<table>
EXHIBIT 13.1
Bio-Rad Laboratories, Inc.
SUMMARY OF OPERATIONS AND SELECTED FINANCIAL DATA (in thousands, except per share data)
<caption>
Year Ended December 31,
2003 2002 2001 2000 1999
<s> <c> <c> <c> <c> <c>
Net sales $ 1,003,382 $ 892,720 $ 817,509 $ 725,884 $ 555,399
Cost of goods sold 437,990 383,235 362,140 348,450 259,573
--------- ------- ------- ------- -------
Gross profit 565,392 509,485 455,369 377,434 295,826
Selling, general and administrative expense 325,360 289,175 264,745 245,866 195,944
Product research and development expense 94,270 82,935 76,543 68,140 66,710
Goodwill amortization -- -- 7,746 8,109 3,813
Loss (gain) on divestitures -- -- 5,150 (21,845) --
Interest expense 31,006 28,207 24,088 30,612 12,741
Foreign exchange losses 4,080 5,441 2,097 420 886
Other, net (3,012) (678) 10,031 689 (684)
--------- ------- ------- ------- -------
Income before taxes and cumulative effect
of change in accounting principle 113,688 104,405 64,969 45,443 16,416
Provision for income taxes (37,517) (36,542) (20,790) (13,633) (4,695)
--------- ------- ------- ------- -------
Income before cumulative effect
of change in accounting principle 76,171 67,863 44,179 31,810 11,721
Cumulative effect of change in
accounting principle (1) -- -- -- (710) --
--------- ------- ------- ------- -------
Net income $ 76,171 $ 67,863 $ 44,179 $ 31,100 $ 11,721
========= ======= ======= ======= =======
Basic earnings per share before cumulative
effect of change in accounting principle (2) $3.00 $2.70 $1.79 $1.30 $0.48
Cumulative effect of change in
accounting principle (1) (2) -- -- -- (0.03) --
--------- ------- ------- ------- -------
Basic earnings per share (2) $3.00 $2.70 $1.79 $1.27 $0.48
========= ======= ======= ======= =======
Diluted earnings per share before cumulative
effect of change in accounting principle (2) $2.90 $2.61 $1.74 $1.30 $0.48
Cumulative effect of change in
accounting principle (1) (2) -- -- -- (0.03) --
--------- ------- ------- ------- -------
Diluted earnings per share (2) $2.90 $2.61 $1.74 $1.27 $0.48
========= ======= ======= ======= =======
Cash dividends paid per common share -- -- -- -- --
Total assets $ 986,858 $ 720,703 $ 684,028 $ 646,278 $ 668,862
Long-term debt, net of current maturities $ 225,835 $ 105,768 $ 188,423 $ 203,360 $ 239,211
(1) Cumulative effect of accounting change per SEC Staff Accounting Bulletin 101, on Revenue Recognition.
(2) Restated to give effect to a stock split in the form of a 100% stock dividend in 2002.
</Table>
1
<page>
CONSOLIDATED BALANCE SHEETS
(in thousands)
ASSETS December 31,
2003 2002
Current assets:
Cash and cash equivalents $ 148,642 $ 27,733
Accounts receivable less allowance of
$12,978 in 2003 and $12,122 in 2002 234,085 209,282
Inventories, net:
Raw materials 38,783 40,559
Work in process 38,798 30,790
Finished goods 112,677 95,023
-------- --------
Total inventories 190,258 166,372
Deferred tax assets 46,536 37,052
Prepaid expenses and other current assets 51,357 26,175
-------- --------
Total current assets 670,878 466,614
Property, plant and equipment:
Land and improvements 9,882 9,572
Buildings and leasehold improvements 105,963 80,531
Equipment 273,121 239,404
-------- --------
Total property, plant and equipment 388,966 329,507
Accumulated depreciation (209,843) (187,272)
-------- --------
Property, plant and equipment, net 179,123 142,235
Goodwill, net of accumulated amortization of
$21,736 in 2003 and 2002 69,503 69,519
Other assets 67,354 42,335
-------- --------
TOTAL ASSETS $ 986,858 $ 720,703
======== ========
The accompanying notes are an integral part of these statements.
2
<page>
(in thousands, except per share data)
LIABILITIES AND STOCKHOLDERS' EQUITY December 31,
2003 2002
Current liabilities:
Accounts payable $ 53,995 $ 50,233
Accrued payroll and employee benefits 71,650 62,800
Notes payable 10,215 6,726
Current maturities of long-term debt 208 760
Sales, income and other taxes payable 20,833 17,019
Other current liabilities 77,425 71,392
-------- --------
Total current liabilities 234,326 208,930
Long-term debt, net of current maturities 225,835 105,768
Deferred tax liabilities 13,991 9,839
Other long-term liabilities 16,899 13,079
-------- --------
Total liabilities 491,051 337,616
-------- --------
Commitments and contingent liabilities -- --
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 2003-
20,709,127; 2002 - 20,402,462 2 2
Class B common stock, $0.0001 par value,
20,000,000 shares authorized; outstanding
2003 - 4,834,290; 2002 - 4,846,942 1 1
Additional paid-in capital 42,164 36,141
Retained earnings 421,012 344,841
Accumulated other comprehensive income:
Currency translation and other 32,628 2,102
-------- --------
Total stockholders' equity 495,807 383,087
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 986,858 $ 720,703
======== ========
The accompanying notes are an integral part of these statements.
3
<page>
Bio-Rad Laboratories, Inc.
Consolidated Statements of Income
(in thousands, except per share data)
Year Ended December 31,
2003 2002 2001
Net sales $ 1,003,382 $ 892,720 $ 817,509
Cost of good sold 437,990 383,235 362,140
--------- -------- --------
Gross profit 565,392 509,485 455,369
Selling, general and administrative expense 325,360 289,175 264,745
Product research and development expense 94,270 82,935 76,543
Goodwill amortization -- -- 7,746
Loss on divestitures -- -- 5,150
Interest expense 31,006 28,207 24,088
Foreign exchange losses 4,080 5,441 2,097
Other, net (3,012) (678) 10,031
--------- -------- --------
Income before taxes 113,688 104,405 64,969
Provision for income taxes (37,517) (36,542) (20,790)
--------- -------- --------
Net income $ 76,171 $ 67,863 $ 44,179
========= ======= ========
Basic earnings per share:
Net income $ 3.00 $ 2.70 $ 1.79
====== ====== ======
Weighted average common shares 25,416 25,104 24,648
====== ====== ======
Diluted earnings per share:
Net income $ 2.90 $ 2.61 $ 1.74
====== ====== ======
Weighted average common shares 26,310 26,021 25,442
====== ====== ======
The accompanying notes are an integral part of these statements.
-4-
<page>
Bio-Rad Laboratories, Inc.
Consolidated Statements of Cash Flows
(in thousands)
<table>
<caption> Year Ended December 31,
2003 2002 2001
<s> <c> <c> <c>
Cash flows from operating activities:
Cash received from customers $ 1,020,135 $ 885,835 $ 787,179
Cash paid to suppliers and employees (826,055) (711,341) (665,572)
Interest paid (17,088) (25,832) (22,064)
Income tax payments (51,280) (43,016) (5,253)
Miscellaneous receipts 1,928 112 5,248
--------- -------- --------
Net cash provided by operating activities 127,640 105,758 99,538
Cash flows from investing activities:
Capital expenditures, net (69,003) (42,224) (43,228)
Payments for acquisitions and investments (16,375) (8,568) (4,650)
Purchases of marketable securities and investments (8,228) (1,887) (567)
Sales of marketable securities and investments 1,610 493 497
Foreign currency hedges, net (14,998) (2,270) 410
--------- -------- --------
Net cash used in investing activities (106,994) (54,456) (47,538)
Cash flows from financing activities:
Net borrowings (payments) on notes payable 435 5,031 (1,884)
Long-term borrowings 249,335 44,025 74,250
Payments on long-term debt (132,012) (133,517) (97,209)
Debt retirement costs on 11-5/8% bonds (9,467) -- --
Debt issuance costs on 7.5% bonds (5,431) -- --
Proceeds from issuance of common stock 5,309 3,047 532
Purchase of treasury stock -- -- (261)
Reissuance of treasury stock -- 2,287 4,367
--------- -------- --------
Net cash provided by (used in) financing activities 108,169 (79,127) (20,205)
Effect of exchange rate changes on cash (7,906) 8,429 1,380
--------- -------- --------
Net increase (decrease) in cash and cash equivalents 120,909 (19,396) 33,175
Cash and cash equivalents at beginning of year 27,733 47,129 13,954
--------- -------- --------
Cash and cash equivalents at end of year $ 148,642 $ 27,733 $ 47,129
========= ======== ========
__________________________________________________________________________________________________
</table>
The accompanying notes are an integral part of these statements.
5
<page>
Bio-Rad Laboratories, Inc.
