Bio-Rad(BIO) - 2020 Q3 - Quarterly Report

PART I – FINANCIAL INFORMATION Item 1. Financial Statements The unaudited condensed consolidated financial statements detail the company's financial position, performance, and cash flows for the period Condensed Consolidated Balance Sheets Total assets and stockholders' equity significantly increased, driven by a substantial rise in other investments and retained earnings Key Balance Sheet Metrics (in thousands, Unaudited) | Metric | Sep 30, 2020 (Unaudited) | Dec 31, 2019 | | :--- | :--- | :--- | | Cash and cash equivalents | $840,325 | $660,672 | | Short-term investments | $314,102 | $453,973 | | Other investments | $8,439,897 | $4,638,205 | | Total assets | $12,020,931 | $8,008,859 | | Total liabilities | $3,195,786 | $2,253,802 | | Total stockholders' equity | $8,825,145 | $5,755,057 | - Total assets increased by approximately $4 billion, largely due to a significant increase in 'Other investments' from $4.6 billion to $8.4 billion[6] - Retained earnings increased from $5.47 billion to $8.43 billion, contributing to the rise in total stockholders' equity[7] Condensed Consolidated Statements of Income Net income dramatically increased due to significant gains from the change in fair market value of equity securities Key Income Statement Metrics (in thousands, Unaudited) | Metric (in thousands) | 3 Months Ended Sep 30, 2020 | 3 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Net sales | $647,263 | $560,633 | $1,755,787 | $1,687,231 | | Gross profit | $367,311 | $307,026 | $977,667 | $926,557 | | Income from operations | $109,600 | $57,460 | $235,715 | $170,456 | | Change in fair market value of equity securities | $(1,580,350) | $390,620 | $(3,591,509) | $(1,384,999) | | Net income (loss) | $1,314,824 | $(258,816) | $2,967,165 | $1,205,189 | | Basic EPS | $44.24 | $(8.68) | $99.75 | $40.42 | | Diluted EPS | $43.64 | $(8.68) | $98.46 | $39.97 | - Net income for Q3 2020 was $1.31 billion, a significant turnaround from a net loss of $258.8 million in the prior year, largely due to a $1.58 billion gain from the change in fair market value of equity securities[8] - For the nine months ended September 30, 2020, net income surged to $2.97 billion from $1.21 billion, driven by a $3.59 billion gain from the change in fair market value of equity securities[8] Condensed Consolidated Statements of Comprehensive Income Comprehensive income substantially increased, driven by strong net income and positive foreign currency translation adjustments Key Comprehensive Income Metrics (in thousands, Unaudited) | Metric (in thousands) | 3 Months Ended Sep 30, 2020 | 3 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Net income (loss) | $1,314,824 | $(258,816) | $2,967,165 | $1,205,189 | | Foreign currency translation adjustments, net of income taxes | $144,902 | $(103,332) | $167,366 | $(109,888) | | Other comprehensive income (loss), net of income taxes | $145,113 | $(102,540) | $171,319 | $(105,155) | | Comprehensive income (loss) | $1,459,937 | $(361,356) | $3,138,484 | $1,100,034 | - Comprehensive income for Q3 2020 was $1.46 billion, a significant improvement from a loss of $361.4 million in the prior year, largely due to net income and positive foreign currency translation adjustments[10] - For the nine months ended September 30, 2020, comprehensive income reached $3.14 billion, up from $1.10 billion in the prior year, driven by strong net income and favorable foreign currency translation adjustments[10] Condensed Consolidated Statements of Cash Flows Operating cash flow slightly decreased, while investing cash use fell and financing cash use rose significantly Key Cash Flow Metrics (in thousands, Unaudited) | Metric (in thousands) | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2019 | | :--- | :--- | :--- | | Net cash provided by operating activities | $290,594 | $298,095 | | Net cash used in investing activities | $(10,141) | $(147,693) | | Net cash used in financing activities | $(101,157) | $(17,975) | | Net increase in cash, cash equivalents, and restricted cash | $182,450 | $129,188 | | Cash, cash equivalents, and restricted cash at end of period | $845,101 | $563,352 | - Net cash provided by operating activities decreased slightly to $290.6 million in 2020 from $298.1 million in 2019[12] - Net cash used in investing activities significantly decreased to $10.1 million in 2020 from $147.7 million in 2019, primarily due to changes in marketable securities and investments[12] - Net cash used in financing activities increased substantially to $101.2 million in 2020 from $18.0 million in 2019, largely driven by payments for purchases of treasury stock[12] Condensed Consolidated Statements of Changes in Stockholders' Equity Total stockholders' equity significantly increased, driven by substantial net income and other comprehensive income Changes in Stockholders' Equity (in thousands, Unaudited) | Metric (in thousands) | Dec 31, 2019 | Sep 30, 2020 | | :--- | :--- | :--- | | Total Stockholders' Equity (Beginning) | $5,755,057 | $5,755,057 | | Net income | $2,967,165 | $2,967,165 | | Other comprehensive income, net of tax | $171,319 | $171,319 | | Purchase of treasury stock | $(100,005) | $(100,005) | | Total Stockholders' Equity (Ending) | $5,755,057 | $8,825,145 | - Total stockholders' equity increased from $5.76 billion at December 31, 2019, to $8.83 billion at September 30, 2020[14] - Retained earnings increased significantly from $5.47 billion to $8.43 billion during the nine-month period, largely due to net income[14] - The company repurchased $100.0 million of treasury stock during the period, partially offsetting the increase in equity[14] Notes to Condensed Consolidated Financial Statements Detailed disclosures cover accounting policies, significant transactions, and financial instrument valuations 1. BASIS OF PRESENTATION AND USE OF ESTIMATES The basis of preparation, revenue recognition policies, and disaggregated revenue by geographic region are outlined - Revenue from contracts with customers is recognized upon transfer of control of promised products or services, net