Logo of jester cap with thought bubble.

Image source: The Motley Fool.

Bio-Rad Laboratories Inc  (NYSE:BIO) (NYSE:BIO.B)
Q1 2020 Earnings Call
May. 06, 2020, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Q1 2020 Bio-Rad Laboratories Inc. Earnings Conference Call. [Operator Instructions]

I would now like to hand the call over to your speaker today, Mr. Ron Hutton. Please go ahead.

Ronald W. Hutton -- Treasurer And Vice President

Thank you, Buena. Good afternoon, and thank you all for joining us. Today, we will review the first quarter results for 2020. With me on the phone are Norman Schwartz, our Chief Executive Officer; 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 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 financial future performance and other matters. These statements are based on assumptions and expectations of future events that are subject to risks and uncertainties. Included in these forward-looking statements are statements regarding the impact of the COVID-19 pandemic on Bio-Rad's results and operations and steps

Bio-Rad is taking in response to the pandemic. Our actual results may differ materially from these plans and expectations, and the impact and duration of the COVID-19 pandemic is unknown. We cannot be certain that Bio-Rad's responses to the pandemic will be successful that the demand for Bio-Rad's COVID-19-related products is sustainable or that Bio-Rad will be able to meet this demand. 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 accepting accounting principles. Investors should review the reconciliation of these non-GAAP measures to the comparable GAAP results contained in our earnings release.

I will now turn the call over to Ilan Daskal, Executive Vice President and Chief Financial Officer.

Ilan Daskal -- Chief Financial Officer And Executive Vice President

Thank you, Ron. Good afternoon. Thank you all for joining us. And we hope that you and your families are well and staying healthy. We would like to recognize and thank our employees around the globe, who continue to make extraordinary efforts to serve our customers under the current tough circumstances. Before I begin the detailed quarterly discussion, Andy Last, our Chief Operating Officer, will provide an update on Bio-Rad's operations in light of the current pandemic-related environment that we are experiencing globally.

Andy?

Andrew Last -- Chief Operating Officer And Executive Vice President

Thank you, Ilan. So I'd like to take a few minutes to update you on our current state of operations around the world. To closely monitor and keep close to all of our sites, we've established a COVID-19 oversight team to manage and respond to the pandemic situation. As we manage through this challenging period, we're focused on three key areas: the ongoing safety of our employees; continuing manufacturing operations to ensure product supply and support of our customers; and making sure we continue to make progress on our core strategies. In the area of employee safety, we have implemented work from home globally for all employees who are not essential to maintaining ongoing production and safe use of our facilities. Travel is limited only to essential customer visits for our field-based personnel. For all employees who are at work, we have implemented safety procedures in line with CDC recommendations and/or local authorities when required.

In China and other Asian region countries where stay at home has been lifted, we have our teams back in the office, where we are adopting shifts, monitoring temperatures and still maintaining social distancing and cleaning routines in accordance with applicable local guidelines. We'll continue to follow this phased return-to-work approach as other regions begin lifting shelter-in-place restrictions. Overall we're very pleased with the positive response of our employees. Our manufacturing operations teams have responded extremely well to this situation. And to date, we've been overall able to maintain continuous production in most of our sites and have been working closely with our customers to ensure product supply continuity. As part of our response efforts, we've been able to mitigate many of the changes in customer demand, both up and down by balancing production and resources across our sites, and in a few instances, we have temporarily suspended production.

In particular, we saw in the first quarter high demand for our PCR and Droplet Digital PCR products, and similar to other companies, have experienced some challenges in procurement and scaling production. These challenges have generally been due to our suppliers being impacted by shelter-in-place requirements as well as their inability to meet increased demand. With the recent launch of our SARS-CoV-2 Serology test, we are also now scaling manufacturing in both the U.S. and in Europe to meet expected demand. As we look forward, we continue to monitor demand across our portfolio to optimally manage this situation, adjust capacity in our supply chain and ensure continuity of high-quality product to our customers. And lastly, while much time and energy has been recently focused on managing through the impacts of the global pandemic, we continue to work on our core initiatives and strategies.

