Good day, ladies and gentlemen, and welcome to the Q2 2013 Bio-Rad Laboratories, Inc. Earnings Conference Call. My name is Allison, and I'll be your operator today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I'd now like to turn the call over to Ms. Christine Tsingos, Executive Vice President and Chief Financial Officer. Please proceed, ma'am.

Thanks, Allison. Good afternoon, everyone, and thank you for joining us. Before we begin the call, I'd like to caution you 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. Today, we are pleased to report quarterly net sales of $525.3 million, an increase of just under 3% on a reported basis versus the same period last year's sales of $510.4 million. On a currency neutral basis, year-over-year sales grew 4%. During the quarter, we had good growth across many of our key diagnostic and life science markets, including $6.2 million of sales contributed by our new antibody business. Excluding currency and the addition of AbD Serotec, organic sales growth for the quarter was 2.8%. Overall, the quarterly top line growth was impacted by continued challenges in certain areas of Europe, especially for our diagnostic products, as well as cautionary funding flows in the academic and government research market. The reported gross margin for the second quarter was better than expected at 57.1% and is reflective of a favorable product mix, as well as increased manufacturing efficiencies, and despite an incremental $2.4 million of amortization expense related to the recent Serotec and cell sorting technology acquisitions. For the quarter, the total non-cash purchase accounting expense recorded in cost of goods sold related to acquisitions was $8.5 million, which compares to $6.7 million in the second quarter of last year. SG&A expenses for the quarter were $195.3 million or 37.2% of sales, which compares to 31.8% in the year…

[Operator Instructions] And your first question comes from Brandon Couillard of Jefferies.

Christine, just back on your operating margin, the commentary there, I mean, what aspect of the ERP timing or expenses were not, I guess, anticipated in your prior outlook? And can you give us an update on just the aggregate dollar amount of ERP-related expenses in the P&L both in the second quarter and for the full year now?

Sure. So in terms of pure cash out the door, Brandon, I don't know that things have changed in terms of our expectation. Basically, in the accounting world, while we're in the implementation phases of the project, both the designing and the actual implementation, the internal and external labor costs are capitalized. Right now where we are, we've gone live with our first deployment, which you remember was kind of a small segment of the U.S., our "keep it close to home" proof of concept kind of project, and we're in the process of supporting that. And then in the fall, we'll begin the designing and implementation of the next appointment, which will be a much larger deployment. And at that time, then the internal and external personnel costs will be capitalized per the accounting rules. So I think when we originally set the budget, while -- as I said, cash out the door probably doesn't change that much, we didn't anticipate that we would have this little break in between the first deployment and the second deployment where we would need to temporarily change our accounting treatment.

Okay. Can you give us any numbers around that? I mean, I think you talked about incremental ERP expenses being some $15 million to $20 million in the P&L this year, any update on that figure?

Yes. So probably, this change in accounting treatment to the P&L over these months where we're in between phases will be somewhere $5 million to $10 million range between what was booked in the second quarter and what we'll book in a good part of the third quarter. Again, we're looking to restart the next blueprint phase in the fall. So -- and it's flat from CapEx.

Okay. If John or Brad are there, I would just be curious if they can elaborate on what they're seeing in the government and academic market, particularly the split between the U.S. and Europe.

This is Brad. I'll take that. For Life Sciences, we definitely saw in the second quarter with the extramural NIH-funded accounts, basically our academic market, came back online. They were basically dormant in the first quarter. The government accounts continue to be off significantly and basically any of the intramural research or actual government labs, CDC and the like. So we certainly saw that. In Europe, it's pretty much status quo. There's overall austerity across most of the regions in Europe. And we had a fairly nice second quarter. But a lot of that was timing from shipments that really didn't make it into the first quarter. So it really is sort of status quo.

And then, Christine, would you care to quantify the impact on the operating line from the QuantaLife and AbD Serotec deals? And if not QuantaLife, maybe just the AbD impact on OP?

So both of them, obviously, are a drag to operating profit. And probably combined between the two of them -- Brandon, it's probably $5 million or $7 million. But let me see if I can get that more. But you remember at the beginning of the year, we talked about that Serotec would be $7 million to $10 million drag on operating expense and we still expected QuantaLife to be $15 million, $20 million plus, depending on our level of investment there. And I don't think anything has changed.

And then just lastly, any decision on whether or not you'll decide to call the 8.5% coupon debt in September?

Well, a good question. Obviously, it's something that we're thinking about, and they do become callable in September. I don't know that we'll be calling them on that exact date. But given that it's 8% money and we took on that debt at a time when we weren't investment grade, we will be very seriously taking a look at this and we'll likely do something after the call date.

And your next question comes from Dan Leonard of Leerink Swann.

Can you give us an update on your ERP implementation now that you've got some road on your tires from the first deployment?

