Bio-Rad Laboratories, Inc. — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015; includes fourth-quarter results. Bio-Rad supplies life science research and clinical diagnostics products worldwide. Clinical Diagnostics generated 65% of annual sales and Life Science 34%; approximately 64% of sales were international.
Financial performance and liquidity
| Metric | FY 2015 | FY 2014 |
|---|---|---|
| Net sales | $2.019 billion | $2.175 billion |
| Gross profit / gross margin | $1.122 billion / 55.5% | $1.179 billion / 54.2% |
| Operating income / operating margin | $166.7 million / 8.3% | $150.0 million / 6.9% |
| Net income attributable to Bio-Rad | $113.1 million | $88.8 million |
| Diluted EPS | $3.85 | $3.05 |
| Cash from operating activities | $186.2 million | $273.3 million |
| Capital expenditures | $112.0 million | $121.0 million |
- Fourth-quarter sales were $570.6 million, versus $598.2 million in Q4 2014; net income was $49.5 million, versus $39.0 million.
- At year-end, cash and cash equivalents were $457.5 million and short-term investments were $328.7 million. Long-term debt, including current maturities, was approximately $436.0 million. The $200 million revolving credit facility had no borrowings outstanding; $0.8 million was used for letters of credit.
- Total assets were $3.712 billion and stockholders’ equity was $2.491 billion. Bio-Rad paid no cash dividends and reported no material off-balance-sheet arrangements.
Material changes versus the prior year
- Reported sales fell 7.2%, while sales grew approximately 1.6% excluding foreign-currency effects. The stronger U.S. dollar reduced reported results; Europe was the largest region and experienced market consolidation and pricing pressure.
- Life Science sales declined 4.6% reported but rose 2.5% currency-neutral to $695.0 million. Growth included Droplet Digital PCR, western blotting, process chromatography media and cell biology.
- Clinical Diagnostics sales declined 8.5% reported but rose 1.1% currency-neutral to $1.310 billion. Quality controls and immunology grew; blood typing and infectious disease products declined.
- Gross margin improved to 55.5%, with management citing higher-margin product mix, facility closures and consolidation, and discontinuation of an underperforming product line. SG&A fell to $762.0 million, partly reflecting foreign exchange and the absence of 2014 FCPA settlement accruals. R&D expense fell to $193.0 million from $220.3 million.
- Operating cash flow fell $87.1 million. The filing attributes the decline in part to currency effects, collection timing and ERP-related billing and collection delays, as well as stronger customer collections in 2014.
- Net income benefited from a lower effective tax rate of 22%, compared with 32% in 2014, including a benefit from expected U.S. use of foreign tax credits.
Outlook, risks and unusual items
- The filing provides no quantified FY 2016 revenue or earnings guidance. Management expected elevated capital spending for at least three years as the ERP and e-commerce platforms advance; ERP implementation costs were estimated at $150–$200 million over more than three years.
- ERP deployment issues had delayed Clinical Diagnostics invoicing and increased receivables in an earlier phase; the July 2015 deployment caused manufacturing and logistics delays that adversely affected sales. Further implementation issues and disruption remained possible.
- In January 2016, Bio-Rad acquired a flow-cytometer platform from Propel for $10 million in cash, with up to $20 million tied to technical milestones and additional sales-based payments through 2020. Launch was expected later in 2016.
- The company’s 2014 FCPA settlement included $55.1 million in penalties, disgorgement and interest. A two-year compliance, reporting and cooperation obligation remained in effect. Related shareholder derivative cases and a former general counsel’s whistleblower and employment lawsuit were pending; Bio-Rad said it could not reasonably estimate potential exposure.
- The FDA had issued a warning letter concerning the Munich manufacturing site in February 2015. Bio-Rad reported remediation actions and a follow-up inspection scheduled for April 2016; production and distribution had not been suspended.
- Foreign exchange, reimbursement and pricing pressure, government research funding, regulatory requirements, supply concentration, cybersecurity, competition and customer collections were identified as risks. Net receivables in Spain, Italy, Greece and Portugal were $40.7 million at year-end.
- Available-for-sale investments included $660.1 million of marketable equity securities. A $205.1 million after-tax unrealized investment gain in other comprehensive income, primarily related to Sartorius preferred shares, contributed to higher equity; it was not reported as net income. Bio-Rad also disclosed approximately $392 million of indefinitely reinvested foreign earnings and estimated about $82 million of associated tax if repatriated.
- Auditors issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective at year-end. A previously identified material weakness had been reported as remediated by December 31, 2014.
Important facts for investors to verify
- Whether constant-currency growth converts into sustained reported growth, especially in Europe and Clinical Diagnostics.
- Whether ERP execution improves invoicing, collections and manufacturing/logistics without further sales disruption; monitor receivables and inventory.
- Whether the 2015 cash-flow decline reverses and whether planned ERP and other capital spending remains within management’s stated expectations.
- The valuation and concentration risks of the investment portfolio, particularly Sartorius-related holdings and unrealized gains.
- Developments in the FCPA-related proceedings, the former general counsel’s lawsuit, and the FDA follow-up inspection; potential legal exposure was not quantifiable in the filing.
- The effects of currency movements, tax-credit utilization, foreign earnings repatriation, reimbursement changes and competitive pricing on future margins and cash flow.