Edited Transcript of BIO earnings conference call or presentation 8-May-19 9:00pm GMT

On a geographic basis, Life Science currency-neutral sales were strong across all 3 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 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 order 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 GAAP 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 cost and inventory reserves. The improvement was partially offset by product mix and higher service cost.

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 volume of the equity securities holdings added $1.59 billion 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 a divestiture 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 growth 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%. These 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 purchased 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 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 $1.59 billion as well as $440,000 associated with revenue -- sorry, with venture investments and other nonrecurring items.

The non-GAAP 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-GAAP effective tax rate to be between 27% and 28%.

And finally, non-GAAP 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, 4-0. 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 31, 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 adapted 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 affect 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 million 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?

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Norman D. Schwartz, Bio-Rad Laboratories, Inc. - Chairman, CEO & President [4]

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