Bio-Rad Laboratories, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with Q1 2018 unless stated otherwise. Bio-Rad sells life science research and clinical diagnostics products and services through its Life Science and Clinical Diagnostics segments. The company says much of its revenue is recurring.
Financial performance and liquidity
| Metric | Q1 2019 | Q1 2018 / comparison |
|---|---|---|
| Net sales | $554.0 million | $551.5 million; up 0.4% reported and approximately 4.0% currency-neutral |
| Gross profit / margin | $311.8 million / 56.3% | $302.2 million / 54.8% |
| Operating income | $56.6 million | $43.6 million |
| Net income | $865.2 million | $656.8 million |
| Diluted earnings per share | $28.74 | $21.77 |
| Cash provided by operations | $42.9 million | $40.3 million |
| Cash, cash equivalents and short-term investments | $859.0 million | At March 31, 2019 |
| Total debt, including finance leases and current maturities | $439.4 million | At March 31, 2019 |
At March 31, cash and cash equivalents were $455.9 million and short-term investments were $403.1 million. Bio-Rad reported $209.5 million available under domestic and international credit lines and guarantee arrangements, with $2.9 million utilized. The $425.0 million senior notes mature in December 2020. The company reported compliance with debt covenants and said available liquidity and operating cash flow should meet current needs.
Material changes and notable items
- Investment-driven earnings: Net income includes a $1,059.2 million unrealized gain on equity securities, primarily Bio-Rad’s Sartorius AG investment, compared with an $815.9 million gain in Q1 2018. The filing identifies the gain as a change in fair value recognized in earnings. It is a major non-operating, noncash factor in reported profit; operating income was $56.6 million.
- Segment trends: Life Science sales increased 9.1% reported and 12.0% currency-neutral to $215.7 million. Clinical Diagnostics sales declined 4.8% reported and 0.9% currency-neutral to $334.1 million. The prior-year Diagnostics comparison included a one-time $6.0 million patent-resolution receipt.
- Margins and costs: Consolidated gross margin rose to 56.3%. Life Science benefited in part from a $7.4 million cost-of-sales benefit from an escrow release related to a 2011 acquisition. Clinical Diagnostics margin declined approximately 1.6 percentage points, reflecting higher service costs and unfavorable manufacturing variances.
- Cash flow: Operating cash flow rose to $42.9 million, despite lower customer cash receipts. The cash-flow reconciliation includes a $1,059.2 million deduction for the noncash securities gain and a $238.5 million increase in deferred income taxes. Investing cash outflow was $22.7 million, including $16.1 million paid for an acquisition and $23.6 million of capital expenditures.
- Acquisition: Bio-Rad completed the purchase of a small private company for approximately $20.0 million, including $16.0 million paid in March. Preliminary purchase accounting includes $12.0 million of definite-lived intangibles and $10.7 million of goodwill; the valuation is not final.
- Accounting changes: Adoption of lease accounting on January 1, 2019 added $221.6 million of operating lease right-of-use assets and $227.0 million of operating lease liabilities to the balance sheet. Comparative periods were not restated. Bio-Rad also said the new lease treatment reduced the portion of reagent-rental income classified as lease income; lease-element revenue was about 3% of total revenue versus 5% in Q1 2018.
Outlook, risks and contingencies
The filing provides no numerical revenue or earnings guidance. Management described global economic conditions as uncertain and cited potential effects from government and customer funding, foreign exchange, Brexit, trade disputes and regulation. It stated that liquidity should support operations, research and development, capital expenditures and acquisitions of reasonable scale, and said it continues to review acquisition opportunities.
- Legal proceeding: In February 2019, the Ninth Circuit reversed the Dodd-Frank claim in the former general counsel case, vacated the Sarbanes-Oxley claim and remanded it for further proceedings, and affirmed $7.96 million in California public-policy damages. The rehearing petition was denied on April 8, 2019. Bio-Rad said it had provided for the judgment, interest and litigation costs. Other legal claims are not quantifiable from the filing.
- Tax and restructuring: The company is under tax examinations and said previously unrecognized tax benefits could decrease by up to $3.1 million within 12 months. Restructuring liabilities were $8.5 million across the disclosed European programs.
- Market and operating risks: Risks include volatility in Sartorius and other investment values, currency movements, competitive and pricing pressure, government funding and reimbursement changes, international compliance, product development and quality, supply continuity, cybersecurity and continued ERP implementation. The filing also discusses the company’s prior FCPA settlement and ongoing compliance-related risks.
- Controls: Management concluded disclosure controls were effective as of March 31, 2019 and reported no material changes to internal control over financial reporting during the quarter. The filing notes a previously identified material weakness was considered remediated as of December 31, 2018.
Important facts for investors to verify
- How much reported earnings and equity value depend on the market price and liquidity of the Sartorius AG investment, and the resulting effect of future fair-value changes.
- Whether Life Science growth and improved consolidated gross margin persist after the one-time escrow benefit, and whether Clinical Diagnostics sales and margins recover.
- The final purchase-price allocation and performance of the acquired company, along with integration costs and benefits.
- Developments in the remanded Sarbanes-Oxley claim, the affirmed damages and any additional legal exposure.
- Cash conversion, working-capital movements and the company’s ability to fund operations and capital needs as the senior notes approach their 2020 maturity.