SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003.
OR
__ 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 1-7928
BIO-RAD LABORATORIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-1381833
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1000 Alfred Nobel Drive, Hercules, California 94547
(Address of principal executive offices) (Zip Code)
(510) 724-7000
(Registrant's telephone number, including area code)
No Change
Former name, former address and former fiscal year, if changed since
last report.
Indicate by check 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. Yes X No _____
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes X No_____
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date--
Shares Outstanding
Title of each Class at July 31, 2003
Class A Common Stock,
Par Value $0.0001 per share 20,620,419
Class B Common Stock,
Par Value $0.0001 per share 4,847,942
<page>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
BIO-RAD LABORATORIES, INC.
Condensed Consolidated Statements of Income
(In thousands, except per share data)
(Unaudited)
<table>
<caption> Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
<s> <c> <c> <c> <c>
NET SALES . . . . . . . . . . . . . . . . . . $243,507 $214,660 $489,476 $424,842
Cost of goods sold . . . . . . . . . . . . . 107,103 92,386 210,359 181,228
-------- -------- -------- --------
GROSS PROFIT . . . . . . . . . . . . . . . . 136,404 122,274 279,117 243,614
Selling, general and administrative expense . 79,026 69,486 156,185 135,222
Product research and development expense . . 22,731 19,806 44,119 40,047
Interest expense . . . . . . . . . . . . . . 3,696 5,982 8,347 11,536
Foreign exchange losses . . . . . . . . . . . 554 2,059 1,323 2,809
Other (income) and expense, net . . . . . . . (880) (489) (1,484) 962
-------- -------- -------- --------
INCOME BEFORE TAXES . . . . . . . . . . . . . 31,277 25,430 70,627 53,038
Provision for income taxes . . . . . . . . . 10,321 9,198 23,307 18,033
-------- -------- -------- --------
NET INCOME . . . . . . . . . . . . . . . . . $ 20,956 $ 16,232 $ 47,320 $ 35,005
======== ======== ======== ========
Basic earnings per share:
Net income . . . . . . . . . . . . . . . . $0.83 $0.65 $1.87 $1.40
======== ======== ======== ========
Weighted average common shares . . . . . . 25,386 25,098 25,336 25,015
======== ======== ======== ========
Diluted earnings per share:
Net income . . . . . . . . . . . . . . . . $0.80 $0.62 $1.81 $1.35
======== ======== ======== ========
Weighted average common shares . . . . . . 26,341 26,085 26,214 25,951
======== ======== ======== ========
The accompanying notes are an integral part of these statements.
</table>
1
<page>
BIO-RAD LABORATORIES, INC.
Condensed Consolidated Balance Sheets
(In thousands, except share data)
(Unaudited)
<table> June 30, December 31,
<caption> 2003 2002
<s>
ASSETS: <c> <c>
Cash and cash equivalents . . . . . . . . . . . . . . $ 28,828 $ 27,733
Accounts receivable, net . . . . . . . . . . . . . . . 211,922 212,282
Inventories, net . . . . . . . . . . . . . . . . . . . 186,278 166,372
Prepaid expenses, taxes and other current assets . . . 67,358 59,409
-------- --------
Total current assets . . . . . . . . . . . . . . . 494,386 465,796
Net property, plant and equipment . . . . . . . . . . 151,916 142,235
Goodwill, net . . . . . . . . . . . . . . . . . . . . 69,519 69,519
Other assets . . . . . . . . . . . . . . . . . . . . . 59,549 43,153
-------- --------
Total assets . . . . . . . . . . . . . . . . . . $775,370 $720,703
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Accounts payable . . . . . . . . . . . . . . . . . . . $ 52,891 $ 75,233
Accrued payroll and employee benefits . . . . . . . . 67,628 72,213
Notes payable and current maturities of long-term debt 13,405 7,486
Sales, income and other taxes payable . . . . . . . . 8,804 17,019
Other current liabilities . . . . . . . . . . . . . . 76,387 50,058
-------- --------
Total current liabilities . . . . . . . . . . . . . 219,115 222,009
Long-term debt, net of current maturities . . . . . . 98,940 105,768
Deferred tax liabilities . . . . . . . . . . . . . . . 8,721 9,839
-------- --------
Total liabilities . . . . . . . . . . . . . . . . . 326,776 337,616
-------- --------
STOCKHOLDERS' EQUITY:
Preferred stock, $0.0001 par value, 7,500,000 shares
authorized; none outstanding . . . . . . . . . . . . -- --
Class A common stock, $0.0001 par value, 50,000,000 shares
authorized; outstanding - 20,583,119 at June 30, 2003
and 20,402,462 at December 31, 2002 . . . . . . . . . 2 2
Class B common stock, $0.0001 par value, 20,000,000 shares
authorized; outstanding - 4,852,242 at June 30, 2003
and 4,846,942 at December 31, 2002 . . . . . . . . . 1 1
Additional paid-in capital . . . . . . . . . . . . . . 39,219 36,141
Class A treasury stock, zero shares at June 30, 2003
and zero shares at December 31, 2002 at cost . . . . -- --
Retained earnings . . . . . . . . . . . . . . . . . . 392,161 344,841
Accumulated other comprehensive income:
Currency translation and other . . . . . . . . . . . 17,211 2,102
-------- --------
Total stockholders' equity . . . . . . . . . . . . 448,594 383,087
-------- --------
Total liabilities and stockholders' equity . . . $775,370 $720,703
======== ========
The accompanying notes are an integral part of these statements.
