Bio-Rad Laboratories Incorporated (BIO)

[SAE]

Form 10-Q for BIO RAD LABORATORIES INC


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6-Aug-2010

Quarterly Report



Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
This discussion should be read in conjunction with the information contained in both our Consolidated Financial Statements for the year ended December 31, 2009 and this report for the three and six months ended June 30, 2010.

Other than statements of historical fact, statements made in this report include forward looking statements, such as statements with respect to our future financial performance, operating results, plans and objectives that involve risk and uncertainties. Forward-looking statements generally can be identified by the use of forward-looking terminology such as, "believe," "expect," "may," "will," "intend," "estimate," "continue," or similar expressions or the negative of those terms or expressions. Such statements involve risks and uncertainties, which could cause actual results to vary materially from those expressed in or indicated by the forward-looking statements. We have based these forward looking statements on our current expectations and projections about future events. However, actual results may differ materially from those currently anticipated depending on a variety of risk factors including among other things:
changes in general domestic and worldwide economic conditions; our ability to successfully develop and market new products; our reliance on and access to necessary intellectual property; our ability to successfully integrate any acquired business; our substantial leverage and ability to service our debt; competition in and government regulation of the industries in which we operate; and the monetary policies of various countries. We caution you not to place undue reliance on forward-looking statements, which reflect an analysis only and speak only as of the date hereof. We undertake no obligation to publicly update or revise any forward looking statements, whether as a result of new information, future events, or otherwise except as required by Federal Securities law.

Overview. We are a multinational manufacturer and worldwide distributor of our own life science research and clinical diagnostics products. Our business is organized into two primary segments, Life Science and Clinical Diagnostics, with the mission to provide scientists with specialized tools needed for biological research and clinical diagnostics. We sell more than 8,000 products and services to a diverse client base comprised of scientific research, healthcare, education and government customers worldwide. We manufacture and supply our customers with a range of reagents, apparatus and equipment to separate complex chemical and biological materials and to identify, analyze and purify components. Because our customers require standardization for their experiments and test results, much of our revenues are recurring. Approximately 32% of our year-to-date 2010 consolidated net sales are from the United States and approximately 68% are from international locations. The international sales are largely denominated in local currencies such as the Euro, Swiss Franc, Japanese Yen and British Sterling. As a result, our consolidated net sales expressed in dollars benefit when the U.S. dollar weakens and suffer when the dollar strengthens. When the U.S. dollar strengthens, we benefit from lower cost of sales from our own international manufacturing sites as well as non-U.S. suppliers and from lower international operating expenses.
The market for reagents and apparatus remains good while growth rates have slowed due to both public and private grant funding being more measured. The market for large capital equipment has slowed, as many pharmaceutical and biotechnology customers delayed or reduced their capital spending. We are generally less impacted by trends in capital spending as lower priced reagents and apparatus comprise more than 70% of product sales.

On January 6, 2010, we acquired certain diagnostic businesses of Biotest AG (Biotest). This 45 million Euro acquisition is expected to broaden our product offering in the area of immunohematology and provide access to the U.S. markets for these products.

The following shows gross profit and expense items as a percentage of net sales:


Three Months Ended Six Months Ended
June 30, June 30,
2010 2009 2010 2009

Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of goods sold 42.6 43.4 43.0 43.1
Gross profit 57.4 56.6 57.0 56.9
Selling, general and administrative expense 33.4 33.6 33.6 34.3
Research and development expense 9.4 9.9 9.1 9.6
Net income attributable to Bio-Rad 8.1 8.9 7.9 8.2




Critical Accounting Policies and Estimates

As previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2009, we have identified accounting for income taxes, valuation of goodwill and long-lived assets, valuation of inventories, warranty reserves, valuation of investments, allowance for doubtful accounts and litigation accruals as the accounting policies and estimates critical to the operations of Bio-Rad.

An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, if different estimates reasonably could have been used, or if changes in the estimate that are reasonably likely to occur could materially impact the financial statements. Management believes that there have been no significant changes during the six months ended June 30, 2010 to the items that we disclosed as our critical accounting policies and estimates in Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009. For a full discussion of these policies, please refer to our Form 10-K for the period ended December 31, 2009.


