Diagnostic Products 10Q 2005 Q3 Quarterly report

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


þ		Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2005


o		Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to

Commission file number 1-9957

Diagnostic Products Corporation

(Exact name of registrant as specified in its charter)


California		95-2802182
(State or other jurisdiction of		(IRS Employer
incorporation or organization)		Identification No.)

5210 Pacific Concourse
Los Angeles, California 90045
(Address of principal executive offices)

Registrant’s telephone number:(310) 645-8200

No change

(Former name, former address, and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

YESþ NOo

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).

YESþ NOo

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).

YESo NOþ

The number of shares of Common Stock, no par value, outstanding as of October 28, 2005, was 29,450,697.

TABLE OF CONTENTS


PART I. FINANCIAL INFORMATION
	ITEM I. FINANCIAL STATEMENTS
	ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
	ITEM 4. CONTROLS AND PROCEDURES
PART II. OTHER INFORMATION
	ITEM 1. LEGAL PROCEEDINGS
	ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
	ITEM 5. OTHER INFORMATION
	ITEM 6. EXHIBITS
SIGNATURES
EXHIBIT INDEX
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1

PART I. FINANCIAL INFORMATION

ITEM I. FINANCIAL STATEMENTS

DIAGNOSTIC PRODUCTS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
(unaudited)


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(Amounts in Thousands, Except Per Share Data)	2005			2004			2005			2004
SALES:
Non-Affiliated Customers	$	111,105		$	100,742		$	337,944		$	300,465
Unconsolidated Affiliates		5,225			8,221			16,756			25,049

Total Sales		116,330			108,963			354,700			325,514

COST OF SALES		50,499			46,432			149,422			137,270

Gross Profit		65,831			62,531			205,278			188,244

OPERATING EXPENSES:
Selling		20,215			19,126			61,907			57,235
Research and Development		12,524			11,188			37,642			33,637
General and Administrative		11,977			11,752			38,120			32,475
Gain on Sale of Product Line		(343	)					(343	)
Equity in Income of Affiliates		(1,752	)		(1,705	)		(7,887	)		(6,535	)

OPERATING EXPENSES-NET		42,621			40,361			129,439			116,812

OPERATING INCOME		23,210			22,170			75,839			71,432

Interest/Other Income — Net		1,084			1,334			2,270			781


INCOME BEFORE INCOME TAXES AND MINORITY INTEREST		24,294			23,504			78,109			72,213
PROVISION FOR INCOME TAXES		6,655			6,573			22,316			21,186
MINORITY INTEREST		587			414			1,724			434

NET INCOME	$	17,052		$	16,517		$	54,069		$	50,593


EARNINGS PER SHARE:
BASIC	$	0.58		$	0.57		$	1.84		$	1.74
DILUTED	$	0.56		$	0.55		$	1.79		$	1.69

WEIGHTED AVERAGE SHARES OUTSTANDING:
BASIC		29,395			29,120			29,329			29,049
DILUTED		30,212			29,853			30,133			29,880

DIVIDENDS DECLARED PER SHARE	$	0.07		$	0.06		$	0.21		$	0.18

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

DIAGNOSTIC PRODUCTS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)


	September 30,			December 31,
(Amounts in Thousands, Except Share Data)	2005			2004
Assets
CURRENT ASSETS:
Cash and cash equivalents	$	97,887		$	80,425
Accounts receivable (including receivables from unconsolidated affiliates of $6,651 and $6,190, respectively) — net of allowance for doubtful accounts of $3,657 and $3,667, respectively		106,190			100,094
Inventories		94,158			93,228
Prepaid expenses and other current assets		7,992			5,297
Deferred income taxes		4,349			4,030

Total current assets		310,576			283,074
PROPERTY, PLANT, AND EQUIPMENT — net		153,172			144,772
INSTRUMENTS — net		78,651			82,730
INVESTMENTS IN AFFILIATED COMPANIES		38,303			39,227
OTHER ASSETS — net		10,964			11,937
GOODWILL		13,383			13,441

TOTAL ASSETS	$	605,049		$	575,181


Liabilities and Shareholders’ Equity
CURRENT LIABILITIES:
Notes payable	$	2,888		$	4,145
Accounts payable		21,878			18,391
Accrued liabilities		35,519			45,644
Income taxes payable		7,205			3,872

Total current liabilities		67,490			72,052
LONG-TERM LIABILITIES		7,632			8,846
DEFERRED INCOME TAXES		6,016			5,841
MINORITY INTEREST		5,349			4,210
SHAREHOLDERS’ EQUITY:
Common Stock—no par value, authorized 60,000,000 shares at September 30, 2005 and December 31, 2004; outstanding 29,445,997 shares and 29,230,196 shares, respectively		80,386			73,881
Retained earnings		438,509			390,597
Unrealized gains (losses) on foreign exchange contracts		55			(500	)
Cumulative foreign currency translation adjustment		(388	)		20,254

Total shareholders’ equity		518,562			484,232

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	605,049		$	575,181

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

DIAGNOSTIC PRODUCTS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)


	Nine Months Ended
	September 30,
(Amounts in Thousands)	2005			2004
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	54,069		$	50,593
Adjustments to reconcile net income to net cash flows from operating activities:
Depreciation and amortization		36,676			31,542
Provision for doubtful accounts		715			549
Minority interest		1,724			434
Equity in undistributed income of unconsolidated affiliates — net of distributions		(3,801	)		(4,630	)
Deferred income taxes		420			3,633
Income tax benefit received upon exercise of stock options		1,378
Changes in operating assets and liabilities:
Accounts receivable		(9,021	)		(13,826	)
Inventories		(26,101	)		(32,092	)
Prepaid expenses and other assets		(3,769	)		980
Accounts payable		5,355			2,425
Accrued liabilities		(9,356	)		8,826
Income taxes payable		3,823			2,181

Net cash flows from operating activities		52,112			50,615


CASH FLOWS USED FOR INVESTING ACTIVITIES:
Investment in affiliated companies		—			(219	)
Additions to property, plant, and equipment		(24,467	)		(43,249	)

Net cash flows used for investing activities		(24,467	)		(43,468	)


CASH FLOWS USED FOR FINANCING ACTIVITIES:
Borrowings under notes payable		1,578			10,158
Repayments of notes payable		(3,656	)		(15,543	)
Proceeds from exercise of stock options		5,127			4,097
Cash dividends paid		(6,157	)		(5,225	)
Cash dividends paid to shareholders of minority interest		(696	)		—

Net cash flows used for financing activities		(3,804	)		(6,513	)


EFFECT OF EXCHANGE RATE CHANGES ON CASH		(6,379	)		513


NET INCREASE IN CASH AND CASH EQUIVALENTS		17,462			1,147

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		80,425			69,843


CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	97,887		$	70,990


SUPPLEMENTAL CASH FLOW INFORMATION:
Non cash transactions — instrument placements transferred from inventories	$	23,001		$	22,614

Cash paid during the period for income taxes	$	17,387		$	17,067

Cash paid during the period for interest, net of capitalized interest	$	904		$	1,202

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

DIAGNOSTIC PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Note 1 — Basis of Presentation

The information for the three and nine-month periods ended September 30, 2005 and 2004 for Diagnostic Products Corporation (“DPC” or the “Company”) has not been audited by independent public accountants, but includes all adjustments (consisting of normal recurring accruals) that are, in the opinion of management, necessary to a fair presentation of the results for such periods.

