged against income when a

decline in the fair market value of an individual security is determined to be other than temporary. Realized gains

and losses on investments are included in interest income.

Concentration of Credit Risk Financial instruments that potentially subject the Company to concentration of credit

risk consist primarily of cash and cash equivalents, short-term investments and trade accounts receivable. Cash and

cash equivalents and short-term investments are placed with highly rated major financial institutions. The Company

performs credit evaluation procedures related to its trade receivables and with the exception of certain developing

countries, generally does not require collateral. As a result of increased risk in these developing countries, some

Bio-Rad sales are subject to collateral letters of credit. Credit risk is limited generally due to the large number of

customers and their dispersion across many geographic areas. However, a significant amount of trade receivables

are with national healthcare systems in countries within the European Economic Community. The Company does

not currently anticipate a credit risk associated with these receivables.

Allowance for Doubtful Accounts The Company maintains an allowance for doubtful accounts for estimated losses

resulting from the inability of our customers to make required payments. The amount of the allowance is determined

by analyzing known uncollectible accounts, aged receivables, economic conditions in the customers’ country or

32 Bio-Rad

Notes to Consolidated Financial Statements (continued)

industry, historical losses and our customers’ credit-worthiness. Amounts later determined and specifically

identified to be uncollectible are charged or written off against this reserve. This valuation allowance is reviewed

quarterly to determine whether a provision or reversal is warranted.

Inventory Valuation Inventories are valued at the lower of actual cost or market and include material, labor and

overhead costs. Management reviews the need for an inventory obsolescence reserve on a quarterly basis or,

if warranted by the circumstances, more frequently. In evaluating this reserve, technology changes, competition,

customer demand and manufacturing quality are considered.

Property, Plant and Equipment Property, plant and equipment are carried at historical cost. Included in property,

plant and equipment is reagent rental equipment. The Company provides these instruments to its customers for use

with the Company’s reagents. Property, plant and equipment are assessed for impairment annually or whenever

events or changes in circumstances indicate that the carrying amount may not be recoverable.

Depreciation is computed on a straight-line basis over the estimated useful lives of the assets. Buildings and lease-

hold improvements are amortized over 15-30 years or the lives of the leases or improvements, whichever is shorter.

With the exception of reagent rental equipment, which is amortized over a 1–5 year period, equipment is depreci-

ated over 3–12 years.

Net capital expenditures include proceeds from the sale of property, plant and equipment of $0.8 million and

$1.1 million for the year ended December 31, 2004 and 2003, respectively.

Goodwill Goodwill, representing the excess of the cost over the net tangible and identifiable intangible assets

of acquired businesses, is stated at cost. Goodwill is assessed for impairment by applying a fair-value based test

annually or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable

(see Note 6).

Income Taxes The Company accounts for income taxes under the asset and liability method which recognizes

deferred tax assets and liabilities for the expected future tax consequences of temporary differences between

carrying amounts and tax basis of assets and liabilities (see Note 8).

Revenue Recognition Revenue is recognized when pervasive evidence of an arrangement exists, the price to the

buyer is fixed and determinable, collectibility is reasonably assured and title has passed to the customer or product

has been delivered absent specific contractual specifications. Equipment that requires factory installation is not

recorded until installation is complete and customer acceptance, if required contractually, has occurred. Reagent

agreements are a Diagnostic industry sales method that provides use of an instrument if the customer exclusively

purchases the Company’s reagents to use on that instrument. The Company has evaluated the reagent agreements

and accounts for the contracts under the terms of the guidance set forth in EITF 00-21, Accounting for Revenue

Arrangements with Multiple Deliverables. All revenues that the Company earns under its reagent agreements are

recognized when the reagent has been delivered to the customer. Service revenues on extended warranty contracts

are recognized ratably over the life of the service agreement or as service is performed, if not under contract.

Bio-Rad 33

Shipping and Handling The Company classifies all freight billed to customers as net sales. Related freight costs are

included in cost of goods sold.

Sales Returns and Warranty At the time the related revenue is recognized, a provision is recognized for estimated

product returns.

The Company warrants certain equipment against defects in design, materials and workmanship, generally for a

period of one year. Upon shipment of that equipment, the Company establishes, 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 reserve.

Components of the warranty accrual, included in Other current liabilities and Other long-term liabilities, were as

follows (in millions):

January 1

Provision for warranty

Actual warranty costs

December 31

2004

2003

$ 9.1

10.4

(9.4)

$10.1

$ 7.1

12.0

(10.0)

$ 9.1

Research and Development

Internal research and development costs are expensed as incurred. Third-party

research and development costs are expensed when the contracted work has been performed. Purchased

in-process research and development costs are expensed at the time of purchase.

Foreign Currency Balance sheet accounts of international subsidiaries are translated at the current exchange

rate as of the end of the accounting period. Income statement items are translated at average exchange rates. The

resulting translation adjustment is recorded as a separate component of stockholders’ equity.

Foreign currency transaction gains and losses are included in foreign exchange losses in the consolidated statement

of income. Transaction gains and losses result primarily from fluctuations in exchange rates when intercompany

receivables and payables are denominated in currencies other than the functional currency of the Company’s

subsidiary that recorded the transaction.

Forward Exchange Contracts As part of distributing its products, the Company regularly enters into intercompany

transactions. The Company enters into forward foreign currency exchange contracts to manage foreign exchange

risk of future movements in foreign exchange rates that affect foreign currency denominated intercompany receiv-

ables and payables. The Company does not use derivative financial instruments for speculative or trading purposes.

In accordance with Statement of Financial Accounting Standard (SFAS) 133, Accounting for Derivative Instruments

and Hedging Activities, the Company does 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 coun-

tries, are recorded at their fair value at each balance sheet date. The resulting gains or losses offset exchange gains

or losses on the related receivables and payables, both of which are recorded as foreign exchange losses in the

34 Bio-Rad

Notes to Consolidated Financial Statements (continued)

consolidated statement of income. The cash flows related to these contracts are classified as cash flows from

investing activities in the Statement of Cash Flows.

Employee Stock Compensation Plans The Company maintains incentive and non-qualified stock option plans for

officers and certain other key employees. The Company also has an employee stock purchase plan that provides

that eligible employees may contribute toward the purchase of the Company’s Class A common stock. These plans

are described more fully in Note 10.

The Company applies the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock

Issued to Employees, and related interpretations in accounting for those plans. No stock-based employee compen-

sation expense is reflected in net income as all options granted under those plans had an exercise price equal to or

greater than the market value of the underlying common stock on the date of grant.

Had compensation cost for the Company’s stock option and stock purchase plans been accounted for under

SFAS 123, Accounting for Stock-Based Compensation, based on the assumptions and methods outlined in Note 10,

the Company’s proforma net income and earnings per share would have been as follows (in millions, except per

share data):

Net income, as reported

$68.2

$76.2

$67.9

Deduct: Total stock-based employee compensation expense

determined under fair value methods for all awards,

Year Ended December 31,

2004

2003

2002

net of related tax effects

Pro forma net income

Earnings per share:

Basic—as reported

Basic—pro forma

Diluted—as reported

Diluted—pro forma

(3.0)

$65.2

$2.65

$2.54

$2.58

$2.47

(2.1)

$74.1

$3.00

$2.91

$2.90

$2.82

(1.8)

$66.1

$2.70

$2.63

$2.61

$2.55

Earnings Per Share The Company calculates basic earnings per share (EPS) and diluted EPS in accordance with

SFAS 128, Earnings per Share. Basic EPS is computed by dividing net income (loss) by the weighted average num-

ber of common shares outstanding for that period. Diluted EPS takes into account the effect of dilutive instruments,

such as stock options, and uses the average share price for the period in determining the number of common stock

equivalents that are to be added to the weighted average number of shares outstanding. Common stock equiva-

lents are excluded from the diluted earnings per share calculation if the effect would be anti-dilutive. Treasury stock

is not considered outstanding for purposes of calculating weighted average shares.

Bio-Rad 35

Weighted average shares used for diluted earning per share include the dilutive effect of outstanding stock

options to purchase 765,000, 894,000 and 917,000 shares for the years ended December 31, 2004, 2003 and

2002, respectively.

Fair Value of Financial Instruments The estimated fair value of financial instruments has been determined using avail-

able market information or other appropriate valuation methodologies. 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 tech-

niques could have a material effect on the estimated fair value.

The estimated fair value of Bio-Rad’s financial instruments was as follows (in millions):

Notes receivable and other

Total long-term debt

Year Ended December 31,

2004

2003

Carrying
Amount

$ 80.0

$426.4

Fair
Value

$104.2

$450.5

Carrying
Amount

$ 52.9

$226.0

Fair
Value

$ 58.3

$256.2

Financial instruments (e.g., notes receivable) that have fair values based on discounted cash flows, market quota-

tions, and other appropriate valuation techniques are included in Other assets. Long-term debt has an estimated fair

value based on quoted market prices for the same or similar issues.

For certain of the Company’s financial instruments, including cash and cash equivalents, short-term investments,

accounts receivable, marketable securities, notes payable, and accounts payable, the carrying amounts approxi-

mate fair value.

New Financial Accounting Standards

In December 2004, the Financial Accounting Standards Board (FASB) issued

SFAS 123R (Revised 2004), Share-Based Payment, which requires that the compensation cost relating to share-based

payment transactions be recognized in financial statements based on alternative fair value models. The share-

based compensation cost will be measured based on the fair value of the equity or liability instruments issued. The

Company currently discloses pro forma compensation expense quarterly and annually (See Note 1). Upon adoption,

the pro forma disclosures previously permitted under SFAS 123 will no longer be an alternative to financial statement

recognition. The provisions of SFAS 123R are effective as of the beginning of the first interim or annual reporting period

that begins after June 15, 2005. The Company is currently evaluating the method of adoption and the effect that the

adoption of SFAS 123R will have on its financial position and results of operations.

