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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|
| |
(Mark One) | |
ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2017
or
|
| |
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from______________to __________
Commission file number 1-7928
BIO-RAD LABORATORIES, INC.
(Exact name of registrant as specified in its charter)
|
| | |
Delaware | | 94-1381833 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
1000 Alfred Nobel Drive, Hercules, California | | 94547 |
(Address of principal executive offices) | | (Zip Code) |
(510) 724-7000
(Registrant's telephone number, including area code)
No Change
(Former name, former address and former fiscal year, if changed since last report.)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232,405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
|
| | | | |
Large accelerated filer | x | | Accelerated filer | o |
Non-accelerated filer | o | (Do not check if smaller reporting company) | Smaller reporting company | o |
| | | Emerging growth company | o |
| | | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
|
| | |
Title of Class | | Shares Outstanding at July 27, 2017 |
Class A Common Stock, Par Value $0.0001 per share | | 24,528,198 |
Class B Common Stock, Par Value $0.0001 per share | | 5,109,777 |
BIO-RAD LABORATORIES, INC.
FORM 10-Q JUNE 30, 2017
TABLE OF CONTENTS
INFORMATION RELATING TO FORWARD-LOOKING STATEMENTS
Other than statements of historical fact, statements made in this report include forward-looking statements, such as statements with respect to our future financial performance, operating results, plans and objectives that involve risk and uncertainties. Forward-looking statements generally can be identified by the use of forward-looking terminology, such as “believe,” “expect,” “anticipate,” “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, but not limited to, those identified under “Part II, Item 1A, Risk Factors” of this Quarterly Report on Form 10-Q. We caution you not to place undue reliance on forward-looking statements, which reflect an analysis only and speak only as of the date hereof. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by law.
PART I – FINANCIAL INFORMATION
BIO-RAD LABORATORIES, INC.
Condensed Consolidated Balance Sheets
(In thousands, except share data)
|
| | | | | | | |
| June 30, 2017 | | December 31, 2016 |
ASSETS: | (Unaudited) | | |
Cash and cash equivalents | $ | 321,584 |
| | $ | 456,264 |
|
Short-term investments | 391,268 |
| | 383,176 |
|
Restricted investments | 4,560 |
| | 4,560 |
|
Accounts receivable, net | 392,842 |
| | 372,348 |
|
Inventories: | | | |
Raw materials | 115,043 |
| | 116,540 |
|
Work in process | 133,055 |
| | 125,982 |
|
Finished goods | 332,483 |
| | 282,439 |
|
Total inventories | 580,581 |
| | 524,961 |
|
Prepaid expenses | 125,655 |
| | 91,014 |
|
Other current assets | 10,038 |
| | 12,201 |
|
Total current assets | 1,826,528 |
| | 1,844,524 |
|
Property, plant and equipment, at cost | 1,277,970 |
| | 1,227,388 |
|
Less: accumulated depreciation and amortization | (774,641 | ) | | (738,774 | ) |
Property, plant and equipment, net | 503,329 |
| | 488,614 |
|
Goodwill, net | 530,287 |
| | 477,115 |
|
Purchased intangibles, net | 184,819 |
| | 161,609 |
|
Other investments | 1,040,959 |
| | 830,790 |
|
Other assets | 57,537 |
| | 47,852 |
|
Total assets | $ | 4,143,459 |
| | $ | 3,850,504 |
|
| | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY: | | | |
Accounts payable, accrued payroll and employee benefits | $ | 277,566 |
| | $ | 296,473 |
|
Current maturities of long-term debt and notes payable | 505 |
| | 334 |
|
Income and other taxes payable | 33,308 |
| | 28,124 |
|
Other current liabilities | 143,731 |
| | 146,391 |
|
Total current liabilities | 455,110 |
| | 471,322 |
|
Long-term debt, net of current maturities | 434,386 |
| | 434,186 |
|
Deferred income taxes | 294,843 |
| | 222,919 |
|
Other long-term liabilities | 148,123 |
| | 135,318 |
|
Total liabilities | 1,332,462 |
| | 1,263,745 |
|
| | | |
Stockholders’ equity: | | | |
Class A common stock, shares issued 24,500,249 and 24,454,048 at 2017 and 2016, respectively; shares outstanding 24,496,127 and 24,453,926 at 2017 and 2016, respectively | 2 |
| | 2 |
|
Class B common stock, shares issued 5,125,094 and 5,123,883 at 2017 and 2016, respectively; shares outstanding 5,124,177 and 5,122,966 at 2017 and 2016, respectively | 1 |
| | 1 |
|
Additional paid-in capital | 347,658 |
| | 332,911 |
|
Class A treasury stock at cost, 4,122 shares and 122 shares at 2017 and 2016, respectively | (895 | ) | | (12 | ) |
Class B treasury stock at cost, 917 shares at 2017 and 2016 | (89 | ) | | (89 | ) |
Retained earnings | 1,853,372 |
| | 1,836,180 |
|
Accumulated other comprehensive income | 610,948 |
| | 417,766 |
|
Total stockholders’ equity | 2,810,997 |
| | 2,586,759 |
|
Total liabilities and stockholders’ equity | $ | 4,143,459 |
| | $ | 3,850,504 |
|
BIO-RAD LABORATORIES, INC.