Consolidated Statements of Changes in
Stockholders' Equity
(in thousands)
Year Ended December 31,
2003 2002 2001
Common Stock, $0.0001 par value:
Balance at beginning of year $ 3 $ 2 $ 2
Issuance of common stock -- 1 --
-------- -------- --------
Balance at end of year 3 3 2
Additional Paid-In Capital:
Balance at beginning of year 36,141 32,171 31,596
Issuance of common stock 5,309 3,047 532
Tax benefit from exercise of
stock options 714 923 43
-------- -------- --------
Balance at end of year 42,164 36,141 32,171
Treasury Stock:
Balance at beginning of year -- (1,863) (5,415)
Purchase of treasury stock -- -- (261)
Reissuance of treasury stock -- 1,863 3,813
-------- -------- --------
Balance at end of year -- -- (1,863)
Retained Earnings:
Balance at beginning of year 344,841 276,554 231,821
Net income 76,171 67,863 44,179
Reissuance of treasury stock at
more than cost -- 424 554
-------- -------- --------
Balance at end of year 421,012 344,841 276,554
Accumulated Other Comprehensive
Income (Loss):
Balance at beginning of year 2,102 (22,987) (13,386)
Other comprehensive income (loss) 30,526 25,089 (9,601)
-------- -------- --------
Balance at end of year 32,628 2,102 (22,987)
-------- -------- --------
Total Stockholders' Equity $ 495,807 $ 383,087 $ 283,877
======== ======== ========
Comprehensive Income, net of tax:
Net income $ 76,171 $ 67,863 $ 44,179
Currency translation adjustments 28,620 25,241 (9,458)
Net unrealized holding gains (losses) 2,137 (59) (12)
Reclassification adjustments for
gains included in net income (231) (93) (131)
-------- -------- --------
Total Comprehensive Income $ 106,697 $ 92,952 $ 34,578
======== ======== ========
The accompanying notes are an integral part of these statements.
6
<page>
Bio-Rad Laboratories, Inc.
Notes to Consolidated Financial Statements
________________________________________________________________
1. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of
Bio-Rad Laboratories, Inc. and all subsidiaries (Bio-Rad or the
Company) after elimination of intercompany balances and
transactions. The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
CHANGES IN PRESENTATION
Certain prior year amounts have been reclassified to conform to
current year presentation.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash and highly liquid
investments with original maturities of three months or less
which are readily convertible into cash. Cash equivalents are
stated at cost, which approximates fair market value.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentration of credit risk consist primarily of cash and cash
equivalents and trade accounts receivable. Cash and cash
equivalents are placed with major financial institutions. The
Company performs credit evaluation procedures and with the
exception of certain developing countries, generally does not
require collateral. As a result of increased risk in these
countries, some Bio-Rad sales are subject to collateral letters
of credit. Credit risk is limited due to the large number of
customers and their dispersion across many geographic areas.
However, a significant amount of trade receivables are with
national healthcare systems in countries within the European
Economic Community. The Company does not currently anticipate a
credit risk associated with these receivables.
7
<page>
INVENTORY VALUATION
Inventories are valued at the lower of actual cost or market and
include material, labor and overhead costs. Management
periodically reviews the need for an inventory obsolescence
reserve. In evaluating this reserve, technology changes,
competition, customer demand and manufacturing quality are
considered.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are carried at historical cost.
Included in property, plant and equipment is reagent rental
equipment. The Company provides these instruments to its
customers for use with the Company's reagents.
Depreciation is computed on a straight-line basis over the
estimated useful lives of the assets. Buildings and leasehold
improvements are amortized over 15-30 years or the lives of the
leases or improvements, whichever is shorter. With the exception
of reagent rental equipment, which is amortized over a 1-5 year
period, equipment is depreciated over 3-12 years.
GOODWILL
Goodwill, representing the excess of the cost over the net
tangible and identifiable intangible assets of acquired
businesses, is stated at cost and through December 31, 2001 has
been amortized on a straight-line basis over the estimated future
periods to be benefited, typically ten to fifteen years.
Beginning January 1, 2002, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 142, "Goodwill and
Other Intangible Assets" which provides that goodwill is no
longer subject to amortization over its useful life. Goodwill is
assessed annually for impairment applying a fair-value based test
or whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable (see Note 5).
INCOME TAXES
The Company accounts for income taxes under the asset and
liability method which recognizes deferred tax assets and
liabilities for the expected future tax consequences of temporary
differences between carrying amounts and tax bases of assets and
liabilities (see Note 7).
REVENUE RECOGNITION
For products, revenue is recognized when shipped and risk of loss
is inconsequential, when persuasive evidence of an arrangement
exists, the price to the buyer is fixed and determinable and
8
<page>
collectibility is reasonably assured. When a customer enters into
a reagent rental agreement (operating-type lease), revenue is
recognized over the life of the agreement. Service revenues on
extended warranty contracts are recognized ratably over the life
of the service agreement or as service is performed, if not under
contract. For those equipment sales that necessitate
installation, we recognize revenue when installation is complete
and customer acceptance has occurred.
SHIPPING AND HANDLING
The Company classifies all freight billed to customers as net
sales. Related freight costs are included in cost of goods sold.
SALES RETURNS AND WARRANTY
At the time the related revenue is recognized, a provision is
recognized for estimated product returns.
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 costs of such warranty.
Components of the warranty accrual, included in Other current
liabilities and Other long-term liabilities, were as follows
(in millions):
2003 2002
-------------------------------------------------
January 1 $ 7.1 $ 6.1
Provision for warranty 12.0 9.0
Actual warranty costs (10.0) (8.0)
----- -----
December 31 $ 9.1 $ $7.1
===== =====
RESEARCH AND DEVELOPMENT
Internal research and development costs are expensed as incurred.
Third-party research and development costs are expensed when the
contracted work has been performed or as milestone results have
been achieved.
FOREIGN CURRENCY TRANSLATION
Balance sheet accounts of international subsidiaries are trans
lated at the current exchange rate as of the end of the account
ing period. Income statement items are translated at average
exchange rates. The resulting translation adjustment is recorded
as a separate component of stockholders' equity.
9
<page>
FORWARD EXCHANGE CONTRACTS
As part of distributing its products, the Company regularly
enters into intercompany transactions. The Company enters into
forward foreign exchange contracts to hedge against future
movements in foreign exchange rates that affect foreign currency
denominated intercompany receivables and payables. The Company
does not use derivative financial instruments for speculative or
trading purposes. In accordance with SFAS No. 133 "Accounting
for Derivative Instruments and Hedging Activities," the Company
does not seek hedge accounting treatment for these contracts. As
a result, these contracts, generally with maturity dates of 90
days or less and related primarily to currencies of industrial
countries, are marked to market at each balance sheet date.
Exchange gains and losses on these contracts are net of premiums
and discounts. The resulting gains or losses offset exchange
losses or gains on the related receivables and payables. The
cash flows related to these contracts are classified as cash
flows from investing activities in the Statement of Cash Flows.
EMPLOYEE STOCK COMPENSATION PLANS
The Company maintains incentive and non-qualified stock option
plans for officers and certain other key employees. The Company
also has an employee stock purchase plan that provides that
eligible employees may contribute toward the purchase of the
Company's Class A common stock. These plans are described more
fully in Note 9.
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 proforma net income
and earnings per share would have been as follows (in millions,
except per share data):
10
<page>
----------------------------
Year Ended December 31,
2003 2002 2001
----------------------------
Net income, as reported $ 76.2 $ 67.9 $ 44.2
Deduct: Total stock-based employee
compensation expense determined
under fair value methods for all
awards, net of related tax effects (2.1) (1.8) (1.3)
----- ----- -----
Pro forma net income $ 74.1 $ 66.1 $ 42.9
===== ===== =====
Earnings per share:
Basic-as reported $ 3.00 $ 2.70 $ 1.79
===== ===== =====
Basic-pro forma $ 2.91 $ 2.63 $ 1.74
===== ===== =====
Diluted-as reported $ 2.90 $ 2.61 $ 1.74
===== ===== =====
Diluted-pro forma $ 2.82 $ 2.55 $ 1.69
===== ===== =====
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. Treasury stock is not considered outstanding
for purposes of calculating weighted average shares.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of financial instruments has been determined
using available market information or other appropriate valuation
methodologies. Estimates are not necessarily indicative of the
amounts that could be realized in a current market exchange as
considerable judgment is required in interpreting market data used to
develop estimates of fair value. The use of different market
assumptions or estimation techniques could have a material effect on
the estimated fair value amounts.
11
<page>
The estimated fair value of Bio-Rad's financial instruments were as
follows(in millions):
Year Ended December 31,
-------------------------------------------
2003 2002
-------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------------------------------------------
Notes receivable and other $ 52.9 $ 58.3 $ 36.0 $ 37.2
Total long-term debt $ 226.0 $ 256.2 $ 106.5 $ 131.8
Financial instruments (e.g., notes receivable) that have fair values
based on discounted cash flows, market quotations, and other
appropriate valuation techniques are included in Other assets. Long-
term debt has an estimated fair value based on quoted market prices
for the same or similar issues.
For certain of the Company's financial instruments, including cash
and cash equivalents, accounts receivable, marketable securities,
notes payable, and accounts payable, the carrying amounts approximate
fair value.
NEW FINANCIAL ACCOUNTING STANDARDS
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 in the
2003 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 the
liability for costs associated with an exit cost 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 a material impact on the consolidated
financial statements of the Company.
12
<page>
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 SFAS No. 133. SFAS No. 149 was
effective for contracts entered into or modified after June 30, 2003
and for hedging relationships designated after June 30, 2003 and did
not have a material impact on the Company's financial position or
results of operations.
2. ACQUISITIONS
See Note 17 regarding an acquisition which took place subsequent to
year-end.
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.
The Company has completed its evaluation of purchased assets,
including intangible assets, and liabilities and has not assigned any
value to goodwill.
On June 28, 2002, the Company purchased for cash the microarray and
robotics technologies business of Virtek Biotech Inc., a subsidiary of
Virtek Vision International Inc. of Waterloo, Ontario, Canada.
