SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarter Ended July 2, 2005 Commission File No. 0-6994
------
NEW BRUNSWICK SCIENTIFIC CO., INC.
State of Incorporation - New Jersey E. I. #22-1630072
---------- -----------
44 Talmadge Road, Edison, N.J. 08818-4005
Registrant's Telephone Number: 732-287-1200
------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding twelve (12) months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past ninety (90) days. Yes X No __
--
Indicate by checkmark whether the registrant is an accelerated filer (as defined
in Rule 12b-2 of the Act). Yes No X
-
There are 8,995,515 Common shares outstanding as of July 29, 2005.
1
NEW BRUNSWICK SCIENTIFIC CO., INC.
Index
PAGE
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets - July 2, 2005 and December 31, 2004 3
Consolidated Statements of Operations - Three and Six Months Ended
July 2, 2005 and July 3, 2004 4
Consolidated Statements of Cash Flows -
Six Months Ended July 2, 2005 and July 3, 2004 5
Consolidated Statements of Comprehensive (Loss) Income -
Three and Six Months Ended July 2, 2005 and July 3, 2004 6
Notes to Unaudited Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition 13
Item 3. Qualitative and Quantitative Disclosures about Market Risk 19
Item 4. Controls and Procedures 19
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 6. Exhibits and Reports and Form 8-K 21
Signatures 22
Exhibit 31(a)
Exhibit 31(b)
Exhibit 32
FORWARD-LOOKING STATEMENTS
This document contains "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Forward-looking statements
may be identified by words such as "expects," "anticipates," "intends," "plans,"
"believes," "seeks," "estimates," "will" or words of similar meaning and
include, but are not limited to, statements about the expected future business
and financial performance of the Company. The forward-looking statements
involve a number of risks and uncertainties, including but not limited to,
changes in economic conditions, demand for the Company's products, pricing
pressures, intense competition in the industries in which the Company operates,
the need for the Company to keep pace with technological developments and timely
respond to changes in customer needs, the Company's dependence on third party
suppliers, the effect on foreign sales of currency fluctuations, acceptance of
new products, the labor relations of the Company and its customers and other
factors identified in the Company's Securities and Exchange Commission filings.
Forward-looking statements are based on management's current expectations and
assumptions, which are inherently subject to uncertainties, risks and changes in
circumstances that are difficult to predict. Actual outcomes and results may
differ materially from these expectations and assumptions due to changes in
global political, economic, business, competitive, market, regulatory and other
factors. The Company undertakes no obligation to publicly update or review any
forward-looking information, whether as a result of new information, future
developments or otherwise.
2
PART I - FINANCIAL INFORMATION
NEW BRUNSWICK SCIENTIFIC CO., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
(Unaudited)
ASSETS
------
July 2, December 31,
2005 2004
----------- ----------
Current Assets:
Cash and cash equivalents $10,347 $10,846
Accounts receivable, net 9,103 11,332
Inventories:
Raw materials and sub-assemblies 7,483 6,914
Work-in-process 2,556 1,366
Finished goods 3,636 3,859
------- -------
Total inventories 13,675 12,139
Deferred income taxes 1,076 1,089
Prepaid expenses and other current assets 1,424 1,143
------- -------
Total current assets 35,625 36,549
------ ------
Property, plant and equipment, net 6,055 6,495
Goodwill 8,082 8,769
Other assets 1,932 1,982
------ ------
Total assets $51,694 $53,795
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Current installments of long-term debt $ 1,684 $ 1,759
Accounts payable and accrued expenses 7,060 7,592
------- -------
Total current liabilities 8,744 9,351
------- -------
Long-term debt, net of current installments 5,594 6,022
Other liabilities 2,117 2,467
------- -------
Total liabilities 16,455 17,840
Commitments and contingencies
Shareholders' equity:
Common stock, $0.0625 par;
authorized 25,000,000 shares; issued
and outstanding,
2005 - 8,990,262 and 2004 - 8,866,262 562 554
Capital in excess of par 53,333 52,793
Accumulated deficit (16,852) (17,263)
Accumulated other comprehensive loss (1,792) (106)
Notes receivable from exercise of
stock options (12) (23)
------ -------
Total shareholders' equity 35,239 35,955
------ ------
Total liabilities and
shareholders' equity $51,694 $53,795
====== ======
See notes to unaudited consolidated financial statements.
