Bio-Rad Laboratories, Inc.

and gentlemen, thank you for standing by and welcome to the Q4 and full year 2019 Bio-Rad Laboratories Incorporated Earnings Conference call. At this time, all participants' 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 1 on your telephone. Please be advised that today's conference may be recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Mr. Ron Hutton. Thank you. Please go ahead, sir.

Thanks, Daniel. Good afternoon, and thank you all for joining us. Today, we will review the fourth quarter and full year financial results for 2019. With me 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 Tumelow, President of the Life Science Group, and Dara Wright, President of the Clinical Diagnostics Group. Before we begin our review, 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 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 reconciliations of these non-GAAP measures to the comparable GAAP results contained in our earnings release. I'd now like to turn the call over to Ilan. Ilan?

Thank you, Ron. Good afternoon, and thank you all for joining us. We will review the fourth quarter and full year results for 2019 on a GAAP basis as well as commentary on a non-GAAP basis. Net sales for the fourth quarter of 2019 were $624.4 million, which is 1.2% increase on a reported basis versus $616.8 million in Q4 of 2018. On a currency-neutral basis, sales increased 2.3%. The fourth quarter revenue fell short by about $20 million from the midpoint of our guidance, mainly due to the cyber attack that we reported in early December. We expect to recover in Q1 of 2020 about $5 million of the Q4 revenue shortfall. During the quarter, we experienced good demand across many of our key product areas and growth in the Americas and in Europe. Sales in Asia were most impacted by the cyber attack, mainly impacting the Life Science Group sales. Sales of the Life Science Group in the fourth quarter of 2019 were $242 million, compared to $239.6 million in Q4 of 2018, which is 1% increase on a reported basis and a 1.8% increase on a currency-neutral basis. Much of the year-over-year growth in the fourth quarter was driven by a double-digit growth in droplet digital PCR and in food safety, as well as very strong results for process media. Excluding process media sales, the life science business declined 2.1% on a currency-neutral basis versus Q4 of 2018 as a result of the cyber attack, which impacted mainly the revenue of life science. On a geographic basis, life science currency neutral year-over-year sales grew in the Americas and in Europe. Our droplet digital PCR business continues to have good momentum. The fully integrated QX1 system was launched in Q4 and we are very pleased with the demand outlook as we continue to ramp production and shipments. Sales of the clinical diagnostics products in Q4 were $379 million compared to $373 million in Q4 of 2018, which is 1.6% growth on a reported basis and 2.8% growth on a currency-neutral basis. During the fourth quarter, we posted solid growth of blood typing, quality control, diabetes, and immunology product lines. This growth was somewhat offset by year-over-year decline within the infectious diseases business. On a geographic basis, the diagnostics group posted growth in Asia and in the Americas. The reported growth margin for the fourth quarter of 2019 was 52.9% on a gap basis and compares to 53.9% in Q4 of 2018. The fourth quarter growth margin was negatively impacted mainly by lower revenue fall-through, the temporary production outage, and lower manufacturing utilization due to the cyber attack, as well as a restructuring reserve. Amortization related to prior acquisitions recorded in cost of goods sold was $4.5 million, compared to $4.2 million in Q4 of 2018. SG&A expenses for Q4 of 2019 were $214.2 million or 34.3% of sales. The SG&A expense in Q4 of 2018 was $214 million or 34.7%. Total amortization expense related to acquisitions recorded in SG&A for the fourth quarter was $2.1 million versus $1.8 million in Q4 of 2018. The SG&A cost savings initiatives remain a focus area to achieve our 2020 goals. Research and development expense in Q4 was $57.1 million, or 9.1% of sales, compared to $53.1 million, or 8.6% in Q4 of 2018. Q4 operating income was $59.2 million, or 9.5% of sales, compared to a $227.1 million loss in Q4 of 2018. Looking below the operating line, the change in fair market value of the equity securities holdings added $646 million 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 expense of $5.8 million compared to about $84,000 last year. The year-over-year increase primarily reflects losses and impairments on some of our venture investments. The effective tax rate in Q4 of 2019 was 20.9% and compares to 20.4% benefit in Q4 of 2018. Reported net income for the fourth quarter was $553.5 million and diluted earnings per share for the quarter were $18.31. 