Condensed Consolidated Statements of Income
(In thousands, except per share data)
(Unaudited)
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| June 30, | | June 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
| | | | | | | |
Net sales | $ | 504,666 |
| | $ | 516,777 |
| | $ | 1,004,717 |
| | $ | 987,974 |
|
Cost of goods sold | 231,367 |
| | 236,545 |
| | 461,431 |
| | 443,713 |
|
Gross profit | 273,299 |
| | 280,232 |
| | 543,286 |
| | 544,261 |
|
Selling, general and administrative expense | 213,027 |
| | 205,536 |
| | 407,967 |
| | 395,252 |
|
Research and development expense | 62,623 |
| | 49,811 |
| | 112,111 |
| | 98,397 |
|
Impairment loss on long-lived asset | — |
| | 2,360 |
| | — |
| | 2,360 |
|
Income (loss) from operations | (2,351 | ) | | 22,525 |
| | 23,208 |
| | 48,252 |
|
Interest expense | 5,770 |
| | 5,632 |
| | 10,811 |
| | 11,212 |
|
Foreign currency exchange losses, net | 2,516 |
| | 1,237 |
| | 4,305 |
| | 2,366 |
|
Other (income) expense, net | (11,757 | ) | | (11,208 | ) | | (13,175 | ) | | (12,385 | ) |
Income before income taxes | 1,120 |
| | 26,864 |
| | 21,267 |
| | 47,059 |
|
Benefit (provision) for income taxes | 3,915 |
| | (8,850 | ) | | (3,819 | ) | | (16,769 | ) |
Net income | $ | 5,035 |
| | $ | 18,014 |
| | $ | 17,448 |
| | $ | 30,290 |
|
| | | | | | | |
Basic earnings per share: | | | | | | | |
Net income per basic share | $ | 0.17 |
| | $ | 0.61 |
| | $ | 0.59 |
| | $ | 1.03 |
|
Weighted average common shares - basic | 29,613 |
| | 29,398 |
| | 29,597 |
| | 29,381 |
|
| | | | | | | |
Diluted earnings per share: | | | | | | | |
Net income per diluted share | $ | 0.17 |
| | $ | 0.61 |
| | $ | 0.58 |
| | $ | 1.03 |
|
Weighted average common shares - diluted | 30,006 |
| | 29,589 |
| | 29,962 |
| | 29,549 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
BIO-RAD LABORATORIES, INC.
Condensed Consolidated Statements of Comprehensive Income
(In thousands)
(Unaudited)
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| June 30, | | June 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Net income | $ | 5,035 |
| | $ | 18,014 |
| | $ | 17,448 |
| | $ | 30,290 |
|
Other comprehensive income: | | | | | | | |
Foreign currency translation adjustments | 41,679 |
| | (18,424 | ) | | 60,522 |
| | 19,512 |
|
Foreign other post-employment benefits adjustments, net of income taxes | (1,938 | ) | | 535 |
| | (2,053 | ) | | (105 | ) |
Net unrealized holding gains on available-for-sale (AFS) investments, net of income taxes | 54,564 |
| | 62,109 |
| | 134,713 |
| | 58,015 |
|
Other comprehensive income, net of income taxes | 94,305 |
| | 44,220 |
| | 193,182 |
| | 77,422 |
|
Comprehensive income | $ | 99,340 |
| | $ | 62,234 |
| | $ | 210,630 |
| | $ | 107,712 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
BIO-RAD LABORATORIES, INC.
