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Bio-Rad Laboratories Inc  (NYSE:BIO) (NYSE:BIO-B)
Q2 2019 Earnings Call
Aug. 01, 2019, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen. And welcome to Bio-Rad Laboratories Second Quarter 2019 Earnings Conference Call. [Operator Instructions].

I would now like to turn the conference over to Ron Hutton, Treasurer and Vice President. You may begin.

Ronald Hutton -- Vice President and Treasurer

Thank you, Tiffany. Good afternoon, and thank you all for joining us today. Today, we will review the second quarter 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 Tumolo, President of the Life Science Group; and John Hertig, 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 Daskal -- Chief Financial Officer

Thank you, Ron. 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 second quarter of 2019 were $572.6 million, which is a 0.6% decline on a reported basis versus $575.9 million in Q2 of 2018. On a currency neutral basis, sales increased 2.7%. During the quarter, we experienced good demand across many of our key product areas, and growth in all three regions.

When comparing to the second quarter of last year, remember that Q2 of 2018 included about $6 million of sales that customers pulled in from Q3. Q2 of 2018 also included about $4 million higher sales associated with a discontinued RainDance's Myriad account. And we expect it to be material as of Q3. If we exclude the Myriad's reduction of sales and the sales that customers pulled in last year from Q3 to Q2, we estimate that the year-over- year currency neutral sales growth for Q2 of 2019 was about 4.6%.

Sales of the Life Science Group in the second quarter of 2019 were $212.4 million compared to $217.8 million in Q2 of 2018, which is a decline of 2.5% on a reported basis, and about flat on a currency neutral basis. Process Media which can fluctuate on a quarterly basis was slow in the second quarter after a very strong sales in Q1 of 2019. All other product areas within Life Science had a solid year-over-year growth and of note a double-digit growth in Droplet Digital PCR antibody business and in food safety.

Our Droplet Digital PCR growth continues to have good momentum, due to its high sensitivity, precision and thousands of optimized assays. To-date, it is cited in several thousands of peer-reviewed publications. Excluding Process Media sales, the Life Science business grew about 7.5% year-over-year on a currency neutral basis, driven by continued biopharma demand.

On a geographic basis, Life Science currency neutral sales, excluding Process Media was strong across all three regions and most notably in the Americas. Sales of Clinical Diagnostics products in the quarter were $357.1 million, compared to $354 million in Q2 of 2018, which is a 0.9% growth on a reported basis, and a 4.8% growth on a currency neutral basis. During the second quarter, we posted solid growth of diabetes and quality control products. Immunology also had strong quarter, which was driven by pull-through -- sorry which was driven by a reagent pull-through, that's a very high one.

We also received this quarter an FDA approval for BioPlex Lyme disease panel, which has been much anticipated by our customers. On a geographic basis, the Diagnostics Group posted a year-over-year currency neutral sales growth across all three regions. The reported gross margin for the second quarter of 2019 was 53.7% on a GAAP basis, and compares to 52.4% in Q2 of 2018. If you recall, in Q2 of 2018, we experienced product mix headwind and atypical inventory related expenses. Much of the year-over-year margin increase is driven by improvements in these two areas. Amortization related to prior acquisitions recorded in cost of goods sold was $3.8 million compared to $4.7 million in Q2 of 2018.

SG&A expenses for Q2 of 2019 were $201.3 million or 35.1% of sales compared to 36.5% in Q2 of 2018. Total amortization related to acquisitions recorded in SG&A for the quarter was $1.6 million versus $2.1 million in Q2 of 2018. Reducing the SG&A spend remains a focus area to achieve our 2020 goals. Research and development expense in Q2 was $50.1 million or 8.8% of sales compared to $47.5 million or 8.2% in Q2 of 2018.

Looking below the operating line. The change in fair market value of the equity securities holdings added $716.4 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 $3.2 million compared to $9.9 million income last year. The year-over-year decrease primarily reflects the Sartorius dividend that was declared this year in Q1 versus Q2 last year.

