Bio-Rad(BIO_B) - 2018 Q4 - Annual Report

PART I Item 1. Business Bio-Rad Laboratories, Inc., founded in 1952, is a multinational manufacturer of life science research and clinical diagnostics products, operating in two main segments - Bio-Rad Laboratories, Inc. was founded in 1952 and incorporated in 1957, initially focusing on specialty chemicals for life science research and later expanding into clinical diagnostics through R&D and acquisitions[7] 2018 Net Sales by Segment and Geography | Segment/Geography | Percentage of Net Sales (2018) | | :---------------- | :----------------------------- | | Life Science | 37% | | Clinical Diagnostics | 62% | | U.S. Sales | 38% | | International Sales | 62% | - The Life Science segment offers approximately 6,000 products for proteomics, genomics, biopharmaceutical production, cellular biology, and food safety, addressing an estimated worldwide market of $9 billion[10] - The Clinical Diagnostics segment provides over 3,000 products covering more than 300 in vitro diagnostic (IVD) tests, focusing on high-margin niches within an estimated $12 billion worldwide market with highly recurring revenue[11][12] - Bio-Rad holds over 2,000 U.S. and international patents and numerous trademarks but considers its knowledge, technology, and special skills more critical to its business[14] - The company employs approximately 940 direct sales and sales management personnel globally, with separate specialist sales forces for each segment[16][17] - Bio-Rad operates in highly competitive markets, with competition based on performance, complete solutions, product quality, broad portfolios, and customer support[20][21][22] - Extensive R&D activities are conducted globally by approximately 800 employees to continuously develop new products and applications[24] - The company's products, particularly diagnostic products, are subject to extensive regulation by authorities like the U.S. FDA, covering all stages from development to post-market surveillance[25][26] - Sales are influenced by third-party payor coverage and reimbursement policies, which are increasingly subject to cost containment programs[27] - As of December 31, 2018, Bio-Rad had approximately 8,260 employees worldwide[32] Item 1A. Risk Factors Bio-Rad faces numerous risks including legal, regulatory, competitive, operational, and financial challenges that could materially impact its business - Past violations of the U.S. Foreign Corrupt Practices Act (FCPA) could harm Bio-Rad's reputation and lead to further punitive actions[36][37][39] - Significant international operations (62% of 2018 net sales) expose the company to complex foreign and U.S. laws, increasing compliance costs and risks[40][41] - The life science and clinical diagnostics markets are highly competitive, and pricing pressures could adversely affect profitability[44][46] - Future growth depends on successful and timely development of new products, and failure to do so could lead to product obsolescence[47] - Foreign currency exchange fluctuations significantly impact results, with a strengthening U.S. dollar negatively affecting consolidated net sales[48] - The multi-year implementation of a new global ERP system has caused past disruptions and continues to pose risks of delays and operational difficulties[49] - Changes in organizational structure and executive management could lead to business disruption and reduced employee morale[51][52] - A material weakness in internal control over financial reporting was identified in 2017 and remediated as of December 31, 2018, but future deficiencies could still arise[55][56][58] - Breaches of information systems could lead to misappropriation of confidential data, regulatory sanctions, and operational disruptions[59] - Reliance on intellectual property rights is crucial, but these rights may be challenged or infringed upon, leading to substantial costs[60] - Global economic conditions, including decreased demand, increased competition, and geopolitical events, could adversely affect operations[61][63] - Reductions in government funding and capital spending by key customers could materially decrease demand for Bio-Rad's products[64][65] - Changes in the healthcare industry, such as reduced reimbursements and excise taxes, could adversely affect gross margins and demand[66][67][69][70] - The company is subject to substantial government regulation, and non-compliance could lead to enforcement actions or market restrictions[71][72][73][74][76][77] - Acquisitions pose integration challenges and potential goodwill impairment charges; in 2018, goodwill for DiaMed, Biotest AG, and AbD Serotec was fully impaired[78][79][80][81] - Product quality and liability issues could harm reputation, customer relationships, and financial performance[83][84] - Intense competition for specialized personnel could impair business operations if key talent is not retained or attracted[85][86] - A reduction or interruption in the supply of components and raw materials could adversely affect manufacturing and product sales[87] - Disruptions to IT systems could harm business operations, order processing, inventory management, and customer service[89][90][91] - Natural disasters, terrorist attacks, or labor unrest could damage facilities and disrupt business[92][93][94] - The company is subject to income taxes in numerous jurisdictions, and changes in tax laws can materially affect financial results[95][97][98][99][100][101][102][103] - Changes in U.S. GAAP can significantly impact reported financial results[104][106][107] - Volatility in financial markets and illiquidity of certain financial instruments could lead to significant write-downs and losses[108][109] - Environmental, health, and safety regulations impose compliance costs and potential liabilities[110][111][112] - Substantial debt ($439.4 million outstanding as of December 31, 