Bio-Rad Laboratories, Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. Bio-Rad manufactures and distributes life science research and clinical diagnostics products. All amounts below are in U.S. dollars; financial figures are in millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net sales | $545.1 | $534.1 | $1,672.6 | $1,538.9 |
| Gross profit / margin | $286.7 / 52.6% | $299.0 / 56.0% | $890.6 / 53.2% | $842.4 / 54.7% |
| Operating income | $36.3 | $38.8 | $123.7 | $63.3 |
| Net income | $269.3 | $22.1 | $1,194.1 | $39.5 |
| Diluted EPS | $8.89 | $0.73 | $39.50 | $1.32 |
| Operating cash flow | Not separately provided for the quarter | $180.5 | $34.8 |
- Q3 sales rose 2.1% reported and approximately 3.4% on a currency-neutral basis; nine-month sales increased 8.7% reported and 6.3% currency-neutral.
- Q3 operating income declined 6.4% year over year despite higher sales. Gross margin fell 3.4 percentage points, while R&D expense decreased to $49.2 from $62.1 and SG&A increased to $201.2 from $198.2.
- For the first nine months, operating income nearly doubled year over year. SG&A fell to 37.1% of sales from 39.3%, and R&D fell to 8.7% from 11.3% of sales.
- Cash, cash equivalents and short-term investments totaled $860.6 at September 30, 2018. Total debt was approximately $440.6, including $425.0 principal on 4.875% senior notes due 2020. The company had no borrowings under its $200 million revolving credit agreement, which matures in June 2019; it was evaluating renewal or similar arrangements.
- Nine-month investing cash outflow was $132.2; capital expenditures were $76.0. Cash and restricted cash increased $50.6 during the period.
Material changes and unusual items
- Net income and EPS were dominated by gains on Bio-Rad’s Sartorius AG equity investment: fair-value gains of $318.0 in Q3 and $1,420.3 for nine months. These gains followed adoption of accounting guidance requiring equity-investment fair-value changes to run through earnings. The gains are noncash and substantially explain the reported profit increase; they do not represent operating performance.
- Bio-Rad held over 37% of Sartorius’s voting shares but reported no significant influence over its operating and financial policies. The Sartorius investment was valued at approximately $3.5 billion at quarter-end, creating material exposure to share-price fluctuations.
- Q3 Life Science sales grew 7.1% reported (8.0% currency-neutral), while Clinical Diagnostics sales declined 1.2% reported but grew 0.5% currency-neutral. Nine-month sales increased 13.9% in Life Science and 5.7% in Clinical Diagnostics.
- Clinical Diagnostics gross margin pressure reflected lower-margin equipment sales and higher installation, warranty, service, reagent-rental and inventory-related costs. Life Science growth included Droplet Digital PCR and other product lines; prior-year comparisons also included a $10.0 RainDance-related expense.
- Nine-month operating cash flow improved from $34.8 to $180.5, driven in part by stronger customer collections, forward-currency-contract proceeds and investment income. It also reflected working-capital and tax-payment changes; reported net income itself included the large noncash Sartorius gain.
Outlook, risks and contingencies
- The filing provides no specific revenue or earnings guidance. Management said liquidity, operating cash flow and available credit were expected to support operations, R&D, capital spending and reasonable acquisitions. Remaining ERP implementation was estimated to require about $110 million over the next three to four years.
- Management cited uncertainty around government and customer funding, reimbursement constraints, competition and pricing, international trade and regulation, foreign exchange, and economic conditions. Approximately 61% of nine-month sales came from outside the United States.
- Disclosure controls were reported ineffective because of a material weakness in internal control over financial reporting connected to staffing, training, risk assessment and review controls after European ERP conversion and reorganization. Remediation continued, with completion expected by year-end 2018; effectiveness was not assured.
- The company reported a $10.92 million judgment, plus interest and litigation costs, in the former general counsel’s whistleblower and employment case. Bio-Rad had provided for the judgment and appealed; oral argument was scheduled for November 14, 2018. Other ordinary-course legal matters could not be reliably quantified.
- Tax accounting under the 2017 Tax Act remained provisional. Proposed regulations could affect transition-tax and GILTI calculations; further adjustments might be recorded. The company also reported ongoing tax examinations and retained a valuation allowance for certain foreign deferred tax assets.
- European restructuring included a $7.2 million liability at quarter-end for a terminated diagnostics R&D project and facility closure. A further $2.0 million liability remained for the European reorganization.
Most important facts for investors to verify
- Separate recurring operating results from Sartorius fair-value gains when assessing earnings, EPS and future volatility.
- Track underlying segment growth and the persistence of Clinical Diagnostics margin pressure.
- Monitor remediation of the material control weakness, including any subsequent filings or auditor conclusions.
- Confirm the outcome of the Wadler appeal and any material developments in other legal or tax matters.
- Review the Sartorius investment concentration, credit-facility renewal, 2020 note maturity and planned ERP spending.