The effective tax rate used in Q2 of 2019 was 22.2%, and compares to 21.2% in Q2 of 2018. These rates are primarily driven by the sizable gain related to our Sartorius investment and in Q2 of 2019 also included tax reform related benefits. Reported net income for the second quarter was $598.8 million and diluted earnings per share for the quarter were $19.86. The increase in net income and earnings per share versus last year is substantially related to the valuation of the Sartorius Holding.

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 second quarter, in cost of goods sold, we have excluded $3.8 million of amortization of purchased intangibles and small restructuring adjustment. The exclusions moved the gross margin for the second quarter of 2019 to a non-GAAP gross margin of 54.4% versus 53.4% in Q2 of 2018.

If you recall, Q2 of 2018 included a headwind from product mix and atypical inventory related expenses and again, much of the year-over-year margin increase is driven by improvements in these two areas. The non-GAAP SG&A in the second quarter of 2019 was 33.9%, an improvement of more than a point versus the 35.1% in Q2 of 2018. In SG&A, on a non-GAAP basis, we have excluded amortization of purchased intangibles of $1.6 million, legal related expenses of $5.4 million and small amounts for restructuring cost and acquisition related benefit. In R&D, we have excluded a small amount of restructuring benefit, the non-GAAP R&D in Q2 was 8.8%, which is inline with our expectations.

The cumulative sum of these non-GAAP adjustments result in moving the quarterly operating margin from 9.8% on a GAAP basis to 11.7% on a non-GAAP basis. This non-GAAP operating margin compares to a non-GAAP operating margin in Q2 of 2018 of 10%. We have also excluded certain items below the operating line, which are the increase in value of the Sartorius equity holdings of $716.4 million, as well as a small loss associated with venture investments. The non-GAAP effective tax rate for the quarter was 26.4%, which was primarily driven by the geographic mix in the second quarter earnings. We continue to estimate the annual tax rate on a non-GAAP basis to be in the 27% to 28% range. And finally, non-GAAP net income and diluted earnings per share for the second quarter of 2019 were $47.4 million, and $1.57 per share, compared to $49.5 million and $1.64 per share in Q2 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 second quarter was $215.5 million, and the associated liabilities included in 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. The total cash and short-term investments at the end of Q2 were $987 million, compared to $850 million at the end of 2018, and $865 million at the end of the first quarter. During the second quarter, we purchased 51,398 shares of our stock for $15 million at an average share price of $291.85. For the second quarter of 2019, net cash generated from operations was about $155 million, which compares to about $78 million in Q2 of 2018.

This improvement, mainly reflects the higher operating profits, improved capital -- working capital, the payment of the Sartorius dividend that was declared in Q1, as well as a tax refund. The adjusted EBITDA for the second quarter of 2019 was $95.1 million, or 16.6% of sales. The adjusted EBITDA in the first six months of 2019 was $196.7 million or about 17.5%, compared to $180.3 million or 16% in the first six months of 2018.

Net capital expenditures for the second quarter of 2019 were $22.2 million or 3.9% of sales. The full year expectation for CapEx spend is at the low end of the forecasted range of $110 million to $120 million. Depreciation and amortization for the second quarter was $33 million. And lastly, I'd like to mention that we are pleased with the Federal Court's recent ruling, upholding the decision against 10X Genomics, and the $23.9 million award and injunction related to our Droplet Digital PCR intellectual property.

Moving on to the guidance, we are pleased with the overall performance in the first half of the year. And we continue to maintain the annual guidance range. We expect the full year-over-year currency neutral sales growth of 4% to 4.5%. We continue to target a non-GAAP gross margin in the 55.5% to 56% range for the year. And non-GAAP operating margin range of 12.5% to 13%.

And with that we will open the line to take your questions. Tiffany?

Questions and Answers:

Operator

Thank you. [Operator Instructions]. And our first question comes from Patrick Donnelly with Goldman Sachs. Please proceed.

