BIO-RAD LABORATORIES, INC. This discussion should be read in conjunction with the information contained in both our consolidated financial statements for the year endedDecember 31, 2021 and the condensed consolidated financial statements for the three and nine months endedSeptember 30, 2022 . Overview. We are a multinational manufacturer and worldwide distributor of our own life science research and clinical diagnostics products. Our business is organized into two reportable segments, Life Science andClinical Diagnostics , with the mission to provide scientists with specialized tools needed for biological research and health care specialists with products needed for clinical diagnostics.
We sell more than 12,000 products and services to a diverse client base comprised of scientific research, healthcare, education and government customers worldwide. We do not disclose quantitative information about our different products and services as it is impractical to do so based primarily on the numerous products and services that we sell and the global markets that we serve.
We manufacture and supply our customers with a range of reagents, apparatus and equipment to separate complex chemical and biological materials and to identify, analyze and purify components. As our customers require standardization for their experiments and test results, much of our revenues are recurring in nature. We are impacted by the support of many governments for both research and healthcare. The current global economic outlook is still uncertain as the need to control government social spending by many governments limits opportunities for growth. Approximately 41% of our year-to-date 2022 consolidated net sales are derived fromthe United States and approximately 59% are derived from international locations, withEurope being our largest international region. The international sales are largely denominated in local currencies such as the Euro, Swiss Franc, Japanese Yen, Chinese Yuan and British Sterling. As a result, our consolidated net sales expressed in dollars benefit when theU.S. dollar weakens and suffer when the dollar strengthens. When theU.S. dollar strengthens, we benefit from lower cost of sales from our own international manufacturing sites, and from lower international operating expenses. We regularly discuss our changes in revenue and expense categories in terms of both changing foreign exchange rates and in terms of a currency neutral basis, if notable, to explain the impact currency has on our results.
Acquisition
OnAugust 3, 2022 (the "Acquisition Date"), we acquired all equity interests ofCuriosity Diagnostics sp.z o.o.("Curiosity") for a total consideration of$137.1 million , including the estimated fair value of contingent consideration. The contingent consideration of up to$70.0 million is payable upon achievement of certain technological development and sales-related milestones.Curiosity Diagnostics , a late-stage, pre-commercial platform company, is in the process of developing a sample-to-answer, rapid diagnostics PCR system for the molecular diagnostics market. The strategic rationale for the transaction was to facilitate our entry into the molecular disease testing market with a differentiated platform. We believe this acquisition will complement ourClinical Diagnostics product offerings. The acquisition was included in ourClinical Diagnostics segment's results of operations from the Acquisition Date. The amount of acquisition-related costs was not material. 35 --------------------------------------------------------------------------------
Senior Notes due 2027 and 2032
InMarch 2022 , pursuant to an indenture we issued$400.0 million in principal amount of Senior Notes dueMarch 2027 (the "2027 Notes") and$800.0 million in principal amount of Senior Notes dueMarch 2032 (the "2032 Notes" and, together with the 2027 Notes, the "Notes"). The issuance of the 2027 Notes yielded net cash proceeds of$395.7 million at an effective rate of 3.5346% and the sale of the 2032 Notes yielded net cash proceeds of$790.5 million at an effective rate of 3.8429%. The 2027 Notes and the 2032 Notes pay a fixed rate of interest of 3.3% and 3.7% per annum, respectively. Interest on the Notes is payable semi-annually in arrears onMarch 15 andSeptember 15 of each year until the principal is paid or made available for payment.
