Bio-Rad Laboratories Annual Report 2013

Plain-text annual report

A S H A R E D O B J E C T V E I . Bio-Rad Laboratories Annual Report 2013 G I E W H C S N U A R B L E I N A D A I N R O F I L A C , A E R A Y A B . P E R S E L A S D L E I F > > > E C N A R F , E T T E U Q O C - A L - S E N R A M T S I L A I C E P S T C U D O R P H A L L A Z R E H A F A W > > > A I N R O F I L A C , D N O M H C I R T S I T N E I C S R O I N E S E E L Y R A G > > > R E G A N A M T C U D O R P . R S A I N R O F I L A C , S E L U C R E H N E H C S R E M E N A J > > > A I N R O F I L A C , E S O J N A S R O I N E S L O O H C S H G I H G N A I J Y E S L E K > > > A I N R O F I L A C , S I V A D C U R O S S E F O R P . T S S A R E S A R F S I R H C > > > 6 0 > 5 0 > 4 0 > 3 0 > 2 0 > 1 0 > CELIAC PATIENT NEONATAL PATIENT SALES DIRECTOR HOSPITAL LIAISON CLINICIAN PROCESS ENGINEER SCIENCE INTERN NURSE CLINICIAN CERTIFIED CONSULTANT STAFF SCIENTIST NURSING SUPERVISOR OB/GYN NURSE PATIENT PATIENT SENIOR SCIENTIST CLINICAL SPECIALIST NURSING OFFICER LAB TECH SALES SPECIALIST DIRECTOR OF SALES CASE MANAGER ADMIN ASSISTANT DIETICIAN PATIENT SERVICE REP PATIENT ACCOUNT EXECUTIVE PATIENT CHEMIST PATIENT HIGH SCHOOL SENIOR CARDIOLOGIST MED RECORDS CLERK PATIENT DIR. PURCHASING BIOLOGY STUDENT ENGINEER PROJECT ANALYST VIROLOGIST SURGEON PHYSICIAN BUYER/PLANNER ANALYST INTERN SUPERVISOR PRODUCT MANAGER DISTRIBUTION MGR. LIFE SCIENTIST UNIVERSITY ADMIN ADMINISTRATOR NURSE MANAGER, ER SHIPPING MGR BIOCHEMIST OSTEOPATHIC PHYS. GENETICIST INFORMATION TECH SOCIAL WORKER MICROBIOLOGIST PATIENT NEUROLOGIST HS BIOLOGY TEACHER GROUP LEADER STUDENT REGISTERED NURSE PATIENT IMMUNOLOGIST SCIENCE STUDENT SALES MANAGER ASSISTANT PROFESSOR ELECTROCHEMIST NURSE MANAGER CASE MANAGER ANALYTICAL CHEMIST ENGINEERING LEAD ENGINEER ER NURSE DIRECTOR PRIMARY CARE MD NURSING INTERN DATA ANALYST NURSING STUDENT PHARMACIST BIOLOGIST DIABETOLOGIST UNIVERSITY STUDENT ELECTROCHEMIST PHARMACOLOGIST ER DIRECTOR FIELD SALES REP. HS SCIENCE STUDENT FLUIDICS ENGINEER PROTEIN ANALYST PATIENT PATIENT CASE MNGT. NURSE SALES TEAM LEAD ACTIVITY ASSISTANT UNIV STUDENT ACCOUNTANT MICROBIOLOGIST PEDIATRIC SURGEON STUDENT NURSE STUDENT HEMATOLOGIST SCIENTIST STUDENT SCIENTIST PHYSICIAN SCIENCE MENTOR STUDENT ADMINISTRATION ASST. GENETICIST SOCIAL SERVICE DIR INTERNIST PATIENT SUPPLY MGR HOSPITAL EXECUTIVE ADMITTING NURSE RESEARCH ASSISTANT ENGINEER PATIENT PRODUCT MANAGER BIOLOGIST PROFESSOR SALES REP PLANT SUPERVISOR DEPARTMENT HEAD BUYER/PLANNER CLINICAL LAB ASST. PHD CANDIDATE LAB MANAGER SHIPPING CLERK CELIAC PATIENT PRESIDENT SALES SUPPORT ASST. PATIENT INSTRUMENT SPECIALIST PLANT ENGINEER MICROBIOLOGY SUPR LAB RESEARCHER INSTRUCTOR PROJECT MANAGER MDS COORDINATOR MEDICAL ASSISTANT PEDIATRIC NURSE ENDOCRINOLOGIST R&D MANAGER SR. PRODUCT MGR ORDERLY TECHNICAL WRITER FACILITIES MANAGER PATIENT STAFF ADMIN ASSOC. PHLEBOTOMIST R&D ENGINEER BIOLOGY STUDENT PATIENT PATIENT SALES REP LABORATORY INTERN PATIENT TECH LEAD CLINICIAN STAFFING COORDINATOR A SHARED INSPIRATION. ADMISSIONS COORD. ANESTHESIOLOGIST HOSPITAL DIRECTOR REGISTERED NURSE We are in this together. INTERN LAB SCIENTIST UROLOGIST PEDIATRICIAN PHARMACOLOGIST NANOTECHNOLOGIST RADIOLOGY TECH ADMITTING SUPER. ENVIRO. CHEMIST RESEARCHER ENDOCRINOLOGIST RESEARCH CHEMIST POLYMER CHEMIST PHYSICIAN SR. R&D ENGINEER PATIENT CARDIOLOGIST PATIENT STUDENT CHEMIST DELIVERY DRIVER LABORATORY MGR GENETICIST ISS MISSION 37 CREW GENETICIST IMMUNOLOGIST HOSPITAL BUYER NURSE ADMINISTRATION ASST. For over 60 years, Bio-Rad has touched the lives of countless people around the world—researchers, healthcare providers, clinicians, patients, instructors, and students—in a common effort to advance scientiﬁc discovery and improve healthcare. From researching the inner workings of proteins and rocketing a bacterial experiment into space, to improving the diagnosis and treatment of diabetes, the many people we interact with do one thing above all else—they inspire us. IT IS TO THEM THAT WE DEDICATE THIS YEAR’S ANNUAL REPORT. 2 Bio-Rad 2013 Annual Report LETTE R TO OUR SH AR E HOL DE R S As I look back, 2013 was an interesting year. We were pleased with As I look back, 2013 was an interesting year. We were pleased with As I look back, 2013 was an interesting year. We were pleased with the progress given all of the events that unfolded during the year. the progress given all of the events that unfolded during the year. the progress given all of the events that unfolded during the year. Sales reached over $2.1 billion, another milestone for the Company. Sales reached over $2.1 billion, another milestone for the Company. Sales reached over $2.1 billion, another milestone for the Company. Growth was 3.9% on a currency neutral basis—respectable given the Growth was 3.9% on a currency neutral basis—respectable given the Growth was 3.9% on a currency neutral basis—respectable given the slow growth in our markets over the past few years. slow growth in our markets over the past few years slow growth in our markets over the past few years The picture in each of our major Western Europe, by comparison, Western Europe, by comparison, Western Europe, by comparison, new platforms including the S3™ geographies around the world was was rather more predictable. was rather more predictable. was rather more predictable. cell sorter, which enters us into the characteristically different in 2013. Diagnostic laboratory consolidation Diagnostic laboratory consolidation Diagnostic laboratory consolidation growing area of single cell biology. We entered the year anticipating a in France continued the pace set in France continued the pace set in France continued the pace set Complementing this ‘cell’ focus was stabilizing U.S. market. This outlook in the previous year and general in the previous year and general in the previous year and general the acquisition of a line of antibodies was tempered by sequestration in pressures on medical costs by pressures on medical costs by pressures on medical costs by that enables us to provide content the ﬁrst half of 2013 and, in the last governments throughout Europe governments throughout Europe governments throughout Europe and offer a complete solution for our half, congressional dysfunction and represented business as usual. represented business as usual. represented business as usual. customers. We also introduced the a resultant government shutdown. The same can probably be said of The same can probably be said of The same can probably be said of second generation of our excit- The impact of these events was felt research budgets, which contin- research budgets, which contin- research budgets, which contin- ing Droplet Digital™ PCR platform, in our life science business, where ued to be constrained during the ued to be constrained during the ued to be constrained during the enhancing performance and lower- funding constraints affected pur funding constraints affected pur- funding constraints affected pur- year. Higher growth in Asia, Latin year. Higher growth in Asia, Latin year. Higher growth in Asia, Latin ing manufacturing costs. This new chase of our reagents and instru- America, and the emerging markets America, and the emerging markets America, and the emerging markets technology played a major role in ments used in biological research generally continued to be robust, generally continued to be robust, generally continued to be robust, advancing science and healthcare and discovery. helping to provide ballast to the helping to provide ballast to the helping to provide ballast to the by helping to determine a ‘functional The clinical diagnostics side of our other markets. cure’ of HIV in a newborn ... a ﬁrst. business fared a little better under During the year we took the oppor- During the year we took the oppor- During the year we took the oppor- Last in this lineup is our new NGC™ the circumstances, although the tunity to restructure our distribu- tunity to restructure our distribu tunity to restructure our distribu platform. Bio-Rad’s roots are in Affordable Care Act mandated tion network in China, which had tion network in China, which had tion network in China, which had chromatography, a separation reductions in reimbursements for a short term effect on growth, but a short term effect on growth, but a short term effect on growth, but technique for biomolecules. The diagnostic tests to help offset costs better positions us for the future. better positions us for the future. better positions us for the future. 2013 launch of this new instrument of increased coverage under the program. Especially disappointing for us was the implementation of a medical device tax which cost us more than $5 million in 2013, money that would have otherwise been in- vested in people and new products. If all these external factors were If all these external factors were If all these external factors were If all these external factors were If all these external factors were not enough, we had to scramble to not enough, we had to scramble to platform broadened our reach in this very important area. replace our auditors late in the year replace our auditors late in the year Our bottom line results reﬂect and have been working to resolve and have been working to resolve conscious investments we are our outstanding FCPA matter with our outstanding FCPA matter with making in our future. These are the government. In addition to our top-line progress, In addition to our top-line progress, there were numerous other accom- there were numerous other accom- in new product technology areas and also in infrastructure we need to sustain our growth. plishments throughout the year. plishments throughout the year. One of the areas of signiﬁcant invest- New product ﬂow remained healthy, New product ﬂow remained healthy, ment and focus over the last two as we successfully introduced three as we successfully introduced three years has been a project to imple- ment a standardized ERP system across the Company and to replace a patchwork of business systems that we grew up with or inherited with acquisitions over the years. A SHARED FUTURE. Bio-Rad 2013 Annual Report 3 N ORMAN SC HWARTZ | P RES IDEN T We met our 2013 implementation goal of successfully deploying Phase 1 of our new ERP system, and are now focused on Phase 2 of this multiyear project, which should start to show beneﬁts to the business as we roll out suc- cessive phases. I would like to take this opportunity to recognize the contributions of Al Hillman, who is retiring from the Board. Al has been a valued Board member since 1980 and his association with the Company dates back to the 1960s. 2014 brings with it a tone of optimism. While we still expect budgets to be tight, there is an undertone of increased conﬁdence in our markets. In addition, we have good momentum from products introduced last year that should carry through 2014. Finally, our new products and platforms to be introduced throughout 2014, along with some targeted acquisitions, give us cause to look forward to a good year ahead. Thank you for your continued interest in Bio-Rad. Norman Schwartz PRESIDENT 4 Bio-Rad 2013 Annual Report A I N R O F I L A C , S I V A D C U R O S S E F O R P . T S S A R E S A R F S I R H C > > > 1 0 > CHRIS DESCRIBES THE NEXT-GENERATION IN CHROMATOGRAPHY Years ago, when the human genome was mapped, instead of discovering how and why diseases occur within the human body, we ended up with even more questions. Genes alone cannot explain the complexity of how the human body works and what goes wrong when a disease occurs. At The Fraser Lab, we’re study- Recently, we were approached The software is also intuitive and ing how some cellular messenger by Bio-Rad, who wanted input allows us to visually follow the path RNAs (ribonucleic acid, a family for their next-generation medium- of our sample to see how we are of large biological molecules that pressure preparative chromatog- doing with our puriﬁcation scheme perform multiple vital roles in the raphy (NGC) systems. After having at any given point. This reduces coding, decoding, regulation, and used these types of systems the risk of sample being lost in the expression of genes) are translated for over 10 years, we had some process or running the column dry into proteins. We’re also trying deﬁnite likes and dislikes about the due to incorrect programming. Un- to understand how some viruses process. Bio-Rad was an incredibly like traditional instruments that are essentially hijack a cell’s machinery attentive listener, highly responsive, complex and intimidating for junior so the virus can use it to make its and very willing to make changes researchers, the NGC system is own protein, which can lead to based on our suggestions. I never extremely easy to use. They can tumor growth. would have expected that from learn to use it straight away with Part of our research requires most companies. little training. the need to purify components, The result is their family of NGC™ It’s all of the features we like in one namely proteins, using a lab chromatography systems, which is scalable instrument. technique called chromatography making life so much easier for us. that’s used to separate complex Built in a modular way, the individual mixtures based on their physical components let us tailor the system size or charge. to best suit our needs. The front- facing design offers convenient access to valves and columns. Now we can easily pump large volumes of sample directly onto the columns without reconﬁguring the system. Obtaining highly pure proteins as components is allowing us to make models and predictions about things we can test in cells, and the NGC helps us obtain these components very rapidly and very well. Now we have a product that we really, really like … that’s doing exactly what we want and how we want it to happen.” A SHARED OUTLOOK. UNLIKE TRADITIONAL INSTRUMENTS, WHICH ARE COMPLEX AND INTIMIDATING FOR JUNIOR RESEARCHERS, THE NGC SYSTEM IS EXTREMELY SIMPLE, REDUCING THE NEED FOR HAND-HOLDING AND TRAINING TIME.” CHRIS FRASER | ASST. PROFESSOR, DEPT. MOLECULAR & CELLULAR BIOLOGY | UC DAVIS HOW IT WORKS: NGC CHROMATOGRAPHY SYSTEMS Bio-Rad’s family of NGC medium-pressure chromatography systems offers biomolecule puriﬁcation at the research, laboratory and process development-scale levels, providing a total laboratory solution. At the core of the ﬂexible platform is a modular and scalable system that adapts to a lab’s requirements and is easily customized to align with a researcher’s needs. Included with the instruments is an intuitive software package for system control and evaluation as well as downstream data analysis. The system’s small footprint allows the instrument to be used on a lab bench, in a laboratory refrigerator, or in a coldroom. NANCY VILLA | UC DAVIS ISS EXPEDITION 37 CREW THE BIO-RAD PEOPLE SHOWED US A DIFFERENT FORMULATION THAT WE COULD USE THAT DOESN’T HAVE THIS TYPE OF NUTRIENT IN IT. WE HADN’T EVEN THOUGHT ABOUT ANYTHING LIKE THAT!” KELSEY JIANG | STUDENT | VALLEY CHRISTIAN HIGH SCHOOL DAN SALDANA | MENTOR A SHARED ASPIRATION. Bio-Rad 2013 Annual Report 7 . S . H N A I T S I R H C Y E L L A V A I N R O F I L A C , E S O J N A S G N A I J Y E S L E K > > > 2 0 > KELSEY DESCRIBES THE BIOTECHNOLOGY EXPLORER PROGRAM I got involved in our high school’s International Space Station lab program last year, when I was a senior. It was awesome. We got to design an actual, self-contained experiment that was launched on a rocket to the Space Station, worked automatically, and was then brought back to earth a month later by the astronauts in the Soyuz space capsule. There were four different was growing. We had used told us that the broth we were groups involved in our school’s many Bio-Rad kits from their planning to feed the bacteria experiment, and because I love Biotechnology Explorer™ program in space actually has a type of biology, I was put in the life in our freshman biology classes, nutrient in it that would itself glow. sciences group. We met twice a so we were familiar with the pGLO Since we wanted only the bacteria week after school, sometimes on kit, which gave us everything we to glow, this would have given us the weekends, designing a self- needed for our experiment. incorrect data and invalidated our contained experiment ‘lab’ that would show what would happen to bacterial growth in microgravity. We hypothesized that bacterial growth and antibiotic resistance may differ in space—which would have implications for space travel and give us insights into the behavior of bacteria on earth. One of the problems we faced was that there was going to be a long wait time from when we ﬁnished packing up the completed experiment to when it was activated on the Space experiment. So the Bio-Rad people showed us a different formulation that we could use that doesn’t have this type of nutrient in it. We hadn’t even thought about anything like that! Station. So we had to freeze-dry When we opened the lab after the bacteria—kind of like putting its trip to space we saw some it in hibernation—until it got to the glowing. Overall, however, the We chose E. coli, a type of bacteria microgravity environment. But we results we got were inconclusive, that lives in the digestive tracts of didn’t really know how to do this. which is why the school’s Space animals and humans. Most people think of this as a disease-causing agent, but there are many types of E. coli and most of them are harmless. Our idea was to use Bio-Rad’s pGLO™ Bacterial Transformation kit to implant a glowing gene from a jellyﬁsh into the bacteria, which, if it glowed in space, would indicate that the E. coli Bio-Rad was very happy to help us. They were really interested in what we planned to do and gave us lots of insights into how we could construct our lab. But even more than that were their suggestions on how to re-animate the bacteria once in space. They Station experiment this year will have even better controls. One thing we did see, though, was that the bacteria started to grow right at the valve insert—directly where the nutrient broth was coming in. I guess bacteria—like us—can be pretty hungry sometimes.” A SHARED ASPIRATION. 8 Bio-Rad 2013 Annual Report HOW IT WORKS: pGLO BACTERIAL TRANSFORMATION KIT Using Bio-Rad’s pGLO Bacterial Transformation kit, students are able to transform bacteria by introducing a gene from the bioluminescent jellyﬁsh Aequorea Victoria that encodes green ﬂuorescent protein (GFP). With this activity, students analyze the growth of bacteria on various media and examine the roles of external and internal factors in gene regulation. When bacteria transformed with pGLO plasmid are grown on plates containing arabinose (a sugar), the GFP gene switches on, causing the bacteria to express GFP and display a glowing brilliant green under UV light. Bio-Rad 2013 Annual Report 9 . S . H N A I T S I R H C Y E L L A V A I N R O F I L A C , E S O J N A S G N A I J Y E S L E K > > > 2 0 > THE SAME TRANSFORMATION PROCEDURE EMPLOYED BY THE STUDENTS AT VALLEY CHRISTIAN HIGH SCHOOL TO CREATE A LAB THEY LATER LAUNCHED ONTO THE INTERNATIONAL SPACE STATION HAS BEEN USED TO CREATE “DESIGNER PROTEINS.” THESE PROTEINS HAVE LED TO THE EXPLOSION OF NEW HEALTH TREATMENTS, AGRICULTURAL APPLICATIONS, AND ENVIRONMENTAL SOLUTIONS. R E G A N A M T C U D O R P . R S A I N R O F I L A C , S E L U C R E H N E H C S R E M E N A J > > > 3 0 > JANE RELATES THE STORY OF AN HbA1c STUDY As a medical technologist involved with hemoglobin A1c (HbA1c), part of my job is to read medical journals to ﬁnd the latest information on this subject. A while back, an article caught my eye that led to correspon- dence with the author about an unusual case study regarding HbA1c. HbA1c is commonly used in rela- from the patient’s chart that a physician would have thought her tion to diabetes. It is a fraction of ﬁngerstick glucose test done in the HbA1c results were in the normal glucose (sugar) and hemoglobin ofﬁce the day of her visit had mea- range when in fact the doctor (a protein in our red blood cells). sured her fasting blood glucose knew this individual was diabetic. When glucose combines with level at 130—a level that did not hemoglobin it makes ‘glyco-hemo- correlate with her HbA1c result. For lab technicians, the worst thing you want is to give the wrong globin’ or HbA1c; this is measured primarily to identify the average glucose level in a diabetic over the life of the red cells, a duration of about three months. Unlike a momentary blood draw, HbA1c normalizes the frequent spikes and ﬂuctuations of glucose levels that occur over the course of a typical day and averages it over that three-month period. Think of it as a ‘batting average’, rather than a singular, individual glucose at-bat, for a patient. The study in question concerned an African-American woman, relatively healthy, who had visited her doctor to check her diabetes status. Her HbA1c blood test that came back from the lab—per- formed using a standard immuno- assay test—indicated a reading of 4.7, which is within the ‘normal’ range. The doctor, however, noted Concerned, the doctor contacted result. And while immunoassay is the lab, which then decided to ideal for a great many chemistry retest the patient’s sample with a screenings, it is not, for HbA1c, Bio-Rad D-10™ hemoglobin test- where you may not even be aware ing system. The D-10 provides not that the result might be incorrect. merely a number as a result, but also a picture, which allows labo- ratorians to see a more complete picture in the glyco-hemoglobin molecule, not just its physical structure, as with the immunoas- say test. To get the word out about this, I wrote a paper, ‘HbA1c Does Not Always Estimate Average Glu- cose,’ co-authored with Kristina Behan, the medical technologist who wrote the original article. In this new paper, which appeared in The results obtained by the D-10 the journal Clinical Laboratory Sci- were indeed different from those of ence, we recommend that all initial the immunoassay. The new results patient screenings for HbA1c be were conﬁrmed by a separate lab, performed on an HPLC analyzer, which revealed that the patient like the D-10 system. had a sickle cell trait and a beta thalassemia trait, a cell disorder than can interfere with a standard, immunoassay HbA1c test. Had the original immunoassay result been accepted—without question—the I’m happy to say that the article received a ‘Clinical Signiﬁcance’ award from the publication, and am even more gratiﬁed that since publication, multiple, if not many, labs have changed their practices in this regard.” A SHARED INTENTION. Bio-Rad 2013 Annual Report 11 FOR LAB TECHNICIANS, THE WORST THING YOU WANT IS TO GIVE THE WRONG RESULT. AND WHILE IMMUNOASSAY IS IDEAL FOR A GREAT MANY CHEMISTRY SCREENINGS, IT IS NOT, FOR HbA1c, WHERE YOU MAY NOT EVEN BE AWARE THAT THE RESULT MIGHT BE INCORRECT.” JANE MERSCHEN | SENIOR PRODUCT MANAGER HOW IT WORKS: THE D-10 HEMOGLOBIN TESTING SYSTEM The D-10 hemoglobin testing system is the smallest and most cost-effective automated high-performance liquid chromatography platform available today. Designed for small- to medium-volume laboratories and clinics, the D-10 provides a fully automated system that combines A1c diabetes monitoring and beta thalassemia testing on a single platform. Fast switching between programs is easily achieved without changing reagents or cartridge. Primary tube sampling, touch screen operation, automatic bar code reading, and an interactive training CD combine to make the system remarkably intuitive, and easy to use. WE BEGAN USING BIO-RAD’S QX100 DROPLET DIGITAL PCR SYSTEM AND WE’VE BEEN AMAZED AT HOW EASILY AND ACCURATELY WE COULD MEASURE THESE LOW-COPY EVENTS IN A SAMPLE OF DNA.” GARY LEE | SENIOR SCIENTIST | SANGAMO BIOSCIENCES NEONATAL PATIENT A I N R O F I L A C , D N O M H C I R T S I T N E I C S R O I N E S E E L Y R A G > > > 4 0 > Bio-Rad 2013 Annual Report 13 GARY DISCUSSES DROPLET DIGITAL PCR AND HIV RESEARCH At Sangamo BioSciences, we’re working at the DNA level to develop therapies designed to provide a functional cure for HIV, the virus that causes AIDS. A functional cure means that although the virus may not be entirely gone, infected subjects are controlling the virus without the help from antiretroviral drugs—which can often have signiﬁcant side effects. Our primary therapeutic concept is traditional method, but it proved to thing that is biologically real and to knock out the CCR5 gene, the be inefﬁcient for detecting very low relevant—since we are using a major co-receptor for HIV infec- levels of HIV DNA or ‘low copy’ technology that is generating data tion. CCR5 is a protein that can be events—which, surprisingly, is we can really trust. found on the surface of white blood the norm in an infected individual. cells. It’s involved in the immune If you take a blood sample of system and is necessary for HIV someone who is HIV positive and entry into cells—the ﬁrst step of isolate the DNA from the white infection. We take a patient’s T cells blood cells, most often you’ll only (a type of white blood cell targeted ﬁnd one copy of HIV DNA in 1,000 by HIV) and use our technology to to 10,000 cells. That’s not much! eliminate the CCR5 gene. Without We needed another way to more this protein, the patient’s T cells are efﬁciently quantify this needle in resistant to HIV infection. Our aim the haystack. As you may have seen in the news early last year, the Bio-Rad system was also used to determine one of two HIV cures to date. A baby in Mississippi born infected with the HIV virus was immediately placed on antiretroviral drugs, which sup- press virus replication. The therapy proved to be successful, pushing the virus down to undetectable is to partially restore the patient’s immune system so it can mount an immune response against the virus to either produce a functional cure, or potentially also reduce what is referred to as the ‘HIV reservoir’ (or the HIV DNA) in the body. In 2011 we began using Bio-Rad’s levels. Even though she eventu- QX100™ Droplet Digital™ PCR ally—and prematurely—went off system and we’ve been amazed at the antiretroviral therapy, when the how easily and accurately we could now-toddler was later tested in measure these low-copy events 2013 using the QX100, research- in a sample of DNA and therefore ers could ﬁnd no signs of HIV in quantify the HIV reservoir in the her blood. One of the challenges we faced subjects we’re treating. In addition, was quantifying this HIV reservoir the system provides the level of in the subjects we were treating reliability needed for clinical studies. so we could monitor how well We can repeat our measurements the drug was working. We were and see the same changes over using qPCR (or real time PCR), the time, so we’re more conﬁdent in what the assay is telling us—some- For us, the QX100 system provides a signiﬁcant improvement over previous qPCR technologies as we can now more accurately detect the HIV reservoir in our subjects and we are more conﬁdent in the results than ever before.” A SHARED AMBITION. 14 Bio-Rad 2013 Annual Report HOW IT WORKS: THE QX200™ DROPLET DIGITAL™ PCR SYSTEM Polymerase Chain Reaction, or PCR, is used to produce many copies of speciﬁc DNA sequences of interest. This method provides researchers with sufﬁcient DNA material for detecting genes of interest in a biological sample or manipulating, modifying, and cloning the desired sequences to further study their role in cellular processes. Bio-Rad has been an important contributor to this area of technology for nearly two decades and entered the “digital” era of PCR in 2011, when it introduced the QX100 Droplet Digital PCR system. Shortly thereafter, the company launched the QX200 Droplet Digital PCR system, which offers researchers even more ﬂexibility in the design of their PCR experiments. By partitioning a sample and PCR reaction mix into approximately 20,000 individual droplets, the QX200 system is able to count nucleic acids molecule by molecule, to help detect rare mutations (including distinguishing rare sequences in tumors), precise measurement of copy number variation, and absolute quantiﬁcation of gene expression. Bio-Rad 2013 Annual Report 15 A I N R O F I L A C , D N O M H C I R T S I T N E I C S R O I N E S E E L Y R A G > > > 4 0 > ANTIRETROVIRAL DRUGS MADE AVAILABLE IN THE ’90S HELP MANY INFECTED WITH HIV LIVE WITH THE DISEASE BY SUPPRESSING THE VIRUS FROM REPLICATING IN THEIR BODIES; HOWEVER, THESE DRUGS DO NOT ELIMINATE THE VIRUS ENTIRELY. SOME RESEARCHERS BELIEVE THAT EDITING T CELLS TO MIMIC A NATURALLY OCCURRING RESISTANCE TO THE HIV VIRUS HOLDS THE KEY TO ELIMINATING THE NEED FOR LIFELONG ANTIRETROVIRAL DRUGS AND COULD EVENTUALLY LEAD TO A FUNCTIONAL CURE. E C N A R F , E T T E U Q O C - A L - S E N R A M T S I L A I C E P S T C U D O R P H A L L A Z R E H A F A W > > > 5 0 > WAFA RELATES A STORY ABOUT CELIAC PATIENT IN FRANCE A few years ago, a six-year-old boy was brought into Hôpitaux de Lyon, in France, suspected of having celiac disease. This autoimmune digestive disease is a problem some people have when ingesting gluten, a protein found in foods such as bread, pasta, and cereal. With this disease, the body’s immune system develops antibodies that cause chronic inﬂammation in the small intestine, destroying the villi that line the walls of the organ. The villi are tiny, ﬁnger-shaped tissues that enable the body’s absorption of vitamins, sugars, and other nutrients as food passes through. Celiac disease can have especially severe consequences in children because the diminished absorption of vitamins and other nutrients may cause stunted growth and even neurological disorders. Although the Lyon hospital is Transglutaminase (tTG), a serology After receiving the positive result, widely respected for its work with marker for celiac disease diagno- the hospital followed up with the celiac disease in children, this sis. The test came back negative: boy and tested him again a few disorder is, in general, difﬁcult no celiac disease shown. How- months later. This time, the Bio-Rad to diagnose. This is because its ever, the hospital also decided to assay found an even stronger range of clinical symptoms, such perform the test using Bio-Rad’s positive result—high levels of anti- as weight loss or gain, abdominal anti-tTG assay. This time, the test bodies to tTG. An intestinal biopsy pain, bloating, and feeling weak came back positive, indicating that was performed to conﬁrm the re- and tired all of the time, are also the boy may have celiac disease. sults, and the boy was immediately common symptoms of other problems—such as irritable bowel syndrome (IBS), Crohn’s disease, intestinal infections, and lactose intolerance—with the result that a patient may be treated for one of these problems ﬁrst. The only treatment for celiac is placed on a gluten-free diet. removing gluten from the diet. Without the heightened sensitiv- This can be an extreme measure ity of the Bio-Rad assay, this boy especially for children, as gluten may have suffered with the disease is so prevalent in the average diet longer than necessary. I was glad and quite difﬁcult to eliminate. In that we were able to make such a addition, timeliness in diagnosis is difference in this child’s life.” In this case, the hospital took also a factor, as the disease gets a blood sample from the boy worse as it progresses. and, using what was otherwise standard laboratory procedures, tested for IgA antibodies to tissue A SHARED RESPONSIBILITY. Bio-Rad 2013 Annual Report 17 WITHOUT THE HEIGHTENED SENSITIVITY OF THE BIO-RAD ASSAY, THIS BOY MAY HAVE SUFFERED WITH THE DISEASE LONGER THAN NECESSARY. I WAS GLAD THAT WE WERE ABLE TO MAKE SUCH A DIFFERENCE IN THIS CHILD’S LIFE.” CELIAC PATIENT WAFA HERZALLAH | PRODUCT SPECIALIST A SHARED RESPONSIBILITY. 18 Bio-Rad 2013 Annual Report WITHIN A COUPLE OF WEEKS AFTER ELIMINATING GLUTEN FROM THE DIET, MANY PEOPLE WITH CELIAC DISEASE FIND THAT THEIR SYMPTOMS IMPROVE. WITHIN THREE MONTHS, SYMPTOMS SHOULD COMPLETELY DISAPPEAR, ALTHOUGH IT TAKES UP TO SIX MONTHS OR MORE ON A GLUTEN-FREE DIET FOR THE VILLI TO RETURN TO NORMAL. SHOWN LEFT, A MICROSCOPIC VIEW OF NORMAL VILLI, WHICH LINE THE WALLS OF THE SMALL INTESTINES AND ALLOW THE BODY TO ABSORB VITAMINS, SUGARS, AND OTHER NUTRIENTS AS FOOD PASSES THROUGH. TO THE RIGHT IS VILLI FROM AN INDIVIDUAL SUFFERING FROM CELIAC DISEASE. Bio-Rad 2013 Annual Report 19 E C N A R F , E T T E U Q O C - A L - S E N R A M T S I L A I C E P S T C U D O R P H A L L A Z R E H A F A W > > > 5 0 > HOW IT WORKS: BIO-RAD’S AUTOIMMUNE EIA ANTI-TISSUE TRANSGLUTAMINASE (tTG) IgA OR IgG KITS The Bio-Rad kits are used to detect the presence of autoantibodies to tissue transglutaminase (tTG) in human serum. Tissue transglutaminase is a ubiquitous enzyme found in many parts of the human body. Antibodies to tissue transglutaminase are found in individuals with celiac disease and are used as a diagnostic marker for this autoimmune disorder. Celiac disease is characterized by damage in the small intestine that is sustained by a diet containing gluten. Bio-Rad’s new generation of automated anti-tTG IgA and IgG serologic tests are highly sensitive and speciﬁc for the early diagnosis of celiac disease, offering clinicians conﬁdence in their test results and ultimately better outcomes for their patients. WITH BIO-RAD’S WORKFLOW, THE RESEARCHER SAW RESULTS THAT OFFERED A GREATER DEGREE OF ACCURACY AND THEREFORE WOULD PROVIDE THE COMPANY WITH MORE CONFIDENCE IN THEIR DATA.” DANIEL BRAUNSCHWEIG | FIELD SALES REPRESENTATIVE A SHARED HOPE. Bio-Rad 2013 Annual Report 21 I G E W H C S N U A R B L E I N A D A I N R O F I L A C , A E R A Y A B . P E R S E L A S D L E I F > > > 6 0 > DANIEL DISCUSSES HCP DETECTION Last year we had a Bay Area pharmaceutical company call in to Technical Support in need of a solution to help them with host cell protein (HCP) testing. This pharma company develops drug therapies for orphan (or rare) diseases with limited treatment options that affect just a small percentage of the population. One of their scientists had just attended a conference in Washington, D.C., in which Bio-Rad had presented information on its ‘2D blotting workﬂow’ that may be used as part of the process of HCP testing. He was interested. HCP detection is crucial to phar- Our 2D blotting workﬂow enables had been using was a combination maceutical companies in providing a comprehensive analysis and of products from different com- safe biopharmaceutical products. identiﬁcation of HCPs in an accu- panies that were pieced together These ‘host’ cells, which include rate and easy-to-use package. The and which, in the end, produced mammalian and yeast cells as well U.S. Food and Drug Administration subjective results. With Bio-Rad’s as other cells, are speciﬁcally used (FDA) regulations require HCPs be workﬂow however, the researcher to express (or produce) proteins reduced to the lowest levels pos- saw results that offered a greater that later become biologic drugs. sible, so this is something pharma degree of accuracy and therefore As you can imagine, host cells companies need to test at every would provide the company with are complex systems that contain stage of drug manufacturing and more conﬁdence in their data. hundreds to thousands of HCPs then report results back to the that can potentially affect the FDA. Accurately monitoring HCPs biopharmaceutical product. Failure during the drug development to identify and sufﬁciently remove process also helps manufactur- harmful HCP impurities—early in ers select the best methods with drug development—can result which to reduce these impurities. in reduced drug efﬁcacy or, even worse, adverse patient reactions. The scientist and his supervisor arranged a visit to Bio-Rad to view the workﬂow and evaluate its results. They spent two days with us, putting the system through its paces, and came away extremely Bio-Rad’s approach to HCP analy- impressed, understanding right sis appealed to this researcher away the implications of using since it is a complete, optimized such a workﬂow for their own workﬂow from start to ﬁnish, but work. They immediately purchased also because it offers more sensi- the system, and have begun to tive and reproducible results with integrate it into their lab.” higher resolution than other meth- ods. The process this company I G E W H C S N U A R B L E I N A D A I N R O F I L A C , A E R A Y A B . P E R S E L A S D L E I F > > > 6 0 > Protein Protein Transfer Transfer 2 2 2D Gel 2D Gel Electrophoresis Electrophoresis 1 1 Protein Staining and Protein Staining and Western Blotting Western Blotting Image Overlay Image Overlay and Analysis and Analysis 3 3 4 4 PROTEAN® i12™ IEF System PROTEAN® i12™ IEF System Trans-Blot® Turbo™ Transfer System Trans-Blot® Turbo™ Transfer System ChemiDoc™ MP Imaging System ChemiDoc™ MP Imaging System PDQuest™ 2-D Analysis Software PDQuest™ 2-D Analysis Software BIO-RAD’S 2D BLOTTING WORKFLOW CONSISTS OF BEST- IN-CLASS TOOLS AND INSTRUMENTS THAT ARE DESIGNED TO WORK TOGETHER TO PERFORM EACH STEP OF THE WORKFLOW FOR HOST CELL PROTEIN TESTING. Bio-Rad 2013 Annual Report 23 2D Gel 2D Gel Electrophoresis Electrophoresis 1 1 Protein Protein Transfer Transfer 2 2 Protein Staining and Protein Staining and Western Blotting Western Blotting Image Overlay Image Overlay and Analysis and Analysis 3 3 4 4 PROTEAN® i12™ IEF System PROTEAN® i12™ IEF System Trans-Blot® Turbo™ Transfer System Trans-Blot® Turbo™ Transfer System ChemiDoc™ MP Imaging System ChemiDoc™ MP Imaging System PDQuest™ 2-D Analysis Software PDQuest™ 2-D Analysis Software HOW IT WORKS: 2D BLOTTING WORKFLOW The PROTEAN i12 IEF system establishes the ﬁrst step, using gel electrophoresis to separate proteins by charge and producing effective and reproducible sample separation. Next, the Criterion™ precast gels separate the proteins by size. The separated proteins are then transferred (or blotted) to a membrane using the Trans-Blot Turbo transfer system. After a period of incubation with host cell antibodies, this membrane is then stained for the total protein and then the blot is imaged (similar to taking a photo) with the ChemiDoc MP imaging system. The resulting images are analyzed with PDQuest 2-D analysis software to determine the percentage of proteins recognized by those antibodies. 24 Bio-Rad 2013 Annual Report BIO-RAD AT A GLANCE Founded in 1952, Bio-Rad has a global team of more than 7,750 employees and serves more than 100,000 research and industry customers worldwide through its global network of operations. Throughout its existence, Bio-Rad has built strong customer relationships that advance scientiﬁc research and development efforts and support the introduction of new technology used in the growing ﬁelds of genomics, proteomics, drug discovery, food safety, medical diagnostics, and more. L I F E S C I E N C E Bio-Rad’s Life Science Group develops, manufactures, and markets a wide range of laboratory instruments, apparatus, and consumables used for research in functional genomics, proteomics, cell biology, and food safety. The group ranks among the top ﬁve life science companies worldwide, and maintains a solid reputation nucleic acids, cells, and bacteria. products are recognized as These technologies include the gold standard for diabetes electrophoresis, imaging, multiplex monitoring and quality control (QC) immunoassay, chromatography, systems. The company is also well microbiology, bioinformatics, protein known for its blood virus testing, function analysis, transfection, ﬂow blood typing, and autoimmune and cytometry, ampliﬁcation, and real-time genetic disorders testing. and Droplet Digital PCR. Bio-Rad products support researchers in laboratories throughout the world. for quality, innovation, and a long- CLINICAL DIAGNOSTICS standing focus on the success of its The Clinical Diagnostics Group customers. Bio-Rad’s life science develops, manufactures, sells, products are based on technologies and supports a large portfolio of products for laboratory used to separate, purify, identify, analyze, and amplify biological materials such as proteins, diagnostics. Bio-Rad is a leading of diseases and other medical diagnostics company and its conditions. Bio-Rad’s clinical diagnostics products incorporate a broad range of technologies used to detect, identify, and quantify substances in bodily ﬂuids and tissues. The results are used as aids to support medical diagnosis, detection, evaluation, and the monitoring and treatment 2013 FINANCIAL HIGHLIGHTS F I V E -Y E A R R E C O R D * (IN MILLIONS, EXCEP T FOR RETURN O N SALES AND PER SHARE DATA) 2009 2010 2011 2012 2013 Net Sales Gross Proﬁt R&D Expense $ 1,784.2 $ 1,927.1 $ 2,073.5 $ 2,069.2 $ 2,132.7 $ 1,000.4 $ 1,091.8 $ 1,178.8 $ 1,155.2 $ 1,178.5 $ 154.1 $ 166.5 $ 177.6 $ 209.2 $ 211.0 Net Income Attributable to Bio-Rad $ 145.4 $ 186.2 $ 179.0 $ 165.5 $ 77.8 Return On Sales 8.1% 9.7% 8.6% 8.0% 3.6% Book Value Per Share $ 45.80 $ 55.25 $ 61.98 $ 70.75 $ 75.99 Basic Earnings Per Share $ 5.31 $ 6.73 $ 6.39 $ 5.85 $ 2.72 Cash Flow From Operations $ 322.6 $ 229.1 $ 262.7 $ 276.0 $ 175.5 * Amounts include correction of immaterial errors and reclassiﬁcation of certain amounts to be consistent with the presentation in Form 10-K for the year ended December 31, 2013. NET SALES NET SALES (IN MILLIONS) CASH FLOW BASIC EARNINGS NET SALES CASH FLOW BASIC EARNINGS 6 . 