Thank you, and I'll pass it back to Ilan.

Ilan Daskal -- Chief Financial Officer And Executive Vice President

Thank you, Andy. And now I would like to review the results of the first quarter. Net sales for the first quarter of 2020 were $571.6 million, which is a 3.2% increase on a reported basis versus $554 million in Q1 of 2019. On a currency-neutral basis, sales increased 4.3%. Sales in all regions were impacted by the global spread of COVID-19 as the quarter progressed. This was evident first in Asia, and late in the quarter, we experienced a tapering in demand in the U.S. and in Europe. As you recall, we estimated $5 million revenue carryover from Q4 due to the cyber attack. We now feel that the first quarter probably benefited by closer to $10 million. As Andy alluded to, the pandemic resulted in a significant change in the mix of product demand across our portfolio. We saw strong orders for PCR-based products related to COVID-19 testing and research and lower demand, mainly within the clinical diagnostics portfolio, which was impacted by shelter-in-place guidelines.

Sales of the Life Science group in the first quarter of 2020 were $227.2 million compared to $215.7 million in Q1 of 2019, which is a 5.3% increase on a reported basis and a 6% increase on a currency-neutral basis. Matching year-over-year growth in the first quarter was driven by double-digit growth in gene expression, Droplet Digital PCR, antibody products and Food Safety. Our core PCR and Droplet Digital PCR products revenue increases were driven by strong demand related to COVID-19 testing and related research. Growth in the Life Science segment was somewhat offset by softer academic research demand as well as the tough compare to 2019 related to our process media product line. Excluding Process Media sales, the Life Science business grew 11.1% on a currency-neutral basis versus Q1 of 2019. On a geographic basis, Life Science currency-neutral year-over-year sales grew in Asia and in Europe as well as a nice growth in the Americas when excluding Process Media.

Sales of Clinical Diagnostics products in the first quarter were $340.3 million compared to $334.1 million in Q1 of 2019, which is a 1.9% growth on a reported basis and a 3.2% growth on a currency-neutral basis. During the first quarter, we posted solid growth in Blood Typing and quality controls. This growth was somewhat offset by a year-over-year decline within our diabetes and immunology product lines, which showed the earliest signs of reduced demand due to lower noncritical hospitals and clinic visits. Overall a decrease in routine lab testing and elective surgeries impacted the Diagnostics group revenue. On a geographic basis, the Diagnostics group posted growth in the Americas and in Europe. As you may have seen in our recent press releases, we are the first company to receive FDA Emergency Use Authorization for a total antibody Serology test for COVID-19, a test which has also met CE mark requirements for Europe.

Clinical evaluation of this test has demonstrated diagnostics specificity of more than 99%. And diagnostics sensitivity of 98%, eight days after the onset of symptoms. We also received FDA Emergency Use Authorization for our Droplet Digital PCR COVID-19 test kit. The test can detect the virus with high sensitivity, even when a low viral load is present. The reported gross margin for the first quarter of 2020 was 55.5% on a GAAP basis and compares to 56.3% in Q1 of 2019. In 2019, gross margin benefited from an escrow release of $7.4 million related to an acquisition from 2011. Net of this, the current quarter gross margin benefited mainly from better product mix and lower inventory reserves expense. Amortization related to prior acquisitions recorded in cost of goods sold was $3.9 million compared to $3.7 million in Q1 of 2019. SG&A expenses for Q1 of 2020 were $193.7 million or 33.9% of sales compared to $207.6 million or 37.5% in Q1 of 2019. Reduction in the SG&A expenses were the result of ongoing cost savings initiatives as well as disciplined hiring and lower discretionary spend, driven by travel and marketing expenses due to the impact of COVID-19.

