Bio-Rad Laboratories, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016. Bio-Rad manufactures and distributes life science research and clinical diagnostics products. Its reportable segments are Life Science and Clinical Diagnostics.
Financial performance
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Net sales | $471.2 million | $472.8 million |
| Gross profit / margin | $264.0 million / 56.0% | $270.1 million / 57.1% |
| Operating income | $25.7 million | $34.3 million |
| Net income | $12.3 million | $17.8 million |
| Diluted EPS | $0.42 | $0.61 |
| Cash from operating activities | $(7.4) million | $29.4 million |
| Capital expenditures | $25.3 million | $27.1 million |
Sales declined 0.3% year over year as reported, but increased approximately 3.9% excluding foreign currency effects. Life Science sales rose 6.4% (9.8% currency-neutral); Clinical Diagnostics sales fell 3.8% (up 0.9% currency-neutral). Segment results were a $3.3 million loss for Life Science and $24.8 million profit for Clinical Diagnostics, compared with a $2.4 million loss and $35.2 million profit, respectively, in Q1 2015.
Gross margin fell 1.1 percentage points. Management cited lower Life Science margins in certain product lines, less favorable manufacturing variances, higher service costs and acquisition-related intangible amortization. SG&A was $189.7 million and R&D was $48.6 million, both higher year over year. Net income also reflected a higher effective tax rate, 39% versus 33%.
Balance sheet and liquidity
- At March 31, 2016, cash and cash equivalents were $403.6 million and short-term investments were $345.0 million; together, $748.7 million. Approximately 36% of these funds were held in foreign subsidiaries.
- Total debt was approximately $434.3 million, including $425.0 million principal of 4.875% senior notes due 2020. The company had no revolver borrowings and reported compliance with its credit agreement covenants.
- Current assets were $1.775 billion and current liabilities $400.9 million. Total assets were $3.753 billion; total liabilities were $1.209 billion.
- Operating cash flow turned negative from $29.4 million provided in Q1 2015. Management attributed the decline principally to supplier and employee payments, including inventory payments delayed in late 2015, performance compensation and professional fees, plus net hedge-contract payments.
Material changes, outlook and risks
- In January 2016, Bio-Rad acquired Propel Labs’ analytical flow cytometer platform for preliminary consideration of $38.8 million: $9.5 million cash and $29.3 million contingent consideration. Purchase accounting is preliminary; the contingent sales milestones could range from zero to an unlimited amount through 2020.
- Management expects 2016 capital expenditures to increase as the third phase of its global ERP implementation proceeds. The ERP project is estimated to cost $140 million to $190 million and take more than three years to complete; spending is expected to remain historically elevated for at least three years.
- The filing provides no specific full-year revenue or earnings guidance. Management said liquidity, including cash, investments and available credit, should support operations and planned investment. It is also reviewing potential acquisitions, with no assurance discussions will result in transactions.
- Risks highlighted include foreign-exchange exposure, competitive and pricing pressure, dependence on government and customer funding, healthcare reimbursement and regulation, product development and quality, and execution of the ERP rollout. The company also cited economic uncertainty and potential collection delays; receivables in Spain, Italy, Greece and Portugal totaled $42.3 million.
- The 2.3% U.S. medical-device excise tax was suspended for 2016–2017. The company remains subject to a 2014 FCPA non-prosecution agreement and SEC order with compliance and reporting obligations. Related shareholder derivative actions were stayed pending mediation. A former general counsel’s lawsuit remained pending; mediation in April 2016 did not settle the case, and trial was scheduled for January 9, 2017. The company said it could not reasonably estimate any potential exposure.
- Bio-Rad reported effective disclosure controls as of quarter-end and no material changes to internal control over financial reporting during the quarter.
Key items for investors to verify
- Whether currency-neutral sales growth translates into sustained reported growth, particularly given the Clinical Diagnostics decline in Europe and pricing pressures.
- Whether margins and earnings recover, and how much the elevated tax rate and Life Science margin pressures persist.
- Cash conversion and working-capital trends, including inventory growth and the timing of supplier payments and collections.
- ERP implementation costs, milestones and any operational disruption; compare actual capital spending with management’s stated expectations.
- Final purchase accounting and future payments or expenses related to the Propel acquisition and other contingent consideration.
- Developments in FCPA-related compliance and litigation, tax examinations, and the company’s international regulatory and currency exposures.