Bio-Rad acquired the assets, including intangible assets, for
approximately $7 million and has included these operations in its Life
Science segment. The Company did not assign any value to goodwill.
In July 2001, the Company acquired all the outstanding shares of
Helix, Inc., a manufacturer of diagnostic products for the autoimmune
market. The business combination was recorded using the purchase
method. The acquisition cost was not material but did include a
premium in excess of the net assets acquired.
3. DIVESTITURE
In October 2001, the Company sold the assets and certain liabilities
of the Company's spectroscopy business to Digilab LLC. In 2001, the
Company recorded a $4.5 million non-cash pre-tax charge reflecting the
estimated impact of its intent to sell the spectroscopy instrument
business and the Company had a write-down of $0.7 million on the value
of a related production facility.
4. INVESTMENTS
The Company purchased shares of ordinary voting stock of Sartorius AG,
of Goettingen, Germany, a process technology supplier to the
biotechnology, pharmaceutical, chemical and food and beverage
industries for approximately $10.4 million in 2003. The Company
accounts for this investment on the cost method.
13
<page>
In December 1997, Bio-Rad began investing in Instrumentation
Laboratory, S.p.A. (IL), an Italian based clinical diagnostics
company. At December 31, 2003, Bio-Rad held approximately 13% of the
outstanding stock of IL. A privately held company based in Spain
controls approximately 84% of the outstanding stock of IL. The most
recently filed financial statements for IL are as of November 30,
2002.
Based on a combination of many factors, including the lack of current
financial information and IL's continued losses, the Company has
determined that its investment has been other than temporarily
impaired. The Company recorded a $9.4 million write-down of its
investment in IL during 2001. As of December 31, 2002, the Company
valued its investment in IL at $6.4 million. This amount reflects a
$3.0 million write-down from December 31, 2001, which has been
recorded in Other, net. As of December 31, 2003 the value of $6.4
million remains the Company's expected value of its investment.
Although management believes that this investment is realizable, there
is a possibility that future events may cause further impairment of
this investment.
5. GOODWILL AND OTHER PURCHASED INTANGIBLE ASSETS
In June 2001, the FASB issued SFAS No. 141, "Business Combinations,"
and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No.
141 requires that all business combinations initiated after June 30,
2001 be accounted for under the purchase method of accounting and
addresses the initial recognition and measurement of goodwill and
other intangible assets acquired in a business combination. SFAS No.
142 addresses the initial recognition and measurement of goodwill and
other intangible assets subsequent to their acquisition, provides that
intangible assets with finite useful lives will be amortized, and that
goodwill and intangible assets with indefinite lives will not be
amortized. The provisions of the standard also require goodwill to be
tested at least annually for impairment.
The Company adopted SFAS No. 142 on January 1, 2002. At that date,
the Company stopped the amortization of goodwill, with a net carrying
value of $77.7 million, and annual amortization of approximately $8
million that had resulted from purchases of businesses completed prior
to the adoption of SFAS No. 141. The transition impairment test for
goodwill was performed as of January 1, 2002. No impairment loss was
recorded in fiscal 2003 or 2002. Additionally, intangible assets that
do not meet the criteria for recognition apart from goodwill must be
reclassified to goodwill. As a result of the Company's analysis, no
reclassification of intangible assets to goodwill was required.
Had the Company been accounting for its goodwill under SFAS No. 142
for all periods presented, the Company's net income and net income per
14
<page>
share would have been as follows (in millions, except per share data):
-------------------------------------
Year Ended December 31,
2003 2002 2001
(as reported) (as reported) (pro forma)
---------- ---------- ----------
Reported net income $ 76.2 $ 67.9 $ 44.2
Add back goodwill amortization,
net of tax -- -- 5.3
----- ----- -----
Pro forma adjusted net income $ 76.2 $ 67.9 $ 49.5
===== ===== =====
Basic earnings per share:
Reported basic earnings per share $ 3.00 $ 2.70 $ 1.79
Goodwill amortization, net of tax -- -- 0.21
----- ----- -----
Pro forma adjusted basic earnings
per share $ 3.00 $ 2.70 $ 2.00
===== ===== =====
Diluted earnings per share:
Reported diluted earnings per share $ 2.90 $ 2.61 $ 1.74
Goodwill amortization, net of tax -- -- 0.21
Pro forma adjusted diluted ----- ----- -----
earnings per share $ 2.90 $ 2.61 $ 1.95
===== ===== =====
The changes in the carrying amount of goodwill for the years ended
December 31, 2003 and 2002 are as follows (in millions):
-------------------------------------
Life Clinical Other
Science Diagnostics Operations
-------------------------------------
December 31, 2001 $ 29.7 $ 46.6 $ 1.4
Tax adjustments (3.9) (4.3) --
---- ---- ----
December 31, 2002 $ 25.8 $ 42.3 $ 1.4
==== ==== ====
December 31, 2003 $ 25.8 $ 42.3 $ 1.4
==== ==== ====
Goodwill balances and goodwill amortization have been included in
corporate for segment reporting purposes in Note 15.
15
<page>
The Company has no intangible assets with indefinite lives.
Information regarding the Company's identifiable purchased
intangible assets is as follows (in millions):
December 31, 2003
--------------------------------------------------
Average Carrying Accumulated
Useful Life Amount Amortization Net
--------------------------------------------------
Patents 16 years $ 4.2 $ 0.4 $ 3.8
Other 6 years 9.9 1.4 8.5
---- ---- ----
Total $ 14.1 $ 1.8 $ 12.3
==== ==== ====
December 31, 2002
--------------------------------------------------
Average Carrying Accumulated
Useful Life Amount Amortization Net
--------------------------------------------------
Patents 16 years $ 3.5 $ 0.1 $ 3.4
Other 5 years 2.3 0.2 2.1
---- ---- ----
Total $ 5.8 $ 0.3 $ 5.5
==== ==== ====
Recorded intangible asset amortization expense for the years ended
December 31, 2003 and 2002 was $1.3 million and $0.3 million,
respectively. Estimated intangible asset amortization expense (based
on existing intangible assets) for the years ended December 31, 2004,
2005, 2006, 2007, and 2008 is $1.6 million, $1.6 million, $1.6
million, $1.7 million and $1.3 million, respectively.
6. NOTES PAYABLE AND LONG-TERM DEBT
Notes payable include local credit lines maintained by the Company's
subsidiaries aggregating approximately $40.4 million, of which $30.2
million was unused at December 31, 2003. At December 31, 2002 these
lines aggregated approximately $30.9 million, of which $24.2 million
was unused. The weighted average interest rate on these lines was
8.1% and 9.1% at December 31, 2003 and 2002, respectively. Bio-Rad
Laboratories, Inc. guarantees most of these credit lines.
16
<page>
The principal components of Long-term debt are as follows (in
millions):
December 31,
2003 2002
--------------------
Senior Subordinated Notes $ 225.0 $ 105.3
Other debt -- 1.1
Capitalized leases 1.0 0.2
----- -----
226.0 106.6
Less current maturities (0.2) (0.8)
----- -----
Long-term debt $ 225.8 $ 105.8
===== =====
In August 2003, the Company sold $225.0 million principal amount of
Senior Subordinated Notes due 2013. The notes pay a fixed rate of
interest of 7.5% per year. The Company has the option to redeem any
or all of the notes at any time prior to August 15, 2008 at a
redemption price equal to 100% of the principal amount of the notes
plus the "applicable premium" (as defined by the indenture) plus
accrued and unpaid interest and certain other charges. The notes may
be redeemed in whole or in part after August 15, 2008 and before
August 15, 2009 at a redemption price of 103.75%; after August 15,
2009 and before August 15, 2010 at a redemption price of 102.50%; for
the interim period to August 15, 2011 at 101.25%; thereafter at 100%.
The Company's obligations under the notes are not secured and rank
junior to all the Company's existing and future senior debt.
Through July 2003, the Company repurchased in the open market $17.3
million (par value) of its Senior Subordinated Notes due in 2007 at an
expense, including interest, unamortized issue costs and unamortized
original issue discount of $2.5 million. The remaining $88.7 million
(par value) of Senior Subordinated Notes due in 2007 were tendered and
repurchased with a portion of the proceeds from the sale of the 7.5%
Senior Subordinated Notes at an expense, including interest,
unamortized issue costs and unamortized original discount of $11.6
million. This expense is included in interest expense.
During 2003, the Company also negotiated a new five-year $150.0
million revolving credit facility to replace its $100.0 million
revolving credit facility. The new credit facility is 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. It is 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 terminated its existing credit facility simultaneously with
17
<page>
the closing of its new facility. Interest varies upon a number of
factors including the duration of the specific borrowing and is based
upon either the Eurodollar, the Federal Funds effective or the Company
corporate based rate.
The new credit facility and the Senior Subordinated Notes require the
Company, among other things, to comply with certain financial ratios
and covenants. These covenants include a leverage ratio test, an
interest coverage test and a consolidated net worth test. There are
also restrictions on the Company's ability to declare or pay
dividends, incur debt, guarantee debt, enter into transactions with
affiliates, merge or consolidate, sell assets, make investments,
create liens and prepay subordinated debt. The Company was in
compliance with all financial ratios as of December 31, 2003.
Maturities of long-term debt at December 31, 2003, are as follows:
2004 - $0.2 million; 2005 - $0.3 million; 2006 - $0.2 million;
2007 - $0.2 million; 2008 - $0.1 million; thereafter - $225.0
million.
