Bio-Rad Laboratories, Inc. — Q2 2016 Form 10-Q
Business context and reporting period. Bio-Rad manufactures and distributes life science research and clinical diagnostics products. This unaudited report covers the quarter and six months ended June 30, 2016; comparisons are with the corresponding 2015 periods. Life Science and Clinical Diagnostics are its reportable segments. About 62% of first-half sales came from outside the United States.
Key financial results
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Net sales | $516.8 million | $506.1 million | $988.0 million | $978.9 million |
| Gross profit / margin | $280.2 million / 54.2% | $279.6 million / 55.2% | $544.3 million / 55.1% | $549.7 million / 56.2% |
| Operating income | $22.5 million | $40.2 million | $48.3 million | $74.6 million |
| Net income | $18.0 million | $28.4 million | $30.3 million | $46.2 million |
| Diluted EPS | $0.61 | $0.97 | $1.03 | $1.58 |
- Revenue increased 2.1% in Q2 and 0.9% in the first half; excluding currency effects, management reported growth of approximately 2.8% and 3.3%, respectively.
- SG&A was $205.5 million in Q2 and $395.3 million in the first half; R&D was $52.2 million and $100.8 million. Both expense categories increased year over year as a share of sales.
- First-half operating cash flow was $69.7 million, versus $68.0 million. Investing used $110.3 million, including $56.9 million of capital expenditures; financing provided $3.3 million. Cash and cash equivalents declined $38.9 million to $418.7 million.
- At June 30, cash, cash equivalents and short-term investments totaled $791.6 million. Total debt was approximately $434.4 million, principally $425 million of 4.875% senior notes due 2020. The $200 million revolving credit agreement had no borrowings; $0.8 million was used for standby letters of credit.
- Total assets were $3.875 billion, current assets $1.806 billion and current liabilities $410.4 million. Inventories were $541.5 million, up from $490.2 million at year-end.
Material changes versus prior periods
- Profitability weakened despite higher sales: Q2 net income fell about 37% and first-half net income about 35%. Lower gross margins and higher SG&A and R&D contributed; Q2 operating income declined to $22.5 million from $40.2 million.
- Life Science sales rose 5.5% in Q2 and 5.9% in the first half. Clinical Diagnostics sales increased 0.5% in Q2 but declined 1.6% in the first half on a reported basis; currency-neutral growth was 1.3% for Q2 and 1.1% for the first half.
- First-half investment cash use increased versus 2015, reflecting greater purchases and fewer maturities of securities, as well as the Propel acquisition. Capital expenditures were slightly lower year over year.
- Other comprehensive income included $58.0 million of first-half unrealized gains on available-for-sale investments, largely associated with marketable equity securities. This contributed to accumulated other comprehensive income rising to $459.6 million.
Outlook, commentary, risks and unusual items
- The filing gives no specific revenue or earnings guidance. Management stated that available liquidity and operating cash flow should support operations, R&D, capital needs and a reasonably sized acquisition. It expects capital expenditures to remain historically higher for at least three years as it implements its ERP and e-commerce systems; the global ERP project is estimated at $175 million and to take more than three years.
- Management cited uncertain global conditions, government and customer funding constraints, currency movements, the UK referendum on leaving the EU, and economic weakness in China and some emerging markets as potential pressures. It reported $39.0 million of net receivables in Spain, Italy, Greece and Portugal.
- Q2 included $11.7 million of restructuring charges, primarily workforce actions in Europe; $11.3 million remained payable through 2019. The company also recorded a $2.4 million write-off of intellectual property following termination of an R&D project. The U.S. medical-device excise tax was suspended for 2016–2017.
- January’s Propel flow-cytometer acquisition had preliminary consideration of $38.8 million: $9.5 million cash and $29.3 million contingent consideration. The contingent sales milestones may range from zero to an unlimited amount through 2020; purchase accounting remains preliminary. Total contingent-consideration liabilities were $43.0 million at quarter-end.
- Bio-Rad signed a July 28, 2016 term sheet proposing dismissal of FCPA-related derivative actions, revised corporate procedures and no monetary payment other than plaintiffs’ counsel fees and costs. It remained subject to definitive documentation and court approval; defendants did not admit liability. A separate former-general-counsel whistleblower and employment lawsuit remained in discovery, with trial scheduled for January 2017.
- Other important risks include FCPA compliance obligations, international regulation and currency exposure, ERP implementation disruptions, competitive and pricing pressures, product development and quality risks, tax disputes, and debt restrictions. Management reported disclosure controls were effective and no material internal-control changes during the quarter.
Important facts for investors to verify
- Whether sales growth, especially in Clinical Diagnostics and Europe, sustains or improves, and whether currency continues to weigh on reported results.
- Whether margins recover as restructuring actions proceed, given rising operating expenses and the Q2 and first-half profit declines.
- Actual cash requirements and timing for ERP implementation, capital expenditures, restructuring payments and Propel milestone payments.
- The valuation and potential earnings or cash-flow effects of Bio-Rad’s investment portfolio, particularly its Sartorius-related holdings and unrealized gains.
- Final terms and court approval of the derivative-action settlement, and developments in the separate whistleblower litigation and tax examinations.