In December 2004, the FASB issued SFAS 153, Exchanges of Nonmonetary Assets, an amendment of APB No. 29,

Accounting for Nonmonetary Transactions. SFAS 153 requires exchanges of productive assets to be accounted for

at fair value, rather than at carryover basis, unless (1) neither the asset received nor the asset surrendered has a fair

value that is determinable within reasonable limits or (2) the transactions lack commercial substance. SFAS 153 is

effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The Company

36 Bio-Rad

Notes to Consolidated Financial Statements (continued)

does not expect the adoption of this standard to have a material effect on its financial position, results of operations

or cash flows.

In November 2004, the FASB issued SFAS 151, Inventory Costs—an amendment of ARB No. 43, Chapter 4. SFAS 151

amends the guidance in ARB No. 43 to clarify the accounting for abnormal amounts of idle facility expense, freight,

handling costs, and wasted material (spoilage). SFAS 151 requires that these costs be recognized as current period

charges regardless of whether they are abnormal. In addition, SFAS 151 requires that allocation of fixed production

overheads to the costs of manufacturing be based on the normal capacity of the production facilities. The provisions

of SFAS 151 are effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company

is investigating the impact this new standard may have on its consolidated financial position or results of operations.

In December 2003, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 104,

Revenue Recognition, which revises or rescinds portions of the interpretive guidance included in SAB 101, Revenue

Recognition in Financial Statements, in order to make the guidance consistent with authoritative accounting and

auditing guidance and with SEC rules and regulations. The principal revisions relate to the rescission of material

no longer necessary because of private sector developments in United States generally accepted accounting prin-

ciples. The adoption of SAB 104 did not have any impact on the Company’s consolidated financial position or results

of operations.

During April 2003, the FASB issued SFAS 149, Amendment of Statement 133 on Derivative Instruments and Hedging

Activities. SFAS 149 amends and clarifies accounting for derivative instruments, including certain derivative instru-

ments embedded in other contracts, and for hedging activities under SFAS 133. SFAS 149 was effective for contracts

entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003 and did

not have a material impact on the Company’s financial position or results of operations.

2. Acquisitions

In August 2004, the Company acquired the outstanding shares of MJ GeneWorks, Inc. and its subsidiaries, a life

science company specializing in instruments and consumables used in modern biological research. The total pur-

chase price of $90.0 million included $7.0 million of net tangible assets, $40.5 million of goodwill and $42.5 million of

intangible assets. The Company paid $31.0 million in cash and assumed liabilities including $9.0 million in notes

payable and capital leases and a $50.0 million litigation accrual (see Note 14). Acquired in-process research and devel-

opment of $13.7 million was charged to expense in the third quarter of 2004. The allocation of the total purchase

price to net tangible assets, goodwill and other intangible assets has been recorded at their fair market value based

upon management estimates and third-party valuations. The Company has included these operations in the Life

Science segment.

In March 2004, the Company purchased for cash the controls business of Hematronix, Inc. of Plano, Texas. Bio-Rad

acquired tangible and intangible assets and assumed certain liabilities for approximately $17 million. Acquired

in-process research and development of $0.9 million was charged to expense in the first quarter of 2004. The

Company has included these operations in the Clinical Diagnostics segment.

Bio-Rad 37

On March 31, 2003, the Company acquired the outstanding shares of Verdot Industrie of Riom, France for approxi-

mately $6 million. The Company has included these operations in its Life Science segment. The Company has

completed its evaluation of purchased assets, including intangible assets, and liabilities and has not assigned any

value to goodwill.

3. Short-Term Investments

Short-term investments consist of the following (in millions):

Available-for-sale securities:

Auction rate securities

Certificate of deposit

Variable rate notes

U.S. Agencies

Total short-term investments

December 31,

2004

2003

$146.5

$81.2

4.0

8.4

7.0

—

2.0

—

$165.9

$83.2

Management classifies investments in marketable securities at the time of purchase and reevaluates such

classification at each balance sheet date. Securities classified as available-for-sale are stated at fair value. As of

December 31, 2004, the short-term investments will mature within one year.

4. Investments

The Company purchased shares of ordinary voting stock of Sartorius AG, of Goettingen, Germany, a process tech-

nology supplier to the biotechnology, pharmaceutical, chemical and food and beverage industries for approximately

$11.0 and $10.4 million in 2004 and 2003, respectively. At December 31, 2004, the Company owned approximately

23% of the outstanding voting shares of Sartorius. The Sartorius family trust and Sartorius family members hold

approximately 60% of the outstanding voting shares. Bio-Rad does not have any representative or designee on

Sartorius’ board of directors, nor does it have any other influence over the operating and financial policies of Sartorius.

Therefore, the Company accounts for this investment using the cost method.

In December 1997, Bio-Rad began investing in Instrumentation Laboratory, S.p.A. (IL), an Italian based clinical diag-

nostics company. At December 31, 2004 and 2003, Bio-Rad held approximately 3% and 13% of the outstanding stock

of IL, respectively. A privately held company based in Spain controls approximately 96% of the outstanding stock of

IL. The most recently filed financial statements for IL available for review are as of November 30, 2003. Based on a

combination of many factors, including the lack of current financial information and IL’s continued losses, the

Company has determined that its investment has been other than temporarily impaired. As of December 31, 2004

and 2003, the Company valued its investment in IL at $4.0 million and $6.4 million, respectively. This amount reflects

a $2.4 million write-down in 2004 and a $3.0 million write-down in 2002, which has been recorded in Other income,

38 Bio-Rad

Notes to Consolidated Financial Statements (continued)

net (see Note 11). Although management believes that this investment is realizable, there is a possibility that future

events may cause further impairment.

5. Discontinued Operations

On May 31, 2004, the Company sold a group of assets and transferred certain liabilities that comprise a substantial

portion of the Company’s confocal microscopy product line to Carl Zeiss Jena GmbH. Proceeds of $19.8 million were

offset by net assets of $5.7 million, lease settlements of $6.7 million and severance, legal and other costs of $1.7 mil-

lion resulting in a pre-tax gain of $5.7 million. Payments on the lease liabilities will continue until 2008. All other costs

were settled by December 31, 2004.

As required by SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets, with the disposition of

this asset group, the sales and expenses related to this product line for current and prior periods have been reclas-

sified as a separate line on the income statement titled “Discontinued Operations.”

The discontinued operations generated net sales of $6.3 million, $23.8 million and $27.7 million for the years ended

December 31, 2004, 2003, and 2002, respectively. The pre-tax operating losses attributable to the discontinued

operations for the years ended December 31, 2004, 2003, and 2002 were $2.0 million, $1.7 million, and $0.8 mil-

lion, respectively.

6. Goodwill and Other Purchased Intangible Assets

The Company adopted SFAS 142, Goodwill and Other Intangible Assets as of January 1, 2002, which provides that

goodwill is no longer subject to amortization over its useful life. Goodwill is subject to an annual assessment for

impairment applying a fair-value based test.

As part of the acquisition of the controls business of Hematronix, Inc. in March 2004, (see Note 2) the Company added

$3.2 million of goodwill and $9.3 million of intangible assets including in-process research and development.

In June 2004, the Company purchased $14.0 million of intangible assets related to licensing agreements. The

Company paid $6.0 million upon acquisition and $4.0 million in the third quarter of 2004. The Company will pay

the remaining $4.0 million over the next two years.

As part of the acquisition of MJ GeneWorks, Inc. and its subsidiaries in August 2004, (see Note 2) the Company

added $40.5 million of goodwill and $42.5 million of intangible assets including $13.7 million of in-process research

and development and $22.5 million of developed technology.

Goodwill balances have been included in corporate for segment reporting purposes in Note 15.

Bio-Rad 39

Other than goodwill, the Company has no intangible assets with indefinite lives. Information regarding the Company’s

identifiable purchased intangible assets is as follows (in millions):

Developed Product Technology

Licenses

Know How

Covenants Not to Compete

Patents

Customer Lists

Other

Know How

Patents

Other

December 31, 2004

Average
Useful Life

Carrying
Amount

Accumulated
Amortization

$28.3

14.1

9.9

6.1

4.6

1.7

2.9

$2.5

0.4

2.8

0.6

0.7

0.3

1.7

Net

$25.8

13.7

7.1

5.5

3.9

1.4

1.2

$67.6

$9.0

$58.6

December 31, 2003

Average
Useful Life

Carrying
Amount

Accumulated
Amortization

$ 9.2

4.2

0.7

$14.1

$1.2

0.4

0.2

$1.8

Net

$ 8.0

3.8

0.5

$12.3

Recorded intangible asset amortization expense for the years ended December 31, 2004 and 2003 was $6.9 million

and $1.3 million, respectively. Estimated intangible asset amortization expense (based on existing intangible assets)

for the years ended December 31, 2005, 2006, 2007, 2008, and 2009 is $10.9 million, $10.2 million, $9.8 million,

$8.5 million and $5.6 million, respectively.

7. Notes Payable and Long-Term Debt

Notes payable include local credit lines maintained by the Company’s subsidiaries aggregating approximately

$62.3 million, of which $53.1 million was unused at December 31, 2004. At December 31, 2003 these lines aggre-

gated approximately $40.4 million, of which $30.2 million was unused. The weighted average interest rate on these

lines was 6.8% and 8.1% at December 31, 2004 and 2003, respectively. Bio-Rad Laboratories, Inc. guarantees most

of these credit lines.

40 Bio-Rad

Notes to Consolidated Financial Statements (continued)

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

7.5% Senior Subordinated Notes

6.125% Senior Subordinated Notes

Capitalized leases

Less current maturities

Long-term debt

December 31,

2004

2003

$225.0

200.0

1.4

426.4

(0.4)

$426.0

$225.0

—

1.0

226.0

(0.2)

$225.8

In December 2004, the Company sold $200.0 million principal amount of Senior Subordinated Notes due 2014

(“6.125% Notes”). The notes pay a fixed rate of interest of 6.125% per year. The Company has the right to repur-

chase up to 35% of the 6.125% Notes any time prior to December 15, 2007 upon any sale of the Company’s com-

mon stock at a specified redemption price plus accrued and unpaid interest and certain other charges. Furthermore,

the Company has the option to redeem any or all of the 6.125% Notes at various declining redemption prices or at

100% of the principal amount plus the “applicable premium” (as defined by the indenture) along with accrued and

unpaid interest and certain other charges depending on the date redeemed. The Company’s obligations under the

6.125% Notes are not secured, rank equal to other senior subordinated notes and rank junior to all the Company’s

existing and future senior debt.