of estimated product returns[21][24] - Reagent rental agreements, which include instrument use and consumables, are primarily classified as operating leases with variable payments recognized upon delivery or consumption of reagents, representing approximately 3% of total revenue[28][32] Disaggregated Revenue by Geographic Region | Geographic Region | 3 Months Ended Sep 30, 2020 (in millions) | 3 Months Ended Sep 30, 2019 (in millions) | 9 Months Ended Sep 30, 2020 (in millions) | 9 Months Ended Sep 30, 2019 (in millions) | | :--- | :--- | :--- | :--- | :--- | | Europe | $220.9 | $181.9 | $590.6 | $556.1 | | Asia | $142.0 | $120.7 | $382.3 | $354.3 | | United States | $250.4 | $225.8 | $685.4 | $674.0 | | Other (Canada & Latin America) | $34.0 | $32.2 | $97.5 | $102.8 | | Total net sales | $647.3 | $560.6 | $1,755.8 | $1,687.2 | - The company early adopted SEC Final Rule Release No. 33-10786 and ASU No. 2020-04, neither of which had a material effect on financial statements[43][44][45] 2. ACQUISITIONS AND DIVESTITURES The company acquired Celsee, Inc for $99.3 million and divested its Informatics division for a gain of $11.7 million - Acquired Celsee, Inc. on April 1, 2020, for $99.3 million, including contingent consideration, to enhance Life Science product offerings[50][51][52] - Divested Informatics division in April 2020 for $12.2 million, recording an $11.7 million gain in Other income, net[59] Celsee Acquisition Fair Value Allocation (in millions) | Celsee Acquisition (in millions) | Fair Value | | :--- | :--- | | Total consideration transferred | $99.3 | | Intangible assets | $79.9 | | Goodwill | $29.8 | | Net assets acquired | $99.3 | 3. FAIR VALUE MEASUREMENTS Financial assets and liabilities are categorized by fair value hierarchy, highlighting significant unrealized gains on equity securities - Fair value measurements are categorized into Level 1 (quoted prices in active markets), Level 2 (other significant observable inputs), and Level 3 (significant unobservable inputs)[60] Fair Value of Financial Assets (in millions) | Financial Assets (in millions) | Level 1 | Level 2 | Level 3 | Total | | :--- | :--- | :--- | :--- | :--- | | Cash equivalents | $141.7 | $190.5 | $— | $332.2 | | Restricted investments | $6.6 | $— | $— | $6.6 | | Equity securities | $8,459.3 | $— | $— | $8,459.3 | | Available-for-sale investments | $— | $261.3 | $— | $261.3 | | Forward foreign exchange contracts | $— | $0.6 | $— | $0.6 | | Total financial assets | $8,607.6 | $452.4 | $— | $9,060.0 | - Unrealized gains on equity securities, primarily from the investment in Sartorius AG, were $1,580.3 million for the three months and $3,591.5 million for the nine months ended September 30, 2020[67] - The company owns approximately 37% of Sartorius AG's ordinary voting shares and 28% of its preference shares as of September 30, 2020, but does not have significant influence[68] - Contingent consideration liabilities, primarily from the Celsee acquisition, are classified as Level 3 and totaled $2.3 million as of September 30, 2020[62][70][72] 4. GOODWILL AND OTHER PURCHASED INTANGIBLE ASSETS Goodwill increased due to the Celsee acquisition, and the carrying amount of purchased intangibles is detailed - Goodwill increased by $29.8 million, primarily from the Celsee acquisition, allocated to the Life Science segment[88] - Amortization expense for purchased intangible assets was $7.2 million for the three months and $20.3 million for the nine months ended September 30, 2020[92] Goodwill by Segment (in millions) | Goodwill (in millions) | Dec 31, 2019 | Sep 30, 2020 | | :--- | :--- | :--- | | Life Science | $208.3 | $236.1 | | Clinical Diagnostics | $55.8 | $55.8 | | Total Goodwill, net | $264.1 | $291.9 | Net Carrying Amount of Purchased Intangible Assets (in millions) | Purchased Intangible Assets (in millions) | Net Carrying Amount (Sep 30, 2020) | | :--- | :--- | | Customer relationships/lists | $30.9 | | Know how | $22.3 | | Developed product technology | $113.1 | | Licenses | $29.0 | | Tradenames | $2.5 | | Covenants not to compete | $2.7 | | In-process research and development | $4.8 | | Total purchased intangible assets | $205.3 | 5. SUPPLEMENTAL CASH FLOW INFORMATION Net income is reconciled to operating cash flow, highlighting significant non-cash adjustments like equity security gains - The significant non-cash gain from the change in fair market value of equity securities ($3.59 billion) was a major adjustment in reconciling net income to operating cash flow[95] - Non-cash investing activities included $6.1 million in purchased property, plant, and equipment and $2.0 million in purchased marketable securities and investments for the nine months ended September 30, 2020[95] Reconciliation of Net Income to Operating Cash Flow | Reconciliation Item (in millions) | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2019 | | :--- | :--- | :--- | | Net income | $2,967.2 | $1,205.2 | | Depreciation and amortization | $101.9 | $99.8 | | Change in fair market value of equity securities | $(3,591.5) | $(1,385.0) | | Gain on divestiture of a division | $(11.7) | $— | | Increase in deferred income taxes | $790.1 | $310.9 | | Net cash provided by operating activities | $290.6 | $298.1 | 6. LONG-TERM DEBT Long-term debt primarily consists of $425.0 million in Senior Notes due in December 2020, which will be repaid - The company has $425.0 million principal amount of 4.875% Senior Notes due in December 2020, which it intends to repay[97] - A $200.0 million unsecured revolving credit facility is available, with no outstanding borrowings as of September 30, 2020, but $0.2 million was used for standby letters of credit[98] - The company was in compliance with all financial ratios and covenants related to its Senior Notes and Credit Agreement as of September 30, 2020[97][99] Long-Term Debt Summary (in millions) | Long-Term Debt (in millions) | Sep 30, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | 4.875% Senior Notes due 2020 | $424.9 | $424.4 | | Finance leases and other debt | $13.9 | $15.4 | | Total | $438.8 | $439.8 | | Less current maturities | $(426.6) | $(426.2) | | Long-term debt | $12.2 | $13.6 | 7. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) The AOCI balance shifted from a loss to a gain, driven by positive foreign currency translation adjustments - Accumulated other comprehensive income (loss) significantly improved from a loss of $87.4 million at January 1, 2020, to a gain of $83.9 million at September 30, 2020[100] - The positive change was primarily driven by $167.4 million in foreign currency translation adjustments for the nine months ended September 30, 2020[100] Changes in Accumulated Other Comprehensive Income (Loss) (in millions) | Components (in millions) | Jan 1, 2020 | Sep 30, 2020 | | :--- | :--- | :--- | | Foreign currency translation adjustments | $(72.4) | $95.0 | | Foreign other postemployment benefits adjustments | $(22.2) | $(21.3) | | Net unrealized holding gains on available-for-sale investments | $7.2 | $10.2 | | Total accumulated other comprehensive income (loss) | $(87.4) | $83.9 | 8. EARNINGS PER SHARE Basic and diluted earnings per share increased substantially, reflecting the company's improved net income - Basic EPS increased to $44.24 for the three months ended September 30, 2020, from a loss of $8.68 in the prior year[104] - Diluted EPS increased to $98.46 for the nine months ended September 30, 2020, from $39.97 in the prior year[104] Earnings Per Share Calculation | EPS Metric (in thousands) | 3 Months Ended Sep 30, 2020 | 3 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Basic weighted average shares outstanding | 29,721 | 29,831 | 29,746 | 29,815 | | Diluted weighted average common shares | 30,128 | 29,831 | 30,137 | 30,149 | | Basic earnings (loss) per share | $44.24 | $(8.68) | $99.75 | $40.42 | | Diluted earnings (loss) per share | $43.64 | $(8.68) | $98.46 | $39.97 | 9. OTHER INCOME AND EXPENSE, NET Net other income decreased due to lower investment income, despite a gain from the Informatics division divestiture - Other income, net decreased to $1.0 million for the three months ended September 30, 2020, from $4.4 million in the prior year, primarily due to lower investment income[105] - For the nine months, other income, net decreased to $21.5 million from $27.0 million, despite an $11.7 million gain on the divestiture of a division, due to lower interest and investment income[105] Other (Income) Expense, Net Components (in millions) | Other (Income) Expense, Net (in millions) | 3 Months Ended Sep 30, 2020 | 3 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Interest and investment income | $(1.8) | $(4.1) | $(14.6) | $(27.4) | | Net realized gains on investments | $— | $(0.2) | $(0.6) | $(0.2) | | Other-than-temporary impairment losses on investments | $— | $— | $4.6 | $1.6 | | Gain on divestiture of a division | $— | $— | $(11.7) | $— | | Other expense (income) | $0.8 | $(0.1) | $0.8 | $(1.0) | | Other (income), net | $(1.0) | $(4.4) | $(21.5) | $(27.0) | 10. INCOME TAXES The effective income tax rate was approximately 22.5% for the nine-month period, with details on unrecognized tax benefits - The company maintains a valuation allowance on California and certain foreign deferred tax assets due to the unlikelihood of their realization[108] - Gross unrecognized tax benefits increased to $54.4 million as of September 30, 2020, from $39.2 million at December 31, 2019, primarily due to a $13.3 million reassessment of a prior tax position[111] - Within the next 12 months, unrecognized tax benefits could decrease by up to $4.7 million, mainly related to various foreign jurisdictions[112] Effective Income Tax Rate | Effective Income Tax Rate | 3 Months Ended Sep 30, 2020 | 3 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Rate | 21.9% | 22.8% | 22.5% | 22.8% | 11. SEGMENT INFORMATION Life Science segment sales grew significantly while Clinical Diagnostics sales declined due to market conditions - Life Science segment net sales increased by 50.2% for the three months and 24.7% for the nine months ended September 30, 2020, driven by PCR, Droplet Digital PCR, and Process Media product lines, including COVID-19 related products[113][115] - Clinical Diagnostics segment net sales decreased by 5.7% for the three months and 8.5% for the nine months ended September 30, 2020, primarily due to lower demand resulting from COVID-19[113][115] Segment Net Sales (in millions) | Segment Net Sales (in millions) | 3 Months Ended Sep 30, 2020 | 3 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Life Science | $324.0 | $215.7 | $803.2 | $643.9 | | Clinical Diagnostics | $322.2 | $341.8 | $945.6 | $1,032.9 | | Other Operations | $1.1 | $3.1 | $7.0 | $10.4 | Segment Net Profit (Loss) (in millions) | Segment Net Profit (Loss) (in millions) | 3 Months Ended Sep 30, 2020 | 3 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Life Science | $70.3 | $11.6 | $128.3 | $45.9 | | Clinical Diagnostics | $38.0 | $43.8 | $100.9 | $117.1 | | Other Operations | $(0.8) | $(0.4) | $(0.2) | $(1.1) | 12. LEGAL PROCEEDINGS The company is involved in ordinary course legal proceedings not expected to have a material adverse effect - The company is party to various claims and legal actions in the ordinary course of business[117] - Management cannot reasonably estimate the range of potential liability but does not believe any ultimate liability will have a material adverse effect on results of operations, financial position, or liquidity[117] 13. RESTRUCTURING COSTS Several restructuring plans are underway, including a facility closure and workforce reductions, with associated costs detailed - Closure of a French manufacturing facility resulted in $4.0 million in total expenses from December 2018 to September 30, 2020, with a remaining liability of $1.9 million[119][120] - A strategy-driven restructuring plan, including workforce reduction in Europe, the US, and Canada, incurred $20.8 million in total expenses from November 2019 to September 30, 2020, with a remaining liability of $6.8 million[120][121] - A finance and administrative consolidation plan, expected to complete by March 2021, had a liability of $3.1 million as of September 