7. INCOME TAXES
The U.S. and international components of income (loss) before
taxes are as follows (in millions):
-----------------------------
Year Ended December 31,
2003 2002 2001
-----------------------------
U.S. $ 42.8 $ 37.6 $ (4.8)
International 70.9 66.8 69.8
----- ----- -----
Income before taxes $ 113.7 $ 104.4 $ 65.0
===== ===== =====
The provision (benefit) for income taxes consists of (in millions):
-----------------------------
Year Ended December 31,
2003 2002 2001
-----------------------------
Current:
U.S. Federal $ 8.3 $ 11.8 $ 2.8
International 33.5 30.8 23.7
U.S. State 1.1 1.0 0.4
----- ----- -----
42.9 43.6 26.9
Deferred:
U.S. Federal $ (3.0) $ (2.3) $ 0.2
International (1.8) (4.2) (5.3)
U.S. State (0.6) (0.6) (1.0)
----- ----- -----
(5.4) (7.1) (6.1)
----- ----- -----
Provision for income taxes $ 37.5 $ 36.5 $ 20.8
===== ===== =====
18
<page>
The Company's income tax provision differs from the amount
computed by applying the U.S. federal statutory rate to income
before taxes as follows:
-----------------------------
Year Ended December 31,
2003 2002 2001
-----------------------------
U. S. statutory tax rate 35% 35% 35%
State taxes, net of
federal income tax benefit -- -- (1)
Foreign Sales Corporation/EIE
tax benefit (2) (2) (4)
Difference between U.S. and
foreign tax rates (net of
foreign tax credits) (1) 2 (10)
Loss carryforwards utilized -- (1) (1)
Amortization of goodwill -- -- 4
Foreign losses not benefited 1 2 1
Capital loss not benefited -- 1 5
Increase(decrease) in tax reserves (1) (1) 3
Other 1 (1) --
---- ---- ----
Provision for income taxes 33% 35% 32%
==== ==== ====
Deferred income taxes reflect the net tax effect of temporary
differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used
for income tax purposes. Significant components of deferred tax
assets and liabilities are as follows (in millions):
Year Ended
December 31,
--------------------
2003 2002
--------------------
Deferred tax assets:
Reserves for obsolete inventory,
warranty, royalty and bad debts $ 17.7 $ 11.5
Elimination of intercompany profit 9.4 7.8
Retirement reserve and vacation pay 7.8 5.5
Tax benefit of loss carryforwards 8.4 8.5
Basis difference in investment 4.1 4.1
State tax credit carryforward 5.2 4.5
Other 8.3 8.1
----- -----
60.9 50.0
Valuation allowance (14.4) (12.9)
----- -----
Deferred tax assets $ 46.5 $ 37.1
===== =====
19
<page>
Deferred tax liabilities:
Deferred gain on condemnation $ 6.1 $ 2.9
Foreign exchange unrealized gain 3.4 --
Development cost of Hercules facility 1.3 1.5
Other 3.2 5.4
----- -----
Deferred tax liabilities $ 14.0 $ 9.8
===== =====
At December 31, 2003, Bio-Rad's international subsidiaries had
combined net operating loss carryforwards of $12.1 million. A
portion of these loss carryforwards will expire in the following
years: 2007 - $0.1 million; and 2008 - $0.1 million. The
remainder of these loss carryforwards have no expiration date.
The utilization of these carryforwards is limited to the separate
taxable income of each individual subsidiary.
At December 31, 2003, Bio-Rad had an unutilized domestic net
operating loss carryforward of $14.7 million. The loss
carryforward will expire in the year 2018. The utilization of
the loss carryforward is limited to Bio-Rad's domestic taxable
income. At December 31, 2003, Bio-Rad had a California tax
credit carryforward of $5.2 million. The credit carryforward has
no expiration date. The utilization of the tax credit
carryforward is limited to the extent Bio-Rad has California
taxable income.
The valuation allowance is needed to reduce the deferred tax
assets to an amount that is more likely than not to be realized.
The net change in the valuation allowance in 2003 was an increase
of $1.5 million, primarily resulting from an increase in foreign
loss carryforwards whose utilization is uncertain. The net
change in 2002 was a decrease of $4.4 million primarily resulting
from the utilization of tax loss carryforwards.
Bio-Rad does not provide for taxes which would be payable if the
cumulative undistributed earnings of its international subsidiaries,
approximately $163 million at December 31, 2003, were remitted to the
U.S. parent company. Unless it becomes advantageous for tax or
foreign exchange reasons to remit a subsidiary's earnings, such
earnings are indefinitely reinvested in subsidiary operations. The
withholding tax and U.S. federal income taxes on these earnings, if
remitted, would in large part be offset by tax credits.
20
<page>
8. STOCKHOLDERS' EQUITY
The Company's outstanding stock consists of Class A Common Stock
(Class A) and Class B Common Stock (Class B). Each share of Class A
and Class B participates equally in the earnings of Bio-Rad, and is
identical in most respects except that Class A has limited voting
rights. Each share of Class A is entitled to one-tenth of a vote on
most matters, and each share of Class B is entitled to one vote.
Additionally, Class A stockholders are entitled to elect 25% of the
Board of Directors and Class B stockholders are entitled to elect the
balance of the directors. Cash dividends may be paid on Class A
shares without paying a cash dividend on Class B shares but no cash
dividend may be paid on Class B shares unless at least an equal cash
dividend is paid on Class A shares. Class B shares are convertible at
any time into Class A shares on a one-for-one basis at the option of
the stockholder.
9. STOCK OPTION AND PURCHASE PLANS
STOCK OPTION PLANS
The Company maintains stockholder approved incentive and non-qualified
stock option plans for officers and certain other key employees. No
options have been issued to non-employees.
Under the Amended 1994 Stock Option Plan, the Company may grant
options to its employees for up to 3,550,000 shares of common stock
provided that no option shall be granted after March 1, 2004. Under
the plans, Class A and Class B options are granted at prices not less
than fair market value on the date of grant. Generally, options
granted have a term of 10 years and vest in increments of 25% per year
over a four-year period on the yearly anniversary date of the grant.
For options granted after January 1, 2001, options vest in increments
of 20% over a five-year period on the yearly anniversary date of the
grant. At December 31, 2003, 918,545 shares remain available to be
granted.
In April 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 2003.
21
<page>
Pro forma compensation costs are calculated for the fair value of the
employees' purchase rights, which was estimated using the Black-
Scholes method. 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 in
2001.
The fair value of options granted was estimated using the Black-
Scholes model with the following weighted average assumptions:
-------------------
Year Ended
December 31,
-------------------
2003 2002
-------------------
Expected volatility 37% 35%
Risk-free interest rate 2.65% 3.99%
Expected life (in years) 4.2 4.2
Expected dividend -- --
See Note 1 for a description of the effect of the pro forma
compensation expense derived using the fair value method on the
Company's results.
22
<page>
Activity under the 1994 Plan is summarized below (amounts reported in the Price
columns represent the weighted average exercise price):
<table>
<s> <c> <c> <c> <c> <c> <c>
Year Ended December 31,
2003 2002 2001
-------------------------------------------------------------
Shares Price Shares Price Shares Price
-------------------------------------------------------------
Outstanding at beginning of year 1,591,832 $ 15.84 1,572,701 $ 11.80 1,921,778 $ 11.90
Granted 302,993 35.71 379,500 28.8 -- --
Exercised (222,699) 12.58 (350,549) 11.67 (287,622) 12.81
Forfeited (89,211) 16.57 (9,820) 10.90 (36,385) 10.61
Expired -- -- -- -- (25,070) 13.06
--------- --------- ---------
Outstanding at end of year 1,582,915 $ 20.04 1,591,832 $ 15.84 1,572,701 $ 11.72
Options exercisable at year-end 780,415 $ 13.22 677,149 $ 12.39 672,266 $ 12.60
========= ========= =========
Weighted average fair value of
options granted during the year $11.85 $9.75 $ --
====== ===== =====
</table>
<table>
The following summarizes information about stock options outstanding at December 31, 2003:
<caption>
<s> <c> <c> <c> <c> <c>
Options Outstanding Options Exercisable
---------------------------------------------------------------------------------
Number Weighted Average Weighted Number Weighted
Range of Outstanding Remaining Average Exercisable Average
Exercise Prices at 12/31/03 Contractual Life Exercise Price at 12/31/03 Exercise Price
- --------------------------------------------------------------------------------------------------
$ 9.50 - $11.31 453,561 5.87 years $ 10.72 319,192 $ 10.69
$ 11.57 - $15.82 459,691 4.33 12.71 378,540 12.85
$ 16.32 - $35.50 585,530 8.08 30.67 82,283 24.65
$ 36.00 $39.60 84,133 8.74 36.30 400 37.23
--------- -------
1,582,915 6.39 20.04 780,415 13.22
========= =======
</table>
23
<page>
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 compensation 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 71,314 shares for $2.4 million, 66,992 shares for $1.8
million and 88,982 shares for $1.2 million under the plan to employees in
2003, 2002 and 2001, respectively. The weighted average fair value of
purchase rights granted in 2003, 2002 and 2001 was $9.76, $8.41 and $4.48,
respectively. At December 31, 2003, 269,239 shares remain authorized under
the plan.