</table> 2
<page>
BIO-RAD LABORATORIES, INC.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
<table> Six Months Ended
<caption> June 30,
2003 2002
<s> <c> <c>
Cash flows from operating activities:
Cash received from customers . . . . . . . . . . . . . . $509,178 $428,480
Cash paid to suppliers and employees . . . . . . . . . . (421,641) (354,877)
Interest paid. . . . . . . . . . . . . . . . . . . . . . (9,164) (10,460)
Income tax payments . . . . . . . . . . . . . . . . . . (31,632) (26,048)
Miscellaneous receipts (payments). . . . . . . . . . . . (149) 875
-------- --------
Net cash provided by operating activities . . . . . . . 46,592 37,970
Cash flows from investing activities:
Capital expenditures, net. . . . . . . . . . . . . . . . (25,368) (18,974)
Payments for acquisitions. . . . . . . . . . . . . . . . (5,957) (8,568)
Net purchases of marketable securities and investments . (2,168) (114)
Foreign currency hedges, net . . . . . . . . . . . . . . (6,783) (1,142)
-------- --------
Net cash used in investing activities. . . . . . . . . . (40,276) (28,798)
Cash flows from financing activities:
Net borrowings under line-of-credit arrangements. . . . 2,924 6,980
Long-term borrowings. . . . . . . . . . . . . . . . . . 10,835 33,523
Payments on long-term debt. . . . . . . . . . . . . . . (18,109) (77,866)
Proceeds from issuance of common stock. . . . . . . . . 3,078 1,580
Treasury stock activity, net. . . . . . . . . . . . . . -- 2,287
-------- --------
Net cash used in financing activities . . . . . . . . . (1,272) (33,496)
Effect of exchange rate changes on cash . . . . . . . . . . . (3,949) 2,850
-------- --------
Net increase (decrease) in cash and cash equivalents. . . . . 1,095 (21,474)
Cash and cash equivalents at beginning of period. . . . . . . 27,733 47,129
-------- --------
Cash and cash equivalents at end of period. . . . . . . . . . $ 28,828 $ 25,655
======== ========
Reconciliation of net income to net cash provided by operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . $ 47,320 $ 35,005
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization. . . . . . . . . . . . . 20,495 17,340
Decrease in accounts receivable. . . . . . . . . . . . 15,123 6,778
Increase in inventories . . . . . . . . . . . . . . . (11,065) (8,998)
Increase in other current assets . . . . . . . . . . . (6,743) (9,575)
Decrease in accounts payable and other
current liabilities. . . . . . . . . . . . . . . . . (20,571) (6,891)
Decrease in income taxes payable . . . . . . . . . . . (13,875) (1,796)
Other. . . . . . . . . . . . . . . . . . . . . . . . . 15,908 6,107
-------- --------
Net cash provided by operating activities . . . . . . . . . . $ 46,592 $ 37,970
======== ========
The accompanying notes are an integral part of these statements.
3
</table>
<page>
BIO-RAD LABORATORIES, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial
statements of Bio-Rad Laboratories, Inc. ("Bio-Rad" or the
"Company"), have been prepared in accordance with accounting
principles generally accepted in the United States of America and
reflect all adjustments which are, in the opinion of management,
necessary to fairly state the results of the interim periods
presented. All such adjustments are of a normal recurring nature.
Results for the interim period are not necessarily indicative of the
results for the entire year. The condensed consolidated financial
statements should be read in conjunction with the notes to the
consolidated financial statements contained in the Company's Annual
Report for the year ended December 31, 2002.
2. INVENTORIES
The principal components of inventories are as follows (in millions):
June 30, December 31,
2003 2002
Raw materials $ 41.4 $ 40.6
Work in process 40.5 30.8
Finished goods 104.4 95.0
------ ------
$186.3 $166.4
====== ======
3. PROPERTY, PLANT AND EQUIPMENT
The principal components of property, plant and equipment are as
follows (in millions):
June 30, December 31,
2003 2002
Land and improvements $ 9.8 $ 9.6
Buildings and leasehold
improvements 89.0 80.5
Equipment 267.7 239.4
------ ------
366.5 329.5
Accumulated depreciation (214.6) (187.3)
------ ------
Net property, plant and equipment $151.9 $142.2
====== ======
4
<page>
4. GOODWILL
The Company adopted Statement of Financial Accounting Standards
(SFAS) No. 142, "Goodwill and Other Intangible Assets" as of
January 1, 2002, which provides that goodwill is no longer subject
to amortization over its useful life. Goodwill is subject to an
annual assessment for impairment applying a fair-value based test.
No goodwill was recorded or impaired during the six months ended
June 30, 2003.
5. ACQUISITIONS
On March 31, 2003, the Company acquired the outstanding shares of
Verdot Industrie of Riom, France for approximately $6 million. The
Company has included these operations in its Life Science segment.
6. PRODUCT WARRANTY LIABILITY
The Company warrants certain equipment against defects in design,
materials and workmanship, generally for one year. Upon shipment
of that equipment, the Company establishes, as part of cost of
goods sold, a provision for the expected cost of such warranty.