COVID-19 and Supply Chain Impact
The full impact of the COVID-19 pandemic and supply constraints continues to be inherently uncertain at the time of this report. The COVID-19 pandemic has impacted and, we expect to some extent, will continue to impact parts of our business, operations, financial condition and results of operations in a variety of ways. During the third quarter of 2022, we saw continued but moderating demand for products associated with COVID-19 testing and related research. In addition, supply chain constraints and lockdowns inChina have negatively impacted sales, particularly instrument placements. We continue to experience delays and shortages in the supply of components and raw materials. These shortages have caused a backlog of sales orders, some of which we consider to be significant, and some delays in certain new product development activities. They have also led to increases in inventory as we continue to receive available materials and source those in short supply. While we are putting significant effort into procuring required materials, we expect the backlog of sales orders to continue through the remainder of 2022 and some to continue into 2023. For more discussion relating to the impacts of the COVID-19 pandemic and supply chain constraints, please see "Item 1A. Risk Factors" to this Form 10-Q. Results of Operations The following table shows cost of goods sold, gross profit, components of operating expense, (gains) losses from change in fair market value of equity securities and loan receivable, and net income (loss) as a percentage of net sales: Three Months Ended Nine Months Ended September 30, September 30, 2022 2021 2022 2021 Net sales 100.0 % 100.0 % 100.0 % 100.0 % Cost of goods sold 45.1 41.4 43.4 43.4 Gross profit 54.9 58.6 56.6 56.6 Selling, general and administrative expense 31.0 28.9 29.8 29.9 Research and development expense 10.3 8.6 9.6 9.2
(Gains) losses from change in fair market value of equity securities and loan receivable
42.4 (651.7) 297.9 (323.3)
Net income (loss) (24.1) 525.8 (215.3) 265.8
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Critical Accounting Policies and Estimates
An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, if different estimates reasonably could have been used, or if changes in the estimate that are reasonably likely to occur could materially impact the financial statements. Management believes that there have been no significant changes during the three and nine months endedSeptember 30, 2022 to the items that we disclosed as our critical accounting policies and estimates in Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2021 . Other than the recent accounting pronouncement adoptions as discussed in Note 1 to the condensed consolidated financial statements, there have been no substantial changes in our significant accounting policies during the three and nine months endedSeptember 30, 2022 , compared with the significant accounting policies described in our Annual Report on Form 10-K for the year endedDecember 31, 2021 . Three Months EndedSeptember 30, 2022 Compared to Three Months EndedSeptember 30, 2021
Results of Operations -- Sales, Margins and Expenses
Percentage sales growth in currency neutral amounts are calculated by translating prior period sales in each local currency using the current period monthly average foreign exchange rates for that currency and comparing that to current period sales. Net sales (sales) for the third quarter of 2022 were$680.8 million compared to$747.0 million in the third quarter of 2021, a decrease of 8.9%. COVID-related sales were approximately$17.2 million in the third quarter of 2022 compared to approximately$57.1 million reported in the third quarter of 2021. Excluding the impact of foreign currency, third quarter 2022 sales decreased by approximately 4.1% compared to the same period in 2021. Currency neutral sales increased inEurope , but this was more than offset by decreased sales in theAmericas andAsia Pacific as a result of ongoing supply constraints. Sales in the third quarter of 2021 were elevated due to approximately$31.6 million of royalty revenue related to an intellectual property litigation settlement. Excluding COVID-related sales and the impact of royalty revenue related to an intellectual property litigation settlement in the third quarter of 2021, revenue increased 6.1% on a currency neutral basis from the third quarter of 2021. The Life Science segment sales for the third quarter of 2022 were$317.9 million , a decrease of 14.9% compared to the same period last year. On a currency neutral basis, sales decreased 11.0% compared to the third quarter in 2021. The currency neutral sales decline was primarily attributed to the$31.6 million royalty revenue related to an intellectual property litigation settlement in the third quarter of 2021, lower COVID-related sales, and the impact from ongoing supply constraints on instrument placements. The sales decreases were partially offset by increased sales of Process Media, Western Blotting, and Antibody products. Currency neutral sales decreased in bothAsia Pacific and theAmericas , partially offset by increased sales inEurope .The Clinical Diagnostics segment sales for the third quarter of 2022 were$361.9 million , a decrease of 2.8% compared to the same period last year. On a currency neutral basis, sales increased 3.0% compared to the third quarter in 2021. The currency neutral sales increase was primarily driven by Quality Controls, Blood Typing, and Infectious Disease products, despite supply chain constraints having an impact on instrument placements. Currency neutral sales increased in bothAsia Pacific and theAmericas , partially offset by a decrease inEurope . 