2018) and associated covenants may restrict future operations[114][115][116] - Compliance with healthcare fraud and abuse laws is critical, and violations could result in substantial penalties[117][119][120] - Regulations related to 'conflict minerals' impose additional costs for compliance and due diligence[121] - The Schwartz family's significant majority ownership of voting stock allows them to control fundamental changes, potentially leading to conflicts of interest[123][124][125] Item 1B. Unresolved Staff Comments There are no unresolved staff comments to report - No unresolved staff comments[126] Item 2. Properties Bio-Rad maintains owned and leased facilities globally for its corporate, manufacturing, research, and administrative functions - Corporate headquarters are owned in Hercules, California[128] Principal Manufacturing and Research Locations by Segment | Segment | Location | Ownership Status | | :----------------- | :------------------------------------- | :--------------- | | Life Science | Greater San Francisco Bay Area, California | Owned/Leased | | | Singapore, Singapore | Leased | | | Oxford, England | Leased | | Clinical Diagnostics | Greater San Francisco Bay Area, California | Owned/Leased | | | Irvine, California | Leased | | | Greater Seattle Area, Washington | Leased | | | Lille, France | Owned | | | Greater Paris Area, France | Leased | | | Nazareth-Eke, Belgium | Leased | | | Cressier, Switzerland | Owned/Leased | | | Dreieich, Germany | Owned/Leased | - Most manufacturing and research facilities also house administration, sales, and distribution activities, supplemented by leased facilities globally[128] Item 3. Legal Proceedings Bio-Rad is involved in a significant legal proceeding with its former general counsel regarding whistleblower retaliation claims - Former general counsel Sanford S. Wadler filed a lawsuit alleging whistleblower retaliation under Sarbanes-Oxley and Dodd-Frank Acts, and wrongful termination[129] - The District Court initially awarded Mr. Wadler $10.92 million plus interest, which Bio-Rad appealed[129] - The Ninth Circuit Court of Appeals reversed the Dodd-Frank claim, vacated the SOX claim, and affirmed the California public policy claim for $7.96 million[131] - The company is also party to other legal actions in the ordinary course of business, with no material adverse effect currently estimated[132] Item 4. Mine Safety Disclosures This item is not applicable to Bio-Rad Laboratories, Inc - Not applicable[133] PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities This section covers the market for Bio-Rad's stock, stockholder matters, dividend policy, and details of its share repurchase program - Bio-Rad's Class A and Class B Common Stock are listed on the New York Stock Exchange under ticker symbols BIO and BIO.B, respectively[133] - As of March 26, 2019, there were 24,707,868 shares of Class A Common Stock and 5,092,404 shares of Class B Common Stock outstanding[4] - The company has never paid cash dividends and has no present plans to do so[134] - In November 2017, the Board authorized a new share repurchase program for up to $250.0 million of common stock[135] Share Repurchase Activity (Q4 2018) | Period | Total Shares Purchased | Average Price Paid per Share | Total Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number (or Approximate Dollar Value) of Shares that May yet be Purchased Under the Plans or Programs (in millions) | | :------------------------- | :--------------------- | :--------------------------- | :--------------------------------------------------------------------- | :-------------------------------------------------------------------------------------------------------------------------- | | October 1 to October 31, 2018 | — | $ — | — | $ 250.0 | | November 1 to November 30, 2018 | 178,911 (Class A) | $ 273.39 | 178,911 (Class A) | $ 201.1 | | December 1 to December 31, 2018 | — | $ — | — | $ 201.1 | Item 6. Selected Financial Data This section presents five years of selected financial data, showing trends in sales, profitability, assets, and debt Selected Financial Data (2014-2018, in thousands, except per share data) | Metric | 2018 | 2017 | 2016 | 2015 | 2014 | | :----------------------------------------- | :---------- | :---------- | :---------- | :---------- | :---------- | | Net sales | $2,289,415 | $2,160,153 | $2,068,172 | $2,019,441 | $2,175,044 | | Cost of goods sold | $1,066,264 | $972,450 | $929,744 | $897,771 | $996,527 | | Gross profit | $1,223,151 | $1,187,703 | $1,138,428 | $1,121,670 | $1,178,517 | | Selling, general and administrative expense | $834,783 | $806,790 | $814,697 | $761,990 | $808,200 | | Research and development expense | $199,196 | $250,157 | $205,708 | $192,972 | $220,333 | | Impairment losses on goodwill and long-lived assets | $292,513 | $11,506 | $62,305 | $— | $— | | Interest expense | $23,962 | $23,014 | $23,380 | $21,692 | $22,131 | | Foreign currency exchange losses, net | $2,861 | $9,128 | $4,542 | $10,249 | $9,305 | | Change in fair market value of equity securities | $(606,230) | $— | $— | $— | $— | | Other (income) expense, net | $(36,593) | $(10,697) | $(13,764) | $(11,080) | $(13,009) | | Income before income taxes | $512,659 | $97,805 | $41,560 | $145,847 | $131,557 | | (Provision for) benefit from income taxes | $(147,045) | $24,444 | $(15,560) | $(36,608) | $(42,712) | | Net income | $365,614 | $122,249 | $26,000 | $109,239 | $88,845 | | Basic earnings per share | $12.25 | $4.12 | $0.88 | $3.74 | $3.08 | | Diluted earnings per share | $12.10 | $4.07 | $0.88 | $3.71 | $3.05 | | Cash dividends paid per common share | $— | $— | $— | $— | $— | | Total assets | $5,611,068 | $4,273,012 | $3,850,504 | $3,709,718 | $3,341,278 | | Long-term debt, net of current maturities | $438,937 | $434,581 | $434,186 | $433,883 | $435,710 | Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes financial performance, covering sales, margins, expenses, liquidity, capital resources, and critical accounting policies - Bio-Rad is a multinational manufacturer and distributor of life science research and clinical diagnostics products, organized into two primary segments[144] - The company sells over 9,000 products and services globally, with recurring revenues due to customer standardization[145][146] - Approximately 38% of 2018 consolidated net sales were from the United States and 62% from international locations, with foreign currency fluctuations significantly impacting results[147] Impairment losses on goodwill and long-lived assets Bio-Rad recognized significant impairment losses on goodwill and long-lived assets in 2018, totaling $292.5 million Impairment Losses on Goodwill and Long-Lived Assets (in millions) | Year | Goodwill Impairment | Long-Lived Assets Impairment | Total Impairment Losses | | :--- | :------------------ | :--------------------------- | :---------------------- | | 2018 | $282.0 | $10.5 | $292.5 | | 2017 | $11.5 | $0.0 | $11.5 | | 2016 | $13.5 | $48.8 | $62.3 | - In 2018, goodwill for DiaMed, Biotest AG, and AbD Serotec was fully impaired, with additional impairments recorded for other developed technology[148][149] Restructuring Costs Bio-Rad incurred restructuring costs from 2016 to 2018 due to reorganization, project termination, and facility closures - Restructuring charges for the termination of a diagnostics R&D project and facility closures in Europe totaled $5.8 million in 2018 and $21.1 million in 2017[152][153][154][155] - The closure of GnuBIO research program facilities in 2017 resulted in $2.9 million in severance and $5.5 million in asset write-offs[156] - European reorganization activities from May 2016 to December 2018 incurred total expenses of $12.8 million, primarily for severance and employee benefits[157] Acquisition of RainDance Technologies, Inc. Bio-Rad acquired RainDance Technologies, Inc. in February 2017 for approximately $72.7 million to expand its Life Science segment - Bio-Rad acquired RainDance Technologies, Inc. in February 2017 for approximately $72.7 million, including a $10.0 million cash payment for a preexisting condition[159] - The acquisition aimed to extend Bio-Rad's reach into next-generation sequencing applications and strengthen its Droplet Digital™ PCR position[159][351] - The final allocation of the $72.9 million payment included $37.6 million to definite-lived intangibles and $26.2 million to goodwill[160] Critical Accounting Policies and Estimates Bio-Rad's financial statements rely on critical accounting policies and estimates for income taxes, business acquisitions, and inventories - Management makes estimates for income tax provisions, including the recoverability of deferred tax assets[162][163] - The Tax Cuts and Jobs Act of 2017 led to a final income tax benefit of $119 million in 2018[167][169] - Goodwill and long-lived assets are assessed for impairment annually using a projected discounted cash flow model, which is highly sensitive to assumptions[173][174][175] - Inventory is valued at the lower of cost or net realizable value, with reductions for excess and obsolete inventory based on demand forecasts[184] Results of Operations - Sales, Gross Margins and Expenses Bio-Rad's 2018 net sales increased by 6.0% to $2.29 billion, while consolidated gross margins decreased to 53.4% Cost of Goods Sold, Gross Profit, Expense Items, and Net Income as a Percentage of Net Sales | Metric | 2018 | 2017 | 2016 | | :-------------------------------------- | :----- | :----- | :----- | | Net sales | 100.0% | 100.0% | 100.0% | | Cost of goods sold | 46.6% | 45.0% | 45.0% | | Gross profit | 53.4% | 55.0% | 55.0% | | Selling, general and administrative expense | 36.5% | 37.3% | 39.4% | | Research and development expense | 8.7% | 11.6% | 9.9% | | Net income | 16.0% | 5.7% | 1.3% | Net Sales Growth (2018 vs. 2017) | Segment/Total | 2018 Sales (millions) | YoY Growth | Currency Neutral Growth | | :------------ | :-------------------- | :--------- | :---------------------- | | Total Net Sales | $2,289.4 | 6.0% | ~5.0% | | Life Science | $861.7 | 9.7% | 8.9% | | Clinical Diagnostics | $1,411.8 | 3.7% | 2.6% | - Life Science segment growth was driven by Droplet Digital™ PCR, process chromatography, Real Time amplification systems, and other key businesses[188] - Clinical Diagnostics segment growth was primarily from quality control, immunology, and blood typing product lines[189] - Consolidated gross margins decreased from 55.0% in 2017 to 53.4% in 2018, primarily due to unfavorable product mix and competitive pricing in Clinical Diagnostics[194] - Selling, general and administrative expenses increased to $834.8 million (36.5% of sales) in 2018, driven by professional fees for legal matters[196] - Research and development expense decreased to $199.2 million (8.7% of sales) in 2018, primarily due to lower development milestone expenses[200] - Impairment losses on goodwill and long-lived assets totaled $292.5 million in 2018, significantly higher than $11.5 million in 2017[202][203][204][205] Results of Operations – Non-operating Non-operating results in 2018 were significantly impacted by a $606.2 million gain from the change in fair market value of equity securities - Interest expense slightly increased to $24.0 million in 2018 from $23.0 million in 2017[207] - Net foreign currency exchange losses decreased to $2.9 million in 2018 from $9.1 million in 2017[208] - A $606.2 million gain was recorded in 2018 for the change in fair market value of equity securities, primarily from the investment in Sartorius AG[209] - Other (income) expense, net, increased to $36.6 million income in 2018, driven by higher dividends, investment income, and asset sales[210] Effective Tax Rate (2016-2018) | Year | Effective Tax Rate | | :--- | :----------------- | | 