Components of the product warranty liability included in Other
current liabilities, were as follows (in millions):
January 1, 2003 $ 7.1
Provision for warranty 5.8
Actual warranty costs (4.6)
-----
June 30, 2003 $ 8.3
=====
7. LONG-TERM DEBT
During the first quarter of 2003, the Company repurchased in the
open market $6.7 million (par value) of its Senior Subordinated
Notes due in 2007. The price paid includes interest to February
2004. The total amount of interest, premiums paid above par,
unamortized debt issue cost and unamortized original issue discount
recognized as a result of the repurchase was $1.0 million and has
been included in interest expense.
8. EARNINGS PER SHARE
The Company calculates basic earnings per share (EPS) and diluted
EPS in accordance with SFAS No. 128, "Earnings per Share." Basic
EPS is computed by dividing net income (loss) by the weighted
average number of common shares outstanding for that period.
Diluted EPS takes into account the effect of dilutive instruments,
such as stock options, and uses the average share price for the
period in determining the number of common stock equivalents that
are to be added to the weighted average number of shares
outstanding. Common stock equivalents are excluded from the
diluted earnings per share calculation if the effect would be
anti-dilutive.
Weighted average shares used for diluted earnings per share include
the dilutive effect of outstanding stock options of 955,000 and
987,000 shares, for the three month periods ended June 30, 2003 and
5
<page>
2002, respectively. There were no anti-dilutive shares for the
three month periods ended June 30, 2003 and 2002.
Weighted average shares used for diluted earnings per share include
the dilutive effect of outstanding stock options of 878,000 and
936,000 for the six month periods ended June 30, 2003 and 2002,
respectively. There were no anti-dilutive shares for the six month
periods ended June 30, 2003 and 2002.
9. STOCK OPTIONS AND PURCHASE PLANS
Stock Option Plans
The Company maintains incentive and non-qualified stock option
plans for officers and certain other key employees. No options
have been issued to non-employees.
In March of 2003, stockholders approved the 2003 Stock Option Plan
of Bio-Rad Laboratories, Inc. (the Plan). The Plan authorizes the
grant to employees of incentive stock options and non-qualified
stock options. A total of 1,675,000 shares have been reserved for
issuance and may be of either Class A or Class B Common Stock. No
options have been granted from this plan during the first six
months of 2003.
The Company applies the recognition and measurement principles of
APB Opinion No. 25, "Accounting for Stock Issued to Employees," and
related interpretations in accounting for those plans. No stock-
based employee compensation expense is reflected in net income as
all options granted under those plans had an exercise price equal
to or greater than the market value of the underlying common stock
on the date of grant.
Had compensation cost for the Company's stock option and stock
purchase plans been accounted for under SFAS No. 123, "Accounting
for Stock-Based Compensation," the Company's pro forma net income
and earnings per share would have been as follows (in millions,
except per share data):
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
Net income, as reported $ 21.0 $ 16.2 $ 47.3 $ 35.0
Deduct: Total stock based
employee compensation expense
determined under fair value
methods for all awards,
net of related tax effects 0.7 0.3 1.2 0.5
------ ------ ------ ------
Pro forma net income $ 20.3 $ 15.9 $ 46.1 $ 34.5
====== ====== ====== ======
Earnings per share:
Basic - as reported $ 0.83 $ 0.65 $ 1.87 $ 1.40
====== ====== ====== ======
Basic - pro forma $ 0.80 $ 0.63 $ 1.82 $ 1.38
====== ====== ====== ======
Diluted - as reported $ 0.80 $ 0.62 $ 1.81 $ 1.35
====== ====== ====== ======
Diluted - pro forma $ 0.77 $ 0.61 $ 1.77 $ 1.33
====== ====== ====== ======
6
<page>
For purposes of the pro forma disclosures, the estimated fair value of
the options granted is amortized to expense over the options' vesting
period. There were no options granted during the three month periods
ended June 30, 2003 and 2002. The fair value of options granted was
estimated using the Black-Scholes model with the following weighted
average assumptions:
Six Months Ended
June 30,
2003 2002
Expected volatility 37% 35%
Risk-free interest rate 2.65% 3.99%
Expected life (in years) 4.2 4.2
Expected dividend -- --
The weighted average fair value of employee stock options granted
during the six months ended June 30, 2003 and 2002 was $11.85 and
$9.75, respectively.
Employee Stock Purchase Plan
The Company has an employee stock purchase plan that provides that
eligible employees may contribute up to 10% of their compensation up
to $25,000 annually toward the quarterly purchase of the Company's
Class A common stock. The employees purchase price is 85% of the
lesser of the fair market value of the stock on the first business
day or the last business day of each calendar quarter. No compen-
sation expense is recorded in connection with the plan. The Company
has authorized the sale of 1,890,000 shares of common stock under the
plan.
The Company sold 17,257 shares for $0.5 million and 13,770 shares for
$0.4 million under the plan to employees for the three months ended
June 30, 2003 and 2002, respectively. At June 30, 2003, 304,655
shares remain authorized under the plan.
The Company sold 35,898 shares for $1.1 million and 33,820 shares for
$0.8 million under the plan to employees for the six months ended
June 30, 2003 and 2002, respectively.