The fair value of the employees' purchase rights was estimated using the
Black-Scholes model with the following assumptions:
Year Ended December 31,
----------------------------
2003 2002 2001
----------------------------
Expected volatility 41.86% 44.19% 44.44%
Risk-free interest rate .93% 1.58% 3.99%
Expected life (in years) .25 .25 .25
Expected dividend -- -- --
See Note 1 for a description of the effect of the pro forma compensation
expense derived using the fair value method on the Company's results.
10. EARNINGS PER SHARE
Weighted average shares used for diluted earnings per share include the
dilutive effect of outstanding stock options of 894,000, 917,000 and
794,000 shares for the years ended December 31, 2003, 2002 and 2001,
respectively.
There were no anti-dilutive shares for 2003 and 2002 and 2001.
24
<page>
11. OTHER INCOME AND EXPENSE
Other, net includes the following income and (expense) components
(in millions):
Year Ended December 31,
----------------------------
2003 2002 2001
----------------------------
Write-down of investments $ -- $ (5.0) $ (10.9)
Interest income 2.1 4.0 1.3
Miscellaneous other items .9 1.7 (0.4)
---- ---- ----
Other, net $ 3.0 $ 0.7 $ (10.0)
==== ==== ====
12. SUPPLEMENTAL CASH FLOW INFORMATION
The reconciliation of net income to net cash provided by operating
activities is as follows (in millions):
Year Ended December 31,
----------------------------
2003 2002 2001
----------------------------
Net income $ 76.2 $ 67.9 $ 44.2
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 40.0 36.9 32.6
Amortization 2.0 1.1 8.7
Foreign currency hedge transactions, net 15.0 2.3 (0.4)
Gains on dispositions of marketable
securities (0.3) (0.1) (0.2)
Decrease(increase)in accounts receivable, net 10.0 (0.7) (22.6)
Increase in inventories, net (8.2) (16.2) (14.0)
Increase in other current assets (14.2) (12.1) (3.6)
Increase (decrease) in accounts payable
and other current liabilities (1.6) 13.0 11.9
Increase (decrease) in income taxes payable (5.6) (6.9) 17.6
Increase (decrease) in deferred taxes (8.0) 13.7 (1.7)
Loss on sale of spectroscopy business and
write-down of investments -- 5.0 15.4
Debt retirement costs on 11-5/8% bonds 9.5 -- --
Other 12.8 1.9 11.6
----- ----- -----
Net cash provided by operating activities $ 127.6 $105.8 $99.5
13. COMMITMENTS AND CONTINGENT LIABILITIES
RENTS AND LEASES
Net rental expense under operating leases was $23.0 million in 2003,
$19.5 million in 2002 and $15.8 million in 2001. Leases are
principally for facilities and automobiles.
25
<page>
Annual future minimum lease payments at December 31, 2003, under
operating leases are as follows: 2004 - $18.7 million; 2005 - $13.5
million; 2006 - $8.4 million; 2007 - $6.1 million; 2008 - $3.2 million;
subsequent to 2008 - $2.9 million.
DEFERRED PROFIT SHARING RETIREMENT PLAN
The Company has a profit sharing plan covering substantially all U.S.
employees. Contributions are made at the discretion of the Board of
Directors. Bio-Rad has no liability other than for the current year's
contribution. Contributions charged to income were $6.5 million, $4.8
million and $4.7 million in 2003, 2002 and 2001, respectively.
FOREIGN EXCHANGE CONTRACTS
The Company enters into forward foreign exchange contracts as an economic
hedge against foreign currency denominated intercompany receivables and
payables. At December 31, 2003, the Company had contracts maturing
in January through March 2004 to sell foreign currency with a nominal value
of $96.7 million and an unrealized loss of $0.1 million. Contracts to
purchase foreign currency had a nominal value of $26.9 million with an
unrealized loss of $0.1 million.
INSURANCE
The Company carries a deductible for workers' compensation and a portion of
its group health insurance cost. Accruals for losses are based on the
Company's claims experience and actuarial assumptions followed in the
insurance industry. Should a greater amount of claims occur compared to the
Company's estimates or cost of medical care increase beyond what has been
anticipated, reserves recorded may not be sufficient and additional charges
to income may be required.
LETTERS OF CREDIT
In the ordinary course of business, the Company is at times required
to post letters of credit. These letters of credit are required by certain
insurance companies to ensure payments of certain charges. The Company was
contingently liable for approximately $4.6 million of standby letters of
credit with banks as of December 31, 2003.
TAXES
Settlement of open tax years, as well as tax issues in other countries where
the Company conducts its business, are not expected to have a material
effect on the consolidated financial position or liquidity of the Company
and, in the opinion of management, adequate provision has been made for
income and franchise taxes for all years under examination or subject to
future examination.
26
<page>
14. LEGAL PROCEEDINGS
The Company is a 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. SEGMENT INFORMATION
Bio-Rad is a multinational manufacturer and worldwide distributor of life
science research products and clinical diagnostics products. Bio-Rad has
two reportable segments: Life Science and Clinical Diagnostics. These
reportable segments are strategic business lines that offer different
products and services and require different marketing strategies.
The Life Science segment develops, manufactures, sells and services
reagents, apparatus and instruments used for biological research. These
products are sold to university and medical school laboratories,
pharmaceutical and biotechnology companies, food testing laboratories and
government and industrial research facilities.
The Clinical Diagnostics segment develops, manufactures, sells and services
automated test systems, informatics systems, test kits and specialized
quality controls for the healthcare market. These products are sold to
reference laboratories, hospital laboratories, state newborn screening
facilities, physicians office laboratories, transfusion laboratories, and
insurance and forensic testing laboratories.
The remainder of the Company's former Analytical Instruments segment is
included in Other Operations. The material product lines of this segment
have been sold.
The accounting policies of the segments are the same as those described in
Significant Accounting Policies (see Note 1). Segment profit or loss used
for corporate management purposes includes an allocation of corporate
expense based upon sales and an allocation of interest expense based upon
accounts receivable and inventories. Segments are expected to manage only
assets completely under their control. Accordingly, segment assets include
primarily accounts receivable, inventories and gross machinery and
equipment. Goodwill balances and goodwill amortization have been included
in corporate for segment reporting purposes.
27
<page>
Information regarding industry segments at December 31, 2003, 2002
and 2001 and for the years then ended is as follows (in millions):
Life Clinical Other
Science Diagnostics Operations
------------------------------------------
Segment net sales 2003 $ 480.0 $ 514.8 $ 8.6
2002 429.5 455.4 7.8
2001 379.2 417.9 20.4
Allocated interest expense 2003 $ 6.7 $ 9.6 $ 0.1
2002 8.8 12.4 0.1
2001 9.3 14.3 0.5
Depreciation and amortization 2003 $ 10.3 $ 29.2 $ 0.3
2002 8.3 27.4 0.2
2001 7.2 26.2 0.4
Segment profit (loss) 2003 $ 71.5 $ 59.8 $ (0.2)
2002 75.2 41.9 (1.6)
2001 72.8 27.3 (5.3)
Segment assets 2003 $ 252.7 $ 379.5 $ 5.0
2002 225.1 336.4 4.7
2001 194.2 302.2 3.4
Capital expenditures 2003 $ 36.2 $ 30.7 $ 0.1
2002 10.9 29.7 0.1
2001 10.0 23.9 0.1
The difference between total segment allocated interest expense,
depreciation and amortization, and capital expenditures and the
corresponding consolidated amounts is attributable to the Company's
corporate headquarters. The following reconciles total segment profit
to consolidated income before taxes (in millions):
Year Ended December 31,
--------------------------------
2003 2002 2001
--------------------------------
Total segment profit $ 131.1 $ 115.5 $ 94.8
Other, net 3.0 0.7 (10.0)
Loss on divestitures -- -- (5.2)
Goodwill amortization -- -- (7.7)
Foreign exchange losses (4.1) (5.4) (2.1)
Costs related to bond redemption (14.6) (6.9) --
Net corporate operating, interest
and other income and expense
not allocated to segments (1.7) 0.5 (4.8)
------ ------ ------
Consolidated income before taxes $ 113.7 $ 104.4 $ 65.0
28
<page>
The following reconciles total segment assets to consolidated total assets
(in millions):
December 31,
--------------------
2003 2002
--------------------
Total segment assets $ 637.2 $ 566.2
Cash and other current assets 247.1 87.6
Net property, plant and equipment excluding
segment specific gross machinery and equipment (34.3) (45.8)
Goodwill 69.5 69.5
Other long-term assets 67.4 43.2
----- -----
Total assets $ 986.9 $ 720.7
===== =====
The following presents sales to external customers by geographic area
based primarily on the location of the use of the product or service
(in millions):
Year Ended December 31,
--------------------------------
2003 2002 2001
--------------------------------
Europe $ 441.4 $ 368.6 $ 341.7
Pacific Rim 167.0 151.9 127.5
United States 344.6 320.4 296.9
Other(primarily Canada and Latin America) 50.4 51.8 51.4
------- ------- ------
Total sales $ 1,003.4 $ 892.7 $ 817.5
======= ======= ======
The following presents long-lived assets by geographic area based
upon the location of the asset (in millions):
Year Ended December 31,
------------------------------
2003 2002 2001
------------------------------
Europe $ 48.4 $ 31.8 $ 25.3
Pacific Rim 7.5 7.2 6.4
United States 254.4 216.2 217.0
Other(primarily Canada and Latin America) 5.7 5.2 4.5
----- ----- -----
Total long-lived assets $ 316.0 $ 260.4 $ 253.2
===== ===== =====
29
<page>
16. QUARTERLY FINANCIAL DATA - (UNAUDITED)
Summarized quarterly financial data for 2003 and 2002 are as follows (in
millions, except per share data):
-------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
2003 -------------------------------------------
----
Net sales $ 246.0 $ 243.5 $ 247.7 $ 266.2
Gross profit 142.7 136.4 137.4 148.9
Net income 26.4 21.0 9.7 19.1
Basic earnings per share $ 1.04 $ 0.83 $ 0.38 $ 0.75
Diluted earnings per share $ 1.01 $ 0.80 $ 0.37 $ 0.73
2002
----
Net sales $ 210.2 $ 214.6 $ 224.9 $ 243.0
Gross profit 121.3 122.3 129.0 136.9
Net income 18.8 16.2 16.6 16.3
Basic earnings per share $ 0.75 $ 0.65 $ 0.66 $ 0.64
Diluted earnings per share $ 0.73 $ 0.62 $ 0.64 $ 0.62
17. SUBSEQUENT EVENT
On March 4, 2004, the Company purchased for cash the controls business
of Hematronix, Inc. of Plano, Texas. Bio-Rad acquired tangible and
intangible assets of approximately $17 million and assumed certain
liabilities.