30, 2020, with $3.6 million reflected in SG&A expense for the nine months[121][122] 14. LEASES: FINANCE, AND OPERATING WHERE WE ACT AS LESSEE The company details its operating and finance lease assets, liabilities, and associated costs for the period - The company has operating and finance leases for buildings, vehicles, and equipment, with remaining lease terms ranging from 1 to 19 years[124] - Weighted average remaining lease terms are 9 years for operating leases and 17 years for finance leases, with discount rates of 4.0% and 6.5% respectively as of September 30, 2020[132] Lease Expense Summary (in millions) | Lease Expense (in millions) | 3 Months Ended Sep 30, 2020 | 3 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Operating lease cost | $13.4 | $14.2 | $38.4 | $38.7 | | Total finance lease cost | $0.3 | $0.3 | $1.0 | $1.2 | | Sublease income | $0.7 | $0.7 | $2.2 | $2.2 | Lease Assets and Liabilities (in millions) | Lease Liabilities (in millions) | Sep 30, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Operating lease right-of-use assets | $196.7 | $201.9 | | Total operating lease liabilities | $206.5 | $211.4 | | Total finance lease liabilities | $11.6 | $11.7 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial performance, operational results, and key business changes for the period Overview The company manufactures and distributes life science and clinical diagnostics products globally, with 61% of sales international - Bio-Rad operates in two reportable segments: Life Science and Clinical Diagnostics, providing specialized tools for biological research and clinical diagnostics[135] - Approximately 61% of year-to-date 2020 consolidated net sales are derived from international locations, with Europe being the largest international region, exposing the company to foreign currency exchange rate fluctuations[139] - The company's revenues are largely recurring due to customer requirements for standardization in experiments and test results[137] COVID-19 The COVID-19 pandemic has negatively impacted business operations and financial results, despite demand for certain products - The COVID-19 pandemic has negatively impacted and is expected to continue to disrupt business operations, financial conditions, and results[140] - The company is evaluating the impact of governmental incentives related to the pandemic[140] Cyberattack A December 2019 cyberattack affected some systems but critical operations were quickly restored without data misuse - A cyberattack in December 2019 affected Windows-based systems, but not the global ERP system (SAP)[141] - No evidence of unauthorized transfer or misuse of personal data was found, and critical systems were back online within days[141] - The company has insurance coverage for cyberattack costs but has not yet settled claims; no ransom was paid[142] Acquisition The company acquired Celsee, Inc for $99.3 million to complement its Life Science segment offerings - Acquired Celsee, Inc on April 1, 2020, for $99.3 million, including contingent consideration[143] - Celsee manufactures instruments and consumables for single-cell analysis, complementing Bio-Rad's Life Science segment[144] Informatics Divestiture The Informatics division was sold for $12.2 million, resulting in an $11.7 million gain - Sold Informatics division in April 2020 for $12.2 million[146] - Recorded an $11.7 million gain in Other income, net, from the divestiture[146] Restructuring A plan to consolidate finance and administrative activities is underway, with completion expected by March 2021 - Announced a restructuring plan in June 2020 to consolidate finance and administrative activities in Europe and the US, expected to complete by March 2021[147] - A liability of $3.1 million was recorded as of September 30, 2020, with $3.6 million reflected in SG&A expense for the nine months[147] Results of Operations Sales and margins were driven by strong Life Science growth, offsetting a decline in Clinical Diagnostics Results of Operations as a Percentage of Net Sales | Metric (% of Net Sales) | 3 Months Ended Sep 30, 2020 | 3 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Net sales | 100.0% | 100.0% | 100.0% | 100.0% | | Cost of goods sold | 43.3% | 45.2% | 44.3% | 45.1% | | Gross profit | 56.7% | 54.8% | 55.7% | 54.9% | | SG&A expense | 30.6% | 36.0% | 33.1% | 36.2% | | R&D expense | 9.2% | 8.6% | 9.2% | 8.6% | | Change in fair market value of equity securities | 244.2% | (69.7)% | 204.6% | 82.1% | | Net income | 203.1% | (46.2)% | 169.0% | 71.4% | - Net sales increased by 15.5% (14.9% currency neutral) for the third quarter and 4.1% (5.0% currency neutral) for the nine months ended September 30, 2020[152][164] - Life Science segment sales increased significantly (50.2% in Q3, 24.7% in 9M) driven by PCR, Droplet Digital PCR, and Process Media, including COVID-19 related products[153][165] - Clinical Diagnostics segment sales decreased (5.7% in Q3, 8.5% in 9M) due to lower demand resulting from COVID-19[154][166] - Consolidated gross margins improved to 56.7% in Q3 2020 (from 54.8%) and 55.7% in 9M 2020 (from 54.9%), primarily due to favorable product mix and lower production costs in Life Science[155][168] - SG&A expenses decreased as a percentage of sales due to lower travel, marketing, and communication expenses, largely impacted by COVID-19[156][169] - R&D expense increased due to investments in Life Science (Celsee acquisition, new product development) but decreased in Clinical Diagnostics due to COVID-19 restrictions and restructuring[157][170] - A significant gain from the change in fair market value of equity securities (Sartorius AG) was the primary driver of net income for both periods[161][173] - Other income, net, for the nine months decreased due to lower investment income and Sartorius AG dividend income, partially offset by the $11.7 million gain on the Informatics division divestiture[174] Liquidity and Capital Resources The company maintains strong liquidity with $1.15 billion in cash and equivalents and plans to repay its Senior Notes - As of September 30, 2020, the company had $1.15 