The fair value of the employees' purchase rights was estimated using
the Black-Scholes model with the following assumptions:
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
Expected volatility 51.91% 45.39% 45.22% 40.16%
Risk free interest rate 1.03% 1.58% 1.02% 1.62%
Expected life (in years) .25 .25 .25 .25
Expected dividend -- -- -- --
The weighted average fair value of those purchase rights granted
during the three months ended June 30, 2003 and 2002 was $8.73 and
$8.35, respectively. The weighted average fair value of those
purchase rights granted during the six months ended June 30, 2003 and
2002, was $8.39 and $7.51, respectively.
7
<page>
10. FOREIGN EXCHANGE LOSSES
Foreign exchange losses include premiums and discounts on forward
foreign exchange contracts and mark-to-market adjustments on foreign
exchange contracts.
11. OTHER INCOME AND EXPENSE
Other (income) and expense, net includes the following components
(in millions):
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
Write-down of investment
in affiliates $ -- $ -- $ -- $ 2.0
Interest income (0.5) (0.2) (1.1) (0.6)
Other (0.4) (0.3) (0.4) (0.4)
----- ----- ----- -----
Total Other (income)
and expense, net $(0.9) $(0.5) $(1.5) $ 1.0
===== ===== ===== =====
In the first quarter of 2002, the Company recorded a $2.0 million
non-cash pre-tax charge reflecting the write-down of the Company's
investment in Digilab, LLC. This reduced the investment value to
zero.
12. COMPREHENSIVE INCOME
SFAS No. 130, "Reporting Comprehensive Income" requires disclosure of
total non-stockholder changes in equity, which include unrealized
gains and losses on securities classified as available-for sale under
SFAS No. 115 "Accounting for Certain Investments in Debt and Equity
Securities", foreign currency translation adjustments accounted for
under SFAS No. 52 "Foreign Currency Translation" and minimum pension
liability adjustments made pursuant to SFAS No. 87 "Employers'
Accounting for Pensions."
The components of the Company's total comprehensive income were
(in millions):
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
Net Income $ 21.0 $ 16.2 $ 47.3 $ 35.0
Currency translation adjustments 11.1 18.1 14.5 18.1
Net unrealized holding gains 0.7 -- 0.6 0.1
------ ------ ------ ------
Total comprehensive income $ 32.8 $ 34.3 $ 62.4 $ 53.2
====== ====== ====== ======
8
<page>
13. SEGMENT INFORMATION
Information regarding industry segments for the three months ended
June 30, 2003 and 2002 is as follows (in millions):
Life Clinical Other
Science Diagnostics Operations Total
Segment net sales 2003 $114.3 $127.3 $ 1.9 $243.5
2002 $100.7 $111.7 $ 2.3 $214.7
Segment profit(loss) 2003 $15.9 $ 15.7 $(0.1) $ 31.5
2002 $15.8 $ 9.7 $(0.4) $ 25.1
Information regarding industry segments for the six months ended
June 30, 2003 and 2002 is as follows (in millions):
Life Clinical Other
Science Diagnostics Operations Total
Segment net sales 2003 $231.8 $253.4 $ 4.3 $489.5
2002 $201.2 $219.6 $ 4.0 $424.8
Segment profit(loss) 2003 $37.6 $ 34.5 $ 0.1 $ 72.2
2002 $35.0 $ 20.6 $(0.8) $ 54.8
Segment results are presented in the same manner as the Company
presents its operations internally to make operating decisions and
assess performance. Net corporate operating income (expense) consists
of receipts and expenditures that are not the primary responsibility
of segment operating management.
Interest expense is charged to segments based on the carrying amount
of inventory and receivables employed by that segment. The following
reconciles total segment profit to consolidated income before taxes
(in millions):
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
Total segment profit $ 31.5 $ 25.1 $ 72.2 $ 54.8
Foreign exchange losses (0.6) (2.1) (1.3) (2.8)
Net corporate operating,
interest and other expense
not allocated to segments (0.5) 1.9 (1.8) 2.0
Other income and (expense), net 0.9 0.5 1.5 (1.0)
------ ------ ------ ------
Consolidated income before taxes $ 31.3 $ 25.4 $ 70.6 $ 53.0
====== ====== ====== ======
9
<page>
14. LEGAL PROCEEDINGS
The Company is party to various claims, legal actions and complaints
arising in the ordinary course of business. The Company does not
believe that any ultimate liability resulting from any of these
lawsuits will have a material adverse effect on its results of
operations, financial position or liquidity. However, the Company
cannot give any assurance regarding the ultimate outcome of these
lawsuits and their resolution could be material to the Company's
operating results for any particular period, depending upon the level
of income for the period.
15. RECENT ACCOUNTING PRONOUNCEMENTS
In April 2002, the Financial Accounting Standards Board (FASB)issued
SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64,
Amendment of FASB Statement No. 13, and Technical Corrections." One of
the major changes of this statement is to change the accounting for the
classification of gains and losses from the extinguishment of debt.
The Company adopted SFAS No. 145 as of January 1, 2002 and will follow
APB 30, "Reporting the Results of Operations -- Reporting the Effects
of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions" in determining whether
such extinguishment of debt may be classified as extraordinary. As a
result of adoption, the expenses incurred (including premiums paid
above par, unamortized debt issuance cost and unamortized original
issue discount) in the repurchase of outstanding debt on the open
market has been included in interest expense. No other impact from
adoption was recognized.