Certain information and footnote disclosure normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant to the requirements of the Securities and Exchange Commission, although the Company believes that the disclosures included in these financial statements are adequate to make the information not misleading.

The consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s 2004 Annual Report on Form 10-K as filed with the Securities and Exchange Commission.

The results of operations for the three and nine-month periods ended September 30, 2005 are not necessarily indicative of the results to be expected for the year ending December 31, 2005.

Certain reclassifications have been made to the 2004 periods to conform to the 2005 presentation.

Note 2 — Pro Forma Stock-Based Compensation

Stock options issued by the Company are accounted for in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) as permitted by Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation.” The Company follows the disclosure requirements of SFAS No. 123, as amended by SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure, an amendment of Financial Accounting Standards Board (“FASB”) Statement No. 123,” which provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation, and amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results.

As permitted by SFAS No. 123, the Company has chosen to continue accounting for stock options at their intrinsic value. Accordingly, no compensation expense has been recognized for its stock option compensation plans as all options granted had an exercise price equal to the market value of the underlying common stock on the date of grant. Had the fair value method of accounting been applied to the Company’s stock option plans, the tax-effected impact would be as follows:


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(Amounts in Thousands, Except Per Share Data)	2005			2004			2005			2004
Net Income:
As Reported	$	17,052		$	16,517		$	54,069		$	50,593
Pro Forma expense		(804	)		(737	)		(2,387	)		(2,090	)

Pro Forma	$	16,248		$	15,780		$	51,682		$	48,503


Net Earnings Per Share
Basic:
As Reported	$	0.58		$	0.57		$	1.84		$	1.74
Pro Forma Adjustment		(0.03	)		(0.03	)		(0.08	)		(0.07	)

Pro Forma	$	0.55		$	0.54		$	1.76		$	1.67

Diluted:
As Reported	$	0.56		$	0.55		$	1.79		$	1.69
Pro Forma Adjustment		(0.02	)		(0.02	)		(0.07	)		(0.07	)

Pro Forma	$	0.54		$	0.53		$	1.72		$	1.62

Note 3 — Inventories

Inventories by major categories are summarized as follows:


	September 30,		December 31,
(Amounts in Thousands)	2005		2004
Raw materials	$	38,992	$	43,899
Work in process		32,703		32,767
Finished goods		22,463		16,562

Total	$	94,158	$	93,228

Note 4 — Property, Plant & Equipment

Property, plant and equipment consist of the following:


	September 30,			December 31,			Estimated
(Amounts in Thousands)	2005			2004			Useful Lives
Land and buildings	$	113,817		$	114,552		20-50 Years
Machinery and equipment		113,787			104,245		3-5 Years
Leasehold improvements		10,356			9,578		3-9 Years
Construction in progress		9,056			3,714

Total		247,016			232,089
Accumulated depreciation and amortization		(93,844	)		(87,317	)

Property, plant and equipment — net	$	153,172		$	144,772

Construction in progress at September 30, 2005 and December 31, 2004 primarily represents the construction and fit out of an expansion of the Company’s manufacturing facility in New Jersey and equipment in the process of being installed for use in operations. Capitalized interest costs were $103,000 and $302,000 in the three months ended September 30, 2005 and 2004, respectively, and $227,000 and $904,000 in the nine months ended September 30, 2005 and 2004, respectively.

Note 5 — Instruments

Instruments consist of the following:


	September 30,			December 31,
(Amounts in Thousands)	2005			2004
Placements and operating leases	$	233,901		$	227,434
Less accumulated amortization		(160,548	)		(150,956	)

Net		73,353			76,478

Sales-type leases		6,493			7,234
Less current portion		(1,195	)		(982	)

Net		5,298			6,252

Total	$	78,651		$	82,730

Note 6 — Other Assets

Other assets consist of the following:


	September 30,			December 31,
(Amounts in Thousands)	2005			2004
Long-term accounts receivable	$	3,305		$	4,637
Purchased technology licenses		9,093			8,017
Less accumulated amortization of purchased technology licenses		(1,434	)		(717	)

Total	$	10,964		$	11,937

Amortization expense was $266,000 and $183,000 for the three months ended September 30, 2005 and 2004, respectively, and $717,000 and $306,000 for the nine months ended September 30, 2005 and 2004, respectively. Amortization expense for each of the next five fiscal years is estimated to be $820,000 and was calculated using the straight-line method over the shorter of the estimated useful life or the period up through the expiration of the underlying license. The technology licenses have an amortization period ranging from 10 to 13 years.

Note 7 — Comprehensive Income

Comprehensive income is summarized as follows:


	Three Months Ended					Nine Months Ended
	September 30,					September 30,
(Amounts in Thousands)	2005			2004		2005			2004
Net income	$	17,052		$	16,517	$	54,069		$	50,593
Foreign currency translation adjustment		(705	)		4,297		(20,642	)		1,308
Unrealized gain on foreign exchange contracts, net of tax impact		(157	)		39		555			2,003

Comprehensive income	$	16,190		$	20,853	$	33,982		$	53,904

The Company does not provide for U.S. income taxes on foreign currency translation adjustments because it does not provide for such taxes on undistributed earnings of consolidated foreign subsidiaries as they have been determined to be indefinitely invested. Further, for foreign currency translation adjustments of its unconsolidated foreign subsidiaries, if the Company decides to repatriate these undistributed earnings, the Company believes it would have foreign tax credits available to substantially offset any additional tax.

Note 8 — Earnings Per Share

Net income as presented in the consolidated income statements is used as the numerator in the earnings per share calculation for both the basic and diluted computations. Basic earnings per share is computed by dividing net income by the weighted-average number of shares outstanding. Diluted earnings per share include the dilutive effect of stock options. The following table is a reconciliation of the weighted-average shares used in the computation of basic and diluted earnings per share for the income statements presented herein:


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(Shares in Thousands)	2005		2004		2005		2004
Basic shares		29,395		29,120		29,329		29,049
Assumed exercise of stock options		817		733		804		831

Diluted shares		30,212		29,853		30,133		29,880

Stock options outstanding but not included in the computation of diluted earnings per common share because the option exercise price was greater than the average market price of the Company’s common stock were as follows:


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(Shares in Thousands)	2005		2004		2005		2004
Antidilutive shares		44		530		48		156

Note 9 — Segment and Product Line Information

The Company considers its manufactured instruments and medical immunodiagnostic test kits to be one operating segment as defined under SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” as the kits are required to run the instruments and utilize similar technology and instrument manufacturing processes. The Company manufactures its instruments and kits principally at facilities located in the United States and the United Kingdom. Kits and instruments are sold to hospitals, medical centers, clinics, physicians, and other clinical laboratories throughout the world through a network of distributors, including consolidated distributors located in the United Kingdom, Germany, Czech Republic, Poland, Slovenia, Slovakia, Croatia, Spain, The Netherlands, Belgium, Sweden, Denmark, Norway, Finland, Latvia, Lithuania, Estonia, France, Australia, New Zealand, China, Brazil, Costa Rica, Venezuela, Uruguay, Bolivia, Honduras, Guatemala and Panama. The Company sells its instruments and immunodiagnostic test kits under several product lines. Product line sales information is as follows:


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(Amounts in Thousands)	2005		2004		2005		2004
Sales:
IMMULITE (includes all models and service)	$	107,716	$	99,715	$	326,438	$	296,795
Radioimmunoassay (“RIA”)		5,288		5,785		16,322		18,266
Other (includes DPC and non-DPC manufactured products)		3,326		3,463		11,940		10,453

	$	116,330	$	108,963	$	354,700	$	325,514

The Company is organized and managed by geographic area. Transactions between geographic segments are accounted for as normal sales for internal reporting and management purposes with all inter-company amounts eliminated in consolidation. Sales are attributed to geographic area based on the location from which the instrument or kit is shipped to the customer. Information reviewed by the Company’s chief operating decision maker on significant geographic segments, as defined under SFAS No. 131, is prepared on the same basis as the consolidated financial statements and is provided in the following tables. Items listed in “Other” represent those geographic locations that are individually insignificant.