billion in cash, cash equivalents, and short-term investments, with approximately 25% held in foreign subsidiaries[177] - The company intends to repay its $425.0 million Senior Notes due December 2020 and has adequate resources to do so[177] - A $200.0 million unsecured revolving credit facility is available, with no outstanding borrowings as of September 30, 2020[177] - Net cash provided by operations decreased slightly to $290.6 million for the nine months ended September 30, 2020, primarily due to higher cash paid to suppliers and employees[180] - Net cash used in investing activities decreased significantly to $10.1 million, mainly due to increased net proceeds from marketable securities and lower capital expenditures[183] - Net cash used in financing activities increased substantially to $101.2 million, primarily due to an $80 million increase in cash used to purchase treasury stock[184] - The Board authorized increasing the Share Repurchase Program by an additional $200.0 million in July 2020, with $273.1 million remaining as of September 30, 2020[189] Item 3. Quantitative and Qualitative Disclosures about Market Risk No material changes to market risk disclosures occurred during the nine months ended September 30, 2020 - No material changes to market risk disclosures were identified during the nine months ended September 30, 2020[191] Item 4. Controls and Procedures Disclosure controls and procedures were deemed effective, with no material changes to internal controls - Disclosure controls and procedures were evaluated as effective at the reasonable assurance level as of September 30, 2020[193] - No changes in internal control over financial reporting materially affected or are reasonably likely to materially affect internal control during the quarter ended September 30, 2020[194] PART II – OTHER INFORMATION Item 1. Legal Proceedings Legal proceedings are detailed in Note 12 and are not expected to have a material adverse effect - Refers to Note 12 for details on legal proceedings, indicating no material adverse effect is currently expected[195] Item 1A. Risk Factors The company faces numerous risks including the COVID-19 pandemic, international operations, and cybersecurity threats Pandemics or disease outbreaks, such as the COVID-19 pandemic, could materially adversely affect our business, operations, financial condition, and results of operations. The COVID-19 pandemic negatively impacts business through reduced demand, supply chain issues, and operational disruptions - COVID-19 has caused an overall drop-off in product demand, reduced sales activity, and customer orders, with labs, universities, and hospitals operating at reduced capacity[198] - Supply chain challenges include raw material shortages and transportation difficulties due to reduced freight availability and travel restrictions[199] - Potential COVID-19 outbreaks at facilities could lead to shutdowns and workforce reductions, impacting the ability to operate[200] Our international operations expose us to additional costs and legal and regulatory risks, which could have a material adverse effect on our business, results of operations and financial condition. Significant international operations expose the company to complex foreign laws, regulations, and compliance risks - Foreign entities generated 61% of net sales in the first nine months of 2020, increasing exposure to international laws and regulations[203] - Compliance with diverse laws (data privacy, labor, tax, anti-competition, anti-corruption) increases costs and risks of inadvertent breaches[203][206] - Violations could lead to fines, criminal sanctions, business cessation, and reputational damage[207] The industries and market segments in which we operate are highly competitive, and we may not be able to compete effectively. The company operates in highly competitive markets, facing pricing pressures and challenges from well-resourced competitors - The life science and clinical diagnostics markets are highly competitive, with some competitors having greater financial resources[208] - Competitive and regulatory conditions restrict the ability to recover higher costs through price increases[208] - Public tenders have become more competitive due to longer commitments and aggressive pricing by competitors[208] We may not be able to grow our business because of our failure to develop new or improved products. Future growth depends on successful new product development and market acceptance in a technologically advancing industry - Future growth relies on improving product offerings and developing new product lines that integrate technological advances[209] - Failure to keep up with industry changes (e.g., molecular diagnostics, point-of-care tests) or experiencing product launch delays could harm the business[209] - There is no assurance that R&D efforts will be successful or that new products will achieve market acceptance[209] Breaches of our information systems could have a material adverse effect on our business and results of operations. Cybersecurity breaches pose a significant risk of data misappropriation, operational disruption, and reputational damage - The company continuously experiences attempts to attack and penetrate its security controls, as seen with the December 2019 Cyberattack[211] - Breaches could lead to misappropriation of confidential information (personal data, protected health information, proprietary business data) and disruption of operations[211] - Increased remote work due to COVID-19 exposes the company to additional cyberattack risks[211] If our information technology systems are disrupted, or if we fail to successfully implement, manage and integrate our information technology and reporting systems, our business, results of operations and financial condition could be harmed. The business relies heavily on IT systems, and disruptions or implementation failures could harm operations - IT systems are integral for processing orders, managing inventory, collecting receivables, and maintaining cost-effective operations[213] - Disruptions from redundancy issues or