Condensed Consolidated Statements of Cash Flows
(In thousands, unaudited)
|
| | | | | | | |
| Six Months Ended |
| June 30, |
| 2017 | | 2016 |
Cash flows from operating activities: | | | |
Cash received from customers | $ | 999,779 |
| | $ | 1,020,149 |
|
Cash paid to suppliers and employees | (970,116 | ) | | (935,587 | ) |
Interest paid, net | (10,315 | ) | | (10,911 | ) |
Income tax payments, net | (19,066 | ) | | (11,085 | ) |
Investment proceeds and miscellaneous receipts, net | 13,947 |
| | 12,810 |
|
Excess tax benefits from share-based compensation | — |
| | (75 | ) |
Payments for forward foreign exchange contracts, net | (8,029 | ) | | (5,594 | ) |
Net cash provided by operating activities | 6,200 |
| | 69,707 |
|
Cash flows from investing activities: | | | |
Capital expenditures | (64,951 | ) | | (56,865 | ) |
Proceeds from dispositions of property, plant and equipment | 21 |
| | 21 |
|
Payments for acquisitions and long-term investments | (73,573 | ) | | (11,477 | ) |
Payments for purchases of intangible assets | (3,920 | ) | | (6 | ) |
Payments for purchases of marketable securities and investments | (142,993 | ) | | (148,423 | ) |
Proceeds from sales of marketable securities and investments | 39,362 |
| | 42,386 |
|
Proceeds from maturities of marketable securities and investments | 98,379 |
| | 64,036 |
|
Net cash used in investing activities | (147,675 | ) | | (110,328 | ) |
Cash flows from financing activities: | | | |
Net payments on line-of-credit arrangements and notes payable | (36 | ) | | — |
|
Payments on long-term borrowings | (149 | ) | | (156 | ) |
Payments of contingent consideration | (3,105 | ) | | (3,500 | ) |
Proceeds from issuances of common stock for share-based compensation | 3,778 |
| | 6,875 |
|
Payments for purchases of treasury stock | (883 | ) | | — |
|
Excess tax benefits from share-based compensation | — |
| | 75 |
|
Net cash (used in) provided by financing activities | (395 | ) | | 3,294 |
|
Effect of foreign exchange rate changes on cash | 7,190 |
| | (1,571 | ) |
Net decrease in cash and cash equivalents | (134,680 | ) | | (38,898 | ) |
Cash and cash equivalents at beginning of period | 456,264 |
| | 457,549 |
|
Cash and cash equivalents at end of period | $ | 321,584 |
| | $ | 418,651 |
|
Reconciliation of net income to net cash used in operating activities: | | | |
Net income | $ | 17,448 |
| | $ | 30,290 |
|
Adjustments to reconcile net income to net cash used in operating activities: | | | |
Depreciation and amortization | 70,688 |
| | 71,668 |
|
Share-based compensation | 10,579 |
| | 9,407 |
|
Losses (gains) on dispositions of securities | 310 |
| | (66 | ) |
Excess tax benefits from share-based compensation | — |
| | (75 | ) |
Changes in fair value of contingent consideration | (8,700 | ) | | (1,873 | ) |
(Increase) decrease in accounts receivable | (1,849 | ) | | 32,067 |
|
Increase in inventories | (37,870 | ) | | (50,979 | ) |
Increase in other current assets | (14,878 | ) | | (2,561 | ) |
Decrease in accounts payable and other current liabilities | (24,160 | ) | | (32,564 | ) |
(Decrease) increase in income taxes payable | (13,208 | ) | | 11 |
|
(Decrease) increase in deferred income taxes | (3,057 | ) | | 4,060 |
|
Net decrease/increase in other long-term assets/liabilities | 10,897 |
| | 10,322 |
|
Net cash provided by operating activities | $ | 6,200 |
| | $ | 69,707 |
|
BIO-RAD LABORATORIES, INC
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1.BASIS OF PRESENTATION AND USE OF ESTIMATES
Basis of Presentation
In this report, “Bio-Rad,” “we,” “us,” “the Company” and “our” refer to Bio-Rad Laboratories, Inc. and its subsidiaries. The accompanying unaudited condensed consolidated financial statements of Bio-Rad have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) and reflect all adjustments which are, in the opinion of management, necessary to fairly state the results of the interim periods presented. All such adjustments are of a normal recurring nature. Results for the interim period are not necessarily indicative of the results for the entire year. The condensed consolidated balance sheet at December 31, 2016 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements. The condensed consolidated financial statements should be read in conjunction with the notes to the consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2016.
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 of those events and conditions.
Use of Estimates
The preparation of the condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingencies at the date of the financial statements as well as the reported amounts of revenues and expenses during the reporting periods. Bio-Rad bases its estimates on historical experience and on various other market-specific and other relevant assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ materially from those estimates.
Recent Accounting Standards Updates
In May 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. (“ASU”) 2017-09, "Scope of Modification Accounting." ASU 2017-09 clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. ASU 2017-09 will allow companies to make certain changes to awards, such as vesting conditions, without accounting for them as modifications. It does not change the accounting for modifications. ASU 2017-09 will be applied prospectively to awards modified on or after the adoption date. We early adopted ASU 2017-09 during the second quarter of 2017, which has not affected our condensed consolidated financial statements.
