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Text: Today, we will review the third quarter of 2020 and with me on the phone today 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.
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.
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.
I'll now turn over the call back to Ilan Daskal, our Executive Vice President and Chief Financial Officer.
Now, before I begin the detailed quarterly discussion, I would like to ask Andy Last, our Chief Operating Officer, to provide an update on Bio-Rad's operations in light of the current pandemic-related environment that we are experiencing globally.
So I'd like to take a few minutes to review our current state of operations around the world.
Before I begin, we would like to recognize our employees globally who have continued to work above and beyond to serve our customers during the pandemic.
We truly appreciate the hard work and dedication across our organization.
As a reminder, we have three key areas of focus as we continue to manage through this challenging period, the ongoing safety of our employees, continuing manufacturing operations to ensure product supply and support of our customers, and making sure we make progress on our core strategies.
We have now established routine practices around the world to improve employee safety.
We have adapted our policies and approaches to local conditions and requirements and are very pleased with the productivity we have been able to achieve.
Work from home continues where required and for those in our facilities, we are continuing to implement broad safety procedures and we continue to experience minimized case numbers.
In the US, we have now implemented a fast turnaround testing solution for suspected cases using a Droplet Digital PCR test and can rapidly deliver results back to an employee.
This has enabled us to avoid significant work downtime, summing to over a full-year productivity equivalent so far.
In manufacturing, our operations teams continue to be flexible and meeting the demand shifts driven by the pandemic.
We have flexed well to meet the high demand for our PCR products which increased in Q3 and we have scaled back where needed, mainly for our Diagnostics products.
We are now past the majority of the initial scale-up issues we encountered with supply chain disruption early in the pandemic and believe we are well-positioned to meet future needs.
Lastly, we continue to work on our core initiatives and strategies, in particular in R&D, where we now have all our labs operational.
Now I would like to review the results of the third quarter.
Net sales for the third quarter of 2020 were $647.3 million, which is a 15.5% increase on a reported basis versus $560.6 million in Q3 of 2019.
On a currency neutral basis, sales increased 14.9%.
On a geographic basis, we experienced currency neutral growth across all three regions.
We saw a strong demand for products associated with COVID-19 testing and related research.
However, we saw lower demand in the rest of our business.
Overall in Q3, we have seen a gradual improvement in demand for both our Life Science and Diagnostics products in all regions as compared to Q2.
Generally, we are seeing most academic and Diagnostics Labs now running between 70% and 90% capacity and slowly continuing to improve.
Biopharma labs are broadly running at a slightly higher capacity rate of 80% to 90% and we continue to monitor the situation closely.
We estimate that COVID-19-related sales were about $98 million in the quarter.
Sales of the Life Science Group in the third quarter of 2020 were $324 million compared to $215.7 million in Q3 of 2019, which is a 50.2% increase on a reported basis and a 48.8% increase on a currency neutral basis.
The majority of the year-over-year growth in the third quarter was driven by our core PCR products, Droplet Digital PCR, and Process Media.
Both core PCR and Droplet Digital PCR products revenue increases were largely COVID-19-related.
Process Media, which can fluctuate on a quarterly basis saw strong double-digit year-over-year growth in the quarter over the same quarter last year.
Excluding Process Media sales, the Life Science business grew 53% on a currency neutral basis versus Q3 of 2019.
Growth in the overall Life Science segment was offset by continued softness in the academic research demand as these labs around the globe were operating below capacity.
We expect a continued gradual increase in lab utilization and are carefully monitoring the situation.
On a geographic basis, Life Science currency neutral year-over-year sales grew across all regions.
We continue to be encouraged by our Droplet Digital PCR business, which is becoming more broadly adopted in wastewater testing as the gold standard.
Droplet Digital PCR is now being used at the Environmental Protection Agency, The Water Research Foundation and more than two dozen labs globally for wastewater testing, including the state of Michigan, which is establishing a standardized and co-ordinated network of COVID-19 monitoring systems across the states.
In addition, last month we launched two new PCR systems, the CFX Opus 96 and the CFX Opus 384, which strengthens our global response and contribution to the fight against the pandemic.
With the launch of the CFX Opus systems, Bio-Rad also introduced access to a cloud-based instrument connectivity, data management, and analysis platform.
These new PCR systems, along with our Droplet Digital PCR offering provides a complete solution for our customers.
Sales of Clinical Diagnostics products in the third quarter were $322.2 million compared to $341.8 million in Q3 of 2019, which is a 5.7% decline on a reported basis and a 5.9% decline on a currency neutral basis.
On a sequential basis, we experienced improved performance across all regions and product lines and we believe this reflects the recovery of routine testing trends.
During the third quarter, strength in our quality controls products was offset by weakness across the rest of the Diagnostics portfolio.
Although clinical labs have seen a significant negative impact by the pandemic, we are now experiencing a gradual recovery from the trough of Q2 and expect incremental recovery until the end of the year.
We will be closely monitoring the potential impact of the recent pandemic resurgence.
On a geographic basis, the Diagnostics Group posted declines across all regions.
The reported gross margin for the third quarter of 2020 was 56.7% on a GAAP basis and compares to 54.8% in Q3 of 2019.
The current gross margin benefited mainly from better product mix, higher manufacturing utilization, and lower service cost, tempered somewhat by higher logistics costs.
Amortization related to prior acquisitions recorded in cost of goods sold was $4.8 million compared to $3.9 million in Q3 of 2019.