In August 2003, the Company sold $225.0 million principal amount of Senior Subordinated Notes due 2013. (“7.5%

Notes”) The notes pay a fixed rate of interest of 7.5% per year. The Company has the right to repurchase up to 35%

of the 7.5% Notes any time prior to August 15, 2006 upon any sale of the Company’s common stock at a specified

redemption price plus accrued and unpaid interest and certain other charges. Furthermore, the Company has the

option to redeem any or all of the 7.5% Notes at various declining redemption prices or at 100% of the principal

amount plus the “applicable premium” (as defined by the indenture) along with accrued and unpaid interest and

certain other charges depending on the date redeemed. The Company’s obligations under the 7.5% Notes are

not secured and rank equal to other senior subordinated notes and rank junior to all the Company’s existing and

future senior debt.

In 2002 and through July 2003, the Company repurchased in the open market $17.3 million (par value) of its Senior

Subordinated Notes due in 2007 (“11.675% Notes”) at an expense, including interest, unamortized issue costs and

unamortized original issue discount of $2.5 million. The remaining $88.7 million (par value) of 11.675% Notes were

tendered and repurchased with a portion of the proceeds from the sale of the 7.5% Notes at an expense, including

interest, unamortized issue costs and unamortized original discount of $11.6 million. This expense is included in inter-

est expense.

Bio-Rad 41

During 2003, the Company negotiated a five-year $150.0 million revolving credit facility to replace its $100.0 million

revolving credit facility. The new credit facility is secured by substantially all of the Company’s personal property assets

and the assets of its domestic subsidiaries and 65% of the capital stock of certain foreign subsidiaries. It is guaran-

teed by all of its existing and future domestic subsidiaries (other than immaterial domestic subsidiaries as defined

for purposes of the new credit facility). The Company terminated its existing credit facility simultaneously with the

closing of its new facility. Interest varies upon a number of factors including the duration of the specific borrowing

and is based upon either the Eurodollar, the Federal Funds effective or the Company corporate based rate.

The credit facility, the 6.125% Notes and the 7.5% Notes require the Company, among other things, comply with

certain financial ratios and covenants. These covenants include a leverage ratio test, an interest coverage test and

a consolidated net worth test. There are also restrictions on the Company’s 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. The Company was in compliance with all financial ratios as of Decem-

ber 31, 2004 and 2003.

Maturities of long-term debt at December 31, 2004, are as follows: 2005—$0.4 million; 2006—$0.4 million; 2007—

$0.3 million; 2008—$0.3 million; 2009—$0.0 million; thereafter—$425.0 million.

8. Income Taxes

The U.S. and international components of income before taxes are as follows (in millions):

U.S.

International

Income from continuing operations before taxes

Year Ended December 31,

2004

2003

2002

$ 3.5

93.8

$97.3

$ 43.6

71.8

$115.4

$ 37.6

67.6

$105.2

42 Bio-Rad

Notes to Consolidated Financial Statements (continued)

The provision (benefit) for income taxes consists of (in millions):

Current:

U.S. Federal

International

U.S. State

Deferred:

U.S. Federal

International

U.S. State

Provision for income taxes

Year Ended December 31,

2004

2003

2002

$ (3.8)

36.4

1.4

34.0

$ 8.6

33.8

1.1

43.5

$11.8

31.0

1.0

43.8

$ (6.2)

$ (3.0)

$ (2.3)

2.1

1.1

(3.0)

(1.8)

(0.6)

(5.4)

(4.2)

(0.6)

(7.1)

$31.0

$38.1

$36.7

The Company’s income tax provision differs from the amount computed by applying the U.S. federal statutory rate

to income before taxes as follows:

U. S. statutory tax rate

Foreign Sales Corporation/EIE tax benefit

Reduction in state tax benefits

Difference between U.S. and foreign tax rates

(net of foreign tax credits)

Loss carryforwards utilized

Foreign losses not benefited

Capital loss not benefited

Decrease in tax reserves

Other

Provision for income taxes

Year Ended December 31,

2004

2003

2002

35%

(2)

(4)

(1)

(2)

—

(1)

—

(1)

35%

(2)

—

(1)

32%

33%

35%

Bio-Rad 43

Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets

and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant compo-

nents of deferred tax assets and liabilities are as follows (in millions):

Deferred tax assets (current):

Reserves for inventory, warranty, and bad debt

Elimination of intercompany profit

Reserve for vacation pay

Other

Valuation allowance

Deferred tax assets (non-current):

Tax benefit of loss carryforwards

Basis difference in investment

State tax credit carryforward

Amortization and depreciation

Retirement reserve

Other

Valuation allowance

Deferred tax liabilities (non-current):

Deferred gain on condemnation

Foreign exchange unrealized gain

Development cost of Hercules facility

Amortization and depreciation

Other

Year Ended December 31,

2004

2003

$ 14.3

$ 15.8

8.8

5.4

7.4

(1.4)

$ 34.5

8.4

4.1

5.9

6.0

4.2

14.5

(16.6)

$ 26.5

5.7

3.3

1.2

7.1

7.5

8.7

3.9

7.0

(4.3)

$ 31.1

10.1

4.1

5.2

7.5

3.5

8.0

(17.2)

$ 21.2

6.2

3.4

1.2

2.5

1.5

$ 24.8

$ 14.8

At December 31, 2004, Bio-Rad’s international subsidiaries had combined net operating loss carryforwards

of $22.2 million. A portion of these loss carryforwards will expire in the following years: 2009—$0.3 million and 2011—

$0.6 million. The remainder of these loss carryforwards have no expiration date. The utilization of these carryforwards

is limited to the separate taxable income of each individual subsidiary.

At December 31, 2004, Bio-Rad had an unutilized domestic net operating loss carryforward of $13.5 million. The loss

carryforward will expire in the year 2018. The utilization of the loss carryforward is limited to Bio-Rad’s domestic

taxable income. At December 31, 2004, Bio-Rad had a California tax credit carryforward of $5.9 million. The credit

carryforward has no expiration date. The utilization of the tax credit carryforward is limited to the extent Bio-Rad has

California taxable income.

44 Bio-Rad

Notes to Consolidated Financial Statements (continued)

A valuation allowance is needed to reduce the deferred tax assets to an amount that is more likely than not to be

realized. The net change in the valuation allowance in 2004 was a decrease of $3.5 million, primarily resulting from

an increase in expected future earnings.

Bio-Rad does not provide for taxes which would be payable if the cumulative undistributed earnings of its inter-

national subsidiaries, approximately $342 million at December 31, 2004, were remitted to the U.S. parent company.

Unless it becomes advantageous for tax or foreign exchange reasons to remit a subsidiary’s earnings, such

earnings are indefinitely reinvested in subsidiary operations. The withholding tax and U.S. federal income taxes on

these earnings, if remitted, would in large part be offset by tax credits.

9. Stockholders’ Equity

The Company’s outstanding stock consists of Class A Common Stock (Class A) and Class B Common Stock

(Class B). Each share of Class A and Class B participates equally in the earnings of Bio-Rad, and is identical in most

respects except that Class A has limited voting rights. Each share of Class A is entitled to one-tenth of a vote on

most matters, and each share of Class B is entitled to one vote. Additionally, Class A stockholders are entitled to

elect 25% of the Board of Directors and Class B stockholders are entitled to elect the balance of the directors. Cash

dividends may be paid on Class A shares without paying a cash dividend on Class B shares but no cash dividend

may be paid on Class B shares unless at least an equal cash dividend is paid on Class A shares. Class B shares are

convertible at any time into Class A shares on a one-for-one basis at the option of the stockholder.

10. Stock Option and Purchase Plans

Stock Option Plans The Company maintains stockholder approved incentive and non-qualified stock option plans

for officers and certain other key employees. No options have been issued to non-employees.

In April of 2003, stockholders approved the 2003 Stock Option Plan of Bio-Rad Laboratories, Inc. (the Plan). The Plan

authorizes the grant to employees of incentive stock options and non-qualified stock options. A total of 1,675,000

shares have been reserved for issuance and may be of either Class A or Class B Common Stock. At December 31,

2004, 1,370,250 shares remain available to be granted.

Under the Amended 1994 Stock Option Plan, the Company may grant options to its employees for up to 3,550,000

shares of common stock provided that no option shall be granted after March 1, 2004.

Under the plans, Class A and Class B options are granted at prices not less than fair market value on the date of

grant. Generally, options granted have a term of 10 years and vest in increments of 25% per year over a four-year

period on the yearly anniversary date of the grant. For options granted after January 1, 2001, options vest in

increments of 20% over a five-year period on the yearly anniversary date of the grant.

Pro forma compensation costs are calculated for the fair value of the employees’ purchase rights, which was esti-

mated using the Black-Scholes model. For purposes of the pro forma disclosures, the estimated fair value of the

options granted is amortized to expense over the options’ vesting period.

Bio-Rad 45

The fair value of options granted was estimated using the Black-Scholes model with the following weighted aver-

age assumptions:

Expected volatility

Risk-free interest rate

Expected life (in years)

Expected dividend

Year Ended December 31,

2004

2003

2002

39%

2.73%

4.3

—

37%

2.65%

4.2

—

35%

3.99%

4.2

—

See Note 1 for a description of the effect of the pro forma compensation expense derived using the fair value method

on the Company’s results.