30
<page>
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF
BIO-RAD LABORATORIES, INC.
We have audited the accompanying consolidated balances sheets of Bio-Rad
Laboratories, Inc. and subsidiaries (the "Company") as of December 31,
2003 and 2002, and the related consolidated statements of income,
stockholders' equity, and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial
statements based on our audits. The consolidated financial statements
of the Company for the year ended December 31, 2001 were audited by
other auditors who have ceased operations. Those auditors expressed an
unqualified opinion on those financial statements in their report dated
February 4, 2002, (February 6, 2002, as to a subsequent event).
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that
we plan and perform the audits to obtain reasonable assurance about
whether the consolidated financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of Bio-Rad
Laboratories, Inc. and subsidiaries as of December 31, 2003 and 2002,
and the results of their operations and their cash flows for the years
then ended in conformity with accounting principles generally accepted
in the United States of America.
As discussed in Note 5 to the consolidated financial statements, in 2002
the Company changed its method of accounting for goodwill and intangible
assets to conform to Statement of Financial Accounting Standards (SFAS)
No. 142, "Goodwill and Other Intangible Assets."
As discussed above, the consolidated financial statements of the Company
for the year ended December 31, 2001 were audited by other auditors who
have ceased operations. As described in Note 5, these consolidated
financial statements have been revised to include the transitional
disclosures required by SFAS No. 142, "Goodwill and Other Intangible
Assets", which was adopted by the Company as of January 1, 2002. Our
audit procedures with respect to the disclosures in Note 5 with respect
to 2001 included (i) agreeing the previously reported net income to the
previously issued financial statements and the adjustments to reported
net income representing amortization expense (including any related tax
effects) recognized in those periods related to goodwill to the
Company's underlying records obtained from management, and (ii) testing
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the mathematical accuracy of the reconciliation of adjusted net income
to reported net income, and the related earnings-per share amounts.
However, we were not engaged to audit, review, or apply any procedures
to the 2001 consolidated financial statements of the Company other than
with respect to such disclosures and, accordingly, we do not express an
opinion or any other form of assurance on the 2001 consolidated
financial statements taken as a whole.
/s/ DELOITTE & TOUCHE LLP
-------------------------
San Francisco, California
March 10, 2004
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THIS REPORT IS A COPY OF THE PREVIOUSLY ISSUED REPORT
COVERING 2001, 2000 AND 1999. THE PREDECESSOR AUDITORS
HAVE NOT REISSUED THEIR REPORT.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of
Bio-Rad Laboratories, Inc.:
We have audited the accompanying consolidated balance sheets of Bio-Rad
Laboratories, Inc. (a Delaware Corporation) and subsidiaries as of
December 31, 2001 and 2000, and the related consolidated statements of
income, cash flows and changes in stockholders' equity for each of the
three years in the period ended December 31, 2001. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Bio-
Rad Laboratories, Inc. and subsidiaries as of December 31, 2001 and 2000,
and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2001 in conformity with
accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
San Francisco, California
February 4, 2002, except for Note 7,
as to which the date is February 6, 2002
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MANAGEMENT'S DISCUSSION AND ANALYSIS
______________________________________________________________________
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
This discussion should be read in conjunction with the information
contained in the Company's Consolidated Financial Statements and the
accompanying notes which are an integral part of the statements.
References are to the Notes to Consolidated Financial Statements.
Other than statements of historical fact, statements made in this Annual
Report include forward looking statements, such as statements with
respect to the Company's future financial performance, operating
results, plans and objectives that involve risk and uncertainties. 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.
Overview. We are a multinational manufacturer and worldwide distributor
of Life Science research and Clinical Diagnostics products. Our
business is organized into two primary segments, Life Science and
Clinical Diagnostics, with the mission to provide scientists with
specialized tools needed for biological research and clinical
diagnostics. We sell more than 8,000 products and services to a diverse
client base comprised of scientific research, healthcare, industry,
education and government customers worldwide. We manufacture and supply
our customers with a range of reagents, apparatus and equipment to
separate complex chemical and biological materials and to identify,
analyze and purify components. Because our customers require
replication of results from experiments and tests, we estimate that
approximately 70% of our revenues are recurring. Approximately 34% of
our 2003 consolidated net sales are from the United States and
approximately 66% are international sales largely denominated in local
currency with the majority of these sales in Euros, Yen and British
Sterling. As a result, our consolidated sales expressed in dollars
benefit when the US dollar weakens and suffers when the dollar
strengthens in relation to other currencies. Currency fluctuations
benefited our consolidated sales expressed in U.S. dollars in 2003 and,
to a lesser extent, 2002 sales as well. The market for reagents and
apparatus remains good as growth rates have slowed in the global
economic downturn but have not turned negative. The market for large
capital equipment in 2002 and 2003 declined from prior periods, as many
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pharmaceutical and biotechnology customers delayed or reduced their
capital spending. Bio-Rad is generally less impacted by capital
spending as lower cost reagents and apparatus comprise more than 70% of
product sales.
The following shows gross profit and expense items as a percentage of
net sales:
Year Ended December 31,
2003 2002 2001
--------------------------
Net sales 100.0 100.0 100.0
Cost of goods sold 43.7 42.9 44.3
----- ----- -----
Gross profit 56.3 57.1 55.7
Selling, general and administrative expense 32.4 32.4 32.4
Product research and development expense 9.4 9.3 9.4
Net income 7.6 7.6 5.4
We intend that the discussion of our financial condition and results of
operations that follow will assist you in understanding how accounting
principles, policies and estimates effect our results, and the
significant factors that caused changes in our operations and financial
position for the years ended December 31, 2003 and 2002.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The accompanying discussion and analysis of the Company's financial
condition and results of operations are based upon the consolidated
financial statements, which have been prepared in accordance with
generally accepted accounting principles in the United States (GAAP).
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported
amounts of assets, liabilities and contingencies as of the date of the
financial statements and reported amounts of revenues and expenses
during the reporting periods. The Company evaluates its estimates on an
on-going basis. The Company bases its estimates on historical
experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis
for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. However, future
events are subject to change and the best current estimates and
assumptions routinely require adjustment. Actual results could differ
from these estimates.
Accounting for Income Taxes. As part of the process of preparing
Bio-Rad's consolidated financial statements management is required to
estimate the Company's income taxes in each of the jurisdictions in
which the Company operates. This process involves estimating Bio-Rad's
actual current tax exposure together with assessing temporary
differences resulting from differing treatment of items for tax and
accounting purposes. These differences result in deferred tax assets
and liabilities, which are included within the consolidated balance
sheet. Management must then assess the likelihood that the deferred tax
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assets will be recovered from future taxable income and to the extent
management believes that recovery is not likely, a valuation allowance
must be established. To the extent management establishes a valuation
allowance or increases this allowance in a period, an expense within the
tax provision in the statement of operations must be included.
Significant management judgment is required in determining the provision
for income taxes, deferred tax assets and liabilities and any valuation
allowance recorded against the net deferred tax assets. The Company has
recorded a valuation allowance of $14.4 million and $12.9 million as of
December 31, 2003, and 2002 respectively due to uncertainties related to
the Company's ability to utilize some of the deferred tax assets,
primarily consisting of certain net operating losses carried forward,
before they expire. The valuation allowance is based on management's
current estimates of taxable income by jurisdiction in which Bio-Rad
operates and the period over which the deferred tax assets will be
recoverable. In the event that actual results differ from these
estimates or these estimates are adjusted in future periods an
additional valuation allowance may need to be established which would
increase the tax provision, lowering income and impacting Bio-Rad's
financial position. Should realization of these deferred assets
previously reserved occur, the tax provision would decrease, raising
income and positively impacting Bio-Rad's financial position.
Valuation of Long-lived and Intangible Assets and Goodwill. The Company
assesses the impairment of identifiable intangibles, long-lived assets
and related goodwill and enterprise level goodwill whenever events or
changes in circumstances indicate that the carrying value may not be
recoverable. Projected future operating results and cash flows of the
reporting units were used to establish the fair value used in evaluating
the carrying value of the associated goodwill. Factors the Company
considers important which could trigger an impairment review include the
following:
- significant under-performance relative to expected historical or
projected future operating results;
- significant changes in the manner of use of the acquired assets or the
strategy for the Company's overall business;
- significant negative industry or economic trends.