SFAS No. 146 "Accounting for Costs Associated with Exit or Disposal
Activities", was issued in June 2002 and addresses accounting for
restructuring and similar costs. SFAS No. 146 requires that a
liability for costs associated with an exit or disposal activity be
recognized and measured initially at fair value only when the
liability is incurred. SFAS No. 146 is effective for exit or disposal
activities that were initiated after December 31, 2002. The adoption
of SFAS No. 146 did not have any impact on the condensed consolidated
financial statements of the Company.
In November 2002, the FASB issued Financial Interpretation No. (FIN)
45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others,"
which requires certain guarantees to be recorded at fair value. The
interpretation also requires a guarantor to make new disclosures, even
when the likelihood of making any payments under the guarantee is
remote. In general, the interpretation applies to contracts or
indemnification agreements that contingently require the guarantor to
make payment to the guaranteed party based upon changes in an
underlying obligation that is related to an asset, liability, or an
equity security of the guaranteed party. The adoption of FIN 45 did
not have an impact on our operating results or financial position.
On December 31, 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure, an Amendment of
FASB Statement No. 123." This statement provides alternative methods
of transition for companies who voluntarily change to the fair value-
based method of accounting for stock-based employee compensation in
10
<page>
accordance with SFAS No. 123, "Accounting for Stock-Based
Compensation." The statement requires prominent disclosures in both
annual and interim financial statements about the method of accounting
for stock-based compensation and the effect of the method used on
reported results. The Company has adopted the disclosure requirements
as required by the statement.
The Company continues to account for stock-based compensation using
the intrinsic value method in accordance with the provisions of
Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees," elected under SFAS No. 123, as amended. As a
result, the adoption of SFAS No. 148 did not have any impact on the
condensed consolidated financial statements of the Company
(see Note 9).
During January 2003, the FASB issued FIN 46, "Consolidation of
Variable Interest Entities". FIN 46 requires that if an entity has a
controlling financial interest in a variable interest entity, the
assets, liabilities and results of activities of the variable interest
entity should be included in the consolidated financial statements on
the entity. FIN 46 requires that its provisions are effective
immediately for all arrangements entered into after January 31, 2003.
For any arrangements entered in prior to January 31, 2003, the FIN 46
provisions are required to be adopted at the beginning of the first
interim or annual period beginning after June 15, 2003. The Company
does not expect the adoption of FIN 46 to have an impact on its
operating results or financial position.
During April 2003, the FASB issued SFAS No. 149, "Amendment of
Statement 133 on Derivative Instruments and Hedging Activities". SFAS
No. 149 amends and clarifies accounting for derivative instruments,
including certain derivative instruments embedded in other contracts,
and for hedging activities under Statement 133. SFAS No. 149 is
effective for contracts entered into or modified after June 30, 2003
and for hedging relationships designated after June 30, 2003. The
guidance should be applied prospectively. The Company does not expect
the adoption of SFAS No. 149 to have a significant impact on its
operating results or financial position.
During May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity". SFAS No. 150 clarifies the accounting for certain financial
instruments with characteristics of both liabilities and equity and
requires that those instruments be classified as liabilities in
statements of financial position. Previously, many of those financial
instruments were classified as equity. SFAS No. 150 is effective for
financial instruments entered into or modified after May 31, 2003 and
otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. The Company does not expect the
adoption of SFAS No. 150 to have a significant impact on its operating
results or financial position.
11
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16. SUBSEQUENT EVENTS
Subsequent to June 30, 2003, the Company repurchased an additional
$10.7 million (par value of its outstanding 11-5/8% Senior
Subordinated Notes due 2007) at an expense, including interest,
unamortized issue costs and unamortized original issue discount of
approximately $1.5 million.
On July 17, 2003, the Company commenced a cash tender offer for all of
its outstanding 11-5/8% Senior Subordinated Notes due 2007. In
connection with the tender offer, the Company solicited holders of the
2007 notes to consent to proposed amendments to the indenture
governing the 2007 notes, which will eliminate substantially all of
the restrictive covenants and certain related events of default. As
of July 30, 2003, tenders and consents representing approximately 69%
of the $88.7 million aggregate principal amount outstanding have been
received, and the Company and the trustee executed the supplemental
indenture with respect to the proposed amendments. The tender offer
will expire at 12:01 a.m., New York City time, on August 14, 2003,
unless extended.
On July 28, 2003 the Company announced that it is offering, subject to
market and other conditions, up to $200 million aggregate principal
amount of senior subordinated notes in a private offering. The
Company intends to use a portion of the net proceeds from this
offering to fund the purchase of its outstanding 11-5/8% Senior
Subordinated Notes due 2007.
The Company is currently negotiating a new five-year revolving credit
facility to provide up to $150 million in available revolving
borrowings on a secured basis. The Company will be required to
terminate its existing credit facility prior to the closing of its new
credit facility.
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Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition.
The following discussion should be read in conjunction with the
Company's unaudited financial statements and notes thereto
included elsewhere in this Form 10-Q and the Company's
Consolidated Financial Statements for the year ended
December 31, 2002.