In March 2017, the FASB issued ASU 2017-07, "Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost." ASU 2017-07 will change how employers that sponsor defined benefit pension and/or other postretirement benefit plans present the net periodic benefit cost, which is comprised of several components, in the income statement. Under ASU 2017-07, employers will present the service cost component of the net periodic benefit cost in the same income statement line item(s) as other employee compensation costs arising from services rendered during the period, and will be the only costs eligible for
capitalization. Employers will present the other components separately from the line item(s) that includes the service cost outside of the subtotal of Income from operations. ASU 2017-07 is effective for fiscal years beginning after December 15, 2017, and interim periods within those years. Employers will apply the guidance on the presentation of the components of net periodic benefit cost in the income statement retrospectively. In several foreign locations, we are statutorily required to provide a lump sum severance or termination indemnity to our employees and are currently evaluating the applicability of ASU 2017-07 to our situation.
In January 2017, the FASB issued ASU 2017-04, "Simplifying the Test for Goodwill Impairment." ASU 2017-04 removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. ASU 2017-04 is effective prospectively for annual and interim periods beginning after December 15, 2019. ASU 2017-04 will provide a more stream-lined approach to evaluating future goodwill impairment and we early adopted on January 1, 2017 on a prospective basis as a change in accounting principle. There was no impact of ASU 2017-04 on our consolidated financial statements because a goodwill impairment has not occurred after January 1, 2017.
In January 2017, the FASB issued ASU 2017-01, "Clarifying the Definition of a Business." ASU 2017-01 changes the definition of a business to assist entities with evaluating when a set of transferred assets and activities is a business. If substantially all of the fair value is concentrated in a single asset or a group of similar assets, the acquired set is not a business. If this is not met, the entity then evaluates whether the set meets the requirement that a business include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs. Determining whether a set constitutes a business is critical because the accounting for a business combination differs significantly from that of an asset acquisition. We early adopted ASU 2017-01 on January 1, 2017 on a prospective basis.
In November 2016, the FASB issued ASU 2016-18, "Restricted Cash." ASU 2016-18 requires entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. As a result, entities will no longer present transfers between cash and cash equivalents and restricted cash and restricted cash equivalents in the statement of cash flows. ASU 2016-18 will be applied retrospectively and is effective for fiscal years beginning after December 15, 2017, and interim periods within those years. We do not expect ASU 2016-18 to have a material impact to our financial statements.
In October 2016, the FASB issued ASU 2016-16, "Intra-Entity Transfers of Assets Other Than Inventory." ASU 2016-16 requires immediate recognition of income tax consequences of intercompany asset transfers, other than inventory transfers. Existing GAAP prohibits recognition of income tax consequences of intercompany asset transfers whereby the seller defers any net tax effect and the buyer is prohibited from recognizing a deferred tax asset on the difference between the newly created tax basis of the asset in its tax jurisdiction and its financial statement carrying amount as reported in the consolidated financial statements. ASU 2016-16 specifically excludes from its scope intercompany inventory transfers whereby the recognition of tax consequences will take place when the inventory is sold to third parties. ASU 2016-16 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. ASU 2016-16 should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. We are currently evaluating the effect ASU 2016-16 will have on our consolidated financial statements.
In August 2016, FASB issued ASU 2016-15, "Classification of Certain Cash Receipts and Cash Payments." ASU 2016-15 is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted. We are currently evaluating the effect ASU 2016-15 will have on our consolidated statements of cash flows.
In June 2016, the FASB issued ASU 2016-13, "Measurement of Credit Losses on Financial Instruments." ASU 2016-13 will replace the current incurred loss approach with an expected loss model for instruments measured at amortized cost and require entities to record allowances for available-for-sale debt securities rather than reduce the
carrying amount under the current other-than-temporary impairment model. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted for all entities for annual periods beginning after December 15, 2018, and interim periods therein. We are currently evaluating the effect ASU 2016-13 will have on our consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09, "Improvements to Employee Share-Based Payment Accounting." ASU 2016-09 will require all income tax effects of awards to be recognized in the income statement when the awards vest or are settled. It also will allow an employer to repurchase more of an employee’s shares than permitted today for tax withholding purposes without triggering liability accounting and to make a policy election to account for forfeitures as they occur. We adopted ASU 2016-09 prospectively as a change in accounting principal on January 1, 2017, and made a policy election to account for forfeitures as they occur. As a result of adopting ASU 2016-09 as of January 1, 2017, the cumulative effect of the change on Retained earnings decreased by $0.3 million, and increased Additional paid-in capital and Deferred tax assets by $0.4 million and $0.1 million, respectively, in the Condensed Consolidated Balance Sheet.
