BIO-RAD LABORATORIES, INC. quarterly report, Q2 FY2014

Bio-Rad Laboratories, Inc. — Q2 2014 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2014. Bio-Rad manufactures and distributes life science research and clinical diagnostics products. Amounts below are in U.S. dollars; financial statement figures are in millions unless stated otherwise.

Financial results and liquidity

Metric	Q2 2014	Q2 2013	First half 2014	First half 2013
Net sales	$536.8	$525.3	$1,046.2	$1,025.0
Gross profit / margin	$297.2 / 55.4%	$300.1 / 57.1%	$572.5 / 54.7%	$571.5 / 55.8%
Operating income	$45.7	$52.9	$66.2	$88.1
Net income attributable to Bio-Rad	$31.6	$34.6	$38.3	$54.8
Diluted EPS	$1.09	$1.20	$1.32	$1.90

• Q2 sales rose 2.2% year over year; excluding currency effects, growth was approximately 1.1%. First-half sales increased 2.1%, or approximately 2.0% excluding currency.
• First-half operating cash flow was $149.8, versus $43.8 in 2013. The filing attributes the improvement mainly to stronger collections and lower tax and interest payments; it includes timing-related factors, including a $20 million federal tax refund.
• First-half capital expenditures were $60.9. Investing activities used $101.9; financing activities provided $6.3. Cash and cash equivalents increased to $384.7 from $331.6 at year-end 2013.
• Cash, cash equivalents and short-term investments totaled $647.6 at June 30; approximately 40% was held in foreign subsidiaries. Current assets were $1,767.5 and current liabilities $480.2.
• Total debt was approximately $437.3, including $425 million principal of 4.875% Senior Notes due 2020. The new $200 million revolving credit agreement had no borrowings outstanding; letters of credit reduced availability. Bio-Rad reported compliance with its covenants.

Changes, business performance and notable items

• Clinical Diagnostics drove Q2 segment growth: sales increased 3.2% to $362.9, while Life Science sales were essentially flat at $170.3. First-half sales grew in both segments: 2.3% in Clinical Diagnostics and 1.6% in Life Science.
• Clinical Diagnostics faced price pressure and higher manufacturing costs, reducing segment gross margin by approximately 3.3 percentage points in Q2 and 2.2 points in the first half. Life Science margins improved, but this did not offset the overall margin decline.
• R&D increased to $55.7 in Q2 and $108.3 for the first half, reflecting work on genomics, instrument platforms, assays and diagnostic applications. First-half SG&A rose to $398.1 from $381.2, including higher employee costs and an FCPA-related charge.
• Interest expense fell substantially year over year because the $300 million 8.0% Senior Subordinated Notes were redeemed in September 2013. First-half effective tax rate rose to 40% from 25%; the filing cites tax adjustments, foreign losses without tax benefits, and the absence of the federal R&D credit benefit.
• Q2 comprehensive income attributable to Bio-Rad was $10.3, versus $32.6 a year earlier, including a $23.5 after-tax unrealized loss on available-for-sale investments.
• In April, Bio-Rad acquired GnuBIO for consideration valued at $50.4, including $39.7 cash and $10.7 contingent consideration. The preliminary allocation included $46.4 of in-process R&D and $15.2 of goodwill; contingent payments could reach $70.0 if all milestones are achieved.
• Bio-Rad recorded a $5.4 reduction in the estimated fair value of Propel Labs cell-sorting contingent consideration, credited to SG&A. Total contingent consideration liabilities were $26.1 at June 30.

Outlook, risks and contingencies

• The filing provides no specific numerical earnings or revenue guidance. Management describes uncertain economic conditions and risks from government and customer funding, reimbursement constraints, currency movements, and international markets. It expects capital spending to remain historically higher during a multi-year ERP rollout; estimated global ERP implementation cost could exceed $250 million over approximately four or more years.
• The DOJ and SEC investigations concerning possible FCPA violations remained ongoing. Bio-Rad reported an aggregate estimated loss contingency accrual of $43.0, including $3.2 of accrued interest, and said it could not estimate a reasonably possible outcome beyond that accrual. Potential sanctions or remedial measures could materially affect the business.
• Chinese authorities were investigating certain selling arrangements and reviewing importation practices; outcomes and effects were not yet assessable. A shareholder derivative matter was stipulated dismissed without prejudice, with limitations tolled pending resolution of the government investigations.
• A material weakness in monitoring controls over certain U.S. and overseas operations remained unremediated at June 30. Management said remediation was in progress but not complete; disclosure controls were deemed ineffective as of the prior year-end due to this weakness.
• Other risks include price competition, foreign-exchange exposure, acquisition integration, regulatory and reimbursement changes, potential disruption from ERP implementation, and access to customer and supplier credit. The filing also reports $57.0 of receivables in Spain, Italy, Greece and Portugal.
• Bio-Rad corrected errors in the 2013 comparative cash-flow presentation, reclassifying contingent consideration and forward-exchange cash flows. It also describes a prior-period French R&D tax-credit presentation reclassification. Management concluded the corrections did not alter financial trends.

Key facts for investors to verify

• Progress and potential financial or operational consequences of the DOJ/SEC FCPA investigations, the $43.0 million accrual, and the China inquiries.
• Remediation of the material weakness and whether subsequent filings report effective controls.
• Whether Clinical Diagnostics pricing and manufacturing costs continue to pressure consolidated margins, and whether sales growth improves beyond the modest currency-neutral rates reported.
• GnuBIO milestone performance, final purchase-price allocation, and future ERP spending, implementation timing and disruption risk.
• Cash conversion excluding tax-refund and collection timing effects, investment-value volatility, and the company’s ability to maintain liquidity while funding capital spending and acquisitions.