2 2 3 $ NET SALES CASH FLOW 2013 SALES BY REGION 42% Europe 39% Americas 19% Paciﬁc Rim NET SALES CASH FLOW CASH FLOW FROM OPERATIONS (IN MILLIONS) 0 . 6 7 2 $ 7 . 2 6 2 $ 1 . 9 2 2 $ 5 . 5 7 1 $ 09 10 11 12 13 5 . 3 7 0 , 2 $ 2 . 9 6 0 , 2 $ 7 . 2 3 1 , 2 $ 1 . 7 2 9 , 1 $ 2 . 4 8 7 , 1 $ 09 10 11 12 13 BASIC EARNINGS BASIC EARNINGS PER SHARE 3 7 . 6 $ 9 3 . 6 $ 5 8 . 5 $ 1 3 . 5 $ 2 7 . 2 $ 09 10 11 12 13 BASIC EARNINGS 26 Bio-Rad 2013 Annual Report BIO-RAD SALES HISTORY $2.0 billion $1.9 billion $1.8 billion $1.7 billion $1.6 billion $1.5 billion $1.4 billion $1.3 billion $1.2 billion $1.1 billion $1.0 billion $900 million $800 million $700 million $600 million $500 million $400 million $300 million $200 million $100 million 1959 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2013 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the year ended December 31, 2013 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________________________ to _________________________________ Commission file number 1-7928 BIO-RAD LABORATORIES, INC. (Exact name of registrant as specified in its charter) Delaware (State or other jurisdiction of incorporation or organization) 1000 Alfred Nobel Drive, Hercules, California (Address of principal executive offices) 94-1381833 (I.R.S. Employer Identification No.) 94547 (Zip Code) Registrant's telephone number, including area code (510) 724-7000 Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Class A Common Stock Par Value $0.0001 per share Class B Common Stock Par Value $0.0001 per share Name of Each Exchange on Which Registered New York Stock Exchange New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: NONE Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes Yes Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes No No No No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer Non-accelerated file (Do not check if a smaller reporting company) Smaller reporting company Accelerated filer Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No As of June 30, 2013, the last business day of the registrant's most recently completed second fiscal quarter, the aggregate market value of the Registrant's Class A Common Stock held by non-affiliates was approximately $2,226,524,962 and the aggregate market value of the registrant's Class B Common Stock held by non-affiliates was approximately $37,350,568. As of March 5, 2014, there were 23,702,410 shares of Class A Common Stock and 5,091,990 of Class B Common Stock outstanding. Documents Incorporated by Reference (1) Definitive Proxy Statement to be mailed to stockholders in connection with the registrant's 2014 Annual Meeting of Stockholders (specified portions) III Document Form 10-K Parts BIO-RAD LABORATORIES, INC. FORM 10-K DECEMBER 31, 2013 TABLE OF CONTENTS Part I. Item 1. Business Item 1A. Risk Factors Item 1B. Unresolved Staff Comments Item 2. Properties Item 3. Legal Proceedings Item 4. Mine Safety Disclosures Part II. Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Item 6. Selected Financial Data Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 7A. Quantitative and Qualitative Disclosures About Market Risk Item 8. Financial Statements and Supplementary Data Item 9. Changes and Disagreements with Accountants on Accounting and Financial Disclosure Item 9A. Controls and Procedures Item 9B. Other Information Part III. Item 10. Directors, Executive Officers and Corporate Governance Item 11. Executive Compensation Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Item 13. Certain Relationships and Related Transactions, and Director Independence Item 14. Principal Accountant Fees and Services Part IV. Item 15. Exhibits and Financial Statement Schedules Signatures 3 3 7 18 19 19 20 20 20 22 22 36 37 85 85 88 88 88 88 89 89 89 90 90 91 2 PART I. ITEM 1. BUSINESS General Founded in 1952 and incorporated in 1957, Bio-Rad Laboratories, Inc. (referred to in this report as “Bio-Rad,” “we,” “us,” and “our”) was initially engaged in the development and production of specialty chemicals used in biochemical, pharmaceutical and other life science research applications. We entered the field of clinical diagnostics with the development of our first test kit based on separation techniques and materials developed for life science research. Through internal research and development efforts and acquisitions we have expanded into various markets. Today, Bio-Rad manufactures and supplies the life science research, healthcare, analytical chemistry and other markets with a broad range of products and systems used to separate complex chemical and biological materials and to identify, analyze and purify their components. As we broadened our product lines, we also expanded our geographical market. We have direct distribution channels in over 35 countries outside the United States through subsidiaries whose focus is sales, customer service and product distribution. In some regions, sales efforts are supplemented by distributors and agents. Description of Business Business Segments Today, Bio-Rad operates in two industry segments designated as Life Science and Clinical Diagnostics. Both segments operate worldwide. Our Life Science segment and our Clinical Diagnostics segment generated 33% and 66%, respectively, of our net sales for the year ended December 31, 2013. We generated approximately 32% of our consolidated net sales for the year ended December 31, 2013 from U.S. sales and approximately 68% from sales in our remaining worldwide markets. For a description of business and financial information on industry and geographic segments, see Note 14 of Item 8 of Part II of this report. Life Science Segment Our Life Science segment is at the forefront of discovery, creating advanced tools to answer complex biological questions. We are a market leader in the life sciences market, developing, manufacturing and marketing a range of more than 5,000 reagents, apparatus and laboratory instruments that serve a global customer base. Many of our products are used in established research techniques, biopharmaceutical production processes and food testing regimes. These techniques are typically used to separate, purify and identify biological materials such as proteins, nucleic acids and bacteria within a laboratory or production setting. We focus on selected segments of the life sciences market in proteomics (the study of proteins), genomics (the study of genes), biopharmaceutical production, cell biology and food safety. We currently estimate that the worldwide market for products in these selected segments was approximately $7 billion. Our principal life science customers include universities and medical schools, industrial research organizations, government agencies, pharmaceutical manufacturers, biotechnology researchers, food producers and food testing laboratories. Clinical Diagnostics Segment Our Clinical Diagnostics segment designs, manufactures, sells and supports test systems, informatics systems, test kits and specialized quality controls that serve clinical laboratories in the global diagnostics market. Our products currently address specific niches within the in vitro diagnostics (IVD) test market, and we seek to focus on the higher margin, higher growth segments of this market. 3 We supply more than 3,000 different products that cover more than 300 clinical diagnostic tests to the IVD test market. We currently estimate that the worldwide sales for products in the markets we serve were approximately $10 billion. IVD tests are conducted outside the human body and are used to identify and measure substances in a patient’s tissue, blood or urine. Our products consist of reagents, instruments and software, typically provided to our customers as an integrated package to allow them to generate reproducible test results. Revenue in this business is highly recurring, as laboratories typically standardize test methodologies, which are dependent on a particular supplier’s equipment, reagents and consumable products. An installed base of diagnostic test systems therefore typically creates an ongoing source of revenue through the sale of test kits for each sample analyzed on an installed system. Our principal clinical diagnostic customers include hospital laboratories, reference laboratories, transfusion laboratories and physician office laboratories. Raw Materials and Components We utilize a wide variety of chemicals, biological materials, electronic components, machined metal parts, optical parts, minicomputers and peripheral devices. Most of these materials and components are available from numerous sources and we have not experienced difficulty in securing adequate supplies. Patents and Trademarks We own numerous U.S. and international patents and trademarks. We also pay royalties on the sales of certain products under several patent license agreements. We view these patents, trademarks and license agreements as valuable assets; however, we believe that our ability to develop and manufacture our products depends primarily on our knowledge, technology and special skills rather than our patent and trademark positions. Seasonal Operations and Backlog Our business is not inherently seasonal. However, the European custom of concentrating vacation during the summer months usually tempers third quarter sales volume and operating income. For the most part, we operate in markets characterized by short lead times and the absence of significant backlogs. Management has concluded that backlog information is not material to our business as a whole. Sales and Marketing We conduct our worldwide operations through an extensive direct sales force and service network, employing approximately 1,000 sales and service people around the world. Our sales force typically consists of experienced industry practitioners with scientific training, and we maintain a separate specialist sales force for each of our segments. We believe that this direct sales approach allows us to sell a broader range of our products and have more direct contact with our customers; however, we also use distributors and agents, particularly in many of our international markets. Our customer base is broad and diversified. Our worldwide customer base includes (1) prominent university and research institutions, providing us access to more than 150,000 scientists in the U.S. alone; (2) hospital, public health and commercial laboratories; (3) other leading diagnostic manufacturers; and (4) leading companies in the biotechnology, pharmaceutical, chemical and food industries. In 2013, no single customer accounted for more than two percent of our total net sales. Our sales are affected by a number of external factors. For example, a number of our customers, particularly in the Life Science segment, are substantially dependent on government grants and research contracts for their funding. A significant reduction of government funding has in the past and will in the future have a detrimental effect on the results of this segment. Most of our international sales are generated by our wholly-owned subsidiaries and their branch offices. Certain of these subsidiaries also have manufacturing facilities. Bio-Rad’s international operations are subject to certain risks common to foreign operations in general, such as changes in governmental regulations, import restrictions and 4 foreign exchange fluctuations. However, our international operations are principally in developed nations, which we regard as presenting no significantly greater risks to our operations than are present in the United States. Competition The markets served by our product groups are highly competitive. Our competitors range in size from start-ups to large multinational corporations with significant resources and reach. We seek to compete primarily in market segments where our products and technology offer customers specific advantages over the competition. Because of the breadth of its product lines, our Life Science segment does not face the same competitors for all of its products. Competitors in this market include GE Biosciences, Life Technologies, Merck Millipore and Thermo Fisher Scientific. We compete primarily based on meeting performance specifications and offering complete solutions. Major competitors of our Clinical Diagnostics segment include Roche, Abbott Laboratories (Diagnostic Division), Siemens Medical Diagnostics Solutions, Danaher, Thermo Fisher, Becton Dickinson, bioMérieux, Ortho Clinical Diagnostics, Tosoh, Immucor and DiaSorin. Research and Development We conduct extensive research and development activities in all areas of our business, employing approximately 820 people worldwide in these activities. Research and development have played a major role in Bio-Rad's growth and are expected to continue to do so in the future. Our research teams are continuously developing new products and new applications for existing products. In our development of new products and applications, we interact with scientific and medical professionals at universities, hospitals and medical schools, and within our industry. We spent approximately $211.0 million, $209.2 million and $177.6 million on research and development activities in 2013, 2012 and 2011, respectively. Regulatory Matters The development, testing, manufacturing, marketing, post-market surveillance, distribution, advertising and labeling of certain of our products (primarily diagnostic products) are subject to regulation in the United States by the Center for Devices and Radiological Health of the United States Food and Drug Administration (FDA) and in other jurisdictions by state and foreign government authorities. FDA regulations require that some new products have pre-marketing clearance or approval by the FDA and require certain products to be manufactured in accordance with FDA's “good manufacturing practice” regulations, to be extensively tested and to be properly labeled to disclose test results and performance claims and limitations. After a product that is subject to FDA regulation is placed on the market, numerous regulatory requirements apply, including, for example, the requirement that we comply with recordkeeping and reporting requirements, such as the FDA’s medical device reporting regulations and reporting of corrections and removals. The FDA enforces these requirements by inspection and market surveillance. The FDA has authority to take various administrative and legal actions against us for our, or our products', failure to comply with relevant legal or regulatory requirements, including issuing warning letters, initiating product seizures, requesting or requiring product recalls or withdrawals, and other civil or criminal sanctions, among other things. We are also subject to additional healthcare regulation and enforcement by the federal government and by authorities in the states and foreign jurisdictions in which we conduct our business. Such laws include, without limitation, state and federal anti-kickback, fraud and abuse, false claims, privacy and security and physician sunshine laws and regulations. If our operations are found to be in violation of any of such laws or any other governmental regulations that apply to us, we may be subject to penalties, including, without limitation, civil and criminal penalties, damages, fines, the curtailment or restructuring of our operations, exclusion from participation in federal and state healthcare programs and imprisonment, any of which could adversely affect our ability to operate our business and our financial results. 5 Sales of our products will depend, in part, on the extent to which our products or diagnostic tests using our products will be covered by third-party payors, such as government health care programs, commercial insurance and managed healthcare organizations. These third-party payors are increasingly reducing reimbursements for certain medical products and services. In addition, the U.S. government, state legislatures and foreign governments have continued implementing cost containment programs, including price controls and restrictions on reimbursement. Adoption of price controls and cost-containment measures, and adoption of more restrictive policies in jurisdictions with existing controls and measures, could further limit our net revenue and results. Decreases in third-party reimbursement for our products or diagnostic tests using our products, or a decision by a third-party payor to not cover our products could reduce or eliminate utilization of our products and have a material adverse effect on our sales, results of operations and financial condition. In addition, state and federal healthcare reform measures have been and will be adopted in the future, any of which could limit the amounts that federal and state governments will pay for healthcare products and services, which could result in reduced demand for our products or additional pricing pressures. As a multinational manufacturer and distributor of sophisticated instrumentation, we must meet a wide array of electromagnetic compatibility and safety compliance requirements to satisfy regulations in the United States, the European Community and other jurisdictions. Our operations are subject to federal, state, local and foreign environmental laws and regulations that govern such activities as transportation of goods, emissions to air and discharges to water, as well as handling and disposal practices for solid, hazardous and medical wastes. In addition to environmental laws that regulate our operations, we are also subject to environmental laws and regulations that create liabilities and clean-up responsibility for spills, disposals or other releases of hazardous substances into the environment as a result of our operations or otherwise impacting real property that we own or operate. The environmental laws and regulations could also subject us to claims by third parties for damages resulting from any spills, disposals or releases resulting from our operations or at any of our properties. These regulatory requirements vary widely among countries. Employees At December 31, 2013, Bio-Rad had approximately 7,750 employees. Approximately seven percent of Bio-Rad's approximately 3,000 U.S. employees are covered by a collective bargaining agreement, which will expire on November 8, 2016. Many of Bio-Rad's non-U.S. full-time employees, especially in France, are covered by collective bargaining agreements. We consider our employee relations in general to be good. Available Information Bio-Rad files annual, quarterly, and current reports, proxy statements, and other documents with the Securities and Exchange Commission (SEC) under the Securities Exchange Act of 1934, as amended. The public may read and copy any materials that we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Also, the SEC maintains an Internet website that contains reports, proxy and information statements, and other information regarding issuers, including Bio-Rad, that file electronically with the SEC. The public can obtain any documents that we file with the SEC at http://www.sec.gov. Bio-Rad’s website address is www.bio-rad.com. We make available, free of charge through our website, our Form 10-Ks, 10-Qs and 8-Ks, and any amendments to these forms, as soon as reasonably practicable after filing with the SEC. The information on our website is not part of this Annual Report on Form 10-K. 6 ITEM 1A. RISK FACTORS The following risk factors should be read carefully in connection with evaluating our business and the forward- looking information contained in this Annual Report on Form 10-K. We believe that any of the following risks could have a material effect on our business, operations, industry, financial position or our future financial performance. While we believe that we have identified and discussed below the key risk factors affecting our business, there may be additional risks and uncertainties that are not presently known or that are not currently believed to be significant that may adversely affect our business, operations, industry, financial position and financial performance in the future. The ongoing investigation by government agencies of possible violations by us of the United States Foreign Corrupt Practices Act and similar laws could have a material adverse effect on our business. Based on an internal investigation, we identified conduct in certain of our overseas operations that may have violated the anti-bribery provisions of the United States Foreign Corrupt Practices Act (FCPA) and is likely to have violated the FCPA's books and records and internal controls provisions and our own internal policies. In May 2010, we voluntarily disclosed these matters to the U.S. Department of Justice (DOJ) and the Securities and Exchange Commission (SEC), each of which commenced an investigation. The Audit Committee of our Board of Directors (Audit Committee) assumed direct responsibility for reviewing these matters and hired experienced independent counsel to conduct an investigation and provide legal advice. We provided additional information to the DOJ and the SEC as the Audit Committee's investigation progressed. Following the completion of the Audit Committee’s investigation, we continue to cooperate with the DOJ and SEC investigations and to provide information to them. The DOJ and SEC investigations are continuing and we are presently unable to predict the duration, scope or results of these investigations or whether either agency will commence any legal actions. The DOJ and the SEC have a broad range of civil and criminal sanctions under the FCPA and other laws and regulations including, but not limited to, injunctive relief, disgorgement, fines, penalties, modifications to business practices including the termination or modification of existing business relationships, the imposition of compliance programs and the retention of a monitor to oversee compliance with the FCPA. We are engaged in discussions with the DOJ and SEC concerning a resolution of these matters, but we are unable to estimate the outcome of these discussions or whether we will be able to reach mutually acceptable settlements. At this point, we are unable to estimate a range of reasonably possible outcomes of this matter that differs from our Estimated loss contingency recorded in the latter half of 2013 of $35.0 million, including $5.0 million of accrued interest. However, the imposition of any of these sanctions or remedial measures could have a material adverse effect on our business, including our results of operations, cash balance and credit rates. We have not to date determined whether any of the activities in question violated the laws of the foreign jurisdictions in which they took place. On April 13, 2011, a shareholder derivative lawsuit was filed against each of our directors in the Superior Court for Contra Costa County, California. The case, which also names the Company as a nominal defendant, is captioned City of Riviera Beach General Employees' Retirement System v. David Schwartz, et al., Case No. MSC11-00854. In the complaint, the plaintiff alleges that our directors breached their fiduciary duties by failing to ensure that we had sufficient internal controls and systems for compliance with the FCPA. Purportedly seeking relief on our behalf, the plaintiff seeks an award of unspecified compensatory and punitive damages, costs and expenses (including attorneys' fees), and a declaration that our directors have breached their fiduciary duties. We and the individual defendants filed a demurrer requesting dismissal of the complaint in this case, as well as a motion to stay this matter pending resolution of the above-referenced investigations by the DOJ and SEC. Following a hearing on September 30, 2011, the court sustained our demurrer and dismissed the complaint, without prejudice, and granted the plaintiff additional time to file an amended complaint. The court denied our motion to stay this matter because it dismissed the complaint. The parties have agreed to a stipulated dismissal of this case, without prejudice, and to a tolling of the statute of limitations pending the resolution of the DOJ and SEC investigations. 7 We have identified a material weakness in our internal control over financial reporting at December 31, 2013. Our failure to establish and maintain effective internal control over financial reporting could result in material misstatements in our financial statements, our failure to meet our reporting obligations and cause investors to lose confidence in our reported financial information, which in turn could cause the trading price of our common stock to decline. Maintaining effective internal control over financial reporting is necessary for us to produce reliable financial statements. In connection with our assessment of the effectiveness of internal control over financial reporting and the preparation of our financial statements for the year ended December 31, 2013, we identified a material weakness in the design of monitoring controls over operations at certain of our locations both within the United States and overseas, as well as a lack of documentation required to operate these controls appropriately. As a result there is a reasonable possibility that a material misstatement to our annual or interim consolidated financial statements could occur and not be detected or prevented. See Item 9A. “Controls and Procedures”. Under standards established by the Public Company Accounting Oversight Board, a material weakness is defined as a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. Under the criteria set forth by the Committee of Sponsoring Organization of the Treadway Commission in Internal Control - An Integrated Framework, a material weakness in the design of monitoring controls indicates that we have not sufficiently developed and/or documented (i.e. designed) internal controls by which management can review and oversee (i.e. monitor) our financial information to detect and correct material errors or that the personnel responsible for performing the review did not have the sufficient skillset or knowledge of the subject matter to perform a proper assessment. In connection with our assessment of our internal control over financial reporting at December 31, 2013, we determined that the precision at which our controls are designed and documented, and the completeness and timeliness of communication between some of our locations are not sufficient to detect and correct a material misstatement in our consolidated financial statements. The reference to the precision of certain of our controls indicates that, where we do have monitoring controls, we do not have within them the appropriate thresholds (i.e. precision) used by management to detect the magnitude of errors that could, either individually or in aggregate, result in a material misstatement. The reference to communications between some of our locations indicates that we have not included in all of our monitoring controls specificity about required communication channels and timelines for communication between elements of the Company when errors are detected. For example, during 2013, we identified two financial adjustments that were not timely detected through our management review controls because the control’s precision, or threshold, for error detection was set too high to prevent a potential material misstatement and, once detected, the error was not communicated to our corporate finance management in an adequate and timely fashion to correct our financial statements. Specifically, during the third quarter of 2013, we identified certain immaterial errors requiring adjustment to prior years and quarters related to the valuation of finished goods inventory in our Life Science segment. The inventory adjustment had developed over a period of years and was not identified prior to 2013 because of a failure to perform detailed management reviews of account reconciliations at a sufficient level of precision to identify the error in prior periods. The methodology used to account for the inventory valuation was not documented, which also contributed to the failure to identify the issue on a timely basis. In addition, following detection at the local level, higher levels of the organization were not informed about this issue in a timely manner. As a result, we over- expensed inventory for non-sales transactions, such as inventory used for demonstration purposes and product samples, which resulted in an understatement of inventory balances in prior periods. We have commenced remediation of this deficiency by enhancing the related reconciliation control and lowering the quarterly threshold for communicating errors. 8 In addition, in the fourth quarter of 2013, our independent registered public accounting firm identified an immaterial financial adjustment pertaining to our Japanese pension liability. The adjustment had developed over a period of years and was not identified prior to 2013 as no monitoring control had been designed to detect this error. The error resulted from an incorrect methodology applied at the local level. The lack of any monitoring control allowed the error to cumulate over a number of years. We have commenced remediation of this deficiency by designing a monitoring control for our pension liabilities and providing training to local personnel. We are actively engaged in developing a remediation plan designed to address the material weakness in our internal control over financial reporting. We plan to enhance our monitoring controls by (i) designing and documenting additional management review controls, (ii) documenting, as needed, precision and specificity to existing management review controls, and (iii) supplementing resources and providing training to effectively perform management review controls. However, we cannot assure you that we will be able to remediate this material weakness or that additional material weaknesses in our internal control over financial reporting will not be identified in the future. For example, we have previously identified different material weaknesses in internal controls at December 31, 2012 and December 31, 2011, both of which we believe have been remediated, but we identified a new material weakness at December 31, 2013. Such material weaknesses have adversely affected us in the past and could affect us in the future, and the results of our periodic management evaluations and annual auditor attestation reports regarding the effectiveness of our internal control over financial reporting required by Section 404 of the Sarbanes-Oxley Act of 2002. Any failure to implement and document new and more precise monitoring controls or to implement organizational changes including skillset enhancements through resource changes or education to improve detection and communication of financial misstatements across all levels of the organization could result in additional material weaknesses, result in material misstatements in our financial statements and cause us to fail to meet our reporting obligations, which in turn could cause the trading price of our common stock to decline. Adverse changes in general domestic and worldwide economic conditions and instability and disruption of credit markets could adversely affect our operating results, financial condition or liquidity. The continuing slow economic growth in developed nations may adversely affect our future results of operations. Demand for our products and services could change more dramatically than in previous years based on activity, funding, reimbursement constraints and support levels from government, universities, hospitals and private industry, including diagnostic laboratories. The need for certain sovereign nations with large annual deficits to curtail spending could lead to slower growth of, or even a decline in, our business. Although signs of limited recovery may exist in some markets, there are continued concerns about systemic economic imbalance, the availability and cost of credit, declining asset values and geopolitical issues that contribute to increased market volatility and uncertain expectations for the global economy. These conditions, combined with greater volatility in business activity levels and consumer confidence, high unemployment and volatile oil prices, contributed to unprecedented levels of volatility in the capital markets in recent years. Continuing or recurring disruptions in the capital and credit markets may adversely affect our business, results of operations, cash flows and financial condition. As a result of these market conditions, the cost and availability of credit has been and may continue to be adversely affected by illiquid credit markets and wider credit spreads. Concern about the stability of the markets generally and the strength of counterparties specifically has led many private sector investors to reduce and, in some cases, cease to provide credit to governments, businesses and consumers. These factors have led to depressed spending by some governments, businesses and consumers. Our customers and suppliers may experience cash flow concerns and, as a result, customers may modify, delay or cancel plans to purchase our products and suppliers may increase their prices, reduce their output or change terms of sales. Additionally, if customers' or suppliers' operating and financial performance deteriorates, or if they are unable to make scheduled payments or obtain credit, customers may not be able to pay, or may delay payment of, amounts owed to us. Sovereign nations either delaying payment for goods and services or renegotiating their debts could impact our liquidity. The situation in these sovereign nations is continuously evolving and we have no greater knowledge of the situation other than what is publicly reported. As of December 31, 2013 and December 31, 2012, we had accounts receivable, net of allowance for doubtful accounts, in Spain, Italy, Greece and Portugal of $66.0 million and $64.8 million, respectively. 