# BIO-RAD LABORATORIES, INC. (BIO) FY 2021 MD&A

Verbatim Item 7 Management's Discussion and Analysis from BIO-RAD LABORATORIES, INC.'s 10-K for fiscal year 2021.

SEC filing source: https://www.sec.gov/Archives/edgar/data/12208/000001220822000011/bio-20211231.htm
Accession: 0000012208-22-000011
Filing date: 2022-02-11
Report date: 2021-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/BIO/
All MD&A years: /company/BIO/mda/
Next year: /company/BIO/mda/fy2022/ (FY 2022)

ITEM 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This discussion should be read in conjunction with the information contained in our consolidated financial statements and the accompanying notes which are an integral part of the statements.

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 and Clinical 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 customer base comprised of scientific research, healthcare, education and government organizations 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 39% of our 2021 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 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 fluctuation 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. During 2021, we saw continued but moderating demand for products associated with COVID-19 testing and related research. The COVID-19 pandemic has created delays and shortages in the supply of components and raw materials. Shortages of raw materials have caused backorders, some of which we consider to be significant, and some delays in certain new product development activities, and we expect backorders and delays to continue in 2022. For more discussion relating to the impacts of the COVID-19 pandemic, please see "Item 1A, Risk Factors" to this Annual Report.

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Acquisition

On October 15, 2021 (the "Acquisition Date"), we acquired all equity interests of Dropworks, Inc. ("Dropworks") for a total consideration of $125.5 million.

Dropworks is a development stage company focused on developing a digital PCR product. The strategic rationale for the transaction was to address additional opportunities in the PCR market. 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.

Restructuring

In February 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 in Europe and includes the elimination of certain positions, the consolidation of certain functions, and the relocation of certain manufacturing operations from Europe to Asia. 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 $25.0 million, $26.1 million and $13.3 million, respectively, in the consolidated statements of income for the year ended December 31, 2021. As of December 31, 2021, we have a restructuring accrual of $47.1 million. The amounts are estimates based on the information currently available to management.

Loan

In November 2021, we extended a collateralized loan to Sartorius-Herbst Beteiligungen II GmbH ("SHB"), a private limited company incorporated under the laws of Germany, with a principal amount of €400 million due at the latest on January 31, 2029, subject to certain events which could trigger payment prior to maturity (the “Loan”). The Loan proceeds will be used by SHB to partially finance the acquisition of interests under the Sartorius family trust (“Trust”) from a beneficiary of the Trust. The Loan is collateralized by the pledge of certain of the Trust interests, which upon termination of the Trust in mid-2028 represent the right to receive Sartorius ordinary shares. Interest on the loan is payable annually in arrears at 1.5% per annum, and the entire principal amount is due at maturity. In addition to contractual interest, we are entitled to certain value appreciation rights associated with the acquired Trust interests that are due upon repayment of the Loan.

Critical Accounting Policies and Estimates

The accompanying discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles (GAAP).  The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and contingencies as of the date of the financial statements and reported amounts of revenues and expenses during the reporting periods.  We evaluate our estimates on an on-going basis.  We base our estimates on historical experience and on other 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. However, future events may cause us to change our assumptions and estimates, which may require adjustment. Actual results could differ from these estimates. We have determined that for the periods reported in this Annual Report on Form 10-K the following accounting policies and estimates are critical in understanding our financial condition and results of operations.

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Accounting for Income Taxes

We operate in multiple jurisdictions and our profits are taxed pursuant to the tax laws of these jurisdictions. Our effective income tax rate may be affected by the changes in or interpretations of tax laws and tax agreements in any given jurisdiction, utilization of net operating loss and tax credit carryforwards, changes in geographical mix of income and expense, and changes in our assessment of matters such as the ability to realize deferred tax assets. As a result of these considerations, we must estimate income taxes in each of the jurisdictions in which we operate. This process involves estimating current tax exposure together with assessing temporary differences resulting from the different treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in the consolidated balance sheet.

We assess the likelihood that our deferred tax assets will be recovered from future taxable income, considering all available evidence such as historical levels of income, expectations and risks associated with estimates of future taxable income and ongoing prudent and feasible tax strategies. When we determine that it is not more likely than not that we will realize all or part of our deferred tax assets, an adjustment is charged to earnings in the period when such determination is made. Likewise, if we later determine that it is more likely than not that all or a part of our deferred tax assets would be realized, the previously provided valuation allowance would be reversed.

