Bio-Rad Laboratories, Inc. — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. Bio-Rad manufactures and distributes life science research and clinical diagnostics products. Its reportable segments are Life Science and Clinical Diagnostics; approximately 67% of year-to-date sales were international.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net sales | $530.6 million | $505.1 million | $1,576.8 million | $1,530.1 million |
| Gross profit | $288.6 million | $284.2 million | $861.1 million | $855.7 million |
| Gross margin | 54.4% | 56.3% | 54.6% | 55.9% |
| Operating income | $33.2 million | $29.1 million | $99.4 million | $117.1 million |
| Net income (loss) attributable to Bio-Rad | $11.5 million | $(7.1) million | $49.8 million | $47.7 million |
| Diluted EPS | $0.39 | $(0.25) | $1.71 | $1.65 |
| Operating cash flow | — | $233.1 million | $98.6 million |
Q3 sales rose 5.1% reported and about 4.3% excluding currency; nine-month sales increased 3.1% reported and about 2.7% currency-neutral. Q3 segment sales were $172.8 million for Life Science, up 6.1%, and $354.7 million for Clinical Diagnostics, up 4.7%. Nine-month segment sales were $504.6 million and $1.062 billion, respectively.
Margins declined year over year, primarily reflecting pricing pressure in Clinical Diagnostics, manufacturing-plant closures and, in Q3 Life Science, a $2.9 million inventory valuation correction. SG&A was 38.2% of Q3 sales versus 40.0%; R&D was 9.9% versus 10.5%. Nine-month R&D increased to $161.0 million from $155.1 million. Q3 interest expense fell to $7.7 million from $31.6 million, and nine-month interest expense fell to $17.1 million from $54.3 million, largely because the $300 million 8.0% notes had been redeemed in 2013.
Balance sheet, cash flow and liquidity
- At September 30, cash and cash equivalents were $424.6 million and short-term investments were $278.0 million; together, $702.6 million. Total assets were $3.386 billion and stockholders’ equity was $2.177 billion.
- Total debt was approximately $437.2 million, including $425 million principal of 4.875% senior notes due 2020. The company had no borrowings under its $200 million revolving credit agreement; $5 million was used for letters of credit. It reported $211.1 million available under domestic and international lines, after letter-of-credit usage.
- Operating cash flow for the first nine months was $233.1 million, versus $98.6 million. Cash increased $93.0 million to $424.6 million. Investing activities used $141.1 million; capital expenditures were $80.9 million. Financing activities provided $8.1 million, compared with $315.5 million used in the prior-year period, chiefly due to the 2013 debt redemption.
- Management stated available liquidity and operating cash flow were expected to support operations and planned investment. Approximately 36% of cash, cash equivalents and short-term investments were held in foreign subsidiaries; repatriation could result in additional U.S. taxes.
Material changes, outlook and risks
- FCPA settlement: Effective November 3, 2014, after quarter-end, Bio-Rad resolved DOJ and SEC investigations. It agreed to pay a $14.4 million DOJ penalty and $40.7 million in SEC disgorgement and interest, totaling $55.1 million accrued at September 30, including $5.6 million interest. Payment was expected in Q4 2014. The DOJ agreement includes two years of compliance, reporting and cooperation obligations; the SEC requires compliance reporting and cessation of FCPA violations. No external monitor was required.
- Acquisition: Bio-Rad acquired GnuBIO in April 2014 for consideration valued at $50.4 million, including $39.7 million cash and contingent consideration. Preliminary purchase accounting included $46.4 million of in-process R&D and $15.2 million goodwill. Contingent payments could reach $70 million if all milestones are achieved.
- ERP investment: The multi-year global ERP implementation is expected to cost more than $300 million and take approximately four or more years. Capital expenditures were expected to remain historically elevated for at least the next four years.
- Accounting corrections: The company corrected immaterial prior-period inventory and property, plant and equipment errors. The December 2013 balance-sheet correction increased inventory and reduced net PP&E by $15.0 million; there was no effect on historical net income or total cash changes. A separate $1.0 million 2013 cash-flow classification correction moved forward-contract cash flows from investing to operating activities.
- Controls: Management reported that a material weakness in monitoring controls and documentation, identified at year-end 2013, remained unremediated at September 30, 2014. Remediation was ongoing, and management could not assure it would be completed or prevent further deficiencies.
- Other exposures: A China review of import practices was ongoing and its outcome could not be assessed. A separate Shanghai investigation concluded with a $0.3 million penalty and disgorgement. Risks cited include foreign exchange movements, pricing and reimbursement pressure, government funding and tender activity, international regulatory and compliance demands, ERP disruption, acquisition integration, and potential impairment of investments or acquired intangibles.
- Guidance: The filing provides no specific numerical revenue or earnings guidance. Management described uncertain global economic conditions and noted that currency-neutral growth varied by geography and product line.
Key facts for investors to verify
- Whether the $55.1 million FCPA settlement was paid as planned and whether the company meets its two-year DOJ and SEC obligations.
- Progress and testing of remediation for the material weakness in internal control over financial reporting.
- ERP implementation costs, timing and any operational or reporting disruption.
- Whether margin pressure, particularly Clinical Diagnostics pricing, persists and how sales growth develops by segment and region.
- GnuBIO milestone outcomes, final purchase-price allocation and potential impairment of its in-process R&D asset.
- Outcome of the China import-practices review and any resulting financial or operating consequences.