37 -------------------------------------------------------------------------------- Consolidated gross margins were 54.9% for the third quarter of 2022 compared to 58.6% for the third quarter of 2021. Life Science segment gross margins for the third quarter of 2022 decreased by approximately 5.6 percentage points, primarily due to higher logistics costs and product mix due to lower COVID related sales, partially offset by the strong US dollar. The third quarter of 2021 Life Science margins benefited from the$31.6 million royalty revenue related to an intellectual property litigation settlement.Clinical Diagnostics segment gross margins for the third quarter of 2022 decreased by approximately 1.1 percentage points from the same period last year. The decrease in gross margins was primarily driven by higher logistics costs and production costs, partially offset by the strong US dollar. Selling, general and administrative expenses (SG&A) decreased to$211.0 million or 31.0% of sales for the third quarter of 2022 compared to$216.2 million or 28.9% of sales for the third quarter of 2021. The decrease to SG&A was primarily driven by lower employee related expenses, partially offset by higher discretionary expense, including marketing and travel. The SG&A expenses in the third quarter of 2022 also benefitted from the impact of a stronger dollar. Research and development (R&D) expenses increased to$69.9 million or 10.3% of sales in the third quarter of 2022 compared to$64.5 million or 8.6% of sales in the third quarter of 2021. Life Science segment R&D expense increased in the third quarter of 2022 compared to the prior year period, primarily from increased personnel costs from theDropworks, Inc. acquisition in October of 2021, and increased investment to complete strategic projects in key investment areas.Clinical Diagnostics segment R&D expense increased in the third quarter of 2022 from the prior year period driven by continued investment in new strategic development projects.
Results of Operations - Non-operating
Interest expense for the third quarter of 2022 and 2021 was$11.7 million and$0.4 million , respectively, an increase of$11.3 million compared to the prior year period. The increase was primarily due to the$1.2 billion Senior Notes (see Note 7, "Long-term Debt" in the condensed consolidated financial statements). Foreign currency exchange (gains) and losses consist primarily of foreign currency transaction gains and losses on intercompany net receivables and payables and the change in fair value of our forward foreign exchange contracts used to manage our foreign currency exchange risk. Foreign currency exchange losses, net were$4.4 million for the third quarter of 2022 compared to foreign currency exchange losses, net of$2.2 million for the third quarter of 2021. Gains and losses are primarily due to the estimating process inherent in the timing of product shipments and intercompany debt payments, market volatility, and the change in the fair value of our foreign exchange contracts. (Gains) losses from change in fair market value of equity securities and loan receivable was a loss of$289.0 million and a gain of$4.87 billion for the third quarter of 2022 and 2021, respectively. The change in the fair market value primarily resulted from the recognition of holding losses of$267.8 million in the third quarter of 2022 compared to holding gains of$4.87 billion in the third quarter of 2021 on our position in Sartorius AG. In addition, in the third quarter of 2022, there was a loss of$19.4 million in the change in fair market value of the Loan we entered into with SHB during the fourth quarter of 2021. Other (income) expense, net for the third quarter of 2022 was income, net of$3.1 million compared to expense, net of$0.6 million for the third quarter of 2021. The difference of income, net of$3.6 million was primarily attributable to an increase in our investment income as a result of cash invested from the$1.2 billion Senior Notes issued inMarch 2022 . Our effective income tax rate was 21.5% and 21.8% for the third quarter of 2022 and 2021, respectively. The effective tax rate reported in the third quarter of 2022 was primarily affected by an unrealized loss in equity securities and the tax rate reported in the third quarter of 2021 was primarily affected by an unrealized gain in equity securities. The difference in the rate is primarily driven by geographical mix of earnings. 38 -------------------------------------------------------------------------------- Our income tax returns are routinely audited byU.S. federal, state and foreign tax authorities. We are currently under examination by many of these tax authorities. There are differing interpretations of tax laws and regulations, and as a result, significant disputes may arise with these tax authorities involving issues of the timing and amount of deductions and allocations of income among various tax jurisdictions. We record liabilities for unrecognized tax benefits related to uncertain tax positions. We do not believe the resolution of our uncertain tax positions will have a material adverse effect on our condensed consolidated financial statements, although an adverse resolution of one or more of these uncertain tax positions in any period may have a material impact on the results of operations for that period. As ofSeptember 30, 2022 , based on the expected outcome of certain examinations or as a result of the expiration of statutes of limitation for certain jurisdictions, we believe that within the next twelve months it is reasonably possible that our previously unrecognized tax benefits could decrease by approximately$3.5 million . Nine Months EndedSeptember 30, 2022 Compared to Nine Months EndedSeptember 30, 2021
Results of Operations -- Sales, Margins and Expenses
Percentage sales growth in currency neutral amounts are calculated by translating prior period sales in each local currency using the current period monthly average foreign exchange rates for that currency and comparing that to current period sales.
