Bio-Rad Laboratories, Inc.

Good day, ladies and gentlemen, and welcome to the Q1 2019 BioRad Laboratories, Inc. earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. If anyone should require assistance during the conference, please press star, then the number zero on your touchtone telephone. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Ron Hutton. Sir, you may begin.

Thank you, Jimmy. Before we begin the call, I would like to caution everyone that we will be making forward-looking statements about management's goals, plans, and expectations, our future financial performance, and other matters. Because our actual results may differ materially from our plans and expectations, you should not place undue reliance on these forward-looking statements, and I encourage you to review our filings with the SEC where we discuss in detail our risk factors in our business. The company does not intend to update any forward-looking statements made during the call today. Our remarks today will also include references to non-GAAP net income and non-GAAP diluted income per share, which are financial measures that are not defined under generally accepted accounting principles. Investors should review the reconciliation of these non-GAAP measures to the comparable GAAP results contained in their earnings release. With that, I'd like to turn the call over to Ilan Daskal, EBP and CFO.

Thank you, Ron. Good afternoon and thank you all for joining us. Today we will review the first quarter financial results for 2019. With me today, Norman Schwartz, our CEO, Andy Last, Chief Operating Officer, Annette Tumalo, President of the Life Science Group, and John Hurtia, President of the Clinical Diagnostics Group. We will review the results on a gap basis as well as commentary on a non-GAAP basis. Net sales for the first quarter of 2019 were $554 million, which is a 0.4% growth on a reported basis, versus $551.5 million in Q1 of 2018. On a currency-neutral basis, sales increased 4%. During the quarter, we experienced good demand across many of our key product areas and growth in all three regions with a particular strength noted in the Americas. When comparing to Q1 of last year, remember that Q1 of 2018 sales included a royalty settlement of approximately $6 million within the diagnostic segments. also included in Q1 of 2018, is about $6 million of rain-dense sales, compared to about $1 million in Q1 of 2019. If we exclude the rain-dense reduction of sales and the royalty settlement in Q1 of 2018, we estimate that the currency-neutral sales growth for Q1 of 2019 was about 6%. Life science in the first quarter of 2019, the revenue was $215.7 million, compared to $197.8 million in Q1 of 2018, which is an increase of 9.1% on a reported basis, and a year-over-year growth of 12% on a currency-neutral basis. The growth in the first quarter was across all product areas, with particular strengths within cell biology and food safety. Digital PCR also had a nice growth when excluding the range in sales, and our process media product line, which can fluctuate on a quarterly basis, had a very strong quarter. Excluding process media sales, the life science business grew about 5.5% year-over-year on a currency-neutral basis. On a geographic basis, life science currency neutral sales were strong across all three regions and most notable in the Americas. Sales of clinical diagnostics products in the quarter were $334.1 million compared to $350.8 million in Q1 of 2018, which is a 4.8% decline on a reported basis and less than 1% decline on a currency-neutral basis. Excluding last year's tough compare of the royalty settlement, the diagnostics business grew about 1% year-over-year on a currency-neutral basis. Despite the tepid growth, it is important to know that placements of our key diagnostic systems showed consistent growth during the first quarter of 2019 versus Q1 of 2018. During the quarter, the Diagnostics Group posted solid growth in the Americas across all the product areas, and of note growth in blood typing and in autoimmune testing products. This geographic growth was somewhat offset by a weaker quarter in parts of EMEA and in Asia. The decline in Asia was associated with older timing this quarter and a tough compare with Q1 of 2018. Overall, our outlook for Asia remains positive. The reported gross margin for the first quarter of 2019 was 56.3% on a gap basis and compares to 54.8% in Q1 of 2018. The current quarter gross margin benefited from an escrow release of $7.4 million related to an acquisition from 2011 within the Life Science Group. The gross margin also benefited from improved logistics costs and inventory reserves. The improvement was partially offset by product mix and higher service costs. Amortization related to prior acquisitions recorded in cost of goods sold was $3.7 million compared to $4.8 million in Q1 of 2018. SG&A expenses for Q1 of 2019 were $207.6 million or 37.5% of sales compared to 37.9% in Q1 of 2018. Total amortization related to acquisition recorded in SG&A for the quarter was $1.7 million versus $2.1 million in Q1 of 2018. Research and development expense in Q1 was $47.6 million, or 8.6% of sales, compared to $49.4 million, or 9% in Q1 of 2018. Looking below the operating line, the change in fair market value of the equity securities holdings added $1,059,000,000 of