We make certain estimates and judgments about the application of tax laws, the expected resolution of uncertain tax positions and other matters surrounding the recognition and measurement of uncertain tax benefits. In the event that uncertain tax positions are resolved for amounts different than our estimates, or the related statutes of limitations expire without the assessment of additional income taxes, we will be required to adjust the amounts of the related assets and liabilities in the period in which such events occur. Such adjustments may have a material impact on our income tax provision and our results of operations.

Business Acquisitions

Accounting for business acquisitions requires us to make significant estimates and assumptions, especially at the acquisition date with respect to tangible and intangible assets acquired and liabilities assumed and pre-acquisition contingencies. In a business combination, we allocate the purchase price to the acquired business’ identifiable assets and liabilities at their acquisition date fair values. The excess of the purchase price over the amount allocated to the identifiable assets and liabilities, if any, is recorded as goodwill.

The assets acquired and liabilities assumed in our business combinations consist of acquired working capital and finite-lived and indefinite-lived intangible assets. The carrying value of acquired working capital approximates its fair value, given the short-term nature of these assets and liabilities. We estimate the fair value of finite-lived and indefinite-lived intangible assets acquired using a discounted cash flow approach, which includes an analysis of the future cash flows expected to be generated by such assets and the risk associated with achieving such cash flows. The key assumptions used in the discounted cash flow model include the discount rate that is applied to the discretely forecasted future cash flows to calculate the present value of those cash flows and the estimate of future cash flows attributable to the acquired intangible assets, which include revenue, operating expenses and taxes. Our estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, we may record adjustments to the fair value of assets acquired and liabilities assumed, with the corresponding offset to goodwill.

Goodwill and Intangible Assets

Goodwill represents the excess of (a) the aggregate of the fair value of consideration transferred in a business combination over (b) the fair value of assets acquired, net of liabilities assumed. Goodwill is not amortized, but is subject to annual impairment tests as described in the section "Impairment of Goodwill".

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We acquired intangible assets in connection with certain of our business acquisitions. These assets were recorded at their estimated fair values at the acquisition date and are amortized over their respective estimated useful lives using a method of amortization that reflects the pattern in which the economic benefits of the intangible assets are used. Estimated useful lives are determined based on our historical use of similar assets and the expectation of future realization of cash flows attributable to the intangible assets. Changes in circumstances, such as technological advances or changes to our business model, could result in the actual useful lives differing from our current estimates. In those cases where we determine that the useful life of an intangible asset should be shortened, we amortize the net book value in excess of the estimated salvage value over its revised remaining useful life. We did not revise our previously assigned useful life estimates attributed to any of our intangible assets during the years ended December 31, 2021, 2020 and 2019.

Impairment of Goodwill

We conduct a goodwill impairment analysis annually in the fourth quarter or more frequently if indicators of impairment exist or if a decision is made to sell or exit a business. We test goodwill at the reporting unit level. Significant judgments are involved in determining if an indicator of impairment has occurred. Such indicators may include deterioration in general economic conditions, negative developments in equity and credit markets, adverse changes in the markets in which an entity operates, increases in input costs that have a negative effect on earnings and cash flows, a trend of negative or declining cash flows, a decline in actual or planned revenue or earnings compared with actual and projected results of relevant prior periods, or other relevant entity-specific events such as changes in management, key personnel, strategy or customers, contemplation of bankruptcy, or litigation. The fair value that could be realized in an actual transaction may differ from that used to evaluate the impairment of goodwill.

We first may assess qualitative factors to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the quantitative goodwill impairment test included in U.S. GAAP. To the extent our assessment identifies adverse conditions, or if we elect to bypass the qualitative assessment, goodwill is tested at the reporting unit level using a quantitative impairment test. There were no impairments for the years ended December 31, 2021 and 2020.

Impairment of Long-Lived Assets

We review long-lived assets, such as property and equipment and finite-lived intangible assets, for impairment whenever events indicate that the carrying amounts might not be recoverable. Typical indicators that an asset may be impaired include, but are not limited to:

•a significant adverse change in the extent or manner in which a long-lived asset is being used or in its physical condition;

•a current-period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of a long-lived asset; or

•a current expectation that, more likely than not, a long-lived asset will be sold or otherwise disposed of significantly before the end of its previously estimated useful life.