Three Months Ended June 30, 2010 Compared to

Three Months Ended June 30, 2009
Corporate Results -- Sales, Margins and Expenses

Net sales (sales) in the second quarter of 2010 increased 9.5% to $467.7 million from $427.2 million in the second quarter of 2009, with Biotest contributing approximately $14.5 million to the growth in sales. Excluding the impact of foreign currency, second quarter 2010 sales increased by approximately 9.0% compared to the same period in 2009. Currency neutral sales growth, excluding Biotest, was reflected in all regions, but primarily for Asia Pacific and Emerging Markets.

The Life Science segment sales for the second quarter of 2010 was relatively flat with sales of $150.7 million compared to $149.7 million in the same period last year. On a currency neutral basis, there was a slight decrease in sales for the second quarter of 2010 compared to the second quarter of 2009. We have seen weakness in government support and spending for research and development, especially in Europe.

The Clinical Diagnostics segment reported sales for the second quarter of 2010 of $314.1 million, an increase of 14.5% compared to the same period last year, with Biotest contributing approximately 5.3% to the sales growth. On a currency neutral basis, sales increased 14.1% including Biotest compared to the second quarter of 2009. Clinical Diagnostics product lines showing growth were immunohematology (before the contribution of Biotest), quality controls and reagent products. The most significant sales growth was in the Asia Pacific and Emerging Markets regions.

Consolidated gross margins were 57.4% for the second quarter of 2010 compared to 56.6% for the second quarter of 2009. Life Science segment gross margins for the second quarter of 2010 improved from the same period last year by approximately 1.6%. The increase was primarily due to improved manufacturing overhead absorption and a reduction in costs. Clinical Diagnostics segment gross margins for the second quarter of 2010 were relatively flat compared to the same period last year. Biotest had a negative impact on Clinical Diagnostics gross margins primarily due to overall generally lower margins than historical segment gross margins as a result of purchase accounting, lower volumes related to total capacity and a current higher cost structure.
Increases in Clinical Diagnostics gross margins were from the settlement of intellectual property disputes.

Selling, general and administrative expenses (SG&A) represented 33.4% of sales for the second quarter of 2010 compared to 33.6% of sales for the second quarter of 2009. Growth in absolute SG&A spending was less than sales growth.
Increases were primarily driven by employee related costs, marketing, travel, and professional services.

Research and development expense increased to $43.9 million in the second quarter of 2010 compared to $42.4 million in the second quarter of 2009. Life Science segment research and development expense increased from the prior year quarter. Life Science segment efforts concentrated on genomics, proteomics and process chromatography applications. Clinical Diagnostics segment research and development expense was flat compared to the prior year period as the prior year had larger spending for the recently released IH 1000 blood typing system and the spending increased during the second quarter of 2010 for other projects.

Corporate Results - Other Items

Interest expense for the second quarter of 2010 increased by $4.0 million compared to the second quarter of 2009. An additional $300 million of 8.0% Senior Subordinated Notes due in 2016 were issued in May 2009, which increased our interest expense compared to the second quarter of 2009. Our other principal debt obligations are the 2003 and 2004 Senior Subordinated Notes totaling $425.0 million, which carry fixed rates of interest of 7.5% and 6.125%, respectively.

Foreign currency exchange gains and losses consist of foreign currency transaction gains and losses on intercompany net receivables and payables and the change in fair value of our forward foreign exchange contracts used to manage our foreign currency exchange risk. Foreign currency exchange losses, net for the quarter ended June 30, 2010 and 2009 were primarily attributable to market volatility, costs to hedge, and the result of the estimating process inherent in the timing of shipments and payments of intercompany debt.

Other income, net for the second quarter of 2010 was $2.5 million compared to $6.3 million for the second quarter of 2009, a decrease of $3.8 million. The decrease primarily resulted from non-recurring income of $4.6 million in 2009 related to the relief of a foreign non-income based tax obligation.

Our effective tax rate was 30% and 20% for the second quarter of 2010 and 2009, respectively. The effective tax rates for the second quarter of 2010 and 2009 both reflected tax benefits for nontaxable dividend income, research and development tax credits, and differences between U.S. and foreign rates. The higher effective tax rate for the second quarter of 2010 was primarily due to a decline in the percentage of total earnings earned in lower tax jurisdictions, the expiration of the research and development tax credit in the U.S. and an increase in the liability for uncertain tax positions.