Net sales (sales) for the first nine months of 2022 were
COVID-related sales were approximately$95.7 million in the first nine months of 2022 compared to approximately$220.1 million reported in the first nine months of 2021. On a currency neutral basis, the first nine months of 2022 sales decreased by approximately 1.5% compared to the same period in 2021. Currency neutral sales decreased in bothAsia Pacific andEurope , partially offset by increased sales in theAmericas . Sales in the first nine months of 2021 were elevated due to the approximately$31.6 million of royalty revenue related to an intellectual property settlement. Excluding COVID-related sales and the impact of royalty revenue related to an intellectual property litigation settlement in the third quarter of 2021, sales increased 6.1% on a currency neutral basis from the first nine months of 2021. The Life Science segment sales for the first nine months of 2022 were$987.5 million , a decrease of 8.1% compared to the same period last year. On a currency neutral basis, sales decreased 4.5% compared to the first nine months of 2021. The currency neutral sales decline was primarily attributed to lower qPCR product sales due to the decline in COVID-19 related demand and the impact of supply chain constraints on instrument placements, partially offset by strong growth of Process Media, Western Blotting, and Antibody products. Sales in 2021 also benefited from the$31.6 million royalty revenue related to an intellectual property litigation settlement. Currency neutral sales declined inEurope andAsia Pacific , while theAmericas was essentially flat.The Clinical Diagnostics segment sales for the first nine months of 2022 were$1.08 billion , a decrease of 2.7% compared to the same period last year. On a currency neutral basis, sales increased 1.6% compared to the first nine months of 2021. The currency neutral sales increase was primarily driven by growth in Quality Controls and Blood Typing products, especially inEurope and theAmericas , despite supply chain constraints having an impact on instrument placements. The increase in currency neutral sales was partially offset by the impact of COVID lockdowns inChina during the second and third quarters of 2022. 39 -------------------------------------------------------------------------------- Consolidated gross margins were 56.6% for the first nine months of 2022 compared to 56.6% for the first nine months of 2021. Life Science segment gross margins for the first nine months of 2022 decreased by approximately 2.1 percentage points from the same period last year. The decrease in gross margins was primarily driven by higher logistics costs and product mix. The 2021 Life Science margins also benefited from the$31.6 million royalty revenue related to an intellectual property litigation settlement.Clinical Diagnostics segment gross margins for the first nine months of 2022 increased by approximately 2.4 percentage points compared to the same period last year. The increase in gross margins was primarily driven by a one-time restructuring expense related to the 2021 restructuring plan that was announced and recorded in the first quarter of 2021 and the strong US dollar, partially offset by higher logistics cost and product mix. Selling, general and administrative expenses (SG&A) decreased to$617.4 million or 29.8% of sales for the first nine months of 2022 compared to$655.4 million or 29.9% of sales for the first nine months of 2021. The decrease in SG&A was primarily driven by a one-time restructuring expense related to the 2021 restructuring plan that was announced and recorded in the first quarter of 2021, as well as by lower employee related expenses. Research and development (R&D) expenses decreased to$199.5 million or 9.6% of sales in the first nine months of 2022 compared to$201.8 million or 9.2% of sales in the first nine months of 2021. Life Science segment R&D expense increased in the first nine months of 2022 compared to the prior year period, primarily from increased personnel costs from theDropworks, Inc. acquisition in October of 2021, and increased investment to complete strategic projects in key investment areas.Clinical Diagnostics segment R&D expense decreased in the first nine months of 2022 from the prior year period, primarily due to a one-time restructuring expense related to the 2021 restructuring plan that was announced and recorded in the first quarter of 2021, partially offset by continued investment in new strategic development projects.