Activity under the 1994 and 2003 Plans are summarized below (amounts reported in the Price columns represent the

weighted average exercise price):

Year Ended December 31,

2004

2003

2002

Price

Outstanding at beginning of year

1,582,915

$20.04

1,591,832

$15.84

1,572,701

$11.80

Granted

Exercised

Forfeited

Expired

306,990

(221,759)

(33,629)

(3,800)

53.82

14.02

25.13

9.85

302,993

(222,699)

(89,211)

—

35.71

12.58

16.57

—

379,500

(350,549)

(9,820)

—

28.85

11.67

10.90

—

Outstanding at end of year

1,630,717

$27.14

1,582,915

$20.04

1,591,832

$15.84

Options exercisable at year-end

849,633

$15.22

780,415

$13.22

677,149

$12.39

Weighted average fair value

of options granted during

the year

$18.74

$11.85

$9.75

46 Bio-Rad

Notes to Consolidated Financial Statements (continued)

The following summarizes information about stock options outstanding at December 31, 2004:

Range of Exercise Prices

$10.75–$11.94

$11.97–$28.61

$28.88–$53.50

$53.75–$58.85

Options Outstanding

Options Exercisable

Number
Outstanding
at 12/31/04

477,726

491,329

425,766

235,896

1,630,717

Weighted
Average Remaining
Contractual Life
(in years)

Weighted
Average
Exercise Price

5.37

4.32

7.80

9.10

6.23

$11.25

20.72

37.52

53.92

$27.14

Number
Exercisable
at 12/31/04

Weighted
Average
Exercise Price

454,976

317,332

77,325

—

$11.25

16.54

33.23

—

849,633

$15.22

Employee Stock Purchase Plan The Company has an employee stock purchase plan that provides that eligible

employees may contribute up to 10% of their compensation up to $25,000 annually toward the quarterly purchase

of the Company’s Class A common stock. The employees purchase price is 85% of the lesser of the fair market

value of the stock on the first business day or the last business day of each calendar quarter. No compensation

expense is recorded in connection with the plan. The Company has authorized the sale of 1,890,000 shares of com-

mon stock under the plan.

The Company sold 68,932 shares for $3.1 million, 71,314 shares for $2.4 million and 66,992 shares for $1.8 million

under the plan to employees in 2004, 2003 and 2002, respectively. The weighted average fair value of purchase rights

granted in 2004, 2003 and 2002 was $10.81, $9.76 and $8.41, respectively. At December 31, 2004, 200,307 shares

remain authorized under the plan.

The fair value of the employees’ purchase rights was estimated using the Black-Scholes model with the following

assumptions:

Expected volatility

Risk-free interest rate

Expected life (in years)

Expected dividend

Year Ended December 31,

2004

2003

2002

20.91%

1.22%

0.25

—

41.86%

0.93%

0.25

—

44.19%

1.58%

0.25

—

See Note 1 for a description of the effect of the pro forma compensation expense derived using the fair value method

on the Company’s results.

Bio-Rad 47

11. Other Income and Expense

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

Write-down of investments (Note 4)

Interest and investment income

Litigation settlement

Income from equity investee (Note 16)

Miscellaneous other items

Other income, net

12. Supplemental Cash Flow Information

Year Ended December 31,

2004

$ (2.4)

6.6

1.9

3.1

1.9

$11.1

2003

$ —

3.2

—

(0.2)

$ 3.0

2002

$(5.0)

4.3

—

1.4

$ 0.7

The reconciliation of net income to net cash provided by operating activities is as follows (in millions):

Income from continuing operations

$ 66.3

$ 77.3

$ 68.5

Adjustments to reconcile income to net cash provided by operating

activities (net of effects of acquisitions):

Year Ended December 31,

2004

2003

2002

Depreciation

Amortization

Foreign currency economic hedge transactions, net

Gains on dispositions of marketable securities

(Increase) decrease in accounts receivable, net

Increase in inventories, net

Decrease (increase) in other current assets

Increase (decrease) in accounts payable and other current

liabilities

Decrease in income taxes payable

Increase (decrease) in deferred taxes

Loss on sale of spectroscopy business and write-down

of investments

Debt retirement costs on 115⁄8% bonds

Other

Net cash provided by continuing operations

Discontinued operations

Net cash provided by operating activities

46.2

10.0

(6.5)

(1.9)

(4.4)

(5.5)

3.5

1.1

(2.8)

2.5

2.4

—

13.7

124.6

(1.5)

40.0

2.0

15.0

(0.3)

10.0

(8.2)

(14.2)

(1.6)

(5.6)

(8.0)

—

9.5

12.8

128.7

(1.1)

$123.1

$127.6

36.9

1.1

2.3

(0.1)

(0.7)

(16.2)

(12.1)

11.6

(6.9)

15.1

5.0

—

1.9

106.4

(0.6)

$105.8

48 Bio-Rad

Notes to Consolidated Financial Statements (continued)

13. Commitments and Contingent Liabilities

Rents and Leases Net rental expense under operating leases was $23.0 million in 2004, $23.0 million in 2003 and

$19.5 million in 2002. Leases are principally for facilities and automobiles.

Annual future minimum lease payments at December 31, 2004, under operating leases are as follows: 2005—

$22.7 million; 2006—$15.4 million; 2007—$9.7 million; 2008—$5.3 million; 2009—$2.8 million; subsequent to 2009—

$5.8 million.

Deferred Profit Sharing Retirement Plan The Company has a profit sharing plan covering substantially all U.S.

employees. Contributions are made at the discretion of the Board of Directors. Bio-Rad has no liability other than for

the current year’s contribution. Contributions charged to income were $7.0 million, $6.5 million and $4.8 million in

2004, 2003 and 2002, respectively.

Other Post Employment Benefits

In several foreign locations the Company is statutorily required to provide a lump

sum severance or termination indemnity to its employees. Under these plans, the vested benefit obligation at

December 31, 2004 and 2003 was $17.3 million and $14.3 million, respectively and have been included in Other long-

term liabilities in the consolidated balance sheets. These plans are not required to be funded, and as such, there is

no trust or other device used to accumulate assets to settle these obligations.

Foreign Exchange Contracts The Company enters into forward foreign exchange contracts as an economic hedge

against foreign currency denominated intercompany receivables and payables. At December 31, 2004, the Company

had contracts maturing in January through March 2005 to sell foreign currency with a nominal value of $80.4 million

and an unrealized loss of $0.1 million. Contracts to purchase foreign currency had a nominal value of $23.0 mil-

lion with an unrealized loss of $0.2 million.

Insurance The Company carries a deductible for workers’ compensation and a portion of its group health insur-

ance cost. Accruals for losses are based on the Company’s claims experience and actuarial assumptions followed

in the insurance industry. Should a greater amount of claims occur compared to the Company’s estimates or cost

of medical care increase beyond what has been anticipated, reserves recorded may not be sufficient and additional

charges to income may be required.

Letters of Credit

In the ordinary course of business, the Company is at times required to post letters of credit.

The letters of credit are issued by our banks to guarantee the Company’s obligations to insurance companies. The

Company was contingently liable for approximately $4.6 million of standby letters of credit with banks as of Decem-

ber 31, 2004.

Taxes Settlement of open tax years, as well as tax issues in other countries where the Company conducts its

business, are not expected to have a material effect on the consolidated financial position or liquidity of the Company

and, in the opinion of management, adequate provision has been made for income and franchise taxes for all years

under examination or subject to future examination.

Bio-Rad 49

14. Legal Proceedings

Applera Corporation and Roche Molecular Systems filed a patent infringement case against MJ Research, Inc.

and John and Michael Finney in the U.S. District Court for the District of Connecticut in June 1998. On August 18,

2004, the Company acquired MJ Research through the acquisition of 100% of the stock of its parent company,

MJ GeneWorks, Inc., from John and Michael Finney. The complaint alleges that MJ Research is infringing on some

Polymerase Chain Reaction (PCR) patents. In response to their claims, MJ Research filed counterclaims including,

among others, allegations that Applera Corporation had licensed and enforced these patents through anticompeti-

tive conduct in violation of federal and state antitrust laws. A trial on these matters commenced in March 2004. The

Court elected to hold the trial in two phases: a patent phase and an antitrust phase. In the patent phase, which has

concluded, the jury found that MJ Research infringed three U.S. patents related to PCR process technology and three

U.S. patents related to thermal cycler instrument technology. The jury found the infringement of four of the six patents

to be willful. In April 2004, the jury awarded damages to Applera Corporation and Roche Molecular Systems in the

amount of $19.8 million. Applera Corporation and Roche Molecular Systems intend to seek an enhancement of

damages, including legal fees, since several infringements were found to be willful subjecting the Company to

triple damages on a portion of the award. Regarding the antitrust phase of the trial, the Court has ruled against

MJ Research on all of its patent misuse defenses and federal antitrust counterclaims. We expect the Court to dis-

miss all of MJ Research’s counterclaims, including the state antitrust and unfair competition claims, based on those

rulings. MJ Research is seeking reconsideration of the Court’s ruling on patent misuse. MJ Research filed for

chapter 11 bankruptcy protection in the U.S. Bankruptcy Court for the District of Nevada on March 29, 2004. On

September 2, 2004, the Bankruptcy Court granted MJ Research’s motion to dismiss its chapter 11 bankruptcy case

and the order dismissing the bankruptcy case became final on September 13, 2004. In connection with these

matters, the Company has established a $50.0 million litigation accrual. See Note 2.

Applera Corporation filed four actions in the Regional Court of Düsseldorf, Germany during the period from August

2002 through September 2003 against MJ Research and others alleging infringement of four European patents relat-

ing to thermal cyclers. The Company is also a defendant in one of the actions. The suit seeks actual damages, costs

and expenses and injunctive relief. Three of the actions had a trial before the Düsseldorf court in April 2004. One of

these actions has since been dismissed and another has been stayed pending a hearing in March 2005. In May 2004,

the Düsseldorf court issued an adverse ruling against MJ Research and the Company, which included an injunction

against the Company and MJ Research from selling any real-time PCR instruments and reagents in Germany. In

December 2004, the European Patent Office revoked the patent and the injunctions against MJ Research and the

Company were lifted, allowing MJ Research and the Company to resume sales of real-time PCR thermal cyclers and

reagents. A decision on a separate action concerning Applera Corporation’s European patent relating to automated

performance of PCR is expected in March 2005.

