This discussion should be read in conjunction with the information contained in both our consolidated financial statements for the year endedDecember 31, 2020 and the condensed consolidated financial statements for the three and six months endedJune 30, 2021 . 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 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. 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 withdrawal of theUnited Kingdom from theEuropean Union . Approximately 38% of our year-to-date 2021 consolidated net sales are derived fromthe United States and approximately 62% 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 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 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. We saw continued but moderate demand for products associated with COVID-19 testing and related research. For more discussions relating to the impacts on the COVID-19 pandemic, please see "Item 1A. Risk Factors" to this Form 10-Q.
Restructuring
InFebruary 2021 , we announced our strategy-driven restructuring plan in furtherance of our ongoing program to improve operating performance. The restructuring plan primarily impacts our operations inEurope and includes the elimination of certain positions, the consolidation of certain functions, and the relocation of certain manufacturing operations fromEurope toAsia . The restructuring plan is being implemented in phases and is expected to be substantially complete by the end of 2022. The amounts reflected in Cost of goods sold, Selling, general and administrative expense and Research and development expense were$1.1 million ,$(6.9) million and$(1.9) million and$25.0 million ,$27.8 million and$15.1 million in the condensed consolidated statements of income for the three and six months endedJune 30, 2021 , respectively. As ofJune 30, 2021 , we have a restructuring accrual of$61.6 million . The amounts are estimates based on the information currently available to management. 31 --------------------------------------------------------------------------------
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 Six Months Ended June 30, June 30, 2021 2020 2021 2020 Net sales 100.0 % 100.0 % 100.0 % 100.0 % Cost of goods sold 43.9 45.4 44.4 44.9 Gross profit 56.1 54.6 55.6 55.1 Selling, general and administrative expense 29.8 35.3 30.4 34.5 Research and development expense 8.9 9.7 9.5 9.1 Change in fair market value of equity securities 144.0 220.4 153.2 181.4 Net income 127.7 180.0 131.1 149.1
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 six months endedJune 30, 2021 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, 2020 . 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 six months endedJune 30, 2021 , compared with the significant accounting policies described in our Annual Report on Form 10-K for the year endedDecember 31, 2020 . Three Months EndedJune 30, 2021 Compared to Three Months EndedJune 30, 2020
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 second quarter of 2021 were$715.9 million compared to$536.9 million in the second quarter of 2020, an increase of 33.4%. Excluding the impact of foreign currency, second quarter 2021 sales increased by approximately 27.5% compared to the same period in 2020. Currency neutral sales increased in all regions. The Life Science segment sales for the second quarter of 2021 were$334.2 million , an increase of 32.6% compared to the same period last year. On a currency neutral basis, sales increased 27.1% compared to the second quarter in 2020. Currency neutral sales were up in nearly all product lines but were primarily driven by growth in our qPCR, Western Blotting, Droplet Digital PCR, and Process Media products. All regions experienced strong currency neutral sales growth compared to the second quarter of 2020. 32 --------------------------------------------------------------------------------
On
a currency neutral basis, sales increased 28.0% compared to the second quarter in 2020. The currency neutral sales were up in nearly all product lines across all regions, primarily driven by higher utilization in lab operations as businesses recover from the COVID-19 pandemic. Consolidated gross margins were 56.1% for the second quarter of 2021 compared to 54.6% for the second quarter of 2020. Life Science segment gross margins for the second quarter of 2021 increased by approximately 1.5 percentage points from the same period last year. The increase in the Life Science segment gross margin was primarily related to favorable product mix and lower customs duty expense as a result of a one-time customs duty adjustment in 2020 that related to products shipped in prior years.Clinical Diagnostics segment gross margins for the second quarter of 2021 increased by approximately 1.6 percentage points from the same period last year. The increase inClinical Diagnostics segment gross margins was mainly related to favorable product costs. Selling, general and administrative expenses (SG&A) increased to$213.4 million or 29.8% of sales for the second quarter of 2021 compared to$189.3 million or 35.3% of sales for the second quarter of 2020. The increase to SG&A was primarily related to higher employee related expenses, travel, and legal expenses. Research and development (R&D) expense increased to$63.4 million or 8.9% of sales in the second quarter of 2021 compared to$52.0 million or 9.7% of sales in the second quarter of 2020. Life Science segment R&D expense increased in the second quarter of 2021 compared to the prior year period, primarily from increases in headcount from the Celsee acquisition, employee related expense, and investment in strategic research initiatives.Clinical Diagnostics segment R&D expense increased in the second quarter of 2021 from the prior year period, primarily due to higher employee related expense.
