Bio-Rad Laboratories, Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing also reports unaudited fourth-quarter results. Bio-Rad operates globally in Life Science and Clinical Diagnostics; about 38% of 2018 sales came from the U.S. and 62% from international markets.
Financial performance
| Metric | 2018 | 2017 |
|---|---|---|
| Net sales | $2.289 billion | $2.160 billion |
| Sales growth | 6.0% reported; about 5.0% currency-neutral | 4.4% reported; about 3.5% currency-neutral |
| Gross profit / margin | $1.223 billion / 53.4% | $1.188 billion / 55.0% |
| Operating income (loss) | $(103.3) million | $119.3 million |
| Net income | $365.6 million | $122.2 million |
| Diluted EPS | $12.10 | $4.07 |
| Cash from operations | $285.5 million | $104.1 million |
| Capital expenditures | $129.8 million | $111.3 million |
Profit comparability: The 2018 net income figure is not a straightforward indicator of operating performance. It included a $606.2 million gain from changes in the fair value of equity securities, primarily Sartorius AG, while operating results included $292.5 million of goodwill and long-lived asset impairments. The 2018 effective tax rate was 29%, including a $49 million tax benefit from finalizing Tax Act accounting.
Fourth quarter: Sales were $616.9 million versus $621.3 million a year earlier; gross profit was $332.6 million versus $345.2 million. Bio-Rad recorded a net loss of $828.5 million, mainly reflecting an $814.1 million decrease in equity-security fair value and $292.5 million of impairment losses. The filing attributes the quarter’s equity-value movement primarily to Sartorius.
Segments and material changes
- Life Science: 2018 sales were $861.7 million, up 9.7% reported and 8.9% currency-neutral. Growth included Droplet Digital PCR, process chromatography, real-time amplification, food science, cell biology and antibodies.
- Clinical Diagnostics: Sales were $1.412 billion, up 3.7% reported and 2.6% currency-neutral. Growth in quality control, immunology and blood typing was partly offset by weaker European sales, pricing pressure, customer losses and order timing.
- Consolidated gross margin fell to 53.4% from 55.0%. Clinical Diagnostics faced product-mix and competitive pricing pressure, $18.6 million of higher excess/expired inventory and on-site service costs, and $5.4 million of facility-closure costs. A $6.0 million patent-license resolution partly offset these items.
- Research and development expense declined to $199.2 million from $250.2 million, reflecting lower development milestones and reduced activity, partly offset by investment in new Droplet Digital products.
Cash, debt and liquidity
- Year-end cash, cash equivalents and short-term investments totaled $844.8 million. Operating cash flow improved to $285.5 million, from $104.1 million, helped by higher customer receipts and improved collections after prior ERP-related issues.
- Debt was approximately $439.4 million, including $425 million of 4.875% Senior Notes due December 2020. The company reported no revolving-credit borrowings at year-end.
- The $200 million revolving credit agreement was scheduled to mature in June 2019; Bio-Rad said it was evaluating renewal or similar arrangements. Domestic and international lines and guarantees provided about $208.2 million of availability before usage.
- Capital expenditures rose to $129.8 million, partly due to investment in two Bay Area office buildings and adjacent land. The company repurchased $48.9 million of shares in 2018 and had $201.1 million remaining under its $250 million authorization at year-end.
Outlook, risks and unusual items
- The filing provides no specific numerical revenue or earnings guidance. Management said liquidity and cash flows were expected to meet operating, R&D, capital and other needs, while noting that government spending, reimbursement constraints, trade disputes and international economic conditions could slow or reduce demand.
- Key exposures include foreign-exchange movements, intense competition and pricing pressure, regulatory and reimbursement changes, dependence on government and research funding, cybersecurity and IT disruption, and sole-source suppliers. The ERP rollout previously affected invoicing, receivables, manufacturing, logistics and shipments.
- Management concluded that a material weakness in financial reporting controls tied to the European reorganization and ERP conversion was remediated by December 31, 2018. KPMG issued unqualified opinions on the financial statements and internal control over financial reporting.
- Goodwill impairments totaled $282.0 million, principally in Clinical Diagnostics; goodwill for DiaMed, Biotest AG and AbD Serotec was fully impaired. The filing cites forecast shortfalls and sensitivity of valuation assumptions.
- A former general counsel’s lawsuit resulted in a 2017 award. In February 2019, the Ninth Circuit reversed the Dodd-Frank portion, affirmed $7.96 million of California public-policy damages, and vacated the SOX claim for further proceedings. Bio-Rad sought rehearing in March 2019.
- Bio-Rad acquired a small commercial-stage company for about $20 million on March 4, 2019; purchase-price allocation was not yet available. Its CFO was also scheduled to retire on April 30, 2019.
Important facts for investors to verify
- Separate underlying operating performance from the large, volatile Sartorius fair-value gains and losses; review Sartorius valuation, concentration and future earnings impact.
- Track Clinical Diagnostics margins, pricing, inventory and service costs, and whether European sales stabilize.
- Confirm renewal or replacement of the revolving credit facility and monitor repayment/refinancing of the 2020 Senior Notes.
- Review subsequent developments in the former general counsel litigation, tax examinations and other contingencies.
- Assess continued ERP implementation, control remediation and the balance-sheet effects of lease-accounting adoption in 2019.