2018 | 29% | | 2017 | (25)% | | 2016 | 37% | - The 2018 effective tax rate was 29%, influenced by non-deductible impairment charges and foreign operations taxation, partially offset by a $49 million benefit from Tax Act accounting[213] Liquidity and Capital Resources Bio-Rad's liquidity is supported by strong cash flow from operations, cash reserves, and access to a $200.0 million credit facility - As of December 31, 2018, Bio-Rad had $844.8 million in cash, cash equivalents, and short-term investments[219] - The company has access to a $200.0 million unsecured Credit Agreement, with no outstanding borrowings as of December 31, 2018[218] Net Cash Provided by Operating Activities (in millions) | Year | Net Cash Provided by Operating Activities | | :--- | :---------------------------------------- | | 2018 | $285.5 | | 2017 | $104.1 | | 2016 | $216.1 | - The $181.4 million increase in net cash from operations in 2018 was due to higher cash received from customers and improved collections[223] Net Cash Used in Investing Activities (in millions) | Year | Net Cash Used in Investing Activities | | :--- | :------------------------------------ | | 2018 | $187.0 | | 2017 | $175.6 | | 2016 | $213.9 | - Investing activities in 2018 included $129.8 million in capital expenditures and net purchases of $68.7 million in marketable securities[226][231] - Net cash used in financing activities was $48.7 million in 2018, primarily due to $48.9 million in common stock repurchases[232] - The company has $425.0 million in Senior Notes due December 2020 and believes current cash and credit are sufficient for operations[233] Payments Due by Period This section outlines Bio-Rad's contractual obligations as of December 31, 2018 Contractual Obligations as of December 31, 2018 (in millions) | Contractual Obligations | Total | Less Than 1 Year | 1-3 Years | 3-5 Years | More than 5 Years | | :---------------------- | :------ | :--------------- | :-------- | :-------- | :---------------- | | Long-term debt, including current portion | $440.7 | $0.5 | $428.3 | $2.0 | $9.9 | | Interest payments | $40.2 | $20.7 | $19.5 | $— | $— | | Operating lease obligations | $168.8 | $44.4 | $65.2 | $33.7 | $25.5 | | Purchase obligations | $12.5 | $6.5 | $5.4 | $0.4 | $0.2 | | Long-term liabilities | $110.9 | $5.8 | $22.6 | $5.9 | $76.6 | - Excluded from the table are tax liabilities for uncertain tax positions and contingencies of $36.0 million[243] Off-Balance Sheet Arrangements Bio-Rad does not have any off-balance sheet arrangements that are reasonably likely to have a material effect on its financial condition - No off-balance sheet arrangements that have had or are reasonably likely to have a current or future material effect on financial condition[237] Contractual Obligations This section reiterates the summary of contractual obligations as detailed in the 'Payments Due by Period' table - The summary of contractual obligations is provided in the 'Payments Due by Period' table[238] Recent Accounting Pronouncements Adopted and to be Adopted This section refers to Note 1 of the consolidated financial statements for details on recent accounting pronouncements - Refer to Note 1 for details on recent accounting pronouncements adopted and to be adopted[238] Item 7A. Quantitative and Qualitative Disclosures About Market Risk Bio-Rad manages financial risks, primarily foreign exchange and interest rate fluctuations, through operational means and financial instruments - Bio-Rad's financial risk management aims to reduce cash flow variance from foreign exchange and interest rate changes[239] - The company faces transactional currency exposures, with a 10% decline in foreign exchange rates potentially resulting in a $26 million loss on derivative positions[244][246] - Interest rate risk on debt instruments is not significant due to the small amount of variable rate debt and fixed-rate long-term debt[247] Item 8. Financial Statements and Supplementary Data This section presents Bio-Rad's audited consolidated financial statements and extensive notes for the years ended December 31, 2018, 2017, and 2016 - The section includes the audited consolidated financial statements for the three years ended December 31, 2018[249][250] - KPMG LLP provided an unqualified opinion on the consolidated financial statements and the effectiveness of internal control over financial reporting[250][251][255] - Changes in accounting principles for revenue recognition (ASC 606) and equity instruments (ASU 2016-01) were adopted effective January 1, 2018[252] Consolidated Balance Sheets The Consolidated Balance Sheets show a significant increase in total assets to $5.61 billion in 2018, driven by a substantial rise in other investments Consolidated Balance Sheet Highlights (in thousands) | Metric | December 31, 2018 | December 31, 2017 | | :-------------------------------------- | :---------------- | :---------------- | | ASSETS: | | | | Cash and cash equivalents | $431,526 | $383,824 | | Short-term investments | $413,270 | $371,154 | | Accounts receivable, net | $392,443 | $464,847 | | Total inventories | $583,815 | $594,804 | | Total current assets | $2,023,478 | $1,976,649 | | Property, plant and equipment, net | $508,690 | $493,496 | | Goodwill, net | $219,770 | $506,069 | | Purchased intangibles, net | $133,123 | $174,113 | | Other investments | $2,655,709 | $1,027,736 | | Total assets | $5,611,068 | $4,273,012 | | LIABILITIES & STOCKHOLDERS' EQUITY: | | | | Accounts payable | $122,450 | $135,182 | | Accrued payroll and employee benefits | $143,510 | $171,632 | | Total current liabilities | $450,795 | $502,696 | | Long-term debt, net of current maturities | $438,937 | $434,581 | | Deferred income taxes | $553,239 | $222,209 | | Other long-term liabilities | $147,766 | $183,276 | | Total liabilities | $1,590,737 | $1,342,762 | | Total stockholders' equity | $4,020,331 | $2,930,250 | - Total assets increased by $1,338,056 thousand (31.3%) from 2017 to 2018, largely due to a significant increase in 'Other investments'[260] - Goodwill, net, decreased by $286,299 thousand (56.6%) from 2017 to 2018, reflecting impairment losses[260] - Total stockholders' equity increased by $1,089,081 thousand (37.2%) from 2017 to 2018[262] Consolidated Statements of Income The Consolidated Statements of Income show a significant increase in net income in 2018, driven by a large gain on equity securities despite an operating loss Consolidated Statements of Income Highlights (in thousands, except per share data) | Metric | 2018 | 2017 | 2016 | | :----------------------------------------- | :---------- | :---------- | :---------- | | Net sales | $2,289,415 | $2,160,153 | $2,068,172 | | Gross profit | $1,223,151 | $1,187,703 | $1,138,428 | | Selling, general and administrative expense | $834,783 | $806,790 | $814,697 | | Research and development expense | $199,196 | $250,157 | $205,708 | | Impairment losses on goodwill and long-lived assets | $292,513 | $11,506 | $62,305 | | (Loss) income from operations | $(103,341) | $119,250 | $55,718 | | Change in fair market value of equity securities | $(606,230) | $— | $— | | Income before income taxes | $512,659 | $97,805 | $41,560 | | Net income | $365,614 | $122,249 | $26,000 | | Basic earnings per share | $12.25 | $4.12 | $0.88 | | Diluted earnings per share | $12.10 | $4.07 | $0.88 | - Net sales increased by 6.0% in 2018 compared to 2017[265] - Income from operations turned into a loss of $103,341 thousand in 2018, primarily due to $292,513 thousand in impairment losses[265] - Net income significantly increased to $365,614 thousand in 2018, largely driven by a $606,230 thousand gain from the change in fair market value of equity securities[265] Consolidated Statements of Comprehensive Income The Consolidated Statements of Comprehensive Income show a lower comprehensive income in 2018 compared to 2017 due to a loss in other comprehensive income Consolidated Statements of Comprehensive Income Highlights (in thousands) | Metric | 2018 | 2017 | 2016 | | :----------------------------------------- | :---------- | :---------- | :---------- | | Net income | $365,614 | $122,249 | $26,000 | | Other comprehensive (loss) income, net of income taxes | $(106,495) | $321,028 | $35,628 | | Comprehensive income | $259,119 | $443,277 | $61,628 | - Other comprehensive income shifted from a gain of $321,028 thousand in 2017 to a loss of $106,495 thousand in 2018, primarily due to foreign currency translation adjustments[267] - Net unrealized holding gains on available-for-sale investments became a loss in 2018 due to the adoption of ASU 2016-01[267] Consolidated Statements of Cash Flows The Consolidated Statements of Cash Flows show a significant increase in net cash provided by operating activities in 2018 Consolidated Statements of Cash Flows Highlights (in thousands) | Metric | 2018 | 2017 | 2016 | | :-------------------------------------- | :---------- | :---------- | :---------- | | Net cash provided by operating activities | $285,494 | $104,137 | $216,066 | | Net cash used in investing activities | $(186,978) | $(175,572) | $(213,880) | | Net cash (used in) provided by financing activities | $(48,680) | $341 | $9,020 | | Net increase (decrease) in cash, cash equivalents and restricted cash | $49,181 | $(72,188) | $(1,652) | | Cash, cash equivalents and restricted cash at end of year | $434,164 | $384,983 | $457,171 | - Net cash provided by operating activities increased by $181.4 million in 2018 compared to 2017[269] - Net cash used in investing activities increased slightly in 2018, primarily due to higher capital expenditures and net purchases of marketable securities[269] - Net cash used in financing activities in 2018 was primarily driven by $48.9 million in treasury stock purchases[269] Consolidated Statements of Changes in Stockholders' Equity The Consolidated Statements of Changes in Stockholders' Equity illustrate a significant increase in total equity in 2018 due to net income and accounting standard adoptions Consolidated Statements of Changes in Stockholders' Equity Highlights (in thousands) | Metric | December 31, 2018 | December 31, 2017 | December 31, 2016 | | :----------------------------------------- | :---------------- | :---------------- | :---------------- | | Total Stockholders' Equity | $4,020,331 | $2,930,250 | $2,579,160 | | Net income | $365,614 | $122,249 | $26,000 | | Other comprehensive (loss) income, net of tax | $(106,495) | $321,028 | $35,628 | | Effect of adoption of ASU 2016-01 and ASU 2018-03 | $864,490 | $— | $— | | Purchase of treasury stock | $(48,912) | $(2,920) | $— | - Total stockholders' equity increased by $1,089,081 thousand in 2018, driven by net income and a cumulative-effect adjustment of $864,490 thousand from new accounting standards[271] - The adoption of ASU 2016-01 and ASU 2018-03 resulted in an increase in Retained earnings of $1,543,747 thousand[271] - The company repurchased $48,912 thousand of treasury stock in 2018[271] Notes to Consolidated Financial Statements The Notes provide detailed disclosures on accounting policies, financial instruments, acquisitions, goodwill, debt, taxes, and other financial information Note 1. Significant Accounting Policies This note outlines Bio-Rad's fundamental accounting principles, including new revenue recognition and financial instrument standards - The consolidated financial statements are prepared in accordance with U.S. GAAP, requiring management estimates and assumptions[273] - Cash and cash equivalents are highly liquid investments; available-for-sale investments are reported at fair value[275][277] - Goodwill is assessed for impairment annually using a projected discounted cash flow model[286][288][291] - The Tax Act of 2017 led to a final income tax