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, 2019 and the condensed consolidated financial statements for the three and nine months endedSeptember 30, 2020 . 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 clinical diagnostics.
We sell more than 9,000 products and services to a diverse client base comprised of scientific research, healthcare, education and government customers worldwide. We do not disclose quantitative information about our different products and services as it is impractical to do so based primarily on the numerous products and services that we sell and the global markets that we serve.
We manufacture and supply our customers with a range of reagents, apparatus and
equipment to separate complex chemical and biological materials and to identify,
analyze and purify components. Because our customers require standardization
for their experiments and test results, much of our revenues are recurring.
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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. Adding to this uncertainty is the upcoming withdrawal of the United
Kingdom from the European Union . Approximately 39% of our year-to-date 2020
consolidated net sales are derived from the United States and approximately 61%
are derived from international locations, with Europe 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 the U.S. dollar weakens and suffer when the dollar strengthens. When the
U.S. dollar strengthens, we benefit from lower cost of sales from our own
international manufacturing sites as well as non-U.S. suppliers, and from lower
international operating expenses. 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.
COVID-19
The full impact of the COVID-19 pandemic is uncertain. The COVID-19 pandemic has
negatively impacted and, we expect, will continue to disrupt our business
operations, impacting our financial conditions and results of operations in a
variety of ways. Governments in the countries in which we operate are passing
legislation intended to alleviate the economic burdens of the COVID-19 pandemic.
We are continuing to evaluate the impact of these governmental incentives to our
customers, operations and financial condition. For more discussions on COVID-19,
please see Item 1A. Risk Factors to this Form 10-Q.
Cyberattack
As we previously disclosed onDecember 9, 2019 on a Form 8-K filed with theSecurities and Exchange Commission (SEC), we detected a cyberattack on our network on the evening ofDecember 5, 2019 PST and immediately took affected systems offline as part of our comprehensive response to contain the activity ("December 2019 Cyberattack"). The virus was targeted at Windows-based systems and did not attack our global ERP system (SAP) and other non-Windows-based systems. Critical systems were back online within a few days of the incident. As part of our in-depth investigation into this incident, we engaged outside cyber security experts to assist us with investigation and remediation efforts. To date, we have found no evidence of unauthorized transfer or misuse of personal data, and there is no indication that customer systems were affected. We have insurance coverage for costs resulting from cyberattacks. We have not recorded any estimated proceeds resulting from an insurance claim regarding this incident as we have not yet settled with the insurance provider on the nature of the costs that are eligible and the extent of coverage. We did not pay a ransom in connection with this incident.
Acquisition
OnApril 1, 2020 , we acquired all equity interests ofCelsee, Inc. ("Celsee") for total consideration of$99.3 million , including the estimated fair value of contingent consideration. The contingent consideration of up to$60.0 million is payable in cash, upon the achievement of certain net revenues for the period beginning onJanuary 1, 2021 and ending onDecember 31, 2022 .
Celsee is a manufacturer of instruments and consumables for the isolation, detection, and analysis of single cells. We believe this acquisition will complement our Life Science product offerings. The acquisition was included in our Life Science segment's results of operations from the acquisition date.
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--------------------------------------------------------------------------------Informatics Divestiture
InApril 2020 , we received$12.2 million for the sale of our Informatics division, which focused on providing and developing comprehensive, high-quality spectral databases and associated software. The division was part of our Other Operations segment. In connection with this sale, we recorded an$11.7 million gain in Other income, net, in the condensed consolidated statements of income for the nine months endedSeptember 30, 2020 .
Restructuring
InJune 2020 , we announced a restructuring plan to consolidate certain finance and administrative activities inEurope andthe United States . The restructuring plan is expected to be completed byMarch 2021 . The liability of$3.1 million as ofSeptember 30, 2020 was recorded in Accrued payroll and employee benefits in the condensed consolidated balance sheets. The amounts reflected in Selling, general and administrative expense were$(0.2) million and$3.6 million for the three and nine months endedSeptember 30, 2020 , respectively.