9 Suppliers may restrict credit or impose less favorable payment terms. Any inability of current and/or potential customers to pay us for our products or any demands by suppliers for accelerated payment terms may adversely affect our earnings and cash flow. Additionally, strengthening of the U.S. dollar associated with the global financial crisis may adversely affect the results of our international operations when those results are translated into U.S. dollars. Furthermore, the disruption in the credit markets could impede our access to capital, especially if we are unable to maintain our current credit ratings. Should we have limited access to additional financing sources when needed, we may decide to defer capital expenditures or seek other higher cost sources of liquidity, which may or may not be available to us on acceptable terms. Continued turbulence in the U.S. and international markets and economies, and prolonged declines in business and consumer spending may adversely affect our liquidity and financial condition, and the liquidity and financial condition of our customers, including our ability to refinance maturing liabilities and access the capital markets to meet liquidity needs. We cannot assure you that we will be able to integrate acquired companies, products or technologies into our company successfully, or we may not be able to realize the anticipated benefits from the acquisitions. As part of our overall business strategy, we pursue acquisitions of and investments in complementary companies, products and technologies. In order to be successful in these activities, we must, among other things: assimilate the operations and personnel of acquired companies; retain acquired business customers; • • • minimize potential disruption to our ongoing business; retain key technical and management personnel; • integrate acquired companies into our strategic and financial plans; • accurately assess the value of target companies, products and technologies; • comply with new regulatory requirements; • harmonize standards, controls, procedures and policies; • • minimize the impact to our relationships with our employees and customers; and • assess, document and remediate any deficiencies in disclosure controls and procedures and internal control over financial reporting. The benefits of any acquisition may prove to be less than anticipated and may not outweigh the costs reported in our financial statements. Completing any potential future acquisition could cause significant diversion of our management's time and resources. If we acquire new companies, products or technologies, we may be required to assume contingent liabilities or record impairment charges for goodwill and other intangible assets over time. We cannot assure you that we will successfully overcome these risks or any other problems we encounter in connection with any acquisitions, and any such acquisitions could adversely affect our business, financial position or operating results. The industries and market segments in which we operate are highly competitive, and we may not be able to compete effectively with larger companies with greater financial resources than we have. The life science and clinical diagnostics markets are each highly competitive. Some of our competitors have consolidated, and some of our competitors have greater financial resources than we do and are less leveraged than we are, making them better equipped to license technologies and intellectual property from third parties or to fund research and development, manufacturing and marketing efforts. Moreover, competitive and regulatory conditions in many markets in which we operate restrict our ability to fully recover, through price increases, higher costs of acquired goods and services resulting from inflation and other drivers of cost increases. Our competitors can be expected to continue to improve the design and performance of their products and to introduce new products with competitive price and performance characteristics. Maintaining these advantages will require us to continue to invest in research and development, sales and marketing and customer service and support. We cannot assure you 10 that we will have sufficient resources to continue to make such investments or that we will be successful in maintaining such advantages. We have significant international operations which subject us to various risks such as general economic and market conditions in the countries in which we operate, as well as compliance with our global controls, policies and procedures. A significant portion of our sales are made outside of the United States. Our foreign subsidiaries generated 68% of our net sales in 2013. Our international operations are subject to risks common to foreign operations, such as general economic and market conditions in the countries in which we operate, changes in governmental regulations, political instability, import restrictions, additional scrutiny over certain financial instruments and currency exchange rate risks. In particular, political unrest in Southeast Asia, the Middle East and Eastern Europe may affect our sales in those regions. In addition, we have a dispersed international sales team, and we use distributors and agents in many of our international operations. This structure makes it more difficult for us to ensure that our international selling operations comply with our global policies and procedures. In addition, changes to the distributors and agents we use could have an impact on our sales and access to our customers. We cannot assure you that shifts in currency exchange rates, especially significant strengthening of the U.S. dollar compared to the Euro and Swiss Franc, will not have a material adverse effect on our operating results and financial condition. We are dependent on government funding and the capital spending programs of our customers, and the effect of healthcare reform on government funding and our customers' ability to purchase our products is uncertain. Our customers include universities, clinical diagnostics laboratories, government agencies, hospitals and pharmaceutical, biotechnology and chemical companies. The capital spending programs of these institutions and companies have a significant effect on the demand for our products. Such programs are based on a wide variety of factors, including the resources available to make such purchases, the availability of funding from grants by governments or government agencies, the spending priorities for various types of equipment and the policies regarding capital expenditures during industry downturns or recessionary periods. If government funding to our customers were to decrease, or if our customers were to decrease or reallocate their budgets in a manner adverse to us, our business, financial condition or results of operations could be materially and adversely affected. Healthcare reform and the growth of managed care organizations have been and continue to be significant factors in the clinical diagnostics market. The trend towards managed care, together with healthcare reform of the delivery system in the United States and efforts to reform in Europe, has resulted in increased pressure on healthcare providers and other participants in the healthcare industry to reduce costs. Consolidation among healthcare providers has resulted in fewer, more powerful groups, whose purchasing power gives them cost containment leverage. These competitive forces place constraints on the levels of overall pricing, and thus could have a material adverse effect on our gross margins for products we sell in clinical diagnostics markets. In the United States, there have been, and we expect there will continue to be, a number of legislative and regulatory changes to the healthcare system that could affect our revenues and profitability and the revenues and profitability of our customers. Our business is impacted by the level of reimbursement available for clinical tests from Medicare, Medicaid, other governmental payors and commercial third party payors. Payment for many diagnostic tests furnished to Medicare fee-for-service beneficiaries is made based on the Medicare Clinical Laboratory Fee Schedule (CLFS), a fee schedule established and adjusted from time to time by the Centers for Medicare and Medicaid Services (CMS). In recent years, payments under the CLFS have decreased and may decrease further in future years. Some commercial payors are guided by the CLFS in establishing their reimbursement rates. Clinicians may decide not to order clinical diagnostic tests if third party payments are inadequate, and we cannot predict whether third party payors will offer adequate reimbursement for tests utilizing our products to make them commercially attractive. Moreover, in March 2010, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, or collectively, the PPACA, impose significant new programs and responsibilities affecting U.S. pharmaceutical and medical device industries. The PPACA, among other things, establishes annual 11 fees and taxes on manufacturers of certain medical devices, including our devices, and promotes programs that increase the federal government's comparative effectiveness research, which may be used to evaluate the selection of medical services by clinicians and others. PPACA also mandates a reduction in payments for clinical laboratory services paid under the CLFS of 1.75% for the years 2011 through 2015. In addition, a productivity adjustment is made to the CLFS payment amount, further reducing payment rates. These changes in payments apply to some or all of the clinical laboratory test services we furnish to Medicare beneficiaries. In addition, other legislative changes have been proposed and adopted in the United States since the PPACA was enacted. On August 2, 2011, the Budget Control Act of 2011, among other things, created measures for spending reductions by Congress. A Joint Select Committee on Deficit Reduction, tasked with recommending a targeted deficit reduction of at least $1.2 trillion for the years 2013 through 2021, was unable to reach required goals, thereby triggering the legislation's automatic reduction to several government programs. This includes aggregate reductions to Medicare payments to providers of 2% per fiscal year, which went into effect on April 1, 2013. On January 2, 2013, the American Taxpayer Relief Act of 2012, or the ATRA, was signed into law, which, among other things, further reduced Medicare payments to several providers, including hospitals, imaging centers and cancer treatment centers, and increased the statute of limitations period for the government to recover overpayments to providers from three to five years. To the extent that the healthcare industry seeks to address the need to contain costs stemming from reform measures such as those contained in PPACA and ATRA, or in future legislation, by limiting the number of clinical tests being performed or the amount of reimbursement available for such tests, our results of operations could be materially and adversely affected. If these changes in the healthcare markets in the United States and Europe continue, we could be forced to alter our approach in selling, marketing, distributing and servicing our products. Our failure to improve our product offerings and develop and introduce new products would negatively impact our business. Our future success depends on our ability to continue to improve our product offerings and develop and introduce new product lines and extensions that integrate new technological advances. If we are unable to integrate technological advances into our product offerings or to design, develop, manufacture and market new product lines and extensions successfully and in a timely manner, our operating results will be adversely affected. We cannot assure you that our product and process development efforts will be successful or that new products we introduce will achieve market acceptance. If we experience a disruption of our information technology systems, or if we fail to successfully implement, manage and integrate our information technology and reporting systems, it could harm our business. Our information technology (IT) systems are an integral part of our business, and a serious disruption of our IT systems could have a material adverse effect on our business and results of operations. We depend on our IT systems to process orders, manage inventory and collect accounts receivable. Our IT systems also allow us to efficiently purchase products from our suppliers and ship products to our customers on a timely basis, maintain cost-effective operations and provide customer service. We cannot assure you that our contingency plans will allow us to operate at our current level of efficiency. Our ability to implement our business plan in a rapidly evolving market requires effective planning, reporting and analytical processes. We expect that we will need to continue to improve and further integrate our IT systems, reporting systems and operating procedures by training and educating our employees with respect to these improvements and integrations on an ongoing basis in order to effectively run our business. If we fail to successfully manage and integrate our IT systems, reporting systems and operating procedures, it could adversely affect our business or operating results. 12 We may experience difficulties implementing our new global enterprise resource planning system. We are engaged in a multi-year implementation of a new global enterprise resource planning system (ERP). The ERP is designed to accurately maintain our books and records and provide information important to the operation of our business to our management team. The ERP will continue to require significant investment of human and financial resources. In implementing the ERP, we may experience significant delays, increased costs and other difficulties. Any significant disruption or deficiency in the design and implementation of the ERP could adversely affect our ability to process orders, ship product, send invoices and track payments, fulfill contractual obligations or otherwise operate our business. In 2013, we experienced system implementation issues in our Clinical Diagnostics segment that impacted invoicing and caused an increase in accounts receivable. While we have invested significant resources in planning, project management and training, additional and significant implementation issues may arise. Risks relating to intellectual property rights may negatively impact our business. We rely on a combination of copyright, trade secret, patent and trademark laws and third-party nondisclosure agreements to protect our intellectual property rights and products. However, we cannot assure you that our intellectual property rights will not be challenged, invalidated, circumvented or rendered unenforceable, or that meaningful protection or adequate remedies will be available to us. For instance, it may be possible for unauthorized third parties to copy our intellectual property, to reverse engineer or obtain and use information that we regard as proprietary, or to develop equivalent technologies independently. Additionally, third parties may assert patent, copyright and other intellectual property rights to technologies that are important to us. If we are unable to license or otherwise access protected technology used in our products, or if we lose our rights under any existing licenses, we could be prohibited from manufacturing and marketing such products. We may find it necessary to enforce our patents or other intellectual property rights or to defend ourselves against claimed infringement of the rights of others through litigation, which could result in substantial costs to us and divert our resources. We also could incur substantial costs to redesign our products, to defend any legal action taken against us or to pay damages to an infringed party. The foregoing matters could adversely impact our business. We are subject to substantial government regulation, and any changes in regulation or violations of regulations by us could adversely affect our business, prospects, results of operations or financial condition. Some of our products (primarily diagnostic products), production processes and marketing are subject to federal, state, local and foreign regulation, including by the FDA and its foreign counterparts. The FDA regulates our diagnostic products as medical devices pursuant to the Federal Food, Drug and Cosmetic Act. Unless an exemption applies, each medical device marketed in the United States must first receive either clearance of a 510(k) premarket notification or approval of a premarket approval application (PMA) from the FDA, depending on the risk classification of the device. Medical devices can be marketed only for the indications for which they are cleared or approved. The FDA has also generally chosen to not enforce applicable regulations, including premarket requirements, with respect to certain diagnostic products referred to as laboratory developed tests, which are tests developed by a single laboratory for use only in that laboratory. However, the FDA has indicated, since 2010, that it intends to reconsider its policy regarding enforcement and to begin drafting an oversight framework for such tests. After a device receives 510(k) clearance, any modification that could significantly affect its safety or effectiveness, or that would constitute a major change in its intended use, requires a new 510(k) clearance or could require a PMA approval. After a device is placed on the market, regardless of the classification or pre-market pathway, it remains subject to significant regulatory requirements, including, for example, recordkeeping and reporting requirements, such as the FDA’s medical device reporting regulations and reporting of corrections and removals. The FDA has broad regulatory and enforcement powers. If the FDA determines that we have failed to comply with applicable regulatory requirements, it can impose a variety of enforcement actions ranging from public warning letters, fines, injunctions, consent decrees and civil penalties to suspension or delayed issuance of approvals, seizure or recall of our products, total or partial shutdown of production, withdrawal of approvals or clearances already granted, and criminal prosecution. The FDA can also require us to repair, replace or refund the cost of devices that we manufactured or distributed. 13 In addition, the FDA may change its clearance and approval policies, adopt additional regulations or revise existing regulations, or take other actions, which may prevent or delay approval or clearance of our products or impact our ability to modify our currently approved or cleared products on a timely basis. For example, the FDA recently initiated a review of the premarket clearance process in response to internal and external concerns regarding the 510 (k) program. In January 2011, the FDA announced several proposed action items intended to reform the review process governing the clearance of medical devices to improve the efficiency and transparency of the clearance process, as well as bolster patient safety. Some of these proposals, if enacted, could impose additional regulatory requirements upon us, which could delay our ability to obtain new 510(k) clearances, increase the costs of compliance or restrict our ability to maintain our current clearances. Moreover, as part of the Food and Drug Administration Safety and Innovation Act, or FDASIA, Congress reauthorized the Medical Device User Fee Amendments with various FDA performance goal commitments and enacted several “Medical Device Regulatory Improvements” and miscellaneous reforms which are further intended to clarify and improve medical device regulation both pre- and post-clearance or approval. Any delay in, or failure to receive or maintain, clearance or approval for our products could prevent us from generating revenue from these products and adversely affect our business operations and financial results. Additionally, the FDA and other regulatory authorities have broad enforcement powers. Regulatory enforcement or inquiries, or other increased scrutiny on us, could affect the perceived safety and efficacy of our products and dissuade our customers from using our products. Many foreign governments have similar rules and regulations regarding the importation, registration, labeling, sale and use of our products. Such agencies may also impose new requirements that may require us to modify or re-register products already on the market or otherwise impact our ability to market our products in those countries. We are also subject to government regulation of the use and handling of a number of materials and controlled substances. The U.S. Drug Enforcement Administration establishes registration, security, recordkeeping, reporting, storage, distribution and other requirements for controlled substances pursuant to the Controlled Substances Act of 1970. Failure to comply with present or future laws and regulations could result in substantial liability to us, suspension or cessation of our operations, restrictions on our ability to expand at our present locations or require us to make significant capital expenditures or incur other significant expenses. We are subject to federal and state healthcare fraud and abuse laws and regulations and could face substantial penalties if we are unable to fully comply with such laws. We are subject to healthcare fraud and abuse regulation and enforcement by both the federal government and the states and foreign governments in which we conduct our business. These healthcare laws and regulations include, for example: • • • • the federal Anti-Kickback Statute, which prohibits, among other things, persons or entities from soliciting, receiving, offering or providing remuneration, directly or indirectly, in return for or to induce either the referral of an individual for, or the purchase order or recommendation of, any item or services for which payment may be made under a federal healthcare program such as the Medicare and Medicaid programs; federal false claims laws, which prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid, or other third-party payors that are false or fraudulent, and which may apply to entities like us to the extent that our interactions with customers may affect their billing or coding practices; the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, which established new federal crimes for knowingly and willfully executing a scheme to defraud any healthcare benefit program or making false statements in connection with the delivery of or payment for healthcare benefits, items or services; the federal Health Insurance Portability and Accountability Act of 1996, as amended by the Health Information Technology for Economic and Clinical Health Act, which governs the conduct of certain electronic healthcare transactions and protects the security and privacy of protected health information; and 14 • state or foreign law equivalents of each of the above federal laws, such as anti-kickback and false claims laws, which may apply to items or services reimbursed by any third-party payor, including commercial insurers. The risk of our being found in violation of these laws is increased by the fact that many of these laws are broad and their provisions are open to a variety of interpretations. Further, the PPACA amends the intent requirement of the federal anti-kickback and criminal health care fraud statutes. A person or entity no longer needs to have actual knowledge of this statute or specific intent to violate it. In addition, the government may assert that a claim including items or services resulting from a violation of the federal anti-kickback statute constitutes a false or fraudulent claim for purposes of the false claims statutes. Further, the PPACA includes provisions known as the Physician Payment Sunshine Act, which requires certain manufacturers of drugs, biologics, devices and medical supplies to record any transfers of value to U.S. physicians and U.S. teaching hospitals. Manufacturers must also disclose investment interests held by physicians and their family members. Failure to submit the required information may result in civil monetary penalties of up an aggregate of $150,000 per year (and up to an aggregate of $1 million per year for “knowing failures”), for all payments, transfers of value or ownership or investment interests not reported in an annual submission, and may result in liability under other federal laws or regulations. Manufacturers have been required to perform data collection since August 1, 2013 and must report such data to the Centers for Medicare and Medicaid Services by March 31, 2014 and by the 90th day of each subsequent calendar year. Several states in the U.S. have also implemented similar reporting requirements and/or mandate implementation of compliance programs. An increasing number of countries worldwide either have adopted or are considering similar laws requiring transparency of interactions with health care professionals. The shifting compliance environment and the need to build and maintain robust and expandable systems to comply with multiple jurisdictions with different compliance and/or reporting requirements increases the possibility that a healthcare company may violate one or more of the requirements. These laws will continue to impose administrative, cost and compliance burdens on us. In addition, any action against us for violation of these laws, even if we successfully defend against it, could cause us to incur significant legal expenses and divert our management's attention from the operation of our business. If our operations are found to be in violation of any of the laws described above or any other governmental regulations that apply to us, we may be subject to penalties, including civil and criminal penalties, damages, fines, exclusion from the Medicare and Medicaid programs, and the curtailment or restructuring of our operations, any of which could adversely affect our ability to operate our business and our financial results. Regulations related to “conflict minerals” could adversely impact our business. On August 22, 2012, the SEC adopted a rule requiring disclosures by public companies of their use of specified minerals (tantalum, tin, tungsten and gold) that are necessary to the functionality or production of products manufactured or contracted to be manufactured. The rule, which is effective for 2013 and requires a disclosure report to be filed by May 31, 2014, requires companies to perform due diligence, disclose and report whether or not the specified minerals originated from the Democratic Republic of Congo or an adjoining country and directly or indirectly financed or benefited armed groups in that region. We have incurred, and will continue to incur, additional costs in order to comply with the disclosure requirements of this rule, such as costs related to determining the source of the specified minerals used in our products. In addition, we might incur additional costs due to possible changes to our products, processes, or sources of supply as a consequence of our due diligence activities. As our supply chain is complex, we may not be able to sufficiently verify the origins of the specified minerals used in our products through our due diligence procedures, which may harm our reputation. In addition, we may encounter challenges to satisfy those customers who require that all of the components of our products be certified as conflict-free, which could place us at a competitive disadvantage if we do not do so. 15 We are currently subject to environmental regulations and enforcement proceedings. Our operations are subject to federal, state, local and foreign environmental laws and regulations that govern such activities as transportation of goods, emissions to air and discharges to water, as well as handling and disposal practices for solid, hazardous and medical wastes. In addition to environmental laws that regulate our operations, we are also subject to environmental laws and regulations that create liability and clean-up responsibility for spills, disposals or other releases of hazardous substances into the environment as a result of our operations or otherwise impacting real property that we own or operate. The environmental laws and regulations also subject us to claims by third parties for damages resulting from any spills, disposals or releases resulting from our operations or at any of our properties. We may in the future incur capital and operating costs to comply with currently existing laws and regulations, and possible new statutory enactments, and these expenditures may be significant. We have incurred, and may in the future incur, fines related to environmental matters and liability for costs or damages related to spills or other releases of hazardous substances into the environment at sites where we have operated, or at off-site locations where we have sent hazardous substances for disposal. We can provide no assurance, however, that such matters or any future obligations to comply with environmental laws and regulations will not have a material impact on our operations or financial condition. Loss of key personnel could hurt our business. Our products and services are highly technical in nature. In general, only highly qualified and trained scientists have the necessary skills to develop and market our products and provide our services. In addition, some of our manufacturing positions are highly technical. We face intense competition for these professionals from our competitors, customers, marketing partners and other companies throughout our industry. We generally do not enter into employment agreements requiring these employees to continue in our employment for any period of time. Any failure on our part to hire, train and retain a sufficient number of qualified personnel could substantially damage our business. Additionally, if we were to lose a sufficient number of our research and development scientists and were unable to replace them or satisfy our needs for research and development through outsourcing, it could adversely affect our business. A significant majority of our voting stock is held by the Schwartz family, which could lead to conflicts of interest. We have two classes of voting stock: Class A Common Stock and Class B Common Stock. With a few exceptions, holders of Class A and Class B Common Stock vote as a single class. When voting as a single class, each share of Class A Common Stock is entitled to one-tenth of a vote, while each share of Class B Common Stock has one vote. In the election or removal of directors, the classes vote separately and the holders of Class A Common Stock are entitled to elect 25% of the Board of Directors, with holders of Class B Common Stock electing the remaining directors. At February 14, 2014, the Schwartz family collectively held approximately 15% of our Class A Common Stock and 94% of our Class B Common Stock. As a result, the Schwartz family is able to elect a majority of the directors, effect fundamental changes in our direction and control matters affecting us, including the determination of business opportunities that may be suitable for our company. In addition, this concentration of ownership and voting power may have the effect of delaying or preventing a change in control of our company. The Schwartz family may exercise its control over us according to interests that are different from other investors’ or debtors’ interests. 16 Natural disasters, terrorist attacks, acts of war or other events beyond our control may cause damage or disruption to us and our employees, facilities, information systems, security systems, vendors and customers, which could significantly impact our net sales, costs and expenses, and financial condition. We have significant manufacturing and distribution facilities, particularly in the western United States, France, Switzerland, Germany and Singapore. In particular, the western United States has experienced a number of earthquakes, wildfires, floods, landslides and other natural disasters in recent years. The occurrences could damage or destroy our facilities which may result in interruptions to our business and losses that exceed our insurance coverage. In addition, strikes or other labor unrest could cause disruption to our business. Terrorist attacks, such as those that occurred on September 11, 2001, have contributed to economic instability in the United States, and further acts of terrorism, bioterrorism, violence or war could affect the markets in which we operate, our business operations, our expectations and other forward-looking statements contained or incorporated in this document. Any of these events could cause a decrease in our revenue, earnings and cash flows. We may incur losses in future periods due to write-downs in the value of financial instruments. We have positions in a variety of financial instruments including asset backed securities and other similar instruments. Financial markets are quite volatile and the markets for these securities can be illiquid. The value of these securities will continue to be impacted by external market factors including default rates, changes in the value of the underlying property, such as residential or commercial real estate, rating agency actions, the prices at which observable market transactions occur and the financial strength of various entities, such as financial guarantors who provide insurance for the securities. Should we need to convert these positions to cash, we may not be able to sell these instruments without significant losses due to current debtor financial conditions or other market considerations. We have substantial debt and have the ability to incur additional debt. The principal and interest payment obligations of such debt may restrict our future operations and impair our ability to meet our obligations under our notes. As of December 31, 2013 we and our subsidiaries had approximately $437.4 million of outstanding indebtedness. The following chart shows certain important credit statistics. Total debt Bio-Rad’s stockholders’ equity Debt to equity ratio At December 31, 2013 (dollars in millions) 437.4 $ 2,186.7 $ 0.2 Our incurrence of substantial amounts of debt may have important consequences. For instance, it could: • make it more difficult for us to satisfy our financial obligations, including those relating to our outstanding • • • notes; require us to dedicate a substantial portion of our cash flow from operations to the payment of interest and principal due under our debt, including our outstanding notes, which will reduce funds available for other business purposes; increase our vulnerability to general adverse economic and industry conditions; limit our flexibility in planning for, or reacting to, changes in our business and the industries in which we operate; 17 • • place us at a competitive disadvantage compared with some of our competitors that have less debt; and limit our ability to obtain additional financing required to fund working capital and capital expenditures and for other general corporate purposes. Our ability to satisfy our obligations and to reduce our total debt depends on our future operating performance and on economic, financial, competitive and other factors, many of which are beyond our control. Our business may not generate sufficient cash flow, and future financings may not be available to provide sufficient net proceeds, to meet these obligations or to successfully execute our business strategy. Our existing credit facility and the terms of our other debt instruments, including agreements we may enter in the future, contain or will contain covenants imposing significant restrictions on our business. These restrictions may affect our ability to operate our business and may limit our ability to take advantage of potential business opportunities as they arise. These covenants place restrictions on our ability to, among other things: • • • • make investments; • • • • incur additional debt; acquire other businesses or assets through merger or purchase; create liens; enter into transactions with affiliates; sell assets; in the case of some of our subsidiaries, guarantee debt; and declare or pay dividends, redeem stock or make other distributions to stockholders. Our existing credit facility also requires that we meet certain financial tests and maintain certain financial ratios, including a maximum consolidated leverage ratio test, a minimum consolidated interest coverage ratio test and a minimum net worth test. Our ability to comply with these covenants may be affected by events beyond our control, including prevailing economic, financial and industry conditions. The breach of any of these restrictions could result in a default. An event of default under our debt agreements would permit some of our lenders to declare all amounts borrowed from them to be due and payable, together with accrued and unpaid interest. If we were unable to repay debt to our senior secured lenders, these lenders could proceed against the collateral securing that debt. The collateral is substantially all of our personal property assets, the assets of our domestic subsidiaries and 65% of the capital stock of certain of our foreign subsidiaries. In addition, acceleration of our other indebtedness may cause us to be unable to make interest payments on our outstanding notes and repay the principal amount of our outstanding notes or may cause the future subsidiary guarantors, if any, to be unable to make payments under the guarantees. ITEM 1B. UNRESOLVED STAFF COMMENTS None. 18 ITEM 2. PROPERTIES We own our corporate headquarters located in Hercules, California. The principal manufacturing and research locations for each segment are as follows: Segment Location Life Science Clinical Diagnostics Richmond, California Hercules, California Pleasanton, California Singapore Shanghai, China Oxford, England Hercules, California Benicia, California Irvine, California Greater Seattle area, Washington Lille, France Greater Paris area, France Nazareth-Eke, Belgium Cressier, Switzerland Dreieich, Germany Owned/Leased Owned/Leased Owned/Leased Leased Leased Leased Leased Owned/Leased Leased Leased Leased Owned Leased Leased Owned/Leased Owned/Leased Most manufacturing and research facilities also house administration, sales and distribution activities. In addition, we lease office and warehouse facilities in a variety of locations around the world. The facilities are used principally for sales, service, distribution and administration for both segments. ITEM 3. LEGAL PROCEEDINGS Based on an internal investigation, we identified conduct in certain of our overseas operations that may have violated the anti-bribery provisions of the United States Foreign Corrupt Practices Act (FCPA) and is likely to have violated the FCPA's books and records and internal controls provisions and our own internal policies. In May 2010, we voluntarily disclosed these matters to the U.S. Department of Justice (DOJ) and the Securities and Exchange Commission (SEC), each of which commenced an investigation. The Audit Committee of our Board of Directors (Audit Committee) assumed direct responsibility for reviewing these matters and hired experienced independent counsel to conduct an investigation and provide legal advice. We provided additional information to the DOJ and the SEC as the Audit Committee's investigation progressed. We continue to cooperate with the DOJ and SEC investigations and to provide information to them. The DOJ and SEC investigations are continuing and we are presently unable to predict the duration, scope or results of these investigations or whether either agency will commence any legal actions. The DOJ and the SEC have a broad range of civil and criminal sanctions under the FCPA and other laws and regulations including, but not 19 limited to, injunctive relief, disgorgement, fines, penalties, modifications to business practices including the termination or modification of existing business relationships, the imposition of compliance programs and the retention of a monitor to oversee compliance with the FCPA. While we have been engaged in discussions with the DOJ and SEC concerning a resolution of these matters, we are unable to estimate a range of reasonably possible outcomes of this matter that differs from our Estimated loss contingency recorded in the latter half of 2013 of $35.0 million, including $5.0 million of accrued interest. The imposition of any of these sanctions or remedial measures could have a material adverse effect on our business or financial condition. We have not to date determined whether any of the activities in question violated the laws of the foreign jurisdictions in which they took place. On April 13, 2011, a shareholder derivative lawsuit was filed against each of our directors in the Superior Court for Contra Costa County, California. The case, which also names the Company as a nominal defendant, is captioned City of Riviera Beach General Employees' Retirement System v. David Schwartz, et al., Case No. MSC11-00854. In the complaint, the plaintiff alleges that our directors breached their fiduciary duties by failing to ensure that we had sufficient internal controls and systems for compliance with the FCPA. Purportedly seeking relief on our behalf, the plaintiff seeks an award of unspecified compensatory and punitive damages, costs and expenses (including attorneys' fees), and a declaration that our directors have breached their fiduciary duties. We and the individual defendants filed a demurrer requesting dismissal of the complaint in this case, as well as a motion to stay this matter pending resolution of the above-referenced investigations by the DOJ and SEC. Following a hearing on September 30, 2011, the court sustained our demurrer and dismissed the complaint, without prejudice, and granted the plaintiff additional time to file an amended complaint. The court denied our motion to stay this matter because it dismissed the complaint. The parties have agreed to a stipulated dismissal of this case, without prejudice, and to a tolling of the statute of limitations pending the resolution of the DOJ and SEC investigations. In addition, we are party to various other claims, legal actions and complaints arising in the ordinary course of business. We do not believe, at this time, that any ultimate liability resulting from any of these other matters will have a material adverse effect on our results of operations, financial position or liquidity. However, we cannot give any assurance regarding the ultimate outcome of these other matters and their resolution could be material to our operating results for any particular period, depending on the level of income for the period. ITEM 4. MINE SAFETY DISCLOSURES Not applicable. PART II. ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Information Concerning Common Stock Bio-Rad’s Class A and Class B Common Stock are listed on the New York Stock Exchange with the symbols BIO and BIO.B, respectively. The following sets forth, for the periods indicated, the high and low intraday sales prices for our Class A and Class B Common Stock. 