Bio-Rad Laboratories, Inc. — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012. Bio-Rad manufactures and distributes life-science research and clinical-diagnostics products through its Life Science and Clinical Diagnostics segments. Approximately 67% of year-to-date sales were international.
Financial performance
| Metric | Q3 2012 | Q3 2011 | First nine months 2012 | First nine months 2011 |
|---|---|---|---|---|
| Net sales | $498.7 million | $516.5 million | $1,495.4 million | $1,523.3 million |
| Gross profit / margin | $273.5 million / 54.8% | $296.2 million / 57.3% | $840.0 million / 56.2% | $866.9 million / 56.9% |
| Operating income | $64.2 million | $73.9 million | $191.9 million | $209.2 million |
| Net income attributable to Bio-Rad | $42.4 million | $45.9 million | $121.7 million | $119.0 million |
| Diluted EPS | $1.48 | $1.61 | $4.26 | $4.18 |
| Operating cash flow | Not separately stated for the quarter | Not separately stated for the quarter | $180.2 million | $181.2 million |
Q3 reported sales declined 3.5%, while sales excluding foreign-exchange effects increased approximately 3.6%. For the first nine months, reported sales declined 1.8% and currency-neutral sales increased approximately 2.7%. Q3 gross margin fell 2.5 percentage points year over year; SG&A was $160.3 million and R&D was $49.0 million. For the first nine months, SG&A was $493.8 million and R&D was $154.3 million.
Cash, liquidity and debt
- At September 30, 2012, cash and cash equivalents were $426.5 million and short-term investments were $427.2 million, totaling $853.6 million, versus $813.1 million at December 31, 2011.
- Total assets were $3.30 billion; current assets were $1.85 billion and current liabilities were $433.7 million.
- Gross debt was approximately $732.5 million, including $296.8 million of 8.0% notes due 2016 and $423.0 million of 4.875% notes due 2020. There were no borrowings under the $200 million revolving credit agreement; the company reported compliance with its debt covenants.
- Nine-month operating cash flow was $180.2 million. Capital expenditures were $112.4 million, up from $67.2 million a year earlier. Investing activities used $340.8 million; cash declined by $147.8 million over the period.
Changes, outlook and notable items
- Segment trends: Q3 Life Science sales were $167.0 million, down 2.6% reported but up 2.2% currency-neutral. Clinical Diagnostics sales were $328.4 million, down 3.8% reported but up 4.5% currency-neutral. Western Europe was weaker; growth in other markets and product lines partly offset this.
- Margins and spending: Management attributed Life Science margin pressure partly to $3.8 million of soil-remediation expense and QuantaLife amortization. R&D spending increased, reflecting QuantaLife and ongoing product development. Management expects capital expenditures to continue rising for two to three years, including implementation of a global ERP system estimated to cost approximately $150 million and take at least four more years to complete.
- Acquisitions and contingent consideration: The Propel Labs cell-sorting acquisition included $5.0 million paid at closing and $44.6 million of estimated contingent consideration. The QuantaLife contingent liability was reduced by $16.0 million year to date, primarily after early sales milestones were missed amid weaker research-market funding and a longer sales cycle. These adjustments benefited reported SG&A.
- Prior-period corrections: The company recorded a $6.1 million accrual for foreign supplemental taxes, penalties and interest, paid during Q1 2012. It also corrected other prior-period tax errors in Q1, recording charges to cost of goods sold, interest expense and other expense, partly offset by a tax benefit. Management said the errors were not material to individual prior periods or full-year 2012.
- Guidance and risks: The filing provides no quantified revenue or earnings guidance. Management cited uncertain global economic conditions, government and research funding, foreign-exchange movements, competition, acquisition integration, debt and ERP execution as risks. It stated that cash, investments, operating cash flow and available credit should support current needs.
- Legal and controls: DOJ and SEC investigations into possible FCPA violations at certain overseas operations continued; the company could not estimate the outcome, and sanctions could materially affect its business or financial condition. The prior material weakness in internal control was reported remediated, but significant deficiencies remained in revenue, reagent-rental and certain subsidiary controls.
Investor verification priorities
- Track currency-neutral growth against reported sales, particularly in western Europe, and assess whether margin pressure persists.
- Review QuantaLife and Propel Labs milestone performance, contingent-liability remeasurement and acquisition integration.
- Monitor ERP costs, rising capital expenditures and their effects on operating and free cash flow.
- Follow the FCPA investigations, related potential sanctions and progress addressing remaining control deficiencies.
- Assess sovereign-customer receivables: exposure in Spain, Italy, Greece and Portugal was $65.7 million at quarter-end, down from $82.1 million at year-end 2011.