3
NEW BRUNSWICK SCIENTIFIC CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended Six Months Ended
July 2, July 3, July 2, July 3,
2005 2004 2005 2004
-------------------- ------------------ --------- ------------
Restated(1) Restated(1)
Net sales $ 15,180 $ 14,905 $ 31,288 $ 29,527
Operating costs and expenses:
Cost of sales 9,267 8,883 19,073 17,574
Selling, general and administrative expenses 4,601 4,431 9,123 8,703
Research, development and engineering expenses 1,239 973 2,376 1,876
-------------------- ------------------ --------- ------------
Total operating costs and expenses 15,107 14,287 30,572 28,153
-------------------- ------------------ --------- ------------
Income from operations 73 618 716 1,374
Other income (expense):
Interest income 58 17 111 35
Interest (expense) credit (145) 56 (181) (155)
Other, net 2 (5) 21 (69)
-------------------- ------------------ --------- ------------
(85) 68 (49) (189)
-------------------- ------------------ --------- ------------
(Loss) income before income tax (benefit) expense (12) 686 667 1,185
Income tax (benefit) expense (16) 254 256 473
-------------------- ------------------ --------- ------------
Net income $ 4 $ 432 $ 411 $ 712
==================== ================== ========= ============
Basic income per share $ 0.00 $ 0.05 $ 0.05 $ 0.08
==================== ================== ========= ============
Diluted income per share $ 0.00 $ 0.05 $ 0.05 $ 0.08
==================== ================== ========= ============
Basic weighted average number of shares
outstanding 8,951 8,714 8,922 8,681
==================== ================== ========= ============
Diluted weighted average number of shares
outstanding 9,002 8,882 8,988 8,837
==================== ================== ========= ============
<FN>
(1)See Note 2, "Restatement of Consolidated Financial Statements" of the Notes to Unaudited
Consolidated Financial Statements.
See notes to unaudited consolidated financial statements.
4
NEW BRUNSWICK SCIENTIFIC CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended
July 2, July 3,
2005 2004
------------------ ------------
Cash flows from operating activities: Restated(1)
Net income $ 411 $ 712
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization 628 681
Deferred income taxes 51 72
Change in fair value of interest rate swaps (116) (180)
Change in related balance sheet accounts:
Accounts and notes receivable 1,724 396
Inventories (1,886) (1,492)
Prepaid expenses and other current assets (339) (165)
Other assets and goodwill (295) (60)
Accounts payable and accrued expenses (396) 190
Advance payments from customers 254 (8)
Other liabilities (285) (185)
------------------ ------------
Net cash used in operating activities (249) (39)
------------------ ------------
Cash flows used in investing activities:
Additions to property, plant and equipment (318) (410)
Proceeds from sale of equipment - 32
------------------ ------------
Net cash used in investing activities (318) (378)
------------------ ------------
Cash flows from financing activities:
Repayments of long-term debt (336) (428)
Proceeds from issue of shares under stock purchase and option plans 444 412
Payments on notes receivable related to exercised stock options 11 11
------------------ ------------
Net cash provided by (used in) financing activities 119 (5)
------------------ ------------
Net effect of exchange rate changes on cash ( 51) 3
------------------ ------------
Net decrease in cash and cash equivalents (499) (419)
Cash and cash equivalents at beginning of period 10,846 10,536
------------------ ------------
Cash and cash equivalents at end of period $ 10,347 $ 10,117
================== ============
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 285 $ 381
Income taxes $ 731 $ 529
<FN>
(1)See Note 2, "Restatement of Consolidated Financial Statements" of the Notes to Unaudited Consolidated
Financial Statements.
