Bio-Rad Laboratories, Inc. — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011; comparisons are with Q1 2010 unless noted. Bio-Rad manufactures and distributes life science research and clinical diagnostics products. Approximately 68% of Q1 sales were international.
Financial performance
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Net sales | $485.1 million | $454.2 million | +6.8%; +4.9% excluding currency |
| Gross profit / margin | $277.6 million / 57.2% | $257.1 million / 56.6% | Margin +0.6 percentage points |
| Operating income | $67.1 million | $63.2 million | +6.1% |
| Income before taxes | $48.3 million | $49.8 million | −3.1% |
| Net income attributable to Bio-Rad | $33.0 million | $34.9 million | −5.2% |
| Diluted EPS | $1.16 | $1.24 | −6.5% |
| Operating cash flow | $19.8 million | $22.3 million | −$2.5 million |
SG&A rose to 34.6% of sales from 33.8%; R&D was $42.7 million, or 8.8% of sales, versus $40.3 million, or 8.9%. The effective tax rate increased to 32% from 29%.
Segments and material changes
- Clinical Diagnostics: Sales of $327.2 million, up 9.1% (7.3% excluding currency); segment profit was $48.0 million versus $38.3 million. Growth included immunohematology, Bio-Plex and clinical microbiology.
- Life Science: Sales of $154.5 million, up 2.1% reported but slightly down excluding currency; segment profit fell to $3.1 million from $11.4 million. Management cited pricing pressure and lower manufacturing volumes.
- Foreign exchange losses were $3.0 million versus a $0.2 million gain. Interest expense increased to $16.8 million from $14.4 million, primarily due to costs of redeeming the 7.5% notes due 2013, including a call premium.
Liquidity, debt and cash flows
- At March 31, cash and cash equivalents were $627.9 million and short-term investments were $163.5 million, totaling $791.4 million. Cash declined by $278.6 million during the quarter.
- Total debt was approximately $741.5 million. Bio-Rad redeemed $225 million principal of 7.5% notes in January for $234.6 million, including the call premium. Remaining principal included $425 million of 4.875% senior notes due 2020 and approximately $300 million of 8.0% subordinated notes due 2016.
- No borrowings were outstanding under the $200 million revolving credit agreement; the company reported compliance with debt covenants. Management said liquidity and operating cash flow should meet current needs.
- Investing cash outflow was $77.3 million, including $17.8 million of capital expenditures. Financing cash outflow was $214.7 million, largely reflecting the notes redemption. Operating cash flow less capital expenditures was approximately $2.0 million, versus $5.9 million in Q1 2010.
Outlook, risks and unusual items
- No specific earnings or revenue guidance was provided. Bio-Rad anticipated higher future spending on international e-commerce and a global ERP implementation estimated to cost up to approximately $150 million over about five years.
- The Audit Committee and U.S. Department of Justice and SEC investigations into possible FCPA violations remained ongoing. The company said it could not estimate the outcome; possible sanctions or remedial measures could materially affect its business or financial condition.
- Management reported that disclosure controls were not effective and that a material weakness in internal control over financial reporting remained as of March 31, 2011. Remediation was in progress and incomplete. The company did not expect the weakness to materially affect reported results to date, but could not assure successful remediation.
- A shareholder derivative suit filed April 13, 2011 alleges directors failed to ensure adequate FCPA controls; damages sought are unspecified. Other ordinary-course legal matters were not considered likely to have a material adverse effect, though outcomes were uncertain.
- Other risks highlighted include foreign-exchange exposure, government and customer funding constraints, competition and pricing pressure, acquisition integration, substantial leverage, and regulatory and intellectual-property risks.
Most important facts for investors to verify
- Progress and potential financial or operational consequences of the FCPA investigations and related derivative litigation.
- Whether remediation resolves the material weakness and strengthens international subsidiary controls.
- Whether sales growth, particularly in Clinical Diagnostics, can offset weaker currency-neutral Life Science performance and SG&A growth.
- Cash generation, debt-service capacity and the cost and execution of the planned ERP and e-commerce investments.