20 2013 Fourth Quarter Third Quarter Second Quarter First Quarter 2012 Fourth Quarter Third Quarter Second Quarter First Quarter Class A Class B High Low High Low $ $ $ $ 125.00 126.98 127.17 126.50 109.93 109.62 118.00 106.91 $ $ 115.25 111.49 110.02 106.10 99.00 91.52 95.05 96.19 $ $ 124.41 122.95 125.50 125.00 110.26 109.50 115.38 105.25 115.59 114.00 110.75 106.75 99.72 92.10 95.63 96.26 On February 14, 2014, we had 331 holders of record of Class A Common Stock and 135 holders of record of Class B Common Stock. Bio-Rad has never paid a cash dividend and has no present plans to pay cash dividends. See Item 12 of Part III of this report for the security ownership of certain beneficial owners and management and for securities authorized for issuance under equity compensation plans. Stock Performance Graph The following graph compares the cumulative stockholder returns over the past five years for our Class A Common Stock, the S&P 400 MidCap Index and a selected peer group, assuming $100 invested on December 31, 2008, and reinvestment of dividends if paid: (1) The Peer Group consists of the following public companies: Danaher, Becton Dickinson, Thermo Fisher Scientific, Meridian Bioscience, PerkinElmer and Life Technologies. Companies in our peer group reflect our participation in two different markets: life science research products and clinical diagnostics. No single public or private company has a comparable mix of products which serve the same markets. In many cases, only one division of a peer group company competes in the same market as we do. Collectively, however, our peer group reflects products and markets similar to those of Bio-Rad. This stock performance graph shall not be deemed incorporated by reference by any general statement incorporating by reference into any filing under the Securities Act or the Exchange Act, and shall not otherwise be deemed filed under these Acts. 21 ITEM 6. SELECTED FINANCIAL DATA BIO-RAD LABORATORIES, INC. Selected Financial Data (in thousands, except per share data) Net sales Cost of goods sold Gross profit Selling, general and administrative expense Research and development expense Impairment losses on goodwill and long- lived assets Interest expense Foreign exchange losses, net Other (income) expense, net Income before income taxes and noncontrolling interests Provision for income taxes Net (income) loss attributable to noncontrolling interests Net income attributable to Bio-Rad Basic earnings per share Diluted earnings per share Cash dividends paid per common share Total assets Long-term debt, net of current maturities $ $ $ $ $ $ $ 2,132,694 954,216 1,178,478 798,070 210,952 — 61,271 8,566 (12,766) 112,385 (34,574) (21) 77,790 2.72 2.69 $ $ $ $ 2013 2012 Year Ended December 31, 2011 2010 2009 $ 2,069,235 914,077 1,155,158 681,778 209,204 $ 2,073,529 894,700 1,178,829 695,984 177,604 $ 1,927,118 835,310 1,091,808 634,413 166,486 1,784,244 783,871 1,000,373 600,708 154,130 — 51,112 5,040 (21,883) 229,907 (64,361) — 53,135 13,842 (7,583) 245,847 (67,034) — 63,717 3,884 (3,875) 227,183 (39,533) 3,802 47,024 5,003 (6,871) 196,577 (46,597) (69) 200 (1,445) (4,545) 165,477 5.85 5.78 $ $ $ 179,013 6.39 6.29 $ $ $ 186,205 6.73 6.61 $ $ $ 145,435 5.31 5.23 — — $ — $ — $ — $ 3,388,790 435,615 $ $ 3,443,503 732,414 $ $ 3,099,743 731,698 $ $ 3,064,914 731,100 $ $ 2,537,288 737,919 ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This discussion should be read in conjunction with the information contained in our consolidated financial statements and the accompanying notes which are an integral part of the statements. Other than statements of historical fact, statements made in this Annual Report include forward looking statements, such as statements with respect to our future financial performance, operating results, plans and objectives that involve risk and uncertainties. Forward-looking statements generally can be identified by the use of forward- looking terminology, such as “believe,” “expect,” “may,” “will,” “intend,” “estimate,” “continue,” or similar expressions or the negative of those terms or expressions. Such statements involve risks and uncertainties, which could cause actual results to vary materially from those expressed in or indicated by the forward-looking statements. We have based these forward-looking statements on our current expectations and projections about future events. However, actual results may differ materially from those currently anticipated depending on a variety of risk factors including among other things: changes in general domestic and worldwide economic conditions; our ability to successfully develop and market new products; our reliance on and access to necessary intellectual property; our ability to successfully integrate any acquired business; our substantial leverage and ability to service our debt; competition in and government regulation of the industries in which we operate; and the monetary policies of various countries. We caution you not to place undue reliance on forward-looking statements, which reflect an analysis only and speak only as of the date hereof. We undertake no obligation to publicly update or revise any 22 forward looking statements, whether as a result of new information, future events, or otherwise except as required by Federal Securities law. Overview. We are a multinational manufacturer and worldwide distributor of our own life science research and clinical diagnostics products. Our business is organized into two primary segments, Life Science and Clinical Diagnostics, with the mission to provide scientists with specialized products needed for biological research and clinical diagnostics. We sell more than 8,000 products and services to a diverse client base comprised of scientific research, healthcare, education and government customers worldwide. We do not disclose quantitative information about our different products and services as it is impractical to do so based primarily on the numerous products and services that we sell and the global markets that we serve. We manufacture and supply our customers with a range of reagents, apparatus and equipment to separate complex chemical and biological materials and to identify, analyze and purify components. Because our customers require standardization for their experiments and test results, much of our revenues are recurring. We are impacted by the support of many governments for both research and healthcare. The current global economic outlook is becoming increasingly uncertain as the need to control government social spending by many governments limits opportunities for growth. Approximately 32% of our 2013 consolidated net sales are derived from the United States and approximately 68% are derived from international locations, with Europe being our largest region overall. The international sales are largely denominated in local currencies such as the Euro, Swiss Franc, Japanese Yen, China Yuan and British Sterling. As a result, our consolidated net sales expressed in dollars benefit when the U.S. dollar weakens and suffer when the dollar strengthens. When the U.S. dollar strengthens, we benefit from lower cost of sales from our own international manufacturing sites as well as non-U.S. suppliers and from lower international operating expenses. During the latter half of 2013, we accrued an aggregate of $35.0 million associated with our initial efforts to resolve the investigations by the U.S. Department of Justice (DOJ) and Securities and Exchange Commission (SEC) relating to the United States Foreign Corrupt Practices Act (FCPA), of which $30.0 million was expensed to Selling, general and administrative expenses and $5.0 was expensed to Interest expense. In September 2013, we redeemed all of our $300.0 million 8.0% Senior Subordinated Notes for $312.0 million, including a call premium of $12.0 million, and expensed the remaining original issuance bond discount of $2.5 million and unamortized bond issuance costs of $1.1 million, all of which are included in Interest expense in our Condensed Consolidated Statements of Income. During the third quarter of 2013, we identified errors in the consolidated financial statements for the years 2011 and 2012 (and for all interim periods therein) and in the unaudited interim condensed consolidated financial statements for the three month periods ended March 31, 2013 and June 30, 2013, related to the valuation of finished goods inventory in our Life Science segment. We were inappropriately expensing inventory in amounts greater than actual costs for non-sales transactions, primarily related to inventory being used for demonstration purposes and product samples that are recorded to Selling, general and administrative expense. In addition, the Life Science segment inventory error affected cost of goods sold as we relieved inventory at a higher cost than incurred on limited sales to third parties produced in a non-U.S. manufacturing facility. The effect of correcting these errors in the 2011 and 2012 consolidated financial statements were increases to net income of $0.8 million and $1.7 million, respectively. During the third quarter of 2013, we revised the classification of one item for all periods presented from “Provision for income taxes” to “Research and development expense” in our Consolidated Statements of Income to conform to the current year presentation. The item reclassified pertains to a refundable French R&D tax credit, which after the reclassification reduces Research and development expense. We believe this presentation is appropriate as we are not required to have taxable income in order to earn the credits. The effect of the reclassifications from Provision 23 for income taxes to Research and development expense for 2011 and 2012 was $8.8 million and $4.8 million, respectively. Management evaluated the materiality of all the errors described above from a qualitative and quantitative perspective. Based on such evaluation, we have concluded that while the accumulation of these errors was significant to the three months ended September 30, 2013, their correction would not be material to any individual prior period, nor did they have an effect on the trend of financial results, taking into account the requirements of the SEC Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (SAB 108). Accordingly, we are correcting these errors in every affected period in the 2013 Consolidated Financial Statements included in this Form 10-K. In January 2013, we acquired 100% of the outstanding shares of AbD Serotec, a division of MorphoSys AG, for total consideration of $62.2 million (net of cash received of $7.3 million). This acquisition was accounted for as a business combination and is included in our Life Science segment's results of operations from the acquisition date. The final fair values of the net assets acquired consist of definite-lived intangible assets of $44.0 million, goodwill of $14.9 million and net tangible assets of $3.3 million. These amounts include certain immaterial measurement period adjustments recorded during the second quarter of 2013. We believe that with AbD Serotec's comprehensive catalog of antibodies, we are able to offer our customers total assay solutions that can be validated on many of our research platforms for western blotting, multiplex protein expression, ELISA and cell sorting. In August 2012, we acquired from Propel Labs, Inc. a new cell sorting system, an automated, easy-to-use, benchtop cell sorting flow cytometer. This asset acquisition was accounted for as a business combination and is included in our Life Science segment's results of operations from the acquisition date. The fair value of the consideration as of the acquisition date was $49.6 million, which included $5.0 million paid in cash at the closing date and $44.6 million in contingent consideration related to the achievement of certain development and sales milestones valued at $19.9 million and $24.7 million, respectively, that could potentially be payable to Propel Labs' shareholders. The development milestones have been achieved and payments totaling $20 million were made in 2013. The contingent consideration was revalued by a net reduction of $3.8 million in 2013 to Selling, general and administrative expense to its estimated fair value of $20.8 million as of December 31, 2013. The fair values of the net assets acquired from Propel Labs, Inc. as of the acquisition date were determined to be $17.4 million of goodwill, $32.1 million of definite-lived intangible assets and $0.1 million of net tangible assets. The acquired cell sorting system fits well into Bio-Rad's existing Life Science segment product offerings. In July 2012, we acquired all of the outstanding shares of DiaMed Benelux for 4.6 million Euros (approximately $5.6 million) in cash. This acquisition was accounted for as a business combination and is included in our Clinical Diagnostics segment's results of operations from the acquisition date. We acquired net liabilities with a fair value of $2.3 million and the fair values of the assets acquired as of the acquisition date were determined to be $3.0 million of goodwill and $4.9 million of definite-lived intangible assets. DiaMed Benelux became the exclusive distributor of certain Bio-Rad immunohematology products in the Benelux market as a result of our 2007 acquisition of DiaMed Holding AG. This distributor acquisition is consistent with our stated objective to control the distribution of our own products and services. In January 2012, we purchased, for cash, certain assets from a raw material supplier for approximately $12.5 million. This asset acquisition was accounted for as a business combination and is included in our Clinical Diagnostics segment's results of operations from the acquisition date. The fair value of the assets acquired at the acquisition date was determined to be $6.3 million of net tangible assets, $5.1 million of intangible assets and $1.1 million of goodwill. In addition, we paid $2.0 million for employment agreements as an incentive to certain employees of the acquired business to remain with Bio-Rad. Such amount was expensed over two years from the date of acquisition. We believe this acquisition will allow us to secure the supply of critical raw materials and lower our overall costs in the Clinical Diagnostics segment. During the first quarter of 2012, we identified an error in the consolidated financial statements for the years 2007 through 2011, related to a foreign supplemental tax associated with social benefits. We incorrectly interpreted and 24 applied the local statutes to our circumstances. We accrued $6.1 million for these foreign supplemental taxes, including penalties and interest, during the first quarter of 2012, all of which has been paid. The foreign supplemental tax, and the related penalties and interest, were not deductible for income tax purposes, and as such this error did not have an impact on Bio-Rad's provision for income taxes. We evaluated the materiality of the error from a qualitative and quantitative perspective. Based on such evaluation, we concluded that while the accumulation of the error was significant to the three-month period ended March 31, 2012, the correction was not material to any individual prior period or for the year ended December 31, 2012, nor did it have an effect on the trend of financial results, taking into account the requirements of SAB 108. During the fourth quarter of 2011 we recognized a contingent consideration liability upon our acquisition of QuantaLife related to potential future payments due upon the achievement of certain sales and development milestones. The contingent consideration was initially recognized at its estimated fair value of $24.1 million, based on a probability-weighted income approach. As of the acquisition date of October 4, 2011, total contingent consideration could have originally reached a maximum of $48 million upon the achievement of all sales milestones and a development milestone. The development milestone was met as of December 31, 2012, resulting in a payment of $6.0 million in January 2013. During 2012, the first three short-term sales milestones were not met and therefore the fair value of the contingent consideration was lowered by $16.1 million and credited to Selling, general and administrative expense. During 2013, we did not expect that any of the remaining sales milestones would be met and therefore $2.0 million of the remaining contingent consideration liability was credited to Selling, general and administrative expense. Critical Accounting Policies and Estimates The accompanying discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles (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. We evaluate our estimates on an on-going basis. We base our estimates on historical experience and on 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 may cause us to change our assumptions and estimates, which may require adjustment. Actual results could differ from these estimates. We have determined that for the periods reported in this Annual Report on Form 10-K the following accounting policies and estimates are critical in understanding our financial condition and results of operations. Accounting for Income Taxes. Management is required to make estimates related to our income tax provision in each of the jurisdictions in which we operate. This process involves estimating our current tax exposures, as well as making judgments regarding the recoverability of deferred tax assets in each jurisdiction. Deferred tax assets and liabilities reflect the tax effects of losses, credits, and temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Management assesses 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 management establishes a valuation allowance or increases this allowance in a period, an increase to expense within the Provision for income taxes in the Consolidated Statements of Income may result. We have recorded a valuation allowance of $64.0 million and $52.9 million as of December 31, 2013 and 2012, respectively, due to uncertainties related to our ability to utilize some of the deferred tax assets, primarily consisting of certain foreign net operating losses carried forward. The valuation allowance is based on management’s current estimates of taxable income for the jurisdictions in which we operate 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 25 adjusted in future periods, an additional valuation allowance may need to be established, which would increase the tax provision, lowering income and impacting our financial position. Should realization of these deferred tax assets for which a valuation allowance has been provided occur, the provision for income taxes may decrease, raising income and positively impacting Bio-Rad’s financial position. We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. The tax benefits recognized in the financial statements on a particular tax position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon settlement. The amount of unrecognized tax benefits is adjusted as appropriate for changes in facts and circumstances, such as significant amendments to existing tax law, new regulations or interpretations by the taxing authorities, new information obtained during a tax examination, or resolution of an examination. We recognize both accrued interest and penalties, where appropriate, related to unrecognized tax benefits in income tax expense. Our overall effective tax rate is subject to fluctuations because of changes in the geographic mix of earnings, changes to statutory tax rates and tax laws, and because of the impact of various tax audits and assessments, as well as generation of tax credits. Valuation of Goodwill and Long-lived Assets. Goodwill represents the excess of the cost over the fair value of net tangible and identifiable intangible assets of acquired businesses. Goodwill amounts are assigned to reporting units at the time of acquisition and are adjusted for any subsequent significant transfers of business between reporting units. We assess the impairment of goodwill annually in the fourth quarter or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. We perform the impairment tests of goodwill at our reporting unit level, which is one level below our operating segments. The goodwill impairment test consists of a two-step process. The first step of the goodwill impairment test, used to identify potential impairment, compares the fair value of a reporting unit to its carrying value, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired, and the second step of the impairment test is not required. The second step, if required, compares the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. The fair value of a reporting unit is allocated to all of the assets and liabilities of that unit (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the price paid to acquire the reporting unit. If the carrying amount of the reporting unit's goodwill exceeds its implied fair value, an impairment charge is recognized in an amount equal to that excess. We use a projected discounted cash flow model to determine the fair value of a reporting unit. This discounted cash value method for determining goodwill may be different from the fair value that would result from an actual transaction between a willing buyer and a willing seller. Projections such as discounted cash flow models are inherently uncertain and accordingly, actual future cash flows may differ materially from projected cash flows. Management judgment is required in developing the assumptions for the discounted cash flow model. These assumptions include revenue growth rates, profit margins, future capital expenditures, working capital needs, expected foreign currency rates, discount rates and terminal values. We estimate future cash flows using current and longer-term high level financial forecasts. These forecasts take into account the current economic environment. The discount rates used are compiled using independent sources, current trends in similar businesses and other observable market data. Changes to these rates might result in material changes in the valuation and determination of the recoverability of goodwill. For example, an increase in the discount rate used to discount cash flows will decrease the computed fair value. In order to evaluate the sensitivity of the fair value calculations on the goodwill impairment test, we apply a 10% decrease to the fair value of each reporting unit. To validate the reasonableness of the reporting unit fair values, we reconcile the aggregate fair values of the reporting units to the enterprise market capitalization including an implied control premium. In performing the reconciliation we may, depending on the volatility of the market value of our stock price, use either the stock price on the valuation date or the average stock price over a range of dates around the valuation date. We compare the implied control premium to premiums paid in observable recent transactions of comparable companies to determine if the accumulated fair values of all the reporting units are reasonable. 26 For purposes of recognition and measurement of an impairment loss, a long-lived asset or assets are grouped with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. We assess the impairment of long-lived assets (including identifiable intangibles) whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors that we consider important that could trigger an impairment review include: • • • • significant under-performance relative to expected, historical or projected future operating results; significant changes in the manner of use of the long-lived assets, intangible assets or the strategy for our overall business; a current expectation that, more likely than not, a long-lived asset will be sold or otherwise disposed of before the end of its previously estimated useful life; and significant negative industry, legal, regulatory or economic trends. When management determines that the carrying value of long-lived assets may not be recoverable based upon the existence of one or more of the above indicators of impairment, we test for any impairment based on a projected undiscounted cash flow method. Projected future operating results and cash flows of the asset or asset group are used to establish the fair value used in evaluating the carrying value of long-lived and intangible assets. We estimate the future cash flows of the long-lived assets using current and long-term financial forecasts. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. If this is the case, an impairment loss would be recognized. The impairment loss recognized is the amount by which the carrying amount exceeds the fair value. There were no impairment losses recorded in 2013, 2012 and 2011. Valuation of Inventories. We value inventory at the lower of the actual cost to purchase and/or manufacture the inventory, or the current estimated net realizable value of the inventory. We review inventory quantities on hand and reduce the cost basis of excess and obsolete inventory based primarily on an estimated forecast of product demand, production requirements and the quality, efficacy and potency of raw materials. This review is done 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. Our estimates of future product demand may prove to be inaccurate, and if too high, we may have overstated the carrying value of our inventory. In the future, if inventory is determined to be overvalued, we would be required to write down the value of inventory to market and recognize such costs in our cost of goods sold at the time of such determination. Therefore, although we make efforts to ensure the accuracy of our forecasts of future product demand and perform procedures to safeguard overall inventory quality, any significant unanticipated changes in demand, technological developments, regulations, storage conditions, or other economic or environmental factors affecting biological materials, could have a significant impact on the value of our inventory and reported results of operations. Valuation of Investments. We regularly review our investments for factors that may indicate that a decline in the fair value of an investment below its carrying value is other-than-temporary. Some factors considered in evaluating whether or not a decline in fair value is other-than-temporary include our ability and intent to retain the investment for a period of time sufficient to allow for a recovery in value, the duration and extent to which the fair value has been less than cost and the financial condition and prospects of the issuer. Such reviews are inherently uncertain in that the value of the investment may not fully recover or may decline further in future periods resulting in realized losses. Warranty Reserves. We warrant certain equipment against defects in design, materials and workmanship, generally for a period of one year. Upon delivery and on acceptance of that equipment, we establish, as part of cost of goods sold, a provision for the expected costs of such warranty repairs 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 and it is adjusted if necessary. The warranty reserve is 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. 27 Allowance for Doubtful Accounts. We maintain an allowance for doubtful accounts for estimated losses resulting from the collectability of our customer accounts. 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 allowance. Uncertainty in the current economic environment, if prolonged, could result in greater amounts becoming uncollectible in the future. Should the estimates of losses be higher than the actual uncollectible accounts, we would report lower profitability when the estimates are made and higher profitability when the receivable is collected. Litigation Accruals. We record as liabilities in our Consolidated Balance Sheets estimated amounts for claims that are probable and can be reasonably estimated. The likelihood of a material change in these estimated liabilities is 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. We disclose in the footnotes of the financial statements when we are unable to make a reasonable estimate of a material liability that could result from unfavorable outcomes in litigation. As events occur, we will assess the potential liability related to our pending litigation and revise our estimates. Such revisions could materially impact our results of operations. Results of Operations - Sales, Gross Margins and Expenses The following shows cost of goods sold, gross profit, expense items and net income as a percentage of net sales: Net sales Cost of goods sold Gross profit Selling, general and administrative expense Research and development expense Net income attributable to Bio-Rad Net sales 2013 Year Ended December 31, 2012 2011 100.0% 44.7 55.3 37.4 9.9 3.6 100.0% 44.2 55.8 32.9 10.1 8.0 100.0% 43.1 56.9 33.6 8.6 8.6 Net sales (sales) in 2013 were $2.13 billion compared to $2.07 billion in 2012. Excluding the impact of foreign currency, 2013 sales increased by approximately 3.9% compared to 2012. Currency neutral sales growth was reflected in most regions, primarily in the Americas, the emerging markets of Eastern Europe and the Pacific Rim, while currency neutral sales in Western Europe decreased. The Life Science segment sales in 2013 were $710.0 million, an increase of 3.1% compared to 2012. On a currency neutral basis, sales increased 4.5% compared to 2012. The sales increase was primarily driven by sales from the newly acquired AbD Serotec, our Droplet Digital™ PCR and cell biology product lines. Currency neutral sales increased in Europe and the Americas, while Asia declined. A government austerity program has slowed Japanese market growth. The Clinical Diagnostics segment sales in 2013 were $1.41 billion, an increase of 3.1% compared to 2012. On a currency neutral basis, sales increased 3.6% compared to 2012. Clinical Diagnostics had growth across most product lines on a currency neutral basis, most notably from quality controls, diabetes and BioPlex® 2200 system. Currency neutral sales growth was primarily in Eastern Europe, China, Asia Pacific and the Americas, while currency neutral sales in Western Europe declined. 28 Sales in 2012 were relatively unchanged at $2.07 billion compared to 2011. Excluding the impact of foreign currency, 2012 sales increased by approximately 3.6% compared to 2011. Currency neutral sales growth was achieved in all regions, however Europe grew by less than 1% percent. The Life Science segment sales in 2012 were $688.4 million, a decrease of 0.9% compared to 2011. On a currency neutral basis, sales increased 1.5% compared to 2011. The currency neutral sales increase was primarily in laboratory separation and process chromatography, as well as increased sales from the droplet digital PCR product line associated with the QuantaLife acquisition. The Life Science segment currency neutral sales increased in North America, Latin America, Europe and Asia. The Clinical Diagnostics segment sales in 2012 were $1.37 billion, an increase of 0.1% compared to 2011. On a currency neutral basis, sales increased 4.7% compared to 2011. Clinical Diagnostics product lines generating growth were quality controls, diabetes, microbiology, blood virus and BioPlex® 2200 system. In 2011, sales were impacted by a one-time blood typing equipment sale of approximately $8 million. Currency neutral sales growth was achieved in the Pacific Rim, the Americas and the emerging markets, while currency neutral sales declined in western Europe. Gross margin Beginning in 2013, the Patient Protection and Affordable Health Care and the Health Care and Education Reconciliation Acts of 2010, among other initiatives, provided for a 2.3% annual excise tax on the sales of certain medical devices in the U.S. Bio-Rad was required to pay this excise tax on most of our U.S. Clinical Diagnostic sales, which we accounted for as a period cost in Cost of goods sold. Consolidated gross margins were 55.3% in 2013 compared to 55.8% in 2012. Life Science segment gross margins in 2013 increased from 2012 by approximately 0.5 percentage points primarily due to an incremental royalty accrual related to a dispute with a third party, as well as a $3.8 million soil remediation expense associated with a manufacturing plant, both of which occurred in 2012. The increase was partially offset by an increase in costs related to inventory sold with a higher cost due to purchase accounting, and an increase in purchased intangibles amortization expense of $6.1 million primarily related to the AbD Serotec and cell sorting system acquisitions. Clinical Diagnostics segment gross margins in 2013 decreased from 2012 by approximately 1.2 percentage points primarily due to some large low margin government tenders, a less favorable product mix, and an increase in obsolescence charges. Gross margins also decreased by approximately 0.36% due to the excise tax on the sales of certain medical devices in the U.S. that went into effect in 2013. Clinical Diagnostics segment lower gross margins were partially offset by a foreign supplemental tax associated with social benefits of $4.1 million that occurred in 2012, and a $0.6 million French Competitiveness Tax Credit that was recorded in 2013. Consolidated gross margins were 55.8% in 2012 compared to 56.9% in 2011. Life Science segment gross margins in 2012 decreased from 2011 by approximately 3.2 percentage points primarily due to amortization expense of $10.0 million related to the droplet digital PCR products and cell sorting system acquisitions, an incremental royalty accrual related to a dispute with a third party, as well as a $3.8 million soil remediation expense associated with a manufacturing plant. Clinical Diagnostics segment gross margins in 2012 were relatively unchanged from 2011, reflecting an increase of 0.1 percentage points. Selling, general and administrative expense Consolidated selling, general and administrative expenses (SG&A) represented 37.4% of sales in 2013 compared to 32.9% of sales in 2012. Increases in SG&A expense relative to sales were primarily driven by: • • an increase of $43.6 million of employee-related expenses, our largest cost, associated with an increase in headcount that included acquisitions, an accrual of $30.0 million in connection with our initial efforts to resolve the SEC and DOJ investigations relating to the FCPA that was recorded in the latter half of 2013, 29 • • • • • • an increase in professional services of $21.7 million primarily related to the first phase of a global single instance ERP system being placed in service, and legal and accounting services, the favorable impact of a 2012 revaluation to the fair value of the QuantaLife contingent consideration of $16.1 million, an increase of $9.6 million in software amortization primarily due to the first phase of the ERP platform being placed in service, an increase of $6.5 million in facilities primarily due to an expansion at our southern California facility and our acquisition of AbD Serotec, an increase of $5.7 million as 2012 benefited from lower bad debt expense, primarily in Spain due to a large sum of payments by public agencies, causing us to revise our estimate for the allowance for doubtful accounts, partially offset by a decrease in the valuation of the cell sorting system contingent consideration of $3.8 million in 2013. Consolidated selling, general and administrative expenses (SG&A) represented 32.9% of sales in 2012 compared to 33.6% of sales in 2011. Decreases in SG&A relative to sales were primarily driven by the 2012 adjustments to the fair value of the QuantaLife contingent consideration of $16.1 million, a decline in third party commissions compared to 2011, and a lower bad debt expense provision compared to 2011, primarily in Spain of approximately $8.6 million associated with large payments made in June 2012 by public agencies that represented Spanish balances that were significantly past due, partially offset by an increase in incentive compensation and professional fees compared to 2011. The decrease in the contingent consideration liability for QuantaLife was primarily due to not achieving the first three short-term milestones as a result of recent weakening in funding to the research and development markets and a longer sales cycle for this new technology, causing a revision in sales forecasts for the remaining sales milestone contractual period ending in March 2014. Research and development expense Research and development expense increased to $211.0 million or 9.9% of sales in 2013 compared to $209.2 million or 10.1% of sales in 2012. Life Science segment research and development expense decreased in 2013 from 2012 primarily due to projects nearing completion. Clinical Diagnostics segment research and development expense increased in 2013 from 2012 primarily due to lower refundable French R&D tax credits, and a broadening of on-going development across a wider range of products. Research and development expense increased to $209.2 million or 10.1% of sales in 2012 compared to $177.6 million or 8.6% of sales in 2011, primarily in the Life Science segment. Life Science segment research and development expense increased in 2012 from 2011 primarily related to the droplet digital PCR products and cell sorting system acquisitions, which had high research and development costs relative to sales for these new products. Clinical Diagnostics segment research and development expense increased in 2012 from 2011 primarily due to increased investment in enhanced product offerings in blood typing, quality controls, diabetes and blood virus product lines. Results of Operations – Non-operating Interest expense Interest expense in 2013 increased 19.9% to $61.3 million compared to 2012 primarily due to the early redemption of our 8.0% Notes on September 30, 2013, resulting in a $15.6 million expense. The redemption included a call premium of $12.0 million, the expensing of $2.5 million of the remaining original issuance bond discount and the expensing of unamortized debt issuance costs of $1.1 million. In addition, Interest expense included an expense of $5.0 million of interest expense associated with our initial efforts to resolve the DOJ and SEC investigations relating to the FCPA that was recorded in the latter half of 2013. The increase was partially offset by estimated interest expense of $1.2 million included in the first quarter of 2012 that was associated with a foreign supplemental tax related to social benefits, and interest on back royalties in 2012. 30 Interest expense in 2012 decreased 3.8% to $51.1 million compared to 2011 primarily due to the refinancing of a portion of our debt that was completed in January 2011, lowering our overall borrowing costs. Foreign currency exchange gains and losses Foreign currency exchange gains and losses consist of foreign currency transaction gains and losses on intercompany net receivables and payables and the change in fair value of our forward foreign exchange contracts used to manage our foreign currency exchange risk. Net foreign currency exchange losses for 2013, 2012 and 2011 were $8.6 million, $5.0 million and $13.8 million, respectively. The 2013, 2012 and 2011 net foreign currency exchange losses were attributable to market volatility, increasing costs to hedge and the result of the estimating process inherent in the timing of shipments and payments of intercompany debt. In addition, approximately $4.6 million of the 2011 loss was attributable to entering into a larger forward foreign exchange contract than required. All years are affected by the economic hedging program we employ to hedge our intercompany receivables and payables. Other income and expense, net Other income and expense, net includes investment and dividend income, generally interest income on our cash and cash equivalents, short-term investments and long term marketable securities. Other (income) expense, net in 2013 decreased to $12.8 million income compared to $21.9 million income in 2012. The decrease was primarily due to higher realized gains associated with the sale of equity investments in 2012 compared to realized losses in 2013, and a 2012 gain of $4.3 million on the sale of a building in our Clinical Diagnostics segment. Sales of investments in 2013 were used to provide cash to redeem all of the $300.0 million 8.0% Senior Subordinated Notes. Other (income) expense, net in 2012 increased to $21.9 million income compared to $7.6 million income in 2011. The increase was primarily due to higher realized gains on the sale of equity investments in 2012 of $8.0 million compared to 2011 and a 2012 gain of $4.3 million on the sale of a building in our Clinical Diagnostics segment. Effective tax rate Our effective tax rate was 31%, 28% and 27% in 2013, 2012 and 2011, respectively. The effective tax rate for 2013 included a significant tax benefit related to the 2012 U.S. federal research credit, which was retroactively reinstated on January 2, 2013. The effective tax rate for 2013 was higher than 2012 primarily due to an increase in tax liabilities and audit settlements in our foreign jurisdictions, and a lower domestic production activities deduction as a result of lower U.S. taxable income in 2013. The effective tax rates for 2013 and 2012 reflected tax benefits related to adjustments to the fair value of the QuantaLife contingent consideration. The effective tax rate for 2011 reflected tax benefits from nontaxable dividend income and the release of tax liabilities. The effective tax rates for all three periods were lower than the U.S. statutory rate primarily due to tax benefits from differences between U.S. and foreign statutory tax rates, and research and development tax credits. Our foreign income is earned primarily in France and Switzerland. Switzerland's statutory tax rate is significantly lower than our U.S. statutory tax rate of 35%. Our effective tax rates are also significantly reduced by French tax incentives related to our research and development activities. Our effective tax rate may be impacted in the future, either favorably or unfavorably, by many factors including, but not limited to, changes to statutory tax rates, changes in tax laws or regulations, tax audits and settlements, and generation of tax credits. 