BIO-RAD LABORATORIES, INC. (BIO) FY 2023 MD&A

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. 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, 2022, filed on February 17, 2023, for the discussion of the comparison of the fiscal year ended December 31, 2022 to the fiscal year ended December 31, 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 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 client base comprised of scientific research, healthcare, education and government customers worldwide. We do not disclose quantitative information about our different products and services as it is impractical to do so based primarily on the numerous products and services that we sell and the global markets that we serve.

We manufacture and supply our customers with a range of reagents, apparatus and equipment to separate complex chemical and biological materials and to identify, analyze and purify components. As our customers require standardization for their experiments and test results, much of our revenues are recurring in nature.

We rely on 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 42% of our 2023 consolidated net sales are derived from the United States and approximately 58% 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 dollar strengthens, we benefit from lower cost of sales from our own international manufacturing sites, and from lower international operating expenses. We regularly discuss our changes in revenue and expense categories in terms of both changing foreign exchange rates and in terms of a currency neutral basis, if notable, to explain the impact currency has on our results.

We are impacted by global economic conditions and our business was negatively impacted by the recent economic constraints in China and the ongoing challenges impacting the biopharma market and small biotech companies. We expect that these conditions will continue to negatively impact our business in 2024.

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.

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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.

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.

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.

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. We generally estimate the fair value of the reporting units in goodwill impairment assessments using an income approach, which includes an analysis of the future cash flows expected to be generated and the risk associated with achieving such cash flows. This approach requires significant management judgment including 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 reporting unit. Actual results may differ from management’s estimates. There were no impairments for the years ended December 31, 2023, 2022 and 2021.

Revenue Recognition

We recognize revenue from operations through the sale of products, services, license of intellectual property and rental of instruments.

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We enter into contracts that can include various combinations of products and services, which are generally accounted for as distinct performance obligations. The transaction consideration is allocated between separate performance obligations of an arrangement based on the stand-alone selling price (“SSP”) for each distinct product or service.

We recognize revenue from product sales at the point in time when we have satisfied our performance obligation by transferring control of the product to the customer. We use judgment to evaluate whether and when control has transferred and consider the right to payment, legal title, physical possession, risks and rewards of ownership, and customer acceptance if it is not a formality, as indicators to determine the transfer of control to the customer.

Fair Value Measurements

We elected the fair value option under ASC 825, Financial Instruments for accounting of the Loan to Sartorius-Herbst Beteiligungen II GmbH to simplify the accounting. 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. 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 (Gains) losses from change in fair market value of equity securities and loan receivable in our consolidated statements of income (loss).

Results of Operations - Sales, Gross Margins and Expenses

Comparison of the Year Ended December 31, 2023 to the Year Ended December 31, 2022

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

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, 2023 were $2.67 billion, compared to $2.80 billion for the year ended December 31, 2022, a decrease of 4.7%. COVID-related sales were approximately $3.6 million for the year ended December 31, 2023 compared to approximately $109.2 million for the year ended December 31, 2022. On a currency neutral basis, for the year ended December 31, 2023 sales decreased by approximately 4.1% compared to

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the same period in 2022. Currency neutral sales decreased mainly in APAC and EMEA. Excluding COVID-related sales, sales decreased 0.4% on a currency neutral basis from the year ended December 31, 2022. Sales of our Life Sciences segment in 2023 were negatively impacted by demand constraints from biopharma and small biotech customers in the biopharma market and the economic environment in China. In addition, the Russia sanctions impacted both our Life Science and Clinical Diagnostics segments.

The Life Science segment sales for the year ended December 31, 2023 were $1.18 billion, a decrease of 12.5% compared to the year ended December 31, 2022. On a currency neutral basis, sales decreased 12.0% compared to the year ended December 31, 2022. The currency neutral sales decrease was mainly in Asia Pacific and EMEA. COVID-related sales were $2.9 million in the year ended December 31, 2023 compared to approximately $105.2 million in the year ended December 31, 2022. Excluding COVID-related sales, sales decreased 4.9% on a currency neutral basis driven primarily by lower process chromatography, qPCR and Western blotting products, as a result of demand constraints from biopharma and small biotech customers, the economic environment in China, and Russia sanctions.

