Bio-Rad Laboratories, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2017. Bio-Rad manufactures and distributes life science research and clinical diagnostics products through its Life Science and Clinical Diagnostics segments.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net sales | $504.7 million | $516.8 million | $1,004.7 million | $988.0 million |
| Gross margin | 54.2% | 54.2% | 54.1% | 55.1% |
| Operating income (loss) | $(2.4) million | $22.5 million | $23.2 million | $48.3 million |
| Net income | $5.0 million | $18.0 million | $17.4 million | $30.3 million |
| Diluted EPS | $0.17 | $0.61 | $0.58 | $1.03 |
| Operating cash flow | Not stated by quarter | $6.2 million | $69.7 million |
- Q2 sales declined 2.3% year over year, or about 1.6% excluding currency effects. Life Science sales fell 0.3%; Clinical Diagnostics sales fell 3.5%.
- First-half sales increased 1.7% year over year, or about 2.3% excluding currency effects. Life Science grew 2.3%; Clinical Diagnostics grew 1.4%.
- Q2 SG&A was $213.0 million, or 42.2% of sales, versus $205.5 million, or 39.8%. R&D was $62.6 million, or 12.4% of sales, versus $49.8 million, or 9.6%.
- Cash, cash equivalents and short-term investments totaled $712.9 million at June 30, 2017. Total assets were $4.14 billion and total liabilities were $1.33 billion.
- Debt was approximately $434.9 million, including $425 million of 4.875% notes due 2020. No borrowings were outstanding under the $200 million revolving credit facility; the company reported about $207.8 million available across domestic and international borrowing arrangements, standby letters of credit and guarantees.
Material changes and drivers
- Management attributed Q2 sales pressure principally to the April Western Europe ERP deployment: customer purchases had shifted into Q1, and implementation issues reduced supply-chain productivity, product availability and shipments. Management said the deployment was more complex than prior phases.
- First-half operating cash flow fell to $6.2 million from $69.7 million. The filing cites lower customer receipts, higher supplier payments around the ERP transition, higher tax payments, and greater net payments on foreign-exchange contracts.
- First-half gross margin declined 1.0 percentage point. Management cited the $10 million one-time RainDance acquisition expense and higher acquisition-related intangible amortization, partly offset by other margin improvements.
- Bio-Rad acquired RainDance Technologies in February for approximately $76.6 million, including assumed net liabilities; closing cash payments were $72.8 million. A separate $10 million one-time acquisition-related expense was recorded in cost of goods sold. The purchase-price allocation remained preliminary.
- Other comprehensive income was $193.2 million for the first half, primarily reflecting unrealized gains on available-for-sale investments and foreign-currency translation. This lifted accumulated other comprehensive income to $610.9 million; it is distinct from reported net income.
Outlook, commentary and risks
- The filing provides no specific revenue or earnings guidance. Management expected ERP-related capital expenditures to moderate in 2017 and projected total global ERP implementation costs of $100 million to $130 million over approximately three to four years.
- Management expected European restructuring-related reductions in headcount and expense to begin in Q3 2017. The restructuring program is expected to continue through 2019; the June 30 reserve was $7.8 million.
- The Q2 effective tax rate was an unusual negative 350%, reflecting discrete benefits from share-based compensation and a transfer of intangibles associated with the European reorganization, combined with low pretax income. The first-half rate was 18%, versus 36% a year earlier. The company cautioned that future tax rates may vary.
- A federal jury awarded former general counsel Sanford Wadler $10.92 million, plus interest and specified costs and fees. Bio-Rad recorded a provision and filed an appeal on June 6, 2017. The filing does not state the total recorded provision value.
- Other disclosed risks include foreign-exchange exposure, dependence on government and customer funding, competitive and reimbursement pressures, international regulatory and compliance exposure, and the possibility of further ERP disruption. The company also disclosed notices of alleged air-quality violations; no formal proceeding had been initiated.
- Management stated that disclosure controls and procedures were effective. ERP implementation required changes to reports, interfaces and IT-dependent controls; management said these changes were not made in response to identified control deficiencies.
Investor verification points
- Track whether Western Europe ERP issues and deferred customer orders normalize, and whether sales and collections recover.
- Assess the drivers and persistence of increased SG&A and R&D, and whether restructuring savings begin as management expected.
- Review operating cash flow and working-capital trends against the substantial first-half decline.
- Monitor the RainDance purchase-price allocation, acquisition-related costs and integration performance, as well as the contingent consideration tied to Propel sales milestones.
- Check developments in the Wadler appeal and the air-quality notices, along with tax examinations and other legal contingencies.
- Evaluate the concentration and valuation sensitivity of investments: Bio-Rad reported $980.1 million of marketable equity securities at fair value, with unrealized gains contributing substantially to first-half comprehensive income.