Bio-Rad Laboratories, Inc. — FY2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. This is an annual report, not a standalone Q4 filing; quarterly figures are summarized where relevant. Bio-Rad operates Life Science and Clinical Diagnostics businesses worldwide, generating approximately 36% and 63% of 2017 sales, respectively. The United States represented about 37% of sales; international markets represented 63%.
Financial results and liquidity
| Metric | FY2017 | FY2016 |
|---|---|---|
| Net sales | $2.160 billion | $2.068 billion |
| Gross profit / margin | $1.187 billion / 55.0% | $1.138 billion / 55.0% |
| Operating income | $116.7 million | $53.2 million |
| Net income | $122.2 million | $26.0 million |
| Diluted EPS | $4.07 | $0.88 |
| Cash from operations | $103.9 million | $216.4 million |
| Capital expenditures | $111.3 million | $141.4 million |
| Cash and short-term investments | $755.0 million | $839.4 million |
| Long-term debt, net of current maturities | $434.6 million | $434.2 million |
- Sales rose 4.4% reported, or approximately 3.5% excluding foreign exchange. Life Science sales grew 7.5% reported (6.8% currency-neutral); Clinical Diagnostics grew 2.8% (1.6% currency-neutral).
- Gross margin was unchanged year over year. SG&A declined to $808.9 million, or 37.4% of sales, from $816.7 million, or 39.5%. R&D increased to $250.3 million, or 11.6% of sales, from $205.9 million, or 10.0%.
- Operating cash flow fell $112.5 million. Working-capital demands—including higher receivables and inventory—cash tax payments, foreign-exchange contract payments and acquisition-related spending were among the cited factors. Capital spending exceeded operating cash flow by $7.4 million in 2017, a simple comparison rather than company-reported free cash flow.
- At year-end, the company reported $1.977 billion of current assets and $502.7 million of current liabilities. It had $208.4 million available under domestic and international credit lines and guarantee arrangements, subject to stated usage; no borrowings were outstanding under its $200 million revolving facility.
- The company reported approximately $435 million of total indebtedness, primarily $425 million of 4.875% senior notes due 2020. It reported compliance with debt covenants at year-end.
Changes, unusual items and quarterly results
- Net income and EPS increased substantially, but FY2017 included an estimated $70 million net tax benefit from the Tax Act, including a provisional $125 million deferred-tax benefit partly offset by a $55 million transition-tax expense. The company said its tax accounting remained provisional and subject to refinement.
- FY2017 included $11.5 million of goodwill impairment, versus $62.3 million of goodwill and long-lived-asset impairment in 2016. The 2017 charges related to Pasteur Sanofi Diagnostics and AbD Serotec.
- Bio-Rad recorded restructuring and exit costs associated with closing its GnuBIO research facilities and terminating an infectious-disease R&D project. It also recorded European reorganization costs. The filing reports $11.0 million of severance and employee-benefit charges and $10.1 million of asset write-offs and exit costs for the infectious-disease project.
- RainDance was acquired in February 2017 for approximately $72.7 million; an additional $10.0 million payment for a preexisting condition was recorded in cost of goods sold. The acquisition contributed to Life Science growth.
- FY2017 net income benefited from $10.4 million of legal matters that reduced cost of goods sold; SG&A also reflected the absence of certain 2016 legal costs, including the Wadler judgment. The company recorded the judgment and related costs and appealed the award.
- As revised in the filing, Q4 2017 sales were $621.3 million and net income was $82.7 million, compared with Q4 2016 sales of $571.5 million and a net loss of $18.7 million. Q4 2017 included a $36.8 million income-tax benefit. The filing also describes immaterial Q3 2017 errors corrected in Q4, including a $0.9 million revenue overstatement and expense and inventory errors.
Outlook, risks and contingencies
- The filing does not provide a quantified FY2018 revenue, earnings or margin outlook. Management stated that cash, operating cash flow and available credit were expected to support operations, R&D, capital investment and acquisitions of reasonable scale. It expected ERP-related capital expenditures to decline over the next couple of years; the remaining global ERP implementation was estimated to cost about $140 million over approximately three to four years.
- Management cited foreign-exchange movements, government and research funding, customer capital spending, reimbursement and pricing pressure, international economic conditions, and regulatory requirements as factors affecting demand and results. The company had $41.0 million of net receivables in Spain, Italy, Greece and Portugal at year-end, up from $32.7 million in 2016.
- Material control issue: Management concluded internal control over financial reporting was ineffective at December 31, 2017 because of a material weakness in certain European entities following ERP conversion and reorganization. The weakness involved staffing and expertise, risk assessment, and controls over areas including inventory and revenue. KPMG issued an adverse opinion on internal control, while giving an unqualified opinion on the consolidated financial statements. Management planned remediation during 2018 but cautioned it might not be effective or timely.
- The company’s 2017 foreign-bribery settlement obligations under its DOJ non-prosecution agreement and SEC order had expired in November 2016, but further investigations or third-party claims remained possible. A shareholder derivative-action settlement was approved in 2017. The former general counsel’s $10.92 million award, plus interest and costs, was provided for and appealed. A $990,000 air-district settlement was paid in January 2018 and accrued at year-end.
- Bio-Rad held more than 35% of Sartorius AG’s outstanding voting shares, without significant influence over its operating or financial policies. The company’s Sartorius preferred-share investment contributed substantially to unrealized gains in other comprehensive income. Adoption of fair-value accounting for equity investments was expected to materially affect the income statement in future periods.
- Other significant risks include product development and quality, competition, foreign currency, cybersecurity and IT disruption, sole-source suppliers, tax examinations and changing tax rules, healthcare regulation, and the Schwartz family’s voting control.
Most important facts for investors to verify
- Progress in remediating the European internal-control material weakness and whether controls over revenue, inventory and ERP reporting operate effectively.
- The sustainability of earnings excluding the Tax Act benefit, restructuring and impairment charges, legal items, and investment-related gains or losses.
- Cash conversion and working-capital trends, particularly receivables and inventory, alongside the company’s substantial planned ERP and other capital spending.
- Future effects of Sartorius investment valuation changes and the final accounting for the Tax Act, including transition-tax and international-tax provisions.
- Status and financial exposure from the Wadler appeal, other legal matters, and any remaining tax or regulatory contingencies.