The following table shows gross profit and expense items as a
percentage of net sales:
<table>
<caption> Three Months Ended Six Months Ended Year Ended
June 30, June 30, December 31,
2003 2002 2003 2002 2002
<s> <c> <c> <c> <c> <c>
Net sales 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 44.0 43.0 43.0 42.7 42.9
----- ----- ----- ----- -----
Gross profit 56.0 57.0 57.0 57.3 57.1
Selling, general and
administrative 32.5 32.4 31.9 31.8 32.4
Product research and
development 9.3 9.2 9.0 9.4 9.3
Net income 8.6% 7.6% 9.7% 8.2% 7.6%
===== ===== ===== ===== =====
</table>
Critical Accounting Policies
As previously disclosed in the Company's Annual Report on Form
10-K for the year ended December 31, 2002, the Company has
identified accounting for income taxes, valuation of long-lived
and intangible assets and goodwill, and valuation of inventories
as the accounting policies critical to the operations of the
Company. For a full discussion of these policies, please refer
to the Form 10-K.
Forward Looking Statements
Other than statements of historical fact, statements made in this
report include forward looking statements, such as statements
with respect to the Company's future financial performance,
operating results, plans and objectives. We have based these
forward looking statements on our current expectations and
projections about future events. However, actual results may
differ materially from those currently anticipated depending on a
variety of risk factors including among other things: our ability
to successfully develop and market new products; our reliance on
and access to necessary intellectual property; our substantial
leverage and ability to service our debt; competition in and
government regulation of the industries in which we operate; and
the monetary policies of various countries. We undertake no
obligation to publicly update or revise any forward looking
statements, whether as a result of new information, future
events, or otherwise.
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The Company manufactures and supplies the life science research,
healthcare, analytical chemistry and other markets with a broad
range of products and systems used to separate complex chemical
and biological materials and to identify, analyze and purify
their components.
Three Months Ended June 30, 2003
Compared to Three Months Ended June 30, 2002
Corporate Results - Sales, Margins and Expenses
Net sales (sales) for the second quarter of 2003 were $243.5
million compared to $214.7 million in the second quarter of 2002,
an increase of 13.4%. The favorable impact from a weakening U.S.
dollar provided 9.4% of the reported sales growth for the
Company. Growth in Life Science, excluding the favorable impact
from currency translation, was 3.7%. Sales increased for the
Company's products in the areas of nucleic acid amplification,
electrophoresis, microarray and biopharmaceutical production.
Sales adjusted for currency declined for the Company's bovine
spongiform encephalopathy (BSE) test as competitive pricing
pressure impacted certain of the Company's larger accounts.
Clinical Diagnostics grew by 4.7% excluding the favorable impact
from currency translation. Product groups contributing to growth
include quality controls, blood virus screening, and diabetes
monitoring.
Consolidated gross margins were 56.0% for the second quarter of
2003 compared to 57.0% for the second quarter of 2002 and 57.1%
for all of 2002. Life Science margins declined on reduced
average selling prices in the food testing product line, costs
associated with integrating recent acquisitions and not achieving
planned factory activity levels. Clinical Diagnostics improved
overall on higher volume, partially offset by higher service
costs on recently introduced platforms.
Selling, general and administrative expense (SG&A) increased
slightly to 32.5% of sales in the second quarter of 2003 from
32.4% of sales in the second quarter of 2002. Life Science grew
SG&A faster than sales growth due to increased spending on
personnel, demonstration equipment and professional fees
associated with U.S. information technology enhancements.
Clinical Diagnostics grew SG&A at a slower rate than sales. The
Company expects that the next several quarters of SG&A growth
will be approximately equal to sales growth as it plans to
relocate some facilities and make information technology
improvements in both the U.S. and France. The longer-term goal
for Bio-Rad remains a gradual reduction in SG&A spending as a
percent of sales.
Product research and development expense remained virtually
unchanged at 9.3% of sales compared to 9.2% in the prior period.
In terms of absolute dollar spending both segments increased
spending with the larger portion of the growth attributable to
Clinical Diagnostics. The Company plans to reinvest between 9%
and 10% of sales in research and development to continue to
introduce new and enhanced products.
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Corporate Results - Other Items
In the second quarter of 2003, interest expense declined by $2.3
million compared to the second quarter of 2002. This was the
result of lower borrowing levels. The Company retired the last
of the term loan portion of its existing credit facility in the
second quarter of 2002. Beginning in the third quarter of 2002
and as of June 30, 2003 the Company has retired, through open
market purchases, $50.6 million aggregate principal amount of its
11-5/8% Senior Subordinated Notes due 2007.
Foreign exchange losses decreased by $1.5 million compared to the
second quarter of 2002 as the sharp decline in Brazilian and
Russian currencies in the second quarter of 2002 was not
repeated. Included in foreign exchange losses is the net premium
or discount of the Company's forward exchange contracts used to
hedge its net intercompany receivable/payable balances.
The Company's effective tax rate was 33% for the second quarter
of 2003 compared to 34% in the second quarter of 2002. For the
full year 2002, the effective tax rate was 35%. The decrease to
33% from 34% is the result of the elimination of tax losses in
locations which did not provide for a consolidated tax benefit in
the second quarter of 2002.