When the Company determines that the carrying value of intangibles, long-
lived assets and related goodwill and enterprise level goodwill may not
be recoverable based upon the existence of one or more of the above
indicators of impairment, the Company measures any impairment based on a
projected discounted cash flow method using a discount rate determined
by management to be commensurate with the risk inherent in Bio-Rad's
current business model.
In 2002, Statement of Financial Accounting Standards No. 142, "Goodwill
and Other Intangible Assets" (SFAS No. 142) became effective. The
Company adopted SFAS No. 142 and ceased to amortize approximately $77.7
million of goodwill. The Company had recorded approximately $7.7
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million of amortization on these amounts during 2001. In lieu of
amortization, the Company is required to perform an annual impairment
review of goodwill. For the years 2002 and 2003 that review indicated
no impairment had taken place. However, there can be no assurance that
a material impairment charge will not be recorded in future periods.
Valuation of Inventories. The Company values inventory at the lower of
the actual cost to purchase and/or manufacture the inventory or the
current estimated market value of the inventory. The Company regularly
reviews inventory quantities on hand and records a provision for excess
and obsolete inventory based primarily on an estimated forecast of
product demand and production requirements for the next twelve months.
In addition, our industry is characterized by technological change,
frequent new product development and product obsolescence that could
result in an increase in the amount of obsolete inventory quantities on
hand. Additionally, the Company's estimates of future product demand
may prove to be inaccurate, in which case the Company may have
understated or overstated the provision required for excess and obsolete
inventory. In the future, if inventory is determined to be overvalued,
the Company would be required to recognize such costs in our cost of
goods sold at the time of such determination. Likewise, if inventory is
determined to be undervalued, the Company may have over-reported cost of
goods sold in previous periods and would be required to recognize such
additional operating income at the time of sale. Therefore, although
the Company makes efforts to ensure the accuracy of its forecasts of
future product demand, any significant unanticipated changes in demand
or technological developments could have a significant impact on the
value of its inventory and reported operating results.
CORPORATE RESULTS -- SALES, MARGINS AND EXPENSES
Bio-Rad net sales for the year 2003 were $1,003.4 million, an increase
of 12.4% over the prior year. The impact of a weakening US dollar
throughout the year provided growth from net foreign currency
denominated sales of approximately 8.7% for the full year.
The Life Science segment had sales growth of 11.8% in 2003, benefiting
from an approximate 8.8% increase due to foreign exchange. Sales
declined on a currency neutral basis for food safety as our competitors
significantly lowered their average per test sales asking price
necessitating Bio-Rad to also lower its average per test sales price.
The microscopy product line sales declined as Bio-Rad entered into an
agreement to sell its product line to a competitor. The sale is
currently being reviewed by the United Kingdom's Competition Commission
and their ruling is presently not expected for several months.
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The Clinical Diagnostics segment had sales growth of 13.0% in 2003,
benefiting from an approximate 8.6% increase due to foreign exchange.
Product lines providing the 4.4% of currency neutral sales growth were
quality control products and blood virus products. Quality control
products grew particularly well in North America and Europe. Blood
virus products grew in Europe.
Bio-Rad net sales for the year 2002 were $892.7 million, an increase of
9% over the prior year. The impact of a weakening US dollar provided
growth from foreign currency denominated sales of less than 1% for the
full year. Overall growth for Bio-Rad exceeded 11% on a currency
neutral basis when adjusted for the spectroscopy product line
divestiture.
The Life Science segment had sales growth of 13% in 2002, benefiting 1%
due to foreign exchange. The majority of growth was provided by
consumables. Modest growth was achieved by apparatus, and instrument
sales declined year over year.
The Clinical Diagnostics segment achieved sales growth of 9% in 2002,
again benefiting 1% due to foreign exchange. Contributing product lines
included diabetes, autoimmune, quality control products, and blood virus
products.
The 2003 consolidated gross margins declined to 56.3% from 57.1% in the
prior year. The decline in gross margin for the Life Science segment
accounted for the entire decline for the Company as a whole. The food
safety product line accounted for the majority of the decline as average
selling price declined and costs to automate customer testing procedures
were not recovered in an attempt to protect the Company's existing
market share. Life Science manufacturing overhead costs also increased
as planned spending levels exceeded the planned activity levels
resulting in less efficient overhead absorption. Life Science
management plans to limit the growth in overhead costs in the near term,
but during early 2004 may incur some additional costs involved in both
the relocation of facilities and installation of new manufacturing
systems. Clinical Diagnostic gross margins improved by approximately
one-half of one percent. Spending increases below the rate of sales
growth have generally aided the small improvement in Clinical Diagnostic
margins.
The 2002 consolidated gross margins improved to 57.1% from 55.7% in the
prior year. Life Science gross margins improved over 2001 approximately
0.3% based largely on sales mix as consumables and apparatus with higher
margins than instruments comprised a greater portion of the total sales
volume. Clinical Diagnostics gross margins improved over 2001 from lower
manufacturing overhead spending and a decrease in provisions for
obsolete inventory. The divestiture of the spectroscopy product line
also helped contribute as it historically operated at a much lower gross
margin than the Company as a whole.
Consolidated selling, general and administrative (SG&A) expense
increased in line with the rate of sales growth, to end the year at
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32.4% of sales, the same percentage as for the years ended 2002 and
2001. The Life Science segment added expenses at a rate of growth
higher than sales. Areas of emphasis were selling and marketing efforts
in the segment's protein function, protein separation and gene
expression product lines. SG&A expenses were not reduced in food safety
as a means to respond in the short term to competitive pressures
maintaining Bio-Rad's market leading position. The Clinical Diagnostics
segment grew SG&A at a lower rate than sales growth and accounts in
large part for their improved segment profitability. The Company also
made investments in financial and tax compliance to improve future
profitability. The Company anticipates some additional expenses related
to Financial Reporting and its annual audits as 2004 will be the first
year of mandatory external auditor certification for compliance with
Section 404 of the Sarbanes-Oxley Act.
In 2002, consolidated selling, general and administrative expense
remained unchanged from the prior year at 32.4% of sales. Spending
increased in absolute dollars in both Life Science and Clinical
Diagnostics. The areas where increases were the largest were in Europe
to support the growth that began in 2001 through the current year. The
Company also increased its involvement in Eastern Europe. Asia,
excluding Japan, was a second area of emphasis in 2002 for Bio-Rad. The
Company sees an opportunity to increase sales through greater
penetration and increasing its direct involvement with the customer.
Product research and development expense (R&D) in 2003 rose to 9.4% of
sales. In absolute dollars each segment had growth with Life Science
increasing slightly more than Clinical Diagnostics. Increased efforts
in Life Science concentrated on proteomics, process chromatography, food
testing and microarray technology. Clinical Diagnostics efforts are
concentrating on automation for the serology, autoimmune and blood virus
product lines as well as the expansion and enhancement of the segment's
quality control products and blood virus diagnostic tests. Bio-Rad
plans to reinvest between 9% and 10% of sales in research and
development annually to support continued sales growth.
Product research and development expense in 2002 increased by 8.4% just
below the rate of sales (9.2%). The majority of the increase in
absolute dollar spending was in the Life Science segment to support
development activities in the areas of proteomics, amplification, food
testing, microarray technology and process chromatography.
In 2002, Clinical Diagnostics R&D remained unchanged. Areas of emphasis
for Clinical Diagnostics included blood screening, autoimmune testing,
genetic disorders and expanded offerings for the quality control product
line.
CORPORATE RESULTS - NON-OPERATING ITEMS
Interest expense increased to $31.0 million in the year 2003. Included
in the current year's interest cost is $14.6 for the open market
repurchase and tendering of $106.0 million of Bio-Rad's 11-5/8% Senior
Subordinated Notes due 2007 and the refinancing of the Company's primary
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credit facility. These costs include a premium to repurchase the notes,
and the expensing of unamortized debt issue costs and original issue
discount.
When compared to 2001, interest expense increased to $28.2 million in
2002 and included $6.9 million of costs associated with the open market
repurchase of $43.9 million of the Company's Senior Subordinated Notes.
Over the two year period Bio-Rad has seen a decline in borrowing rates
on its variable rate debt. During the period January 2002 through
August 2003, Bio-Rad had a consistent general decline in borrowed funds
as it repaid debt that originated from its acquisition of Pasteur Sanofi
Diagnostics in October 1999.
Foreign exchange losses for 2003 decreased by $1.4 million when compared
to the year 2002. During 2002 Bio-Rad had atypical currency losses on
unhedged intercompany receivables from Brazil and Russia. For the full
year 2003 Bio-Rad hedged a substantial portion of its Brazilian
intercompany receivable which successfully avoided exposure to currency
changes. As a result, the additional cost of hedging was greater than
2002, offsetting a significant portion of the improvement. All years
include the net cost of Bio-Rad's hedging program for the established
European, Asian and North America currencies.
Bio-Rad's consolidated effective tax rate was 33%, 35% and 32% in 2003,
2002 and 2001, respectively. The tax rate for all years reflects the
utilization of loss carryforwards, foreign sales corporation benefits,
and foreign tax credits. The effective tax rate declined in 2003,
primarily as a result of the utilization of unbenefited tax loss
carryforwards, most notably in Brazil.
