Bio-Rad Laboratories, Inc. — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. The filing also reports unaudited fourth-quarter results. Amounts are in U.S. dollars.
Business context
Bio-Rad develops, manufactures and sells life science research and clinical diagnostics products worldwide. Clinical Diagnostics generated 66% of 2014 sales and Life Science 33%; approximately 68% of sales came from outside the United States. Sales are broadly diversified, with no customer representing more than 3% of revenue.
Financial performance and liquidity
| Metric | 2014 | 2013 |
|---|---|---|
| Net sales | $2,175.0 million | $2,132.7 million |
| Gross profit / gross margin | $1,178.5 million / 54.2% | $1,178.5 million / 55.3% |
| Operating income / operating margin | $150.0 million / 6.9% | $169.5 million / 7.9% |
| Net income attributable to Bio-Rad | $88.8 million | $77.8 million |
| Diluted EPS | $3.05 | $2.69 |
| Net cash from operating activities | $273.3 million | $169.1 million |
| Capital expenditures | $121.0 million | $106.7 million |
- Reported sales rose 2.0%; growth was 3.3% excluding foreign-currency effects. Life Science sales increased 2.6% to $728.3 million; Clinical Diagnostics increased 1.7% to $1.43 billion.
- Gross margin declined 1.1 percentage points. Management cited Clinical Diagnostics pricing pressure, product discontinuation and related inventory and license write-downs, manufacturing consolidation costs and obsolete-product scrap. Operating income fell despite higher sales, while net income increased, helped in part by lower interest expense.
- Cash, cash equivalents and short-term investments totaled $697.6 million at year-end. Current assets were $1.72 billion and current liabilities $446.8 million. Operating cash flow increased by $104.2 million year over year, primarily reflecting better collections and lower tax and interest payments; it included the $55.1 million FCPA settlement payment.
- Debt was approximately $436.0 million, primarily $425 million of 4.875% Senior Notes due 2020. The company reported no borrowings on its $200 million revolving credit agreement, with $5 million used for letters of credit; it also reported $233.3 million of borrowing availability across domestic and international lines.
- Fourth-quarter 2014 sales were $598.2 million versus $602.6 million in fourth-quarter 2013; net income was $39.0 million versus $30.1 million. Fourth-quarter diluted EPS was $1.34 versus $1.04.
Material changes and unusual items
- Bio-Rad settled DOJ and SEC FCPA investigations effective November 3, 2014, paying $55.1 million in the fourth quarter: a $14.4 million DOJ penalty, $35.1 million in SEC disgorgement and $5.6 million in interest. It must meet compliance, reporting and cooperation obligations for two years; the agreements do not require an independent monitor.
- The company acquired GnuBIO for consideration valued at $50.4 million, including $39.7 million cash and contingent consideration. The acquisition added $46.4 million of in-process research and development and $13.5 million of goodwill.
- Bio-Rad identified and corrected prior-period balance-sheet and cash-flow classification errors involving inventory and property, plant and equipment. The company said the corrections did not affect net income or total assets, though reported operating and investing cash flows were reclassified.
- A $6.4 million impairment was recorded for licenses associated with a discontinued product line. The company reported no goodwill impairment in 2014.
- A prior-year material weakness in monitoring controls was reported as remediated by December 31, 2014. Management and the independent auditor concluded internal control over financial reporting was effective at year-end; the financial-statement audit opinion was unqualified.
Outlook, risks and contingencies
- The filing provides no specific annual revenue or earnings guidance. Management expected first-quarter 2015 operating cash flow to be lower than fourth-quarter 2014 because of the usual timing of royalty, commission and employee-bonus payments.
- The global ERP implementation is expected to cost more than $300 million and take at least four years; management expected capital expenditures to remain historically elevated during implementation. Earlier deployment issues affected Clinical Diagnostics invoicing and increased receivables.
- Key risks include foreign-exchange movements, international regulatory and compliance obligations, healthcare reimbursement and pricing pressure, government and research funding levels, competition, product development and quality, supply-chain concentration, tax disputes, information-system security and execution of organizational changes.
- Net receivables in Spain, Italy, Greece and Portugal were $45.4 million at year-end, down from $66.0 million a year earlier. Management cited collections, including payments from Spanish public agencies, but warned that sovereign payment delays remain a risk.
- Other contingencies include a shareholder derivative lawsuit filed in January 2015 related to FCPA controls and a shareholder demand to inspect company records. The filing does not provide a clear estimate of any potential loss from these matters.
Important facts for investors to verify
- Whether sales growth and Clinical Diagnostics performance can improve while foreign-exchange and pricing pressures persist.
- Whether gross-margin and operating-income declines reverse, and how much of 2014 net-income growth reflects lower interest expense rather than operating improvement.
- Progress on the ERP rollout, including total spending, delivery timetable, and effects on invoicing, receivables and controls.
- Compliance with the two-year DOJ and SEC obligations and developments in the related shareholder litigation or records demand.
- Liquidity and investment risks, including availability under credit facilities, the valuation and liquidity of investments, and exposure to foreign receivables and currency movements.