Business context and reporting period
Bio-Rad Laboratories, Inc. filed this unaudited Form 10-Q for the three months ended March 31, 2017. It operates in Life Science and Clinical Diagnostics, selling research and diagnostic products globally. Approximately 63% of first-quarter sales came from outside the United States.
Financial performance and liquidity
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Net sales | $500.1 million | $471.2 million |
| Gross profit / margin | $270.0 million / 54.0% | $264.0 million / 56.0% |
| Operating income | $25.6 million | $25.7 million |
| Net income | $12.4 million | $12.3 million |
| Diluted EPS | $0.41 | $0.42 |
| Operating cash flow | $(56.2) million | $(7.4) million |
| Capital expenditures | $39.3 million | $25.3 million |
Sales grew 6.1% year over year, or approximately 6.7% excluding currency effects. SG&A was $194.9 million (39.0% of sales), compared with $189.7 million (40.3%); R&D was $49.5 million (9.9%), compared with $48.6 million (10.3%). The effective tax rate was 38%, versus 39%.
At March 31, cash and cash equivalents were $291.7 million and short-term investments were $382.4 million, totaling $674.1 million. Current assets were $1.73 billion and current liabilities $407.5 million. Total debt was approximately $434.8 million, including $425 million of 4.875% senior notes due 2020. No revolver borrowings were outstanding; approximately $206 million of domestic and international borrowing capacity was available, subject to existing usage and covenants.
Investing cash outflow was $110.4 million, including acquisition and long-term investment payments of $73.5 million. Financing provided $0.7 million. Cash and cash equivalents declined by $164.6 million to $291.7 million. Operating cash outflow plus capital expenditures was $95.6 million.
Material changes versus the prior comparable period
- Life Science sales rose 5.1% to $174.3 million (6.3% currency-neutral); Clinical Diagnostics sales rose 6.8% to $322.3 million (7.0% currency-neutral). Other Operations sales were $3.5 million.
- Gross margin fell 2.0 percentage points. Management attributed the Life Science decline primarily to a $10.0 million one-time RainDance-related charge in cost of goods sold; Clinical Diagnostics margin also declined, mainly due to higher manufacturing costs.
- Operating cash outflow widened, with management citing supplier payments ahead of the Western Europe ERP deployment, income tax payments versus refunds in the prior-year quarter, and higher net foreign-exchange contract payments.
- Comprehensive income was $111.3 million, versus $45.5 million, including $80.1 million of net unrealized gains on available-for-sale investments, principally reflecting investment valuation changes; this was not equivalent to earnings from operations.
Outlook, management commentary, risks and unusual items
- No quantified full-year revenue or earnings guidance is provided. Management said ERP-related capital expenditures are expected to moderate in 2017 and decline over the following couple of years; estimated remaining ERP implementation costs were $75 million to $110 million over approximately two to three years.
- Management said first-quarter sales, particularly Clinical Diagnostics in Europe, benefited from customers ordering ahead of the April 2017 Western Europe ERP launch. The more complex deployment could disrupt orders, manufacturing, logistics, invoicing or collections.
- Bio-Rad acquired RainDance Technologies in February for approximately $75.2 million, including assumed net liabilities, and paid $72.9 million at closing. The $10.0 million one-time expense was recorded in cost of goods sold. Purchase-price allocation remained preliminary; $34.8 million was allocated to goodwill and $35.0 million to purchased intangibles.
- A jury awarded former general counsel Sanford Wadler $10.92 million, plus interest, litigation costs and court-approved attorneys’ fees, in a whistleblower case. Bio-Rad provided for the judgment and related amounts and filed motions for judgment as a matter of law and a new trial in March 2017.
- A shareholder derivative action concerning FCPA-related allegations was settled with revised corporate procedures and no monetary payment other than plaintiffs’ counsel fees and costs; the court approved the settlement in March 2017. The company’s DOJ non-prosecution agreement expired in November 2016 and was not extended.
- Key disclosed risks include foreign-exchange movements, government and customer funding or reimbursement pressure, competition, international regulatory and compliance exposure, tax examinations, and ERP and organizational-change execution. The company also reported notices alleging air-permit monitoring and emissions violations; no formal proceeding had been initiated.
- Liquidity includes substantial marketable investments, including a large Sartorius-related equity position. First-quarter unrealized investment gains increased other comprehensive income; investment values may fluctuate. The filing says the company intends generally to reinvest foreign subsidiary cash abroad and that repatriation may incur additional U.S. taxes.
Most important facts for investors to verify
- Whether underlying demand remains strong after the customer ordering ahead of the Western Europe ERP launch, and whether that deployment causes operational disruption.
- Whether margin pressure eases after the RainDance one-time charge and how acquisition integration and the preliminary purchase-price allocation develop.
- Whether operating cash flow recovers as working-capital movements and ERP-related supplier payments normalize.
- The final costs and status of the Wadler judgment and motions, and any further consequences of FCPA-related matters.
- The sustainability and market value of investment-related gains, along with the effects of currency changes, tax examinations and international regulatory developments.