Bio-Rad Laboratories, Inc. — Q1 2014 Form 10-Q
Business context and reporting period. The filing covers the three months ended March 31, 2014. Bio-Rad manufactures and distributes life science research and clinical diagnostics products; its reportable segments are Life Science and Clinical Diagnostics. Approximately 68% of quarterly sales were international.
Financial performance and liquidity
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Net sales | $509.3 million | $499.7 million |
| Gross profit / margin | $275.3 million / 54.0% | $271.4 million / 54.3% |
| Operating income | $20.5 million | $35.2 million |
| Net income attributable to Bio-Rad | $6.7 million | $20.2 million |
| Diluted EPS | $0.23 | $0.70 |
| Operating cash flow | $68.9 million | $24.0 million |
| Capital expenditures | $25.9 million | $34.1 million |
Sales increased 1.9% year over year, or approximately 2.9% excluding currency effects. Life Science sales rose 3.3% (4.6% currency-neutral); Clinical Diagnostics sales rose 1.3% (2.1% currency-neutral). Segment profit was a $6.6 million loss for Life Science versus a $12.8 million loss, and $32.4 million for Clinical Diagnostics versus $37.7 million.
At March 31, cash and cash equivalents were $364.5 million and short-term investments were $276.8 million. The MD&A reports combined cash, cash equivalents and short-term investments of $641.3 million. Total debt was approximately $437.3 million; the $425 million 4.875% Senior Notes mature in 2020. No revolving credit facility borrowings were outstanding, and the company reported $219 million available under domestic and international lines, including $8.3 million reserved for letters of credit.
Material changes and unusual items
- Net income fell to $6.7 million from $20.2 million. SG&A rose to $202.3 million from $185.9 million, including FCPA-related expense; operating income declined despite higher sales.
- Effective tax rate was 54%, compared with 16%, reflecting foreign losses without tax benefits, state-tax adjustments, and the absence of a U.S. federal research-credit benefit. The 2013 rate included a retroactively reinstated research-credit benefit.
- Interest expense declined to $3.9 million from $11.0 million, primarily because the company redeemed $300 million of 8.0% Senior Subordinated Notes in September 2013; Q1 2014 also included a $1.8 million reduction associated with the FCPA matter.
- Operating cash flow improved, aided by customer collections, lower income-tax payments and lower interest payments; collections included approximately $11 million from Spanish public agencies.
- The filing corrects immaterial prior-period cash-flow classification errors and a prior-period R&D tax-credit presentation. The company says the corrections affected the comparative presentation but not the trend of financial results.
Outlook, risks and contingencies
- No specific financial guidance or quantified sales outlook is provided. Management cites uncertain economic conditions, government and customer funding constraints, reimbursement pressure, competition and foreign-exchange exposure.
- The $200 million revolving credit agreement expires in June 2014; Bio-Rad was evaluating renewal or similar arrangements. Management said available liquidity and operating cash flow were adequate for current objectives.
- The company expects capital spending to rise as it continues a global ERP implementation. Estimated ERP implementation cost could exceed $250 million and take four or more years; management expects historically higher capital expenditures for at least the next four years.
- DOJ and SEC investigations concerning possible FCPA violations continued. Bio-Rad reported a $43.0 million aggregate estimated loss-contingency accrual, including $3.2 million accrued interest, and said it could not predict the investigations’ outcome or estimate a reasonably possible range beyond the accrual. Potential sanctions could materially adversely affect the business or financial condition.
- A material weakness in monitoring controls over certain U.S. and overseas operations remained unremediated at March 31, 2014. Management’s remediation efforts were underway but incomplete; the company cautioned that it could not assure successful remediation or that further weaknesses would not be identified.
- In April 2014, after quarter-end, Bio-Rad acquired GnuBIO for approximately $40 million cash, with contingent consideration potentially up to $70 million. The purchase-price allocation was not yet available.
- Other risks include exposure to sovereign-customer payment delays (receivables in Spain, Italy, Greece and Portugal totaled $56 million), healthcare reimbursement changes, acquisition integration, and ERP implementation disruptions.
Important facts for investors to verify
- Progress and any final resolution of the DOJ/SEC FCPA investigations, and whether the $43.0 million accrual proves sufficient.
- Remediation of the material weakness and any subsequent assessment of financial-reporting controls.
- Renewal or replacement of the credit facility expiring in June 2014, and the cost and funding needs of the ERP program.
- GnuBIO’s final acquisition accounting, milestone obligations and contribution to Clinical Diagnostics.
- Whether sales growth, segment margins and cash generation persist, particularly amid pricing pressure and uneven regional demand.