In March 2016, the FASB issued ASU 2016-07, "Simplifying the Transition to the Equity Method of Accounting," which eliminates the requirement to retrospectively apply the equity method in previous periods when an investor initially obtains significant influence over an investee. Under current guidance, an investor that does not consolidate an investment and initially accounts for it under a method other than the equity method is required to retrospectively apply the equity method in prior periods in which it held the investment when it subsequently obtained significant influence. We adopted ASU 2016-07 on January 1, 2017 on a prospective basis, which currently has not affected our condensed consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, "Leases," which will require, among other items, lease accounting to recognize most leases as assets and liabilities on the balance sheet. Qualitative and quantitative disclosures will be enhanced to better understand the amount, timing and uncertainty of cash flows arising from leases. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, with early adoption permitted. We do not plan to early adopt. ASU 2016-02 will be adopted on a modified retrospective basis, with elective reliefs, which requires application of ASU 2016-02 for all periods presented. We are currently gathering, documenting and analyzing lease agreements related to this ASU and anticipate material additions to the balance sheet for right-of-use assets, offset by the associated liabilities.
In January 2016, the FASB issued ASU 2016-01, "Recognition and Measurement of Financial Assets and Financial Liabilities." Amendments under ASU 2016-01, among other items, require that all equity investments in unconsolidated entities (other than those accounted for using the equity method of accounting) will generally be measured at fair value through earnings. There will no longer be an available-for-sale classification, for which changes in fair value are reported in other comprehensive income, for equity securities with readily determinable fair values. For equity investments without readily determinable fair values, the cost method is also eliminated. However, entities will be able to elect to record equity investments without readily determinable fair values at cost, less impairment, and plus or minus subsequent adjustments for observable price changes. Changes in the basis of these equity investments will be reported in current earnings. ASU 2016-01 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. For equity securities that would be affected by ASU 2016-01, see the available-for-sale investments table in Note 3 to the condensed consolidated financial statements. At the time of adoption, we cannot assure whether these same equity securities will be held or what other equity securities we may have.
In July 2015, the FASB issued ASU 2015-11, “Simplifying the Measurement of Inventory.” Under current guidance, an entity subsequently measures inventory at the lower of cost or market, with market defined as replacement cost, net realizable value (NRV), or NRV less a normal profit margin. An entity uses current replacement cost provided that it is not above NRV (i.e., the ceiling) or below NRV less an “approximately normal profit margin” (i.e., the floor). ASU 2015-11 eliminates this analysis and requires entities to measure most inventory “at the lower of cost and NRV.” We prospectively adopted ASU 2015-11 as a change in accounting
principle on January 1, 2017, which did not have a material impact on our condensed consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers,” which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 will replace most existing revenue recognition guidance in GAAP when it becomes effective. In August 2015, the FASB issued ASU 2015-14 to defer the effective date for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early adoption is permitted as of the original effective date in ASU 2014-09, which is annual reporting periods beginning after December 15, 2016, however, we will not early adopt. In December 2016, the FASB issued ASU 2016-20, "Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers" which affect narrow aspects of the guidance issued in ASU 2014-09. In May 2016, the FASB issued ASU 2016-12, "Narrow-Scope Improvements and Practical Expedients," which amends and clarifies certain aspects in ASU 2014-09 that include collectiblity, presentation of sales and other taxes collected from customers, noncash consideration, contract modifications and completed contracts at transition. In April 2016, the FASB issued ASU 2016-10, "Identifying Performance Obligations and Licensing," which amends the guidance in ASU 2014-09 on accounting for licenses of intellectual property and identifying performance obligations. In March 2016, the FASB issued ASU 2016-08, "Principal versus Agent Considerations (Reporting Revenue Gross versus Net)," which amends the principal versus agent guidance in ASU 2014-09. The standards are to be applied retrospectively and permit the use of either the retrospective or cumulative effect transition method. We will use the cumulative effect transition method once we adopt ASUs 2014-09, 2016-20, 2016-12, 2016-10 and 2016-08 on January 1, 2018. We have completed revenue recognition diagnostic surveys across all regions in our decentralized sales contracting process, which is based on local country commercial regulations and practices. We are in the process of assessing individual contracts to identify performance obligations under these ASU’s, as compared with the deliverables and separate units of accounting previously identified under current U.S. GAAP, to determine the effect that these ASU’s will have on our consolidated financial statements and related disclosures.
2.ACQUISITIONS
RainDance Technologies, Inc.
In February 2017, we acquired all the issued and outstanding stock of RainDance Technologies, Inc. (RainDance) for approximately $76.6 million including certain assumed net liabilities. Cash payments at closing were $72.8 million. In addition, we had a cash payment of $10.0 million for a one-time expense associated with the acquisition that was recorded in Cost of goods sold. The acquisition was included in our Life Science segment’s results of operations from the acquisition date and was accounted for as a business combination. The amount of acquisition-related costs was minimal as Bio-Rad primarily represented itself during the acquisition process. The goodwill related to this acquisition is not deductible for income tax purposes. Pro forma financial statements are not provided as the acquisition is immaterial to Bio-Rad taken as a whole for the periods presented.
