Edited Transcript of BIO earnings conference call or presentation 28-Feb-19 10:00pm GMT

Life Science sales in the fourth quarter were $239.6 million, a slight increase on a reported basis when compared to last year and growth of 2.3% on a currency-neutral basis. It is important to note that this increase was on top of the 12% currency-neutral growth in the year-ago period.

Much of the growth in the fourth quarter of this year was driven by continued strong demand for our Cell Biology, Western Blot and Digital PCR products as well as higher-than-market growth for gene expression and antibody products. This growth was somewhat offset by the tough compare and expect to decrease in our process media product line as well as the expected reduction of sales of RainDance products. The combined decline in sales of RainDance and process media products totaled more than $8 million in the fourth quarter.

On a geographic basis, Life Science experienced strong currency-neutral sales growth, most particularly in the U.S. and China.

Sales of Clinical Diagnostics products in the quarter were $373.7 million compared to $378.4 million last year, a decline of 1.3% on a reported basis, but growth of 1.7% on a currency-neutral basis.

During the quarter, we posted solid growth in the U.S., especially for Blood Typing, quality control and autoimmune testing products as well as growth in Asia Pacific. This geographic growth was partially offset by a decline in Europe.

The reported gross margin for the fourth quarter was 54% on a GAAP basis and lower than last year, but certainly improved from recent levels experienced in the second and third quarters. The current quarter margin was impacted by a sizable restructuring charge, changes in product mix, higher service costs as well as additional inventory-related expense in our European operations.

Amortization related to prior acquisitions recorded in cost of goods sold for the quarter was $4.2 million, which compares to $4.9 million in the same period last year. SG&A expenses for the fourth quarter were $212.5 million or 34.4% of sales. When compared to the third quarter of this year, the sequential increase in spend is the result of higher employee-related expenses as well as a significant increase in litigation cost as we vigorously defend our key intellectual property.

Total amortization related to acquisitions recorded in SG&A for the quarter was $1.8 million versus $2.1 million in the third quarter of last year.

Research and development expense in Q4 was in line at $53.1 million or 8.6% of sales.

During the quarter, we impaired approximately $300 million of goodwill and intangible assets related to prior acquisitions, the lion's share being ready to the acquisition of DiaMed, which was completed in 2007. The dynamics in pricing environment of the global Blood Typing market has changed significantly compared to 10-plus years ago, leading us to make the appropriate accounting decision regarding the value on our books. And while we have taken the appropriate accounting action, we continue to be optimistic about the business with future growth and margin-expansion opportunity.

Looking below the operating line, the change in fair market value of our holdings of equity securities resulted in a loss of $814 million in our reported results for the quarter and is substantially related to our holdings of ordinary and preferred shares of Sartorius.

Also, during the quarter, interest and other income resulted in net expense of $84,000 compared to $10 million of expense last year. This improvement primarily reflects higher investment income as well as lower foreign exchange hedging cost versus last year. The effective tax rate used during the fourth quarter was 20%. This lower-than-expected rate was driven by the sizable loss related to our Sartorius investment and impacted by the benefit from tax reform in the U.S. and the nondeductible goodwill impairment.

Now as we look to our results on a non-GAAP basis, it's important to note that we have excluded certain atypical and unique items that impacted both our growth and operating margins. These items are detailed in the reconciliation chart in our press release.

Looking at the non-GAAP results for the fourth quarter. In cost of goods sold, we have excluded amortization of purchased intangibles of $4.2 million as well as restructuring charges of $5.1 million related to a manufacturing operation in Europe that we will be closing and consolidating into one of our existing facilities in early 2020. This represents another step along the path to optimizing our global supply chain and is expected to result in more than $2 million of annual savings starting in 2020. These adjustments move the gross margin for the fourth quarter from 54% to 55.6%. This non-GAAP margin compares to a non-GAAP margin in the fourth quarter of 2017 of 55%.

In SG&A, on a non-GAAP basis, we have excluded amortization of purchased intangibles of $1.8 million, legal-related expenses of $8.7 million, a small acquisition-related benefit and restructuring cost of $421,000 related to a prior action.

In R&D, we have excluded $1.3 million of expense related to restructuring as well as excluded the impairment charge. The cumulative sum of these non-GAAP adjustments result in moving the operating margin for the fourth quarter of 2018 from 11.11% on a GAAP basis to 14.5% on a non-GAAP basis. This significant improvement, compared to the first 3 quarters of 2018, represents good expense control and early signs of driving operating leverage, especially in SG&A, where the margin dropped to 32.7% of sales.

We have also excluded the change in fair market value of our equity holdings and a small loss associated with venture investments that are recorded on the equity method of accounting from our non-GAAP results. With all of these various items in mind, we adjusted our tax provision for these exclusions resulting in the non-GAAP effective tax rate of 28%, significantly improved from the third quarter and in line with our guidance given on the last earnings call.

And finally, non-GAAP net income and earnings per share for the fourth quarter of 2018 were just over $64 million or 10.4% of sales and $2.13 per share, which compares to $57.3 million and $1.90 per share last year.

Looking at the full year results, we are pleased to report annual sales of $2,290,000,000, which represents currency-neutral growth of 5% and ahead of our guidance. This growth reflects strength across many product and regions for both Life Science and Diagnostics.

Our Life Science group posted record annual sales of $861.7 million, an increase of 9.7% on a reported basis when compared to 2017 and growth of nearly 9% currency neutral. This impressive growth was driven by continued strong demand for our Droplet Digital PCR product family as well as solid growth in areas where we are increasing focus and investment, such as cell biology and food safety. All 3 of these key product areas growing double digits for the year.

Equally satisfying is seeing significant increases in sales for our more traditional product areas of gene expression and Western Blotting. And of course, our process media business came back exceptionally strong in 2018 and finished the year at record levels.

From a regional view, Life Science sales increased in all 3 geographies, led by double-digit growth in the U.S. and China.

For the year, Clinical Diagnostics sales were $1,412,000,000, an increase of 3.8% on a reported basis and 2.7% currency neutral. This growth was fueled by continued momentum in quality control, Blood Typing and autoimmune testing products. During the year, we placed more than 2,000 new instruments around the world, which bodes well for higher consumable sales in the years to come.

From a regional view, Diagnostic sales increased most notably in the U.S., China and Japan and were partially offset by continued challenges in Europe. We now believe that much of the ERP transition woes in that region are behind us. And we are looking forward to growth returning for Diagnostics sales in EMEA in 2019.

Looking to the full year operating results on a non-GAAP basis, the 2018 gross margin was 54.6% and compares to a non-GAAP margin of 56.1% in 2017. This 150 basis point decline is attributable to changes in product mix, including pricing pressure, primarily in our Diagnostic segment as well as startup cost associated with our entry into the U.S. Blood Typing market.

We estimate that mix and pricing accounted for approximately 70, 7 0, basis points of the decline, while startup cost for the U.S. Blood Typing entry accounted for an additional 25 or so basis points.