50 Bio-Rad

Notes to Consolidated Financial Statements (continued)

The Company is a defendant in an action in Japan which is similar to the action concerning the revoked European

patent relating to real-time PCR. Applera Corporation commenced this action against the Company on May 7, 2002.

The complaint alleges that the Company is infringing a Japanese patent which is a counterpart to the revoked

European patent and seeks injunctive relief but not damages. In November 2003, the Japanese court issued an

adverse ruling against the Company which enjoins the Company from selling real-time PCR instruments and reagents

in Japan. The Company has appealed the decision and has also filed a separate action in the Japanese Patent Office

seeking revocation of the Japanese patent.

The Company and MJ Research are also defendants in an action in the U.S. District Court for the District of Con-

necticut which is similar to the action concerning the European real-time PCR patent. Applera Corporation com-

menced the action against the Company on November 9, 2004. The complaint alleges that the Company is infringing

a U.S. patent which is a counterpart to the revoked European real-time PCR patent. The complaint seeks damages

and injunctive relief.

The Company is also party to various other claims, legal actions and complaints arising in the ordinary course of

business. The Company does not believe that any ultimate liability resulting from any of these other lawsuits will have

a material adverse effect on its results of operations, financial position or liquidity. However, the Company cannot

give any assurance regarding the ultimate outcome of these lawsuits and their resolution could be material to the

Company’s operating results for any particular period, depending upon the level of income for the period.

15. Segment Information

Bio-Rad is a multinational manufacturer and worldwide distributor of its own life science research products and

clinical diagnostics products. Bio-Rad has two reportable segments: Life Science and Clinical Diagnostics. These

reportable segments are strategic business lines that offer different products and services and require different

marketing strategies.

The Life Science segment develops, manufactures, sells and services reagents, apparatus and instruments used for

biological research. These products are sold to university and medical school laboratories, pharmaceutical and

biotechnology companies, food testing laboratories and government and industrial research facilities.

The Clinical Diagnostics segment develops, manufactures, sells and services automated test systems, informatics

systems, test kits and specialized quality controls for the healthcare market. These products are sold to reference

laboratories, hospital laboratories, state newborn screening facilities, physicians office laboratories, transfusion lab-

oratories, and insurance and forensic testing laboratories.

The remainder of the Company’s former Analytical Instruments segment is included in Other Operations. The

material product lines of this segment were sold in 2001 and 2000.

Bio-Rad 51

The accounting policies of the segments are the same as those described in Significant Accounting Policies (see

Note 1). Segment profit or loss used for corporate management purposes includes an allocation of corporate expense

based upon sales and an allocation of interest expense based upon accounts receivable and inventories. Segments

are expected to manage only assets completely under their control. Accordingly, segment assets include primarily

accounts receivable, inventories and gross machinery and equipment. Goodwill balances have been included in

corporate for segment reporting purposes.

Information regarding industry segments at December 31, 2004, 2003 and 2002 and for the years then ended is as

follows (in millions):

Segment net sales

Allocated interest expense

Depreciation and amortization

Segment profit (loss)

Segment assets

Capital expenditures

Life
Science

Clinical
Diagnostics

Other
Operations

2004

2003

2002

2004

2003

2002

2004

2003

2002

2004

2003

2002

2004

2003

2002

2004

2003

2002

$504.7

456.2

401.8

$576.4

514.8

455.4

$ 8.0

$ 12.1

6.7

8.8

9.6

12.4

$ 18.8

$ 32.6

10.3

8.3

29.2

27.4

$ 31.4

$ 60.1

73.2

76.0

$277.5

252.7

225.1

59.8

41.9

$401.2

379.5

336.4

$ 24.1

$ 34.6

36.2

10.9

30.7

29.7

$ 8.9

8.6

7.8

$ 0.1

0.1

$ 0.2

0.3

0.2

$(0.1)

(0.2)

(1.6)

$ 6.0

5.0

4.7

$ 0.1

0.1

The Life Science segment profit (loss) for 2004 includes $13.7 million of in-process research and development

expense purchased as part of the MJ GeneWorks, Inc. acquisition.

52 Bio-Rad

Notes to Consolidated Financial Statements (continued)

The difference between total segment allocated interest expense, depreciation and amortization, and capital expen-

ditures and the corresponding consolidated amounts is attributable to the Company’s corporate headquarters. The

following reconciles total segment profit to consolidated income before taxes (in millions):

Total segment profit

Other income, net

Foreign exchange losses

Costs related to bond redemption

Net corporate operating, interest and other income and expense

not allocated to segments

Consolidated income before taxes from continuing operations

Year Ended December 31,

2004

2003

2002

$91.4

$132.8

$116.3

8.0

(2.4)

—

3.0

(4.1)

(14.1)

0.7

(5.4)

(6.9)

0.3

$97.3

(2.2)

$115.4

0.5

$105.2

The following reconciles total segment assets to consolidated total assets (in millions):

Total segment assets

Cash and other current assets

Net property, plant and equipment excluding segment specific gross machinery

and equipment

Goodwill

Other long-term assets

Total assets

December 31,

2004

2003

$ 684.7

471.8

$637.2

231.6

(16.4)

113.3

138.6

(34.2)

69.5

88.5

$1,392.0

$992.6

The following presents sales to external customers by geographic area based primarily on the location of the use of

the product or service (in millions):

Europe

Pacific Rim

United States

Other (primarily Canada and Latin America)

Total sales

Year Ended December 31,

2004

2003

2002

$ 502.2

$434.5

$363.4

168.2

370.2

49.4

159.8

335.2

50.1

142.6

307.8

51.2

$1,090.0

$979.6

$865.0

Bio-Rad 53

The following presents long-lived assets by geographic area based upon the location of the asset (in millions):

Europe

Pacific Rim

United States

Other (primarily Canada and Latin America)

Total long-lived assets

16. Quarterly Financial Data—(Unaudited)

Year Ended December 31,

2004

2003

2002

$ 57.7

$ 48.4

$ 31.8

8.0

385.4

3.1

7.5

254.4

5.7

7.2

216.2

5.2

$454.2

$316.0

$260.4

Summarized quarterly financial data for 2004 and 2003 are as follows (in millions, except per share data):

2004

Net sales

Gross profit

Net income

Basic earnings per share

Diluted earnings per share

2003

Net sales

Gross profit

Net income

Basic earnings per share

Diluted earnings per share

First
Quarter

Second
Quarter

Third
Quarter

Fourth
Quarter

$262.7

149.3

22.0

$ 0.86

$ 0.83

$240.4

140.7

26.4

$ 1.04

$ 1.01

$260.5

149.7

22.9

$ 0.89

$ 0.86

$239.3

135.0

21.0

$ 0.83

$ 0.80

$258.9

142.8

6.3

$ 0.24

$241.8

135.0

9.7

$ 0.38

$ 0.37

$307.9

168.3

17.0

$ 0.66

$ 0.65

$258.1

145.5

19.1

$ 0.75

$ 0.73

In the fourth quarter of 2004, the Company refined its procedures to more accurately reflect the application of its

revenue recognition policy, resulting in a decrease in net sales and net income of approximately $5.0 million and

$1.7 million, respectively. Also, in the fourth quarter of 2004, the Company adopted the equity method of account-

ing for one of its investments previously accounted for on the cost method. The result was an increase in net income

of $2.1 million. Neither of these items had a significant effect on any prior quarter or fiscal year.

54 Bio-Rad

Notes to Consolidated Financial Statements (continued)

As stated in Note 5, the Company sold a group of the Life Science Division’s assets and transferred certain liabili-

ties. The quarterly financial data has been restated for the effects of this sale. A reconciliation to previously reported

quarterly financial data is as follows:

2004

Net sales

Sales of discontinued operations

Net sales previously reported

Gross profit

Gross profit of discontinued operations

Gross profit previously reported

2003

Net sales

Sales of discontinued operations

Net sales previously reported

Gross profit

Gross profit of discontinued operations

Gross profit previously reported

First
Quarter

Second
Quarter

Third
Quarter

Fourth
Quarter

$262.7

3.9

$266.6

$149.3

1.5

$150.8

$240.4

5.6

$246.0

$140.7

2.0

$142.7

$260.5

2.4

$262.9

$149.7

0.5

$150.2

$239.3

4.2

$243.5

$135.0

1.4

$136.4

$258.9

—

$258.9

$142.8

—

$142.8

$241.8

5.9

$247.7

$135.0

2.4

$137.4

$307.9

—

$307.9

$168.3

—

$168.3

$258.1

8.1

$266.2

$145.5

3.4

$148.9

Bio-Rad 55

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of Bio-Rad Laboratories Inc., Hercules, California

We have audited the accompanying consolidated balance sheets of Bio-Rad Laboratories, Inc. and subsidiaries

(“the Company”) as of December 31, 2004 and 2003, and the related consolidated statements of income, stock-

holders’ equity, and cash flows for each of the three years in the period ended December 31, 2004. These financial

statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these

financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board

(United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about

whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a

test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes

assessing the accounting principles used and significant estimates made by management, as well as evaluating the

overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of

Bio-Rad Laboratories, Inc. and subsidiaries as of December 31, 2004 and 2003, and the results of their operations

and their cash flows for each of the three years in the period ended December 31, 2004, in conformity with account-

ing principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United

States), the effectiveness of the Company’s internal control over financial reporting as of December 31, 2004, based

on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring

Organizations of the Treadway Commission and our report (not presented herein) dated March 2, 2005 expressed

an unqualified opinion on management’s assessment of the effectiveness of the Company’s internal control over

financial reporting and an unqualified opinion on the effectiveness of the Company’s internal control over finan-

cial reporting.

San Francisco, California

March 2, 2005

56 Bio-Rad

Management’s Discussion and Analysis

Management’s Discussion and Analysis of Results of Operations and Financial Condition

This discussion should be read in conjunction with the information contained in the Company’s Consolidated

Financial Statements and the accompanying notes which are an integral part of the statements. References are to

the Notes to Consolidated Financial Statements.