The Clinical Diagnostics segment sales for the year ended December 31, 2023 were $1.49 billion, an increase of 2.6% compared to the year ended December 31, 2022. On a currency neutral basis, sales increased 3.2% compared to the year ended December 31, 2022. COVID-related sales were $0.7 million in the year ended December 31, 2023 compared to approximately $4.0 million in the year ended December 31, 2022. Excluding COVID-related sales, sales increased 3.4% on a currency neutral basis. The currency neutral sales increase was primarily driven by an increased demand for our diagnostic testing systems, primarily diabetes, blood typing, and quality control products, especially in Asia Pacific and EMEA, partially offset by a decline in our infectious disease products and lower sales due to Russia sanctions.

Gross margin

Consolidated gross margin was 53.4% for the year ended December 31, 2023 compared to 55.9% for the year ended December 31, 2022. Gross margin for the Life Science segment and Clinical Diagnostics segment for the year ended December 31, 2023 decreased by approximately 4.1 percentage points and 0.7 percentage points, respectively, from the year ended December 31, 2022. The decrease in gross margin was primarily driven by product mix, increased material costs and inventory reserves.

Selling, general and administrative expense

Consolidated selling, general and administrative expense (SG&A) increased to $841.7 million or 31.5% of sales for the year ended December 31, 2023 compared to $827.8 million or 29.5% of sales for the year ended December 31, 2022. The increase to SG&A expense was primarily driven by restructuring costs as well as higher facility-related expenses, partially offset by lower employee-related expenses.

Research and development expense

Consolidated research and development (R&D) expense decreased to $247.4 million or 9.3% of sales for the year ended December 31, 2023 compared to $256.9 million or 9.2% of sales for the year ended December 31, 2022. The decrease in R&D expense in the year ended December 31, 2023 compared to the year ended December 31, 2022 was primarily due to a change in the fair value of contingent consideration, partially offset by higher restructuring costs and continued investment in research and development.

Results of Operations – Non-operating

Interest expense

Interest expense for the years ended December 31, 2023 and 2022 was $49.4 million and $38.1 million, respectively, an increase of $11.3 million compared to the prior year period. The increase was primarily due to the sale in March 2022 of the $1.2 billion Senior Notes.

Foreign currency exchange gains and losses

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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 $7.3 million and $0.2 million for the years ended December 31, 2023 and December 31, 2022, 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 securities and loan receivable

(Gains) losses from change in fair market value of equity securities and loan receivable was a loss of $1.25 billion and $5.19 billion for the years ended December 31, 2023 and 2022, respectively. The change in the fair market value primarily resulted from the recognition of lower holding losses of $1.26 billion compared to holding losses of $5.07 billion in the year ended December 31, 2022 on our position in Sartorius AG. In addition, lower losses from the change in fair market value of our loan receivable of $6.8 million in the year ended December 31, 2023, compared to holding losses of $100.6 million in the year ended December 31, 2022 contributed to the change.

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, 2023 increased to $106.4 million compared to $44.6 million for the year ended December 31, 2022. The increase was primarily due to higher interest rates favorably impacting our investments resulting from cash invested from the $1.2 billion Senior Notes issued in March 2022. The increase to Other income, net also resulted from a $3 million higher dividend from Sartorius AG in 2023 compared to 2022, and from no credit loss or other than temporary impairment in 2023 compared to a credit loss of $8 million and other than temporary impairment losses of $12 million in 2022.

Effective tax rate

Our effective tax rates were 25.0% and 22.9% for the years ended December 31, 2023 and 2022, respectively. The effective tax rates for the years ended December 31, 2023 and 2022 were primarily driven by the unrealized gain/loss in equity securities that was taxed at 22.3% and 22.5%, respectively, as well as the geographical mix of earnings.

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 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, 2023, 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 $17.2 million.

On August 16, 2022, President Biden signed into law the Inflation Reduction Act of 2022, which includes an Alternative Minimum Tax based on the Adjusted Financial Statement Income of Applicable Corporations. Based on our initial evaluation, we do not believe the Inflation Reduction Act will have a material impact on our income tax provision and cash taxes. We continue to monitor the changes in tax laws and regulations to evaluate their potential impact on our business.