Results of Operations - Non-operating
Interest expense for the second quarter of 2021 and 2020 was$0.4 million and$5.7 million , respectively. The reduction in interest expense was primarily due to the repayment of the$425.0 million principal amount of Senior Notes inDecember 2020 . 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 gains were$1.8 million for the second quarter of 2021 compared to net losses of$0.8 million for the second quarter of 2020. 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$1.03 billion and$1.18 billion for the second quarter of 2021 and 2020, respectively, primarily resulting from the recognition of lower holding gains in the second quarter of 2021 compared to the second quarter of 2020 on our position inSartorius AG . Other income, net for the second quarter of 2021 was$0.1 million of losses, net compared to$17.2 million of income, net for the second quarter of 2020. The decrease of$17.3 million was primarily due to a gain of$11.7 million on the sale of our Informatics division during the second quarter of 2020 and the timing of the Sartorius dividend. The dividend for fiscal year 2020 amounting to$8.9 million was declared in the second quarter of 2020, while the dividend for fiscal year 2021 was declared in the first quarter of 2021. Our effective income tax rate was 21.0% and 22.4% for the second quarter of 2021 and 2020, respectively. The decrease in our effective income tax rate primarily related to the release of reserves due to the lapse of certain statutes of limitations. 33 -------------------------------------------------------------------------------- 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 ofJune 30, 2021 , 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$18.8 million . Six Months EndedJune 30, 2021 Compared to Six Months EndedJune 30, 2020
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 half of 2021 were$1.44 billion compared to$1.11 billion in the first half of 2020, an increase of 30.1%. Excluding the impact of foreign currency, the first half of 2021 sales increased by approximately 25.4% compared to the same period in 2020. Currency neutral sales increased in all regions, led byAsia Pacific andEurope . The Life Science segment sales for the first half of 2021 were$700.7 million , an increase of 46.2% compared to the same period last year. On a currency neutral basis, sales increased 41.1% compared to the first half of 2020. Currency neutral sales were up in nearly all product lines but were primarily driven by growth in our qPCR, Western Blotting, Droplet Digital PCR, and Process Media products. A significant portion of the Life Science segment growth came from products used to support COVID-19 research and testing. All regions experienced double digit currency neutral sales growth compared to the first half of 2020.
On
a currency neutral basis, sales increased 14.1% compared to the first half of 2020. The currency neutral sales increase was primarily driven by the quality controls business, especially inAsia Pacific , as the overall diagnostics market continues to recover from the COVID-19 pandemic. Currency neutral sales also benefited from the higher utilization in lab operations as businesses recover from the COVID-19 pandemic. Consolidated gross margins were 55.6% for the first half of 2021 compared to 55.1% for the first half of 2020. Life Science segment gross margins for the first half of 2021 increased from the prior year period by approximately 3.8 percentage points. The increase in the Life Science segment gross margin was primarily related to favorable product mix related to higher sales of Gene Expression and Process Media products and lower production costs.Clinical Diagnostics segment gross margins for the first half of 2021 decreased from the prior year period by approximately 3.0 percentage points. The decrease in theClinical Diagnostics segment gross margins was primarily related to the costs associated with the restructuring plan announced inFebruary 2021 . 34 -------------------------------------------------------------------------------- Selling, general and administrative expenses (SG&A) increased to$439.3 million or 30.4% of sales for the first half of 2021 compared to$383.0 million or 34.5% of sales for the first half of 2020. The increase to SG&A was primarily related to the restructuring plan announced inFebruary 2021 , as well as increased employee related expenses and legal expenses. Research and development (R&D) expense increased to$137.3 million or 9.5% of sales in the first half of 2021 compared to$101.3 million or 9.1% of sales in the first half of 2020. Life Science segment R&D expense increased in the first half of 2021 compared to the prior year period, primarily from increases in headcount from the Celsee acquisition, employee related expense, and investment in strategic research initiatives.Clinical Diagnostics segment R&D expense increased in the first half of 2021 from the prior year period, primarily related to the restructuring plan announced inFebruary 2021 and higher employee related expenses.