Recoverability of property, plant and equipment, and other finite-lived intangible asset is measured by comparing the projected undiscounted net cash flows associated with those assets to their carrying values. If an asset is considered impaired, it is written down to its fair value, which is determined based on the asset's projected discounted cash flows or appraised value, depending on the nature of the asset. For purposes of recognition of impairment for assets held for use, we group assets and liabilities at the lowest level for which cash flows are separately identifiable. There were no triggering events to cause us to record an impairment charge for the years ended December 31, 2021, 2020 and 2019.

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Revenue Recognition

We recognize revenue from operations through the sale of products, services, license of intellectual property and rental of instruments. Revenue from contracts with customers is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. We enter into contracts that can include various combinations of products and services, which are generally accounted for as distinct performance obligations. Revenue is recognized net of any taxes collected from customers (sales tax, value added tax, etc.), which are subsequently remitted to government authorities.

Our contracts from customers often include promises to transfer multiple products and services to a customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment, and may or may not impact the timing of revenue recognition. Revenue associated with equipment that requires factory installation is not recognized until installation is complete and customer acceptance, if required, has occurred. Certain equipment requires installation due to the fact that the instruments are being operated in a clinical/laboratory environment, and the installation services could result in modification of the equipment in order to ensure that the instruments are working according to customer specifications, which are subject to validation tests upon completion of the installation. In these arrangements, which require factory installation, the delivery of the equipment and the installation are separate performance obligations. We will recognize the transaction price allocated to the equipment only upon customer acceptance, as the transfer of control in relation to the equipment has occurred at that point as the customer has the ability to direct the use of and obtain substantially all of the remaining benefits from the asset. The transaction price allocated to the installation services is also recognized upon customer acceptance because without the completion of the installation services and related customer acceptance the customer cannot receive any of the benefits of the service.

At the time revenue is recognized, a provision is recorded for estimated product returns as this right is considered variable consideration. Accordingly, when product revenues are recognized, the transaction price is reduced by the estimated amount of product returns.

Service revenues on extended warranty contracts are recognized ratably over the life of the service agreement as a stand-ready performance obligation. For arrangements that include a combination of products and services, the transaction price is allocated to each performance obligation based on stand-alone selling prices. The method used to determine the stand-alone selling prices for product and service revenues is based on the observable prices when the product or services have been sold separately.

We recognize revenues for a functional license of intellectual property at a point in time when the control of the license and technology transfers to the customer. For license agreements that include sales or usage-based royalty payments to us, we recognize revenue at the later of (i) when the related sale of the product occurs, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied, or partially satisfied.

The primary purpose of our invoicing terms is to provide customers with simple and predictable methods of purchasing our products and services, not to either provide or receive financing to or from our customers. We record contract liabilities when cash payments are received or due in advance of our performance.

We do not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less. Our payment terms vary by the type and location of our customer, and the products and services offered. The term between invoicing and when payment is due is not significant.

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Reagent rental agreements are primarily a diagnostic industry sales method that provides use of an instrument and consumables (reagents) to a customer on a per test basis. These agreements may also include maintenance of the instruments placed at customer locations as well as initial training. We initially determine if a reagent rental arrangement contains a lease at contract commencement. Where we have determined that such an arrangement contains a lease, we next must ascertain its lease classification for purposes of applying appropriate accounting treatment as an operating, sales-type or direct financing lease. For purposes of determining the lease term used in performing the lease classification test, we include the noncancellable period of the lease together with those periods covered by the option to extend the lease if the customer is reasonably certain to exercise that option, the periods covered by an option to terminate the lease if the customer is reasonably certain not to exercise that option, and the periods covered by the option to extend (or not to terminate) the lease in which exercise of the option is controlled by the Company. The assessment of the lease term for reagent rental agreements, including the impact from any associated contractual termination penalties, are subject to an estimation process. While most of our reagent rental arrangements contain either the option for a lessee to extend and/or cancel, the period in which the contract is enforceable is a very short period and therefore the lease term has been limited to the noncancellable period. Generally, these arrangements do not contain an option for the lessee to purchase the underlying asset.