Results of Operations
The following table shows cost of goods sold, gross profit, components of operating expense, change in fair market value of equity securities, and net income as a percentage of net sales:
Three Months Ended Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of goods sold 43.3 45.2 44.3 45.1
Gross profit 56.7 54.8 55.7 54.9
Selling, general and administrative expense 30.6 36.0 33.1 36.2
Research and development expense 9.2 8.6 9.2 8.6
Change in fair market value of equity securities 244.2 (69.7) 204.6 82.1
Net income 203.1 (46.2) 169.0 71.4
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 nine months endedSeptember 30, 2020 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, 2019 .
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 nine
months ended
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Three Months Ended September 30, 2020 Compared to
Three Months Ended September 30, 2019 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 2020 were$647.3 million compared to$560.6 million in the third quarter of 2019, an increase of 15.5%. Excluding the impact of foreign currency, third quarter 2020 sales increased by approximately 14.9% compared to the same period in 2019. Currency neutral sales increased in all regions. The Life Science segment sales for the third quarter of 2020 were$324.0 million , an increase of 50.2% compared to the same period last year. On a currency neutral basis, sales increased 48.8% compared to the third quarter in 2019. The currency neutral sales increase was primarily driven by growth in our PCR, Droplet Digital PCR, and Process Media product lines. A significant portion of the growth in the Life Science segment came from products used to support COVID-19 testing and research. All regions experienced double digit currency neutral sales growth compared to the third quarter of 2019.The Clinical Diagnostics segment sales for the third quarter of 2020 were$322.2 million , a decrease of 5.7% compared to the same period last year. On a currency neutral basis, sales decreased 5.9% compared to the third quarter in 2019. The currency neutral sales decrease was primarily driven by lower demand as a result of COVID-19. The currency neutral sales decrease was across all regions in most product lines. Consolidated gross margins were 56.7% for the third quarter of 2020 compared to 54.8% for the third quarter of 2019. Life Science segment gross margins for the third quarter of 2020 increased from the prior year period by approximately 5.3 percentage points. The increase was primarily driven by favorable product mix related to higher sales of PCR products, lower production costs, and higher absorption due to increased volumes.Clinical Diagnostics segment gross margins for the third quarter of 2020 decreased by approximately 1.9 percentage points from the same period last year. The decrease was primarily driven by lower sales, higher freight costs, and a customs duty charge relating to products shipped primarily in prior years. Selling, general and administrative expenses (SG&A) decreased to$198.2 million or 30.6% of sales for the third quarter of 2020 compared to$201.6 million or 36.0% of sales for the third quarter of 2019. The decrease in SG&A expenses were primarily driven by lower travel, marketing and communication expenses mostly due to the impact of COVID-19. These expenses were partially offset by increases mostly due to employee-related expenses and third-party professional service costs. Research and development (R&D) expense increased to$59.5 million or 9.2% of sales in the third quarter of 2020 compared to$47.9 million or 8.6% of sales in the third quarter of 2019. The increase in R&D expense in the Life Science segment was primarily driven by increased headcount from the recent Celsee acquisition and our continued investment in key areas to accelerate new product development.Clinical Diagnostics segment R&D decreased in the third quarter of 2020 from the prior year period, primarily due to lower spending as a result of COVID-19 restrictions and lower headcount related to restructuring programs. 40 --------------------------------------------------------------------------------
Results of Operations - Non-operating
Interest expense for the third quarter of 2020 and 2019 was
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 net losses were$0.8 million for the third quarter of 2020 compared to$0.9 million for the third quarter of 2019. 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. Change in fair market value of equity securities was a gain of$1.58 billion and a loss of$390.6 million for the third quarter of 2020 and 2019, respectively, primarily resulting from the recognition of holding gains in the third quarter of 2020 compared to holding losses in third quarter of 2019 on our position inSartorius AG .
