Bio-Rad Laboratories, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Bio-Rad manufactures and distributes life science research and clinical diagnostics products. The filing is unaudited.
Financial performance
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Net sales | $572.6 million | $575.9 million | $1,126.6 million | $1,127.4 million |
| Gross profit / margin | $307.8 million / 53.7% | $301.7 million / 52.4% | $619.5 million / 55.0% | $603.9 million / 53.6% |
| Operating income / margin | $56.4 million / 9.8% | $43.8 million / 7.6% | $113.0 million / 10.0% | $87.4 million / 7.8% |
| Net income | $598.8 million | $268.0 million | $1,464.0 million | $924.8 million |
| Diluted EPS | $19.86 | $8.87 | $48.60 | $30.63 |
| Operating cash flow | Six-month period: $198.3 million | Prior-year first half: $118.2 million |
Earnings quality: Net income was substantially influenced by unrealized gains on equity securities, primarily Bio-Rad’s Sartorius AG investment: $716.4 million in Q2 and $1,775.6 million in the first half, compared with $286.4 million and $1,102.3 million, respectively, in 2018. These valuation gains are not a measure of underlying operating growth and are sensitive to market prices. Operating income increased despite nearly flat reported sales.
Segment and sales trends: Q2 Life Science sales declined 2.5% reported and 0.1% excluding currency; Clinical Diagnostics sales rose 0.9% reported and 4.8% excluding currency. For the first half, Life Science sales rose 3.0% reported and 5.6% currency-neutral, while Clinical Diagnostics fell 1.9% reported but rose 2.0% currency-neutral. Consolidated sales were down 0.6% reported in Q2 and essentially flat for the half; management cited currency-neutral growth of approximately 2.7% and 3.4%, respectively.
Liquidity, debt and cash flow
- At June 30, cash and cash equivalents were $580.7 million and short-term investments were $401.2 million, totaling $981.9 million. Approximately 23% of cash, cash equivalents and short-term investments was held in foreign subsidiaries.
- Six-month operating cash flow was $198.3 million; investing cash outflow was $37.8 million, including $45.8 million of capital expenditures; financing cash outflow was $13.5 million, including $15.0 million of share repurchases. Cash and cash equivalents increased by $149.2 million from year-end.
- Total debt and notes payable, including finance leases, were approximately $439.4 million. The principal borrowing was $425 million of 4.875% senior notes due December 2020. Bio-Rad had no revolver borrowings and reported approximately $209.7 million available under domestic and international credit and guarantee arrangements, subject to $3.1 million already utilized.
- A new $200 million unsecured revolving credit agreement was entered into in April 2019 and matures in April 2024. The company reported compliance with applicable debt covenants.
- Adoption of lease accounting added $215.5 million of operating lease right-of-use assets and $221.6 million of operating lease liabilities to the balance sheet. Total assets rose to $7.65 billion from $5.61 billion at year-end, primarily reflecting the increase in the fair value of equity investments as well as lease accounting.
Material changes, outlook and notable items
- Gross margin improved year over year, supported by product mix and lower service, logistics and inventory-related costs. First-half Life Science margin also benefited from a $7.4 million escrow release related to an earlier acquisition.
- Q2 SG&A declined to $201.3 million from $210.4 million; R&D increased to $50.1 million from $47.5 million. First-half SG&A also declined, while R&D was slightly higher.
- In March, Bio-Rad completed an approximately $20 million acquisition of a small private company for its Life Science segment. The purchase price allocation remained preliminary at quarter-end.
- Bio-Rad provided no quantified full-year revenue or earnings guidance in the supplied filing text. Management said available liquidity and operating cash flow should be adequate for current operating, R&D, capital and reasonably sized acquisition needs.
- Management identified potential demand and growth uncertainties tied to government and customer funding, healthcare reimbursement and spending, international trade and tariffs, Brexit, foreign exchange, and regulatory requirements. It also noted risks from competition, product development, supply continuity and ERP implementation.
- In the former general counsel’s lawsuit, the Ninth Circuit reversed the Dodd-Frank claim, affirmed $7.96 million of damages on the California public-policy claim, and vacated the Sarbanes-Oxley claim for further proceedings. Bio-Rad had provided for the judgment and related costs; other litigation exposure was not clearly estimable.
- Management stated disclosure controls were effective as of June 30, 2019 and reported no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- How much of reported earnings and EPS reflects Sartorius-related fair-value gains, and how changes in that investment’s market price could affect future results.
- Underlying sales trends by segment and region, including currency-neutral growth and the effect of the prior-year $6.0 million patent-resolution receipt in Clinical Diagnostics.
- The operating cash flow drivers, including tax timing, supplier and employee payments, and whether improved cash generation is sustainable.
- The status and funding plan for the $425 million notes due in December 2020, and continuing compliance with credit-agreement covenants.
- Developments in the remanded Sarbanes-Oxley litigation claim and any material changes in other legal or tax contingencies.