Total amortization expense related to acquisitions recorded in SG&A for the quarter was $2 million versus $1.7 million in Q1 of 2019. Research and development expense in Q1 was $49.3 million, or 8.6% of sales compared to $47.6 million or 8.6% in Q1 of 2019. Q1 operating income was $74.4 million or 13% of sales compared $56.6 million, or 10.2% in Q1 of 2019. Looking below the operating line. The change in fair market value of equity securities holdings added $827.7 million of income to the reported results and is substantially related to holdings of the shares of Sartorius AG. Also during the quarter, interest and other income resulted in net other expense of $3.3 million compared to $11.4 million of income last year. Q1 of 2019 included $15.7 million of dividend from Sartorius, which was not declared in Q1 of 2020. The effective tax rate was 23.7% compared to 23.2% in Q1 of 2019. Reported net income for the first quarter was $685.9 million and diluted earnings per share were $22.72. This is a decrease from last year and is substantially related to the valuation of the Sartorius Holdings.

Moving on to the non-GAAP results. Looking at the 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 first quarter, in cost of goods sold, we have excluded $3.9 million of amortization of purchase intangibles and $1.5 million of restructuring benefits. These exclusions moved the gross margin for the first quarter of 2020 to a non-GAAP gross margin of 55.9% versus 55.6% in Q1 of 2019. Non-GAAP SG&A in the first quarter of 2020 was 33.3% versus 36.4% in Q1 of 2019. In SG&A, on a non-GAAP basis, we have excluded amortization of purchased intangibles of $2 million, legal-related expenses of $1.8 million, and restructuring and acquisition-related benefit of $600,000. In R&D, we had excluded $400,000 of restructuring benefit and the non-GAAP R&D expense in Q1 was consequently 8.7%.

The cumulative sum of these non-GAAP adjustments result in moving the quarterly operating margin from 13% on a GAAP basis to 13.9% on a non-GAAP basis. This non-GAAP operating margin compares to a non-GAAP operating margin in Q1 of 2019 of 10.5%. We have also excluded certain items below the operating line which are the increase in value of the Sartorius equity holdings of $827.7 million and $1.3 million of loss associated with venture investments. The non-GAAP effective tax rate for the quarter was 25.7% versus 28.5% in Q1 of 2019. The tax rate was impacted by changes in the geographic mix of earnings. And finally, non-GAAP net income for the first quarter of 2020 was $57.6 million or $1.91 diluted earnings per share compared to $49.6 million and $1.65 per share in Q1 of 2019. Moving on to the balance sheet. The cash and short-term investments at the end of Q1 were $1.42 billion compared to $1.120 billion at the end of 2019.

During the first quarter, we purchased 291,941 shares of our stock for a total of $100 million at an average price of approximately $342 per share. For the first quarter of 2020 net cash generated from operations was $63 million, which compares to about $43 million in Q1 of 2019. This improvement mainly reflects the higher operating profits and improved working capital. Following the end of the quarter, we completed the acquisition of Celsee for $100 million in cash. Celsee is an exciting early stage company with products focused on detection and analysis of single cells. We plan to further invest in new applications to enhance Celsee's technology. We also completed in early April, a divestiture of a small noncore business that used to be part of our former analytical instruments group. The proceeds from that transaction were about $12 million. The adjusted EBITDA for the first quarter of 2020 was $107.4 million or 18.8% of sales.

The adjusted EBITDA in Q1 of 2019 was $101.7 million or 18.4% of sales, which included the 2019 which included the 2019 the 2019, sorry, Sartorius dividend. The adjusted EBITDA in Q1 of 2019, excluding the Sartorius dividend was about 15.5%. Net capital expenditures for the first quarter of 2020 were $21.6 million, and depreciation and amortization for the first quarter was $33.6 million. Moving on to the guidance. Given the uncertainties regarding the duration and impact of the COVID-19 pandemic, we are withdrawing our previously issued annual guidance for this year. We currently believe that the second quarter year-over-year sales may decline by 10% to 15%. We continue to assess various demand and supply indicators as well as return-to-work protocols. We believe that the COVID-19 impact will be transitory, and we would expect some recovery in the second half of the year. But currently, it is difficult to predict the rate of recovery that we might experience.