Results of Operations - Non-operating
Interest expense for the first nine months of 2022 and 2021 was$26.4 million and$1.2 million , respectively, an increase of$25.2 million compared to the prior year period. The increase was primarily due to the sale inMarch 2022 of the$1.2 billion Senior Notes. Foreign currency exchange (gains) and losses consist primarily of foreign currency transaction gains and losses on intercompany net receivables and payables and the change in fair value of our forward foreign exchange contracts used to manage our foreign currency exchange risk. Foreign currency exchange losses, net were$3.1 million for the first nine months of 2022 compared to losses, net of$0.5 million for the first nine months of 2021. Gains and losses are primarily due to the estimating process inherent in the timing of product shipments and intercompany debt payments, market volatility, and the change in the fair value of our foreign exchange contracts. (Gains) losses from change in fair market value of equity securities and loan receivable was a loss of$6.17 billion and a gain of$7.08 billion for the first nine months of 2022 and 2021, respectively. The change in the fair market value primarily resulted from the recognition of holding losses of$6.0 billion in the first nine months of 2022 compared to holding gains of$7.07 billion in the first nine months of 2021 on our position in Sartorius AG. In addition, there was a loss of$149.0 million in the change in fair market value of the Loan entered into with SHB during the fourth quarter of 2021. Other income, net for the first nine months of 2022 was$42.4 million compared to$16.7 million for the first nine months of 2021. The difference of income of$25.6 million was primarily due to$12.6 million increase in the Sartorius AG dividends declared in the first quarter of 2022 compared to the first quarter of 2021 and an increase in our investment income primarily attributable to an increase in our investments as a result of cash invested from the$1.2 billion Senior Notes issued inMarch 2022 . Our effective income tax rate was 23.1% and 22.2% for the first nine months of 2022 and 2021, respectively. The effective tax rate reported in the first nine months of 2022 was primarily affected by an unrealized loss in equity securities and the tax rate reported in the first nine months of 2021 was primarily affected by an unrealized gain in equity securities. The difference in the rate is primarily driven by geographical mix of earnings. 40 -------------------------------------------------------------------------------- OnAugust 16, 2022 ,President Biden signed into law the Inflation Reduction Act of 2022, which includes an Alternative Minimum Tax based on the Adjusted Financial Statement Income of Applicable Corporations. Based on our initial evaluation, we do not believe the Inflation Reduction Act will have a material impact on our income tax provision and cash taxes. The company continues to monitor the changes in tax laws and regulations to evaluate their potential impact on our business. Liquidity and Capital Resources Bio-Rad operates and conducts business globally, primarily through subsidiary companies established in the markets in which we trade. Goods are manufactured in a small number of locations, and are then shipped to local distribution facilities around the world. Our product mix is diversified, and certain products compete largely on product efficacy, while others compete on price. Gross margins are generally sufficient to exceed normal operating costs, and funding for research and development of new products, as well as routine outflows for capital expenditures, interest and taxes. In addition to the annual positive cash flow from operating activities, additional liquidity is readily available via the sale of short-term investments and access to our$200.0 million unsecured revolving credit facility (Credit Agreement, as amended) that we entered into inApril 2019 , and to a lesser extent international lines of credit. Borrowings under the Credit Agreement, as amended, are available on a revolving basis and can be used to make permitted acquisitions, for working capital and for other general corporate purposes. We had no outstanding borrowings under the 2019 Credit Agreement, as amended, as ofSeptember 30, 2022 , however,$0.2 million was utilized for domestic standby letters of credit that reduced our borrowing availability. InMarch 2022 , we sold$400 million aggregate principal amount of 3.3% Senior Notes due 2027, and$800 million aggregate principal amount of 3.7% Senior Notes due 2032. The sales yielded net cash proceeds after deducting the underwriting discount and estimated offering expenses payable by it, of$1.186 billion . Interest on the Notes is payable semiannually in arrears onMarch 15 andSeptember 15 of each year until the principal is paid or made available for payment. Management believes that this availability, together with cash flow from operations, will be adequate to meet our current objectives for operations, research and development, capital additions for manufacturing and distribution, plant and equipment, information technology systems and acquisitions of reasonable proportion to our existing total available capital. AtSeptember 30, 2022 , we had available$1.85 billion in cash, cash equivalents and short-term investments, of which approximately 13% was held in our foreign subsidiaries. The amount of funds held inthe United States can fluctuate due to the timing of receipts and payments in the ordinary course of business and due to other reasons, such as acquisitions and borrowings. As part of our ongoing liquidity assessments, we regularly monitor the mix of domestic and foreign cash flows (both inflows and outflows).