			Euro/DPC		DPC		DPC
			Limited		Biermann		Medlab				Less:
	United		(United		(German		(Brazilian				Intersegment
(Amounts in Thousands)	States		Kingdom)		Group)*		Group)*		Other		Elimination			Total
Three Months Ended September 30, 2005
Sales	$	78,413	$	22,189	$	14,515	$	13,528	$	21,466	$	(33,781	)	$	116,330
Net income		8,511		5,429		472		1,334		1,834		(528	)		17,052

Three Months ended September 30, 2004
Sales	$	69,476	$	22,432	$	13,599	$	10,640	$	22,491	$	(29,675	)	$	108,963
Net income		8,039		5,130		310		940		2,452		(354	)		16,517


			Euro/DPC		DPC		DPC
			Limited		Biermann		Medlab				Less:
	United		(United		(German		(Brazilian				Intersegment
(Amounts in Thousands)	States		Kingdom)		Group)*		Group)*		Other		Elimination			Total
Nine Months Ended September 30, 2005
Sales	$	229,743	$	66,849	$	47,355	$	38,721	$	73,517	$	(101,485	)	$	354,700
Net income		25,136		16,205		2,111		3,919		8,239		(1,541	)		54,069

Nine Months Ended September 30, 2004
Sales	$	207,165	$	66,480	$	42,479	$	28,162	$	72,612	$	(91,384	)	$	325,514
Net income		24,757		15,669		1,553		987		7,871		(244	)		50,593


*		DPC Biermann includes the Company’s operations in Germany, Czech Republic, Poland, Slovenia, Slovakia and Croatia. DPC Medlab includes the Company’s operations in Brazil, Costa Rica, Venezuela, Uruguay, Bolivia, Honduras, Guatemala and Panama. Germany and Brazil account for the most significant portion of sales and net income for their respective groups.

Note 10 — New Accounting Pronouncements

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections-A Replacement of APB Opinion No. 20 and FASB Statement No. 3.” SFAS 154 requires retrospective application to prior periods’ financial statements for changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS 154 also requires that retrospective application of a change in accounting principle be limited to the direct effects of the change. Indirect effects of a change in accounting principle, such as a change in non-discretionary profit-sharing payments resulting from an accounting change, should be recognized in the period of the accounting change. SFAS 154 also requires that a change in depreciation, amortization, or depletion method for long-lived non-financial assets be accounted for as a change in accounting estimate affected by a change in accounting principle. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. Early adoption is permitted for accounting changes and corrections of errors made in fiscal years beginning after the date this Statement was issued. The Company does not believe this will have a significant effect on its financial statements.

effective as of January 1, 2006. The Company expects to use the Black-Scholes model to determine the fair value of share-based payments, such as stock options, which is the same method used in determining the pro forma disclosures set forth in Note 2, although the actual expense in 2006 and thereafter will depend on a number of factors, including the number of options granted, the Company’s stock price and related volatility, and other assumptions used in estimating the fair value of stock options at the time of grant.

In December 2004 the FASB issued FASB Staff Position (“FSP”) No. 109-2, “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004” FSP 109-2 provides guidance under SFAS No. 109, “Accounting for Income Taxes,” with respect to recording the potential impact of the repatriation provisions of the American Jobs Creation Act of 2004 (the “Jobs Act”) on income tax expense and deferred tax liabilities. The Jobs Act was enacted on October 22, 2004. FSP 109-2 states that an enterprise is allowed time beyond the financial reporting period of enactment to evaluate the effect of the Jobs Act on its plan for reinvestment or repatriation of foreign earnings for purposes of applying SFAS No. 109. In the third quarter of 2005, the Company recorded an income tax charge, net of expected foreign tax credits available, of $967,000 based on the decision to repatriate approximately $42 million of foreign earnings. The Company will finalize the amount of foreign affiliate dividends to be repatriated in the fourth quarter and pay all dividends by December 31, 2005.

Note 11 — Commitments and Contingent Liabilities

In the fourth quarter of fiscal year 2002, the Company discovered internally that certain senior managers and other employees of its Chinese subsidiary had made certain improper payments that may have violated foreign and U.S. laws. In addition, the deduction of these payments and benefits by the subsidiary on its tax returns may have been improper under the Chinese tax law, resulting in underpayments of Chinese taxes. An independent investigation by the Company’s audit committee concluded that no current members of the Company’s senior management knew of or were involved in the provision of the payments and benefits. The Company has made changes in the management of the Chinese subsidiary, including replacement of the senior managers involved, and has implemented procedures and controls to address these issues and to promote compliance with applicable laws. The Company voluntarily disclosed these payment issues to the Securities and Exchange Commission (“SEC”) and the Department of Justice (“DOJ”) in the first quarter of 2003 and cooperated fully with these agencies in their investigations.

In the fourth quarter of 2002, the Company accrued $1.5 million for actual and estimated costs to resolve this matter. In the third quarter of 2004, the Company accrued an additional $1.0 million based on its revised estimates of costs that would be paid to the U.S. Government to resolve the matter. In the fourth quarter of 2004, the Company accrued an additional $2.4 million, including $750,000 in interest. In addition, the Company recorded a charge of $1.4 million to its 2002 fourth quarter tax provision related to the non-deductibility of the payments in China. During the third quarter of 2003, the Company recorded an additional charge of $0.9 million to its income tax provision for this and other Chinese tax-related matters. Legal expenses of approximately $64,000 and $345,000 were charged to general and administrative expense during the three and nine month periods ended September 30, 2005 as compared to $822,000 and $1,547,000 in the three and nine month periods ended September 30, 2004.

The Company has resolved these issues with both the SEC and the DOJ. In the second quarter of 2005, the Company paid an aggregate of approximately $4.8 million to those agencies, consisting of $2.0 million in fines and approximately $2.8 million in disgorgement of profits and related interest charges. The Company’s Chinese subsidiary pled guilty to violations of the United States Foreign Corrupt Practices Act (“FCPA”) and has agreed to take certain actions including engaging an independent monitor for its FCPA compliance activities in China. The SEC has issued a cease and desist order, and the Company has agreed to take certain actions including engaging an independent monitor for its FCPA compliance program. The termination of the improper payments in China has had and may continue to have a significant adverse effect on future operations in China because such termination could negatively influence a significant number of the Chinese subsidiary’s customers’ decisions as to whether to continue to do business with that subsidiary or result in actions by Chinese authorities. For the quarter and the first nine months of 2005, the Chinese subsidiary had sales of $1.6 million and $4.5 million, respectively, versus sales of $2.5 million and $6.8 million, respectively, for the same periods in 2004.