SG&A expenses for Q3 of 2020 were $198.2 million or 30.6% of sales compared to $201.6 million or 36% in Q3 of 2019.
We continue with cost saving initiatives to reduce our SG&A.
Total amortization expense related to acquisitions recorded in SG&A for the quarter was $2.3 million versus $1.9 million in Q3 of 2019.
Research and development expense in Q3 was $59.5 million or 9.2% of sales compared to $47.9 million or 8.6% of sales in Q3 of 2019.
Q3 operating income was $109.6 million or 16.9% of sales compared to $57.5 million or 10.2% of sales in Q3 of 2019.
Looking below the operating line, the change in fair market value of equity securities holdings added $1,580 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 a net expense of $5.5 million compared to $2.1 million of expense last year.
The effective tax rate for the quarter was 21.9% compared to 22.8% in Q3 of 2019.
Reported net income for the third quarter was $1,315 million and diluted earnings per share were $43.64.
This is an increase from last year and is again substantially related to the changes in the valuation of 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.
Looking at the non-GAAP results for the third quarter, in cost of goods sold, we have excluded $4.8 million of amortization of purchased intangibles and a small restructuring benefits.
These exclusions moved the gross margin for the third quarter of 2020 to a non-GAAP gross margin of 57.5% versus 56% in Q3 of 2019.
Non-GAAP SG&A in the third quarter of 2020 was 29.4% versus 35.5% in Q3 of 2019.
In SG&A, on a non-GAAP basis, we have excluded amortization of purchased intangibles of $2.3 million, legal related expenses of $6 million and restructuring and acquisition-related benefits of less than $1 million.
Non-GAAP R&D expense in the third quarter of 2020 was 9.2% versus 8.5% in Q3 of 2019.
In R&D, on a non-GAAP basis, we have excluded negligible restructuring benefits.
The cumulative sum of these non-GAAP adjustments result in moving the quarterly operating margin from 16.9% on a GAAP basis to 18.8% on a non-GAAP basis.
These non-GAAP operating margin compares to a non-GAAP operating margin in Q3 of 2019 of 12%.
We have also excluded certain items below the operating line, which are the increase in value of the Sartorius Equity Holdings of 1,580 million and a small loss associated with venture investments.
The non-GAAP effective tax rate for the quarter was 22.5% compared to 25.5% in Q3 of 2019.
The lower rate this quarter was primarily driven by a change in our geographic mix of earnings and the taxation of our foreign earnings.
We now estimate the full year tax rate on a non-GAAP basis to be approximately 24%.
And finally, non-GAAP net income for the third quarter of 2020 was $90.3 million or $3 diluted earnings per share compared to $48.6 million and $1.61 per share in Q3 of 2019.
Moving on to the balance sheet.
Total cash and short-term investments at the end of Q3 were $1,160 million, an increase of $123 million from the end of Q2 of 2020.
During the third quarter, our inventory increased by about $12 million from the second quarter of 2020.
The increase of inventory in Q3 of 2020 was driven by the continued expectation of higher demand for COVID-19 related products.
We expect inventory levels to come down over the next two quarters to three quarters.
We plan to use the cash on hand to repay the $425 million of outstanding senior notes in December.
In addition, the market value of our holdings in Sartorius AG has increased, which technically may deem us as an investment company under the 1940 Investment Company Act.
While we are working on the resolution, our access to the capital markets may be restricted.
We feel that we have adequate resources to effectively run our business in the near term.
During the third quarter, we did not purchase any shares of our stock, we had a total of $273 million available for potential share buybacks.
For the third quarter of 2020, net cash generated from operating activities was $135.7 million, which compares to $99.8 million in Q3 of 2019.
The adjusted EBITDA for the third quarter of 2020 was 22.9% of sales.
The adjusted EBITDA in Q3 of 2019 was 17%.
Net capital expenditures for the third quarter of 2020 were $20 million and depreciation and amortization for the third quarter was $33.7 million.
We project that the full-year capex spend will likely be between $80 million and $90 million.
Moving on to the guidance.
We continue to be uncertain about the duration and impact of the COVID-19 pandemic, although we do assume a gradual return to pre-pandemic activity levels and business mix.
With that in mind, we currently believe that the full year 2020 year-over-year currency-neutral sales to be up 5.9% to 6.3%.
We estimate 27% to 28% currency-neutral revenue growth for Life Science and estimate about 7% currency-neutral revenue decline for the Diagnostics Group in 2020.
This assumes that the fourth quarter will see a gradual improvement in non-COVID-19 related product sales and a smaller relative benefit of COVID-19 related product sales versus Q3.
Full year non-GAAP gross margin is projected to be between 56.5% and 57%.
R&D is around 9%.
Full year GAAP operating margin between 16% and 16.5% and full-year adjusted EBITDA margin to be between 21% and 21.5%.
Our significantly higher operating profit over the last year was driven by discretionary cost control measures and better product mix.
As our operations begin to return back to normal, we expect a gradual reversal of these benefits that we experienced in 2020.
Lastly, due to the uncertain nature of the current pandemic we will not host an Investor Day this year and instead look to host it in 2021 when business activity normalizes.
With that said, in December, we plan on updating you with our revenue growth and margin targets.

user
q3 earnings per share $43.64.
q3 sales $647.3 million versus refinitiv ibes estimate of $570.6 million.
bio rad laboratories - currently believes full-year 2020 yoy currency-neutral sales may be up 5.9 to 6.3 percent.

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