It is generally our intention to repatriate certain foreign earnings to the extent that such repatriations are not restricted by local laws or accounting rules, and there are no substantial incremental costs.
Cash Flows from Operations
Net cash provided by operations was$104.0 million compared to cash provided by operations of$498.6 million for the nine months endedSeptember 30, 2022 and 2021, respectively. The decrease in operating cash flows was primarily due to lower cash received from customers, higher cash paid to suppliers and to employees, higher income taxes paid, and interest paid inSeptember 2022 on the Notes in the first nine months of 2022. These decreases were partially offset by higher proceeds from foreign exchange contracts and higher dividends in 2022 compared to 2021. 41 --------------------------------------------------------------------------------
Cash Flows from Investing Activities
Our investing activities have consisted primarily of cash used for purchases of marketable securities and investments, and an acquisition.
Net cash used in investing activities was$1,138.3 million and$230.0 million for the nine months endedSeptember 30, 2022 and 2021, respectively. The increase was primarily attributable to the purchase of marketable securities and investments utilizing the cash proceeds from the sale of the senior notes as described below. The increase also included net cash outflows of$100.8 million for the acquisition of Curiosity. Cash Flows from Financing Activities
Our financing activities have consisted primarily of cash from the issuance of senior notes.
Net cash provided by financing activities was$1,060.2 million compared to cash used for financing activities of$60.1 million for the nine months endedSeptember 30, 2022 , and 2021, respectively. This increase was primarily attributable to the net cash proceeds from the Notes. The increase was partially offset by a higher repurchase of our common stock by$75.0 million in 2022 than in 2021 as described below.
Treasury Shares
During the third quarter of 2022, 111,144 shares of Class A treasury stock with an aggregate total cost of$48.1 million were reissued to fulfill grants to employees under our restricted stock program and our Employee Stock Purchase Program. Upon reissuing the Class A treasury stock, a loss of$0.3 million was incurred as they were reissued at a lower price than their average cost, which reduced Retained earnings, while$49.5 million reduced Additional paid-in-capital. During the second quarter of 2022, 11,609 shares of Class A treasury stock with an aggregate total cost of$4.95 million were reissued to fulfill grants to employees under our restricted stock program and our Employee Stock Purchase Program. Upon reissuing the Class A treasury stock, a loss of$13 thousand was incurred as they were reissued at a lower price than their average cost, which reduced Retained earnings, while$0.7 million reduced Additional paid-in-capital. During the second quarter of 2022, we repurchased 255,284 shares of Class A common stock for$125.0 million under our Share Repurchase Program. We designated these repurchased shares as treasury stock. InJuly 2022 , the Board of Directors authorized increasing the amount available under the Share Repurchase Program to allow the Company to repurchase up to an additional$200.0 million of stock. As ofSeptember 30, 2022 ,$298.1 million remained available for repurchases under the Share Repurchase Program. During the second quarter of 2021, 1,164 shares of Class A treasury stock with an aggregate total cost of$0.4 million were reissued to fulfill grants to employees under our restricted stock program. Upon reissuing the Class A treasury stock, a loss of$65 thousand was incurred as they were reissued at a lower price than their average cost, which reduced Retained earnings, while$0.4 million reduced Additional paid-in capital. During the third quarter of 2021, 112,623 shares of Class A treasury stock with an aggregate total cost of$42.8 million were reissued to fulfill grants to employees under our restricted stock program. Upon reissuing the Class A treasury stock, a loss of$6.7 million was incurred as they were reissued at a lower price than their average cost, which reduced Retained earnings, while$36.2 million reduced Additional paid-in capital. During the first quarter of 2021, we repurchased 89,506 shares of Class A common stock for$50.0 million under our Share Repurchase Program. We designated these repurchased shares as treasury stock.
See Note 1 to the condensed consolidated financial statements for recent accounting pronouncements adopted.
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