Sure. So as I said, the first deployment was a smaller segment of our U.S. sales, probably represents 10% to 15% of the total company revenue. And I think for the most part, it's gone pretty well, especially when I hear some of the horror stories from other companies. We have a lot of people involved with it, a lot of process changed. But at the same time, we continue, didn't seem to miss a beat in terms of shipping product to our customers. Where we are now and part of this support mode that I'm talking about is really just adopting to all of the new processes and becoming efficient with those processes. And so, as I mentioned, cash from operations is lower than we've been running because receivables were up a little, our folks were focused on working on those new processes. But that's just a matter of timing. And with each month since we've gone live, we've seen that efficiency get better and better. So I think on the whole, we're feeling pretty positive about this. The lesson learned is it's hard. It is a lot of change, and part of our understanding of that is we've made the decision now for the next deployment to really focus on finishing the rest of the United States. Originally, we were thinking the second deployment, we could take our show on the road to Europe because Europe is where the greatest benefit return resides. But I think we also see benefit in staying in the U.S., and that's the deployment we'll start working on in the fall.

Okay, that's helpful. And, Christine, to follow up on the cash flow portion of that, how do we think about your cash flow trending through the balance of the year? Obviously, cash flow from operations was lower than we thought in Q2. Does that reverse as you get some of these receivables under control? Or should that stay at depressed levels through the balance of the year?

Well, so good question, Dan. And the receivables is only a small part of it. I mean -- and if you look historically, our cash flow is pretty backend loaded. If you look at our historical results, because there's a lot of cash obligations at the beginning of the year and then, of course, last year we had that windfall from Spain. But so I think seeing improvement from here would be within our historical pattern. And again, I think the receivable growth is more transition and timing in nature and not indicative of some sort of change. And then, obviously, in the second half of the year, we're starting in the fall time frame when we are back into the designing and implementing of the second deployment of SAP, all of these internal and external personnel-related costs will be capitalized, which will affect the investing cash flow, but not the operational cash flow. And so that, obviously, will help as well.

Got it. And then my final question is a 2-part, one for Brad. Brad, could you help me understand how you're looking at the Asian market for Life Science tools in the back half of the year? I think there was some commentary that it had slowed down a bit. And then secondly, the new Digital PCR product, what are the differences versus the initial version?

Okay. Yes, I think if you look at the Asian market, Japan is off. I mean, most of us have seen that. And it's kind of in a shift in the way that they fund their research. We expect that to come back a little bit in the second half of the year. We also expect our business in China to build in the second half of the year, as it always does. A lot of the tenders and government contracts seem to come due in the last quarter. So overall, in general, Asia will continue to build in the last 2 quarters. As far as the Digital PCR, we have invested very heavily in taking the original product, which is the QX100 and transforming it into a new-generation, the QX200. The principal change there is that we drastically expand the type of chemistries that can be used in Digital PCR and allow customers to adopt a lot of different workflows to it, using some of the intercalating dye instead of some of the other specific TaqMan probes. So overall, that's the biggest change. And again, it gives us a lot more flexibility. We moved one of the sort of the challenges that we had or one of the objections that customers had when we brought this product on-market in its original form.

Your next question comes from Brian Turner of Levin Capital Strategies.

Question on the operating margin. Essentially, on the last quarter, we were talking 10%, 11%, and we're a little bit under that now. You said, when discussing that operating margin, that going forward, you're going to be able to move to a margin that's back up to mid-teens, if not something better. So the question is, have we troughed for sure? And when -- if you could just provide a sort of a map to when we should start to see the improvement in the margin, that would be terrific. And then, the second question is, could you just give us a little bit more color on Europe? I know that you sort of opened up the call with it being a little bit challenged. But at the end of the call, you sort of -- in your prepared remarks, you said that it was getting better. So if you could just give us a little bit more color what you're seeing, et cetera, that would be very helpful.

Okay. So, Brian, on the operating margin, you're correct that at the beginning of the year, we talked about an 11% to 11.5% target on the margin. And given the margin on a reported basis, and all of this is good old GAAP reported margins, given where we were in the first quarter, we brought that down to be around 10%. And what changed a little bit since that and now we're saying, well, maybe 8% to 10% for the year is taking this time to do the support phase of ERP brings operating costs to the P&L that originally were assumed to be capitalized. And on top of that, we continue to be cautious in watching the top line. You know that our margin is impacted pretty significantly by whatever goes on, on the top line. So I think our caution for the remainder of the year, given that we're halfway through the year and we're still in single digits in terms of a GAAP reported operating margin and we know that we have a few more months of ERP as an operating expense rather than a capital expense, and our caution with what -- watching the top line has led us to have a range of thinking 8% to 10% for this year in terms of a full year GAAP operating margin. Now having said that, a lot of this is being driven by the fact that we continue to be in investment mode here at Bio-Rad. And systems is one investment, that's clearly a sizable investment. We're also investing in building our presence in some of these higher growth emerging markets where we're putting up pretty solid double-digit top line growth. But again, it's an operating expense that we're absorbing today for a benefit in the future. Our longer-term goal, when we get ERP behind us, of getting our operating margin back to that mid-teen, we were at about 14.8% before we turned on the investment spigot, that hasn't changed. And our goal to get back to that level we were, if not higher, the mid-teens to the higher teens is still there and still achievable. And, of course, it's just a matter of timing and a matter of getting through the ERP, which continues to be a multiple year project. And a good portion of the return, as I said earlier, sits in Europe. And we -- it will be a few more years before we do the European deployment, which stretches out the timing of getting to that mid- to high teens level. But the proposition and the underlying assumptions of what can be achieved has not changed.