Patrick Donnelly -- Goldman Sachs -- Analyst

Great, thanks guys. Maybe one for you, Ilan. Margins came in ahead of our expectations again this quarter, clearly gaining some momentum with the internal initiatives there. Can you just give us an update on what you've seen to date? Obviously, you've been in the seat for a little while now. And then expectations are going forward, as we think ahead even to the 2020 target, what are the key levers or initiatives you have yet to kind of capitalize on that help you get toward that target?

Ilan Daskal -- Chief Financial Officer

Yes, sure. Thank you, Patrick. Good question. So you know being here for a few months obviously, not only myself but also Andy, we looked at the initiatives -- going to achieve the 2020 target model, and we are also looking at additional initiatives in order to achieve the 2020 margin. For the most part, we are focused on the SG&A related items, and to a lesser extent, but also an incremental expansion of the gross margin. But again, the main focus is on the SG&A line.

Patrick Donnelly -- Goldman Sachs -- Analyst

Okay. And then maybe just on the growth side. Flat organic in Life Science was actually pretty encouraging given the comp there. Can you just talk through what specific areas you're seeing strength? And then maybe specifically on DD PCR, like it seems to be continuing to gain momentum. Can you just help frame that opportunity for us? What type of sales are you seeing to date, if you're willing to break that out? Just trying to get a better hand on how significant of a growth driver that can be for you guys going forward?

Annette Tumolo -- Executive Vice President, President, Life Science Group

Hi, this is Annette. Yeah, well, we're seeing good growth across all of our core product lines and that's really encouraging to us. But in particular, our genomics lines and digital PCR is really leading the way there. We are getting really good traction in the biopharma segment for sure and we're moving. We have a lot of our customers adopting -- adapting and validating our platform for lab developed tests. So we're moving into the clinic, along with some of our cleared products, and we're just starting. So we really see good traction in those segments and we are very optimistic moving forward.

Patrick Donnelly -- Goldman Sachs -- Analyst

Okay. Maybe just one last one, Ilan. I know you briefly touched on the litigation side. Can you just maybe parse out a little bit on the update, we saw last week, obviously talking about a 15% royalty some sort of injunction. Maybe just give us your thoughts on what you expect to kind of be finalized on that front? Maybe timing once we will have kind of -- again a conclusive definitive outcome there.

Annette Tumolo -- Executive Vice President, President, Life Science Group

This is Annette again. I'll take that. We generally don't like to talk a lot about ongoing matters and litigation. But this is -- there have been some public announcements there. The Delaware Court recently confirmed the jury verdict that the 10X products infringed the patents that we asserted, and awarded us damages. And the judge followed that with a ruling issuing an injunction. The way it works so is, the court has to finalize that order and that's what's happening now, and we imagine in the next days to weeks, we will get the final issuance from the court on what exactly the details of that injunction are.

Patrick Donnelly -- Goldman Sachs -- Analyst

All right. That's very helpful. And I appreciate it.

Ilan Daskal -- Chief Financial Officer

Thank you.

Operator

And our next question comes from Mitch Petersen with Barclays. Your line is open.

Mitchell Frank Petersen -- Barclays Bank PLC -- Analyst

Hey, thanks. Maybe first off just on Droplet Digital. I was hoping you could update us on the timing of the new products that you're developing there.

Annette Tumolo -- Executive Vice President, President, Life Science Group

Sure. We are launching our next-generation integrated system with four-colors, probably in the fourth quarter of 2019.

Mitchell Frank Petersen -- Barclays Bank PLC -- Analyst

Got it. That's helpful. Maybe similarly, just on that business within Droplet Digital, could you comment on how big your business is in single-cell today? And then relatedly, just on, I think you called out double-digit growth for Droplet Digital as a whole. Just as a clarification, does that include the headwind from RainDance in the quarter?