failures in managing and integrating IT systems could harm business operations and financial condition[213][214] - Ongoing improvements and integration of IT systems, including ERP, require effective planning and employee training to avoid service interruptions or data loss[214] We are subject to foreign currency exchange fluctuations, which could have a material adverse effect on our results of operations and financial condition. Significant international sales create exposure to foreign currency fluctuations that can adversely affect financial results - Significant international operations and sales denominated in local currencies expose the company to foreign currency fluctuations[217] - A strengthening U.S. dollar negatively impacts consolidated net sales, while a weakening dollar increases international operating expenses[217] - Currency volatility can increase hedging costs and adversely affect financial condition[217] Changes in the market value of our position in Sartorius AG may materially impact our financial results and might cause us to be deemed an investment company. Market value changes in the Sartorius AG investment can materially impact income and pose an investment company classification risk - Changes in the market value of the Sartorius AG investment can materially impact consolidated statements of income, independent of Bio-Rad's operating performance[218][219] - A decline in Sartorius AG's market value could result in significant write-downs and losses[218] - There is a risk of being deemed an 'investment company' under the Investment Company Act of 1940, which could restrict access to capital markets[218] We may incur losses in future periods due to write-downs in the value of financial instruments. The company holds volatile financial instruments that are subject to write-downs and losses from market factors - The company holds positions in volatile and illiquid financial instruments, including asset-backed and equity securities (e.g., Sartorius AG)[220][221] - External market factors (interest rates, economic conditions, issuer financial strength) can cause significant write-downs and losses[220][221] - Converting these investments to cash may result in significant losses[220][221] We may experience difficulties implementing our new global enterprise resource planning system. The multi-year global ERP system implementation carries risks of delays, increased costs, and operational disruptions - The multi-year implementation of a new global ERP system requires significant human and financial resources[223] - Risks include significant delays, increased costs, and operational disruptions, as experienced in past deployments (e.g., Western Europe in April 2017)[223] - Disruptions could affect order processing, product shipments, invoicing, and overall business operations[223] Recent and planned changes to our organizational structure and executive management team could negatively impact our business. Recent organizational and executive management changes could lead to business disruption and reduced productivity - Significant changes to organizational structure and executive management team have occurred, including new CFO, COO, and Chief Accounting Officer appointments[224] - The Clinical Diagnostics segment was restructured based on functional groups rather than product lines[224] - These changes could lead to management distraction, business disruption, employee attrition, and reduced morale or productivity[224] Violations of the U.S. Foreign Corrupt Practices Act or similar anti-corruption laws could have a material adverse effect on our business, results of operations and financial condition. International operations create a risk of violating anti-corruption laws, which could result in punitive actions - International operations expose the company to risks of violating anti-corruption laws, such as the U.S. Foreign Corrupt Practices Act (FCPA)[225][226] - Past FCPA violations led to a non-prosecution agreement in 2014[226] - Future violations could result in more punitive actions, reputational harm, and material adverse effects on business and financial condition[226] Our failure to establish and maintain effective internal control over financial reporting could result in material misstatements in our financial statements, our failure to meet our reporting obligations and cause investors to lose confidence in our reported financial information, which in turn could cause the trading price of our common stock to decline. Failure to maintain effective internal controls could lead to financial misstatements and loss of investor confidence - Effective disclosure controls and internal controls over financial reporting are necessary for reliable financial statements[228] - A material weakness in internal control was identified in 2017 and remediated by December 31, 2018, but future deficiencies are possible[229] - Failure to maintain or implement new controls could result in material misstatements, missed reporting obligations, loss of public confidence, and a decline in stock price[230] Risks relating to intellectual property rights may negatively impact our business. The business depends on protecting intellectual property, facing risks from infringement claims and challenges to its IP rights - The company relies on copyright, trade secret, patent, and trademark laws to protect its intellectual property[231] - IP rights may be challenged, invalidated, circumvented, or rendered unenforceable, or third parties may independently develop equivalent technologies[231] - Litigation to enforce or defend IP rights could result in substantial costs, product redesigns, or payment of damages/royalties[231] Global economic and geopolitical conditions could adversely affect our operations. Challenging global economic and geopolitical conditions can decrease product demand and adversely impact profitability - Challenging global economic conditions, including the COVID-19 pandemic, can decrease product demand, increase competition, and pressure prices[232] - Economic weakening may affect suppliers, leading to supply