Bio-Rad Laboratories, Inc. — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013; comparisons are with the corresponding 2012 periods. Bio-Rad manufactures and distributes life science research and clinical diagnostics products through its Life Science and Clinical Diagnostics segments. About 67% of year-to-date sales came from international markets.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | $505.1 million | $498.7 million | $1,530.1 million | $1,495.4 million |
| Gross margin | 56.3% | 54.9% | 55.9% | 56.2% |
| Operating income | $29.1 million | $65.8 million | $117.1 million | $197.1 million |
| Net income attributable to Bio-Rad | $(7.1) million | $42.6 million | $47.7 million | $122.2 million |
| Diluted earnings per share | $(0.25) | $1.49 | $1.65 | $4.27 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $102.0 million | $180.2 million |
Q3 sales increased 1.3% year over year, or approximately 1.8% excluding currency effects. Nine-month sales increased 2.3%, or approximately 3.1% currency-neutral. Q3 Life Science sales fell 2.5% to $162.9 million; Clinical Diagnostics sales rose 3.2% to $338.8 million. For the nine months, Life Science sales rose 1.1% to $489.5 million and Clinical Diagnostics sales rose 3.1% to $1.03 billion.
Q3 gross margin improved year over year, while nine-month margin edged lower. Operating income and earnings declined materially in both comparisons, reflecting higher SG&A and interest expense. Q3 SG&A included $16 million accrued for the FCPA matter; interest expense included $15.6 million for extinguishing debt and $4 million associated with the FCPA matter. The quarter’s effective tax rate was negative 36%, with discrete foreign tax items cited; the nine-month effective rate was 30%.
Cash, liquidity and debt
- At September 30, cash and cash equivalents were $291.8 million and short-term investments were $270.0 million, totaling $561.8 million. Approximately 38% of these funds were held in foreign subsidiaries.
- Total debt was approximately $437.2 million, versus $734.2 million at December 31, 2012. Bio-Rad redeemed its $300 million 8.0% senior subordinated notes in September for $312 million, including a $12 million call premium. Remaining senior notes carry a 4.875% coupon and mature in 2020.
- Operating cash flow for the first nine months fell to $102.0 million from $180.2 million. Capital expenditures were $83.4 million, compared with $112.4 million. Cash and cash equivalents declined by $171.6 million during the period.
- The company reported no borrowings under its $200 million revolving credit agreement and compliance with its covenants at quarter-end. The facility expires in June 2014. Management said available liquidity and operating cash flows should support current needs.
Material changes, outlook and risks
- Earnings and segment trends: Clinical Diagnostics grew, particularly in diabetes, BioPlex 2200 and quality controls; Life Science weakened in Q3, with declines across regions. Management cited government austerity and slower growth in the U.S., Europe and Japan. It provided no specific financial guidance.
- Costs and investment: SG&A rose substantially, including employee costs, ERP implementation, professional services and the FCPA accrual. Bio-Rad expects capital expenditures to increase as it continues a global ERP implementation, estimated to cost more than $200 million over four or more years.
- FCPA investigations: DOJ and SEC investigations into possible overseas violations remain ongoing, and Bio-Rad is discussing resolution with the agencies. The company accrued $20 million, including interest, but could not estimate reasonably possible outcomes beyond that accrual. Additional sanctions or remedial measures could materially affect results, cash and business operations.
- Financial reporting controls: A material weakness in internal control over financial reporting remained at September 30, 2013. Deficiencies involved the accounting close, revenue recognition, reagent rentals and expenditure controls; remediation was incomplete.
- Accounting corrections: Bio-Rad identified finished-goods inventory errors affecting 2008–2012 and the first two quarters of 2013, as well as prior-period comprehensive-income presentation errors. Management deemed prior-period corrections immaterial and said corrections would be made prospectively in future filings. The inventory-control failure was included in the existing material weakness.
- Other exposures: Risks include foreign currency movements, government and healthcare funding constraints, customer receivables in Spain, Italy, Greece and Portugal ($66.7 million net at quarter-end), regulatory requirements, competition, acquisitions, and the company’s debt and credit covenants. A shareholder derivative suit related to FCPA controls was stipulated dismissed without prejudice, with the statute of limitations tolled pending the agency investigations.
Key facts for investors to verify
- Progress and final cost of resolving the DOJ and SEC investigations, compared with the $20 million accrual.
- Remediation of the material weakness and whether further reporting errors or restatements arise.
- Whether sales growth, particularly in Clinical Diagnostics, offsets continued Life Science softness and higher operating costs.
- Liquidity and cash-flow trends after the debt redemption, including the June 2014 credit-facility expiration and planned ERP spending.
- Effects of foreign exchange, government spending constraints, and collections from European sovereign customers on sales and cash flow.