Bio-Rad Laboratories, Inc. — Q3 2010 Form 10-Q
Business context and period. Unaudited results cover the three and nine months ended September 30, 2010, compared with the same 2009 periods. Bio-Rad sells life science research and clinical diagnostics products worldwide; approximately 68% of year-to-date sales were international. In January 2010, it acquired certain Biotest diagnostic businesses for approximately $64.9 million.
Financial performance
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Net sales | $471.5 million | $461.1 million | $1,393.4 million | $1,289.2 million |
| Gross profit / margin | $266.3 million / 56.5% | $260.5 million / 56.5% | $791.8 million / 56.8% | $731.4 million / 56.7% |
| Operating income | $74.8 million | $67.4 million | $206.2 million | $174.7 million |
| Income before taxes | $57.9 million | $51.2 million | $163.1 million | $143.7 million |
| Net income attributable to Bio-Rad | $44.8 million | $38.5 million | $117.6 million | $106.8 million |
| Diluted EPS | $1.59 | $1.38 | $4.18 | $3.85 |
Q3 SG&A was $148.7 million (31.5% of sales), down from $153.6 million (33.3%); R&D rose to $42.9 million from $39.5 million. Nine-month SG&A was $458.5 million (32.9% of sales), versus $437.6 million (33.9%); R&D was $127.0 million versus $119.1 million. Nine-month interest expense increased to $43.2 million from $32.7 million, primarily reflecting the 2009 issuance of $300 million of 8% notes. Effective tax rates were 22% versus 23% for Q3 and 27% versus 23% year to date.
Segments and changes versus prior year
- Q3 sales: Life Science $153.2 million, up 1.9% reported and 3.5% currency-neutral; Clinical Diagnostics $314.9 million, up 2.4% reported. Clinical Diagnostics’ currency-neutral growth was 6.3% including Biotest and 1.5% excluding it.
- Nine-month sales: Life Science $455.3 million, up 3.4% reported; Clinical Diagnostics $928.8 million, up 10.6% reported. Management said currency-neutral total sales growth excluding Biotest was 4.1% year to date.
- Consolidated Q3 gross margin was unchanged. Life Science margins improved, while Clinical Diagnostics margins were pressured by the lower-margin Biotest products; the acquisition also affected segment comparisons. Management cited European government spending reductions and weaker capital-equipment demand, with growth led by Asia Pacific and emerging markets.
Cash flow, balance sheet and liquidity
- Nine-month operating cash flow was $125.5 million, down from $209.4 million. Management attributed the decline to higher supplier and royalty payments, intellectual-property dispute settlements, taxes and interest, as well as slower customer collections, particularly amid European government deficit-reduction measures.
- Investing cash outflow was $164.4 million, including $55.8 million of net capital expenditures and acquisition/investment spending. Financing cash inflow was $7.2 million, compared with $292.3 million in 2009, when the 8% notes were issued. Cash and cash equivalents declined $19.3 million to $630.6 million.
- At September 30, cash, cash equivalents and short-term investments totaled $738.0 million. Current assets were $1,651.7 million and current liabilities $410.7 million. Management stated that cash flow, investments and available borrowing capacity were expected to meet current operating and investment needs.
- Total debt was approximately $742.7 million, including $733.6 million of long-term debt net of current maturities. Debt included senior subordinated notes bearing fixed rates of 6.125%, 7.5% and 8.0%. The $200 million revolving credit agreement had no borrowings outstanding and expires in June 2014. The company reported covenant compliance at quarter-end.
- Management anticipated increased future capital spending for international e-commerce and a global ERP implementation. It also continued to review potential acquisitions. No specific earnings or revenue guidance was provided.
Outlook, risks and unusual items
- FCPA investigation: Following an internal review, Bio-Rad disclosed overseas conduct to the DOJ and SEC in May 2010. The company said the conduct may have violated FCPA anti-bribery provisions and likely violated books-and-records and internal-controls provisions. The Audit Committee investigation was continuing; the company could not predict its outcome, duration, or potential sanctions. No liability estimate is provided.
- Material weakness and ineffective disclosure controls: Three significant deficiencies—in entity-level controls, certain international subsidiaries’ expenditure processes, and revenue/accounts-receivable processes—together constituted a material weakness in internal control over financial reporting as of September 30. Management did not anticipate a material effect on reported results to date but could not assure successful remediation. Remediation included FCPA training and protocols, with further control improvements under evaluation.
- Other risks include international currency and economic exposure, slower customer collections, dependence on public and private research funding and customer capital spending, competition, regulation, acquisition integration, substantial leverage, and the possibility of future investment impairment. Management said the higher year-to-date tax rate reflected a lower share of earnings in lower-tax jurisdictions, expiration of the U.S. R&D tax credit, and increased uncertain-tax-position liabilities; unrecognized tax benefits could decrease by up to $5.7 million over the next 12 months.
Important facts for investors to verify
- Progress and outcome of the DOJ/SEC and Audit Committee FCPA investigations, including any fines, remediation requirements, or business restrictions.
- Whether the material weakness is remediated, and whether additional control deficiencies or reporting issues emerge.
- Customer collection trends and working-capital needs, given the decline in operating cash flow and increases in receivables and inventory.
- Underlying segment growth excluding currency and Biotest effects, and the acquisition’s impact on margins and integration.
- Debt service, covenant headroom, and planned capital spending for the e-commerce and ERP programs.