benefit of $119 million in 2018[292][298] - Effective January 1, 2018, Bio-Rad adopted ASC 606, 'Revenue from Contracts with Customers,' recognizing revenue upon transfer of control[300][302][303] - Reagent rental agreements are allocated between lease and non-lease elements[310][311][312] - Share-based compensation expense is recognized over the vesting period, with forfeitures recognized as they occur[325][425] - ASU 2016-01 and ASU 2018-03, adopted January 1, 2018, require equity investments to be measured at fair value through earnings, resulting in a $606.2 million gain in 2018[333][334] - ASU 2016-02, 'Leases,' will be adopted on January 1, 2019, requiring most leases to be recognized on the balance sheet[347] Note 2. Acquisitions This note details the acquisition of RainDance Technologies, Inc. in February 2017 for approximately $72.7 million - Bio-Rad acquired RainDance Technologies, Inc. in February 2017 for approximately $72.7 million[349] - The acquisition was included in the Life Science segment and aimed to extend Bio-Rad's reach into next-generation sequencing applications[349][351] - The purchase price allocation included $37.6 million to definite-lived intangibles and $26.2 million to goodwill[350] Note 3. Fair Value Measurements This note provides a detailed breakdown of financial assets and liabilities measured at fair value, categorized into the three-level hierarchy - Fair value measurements are categorized into a three-level hierarchy: Level 1, Level 2, and Level 3[353] Financial Assets and Liabilities Carried at Fair Value (December 31, 2018, in millions) | Category | Level 1 | Level 2 | Level 3 | Total | | :---------------------------------------- | :-------- | :-------- | :------ | :-------- | | Financial Assets: | | | | | | Cash equivalents | $59.6 | $88.1 | $— | $147.7 | | Restricted investment | $5.6 | $— | $— | $5.6 | | Equity Securities | $2,672.9 | $— | $— | $2,672.9 | | Available-for-sale investments | $— | $373.2 | $— | $373.2 | | Forward foreign exchange contracts | $— | $0.6 | $— | $0.6 | | Total Financial Assets | $2,738.1| $461.9| $— | $3,200.0| | Financial Liabilities: | | | | | | Forward foreign exchange contracts | $— | $0.7 | $— | $0.7 | | Contingent consideration | $— | $— | $8.4 | $8.4 | | Total Financial Liabilities | $— | $0.7 | $8.4| $9.1 | - Equity securities, primarily the investment in Sartorius AG, are now reported at fair value through earnings, with unrealized gains of $607.7 million as of December 31, 2018[354][358][373] - Contingent consideration liabilities, classified as Level 3, were $8.4 million as of December 31, 2018[360][361][363] - Forward foreign exchange contracts are used to manage foreign exchange risk, with a notional value of $50.6 million to sell and $284.5 million to purchase foreign currency[370][371] Note 4. Goodwill and Other Purchased Intangible Assets This note details a significant decrease in goodwill in 2018 due to substantial impairment losses totaling $282.0 million Goodwill, Net by Segment (in millions) | Segment | December 31, 2018 | December 31, 2017 | | :----------------- | :---------------- | :---------------- | | Life Science | $192.7 | $198.8 | | Clinical Diagnostics | $27.1 | $307.3 | | Total Goodwill, net | $219.8 | $506.1 | - Goodwill, net, decreased by $286.3 million in 2018, primarily due to impairment losses of $282.0 million[374] - In 2018, goodwill impairments included $247.2 million for DiaMed and $18.1 million for Pasteur Sanofi Diagnostics S.A., with several reporting units fully impaired[376] Definite-Lived Intangible Assets (December 31, 2018, in millions) | Category | Average Remaining Life (years) | Net Carrying Amount | | :----------------------------- | :----------------------------- | :------------------ | | Customer relationships/lists | 1-6 | $20.4 | | Know how | 1-7 | $30.8 | | Developed product technology | 1-10 | $43.8 | | Licenses | 7-11 | $35.4 | | Tradenames | 2-6 | $0.6 | | Covenants not to compete | 7 | $2.1 | | Total definite-lived intangible assets | | $133.1 | - Amortization expense for purchased intangible assets was $28.3 million in 2018, with estimated future amortization of $21.7 million in 2019[381] Note 5. Notes Payable and Long-Term Debt Bio-Rad's long-term debt primarily consists of $425.0 million in 4.875% Senior Notes due 2020 Principal Components of Long-Term Debt (in millions) | Debt Component | December 31, 2018 | December 31, 2017 | | :-------------------------------------------- | :---------------- | :---------------- | | 4.875% Senior Notes due 2020, net of discount | $425.0 | $425.0 | | Less unamortized discount and debt issuance costs | $(1.3) | $(1.9) | | Long-term debt less unamortized discount and debt issuance costs | $423.7 | $423.1 | | Capital leases and other debt | $15.7 | $11.9 | | Total | $439.4 | $435.0 | | Less current maturities | $(0.5) | $(0.4) | | Long-term debt | $438.9 | $434.6 | - The 4.875% Senior Notes due December 2020 have a principal amount of $425.0 million[384] - A $200.0 million unsecured Credit Agreement matures in June 2019 with no outstanding borrowings as of December 31, 2018[385] - Bio-Rad was in compliance with all financial ratios and covenants as of December 31, 2018[386] - Maturities of long-term debt are concentrated in 2020 ($426.6 million)[387] Note 6. Income Taxes This note details Bio-Rad's income tax provision, effective tax rate, and deferred tax assets and liabilities U.S. and International Components of Income Before Taxes (in millions) | Component | 2018 | 2017 | 2016 | | :------------ | :----- | :---- | :---- | | U.S. | $363.4 | $72.8 | $(38.5)| | International | $149.3 | $25.0 | $80.1 | | Total | $512.7 | $97.8 | $41.6 | Provision for Income Taxes (in millions) | Tax Component | 2018 | 2017 | 2016 | | :---------------------- | :------ | :------ | :------ | | Current tax expense | $41.5 | $42.1 | $49.6 | | Deferred tax