Ronald W. Hutton - Vice President and Treasurer Christine A. Tsingos - Chief Financial Officer and Executive Vice President Bradford J. Crutchfield - Executive Vice President and President of the Life Science Group John Goetz - Executive Vice President and President of the Clinical Diagnostics Group Norman D.

Schwartz - Chairman, Chief Executive Officer and President.

Daniel L. Leonard - Leerink Swann LLC, Research Division S. Brandon Couillard - Jefferies LLC, Research Division.

Good day, ladies and gentlemen, and welcome to the Quarter 2 2014 Bio-Rad Laboratories Inc. Earnings Conference Call. My name is Patrick, and I'll be your moderator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to Mr.

Ron Hutton, Vice President and Treasurer. Please proceed, sir..

Thank you, Patrick. Before we begin the call, I would like to caution everyone that we will be making forward-looking statements about management's goals, plans and expectations.

Because our actual results may differ materially from these plans and expectations, 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.

With that, I'd like to turn the call over to Christine Tsingos, Executive Vice President and Chief Financial Officer..

Thanks, Ron. Good afternoon, everyone, and thank you for joining us. Net sales for the quarter were $536.8 million, an increase of 2.2% on a reported basis versus the same period last year sales of $525.3 million. On a currency-neutral basis, year-over-year sales grew 1.1%.

During the quarter, we had growth across many of our key Diagnostic and Life Science markets, most notably, in our Digital PCR product lines and sales of Diagnostic products in the emerging markets.

Overall, the quarterly comp line was negatively impacted by continued competitive challenges in our Diagnostic products in Europe, as well as headwinds for Life Science products in the Asia-Pacific and China markets. The reported gross margin for the second quarter was in line with expectations at 55.4% and compares to 54% in the first quarter.

This sequential improvement is primarily reflective of a favorable product mix. When compared to the year-ago period, the decline in gross margin as related to pricing pressure, we continue to experience in our Diagnostics business, especially in Europe.

For the quarter, the total non-cash purchase accounting expense recorded in cost of goods sold related to acquisitions was $8.1 million, which compares to $8.5 million in the second quarter of last year.

Good spending management during the quarter resulted in flat year-over-year SG&A expenses of $195.8 million or 36.5% of sales, which compares to 37.2% in the year-ago period. Also recorded in SG&A is $2.2 million for amortization of intangibles related to acquisitions.

Research and development expense in Q2 was 10.4% of sales or $55.7 million compared to $51.8 million last year. The year-over-year increase in R&D spend is primarily related to our investment in new instruments for the Diagnostics market, as well as Droplet Digital technology and products. This increase also includes the newly acquired GnuBIO team.

Going forward, we expect R&D spend to continue to be around 10% of sales. With the improved gross margin and combined with good spending management, the operating margin for the second quarter was 8.5% and significantly better than the first quarter of this year. As a result, operating income more than doubled on a sequential basis to $45.7 million.

During the quarter, interest in other income resulted in -- a net income position of $3.1 million compared to a net expense of $3.9 million in Q2 of last year. This improvement versus last year is largely related to lower interest and foreign exchange costs, as well as additional dividend income typically associated with our second quarter.

The effective tax rate used during the second quarter was 35%, reflecting the continued expiration of the federal R&D tax credit. Excluding any discrete items that may occur, we anticipate the full year tax rate to remain in the 34% to 35% range.

Net income attributable to Bio-Rad for the second quarter was $31.6 million and diluted earnings per share for the quarter were $1.09, this compares to $1.20 per share in Q2 of last year. And now for certain segment information. Life Science reported sales for the second quarter were $170.3 million, essentially flat when compared to last year.

On a currency-neutral basis, sales declined 1.1%. These quarterly results reflect strong growth in both process media and Digital PCR products. However, sales growth during the quarter was negatively impact by weakness in some of our more traditional product lines for academic research.