In February 2004, the Company was informed by the U.S. Food and Drug Administration (“FDA”) that, based on inspectional findings that included data integrity and procedural issues related solely to the Company’s application for the IMMULITE Chagas test, the Company was subject to the FDA’s Application Integrity Policy (“AIP”). The FDA suspended its review of all applications submitted by the Company and would not review any future applications until the FDA determined that the Company had resolved these issues. On September 6, 2005, the Company was informed by the FDA that the suspension was lifted and that it was no longer subject to AIP.

In late July 2004, the Company was served with a subpoena requiring it to produce to the Federal grand jury for the Central District of California, documents relating to trading in the Company’s securities and the exercise of options by officers, directors and employees of the Company between December 30, 2003 and April 1, 2004. The subpoena also seeks all documents relating to the FDA’s review of the Company’s diagnostic test to detect Chagas and any audits or reviews by the FDA between 2000 and the present relating to the Company’s products. Finally, the subpoena seeks the personnel file of a former Company employee. The Company is cooperating with the United States Attorney and the SEC regarding these matters. An independent committee of the Board of Directors has conducted an investigation of the trading issues and has presented its findings and conclusions to the United States Attorney and the SEC. Management believes the ultimate resolution of this matter will not have a material financial impact on the Company.

The Company’s Brazilian subsidiary is a participant along with various other companies in a number of lawsuits against the Brazilian Government claiming unlawful taxation. Historically the companies involved in these suits have had limited success in having these taxes overturned. The Company has also purchased unused tax credits for approximately $1.0 million from an unrelated company. However, due to uncertainty related to the Company’s ability to use these credits against its tax liabilities, it has fully reserved against the cost of these credits. These court cases typically take many years to be decided. The Company estimates its most likely loss outcome based on the merits of the individual cases and advice of outside counsel. As of September 30, 2005, the Company has accrued for the amounts it believes it will have to pay. In the suit that involves the majority of the disputed taxes, in this case sales taxes, if the courts were to rule against the Company in all actions, it would create an additional liability of approximately $1.0 million. In March of 2005, the Company’s Brazilian subsidiary was informed by the Brazilian Government that it believed the Company owed additional tariffs due to a change the Company made to its product classification. The Company believes that it will prevail in this case. However, if the courts were to rule against it, it would create an additional liability of approximately $500,000.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

Except for the historical information contained herein, this report and the following discussion in particular contain forward-looking statements (identified by the words “estimate,” “project,” “anticipate,” “plan,” “expect,” “intend,” “believe,” “hope,” and similar expressions) that are based upon management’s current expectations and speak only as of the date made. These forward-looking statements are subject to risks, uncertainties, and factors that could cause actual results to differ materially from the results anticipated in the forward-looking statements. These risks and uncertainties include:

	-		the Company’s ability to successfully market new and existing products;

	-		the Company’s ability to keep abreast of technological innovations and successfully incorporate them into new products;

	-		the Company’s current dependence on sole suppliers for key chemical components in the IMMULITE assays;

	-		the Company’s ability to have new tests reviewed and approved by the FDA;

	-		the risks inherent in the development and release of new products, such as delays, unforeseen costs, technical difficulties, and regulatory approvals;

	-		competitive pressures, including technological advances and patents obtained by competitors;

	-		environmental risks related to substances regulated by various federal, state, and international laws;

	-		currency risks based on the relative strength or weakness of the U.S. dollar;

	-		domestic and foreign governmental health care regulation and cost containment measures;

	-		political and economic instability in certain foreign markets;

	-		changes in accounting and auditing standards promulgated by the Financial Accounting Standards Board, the Securities and Exchange Commission, the Public Company Accounting Oversight Board, or the American Institute of Certified Public Accountants; and

	-		the effects of governmental or other actions relating to certain payments by the Company’s Chinese subsidiary.

Overview

DPC develops and manufactures automated diagnostic test systems and related reagent test kits that are used by hospital, reference, and physicians’ office laboratories throughout the world. The Company’s principal product line, IMMULITE, is a fully automated, computer-driven modular system that uses specialized proprietary software to provide rapid, accurate test results that reduce the customer’s labor and reagent costs. The Company’s immunoassay tests provide critical information useful to physicians in the diagnosis, monitoring, management, and prevention of various diseases.

DPC manufactures immunodiagnostic test kits (also called “reagents” or “assays”) using several different technologies and assay formats. The IMMULITE instruments are closed systems, meaning that they will not perform other manufacturers’ tests. Accordingly, a major factor in the successful marketing of these systems is the ability to offer a broad menu of assays. In addition to almost 100 IMMULITE assays, the Company sells a broad range of tests based on other technologies that can be performed manually using the customer’s own laboratory equipment, such as radioimmunoassay (RIA) and enzyme immunoassay (EIA) tests.

Along with the breadth of menu, major competitive factors for the IMMULITE instruments include time-to-first-result (how quickly the instrument performs the test), ease of use, and overall cost effectiveness. Because of these competitive factors and the rapid technological developments that characterize the industry, the Company devotes approximately 10% of its annual revenues to research and development activities, all of which are expensed as incurred.

The Company’s products are sold throughout the world directly and through affiliated and independent distributors. Historically, foreign sales (including U.S. export sales, sales to unconsolidated affiliates and independent distributors, and sales of consolidated subsidiaries) have accounted for more than 70% of revenues, although, since 1998, domestic sales growth has outpaced foreign sales growth.

The Company derives revenues from two principal sources: reagent (test kit) sales and IMMULITE instrument placements. The Company recognizes sales of test kits upon shipment and transfer of title to the customer.

IMMULITE instruments are placed with customers under many different types of arrangements that generally fall into the following categories: sale, lease, reagent rental, and soft placement. The Company sells instruments directly to end-users, to third party leasing companies that lease the instruments to end-users, and to independent distributors that then resell the instruments to their customers. Instrument sales, which represent the smallest component of placements, are recognized upon shipment and transfer of title. The Company also sells instruments under sales-type leases, which are recorded as revenue upon shipment in an amount equal to the present value of the future minimum lease payments to be received over the lease term.

Many instruments are placed by other than outright sale or sales-type leases. The Company enters into various types of operating lease arrangements with customers that generally provide for terms of three to five years and periodic rental payments. Revenue on these types of leases is recognized on a pro rata basis over the term of the lease. When an instrument is placed on a reagent rental basis, the customer agrees to pay a mark-up on reagents, but is not charged for the instrument. The Company also places instruments at no charge to the customer (“soft placement”) subject to the customer’s agreement to purchase a minimum amount of reagents. In reagent rentals and soft placements, the only revenue recognized is based on reagent shipments. Under operating lease, rental, and soft placements, DPC continues to own the instrument that is placed with the customer. These instruments are generally amortized on a straight-line basis over five years and maintenance costs are expensed as incurred. The Company also enters into service contracts with customers and recognizes service revenue over the related contract life (related costs are expensed as incurred).

Two important indicators used by management to evaluate financial performance are instrument shipments and reagent utilization. The number of IMMULITE instruments that the Company reports as being shipped in any period is net of instruments that come back to the Company, such as returns at the end of a lease or rental or trade-ins on the purchase of a new model. Historically, the Company has rarely experienced sales returns. The Company refurbishes and seeks to place at reduced prices instruments that come back to the Company. Because of the different methods in which instruments are placed, total instrument sales vary from period to period based on the relative mix of placement methods, and such sales do not necessarily have a direct correlation to the number of instruments shipped during the period.