That concludes our prepared remarks, and we will now open the line to take your questions. Operator?

Questions and Answers:

Operator

[Operator Instructions] And your first question is from the line of Brandon Couillard. Your line is now open

Brandon Couillard -- Jefferies LLC -- Analyst

So, thanks, good afternoon. I'd actually like to start with Dara just on the serology antibody test. You face an entrenched market with many other high-volume immunoassay systems that have great tests as well. At a high level, what is Bio-Rad's kind of right to win in the category?

And secondly, any color you can share with us in terms of your manufacturing capacity where it stands today in terms of number of tests per month? Where you expect that to be in a few months from now? Expected ASP? And then any color on the EVOLIS platform, either in terms of installed base or kind of throughput metrics you can help us with?

Dara Grantham Wright -- Executive Vice President And Clinical Diagnostics Group President

Thanks, Brandon. This is Dara. So starting with your first question around positioning. I mean as you said, there are other players with a variety of throughput capabilities who are entering the market, we believe that a key differentiator for our platform is that it is an open system and incredibly well suited for medium-sized labs or as a complementary format to high throughput systems, which are typically closed systems. And so as routine testing starts to ramp-up in those large laboratories, we also expect that there will be kind of competition for volume on those closed systems. And so we believe that our platform offers a really, really nice approach to either do batch processing alongside those systems and/or we think the workflow is really great for medium-sized labs. The kit can be run on our EVOLIS platform, which is our automated plate reader that you referred to, of which there are more than 3,000 installed globally, or it can be adapted to any plate-based system, of which there are tens of thousands of systems globally to automate both the kind of pipe heading and plate handling.

So great flexibility there. From a capacity perspective, this is an exceptionally scalable format for manufacturing approach as well. So we've got the capability to manufacture few millions of tests a week if the demand is there. And as you've probably read, the adoption of Serology's routine practice is still being established, but we believe that the opportunity is meaningful. And then lastly, you asked about ASPs. So the pricing for CPT codes in North America are still being established. But we think that ASP will depend on volume as well as other market entrants, but likely to be in the mid single-digit range. Was that all your questions, Brandon?

Brandon Couillard -- Jefferies LLC -- Analyst

Yes. That's very helpful. Maybe just one more on the science. You talked about measuring antibody antibodies eight days post infection. Many others have kind of oriented around a 21-day window. And then secondly, could you sort of speak to the value of a total antibody approach rather than just measuring, say, IgE, as many others have decided to sort of focus on?

Dara Grantham Wright -- Executive Vice President And Clinical Diagnostics Group President

Yes. Our product is designed to detect IgM, IgG and IgA. And IgM is the first antibody type that appears post-symptom onset as early as six, seven days post infection. So by virtue of having a kit that's designed to detect all of these serotypes it enables earlier detection. So upwards of about 100%, 99% sensitivity as early as eight days post-symptom onset. So as these tests are being used to complement diagnostic workup, especially if a patient has a negative PCR test, we believe that earlier detection is really quite useful.

Brandon Couillard -- Jefferies LLC -- Analyst

And one follow-up for Ilan, just in terms of the 2Q directional commentary being down 10% to 15%. It's actually one of the tightest ranges we've seen from many other companies to date so far. Could you give us a sense of how that might break down between Life Sciences? Is the main wildcard just to pace the lab reopenings? And any chance you might be able to sort of quantify the positive COVID tailwinds that might be a contributor relative to the COVID-related sort of headwinds from, let's say, lab closures?

Ilan Daskal -- Chief Financial Officer And Executive Vice President

Thanks, Brendon. I appreciate the question. There are several components that, obviously, we had to consider when we think about the potential Q2 revenue. Generally speaking, the return to work, and if you think about Asia or China, it's a gradual return to work. And we have to wait to see kind of how it evolves in the other regions. And obviously, we do see continued demand for the core PCR instruments. So that will continue to be kind of a driving a driver for the Q2 revenue. And then we have to continue to monitor in terms of the elective surgeries and return to kind of to the clinics and how does that kind of impact the Diagnostics group. So far, we baked in different scenarios, and that's how we came up with the range for Q2. And we'll have to wait and see how Q2 will this is going to evolve.