See notes to unaudited consolidated financial statements.
5
NEW BRUNSWICK SCIENTIFIC CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(In thousands)
(Unaudited)
Three Months Ended Six months Ended
July 2, July 3, July 2, July 3,
2005 2004 2005 2004
-------------------- ------------------ --------- ------------
Restated(1) Restated(1)
Net income $ 4 $ 432 $ 411 $ 712
Other comprehensive (loss) income:
Foreign currency translation adjustment (1,125) 174 (1,686) 342
(1)
--------------------
Change in fair value of interest rate swaps - (1) -
------------------ --------- ------------
Comprehensive (loss) income $ (1,122) $ 606 $ (1,276) $ 1,054
==================== ================== ========= ============
<FN>
(1)See Note 2, "Restatement of Consolidated Financial Statements" of the Notes to Unaudited
Consolidated Financial Statements.
See notes to unaudited consolidated financial statements.
6
NEW BRUNSWICK SCIENTIFIC CO., INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Interim results:
In the opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments (consisting only of normal recurring
adjustments) necessary to present fairly, the financial position of the Company
as of July 2, 2005 and the results of its operations for the three and six
months ended July 2, 2005 and July 3, 2004 and its cash flows for the six months
ended July 2, 2005 and July 3, 2004. Interim results may not be indicative of
the results that may be expected for the year.
The accompanying unaudited consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's annual report on Form 10-K for the year ended December
31, 2004.
Note 2 - Restatement of consolidated financial statements:
On March 21, 2005, the Company announced that certain of its historical
financial statements required restatement. Specifically, the Company determined
that the restatement was required because of a misapplication of SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities" as it applies to
three interest rate swaps that were entered into in 1999 and 2004 to fix the
interest rates on variable rate debt incurred primarily for acquisitions in 1999
and 2003.
The interest rate swaps were not previously disclosed or accounted for and were
not properly designated as effective cash flow hedges, as defined by SFAS No.
133 which went into effect on January 1, 2001. The accounting rules require
that changes in the fair value of swaps not properly designated as effective
cash flow hedges be recorded as a part of interest expense in each period's
statement of operations.
The required changes affected the previously filed financial statements for the
years ended December 31, 2001, 2002 and 2003, as well as for the 2003 quarters
and the 2004 quarters through October 2, 2004. The foregoing restatement
adjustments did not affect the Company's reported cash and cash equivalents or
income (loss) from operations in any of the above periods.
7
The following table presents the impact of the financial statement adjustments
on the Company's previously reported consolidated statements of operations for
the three and six months ended July 3, 2004 (in thousands):
Three Months Ended July 3, 2004
-------------------------------
Previously As
-------------------------------
Reported Adjustments(1) Restated
--------------------------------- --------------- -------------------------------
Income from operations $ 618 $ - $ 618
Other income (expense):
Interest income 17 - 17
Interest expense (170) 226 56
Other expense, net (5) - (5)
--------------- -------------------------------
(158) 226 68
--------------- -------------------------------
Income before income tax expense
(benefit) 460 226 686
Income tax expense (benefit) 164 90 254
--------------- -------------------------------
Net income $ 296 $ 136 $ 432
================================= =============== ===============================
Basic income per share $ 0.03 $ 0.02 $ 0.05
================================= =============== ===============================
Diluted income per share $ 0.03 $ 0.02 $ 0.05
================================= =============== ===============================
Basic weighted average number
of shares outstanding 8,714 8,714 8,714
================================= =============== ===============================
Diluted weighted average number
of shares outstanding 8,882 8,882 8,882
================================= =============== ===============================
Six Months Ended July 3, 2005
-------------------------------------------
Previously
Reported Adjustments(1) As Restated
------------ --------------- -------------
Income from operations $ 1,374 $ - $ 1,374
Other income (expense):
Interest income 35 - 35
Interest expense (335) 180 (155)
Other expense, net (69) - (69)
(369) 180 (189)
Income before income tax expense
(benefit) 1,005 180 1,185
Income tax expense (benefit) 401 72 473
Net income $ 604 $ 108 $ 712
=============== =============
Basic income per share $ 0.07 $ 0.01 $ 0.08
============ =============== =============
Diluted income per share $ 0.07 $ 0.01 $ 0.08
============ =============== =============
Basic weighted average number
of shares outstanding 8,681 8,681 8,681
============ =============== =============
Diluted weighted average number
of shares outstanding 8,837 8,837 8,837
============ =============== =============
<FN>
(1) Reflects adjustments to interest expense and related deferred tax benefit to correct
for the misapplication of SFAS No. 133 as it applies to interest rate swaps entered into in
1999 and 2004 primarily to fix the interest rates on variable rate debt incurred for
acquisitions in 1999 and 2003.