The preliminary allocation of the payments were $10.0 million for the one-time expense, $35.0 million to purchased intangibles consisting primarily of a large patent and license portfolio, limited know how and customer relationships, $3.8 million to assumed net liabilities, and $36.2 million to goodwill. We recorded a deferred tax liability of $12.9 million related to the purchased intangibles and a deferred tax asset of $18.3 million related to the acquired net operating losses. The purchase price allocation is preliminary as additional time is required to complete the valuation of the intangibles.
RainDance's foundational intellectual property portfolio and product lines encompass a wide range of biological reactions in droplets, with potential applications in life science research and clinical research. These genomic tools provide ultra-sensitive detection of genetic variations in cancer as well as inherited and infectious diseases, enabling research in areas such as non-invasive liquid biopsy. We believe that RainDance's droplet-based solutions will extend our reach into next-generation sequencing applications and strengthen our position in the area of Droplet Digital™ PCR, offering customers with solutions for a wide range of nucleic acid detection applications.
Propel Labs, Inc.
In January 2016, we acquired a high performance analytical flow cytometer platform from Propel Labs (Propel) that will enable advanced and novice users to perform basic and multi-parameter cytometry for a wide range of applications and chemistries. This asset acquisition was accounted for as a business combination, as the new analytical flow cytometer platform 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 the 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 $32.8 million, which included $9.5 million paid in cash at the closing date and $23.3 million in contingent consideration potentially payable to Propel. The amount of contingent consideration was determined based on a probability-weighted income approach related to the achievement of sales milestones, and was recognized at its estimated fair value of $26.7 million as of June 30, 2017 (see Note 3, "Fair Value Measurements").
The fair values of the net assets acquired from Propel as of the acquisition date were determined to be $32.7 million of definite-lived intangible assets and $0.1 million of goodwill. The goodwill related to this acquisition will be deductible for income tax purposes. The acquired analytical flow cytometer platform fits well into Bio-Rad’s existing Life Science segment product offerings and may offer researchers greater access to this technology.
In addition, Bio-Rad contracted with Propel to provide development services concurrent with and included in the purchase agreement. Bio-Rad is receiving future manufacturing, engineering and marketing support from Propel on which payments will be made upon the successful completion of all contracted services. As a result, these services are not included in the total purchase consideration and a majority will be expensed in future periods.
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 June 30, 2017 are classified in the hierarchy as follows (in millions):
|
| | | | | | | | | | | | | | | |
| Level 1 | | Level 2 | | Level 3 | | Total |
Financial Assets Carried at Fair Value: | | | | | | | |
Cash equivalents: | | | | | | | |
Commercial paper | $ | — |
| | $ | 15.2 |
| | $ | — |
| | $ | 15.2 |
|
Foreign time deposits | 12.4 |
| | — |
| | — |
| | 12.4 |
|
Money market funds | 4.6 |
| | — |
| | — |
| | 4.6 |
|
Total cash equivalents (a) | 17.0 |
| | 15.2 |
| | — |
| | 32.2 |
|
Restricted investment: | 4.6 |
| | — |
| | — |
| | 4.6 |
|
Available-for-sale investments: | | | | | | | |
Corporate debt securities | — |
| | 201.7 |
| | — |
| | 201.7 |
|
U.S. government sponsored agencies | — |
| | 72.1 |
| | — |
| | 72.1 |
|
Foreign government obligations | — |
| | 3.0 |
| | — |
| | 3.0 |
|
Brokered certificates of deposit | — |
| | 3.6 |
| | — |
| | 3.6 |
|
Municipal obligations | — |
| | 13.8 |
| | — |
| | 13.8 |
|
Marketable equity securities | 980.1 |
| | — |
| | — |
| | 980.1 |
|
Asset-backed securities | — |
| | 58.1 |
| | — |
| | 58.1 |
|
Total available-for-sale investments (b) | 980.1 |
| | 352.3 |
| | — |
| | 1,332.4 |
|
Forward foreign exchange contracts (c) | — |
| | 0.4 |
| | — |
| | 0.4 |
|
Total financial assets carried at fair value | $ | 1,001.7 |
| | $ | 367.9 |
| | $ | — |
| | $ | 1,369.6 |
|
| | | | | | | |
Financial Liabilities Carried at Fair Value: | | | | | | | |
Forward foreign exchange contracts (d) | $ | — |
| | $ | 1.0 |
| | $ | — |
| | $ | 1.0 |
|
Contingent consideration (e) | — |
| | — |
| | 26.7 |
| | 26.7 |
|
Total financial liabilities carried at fair value | $ | — |
| | $ | 1.0 |
| | $ | 26.7 |
| | $ | 27.7 |
|