An important measure of the penetration of IMMULITE reagent sales is the average amount of reagent sales per instrument shipped. It takes a number of weeks or months after an instrument is shipped for it to become fully functional with regard to reagent utilization because of the time it takes for a customer to become familiar with the operation of the instrument and all of the tests a customer can run on the instrument. The Company calculates average reagent utilization for a fiscal period by dividing IMMULITE reagent sales for the period by the total number of instruments shipped as of the end of the previous fiscal period.

Results of Operations

SUMMARY FINANCIAL DATA


	Three Months Ended									Nine Months Ended
(Amounts in Thousands, Except Per Share Data)	2005			% change			2004			2005			% change			2004
Sales	$	116,330			6.8	%	$	108,963		$	354,700			9.0	%	$	325,514
Gross Profit		65,831						62,531			205,278						188,244
% of sales		56.6	%					57.4	%		57.9	%					57.8	%
Operating Expenses:
Selling		20,215						19,126			61,907						57,235
Research and Development		12,524						11,188			37,642						33,637
General and Administrative		11,977						11,752			38,120						32,475
Gain on Sale of Product Line		(343	)								(343	)
Equity in Income of Affiliates		(1,752	)					(1,705	)		(7,887	)					(6,535	)

Total Operating Expenses		42,621			5.6	%		40,361			129,439			10.8	%		116,812
% of sales		36.6	%					37.0	%		36.5	%					35.9	%
Operating Income		23,210			4.7	%		22,170			75,839			6.2	%		71,432
% of sales		20.0	%					20.3	%		21.4	%					21.9	%
Interest/Other Income-net		1,084						1,334			2,270						781

Income Before Income Taxes and Minority Interest		24,294						23,504			78,109						72,213
Provision for Income Taxes		6,655						6,573			22,316						21,186
Income Tax Rate		27.4	%					28.0	%		28.6	%					29.3	%
Minority Interest		587						414			1,724						434


Net Income	$	17,052			3.2	%	$	16,517		$	54,069			6.9	%	$	50,593

Earnings per share:
Basic	$	0.58					$	0.57		$	1.84					$	1.74
Diluted	$	0.56					$	0.55		$	1.79					$	1.69

Sales

The 7% sales increase in the third quarter of 2005 reflected continued demand for the IMMULITE product line. Sales of all IMMULITE products, instruments, service, and reagents in the third quarter of 2005 were $107.7 million, an 8% increase over 2004. In the third quarter of 2005, IMMULITE products represented 93% of sales versus 92% in 2004. In the first nine months of 2005, sales of IMMULITE products increased 10% to $326.4 million from $296.8 million in the first nine months of 2004. In the first nine months of 2005, IMMULITE products represented 92% of sales versus 91% in 2004. The various categories of IMMULITE product line sales in the third quarter and nine months ended September 30, 2005 and 2004 are shown in the following chart:



IMMULITE Product Line Sales	Three Months Ended September 30,							Nine Months Ended September 30,
(Amounts in Thousands)	2005		% change			2004		2005		% change			2004

IMMULITE 2000/2500
Reagents	$	66,337		13.7	%	$	58,351	$	201,700		16.6	%	$	173,055
Instruments and Service		10,542		16.9	%		9,016		29,781		6.8	%		27,874

Total	$	76,879		14.1	%	$	67,367	$	231,481		15.2	%	$	200,929

IMMULITE 1000
Reagents	$	25,539		-7.7	%	$	27,667	$	80,052		-2.6	%	$	82,156
Instruments and Service		5,298		13.2	%		4,681		14,905		8.7	%		13,710

Total	$	30,837		-4.7	%	$	32,348	$	94,957		-0.9	%	$	95,866


IMMULITE Product Line Sales	$	107,716		8.0	%	$	99,715	$	326,438		10.0	%	$	296,795

The Company shipped a total of 226 IMMULITE systems during the third quarter of 2005, including 146 IMMULITE 2000 and 2500 systems and 80 IMMULITE 1000 systems. The total base of IMMULITE systems shipped grew to 10,671, including 4,101 IMMULITE 2000 and 2500 systems. In the third quarter of 2004 the Company shipped a total of 271 IMMULITE systems, including 199 IMMULITE 2000 and 2500 systems.

The reduction in the number of IMMULITE 2000s and 2500s shipped is in part a result of the Company’s Italian affiliate purchasing significantly fewer instruments. Sales to Italy were down by approximately $2.5 million in the third quarter of 2005 as compared to the third quarter of 2004. Although the Company has received an order for 30 instruments that will be shipped in the fourth quarter, instrument sales to Italy may be less than historical levels. The Company also ships IMMULITE systems that have been returned by customers and refurbished by the Company. The IMMULITE 2000/2500 has a longer sales process than the IMMULITE 1000 due to its higher sales price, and the IMMULITE 2000/2500 experiences a longer time delay between instrument placement and the ramp-up of reagent sales. The IMMULITE 2500 was introduced in June of 2004. It reduces the time it takes to get a result for certain tests, most importantly tests for the emergency room to aid in the diagnosis of cardiac conditions, and sells at a higher price than the IMMULITE 2000. Sales of the 2500 may erode sales of the 2000. The Company has 86 tests available on the IMMULITE 2000 and 78 tests available on the IMMULITE 2500. Not all of the Company’s tests are available in the United States. The Company introduced its test for proBNP internationally in the fourth quarter. The Company’s ability to introduce tests in the United States is controlled by the requirement to have tests approved by the FDA. The Company anticipates submitting tests for the IMMULITE 2500, such as enhanced Vitamin B12, enhanced Folic Acid and pro-BNP to the FDA in the fourth quarter of 2005.

The increase in IMMULITE and IMMULITE 2000 instrument and service revenue in the third quarter is due to an increase in the number of IMMULITE 2000/2500 instruments that were sold outright and an increase in service revenue. Included in IMMULITE 2000 equipment sales is revenue relating to the Company’s sample management system (SMS), a sample-handling device that can be attached to the IMMULITE 2000 or 2500.

For the third quarter of 2005, IMMULITE 2000 reagent utilization per instrument was $16,773 and IMMULITE reagent utilization per instrument was $3,935 as compared to the third quarter of 2004, when they were $17,752 and $4,462, respectively. The decrease in utilization on the IMMULITE 2000 is in part a result of the Company introducing almost no new tests in the last year. The Company has introduced tests for enhanced B-12 and Folic Acid on the 2500 internationally in the last two months, and anticipates introducing a number of new tests over the next two quarters. The decrease in average utilization per instrument on the IMMULITE is expected to continue as high volume IMMULITE installations are replaced with IMMULITE 2000s and incremental IMMULITE placements go into lower volume environments.

Sales of the Company’s mature RIA product line declined approximately 9% in the third quarter of 2005, representing 5% of sales, slightly less than the third quarter of 2004. This trend is expected to continue. Sales of other DPC products declined to $1.0 million in the third quarter of 2005 from $1.4 million in the third quarter of 2004. The primary reason for this was a decline in sales of the Company’s micro-plate allergy product line. The Company ceased manufacturing this product line at the end of 2003 because of the availability of allergy testing on the IMMULITE 2000. Sales of non-DPC products, primarily through its consolidated international affiliates, increased 9% in the third quarter of 2005 to $2.3 million. A portion of the increase was related to the Company beginning to distribute clinical chemistry analyzers outside of the United States.