Other than statements of historical fact, statements made in this Annual Report include forward looking statements,

such as statements with respect to the Company’s future financial performance, operating results, plans and objec-

tives that involve risk and uncertainties. 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: our ability to successfully develop and market

new products; our reliance on and access to necessary intellectual property; 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 undertake no obligation to publicly update or revise any forward looking statements,

whether as a result of new information, future events, or otherwise.

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 clini-

cal diagnostics. We sell more than 8,000 products and services to a diverse client base comprised of scientific

research, healthcare, industry, 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 replication of results from

experiments and tests, we estimate that approximately 70% of our revenues are recurring. Approximately 34% of

our 2004 consolidated net sales are from the United States, and approximately 66% are international sales, largely

denominated in local currency with the majority of these sales in Euros, Yen and British Sterling. As a result, our con-

solidated sales expressed in dollars benefit when the US dollar weakens and suffers when the dollar strengthens in

relation to other currencies. Currency fluctuations benefited our consolidated sales expressed in U.S. dollars in 2004

and 2003. The market for reagents and apparatus remains good as growth rates have slowed in the global economic

downturn but have not turned negative. The market for large capital equipment in 2003 and 2004 declined from prior

periods, as many pharmaceutical and biotechnology customers delayed or reduced their capital spending. Bio-Rad

is generally less impacted by capital spending as lower cost reagents and apparatus comprise more than 70% of

product sales.

Bio-Rad 57

The following shows gross profit and expense items as a percentage of net sales:

Net sales

Cost of goods sold

Gross profit

Selling, general and administrative expense

Product research and development expense, excluding in-process

research and development

Income from continuing operations

Discontinued operations

Net income

Year Ended December 31,

2004

2003

2002

100.0

44.0

56.0

34.7

9.9

6.1

0.2

6.3

100.0

43.2

56.8

32.4

9.3

7.9

(0.1)

7.8

100.0

42.2

57.8

32.6

9.2

7.9

(0.1)

7.8

We intend that the discussion of our financial condition and results of operations that follow will assist you in under-

standing how accounting principles, policies and estimates effect our results, and the significant factors that caused

changes in our operations and financial position for the years ended December 31, 2004 and 2003.

Critical Accounting Policies and Estimates

The accompanying discussion and analysis of the Company’s financial condition and results of operations are based

upon the consolidated financial statements, which have been prepared in accordance with generally accepted

accounting principles in the United States (GAAP). The preparation of financial statements in conformity with GAAP

requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and

contingencies as of the date of the financial statements and reported amounts of revenues and expenses during the

reporting periods. The Company evaluates its estimates on an on-going basis. The Company bases its estimates on

historical experience and on various other 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. However, future events are subject to change and the best current esti-

mates and assumptions routinely require adjustment. Actual results could differ from these estimates. The Company

has determined that for the periods reported in their 2004 Annual Report that the following critical accounting poli-

cies and estimates, are critical in understanding the financial condition and results of operation of the Company.

Accounting for Income Taxes As part of the process of preparing Bio-Rad’s consolidated financial statements

management is required to estimate the Company’s income taxes in each of the jurisdictions in which the Company

operates. This process involves estimating Bio-Rad’s actual current tax exposure together with assessing tempo-

rary differences resulting from differing treatment of items for tax and accounting purposes. These differences result

in deferred tax assets and liabilities, which are included within the consolidated balance sheet. Management must

then assess the likelihood that the deferred tax assets will be recovered from future taxable income and to the

extent management believes that recovery is not likely, a valuation allowance must be established. To the extent

58 Bio-Rad

Management’s Discussion and Analysis (continued)

management establishes a valuation allowance or increases this allowance in a period, an expense within the tax

provision in the statement of operations must be included.

Significant management judgment is required in determining the provision for income taxes, deferred tax assets and

liabilities and any valuation allowance recorded against the net deferred tax assets. The Company has recorded

a valuation allowance of $18.0 million and $21.4 million as of December 31, 2004, and 2003 respectively due to

uncertainties related to the Company’s ability to utilize some of the deferred tax assets, primarily consisting of

certain foreign net operating losses carried forward, before they expire. The valuation allowance is based on man-

agement’s current estimates of taxable income by the jurisdictions in which Bio-Rad operates and the period over

which the deferred tax assets will be recoverable. In the event that actual results differ from these estimates or these

estimates are adjusted in future periods an additional valuation allowance may need to be established which would

increase the tax provision, lowering income and impacting Bio-Rad’s financial position. Should realization of these

deferred assets previously reserved occur, the tax provision would decrease, raising income and positively impact-

ing Bio-Rad’s financial position.

Valuation of Long-lived and Intangible Assets and Goodwill The Company assesses the impairment of identifiable

intangibles, long-lived assets and related goodwill and enterprise level goodwill whenever events or changes in

circumstances indicate that the carrying value may not be recoverable. Projected future operating results and

cash flows of the reporting units are used to establish the fair value used in evaluating the carrying value of the

associated goodwill. Factors the Company considers important which could trigger an impairment review include

the following:

• significant under-performance relative to expected historical or projected future operating results;

• significant changes in the manner of use of the acquired assets or the strategy for the Company’s overall business;

• significant negative industry or economic trends.

When the Company determines that the carrying value of intangibles, long-lived assets and related goodwill and

enterprise level goodwill may not be recoverable based upon the existence of one or more of the above indicators

of impairment, the Company measures any impairment based on a projected discounted cash flow method using

a discount rate determined by management to be commensurate with the risk inherent in Bio-Rad’s current

business model.

In 2002, SFAS 142, Goodwill and Other Intangible Assets became effective. The Company adopted SFAS 142 and

ceased to amortize approximately $77.7 million of goodwill. In lieu of amortization, the Company is required to

perform an annual impairment review of goodwill. For the years 2003 and 2004 that review indicated no impairment

had taken place. However, there can be no assurance that a material impairment charge will not be recorded in

future periods.

Bio-Rad 59

Valuation of Inventories The Company values inventory at the lower of the actual cost to purchase and/or manu-

facture the inventory or the current estimated market value of the inventory. The Company reviews inventory quan-

tities on hand and records a provision for excess and obsolete inventory based primarily on an estimated forecast

of product demand and production requirements for the next twelve months on a quarterly basis or, if warranted by

the circumstances, more frequently. In addition, our industry is characterized by technological change, frequent

new product development and product obsolescence that could result in an increase in the amount of obsolete

inventory quantities on hand. Additionally, the Company’s estimates of future product demand may prove to be

inaccurate, in which case the Company may have understated or overstated the provision required for excess and

obsolete inventory. In the future, if inventory is determined to be overvalued, the Company would be required to

recognize such costs in our cost of goods sold at the time of such determination. Likewise, if inventory is determined

to be undervalued, the Company may have over-reported cost of goods sold in previous periods and would be

required to recognize such additional operating income at the time of sale. Therefore, although the Company makes

efforts to ensure the accuracy of its forecasts of future product demand, any significant unanticipated changes in

demand or technological developments could have a significant impact on the value of its inventory and reported

operating results.

Allowance for Doubtful Accounts The Company maintains an allowance for doubtful accounts for estimated losses

resulting from the inability of our customers to make required payments. The amount of the allowance is determined

by analyzing known uncollectible accounts, the age of our receivables, economic conditions in the customers’

country or industry, historical losses and our customers’ general credit-worthiness. Amounts later determined and

specifically identified to be uncollectible are charged or written off against this reserve. This valuation allowance is

reviewed on a quarterly basis to determine whether a provision or reversal is warranted. Should the estimates be

higher than the actual uncollectible accounts, the Company would report lower profitability when the estimates are

made and higher profitability when the receivable is collected through negotiation or litigation.

Warranty Reserves The Company warrants certain equipment against defects in design, materials and work-

manship, generally for a period of one year. Upon shipment of that equipment, the Company establishes, as part of

cost of goods sold, a provision for the expected costs of such warranty based on historical experience, specific war-

ranty terms and customer feedback. A review is performed on a quarterly basis to assess the adequacy of our

warranty reserve, and adjusted, if necessary. The warranty percentage and accrual are based on actual experience

and expected future costs to be incurred. Should realized costs be higher than expected costs, cost of goods sold

would be lower in the period of estimation and higher when realized.

Litigation Reserves Estimated amounts for claims that are probable and can be reasonably estimated are recorded

as liabilities in the consolidated balance sheets. The likelihood of a material change in these estimated reserves would

be dependent on the possible outcome of settlement negotiations, regulatory or judicial review and the development

of facts and circumstances in extended litigation which could change claims or assessments when both the amount

and range of loss on some outstanding litigation is uncertain. The Company is obligated to disclose in the footnotes

of the financial statements when it is unable to make a reasonable estimate of the liability that could result from

unfavorable outcomes in litigation. As events occur, the Company will assess the potential liability related to our

pending litigation and revise our estimates. Such revisions in our estimates of the potential liability could materially

impact our results of operations and financial position.

60 Bio-Rad

Management’s Discussion and Analysis (continued)

Corporate Results—Sales, Margins and Expenses

Bio-Rad net sales for the year 2004 were $1,090.0 million, an increase of 11.3% over the prior year. The impact of a

weakening US dollar throughout the year provided growth from foreign currency denominated net sales of approxi-

mately 5.8% for the full year.

The Life Science segment had sales growth of 10.6% in 2004, benefiting from an approximate 5.8% increase due to

foreign exchange. Currency neutral sales growth of 4.8% was provided by the acquisition of MJ Research and the

Company’s protein expression product lines. Additionally, amplification and electrophoresis reagents product lines

grew well.

Offsetting the sales growth of this segment is continued aggressive competitor pricing for the BSE test, continued

general weakness related to some government grant spending (most notable Japan), and diminished capital equip-

ment purchases by large pharmaceutical companies.

The Clinical Diagnostics segment had sales growth of 12.0% in 2004, benefiting from an approximate 5.7% increase

due to foreign exchange. Currency neutral sales growth of 6.3% was provided in several broad product lines of

the Clinical Diagnostics segment. The Company’s quality control products had significant growth both from the

Hematronix acquisition and the growth of existing product offerings followed by diagnostic testing for autoimmune,

diabetes and blood virus.

