Bio-Rad Laboratories, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021; comparisons are with the corresponding 2020 periods unless noted. Amounts are in U.S. dollars.
Business context and results
Bio-Rad sells life science research and clinical diagnostics products worldwide. Its two reportable segments are Life Science and Clinical Diagnostics. Results reflected stronger product demand and laboratory utilization, alongside continued COVID-19-related demand and supply-chain challenges.
Key financial metrics
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $747.0 million | $647.3 million | $2,189.8 million | $1,755.8 million |
| Gross margin | 58.6% | 56.7% | 56.6% | 55.7% |
| Income from operations | $156.8 million | $109.6 million | $382.4 million | $235.7 million |
| Net income | $3,928.0 million | $1,314.8 million | $5,819.6 million | $2,967.2 million |
| Diluted EPS | $129.96 | $43.64 | $192.76 | $98.46 |
| Operating cash flow | Not separately stated | Not separately stated | $498.6 million | $290.6 million |
Revenue growth: Sales increased 15.4% in Q3 (13.8% currency-neutral) and 24.7% year to date (21.2% currency-neutral). Q3 Life Science sales were $373.5 million, up 15.3%; Clinical Diagnostics sales were $372.2 million, up 15.5%. Nine-month sales were $1,074.2 million for Life Science and $1,111.0 million for Clinical Diagnostics.
Cash, liquidity and debt: At September 30, cash and cash equivalents were $859.9 million and short-term investments were $477.2 million. Total current assets were $2.47 billion against current liabilities of $649.9 million. Debt and notes payable totaled approximately $12.4 million, including current maturities; no borrowings were outstanding under the $200 million revolving facility, with $0.2 million used for standby letters of credit. Nine-month capital expenditures were $77.6 million.
Material changes and unusual items
- Sartorius investment drove reported earnings: Gains on equity securities were $4.87 billion in Q3 and $7.08 billion for the first nine months, primarily from Bio-Rad’s Sartorius AG holding. These fair-value gains substantially inflated net income and are distinct from operating performance. Bio-Rad held approximately 37% of Sartorius’ ordinary voting shares and 28% of its preference shares. Equity securities were valued at $16.26 billion at quarter-end.
- The fair-value gains are noncash; nine-month operating cash flow nevertheless rose to $498.6 million from $290.6 million, reflecting higher customer receipts and Sartorius dividends, among other factors. The balance sheet also included $3.57 billion of deferred income taxes.
- Q3 included $31.6 million of revenue from an intellectual-property litigation settlement covering alleged infringing sales from November 2018 through July 2021. Management said this lifted Life Science gross margin by about 2.0 percentage points in Q3.
- Nine-month gross margin improved 0.9 percentage points. Life Science benefited from sales volume, mix, lower production costs and the settlement; Clinical Diagnostics margin declined about 1.9 percentage points, mainly due to restructuring costs.
- Interest expense fell to $1.2 million for nine months from $17.2 million, primarily following repayment of $425 million of Senior Notes in December 2020.
Outlook, risks and contingencies
- The filing provides no specific numerical revenue or earnings guidance. Management described COVID-19-related product demand as continuing but moderating and noted that recovery in diagnostic testing and laboratory utilization supported Clinical Diagnostics.
- Bio-Rad reported shortages of raw materials, resins and electronic components, product backorders, freight constraints and increased material costs. The pandemic’s future effects on demand, operations and customers remain uncertain.
- The February 2021 restructuring affects primarily European operations, including position reductions, function consolidation and moving some manufacturing to Asia. It is expected to be substantially complete by the end of 2022. The September 30 accrual was $58.0 million; nine-month restructuring expenses were reflected across cost of goods sold, SG&A and R&D.
- Bio-Rad cautioned that the value of its Sartorius holding can materially affect earnings and share price, and that the holding could cause the company to be deemed an investment company. Management said this status could limit access to capital markets and financing.
- Other disclosed risks include foreign exchange movements, international regulatory and tax exposure, competition, product development and quality, cybersecurity and ERP implementation, customer funding and reimbursement pressures, and supply-chain disruption. Ordinary-course legal matters were not believed by management to have a material adverse effect, though outcomes remain uncertain.
- On October 15, 2021, after quarter-end, Bio-Rad acquired Dropworks, Inc. for approximately $125 million to complement Digital PCR offerings. Purchase-price allocation was not complete at filing.
Important facts for investors to verify
- How much of future earnings and equity value depends on Sartorius’ market price, and what regulatory or financing consequences could follow an investment-company determination.
- Underlying operating growth and margins excluding the one-time $31.6 million settlement and volatile equity-security gains.
- Whether supply constraints, freight costs and moderating COVID-19-related demand affect sales, costs or product launches.
- The remaining restructuring charges, cash costs and expected benefits through the planned 2022 completion.
- Integration progress and purchase accounting for Dropworks, plus the status of tax examinations and the possibility that unrecognized tax benefits decrease by up to $20.4 million within twelve months.