expense (benefit) | $120.9 | $(84.8) | $(51.2) | | Non-current tax (benefit) expense | $(15.4) | $18.3 | $17.2 | | Total Provision for (benefit from) income taxes | $147.0 | $(24.4) | $15.6 | - The effective tax rate was 29% in 2018, (25)% in 2017, and 37% in 2016, with the 2018 rate impacted by non-deductible impairment charges[394] Deferred Tax Assets and Liabilities (in millions) | Category | December 31, 2018 | December 31, 2017 | | :---------------------------- | :---------------- | :---------------- | | Total gross deferred tax assets | $147.1 | $145.6 | | Valuation allowance | $(70.8) | $(66.4) | | Total deferred tax assets | $76.3 | $79.2 | | Total deferred tax liabilities | $580.7 | $252.6 | | Net deferred tax liabilities | $(504.4) | $(173.4) | - A valuation allowance of $70.8 million was maintained as of December 31, 2018, due to uncertainties in realizing certain tax credits and loss carryforwards[397] Unrecognized Tax Benefits Reconciliation (in millions) | Metric | 2018 | 2017 | 2016 | | :----------------------------------------- | :------ | :------ | :------ | | Unrecognized tax benefits – January 1 | $54.9 | $21.1 | $11.9 | | Additions to tax positions related to prior years | $0.6 | $1.3 | $10.4 | | Reductions to tax positions related to prior years | $(20.2) | $(1.0) | $— | | Additions to tax positions related to the current year | $4.6 | $34.8 | $3.4 | | Settlements | $(6.8) | $(0.2) | $(2.4) | | Lapse of statute of limitations | $(1.1) | $(3.4) | $(2.3) | | Currency translation | $(2.2) | $2.3 | $0.1 | | Unrecognized tax benefits – December 31 | $29.8 | $54.9 | $21.1 | - As of December 31, 2018, unrecognized tax benefits totaled $29.8 million, with accrued interest and penalties of $9.5 million[401] Note 7. Stockholders' Equity This note details Bio-Rad's two classes of common stock, the Schwartz family's controlling interest, and share repurchase activity - Bio-Rad has Class A and Class B Common Stock with differing voting rights; the Schwartz family holds a majority of voting stock[404] Changes to Issued Common Stock Shares (in thousands) | Metric | Class A Shares | Class B Shares | | :------------------------- | :------------- | :------------- | | Balance at January 1, 2016 | 24,230 | 5,131 | | B to A conversions | 13 | (13) | | Issuance of common stock | 211 | 6 | | Balance at December 31, 2016 | 24,454 | 5,124 | | B to A conversions | 34 | (34) | | Issuance of common stock | 191 | 18 | | Balance at December 31, 2017 | 24,679 | 5,108 | | B to A conversions | 30 | (30) | | Issuance of common stock | 175 | 18 | | Balance at December 31, 2018 | 24,884 | 5,096 | - In November 2017, a new $250.0 million share repurchase program was authorized; in 2018, $48.9 million of common stock was repurchased[407][408] Note 8. Accumulated Other Comprehensive Income (Loss) This note details a significant shift in accumulated other comprehensive income to a loss position due to accounting standard adoptions Accumulated Other Comprehensive Income (Loss) Components (in millions) | Component | December 31, 2018 | December 31, 2017 | | :-------------------------------------------- | :---------------- | :---------------- | | Foreign currency translation adjustments | $(35.5) | $77.4 | | Foreign other post-employment benefits adjustments, net of income taxes | $(14.8) | $(22.3) | | Net unrealized holding (losses) gains on available-for-sale investments | $3.3 | $683.7 | | Total Accumulated Other Comprehensive Income (Loss) | $(47.0) | $738.8 | - The adoption of ASU 2016-01 and ASU 2018-03 resulted in a cumulative-effect adjustment of $(679.3) million to Accumulated other comprehensive income[410] - Other comprehensive income (loss), net of income taxes, was $(106.5) million in 2018, compared to $321.1 million in 2017[410] Note 9. Share-Based Compensation/Equity Award and Purchase Plans Bio-Rad offers share-based compensation through equity award plans and an Employee Stock Purchase Plan - Bio-Rad has three equity award plans and an Employee Stock Purchase Plan to align employee interests with shareholders[415][416][418][419] - Total share-based compensation expense recognized was $27.8 million in 2018, $23.4 million in 2017, and $19.7 million in 2016[423] Stock Option Activity (2018) | Metric | Shares | Weighted-Average Exercise Price | | :----------------------------------- | :-------- | :------------------------------ | | Outstanding, December 31, 2017 | 407,480 | $120.39 | | Granted | 33,000 | $326.15 | | Exercised | (44,600) | $93.63 | | Forfeited/expired | (22,240) | $169.93 | | Outstanding, December 31, 2018 | 373,640 | $138.81 | | Unvested, December 31, 2018 | 99,600 | $223.91 | | Exercisable, December 31, 2018 | 274,040 | $107.88 | - The weighted-average fair value of stock options granted in 2018 was $105.94, estimated using a Black-Scholes model[429] Restricted Stock Unit Activity (2018) | Metric | Restricted Stock Units | Weighted-Average Grant-Date Fair Value | | :----------------------------------- | :--------------------- | :------------------------------------- | | Outstanding, December 31, 2017 | 473,000 | $172.76 | | Granted | 185,755 | $326.15 | | Vested | (128,294) | $158.49 | | Forfeited | (56,011) | $182.15 | | Outstanding, December 31, 2018 | 474,450 | $235.57 | - The total fair value of restricted stock units vested was $40.0 million in 2018; unrecognized compensation cost for RSUs was $102.4 million[432] - Under the 2011 ESPP, 63,464 shares were sold to employees for $13.6 million in 2018[434][435] Note 10. Other Income and Expense, Net This note details a significant increase in other income, net, to $36.6 million in 2018, driven by investment income and asset sales Other (Income) Expense, Net Components (in millions) | Component | 2018 | 2017 | 2016 | | :-------------------------------------------- | :------ | :------ | :------ | | Interest and investment income | $(26.6) | $(19.1) | $(14.7) | | Net realized gains on investments | $(1.6) | $(0.1) | $(0.8) | | Other-than-temporary impairment losses on investments | $0.8 | $7.0 | $0.6 | | Gain on sale of land | $(4.1) | $— | $— | | Gain on divestiture of product line | $(5.1) | $— | $— | | Other expense | $— | $1.5 | $1.1 | | Total Other (income) expense, net | $(36.6) | $(10.7) | $(13.8) | - Other (income) expense, net, increased by $25.9 million in 2018, primarily due to higher investment income, a $4.1 million gain on land sale, and a $5.1 million gain on product line divestiture[436] Note 11. Supplemental Cash Flow Information This note provides a reconciliation of net income to net cash provided by operating activities, detailing non-cash adjustments Reconciliation of Net Income to Net Cash Provided by Operating Activities (in millions) | Metric | 2018 | 2017 | 2016 | | :----------------------------------------- | :------ | :------ | :------ | | Net income | $365.6 | $122.2 | $26.0 | | Depreciation and amortization | $138.1 | $148.7 | $142.9 | | Share-based compensation | $27.8 | $23.4 | $19.7 | | Change in fair market value of equity securities | $(606.2) | $— | $— | | Impairment losses on goodwill and long-lived assets | $292.5 | $11.5 | $62.3 | | Decrease (increase) in accounts receivable, net | $59.7 | $(64.1) | $12.5 | | Increase in inventories, net | $(12.9) | $(47.7) | $(57.1) | | Net cash provided by operating activities | $285.5 | $104.1 | $216.1 | - Non-cash investing activities in 2018 included $5.7 million for purchased property, plant and equipment[438] Note 12. Commitments and Contingent Liabilities This note details Bio-Rad's various commitments, including operating leases, profit sharing, and post-employment benefits - Rental expense under operating leases was $47.4 million in 2018; future minimum lease payments total $168.8 million[440] - Contributions to the U.S. profit sharing plan were $15.9 million in 2018[442] - Other post-employment benefits for foreign employees had an underfunded status of $70.4 million at December 31, 2018[443][445] - Net periodic benefit costs for post-employment benefits were $8.9 million in 2018[446] - Recognized purchase obligations on the balance sheet totaled $110.9 million; unrecognized purchase obligations totaled $12.5 million[449][450][451][452] - Contingent liabilities included $3.1 million in standby letters of credit/guarantees as of December 31, 2018[453] - A contingent consideration liability of $8.4 million was accrued as of December 31, 2018, related to an acquisition[455] - Approximately 8% of U.S. employees and many non-U.S. employees are covered by collective bargaining agreements[456] Note 13. Legal Proceedings This note provides an update on the legal proceedings involving Bio-Rad and its former general counsel - The Ninth Circuit Court of Appeals affirmed a $7.96 million California public policy claim in the lawsuit filed by former general counsel Sanford S. Wadler[457] - Bio-Rad filed a petition for panel rehearing or rehearing en banc on March 12, 2019[457] - Other legal actions arising in the ordinary course of business are not currently believed to have a material adverse effect[458] Note 14. Segment Information Bio-Rad operates in two reportable segments: Life Science and Clinical Diagnostics, with results presented by segment and geographic region - Bio-Rad has two reportable segments: Life Science and Clinical Diagnostics, plus 'Other Operations' for Analytical Instruments[460][462] Segment Net Sales (in millions) | Segment | 2018 | 2017 | 2016 | | :----------------- | :-------- | :-------- | :-------- | | Life Science | $861.7 | $785.2 | $730.7 | | Clinical Diagnostics | $1,411.8 | $1,360.8 | $1,323.3 | | Other Operations | $15.9 | $14.2 | $14.2 | Segment Profit (Loss) (in millions) | Segment | 2018 | 2017 | 2016 | | :----------------- | :-------- | :------- | :------- | | Life Science | $28.7 | $(9.9) | $(19.1) | | Clinical Diagnostics | $(145.7) | $114.8 | $58.0 | | Other Operations | $0.2 | $1.4 | $0.9 | - The Clinical Diagnostics segment reported a loss of $145.7 million in 2018, primarily due to $276.1 million in goodwill impairment losses[465] Net Sales by Geographic Region (in millions) | Region | 2018 | 2017 | 2016 | | :--------------------------------- | :-------- | :-------- | :-------- | | Europe | $792.0 | $758.5 | $742.2 | | Pacific Rim | $495.5 | $461.3 | $427.1 | | United States | $863.6 | $800.2 | $770.6 | | Other (Canada and Latin America) | $138.3 | $140.2 | $128.3 | | Total net sales | $2,289.4 | $2,160.2 | $2,068.2 | Assets by Geographic Region (in millions) | Region | December 31, 2018 | December 31, 2017 | | :--------------------------------- | :---------------- | :---------------- | | Europe | $1,571.9 | $230.6 | | Pacific Rim | $20.7 | $18.4 | | United States | $1,582.1 | $1,305.2 | | Other (Canada and Latin America) | $11.1 | $13.1 | | Total Property, plant and equipment, net, Other investments and Other assets, excluding deferred income taxes | $3,185.8 | $1,567.3 | - The significant increase in Europe's assets in 2018 is primarily due to the investment in Sartorius AG[469] Note 15. Restructuring Costs This note details Bio-Rad's restructuring costs from 2016 to 2018, primarily involving severance, benefits, and asset write-offs - European reorganization activities from May 2016 to December 2018 incurred total expenses of $12.8 million[471] European Reorganization Restructuring Reserves for Severance (in millions) | Metric | 2018 | 2017 | | :----------------------------------- | :----- | :----- | | Balance as of January 1 | $6.3 | $9.0 | | Adjustment to expense | $(0.2) | $0.5 | | Cash payments | $(4.4) | $(4.2) | | Foreign currency translation (gains) losses | $(0.1) | $1.0 | | Balance as of December 31 | $1.6 | $6.3 | - Termination of a diagnostics R&D project and facility closures resulted in $5.8 million in re