Our effective tax rate may be impacted in the future, either favorably or unfavorably, by many factors including but not limited to statutory tax rates, changes in tax laws or regulations, tax audits and settlements, and generation of tax credits.


Six Months Ended June 30, 2010 Compared to

Six Months Ended June 30, 2009
Corporate Results - Sales, Margins and Expenses

Net sales (sales) in the first half of 2010 increased 11.3% to $921.9 million from $828.1 million in the first half of 2009, with Biotest contributing approximately $27.2 million to the growth in sales. Excluding the impact of foreign currency, second quarter 2010 sales increased by approximately 8.4% compared to the same period in 2009. Currency neutral sales growth, excluding Biotest, was achieved in all regions, but primarily in Asia Pacific and Emerging Markets.

The Life Science segment sales for the first half of 2010 were $302.0 million, an increase of 4.1%, or 1.6% on a currency neutral basis, compared to the same period last year. Sales growth was primarily attributed to real-time PCR products, offset by general market weakness, especially in Europe. Currency neutral sales growth in the Life Science segment was primarily in Asia Pacific and North America, while European sales declined.

The Clinical Diagnostics segment reported sales for the first half of 2010 of $613.9 million, an increase of 15.4% compared to the same period last year, with Biotest contributing approximately 5.1% to the sales growth. On a currency neutral basis, sales increased 12.3% including Biotest compared to the first half of 2009. Clinical Diagnostics product lines generating growth were immunohematology (before the contribution of Biotest), quality controls and reagent products. Sales growth was primarily in Asia Pacific.

Consolidated gross margins were 57.0% for the first half of 2010 compared to 56.9% for the first half of 2009. Life Science segment gross margins for the first half of 2010 improved from the same period last year by approximately 1.6%. The increase was primarily due to improved manufacturing overhead absorption and a reduction in costs. Clinical Diagnostics segment gross margins for the first half of 2010 decreased by approximately 0.7% from the same period last year. The Biotest acquisition had a negative impact on Clinical Diagnostics gross margins due to purchase accounting and overall generally lower margins than historical segment gross margins as a result of current lower volumes and a current higher cost structure. Offsetting this decrease in gross margins was the settlement of intellectual property disputes.

Selling, general and administrative expenses (SG&A) represented 33.6% of sales for the first half of 2010 compared to 34.3% of sales for the first half of 2009. Growth in absolute SG&A spending was less than sales growth. Increases were primarily driven by employee related costs, marketing, travel and professional services.

Research and development expense increased to $84.1 million in the first half of 2010 compared to $79.6 million in the first half of 2009. Life Science segment research and development expense increased from the prior year period. Life Science segment efforts concentrated on genomics, proteomics and process chromatography applications. Clinical Diagnostics segment research and development expense increased from the prior year period. The majority of the increase was related to immunohematology, with additional emphasis in clinical systems, clinical microbiology and blood virus diagnostic tests.

Corporate Results - Other Items

Interest expense for the first half of 2010 increased by $10.6 million compared to the first half of 2009. An additional $300 million of 8.0% Senior Subordinated Notes due in 2016 were issued in May 2009, which increased our interest expense compared to the prior year period. Our other principal debt obligations are the 2003 and 2004 Senior Subordinated Notes totaling $425.0 million, which carry fixed rates of interest of 7.5% and 6.125%, respectively.

Foreign currency exchange gains and losses consist of foreign currency transaction gains and losses on intercompany net receivables and payables and the change in fair value of our forward foreign exchange contracts used to manage our foreign currency exchange risk. Foreign currency exchange losses, net for the six months ended June 30, 2010 and 2009 were primarily attributable to market volatility, costs to hedge and the result of the estimating process inherent in the timing of shipments and payments of intercompany debt.

Other income, net for the first half of 2010 was $3.3 million compared to $5.1 million for the first half of 2009. The decrease primarily resulted from non-recurring income of $4.6 million in 2009 related to the relief of a foreign non-income based tax obligation, partially offset by $2.5 million of other-than-temporary impairment of investments.

