Bio-Rad Laboratories, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Bio-Rad sells life science research and clinical diagnostics products worldwide through its Life Science and Clinical Diagnostics segments. The period reflects significant COVID-19 disruption and large noncash gains on its Sartorius AG investment.
Key financial metrics
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $536.9 million | $572.6 million | $1,108.5 million | $1,126.6 million |
| Gross profit / margin | $293.0 million / 54.6% | $307.8 million / 53.7% | $610.4 million / 55.1% | $619.5 million / 55.0% |
| Operating income | $51.7 million | $56.4 million | $126.1 million | $113.0 million |
| Net income | $966.4 million | $598.8 million | $1,652.3 million | $1,464.0 million |
| Diluted EPS | $32.15 | $19.86 | $54.84 | $48.60 |
| Cash from operations | Not presented quarterly | Not presented quarterly | $154.9 million | $198.3 million |
Q2 operating margin was approximately 9.6% versus 9.8% a year earlier. Six-month operating margin was approximately 11.4% versus 10.0%. These operating results contrast with net income, which was heavily influenced by investment valuation gains.
- Segment sales, Q2: Life Science $252.1 million, up 18.7% reported (20.0% currency neutral); Clinical Diagnostics $283.2 million, down 20.7% reported (18.7% currency neutral).
- Liquidity at June 30: Cash and cash equivalents were $607.6 million and short-term investments $424.2 million, totaling about $1.032 billion. Current assets were $2.133 billion and current liabilities $926.9 million.
- Debt: Total debt was approximately $438.7 million, including $425.0 million of 4.875% senior notes due December 2020. The company reported no revolver borrowings; $0.2 million of its $200 million facility supported letters of credit.
- Cash uses and investment: Six-month capital expenditures were $39.7 million; acquisition payments were $96.9 million; and share repurchases used $100.0 million. Investing cash flow was negative $101.0 million and financing cash flow negative $101.6 million.
Material changes and unusual items
- Q2 sales declined 6.2% reported and approximately 4.4% currency neutral. Life Science growth, including products used in COVID-19 testing and research, was more than offset by the Clinical Diagnostics decline and weaker demand associated with laboratory closures.
- Bio-Rad recorded a $1.183 billion Q2 gain on the fair value of equity securities, primarily its Sartorius AG investment; the six-month gain was $2.011 billion. The gain is noncash and substantially explains the increase in net income. Bio-Rad owned approximately 37% of Sartorius voting shares but reported no significant influence over its operating or financial policies.
- Gross margin improved in Q2, with favorable Life Science product mix partly offset by an $8.3 million customs-duty charge. Clinical Diagnostics faced higher excess and obsolete inventory costs and freight charges.
- Operating cash flow fell by $43.4 million year over year for the first half. Management cited higher supplier and employee payments, including COVID-19-related supplies, and lower customer receipts; lower income-tax payments partly offset the decline. Inventory increased $79.8 million.
- On April 1, Bio-Rad acquired Celsee for $99.5 million, including contingent consideration valued at $0.1 million; additional cash earn-out payments of up to $60 million depend on 2021–2022 revenue targets. In April, it sold its Informatics division for $12.2 million and recorded an $11.7 million gain.
Outlook, risks and contingencies
- The filing provides no quantitative earnings or revenue guidance. Management said COVID-19 had negatively affected operations and was expected to continue disrupting results; it also specifically expected negative effects on revenue growth and net income. The duration and magnitude were uncertain.
- Risks included reduced customer orders and routine diagnostic testing, customer-site closures, raw-material and component constraints, freight disruption and possible facility shutdowns. Certain COVID-19-related product demand increased, but did not offset broader weakness.
- Management said it was assessing options for the $425 million notes due in December 2020 and believed available resources were adequate to repay them, whether or not refinanced. It reported compliance with debt covenants.
- In July 2020, the board authorized an additional $200 million for share repurchases, after $73.1 million remained under the existing program at June 30.
- Bio-Rad announced a finance and administrative restructuring expected to be completed by March 2021; its June 30 liability was $3.8 million. Other restructuring liabilities included $9.8 million for the 2019 plan and $2.2 million for a facility closure.
- The company disclosed ordinary-course legal matters for which it could not estimate potential exposure. It did not believe the matters would ultimately have a material adverse effect, while noting resolution could affect results in a particular period. Tax examinations and uncertain tax positions remain; gross unrecognized tax benefits were $53.0 million, with up to $4.5 million potentially decreasing within 12 months.
- The December 2019 cyberattack disrupted certain systems; Bio-Rad reported no evidence of unauthorized transfer or misuse of personal data and no ransom payment. Insurance proceeds had not been recorded because coverage and eligible costs were unsettled.
Important facts for investors to verify
- How much reported earnings depend on Sartorius share-price movements, and the resulting effects on earnings volatility, deferred taxes and the balance sheet.
- The repayment or refinancing plan for the $425 million notes due December 2020, including the effect on liquidity and future interest costs.
- Whether Life Science growth can persist and Clinical Diagnostics demand recovers as COVID-19 restrictions and customer activity change.
- Trends in operating cash flow, inventory, receivables and supply-chain costs, given the decline in first-half cash generation.
- Celsee integration, acquisition accounting estimates and the conditions for any future earn-out payments; also confirm progress and costs of announced restructurings.
- Any material developments in COVID-19 impacts, cyberattack insurance recovery, tax examinations or legal contingencies.