Financial assets and liabilities carried at fair value and measured on a recurring basis as of December 31, 2016 are classified in the hierarchy as follows (in millions):
|
| | | | | | | | | | | | | | | |
| Level 1 | | Level 2 | | Level 3 | | Total |
Financial Assets Carried at Fair Value: | | | | | | | |
Cash equivalents: | | | | | | | |
Commercial paper | $ | — |
| | $ | 14.1 |
| | $ | — |
| | $ | 14.1 |
|
Foreign time deposits | 11.8 |
| | — |
| | — |
| | 11.8 |
|
Domestic time deposits | — |
| | 20.0 |
| | — |
| | 20.0 |
|
U.S. government sponsored agencies | — |
| | 1.1 |
| | — |
| | 1.1 |
|
Money market funds | 5.9 |
| | — |
| | — |
| | 5.9 |
|
Total cash equivalents (a) | 17.7 |
| | 35.2 |
| | — |
| | 52.9 |
|
Restricted investment: | 4.6 |
| | — |
| | — |
| | 4.6 |
|
Available-for-sale investments: | | | | | | | |
Corporate debt securities | — |
| | 179.4 |
| | — |
| | 179.4 |
|
U.S. government sponsored agencies | — |
| | 82.5 |
| | — |
| | 82.5 |
|
Foreign government obligations | — |
| | 4.4 |
| | — |
| | 4.4 |
|
Brokered certificates of deposit | — |
| | 3.6 |
| | — |
| | 3.6 |
|
Municipal obligations | — |
| | 15.4 |
| | — |
| | 15.4 |
|
Marketable equity securities | 767.8 |
| | — |
| | — |
| | 767.8 |
|
Asset-backed securities | — |
| | 62.5 |
| | — |
| | 62.5 |
|
Total available-for-sale investments (b) | 767.8 |
| | 347.8 |
| | — |
| | 1,115.6 |
|
Forward foreign exchange contracts (c) | — |
| | 0.6 |
| | — |
| | 0.6 |
|
Total financial assets carried at fair value | $ | 790.1 |
| | $ | 383.6 |
| | $ | — |
| | $ | 1,173.7 |
|
| | | | | | | |
Financial Liabilities Carried at Fair Value: | | | | | | | |
Forward foreign exchange contracts (d) | $ | — |
| | $ | 1.3 |
| | $ | — |
| | $ | 1.3 |
|
Contingent consideration (e) | — |
| | — |
| | 38.5 |
| | 38.5 |
|
Total financial liabilities carried at fair value | $ | — |
| | $ | 1.3 |
| | $ | 38.5 |
| | $ | 39.8 |
|
|
| | | | | | | |
| June 30,
2017 | | December 31, 2016 |
Short-term investments | $ | 391.3 |
| | $ | 383.2 |
|
Other investments | 941.1 |
| | 732.4 |
|
Total | $ | 1,332.4 |
| | $ | 1,115.6 |
|
|
| | | | | | | |
| June 30, 2017 | | December 31, 2016 |
Other current liabilities | $ | 3.2 |
| | $ | 14.5 |
|
Other long-term liabilities | 23.5 |
| | 24.0 |
|
Total | $ | 26.7 |
| | $ | 38.5 |
|
In 2012, we recognized a contingent consideration liability for certain milestones of $44.6 million upon our acquisition of a cell sorting system from Propel. Since 2012, we have paid $32.0 million upon reaching the milestones and have reduced the valuation of the milestones by $12.6 million. The remaining liability of $3.1 million was paid in February 2017.
During the first quarter of 2016, we recognized a contingent consideration liability upon our acquisition of a high performance analytical flow cytometer platform from Propel. At the acquisition date, the amount of contingent consideration was determined based on a probability-weighted income approach related to the achievement of sales milestones, ranging from 39% to 20% for the calendar years 2017 through 2020. The sales milestones could potentially range from $0 to an unlimited amount through December 31, 2020. The contingent consideration was accrued at its estimated fair value of $26.7 million as of June 30, 2017.
The following table provides a reconciliation of the Level 3 cell sorting system and analytical flow cytometer platform contingent consideration liabilities measured at estimated fair value (in millions):
|
| | | |
January 1, 2017 | $ | 28.5 |
|
Cell sorting system: | |
Payment of sales milestone | (3.1 | ) |
| |
Analytical flow cytometer platform: | |
Increase in estimated fair value of contingent consideration included in Selling, general and administrative expense | 1.3 |
|
June 30, 2017 | $ | 26.7 |
|
The following table provides quantitative information about Level 3 inputs for fair value measurement of our analytical flow cytometer platform contingent consideration liability as of June 30, 2017. Significant increases or decreases in these inputs in isolation could result in a significantly lower or higher fair value measurement.
|
| | | | |
| | | |
| Valuation Technique | Unobservable Input | |
Analytical flow cytometer platform | Probability-weighted income approach | Sales milestones: | |
| | Discount rate | 10.5 | % |
| | Cost of debt | 4.3 | % |
| | | |
In 2014, we recognized a contingent consideration liability upon our acquisition of GnuBIO, Inc. The contingent consideration for the milestones was valued at $10.7 million at the acquisition date based on assumptions regarding the probability of achieving the milestones, with such amounts discounted to present value. The contingent
consideration was revalued to a fair value of $10.0 million as of December 31, 2016 and was reversed to selling, general and administrative expenses during the first quarter of 2017 due to reaching a favorable outcome with GnuBIO, Inc.