income to the reported results, and is substantially related to the holdings of the shares of Sartorius AG. Also during the quarter, interest and other income resulted in net other income of $11.4 million compared to $4.1 million income last year. Q1 of 2019 includes $15.7 million of gross dividend income from Sartorius, which was declared this year in March and was paid in April. In 2018, the dividend was declared and paid in the second quarter. Remember that in the first quarter of 2018, other income included $9.2 million for the vestiture of a small product line and a sale of surplus land in Europe. The effective tax rate used in Q1 of 2019 was 23.2% and compares to 24% in Q1 of 2018. Reported net income for the first quarter was $865.2 million, and diluted earnings per share for the quarter were $28.74. The increase in net income and earnings per share versus last year is substantially related to the valuation of the Sartorius holdings. Moving on to the non-GAAP results. Looking at our results on a non-GAAP basis, we have excluded certain atypical and unique items that impacted both the gross and operating margins, as well as other income. These items are detailed in the reconciliation table in the press release. Looking at the non-GAAP results for the first quarter, in cost of goods sold, we have excluded $3.7 million of amortization of purchased intangibles, $7.4 million escrow release related to a prior acquisition within the life science group, and a small restructuring adjustment. These adjustments move the gross margin for the first quarter from 56.3% to 55.6%. This non-GAAP gross margin compares to a non-GAAP gross margin of 55.7% in Q1 of 2018. The non-GAAP SG&A in the first quarter of 2019 was 36.4%, an improvement versus 37.1% in Q1 of 2018. In SG&A, on a non-GAAP basis, we have excluded amortization of purchase intangibles of $1.7 million, legal-related expenses of $4.4 million, acquisition-related benefit of $355,000, and a small restructuring cost. In R&D, we have excluded a small amount of restructuring cost. The non-GAAP R&D in Q1 was 8.6%, which is in line with our expectation. The cumulative sum of these non-GAAP adjustments result in moving the quarterly operating margin from 10.2% on a GAAP basis to 10.5% on a non-GAAP basis. This non-GAAP operating margin compares to a non-GAAP operating margin in Q1 of 2018 of 9.7%. We have also excluded certain items below the operating line, which are the increase in value of the Sartorius equity holdings of $1,059,000,000, as well as $440,000 associated with venture investments and other non-recurring items. The non-GET effective tax rate for the quarter was 28.5%. This higher tax rate reflects a change in geographic mix of the profitability. However, we still expect the full-year non-GET effective tax rate to be between 27% and 28%. And finally, non-GET net income and earnings per share for the first quarter of 2019 were $49.6 million, and $1.65 per share, compared to $35.4 million and $1.17 per share in Q1 of 2018. We estimate that the Sartorius dividend, net of an estimation of its tax provision, totals $0.40. The estimated EPS benefit of $0.40 shifts from Q2 to Q1 and Sartorius may continue to declare future annual dividend distributions in the first calendar quarter of each year. Moving on to the balance sheet, as of March 31st, total cash and short-term investments were $865 million compared to $850 million at the end of 2018. The first quarter historically has tended to be a heavy cash use quarter, as we typically pay the annual bonuses and commissions, as well as annual software and IT-related maintenance expenses. Also during the quarter, we completed an acquisition of a small company in the life science group that will expand our suite of genomic reagent offerings. In the first quarter, we adopted a new accounting standard related to leases, which requires us to recognize most leases as assets and liabilities on the balance sheet. You will note a $222 million addition to the balance sheet of right-of-use assets and associated liabilities which are included in other current liabilities and in other long-term liabilities. These balances primarily represent our operating lease obligations for the duration of the global facilities and auto leases. The adoption of this standard has a minimal effect to the income statement. For the first quarter of 2019, net cash generated from operations was $43 million, which compares to $40 million in Q1 of 2018. This improvement reflects the higher operating profits partially as a result of a disciplined cost control. The adjusted EBITDA for the first quarter of 2019, which includes the Sartorius dividend, was $101.7 million, or 18.4% of sales. The estimated adjusted EBITDA in Q1 of 2019, and excluding the Sartorius dividend, was about 15.5%. The adjusted EBITDA in the first quarter of 2018, was $81.1 million, or about 14.7% of sales. Net capital expenditures for the first quarter of 2019 were $23.6 million, or 4.3% of sales. Our expectation for the full year CapEx spend remains in the range of $110 to $120 million. And depreciation and amortization for the quarter was $32.9 million. We are currently on track with the annual guidance that was provided during the last call. And with that, Norman, do you have anything you would like to say before we open the call for the questions?