In the third quarter of 2005, sales to domestic customers grew by 15% to 32% of total sales from 30% in the third quarter of 2004. The increase in domestic sales was due to increased penetration into most customer segments and strong instrument placements. Foreign sales (including U.S. export sales, sales to non-consolidated foreign subsidiaries, and sales of consolidated foreign subsidiaries) as a percentage of total sales were approximately 68% in the third quarter of 2005 compared to 70% in the same period of 2004. Europe, the Company’s principal foreign market, represented 37% of sales in the third quarter of 2005 and 43% of sales in the third quarter of 2004. Sales by the Company’s German subsidiary, which includes the Czech Republic and Poland, increased 7%. Sales in the Brazil region, which includes certain other Central and South American countries, accounted for approximately 12% of total sales in the third quarter of 2005, an increase of 27% over the third quarter of 2004, in great part due to the strength of the Brazilian real. Although the Brazilian real

strengthened significantly relative to the U.S. dollar in the third quarter and the first nine months of 2005, in the past few years the real has been very volatile relative to the dollar.

In the first nine months of 2005 sales to domestic customers grew by 13% and increased to 30% of sales from 29% in the first 9 months of 2004. Europe, the Company’s principal foreign market represented 41% of sales versus 46% in the first nine months of 2004. Sales by the Company’s German subsidiary, which includes the Czech Republic and Poland, increased 11% in part as a result of the strength of the euro. Sales in the Brazil region accounted for approximately 11% of sales, an increase of 37% related in great part to the strength of the real.

Due to the significance of foreign sales, the Company is subject to currency risks based on the relative strength or weakness of the U.S. dollar. In periods when the U.S. dollar is strengthening, the effect of translation of financial statements of consolidated affiliates is that of lower sales and net income. Due to intense competition, the Company is generally unable to increase prices to offset this negative effect when the U.S. dollar is strong. In periods where the dollar is weakening, the impact is the reverse. Based on comparative exchange rates in the third quarter and the first nine months of 2005 and 2004, the dollar weakened relative to the euro and the Brazilian real. The effect of the changes of exchange rates on sales was a positive 2% in the third quarter and 3% in the first nine months of 2005.

In the fourth quarter of 2002, the Company accrued $1.5 million for actual and estimated costs to resolve this matter. In the third quarter of 2004, the Company accrued an additional $1.0 million based on its revised estimates of costs that would be paid to the U.S. Government to resolve the matter. In the fourth quarter of 2004, the Company accrued an additional $2.4 million, including $750,000 in interest. In addition, the Company recorded a charge of $1.4 million to its 2002 fourth quarter tax provision related to the non-deductibility of the payments in China. During the third quarter of 2003, the Company recorded an additional charge of $0.9 million to its income tax provision for this and other Chinese tax-related matters. Legal expenses of approximately $64,000 and $345,000 were charged to general and administrative expense during the three and nine month periods ending September 30, 2005 as compared to $822,000 and $1,547,000 in the three and nine month periods ending September 30, 2004.

The Company has resolved these issues with both the SEC and the DOJ. In the second quarter of 2005, the Company paid an aggregate of approximately $4.8 million to those agencies, consisting of $2.0 million in fines and approximately $2.8 million in disgorgement of profits and related interest charges. The Company’s Chinese subsidiary pled guilty to violations of the United States Foreign Corrupt Practices Act (“FCPA”) and has agreed to take certain actions including engaging an independent monitor for its FCPA compliance activities in China. The SEC has issued a cease and desist order, and the Company has agreed to take certain actions including engaging an independent monitor for its FCPA compliance program. The termination of the improper payments in China has had and may continue to have a significant adverse effect on future operations in China because such termination could negatively influence a significant number of the Chinese subsidiary’s customers’ decisions as to whether to continue to do business with that subsidiary or result in actions by Chinese authorities. . For the quarter and the first nine months of 2005, the Chinese subsidiary had sales of $1.6 million and $4.5 million, respectively, versus sales of $2.5 million and $6.8 million, respectively, for the same periods in 2004.

Cost of Sales

Gross margin decreased to 56.6% in the third quarter of 2005 from 57.4% in the third quarter of 2004. This decrease was due in part to a shift in the mix of revenues toward instruments, particularly the IMMULITE 2000 and an increase in average instrument manufacturing costs due in part to lower production volumes. Gross margin for the first nine months of 2005 was 57.9%, marginally higher than 57.8% in the same period of 2004. All products manufactured in the United States are dollar-based. However, a large percentage of these products are sold to company-owned international distributors, which sell the products in their local currencies. In periods of a weakening dollar, sales as measured in dollars increase, resulting in higher gross margins. A strengthening dollar generally results in lower gross margins at international distributors.

Operating Expenses and Other

Selling expense in the third quarter of 2005 decreased to 17.4% of sales from 17.6% in the third quarter of 2004 in part due to a decrease in sales compensation as a percentage of sales as a result of lower relative sales growth. Research and development expenses increased by 11.9% in the quarter to 10.8% of sales from 10.3% in 2004 reflecting the increased activity related to instrument and assay development.

General and administrative expense decreased to 10.3% of sales in the third quarter of 2005 from 10.8% in the third quarter of 2004. Included in general and administrative expense for the first nine months of 2005 is $1.4 million in legal and other transaction related fees, for which discussions are no longer active, and $64,000 and$345,000 in legal fees during the three and nine month periods ending September 30, 2005 related to the Company’s internal investigation of its Chinese subsidiary. This is compared to $822,000 and $1,547,000 in the three and nine month periods ending September 30, 2004. The review of issues relating to the Company’s

internal investigation is complete and legal expenses related to it should be minimal in the future. See Note 11 of Notes to the Consolidated Financial Statements.

The $343,000 gain on the sale of a product line relates to the sale of the Company’s PathoDx product line in 2003. This represents the final holdback amount for services rendered during the transition period, net of related inventory write-offs.

Equity in income of affiliates represents the Company’s share of earnings in non-consolidated affiliates, principally the 45%-owned Italian distributor’s results. The amount increased to $1.8 million in the third quarter of 2005 from $1.7 million in 2004. For the nine months ended September 30, 2005 the amount increased to $7.9 million from $6.5 million. Included in the first nine months of 2005 was a tax benefit from a tax law change in Italy of $980,000, compared to a different but related tax benefit of $260,000 in 2004.

In the first nine months ended September 30, 2005, operating expenses increased in absolute terms in part due to the increase in sales and the increase in the value of the euro and the real relative to the dollar. Operating expenses for the first nine months of 2005 increased as a percentage of sales to 36.5% from 35.9% in 2004.

Interest/other income-net includes interest income, interest expense, and foreign exchange transaction losses and gains. The net amount was income of $1.1 million in the third quarter of 2005 versus $1.3 million in 2004. This difference was driven in part by a $241,000 decrease in foreign currency transaction gains. For the first nine months of 2005 interest/other income-net was of $2.3 million versus $781,000 in 2004. This difference was due in part to a $646,000 increase in foreign currency gains and an increase in interest income of $579,000.