To estimate the fair value of Level 2 debt securities as of June 30, 2017 and December 31, 2016, our primary pricing provider uses S&P Capital IQ as the primary pricing source. Our 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 June 30, 2017 and December 31, 2016, 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.
Our pricing provider performs daily reasonableness testing of the S&P Capital IQ prices. Price changes of 5% or greater are investigated and resolved. In addition, we perform a quarterly testing of the S&P Capital IQ prices to custodian reported prices. Price differences outside a tolerable variance of approximately 1% are investigated and resolved.
Available-for-sale investments consist of the following (in millions):
|
| | | | | | | | | | | | | | | |
| June 30, 2017 |
| Amortized Cost | | Unrealized Gains | | Unrealized Losses | | Estimated Fair Value |
Short-term investments: | | | | | | | |
Corporate debt securities | $ | 201.6 |
| | $ | 0.4 |
| | $ | (0.3 | ) | | $ | 201.7 |
|
Brokered certificates of deposit | 3.6 |
| | — |
| | — |
| | 3.6 |
|
Municipal obligations | 13.8 |
| | — |
| | — |
| | 13.8 |
|
Asset-backed securities | 57.9 |
| | 0.1 |
| | (0.1 | ) | | 57.9 |
|
U.S. government sponsored agencies | 72.4 |
| | 0.1 |
| | (0.4 | ) | | 72.1 |
|
Foreign government obligations | 3.0 |
| | — |
| | — |
| | 3.0 |
|
Marketable equity securities | 32.5 |
| | 7.0 |
| | (0.3 | ) | | 39.2 |
|
| 384.8 |
| | 7.6 |
| | (1.1 | ) | | 391.3 |
|
Long-term investments: | | | | | | | |
Marketable equity securities | 54.5 |
| | 886.4 |
| | — |
| | 940.9 |
|
Asset-backed securities | 0.2 |
| | — |
| | — |
| | 0.2 |
|
| 54.7 |
| | 886.4 |
| | — |
| | 941.1 |
|
Total | $ | 439.5 |
| | $ | 894.0 |
| | $ | (1.1 | ) | | $ | 1,332.4 |
|
|
| | | | | | | | | | | | | | | |
| December 31, 2016 |
| Amortized Cost | | Unrealized Gains | | Unrealized Losses | | Estimated Fair Value |
Short-term investments: | | | | | | | |
Corporate debt securities | $ | 179.7 |
| | $ | 0.2 |
| | $ | (0.5 | ) | | $ | 179.4 |
|
Brokered certificates of deposit | 3.6 |
| | — |
| | — |
| | 3.6 |
|
Municipal obligations | 15.5 |
| | — |
| | (0.1 | ) | | 15.4 |
|
Asset-backed securities | 62.2 |
| | 0.1 |
| | (0.1 | ) | | 62.2 |
|
U.S. government sponsored agencies | 83.1 |
| | 0.1 |
| | (0.7 | ) | | 82.5 |
|
Foreign government obligations | 4.4 |
| | — |
| | — |
| | 4.4 |
|
Marketable equity securities | 32.4 |
| | 3.7 |
| | (0.4 | ) | | 35.7 |
|
| 380.9 |
| | 4.1 |
| | (1.8 | ) | | 383.2 |
|
Long-term investments: | | | | | | | |
Marketable equity securities | 54.5 |
| | 677.6 |
| | — |
| | 732.1 |
|
Asset-backed securities | 0.3 |
| | — |
| | — |
| | 0.3 |
|
| 54.8 |
| | 677.6 |
| | — |
| | 732.4 |
|
Total | $ | 435.7 |
| | $ | 681.7 |
| | $ | (1.8 | ) | | $ | 1,115.6 |
|
The unrealized gains of our long-term marketable equity securities are primarily due to our investment in Sartorius AG preferred shares.
The following is a summary of investments with gross unrealized losses and the associated fair value (in millions):
|
| | | | | | | |
| June 30,
2017 | | December 31, 2016 |
Fair value of investments in a loss position 12 months or more | $ | 8.1 |
| | |