Brandon Couillard -- Jefferies LLC -- Analyst

Thanks. I'll hop back in queue.

Operator

Your next question is from the line of Patrick Donnelly. Your line is now open

Patrick Donnelly -- Citigroup Inc -- Analyst

Great thanks guys Ilan, maybe one for you. Certainly appreciate the guidance range. Can you just talk about on the margin side? It's obviously been a big focus for you guys when times were good and revenue was kind of growing nicely in the mid-single digits there. Can you talk about what levers you guys are pulling here in the near term given the pressure on the revenue that obviously nobody saw coming? How nimble can you be with some of those initiatives that you have out there?

Ilan Daskal -- Chief Financial Officer And Executive Vice President

Yes. Andy, do you want to start?

Andrew Last -- Chief Operating Officer And Executive Vice President

Well, I mean, this is Andy. Sorry, your question was to Ilan, I'm sure he'll add on at the end. From on the supply chain side, clearly, mix and overhead absorption are critical factors when looking at margin. And we'll be watching that closely as we go through the quarter. Some areas of mitigation for us, we're closely monitoring demand versus supply so that we can reduce capacity quickly, and also be in a position to respond again. So if demand picks up ahead of pace and expectation. So that's how we're looking at our supply chain situation. And its impact on margin.

Ilan Daskal -- Chief Financial Officer And Executive Vice President

Yes. And I would add to that, Patrick, also that overall, we continue to be very disciplined in terms of the discretionary expenses, whether it's travel, whether it's disciplined hiring, and we'll react to any change in the marketplace.

Patrick Donnelly -- Citigroup Inc -- Analyst

Right. Okay. And just to be clear, the 20% has been also pulled, correct?

Ilan Daskal -- Chief Financial Officer And Executive Vice President

The 20%, generally, yes. And we'll have to see how the second half of the year will shape up and this 20% EBITDA. Yes.

Patrick Donnelly -- Citigroup Inc -- Analyst

Then maybe one on Blood Typing. Obviously, there's a great need and demand for that right now in this environment. It seems like people have been mostly unwilling and reluctant to go to donation centers. How should we be thinking about the growth for that business in the near term here?

Norman Schwartz -- Chairman, President And Chief Executive Officer

So I think there may be two ways to look at it. One is maybe I'll take that for a second. One way to look at it is, is things getting back to normal. Obviously, with elective surgeries down, the Blood Typing has been a little weaker as that market as people kind of return to elective surgeries and hospitals open up, I think we'll come back to seeing that more normally. It is overall, it's a slow-growing market. And so we would expect it to, again, come back to some degree of normalcy and then continue at that pace.

Patrick Donnelly -- Citigroup Inc -- Analyst

Okay. That's helpful, Norm. And then last one, Ilan, maybe for you on the share repo. $100 million in the quarter, really, really encouraging to see. I think it's the biggest number certainly that I've seen you guys do. Was it just being opportunistic given the market pullback? Should we expect a higher cadence going forward? Maybe just dive into that a little bit.

Ilan Daskal -- Chief Financial Officer And Executive Vice President

Yes. Thanks, Patrick. Yes. Definitely, it was part of the approach that we took, and we have been communicating this approach for a while. And currently, we have about $70 million left in about $70 million left in the pool. But with that said, we'll have to see how the market evolves and what does it mean? And what type of clarity we get and visibility we get through the rest of the year. And generally speaking, we'll continue to be opportunistic.

Patrick Donnelly -- Citigroup Inc -- Analyst

Great, thank you

Operator

Your next question is from the line of Dan Leonard. Your line is now open

Dan Leonard -- Wells Fargo Securities -- Analyst

Thank you. So first, a question on your Diagnostics business. Can you offer a like what proportion of that business would you say is sensitive to noncritical testing volumes or versus what might be more insulated in run rate in any environment?

