Bio-Rad Laboratories, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; comparison is with Q1 2012 unless noted. Bio-Rad manufactures and distributes life science research and clinical diagnostics products. All financial amounts below are in U.S. dollars.
Key financial results
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Net sales | $499.7 million | $486.3 million |
| Gross profit / gross margin | $271.4 million / 54.3% | $278.6 million / 57.3% |
| Income from operations | $33.6 million | $54.4 million |
| Net income attributable to Bio-Rad | $19.5 million | $31.0 million |
| Diluted EPS | $0.68 | $1.09 |
| Operating cash flow | $20.5 million | $35.3 million |
| Capital expenditures | $34.1 million | $34.7 million |
- Sales increased 2.8% reported and approximately 3.6% excluding foreign-currency effects. Life Science sales rose 0.9% reported (2.5% currency-neutral); Clinical Diagnostics sales rose 3.9% (4.3% currency-neutral).
- Operating margin declined to approximately 6.7% from 11.2%; net margin declined to approximately 3.9% from 6.4%.
- Cash and cash equivalents were $368.6 million at March 31, down from $463.4 million at year-end. Short-term investments were $468.2 million, giving $836.8 million in cash, cash equivalents and short-term investments.
- Total debt was approximately $734.3 million, including $1.7 million of current maturities; stockholders’ equity was $2.03 billion. The $200 million revolving credit facility had no borrowings outstanding; the company reported covenant compliance.
- Current assets were $1.87 billion and current liabilities $446.7 million. Inventory rose to $467.3 million from $448.4 million at year-end.
Changes and management commentary
- Profitability fell despite sales growth. Cost of goods sold increased faster than sales, while SG&A rose to 37.2% of sales from 35.2%. R&D expense was $51.9 million, or 10.4% of sales, versus $52.9 million, or 10.9%.
- Management attributed lower Life Science gross margin partly to acquired-intangible amortization and higher royalties. Clinical Diagnostics margin was pressured by low-margin tenders, product mix, obsolescence, license and warranty costs, and the U.S. medical-device excise tax. Management expected acquisition amortization and the excise tax to continue affecting margins during the year.
- Other income was $1.4 million, versus $6.5 million in Q1 2012, primarily because the prior-year period included larger realized gains on equity investments. The 2013 effective tax rate was 13%, compared with 33%, reflecting a tax benefit from retroactive reinstatement of the 2012 U.S. federal research credit and other tax effects.
- Operating cash flow declined as cash payments to suppliers and employees increased and customer payments slowed; lower income-tax payments partly offset the decline. Management noted customers were seeking price concessions and extended payment terms.
- Bio-Rad acquired AbD Serotec in January for $62.2 million net of cash acquired. Preliminary purchase accounting included $42.3 million of definite-lived intangibles and $17.0 million of goodwill. No specific earnings or revenue guidance was provided.
Outlook, risks and unusual items
- Management cited uncertain global conditions, potential further deterioration in Europe and U.S. sequestration as risks to demand. It also highlighted government and research funding, reimbursement constraints, currency movements, competition, product development, acquisition integration, and substantial debt as risks. Approximately 67% of Q1 sales were international.
- The company expects capital expenditures to remain historically elevated for three to four years, largely due to implementation of a global ERP system and expansion of e-commerce. The ERP implementation could cost up to $200 million and was estimated to require approximately four more years.
- DOJ and SEC investigations into possible FCPA violations remain ongoing. Bio-Rad said it could not predict the investigations’ duration or outcome or estimate potential effects; sanctions or remedial measures could materially adversely affect the business or financial condition.
- A material weakness in internal control over financial reporting remained at March 31. Identified deficiencies involved accounting close, revenue recognition, reagent rentals and expenditure controls. Remediation was in progress and not complete. Separately, the company identified immaterial prior-period comprehensive-income presentation errors that did not affect total other comprehensive income.
- Bio-Rad settled a dispute over royalties under third-party patent licenses for $12 million, an amount within its previously accrued range; payment was made in April 2013. The matter had prompted further Audit Committee investigation.
- Q1 2012 results included corrections of prior-period tax errors: charges to cost of goods sold, interest expense and other expense, partly offset by a tax benefit. The filing says the corrections were significant to that quarter but not material to individual prior periods or 2012 as a whole.
Important facts for investors to verify
- Progress and testing of remediation for the material weakness, including whether the controls issues lead to further reporting errors.
- Developments, potential sanctions and financial exposure from the FCPA investigations and related royalty matter.
- Whether sales growth converts into improved margins and cash generation, given weaker operating cash flow and customer requests for extended payment terms.
- ERP implementation spending, timing and execution, alongside other elevated capital needs.
- Debt-service capacity, credit-facility availability and compliance with debt covenants as operating conditions evolve.
- Acquisition accounting and performance, including final AbD Serotec valuations and contingent consideration tied to acquired products.