Bio-Rad Laboratories, Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the Bio-Rad Laboratory's third quarter earnings call. At this time, all participant lines are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star, then 1 on your telephone. If you require any further assistance, please press star, then 0. I'd now like to hand the conference over to your speaker today, Mr. Ron Hutton, Vice President and Treasurer. Please go ahead.

Thank you, Liz. Good afternoon and thank you for joining us. Today we will review the third quarter financial results for 2019. With me on the call today are Norman Schwartz, our CEO, Ilan Daskal, Executive Vice President and Chief Financial Officer, Andy Last, Executive Vice President and Chief Operating Officer, Annette Tumalo, President of the Life Science Group, and John Hrdia, President of the Clinical Diagnostics Group. Before we begin our review, I would like to caution everybody 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 these 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 the 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 our earnings release. I'd like to turn the call now over to Ilan Daskal. Ilan?

Thank you, Rohan. Good afternoon and thank you all for joining us. We will review the results on a GAAP basis as well as commentary on a non-GAAP basis. Net sales for the third quarter of 2019 were $560.6 million, which is an increase of 2.8% on a reported basis versus $545.1 million in Q3 of 2018. On a currency-neutral basis, sales increased 4.5%. During the quarter, we experienced good demand across many of our key product areas and growth in all three regions. When comparing to the third quarter of last year, remember that Q3 of 2018 included about $6 million of sales that customers pulled into the second quarter of 2018, substantially all of it related to our diagnostics business. If we adjust the easy compare of the sales that customers pulled in last year from Q3 to Q2, we estimate that the year-over-year currency-neutral sales growth for Q3 of 2019 was about 3.4%. Sales of the life science group in the third quarter of 2019 were $215.7 million compared to $206.6 million in Q3 of 2018, which is an increase of 4.5% on a reported basis and 5.7% increase on a currency neutral basis. Much of the year-over-year growth in the third quarter was driven by a double-digit growth in droplet digital PCR and in food safety, as well as good demand within gene expression and Western bloating product lines. Process media, which can fluctuate on a quarterly basis, had a slight year-over-year growth. Excluding process media sales, the life science business grew about 5.8% year-over-year on a currency-neutral basis. On a geographic basis, LifeScience currency-neutral year-over-year sales grew across all three regions. Our Droplet digital PCR platform continues to have good momentum, and we are scheduled to introduce next month the QX1, which is a fully integrated system. This allows customers to fully automate the Droplet digital PCR workflow and increases the multiplexing capability. We have an initial backlog of orders for this new instrument, and we anticipate production and shipment ramp over the next 12 months. Sales of clinical diagnostics products in the third quarter were $341.8 million, compared to $334 million in Q3 of 2018, which is a 2.4% growth on a reported basis, and a 4.3% growth on a currency-neutral basis. When adjusting for the $6 million sales that customers pulled in last year from Q3 to Q2, the year-over-year currency-neutral sales growth was about 2.4%. During the quarter, we posted solid growth of blood typing, quality control, and immunology product lines. This growth was somewhat offset by year-over-year decline within diabetes as a result of price pressure in core markets. On a geographic basis, the diagnostics group posted nice growth in the Americas and in Asia, while the macroeconomic environment in Europe weighs on the growth rates in the region. The reported gross margin for the third quarter of 2019 was 54.8% on a get basis and compares to 52.6% in Q3 of 2018. The year-over-year margin increase is driven mainly by product mix and lower cost of inventory reserves. Amortization related to prior acquisitions recorded in cost of goods sold was $3.9 million compared to $4.7 million in Q3 of 2018. SG&A expenses for Q3 of 2019 were $201.6 million, or 36% of sales. The SG&A expenses in Q3 of 2018 were $201.2 million, or 36.9%, and including $4 million of contingent consideration benefits. Total amortization expense related to acquisitions recorded in SG&A for the quarter was $1.9 million versus $1.8 million in Q3 of 2018. Reducing the SG&A spend continues to remain a focus area to achieve our 2020 goals. Research and development expense in Q3 was $47.9 million or 8.6% of sales compared to $49.2 million, or 