Dara Grantham Wright -- Executive Vice President And Clinical Diagnostics Group President

Do you want to take that, Ilan? Or would you like me to?

Ilan Daskal -- Chief Financial Officer And Executive Vice President

Sure. You can take that, Dara. Yes.

Norman Schwartz -- Chairman, President And Chief Executive Officer

Yes, go ahead.

Dara Grantham Wright -- Executive Vice President And Clinical Diagnostics Group President

Sure. Thanks for the question, Dan. I mean,I think it's for any of the products that are being used routinely like our quality control, those are relatively protected and/or aspects of the immunohematology business that are not tied to elective surgery. Things like diabetes testing, obviously, has been constrained as people have been staying away from the routine kind of testing environment. But as certain countries start to lift shelter-in-place orders, we expect that to start to come back to previous levels.

Dan Leonard -- Wells Fargo Securities -- Analyst

Okay. And then on the PCR business, Andy, I think you mentioned supply chain issues. Can you elaborate on when these issues might resolve? And is it right to infer that in PCR right now, you're selling everything you can and the only rate-limiting factor is the supply constraints?

Andrew Last -- Chief Operating Officer And Executive Vice President

So. Okay. The supply chain side, I think, is increasingly becoming more and more solvable. When COVID hit, there was this crazy rush for demand, and it was surge demand that the industry hadn't expected. So I think broadly everyone suffered the same problems. To a large degree, I would say that at the moment, we've been able to sell pretty much everything we can produce, and we've been working hard to expand our capacity at a couple of sites that we manufacture both core PCR and Droplet Digital PCR platforms and their consumables and reagents. There is a little competition out there for some core components, but largely, we've been able to secure our fair share of that.

Dan Leonard -- Wells Fargo Securities -- Analyst

And then my final question, just hoping somebody could elaborate on the Celsee acquisition. What are the objectives there? Is it more of an IP play like RainDance? Or is this something that you expect you're going to develop and perhaps obsolete the DDC over time or complement the DDC? Any elaboration would be helpful.

Ilan Daskal -- Chief Financial Officer And Executive Vice President

Yes, I think we'll invite Annette on that one.

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

Yes, I'd be happy to take that. I can say, it certainly the acquisition comes with important intellectual property, but this technology is one that we think has broad applications in the single cell partitioning and sorting market. And it's flexible, it's cost effective, scalable, the high throughput cell analysis and it's really well suited to the kind of transcriptomic and genomic and multi-omic applications that customers' trying to interrogate single cells, are so interested in doing. So we're really excited. And we have now the flexibility of choosing the right test tube for the right application and Droplets are certainly a good test tube for many of the kinds of things we're trying to do. But right now, we're focused on expanding the Celsee platform to the many applications in single cell that people are so interested in doing.

Dan Leonard -- Wells Fargo Securities -- Analyst

Okay appreciate that color

Operator

[Operator Instructions]

Ilan Daskal -- Chief Financial Officer And Executive Vice President

Okay. Operator, if there are no more questions, can you pull the line again?

Operator

No questions at the moment, sir. Please continue.

Ilan Daskal -- Chief Financial Officer And Executive Vice President

Okay. Thank you, everyone. We appreciate all you joining the call today. [Operator Closing Remarks]

Duration: 37 minutes

Call participants:

Ronald W. Hutton -- Treasurer And Vice President

Ilan Daskal -- Chief Financial Officer And Executive Vice President

Andrew Last -- Chief Operating Officer And Executive Vice President

Brandon Couillard -- Jefferies LLC -- Analyst

Dara Grantham Wright -- Executive Vice President And Clinical Diagnostics Group President

Patrick Donnelly -- Citigroup Inc -- Analyst

Norman Schwartz -- Chairman, President And Chief Executive Officer

Dan Leonard -- Wells Fargo Securities -- Analyst

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

More BIO analysis

Transcript powered by AlphaStreet

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.