Bio-Rad Laboratories, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; compared with the three months ended March 31, 2017. Bio-Rad manufactures and distributes life science research and clinical diagnostics products.
Financial performance
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Net sales | $551.5 million | $500.1 million |
| Gross profit / gross margin | $302.2 million / 54.8% | $270.1 million / 54.0% |
| Operating income | $43.6 million | $26.2 million |
| Net income | $656.8 million | $12.4 million |
| Diluted EPS | $21.77 | $0.41 |
| Operating cash flow | $40.3 million | $(56.2) million |
| Capital expenditures | $27.2 million | $39.3 million |
Revenue increased 10.3% year over year, or approximately 4.5% excluding foreign-exchange effects. Operating margin rose to about 7.9% from 5.2%; SG&A was 37.9% of sales versus 38.9%, and R&D was 9.0% versus 9.9%. The effective income tax rate was 24%, compared with 38%.
Segments
| Segment | Sales, Q1 2018 | Year-over-year growth | Currency-neutral growth | Segment profit (loss) |
|---|---|---|---|---|
| Life Science | $197.8 million | 13.5% | 8.9% | $3.3 million |
| Clinical Diagnostics | $350.8 million | 8.9% | 2.4% | $36.6 million |
Life Science growth reflected strength in Droplet Digital PCR, process chromatography, gene expression and cell biology, as well as RainDance sales. Clinical Diagnostics growth included diabetes, quality control and immunology products and a $6.0 million licensed-patent resolution. Currency-neutral sales generally increased in North America and Asia Pacific; Europe was weaker.
Liquidity, debt and cash flows
At March 31, 2018, cash and cash equivalents were $407.3 million and short-term investments were $355.7 million, totaling $762.9 million. Current assets were $2.0 billion and current liabilities were $456.2 million. Total debt was approximately $435.0 million, including $425.0 million of 4.875% senior notes due 2020. No revolving-credit borrowings were outstanding; the company reported approximately $208.8 million of availability under domestic and international lines, letters of credit and guarantees, net of usage.
Operating cash flow improved to $40.3 million from cash used of $56.2 million, primarily reflecting higher customer collections and lower supplier, employee and tax payments. Investing cash outflow was $18.8 million, versus $110.4 million, including lower acquisition spending and $6.9 million of proceeds from a product-line divestiture. Management said available liquidity and operating cash flows should meet current needs. A $250 million discretionary share-repurchase authorization was in place; no other repurchases were reported during the quarter.
Material changes and unusual items
- Unrealized investment gain drove reported earnings: Net income included an $815.9 million gain from the change in fair value of equity securities, primarily Bio-Rad’s Sartorius AG investment. The gain followed adoption of accounting guidance requiring equity investment fair-value changes to be recorded in earnings. The filing identifies the gain as non-cash; it also contributed $181.1 million of deferred tax expense. Net income and EPS therefore substantially overstate the quarter’s operating performance if viewed without this item.
- Sartorius investment: Bio-Rad owned more than 37% of Sartorius’ outstanding voting shares, but reported no board representation or significant influence. Equity securities were valued at $3.005 billion at quarter end. A $10.3 million Sartorius dividend was declared after quarter end and was to be recorded in Q2.
- Accounting adoption: ASC 606 was adopted January 1, 2018; its Q1 revenue impact was not significant. Adoption of the financial-instrument guidance resulted in a $864.5 million cumulative increase to opening stockholders’ equity, including a $1,097.4 million increase in other investments and a $232.9 million increase in deferred tax liabilities. The 2017 income comparison was not restated for ASC 606.
- Other income items: A $4.1 million land-sale gain and a $5.1 million product-line divestiture gain contributed to other income. Life Science gross margin improved partly because Q1 2017 included a $10.0 million RainDance-related one-time expense. Clinical Diagnostics gross margin declined approximately 1.5 percentage points, reflecting mix, manufacturing costs and variances, partly offset by the patent resolution.
Outlook, risks and contingencies
The filing gives no quantified revenue, earnings or margin guidance. Management said cash should support operations, R&D, capital spending and acquisitions of reasonable scale. It estimated approximately $130 million of future cash outlays for the global ERP implementation, expected to take another three to four years. The European reorganization and ERP rollout remain potential sources of disruption.
Controls: Disclosure controls and procedures were reported ineffective because of a material weakness in internal control over financial reporting involving staffing, risk assessment and controls over inventory and revenue in European entities affected by the ERP conversion and reorganization. The deficiencies had caused immaterial misstatements, some corrected before the 2017 financial statements were issued. Remediation was underway and expected to be completed by year-end 2018; effectiveness was not assured.
Legal and tax: Bio-Rad had provided for a former general counsel’s $10.92 million whistleblower award, interest and litigation costs and had appealed. Other legal matters could not be reliably quantified. Tax accounting under the 2017 Tax Act remained provisional, including the transition tax and GILTI; the company recorded a provisional $55 million transition-tax expense and said estimates could change as guidance develops. Tax authorities were examining returns; unrecognized tax benefits could decrease by up to $3 million within 12 months.
Principal risks: The filing highlights foreign-exchange exposure, uncertain government and customer funding, pricing and reimbursement pressure, competition, product and regulatory risks, international compliance obligations, ERP and cybersecurity risks, supply interruptions, tax uncertainty, and volatility or potential losses in equity and other investments. It also notes approximately $40.1 million of net receivables in Spain, Italy, Greece and Portugal.
Investor verification checklist
- Separate recurring operating results from the $815.9 million unrealized equity-security gain; assess the effect of future Sartorius share-price movements on earnings.
- Review segment growth and margins excluding currency effects and one-time items, including the $6.0 million Clinical Diagnostics patent resolution.
- Monitor remediation of the European internal-control material weakness and the remaining ERP rollout, costs and operational effects.
- Track Tax Act measurement-period adjustments, deferred taxes and outcomes of tax examinations.
- Assess liquidity, the 2020 note maturity, ERP spending commitments and any use of the share-repurchase authorization.
- Follow the Wadler appeal and any developments in other legal, regulatory or international compliance matters.