Bio-Rad Laboratories, Inc. — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011; comparisons are with the corresponding 2010 periods. Bio-Rad manufactures and distributes life science research and clinical diagnostics products. Approximately 31% of year-to-date sales were in the U.S. and 69% internationally.
Key financial results
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net sales | $516.5M | $471.5M | $1,523.3M | $1,393.4M |
| Gross profit / margin | $296.2M / 57.3% | $266.3M / 56.5% | $866.9M / 56.9% | $791.8M / 56.8% |
| Operating income | $73.9M | $74.8M | $209.2M | $206.2M |
| Net income attributable to Bio-Rad | $45.9M | $44.8M | $119.0M | $117.6M |
| Diluted EPS | $1.61 | $1.59 | $4.18 | $4.18 |
| Operating cash flow | Not separately stated for quarter | Not separately stated for quarter | $181.2M | $125.5M |
- Q3 sales rose 9.5% reported but 1.1% excluding currency effects; nine-month sales rose 9.3% reported and 3.4% currency-neutral.
- Q3 SG&A was $176.9M, or 34.2% of sales, versus 31.5% a year earlier. Nine-month SG&A was $521.4M, or 34.2%, versus 32.9%. R&D was $45.4M in Q3 and $136.3M year to date.
- Q3 foreign-exchange losses were $6.3M, versus $2.7M; nine-month losses were $12.1M, versus $3.5M. Management attributed about $3.0M of current-period losses to entering into larger forward contracts than required, as well as market volatility and hedge costs.
- Effective tax rate was 18% in Q3 versus 22%; it was 27% for both nine-month periods. Q3 tax benefits included a revised estimate on French patent income and release of tax reserves.
Balance sheet, debt and liquidity
- At September 30, cash and cash equivalents were $671.0M and short-term investments were $239.2M, totaling $910.2M. Total current assets were $1,877.7M and current liabilities $415.3M.
- Total debt was approximately $732.4M; long-term debt on the balance sheet was $731.6M. Bio-Rad had $806,000 of current notes and maturities, compared with $233.2M at year-end 2010, following redemption of $225M of 7.5% notes due 2013 in January.
- Management reported $221.1M available under domestic and international lines of credit, including $16.8M reserved for standby letters of credit. The separate $200M revolving credit agreement had no outstanding borrowings. The company stated liquidity and operating cash flow should support current operating, investment and reasonably sized acquisition objectives; it was in compliance with debt covenants.
- Nine-month investing cash outflow was $213.9M, including $67.2M of capital expenditures; financing cash outflow was $211.8M, primarily reflecting the note redemption. Cash declined $235.5M from year-end 2010.
Material changes, outlook and risks
- Clinical Diagnostics Q3 sales increased 8.4% reported but declined 0.9% currency-neutral; management cited competitive pricing and public-sector spending constraints in many regions. Life Science Q3 sales rose 11.9% reported and 5.1% currency-neutral, supported by electrophoresis, imaging and product launches.
- Management provided no quantified sales or earnings guidance. It anticipated higher future spending on a global ERP implementation, estimated to cost up to approximately $150M over about five years, and international e-commerce expansion.
- On October 4, 2011, after quarter-end, Bio-Rad acquired QuantaLife for $164.8M cash consideration, with $5.0M held back and potential contingent payments of up to approximately $48M. The acquisition will be included in Life Science; management expects it to complement its amplification business.
- A continuing Audit Committee, DOJ and SEC investigation concerns possible FCPA violations in overseas operations. The company could not estimate the outcome or potential sanctions, which it said could materially adversely affect business or financial condition. A shareholder derivative complaint was dismissed without prejudice; the plaintiff could amend it by February 29, 2012.
- Disclosure controls and internal control over financial reporting were reported ineffective, with an ongoing material weakness linked to FCPA compliance, entity-level controls, and certain international expenditure, revenue and receivables processes. Remediation was underway but incomplete. Management did not anticipate a material effect on reported 2011 results, but warned future errors or reporting failures remained possible.
- Other cited risks include government funding and healthcare spending constraints, foreign-currency movements, competition, acquisition integration, substantial debt, and execution of the ERP program. Q3 comprehensive loss attributable to Bio-Rad was $38.0M, driven principally by foreign-currency translation and investment valuation changes, despite positive net income.
Important facts for investors to verify
- Progress and potential financial or operational consequences of the FCPA investigations and remediation of the material weakness.
- Whether modest currency-neutral sales growth and higher SG&A spending affect future margins, particularly amid public-sector budget constraints and bad-debt provisions in southern Europe.
- QuantaLife’s final purchase accounting, contingent consideration and integration performance, alongside the planned ERP costs and timeline.
- Liquidity and debt covenant headroom after the acquisition, and the sensitivity of earnings and cash flow to foreign exchange and investment-market movements.