On a geographic basis, European sales continue to rebound nicely, and the U.S. market is showing some modest growth. Offsetting this performance were challenges in the Asia-Pacific and China markets, related to some local spending constraints, as well as the timing of revenue recognition.

Our Clinical Diagnostics segment posted quarterly sales of $362.9 million, compared to $351.5 million last year, an increase of 3.2%. On a currency-neutral basis, year-over-year sales for the Diagnostics group grew 2.1%. This growth was led by performance across many product lines, most notably, our BioPlex 2200 assay and quality control products.

Sales to China in the emerging markets were especially strong for Diagnostics during the quarter. This growth was partially offset by a continued decline in Europe. Moving to the balance sheet. As of June 30, total cash and short-term investments were $648 million.

This minimal increase in cash balances from last quarter reflects $40 million of cash used for the purchase of GnuBIO. Despite the relatively flat sales in income, net cash generated from operations for the quarter was substantial at more than $80 million, which compares to just under $20 million in the year-ago period.

This increase in the cash flow is the result of improved customer collections and lower interest payments. Additionally, the quarterly cash flow benefited from a onetime sizable tax refund of $20 million related to prior period. EBITDA for the quarter was also good at $91 million or 17% of sales.

The net capital expenditures for the quarter was $34.7 million, which is an increase both sequentially and year-over-year. This increase relates largely to additional spending for our global ERP project, as well as an increase in reagent rental placements for Diagnostics.

Our full year expectation for CapEx has been in the $140 million to $150 million range. Given the year-to-date spend of just over $60 million, we will likely be at the lower end of that range. And finally, depreciation and amortization for the quarter was $36.3 million and essentially flat with Q1.

As we look to the full year for 2014, we remain cautiously optimistic of achieving the currency neutral sales growth guidance of 2.5% that we laid out at the beginning of the year. For the first 6 months of 2014, our currency neutral sales growth is 2%.

However, we are planning to launch more new products in the second half for the year, primarily for the Life Science market, which should help fuel growth. In addition, the headwinds we faced in the second quarter in the Asia-Pacific and China Life Science market appear to be more timing in nature.

And hopefully, we will return to growth in that part of the world in the second half for the year. On the last earnings call, we revised our operating margin expectations for the full year to be around 8% on a reported basis, down from the original 9% outlook in order to include the addition of GnuBIO.

Given the year-to-date margin of 6.3%, which includes the first quarter accrual related to our potential FCPA resolution, we're also somewhat cautious about achieving a full year operating margin in the 8% range.

As you have heard us say many times in the past, with a fairly high level of fixed costs, our operating margin is affected more by what happens with top line growth. If sales growth does not accelerate in the second half for the year, the operating margin for the full year could be lower than our 8% goal. And now we are happy to take your questions..

[Operator Instructions] And our first question comes from the line of Dan Leonard with Leerink..

My first question, your comments around China are similar to what peers in Life Sciences have reported, but presumably you're 2 weeks smarter than your peers here. So I'm wondering if you're seen any green shoots that the issue in China is more timing than something more than that..

This is Brad, I'll take this question. I think, the situation in China in general is slower than it has been. I think it was particularly slow for Bio-Rad in the second quarter. As Christine pointed out, that was particularly more timing issues. I think, overall, I do see it improving in the second half for the year.

And but certainly, I think, we're all seeing a much slower China than we've seen in the past..

Okay. And then my follow-up.

Christine, when is the second deployment of your ERP due to occur, to begin?.

The second deployment is scheduled for some time in 2015, probably late spring, early summer..

[Operator Instructions] Your next question comes from the line of Brandon Couillard with Jefferies..

Brad, another one for you.

I will be curious if you've seen any changes or improvements in the competitive landscape in the PCR space? Has your primary competitor there been any more rational about pricing? And what were some of the legacy products or the more mature products that Christine mentioned in the script?.

Okay. So, yes, I think in general we're seeing a lot more saner practice in the marketplace. I can certainly attest to that. And as Christine pointed out, some of the more traditional products around electrophoresis and Thermal Cyclers and even qPCR has been somewhat impacted.