And a commentary on Europe?

Yes, Europe. This is Norman. I think it's pretty much the same as it has been in the last few quarters. I think that it's kind of tough sledding in Europe. You've got laboratory consolidations going on in some regions on the diagnostics side. And on the life science side, as Brad said, budget constraints. That all applies to Western Europe. Eastern Europe seems to be going better, still some pretty good growth out of there, good expansion in those markets. So that's basically the picture that we have in Europe.

Okay. And just one last question, as it relates to your holding in Sartorius, is there anything -- has the position stayed the same? Is there any update you can tell us about your investment there? That would be helpful.

It stayed about the same. I'm sure we've maybe acquired a few shares over time. But it remains relatively the same.

Your next question comes from David Cowen [ph] of Sinca [ph].

Regarding Sartorius, I wonder if you could actually give us the amount of shares and the preferreds you earned. Also, if you could tell us what the tax basis are of the shares, and then also just any plans on the shares and business relationship between Bio-Rad and Sartorius?

No, we're not prepared to comment at this time on that.

Our next question comes from Sam Siegel [ph] of Senator Investment Group.

Christine, in terms of the margin guidance, I recognize you don't give quarterly guidance. But could you at least give us a feel for how to think about the balance of the year? Because if you're a little bit above 8% year-to-date on a reported basis, seasonally, you would expect a stronger fourth quarter margin number. Does that suggest that, I guess, given some of the accounting changes and timing that Q3 margin is -- will be a bit below Q2? So just some insight there, and if not numerical, at least qualitatively, if you can give us some direction. And just in terms of this refinancing, given the size of your cash balance, why not just pay down the debt outright? Because you have substantial dry powder, and I think, we're all supportive of that. But to pay any money in the form of interest expense to preserve that, given that you're sitting on, even net of paying it down, almost $0.5 billion of cash doesn't seem necessary. So maybe just a little bit of your philosophy on whether it's a refi or if it's paydown.

Okay, Sam, good questions. In terms of the trajectory in the operating margin for the remainder of the year, you're right. We don't really give specific quarterly guidance. Again, our historical pattern is we do have a more attractive margin generally in our fourth quarter. And I fully anticipate by the fourth quarter, we will be back into full implementation on the ERP side, which should relieve that cost burden that we're bearing right now of the internal and external labor on the projects. So that ought to help the margin. Q3 is always a little more difficult margin quarter for us because of seasonality in Europe and things like that. But other than that, that's the most clarification I can give you in terms of this 8% to 10% range. Obviously, we'd like to be at the higher end, not the lower end of that range. Regarding the debt and the refinancing, I think you're right, and the things that we're looking at now are options. We recognize that we have a fair amount of cash on the balance sheet. For sure, we don't want to carry 8% money, especially in this interest rate environment and our credit quality. And the decision-making process that we're going to be going through now is looking at our options of taking the debt out or refinancing it all or part or, frankly, even more. And the balance that we're going to strike is looking at the investment opportunities that we see on the horizon, especially on the acquisition front, and balance that with the ability to lock in some relatively attractive long-term money. So we -- those are the -- you hit it on the head. I mean, I think we can argue it both ways, but we're going to sharpen our pencils and work through this and make some decisions here over the next couple of months.

Christine, just to follow up on that, is your cash -- what's usable, what's not usable? I know a lot of companies have issues with trapped cash, and obviously, you want to have substantial working capital-type cash. But I mean, if you give us a sense of how much of the cash and the short-term investments is actually accessible, how much is trapped internationally, and what's the comfortable level just to have from a safety perspective.

So the majority of our cash is actually here in the U.S. and very usable, as you say, but even our cash that's offshore, again as I mentioned, we are investing in many of these high-growth markets, and so finding use for the cash there in terms of investing for the future. So -- but 75% plus of our cash is held here in the U.S., and even of the 25% that's outside of the U.S., a lot of it is used for operating activities or acquisitions. We -- the Serotec acquisition, for example, that we acquired at the beginning of this year, we were able to use our foreign cash.

[Operator Instructions] We have no further questions at this time, so I'd now like to turn the call back over to Christine Tsingos for closing remarks.

Okay. Thanks, Allison. Thank you, everyone, for taking the time to join us today for the earnings call, and we look forward to hopefully seeing you soon. Bye bye.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. And thank you, and good day.