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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, as amended) that we entered into in April 2019, and to a lesser extent international lines of credit. Borrowings under the Credit Agreement, as amended, are available on a revolving basis and can be used to make permitted acquisitions, for working capital and for other general corporate purposes. We had no outstanding borrowings under the 2019 Credit Agreement, as amended, as of December 31, 2023, however, $0.2 million was utilized for domestic standby letters of credit that reduced our borrowing availability. In March 2022, we issued $400 million aggregate principal amount of 3.3% Senior Notes due 2027, and $800 million aggregate principal amount of 3.7% Senior Notes due 2032. Net cash proceeds from the bond issuance after deducting the underwriting discount and estimated offering expenses was $1.186 billion. Interest on the Notes is payable semiannually in arrears on March 15 and September 15 of each year until the principal is paid or made available for payment. Management believes that this availability, together with cash flow from operations, will be adequate to meet our current objectives for operations, research and development, capital additions for manufacturing and distribution, plant and equipment, information technology systems and acquisitions of reasonable proportion to our existing total available capital.

At December 31, 2023, we had available $1.6 billion in cash, cash equivalents and short-term investments, of which approximately 16% 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 and borrowings. As part of our ongoing liquidity assessments, we regularly monitor the mix of domestic and foreign cash flows (both inflows and outflows).

It is generally our intention to repatriate certain foreign earnings to the extent that such repatriations are not restricted by local laws or accounting rules, and there are no substantial incremental costs.

On February 13, 2024, we entered into a new $200.0 million unsecured revolving credit facility with a group of financial institutions. Borrowings under the credit agreement are on a revolving basis and can be used to make acquisitions, for working capital and for other general corporate purposes. The credit agreement requires Bio-Rad to comply with certain financial ratios and covenants, among other things. The new credit facility replaces the credit facility which expires April 2024.

Cash Flows from Operations

Net cash provided by operations was $374.9 million and $194.4 million for the years ended December 31, 2023 and 2022, respectively. The increase in operating cash flows was primarily due to lower cash paid to suppliers and employees, higher dividend proceeds, and lower income tax paid, partially offset by higher interest paid, lower cash received from customers, and lower proceeds from foreign exchange contracts.

Cash Flows from Investing Activities

Our investing activities have consisted primarily of cash used for purchases of marketable securities and investments, and acquisitions.

Net cash provided by investing activities was $20.2 million compared to net cash used for investing activities of $1,207.6 million for the years ended December 31, 2023 and 2022, respectively, primarily due to the timing of our purchases, maturities and sales of marketable securities and investments as a result of the cash proceeds from the sale of Senior Notes issued in March 2022.

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Cash Flows from Financing Activities

Our financing activities have consisted primarily of cash from the issuance of senior notes.

Net cash used in financing activities was $425.6 million compared to net cash provided by financing activities of $973.6 million for the years ended December 31, 2023 and 2022, respectively, primarily attributable to the sale in March 2022 of the Senior Notes which yielded net cash proceeds of $1,186.2 million. The change also resulted from higher payments for share repurchases in 2023.

Treasury Shares

During the year ended December 31, 2023, 160,811 shares of Class A treasury stock with an aggregate total cost of $64.1 million were reissued to fulfill grants to employees under our restricted stock program and our Employee Stock Purchase Program. Upon reissuing the Class A treasury stock, Additional paid-in capital was reduced by $49.7 million from share reissuance activity during the year.

During the year ended December 31, 2022, 135,744 shares of Class A treasury stock with an aggregate total cost of $58.4 million were reissued to fulfill grants to employees under our restricted stock program and our Employee Stock Purchase Program. Upon reissuing the Class A treasury stock, Additional paid-in capital was reduced by $51.8 million from share reissuance activity during the year.

The re-issuance of the treasury stock for the years ended December 31, 2023 and 2022 did not require cash payments or receipts and therefore did not affect liquidity.

During the year ended December 31, 2023, we repurchased 1,267,757 shares of Class A common stock for $428.7 million under our share repurchase programs, compared to the repurchase of 496,692 shares of our common stock for $215.7 million during the year ended December 31, 2022. As of December 31, 2023, $278.7 million of stock remained available for repurchases under the Company's 2023 Share Repurchase Program. We designated these repurchased shares as treasury stock.

Contractual Obligations

The following summarizes certain of our contractual obligations as of December 31, 2023 and the effect such obligations are expected to have on our cash flows in future periods (in millions):

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Recent Accounting Pronouncements Adopted

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