Six Months Ended June 30, 2003
Compared to Six Months Ended June 30, 2002
Corporate Results - Sales, Margins and Expenses
Sales for the first half of 2003 were $489.5 million compared to
$424.8 million in the first half of 2002, an increase of 15.2%.
The favorable impact from a weakening U.S. dollar provided 9.9%
of the reported sales growth for the Company. Sales increased
4.7% in Life Science on a constant currency basis. Clinical
Diagnostics sales growth on a constant currency basis was 5.9%.
The growth in Life Science is attributed to demand for the
Company's process chromatography products for bio-pharmaceutical
manufacturing, laboratory supplies and microarray offerings. The
growth in Clinical Diagnostics was from products for quality
controls, autoimmune testing and diabetes monitoring.
Adjusted for currency, non-U.S. sales growth was flat in the
first half of 2003 compared to the first half of 2002, reflecting
general economic conditions while U.S. sales growth exceeded that
of the total Company.
Consolidated gross margins were 57.0% for the first half of 2003
compared to 57.3% for the first half of 2002 and 57.1% for all of
2002. The net overall decrease is attributable to Life Science,
as Clinical Diagnostics margins improved less than 1%. Gross
margins decreased in Life Science principally due to lower
average selling price in food safety products. Clinical
Diagnostics margins improved due to improved sales in the form of
increased unit volume.
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SG&A increased to 31.9% of sales in the first half of 2003 from
31.8% of sales in the first half of 2002. Overall, Life Science
grew SG&A at a rate that exceeded sales while Clinical
Diagnostics' SG&A growth was less than its sales growth. Life
Science has increased spending on personnel, demonstration
equipment and professional services. This segment has current
initiatives to grow proteomic and genomic sales, preserve its
market share in food safety and enhance its current information
technology. Clinical Diagnostics grew SG&A at less than three
quarters of its sales growth.
Product research and development expense increased to $44.1
million or 9.0% of sales in the first half of 2003 compared to
9.4% of sales in the prior year. Spending increased in both Life
Science and Clinical Diagnostics in absolute dollars. The
Company plans to reinvest between 9% and 10% of sales in research
and development going forward to support growth. The Company's
spending level during the first half of 2003 was lower than
anticipated, but the Company expects spending to increase prior
to December 31, 2003.
Corporate Results - Other Items
Interest expense for the first half of 2003 decreased from the
same period in the prior year, reflecting a reduction in total
borrowings. In 2002 the Company retired the remaining $42.5
million aggregate principal of the term loan portion of its
existing credit facility. The Company also retired through open
market purchases $50.6 million aggregate principal amount of its
11-5/8% Notes due in 2007 as of June 30, 2003.
Other (income) and expense, net in the first half of 2003 is
principally comprised of interest income and other investment
income. The first half of 2002 includes a $2.0 million non-cash
pre-tax expense reflecting impairment in the Company's investment
in Digilab LLC. Foreign exchange losses decreased compared to
the same period in 2002 as the exchange losses incurred at the
Company's Brazilian subsidiary have not occurred in 2003.
Foreign exchange losses also include premiums and discounts for
the Company's hedging program.
The Company's effective tax rate declined to 33% for the first
half of 2003 compared to 34% for the first half of 2002. The
decline is attributed to improved profitability in countries
which in the prior period had losses which did not provide a
benefit to the overall Company effective rate.
Liquidity and Capital Resources
The Company, as of June 30, 2003, had available approximately
$100 million, or 100% of the revolving portion of the existing
credit facility and $20.1 million under various foreign lines of
credit. Cash and cash equivalents available were $28.8 million.
16
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At June 30, 2003, consolidated accounts receivable decreased by
$0.4 million from December 31, 2002. The decrease was due to
improved overall collections offset by the appreciation of
receivables denominated in foreign currency. Management
regularly reviews receivables for collectibility.
At June 30, 2003, consolidated net inventories increased by $19.9
million from December 31, 2002. Approximately one-third of this
increase is due to the strengthening of European and Japanese
currency against the U.S. dollar. The remaining increase largely
represents levels necessary to meet customer demands for Life
Science consumable products. Clinical Diagnostics inventory have
grown in part for the U.S. introductions of a new diabetes
testing system and large year-end orders in the quality controls
product line. Inventory for the Clinical Diagnostics controls
business is characterized by long lead times and large infrequent
batch production which is necessary to meet customer
requirements. Bio-Rad management regularly reviews inventory
valuation for excess, obsolete and slow moving products.
Net capital expenditures totaled $25.4 million for the first six
months of 2003 compared to $19.0 million for the same period of
2002. Capital expenditures for the period include reagent rental
equipment placed with Clinical Diagnostic customers who then commit
to purchase the Company's diagnostic reagents for use. Other
expenditures represent the Company's investment in business systems,
data communication, production equipment and improvements to
production facilities.
The Company's construction of a new facility on its Hercules Campus
in California represents $6.2 million of spending for the first six
months of 2003. In total the Company has capitalized $8.0 million
of the estimated $25.0 million to complete the project. The project
should be complete in the first quarter of 2004.
The Company continues to review possible acquisitions to expand both
its Life Science and Clinical Diagnostics segments. The Company
routinely meets with the principals or brokers of the subject
companies. Currently no discussions involving a material
acquisition (defined as having the potential to be greater than
either 5% of total assets, sales or net income) have progressed
beyond the most initial phases.
