Bio-Rad Laboratories, Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Bio-Rad manufactures and distributes life-science research and clinical-diagnostics products through its Life Science and Clinical Diagnostics segments. Amounts below are in U.S. dollars; financial-statement figures are unaudited.
Financial performance
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Net sales | $506.1 million | $536.8 million | $978.9 million | $1,046.2 million |
| Gross margin | 55.2% | 55.4% | 56.2% | 54.7% |
| Operating income | $40.2 million | $45.7 million | $74.6 million | $66.2 million |
| Net income | $28.4 million | $31.6 million | $46.2 million | $38.3 million |
| Diluted EPS | $0.97 | $1.09 | $1.58 | $1.32 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $68.0 million | $142.4 million |
- Reported sales fell 5.7% in Q2 and 6.4% in the first half, while currency-neutral sales grew approximately 4.2% and 2.9%, respectively. The stronger U.S. dollar materially reduced reported revenue.
- Q2 operating income and net income declined year over year despite lower SG&A and R&D. For the first half, operating income and net income increased even as reported sales declined.
- First-half capital expenditures were $59.3 million, compared with $53.5 million. Cash and cash equivalents were $450.1 million at June 30.
Segments and material changes
- Life Science: Q2 sales were $170.6 million, up 0.2% reported and 8.6% currency-neutral. First-half sales were $326.5 million, down 1.6% reported but up 6.4% currency-neutral.
- Clinical Diagnostics: Q2 sales were $332.1 million, down 8.5% reported and up 2.2% currency-neutral. First-half sales were $645.7 million, down 8.7% reported and up 1.3% currency-neutral. Management cited European consolidation and pricing pressure, and declines in some infectious-disease, blood-typing and diabetes-testing products.
- First-half gross margin increased to 56.2%, supported by improved segment margins, facility consolidation, discontinuation of an underperforming product line and lower acquisition-related intangible amortization. Q2 gross margin was slightly lower year over year; Life Science faced sales-mix, pricing and royalty cost pressure.
- First-half SG&A decreased to $381.4 million from $398.1 million, partly reflecting currency and the prior-year $9.8 million FCPA-related accrual. R&D decreased to $93.7 million from $108.3 million.
Liquidity, debt and cash flow
- Cash, cash equivalents and short-term investments totaled approximately $727.6 million; about 48% was held by foreign subsidiaries. Total liabilities were $1.17 billion and stockholders’ equity was $2.36 billion.
- Long-term debt was $435.7 million, principally $425 million of 4.875% senior notes due 2020. The company had no borrowings under its $200 million revolving credit agreement and reported $198.8 million available under domestic and international lines of credit, after standby letters of credit. It was in compliance with credit-agreement covenants.
- First-half operating cash flow fell to $68.0 million from $142.4 million. Management attributed the decline mainly to lower customer collections, including currency effects and unusually strong prior-year collections, partly offset by lower supplier and employee payments and income-tax refunds.
- Net cash used in investing activities was $55.9 million, including $59.3 million of capital expenditures. Management expects capital expenditures to remain historically elevated for at least three years as it implements its global ERP and expands e-commerce; estimated ERP project cost is $150–$200 million.
Outlook, commentary and significant risks
- No full-year revenue or earnings guidance is provided. Management estimated 2015 R&D could reach nearly 10% of sales and said elevated capital spending is expected to continue as the ERP project proceeds.
- The second ERP deployment began in July 2015. The filing warns that implementation delays, higher costs or operational disruption could affect orders, shipments, invoicing, collections, research and manufacturing.
- Bio-Rad’s 2014 FCPA resolution requires two years of compliance, reporting and cooperation obligations. The company disclosed shareholder-related litigation and a former general counsel’s whistleblower-retaliation and employment lawsuit; it said it was defending the claims and could not reasonably estimate potential exposure.
- Management cited foreign-exchange exposure, government and customer spending constraints, pricing pressure, and sovereign-debt collection risks. Net receivables in Spain, Italy, Greece and Portugal totaled $43.3 million; Greek entity net receivables were $1.9 million.
- The Q2 and first-half 2015 effective tax rates—28% and 30%—included benefits from releases of U.S. tax liabilities following statute-of-limitations lapses. The filing says approximately $3.2 million of unrecognized tax benefits could reasonably decrease within 12 months.
- First-half other comprehensive income included $95.1 million of after-tax unrealized gains on available-for-sale investments, substantially affecting comprehensive income and accumulated other comprehensive income; these gains are distinct from reported net income.
- The filing describes prior-period inventory/property-and-equipment and cash-flow classification errors. The corrections reclassified $7.4 million between operating and investing cash flows for first-half 2014 and did not affect net income or the net change in cash.
Important facts for investors to verify
- Whether currency-neutral growth translates into sustained reported sales growth, especially in Clinical Diagnostics and Europe.
- Progress, remaining cost and operational effects of the ERP deployment and the projected $150–$200 million implementation.
- Cash-collection trends, including exposure to Greece and other southern European markets, and the reasons operating cash flow declined.
- The valuation and concentration of investment holdings, and the extent to which investment-related gains affect comprehensive income rather than operating performance.
- Compliance with FCPA settlement obligations and developments in the disclosed legal matters, tax examinations and contingent-consideration estimates.