Ilan Daskal -- Chief Financial Officer

Yeah, definitely. It does include the headwind from RainDance and usually what we disclose is kind of the double-digit growth that we mentioned.

Mitchell Frank Petersen -- Barclays Bank PLC -- Analyst

Got it. And then lastly for me, I noticed that you didn't call out blood typing in the script. Could you just comment on how that business trended in the quarter? Thank you.

John Hertia -- Executive Vice President, President, Clinical Diagnostics Group

Yeah, this is John Hertia. I'll take that. Our blood typing business did grow year-over-year. It just wasn't that highlight level, but we continue to see strong placements of both the IH-1000 the IH-500 around the world, and strong reagent pull through.

Mitchell Frank Petersen -- Barclays Bank PLC -- Analyst

Great, helpful. Thank you.

John Hertia -- Executive Vice President, President, Clinical Diagnostics Group

Thank you.

Operator

And our next question comes from Dan Leonard with Deutsche Bank. Please proceed.

Dan Leonard -- Deutsche Bank -- Analyst

Thank you. Can you please elaborate on market conditions in China across both your businesses? That seems to be a point where we've seen softness from a number of peers in the quarter.

Andrew Last -- Executive Vice President and Chief Operating Officer

This is Andy, I'll take that. And others can certainly add. Generally, we've been pleased with our China performance. We're not experiencing any material impact the way that some others may have reported. And subject to any major geopolitical shifts that may occur, we continue to see China as a positive for us across the portfolio.

Dan Leonard -- Deutsche Bank -- Analyst

Okay. And a couple of product specific questions in Diagnostics for John. John, can you update us on the autoimmune diagnostics testing environment in the US, specifically in the competitive environment. And then secondly, can you help us frame how you're thinking about this Lyme test opportunity. It seems like there is more in the news about at lately. Thank you.

John Hertia -- Executive Vice President, President, Clinical Diagnostics Group

Okay. So let's take autoimmune first. It's kind of a fragmented market. We have the -- the only fully automated integrated multiplex system for autoimmune testing. We're seeing an evolution of manual IFA slide testing to automated systems, and that's the heart of our BioPlex business, which is doing quite well year-over-year.

Dan Leonard -- Deutsche Bank -- Analyst

And then on Lyme?

John Hertia -- Executive Vice President, President, Clinical Diagnostics Group

So Lyme, we just introduced. We just got FDA approval for the Lyme test. It's a large and growing market. There is a lot of dissatisfaction in Lyme right now. And there is multiple court cases going around the world, because of the lack of sensitivity and specificity in the market. It's a hard disease to diagnose and it takes a long time. We have a very novel assay design that gives us better sensitivity and better specificity than anything else on the market and it's a fully automated solution.

Dan Leonard -- Deutsche Bank -- Analyst

Great, thank you.

John Hertia -- Executive Vice President, President, Clinical Diagnostics Group

Thank you.

Operator

[Operator Instructions]. Our next question comes from Brandon Couillard with Jefferies. Please proceed.

Brandon Couillard -- Jefferies LLC -- Analyst

Hey, thanks, good afternoon. Annette, maybe starting with you. Could you just give us an update on where you stand with your cell analysis portfolio? When you were going back a year or two, you kind of the cobbled together imaging and Cell Sorter and of course cytometer. Just update us on where uptake is with that platform and then would you still expect process media to be a headwind to Life Sciences in the back half as well?

Annette Tumolo -- Executive Vice President, President, Life Science Group

Okay, thanks. Thanks, Brandon. So we are seeing really strong uptick in the biopharma segment of our cell biology products in particular are ZE5 flow cytometer flow analyzer. So we continue to invest, we think it is a perfect time to develop new tools for our customers in this era of cell biology. So we're optimistic about the future of the products we have. And we're looking to expand our market share in that area. With regard to process chromatography, we think the second half of the year, we're going to see incremental year-over-year growth. And we think that we'll end the year with growth over 2018. It's -- we said this before, quarter-to-quarter, it can be a little bit lumpy. So it's hard to compare quarter-over-quarter results sometimes.