The Board of Directors has authorized the Company to repurchase up
to $18 million of its common stock over an indefinite period of
time. Through June 30, 2003, the Company has cumulatively
repurchased 1,179,272 shares of Class A Common Stock and 60,000
shares of Class B Common Stock for a total of $14.7 million. The
Company's credit agreements restrict its ability to repurchase its
own stock. There were no share repurchases made during 2002 or in
2003 to date. The repurchase is designed to improve shareholder
value and to satisfy the Company's obligations under its employee
17
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stock purchase and stock option plans.
Subsequent to June 30, 2003, the Company has redeemed an additional
$10.7 million of its 11-5/8% Senior Subordinated Notes due 2007 at
an expense including interest, premiums paid above par, unamortized
issue costs, and unamortized discount of approximately $1.5 million.
The Company is currently negotiating a new five-year revolving
credit facility to replace its $100 million revolving portion of the
existing credit facility. The Company anticipates its new credit
facility will provide it with up to $150 million in available
revolving borrowings, subject to the agreement of the administrative
agent and lenders or lenders providing the increase and provided the
Company is not in default under the new credit facility. The new
credit facility will contain financial covenants and maintenance
tests including a leverage ratio test, an interest coverage test and
a consolidated net worth test. Restrictive covenants include
restrictions on the Company's ability to declare or pay dividends,
incur debt (in the case of some of its subsidiaries), guarantee
debt, enter into transactions with affiliates, merge or consolidate,
sell assets, make investments, create liens and prepay subordinated
debt. These covenants will be similar to the covenants in the
Company's existing credit facility.
The new credit facility will be secured by substantially all of the
Company's personal property assets and the assets of its domestic
subsidiaries and 65% of the capital stock of certain foreign
subsidiaries, and will be guaranteed by all of its existing and
future domestic subsidiaries (other than immaterial domestic
subsidiaries as defined for purposes of the new credit facility).
The Company will terminate its existing credit facility prior to the
closing of its new facility. On July 15, 2003 the Company executed
a commitment letter with Bank One, N.A. and Bank One Capital
Markets, Inc. as agent and arranger, respectively, regarding the new
credit facility. The commitments are subject to customary
conditions. The Company continues to negotiate the terms; however,
once finalized the terms of the new credit facility may differ
substantially from those described above.
On July 17, 2003, the Company commenced a cash tender offer for all
of its outstanding 11-5/8% Senior Subordinated Notes due 2007. In
connection with the tender offer, the Company solicited holders of
the 2007 notes to consent to proposed amendments to the indenture
governing the 2007 notes, which will eliminate substantially all of
the restrictive covenants and certain related events of default. As
of July 30, 2003, tenders and consents representing approximately
69% of the $88.7 million aggregate principal amount outstanding have
been received, and the Company and the trustee executed the
supplemental indenture with respect to the proposed amendments. The
tender offer will expire at 12:01 a.m., New York City time, on
August 14, 2003, unless extended.
18
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On July 28, 2003 the Company announced that it is offering, subject
to market and other conditions, up to $200 million aggregate
principal amount of senior subordinated notes in a private offering.
The Company intends to use a portion of the net proceeds from this
offering to fund the purchase of its outstanding 11-5/8% Senior
Subordinated Notes due 2007.
Item 3. Quantitative and Qualitative Disclosures
About Market Risk
During the six months ended June 30, 2003, there have been no
material changes from the disclosures about market risk provided in
the Company's Annual Report on Form 10-K for the year ended
December 31, 2002.
Item 4. Controls and Procedures
The Company maintains disclosure controls and procedures that are
designed to ensure that information required to be disclosed in the
Company's Exchange Act reports is recorded, processed, summarized
and reported within the time periods specified in the Securities and
Exchange Commission's rules and forms and that such information is
accumulated and communicated to the Company's management, including
its Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow for timely decisions regarding required
disclosure. In designing and evaluating the disclosure controls and
procedures, management recognizes that any controls and procedures,
no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives,
and management is required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures.
As required by SEC Rule 13a-15(b), the Company carried out an
evaluation, under the supervision and with the participation of the
Company's management, including the Company's Chief Executive
Officer and the Company's Chief Financial Officer, of the
effectiveness of the design and operation of the Company's
disclosure controls and procedures as of the end of the quarter
covered by this report. Based on the foregoing, the Company's Chief
Executive Officer and Chief Financial Officer concluded that the
Company's disclosure controls and procedures were effective at the
reasonable assurance level.
There has been no change in the Company's internal controls over
financial reporting during the Company's most recent fiscal quarter
that has materially affected, or is reasonably likely to materially
affect, the Company's internal controls over financial reporting.
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Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
The following documents are filed as part of this report:
Exhibit No.
31.1 Chief Executive Officer Section 302 Certification
31.2 Chief Financial Officer Section 302 Certification
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
There were no reports on Form 8-K for the quarter ended
June 30, 2003.
20
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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 thereto duly authorized.
BIO-RAD LABORATORIES, INC.
(Registrant)
Date: August 6, 2003 /s/ Christine A. Tsingos
Christine A. Tsingos, Vice President,
Chief Financial Officer
Date: August 6, 2003 /s/ Sanford S. Wadler
Sanford S. Wadler, Vice President,
General Counsel and Secretary
21
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