Bio-Rad Laboratories, Inc. — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing also reports fourth-quarter results. Bio-Rad operates Life Science and Clinical Diagnostics businesses, selling research tools, diagnostic systems, reagents and related products worldwide. Clinical Diagnostics generated about 64% of annual sales and Life Science about 35%; approximately 63% of sales were outside the United States.
Financial performance and position
| Metric | 2016 | 2015 | Change / context |
|---|---|---|---|
| Net sales | $2.068 billion | $2.019 billion | Up 2.4% reported; up approximately 4.0% excluding currency effects |
| Gross profit / margin | $1.138 billion / 55.0% | $1.122 billion / 55.5% | Margin down 0.5 percentage points |
| Income from operations | $53.2 million | $166.7 million | Includes $62.3 million of goodwill and long-lived asset impairments in 2016 |
| Net income | $28.1 million | $113.1 million | Down substantially; diluted EPS was $0.95 versus $3.85 |
| Operating cash flow | $216.4 million | $186.2 million | Up $30.2 million |
| Capital expenditures | $141.4 million | $112.0 million | Up $29.4 million |
| Cash and short-term investments | $839.4 million | — | About 28% of cash, cash equivalents and short-term investments was held by foreign subsidiaries |
| Debt | About $434.5 million | About $434.2 million | Primarily $425 million of 4.875% Senior Notes due 2020 |
- Segment sales: Life Science was $730.7 million, up 5.1% reported and 6.5% currency-neutral. Clinical Diagnostics was $1.323 billion, up 1.0% reported and 2.6% currency-neutral. Clinical Diagnostics growth reflected quality control, immunology, blood typing and diabetes products; Europe declined on a currency-neutral basis.
- Operating costs and margins: SG&A rose to $816.7 million, or 39.5% of sales, from $762.0 million, or 37.7%. R&D increased to $205.9 million from $193.0 million. Management cited employee costs, legal matters, professional fees and restructuring among SG&A increases; gross-margin pressures included mix, pricing and higher costs.
- Quarterly results: Fourth-quarter sales were $571.5 million versus $570.6 million a year earlier. Bio-Rad recorded a fourth-quarter 2016 net loss of $20.6 million, or $0.70 per diluted share, compared with net income of $49.5 million, or $1.68 per diluted share, in fourth-quarter 2015.
- Liquidity and debt capacity: The company reported $471.3 million in current liabilities and $1.845 billion in current assets. It had no borrowings under its $200 million revolving credit agreement at year-end, although letters of credit reduced availability. The company reported compliance with debt covenants.
Material changes versus the prior comparable period
- Sales increased modestly, with currency-neutral growth in both segments, while reported growth was partly reduced by foreign exchange.
- Net income fell to $28.1 million from $113.1 million. The principal unusual charge was a $62.3 million impairment, including a full impairment of GnuBIO goodwill of $13.5 million and in-process research and development of $46.4 million, plus $2.4 million of other intellectual-property impairment.
- Operating cash flow increased from $186.2 million to $216.4 million. Management attributed the improvement principally to higher customer collections, including recovery from ERP-related collection delays in 2015; higher supplier, employee, tax and legal payments partly offset the increase.
- Cash capital spending increased, in part as the global ERP implementation advanced. Bio-Rad estimated the remaining ERP project cost at $90 million to $130 million and expected capital expenditures to moderate in 2017 and decline over the following couple of years.
- Foreign-exchange losses declined to $4.5 million from $10.2 million. The company reported an effective tax rate of 32%, compared with 22% in 2015.
Outlook, commentary, risks and unusual items
- The filing gives no specific numerical revenue or earnings guidance. Management said it expected to continue European restructuring and ERP implementation, and anticipated moderating capital expenditures in 2017. It warned that restructuring may not deliver expected savings and may disrupt operations.
- In February 2017, after year-end, Bio-Rad acquired RainDance Technologies for approximately $87 million, including assumed net liabilities; $82.9 million was paid in cash at closing. The acquisition is intended to expand genomic and droplet-based PCR capabilities. The purchase-price allocation was not yet complete when the filing was prepared.
- The company recorded $12.5 million of 2016 restructuring charges, primarily for workforce reductions or relocations; $9.0 million was expected to be paid through 2019.
- Bio-Rad said the DOJ and SEC would not extend the FCPA non-prosecution agreement after its November 2, 2016 expiration. The filing nevertheless warns of possible further investigations, claims and reputational effects. A proposed settlement of related shareholder derivative actions required court approval and included revised corporate procedures, with no monetary payment other than plaintiffs’ attorneys’ fees and costs.
- After year-end, a court awarded former general counsel Sanford Wadler $10.92 million, plus interest and litigation costs, expert fees and approved attorneys’ fees, in a whistleblower-retaliation case. Bio-Rad said it had provided for the judgment, interest and litigation costs and was considering an appeal.
- Key operating risks include foreign-currency movements, competitive and pricing pressures, healthcare reimbursement and regulatory changes, reliance on government and institutional funding, and potential supply constraints from sole-source suppliers. The company also highlighted risks from its multi-year ERP rollout: prior deployments caused invoicing and collection issues and manufacturing and logistics delays; a more complex Western Europe deployment was planned for April 2017.
- Other items to monitor include tax examinations and uncertain tax positions, a $66.4 million valuation allowance against deferred tax assets, and $32.7 million of receivables in Spain, Italy, Greece and Portugal. The filing also reports three air-district violation notices under investigation; no formal proceeding had been initiated.
- Foreign-exchange sensitivity analysis estimated that a 10% adverse exchange-rate move would cause an approximately $30 million net-present-value loss on year-end derivative positions, before considering offsets from underlying assets and liabilities.
Most important facts for investors to verify
- Whether the GnuBIO impairment and subsequent product or development plans signal further impairment risk or affect expected returns from the acquisition.
- Whether segment growth, especially in Clinical Diagnostics and Europe, improves enough to stabilize margins amid pricing and reimbursement pressure.
- Whether the ERP deployment proceeds as planned, and whether it resolves prior collection, manufacturing and logistics disruptions.
- The ultimate costs and outcomes of the Wadler judgment, derivative-action settlement, air-district notices and other legal or regulatory matters.
- How much of reported liquidity is readily available for U.S. uses, considering foreign cash, reinvestment intentions and possible tax costs on repatriation.
- The value and concentration risks of investments, including the large unrealized gains in Sartorius shares, and the effect of any market-value decline.
- The timing and financial impact of RainDance integration, contingent consideration and the company’s anticipated restructuring and ERP spending.