Bio-Rad Laboratories, Inc. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016; filed November 2, 2016. Bio-Rad manufactures and distributes life science research and clinical diagnostics products. Results are unaudited and interim results may not indicate full-year performance.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $508.7 million | $470.0 million | $1,496.7 million | $1,448.9 million |
| Gross profit / margin | $279.5 million / 54.9% | $263.5 million / 56.1% | $823.7 million / 55.0% | $813.2 million / 56.1% |
| Operating income | $28.1 million | $32.7 million | $76.3 million | $107.2 million |
| Net income | $18.4 million | $17.4 million | $48.7 million | $63.6 million |
| Diluted EPS | $0.62 | $0.59 | $1.65 | $2.17 |
| Operating cash flow | Not separately reported | Not separately reported | $121.3 million | $150.3 million |
| Capital expenditures | Not separately reported | Not separately reported | $96.3 million | $84.0 million |
Q3 sales rose 8.3% year over year, or approximately 9.1% excluding currency effects; nine-month sales increased 3.3%, or approximately 5.2% currency-neutral. Q3 net income increased despite lower operating income, with the lower effective tax rate contributing. Nine-month net income and diluted EPS declined year over year.
Q3 Life Science sales rose 18.4% to $178.1 million and Clinical Diagnostics sales rose 3.5% to $327.1 million. For nine months, Life Science sales rose 9.9% to $523.9 million, while Clinical Diagnostics sales were nearly flat at $962.5 million. Life Science reported a Q3 segment loss of $4.4 million, narrower than the $12.3 million loss a year earlier; Clinical Diagnostics segment profit fell to $28.4 million from $40.2 million.
Liquidity, debt and balance sheet
- At September 30, cash and cash equivalents were $417.9 million and short-term investments were $388.2 million, totaling $806.1 million. About 37% of cash, cash equivalents and short-term investments was held in foreign subsidiaries; repatriation may trigger additional U.S. taxes.
- Total debt was approximately $434.4 million, including $425 million of 4.875% Senior Notes due 2020. The $200 million revolving credit facility had no borrowings; $0.8 million was used for standby letters of credit. Bio-Rad reported compliance with its credit agreement covenants.
- Operating cash flow was lower year over year, while investing cash outflow increased to $163.8 million from $83.1 million. Cash and cash equivalents declined by $39.6 million during the nine months.
- Inventory increased to $556.4 million from $490.2 million at year-end 2015. The company reported approximately $206.4 million available under domestic and international credit lines and guarantee arrangements, after usage.
Changes, outlook and significant items
- Gross margin contracted by 1.2 percentage points in Q3 and 1.1 points for the first nine months. Management cited product mix, manufacturing costs and pricing pressures, particularly in Clinical Diagnostics. The U.S. medical-device excise tax was suspended through 2017.
- Management cited increased spending on research and development, legal and professional fees, and employee costs. Nine-month results included $11.5 million in restructuring charges; $8.8 million remained payable through 2019. A $2.4 million write-off of intellectual property related to a discontinued R&D project was also recorded.
- Capital expenditures were $96.3 million for the first nine months. Management expects spending to remain historically elevated for approximately three years while implementing the ERP system; estimated future cost of the global ERP implementation was $155 million over approximately three years. The next deployment carries execution risk.
- No specific revenue or earnings guidance was provided. Management said cash and available credit, together with operating cash flow, should support operations, R&D, capital investment and potential acquisitions. It was assessing possible acquisitions, but completion was uncertain.
- Other income for the nine months was $13.8 million, primarily reflecting higher dividend and investment income, including income from Sartorius. Unrealized gains on available-for-sale investments contributed substantially to other comprehensive income; the filing identifies Sartorius preferred shares as the primary source of unrealized gains on long-term marketable equity securities.
- Bio-Rad acquired a flow-cytometer platform from Propel for stated consideration of $38.8 million, including $29.3 million of contingent consideration recognized at fair value. Payments depend on sales milestones through 2020 and could range from zero to an unlimited amount.
- Bio-Rad said the DOJ and SEC did not intend to extend its FCPA non-prosecution agreement beyond its November 2, 2016 expiration. The filing notes potential reputational, regulatory and third-party claims risks associated with the matter.
- A proposed settlement of shareholder derivative actions would dismiss claims with prejudice, require revised corporate procedures and involve no monetary payment apart from plaintiffs’ counsel fees and costs; court approval remained pending. A former general counsel’s whistleblower and employment case remained unresolved, with trial scheduled for January 9, 2017. Bio-Rad said it believed the case was without merit.
- Management cited foreign-exchange exposure, uncertain global economic conditions, government funding and healthcare reimbursement pressures, regulatory requirements, and possible delays or disruption from the ERP implementation among ongoing risks. The filing reported $38.1 million of net receivables in Spain, Italy, Greece and Portugal.
Key facts for investors to verify
- Whether Life Science growth and Clinical Diagnostics performance translate into improved segment profitability and consolidated margins.
- Whether operating cash flow, working-capital needs and elevated ERP-related capital spending remain manageable.
- The ultimate cost, timing and operational effects of the ERP rollout and restructuring actions.
- Developments in the pending whistleblower case and court approval and implementation of the proposed derivative-action settlement.
- Changes in the value and income contribution of investment holdings, particularly Sartorius-related investments, and the assumptions behind contingent consideration.
- Any subsequent tax, regulatory or FCPA-related developments, and the effect of foreign exchange, reimbursement and public-sector funding conditions.