31 Liquidity and Capital Resources Bio-Rad operates and conducts business globally, primarily through subsidiary companies established in the markets in which we trade. Goods are manufactured in a small number of locations, and are then shipped to local distribution facilities around the world. Our product mix is diversified, and certain products compete largely on product efficacy, while others compete on price. Gross margins are generally sufficient to exceed normal operating costs, and funding for research and development of new products, as well as routine outflows of capital expenditure, interest and taxes. In addition to the annual positive cash flow from operating activities, additional liquidity is readily available via the sale of short-term investments and access to our $200.0 million Amended and Restated Credit Agreement (Credit Agreement) that we entered into in June 2010. Borrowings under the Credit Agreement are on a revolving basis and can be used to make acquisitions, for working capital and for other general corporate purposes. We had no outstanding borrowings under the Credit Agreement as of December 31, 2013. The Credit Agreement expires on June 21, 2014. At December 31, 2013, we had available $608.9 million in cash, cash equivalents and short-term investments, of which approximately 39% was held in our foreign subsidiaries. We believe that our holdings of cash, cash equivalents and short-term investments in the U.S. and in our foreign subsidiaries are sufficient to meet both the current and long-term needs of our global operations. The amount of funds held in the United States can fluctuate due to the timing of receipts and payments in the ordinary course of business and due to other reasons, such as business-development activities. As part of our ongoing liquidity assessments, we regularly monitor the mix of domestic and foreign cash flows (both inflows and outflows). Repatriation of overseas funds will result in additional U.S. federal and state income tax payments. In general, it is our practice and intention to reinvest the cash generated by our foreign subsidiaries in our foreign subsidiaries' operations. Under domestic and international lines of credit, we had $218.8 million available for borrowing as of December 31, 2013, of which $8.2 million is reserved for standby letters of credit issued by our banks to guarantee our obligations, mostly to meet the deductible amount under insurance policies for our benefit. Management believes that this availability, together with cash flow from operating activities, will be adequate to meet our current objectives for operations, research and development, capital additions for manufacturing and distribution, plant and equipment, information technology systems and an acquisition of reasonable proportion to our existing total available capital. The continuing slow economic growth in developed nations, including sequestration in the U.S., may adversely affect our future results of operations. Demand for our products and services could change more dramatically than in previous years based on activity, funding, reimbursement constraints and support levels from government, universities, hospitals and private industry, including diagnostic laboratories. The need for certain sovereign nations with large annual deficits to curtail spending could lead to slower growth of, or even a decline in, our business. Sovereign nations either delaying payment for goods and services or renegotiating their debts could impact our liquidity. The situation in these sovereign nations is continuously evolving and we have no greater knowledge of the situation other than what is publicly reported. As of December 31, 2013 and December 31, 2012, we had accounts receivable, net of allowance for doubtful accounts, in Spain, Italy, Greece and Portugal of $66.0 million and $64.8 million, respectively. The instability in credit markets along with inadequate capitalization in some parts of the financial services industry could impact both our ability and our customer’s ability to access the necessary capital for acquisition, equipment and technology modernization, and the financing of inventory and receivables. Without this crucial intermediary function, manufacturers and end users may have to renegotiate existing arrangements, reduce activity levels or seek other business partners. 32 Cash Flows from Operations Net cash provided by operations was $175.5 million, $276.0 million and $262.7 million in 2013, 2012, and 2011, respectively. The net decrease between 2013 and 2012 of $100.5 million primarily resulted from: • • • • • • higher cash paid to employees, mostly due to an increase in headcount that included acquisitions, an increase in outside services as we placed in service during the second quarter of 2013 the first phase of a global single instance Enterprise Resource Planning (ERP) platform, moving to expense in the post- implementation/operation stage from capitalizing in the application development stage in the prior year period, 2012 benefited from an approximately $21 million payment for multiple years of Spanish receivables, an increase in interest paid primarily due to the early redemption of the $300.0 million of 8.0% Senior Subordinated Notes on September 30, 2013, and a payment settlement for a royalties audit of $12 million in the second quarter of 2013, slightly offset by lower income tax payments and higher customer receipts. In 2014 we have begun another phase of the global single instance ERP platform in which we will be in the application development stage and therefore expect to have lower associated expenses than in 2013 as qualified expenses are capitalized. Capitalized expenses are reflected in cash flows from investing activities. The net increase between 2012 and 2011 of $13.3 million primarily represented higher cash received from customers that in part reflected improved payments in 2012 from Southern European customers, and a decline in interest paid due to the refinancing of a portion of our debt that was completed in January 2011, partially offset by higher income tax payments as 2011 included an income tax refund of approximately $25 million. Also affecting cash flows from operations was the Enterprise Resource Planning (ERP) project that was considered in the preliminary project stage in 2011, which requires internal labor costs to be expensed, whereas in 2012 we were in the application development stage," which requires internal labor costs to be capitalized and is currently included in cash flows from investing activities. We continue to focus on cash flow improvements as a global company-wide goal. We regularly review past due receivables to assess the allowance for doubtful accounts and believe net accounts receivable are fully realizable. We also routinely review inventory for the impact of obsolescence and changes in market prices caused by the introduction of new products, technologies and in government reimbursement policies. We expect the first quarter of 2014 cash flows from operations to be lower than the fourth quarter of 2013 as Bio-Rad historically has made larger payments for royalties, fourth quarter sales commissions to third parties and annual employee bonuses during this period. Cash Flows from Investing Activities Net cash used in investing activities, including capital expenditures, was $5.4 million, $409.9 million and $386.3 million for 2013, 2012 and 2011, respectively. Capital expenditures in 2013 totaled $113.0 million, compared to $152.4 million and $102.9 million in 2012 and 2011, respectively. Capital expenditures represent the addition and replacement of production machinery and research equipment, ongoing manufacturing and facility additions for expansion, regulatory, environmental and compliance. Also included in capital expenditures are investments in business systems and data communication upgrades and enhancements. All periods include payments made for equipment placed with Clinical Diagnostics segment customers who then contract to purchase our reagents for use. Capital expenditures were lower in 2013 compared to 2012 as we placed in service the first phase of a global single instance ERP platform in 2013 and began to expense costs capitalized during the application development stage in 2012. Capital expenditures were higher in 2012 than in 2011 as the first phase of the global single instance ERP platform was nearing completion in 2012. However, as we continue to implement more phases of the ERP platform and expand our e-commerce platform, we expect capital expenditures to increase and continue to remain historically higher for the next four years or more. The current estimated global implementation cost for the single instance ERP platform could exceed $250 million and is estimated to take approximately four or more years to fully implement. 33 Purchases for marketable securities and investments in 2013 were lower than 2012 and 2011 primarily due to reallocating funds. Proceeds from the sale of marketable securities and investments was higher in 2013 than prior years primarily to provide cash to redeem all of the $300.0 million 8.0% Senior Subordinated Notes. Our investment objective is to maintain liquidity to meet anticipated operational and other corporate requirements, consistent with our risk tolerance level. Payments for acquisitions, net of cash received, and long-term investments was higher than the prior year period primarily due to the following: • • • • • • • in January 2013, we acquired 100% of the outstanding shares of AbD Serotec, a division of MorphoSys AG, for total consideration of $62.2 million (net of cash received of $7.3 million), in August 2012, we acquired from Propel Labs, Inc. a new cell sorting system that included $5.0 million in cash at the closing date, in July 2012, we acquired all of the outstanding shares of DiaMed Benelux for 4.6 million Euros (approximately $5.6 million) in cash, in January 2012, we purchased, for cash, certain assets from a raw material supplier for approximately $12.5 million, in October 2011, we acquired all the issued and outstanding stock of QuantaLife that included $150.3 million in cash at the closing date, in June 2011, we acquired the remaining outstanding shares of DiaMed S.E.A. Limited (DiaMed Thailand) from multiple noncontrolling shareholders for approximately $0.2 million in cash, and in February 2011, we acquired an additional 39% of Distribuidora de Analitica para Medicina Ibérica S.A. (DiaMed Spain) from multiple noncontrolling shareholders, increasing our ownership in DiaMed Spain to 90% for approximately 2.5 million Euros, or approximately $3.4 million in cash. We continue to review possible acquisitions to expand both our Life Science and Clinical Diagnostics segments. We routinely meet with the principals or brokers of the subject companies. It is not certain at this time that any of these discussions involving material or significant acquisitions will advance to completion. Cash Flows from Financing Activities Net cash used in financing activities was $311.7 million and $213.6 million in 2013 and 2011, respectively, and net cash provided by financing activities was $12.6 million in 2012. Net cash used in financing activities in 2013 was primarily due to the early redemption of the $300.0 million of 8.0% Senior Subordinated Notes on September 30, 2013. Also in 2013, $20.0 million was paid to Propel Labs' shareholders in contingent consideration, of which $19.9 million was associated with the valuation as of the 2012 acquisition date and the remainder was recognized in cash flows from operations. Additionally in 2013, $6.0 million was paid to QuantaLife in contingent consideration, of which $5.6 million was associated with the valuation as of the 2011 acquisition date and the remainder was recognized in cash flows from operations. Net cash provided in 2012 was primarily from proceeds from issuance of our common stock. Net cash used in 2011 was attributable to the redemption in January 2011 of $225.0 million 7.5% Senior Subordinated Notes, including a call premium of $2.8 million that was recorded in Interest expense in the Consolidated Statements of Income. We have outstanding Senior Notes of $425.0 million, which are not due until 2020. The Credit Agreement that was entered into in June 2010 is secured by substantially all of our personal property assets, the assets of our domestic subsidiaries and 65% of the capital stock of certain foreign subsidiaries. It is guaranteed by all of our existing and future material domestic subsidiaries and expires in June 2014. We are currently evaluating our options on renewing the Credit Agreement or similar arrangements. The Board of Directors has authorized the repurchase of up to $18.0 million of Bio-Rad's common stock, of which $3.3 million has yet to be repurchased as of December 31, 2013. The Credit Agreement limits our ability to 34 repurchase our stock. In accordance with the terms of awards under the 2007 Incentive Award Plan, in June 2012, we withheld 122 shares of our Class A common stock and 917 shares of our Class B common stock to satisfy tax obligations due upon the vesting of restricted stock of certain of our employees, which is considered a repurchase of our stock. All of the restricted stock has vested as of December 31, 2013 and therefore we do not anticipate any repurchasing of shares for this purpose. We had no other repurchases of our stock during 2013, 2012 or 2011. Off-Balance Sheet Arrangements We do not have any off-balance sheet arrangements that have had or are reasonably likely to have a current or future material effect on our financial condition, results of operations or liquidity. Contractual Obligations The following summarizes certain of our contractual obligations as of December 31, 2013 and the effect such obligations are expected to have on our cash flows in future periods (in millions): Contractual Obligations Long-term debt, including current portion (1) Interest payments (1) Operating lease obligations (2) Purchase obligations (3) Long-term liabilities (4) $ Payments Due by Period Less Than One Year Total 1-3 Years 3-5 Years More than 5 Years $ 437.4 144.0 161.6 65.4 99.0 $ 1.8 20.7 39.1 57.4 — 0.4 41.4 54.1 7.6 32.3 $ 0.5 $ 41.4 32.8 0.4 7.3 434.7 40.5 35.6 — 59.4 (1) These amounts represent expected cash payments, including capital lease obligations and notes payable, which are included in our December 31, 2013 Consolidated Balance Sheets. Our debt is fixed and primarily consists of the 4.875% Notes. See Note 5 of the Consolidated Financial Statements for additional information about our debt. (2) Operating lease obligations are described in Note 12 of the Consolidated Financial Statements. (3) Purchase obligations include agreements to purchase goods or services that are enforceable and legally binding to Bio-Rad and that specify all significant terms. Purchase obligations exclude agreements that are cancelable without penalty. (4) Excluded from this table is our liability for income taxes payable, including uncertain tax positions, in the amount of $17.8 million. We are not able to reasonably estimate the timing of future cash flows of these tax liabilities, therefore, our income tax obligations are excluded from the table above. See Note 6 of the Consolidated Financial Statements for additional information about our income taxes. Also excluded from this table is our $35.0 million accrual related to the United States Foreign Corrupt Practices Act (FCPA). We are not able to reasonably estimate the timing of payments related to this accrual. See Note 13 of the Consolidated Financial Statements for additional information about this accrual. 35 ITEM 7A. QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Financial Risk Management The main goal of Bio-Rad’s financial risk management program is to reduce the variance in expected cash flows arising from unexpected foreign exchange rate and interest rate changes. Financial exposures are managed through operational means and by using various financial instruments, including cash and liquid resources, borrowings, and forward and spot foreign exchange contracts. No derivative financial instruments are entered into for the purpose of trading or speculation. Company policy requires that all derivative positions are undertaken to manage the risks arising from underlying business activities. These derivative transactions do not qualify for hedge accounting treatment. Derivative instruments used in these transactions are valued at fair value and changes in fair value are included in reported earnings. Foreign Exchange Risk. We operate and conduct business in many countries and are exposed to movements in foreign currency exchange rates. We face transactional currency exposures that arise when we enter into transactions denominated in currencies other than U.S. dollars. Additionally, our consolidated net equity is impacted by the conversion of the net assets of our international subsidiaries for which the functional currency is not the U.S. dollar. Foreign currency exposures are managed on a centralized basis. This allows for the netting of natural offsets and lowers transaction costs and net exposures. Where possible, we seek to manage our foreign exchange risk in part through operational means, including matching same-currency revenues to same-currency costs, and same-currency assets to same-currency liabilities. Moreover, weakening in one currency can often be offset by strengthening in another currency. Foreign exchange risk is also managed through the use of forward foreign exchange contracts. Positions are primarily in Euro, Swiss Franc, British Sterling, Singapore Dollar, Brazilian Real and Japanese Yen. The majority of forward contracts are for periods of 90 days or less. We record the change in value of our foreign currency receivables and payables as a Foreign exchange (gain) loss on our Consolidated Statements of Income along with the change in fair market value of the forward exchange contract used as an economic hedge of those assets or liabilities. Our forward contract holdings at year-end were analyzed to determine their sensitivity to fluctuations in foreign currency exchange rates. All other variables were held constant. Market risk associated with derivative holdings is the potential change in fair value of derivative positions arising from an adverse movement in foreign exchange rates. A decline of 10% on quoted foreign exchange rates would result in an approximate net-present-value loss of $46 million on our derivative position as of December 31, 2013. This impact of a change in exchange rates excludes the offset derived from the change in value of the underlying assets and liabilities, which could reduce the adverse effect significantly. Interest Rate Risk of Debt Instruments. Bio-Rad centrally manages the short-term cash surpluses and shortfalls of its subsidiaries. Our holdings of variable rate debt instruments at year-end were analyzed to determine their sensitivity to movements in interest rates. Due to the relatively small amount of short-term variable rate debt we have outstanding, there would not be a material impact to earnings or cash flows if interest rates moved adversely by 10%. Our long-term debt consists primarily of fixed-rate instruments, and is thus insulated from interest rate changes. As of December 31, 2013, the overall interest rate risk associated with our debt was not significant. 36 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Index to Consolidated Financial Statements Reports of Independent Registered Public Accounting Firms Consolidated Balance Sheets at December 31, 2013 and 2012 Consolidated Statements of Income for each of the three years in the period ended December 31, 2013 Consolidated Statements of Comprehensive Income for each of the three years in the period December 31, 2013 Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2013 Consolidated Statements of Changes in Stockholders’ Equity for each of the three years in the period ended December 31, 2013 Notes to Consolidated Financial Statements Page 38-41 42-43 44 45 46 47 48-85 37 Report of Independent Registered Public Accounting Firm The Board of Directors and Stockholders Laboratories, Inc.: We have audited the accompanying consolidated balance sheet of Laboratories, Inc. and subsidiaries (the Company) as of December 31, 2013, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for the year ended December 31, 2013. In connection with our audit of the consolidated financial statements, we also have audited the financial statement schedule. These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the 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 audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the Laboratories, Inc. and subsidiaries as of December 31, 2013, and the results of their financial position of operations and their cash flows for the year ended December 31, 2013, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Laboratories, Inc.’s internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 17, 2014 expressed an adverse opinion on the effectiveness of the Company’s internal control over financial reporting. /s/ KPMG LLP San Francisco, California March 17, 2014 38 Report of Independent Registered Public Accounting Firm The Board of Directors and Stockholders Laboratories, Inc.: We have audited Bio-Rad Laboratories, Inc.’s (the Company) internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Bio-Rad Laboratories, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting (Item 9A(b)). Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. A material weakness related to the design of monitoring controls over operations at certain of the Company’s locations both within the United States and overseas and the completeness and timeliness of communication between locations, as well as the precision at which these controls are designed and documented, has been identified and included in management’s assessment. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet and consolidated statements of income, comprehensive income, stockholders’ equity, cash flows, and financial statement schedule of Bio-Rad Laboratories, Inc. This material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2013 consolidated financial statements, and this report does not affect our audit opinion dated March 17, 2014, which expressed an unqualified opinion on those consolidated financial statements. 39 In our opinion, because of the effect of the aforementioned material weakness on the achievement of the objectives of the control criteria, Bio-Rad Laboratories, Inc. has not maintained effective internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control-Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). /s/ KPMG LLP San Francisco, California March 17, 2014 40 REPORT OF ERNST & YOUNG LLP - INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Stockholders of Bio-Rad Laboratories, Inc. We have audited the accompanying consolidated balance sheet of Bio-Rad Laboratories, Inc. as of December 31, 2012, and the related consolidated statements of income, comprehensive income, cash flows, and changes in stockholders' equity for the two years ended December 31, 2012. Our audits also included the financial statement schedule listed in the Index at Item 15(a)2. These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule 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 audit to obtain reasonable assurance about whether the 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, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Bio-Rad Laboratories, Inc. at December 31, 2012, and the consolidated results of its operations and its cash flows for the two years ended December 31, 2012 in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. Redwood City, California March 18, 2013, except for the section in Note 1 entitled ‘Correction of Immaterial Errors, and Reclassification of Certain Amounts’, as to which the date is March 17, 2014 /s/ Ernst & Young LLP 41 BIO-RAD LABORATORIES, INC. Consolidated Balance Sheets (In thousands) ASSETS Current assets: Cash and cash equivalents Short-term investments Accounts receivable, less allowance for doubtful accounts of $32,471 at 2013 and $29,202 at 2012 Inventories: Raw materials Work in process Finished goods Total inventories Prepaid expenses Other current assets Total current assets Property, plant and equipment: Land and improvements Buildings and leasehold improvements Equipment Total property, plant and equipment Less: accumulated depreciation and amortization Property, plant and equipment, net Goodwill, net Purchased intangibles, net Other investments Other assets Total assets December 31, 2013 2012 $ 331,551 277,369 $ 463,388 457,685 422,660 398,739 105,708 129,894 265,689 501,291 93,009 124,737 237,374 455,120 135,969 79,016 1,747,856 92,490 69,260 1,936,682 19,066 284,299 783,950 1,087,315 (657,960) 429,355 18,898 268,217 724,919 1,012,034 (595,096) 416,938 517,770 266,188 377,870 49,751 3,388,790 $ 495,418 260,939 293,613 39,913 3,443,503 $ The accompanying notes are an integral part of these consolidated financial statements. 42 BIO-RAD LABORATORIES, INC. Consolidated Balance Sheets (continued) (In thousands, except share data) LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable Accrued payroll and employee benefits Notes payable and current maturities of long-term debt Income and other taxes payable Accrued royalties Deferred revenue Estimated loss contingency Other current liabilities Total current liabilities Long-term debt, net of current maturities Deferred income taxes Other long-term liabilities Total liabilities Commitments and contingent liabilities Stockholders’ equity: Bio-Rad stockholders’ equity: Preferred stock, $0.0001 par value, 7,500,000 shares authorized; issued and outstanding - none Class A common stock, $0.0001 par value; 80,000,000 shares authorized; shares issued - 23,680,749 and 23,332,532 at 2013 and 2012, respectively; shares outstanding - 23,680,627 and 23,332,410 at 2013 and 2012, respectively Class B common stock, $0.0001 par value; 20,000,000 shares authorized; shares issued - 5,096,780 and 5,149,771 at 2013 and 2012, respectively; shares outstanding - 5,095,863 and 5,148,854 at 2013 and 2012, respectively Additional paid-in capital Class A treasury stock at cost, 122 shares at 2013 and 2012 Class B treasury stock at cost, 917 shares at 2013 and 2012 Retained earnings Accumulated other comprehensive income Total Bio-Rad stockholders’ equity Noncontrolling interests Total stockholders’ equity Total liabilities and stockholders’ equity December 31, 2013 2012 $ $ 148,510 130,658 1,786 33,555 19,556 26,390 30,000 97,017 487,472 130,867 135,955 1,750 34,779 29,718 26,288 — 113,043 472,400 435,615 162,110 116,871 1,202,068 732,414 115,054 108,095 1,427,963 — 2 — 2 1 239,986 (12) (89) 1,606,117 340,717 2,186,722 — 2,186,722 3,388,790 $ 1 212,244 (12) (89) 1,528,327 274,532 2,015,005 535 2,015,540 3,443,503 $ The accompanying notes are an integral part of these consolidated financial statements. 43 BIO-RAD LABORATORIES, INC. Consolidated Statements of Income (In thousands, except per share data) Net sales Cost of goods sold Gross profit Selling, general and administrative expense Research and development expense Income from operations Interest expense Foreign exchange losses, net Other (income) expense, net Income before income taxes Provision for income taxes Net income including noncontrolling interests Net (income) loss attributable to noncontrolling interests Net income attributable to Bio-Rad Basic earnings per share: Net income per basic share attributable to Bio-Rad Weighted average common shares - basic Diluted earnings per share: Net income per diluted share attributable to Bio-Rad Weighted average common shares - diluted Year Ended December 31, 2013 2012 2011 2,132,694 $ 954,216 1,178,478 798,070 210,952 169,456 61,271 8,566 (12,766) 112,385 (34,574) 77,811 (21) 77,790 $ 2,069,235 $ 914,077 1,155,158 681,778 209,204 264,176 51,112 5,040 (21,883) 229,907 (64,361) 165,546 (69) 165,477 $ 2,073,529 894,700 1,178,829 695,984 177,604 305,241 53,135 13,842 (7,583) 245,847 (67,034) 178,813 200 179,013 2.72 $ 5.85 $ 28,586 28,290 6.39 28,031 2.69 $ 5.78 $ 28,906 28,642 6.29 28,468 $ $ $ $ The accompanying notes are an integral part of these consolidated financial statements. 44 BIO-RAD LABORATORIES, INC. Consolidated Statements of Comprehensive Income (In thousands) Year Ended December 31, 2013 2012 2011 Net income including noncontrolling interests $ 77,811 $ 165,546 $ 178,813 Other comprehensive income: Foreign currency translation adjustments 16,682 23,668 (12,494) Reclassification of realized portion of cumulative translation adjustments due to liquidation, net of tax of $0. Other post-employment benefits adjustments, net of tax of $0.2 million, $2.8 million and ($0.4) million for 2013, 2012, and 2011, respectively. Reclassification adjustments for net periodic other post- employment benefit cost, net of tax of ($0.2) million, ($0.1) million, and ($0.1) million for 2013, 2012, and 2011, respectively. Net unrealized holding gains on available-for-sale investments, net of tax of ($28.8) million, ($38.1) million and ($7.4) million for 2013, 2012, and 2011, respectively. Reclassification adjustments for gains (losses) included in Net income including noncontrolling interests, net of tax of ($0.1) million, $2.9 million, and ($0.1) million for 2013, 2012, and 2011, respectively. Other comprehensive income, net of tax Comprehensive income (20) 70 (1,055) (510) (8,531) 1,286 546 253 355 49,459 65,448 12,663 192 66,349 144,160 (5,045) 75,863 104 859 241,409 179,672 Comprehensive (income) loss attributable to noncontrolling interests (185) (90) 11 Comprehensive income attributable to Bio-Rad $ 143,975 $ 241,319 $ 179,683 Reclassification adjustments are calculated using the specific identification method. The accompanying notes are an integral part of these consolidated financial statements. 45 BIO-RAD LABORATORIES, INC. 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 Investment proceeds and miscellaneous receipts, net Excess tax benefits from share-based compensation Proceeds from (payments for) forward foreign exchange contracts, net Net cash provided by operating activities Cash flows from investing activities: Capital expenditures Proceeds from dispositions of property, plant and equipment Payments for acquisitions, net of cash received, and long-term investments Payments for purchases of intangible assets Payments for purchases of marketable securities and investments Proceeds from sales of marketable securities and investments Proceeds from maturities of marketable securities and investments Net cash used in investing activities Cash flows from financing activities: Net payments on line-of-credit arrangements and notes payable Payments on long-term borrowings Proceeds from issuance of common stock Payments of contingent consideration Debt issuance costs on long-term borrowings Purchase of treasury stock Excess tax benefits from share-based compensation Net cash (used in) provided by financing activities Effect of foreign exchange rate changes on cash Net decrease in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year Year Ended December 31, 2011 2012 2013 $ 2,090,030 (1,797,688) (61,233) (71,144) 16,760 (2,720) 1,471 175,476 $2,063,805 (1,654,943) (46,369) (93,697) 12,991 (2,889) (2,870) 276,028 $ 2,018,755 (1,639,848) (56,859) (68,750) 9,686 (3,168) 2,919 262,735 (112,998) 1,214 (152,417) 6,325 (102,888) 234 (72,054) (700) (386,714) 289,779 276,052 (5,421) (39,443) (1,780) (680,966) 131,295 327,052 (409,934) (158,538) (436) (509,310) 48,825 335,781 (386,332) 48 (300,228) 11,237 (25,474) — — 2,720 (311,697) 9,805 (131,837) 463,388 $ 331,551 (191) (620) 10,611 — — (101) 2,889 12,588 10,475 (110,843) 574,231 $ 463,388 (3,900) (226,835) 14,249 — (242) — 3,168 (213,560) 4,837 (332,320) 906,551 $ 574,231 The accompanying notes are an integral part of these consolidated financial statements. 46 BIO-RAD LABORATORIES, INC. Consolidated Statements of Changes in Stockholders’ Equity (In thousands) Common Stock Additional Paid-in Capital Treasury Stock Retained Earnings Accumulated Other Comprehensive Income Total Bio-Rad Stockholders' Equity Non- controlling Interests Total Stockholders' Equity Balance at December 31, 2010 Adjustment - see Note 1 Net income Other comprehensive income, net of tax Issuance of common stock Stock compensation expense Tax benefit-exercise stock options Purchase of additional controlling interests and other Balance at December 31, 2011 Net income Other comprehensive income, net of tax Issuance of common stock Stock compensation expense Tax benefit-exercise stock options Purchase of treasury stock Balance at December 31, 2012 Net income Other comprehensive income, net of tax Issuance of common stock Stock compensation expense Tax benefit-exercise stock options Purchase of additional controlling interests and other Balance at December 31, 2013 $ $ 3 — — — — — — — 3 — — — — — — 3 — — — — — — 3 $ 156,986 — — $ — $ 1,181,687 2,150 179,013 — — $ 198,020 — — $ 1,536,696 2,150 179,013 $ 3,823 — (200) $ 1,540,519 2,150 178,813 — 14,249 10,738 3,582 (221) — — — — — — — — — — 670 — — — — 670 14,249 10,738 3,582 189 — — — 859 14,249 10,738 3,582 (221) (3,367) (3,588) 185,334 — 1,362,850 198,690 1,746,877 — — 10,611 12,936 3,363 — — — — — 165,477 — 165,477 — — — — 75,842 — — — 75,842 10,611 12,936 3,363 — (101) (101) — 212,244 — — 1,528,327 77,790 — 274,532 — (101) 2,015,005 77,790 — 11,237 13,657 3,135 — — — — — — — — 66,185 — — — 66,185 11,237 13,657 3,135 445 69 21 — — — — 535 21 164 — — — 1,747,322 165,546 75,863 10,611 12,936 3,363 (101) 2,015,540 77,811 66,349 11,237 13,657 3,135 (287) $ 239,986 — — $ (101) $ 1,606,117 — $ 340,717 (287) $ 2,186,722 (720) (1,007) $ — $ 2,186,722 The accompanying notes are an integral part of these consolidated financial statements. 47 BIO-RAD LABORATORIES, INC. 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 of our wholly and majority owned subsidiaries (referred to in this report as “Bio-Rad,” “we,” “us” and “our”) after elimination of intercompany balances and transactions. The preparation of financial statements in conformity with U.S. generally accepted accounting principles 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. We evaluate subsequent events and the evidence they provide about conditions existing at the date of the balance sheet as well as conditions that arose after the balance sheet date but through the date the financial statements are issued. The effects of conditions that existed at the balance sheet date are recognized in the financial statements. Events and conditions arising after the balance sheet date but before the financial statements are issued are evaluated to determine if disclosure is required to keep the financial statements from being misleading. To the extent such events and conditions exist, disclosures are made regarding the nature of events and the estimated financial effects for those events and conditions. 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 value. Available-for-Sale Investments Available-for-sale investments consist of corporate obligations, municipal securities, asset backed securities, U.S. government sponsored agencies and marketable equity securities. Management classifies investments at the time of purchase and reevaluates such classification at each balance sheet date. Investments with maturities beyond one year may be classified as short-term based on their liquid nature and because such marketable securities represent the investment of cash that is available for current operations. Available-for-sale investments are reported at fair value based on quoted market prices and other observable market data. Unrealized gains and losses are reported as a component of other comprehensive income, net of any related tax effect. Unrealized losses are charged against income when a decline in the fair value of an individual security is determined to be other-than-temporary. We review our available-for-sale investments for other-than-temporary losses on a quarterly basis. Realized gains and losses and other-than-temporary impairments on investments are included in Other (income) expense, net (see Note 10). Concentration of Credit Risk Financial instruments that potentially subject us to concentration of credit risk consist primarily of cash and cash equivalents, investments, foreign exchange contracts and trade accounts receivable. Cash and cash equivalents and investments are placed with various highly rated major financial institutions located in different geographic regions. Bio-Rad has not sustained significant losses from instruments held at financial institutions. The forward contracts used in managing our foreign currency exposures have an element of risk in that the counterparties may be unable to meet the terms of the agreements. We attempt to minimize this risk by limiting the counterparties to a diverse group of highly-rated domestic and international financial institutions. In the event of non-performance by these counterparties, the carrying values of our financial instruments represent the maximum 48 amount of loss we would have incurred as of our fiscal year-end. However, we do not expect to record any losses as a result of counterparty default. We perform credit evaluation procedures related to our trade receivables and with the exception of certain developing countries, generally do not require collateral. As a result of increased risk in certain developing countries, some Bio-Rad sales are subject to collateral letters of credit from our customers. Credit risk for trade accounts receivable is generally limited 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 Union. Accounts Receivable We maintain 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 industry, historical losses and our customers’ credit-worthiness. Amounts later determined and specifically identified to be uncollectible are charged or written off against this allowance. Inventory Inventories are valued at the lower of actual cost or market (net realizable value) and include material, labor and overhead costs. The first-in, first-out method is used to relieve inventory for products sold. Property, Plant and Equipment Property, plant and equipment are carried at cost, less accumulated depreciation and amortization. Included in property, plant and equipment are buildings and equipment acquired under capital lease arrangements, reagent rental equipment and capitalized software, including costs for software developed or obtained for internal use. Property, plant and equipment are assessed for impairment quarterly 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 leasehold improvements are amortized over 15-30 years or the term of the leases or life of the improvements, whichever is shorter. With the exception of reagent rental equipment, which is amortized over a 1-5 year period, equipment and capitalized software is depreciated over 3-12 years. Goodwill Goodwill represents the excess of the cost over the fair value of net tangible and identifiable intangible assets of acquired businesses. Goodwill is assessed for impairment by applying fair value based tests annually in the fourth quarter or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. We perform impairment tests of goodwill at our reporting unit level, which is one level below our operating segments. Our reporting units are identified as components for which discrete financial information is available and is regularly reviewed by management. Goodwill amounts are assigned to reporting units at the time of acquisition. The goodwill impairment test consists of a two-step process. The first step of the goodwill impairment test, used to identify potential impairment, compares the fair value of a reporting unit to its carrying value, including goodwill. We use a projected discounted cash flow model to determine the fair value of a reporting unit. If the fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired, and the second step of the impairment test is not required. The second step, if required, compares the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. The fair value of a reporting unit is allocated to all of the assets and liabilities of that unit (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the price paid to acquire 49 the reporting unit. If the carrying amount of the reporting unit’s goodwill exceeds its implied fair value, an impairment charge is recognized in an amount equal to that excess. Long-Lived Assets For purposes of recognition and measurement of an impairment loss, a long-lived asset or assets are grouped with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. We assess the impairment of long-lived assets (including identifiable intangible assets) quarterly or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors that we consider important that could trigger an impairment review include: • • • • significant under-performance relative to expected, historical or projected future operating results; significant changes in the manner of use of the long-lived assets, intangible assets or the strategy for our overall business; a current expectation that, more likely than not, a long-lived asset will be sold or otherwise disposed of at a loss before the end of its previously estimated useful life; and significant negative industry, legal, regulatory or economic trends. When management determines that the carrying value of long-lived assets may not be recoverable based upon the existence of one or more of the above indicators of impairment, we test for any impairment based on a projected undiscounted cash flow method. Projected future operating results and cash flows of the asset or asset group are used to establish the fair value used in evaluating the carrying value of long-lived and intangible assets. We estimate the future cash flows of the long-lived assets using current and long-term financial forecasts. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. If this is the case, an impairment loss would be recognized. The impairment loss recognized is the amount by which the carrying amount exceeds the fair value. Income Taxes We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities reflect the tax effects of losses, credits, and temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. They are determined using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. We record net deferred tax assets to the extent we believe these assets will more likely than not be realized. In making such determination, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial operations. To the extent we determine that we are able to realize our deferred income tax assets in the future in excess of their net recorded amount, we make an adjustment to the valuation allowance which may reduce the provision for income taxes. When we establish or reduce the valuation allowance against our deferred tax assets, our provision for income taxes will increase or decrease, respectively, in the period that determination to change the valuation allowance is made. We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. The tax benefits recognized in the financial statements on a particular tax position are measured based on the largest benefit that has a greater than a 50% likelihood of being realized upon settlement. The amount of unrecognized tax benefits is adjusted as appropriate for changes in facts and circumstances, such as significant amendments to existing tax law, new regulations or interpretations by the taxing authorities, new information obtained during a tax examination, or resolution of an examination. We recognize both accrued interest and penalties, where appropriate, related to unrecognized tax benefits in the provision for income taxes. 50 Revenue Recognition Revenue is recognized when pervasive evidence of an arrangement exists, the price to the buyer is fixed or determinable, collectability is reasonably assured and title has passed to the customer or product has been delivered absent specific contractual specifications. Revenue associated with equipment that requires factory installation is not recorded until installation is complete and customer acceptance, if required contractually, has occurred. At the time revenue is recognized, a provision is recognized for estimated product returns. Service revenues on extended warranty contracts are recognized ratably over the life of the service agreement, or as services are performed if not under contract. Reagent agreements are a diagnostic industry sales method that provides use of an instrument and consumables (reagents) to a customer on a per test basis. We evaluate our reagent agreements and account for these contracts under the guidance pertaining to accounting for revenue arrangements with multiple deliverables. Our reagent agreements represent one unit of accounting as the instrument and consumables are interdependent in producing a diagnostic result that neither has a stand-alone value with respect to these agreements. All revenues that we earn under our reagent agreements are recognized pursuant to the terms of each agreement and are based and entirely contingent upon either (i) when the consumables to conduct a fixed number of tests are delivered or (ii) as reported by the customer on a per test basis. Shipping and Handling We classify all freight costs billed to customers as Net sales. Related freight costs are included in Cost of goods sold. Warranty We warrant certain equipment against defects in design, materials and workmanship, mostly for a period of one year. Upon delivery of that equipment, we establish, as part of Cost of goods sold, a provision for the expected costs of such warranty based on historical experience, specific warranty terms and customer feedback. A review is performed on a quarterly basis to assess the adequacy of our warranty accrual. Changes in 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 Research and Development 2013 2012 16.4 $ 15.6 (16.4) 15.6 $ 16.4 19.8 (19.8) 16.4 $ $ Internal research and development costs are expensed as incurred. Third-party research and development costs are expensed when the contracted work has been performed. Foreign Currency Balance sheet accounts of international subsidiaries are translated at the current exchange rates as of the end of each accounting period. Income statement items are translated at average exchange rates for the period. The resulting translation adjustments are recorded as a separate component of stockholders’ equity. Foreign currency transaction gains and losses are included in Foreign exchange losses, net in the Consolidated Statements of Income. Transaction gains and losses result primarily from fluctuations in exchange rates when 51 intercompany receivables and payables are denominated in currencies other than the functional currency of our subsidiary that recorded the transaction. Forward Foreign Exchange Contracts As part of distributing our products, we regularly enter into intercompany transactions. We enter into forward foreign exchange contracts to manage foreign exchange risk of future movements in exchange rates that affect foreign currency denominated intercompany receivables and payables. We do not use derivative financial instruments for speculative or trading purposes, nor do we seek hedge accounting treatment for any of our contracts. As a result, these contracts, generally with maturity dates of 90 days or less and denominated primarily in currencies of industrial countries, are recorded as an asset or liability measured 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, all of which are recorded as Foreign exchange losses, net in the Consolidated Statements of Income. Noncontrolling Interests A noncontrolling interest in a subsidiary is an ownership interest in a consolidated entity that is reported as equity in the consolidated financial statements and separate from Bio-Rad’s equity. In addition, net income (loss) attributable to noncontrolling interests is reported separately from net income attributable to Bio-Rad in the consolidated financial statements. Our consolidated statements presented the full amount of assets, liabilities, income and expenses of all of our consolidated subsidiaries, with a partially offsetting amount shown in noncontrolling interests for the portion of assets and liabilities that were not controlled by us. In February 2013, we acquired the remaining outstanding shares of Distribuidora de Analitica para Medicina Iberica S.A. (DiaMed Spain) from the remaining noncontrolling shareholder for approximately 0.6 million Euros or $0.9 million in cash. This acquisition was accounted for as an equity transaction, which reduced Bio-Rad's noncontrolling interests and additional paid-in capital by $0.6 million and $0.3 million, respectively, and therefore there are no noncontrolling interests in Bio-Rad. Share-Based Compensation Plans Stock-based compensation expense for all share-based payment awards granted is determined based on the grant- date fair value. We recognize these compensation costs net of estimated forfeitures over the requisite service period of the award, which is generally the vesting term of the share-based payment awards. We estimated the forfeiture rate based on our historical experience. These plans are described more fully in Note 9. Earnings Per Share Basic earnings per share is computed by dividing net income attributable to Bio-Rad by the weighted average number of common shares outstanding for that period. Diluted earnings per share takes into account the effect of dilutive instruments, such as stock options and restricted stock, and uses the average share price for the period in determining the number of potential common shares that are to be added to the weighted average number of shares outstanding. Potential common shares are excluded from the diluted earnings per share calculation if the effect would be anti-dilutive. Unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and are included in the computation of earnings per share (EPS) pursuant to the two-class method. As our unvested restricted shares qualify as participating securities, we have included these shares in the computation of EPS. The weighted average number of common shares outstanding used to calculate basic and diluted earnings per share and the anti-dilutive shares are as follows (in thousands): 52 Basic weighted average shares outstanding Effect of potentially dilutive stock options and restricted stock awards Diluted weighted average common shares Anti-dilutive stock options and restricted stock awards excluded from the computation of diluted EPS Fair Value of Financial Instruments Year Ended December 31, 2012 2011 2013 28,586 28,290 28,031 320 28,906 352 28,642 437 28,468 107 83 63 For certain financial instruments, including cash and cash equivalents, short-term investments, accounts receivable, marketable securities, notes payable, accounts payable and foreign exchange contracts, the carrying amounts approximate fair value. The estimated fair value of financial instruments is based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) using available market information or other appropriate valuation methodologies in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. Estimates are not necessarily indicative of the amounts that could be realized in a current market exchange as considerable judgment is required in interpreting market data used to develop estimates of fair value. The use of different market assumptions or estimation techniques could have a material effect on the estimated fair value (see Note 3). CORRECTION OF IMMATERIAL ERRORS, AND RECLASSIFICATION OF CERTAIN AMOUNTS Inventory Costing During the third quarter of 2013, we identified errors in the consolidated financial statements for the years 2011 and 2012 (and for all interim periods therein) and in the unaudited interim condensed consolidated financial statements for the three month periods ended March 31, 2013 and June 30, 2013, related to the valuation of finished goods inventory in our Life Science segment. We were inappropriately expensing inventory in amounts greater than actual costs for non-sales transactions, primarily related to inventory being used for demonstration purposes and product samples that are recorded to Selling, general and administrative expense. In addition, the Life Science segment inventory error affected cost of goods sold as we relieved inventory at a higher cost than incurred on limited sales to third parties produced in a non-U.S. manufacturing facility. The effect of correcting these errors in the 2011 and 2012 consolidated financial statements were increases to net income of $0.8 million and $1.7 million, respectively. Research and Development (R&D) Tax Credit During the third quarter of 2013, we revised the classification of one item for all periods presented from “Provision for income taxes” to “Research and development expense” in our Consolidated Statements of Income to conform to the current year presentation. The item reclassified pertains to a refundable French R&D tax credit, which after the reclassification reduces Research and development expense. We believe this presentation is appropriate as we are not required to have taxable income in order to earn the credits. The effect of the reclassifications from Provision for income taxes to Research and development expense for 2011 and 2012 was $8.8 million and $4.8 million, respectively. The impact of the immaterial error correction, and the reclassification, both described above on our Consolidated Balance Sheet and Consolidated Statements of Income for the periods presented is as follows (in thousands, except per share data): 53 December 31, 2012 As reported Adjustment As revised Inventories: finished goods $ 230,624 $ Total inventories Total current assets Total assets Income and other taxes payable Total current liabilities Total liabilities Total stockholders' equity 448,370 1,929,932 3,436,753 32,299 469,920 1,425,483 2,011,270 Total liabilities and stockholders' equity $ 3,436,753 $ 6,750 6,750 6,750 6,750 2,480 2,480 2,480 4,270 6,750 $ 237,374 455,120 1,936,682 3,443,503 34,779 472,400 1,427,963 2,015,540 $ 3,443,503 Year ended December 31, 2012 2011 As reported Adjustment As revised As reported Adjustment As revised Cost of goods sold $ 915,097 $ (1,020) $ 914,077 $ 895,640 $ (940) $ 894,700 Gross profit Selling, general and administrative expense 1,154,138 1,020 1,155,158 1,177,889 940 1,178,829 682,898 (1,120) 681,778 696,294 (310) 695,984 Research and development expense 214,040 (4,836) 209,204 186,439 (8,835) 177,604 Income from operations Income before income taxes Provision for income taxes Net income including noncontrolling interests Net income attributable to Bio-Rad Net income per basic share attributable to Bio-Rad Net income per diluted share attributable to Bio-Rad $ $ $ 257,200 222,931 59,084 6,976 6,976 5,277 264,176 229,907 64,361 295,156 235,762 57,739 10,085 10,085 9,295 305,241 245,847 67,034 163,847 1,699 165,546 178,023 790 178,813 163,778 $ 1,699 $ 165,477 5.79 $ 0.06 $ 5.72 $ 0.06 $ 5.85 5.78 $ $ $ 178,223 $ 790 $ 179,013 6.36 $ 0.03 $ 6.26 $ 0.03 $ 6.39 6.29 Presentation and Disclosure of the Statements of Comprehensive Income During the first quarter of 2013, we identified errors in the Consolidated Statements of Comprehensive Income for 2012, 2011 and 2010, and in the unaudited interim Condensed Consolidated Statements of Comprehensive Income for all three quarters of 2012, which affected two line items within this financial statement. Specifically, we incorrectly calculated the 1) net unrealized holding gains on available-for-sale (AFS) investments, net of tax, and 2) reclassification adjustments for net holding gains/losses on AFS investments included in net income including noncontrolling interests, net of tax. Following are the amounts in thousands that should have been reported for the Consolidated Statements of Comprehensive Income giving effect to the errors described above: 54 Net unrealized holding gains on AFS investments, net of income tax, understated by $10,090 for the year ended 2012, and overstated by $208 for the year ended 2011. Income taxes on net unrealized holding gains on AFS investments, understated by $5,874 for the year ended 2012, and overstated by $121 for the year ended 2011. Reclassification adjustments for net holding (gains) losses on AFS investments included in Net income including noncontrolling interests, net of income tax, understated by $10,090 for the year ended 2012, and overstated by $208 for the year ended 2011. Income taxes on reclassification adjustments for net holding gains/ losses on AFS investments included in Net income including noncontrolling interests, understated by $5,874 for the year ended 2012, and overstated by $121 for the year ended 2011. Year Ended December 31, 2012 2011 $65,448 $12,663 $38,108 $7,373 $(5,045) $104 $(2,937) $61 Management evaluated the materiality of all the errors described above from a qualitative and quantitative perspective. Based on such evaluation, we have concluded that while the accumulation of these errors was significant to the year ended December 31, 2013, their correction would not be material to any individual prior period, nor did they have an effect on the trend of financial results, taking into account the requirements of the Securities and Exchange Commission (SEC) Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (SAB 108). Accordingly, we are correcting these errors in every affected period in the 2013 Consolidated Financial Statements included in this Form 10-K. Recent Accounting Standards Updates In February 2013, the Financial Accounting Standards Board (FASB) issued guidance requiring that companies present either in a single note or parenthetically on the face of the financial statements, the effect of significant amounts reclassified from each component of accumulated other comprehensive income based on its source and the income statement line items affected by the reclassification. If a component is not required to be reclassified to net income in its entirety, companies would instead cross reference to the related footnote for additional information. We adopted this guidance as of January 1, 2013 and present it in a single note. This guidance is related to disclosure only and therefore did not have an impact on our consolidated financial position, results of operations or cash flows. 2. ACQUISITIONS In January 2013, we acquired 100% of the outstanding shares of AbD Serotec, a division of MorphoSys AG, for total consideration of $62.2 million (net of cash received of $7.3 million). This acquisition was accounted for as a business combination as AbD Serotec represented an integrated set of activities and assets that was capable of being conducted and managed for the purpose of providing a return and therefore constitutes a business in accordance with GAAP. The amount of acquisition-related costs was minimal as Bio-Rad primarily represented itself during the acquisition process. This business acquisition is included in our Life Science segment's results of operations from the acquisition date. We believe that with AbD Serotec's comprehensive catalog of antibodies, we are able to 55 offer our customers total assay solutions that can be validated on many of our research platforms for western blotting, multiplex protein expression, ELISA and cell sorting. During the second quarter of 2013, we finalized the determination of fair values of certain acquired intangible assets and adjusted the preliminary carrying values of goodwill and certain other assets and liabilities to include final information received, and an update to the weighted average tax rate applied to our valuation model and changes in the determination of fair values of certain assets acquired and liabilities assumed. These factors that existed as of the acquisition date resulted in an overall increase to intangible assets of $1.7 million, a reduction of goodwill of $2.1 million and an increase to net tangible assets of $0.4 million. These measurement period adjustments did not have a material impact on our previously reported condensed consolidated financial statements and, therefore, we have not retrospectively adjusted those financial statements. The final fair values of the net assets acquired consist of definite-lived intangible assets of $44.0 million, goodwill of $14.9 million and net tangible assets of $3.3 million. A portion of the goodwill recorded may be deductible for income tax purposes. We do not consider this business combination to be material and therefore have not disclosed the pro forma results of operations as required for material business combinations. In August 2012, we acquired from Propel Labs, Inc. a new cell sorting system, an automated, easy-to-use, benchtop cell sorting flow cytometer. The new system will be sold exclusively under the Bio-Rad brand as the S3TM Cell Sorter. This asset acquisition was accounted for as a business combination as the new cell sorting system represented an integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing a return and therefore constitutes a business in accordance with GAAP. The amount of acquisition- related cost was minimal as Bio-Rad primarily represented itself during the acquisition process. This business acquisition is included in our Life Science segment's results of operations from the acquisition date. The fair value of the consideration as of the acquisition date was $49.6 million, which included $5.0 million paid in cash at the closing date and $44.6 million in contingent consideration potentially payable to Propel Labs' shareholders. The contingent consideration was based on a probability-weighted income approach related to the achievement of certain development and sales milestones. The contingent consideration for the development milestones was valued at $19.9 million, based on assumptions regarding the probability of achieving the milestones, with such amounts discounted to present value. The contingent consideration for the sales milestones was valued at $24.7 million, based on a statistically significant number of simulations for each potential outcome. The contingent consideration was recognized at its estimated fair value of $20.8 million as of December 31, 2013. (See Note 3 for further discussion of the contingent consideration valuation and underlying assumptions.) The fair values of the net assets acquired from Propel Labs, Inc. as of the acquisition date were determined to be $17.4 million of goodwill, $32.1 million of definite-lived intangible assets and $0.1 million of net tangible assets. We expect the goodwill recorded to be deductible for income tax purposes. The acquired cell sorting system fits well into Bio-Rad's existing Life Science segment product offerings. In July 2012, we acquired 100% of the outstanding shares of DiaMed Benelux for 4.6 million Euros (approximately $5.6 million) in cash. This acquisition was accounted for as a business combination as DiaMed Benelux represented an integrated set of activities and assets that was capable of being conducted and managed for the purpose of providing a return and therefore constitutes a business in accordance with GAAP. The amount of acquisition-related cost was minimal as Bio-Rad primarily represented itself during the acquisition process. This business acquisition is included in our Clinical Diagnostics segment's results of operations from the acquisition date. We acquired net liabilities with a fair value of $2.3 million and the fair values of the assets acquired as of the acquisition date were determined to be $3.0 million of goodwill and $4.9 million of definite-lived intangible assets. The goodwill recorded will not be deductible for income tax purposes. DiaMed Benelux became the exclusive 56 distributor of certain Bio-Rad immunohematology products in the Benelux market as a result of our 2007 acquisition of DiaMed Holding AG. This distributor acquisition is consistent with our stated objective to control the distribution of our own products and services. In January 2012, we purchased, for cash, certain assets from a raw material supplier for approximately $12.5 million. This asset acquisition was accounted for as a business combination as the certain assets acquired represented an integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing a return and therefore constitutes a business in accordance with GAAP. The amount of acquisition- related cost was minimal as Bio-Rad primarily represented itself during the acquisition process. This business acquisition is included in the Clinical Diagnostics segment's results of operations from the acquisition date. The fair value of the assets acquired at the acquisition date was determined to be $6.3 million of net tangible assets, $5.1 million of intangible assets and $1.1 million of goodwill. We expect the goodwill recorded to be deductible for income tax purposes. In addition, we paid $2.0 million for employment agreements as an incentive to certain employees of the acquired business to remain with Bio-Rad. Such amount was expensed over two years from the date of acquisition. We believe this acquisition will allow us to secure the supply of critical raw materials and lower our overall costs in the Clinical Diagnostics segment. 3. FAIR VALUE MEASUREMENTS We determine the fair value of an asset or liability based on the assumptions that market participants would use in pricing the asset or liability in an orderly transaction between market participants at the measurement date. The identification of market participant assumptions provides a basis for determining what inputs are to be used for pricing each asset or liability. A fair value hierarchy has been established which gives precedence to fair value measurements calculated using observable inputs over those using unobservable inputs. This hierarchy prioritizes the inputs into three broad levels as follows: • Level 1: Quoted prices in active markets for identical instruments • Level 2: Other significant observable inputs (including quoted prices in active markets for similar instruments) • Level 3: Significant unobservable inputs (including assumptions in determining the fair value of certain investments) Financial assets and liabilities carried at fair value and measured on a recurring basis as of December 31, 2013 are classified in the hierarchy as follows (in millions): 57 Financial Assets Carried at Fair Value: Cash equivalents (a): Commercial paper Foreign time deposits U.S. government sponsored agencies Money market funds Total cash equivalents Available-for-sale investments (b): Corporate debt securities Foreign brokered certificates of deposit U.S. government sponsored agencies Foreign government obligations Municipal obligations Marketable equity securities Asset-backed securities Total available-for-sale investments Forward foreign exchange contracts (c) Total financial assets carried at fair value Financial Liabilities Carried at Fair Value: Forward foreign exchange contracts (d) Contingent consideration (e) Total financial liabilities carried at fair value Level 1 Level 2 Level 3 Total $ — $ 11.1 — 1.2 12.3 — — — — — 325.2 — 325.2 — 337.5 $ 7.0 $ — 1.2 — 8.2 132.5 8.9 39.1 5.6 11.0 — 48.6 245.7 0.6 254.5 $ — $ — — — — — — — — — — — — — — $ — $ — — $ 1.1 $ — 1.1 $ — $ 20.8 20.8 $ $ $ $ 7.0 11.1 1.2 1.2 20.5 132.5 8.9 39.1 5.6 11.0 325.2 48.6 570.9 0.6 592.0 1.1 20.8 21.9 Financial assets and liabilities carried at fair value and measured on a recurring basis as of December 31, 2012 are classified in the hierarchy as follows (in millions): 58 Financial Assets Carried at Fair Value: Cash equivalents (a): Commercial paper Foreign time deposits U.S. government sponsored agencies Money market funds Total cash equivalents Available-for-sale investments (b): Corporate debt securities Foreign brokered certificates of deposit U.S. government sponsored agencies Foreign government obligations Municipal obligations Marketable equity securities Asset-backed securities Total available-for-sale investments Forward foreign exchange contracts (c) Total financial assets carried at fair value Financial Liabilities Carried at Fair Value: Forward foreign exchange contracts (d) Contingent consideration (e) Total financial liabilities carried at fair value Level 1 Level 2 Level 3 Total $ — $ 10.1 — 5.5 15.6 — — — — — 242.1 — 242.1 — 257.7 $ 52.8 — 1.3 — 54.1 240.6 0.4 92.7 5.6 12.1 — 82.2 433.6 1.1 488.8 — $ — — — — — — — — — — — — — — $ — $ — — $ 0.8 — 0.8 $ — $ 52.6 52.6 $ $ $ $ 52.8 10.1 1.3 5.5 69.7 240.6 0.4 92.7 5.6 12.1 242.1 82.2 675.7 1.1 746.5 0.8 52.6 53.4 (a) Cash equivalents are included in Cash and cash equivalents in the Consolidated Balance Sheets. (b) Available-for-sale investments are included in the following accounts in the Consolidated Balance Sheets (in millions): Short-term investments Other investments Total December 31, 2013 December 31, 2012 $ $ 277.4 293.5 570.9 $ $ 457.7 218.0 675.7 (c) Forward foreign exchange contracts in an asset position are included in Prepaid expenses, taxes and other current assets in the Consolidated Balance Sheets. (d) Forward foreign exchange contracts in a liability position are included in Other current liabilities in the Consolidated Balance Sheets. (e) The contingent consideration liability is included in the following accounts in the Consolidated Balance Sheet (in millions): Other current liabilities Other long-term liabilities Total 59 December 31, 2013 December 31, 2012 $ $ 6.1 14.7 20.8 $ $ 27.3 25.3 52.6 During the fourth quarter of 2011, we recognized a contingent consideration liability upon our acquisition of QuantaLife related to potential future payments due upon the achievement of certain sales and development milestones. The contingent consideration was initially recognized at its estimated fair value of $24.1 million, based on a probability-weighted income approach. As of the acquisition date of October 4, 2011, total contingent consideration could have originally reached a maximum of $48 million upon the achievement of all sales milestones and a development milestone. The development milestone was met as of December 31, 2012, resulting in a payment of $6.0 million in January 2013. During 2012, the first three short-term sales milestones were not met and therefore the fair value of the contingent consideration was lowered by $16.1 million and credited to Selling, general and administrative expense. During 2013, we did not expect that any of the remaining sales milestones would be met and therefore $2.0 million of the remaining contingent consideration liability was credited to Selling, general and administrative expense. During the third quarter of 2012, we recognized a contingent consideration liability upon our acquisition of a new cell sorting system from Propel Labs, Inc. The fair value of the contingent consideration was based on a probability-weighted income approach related to the achievement of certain development and sales milestones and was recorded at $44.6 million in 2012. The development milestones have been achieved and payments totaling $20.0 million were made in 2013. Based on the most recent valuation, the sales milestones could potentially range from $0 to a maximum of 60.0%, 51.32% and 50.38% of annual cell sorting system purchase orders, with payment to occur upon the anniversary of the completion of a certain number of cell sorting systems for three consecutive years, respectively. These maximum payout ratios begin at annual cell sorting system purchase orders in excess of $20 million, $30 million and $45 million for the three consecutive years, respectively. The contingent consideration was revalued by a net reduction of $3.8 million in 2013 to Selling, general and administrative expense to its estimated fair value of $20.8 million as of December 31, 2013. The following table provides a reconciliation of the Level 3 contingent consideration liabilities measured at estimated fair value based on original valuations and updated quarterly for the year ended December 31, 2013 (in millions): January 1 Payment of development milestone - QuantaLife Payment of development milestone - Cell sorting system Decrease in fair value of contingent consideration included in Selling, general and administrative expense - QuantaLife Net decrease in estimated fair value of contingent consideration included in Selling, general and administrative expense - Cell sorting system December 31 $ $ 2013 52.6 (6.0) (20.0) (2.0) (3.8) 20.8 The following table provides quantitative information about Level 3 inputs for fair value measurement of our contingent consideration liabilities as of December 31, 2013. Significant increases or decreases in these inputs in isolation could result in a significantly lower or higher fair value measurement. 60 Cell sorting system Valuation Technique Probability-weighted income approach Unobservable Input Sales milestone: Credit adjusted discount rates Projected volatility of growth rates Market price of risk Range From To 0.97% 13.0% 1.0% 1.93% 15.0% N/A To estimate the fair value of Level 2 debt securities as of December 31, 2013, our primary pricing provider simplified its process during the first quarter of 2013 by eliminating certain pricing sources and established S&P Capital IQ as the primary pricing source. The new pricing process allows us to select a hierarchy of pricing sources for securities held. The chosen pricing hierarchy for our Level 2 securities, other than certificates of deposit and commercial paper, is S&P Capital IQ as the primary pricing source and then our custodian as the secondary pricing source. If S&P Capital IQ does not price a Level 2 security that we hold, then the pricing provider will utilize our custodian supplied pricing. For commercial paper as of December 31, 2013, pricing is determined by a straight-line calculation, starting with the purchase price on the date of purchase and increasing to par at maturity. Interest bearing certificates of deposit and commercial paper are priced at par. In addition to the above, our primary pricing provider performed daily reasonableness testing of S&P Capital IQ prices to custodian reported prices. Prices outside a tolerable variance of approximately 1% are investigated and resolved. To estimate the fair value of Level 2 debt securities as of December 31, 2012, our primary pricing service relied on inputs from multiple industry-recognized pricing sources to determine the price for each investment. In addition, our pricing service performed reasonableness testing of their prices on a daily basis by comparing them to the prices reported by our custodians as well as prior day prices. If the price difference fell outside of predetermined tolerable levels, they investigated the cause and resolved the pricing issue. Based on a review of the results of this analysis, we utilized our primary pricing service for all Level 2 debt securities as none of these securities tested outside of the tolerable levels. As of December 31, 2012, our primary pricing service inputs for Level 2 U.S. government sponsored agencies, municipal obligations, corporate and foreign government bonds, asset-backed securities and related cash equivalents consisted of market prices from a variety of industry standard data providers, security master files from large financial institutions and other third-party sources. These multiple market prices were used by our primary pricing service as inputs into a distribution-curve based algorithm to determine the daily market value. As of December 31, 2012, our primary pricing service inputs for Level 2 corporate debt securities (commercial paper), bank deposits and related cash equivalents consisted of dynamic and static security characteristics information obtained from several independent sources of security data. The dynamic inputs such as credit rating, factor and variable-rate, were updated daily. The static characteristics included inputs such as day count and first coupon upon initial security creation. These securities were typically priced utilizing mathematical calculations reliant on these observable inputs. Other available-for-sale foreign government obligations were based on indicative bids from market participants. Available-for-sale investments consist of the following (in millions): 61 $ $ $ Short-term investments: Corporate debt securities Foreign brokered certificates of deposit Municipal obligations Asset-backed securities U.S. government sponsored agencies Foreign government obligations Marketable equity securities Long-term investments: Marketable equity securities Asset-backed securities Total Short-term investments: Corporate debt securities Foreign brokered certificates of deposit Municipal obligations Asset-backed securities U.S. government sponsored agencies Foreign government obligations Marketable equity securities Long-term investments: Marketable equity securities Asset-backed securities Foreign government obligations December 31, 2013 Amortized Cost Unrealized Gains Unrealized Losses Estimated Fair Value 132.6 $ 8.9 11.1 48.4 39.1 5.6 26.6 272.3 54.5 0.4 54.9 327.2 $ 0.3 $ — — 0.1 0.1 — 5.4 5.9 238.7 — 238.7 244.6 $ (0.4) $ — (0.1) (0.2) (0.1) — — (0.8) — (0.1) (0.1) (0.9) $ 132.5 8.9 11.0 48.3 39.1 5.6 32.0 277.4 293.2 0.3 293.5 570.9 December 31, 2012 Amortized Cost Unrealized Gains Unrealized Losses Estimated Fair Value 239.3 $ 0.4 12.0 81.6 92.5 5.4 24.1 455.3 54.5 0.4 0.2 55.1 1.4 $ — 0.1 0.4 0.3 — 0.7 2.9 163.0 — — 163.0 (0.1) $ — — (0.1) (0.1) — (0.2) (0.5) — (0.1) — (0.1) 240.6 0.4 12.1 81.9 92.7 5.4 24.6 457.7 217.5 0.3 0.2 218.0 675.7 Total $ 510.4 $ 165.9 $ (0.6) $ The following is a summary of investments with gross unrealized losses and the associated fair value (in millions): 62 December 31, 2013 December 31, 2012 Fair value of investments in a loss position 12 months or more Fair value of investments in a loss position less than 12 months Gross unrealized losses for investments in a loss position 12 months or more Gross unrealized losses for investments in a loss position less than 12 months $ $ $ $ $ 2.3 $ 73.9 0.1 $ 0.8 $ 0.3 99.0 0.1 0.5 The unrealized losses on these securities are due to a number of factors, including changes in interest rates, changes in economic conditions and changes in market outlook for various industries, among others. Because Bio-Rad has the ability and intent to hold these investments with unrealized losses until a recovery of fair value, or for a reasonable period of time sufficient for a forecasted recovery of fair value, which may be maturity, we do not consider these investments to be other-than-temporarily impaired at December 31, 2013 or at December 31, 2012. Forward foreign exchange contracts: As part of distributing our products, we regularly enter into intercompany transactions. We enter into forward foreign exchange contracts to manage foreign exchange risk of future movements in foreign exchange rates that affect foreign currency denominated intercompany receivables and payables. We do not use derivative financial instruments for speculative or trading purposes. We do not seek hedge accounting treatment for these contracts. As a result, these contracts, generally with maturity dates of 90 days or less and denominated primarily in currencies of industrial countries, are recorded at their fair value at each balance sheet date. The notional principal amounts provide one measure of the transaction volume outstanding as of December 31, 2013 and do not represent the amount of Bio-Rad's exposure to loss. The estimated fair value of these contracts was derived using the spot rates from Reuters on the last business day of the quarter and the points provided by counterparties. The resulting gains or losses offset exchange gains or losses on the related receivables and payables, both of which are included in Foreign exchange losses, net in the Consolidated Statements of Income. The following is a summary of our forward foreign currency exchange contracts (in millions): Contracts maturing in January through March 2014 to sell foreign currency: Notional value Unrealized loss Contracts maturing in January through March 2014 to purchase foreign currency: Notional value Unrealized loss December 31, 2013 $ $ $ $ 83.8 — 409.4 0.5 The following is a summary of the amortized cost and estimated fair value of our debt securities at December 31, 2013 by contractual maturity date (in millions): Mature in less than one year Mature in one to five years Mature in more than five years Total 63 Amortized Cost Estimated Fair Value $ $ 97.5 $ 109.1 39.5 246.1 $ 97.6 109.2 38.9 245.7 The estimated fair value of financial instruments that are not recognized at fair value in the Consolidated Balance Sheets and are included in Other investments, are presented in the table below. Fair value has been determined using significant observable inputs, including quoted prices in active markets for similar instruments. Estimates are not necessarily indicative of the amounts that could be realized in a current market exchange as considerable judgment is required in interpreting market data used to develop estimates of fair value. The use of different market assumptions or estimation techniques could have a material effect on the estimated fair value. Other investments include financial instruments, the majority of which has fair value based on similar, actively traded stock adjusted for various discounts, including a discount for marketability. Long-term debt, excluding leases and current maturities, has an estimated fair value based on quoted market prices for the same or similar issues. The estimated fair value of the financial instruments discussed above and the level of the fair value hierarchy within which the fair value measurement is categorized are as follows (in millions): December 31, 2013 December 31, 2012 Other investments Total long-term debt, excluding leases and current maturities Carrying Amount $ 77.5 $ Estimated Fair Value 382.9 Fair Value Hierarchy Level 2 Carrying Amount 68.4 $ Estimated Fair Value $ 272.5 Fair Value Hierarchy Level 2 $ 423.2 $ 433.0 2 $ 720.0 $ 778.4 2 We own shares of ordinary voting stock of Sartorius AG (Sartorius), of Goettingen, Germany, a process technology supplier to the biotechnology, pharmaceutical, chemical and food and beverage industries. We own over 35% of the outstanding voting shares (excluding treasury shares) of Sartorius as of December 31, 2013. The Sartorius family trust and Sartorius family members hold a controlling interest of the outstanding voting shares. We do not have any representative or designee on Sartorius’ board of directors, nor do we have the ability to exercise significant influence over the operating and financial policies of Sartorius. We account for this investment using the cost method. The carrying value of this investment is included in Other investments in our Consolidated Balance Sheets. Historically, we classified the estimated fair value of Sartorius ordinary voting stock as Level 1 under the fair value hierarchy. However, because the stock is thinly traded and in conjunction with the valuation method discussed above, we believe the classification as Level 1 was inappropriate and have classified the estimated fair value as Level 2 for all periods presented in conjunction with this filing. The Level 2 classification is appropriate given the valuation method employed, which incorporates an observable input of the fair value of the Sartorius’ actively traded preferred stock. 