Bio-Rad Laboratories, Inc. — FY 2012 Form 10-K
Business context and reporting period. The filing covers the fiscal year ended December 31, 2012; quarterly figures below identify the fourth quarter. Bio-Rad sells life-science research and clinical-diagnostics products worldwide. Clinical Diagnostics generated 66% of annual sales and Life Science 33%; approximately 68% of sales were international.
Financial performance and position
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Net sales | $2.069 billion | $2.074 billion |
| Gross profit / margin | $1.154 billion / 55.8% | $1.178 billion / 56.8% |
| Operating income | $257.2 million | $295.2 million |
| Net income attributable to Bio-Rad | $163.8 million | $178.2 million |
| Diluted EPS | $5.72 | $6.26 |
| Cash from operating activities | $278.9 million | $259.8 million |
| Capital expenditures | $152.4 million | $102.9 million |
| Cash and short-term investments | $921.1 million | $813.1 million |
| Total debt | $734.2 million | $732.5 million |
Annual sales were nearly flat year over year, but constant-currency sales increased approximately 3.6%. Operating income declined about 13% and net income about 8%. Higher R&D spending and lower gross margin weighed on results. Cash provided by operations less capital expenditures was approximately $126.5 million. Cash and cash equivalents declined $110.8 million to $463.4 million, partly as short-term investments increased. Current assets were $1.930 billion and current liabilities $469.9 million. The $200 million revolving credit facility had no borrowings outstanding at year-end; the company reported compliance with debt covenants.
Fourth quarter: Sales were $573.8 million versus $550.2 million, net income attributable to Bio-Rad was $42.0 million versus $59.2 million, and diluted EPS was $1.46 versus $2.08. Gross profit was $314.1 million, or approximately 54.7% of sales, compared with $311.0 million, or approximately 56.5%, in Q4 2011.
Material changes versus the prior year
- Life Science sales fell 0.9% reported but rose 1.5% in constant currency; segment profit decreased to $11.4 million from $45.7 million. Bio-Rad cited acquisition-related amortization, an incremental royalty accrual and $3.8 million of soil-remediation expense.
- Clinical Diagnostics sales increased 0.1% reported and 4.7% in constant currency; segment profit was essentially unchanged at $197.8 million.
- R&D expense rose 14.8% to $214.0 million, or 10.3% of sales, from $186.4 million, or 9.0% of sales.
- SG&A declined to 33.0% of sales from 33.6%, benefiting in part from a $16.1 million reduction in the estimated QuantaLife contingent-consideration liability and improved collections in Spain.
- Other income included realized investment gains and a $4.3 million gain on the sale of a building. The effective tax rate increased to 27% from 24%.
Outlook, risks, contingencies and unusual items
- No specific sales or earnings guidance was provided. Management cited uncertain global conditions and dependence on government, university, hospital and industry funding and spending.
- Bio-Rad expected higher capital spending for the next three to four years as it implements a global ERP system and expands e-commerce. ERP implementation costs could reach $200 million and were expected to take approximately four more years. Management expected Q1 2013 operating cash flow to be lower than Q4 2012 due to customary royalty, commission and bonus payments.
- A 2.3% U.S. excise tax on certain medical-device sales began in 2013; Bio-Rad estimated the gross-margin impact at less than 0.25%.
- A third party claimed $30.2 million in additional unpaid royalties. Bio-Rad disputed the amount and recorded an accrual based on its best estimate of a possible settlement; the filing does not state the precise accrual. A larger loss remained possible. The royalty matter also prompted an increase to the accrual included in the 2012 financial statements after the company’s preliminary results announcement.
- DOJ and SEC investigations into possible FCPA violations remained ongoing. The company said it could not predict the outcome or estimate potential sanctions, which could materially affect operations, cash and credit ratings.
- Management identified four significant control deficiencies—accounting close, revenue recognition, reagent rental and expenditure controls—that together constituted a material weakness in internal control over financial reporting. Ernst & Young issued an adverse opinion on internal controls, while expressing an unqualified opinion on the financial statements. Management had begun remediation but could not assure successful completion.
- A $6.1 million foreign supplemental-tax error relating to 2007–2011 was accrued and paid in Q1 2012. Management concluded it was not material to any individual prior year or FY 2012.
- 2012 acquisitions included the Propel Labs cell-sorting system, with $44.6 million of contingent consideration recorded, and DiaMed Benelux; Bio-Rad also acquired a supplier’s assets. In January 2013 it acquired AbD Serotec for approximately $70 million in cash.
Most important facts for investors to verify
- Progress and independent validation of remediation for the material weakness, particularly revenue recognition, royalty accruals and controls at foreign subsidiaries.
- Resolution of the DOJ/SEC investigations and the royalty dispute, including final settlement amounts, penalties or compliance requirements.
- Whether Life Science growth and profitability recover, given the sharp decline in segment profit and weaker R&D-market funding cited for QuantaLife milestones.
- Cash generation after elevated capital spending, the expected ERP investment, and the maturity/refinancing profile of the $300 million 8.0% notes due 2016 and $425 million 4.875% notes due 2020.
- Exposure to international currency movements and public-sector receivables: balances in Spain, Italy, Greece and Portugal were $64.8 million at year-end 2012.