Valuation of Inventories

We value inventory at the lower of the actual cost to purchase and/or manufacture the inventory, or the current estimated net realizable value of the inventory.  We review inventory quantities on hand and reduce the cost basis of excess and obsolete inventory based primarily on an estimated forecast of product demand, production requirements and the quality and efficacy of raw materials.  This review is done at the end of each fiscal quarter.  In addition, our industry is characterized by technological change, frequent new product development and product obsolescence that could result in an increase in the amount of obsolete inventory quantities on hand.  Our estimates of future product demand may prove to be inaccurate, and if too high, we may have overstated the carrying value of our inventory. In the future, if inventory is determined to be overvalued, we would be required to write down the value of inventory to market and recognize such costs in our cost of goods sold at the time of such determination. Therefore, although we make efforts to ensure the accuracy of our forecasts of future product demand and perform procedures to safeguard overall inventory quality, any significant unanticipated changes in demand, technological developments, regulations, storage conditions, or other economic or environmental factors affecting biological materials, could have a significant impact on the value of our inventory and reported results of operations.

Fair Value Measurements

U.S. GAAP establishes three levels of inputs that may be used to measure fair value. Each level of input has different levels of subjectivity and difficulty involved in determining fair value. Valuation of Level 1 and 2 instruments generally do not require significant management judgment and the estimation is not difficult. Level 3 instruments include unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. The determination of fair value for Level 3 instruments requires the most management judgment and subjectivity.

We elected the fair value option under ASC 825, Financial Instruments for accounting of the Loan to Sartorius-Herbst Beteiligungen II GmbH. The Loan includes certain value appreciation rights that are due upon repayment of the Loan. The fair value of the Loan and value appreciation right is estimated under the income approach using a discounted cash flow, and option pricing model, respectively, which results in a fair value measurement categorized in Level 3. The significant assumptions used to estimate fair value of the Loan include an estimate of the discount rate and cash flows of the Loan and the significant assumptions used to estimate the fair value of the value appreciation right include volatility, the risk-free interest rate, expected life (in years) and expected dividend. The inputs are subject to estimation uncertainty and actual amounts realized may materially differ. An increase in the expected volatility may result in a significantly higher fair value, whereas a decrease in expected life may result in a significantly lower fair value. All subsequent changes in fair value of the Loan and value appreciation right, including accrued interest are recognized in change in fair value of equity and debt securities in our consolidated statements of income.

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Results of Operations - Sales, Gross Margins and Expenses - Incorporating by Reference the Results of Operations - Sales, Gross Margins and Expenses from our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.

The following shows cost of goods sold, gross profit, expense items and net income as a percentage of net sales:

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Net sales

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 year ended December 31, 2021 were $2.92 billion, compared to $2.55 billion for the year ended December 31, 2020, an increase of 14.8%. Excluding the impact of foreign currency, for the year ended December 31, 2021 sales increased by approximately 12.7% compared to the year ended December 31, 2020. Currency neutral sales increased in all regions, led by growth in Asia Pacific and Europe. Excluding the impact of COVID related sales, currency neutral sales increased by 17% compared to the year ended December 31, 2020.

The Life Science segment sales for the year ended December 31, 2021 were $1.40 billion, an increase of 13.7% compared to the year ended December 31, 2020.  On a currency neutral basis, sales increased 12.0% compared to the year ended December 31, 2020. Currency neutral sales were up in nearly all product lines but were primarily driven by growth in our Western Blotting, 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 year ended December 31, 2020.

The Clinical Diagnostics segment sales for the year ended December 31, 2021 were $1.52 billion, an increase of 16.1% compared to the year ended December 31, 2020. On a currency neutral basis, sales increased 13.6% compared to the year ended December 31, 2020. Currency neutral sales increased across all product lines and regions as the overall diagnostics market continues to recover from the COVID-19 pandemic, including an increase in utilization in lab operations.

Gross margin

Consolidated gross margins were 56.1% for the year ended December 31, 2021 compared to 56.5% for the year ended December 31, 2020. Life Science segment gross margins for the year ended December 31, 2021 increased by approximately 0.6 percentage points compared to the year ended December 31, 2020, primarily related to increased sales volume, favorable product mix related to higher sales of Digital PCR and Process Media products, and lower production costs. Clinical Diagnostics segment gross margins for the year ended December 31, 2021 decreased by approximately 1.1 percentage points compared to the year ended December 31, 2020. The decrease in the Clinical Diagnostics segment gross margins for the year ended December 31, 2021 was primarily related to the costs associated with the restructuring plan announced in February 2021, partially offset by increased sales for the year ended December 31, 2021.