9%, in Q3 of 2018. All of this adds up to a reported Q3 operating income of $57.5 million, or 10.2% of sales, compared to $36.3 million, or 6.7% in Q3 of 2018. Looking below the operating line, The change in fair market value of the equity securities holdings reduced the reported income by $390.6 million 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 expense of $2.1 million compared to $4.2 million last year. The year-over-year improvement primarily reflect higher investment income. The effective tax rate in Q3 of 2019 was 22.8% and compares to 23.1% in Q3 of 2018. Reported net loss for the third quarter was $258.8 million and diluted loss per share for the quarter was $8.68. The decrease 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 the operating margins, as well as other incomes. These items are detailed in the reconciliation table in the press release. Looking at the non-GAAP results for the third quarter, in cost of goods sold, we have excluded $3.9 million of amortization of purchased intangibles and $3.2 million of restructuring expenses. These exclusions move the gross margin for the third quarter of 2019 to a non-GAAP gross margin of 56%, versus 53.5% in Q3 of 2018. The non-GAAP SG&A in the third quarter of 2019 was 35.5% versus 36.3% in Q3 of 2018. In SG&A, on a non-GAAP basis, we have excluded amortization of purchased intangibles of $1.9 million, a restructuring cost of $2.7 million, and $1.9 million adjustment to legal reserves. In R&D, we have excluded a small amount of restructuring benefit. The non-GAAP R&D expense in Q3 was 8.5%, which is in line with our expectation. The cumulative sum of these non-GAAP adjustments results in moving the quarterly operating margin from 10.2% on a GAAP basis to 12% on a non-GAAP basis. This non-GAAP operating margin compares to a non-GAAP operating margin in Q3 of 2018 of 8.2%. We have also excluded certain items below the operating line, which are the decrease in value of the Sartorius equity holdings of $390.6 million, as well as a small loss associated with venture investments. The non-GAAP effective tax rate for the quarter was 25.5%, and we estimate the full-year tax rate on a non-GAAP basis to be approximately 27%, which is primarily driven by the geographic mix of earnings. And finally, non-GAAP net income and diluted earnings per share for the third quarter of 2019 were $48.6 million and $1.61 per share, compared to $27.6 million.91 per share in Q3 of 2018. Moving on to the balance sheet. In the first quarter of 2019, we adopted a new accounting standard related to leases, which requires us to recognize most leases as assets and liabilities on the balance sheet. The right of use assets balance in the third quarter was $217.5 million, and associated liabilities are included in the other current liabilities and in other long-term liabilities. These balances primarily represent our operating lease obligations for facilities and auto leases. The adoption of this standard has a minimal effect on the income statement. Total cash and short-term investments at the end of Q3 were $985 million, compared to $850 million at the end of 2018. During the quarter, we completed an acquisition of a small manufacturer in the diagnostics group that will expand our capabilities within our quality control products. Also during the third quarter, we purchased 14,745 shares of our stock for $5 million at an average share price of $339.05. For the third quarter of 2019, net cash generated from operations was about $100 million, which compares to about $62 million in Q3 of 2018. This improvement mainly reflects the higher operating profits and improved working capital. The adjusted EBITDA for the third quarter of 2019 was $95.1 million, or 17% of sales. The adjusted EBITDA in the first nine months of 2019 was $288.5 million, or about 17.1%, compared to $253.1 million, or 15.1% in the first nine months of 2018. Net capital expenditures for the third quarter of 2019 were $31.1 million. We project that the full-year capex spend will likely be at the low end of the forecasted range of $110 to $120 million. Depreciation and amortization for the Amortization for the third quarter was $33.6 million. Moving on to the guidance. The overall performance in the first nine months of the year. We continue to see strong momentum for the fourth quarter. However, we remain cautious of the macroeconomic softness environment in Europe, as well as geopolitical and global trade tension in other parts of the globe. With that in mind, we are maintaining our full-year guidance range. We estimate a full year-over-year currency-neutral revenue growth between 4% and 4.5%. Full-year non-GAAP gross margin is projected between 55.5% and 56%. And full-year non-GAAP operating margin between 12.5% and 13%. And with that, we will open the line to take your questions. Operator?