Other income, net for the third quarter of 2020 was
Our effective income tax rate was 21.9% and 22.8% for the three months ended
Nine Months Ended September 30, 2020 Compared to
Nine Months Ended September 30, 2019 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. Sales for the first nine months of 2020 were$1.76 billion compared to$1.69 billion in the first nine months of 2019, an increase of 4.1%. Excluding the impact of foreign currency, for the first nine months of 2020 sales increased by approximately 5.0% compared to the same period in 2019. Currency neutral sales were led by growth inAsia andEurope . The Life Science segment sales for the first nine months of 2020 were$803.2 million , an increase of 24.7% compared to the same period last year. On a currency neutral basis, sales increased 25.1% compared to the first nine months of 2019. The currency neutral sales increase was primarily driven by growth in our PCR, Droplet Digital PCR, and Process Media product lines. Currency neutral sales increases occurred inEurope ,Asia , andLatin America . Sales for the first nine months of 2020 benefited from the carryover related to theDecember 2019 Cyberattack, primarily inAsia , and from product lines used for COVID-19, partially offset by lower sales inNorth America due to the lab closures resulting from the COVID-19 pandemic.The Clinical Diagnostics segment sales for the first nine months of 2020 were$945.6 million , a decrease of 8.5% compared to the same period last year. On a currency neutral basis, sales decreased 7.3% compared to the first nine months of 2019. The currency neutral sales decrease was across all regions in most product lines. Sales for the first nine months of 2020 benefited from the carryover related to theDecember 2019 Cyberattack. Sales in all regions were impacted negatively due to the impact of COVID-19 on our customer's operations. 41 -------------------------------------------------------------------------------- Consolidated gross margins were 55.7% for the first nine months of 2020 compared to 54.9% for the first nine months of 2019. Life Science segment gross margins for the first nine months of 2020 increased from the prior year period by approximately 1.4 percentage points primarily due to higher sales, favorable product mix and lower production costs, partially offset by$7.4 million cost of sales benefit in the first quarter of 2019 from an escrow release related to an acquisition from 2011, and a customs duty charge relating to products shipped primarily in prior years.Clinical Diagnostics segment gross margins for the first nine months of 2020 decreased by approximately 0.5 percentage points from the same period last year, driven primarily by lower sales, higher freight, excess and obsolete inventory costs and a customs duty charge relating to products shipped primarily in prior years, partially offset by lower field activity as a result of COVID-19. SG&A expenses decreased to$581.1 million or 33.1% of sales for the first nine months of 2020 compared to$610.5 million or 36.2% of sales for the first nine months of 2019. The decrease in SG&A was primarily driven by lower travel, marketing and communications expenses mostly due to the impact of COVID-19. These expenses were partially offset by increases to employee-related expenses, facilities and third-party professional service costs. R&D expense increased to$160.8 million or 9.2% of sales for the first nine months of 2020 compared to$145.6 million or 8.6% of sales for the first nine months of 2019. The increase in R&D expense in the Life Science segment was primarily driven by increased headcount from the recent Celsee acquisition and our continued investment in key areas to accelerate new product development.Clinical Diagnostics segment R&D decreased for the first nine months of 2020 from the prior year period primarily due to lower spending as a result of COVID-19 restrictions and lower headcount related to restructuring programs.
Results of Operations - Non-operating
Interest expense for the first nine months of 2020 and 2019 was
Foreign currency exchange net losses were$2.5 million for the first nine months of 2020 compared to$3.4 million for the first nine months of 2019. 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. Change in fair market value of equity securities was a gain of$3.59 billion and$1.38 billion for the first nine months of 2020 and 2019, respectively, primarily resulting from the recognition of holding gains on our position inSartorius AG . Other (income) expense, net for the first nine months of 2020 was$21.5 million of income compared to$27.0 million of income for the first nine months of 2019. The decrease of$5.5 million was primarily due to lower investment income of$15.5 million and lowerSartorius AG dividend income of$6.8 million , partially offset by the gain on the sale of the Informatics division of$11.7 million in 2020.
Our effective income tax rate was 22.5% and 22.8% for the nine months ended
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--------------------------------------------------------------------------------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) that we entered into inApril 2019 , and to a lesser extent international lines of credit. Borrowings under the 2019 Credit Agreement 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 ofSeptember 30, 2020 , however,$0.2 million was utilized for domestic standby letters of credit that reduced our borrowing availability. 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. We have outstanding$425.0 million principal amount of Senior Notes that are due inDecember 2020 (4.875% Notes). We intend to repay the 4.875% Notes and believe that we have adequate resources to make the payment on the due date. AtSeptember 30, 2020 , we had available$1.15 billion in cash, cash equivalents and short-term investments, of which approximately 25% was held in our foreign subsidiaries. We believe that our holdings of cash, cash equivalents and short-term investments in theU.S. and in our foreign subsidiaries are sufficient to meet both the current and long-term needs of our global operations and repay our 4.875% Notes. 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. 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.
