Bio-Rad Laboratories, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Bio-Rad manufactures and distributes life science research and clinical diagnostics products. Results are unaudited; interim results are not necessarily indicative of full-year performance.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $560.6 million | $545.1 million | $1,687.2 million | $1,672.6 million |
| Gross margin | 54.8% | 52.6% | 54.9% | 53.2% |
| Operating income | $57.5 million | $36.3 million | $170.5 million | $123.7 million |
| Net income (loss) | $(258.8) million | $269.3 million | $1,205.2 million | $1,194.1 million |
| Diluted EPS | $(8.68) | $8.89 | $39.97 | $39.50 |
- Revenue and segments: Q3 sales rose 2.8% reported and approximately 4.5% excluding foreign currency effects. Life Science sales were $215.7 million, up 4.5%; Clinical Diagnostics sales were $341.8 million, up 2.4%. Nine-month sales increased 0.9% reported and approximately 3.7% currency-neutral; Life Science grew 3.5%, while Clinical Diagnostics declined 0.6% reported but grew 2.7% currency-neutral.
- Margins and expenses: Q3 gross margin improved 2.2 percentage points year over year. SG&A was $201.6 million (36.0% of sales), broadly flat in dollars; R&D was $47.9 million (8.6% of sales), down from $49.2 million. Nine-month SG&A fell to $610.5 million from $620.8 million; R&D was $145.6 million versus $146.1 million.
- Cash flow: Nine-month operating cash flow was $298.1 million, up from $180.5 million. Investing activities used $147.7 million, including $76.9 million of capital expenditures and acquisition payments; financing activities used $18.0 million, including $20.0 million of share repurchases.
- Liquidity: At September 30, cash and cash equivalents were $561.1 million and short-term investments were $418.2 million, totaling $979.2 million. Current assets were $2.05 billion and current liabilities were $434.0 million.
- Debt and leases: Total debt and finance-lease obligations were approximately $439.6 million, including $425 million of 4.875% Senior Notes due December 2020. A $200 million revolving credit facility had no borrowings outstanding; the company reported covenant compliance. Adoption of lease accounting added $217.5 million of operating lease right-of-use assets and $226.3 million of operating lease liabilities.
- Investment exposure: Other investments were $3.93 billion, primarily equity securities including Sartorius AG. The company reported a $390.6 million Q3 loss from changes in the fair value of equity securities, versus a $318.0 million gain in Q3 2018. For the first nine months, fair-value gains were $1.385 billion versus $1.420 billion.
Material changes and unusual items
- The Q3 net loss primarily reflects the mark-to-market decline in equity securities, especially Sartorius AG; it does not represent a comparable deterioration in operating income, which increased year over year. Nine-month net income was also substantially affected by unrealized investment gains.
- Nine-month Life Science gross margin benefited in part from a $7.4 million acquisition escrow release. Prior-year Clinical Diagnostics sales included a one-time $6.0 million licensed-patent receipt, affecting comparisons.
- Bio-Rad acquired a small U.S. manufacturer in August for approximately $60 million, primarily to support Clinical Diagnostics quality controls and assay verification. It also completed a roughly $20 million Life Science acquisition in March.
- The company settled and closed the former general counsel’s lawsuit in September 2019; the filing says it did not materially affect Q3 results. Other ordinary-course legal matters remain, and potential exposure could not be estimated.
Outlook, management commentary, and risks
- The filing provides no specific quantitative revenue or earnings guidance. Management said European Clinical Diagnostics growth is expected to remain challenging amid government healthcare-spending controls and increased competition.
- Management said operating cash flow, cash and investments, and available borrowing capacity should be adequate for operating needs, R&D, capital investment, and reasonably sized acquisitions. Approximately 60% of nine-month sales came from outside the United States, exposing results to currency movements.
- Key disclosed risks include volatility in Sartorius AG’s market value and resulting earnings swings; foreign exchange exposure; competition and pricing pressure; government funding and reimbursement changes; international regulatory and compliance risks; ERP implementation and IT-security issues; and the December 2020 Senior Notes maturity.
- Tax authorities are examining the company in multiple jurisdictions. Bio-Rad maintained valuation allowances for certain California and foreign deferred tax assets; it said a decrease of up to $2.1 million in unrecognized tax benefits was reasonably possible within 12 months.
Investor verification priorities
- Assess Sartorius AG exposure, valuation movements, liquidity and the potential effect of investment changes on reported earnings and share-price volatility.
- Review operating performance excluding investment fair-value changes, including segment growth, margin trends, and the contribution of the escrow release and prior-year patent receipt.
- Confirm the company’s refinancing or repayment plans for the $425 million notes due December 2020 and monitor compliance with credit-facility covenants.
- Track currency-neutral growth, particularly European Clinical Diagnostics, and evaluate exposure to reimbursement, public funding, competition and international regulation.
- Monitor acquisition integration and completion of the preliminary purchase-price allocation for the August acquisition, as well as ERP implementation and the remaining legal and tax matters.