Results of Operations - Non-operating
Interest expense for the first half of 2021 and 2020 was$0.8 million and$11.4 million , respectively, a decrease of$10.6 million primarily due to the repayment of the$425.0 million principal amount of Senior Notes inDecember 2020 . 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 gains were$1.7 million for the first half of 2021 compared to net losses of$1.7 million for the first half of 2020. 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 were gains of$2.21 billion and$2.01 billion for the first half of 2021 and 2020, respectively, primarily resulting from the recognition of higher holding gains in the first half of 2021 compared to the first half of 2020 on our position inSartorius AG .
Other income, net for the first half of 2021 was
Our effective income tax rate was 22.9% and 23.0% for the first half of 2021 and 2020, respectively. The decrease in our effective income tax rate primarily related to the release of reserves due to the lapse of certain statutes of limitations.
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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 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 ofJune 30, 2021 , 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.
Because the Company might be deemed an investment company under the Investment
Company Act based on the market value of our position in
AtJune 30, 2021 , we had available$1.17 billion in cash, cash equivalents and short-term investments, of which approximately 31% 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. 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 impacts of the COVID-19 pandemic, 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$268.2 million compared to$154.9 million for the six months endedJune 30, 2021 and 2020, respectively. The increase in operating cash flows was primarily due to higher cash received from customers as a result of the growth in sales, higherSartorius AG dividends in 2021 compared to no cash dividends in 2020 as it was received in the third quarter of 2020, higher investment income received and lower interest paid as a result of the repayment of the$425.0 million principal amount of Senior Notes inDecember 2020 . These increases were partially offset by higher cash paid to suppliers primarily for materials to support the increase in sales, cash paid for employee related expenses such as salaries, bonuses and benefits, and to a lesser extent for employee restructuring programs. The increases were also partially offset by higher income taxes paid. 36 --------------------------------------------------------------------------------
Cash Flows from Investing Activities
Our investing activities have consisted primarily of capital expenditures and activity related to the purchases, sales and maturities of marketable securities.
Net cash used in investing activities was$148.6 million and$101.0 million for the six months endedJune 30, 2021 and 2020, respectively. The increase was primarily attributable to an increase of$129.1 million in net cash outflows from maturities, sales and purchases of marketable securities and investments, and to a lesser extent proceeds of$12.2 million from a divestiture of a division that was received in 2020 compared to none in 2021. The increased cash outflows were partially offset by cash outflows in 2020 for the acquisition of all equity interests ofCelsee, Inc. for total consideration of$99.5 million in 2020 compared to no acquisitions in 2021. Cash Flows from Financing Activities Our financing activities have consisted primarily of cash used for purchases of treasury stock, payments for contingent consideration, and cash proceeds from the issuance of common stock for share-based compensation. Net cash used in financing activities was$44.5 million and$101.6 million for the six months endedJune 30, 2021 , and 2020, respectively. This decrease was primarily attributable to a$50.0 million decrease in cash used to purchase treasury stock.
Treasury Shares
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 compared to the repurchase of 291,941 shares of our Class A common stock for$100.0 million in 2020. No shares were purchased for the remainder of 2020. We designated these repurchased shares as treasury stock. As ofJune 30, 2021 ,$223.1 million remained 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.
Recent Accounting Pronouncements Adopted
See Note 1 to the condensed consolidated financial statements for recent accounting pronouncements adopted and to be adopted.
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