interruptions, and cause delays in collecting receivables in certain countries[232] - Geopolitical events like Brexit, international trade disputes, and tariffs could adversely impact profitability and competitiveness[233] Reductions in government funding and the capital spending programs of our customers could have a material adverse effect on our business, results of operations or financial condition. Demand is influenced by customer capital spending, which is vulnerable to reductions in government funding - Demand for products is significantly affected by capital spending programs of customers (universities, government agencies, hospitals, pharmaceutical companies)[235] - These programs depend on available resources and government grants[235] - Decreases in government funding or adverse budget reallocations by customers could materially affect business and financial condition[235] Changes in the healthcare industry could have an adverse effect on our business, results of operations and financial condition. Healthcare industry changes, including cost containment and reform, create pricing pressure and could reduce margins - Trends like managed care and healthcare reform (e.g., PPACA, PAMA) increase pressure on healthcare providers to reduce selling prices[236][237] - Consolidation among healthcare providers and laboratories results in fewer, more powerful groups with greater cost containment leverage[236] - Reductions in third-party payor reimbursements for clinical tests (e.g., Medicare Clinical Laboratory Fee Schedule) could impact demand for Bio-Rad's Clinical Diagnostics products[237] We are subject to substantial government regulation, and any changes in regulation or violations of regulations by us could adversely affect our business, prospects, results of operations or financial condition. Products are subject to extensive government regulation, and non-compliance or changes can impede market access - Clinical Diagnostic products are regulated as medical devices by the FDA and foreign counterparts, requiring clearances/approvals and compliance with reporting requirements[241] - Non-compliance can result in enforcement actions ranging from warning letters and fines to product recalls, operational shutdowns, and criminal prosecution[241] - Changes in regulatory policies (e.g., FDA review of laboratory developed tests, new EU regulations, stricter foreign requirements) can delay approvals, increase costs, and restrict market access[242][243] We cannot assure you that we will be able to integrate acquired companies, products or technologies into our company successfully, or we may not be able to realize the anticipated benefits from the acquisitions. Acquisitions carry integration risks and may not yield anticipated benefits, potentially leading to impairment charges - Acquisitions involve risks such as integrating operations and personnel, retaining customers, minimizing disruption, and complying with new regulatory requirements[248] - Benefits of acquisitions may be less than anticipated, and the company may incur contingent liabilities or impairment charges for goodwill and intangible assets[249] - Goodwill impairment tests are highly sensitive to changes in assumptions, and failure to achieve forecasts could result in future impairment losses[249] Product quality and liability issues could harm our reputation and negatively impact our business, results of operations and financial condition. Product quality issues or liability claims could harm the company's reputation and lead to significant costs - Quality issues with complex products (instruments, reagents, consumables) can arise from design, manufacturing, or third-party components[253] - Remediating quality issues can incur significant costs and time, and delay new product launches[253] - Quality issues, unapproved uses, or inadequate risk disclosure could lead to product recalls, product liability claims, reputational harm, and negative impact on business[253] Lack of key personnel could hurt our business. The business depends on attracting and retaining highly qualified personnel in a competitive labor market - Highly qualified and well-trained scientists are essential for developing, marketing, and selling technical products, and specialized knowledge is needed for manufacturing[254] - The company faces intense competition for these professionals, especially in competitive job markets like Northern California[254] - Failure to retain or attract qualified personnel, or loss of long-term staff due to restructuring, could impair business operations and increase costs[255] A reduction or interruption in the supply of components and raw materials could adversely affect our manufacturing operations and related product sales. Manufacturing relies on a global supply chain, and interruptions could adversely affect operations and sales - Manufacturing requires timely delivery of quality components and materials from numerous global suppliers, including sole suppliers[256] - Regulatory environments can make it difficult to quickly establish additional or replacement supply sources[256] - Supply reductions, interruptions, or poor quality could adversely affect manufacturing and product sales[256] Natural disasters, terrorist attacks, acts of war or other events beyond our control may cause damage or disruption to us and our employees, facilities, information systems, security systems, vendors and customers, which could significantly impact our business, results of operations and financial condition. Global facilities are vulnerable to natural disasters and other events that could disrupt business operations - Global manufacturing and distribution facilities are vulnerable to natural disasters (e.g., earthquakes, wildfires), electricity outages, and labor unrest[259] - Acts of terrorism, bioterrorism, violence, war, or public health issues (like COVID-19) could disrupt markets and business operations[260] - These events could cause damage, business interruptions, and losses exceeding insurance coverage, adversely affecting financial condition[259][260] We may have higher