Bio-Rad Laboratories, Inc. — Q1 2012 Form 10-Q
Business context and reporting period. Unaudited results cover the three months ended March 31, 2012, compared with the three months ended March 31, 2011. Bio-Rad sells life science research and clinical diagnostics products through its Life Science and Clinical Diagnostics segments.
Financial performance
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Net sales | $486.3 million | $485.1 million |
| Gross profit / gross margin | $278.6 million / 57.3% | $277.6 million / 57.2% |
| Operating income | $54.4 million | $67.1 million |
| Net income attributable to Bio-Rad | $31.0 million | $33.0 million |
| Diluted EPS | $1.09 | $1.16 |
| Operating cash flow | $35.3 million | $19.8 million |
| Capital expenditures | $34.7 million | $17.8 million |
Reported sales rose 0.2%; sales growth excluding foreign-currency effects was approximately 1.4%. Operating income fell about 19%, and attributable net income declined about 6%. Gross margin was nearly unchanged; higher operating expenses, particularly R&D, weighed on operating profit. R&D was $52.9 million versus $42.7 million, while SG&A was $171.3 million versus $167.8 million. Net income included $6.5 million of other income, mainly realized investment gains, compared with $1.0 million in Q1 2011. The effective tax rate was 33%, versus 32%.
Segments: Life Science sales were $154.8 million, up 0.2% reported and 0.7% currency-neutral; segment profit was a $3.9 million loss versus $3.1 million profit. Clinical Diagnostics sales were $327.2 million, essentially flat reported and up 1.6% currency-neutral; segment profit was $45.7 million versus $48.0 million. Comparisons were affected by an approximately $8 million one-time blood-typing sale in Q1 2011.
Financial position, liquidity and debt
At March 31, 2012, cash and cash equivalents were $533.8 million and short-term investments were $273.2 million, totaling $807.1 million. Total debt was approximately $732.7 million, primarily fixed-rate notes due 2016 and 2020; the company had no borrowings outstanding under its $200 million revolving credit agreement. Bio-Rad reported $220.1 million available under domestic and international credit lines, including $13.1 million reserved for letters of credit. The company was in compliance with debt covenants.
Operating cash flow improved year over year, but capital spending rose substantially; operating cash flow less capital expenditures was approximately $0.6 million. Cash and cash equivalents decreased $40.4 million during the quarter. Inventory increased from $433.5 million at year-end to $463.4 million. Management stated that available liquidity and operating cash flow should meet current operating, investment and acquisition needs.
Material changes, outlook and notable items
- Bio-Rad corrected accumulated errors from prior periods in Q1 2012. The corrections included an estimated $6.1 million foreign supplemental tax, penalties and interest payable, plus other income-tax errors. The quarter included charges of $4.1 million to cost of goods sold, $1.2 million to interest expense and $0.8 million to other expense, partly offset by a $0.7 million tax benefit. Management said the accumulated errors were significant to Q1 2012 but not material to any individual prior period or full-year 2012.
- In January 2012, the company paid approximately $12.5 million for assets from a raw-material supplier, aiming to secure critical supplies and reduce Clinical Diagnostics costs; it also paid $2.0 million for employee retention agreements.
- Capital spending is expected to increase, including for a global ERP implementation estimated to cost up to approximately $150 million and take about four more years. The filing provides no specific revenue or earnings guidance.
- Management cited uncertain economic conditions, public-sector spending constraints and pricing concessions. Europe declined approximately 1.8% on a currency-neutral basis; net receivables in Spain, Italy, Greece and Portugal were $87.8 million.
- An Audit Committee, DOJ and SEC investigation into possible FCPA violations remains ongoing. Bio-Rad said it could not estimate the outcome; potential sanctions or remedial measures could materially affect the business or financial condition. A related derivative lawsuit was stipulated dismissed without prejudice, with limitations tolled pending the investigations.
- The company said a previously reported material weakness in internal control was remediated by year-end 2011, but significant deficiencies remained in revenue processes, reagent-rental controls at certain foreign subsidiaries and certain controls at smaller subsidiaries. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Progress and potential financial or operational consequences of the DOJ and SEC FCPA investigations.
- Whether remaining internal-control deficiencies are remediated and whether further financial-statement corrections arise.
- Collection timing and credit quality of the $87.8 million in receivables from Spain, Italy, Greece and Portugal.
- Execution, total cost and expected benefits of the ERP program and higher capital expenditures.
- Whether sales growth, segment profitability and cash generation improve, particularly in Life Science and Europe.
- Debt covenant compliance, refinancing capacity and the impact of the company’s substantial debt.