Bio-Rad net sales for the year 2003 were $979.6 million, an increase of 13.3% over the prior year after presenting the

Company’s confocal microscopy operations, sold in May 2004, as discontinued operations. The impact of a weak-

ening US dollar throughout the year provided growth from net foreign currency denominated sales of approximately

8.8% for the full year.

The Life Science segment had sales growth of 13.6% in 2003, benefiting from an approximate 9.2% increase due

to foreign exchange. Life Science experienced sales growth in the areas of amplification and electrophoresis

reagents. Offsetting this growth was a currency neutral sales decline in the BSE test as a result of aggressive com-

petitor price discounting.

The Clinical Diagnostics segment had sales growth of 13.0% in 2003, benefiting from an approximate 8.6% increase

due to foreign exchange. Product lines providing the 4.4% of currency neutral sales growth were quality control

products and blood virus products.

The 2004 consolidated gross margins declined to 56.0% in the current year from 56.8% after presenting the

confocal microscopy product line divestiture as discontinued operations on a consistent basis. The decline in Life

Science gross margins accounted for the decline for the Company as a whole. Factors contributing to the

Life Science decline were continued lower overall pricing on the BSE product line, increased intangible asset

amortization from the MJ acquisition, as well as MJ integration costs, and lower than anticipated factory volumes

not absorbing fixed factory overhead costs. Clinical Diagnostics margins improved by about 1%. Efficiency gains in

factory performance have resulted in a general trend of improving Clinical Diagnostics margins.

Bio-Rad 61

The 2003 consolidated gross margins declined to 56.8% from 57.8% in the prior year. The decline in gross margin

for the Life Science segment accounted for the decline for the Company as a whole. The BSE product line accounted

for the majority of the decline as average selling price declined and costs to automate customer testing procedures

were not fully recovered in an attempt to protect the Company’s existing market share. Life Science manufacturing

overhead costs also increased as planned spending levels exceeded the planned activity levels resulting in less

efficient overhead absorption. Clinical Diagnostics gross margins improved by approximately one-half of one

percent. Spending increases below the rate of sales growth have generally aided the small improvement in Clinical

Diagnostics margins.

Consolidated selling, general and administrative expense was 34.7% for the year 2004 compared to 32.4% for the

year 2003. Both the Life Science and Clinical Diagnostics segments added expenses at a rate that exceeded sales

growth, with a significant portion of the growth attributable to Life Science. During 2004 Life Science had increased

facility costs from moving into new facilities and consulting costs associated with the implementation of new distri-

bution, manufacturing and financial software systems. Costs also increased related to the MJ acquisition and legal

matters associated with the gene expression product line.

The Company as a whole has seen significant increased costs associated with regulatory compliance especially

Section 404 of Sarbanes-Oxley Act, but also global tax compliance and security and disaster recovery for the

Company’s information technology infrastructure. Personnel costs remain the largest element of selling, general and

administrative (SG&A) expense and the increased cost for salary and wages, fringe benefits for existing, acquisition-

related and current year increases to personnel all contributed to higher spending levels.

Consolidated selling, general and administrative expense for 2003 was 32.4% of sales, compared to 32.6% for

the year ended 2002. The Life Science segment added expenses at a rate of growth higher than sales. Areas of

emphasis were selling and marketing efforts in the segment’s protein function, protein separation and gene expres-

sion product lines. SG&A expenses were not reduced in food safety as a means to respond in the short term to

competitive pressures maintaining Bio-Rad’s market leading position. The Clinical Diagnostics segment grew SG&A

at a lower rate than sales growth and accounts in large part for their improved segment profitability. The Company

also made investments in financial and tax compliance to improve future profitability.

Excluding $14.6 million of purchased in-process R&D from both the Hematronix and MJ Research acquisitions,

product research and development expense (R&D) in 2004 rose to 9.9% of sales from 9.3% in 2003. The significant

increase in spending levels occurred in Life Science in the areas of protein separation and function and food safety.

Increased spending levels in Clinical Diagnostics are attributable to the recently announced FDA clearance for the

BioPlex®2200, an immunoassay platform that employs multiplexing technology. Clinical Diagnostics continues to

invest in expanding its quality control products and blood virus diagnostic tests. Bio-Rad plans to reinvest between

9% and 10% of sales in research and development annually to support sales growth.

Product research and development expense in 2003 rose to 9.3% of sales. In absolute dollars each segment had

growth with Life Science increasing more than Clinical Diagnostics. Life Science concentrated on proteomics, process

chromatography, food testing and microarray technology. Clinical Diagnostics concentrated on automation for the

serology, autoimmune and blood virus products as well as the segment’s quality control products.

62 Bio-Rad

Management’s Discussion and Analysis (continued)

Corporate Results

Interest expense declined in 2004 to $20.2 million, a decrease of $10.8 million. The year 2004 is representative of

approximately $251.6 million of average borrowings, consisting largely of the September 2003, 7.5%, 10 year bonds

plus the amortization of bond origination fees and interest on local foreign lines of credit. In December 2004, the

Company borrowed an additional $200.0 million in a private placement of 10 year Senior Subordinated Notes at

6.125%. This additional borrowing will cause 2005 interest expenses to increase by approximately $12.5 million includ-

ing the amortization of bond origination fees. For 2004, the 6.125% 2004 bonds were outstanding for nine days.

Interest expense increased to $31.0 million in the year 2003. Included in the current year’s interest cost is $14.6

million for the open market repurchase and tendering of $106.0 million of Bio-Rad’s 115⁄8% Senior Subordinated Notes

due 2007 and the refinancing of the Company’s primary credit facility. These costs include a premium to repurchase

the notes, and the expensing of unamortized debt issue costs and original issue discount.

Foreign exchange losses for 2004 and 2003 decreased by $1.7 million and $1.4 million, respectively, when compared

to prior years. All years include the net cost of Bio-Rad’s economic hedging program valuing open option contracts

to fair market value at period end and the revaluation of intercompany receivables and payables for the established

European, Asian and North America currencies.

Other income and expense for the year 2004 includes $4.6 million of interest and dividends generated by the

Company’s net cash position and notes receivable. The Company also settled by negotiation and received cash pay-

ments of $3.3 million in two matters that originated prior to 2002. First was a $1.9 million settlement with an outside

legal firm which represented the Company in the mid 1990s. The second settlement was with Digilab LLC for con-

tested transition services settled in connection with the sale of the Company’s spectroscopy product line in October

2001. The Company additionally recorded a write-down of $2.4 million for an other than temporary impairment of its

investment in Instrumentation Laboratories, an Italian diagnostic company in which it holds a 3% stake, and recorded

$3.1 million of other income associated with an equity method investee, a Japanese equipment manufacturer in which

it holds a 40% stake.

Bio-Rad’s consolidated effective tax rate was 32%, 33% and 35% in 2004, 2003 and 2002, respectively. The tax rate

for all years reflects the utilization of loss carryforwards, foreign sales corporation benefits, and foreign tax credits.

The largest component in the 2004 and 2003 year over year decline in the tax rate is the difference between U.S. and

foreign tax rates, net of foreign tax credits.

Financial Condition

Historically, the Company’s principal capital requirement was for working capital to fund its internal growth. Manage-

ment assesses Bio-Rad’s liquidity in terms of its ability to generate cash to fund its operations and make acquisi-

tions. The relevant factors that effect liquidity are cash flows from operations, capital expenditures, acquisition

opportunities, Common Stock repurchases, the adequacy of available bank lines of credit and the ability to raise

long-term capital by borrowing in the debt markets with satisfactory terms and conditions.

Bio-Rad 63

At December 31, 2004, the Company had available $361.6 million in cash, cash equivalents and short-term invest-

ments, and $53.1 million under international lines of credit. Under the $150.0 million restated and amended Revolving

Credit Facility the Company has $145.4 million available with $4.6 million reserved for standby letters of credit issued

by our banks to guarantee the Company’s obligations to certain insurance companies. Management believes that

this availability, together with cash flow from operations, will be adequate to meet the Company’s current objectives

for operations, research and development, capital additions for plant, equipment and systems and an acquisition

consistent with opportunities presently available.

Cash Flow from Operations

Net cash provided by operations was $123.1 million, $127.6 million and $105.8 million in 2004, 2003 and 2002 respec-

tively. The decrease is primarily due to increased spending with suppliers and employees in operating the business.

This decline in operating cash flows was caused by higher regulatory compliance, facility, and personnel costs,

offset by lower income tax payments and miscellaneous receipts including settlements of disputed legal charges

and the collection of a disputed non-trade receivable. The increase in receivables and inventory after elimination of

foreign currency and acquisitions was in line with our sales growth and not a significant factor to declining cash flows

from operations.

Bio-Rad’s management regularly reviews the allowance for uncollectible receivables and believes net accounts

receivable are fully realizable. Management routinely reviews inventory for the impact of obsolesence and

changes in market prices caused by the introduction of new products, technologies and in government reimburse-

ment policies.

Cash Flow from Investing Activities

Net capital expenditures in 2004 totaled $60.5 million, compared to $69.0 million and $42.2 million in 2003 and 2002,

respectively. The cost to complete a new 160,000 square foot building on our Hercules campus was approximately

$26 million of which $23.1 million was incurred in 2003. Complete occupancy occurred at the end of the first

quarter of 2004. A principal expenditure in all years was clinical diagnostics equipment placed with customers to be

used with the Company’s clinical diagnostics reagents. For 2004 this amount represents $15.9 million of capital

additions. The Company continues to invest in business systems to standardize distribution software and enhance

data communication. Other expenditures were made for the replacement and improvement of production equipment

and facilities to meet the necessary Good Manufacturing Practices, (GMP) mandated by the Food and Drug Admin-

istration (FDA) for Clinical Diagnostics and to meet the requirements of other regulatory bodies as well as many

customers in the Life Science market.

