Bio-Rad Laboratories, Inc. — Q2 2011 Form 10-Q
Reporting period: Three and six months ended June 30, 2011. Bio-Rad manufactures and distributes life science research and clinical diagnostics products. Approximately 69% of first-half sales were international.
Financial performance
| Metric | Q2 2011 | Q2 2010 | First half 2011 | First half 2010 |
|---|---|---|---|---|
| Net sales | $521.7 million | $467.7 million | $1,006.8 million | $921.9 million |
| Gross margin | 56.2% | 57.4% | 56.7% | 57.0% |
| Income from operations | $68.2 million | $68.2 million | $135.3 million | $131.4 million |
| Net income attributable to Bio-Rad | $40.0 million | $38.0 million | $73.1 million | $72.8 million |
| Diluted EPS | $1.41 | $1.35 | $2.57 | $2.59 |
Q2 sales rose 11.5% reported and approximately 4.2% excluding currency effects; first-half sales rose 9.2% reported and approximately 4.5% currency-neutral. Q2 operating income was essentially unchanged despite higher sales. First-half operating income increased, while diluted EPS declined.
Q2 segment sales were $169.9 million for Life Science, up 12.8% reported and 6.7% currency-neutral, and $348.0 million for Clinical Diagnostics, up 10.8% reported and 2.8% currency-neutral. First-half segment sales were $324.4 million for Life Science and $675.2 million for Clinical Diagnostics.
Operating cash flow for the first half was $130.1 million, versus $58.7 million a year earlier. Capital expenditures were $42.6 million versus $35.9 million. Cash and cash equivalents were $670.3 million; short-term investments were $215.9 million. Total cash, cash equivalents and short-term investments were $886.2 million. Current assets were $1.89 billion and current liabilities $442.8 million.
Total debt was approximately $732.7 million, compared with $964.2 million at December 31, 2010, largely reflecting redemption of $225 million of 7.5% notes in January. Debt included $296 million of 8.0% notes due 2016 and $422.7 million of 4.875% notes due 2020. The company reported no borrowings under its $200 million revolving credit agreement and said it was in compliance with debt covenants.
Material changes and management commentary
- Gross margin fell year over year in Q2. Life Science margin was affected by an estimated liability related to a patent-infringement dispute; the filing does not provide a clear amount. Clinical Diagnostics margin comparisons were affected by a favorable intellectual-property settlement in Q2 2010.
- First-half Life Science margins also faced pricing pressure and lower manufacturing volumes, while Clinical Diagnostics margins were relatively flat.
- SG&A rose to 33.9% of Q2 sales from 33.4%, and to 34.2% of first-half sales from 33.6%. Management cited professional services, facilities, travel, IT, currency translation and bad-debt expense, including exposure to southern European receivables.
- Management attributed stronger first-half operating cash flow primarily to higher customer receipts following large fourth-quarter 2010 sales. First-half financing cash outflow of $213.9 million principally reflected the January note redemption.
- Bio-Rad expects increased investment in international e-commerce and a global single-instance ERP implementation. The filing estimates ERP implementation could cost approximately $150 million over about five years.
Outlook, risks and contingencies
The filing provides no specific revenue or earnings guidance. Management said available liquidity, operating cash flow and borrowing capacity should be adequate for current operating, R&D, capital and reasonably sized acquisition needs. It continues to consider acquisitions, but no prospective transaction was certain to proceed.
The Audit Committee, DOJ and SEC investigations into possible FCPA violations in overseas operations were ongoing. Potential sanctions or remedial measures could materially adversely affect the business or financial condition; the company said it could not estimate the outcome. A shareholder derivative suit alleging directors failed to ensure adequate FCPA controls was also pending.
Disclosure controls were assessed as not effective, and internal control over financial reporting continued to have a material weakness at June 30, 2011. The company cited entity-level, expenditure-process, and revenue/accounts-receivable control deficiencies at certain international subsidiaries. Remediation was underway but incomplete; management did not anticipate a material effect on reported financial results to date.
Other risks highlighted include foreign-exchange exposure, economic and customer-budget uncertainty, competition and pricing pressure, reliance on new products and intellectual property, acquisition integration, IT implementation, regulation, substantial debt, and possible investment-security losses. Management identified no material change in market-risk disclosures during the half year.
Investor verification points
- Track the FCPA investigations, potential penalties or business restrictions, and progress in remediating the material weakness in internal controls.
- Seek updates on the patent-infringement liability and any related litigation or settlement costs; the filing does not state the estimated liability amount.
- Assess whether sales growth, margins and bad-debt exposure improve, particularly in Europe and other government-budget-constrained markets.
- Monitor ERP implementation spending against the approximately $150 million, five-year estimate, alongside capital expenditures and cash generation.
- Review debt service, covenant compliance, and the effect of currency movements on international sales, expenses and reported results.