Ilan Daskal -- Chief Financial Officer

And Brandon I'll add to that, you know for process chrom. I mean in the first half, it was about flat relative to last year, and we do anticipate most of the incremental revenue to come in, in the second half as Annette mentioned.

Brandon Couillard -- Jefferies LLC -- Analyst

Super. And then one more on Droplet Digital, Annette there has been -- there is some newer entrants in the Digital PCR space come in with a couple of new platforms. Could you sort of speak to the advantages and disadvantages of your droplet system versus other digital platforms?

Annette Tumolo -- Executive Vice President, President, Life Science Group

Well, I can say that our platform and our optimized assays, which we have thousands of have already enabled a lot of breakthrough research, and given clinicians new options in liquid biopsy and precision medicine. And we've got thousands as Ilan mentioned of peer-reviewed publications that support the scientific utility of the droplet system, and clinical utility of the droplet platform that we developed. So I think that our focus moving forward is to make sure that we're developing new platforms in that area that will both expand the applications and relevant to new market segments for Digital PCR and build on the already compelling value proposition that we have. Droplets are a really good test tube for this assay and they are very, very scalable. And given our success in this market that we created, it doesn't surprise us that you know people want to join in with us, but we think that we are in a position, business continue to build on really strongly that we have.

Brandon Couillard -- Jefferies LLC -- Analyst

Thanks. And then maybe one for you, Ilan. Cash continues to build on the balance sheet. I appreciate that you did $15 million of buybacks in the second quarter but that's tiny fraction really of what you generated just in the second quarter in terms of cash flow. Just curious like why that's not a bigger priority for you given the operating cash flow improvement and where the underlying valuation of the stock is here when you strip out the Sartorius valuation? Just curious, what you are thinking there?

Ilan Daskal -- Chief Financial Officer

Yeah, great question. Thanks, Brandon. Generally, we continue to be opportunistic in terms of the buyback. The Board authorized us $250 million plan, we did about $65 million so far. And we plan to continue to be opportunistic, and the way we think about it is, how do we kind of bundle it as part of the overall capital allocation model and specifically with various inorganic kind of opportunities that we keep looking into.

Brandon Couillard -- Jefferies LLC -- Analyst

Thanks. A last one for Norman, just an update from your end in terms of how the M&A pipeline is shaping up right now? Again balance sheets most overcapitalized, it's been quite some time? Are you any closer today to perhaps finding a bolt-on deal or not?

Norman Schwartz -- President and Chief Executive Officer

Yeah, yeah, I think we -- I think we've certainly got some possibilities out there and are encouraged by what we're seeing, and in the progress we're making on a couple of fronts. So hopefully, we can put more of that capital to use in the near term.

Brandon Couillard -- Jefferies LLC -- Analyst

Okay, thank you.

Norman Schwartz -- President and Chief Executive Officer

Thank you.

Operator

And I'm currently showing no questions in queue. This concludes our Q&A session. I'd like to turn the call back over to Ilan Daskal for closing -- further remarks.

Ilan Daskal -- Chief Financial Officer

Thank you everyone for joining us today. And we will connect again in the next quarter's call.

Operator

[Operator Closing Remarks]

Duration: 30 minutes

Call participants:

Ronald Hutton -- Vice President and Treasurer

Ilan Daskal -- Chief Financial Officer

Patrick Donnelly -- Goldman Sachs -- Analyst

Annette Tumolo -- Executive Vice President, President, Life Science Group

Mitchell Frank Petersen -- Barclays Bank PLC -- Analyst

John Hertia -- Executive Vice President, President, Clinical Diagnostics Group

Dan Leonard -- Deutsche Bank -- Analyst

Andrew Last -- Executive Vice President and Chief Operating Officer

Brandon Couillard -- Jefferies LLC -- Analyst

Norman Schwartz -- President and Chief Executive Officer

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