FINANCIAL CONDITION
Historically, the Company's principal capital requirement was for
working capital to fund its internal growth. As a result of the
obligations undertaken in relation to the acquisition of Pasteur Sanofi
Diagnostics, the Company became highly leveraged with a debt to equity
ratio at year-end 1999 of 119%. Since that time and up to Bio-Rad's
decision in August 2003 to secure $225 million in long-term capital in
the form of 7.5% debentures, the Company had improved its overall
liquidity reducing its debt to equity ratio at July 31, 2003 to 22%.
At December 31, 2003, the Company had available $148.6 million in cash
and cash equivalents, $30.2 million under the international lines of
credit and $150.0 million under the restated and amended Revolving
Credit Facility signed September 5, 2003. Management believes that this
availability, together with cash flow from operations, will be adequate
to meet the Company's current objectives for operations, research and
development, capital additions for plant, equipment and systems and an
acquisition or acquisitions with an accumulated value of approximately
$200 million.
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CASH FLOW FROM OPERATIONS
Net cash provided by operations was $127.6 million, $105.8 million and
$99.5 million in 2003, 2002 and 2001 respectively. The integration of
the Pasteur Sanofi Diagnostics acquisition, the introduction of new
products (most notable the BSE test) and improved profitability in the
Clinical Diagnostics segment have all contributed to the improved cash
flow from operations for the Company.
Consolidated net accounts receivable increased by $24.8 million or 11.9%
over 2002. The impact of strengthening foreign currencies, in
particular, the Euro versus the U.S. dollar, accounts for the majority
of the increase. From December 31, 2002 to December 31, 2003 the Euro
strengthened approximately 20%. European accounts receivable
approximated 59% of the Company's year-end 2003 balance of total
receivables. Overall, the Company experienced better collections as the
number of days sales outstanding dropped slightly. Bio-Rad's management
regularly reviews the allowance for uncollectable accounts receivable
and believes net accounts receivable are fully realizable.
Consolidated net inventory increased $23.9 million or 14.4% over 2002.
Again, strengthening foreign currencies accounted for a majority ($15.2
million) of the increase in inventory value. Inventory growth in 2003
over 2002, unrelated to the foreign currency increase, was principally
the result of inventory builds associated with a product distribution
agreement starting more slowly than anticipated, a facility relocation
completed in January 2004 and a purchase commitment for certain
automated equipment which should begin shipping to customers in the
second quarter of 2004. Inventory in the quality controls and process
chromatography area are characterized by large batch sizes to meet
customer specifications and pose an increased risk should either
manufacturing processes or customer commitments change. Management
routinely reviews the impact of obsolescence and market prices on
current inventory caused by the introduction of new products,
technologies and various pricing regulations.
CASH FLOW FROM INVESTING ACTIVITIES
Net capital expenditures in 2003 totaled $69.0 million compared to $42.2
million and $43.2 million in 2002 and 2001, respectively. The Company
completed construction in January 2004 of the new facilities for
manufacturing, laboratory, and general office use on Company owned land
in the business park where Corporate headquarters, Life Science and
Clinical Diagnostics group operations are now located. The estimated
current cost of the facility is $25 million and complete occupancy will
occur by the end of the first quarter of 2004. To December 31, 2003,
approximately $24.8 million has been capitalized on this project of
which $23.1 million was capitalized in the current year. A principal
expenditure in all years was clinical diagnostic equipment placed with
customers to be used with the Company's diagnostic reagents. For 2003
the amount represents $14.5 million of capital additions. The Company
continues to invest in business systems to standardize distribution
software and enhance data communication. Other expenditures were made
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for the replacement and improvement of production equipment and
facilities to meet the necessary Good Manufacturing Practices, (GMP)
mandated by the Food and Drug Administration (FDA) for Clinical
Diagnostics and other regulatory bodies as well as many customers of the
Life Science group. It is anticipated that the European In Vitro
Diagnostic Directive will increase the burden of compliance for the
Company in Europe and will necessitate continued compliance expenditures
of a capital nature.
CASH FLOW FROM FINANCING ACTIVITIES
The Company completed three significant financing transactions during 2003.
These transactions were the completion of a new $150.0 million revolving
credit facility, the placement of $225.0 million aggregate principal amount
of Senior Subordinated Notes in a private offering and completion of a cash
tender offer to retire all of its outstanding 11-5/8% Senior Subordinated
Notes due in 2007.
The new $150.0 million revolving credit facility is 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 is 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 terminated
its existing $100.0 million revolving credit facility prior to the closing
of the new revolving credit facility. The interest rate varies due to a
number of factors including the duration of the specific borrowing and is
based upon either the Eurodollar, the Federal Funds effective or the
Company corporate based rate. The Company will pay a commitment fee
annually on the daily unused portion of the revolving credit facility.
On August 11, 2003 the Company completed the sale of $225 million aggregate
principal amount of its 7.5% Senior Subordinated Notes due 2013 in a
private offering. The Company used $98.2 million of the net proceeds from
this offering to fund the purchase of the outstanding 11-5/8% Senior
Subordinated Notes due 2007 pursuant to a tender offer completed on
September 30, 2003 with the remainder available for general corporate
purposes, which may include acquisitions.
The new Senior Subordinated Notes have been exchanged for the new 7.5%
Exchange Notes that have been registered under the Securities Act of 1933,
as amended, or applicable state securities laws. This transaction was
completed on October 30, 2003, with the new Exchange Notes being virtually
identical in all material respects to the 7.5% Senior Subordinated Notes
originally issued only to qualified institutional buyers in reliance of
Rule 144A and in offshore transactions pursuant to Regulation S under the
Securities Act as amended.
The Company completed a cash tender and consent solicitation for all of its
outstanding 11-5/8% Senior Subordinated Notes due 2007. Holders received
consideration of 110.625% of the principal amount of notes, which included
a consent payment of 1.5% of the principal amount of the notes. In
accordance with the terms of the indenture governing the notes, any notes
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not tendered were called for redemption, redeemed and the notes retired.
This closes the last of the financings originally used to primarily fund
the 1999 acquisition by Bio-Rad of Pasteur Sanofi Diagnostics from Sanofi
Synthelabo and the Institut Pasteur.
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 have
progressed beyond the most initial phases. Should the Company make a
material acquisition it would most likely require an increase in
borrowed funds.
The Board of Directors has authorized the Company to repurchase up to
$18 million of the Company's common stock over an indefinite period of
time. Through December 31, 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 the Company's ability to repurchase its own
stock. There were no share repurchases made during 2002 or 2003. The
repurchase is designed to improve shareholder value and to satisfy the
Company's obligations under the employee stock purchase and stock option
plans.
CONTRACTUAL OBLIGATIONS
The following summarizes certain of our contractual obligations as of
December 31, 2003 and the effect such obligations are expected to have
on our cash flows in future periods (in millions):
Less
than More
One 1-3 3-5 than 5
Contractual Obligations Total Year Years Years Years
-----------------------------------------------------------------------
Long-term debt,
including current portion (1) 226.0 0.2 0.5 0.3 225.0
Operating lease obligations (2) 52.8 18.7 21.9 9.3 2.9
Purchase obligations (3) 10.9 7.3 1.3 0.8 1.5
Long-term liabilities 16.9 -- 2.7 0.9 13.3
(1) These amounts represent expected cash payments, include capital
lease obligations and are included in our Consolidated Balance Sheets.
See Note 6 of the Consolidated Financial Statements for additional
information about our debt.
(2) Operating lease obligations are described in Note 13 of the
Consolidated Financial Statements.
(3) Purchase obligations include agreements to purchase goods or
services that are enforceable and legally binding on the Company and
that specify all significant terms. Purchase obligations exclude
agreements that are cancelable without penalty.
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FINANCIAL RISK MANAGEMENT
Bio-Rad uses derivative financial instruments to reduce the Company's
exposure to fluctuations in foreign exchange rates and, on occasion,
interest rates. No derivative financial instruments are entered into
for the purpose of speculating or trading. Company policy limits all
derivative positions exclusively to reducing risk by hedging an
underlying economic exposure. These derivative investments do not
qualify for hedge accounting treatment under Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and
Hedging Activities." Derivative instruments used in these transactions
will be valued at fair value and changes in fair value will be included
in reported earnings.
Bio-Rad operates and conducts business in many countries and is exposed
to movements in foreign currency exchange rates. Additionally,
Bio-Rad's consolidated net equity is impacted by the conversion of the
net assets of international subsidiaries for which the functional
currency is not the U.S. Dollar. Foreign currency exposures are managed
on a centralized basis by the Company's Treasury Department. This
allows for the netting of natural offsets and lowers transaction costs
and exposures. Bio-Rad currently makes more than 60% of its sales
outside the United States and weakening in one currency can often be
offset by strengthening in another.
Bio-Rad typically enters into forward exchange contracts to sell its
foreign currency. Contracts primarily in British Sterling, Japanese Yen
and the Euro, are entered into typically for 30 to 60 days. The costs
are recognized in income monthly and generally are the reciprocal of the
change in underlying assets. Bio-Rad does not hold any derivative
contracts that hedge its foreign currency denominated net asset
exposures.
Bio-Rad uses sensitivity analysis to assess the market risk associated
with its foreign currency exchange risk. Market risk is the potential
change in fair value of derivative positions from an adverse movement in
currency exchange rates. As of December 31, 2003, the Company's market
risk was not significant.
The Company's long-term debt consists mostly of fixed rate instruments.
While the Company has used derivative instruments in the past, it did
not hold any interest rate derivative contracts at December 31, 2003.
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