Bio-Rad Laboratories, Inc. — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012; filed August 9, 2012. Bio-Rad sells life science research and clinical diagnostics products worldwide. Approximately 68% of first-half sales came from outside the United States.
Financial results
| Metric | Q2 2012 | Q2 2011 | First half 2012 | First half 2011 |
|---|---|---|---|---|
| Net sales | $510.4 million | $521.7 million | $996.7 million | $1,006.8 million |
| Gross margin | 56.4% | 56.2% | 56.8% | 56.7% |
| Operating income | $73.3 million | $68.2 million | $127.7 million | $135.3 million |
| Net income attributable to Bio-Rad | $48.3 million | $40.0 million | $79.3 million | $73.1 million |
| Diluted EPS | $1.69 | $1.41 | $2.78 | $2.57 |
| Operating cash flow | Not separately reported | Not separately reported | $108.9 million | $130.1 million |
Q2 reported sales fell 2.2%, while sales excluding currency effects rose approximately 3.0%. First-half reported sales declined 1.0%, versus approximately 2.3% growth excluding currency effects. First-half capital expenditures were $75.7 million, up from $42.6 million; operating cash flow less capital expenditures was $33.2 million, versus $87.5 million a year earlier.
At June 30, cash and cash equivalents were $456.5 million and short-term investments were $378.8 million, totaling $835.3 million. Total debt was approximately $732.8 million; stockholders’ equity was $1.85 billion. The company had no borrowings under its $200 million revolving credit agreement and reported compliance with debt covenants. Cash and short-term investments exceeded total debt by approximately $102.5 million.
Changes and operating drivers
- Q2 net income attributable to Bio-Rad increased about 21% despite lower reported sales; first-half net income increased about 9% while reported sales declined.
- Clinical Diagnostics Q2 sales were $344.0 million, down 1.2% reported but up 4.9% currency-neutral. Life Science sales were $162.4 million, down 4.4% reported and 0.9% currency-neutral.
- First-half Clinical Diagnostics sales were $671.2 million, down 0.6% reported and up 3.3% currency-neutral. Life Science sales were $317.2 million, down 2.2% reported and 0.1% currency-neutral.
- SG&A declined to 31.8% of Q2 sales from 33.9%, partly reflecting lower bad-debt provisions, commissions and currency-related costs, and a reduction in QuantaLife contingent consideration. R&D rose to 10.3% of Q2 sales from 9.2%; for the first half it rose to 10.6% from 9.0%.
- Q2 gross margin improved slightly. Life Science margins were pressured by QuantaLife amortization; Clinical Diagnostics benefited from product mix.
Outlook, unusual items and risks
- The filing provides no specific revenue or earnings guidance. Management said capital expenditures are expected to increase, partly for a global ERP implementation estimated at approximately $150 million and expected to take at least four more years.
- Management cited uncertain global economic conditions, government spending and research funding, and the risk of delayed sovereign payments. Receivables in Spain, Italy, Greece and Portugal totaled $66.2 million at quarter-end, down from $82.1 million at year-end 2011, largely after Spanish public-agency payments.
- The company paid $5.6 million in Q2 for foreign supplemental taxes, penalties and interest related to prior years. It corrected several prior-period tax errors in Q1 2012, concluding they were not material to individual prior years or 2012 as a whole; the cumulative correction was significant to Q1. The filing records charges to cost of goods sold, interest and other expense, partly offset by an income-tax benefit.
- A reduction in the fair value of QuantaLife contingent consideration lowered SG&A expense by $8.1 million in Q2; the first-half fair-value decrease was $7.5 million. The remaining liability was $16.6 million and could rise to $45 million if remaining milestones are achieved.
- DOJ and SEC investigations into possible FCPA violations at certain overseas operations continued. Bio-Rad said it could not estimate the outcome; sanctions or required remedial measures could materially affect its business or financial condition. A related shareholder derivative action was stipulated dismissed without prejudice, with limitations tolled pending the investigations.
- Management reported disclosure controls were effective and the previously identified material weakness had been remediated. However, a significant deficiency remained in the revenue process, with additional deficiencies involving reagent-rental controls and controls at certain smaller international subsidiaries.
- Other risks include foreign-exchange movements, substantial debt and covenant restrictions, acquisition integration, competition, reliance on government and institutional funding, and regulatory and intellectual-property risks.
Important facts for investors to verify
- Whether currency-neutral growth, particularly in Clinical Diagnostics, continues and offsets softness in Life Science and developed western European markets.
- Whether improved reported earnings are sustainable after considering the contingent-consideration adjustment, lower bad-debt provisions and prior-period error corrections.
- Progress and spending against the ERP implementation and higher capital-expenditure plans, and the resulting effect on cash generation.
- Developments in the FCPA investigations, possible sanctions, and remediation of the remaining internal-control deficiencies.
- Collection of government-related receivables and compliance with debt covenants; the revolving credit agreement expires June 21, 2014.