Income Taxes and Minority Interest

The Company’s effective tax rate includes federal, state, and foreign taxes. The Company’s tax rate decreased to 27.4% in the third quarter from 28.0% in the third quarter of 2004. In the first nine months of 2005, the Company’s tax rate decreased to 28.6% from 29.3% in the first nine months of 2004. The lower tax rate in 2005 is predominantly due to additional research and development credits available to be used in the Company’s federal and state tax returns. In addition, there was a decrease in permanent differences in 2005 primarily due to higher non-deductible expenses recognized in 2004 related to the Chinese litigation. These were partially offset by a charge of $967,000 in the third quarter of 2005 related to the decision to repatriate approximately $42 million of foreign earnings. The Company believes its tax rate will be closer to 29% in the future in part as a result of the absence of the discrete items in the third quarter of 2005 and a lower relative amount of earnings from unconsolidated affiliates. Minority interest represents the 44% interest in the Company’s Brazilian subsidiary held by a third party. Increases or decrease in this amount reflect increases and decreases in the profitability of the Brazilian subsidiary.

Contractual Obligations and Commitments

The Company’s contractual obligations and commitments have not changed significantly from those discussed in Item 7 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.

Net Income

Net income in the third quarter of 2005 increased 3.2% to $17.1 million or $.56 per diluted share and in the first nine months of 2005 net income increased 6.9% to $54.1 million or $1.79 per diluted share.

Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management bases its estimates and assumptions, where applicable, on historical experience and on various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities.

Allowance for Bad Debts

Credit is granted to customers on an unsecured basis. The Company records an allowance for doubtful accounts at the time revenue is recognized based on the assessment of the business environment, customers’ financial condition, historical collection experience, accounts receivable aging and customer disputes. When circumstances arise or a significant event occurs that comes to the attention of management, such as a bankruptcy filing of a customer, the allowance is reviewed for adequacy and adjusted to reflect the change in the estimated amount to be received from the customer. If the Company’s aging of receivables balances were to deteriorate, the Company would have to record additional provisions for doubtful accounts.

Allowance for Obsolete and Slow-Moving Inventories

Inventories are stated at the lower of cost, determined on the first-in, first-out basis, or market. The Company regularly evaluates inventory for obsolescence and records a provision if inventory costs are not estimated to be recoverable in the normal course of business. If the Company’s inventories were to become obsolete or slow moving, the Company would have to record additional provisions for obsolete inventories.

Property, Plant and Equipment

Property, plant and equipment is stated at cost, less accumulated depreciation and amortization, which is computed using straight-line and declining-balance methods over the estimated useful lives (3 to 50 years) of the related assets. Leasehold improvements are amortized over the shorter of their estimated useful lives or the term of the related lease. If the Company’s estimate of the useful life of its property, plant and equipment changes, the Company may have to use a different life to record its depreciation and amortization.

The Company reviews property, plant, and equipment for impairment whenever events or changes in circumstance indicate that the carrying amount of an asset may not be recoverable. An impairment loss, measured by the difference in the estimated fair value and the carrying value of the related asset, is recognized when the future cash flows (based on undiscounted cash flows) are less than the carrying amount of the asset. For purposes of estimating future cash flows for possibly impaired assets, the Company groups assets at the lowest level for which there are identifiable cash flows that are largely independent of the cash flows of other groups of assets.

Goodwill and Intangible Assets

Goodwill results primarily from the Company’s purchase of certain of its foreign distributors. Goodwill is tested for impairment at the reporting unit level at least annually or whenever events or circumstances indicate that goodwill might be impaired. The evaluation requires that the reporting unit underlying the goodwill be measured at fair value and, if this value is less than the carrying value of the unit, a second test must be performed. Under the second test, the current fair value of the reporting unit is allocated to the assets and liabilities of the unit, including an amount for “implied” goodwill. If implied goodwill is less than the net carrying amount of goodwill, then the difference becomes the amount of the impairment that must be recorded in that year. The 2005 annual review did not result in any goodwill impairment for the Company. Intangible assets consist of purchased technology licenses. The technology licenses are amortized using the straight-line method over the shorter of their estimated useful life or period up through the expiration of the underlying license. The technology licenses have an amortization period ranging from 10 years to 13 years.

Deferred Income Taxes

Deferred income taxes represent the income tax consequences on future years of differences between the income tax basis of assets and liabilities and their basis for financial reporting purposes multiplied by the applicable statutory income tax rate. Valuation allowances are established against deferred income tax assets if it is more likely than not that they will not be realized. The Company has deferred income tax assets for state net operating loss carry-forwards and state research and development tax credits. Such loss carry-forwards and credits expire in accordance with provisions of applicable tax laws beginning in the years 2005 through 2011. The Company maintains a valuation allowance for the entire state net operating loss and research and development tax credit carry-forwards because it is more likely than not that they will not be recovered.

Revenue Recognition

The Company’s revenue recognition policies are included in “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations–Overview.” Changes in the underlying terms of the Company’s various revenue arrangements could result in changes in the revenue recognition policies. Additionally, changes in the Company’s sales returns experience could result in the need for a sales return allowance.

Contingencies

The Company is involved with various legal matters for which there is uncertainty relative to the outcome, including those involving the Company’s Chinese and Brazilian subsidiaries. To provide for the potential exposure, the Company established accruals for amounts it believes are probable it will have to pay. In addition, the Company is routinely involved in federal and state income tax audits. To provide for potential tax exposures, the Company maintains an accrual for tax contingencies which management believes is adequate.

Liquidity and Capital Resources

The Company has adequate working capital and sources of capital to carry on its current business and to meet its existing capital requirements. At September 30, 2005 and December 31, 2004, the Company had cash and cash equivalents of $97.9 million and $80.4 million, respectively. Net cash flows from operating activities was $52.1 million in the first nine months of 2005, consisting of $91.2 million provided by net income ($54.1 million) adjusted for depreciation and amortization ($36.7 million), plus other non-cash items ($0.4 million) included in net income. This was partially offset by $39.1 million used due to changes in operating assets and liabilities. The most significant elements of the net cash used in operating assets and liabilities were a $26.1 million increase in inventories, which includes $23.0 million in placed instruments, a $9.0 million increase in accounts receivable, related to the increase in sales and a $9.4 million reduction in accrued liabilities of which $6.1 million related to the funding of the Company’s 401(K) plan and $4.8 million related to the settlement of the China matter. The most significant changes to assets and liabilities that provided cash were an increase of $5.4 million and $3.8 million in accounts payable and income taxes payable, respectively. Net cash flows from operating activities was $50.6 million in the first nine months of 2004, consisting of $82.1 million provided by net income ($50.6 million) adjusted for depreciation and amortization ($31.5 million). This was partially offset by $31.5 million used due to changes in operating assets and liabilities. The most significant elements of the net cash used in operating assets and liabilities were a $32.1 million increase in inventories, which includes $22.6 million in placed instruments, a $13.8 million increase in accounts receivable related to an increase in sales. The most significant changes to assets and liabilities that provided cash were a decrease in prepaid expenses ($1.0 million), and increases in accounts payable ($2.4 million), income taxes payable ($2.2 million) and accrued liabilities ($8.8 million).