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Selling, general and administrative expense

Consolidated selling, general and administrative expenses (SG&A) increased to $879.6 million or 30.1% of sales for the year ended December 31, 2021 compared to $800.3 million or 31.4% of sales for the year ended December 31, 2020.  The increase to SG&A was primarily related to the restructuring plan announced in February 2021, as well as increased employee related expenses.

Research and development expense

Research and development (R&D) expense increased to $271.7 million or 9.3% of sales for the year ended December 31, 2021 compared to $226.6 million or 8.9% of sales for the year ended December 31, 2020.  R&D expense increased for the year ended December 31, 2021 compared to the year ended December 31, 2020, in both the Life Science and Clinical Diagnostics segment. The increase was primarily from increases in investment in strategic projects and research initiatives, costs related to the restructuring plan announced in February 2021, and higher employee related expenses.

Results of Operations – Non-operating

Interest expense

Interest expense for the years ended December 31, 2021 and 2020 was $1.6 million and $21.9 million, respectively, a decrease of $20.3 million primarily due to the repayment of the $425.0 million principal amount of Senior Notes in December 2020.

Foreign currency exchange gains and losses

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 for the years ended December 31, 2021 and 2020 were $2.8 million and $1.8 million, respectively.  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 and debt securities

Change in fair market value of equity and debt securities were gains of $4.93 billion for the year ended December 31, 2021 compared to $4.50 billion for the year ended December 31, 2020, primarily resulting from the recognition of holding gains on our position in Sartorius AG of $4.92 billion in 2021 and $4.48 billion in 2020, partially offset by a decrease in fair value of a loan to Sartorius-Herbst Beteiligungen II GmbH of $10.8 million.

Other income, net

Other income, net includes investment and dividend income, interest income on our cash and cash equivalents, short-term investments and long-term marketable securities.  Other income, net for the year ended December 31, 2021 increased to $26.8 million compared to $24.5 million for the year ended December 31, 2020. Other income, net increased primarily due to a $10.1 million increase in the Sartorius AG dividends declared in 2021, and an increase in investment and other income of $3.9 million, partially offset by a gain of $11.7 million on the sale of our Informatics division in 2020.

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Effective tax rate

Our effective tax rates were 21.9% and 22.4% for the years ended December 31, 2021 and 2020, respectively. The effective tax rates for the years ended December 31, 2021 and 2020 were driven by the unrealized gain in equity securities that is taxed at approximately 22% as well as the geographic mix of earnings and the taxation of our foreign earnings. Our effective tax rate may be impacted in the future, either favorably or unfavorably, by many factors including, but not limited to, changes in the geographic mix of earnings, changes to statutory tax rates, changes in tax laws or regulations, tax audits and settlements, and generation of tax credits.

Our income tax returns are routinely audited by U.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 do not believe any currently pending uncertain tax positions will have a material adverse effect on our 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.

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 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 of December 31, 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 $20.8 million. Substantially all such amounts will impact our effective income tax rate.

Comparison of the Year Ended December 31, 2020 to the Year Ended December 31, 2019

Refer to Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations located in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, filed on February 16, 2021, for the discussion of the comparison of the fiscal year ended December 31, 2020 to the fiscal year ended December 31, 2019, the earliest of the three fiscal years presented in the Consolidated Statements of Operations.

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 in April 2019 and amended in November 2021 (see Note 5, "Notes Payable and Long-Term Debt," to the consolidated financial statements), 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 of December 31, 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.

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At December 31, 2021, we had available $869.9 million in cash, cash equivalents and short-term investments, of which approximately 23% was held in our foreign subsidiaries. The amount of funds held in the 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 $656.5 million and $575.3 million for the years ended December 31, 2021 and 2020, respectively.  The net increase between the year ended December 31, 2021 and the year ended December 31, 2020 of $81.2 million was primarily due to higher cash received from customers as a result of the growth in sales, higher Sartorius AG dividends in 2021 compared to 2020, lower interest paid as a result of the repayment of the $425.0 million principal amount of Senior Notes in December 2020, proceeds from forward foreign exchange contracts in 2021 compared to payments for forward foreign exchange contracts in 2020, and higher investment income received in 2021 than in 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.

Cash flows from operations during the first quarter have historically had larger payments for royalties, fourth quarter sales commissions and annual employee bonuses, and we expect this pattern to recur in the first quarter of 2022.

Cash Flows from Investing Activities

Our investing activities consisted primarily of cash used for extending a collateralized loan, activity related to the purchases, sales and maturities of marketable securities, acquisitions and capital expenditures.