Net cash used in investing activities was $186.3 million for the year 2004. Payments for acquisitions include cash

paid for the acquisition of Hematronix in the first quarter of 2004, an increase in the Company’s investment in Sartorius

in the second quarter of 2004, and the acquisition of MJ Geneworks in the third quarter of 2004. Proceeds from divesti-

tures represents the cash received from the divestiture of the confocal microscopy product line. The $88.9 million

of net purchases of marketable securities and investments represents the temporary placement of funds not being

used in operations. Cash and short-term investment in part represents the Company’s resources available to do an

64 Bio-Rad

Management’s Discussion and Analysis (continued)

acquisition before drawing on its available credit facilities and incurring additional debt. Actual acquisition spending,

however, may vary depending upon the availability and timing of a suitable candidate.

Cash Flow from Financing Activities

Net cash flow provided from financing was $193.2 million for 2004. During the fourth quarter of 2004, the Company

borrowed $200 million at 6.125% due 2014 in a private placement. The funds were invested in cash equivalents and

short-term investments to be available for a possible acquisition. A specific target has not been identified but the

Company continually discusses strategic and tactical opportunities with owners and principals representing possi-

ble acquirees. Net borrowings under lines of credit represent repayments of the credit facility Bio-Rad assumed

in the MJ Geneworks acquisition.

The Company completed three significant financing transactions during 2003. These transactions were the comple-

tion of a $150.0 million revolving credit facility, the placement of $225.0 million aggregate principal amount of Senior

Subordinated Notes in a private offering and completion of a cash tender offer to retire all of its outstanding 115⁄8%

Senior Subordinated Notes due in 2007.

The $150.0 million revolving credit facility is secured by substantially all of the Company’s personal property assets

and the assets of its domestic subsidiaries and 65% of the capital stock of certain foreign subsidiaries, and is

guaranteed by all of its existing and future domestic subsidiaries (other than immaterial domestic subsidiaries as

defined for purposes of the new credit facility).

On August 11, 2003 the Company completed the sale of $225 million aggregate principal amount of its 7.5% Senior

Subordinated Notes due 2013 in a private offering. The Company used $98.2 million of the net proceeds from this

offering to fund the purchase of the outstanding 115⁄8% Senior Subordinated Notes due 2007 pursuant to a tender

offer completed on September 30, 2003 with the remainder available for general corporate purposes, which may

include acquisitions.

The $225.0 million private placement has been exchanged for the new 7.5% Exchange Notes that have been

registered under the Securities Act of 1933, as amended, or applicable state securities laws. This transaction was

completed on October 30, 2003, with the new Exchange Notes being virtually identical in all material respects to the

7.5% private placement.

The Board of Directors has authorized the Company to repurchase up to $18 million of the Company’s common stock

over an indefinite period of time. Through December 31, 2004, the Company has cumulatively repurchased 1,179,272

shares of Class A Common Stock and 60,000 shares of Class B Common Stock for a total of $14.7 million. The

Company’s credit agreements restrict the Company’s ability to repurchase its own stock. There were no share

repurchases made during 2003 or 2004. The repurchase is designed to improve shareholder value and to satisfy

the Company’s obligations under the employee stock purchase and stock option plans.

Bio-Rad 65

Contractual Obligations

The following summarizes certain of our contractual obligations as of December 31, 2004 and the effect such obli-

gations are expected to have on our cash flows in future periods (in millions):

Contractual Obligations

Long-term debt, including current portion(1)

Operating lease obligations(2)

Purchase obligations(3)

Long-term liabilities

Total

426.4

61.7

12.7

29.0

Less than
One Year

1-3 Years

3-5 Years

More than
5 Years

0.4

22.7

9.5

—

0.7

25.1

1.4

14.7

0.3

8.1

0.9

2.9

425.0

5.8

0.9

11.4

(1)These amounts represent expected cash payments, include capital lease obligations and are included in our Consolidated Balance Sheets. See Note 7 of the

Consolidated Financial Statements for additional information about our debt.

(2)Operating lease obligations are described in Note 13 of the Consolidated Financial Statements.
(3)Purchase obligations include agreements to purchase goods or services that are enforceable and legally binding on the Company and that specify all signif-

icant terms. Purchase obligations exclude agreements that are cancelable without penalty.

Financial Risk Management

Bio-Rad uses derivative financial instruments to reduce the Company’s exposure to fluctuations in foreign exchange

rates and, on occasion, interest rates. No derivative financial instruments are entered into for the purpose of

speculating or trading. Company policy limits all derivative positions exclusively to reducing risk by hedging an

underlying economic exposure. These derivative investments do not qualify for hedge accounting treatment under

SFAS 133, Accounting for Derivative Instruments and Hedging Activities. Derivative instruments used in these trans-

actions will be valued at fair value and changes in fair value will be included in reported earnings.

Bio-Rad operates and conducts business in many countries and is exposed to movements in foreign currency

exchange rates. Additionally, Bio-Rad’s consolidated net equity is impacted by the conversion of the net assets of

international subsidiaries for which the functional currency is not the U.S. Dollar. Foreign currency exposures are man-

aged on a centralized basis by the Company’s Treasury Department. This allows for the netting of natural offsets and

lowers transaction costs and exposures. Bio-Rad currently makes more than 60% of its sales outside the United

States and weakening in one currency can often be offset by strengthening in another currency.

Bio-Rad typically enters into forward exchange contracts to sell its foreign currency. Contracts primarily in British

Sterling, Japanese Yen and the Euro, are entered into typically for 30 to 60 days. Bio-Rad records the change in

the value of its foreign currency intercompany receivables and payables as a foreign exchange gain or loss on its

statements of income along with the change in the fair market value of the forward exchange contract used as an

economic hedge of that asset or liability.

66 Bio-Rad

Management’s Discussion and Analysis (continued)

Bio-Rad uses sensitivity analysis to assess the market risk associated with its foreign currency exchange risk. Market

risk is the potential change in fair value of derivative positions from an adverse movement in currency exchange rates.

A 10% adverse loss on quoted foreign currency exchange rates would result in an approximate $10 million loss. This

impact of a change in exchange rates excludes the offset derived from the change in the Company’s underlying

assets and liabilities, which could reduce the effect to zero.

The Company’s long-term debt consists primarily of fixed rate instruments. Bio-Rad uses sensitivity analysis to

assess the market risk associated with its interest rate risk. As of December 31, 2004, the Company’s interest rate

risk was not significant.

Bio-Rad 67

Notes

68 Bio-Rad

Corporate Information

Directors
David Schwartz
Chairman of the Board

Norman Schwartz
Director

James J. Bennett
Director

Albert J. Hillman
Director

Ruediger Naumann-Etienne
Director

Philip L. Padou
Director

Alice N. Schwartz
Director

Officers
David Schwartz
Chairman of the Board

Norman Schwartz
President and
Chief Executive Officer

Brad Crutchfield
Vice President and
Group Manager
Life Science

John Goetz
Vice President and
Group Manager
Clinical Diagnostics

Giovanni Magni
Vice President and
International Sales Manager

Ronald W. Hutton
Treasurer

James R. Stark
Corporate Controller

Other Executives
John Hertia
Group Operations Manager,
U.S. Clinical Diagnostics

Nicolas Roelofs
Group Operations Manager,
U.S. Life Science

Patrick Bugeon
Group Operations Manager,
France Clinical Diagnostics

Gregory Banik
Manager, Informatics

Bruce Bartholomew
Manager, U.S. Sales
and Service
Clinical Diagnostics

Steve Binder
Director, Technology
Development
Clinical Diagnostics

John Bussell
Manager, Clinical Systems

François Capit
Manager, Food Science

Diane Dahowski
Manager, BioPlex

Patrice Deletoille
Manager, Blood Virus

Ann Madden
Manager, Clinical
Microbiology

Paul Menter
Manager,
North America Sales
Life Science

Leonard Pulig
Manager, Protein Function

Yves Quinchard
Regional Manager, France

Wolfram Rodatz
Regional Manager,
Central Europe

Gus Salem
Manager, Protein Separation

Angelo Scandroglio
Regional Manager, Southern
Europe

Edward Stauber
Regional Manager,
Asia Pacific

Sanjiv Suri
Regional Manager,
Eastern Europe,
Latin America

Annual Meeting
The Annual Meeting of
Stockholders will be held
on Tuesday, April 26, 2005
at 4:00 p.m., Pacific Time,
at the Corporate Offices of
the Company in Hercules,
California.

Bio-Rad will provide without
charge to each stockholder,
upon written request to the
Secretary, a copy of its 2004
Annual Report filed with the
Securities and Exchange
Commission on Form 10-K.

Transfer Agent
Computershare
Investor Services LLC
2 North LaSalle Street
Chicago, Illinois 60602

Tel: (312) 360-5132
Fax: (312) 601-4332
www.computershare.com

Auditors
Deloitte and Touche LLP
San Francisco, California

Sadashi Suzuki
Regional Manager, Japan

Common Stock
Traded on the American
Stock Exchange

Annette Tumolo
Manager, Gene Expression

Class A Common Stock
Symbol BIO

Class B Common Stock
Symbol BIOb

Christine A. Tsingos
Vice President and
Chief Financial Officer

David Forrester
Regional Manager,
Northern Europe

Sanford S. Wadler
Vice President,
General Counsel
and Secretary

Robyn Hawkins
Manager, Quality Systems

Bio-Rad Laboratories plays a leading role in the advancement of scientific dis-
covery by providing a broad range of innovative tools and services to the life
science research and clinical diagnostics industries. The company is world
renowned among hospitals, universities, major research institutions, biotech-
nology companies and pharmaceutical firms for its commitment to quality and
customer service. With a global team of more than 5,000 employees, Bio-Rad
has built strong customer relationships that advance scientific research and
development efforts and support the commercialization of new technology
used in the high-growth fields of genomics, proteomics, drug discovery, food
safety, medical diagnostics and more. Today and throughout the coming
years, Bio-Rad will continue its pioneering efforts in both existing and niche
markets and remain a consistent and dynamic force in the advancement of
scientific discovery and human health care.

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Bio-Rad Laboratories
1000 Alfred Nobel Drive
Hercules, CA 94547
Tel: (510) 724-7000
Fax: (510) 741-5817
www.bio-rad.com