Demand for our products and services could change more dramatically in the short-term than in previous years due to the outbreak of COVID-19 related constraints, as well as due to funding, reimbursement constraints and support levels from government, universities, hospitals and private industry, including diagnostic laboratories. The need for certain sovereign nations with large annual deficits to curtail spending, international trade disputes and increased regulation could lead to slower growth of, or even a decline in, our business. Sovereign nations either delaying payment for goods and services or renegotiating their debts could impact our liquidity.
Cash Flows from Operations
Net cash provided by operations was$290.6 million compared to$298.1 million for the nine months endedSeptember 30, 2020 and 2019, respectively. The decrease in operating cash flows was primarily due to higher cash paid to suppliers and employees resulting primarily from supplies needed for COVID-19 products and to a lesser extent for employee restructuring programs. The decrease also consisted of lower investment income and, higher income taxes paid. These decreases were partially offset by higher cash received from customers due to the growth in sales. 43 --------------------------------------------------------------------------------
Cash Flows from Investing Activities
Our investing activities have consisted primarily of cash used for acquisitions, capital expenditures and activity related to the purchases, sales and maturities of marketable securities. For the nine months endedSeptember 30, 2020 , net cash used in investing activities was$10.1 million , compared to net cash used in investing activities of$147.7 million for the same period in 2019. This decrease was primarily attributable to a$136.4 million increase in net proceeds from maturities, sales and purchases of marketable securities and a$17.3 million decrease in capital expenditures, partially offset by a$20.8 million increase in payments for acquisitions. Cash Flows from Financing Activities Our financing activities have consisted primarily of cash used for purchases of treasury stock, taxes paid on the vesting of restricted stock units and proceeds from the issuance of common stock for share-based compensation.
For the nine months ended
Treasury Shares
During the second and third quarters of 2020, 116,935 shares of Class A treasury stock with an aggregate total cost of$38.3 million were reissued to fulfill grants to employees under our restricted stock program. Upon reissuing the Class A treasury stock, a loss of$9.0 million was incurred as they were reissued at a lower price than their average cost, which reduced Retained earnings, while$29.3 million reduced Additional paid-in capital. During the third quarter of 2019, 117,833 shares of Class A treasury stock with an aggregate total cost of$33.2 million were reissued to fulfill grants to employees under our restricted stock program. Upon reissuing the Class A treasury stock, a loss of$8.4 million was incurred as they were reissued at a lower price than their average cost, which reduced Retained earnings, while$24.9 million reduced Additional paid-in capital.
The re-issuance of the treasury stock in 2020 and 2019 did not require cash payments or receipts and therefore did not affect liquidity.
During the first quarter of 2020, we repurchased 291,941 shares of Class A common stock for$100.0 million under our repurchase program compared to the repurchase of 66,143 shares of our common stock for$20.0 million in 2019. No shares were purchased during the second and third quarters of 2020. We designated these repurchased shares as treasury stock. During the first quarter of 2019, 19,755 shares of Class A treasury stock with an aggregate total cost of$5.4 million were reissued to fulfill our Employee Stock Purchase Plan purchases. A loss of$1.6 million was incurred upon reissuing the Class A treasury stock as they were reissued at a lower price than their average cost, which reduced Retained earnings and resulted in net proceeds of$3.8 million . InJuly 2020 , the Board of Directors authorized increasing the Share Repurchase Program to allow the Company to repurchase up to an additional$200.0 million of stock. As ofSeptember 30, 2020 ,$273.1 million remained under the Share Repurchase Program.
Recent Accounting Pronouncements Adopted and to be Adopted
See Note 1 to the condensed consolidated financial statements for recent accounting pronouncements adopted and to be adopted.
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