Bio-Rad Laboratories, Inc. — 2010 Form 10-K
Reporting period: Year ended December 31, 2010; the filing also reports unaudited fourth-quarter results. Bio-Rad operates globally in Life Science research products and Clinical Diagnostics. Clinical Diagnostics generated 66% of 2010 sales and Life Science 34%; approximately 69% of sales were outside the United States.
Financial performance
| Metric | 2010 | 2009 |
|---|---|---|
| Net sales | $1.927 billion | $1.784 billion |
| Gross profit / gross margin | $1.091 billion / 56.6% | $999.8 million / 56.0% |
| Operating income | $284.0 million | $231.0 million |
| Net income attributable to Bio-Rad | $185.5 million | $144.6 million |
| Diluted earnings per share | $6.59 | $5.20 |
| Cash provided by operating activities | $225.9 million | $325.1 million |
| Capital expenditures | $87.3 million | $66.8 million |
| Cash, cash equivalents and short-term investments | $1.025 billion | $744.8 million |
| Total debt | $964.3 million | $742.6 million |
Fourth quarter 2010: Sales were $533.7 million, gross profit $299.7 million, net income attributable to Bio-Rad $67.9 million, and diluted EPS $2.41. Fourth-quarter 2009 figures were $495.1 million, $268.5 million, $37.9 million, and $1.35, respectively.
Changes versus 2009
- Annual sales increased 8.0%. Excluding Biotest, sales grew 4.8% on a currency-neutral basis. Biotest contributed approximately $56.1 million to sales growth.
- Clinical Diagnostics sales rose 11.0% to $1.265 billion; Life Science sales rose 2.6% to $648.1 million. Growth was strongest in Asia Pacific, Eastern Europe and Latin America; Life Science sales declined in Europe.
- Gross margin improved 0.6 percentage points, with Life Science manufacturing efficiencies and product mix contributing. Biotest acquisition accounting and its lower margins partly pressured Clinical Diagnostics margins.
- Operating cash flow declined $99.2 million, reflecting higher supplier and royalty payments, intellectual-property settlement payments, taxes and interest, as well as slower customer collections, particularly from European government customers.
- Interest expense rose to $63.7 million from $47.0 million, including costs associated with debt refinancing and the December 2010 redemption of $200 million of 6.125% notes.
Liquidity, debt and capital allocation
Year-end cash and cash equivalents were $906.6 million, with $118.6 million of short-term investments. Management stated that, after accounting for the January 2011 redemption of the 7.50% notes, approximately $790.6 million in cash, cash equivalents and short-term investments remained available. The company had no borrowings under its $200 million revolving credit agreement at year-end. It issued $425 million of 4.875% senior notes due 2020 in December 2010; proceeds funded redemption of $200 million of 6.125% notes in December and, with cash on hand, $225 million of 7.50% notes in January 2011. Management expected the refinancing to reduce future interest expense. Debt covenants were reported in compliance at December 31, 2010.
Outlook, risks and unusual items
- The filing provides no specific numerical revenue, earnings or margin guidance. Management cautioned that slow economic growth, government and customer spending, and sovereign deficit-reduction measures could affect demand and collections. First-quarter 2011 operating cash flow was expected to be lower due to customary royalty, commission and bonus payments.
- A DOJ and SEC investigation remained ongoing following Bio-Rad’s May 2010 voluntary disclosure of possible overseas FCPA violations. The company said it could not estimate the outcome or potential penalties, remediation costs or business restrictions.
- Management identified three significant control deficiencies that together constituted a material weakness in internal control over financial reporting as of year-end. Deficiencies involved entity-level controls and expenditure, revenue and receivables processes at certain international subsidiaries. Management and the auditor concluded internal control over financial reporting was ineffective; Ernst & Young issued an adverse opinion on ICFR. The auditor nevertheless gave an unqualified opinion on the financial statements.
- Bio-Rad reported $964.3 million of debt and noted covenant restrictions, substantial interest obligations and refinancing risks. It also faces foreign-exchange exposure; a 10% adverse exchange-rate movement was estimated to produce an approximately $49 million loss in the value of derivative positions before offsets from underlying assets and liabilities.
- The company acquired certain Biotest diagnostic businesses for approximately $64.9 million in January 2010. It also disclosed a planned global ERP and e-commerce investment, with estimated implementation costs potentially reaching $150 million over approximately five years.
- The 2010 effective tax rate was 15%, including an approximately $22.4 million benefit associated with foreign tax credits and a $163.9 million distribution of foreign earnings. Approximately $393 million of foreign earnings were considered permanently reinvested; estimated tax if repatriated was approximately $86 million.
Most important facts for investors to verify
- Progress and eventual outcomes of the FCPA investigations, including any fines, monitors, compliance obligations or business impacts.
- Remediation and independent validation of the material weakness, and whether future filings report effective controls or identify further deficiencies.
- Post-January 2011 debt balances, interest savings from refinancing, covenant headroom and cash available after debt repayments and planned investments.
- Whether operating cash flow recovers as customer collections improve, and the extent of receivables exposure to European national healthcare systems.
- Underlying segment growth and margins excluding Biotest, currency movements and purchase-accounting effects; also execution and total cost of the ERP program.