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 fourth quarter, in cost of goods sold, we have excluded $4.5 million of amortization of purchase intangibles, $1.5 million of acquisition-related benefits, and $4.4 million of restructuring expenses. These exclusions move the gross margin for the fourth quarter of 2019 to a non-GAAP gross margin of 54.1%, versus 55.4% in Q4 of 2018. The non-GET SG&A in the fourth quarter of 2019 was 31.7% versus 32.7% in Q4 of 2018. In SG&A, on a non-GET basis, we have excluded amortization of purchased intangibles of $2.1 million, $1.3 million of acquisition-related benefit, a restructuring cost of $13.2 million, and $2.2 million adjustment to legal reserve. In R&D, we have excluded a restructuring cost of $6.1 million. The non-GAAP R&D expense in Q4 was consequently 8.2%. The cumulative sum of these non-GAAP adjustments result in moving the quarterly operating margin from 9.5% on a gap basis to 14.3% on a non-gap basis, which is about flat from Q4 of 2018. We have also excluded certain items below the operating line, which are the increase in value of the Sartorius equity holdings of $646 million and $1.8 million losses associated with venture investments. The non-GAAP effective tax rate for the quarter was 17.7%. A change in the tax rules this quarter enabled us to apply higher foreign tax credits. And finally, non-GAAP net income for the fourth quarter of 2019 was $17 million, or $2.32 diluted earnings per share, compared to $63.1 million and $2.09 per share in Q4 of 2018. Moving on to the full year results. Net sales for the full year were $2,312,000,000, which is 3.3% growth on a currency-neutral basis. The annual revenue is about $20,000,000 below the midpoint of our guidance, mainly due to the fourth quarter cyber attack. We expect to recover in Q1 of 2020 about $5 million of the fourth quarter revenue shortfall. Sales of the Life Science Group for 2019 were $885.9 million, which is an increase of 2.8% on a reported basis and 4.6% on a currency-neutral basis. Much of the full year-over-year growth was driven by double-digit growth in droplet digital PCR, food safety, and process media. On a geographic basis, life science currency-neutral full year-over-year sales grew in the Americas and in Europe, driven mainly by the demand from biopharma market. Life science sales in Asia were most impacted by the cyber attack in December. Sales of clinical diagnostics products for 2019 were $1,412,000,000, which is about flat on a reported basis and 2.8% growth on a currency-neutral basis. The full year-over-year growth was driven mainly by quality control, blood typing, and autoimmune testing products. During the year, we continue to see a nice year-over-year increase in new instrument installations. On a geographic basis, clinical diagnostics' full year-over-year sales saw growth in the Americas and in Asia, as well as a modest growth in Europe. The full-year non-GAAP gross margin was 55% compared to 54.5% in 2018. The year-over-year margin increase was driven mainly by product mix, manufacturing efficiencies, and lower cost of inventory reserves, but was negatively impacted by costs associated with a cyber attack. Full-year non-GAAP SG&A was 34.4% compared to 35.2% in 2018. The SG&A remains a focus area for us to achieve our 2020 goals. Full-year non-GAAP R&D was 8.5% versus 8.7% in 2018 and full-year non-GAAP operating income was 12% compared to 10.7% in 2018. Lastly, the full-year non-GAAP tax rate was 24.1% versus our guidance of 27%. The lower tax rate was mainly driven by a change in the tax rules, which enabled us to apply higher foreign tax credits. Moving on to the balance sheet. Total cash and short-term investments at the end of Q4 were $1,120,000,000 compared to $850,000,000 at the end of 2018 and $985,000,000 at the end of the third quarter. We reclassified $425,000,000 of the outstanding bonds that are due in December of this year from long-term liabilities to current liabilities. During the fourth quarter, we purchased 22,343 shares of our stock for $8 million at an average share price of approximately $358. For the fourth quarter of 2019, net cash generated from operations was $160 million, which compares to about $105 million in Q4 of 2018. This improvement mainly reflects the higher operating profits and improved working capital. For the full year of 2019, net cash generated from operations was $458 million versus $285 million in 2018. The adjusted EBITDA for the fourth quarter of 2019 was $116.8 million or 18.7% of sales. Full-year adjusted EBITDA, including the Sartorius dividend that was declared in Q1 and paid in Q2, was $405.3 million, or about 17.5%, compared to 16.2% in 2018. Net capital expenditures for the fourth quarter of 2019 were $21.6 million, and full year CapEx was $98.4 million. Depreciation and amortization for the fourth quarter was $34.5 million and $134.2 million for the full year. Moving on to the guidance for 2020. We are pleased with the overall performance in 2019 and we continue to see strong momentum in 2020. We are guiding a currency-neutral revenue growth in 2020 between 4.5% and 5.25%. It is too early for us to estimate at this point of time the potential global impact of the coronavirus outbreak. We estimate 7% to 8% currency-neutral revenue growth for the life science group and between 3% to 4% for the diagnostics group in 2020. We continue to assume that we will experience a quarterly revenue fluctuation for process media. Q1 revenue is expected to be lower for process media compared to Q1 of 2019. However, we estimate an overall double-digit growth for the full year. Full year non-GAAP gross margin is projected between 55.7% and 56.1%, and full-year non-GAAP operating margin between 13.8% and 14.3%. We estimate the non-GAAP full-year tax rate to be about 26%, and CapEx is projected between $100 and $110 million. Overall, we are on track to achieve our goal of 20% adjusted EBITDA run rate by the end of this year. And now I'll turn the call to Norman for a few comments.