than anticipated tax liabilities. The company is subject to tax audits and disputes that could result in higher than anticipated tax liabilities - Income tax liabilities involve estimation and judgment, and are subject to review by tax authorities in various jurisdictions[261] - Disagreements with tax authorities could lead to additional tax assessments, impacting operating results and financial condition[261] - Economic and political pressures to increase tax revenues may complicate dispute resolution, potentially leading to material adverse effects[262] Changes in tax laws or rates, changes in the interpretation of tax laws or changes in the jurisdictional mix of our earnings could adversely affect our financial position and results of operations. Changes in tax laws, interpretations, or the jurisdictional mix of earnings could adversely affect financial results - Changes in tax laws (e.g., Tax Act), interpretations, or the jurisdictional mix of earnings can significantly impact the effective tax rate[263][267] - The COVID-19 pandemic and related tax incentives introduce further uncertainty regarding anticipated tax liabilities[266] - Adoption of BEPS recommendations by tax authorities could negatively impact the effective tax rate[269] Our reported financial results may be materially affected by changes in accounting principles generally accepted in the United States. Changes in U.S. GAAP can materially affect reported financial results, as seen with the new equity investment standard - Changes in U.S. GAAP or its interpretations can significantly affect reported financial results[270][271] - The adoption of ASU 2016-01, requiring fair value measurement of equity investments through earnings, materially impacted income due to the Sartorius AG position, and this impact may continue[272] Environmental, health and safety regulations and enforcement proceedings may negatively impact our business, results of operations and financial condition. Operations are subject to extensive environmental, health, and safety laws, with non-compliance leading to costs and fines - Operations are subject to federal, state, local, and foreign environmental, health, and safety laws and regulations[273][274] - Non-compliance can result in significant capital and operating costs, fines, and liability for spills or releases of hazardous substances[276] - Future statutory enactments or enforcement proceedings could adversely affect business and financial condition[276] Our debt may restrict our future operations. Substantial debt levels could restrict operational flexibility and increase vulnerability to adverse economic conditions - The company has substantial debt ($438.9 million outstanding as of September 30, 2020) and ability to incur more[277] - Debt can restrict future operations by making financial obligations difficult, reducing available cash flow, increasing vulnerability to adverse conditions, and limiting flexibility[277] - Existing credit facilities contain covenants restricting activities (e.g., incurring debt, acquisitions, dividends) and require compliance with financial ratios, with breach potentially leading to default[278][279] We are subject to healthcare laws and regulations and could face substantial penalties if we are unable to fully comply with such laws. Compliance with complex healthcare laws is required to avoid substantial penalties and operational disruptions - The company is subject to U.S. federal, state, and foreign healthcare laws, including anti-kickback statutes, false claims laws, Physician Payment Sunshine Act, and HIPAA[281] - Compliance with these complex and evolving laws imposes administrative, cost, and compliance burdens[282] - Violations could result in substantial penalties, including civil and criminal penalties, exclusion from Medicare/Medicaid, and operational restructuring, adversely affecting the business[282] Regulations related to "conflict minerals" could adversely impact our business. Compliance with conflict minerals regulations incurs costs and poses reputational and competitive risks - The company incurs costs to comply with SEC disclosure requirements regarding conflict minerals[284] - Verifying the origins of specified minerals in a complex supply chain is difficult and could harm the company's reputation[284] - Challenges in satisfying customer requirements for 'DRC conflict free' products could lead to a competitive disadvantage[284] Risks related to our common stock The Schwartz family's majority voting control allows them to direct company actions and may prevent a change in control - The Schwartz family holds a significant majority of voting stock (Class A and Class B Common Stock)[285][286] - This ownership allows them to elect a majority of directors and control fundamental company changes, potentially according to interests different from other investors[286] - Concentration of ownership may delay or prevent a change in control of the company[286] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The Share Repurchase Program was increased by $200.0 million, with no shares repurchased in the third quarter - The Board of Directors authorized an additional $200.0 million for the Share Repurchase Program in July 2020[287] - As of September 30, 2020, $273.1 million remained under the Share Repurchase Program[287] - No shares were purchased under the program during the three months ended September 30, 2020[290] Item 3. Defaults Upon Senior Securities The company reported no defaults upon senior securities during the period - No defaults upon senior securities were reported[290] Item 4. Mine Safety Disclosures This item is not applicable to the company's operations - This item is not applicable[291] Item 5. Other Information No other information was reported under this item for the period - No other information was reported[291] Item 6. Exhibits This section lists documents filed as exhibits, including certifications and Inline XBRL files - Exhibits include Global Restricted Stock Unit Award Grant Notice, Stock Option Grant Notice, CEO and CFO Section 302 Certifications, and **CE