64 4. GOODWILL AND OTHER PURCHASED INTANGIBLE ASSETS Changes to goodwill by segment were as follows (in millions): Balances as of January 1: Goodwill Accumulated impairment losses and write-offs Goodwill, net Acquisitions Purchase adjustment Goodwill written off related to excess property Currency fluctuations Balances as of December 31: Goodwill Accumulated impairment losses and write-offs 2013 2012 Life Science Clinical Diagnostics Total Life Science Clinical Diagnostics Total $ 193.6 $ 330.0 $ 523.6 $ 176.8 $ 319.3 $ 496.1 (27.2) 166.4 14.9 — — 0.5 209.0 (27.2) (1.0) 329.0 (28.2) 495.4 — — — 7.0 14.9 — — 7.5 337.0 (1.0) 546.0 (28.2) (27.2) 149.6 17.4 (0.6) — — 193.6 (27.2) — 319.3 4.1 — (1.0) 6.6 330.0 (1.0) (27.2) 468.9 21.5 (0.6) (1.0) 6.6 523.6 (28.2) Goodwill, net $ 181.8 $ 336.0 $ 517.8 $ 166.4 $ 329.0 $ 495.4 In conjunction with the acquisition of 100% of the outstanding shares of AbD Serotec in our Life Science segment in January 2013, we recorded $14.9 million of goodwill and $44.0 million of definite-lived intangible assets: $33.0 million of developed product technology, $8.8 million of licenses, $1.3 million of customer relationships/lists, $0.4 million of tradenames and $0.5 million of other purchased intangibles. The weighted average useful lives of the definite-lived intangible assets as of the acquisition date were 13.9, 13, 12, 2 and 1 years, respectively, with a total weighted average useful life of 13.7 years. In December 2012, we sold a building for $6.4 million in our Clinical Diagnostics segment that was associated with a 1999 acquisition. We recognized a gain on the sale of $4.3 million and a portion of the goodwill recorded in a 1999 acquisition was written off of $1.0 million. In conjunction with the purchase of certain assets from Propel Labs, Inc. in our Life Science segment in August 2012, we recorded $17.4 million of goodwill and $32.1 million of definite-lived intangible assets: $27.3 million of developed product technology, $4.7 million of covenants not to compete and $0.1 million of other intangible assets. In conjunction with the acquisition of 100% of the outstanding shares of DiaMed Benelux in our Clinical Diagnostics segment in July 2012, we recorded $3.0 million of goodwill and $4.9 million of definite-lived intangible assets: $3.8 million of customer relationships/lists and $1.1 million of tradenames. In conjunction with the acquisition of certain assets from a raw material supplier in our Clinical Diagnostics segment in January 2012, we recorded $1.1 million of goodwill and $5.1 million of definite-lived intangible assets considered developed product technology. Other than goodwill, we have no intangible assets with indefinite lives. Information regarding our identifiable purchased intangible assets with definite lives is as follows (in millions): 65 Customer relationships/lists Know how Developed product technology Licenses Tradenames Covenants not to compete Other Customer relationships/lists Know how Developed product technology Licenses Tradenames Covenants not to compete Other Average Remaining Life (years) 1-11 2-12 1-13 1-12 1-9 5-9 — Average Remaining Life (years) 1-12 1-13 1-10 1-8 1-10 1-10 1 December 31, 2013 Purchase Price Accumulated Amortization Net Carrying Amount 99.8 $ 194.6 109.5 44.9 4.3 4.9 0.6 458.6 $ (41.1) $ (89.3) (36.2) (22.4) (2.1) (0.7) (0.6) (192.4) $ 58.7 105.3 73.3 22.5 2.2 4.2 — 266.2 December 31, 2012 Purchase Price Accumulated Amortization Net Carrying Amount 102.8 $ 189.3 74.6 35.6 7.4 4.9 0.1 414.7 $ (38.4) $ (67.1) (25.1) (18.7) (4.3) (0.2) — (153.8) $ 64.4 122.2 49.5 16.9 3.1 4.7 0.1 260.9 $ $ $ $ No material impairment losses related to intangible assets were recorded in 2013 or 2012. Amortization expense related to purchased intangible assets for the years ended December 31, 2013, 2012 and 2011 was $45.0 million, $42.8 million and $39.1 million, respectively. Estimated future amortization expense (based on existing intangible assets) for the years ending December 31, 2014, 2015, 2016, 2017, 2018 and thereafter is $42.0 million, $39.0 million, $35.6 million, $27.0 million, $24.1 million, and $98.5 million, respectively. 5. NOTES PAYABLE AND LONG-TERM DEBT Notes payable includes amounts borrowed against credit lines maintained locally by our international subsidiaries, under which the borrowing capacity was approximately $20.1 million, of which $15.8 million was unused at December 31, 2013. At December 31, 2012, borrowing capacity aggregated approximately $27.9 million, of which $23.8 million was unused. The weighted average interest rate on these lines was 3.0% and 3.2% at December 31, 2013 and 2012, respectively. Bio-Rad guaranteed eight of these credit lines at December 31, 2013 and 2012. The principal components of long-term debt are as follows (in millions): 66 8.0% Senior Subordinated Notes due 2016 4.875% Senior Notes due 2020, net of discount Capital leases and other debt Less current maturities Long-term debt Senior Subordinated Notes due 2016 December 31, 2013 December 31, 2012 $ — $ 423.2 12.6 435.8 (0.2) $ 435.6 $ 296.9 423.0 12.7 732.6 (0.2) 732.4 In May 2009, Bio-Rad sold $300.0 million principal amount of Senior Subordinated Notes due 2016 (8.0% Notes). The sale yielded net cash proceeds of $294.8 million. In September 2013, we redeemed all of the 8.0% Notes for $312.0 million, including a call premium of $12.0 million, and expensed the remaining original issuance bond discount of $2.5 million and unamortized bond issuance costs of $1.1 million. The total expense for the redemption was $15.6 million and is included in Interest expense in our Consolidated Statements of Income. Senior Notes due 2020 In December 2010, Bio-Rad sold $425.0 million principal amount of Senior Notes due 2020 (4.875% Notes). The sale yielded net cash proceeds of $422.6 million at an effective rate of 4.946%. The 4.875% Notes pay a fixed rate of interest of 4.875% per year. We have the option to redeem any or all of the 4.875% Notes at any time at a redemption price of 100% of the principal amount (plus a specified make-whole premium as defined in the indenture governing the 4.875% Notes) and accrued and unpaid interest thereon to the redemption date. Our obligations under the 4.875% Notes are not secured and rank equal in right of payment with all of our existing and future unsubordinated indebtedness. Certain covenants apply to the 4.875% Notes including limitations on the following: liens, sale and leaseback transactions, mergers, consolidations or sales of assets and other covenants. There are no restrictive covenants relating to total indebtedness, interest coverage, stock repurchases, recapitalizations, dividends and distributions to shareholders or current ratios. The net proceeds from the issuance of the 4.875% Notes were used, together with cash on hand, to redeem all $200.0 million of our 6.125% Notes for $204.3 million, including a call premium of $4.1 million in December 2010 and all $225.0 million of our 7.5% Notes for $234.6 million, including a call premium of $2.8 million in January 2011. Amended and Restated Credit Agreement (Credit Agreement) In June 2010, Bio-Rad entered into a $200.0 million Credit Agreement. Borrowings under the Credit Agreement are on a revolving basis and can be used for acquisitions, for working capital and for other general corporate purposes. We had no outstanding borrowings under the Credit Agreement as of December 31, 2013 or 2012. If we had borrowed against our Credit Agreement, the borrowing rate would have been 2.0% at December 31, 2013. The Credit Agreement expires on June 21, 2014. The Credit Agreement is secured by substantially all of our personal property assets, the assets of our domestic subsidiaries and 65% of the capital stock of certain of our foreign subsidiaries. It is guaranteed by all of our existing and future material domestic subsidiaries. The Credit Agreement requires Bio-Rad to comply with certain financial ratios and covenants, among other things. These ratios and covenants include a leverage ratio test and an interest coverage test, as well as restrictions on our ability to declare or pay dividends, incur debt, guarantee debt, enter into transactions with affiliates, merge or consolidate, sell assets, make investments, create liens and prepay subordinated debt. We were in compliance with all of these ratios and covenants as of December 31, 2013. Maturities of long-term debt at December 31, 2013 are as follows: 2014 - $0.2 million; 2015 - $0.2 million; 2016 - $0.2 million; 2017 - $0.2 million; 2018 - $0.2 million; thereafter - $434.8 million. 67 6. INCOME TAXES The U.S. and international components of income before taxes are as follows (in millions): U.S. International Income before taxes Year Ended December 31, 2012 2011 2013 $ $ 5.7 106.7 112.4 $ $ 110.6 119.3 229.9 $ $ 111.8 134.0 245.8 The provision for income taxes consists of the following (in millions): Current tax expense (benefit): U.S. Federal State International Current tax expense Deferred tax (benefit) expense: U.S. Federal State International Deferred tax benefit Non-current tax expense (benefit) Provision for income taxes Year Ended December 31, 2012 2011 2013 $ (5.0) $ 0.6 38.3 33.9 4.8 (0.1) (9.4) (4.7) 5.4 34.4 $ 4.1 37.3 75.8 (3.1) (0.9) (6.3) (10.3) (1.1) $ 34.6 $ 64.4 $ 29.0 3.5 42.0 74.5 6.7 0.4 (9.1) (2.0) (5.5) 67.0 The reconciliation between our effective tax rate on income before taxes and the statutory tax rate is as follows: U. S. statutory tax rate Impact of foreign operations Research tax credits Nontaxable subsidies Tax settlements and changes to unrecognized tax benefits Contingent consideration Other Provision for income taxes Year Ended December 31, 2012 2011 2013 35% (6) (6) (2) 5 (1) 6 31% 35% (3) — (1) — (2) (1) 28% 35% (4) (1) (1) (2) — — 27% The effective tax rate for 2013 included a significant tax benefit related to the 2012 U.S. federal research credit, which was retroactively reinstated on January 2, 2013. The effective tax rate for 2013 was higher than 2012 primarily due to an increase in tax liabilities and audit settlements in our foreign jurisdictions, and a lower domestic production activities deduction as a result of lower U.S. taxable income in 2013. The effective tax rates for 2013 68 and 2012 reflected tax benefits related to adjustments to the fair value of the QuantaLife contingent consideration. The effective tax rate for 2011 reflected tax benefits from nontaxable dividend income and the release of tax liabilities. The effective tax rates for all three periods were lower than the U.S. statutory rate primarily due to tax benefits from differences between U.S. and foreign statutory tax rates, and research and development tax credits. Our foreign income is earned primarily in France and Switzerland. Switzerland's statutory tax rate is significantly lower than our U.S. statutory tax rate of 35%. Our effective tax rates are also significantly reduced by French tax incentives related to our research and development activities. Our effective tax rate may be impacted in the future, either favorably or unfavorably, by many factors including, but not limited to, changes to statutory tax rates, changes in tax laws or regulations, tax audits and settlements, and generation of tax credits. Deferred tax assets and liabilities reflect the tax effects of losses, credits, and temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of deferred tax assets and liabilities are as follows (in millions): Deferred tax assets: Bad debt, inventory and warranty accruals Legal reserves Other post-employment benefits, vacation and other reserves Tax credit and net operating loss carryforwards Other Valuation allowance Deferred tax liabilities: Property and equipment Investments and intangible assets Net deferred tax liabilities December 31, 2013 2012 $ $ 27.5 $ 12.0 22.2 62.3 19.0 (64.0) 79.0 17.2 147.0 164.2 (85.2) $ 24.1 — 26.5 62.1 18.3 (52.9) 78.1 8.6 119.3 127.9 (49.8) At December 31, 2013, Bio-Rad’s international subsidiaries had combined net operating loss carryforwards of $116.6 million. Of these loss carryforwards, $114.6 million have no expiration date. We believe that it is more likely than not that the benefit from most of these net operating loss carryforwards will not be realized. We have provided a valuation allowance of $28.0 million relating to these net operating loss carryforwards. At December 31, 2013, Bio-Rad had U.S. Federal net operating loss carryforwards of approximately $17 million as a result of acquisitions. These carryforwards are subject to limitation on their utilization and will expire between 2018 and 2030. At December 31, 2013, Bio-Rad had U.S. Federal research tax credit carryforwards of $1.5 million, which are subject to limitations on their utilization. At December 31, 2013, Bio-Rad had approximately $53 million of California net operating loss carryforwards related to the acquisition of QuantaLife. We believe that it is more likely than not that the benefit from these net operating loss carryforwards will not be realized and have recorded a full valuation allowance against these losses. At December 31, 2013, Bio-Rad had a deferred tax asset of $21.4 million relating to California research tax credit carryforwards, including $2.0 million from the acquisition of QuantaLife, which may be carried forward indefinitely. Based on our judgment and consistent with prior years, we have recorded a full valuation allowance against the deferred tax asset. 69 We believe that it is more likely than not that certain of these deferred tax assets described above will not be realized in the foreseeable future. If or when recognized, the tax benefits relating to any reversal of the valuation allowance on deferred tax assets at December 31, 2013 will be recognized as a reduction of income tax expense. The tax years subject to examination by tax authorities in major jurisdictions that Bio-Rad operates in include the years 2009 and forward for the U.S., and the years 2008 and forward for certain foreign jurisdictions, including France, Switzerland and Germany. The following is a tabular reconciliation of the total amounts of unrecognized tax benefits (in millions): Unrecognized tax benefits – January 1 Additions to tax positions related to prior years Reductions to tax positions related to prior years Additions to tax positions related to the current year Settlements Lapse of statute of limitations Acquisitions Currency translation Unrecognized tax benefits – December 31 2013 2012 2011 $ $ 12.6 $ 4.7 (0.8) 2.0 (0.3) (1.7) — (0.3) 16.2 $ 11.3 $ 1.3 (0.8) 1.6 — (3.0) 2.2 — 12.6 $ 16.6 1.2 (0.4) 1.5 (2.2) (5.1) — (0.3) 11.3 Substantially all our unrecognized tax benefits at December 31, 2013, 2012 and 2011 would affect the effective tax rate if recognized. Bio-Rad recognizes accrued interest and penalties related to unrecognized tax benefits as income tax expense. Related to the unrecognized tax benefits noted above, Bio-Rad has accrued interest of $3.4 million , $1.9 million and $2.0 million as of December 31, 2013, 2012 and 2011, respectively. At December 31, 2013, we believe that it is reasonably possible that $1.5 million of our unrecognized tax benefits may be recognized by the end of 2014 as a result of statute lapses. These benefits are related to uncertainty regarding sustainability of certain deductions and credits for tax years that remain subject to examination by the relevant tax authorities. In general, it is our practice and intention to reinvest the earnings of our non-U.S. subsidiaries in their operations. As of December 31, 2013, Bio-Rad had not made a provision for U.S. or additional foreign withholding taxes on approximately $537 million of the excess of the amount for financial reporting over the tax basis of investments in foreign subsidiaries that are essentially permanent in duration. Generally, such amounts become subject to U.S. taxation upon remittance of dividends and under certain other circumstances. If these earnings were repatriated to the U.S., the deferred tax liability associated with these temporary differences would be approximately $108 million. 70 7. STOCKHOLDERS' EQUITY Bio-Rad’s issued and 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 all respects except as follows. 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 75% 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. The founders of Bio-Rad, the Schwartz family, collectively hold a majority of Bio-Rad’s voting stock. As a result, the Schwartz family is able to exercise significant influence over Bio-Rad. Changes to Bio-Rad's common stock shares are as follows (in thousands): Class A Shares Class B Shares Balance at January 1, 2011 B to A conversions Issuance of common stock 22,677 39 304 Balance at December 31, 2011 23,020 B to A conversions Issuance of common stock 59 253 Balance at December 31, 2012 23,333 B to A conversions Issuance of common stock 80 269 Balance at December 31, 2013 23,681 5,175 (39) 28 5,165 (59) 44 5,150 (80) 27 5,097 Treasury Shares The Board of Directors has authorized the repurchase of up to $18.0 million of Bio-Rad's common stock, of which $3.3 million has yet to be repurchased in the open market as of December 31, 2013. The Amended and Restated Credit Agreement (Credit Agreement) limits our ability to repurchase our stock. In accordance with the terms of awards under the 2007 Incentive Award Plan, in June 2012, we withheld 122 shares of our Class A common stock and 917 shares of our Class B common stock to satisfy the minimum statutory tax obligations due upon the vesting of restricted stock of certain of our employees, which is considered a repurchase of our stock. All of the restricted stock has vested as of December 31, 2013, and therefore we do not anticipate any repurchasing of shares for this purpose. We had no other repurchases of our stock during 2013 or 2012. 71 8. ACCUMULATED OTHER COMPREHENSIVE INCOME Accumulated other comprehensive income included in our Consolidated Balance Sheets and Consolidated Statements of Changes in Stockholders' Equity consists of the following components, all net of income taxes (in millions): Foreign currency translation adjustments Foreign other post- employment benefits adjustments Net unrealized holding gains on available- for-sale investments Bio-Rad Accumulated other comprehensive income Total Accumulated other comprehensive income Non- controlling interests $ 149.2 $ 0.2 $ 49.3 $ 198.7 $ (0.2) $ 198.5 23.6 0.1 23.7 (8.5) 65.4 80.5 0.2 (5.0) (8.3) 60.4 (4.7) 75.8 — — — 80.5 (4.7) 75.8 $ 172.9 $ (8.1) $ 109.7 $ 274.5 $ (0.2) $ 274.3 16.7 (0.5) 49.5 (0.2) 16.5 0.5 — 0.2 49.7 65.7 0.5 66.2 — 0.2 0.2 65.7 0.7 66.4 $ 189.4 $ (8.1) $ 159.4 $ 340.7 $ — $ 340.7 Balance at January 1, 2012 Other comprehensive income (loss), net of tax before reclassifications Amounts reclassified from Accumulated other comprehensive income Net current-period Other comprehensive income (loss), net of tax Balance at December 31, 2012 Other comprehensive income (loss), net of tax before reclassifications Amounts reclassified from Accumulated other comprehensive income Net current-period Other comprehensive income, net of tax Balance at December 31, 2013 The effects on the Consolidated Statements of Income of amounts reclassified from Accumulated other comprehensive income for the period ended December 31, 2012 are summarized in the following table: 72 Details about Accumulated other comprehensive income components Amortization of foreign other post-employment benefit items Net holding gains on available-for-sale investments Amount reclassified from Accumulated other comprehensive income $ (0.3) 0.1 (0.2) 7.9 (2.9) 5.0 Affected line item Selling, general and administrative expense Income tax expense Net of income taxes Other (income) expense, net Income tax expense Net of income taxes The effects on the Consolidated Statements of Income of amounts reclassified from Accumulated other comprehensive income for the period ended December 31, 2013 are summarized in the following table: Details about Accumulated other comprehensive income components Amortization of foreign other post-employment benefit items Net holding losses on available-for-sale investments Amount reclassified from Accumulated other comprehensive income $ (0.7) 0.2 (0.5) (0.3) 0.1 (0.2) Affected line item Selling, general and administrative expense Income tax expense Net of income taxes Other (income) expense, net Income tax expense Net of income taxes 9. SHARE-BASED COMPENSATION/STOCK OPTION AND PURCHASE PLANS Description of Share-Based Compensation Plans Stock Option and Award Plans We have three stock option plans for officers and certain other employees: the 1994 Stock Option Plan (1994 Plan); the 2003 Stock Option Plan (2003 Plan); and the 2007 Incentive Award Plan (2007 Plan). The 1994 Plan and 2003 Plan authorized the grant of incentive stock options and non-qualified stock options to employees. The 2007 Plan authorizes the grant of stock options, restricted stock, restricted stock units, stock appreciation rights and other types of equity awards to employees. We no longer grant stock option grants under the 1994 Plan or 2003 Plan. Since 2007, all share-based compensation grants have been from the 2007 Plan. A total of 1,650,360 shares have been reserved for issuance of equity awards under the 2007 Plan and may be of either Class A or Class B common stock. At December 31, 2013, there were 492,310 shares available to be granted in the future. Under the above plans, Class A and Class B options are granted at prices not less than fair market value of the underlying common stock on the date of grant. Generally, options granted have a term of 10 years and vest in increments of 20% per year over a five-year period on the yearly anniversary date of the grant. Stock awards issued under the 2007 Plan generally vest in increments of 20% per year over a five-year period on the yearly anniversary date of the grant. 73 Employee Stock Purchase Plans Our Amended and Restated 1988 Employee Stock Purchase Plan (1988 ESPP) and our 2011 Employee Stock Purchase Plan (2011 ESPP) provides that eligible employees may contribute up to 10% of their compensation up to $25,000 annually toward the quarterly purchase of our 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. As of January 1, 2012, we no longer issue shares from the 1988 ESPP. The 2011 ESPP includes two components: a Code Section 423 Component that we intend to qualify as an “employee stock purchase plan” under Section 423 of the U.S. Internal Revenue Code of 1986, as amended (the “Code”) and a Non-423 Component, which authorizes the grant of purchase rights that does not qualify as an “employee stock purchase plan” under Section 423 of the Code. We have authorized the sale of 600,000 shares of Class A common stock under the 2011 ESPP. Share-Based Compensation Expense Included in our share-based compensation expense is the cost related to stock option grants, ESPP stock purchases, restricted stock and restricted stock unit awards. Share-based compensation expense is allocated to Cost of goods sold, Research and development expense, and Selling, general and administrative expense in the Consolidated Statements of Income. For 2013, 2012 and 2011, we recognized share-based compensation expense of $13.7 million, $13.2 million and $10.7 million, respectively. We did not capitalize any share-based compensation expense in inventory. For options and awards, we amortize the fair value on a straight-line basis. All stock compensation awards are amortized over the requisite service periods of the awards, which are generally the vesting periods. Stock Options The following table summarizes stock option activity: Outstanding, January 1, 2011 Granted Exercised Forfeited/expired Outstanding, December 31, 2011 Granted Exercised Forfeited/expired Outstanding, December 31, 2012 Granted Exercised Forfeited/expired Outstanding, December 31, 2013 Vested and expected to vest, December 31, 2013 Exercisable, December 31, 2013 Weighted- Average Remaining Contractual Term (in years) Aggregate Intrinsic Value (in millions) 4.53 4.41 3.23 $ $ $ 28.3 28.0 25.2 Weighted- Average Exercise Price 57.12 99.49 42.44 62.98 63.50 107.32 44.66 87.78 70.83 117.67 54.16 91.32 78.72 $ $ $ $ $ $ $ $ $ $ $ $ $ Shares 1,057,819 58,500 (220,372) (7,197) 888,750 55,250 (181,707) (15,000) 747,293 55,050 (159,450) (13,250) 629,643 612,946 472,193 $ $ 77.91 70.14 74 The following summarizes information about stock options outstanding at December 31, 2013: Range of Exercise Prices $ 53.75 - $ 62.47 $ 63.00 - $ 75.38 $ 84.57 - $107.32 $117.00 - $122.36 Totals Number Outstanding 191,930 178,413 204,250 55,050 629,643 Options Outstanding Weighted-Average Remaining Contractual Term (in years) Weighted - Average Exercise Price Options Exercisable Number Exercisable Weighted - Average Exercise Price 1.41 3.53 6.93 9.71 $ $ $ $ 58.40 69.87 95.03 117.67 191,930 168,313 111,950 $ $ $ — $ 472,193 58.40 69.56 91.11 — Intrinsic value for stock options is defined as the difference between the current market value and the grant price. The total intrinsic value on the date of exercise of stock options exercised during 2013, 2012 and 2011 was approximately $11 million, $11 million and $14 million, respectively. The total fair value of options vested during 2013, 2012 and 2011 was $2.2 million, $2.3 million and $3.3 million, respectively. Cash received from stock options exercised during 2013, 2012 and 2011 was $4.1 million, $3.4 million and $7.7 million, respectively. The actual tax benefit realized for the tax deductions from stock options exercised totaled $6.6 million, $6.5 million and $6.0 million in 2013, 2012 and 2011, respectively. As of December 31, 2013, there was $6.1 million of total unrecognized compensation cost from stock options. This amount is expected to be recognized in the future over a weighted-average period of approximately 3 years. The weighted-average fair value of stock options granted was estimated using a Black-Scholes option-pricing model with the following weighted-average assumptions: Expected volatility Risk-free interest rate Expected life (in years) Expected dividend Weighted-average fair value of options granted Year Ended December 31, 2012 2011 2013 28% 2.65% 8.9 — 47.25 $ 30% 1.53% 9.0 — 41.82 $ $ 32% 1.71% 8.6 — 40.81 Volatility is based on the historical volatilities of our common stock for a period equal to the stock option’s expected life. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of the grant. The expected life represents the number of years that we estimate, based primarily on historical experience, that the options will be outstanding prior to exercise. We do not anticipate paying any cash dividends in the future and therefore use an expected dividend yield of zero. Restricted Stock Under the 2007 Plan, restricted stock was last granted in 2008 and there will be no further grants. The fair value of each share of restricted stock is the market value as determined by the closing price of the stock on the day of grant. The following table summarizes restricted stock activity: 75 2013 Year Ended December 31, 2012 2011 Restricted Stock Shares Weighted- Average Grant-Date Fair Value Restricted Stock Shares Weighted- Average Grant-Date Fair Value Restricted Stock Shares Weighted- Average Grant-Date Fair Value $ 12,957 (12,610) $ (347) $ 88.09 88.09 88.00 $ 39,629 (25,124) $ (1,548) $ 84.07 81.98 84.20 $ 68,893 (26,179) $ (3,085) $ 83.21 81.98 82.63 — $ — 12,957 $ 88.09 39,629 $ 84.07 Nonvested shares, at beginning of year Vested Cancelled/forfeited Nonvested shares, at end of year As of December 31, 2013, there was no unrecognized compensation cost related to restricted stock. Restricted Stock Units Restricted stock units, which are rights to receive shares of company stock, were granted from 2007 through 2013 under the 2007 Plan. The fair value of each restricted stock unit is the market value as determined by the closing price of the stock on the day of grant. The following table summarizes restricted stock unit activity: Restricted Stock Units Weighted- Average Grant-Date Fair Value Weighted-Average Remaining Contractual Term (in years) Aggregate Intrinsic Value as of December 31, 2013 (in millions) Outstanding, January 1, 2011 Granted Vested Forfeited Outstanding, December 31, 2011 Granted Vested Forfeited Outstanding, December 31, 2012 Granted Vested Forfeited Outstanding, December 31, 2013 242,222 127,920 (54,350) (16,430) 299,362 138,840 (75,466) (14,235) 348,501 144,445 (92,273) (25,243) 375,430 $ $ $ $ $ $ $ $ $ $ $ $ $ 80.61 98.25 79.67 80.70 88.31 107.32 85.52 89.31 96.45 117.09 92.26 96.08 105.44 2.13 $ 46.4 As of December 31, 2013, there was approximately $30.5 million of total unrecognized compensation cost related to restricted stock units. This amount is expected to be recognized over a remaining weighted-average period of approximately 4 years. Employee Stock Purchase Plans The fair value of the employees’ purchase rights under the 2011 ESPP and the 1988 ESPP was estimated using a Black-Scholes model with the following weighted-average assumptions: 76 Expected volatility Risk-free interest rate Expected life (in years) Expected dividend Weighted-average fair value of purchase rights Year Ended December 31, 2012 2011 2013 19% 0.05% 0.25 — 27% 0.07% 0.25 — 20% 0.06% 0.25 — $21.76 $20.70 $20.35 The major assumptions are primarily based on historical data. Volatility is based on the historical volatilities of our common stock for a period equal to the expected life of the purchase rights. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of the grant. We do not anticipate paying any cash dividends in the future and therefore use an expected dividend yield of zero. We sold 103,669 shares for $10.0 million, 107,749 shares for $9.2 million and 96,362 shares for $8.1 million under the 2011 ESPP and 1988 ESPP to employees in 2013, 2012 and 2011, respectively. At December 31, 2013, 388,582 shares remain authorized and available for issuance under the 2011 ESPP. We currently issue new shares to satisfy stock option exercises, restricted stock issuances and ESPP stock purchases. 10. OTHER INCOME AND EXPENSE, NET Other (income) expense, net includes the following components (in millions): Year Ended December 31, 2012 2013 2011 Interest and investment income Net realized losses (gains) on investments Other-than-temporary impairment losses on investments Losses (gains) on disposal of property, plant and equipment Miscellaneous other (income) expense items, net $ (13.4) $ 0.3 0.3 0.5 (0.5) (11.4) $ (8.7) 1.0 (3.8) 1.0 Other (income) expense, net $ (12.8) $ (21.9) $ (8.2) (0.7) 2.1 0.2 (1.0) (7.6) Other-than-temporary impairment losses on investments were recorded in 2013, 2012 and 2011 on certain of our available-for-sale investments in light of the continuing declines in their market prices at that time, primarily associated with our investment in a sovereign nation with large deficits and our decision to sell holdings in a particular adviser account. In December 2012, we sold a building for $6.4 million in our Clinical Diagnostics segment that was associated with a 1999 acquisition. We recognized a gain on the sale of $4.3 million and a portion of goodwill recorded in a 1999 acquisition was written off of $1.0 million. 77 11. SUPPLEMENTAL CASH FLOW INFORMATION The reconciliation of net income including noncontrolling interests to net cash provided by operating activities is as follows (in millions): Net income including noncontrolling interests Adjustments to reconcile net income including noncontrolling interests to net cash provided by operating activities (net of effects of acquisitions): Depreciation and amortization Share-based compensation Losses (gains) on dispositions of securities Losses (gains) on dispositions of fixed assets Excess tax benefits from share-based compensation Changes in fair value of contingent consideration (Increase) decrease in accounts receivable, net Increase in inventories, net Increase in other current assets Increase (decrease) in accounts payable and other current liabilities (Decrease) increase in income taxes payable Decrease in deferred income taxes Write-off of goodwill Net increase/decrease in other long-term liabilities/assets Net cash provided by operating activities Non-cash investing activities: Purchased intangible assets Purchased marketable securities and investments Year Ended December 31, 2012 2011 2013 $ 77.8 $ 165.5 $ 178.8 147.2 13.7 0.6 0.5 (2.7) (5.8) (24.2) (33.4) (4.2) 33.2 (38.0) (4.0) — 14.8 130.4 13.2 (7.6) (4.8) (2.9) (16.1) 4.4 (4.3) (5.6) 19.0 (18.0) (10.3) 1.0 12.1 121.0 10.7 1.5 0.2 (3.2) — (20.1) (45.2) 11.1 (6.6) 5.4 (1.6) — 10.7 $ $ $ 175.5 $ 276.0 $ 262.7 12.0 $ 0.4 $ 0.5 $ 1.6 $ — 11.6 12. COMMITMENTS AND CONTINGENT LIABILITIES Rents and Leases Net rental expense under operating leases was $45.5 million, $41.4 million and $42.4 million in 2013, 2012 and 2011, respectively. Leases are principally for facilities and automobiles. Annual future minimum lease payments at December 31, 2013 under operating leases are as follows: 2014 - $39.1 million; 2015 - $30.1 million; 2016 - $24.0 million; 2017 - $18.6 million; and 2018 and beyond - $49.8 million. 78 Deferred Profit Sharing Retirement Plan We have 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. Contribution expense was $13.5 million, $12.1 million and $12.1 million in 2013, 2012 and 2011, respectively. Other Post-Employment Benefits In several foreign locations we are statutorily required to provide a lump sum severance or termination indemnity to our employees. Under these plans, the vested benefit obligation at December 31, 2013 and 2012 was $46.3 million and $39.5 million, respectively, and has been included in Other current liabilities and 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. Purchase Obligations As of December 31, 2013, we had obligations that have been recognized on our balance sheet of $99.0 million, which include agreements to purchase goods or services that are enforceable and legally binding to Bio-Rad and that specify all significant terms and exclude agreements that are cancelable without penalty. The annual future fixed and determinable portion of our purchase obligations that have been recognized on our balance sheet as of December 31, 2013 are as follows: 2015 to 2016 - $32.3 million, 2017 to 2018 - $7.3 million and after 2018 - $59.4 million. As of December 31, 2013, we had purchase obligations that have not been recognized on our balance sheet of $65.4 million, which include agreements to purchase goods or services that are enforceable and legally binding to Bio- Rad and that specify all significant terms and exclude agreements that are cancelable without penalty. The annual future fixed and determinable portion of our purchase obligations that have not been recognized on our balance sheet as of December 31, 2013 are as follows: 2014 - $57.4 million, 2015 - $7.2 million, 2016 - $0.4 million and 2017 - $0.4 million. Letters of Credit In the ordinary course of business, we are at times required to post letters of credit. The letters of credit are issued by our banks to guarantee our obligations to various parties including insurance companies. We were contingently liable for $8.2 million of standby letters of credit with banks as of December 31, 2013. Contingent Consideration During the fourth quarter of 2011, we recognized a contingent consideration liability upon our acquisition of QuantaLife related to potential future payments due upon the achievement of certain sales and development milestones. The contingent consideration was initially recognized at its estimated fair value of $24.1 million, based on a probability-weighted income approach. As of the acquisition date of October 4, 2011, total contingent consideration could have originally reached a maximum of $48 million upon the achievement of all sales milestones and a development milestone. The development milestone was met as of December 31, 2012, resulting in a payment of $6.0 million in January 2013. During 2012, the first three short-term sales milestones were not met and therefore the fair value of the contingent consideration was lowered by $16.1 million and credited to Selling, general and administrative expense. During 2013, we did not expect that any of the remaining sales milestones would be met and therefore $2.0 million of the remaining contingent consideration liability was credited to Selling, general and administrative expense. During the third quarter of 2012, we recognized a contingent consideration liability upon our acquisition of a new cell sorting system from Propel Labs, Inc. The fair value of the contingent consideration was based on a 79 probability-weighted income approach related to the achievement of certain development and sales milestones and was recorded at $44.6 million in 2012. The development milestones have been achieved and payments totaling $20.0 million were made in 2013. Based on the most recent valuation, the sales milestones could potentially range from $0 to a maximum of 60.0%, 51.32% and 50.38% of annual cell sorting system purchase orders, with payment to occur upon the anniversary of the completion of a certain number of cell sorting systems for three consecutive years, respectively. These maximum payout ratios begin at annual cell sorting system purchase orders in excess of $20 million, $30 million and $45 million for the three consecutive years, respectively. The contingent consideration was revalued by a net reduction of $3.8 million to Selling, general and administrative expense to its estimated fair value of $20.8 million as of December 31, 2013. Concentrations of Labor Subject to Collective Bargaining Agreements At December 31, 2013, approximately seven percent of Bio-Rad's approximately 3,000 U.S. employees are covered by a collective bargaining agreement, which will expire on November 8, 2016. Many of Bio-Rad's non-U.S. full- time employees, especially in France, are covered by collective bargaining agreements. 