But it's important to note that we do -- a lot of our business in China is around our gene expression product line, and it's because we've had some slowness on timing in China, or there was some slowdown as a result of timing in China, it really had a disproportionate impact on these types of products..

That's a good point..

Christine, could you quantify the dollar amount from the drag in China and Asia more broadly as it relates to the timing and spending constraints? Just how much of a drag that was on Life Sciences?.

Brandon, we don't usually talk about things in that detail, but it was enough for it to have a negative impact to their growth during the quarter..

I guess, is it fair to say the segment would've been positive in terms of growth excluding these factors?.

Probably..

Okay. Secondly, if John's there, would be curious if he has an update on the BioPlex 2200, and specifically, sort of the timing of when do you guys think you can get the vitamin D and HIV assays commercialized in the U.S.

market?.

Yes, Brandon. I don't have an update for you on the timing on when we will be able to bring those into the market. They are in regulatory now, and your guess is as good as mine right now..

Okay.

Last one, Christine, any update on the timing of the FCPA resolution?.

Well, it's a good question. It's -- we're hopeful that we will be able to reach resolution this year, but these things just take time.

I don't know, Norman, if you want to add anything?.

No, I think that's fair..

[Operator Instructions] We have a follow-up question from the line of Brandon Couillard with Jefferies..

Christine or John, could you speak to the Diagnostics business in the U.S.

and how that performed in the period? And I don't know, if you're willing to go into this much detail, but if we backed out Europe, what would that business have grown organically in the second quarter?.

So we're probably not going to try and guess what the rate was. I mean, the European business, as we talked about in the past is generally about 1/3 of the Diagnostic overall sales, and it was down year-over-year. So you can't help but feel that. I think on the Life Science -- on the U.S.

Diagnostics business, I think it was maybe up slightly, but still also feeling some competitive pressures. And that's probably another 1/3 of Diagnostics and so when you have 60%, it affects your overall growth rate. If both of those were growing in the low single digits, then we would've seen a very different result..

Fair enough. And then, Norman, looking back 2 quarters, I believe, you mentioned a key focus of yours this year would be bringing cost out of the manufacturing organization focus on better logistics and efficiency there.

Any update on how those initiatives are progressing to date?.

Yes. So I think that especially in the Life Science side, you've seen some -- we've seen some of the effects of that in the increase gross margins this year and for the increase gross margins. And then certainly in the logistics side, we're working on a lot of pieces of that puzzle.

We haven't seen the effects so far, but -- because it's a longer-term project, but it's proceeding..

And I think there's opportunity in both manufacturing costs and logistics, Brandon. We've talked about trying to consolidate some of our manufacturing, especially on the Diagnostics side, especially in Europe where we've taken on a lot of the acquisitions over the years.

And again, it just -- it takes time, when you're dealing with those larger locations and people. On the logistics side, it's something that we pulled together on a global basis now to really look at it globally. And I think that the benefit to doing it that way is the ability to find some real savings.

But it's going to take time for this -- for the group to really come together, and in our current IT environment, it's not as easy to do as it will be in the future state with a single ERP, but both have upside..

And last one, Brad, in terms of the new products that are planned for the Life Science unit in the second half.

Are these more of a 4Q phenomenon or should we see some benefit from those rolling out as early as the third quarter?.

Well, I think you'll definitely see some more -- we'll see some impact in the quarter, and then the rest of the year. I mean, we're launching products around our imaging business, we have some have a new cell biology product. We have an extension into our Droplet Digital PCR system and a lot of assays.

So it's -- these are things that tend to have a pretty good pent-up demand, so we're encouraged..

Let's hope the customers having the budgets..

There are no additional questions in queue. I would now like to turn the call back over to management for closing remarks..

Okay. All right, everyone. Well, thank you very much for taking the time to join us today. We appreciate your support. Bye..

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day..