Bio-Rad Laboratories, Inc. — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. The filing also reports unaudited fourth-quarter results. Bio-Rad operates two worldwide segments: Life Science and Clinical Diagnostics.
Financial performance
| Metric | 2013 | 2012 |
|---|---|---|
| Net sales | $2,132.7 million | $2,069.2 million |
| Gross profit / gross margin | $1,178.5 million / 55.3% | $1,155.2 million / 55.8% |
| Income from operations | $169.5 million | $264.2 million |
| Net income attributable to Bio-Rad | $77.8 million | $165.5 million |
| Diluted EPS | $2.69 | $5.78 |
| Net cash from operating activities | $175.5 million | $276.0 million |
| Capital expenditures | $113.0 million | $152.4 million |
- Sales increased 3.1% as reported and approximately 3.9% excluding foreign-currency effects. Life Science sales were $710.0 million, up 3.1%; Clinical Diagnostics sales were $1,408.0 million, up 3.1%.
- Net income fell 53% year over year. Operating costs included $35.0 million accrued for the FCPA matter and $15.6 million of debt-redemption expense. SG&A rose to 37.4% of sales from 32.9%.
- Clinical Diagnostics gross margin was pressured by low-margin government tenders, product mix, obsolescence charges and the U.S. medical-device excise tax. Consolidated gross margin declined 0.5 percentage point.
- Operating cash flow declined $100.5 million, reflecting higher employee and outside-service costs, interest, a royalty-audit settlement, and the absence of a prior-year Spanish receivables collection benefit.
Fourth quarter
Fourth-quarter 2013 sales were $602.6 million, gross profit was $322.7 million, and net income attributable to Bio-Rad was $30.1 million (diluted EPS $1.04). In fourth-quarter 2012, revised sales were $573.8 million, gross profit $314.5 million, and net income $43.2 million (diluted EPS $1.51).
Financial position and liquidity
- At year-end, cash and cash equivalents were $331.6 million and short-term investments $277.4 million, totaling $608.9 million. Approximately 39% of these funds were held in foreign subsidiaries.
- Total debt was approximately $437.4 million; stockholders’ equity was $2,186.7 million. The company redeemed its $300 million 8.0% notes in September 2013 for $312 million, including a $12 million call premium. Remaining principal debt is primarily $425 million of 4.875% notes due 2020.
- No borrowings were outstanding under the $200 million revolving credit agreement, which expires June 21, 2014. Management said it was evaluating renewal or similar arrangements. The filing also reports $218.8 million available under domestic and international credit lines, including amounts reserved for letters of credit.
- Net cash used in financing activities was $311.7 million, primarily due to the notes redemption. Bio-Rad paid no cash dividends and reported no material off-balance-sheet arrangements.
Outlook, risks and unusual items
- No quantified earnings or revenue guidance was provided. Management cited uncertain global economic conditions, government research funding, healthcare reimbursement and customer capital spending as factors affecting demand.
- Bio-Rad expected higher capital expenditures over the coming years as it continued ERP and e-commerce investments. The global ERP implementation was estimated to cost more than $250 million and take four or more years; management expected lower ERP-related expense in 2014 than in 2013 as qualifying development costs were capitalized. First-quarter 2014 operating cash flow was expected to be seasonally lower than fourth-quarter 2013.
- The DOJ and SEC investigations into possible FCPA violations remained ongoing. The company recorded a $35.0 million loss contingency, including $5.0 million accrued interest, but could not predict the investigations’ outcome or potential sanctions.
- Management identified a material weakness in monitoring controls, documentation, and communication across certain U.S. and overseas locations. Management and the auditor concluded internal control over financial reporting was ineffective at year-end; the auditor issued an adverse opinion on internal controls. The auditor’s opinion on the 2013 financial statements was unqualified.
- Bio-Rad corrected immaterial prior-period inventory-costing errors and reclassified refundable French R&D tax credits from income-tax provision to R&D expense. The filing says the corrections did not materially affect individual prior periods or the trend in reported results.
- Other notable exposures include foreign-exchange movements, European sovereign receivables ($66.0 million in Spain, Italy, Greece and Portugal at year-end), debt covenants, regulatory and reimbursement changes, and the complexity of implementing the ERP system.
Important facts for investors to verify
- Progress, settlement terms and any additional exposure related to the DOJ/SEC FCPA investigations and the $35.0 million accrual.
- Remediation and independent validation of the material weakness in internal controls, including whether further errors or deficiencies are identified.
- Renewal or replacement of the revolving credit agreement expiring in June 2014, and compliance with debt covenants.
- ERP implementation spending, timing, operational effects and the expected impact on future cash flows.
- Whether segment growth and margins recover, particularly given lower Clinical Diagnostics margins and the Life Science segment’s reported 2013 segment loss.
- Changes in government funding, reimbursement rates, foreign exchange, and collection of public-sector receivables in Southern Europe.