Cash flows for investing activities consist primarily of additions to property, plant and equipment, which in the first nine months of 2005 and 2004 were $24.5 million and $43.2 million, respectively. In 2005 the additions were in part related to the expansion of the Company’s manufacturing facility in New Jersey, and increases in equipment in Los Angeles. In 2004 the additions were in part related to the fit-out of the new Los Angeles corporate headquarters and the construction of a new building in Wales, both of which were completed by the end of 2004. The Company’s New Jersey expansion has for the most part been completed, but is not fully occupied, as of September 30, 2005 at a cost of $9.3 million. The Company decreased borrowings on a net basis by $2.1 million in the first nine months of 2005 and by $5.4 million in the first nine months of 2004. In the first quarter of 2006 the Company intends to use approximately $13 million to purchase the remaining interests in its Greek and Portuguese affiliates. The Company’s foreign operations are subject to risks, such as currency devaluations, associated with political and economic instability. See discussion above under “Results of Operations.”

The Company has a $20 million unsecured line of credit with Wells Fargo Bank. No borrowings were outstanding at September 30, 2005 or December 31, 2004 under the line of credit. The line of credit matures July 2007. The Company had notes payable (consisting of bank borrowings by the Company’s foreign consolidated subsidiaries payable in the local currency, some of which are guaranteed by the U.S. parent Company) of $9.5 million at September 30, 2005 compared to $13.0 million at December 31, 2004. Obligations under the foreign notes payable are secured by certain property, equipment and accounts receivable.

The Company paid a quarterly cash dividend of $.06 per share, on a split-adjusted basis, from 1995 until the fourth quarter of 2004. In the fourth quarter of 2004, the Company increased its quarterly cash dividend to $.07 per share.

New Accounting Pronouncements

In May 2005, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 154, “Accounting Changes and Error Corrections-A Replacement of APB Opinion No. 20 and FASB Statement No. 3.” SFAS 154 requires retrospective application to prior periods’ financial statements for changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS 154 also requires that retrospective application of a change in accounting principle be limited to the direct effects of the change. Indirect effects of a change in accounting principle, such as a change in non-discretionary profit-sharing payments resulting from an accounting change, should be recognized in the period of the accounting change. SFAS 154 also requires that a change in depreciation, amortization, or depletion method for long-lived non-financial assets be accounted for as a change in accounting estimate affected by a change in accounting principle. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. Early adoption is permitted for accounting changes and corrections of errors made in fiscal years beginning after the date this Statement is issued.

In December 2004, the FASB issued SFAS No. 123 (revised 2004) (“SFAS 123R”), “Shared Based Payment.” This standard will require the Company to measure the cost of employee services received in exchange for an award of equity instruments based on a grant-date fair value of the award (with limited exceptions), and that cost will be recognized over the vesting period. The Company is required to adopt the provisions of SFAS 123R effective as of January 1, 2006. The Company expects to use the Black-Scholes model to determine the fair value of share-based payments, such as stock options, which is the same method used in determining the pro forma disclosures set forth in Note 2, although the actual expense in 2006 and thereafter will depend on a number of factors, including the number of options granted, the Company’s stock price and related volatility, and other assumptions used in estimating the fair value of stock options at the time of grant .

In December 2004 the FASB issued FASB Staff Position (“FSP”) No. 109-2, “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004” FSP 109-2 provides guidance under SFAS No. 109, “Accounting for Income Taxes,” with respect to recording the potential impact of the repatriation provisions of the American Jobs Creation Act of 2004 (the “Jobs Act”) on income tax expense and deferred tax liabilities. The Jobs Act was enacted on October 22, 2004. FSP 109-2 states that an enterprise is allowed time beyond the financial reporting period of enactment to evaluate the effect of the Jobs Act on its plan for reinvestment or repatriation of foreign earnings for purposes of applying SFAS No. 109. In the third quarter, the Company recorded an initial estimated income tax charge of $967,000 based on the decision to repatriate $42 million of foreign earnings. The Company will finalize the amount of foreign affiliate dividends to be repatriated in the fourth quarter and pay all dividends by December 31, 2005.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes during the quarter ended September 30, 2005, from the disclosures about market risk provided in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Reporting

The Company’s management, with the participation of the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the Company’s disclosure controls and procedures as of September 30, 2005. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer of the Company have concluded that such disclosure controls and procedures were adequate and effective and designed to ensure that material information relating to the Company and its consolidated subsidiaries would be made known to them by others within those entities.

Internal Control Over Financial Reporting

There has been no change in the Company’s internal control over financial reporting identified in connection with the evaluation that occurred during the Company’s last fiscal quarter that has materially affected or is reasonably likely to materially affect the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The information contained in the first three paragraphs of Note 11 to the Notes to Consolidated Financial Statements in Item I, Part I hereof, is hereby incorporated herein by reference.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

The following persons were elected directors of the Company at the Annual Meeting of Shareholders held on September 8, 2005:


	Votes Cast
Name	For		Withheld
Sidney A. Aroesty		20,977,005		6,846,301
Frederick Frank		20,792,301		7,031,005
Kenneth A. Merchant		26,658,675		1,164,631
John H. Reith		27,495,528		327,778
James D. Watson		27,350,520		472,786
Ira Ziering		20,496,873		7,326,433
Michael Ziering		20,744,167		7,079,139

ITEM 5. OTHER INFORMATION

Shareholders are advised that the Company intends to hold its 2006 annual meeting of shareholders during the month of May in accordance with historical practice. Shareholders interested in submitting a proposal for inclusion in the Company’s proxy statement for the annual meeting of shareholders to be held in 2006 may do so by following the procedures prescribed in SEC Rule 14a-8. In accordance with the SEC’s rules and assuming that the date of the proxy statement for the annual meeting will be April 3, 2006, shareholder proposals must be received by the Company no later than December 5, 2005 to be eligible for inclusion in the Company’s proxy statement for the 2006 annual meeting, and must also comply with the requirements of Rule 14a-8 and the Company’s Bylaw provisions regarding advance notice of shareholder proposals and nominations.

In addition, the proxy solicited by the Board of Directors for the 2006 annual meeting will confer discretionary authority to vote on any shareholder proposal presented at the meeting other than pursuant to Rule 14a-8, unless the Company receives notice of such proposal at least 45 days before it mails its proxy materials for the 2006 annual meeting, which is expected to occur on or about April 3, 2006; that is, by February 28, 2006.

All notices of proposals by shareholders, whether or not to be included in the Company’s proxy materials, should be sent to the attention of the Secretary of the Company at 5210 Pacific Concourse Drive, Los Angeles, California 90045.

ITEM 6. EXHIBITS

31.1

Certificate of Chief Executive Officer

	31.2		Certificate of Chief Financial Officer

	32.1		Section 906 Officers’ Certification

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


DIAGNOSTIC PRODUCTS CORPORATION
(Registrant)

/s/ Michael Ziering	Chief Executive Officer and	November 9, 2005

Michael Ziering	Chairman of the Board
	(Principal Executive Officer)
	Director

/s/ James L. Brill	Chief Financial Officer and	November 9, 2005

James L. Brill	Vice President-Finance
	(Principal Financial and
	Accounting Officer)

EXHIBIT INDEX

	31.1		Certificate of Chief Executive Officer

	31.2		Certificate of Chief Financial Officer

	32.1		Section 906 Officers’ Certification

Positive
Negative
Uncertain
Constraining
Legalese
Litigious
Readability	H.S. sophomore Avg

Diagnostic Products (DP) Inactive 10-Q2005 Q3 Quarterly report

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