Bio-Rad Laboratories, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Bio-Rad operates Life Science and Clinical Diagnostics businesses. Unless noted, financial figures are in U.S. dollars.
Key financial results
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $680.8 million | $747.0 million | $2,072.0 million | $2,189.8 million |
| Gross margin | 54.9% | 58.6% | 56.6% | 56.6% |
| Operating income | $92.8 million | $156.8 million | $356.4 million | $382.4 million |
| Net income (loss) | $(164.2) million | $3,928.0 million | $(4,461.0) million | $5,819.6 million |
| Diluted EPS | $(5.52) | $129.96 | $(149.60) | $192.76 |
| Operating cash flow | — | $104.0 million | $498.6 million |
- Q3 sales fell 8.9% reported and approximately 4.1% on a currency-neutral basis. Nine-month sales declined 5.4% reported and approximately 1.5% currency-neutral.
- Quarterly segment sales were $317.9 million for Life Science (down 14.9% reported; down 11.0% currency-neutral) and $361.9 million for Clinical Diagnostics (down 2.8% reported; up 3.0% currency-neutral). For nine months, segment sales were $987.5 million and $1,081.4 million, respectively.
- Reported net results were dominated by changes in the fair value of Bio-Rad’s Sartorius AG equity investment and related loan: a $289.0 million loss in Q3 2022 and a $6.17 billion loss for the first nine months, versus gains of $4.87 billion and $7.08 billion in the comparable 2021 periods. These non-operating valuation changes substantially obscure the operating business’s results.
Balance sheet, debt and liquidity
- At September 30, 2022, cash and cash equivalents were $517.9 million and short-term investments were $1.332 billion; management reported $1.85 billion of cash, cash equivalents and short-term investments available.
- Total assets were $12.06 billion, including $7.46 billion of other investments. Stockholders’ equity was $8.45 billion.
- Long-term debt was $1.197 billion, primarily $400 million of 3.3% senior notes due 2027 and $800 million of 3.7% senior notes due 2032. The company reported no borrowings under its $200 million revolving facility; $0.2 million was used for letters of credit.
- Nine-month investing cash outflow was $1.138 billion, including purchases of investments and the Curiosity acquisition. Financing cash inflow was $1.060 billion, principally from the notes issuance. Cash, cash equivalents and restricted cash ended at $518.2 million.
Material changes and management commentary
- Management attributed sales pressure to lower COVID-related demand, supply constraints and China lockdowns, as well as the prior-year comparison with $31.6 million of intellectual-property litigation settlement royalty revenue. Excluding COVID-related sales and that prior-year royalty, management reported currency-neutral revenue growth of 6.1% for both Q3 and the first nine months.
- Supply shortages and delays caused a significant sales-order backlog and delayed some product-development work. Management expected the backlog to continue through the remainder of 2022, with some orders extending into 2023.
- Q3 gross margin declined year over year, mainly from higher logistics and production costs and product mix; the prior-year Life Science margin also benefited from the royalty revenue. Nine-month consolidated gross margin was unchanged, with different trends across the two segments.
- Bio-Rad acquired Curiosity Diagnostics on August 3 for total estimated consideration of $137.1 million, including $101.0 million cash consideration and $36.1 million estimated contingent consideration. Potential milestone payments may reach $70 million. Curiosity is developing a rapid molecular diagnostics PCR platform; its post-acquisition operating results were immaterial in the period.
- The European restructuring plan, announced in 2021, is expected to be substantially complete by mid-2023. The restructuring liability was $36.4 million at quarter-end.
- Management stated that existing liquidity, operating cash flow and available credit were expected to meet current operating, investment and acquisition objectives. The filing provides no specific revenue or earnings guidance.
Risks, contingencies and unusual items
- The large Sartorius investment and loan are subject to market-price, valuation and foreign-exchange volatility; the company cautions that these movements can materially affect reported earnings independently of operating performance. Bio-Rad also disclosed potential Investment Company Act classification risk related to its securities holdings.
- COVID-related demand normalization, supply-chain constraints, component shortages, freight costs and foreign-exchange movements may affect sales, costs and product launches. The company cited competition, customer funding and spending, regulation, cybersecurity, ERP implementation, geopolitical conditions and talent retention among other risks.
- Available-for-sale debt investments had $22.3 million of unrealized losses at September 30, 2022, attributed to market conditions and interest-rate movements; management reported no credit-loss allowance and expected contractual payments in full and on time.
- Gross unrecognized tax benefits were $73.9 million. The company said up to $3.5 million could reasonably possibly decrease within 12 months. It reported routine tax examinations and ordinary-course legal matters, without identifying a currently expected material adverse effect.
- Management identified an immaterial prior-period inventory classification revision between work in process and finished goods; total inventory and previously reported financial results were not affected. Disclosure controls were reported effective, with no material internal-control changes during the quarter.
Important facts for investors to verify
- How Sartorius share-price movements and the fair value of the related loan drive reported earnings, equity and balance-sheet investment values.
- Whether supply constraints and the sales backlog clear on the expected timetable, and whether instrument placements and product-development schedules recover.
- Underlying revenue and margin trends excluding COVID-related sales, currency effects and the prior-year litigation royalty; compare the company’s stated currency-neutral measures with reported results.
- Operating cash-flow conversion and working-capital trends, particularly inventory growth, alongside the cost of servicing the newly issued debt.
- Progress, product-development milestones and potential contingent payments associated with Curiosity, plus completion costs and timing for the restructuring plan.