Bio-Rad Laboratories, Inc. — Q3 2017 Form 10-Q
Business context and reporting period
Quarter ended September 30, 2017; year-to-date figures cover the nine months ended that date. Bio-Rad develops and sells life science research and clinical diagnostics products. Its reportable segments are Life Science and Clinical Diagnostics. Approximately 61% of year-to-date sales came from outside the United States.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net sales | $535.0 million | $508.7 million | $1,539.7 million | $1,496.7 million |
| Gross margin | 56.9% | 54.9% | 55.1% | 55.0% |
| Income from operations | $46.4 million | $28.1 million | $69.6 million | $76.3 million |
| Net income | $27.4 million | $18.4 million | $44.8 million | $48.7 million |
| Diluted EPS | $0.91 | $0.62 | $1.49 | $1.65 |
Q3 sales grew 5.2% reported and approximately 3.4% excluding currency effects; year-to-date sales grew 2.9% reported and approximately 2.7% currency-neutral. Q3 Life Science sales were $193.6 million, up 8.7% (7.6% currency-neutral); Clinical Diagnostics sales were $338.0 million, up 3.3% (1.2% currency-neutral). Year-to-date segment sales were $547.3 million for Life Science and $982.3 million for Clinical Diagnostics.
Q3 selling, general and administrative expense was $196.8 million, or 36.8% of sales, versus $201.5 million, or 39.6%. Research and development expense rose to $61.4 million, or 11.5% of sales, from $49.9 million, or 9.8%. The nine-month tax rate was 25%, compared with 30%; Q3 rates were 29% and 19%, respectively. Tax benefits from share-based compensation and the European reorganization contributed to the lower year-to-date rate.
Cash flow, balance sheet and liquidity
For the first nine months, operating cash flow was $34.5 million, down from $121.3 million; investing cash outflow was $162.5 million, and financing cash outflow was $3.2 million. Cash and cash equivalents declined to $328.9 million from $456.3 million at year-end 2016. Cash, cash equivalents and short-term investments totaled $716.5 million at September 30, 2017.
Total debt was approximately $434.9 million, principally $425 million of 4.875% senior notes due 2020. The $200 million revolving credit facility had no borrowings; $0.5 million was used for standby letters of credit. Bio-Rad reported compliance with its credit agreement covenants and approximately $207.8 million available across domestic and international borrowing and guarantee arrangements. Management stated available liquidity and operating cash flow were expected to meet current needs.
Changes, outlook and material items
- Nine-month net income and operating income declined despite higher sales. Operating cash flow also fell, reflecting lower customer receipts, increased supplier and employee payments, taxes, foreign-exchange contract payments, and working-capital movements.
- Reported Q3 gross margin benefited from two ERP-related timing/classification items: $2.5 million of sales recorded in Q3 rather than Q2 while related cost of goods sold was recorded in Q2; and a $5.3 million reclassification from cost of goods sold to SG&A. The latter did not affect net income. The filing states neither item affected nine-month results.
- RainDance was acquired in February for approximately $76.0 million, including assumed net liabilities; a separate $10.0 million one-time acquisition-related expense was recorded in cost of goods sold. The company cited RainDance as supporting its genomic and droplet digital PCR offerings.
- Bio-Rad announced closure of the GnuBIO research program facilities, recording $2.9 million of severance-related charges and $5.5 million of asset write-offs. It also recorded $7.6 million of GnuBIO closure costs in Q3 R&D.
- In September 2017, management disclosed a material weakness in disclosure controls tied to ERP data migration and system configuration. Two items were recorded in Q3 instead of Q2. The company said the nine-month financial statements were unaffected, and planned enhanced review and user-acceptance testing controls, with remediation targeted by year-end.
- No specific financial guidance was provided in the supplied filing text. Management cited ongoing ERP implementation and European organizational changes; it expected capital expenditures to moderate in 2017, while the global ERP program was estimated to require $100–$130 million over approximately three to four years. Revenue-standard adoption was planned for January 1, 2018; the company had not identified material timing changes to revenue recognition but had not completed its assessment.
- Other matters include a $10.92 million judgment plus interest and costs in a former general counsel’s whistleblower lawsuit, for which Bio-Rad provided and appealed; the company also disclosed air-district violation notices under investigation. It stated other ordinary-course claims could not be reliably estimated.
Key investor verification points
- Track remediation of the ERP-related material weakness and whether further reporting-period errors arise.
- Assess underlying margins excluding the Q3 timing and classification items, acquisition costs, and GnuBIO closure charges.
- Monitor operating cash conversion, receivables and inventory, given the sharp year-to-date operating cash-flow decline.
- Review the valuation and earnings sensitivity of the substantial Sartorius-related investment holdings and the expected effect of adopting financial-instrument accounting changes.
- Follow the whistleblower judgment appeal, tax examinations and deferred-tax-asset valuation allowance, and potential exposure from other legal or regulatory matters.