Net cash used in investing activities was $784.4 million and $60.3 million for the years ended December 31, 2021 and 2020, respectively. The increase of $724.2 million was primarily attributable to a $453.4 million funding for a collateralized loan to Sartorius-Herbst Beteiligungen II GmbH, an increase of $204.3 million for net cash outflows from purchases, sales and maturities of marketable securities and investments, higher net cash outflows of $28.9 million for the acquisition of Dropworks, Inc. in 2021 compared to the acquisition of Celsee, Inc. in 2020, net payments of $21.9 million for higher capital expenditures, and proceeds of $12.2 million from a divestiture of a division that was received in 2020 compared to none in 2021.

Cash Flows from Financing Activities

Our financing activities have consisted primarily of cash used for repayment of debt, purchases of treasury stock, payments for contingent consideration, and cash proceeds from the issuance of common stock for share-based compensation.

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Net cash used in financing activities was $55.4 million compared to $523.0 million for the years ended December 31, 2021 and 2020, respectively. This decrease was primarily attributable to the repayment of the $425 million principal amount of Senior Notes in 2020, and lower purchases of treasury stock in 2021 compared to 2020 of $50.0 million.

Treasury Shares

During the year ended December 31, 2021, 114,711 shares of Class A treasury stock with an aggregate total cost of $43.6 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 $37.0 million reduced Additional paid-in capital.

During the year ended December 31, 2020, 117,423 shares of Class A treasury stock with an aggregate total cost of $38.5 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 $29.5 million reduced Additional paid-in capital.

The re-issuance of the treasury stock for the years ended December 31, 2021 and 2020 did not require cash payments or receipts and therefore did not affect liquidity.

In November 2017, the Board of Directors authorized a new share repurchase program, granting Bio-Rad authority to repurchase, on a discretionary basis, up to $250.0 million of outstanding shares of our common stock (“Share Repurchase Program”). In July 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 of December 31, 2021, $223.1 million remained under the Share Repurchase Program.

During the year ended December 31, 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 common stock for $100.0 million during the year ended December 31, 2020. We designated these repurchased shares as treasury stock.

Contractual Obligations

The following summarizes certain of our contractual obligations as of December 31, 2021 and the effect such obligations are expected to have on our cash flows in future periods (in millions):

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[[GREPCENT_TABLE]]
[["","","Payments Due by Period"],["","","","","Less Than","","1-3","","3-5","","More than"],["Contractual Obligations","","Total","","One Year","","Years","","Years","","5 Years"],["Long-term debt, including current portion (1)","","$","11.0","","","$","0.5","","","$","0.9","","","$","0.9","","","$","8.7"],["Interest payments (1)","","$","7.8","","","$","0.7","","","$","1.5","","","$","1.3","","","$","4.3"],["Operating lease obligations (2)","","$","246.8","","","$","42.5","","","$","71.7","","","$","53.1","","","$","79.5"],["Purchase obligations (3)","","$","16.7","","","$","12.2","","","$","4.3","","","$","0.2","","","$","\u2014"],["Long-term liabilities (4)","","$","124.8","","","$","10.6","","","$","21.8","","","$","9.1","","","$","83.3"],["(1) These amounts represent expected cash payments, primarily from finance lease obligations, which are included in our December 31, 2021 consolidated balance sheet. See Note 5 of the consolidated financial statements for additional information about our debt."],["(2) Operating lease obligations are described in Note 16 of the consolidated financial statements."],["(3) Purchase obligations include agreements to purchase goods or services that are enforceable and legally binding to Bio-Rad and that specify all significant terms. Purchase obligations exclude agreements that are cancelable without penalty. Recognition of purchase obligations occurs when products or services are delivered to Bio-Rad."],["(4) These amounts primarily represent recognized long-term obligations for other post-employment benefits mostly due in more than 5 years, and long-term deferred revenue. Excluded from this table are tax liabilities for uncertain tax positions and contingencies in the amount of $66.6 million. We are not able to reasonably estimate the timing of future cash flows of these tax liabilities, therefore, our income tax obligations are excluded from the table above. See Note 6 of the consolidated financial statements for additional information about our income taxes."]]
[[/GREPCENT_TABLE]]

Recent Accounting Pronouncements Adopted and to be Adopted

See Note 1 to the consolidated financial statements for recent accounting pronouncements adopted and to be adopted.

36