Bio-Rad Laboratories, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2015. Bio-Rad manufactures and distributes life science research and clinical diagnostics products through its Life Science and Clinical Diagnostics segments. Approximately 38% of year-to-date sales were in the U.S. and 62% internationally.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net sales | $470.0 million | $530.6 million | $1,448.9 million | $1,576.8 million |
| Gross profit / margin | $263.5 million / 56.1% | $288.6 million / 54.4% | $813.2 million / 56.1% | $861.1 million / 54.6% |
| Operating income | $32.7 million | $33.2 million | $107.2 million | $99.4 million |
| Net income | $17.4 million | $11.5 million | $63.6 million | $49.8 million |
| Diluted EPS | $0.59 | $0.39 | $2.17 | $1.71 |
| Operating cash flow | Not separately reported for the quarter | $150.3 million | $233.1 million |
Liquidity, debt and balance sheet
- Cash and cash equivalents were $507.3 million and short-term investments were $278.7 million at September 30, 2015, totaling $786.1 million. About 47% of these funds were held by foreign subsidiaries; repatriation could create additional U.S. taxes.
- Total debt was approximately $436 million, principally $425 million of 4.875% senior notes due 2020. There were no borrowings under the $200 million revolving credit agreement; $5 million was used for domestic standby letters of credit. The company reported compliance with its credit agreement covenants.
- Current assets were $1.794 billion versus current liabilities of $435.2 million. Total assets were $3.666 billion and stockholders’ equity was $2.430 billion.
- Capital expenditures were $84.0 million for the first nine months, compared with $80.9 million in 2014.
Changes versus the prior comparable period
- Q3 sales fell 11.4% reported, but declined approximately 2.2% excluding currency effects. Year-to-date sales fell 8.1% reported, while increasing approximately 1.2% on a currency-neutral basis. A stronger U.S. dollar weighed on reported sales.
- Q3 Life Science sales declined 13.0% reported and 5.9% currency-neutral; Clinical Diagnostics declined 10.9% reported and 0.5% currency-neutral. Year-to-date currency-neutral sales rose 2.2% in Life Science and 0.7% in Clinical Diagnostics.
- Gross margin improved year over year in both the quarter and year to date, benefiting from prior-year facility closures and consolidation, product mix and lower acquisition-intangible amortization. Sales and gross profit nevertheless declined in dollars.
- Net income increased despite lower sales. SG&A and R&D declined in dollars, and the effective tax rate fell to 32% from 49% for Q3 and to 31% from 42% year to date. 2015 tax rates benefited from releases of U.S. tax liabilities; 2014 rates were affected by foreign losses without tax benefits and nondeductible penalties.
- Year-to-date operating cash flow fell to $150.3 million from $233.1 million, reflecting lower customer collections, including currency effects and ERP-related collection and delivery timing. Inventory increased $67.6 million in operating cash-flow reconciliation.
- Comprehensive income was $224.0 million year to date, compared with a $29.9 million comprehensive loss in 2014. The 2015 result included $170.1 million of net unrealized gains on available-for-sale investments, primarily related to Sartorius shares, partly offset by currency translation losses.
Outlook, commentary and significant risks
- No specific revenue or earnings guidance was provided. Management said cash, operating cash flow and available credit were expected to support operations, R&D and planned capital needs.
- The second phase of the global ERP implementation launched in July 2015 caused manufacturing, logistics and shipment delays, affecting Q3 sales; some Clinical Diagnostics deliveries had shifted into Q2. Management warned that additional implementation issues could arise. The full ERP project was estimated at $150–$200 million and expected to take more than three years; capital spending was expected to remain historically elevated for at least three years, with the third ERP phase ramping up in 2016.
- Management cited European pricing pressure and market consolidation, declines in certain blood typing and infectious-disease products, and continuing uncertainty around government and research funding. Foreign-exchange movements, sovereign payment delays and the Greek debt situation remain risks; net Greek receivables were $1.9 million at quarter end.
- The 2014 FCPA investigations were settled with the DOJ and SEC for $55.1 million paid in Q4 2014. Compliance, reporting and cooperation obligations continue. Related derivative shareholder suits and a former general counsel’s whistleblower and employment claims remained pending; the company said it could not reasonably estimate potential exposure. A separate arbitration involving former QuantaLife employees also remained unresolved.
- The FDA issued a February 2015 warning letter concerning the Munich manufacturing site. The company reported remediation actions and said it submitted its response in September; the letter did not require suspension of production or sales.
- Other stated risks include international regulatory and compliance exposure, competition and pricing pressure, product development and quality, tax examinations, information security, and ERP and internal-control execution. Management stated disclosure controls were effective as of September 30, 2015 and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether ERP-related manufacturing, shipment and collection disruptions are resolved and how they affect subsequent sales, receivables and inventory.
- Underlying demand by segment and geography, including currency-neutral growth, European pricing conditions, and performance in Life Science and Clinical Diagnostics product categories.
- Durability of improved gross margins and earnings, including the effect of lower tax rates and the absence of prior-year FCPA-related accruals.
- Operating cash-flow recovery, working-capital trends, planned ERP and other capital spending, and the availability of cash held overseas.
- Changes in the value and concentration of Sartorius-related investments, and any resulting impact on reported earnings, other comprehensive income or liquidity.
- Developments in FCPA-related obligations and litigation, the former general counsel’s claims, the QuantaLife arbitration and the FDA warning-letter remediation.