Our effective tax rate was 30% and 23% for the first half of 2010 and 2009, respectively. The effective tax rates for the first half of 2010 and 2009 both reflected tax benefits for nontaxable dividend income, research and development tax credits, and differences between U.S. and foreign rates. The higher effective tax rate for the first half of 2010 was primarily due to a decline in the percentage of total earnings earned in lower tax jurisdictions, the expiration of the research and development tax credit in the U.S. and an increase in the liability for uncertain tax positions.

Our effective tax rate may be impacted in the future, either favorably or unfavorably, by many factors including but not limited to statutory tax rates, changes in tax laws or regulations, tax audits and settlements, and generation of tax credits.

Liquidity and Capital Resources

Bio-Rad operates and conducts business globally, primarily through subsidiary companies established in the markets in which we trade. Goods are manufactured in a small number of locations, and are then shipped to local distribution facilities around the world. Our product mix is diversified, and certain products compete largely on product efficacy, while others compete on price.
Gross margins are generally sufficient to exceed normal operating costs. Funding for research and development of new products as well as routine outflows of capital expenditure and tax expense are covered by cash flow from operations. Our cash flow from operations is also sufficient to make interest payments. In addition to the annual positive cash flow from operating activities, additional liquidity is readily available via the sale of short-term investments and access to our $200.0 million Amended and Restated Credit Agreement (Credit Agreement) that was entered into in June 2010. Borrowings under the Credit Agreement are on a revolving basis and can be used to make acquisitions, for working capital and for other general corporate purposes. We had no outstanding balance under the Credit Agreement as of June 30, 2010. The Credit Agreement expires on June 21, 2014.

At June 30, 2010, we had available $717.7 million in cash, cash equivalents and short-term investments. Under domestic and international lines of credit, we had $247.0 million available for borrowing as of June 30, 2010, of which $12.6 million is reserved for standby letters of credit issued by our banks to guarantee our obligations to various companies. Management believes that this availability together with cash flow from operations, will be adequate to meet our current objectives for operations, research and development, capital additions for manufacturing and distribution, plant and equipment, information technology systems and future acquisitions for the foreseeable future.

Cash Flows from Operations

Net cash provided by operations was $58.7 million and $111.9 million for the six months ended June 30, 2010 and 2009, respectively. The net decrease of $53.2 million primarily represents an increase in cash paid to suppliers including higher royalty payments and settlement payments of intellectual property disputes, higher payments on income taxes and higher interest payments from the $300 million bond offering in May 2009, partially offset by an increase in cash received from customers compared to the prior periods. Cash received from customers was at a slower rate than expected in 2010 due to a slowdown of cash collections in some European countries. We continue to focus on cash flow improvements as a global company-wide goal.

Cash Flows from Investing Activities

Net capital expenditures totaled $35.6 million and $33.4 million for the six months ended June 30, 2010 and 2009, respectively. Capital expenditures represent the addition and replacement of production machinery and research equipment, ongoing manufacturing and facility additions for expansions, regulatory and environmental compliance, and leasehold improvements. Also included in capital expenditures are investments in business systems and data communication upgrades and enhancements. We anticipate accelerating expenditures in future periods to initiate expanding e-commerce platforms internationally and implementation of a global ERP system. These projects have not had the anticipated cash outflow as we have increased our due diligence in the selection of a system provider. All periods included reagent rental equipment placed with Clinical Diagnostics customers who then contract to purchase our reagents for use.

On January 6, 2010, we acquired certain diagnostic businesses of Biotest for 45 million Euros (approximately $64.9 million) in cash. This acquisition is included in our Clinical Diagnostics segment. We continue to review possible acquisitions to expand both our Life Science and Clinical Diagnostics segments.
We routinely meet with the principals or brokers of the subject companies. It is not certain that any of these transactions will advance beyond the preliminary stages to completion.

Cash Flows from Financing Activities

Net cash provided by financing activities was $4.2 million and $291.1 million for the six months ended June 30, 2010 and 2009, respectively. Cash provided in 2010 was primarily due to net proceeds from common stock, partially offset by repayments of long-term debt. Cash provided in 2009 was primarily due to the $300 million 8.0% Senior Subordinated Notes due in 2016 that was issued in May 2009. We have outstanding Senior Subordinated Notes due in 2013, 2014 and 2016 of $225.0 million, $200.0 million and $300.0 million, respectively.

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