13. LEGAL PROCEEDINGS Based on an internal investigation, we identified conduct in certain of our overseas operations that may have violated the anti-bribery provisions of the United States Foreign Corrupt Practices Act (FCPA) and is likely to have violated the FCPA's books and records and internal controls provisions and our own internal policies. In May 2010, we voluntarily disclosed these matters to the U.S. Department of Justice (DOJ) and the Securities and Exchange Commission (SEC), each of which commenced an investigation. The Audit Committee of our Board of Directors (Audit Committee) assumed direct responsibility for reviewing these matters and hired experienced independent counsel to conduct an investigation and provide legal advice. We provided additional information to the DOJ and the SEC as the Audit Committee's investigation progressed. We continue to cooperate with the DOJ and SEC investigations and to provide information to them. The DOJ and SEC investigations are continuing and we are presently unable to predict the duration, scope or results of these investigations or whether either agency will commence any legal actions. The DOJ and the SEC have a broad range of civil and criminal sanctions under the FCPA and other laws and regulations including, but not limited to, injunctive relief, disgorgement, fines, penalties, modifications to business practices including the termination or modification of existing business relationships, the imposition of compliance programs and the retention of a monitor to oversee compliance with the FCPA. While we have been engaged in discussions with the DOJ and SEC concerning a resolution of these matters, we are unable to estimate a range of reasonably possible outcomes of this matter that differs from our Estimated loss contingency recorded in the latter half of 2013 of $35.0 million, including $5.0 million of accrued interest. The imposition of any of these sanctions or remedial measures could have a material adverse effect on our business or financial condition. We have not to date determined whether any of the activities in question violated the laws of the foreign jurisdictions in which they took place. On April 13, 2011, a shareholder derivative lawsuit was filed against each of our directors in the Superior Court for Contra Costa County, California. The case, which also names the Company as a nominal defendant, is captioned City of Riviera Beach General Employees' Retirement System v. David Schwartz, et al., Case No. MSC11-00854. In the complaint, the plaintiff alleges that our directors breached their fiduciary duties by failing to ensure that we had sufficient internal controls and systems for compliance with the FCPA. Purportedly seeking relief on our behalf, the plaintiff seeks an award of unspecified compensatory and punitive damages, costs and expenses (including attorneys' fees), and a declaration that our directors have breached their fiduciary duties. We and the individual defendants filed a demurrer requesting dismissal of the complaint in this case, as well as a motion to stay this matter pending resolution of the above-referenced investigations by the DOJ and SEC. Following a hearing on September 30, 2011, the court sustained our demurrer and dismissed the complaint, without prejudice, and granted the plaintiff additional time to file an amended complaint. The court denied our motion to stay this matter because 80 it dismissed the complaint. The parties have agreed to a stipulated dismissal of this case, without prejudice, and to a tolling of the statute of limitations pending the resolution of the DOJ and SEC investigations. In addition, we are party to various other claims, legal actions and complaints arising in the ordinary course of business. We do not believe, at this time, that any ultimate liability resulting from any of these other matters will have a material adverse effect on our results of operations, financial position or liquidity. However, we cannot give any assurance regarding the ultimate outcome of these other matters and their resolution could be material to our operating results for any particular period, depending on the level of income for the period. 14. SEGMENT INFORMATION Bio-Rad is a multinational manufacturer and worldwide distributor of its own life science research products and clinical diagnostics products. We have two reportable segments: Life Science and Clinical Diagnostics. These reportable segments are strategic business lines that offer more than 8,000 different products and services and require different marketing strategies. We do not disclose quantitative information about our different products and services as it is impractical to do so based primarily on the numerous products and services that we sell and the global markets that we serve. 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 laboratories and insurance and forensic testing laboratories. Other Operations include the remainder of our former Analytical Instruments segment. Segment results are presented in the same manner as we present our operations internally to make operating decisions and assess performance. The accounting policies of the segments are the same as those described in Significant Accounting Policies (see Note 1). Segment profit or loss includes an allocation of corporate expense based upon sales and an allocation of interest expense based upon accounts receivable and inventories. The difference between total segment allocated interest expense, depreciation and amortization, and capital expenditures and the corresponding consolidated amounts is attributable to our corporate headquarters. 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, 2013, 2012, and 2011 and for the years then ended is as follows (in millions): 81 Segment net sales Allocated interest expense Depreciation and amortization Segment (loss) profit Segment assets Capital expenditures Life Science Clinical Diagnostics Other Operations 710.0 $ 688.4 694.7 1,408.0 $ 1,365.5 1,363.8 14.7 15.3 15.0 10.4 $ 13.4 14.2 32.6 $ 26.3 17.3 (13.7) $ 13.2 46.7 30.1 $ 37.8 38.9 91.5 $ 92.9 93.2 176.2 $ 202.6 206.7 389.1 $ 359.9 980.9 $ 917.0 19.8 $ 17.3 72.8 $ 76.8 0.1 0.2 0.2 0.1 0.1 0.2 1.1 1.6 1.3 5.1 4.3 0.2 0.1 2013 2012 2011 2013 2012 2011 2013 2012 2011 2013 2012 2011 2013 2012 2013 2012 $ $ $ $ $ $ Net corporate operating expense consists of receipts and expenditures that are not the primary responsibility of segment operating management and therefore are not allocated to the segments for performance assessment by our chief operating decision maker. In 2013, this included the accrual of $35.0 million in connection with our initial efforts to resolve the SEC and DOJ investigations relating to the FCPA that was recorded in the latter half of 2013 (see Note 13), and the $15.6 million expense for the redemption of our 8.0% Senior Subordinated Notes (see Note 5). The following reconciles total segment profit to consolidated income before taxes (in millions): Year Ended December 31, 2012 2011 2013 Total segment profit Foreign exchange losses Net corporate operating, interest and other expense, net not allocated to segments Other income (expense), net Consolidated income before taxes $ 163.6 $ (8.6) 217.4 $ (5.0) 254.7 (13.8) (55.4) 12.8 (4.4) 21.9 (2.7) 7.6 $ 112.4 $ 229.9 $ 245.8 The following reconciles total segment assets to consolidated total assets (in millions): 82 Total segment assets Cash and other current assets Property, plant and equipment, net, excluding segment specific gross machinery and equipment Goodwill, net Other long-term assets Total assets December 31, 2013 2012 1,375.1 $ 835.1 (14.9) 517.8 675.7 3,388.8 $ 1,281.2 1,092.0 (4.2) 495.4 579.1 3,443.5 $ $ The following presents net sales to external customers by geographic region 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 net sales Year Ended December 31, 2012 2013 2011 886.1 413.3 677.7 155.6 2,132.7 $ $ 837.0 425.7 656.7 149.8 2,069.2 $ $ 896.4 398.4 631.0 147.7 2,073.5 $ $ The following presents Other assets and Property, plant and equipment, net by geographic region based upon the location of the asset (in millions): Europe Pacific Rim United States Other (primarily Canada and Latin America) Total Other assets and Property, plant and equipment, net 15. QUARTERLY FINANCIAL DATA (UNAUDITED) December 31, 2013 2012 $ $ 217.4 28.2 579.9 13.4 838.9 $ $ 199.1 30.0 487.8 18.1 735.0 During the third quarter of 2013, we identified errors in the consolidated financial statements for the years 2011 and 2012 (and for all interim periods therein) and in the unaudited interim condensed consolidated financial statements for the three month periods ended March 31, 2013 and June 30, 2013, related to the valuation of finished goods inventory in our Life Science segment. We were inappropriately expensing inventory in amounts greater than actual costs for non-sales transactions, primarily related to inventory being used for demonstration purposes and product samples that are recorded to Selling, general and administrative expense. In addition, the Life Science segment inventory error affected cost of goods sold as we relieved inventory at a higher cost than incurred on limited sales to third parties produced in a non-U.S. manufacturing facility. During the third quarter of 2013, we revised the classification of one item for all periods presented from “Provision for income taxes” to “Research and development expense” in our Consolidated Statements of Income to conform to 83 the current year presentation. The item reclassified pertains to a refundable French R&D tax credit, which after the reclassification reduces Research and development expense. We believe this presentation is appropriate as we are not required to have taxable income in order to earn the credits. Management evaluated the materiality of all the errors described above from a qualitative and quantitative perspective. Based on such evaluation, we have concluded that while the accumulation of these errors was significant to the three months ended September 30, 2013, their correction would not be material to any individual prior period, nor did they have an effect on the trend of financial results, taking into account the requirements of the Securities and Exchange Commission (SEC) Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (SAB 108). Accordingly, we are correcting these errors in every affected period in the 2013 Financial Statements included in this Form 10-K. The impact of the immaterial error correction, and the reclassification, both described above are presented on a as reported, adjustment and as revised basis in the following summarized quarterly financial data for 2013 and 2012 (in millions, except per share data): As reported: 2013 Net sales Gross profit Net income (loss) attributable to Bio-Rad Basic earnings (loss) per share Diluted earnings (loss) per share 2012 Net sales Gross profit Net income attributable to Bio-Rad Basic earnings per share Diluted earnings per share Adjustments: 2013 Net sales Gross profit Net income (loss) attributable to Bio-Rad Basic earnings (loss) per share Diluted earnings (loss) per share 2012 Net sales Gross profit Net income attributable to Bio-Rad Basic earnings per share Diluted earnings per share $ $ $ $ $ $ $ $ $ $ $ $ First Quarter Second Quarter Third Quarter Fourth Quarter 499.7 $ 271.4 19.5 0.68 $ 0.68 $ 486.3 $ 278.6 31.0 1.10 $ 1.09 $ 525.3 $ 300.1 34.7 1.22 $ 1.20 $ 510.4 $ 287.9 48.3 1.71 $ 1.69 $ 505.1 $ 284.2 (7.1) (0.25) $ (0.25) $ 498.7 $ 273.5 42.4 1.50 $ 1.48 $ 602.6 322.7 30.1 1.05 1.04 573.8 314.1 42.0 1.48 1.46 First Quarter Second Quarter Third Quarter Fourth Quarter — $ — 0.7 0.03 $ 0.02 $ — $ 0.1 0.5 0.02 $ 0.01 $ 84 — $ — (0.1) (0.01) $ — $ — $ 0.2 (0.2) (0.01) $ (0.01) $ — $ — — — $ — $ — $ 0.3 0.2 0.01 $ 0.01 $ — — — — — — 0.4 1.2 0.04 0.05 As revised: 2013 Net sales Gross profit Net income (loss) attributable to Bio-Rad Basic earnings (loss) per share Diluted earnings (loss) per share 2012 Net sales Gross profit Net income attributable to Bio-Rad Basic earnings per share Diluted earnings per share $ $ $ $ $ $ First Quarter Second Quarter Third Quarter Fourth Quarter 499.7 $ 271.4 20.2 0.71 $ 0.70 $ 486.3 $ 278.7 31.5 1.12 $ 1.10 $ 525.3 $ 300.1 34.6 1.21 $ 1.20 $ 510.4 $ 288.1 48.1 1.70 $ 1.68 $ 505.1 $ 284.2 (7.1) (0.25) $ (0.25) $ 498.7 $ 273.8 42.6 1.51 $ 1.49 $ 602.6 322.7 30.1 1.05 1.04 573.8 314.5 43.2 1.52 1.51 During the first quarter of 2012, we identified an error in the consolidated financial statements for the years 2007 through 2011, related to a foreign supplemental tax associated with social benefits. We incorrectly interpreted and applied the local statutes to our circumstances. We accrued $6.1 million for these foreign supplemental taxes, including penalties and interest, during the first quarter of 2012, all of which has been paid. The foreign supplemental tax, and the related penalties and interest, were not deductible for income tax purposes, and as such this error did not have an impact on Bio-Rad's provision for income taxes. We evaluated the materiality of this error from a qualitative and quantitative perspective. Based on such evaluation, we concluded that while the accumulation of this error was significant to the three-month period ended March 31, 2012, the correction was not material to any individual prior period or for the year ended December 31, 2012, nor did it have an effect on the trend of financial results, taking into account the requirements of the Securities and Exchange Commission (SEC) Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (SAB 108). ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. ITEM 9A. CONTROLS AND PROCEDURES (a) Evaluation of Disclosure Controls and Procedures As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as a result of the material weakness in our internal control over financial reporting at December 31, 2013, which we view as an integral part of our disclosure controls and procedures, discussed in further detail below. 85 (b) Management’s Report on Internal Control Over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Securities and Exchange Act of 1934, as amended (Exchange Act). Our internal control is designed to provide reasonable assurance regarding the preparation and fair presentation of our financial statements presented in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Our management has used the criteria set forth in the report entitled “Internal Control - Integrated Framework (1992)” published by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission to evaluate the effectiveness of Bio-Rad’s internal control over financial reporting at December 31, 2013. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim consolidated financial statements will not be prevented or detected on a timely basis. In connection with our assessment of the effectiveness of internal control over financial reporting at December 31, 2013, we identified the following material weakness that existed at December 31, 2013: A material weakness exists in the design of monitoring controls over operations at certain of our locations both within the United States and overseas, as well as a lack of documentation required to operate these controls appropriately. Specifically, the precision at which these controls are designed and documented, and the completeness and timeliness of communication between some of our locations are not sufficient to detect and correct a material misstatement in our consolidated financial statements. As a result there was a misstatement in a foreign pension accrual, and there is a reasonable possibility that a material misstatement to our annual or interim consolidated financial statements could occur and not be detected or prevented. As a result of this material weakness, our management concluded that our internal control over financial reporting was not effective at December 31, 2013 to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with accounting principles generally accepted in the United States of America. KPMG LLP, an independent registered public accounting firm, has audited the consolidated financial statements of Bio-Rad Laboratories, Inc. for the year ended December 31, 2013 and has issued an attestation report on the effectiveness of Bio-Rad’s internal control over financial reporting at December 31, 2013, as stated in their report. (c) Completed and Planned Remediation Actions to Address the Material Weakness Our management has discussed the results of the evaluation and assessment with our Audit Committee. Management intends to enhance its management review controls used to monitor our financial information worldwide. Our enhancements will increase the level of precision in our management review controls. Management plans to enhance its review controls by (i) designing and documenting additional management review controls, (ii) documenting, as needed, precision and specificity to existing 86 management review controls, and (iii) supplementing resources and providing training to effectively perform management review controls. We intend to formalize through documentation, communication and training the steps required for investigation of financial deviations or differences from expectation detected in our management review controls and the procedures for execution and communication of timely corrective actions, as needed. We believe this planned increased level of precision in our management review controls will allow for earlier detection of errors. In addition, the design of our monitoring controls will follow a top-down approach that begins at the financial statement level to identify and assess the overall risks to internal control over financial reporting. We also plan to make organizational changes and develop skills in our employees across all functions involved in the performance of internal control over financial reporting to ensure that we have adequate local, regional and global monitoring, oversight and timely communication. However, we cannot assure you that we will be able to remediate the material weakness or that additional deficiencies or material weaknesses in our internal control over financial reporting will not be identified in the future. Any failure to maintain or implement new or improved internal controls, or any difficulties that we may encounter in their maintenance or implementation, could result in additional significant deficiencies or material weaknesses, result in material misstatements in our financial statements and cause us to fail to meet our reporting obligations, which in turn could cause the trading price of our common stock to decline. (d) Changes in Internal Control Over Financial Reporting In connection with our preparation of our financial statements for 2012 and our assessment of the effectiveness of our internal controls over financial reporting, we determined that we had a material weakness at December 31, 2012. The elements of this material weakness were significant deficiencies with respect to our accounting close process, revenue recognition process, reagent rental process and expenditure controls at our German subsidiary which, when aggregated, constituted a material weakness at December 31, 2012. At December 31, 2013, management believes it has sufficient evidence to conclude that the changes listed below, which were initiated throughout the year and which were designed to remediate these significant deficiencies, were completely implemented during the three-month period ended December 31, 2013. Changes designed to remediate these significant deficiencies that were implemented during 2013 include the following: Enhancements to the accounting close process • Formalized our period end disclosure review controls. • Enhanced our reconciliation review controls. • Transferred experienced personnel and hired additional temporary staff to improve management of the accounting function at our German subsidiary. Enhancements to revenue recognition process • Changed sales personnel in our Chinese subsidiary. • Implemented and enforced internal controls for analyzing credit risk. Enhancements to the reagent rental process at certain of our international subsidiaries Inventoried our reagent rental agreements. • • Reconciled reagent rental accounting records. • Standardized the monitoring of reagent rental customer commitments. Enhancements to our expenditure controls at our German subsidiary 87 • Transferred experienced personnel and hired additional temporary staff to improve management of the accounting function of our German subsidiary. • Enhanced our management review controls over expenditure budget to actual by adding precision. • Addressed segregation of duty issues. Despite these changes, we concluded that a material weakness exists at December 31, 2013 with respect to our monitoring controls and the timeliness of communication. ITEM 9B. OTHER INFORMATION None. PART III. ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE Part of the information required to be furnished pursuant to this item is incorporated by reference from portions of Bio-Rad’s definitive proxy statement to be mailed to stockholders in connection with our 2014 annual meeting of stockholders (the “2014 Proxy Statement”) under “Election of Directors,” “Committees of the Board of Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance.” Bio-Rad’s Board of Directors has determined that Mr. Louis Drapeau is an “audit committee financial expert,” as defined in Item 407(d)(5) of Regulation S-K. Mr. Drapeau is also an “independent” director, as determined in accordance with the independence standards set forth in Rule 10A-3 under the Securities Exchange Act of 1934, as amended, and Section 303A.02 of the New York Stock Exchange (NYSE) Listed Company Manual. We have adopted a code of business ethics and conduct that applies to our principal executive officer, principal financial officer, controller and all other employees and is available through our Corporate/Investor Relations website (www.bio-rad.com). We will also provide a copy of the code of ethics to any person, without charge, upon request, by writing to us at “Bio-Rad Laboratories, Inc., Investor Relations, 1000 Alfred Nobel Drive, Hercules, CA 94547.” ITEM 11. EXECUTIVE COMPENSATION The information required to be furnished pursuant to this item is incorporated by reference from portions of the 2014 Proxy Statement under “Compensation Discussion and Analysis,” “Summary Compensation Table,” “Grants of Plan-Based Awards,” “Outstanding Equity Awards at Fiscal Year-End,” “Option Exercises and Stock Vested Table,” “Pension Benefits,” “Nonqualified Defined Contribution and Other Nonqualified Deferred Compensation Plans,” “Potential Payments on Termination or Change in Control,” “Director Compensation” and “Compensation Committee Interlocks and Insider Participation.” In addition, the information from a portion of the 2014 Proxy Statement under “Compensation Committee Report” is incorporated herein by reference and furnished on this Form 10-K and shall not be deemed “filed” for purposes of Section 18 of the Securities and Exchange Act of 1934, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933. 88 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS Part of the information required to be furnished pursuant to this item is incorporated by reference from a portion of the 2014 Proxy Statement under “Principal and Management Stockholders.” Equity Compensation Plan Information as of December 31, 2013 Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) Weighted-average exercise price of outstanding options, warrants and rights (b)(3) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c) 1,005,073 $ — 1,005,073 $ 78.72 — 78.72 880,892 (2) — 880,892 Plan category Equity compensation plans approved by security holders (1) Equity compensation plans not approved by security holders Total (1) Consists of the 2003 Stock Option Plan of Bio-Rad Laboratories, Inc., the Bio-Rad Laboratories, Inc. 2007 Incentive Award Plan, and the Bio-Rad Laboratories, Inc. 2011 Employee Stock Purchase Plan. (2) Consists of 492,310 shares available under the Bio-Rad Laboratories, Inc. 2007 Incentive Award Plan and 388,582 shares available under the Bio-Rad Laboratories, Inc. 2011 Employee Stock Purchase Plan. (3) Excludes Restricted Stock Units. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE The information required to be furnished pursuant to this item is incorporated by reference from portions of the 2014 Proxy Statement under “Transactions with Related Persons” and “Committees of the Board of Directors.” ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The information required to be furnished by this item is incorporated by reference from a portion of the 2014 Proxy Statement under “Report of the Audit Committee of the Board of Directors.” 89 PART IV. ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a)1 Index to Financial Statements – See Item 8 of Part II of this report “Financial Statements and Supplementary Data" on page 37 for a list of financial statements. 2 Schedule II Valuation and Qualifying Accounts All other financial statement schedules are omitted because they are not required or the required information is included in the consolidated financial statements or the notes thereto. 3 Index to Exhibits The exhibits listed in the accompanying Index to Exhibits on pages 92 through 95 of this report are filed or incorporated by reference as part of this report. BIO-RAD LABORATORIES, INC. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS Years Ended December 31, 2013, 2012, and 2011 (in thousands) Allowance for doubtful accounts receivable Balance at Beginning of Year Additions Charged to Costs and Expenses Deductions Balance at End of Year 2013 2012 2011 $ $ $ 29,202 33,259 25,052 $ $ $ 9,181 7,597 15,112 $ $ $ (5,912) (11,654) (6,905) $ $ $ 32,471 29,202 33,259 Valuation allowance for current and long-term deferred tax assets Balance at Beginning of Year Additions Charged (Credited) to Income Tax Expense Deductions Other (A) Balance at End of Year 2013 2012 2011 $ $ $ 52,856 48,926 37,015 $ $ $ 11,155 3,700 6,356 $ $ $ — $ — $ — $ — $ 64,011 230 5,555 $ $ 52,856 48,926 (A) Due to acquisitions. 90 Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SIGNATURES BIO-RAD LABORATORIES, INC. By: /s/ Christine A. Tsingos Christine A. Tsingos Executive Vice President, Chief Financial Officer Date: March 17, 2014 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Principal Executive Officer: /s/ Norman Schwartz (Norman Schwartz) Principal Financial Officer: /s/ Christine A. Tsingos (Christine A. Tsingos) Principal Accounting Officer: /s/ James R. Stark (James R. Stark) Other Directors: /s/ Louis Drapeau (Louis Drapeau) /s/ Albert J. Hillman (Albert J. Hillman) /s/ Robert M. Malchione (Robert M. Malchione) /s/ Deborah J. Neff (Deborah J. Neff) /s/ Alice N. Schwartz (Alice N. Schwartz) Chairman of the Board, President and Chief Executive Officer March 17, 2014 Executive Vice President, Chief Financial Officer March 17, 2014 Vice President, Corporate Controller March 17, 2014 March 17, 2014 March 17, 2014 March 17, 2014 March 17, 2014 March 17, 2014 Director Director Director Director Director 91 BIO-RAD LABORATORIES, INC. INDEX TO EXHIBITS ITEM 15(a)3 Exhibits 32.1 and 32.2 are furnished herewith and should not be deemed to be “filed under the Securities Exchange Act of 1934.” Exhibit No. 2.1 Share Purchase Agreement as of May 14, 2007 by and among Bio-Rad Laboratories, Inc. and certain selling shareholders regarding the purchase of 77.6765% of the equity of DiaMed Holding AG. (1) 3.1 Restated Certificate of Incorporation of Bio-Rad Laboratories, Inc. (2) 3.1.1 Certificate of Amendment to Restated Certificate of Incorporation of Bio-Rad Laboratories, Inc. (2) 3.2 Bylaws of Bio-Rad Laboratories, Inc. (2) 4.1 Indenture dated as of August 11, 2003 for 7.50% Senior Subordinated Notes due 2013 among Bio-Rad Laboratories, Inc., as Issuer, and Wells Fargo Bank, N.A., as Trustee. (3) 4.2 Exchange and Registration Rights Agreement dated as of August 11, 2003 for 7.50% Senior Subordinated Notes due 2013. (3) 4.3 Indenture dated as of May 26, 2009 for 8.00% Senior Subordinated Notes due 2016 among Bio-Rad Laboratories, Inc., as Issuer, and Wells Fargo Bank, N.A., as Trustee. (4) 4.4 Exchange and Registration Rights Agreement dated as of May 26, 2009 for 8.00% Senior Subordinated Notes due 2016. (4) 4.5 Indenture dated as of December 9, 2010 for 4.875% Senior Notes due 2020 among Bio-Rad Laboratories, Inc., as Issuer, and Wilmington Trust FSB, as Trustee. (5) 10.1 Second Amended and Restated Credit Agreement, dated as of June 21, 2010, by and among Bio-Rad Laboratories, Inc., the lenders referred to therein, JPMorgan Chase Bank, N.A. as administrative agent, Union Bank of California N.A., and Wells Fargo Bank, N.A., as co-syndication agents, and Bank of America, N.A. and HSBC Bank USA, National Association, as co-documentation agents. (6) 10.2 Second Amended and Restated Security Agreement, dated as of June 21, 2010, between Bio-Rad Laboratories, Inc. and JPMorgan Chase Bank, N.A., as administrative agent. (6) 10.3 Second Amended and Restated Pledge Agreement, dated as of June 21, 2010, between Bio-Rad Laboratories, Inc. and JPMorgan Chase Bank, N.A., as administrative agent. (6) 92 Exhibit No. 10.4 1994 Stock Option Plan. (7) 10.4.1 Amendment to the Bio-Rad Laboratories, Inc. 1994 Stock Option Plan dated April 28, 1998. (8) 10.4.2 Second Amendment to the Bio-Rad Laboratories, Inc. 1994 Stock Option Plan dated December 6, 1999. (8) 10.4.3 Third Amendment to the Bio-Rad Laboratories, Inc. 1994 Stock Option Plan dated September 19, 2000. (8) 10.4.4 Fourth Amendment to the Bio-Rad Laboratories, Inc. 1994 Stock Option Plan dated April 25, 2001. (8) 10.4.5 Amendment to the 1994 Stock Option Plan of Bio-Rad Laboratories, Inc., dated February 18, 2009. (9) 10.4.6 Amendment to the 1994 Stock Option Plan of Bio-Rad Laboratories, Inc., dated December 12, 2011. (20) 10.5 Amended and Restated 1988 Employee Stock Purchase Plan. (10) 10.5.1 Amendment to the Amended 1988 Employee Stock Purchase Plan. (11) 10.5.2 Amendment to the Bio-Rad Laboratories, Inc. Amended and Restated 1988 Employee Stock Purchase Plan (12) 10.6 Bio-Rad Laboratories, Inc. 2011 Employee Stock Purchase Plan (13) 10.7 Employees’ Deferred Profit Sharing Retirement Plan (Amended and Restated effective January 1, 1997). (14) 10.8 2003 Stock Option Plan. (15) 10.8.1 Amendment to the 2003 Stock Option Plan of Bio-Rad Laboratories, Inc. (16) 10.9 2007 Incentive Award Plan. (17) 10.9.1 Restricted Stock Unit Award Grant Notice and Restricted Stock Unit Award Agreement under the 2007 Incentive Award Plan. (18) 10.10 Form of Indemnification Agreement (19) 10.11 Second Amendment to the 2003 Stock Option Plan of Bio-Rad Laboratories, Inc., dated March 1, 2012. (21) 21.1 Listing of Subsidiaries. 23.1 Consent of KPMG LLP, Independent Registered Public Accounting Firm. 23.2 Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm. 31.1 Certification of Chief Executive Officer Required by Rule 13a-14(a) (17CFR 240.13a-14(a)). 31.2 Certification of Chief Financial Officer Required by Rule 13a-14(a) (17CFR 240.13a-14(a)). 93 Exhibit No. 32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 101 Pursuant to Rule 405 of Regulation S-T, the following financial information from the Company's Annual Report on Form 10-K for the year ended December 31, 2013, is filed in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Cash Flows, (v) the Consolidated Statements of Changes in Stockholders' Equity, (vi) the Notes to Consolidated Financial Statements and (vii) Schedule II - Valuation and Qualifying Accounts. (1) Incorporated by reference to Exhibit 2.1 to Bio-Rad’s June 30, 2007 Form 10-Q filing, dated August 8, 2007 (File No. 001-07928; Film No. 071035483). (2) Incorporated by reference to the Exhibits to Bio-Rad's Form 10-K filing for the fiscal year ended December 31, 2010 (File No. 001-07928; Film No. 11645568). (3) Incorporated by reference to the Exhibits to Bio-Rad’s Form S-4 filing, dated September 19, 2003 (File No. 333-108957; Film No. 03903026). (4) Incorporated by reference to the Exhibits to Bio-Rad’s Form 8-K filing, dated May 28, 2009 (File No. 001-07928; Film No. 09856654). (5) Incorporated by reference to Exhibit 4.1 to Bio-Rad’s Form 8-K filing, dated December 9, 2010 (File No. 001-07928; Film No. 101242545). (6) Incorporated by reference to the Exhibits to Bio-Rad’s 8-K filing, dated June 25, 2010 (File No. 001-07928; Film No. 10917383). (7) Incorporated by reference to Exhibit 4.1 to Bio-Rad’s Form S-8 filing, dated April 29, 1994 (File No. 033-53337; Film No. 94525059). (8) Incorporated by reference to the Exhibits to Bio-Rad’s Form 10-K filing for the fiscal year ended December 31, 2003, dated March 15, 2004 (File No. 001-7928; Film No. 04669434). (9) Incorporated by reference to Exhibit 10.4.5 to Bio-Rad’s June 30, 2009 Form 10-Q filing, dated August 5, 2009 (File No. 001-07928; Film No. 09988587). (10) Incorporated by reference to Exhibit 10.5 to Bio-Rad’s September 30, 1998 Form 10-Q filing, dated November 12, 1998 (File No. 001-7928; Film No. 98743709). (11) Incorporated by reference to Exhibit 10.5.1 to Bio-Rad’s Form 10-K filing for the fiscal year ended December 31, 2003, dated March 15, 2004 (File No. 001-7928; Film No. 04669434). (12) Incorporated by reference to Exhibit 10.5.2 to Bio-Rad’s Form 10-K filing for the fiscal year ended December 31, 2009, dated February 26, 2010 (File No. 001-07928; Film No. 10640714). 94 (13) Incorporated by reference to Exhibit 10.9 to Bio-Rad's June 30, 2011 Form 10-Q filing, dated August 4, 2011 (File No. 001-07928; Film No. 111008011). (14) Incorporated by reference to Exhibit 10.6 to Bio-Rad’s September 30, 1997 Form 10-Q filing, dated November 13, 1997 (File No. 001-7928; Film No. 9771652). (15) Incorporated by reference to Exhibit 10.7 to Bio-Rad’s March 31, 2003 Form 10-Q filing, dated May 13, 2003 (File No. 001-7928; Film No. 03696450). (16) Incorporated by reference to Exhibit 10.7.1 to Bio-Rad’s March 31, 2007 Form 10-Q filing, dated May 4, 2007 (File No. 001-7928; Film No. 07819469). (17) Incorporated by reference to Exhibit 4.1 to Bio-Rad’s Form S-8 filing, dated July 30, 2007 (File No. 333-144926; Film No. 071010234). (18) Incorporated by reference to Exhibit to 10.8.1 Bio-Rad’s September 30, 2009 Form 10-Q filing, dated November 4, 2009 (File No. 001-07928; Film No. 091158805). (19) Incorporated by reference to Exhibit 10.1 to Bio-Rad's Form 8-K filing, dated June 28, 2011 (File No. 001-07928; Film No. 11935120). (20) Incorporated by reference to Exhibit 10.4.6 to Bio-Rad's Form 10-K filing for the fiscal year ended December 31, 2011, dated February 29, 2012 (File No. 001-07928; File No. 12652048). (21) Incorporated by reference to Exhibit 10.1 to Bio-Rad's June 30, 2012 Form 10-Q filing, dated August 9, 2012 (File No. 001-07928; Film No. 121019446). 95 BIO-RAD L ABOR ATORI ES COR PORATE I NFORMATION DIREC TORS Norman Schwartz Chairman of the Board Louis Drapeau Director Albert J. Hillman Director Robert M. Malchione Director Deborah J. Neff Director Alice N. Schwartz Director OFFIC ERS Norman Schwartz Chairman of the Board, President and Chief Executive Ofﬁcer Brad Crutchﬁeld Executive Vice President, President, Life Science John Goetz Executive Vice President, President, Clinical Diagnostics Giovanni Magni Executive Vice President, International Sales Christine Tsingos Executive Vice President, Chief Financial Ofﬁcer Shawn M. Soderberg Executive Vice President, General Counsel & Secretary Ronald Hutton Vice President, Treasurer James Stark Vice President, Corporate Controller OTHER EXECU T IVES Michael Barcellos Vice President, General Manager, Clinical Immunology, Clinical Diagnostics Steve Binder Director, Technology Development, Clinical Diagnostics Patrick Bugeon Senior Vice President, Operations Europe, Clinical Diagnostics George Cao Vice President, Commercial Manager, Greater China Patrick Carroll Vice President, Commercial Manager, North America Sales, Life Science Jean-Francois Chauvet Vice President, General Manager, Food Science, Life Science Colleen Corey Vice President, Corporate Human Resources Michael Crowley Vice President, Commercial Manager, Europe Diane Dahowski Senior Vice President, Operations, North America U.S. Clinical Diagnostics Patrice Deletoille Vice President, General Manager, Infectious Diseases, Clinical Diagnostics Regis Duval Vice President, Commercial Manager, Emerging Markets H. Jeff Garner Vice President, Manufacturing, Life Science Ted Tisch Vice President, General Manager, Protein Function, Life Science Shannon Hall Vice President, General Manager, Laboratory Separations, Life Science John Hertia Senior Vice President, Global Technology & Systems Annette Tumolo Vice President, General Manager, Digital Biology Center, Life Science Octavio Zendejas Vice President, Commercial Manager, Latin America AN NU AL MEETIN G The Annual Meeting of Stockholders will be held on Tuesday, April 22, 2014 at 4 PM, 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 2013 Annual Report ﬁled with the Securities and Exchange Commission on Form 10-K. T RAN SF ER AG ENT Computershare 211 Quality Circle, Suite 210 College Station, Texas 77845 800-962-4284 www.computershare.com AU DI TO RS KPMG LLP San Francisco, California C OMM ON S T OCK Traded on the New York Stock Exchange Class A Common Stock Symbol BIO Class B Common Stock Symbol BIOb Chang Hong Vice President, Commercial Manager, Asia Paciﬁc Michael Jackson Vice President, General Manager, Clinical Systems, Clinical Diagnostics Scott Jenest Senior Vice President, Operations, Life Science Leo Kaabi Vice President, General Manager, Quality Systems, Clinical Diagnostics Daniel Merle Director, Business Development, Clinical Diagnostics Manuel Nyffeler Vice President, General Manager, Immunohematology, Clinical Diagnostics Dave Reilly Vice President, Commercial Manager, North America Sales, Clinical Diagnostics Jonathan Schimmel Vice President, General Manager, Gene Expression, Life Science Sadashi Suzuki Vice President, Commercial Manager, Japan Bio-Rad Laboratories 1000 Alfred Nobel Drive Hercules, California 94547 510-724-7000 www.bio-rad.com

Continue reading text version or see original annual report in PDF format above