Note 3 - Interest rate swaps:
On April 1, 2005 the Company put in place the required documentation as
prescribed by SFAS No. 133 and designated its three interest rate swaps referred
to in Note 2 above as effective interest rate hedges and will therefore avail
itself of the hedge accounting rules for the remainder of the lives of the
swaps. As such, the negative fair values of the swaps as of the designation
date, which aggregated $146,000, will ultimately be recognized into income over
the remaining lives of the interest rate swaps as ineffectiveness. On a going
forward basis, we have for this past quarter and will continue to measure the
ineffectiveness of the hedges based on the hypothetical derivative method as
described in DIG Issue G-7. Hedge ineffectiveness measured each quarter will be
recognized in operations. The effective changes in the fair value of the swaps
subsequent to April 1, 2005 will be shown as an increase or decrease in other
comprehensive income on the Company's balance sheet in accordance with the
requirements of SFAS No. 133.
8
At July 2, 2005 the remaining negative fair values of the swaps had increased by
$1,000 and aggregated $147,000. During the three and six months ended July 2,
2005 and July 3, 2004, respectively, the change in the fair value of the swap
agreements recorded as a decrease to interest expense amounted to zero and
$117,000, respectively, for the 2005 periods and $226,000 and $180,000,
respectively, for the 2004 periods.
Note 4 - Income per share:
Basic income per share is calculated by dividing net income by the weighted
average number of shares outstanding. Diluted income per share is calculated by
dividing net income by the sum of the weighted average number of shares
outstanding plus the dilutive effect of stock options which have been issued by
the Company using the treasury stock method. Antidilutive options are excluded
from the calculation of diluted income per share. The dilutive effect of stock
options for the three and six month periods ended July 2, 2005 and July 3, 2004
is 50,668 and 66,115 shares, respectively, for the 2005 periods and 168,000 and
156,000 shares, respectively, for the 2004 periods. Stock options to purchase
153,700 and 151,500 shares of common stock are excluded from the income per
share calculation for the three and six month periods ended July 2, 2005,
respectively, because their inclusion would also be antidilutive. There were no
options excluded from the calculation for the three and six month periods ended
July 3, 2004.
Note 5 - Long-term debt and credit agreement:
The Company and Wachovia Bank, National Association (the "Bank") are parties to
an agreement, which has had a number of amendments (the "Bank Agreement"), which
has been extended to May 31, 2008, and which provides the Company with a credit
facility for acquisitions, equipment loans, working capital and letters of
credit, and foreign exchange transactions. The maturity of the outstanding debt
incurred related to the acquisition portion of the credit facility with respect
to a 1999 acquisition is December 1, 2006, and with respect to a 2003
acquisition is November 1, 2008. The maturity date of the outstanding debt
incurred related to the equipment loan portion of the credit facility is
November 1, 2008. There are no compensating balance requirements and any
borrowings under the Bank Agreement bear interest at the Bank's prime rate less
125 basis points or Libor plus 125 basis points, at the discretion of the
Company. At July 2, 2005, the Bank's prime rate was 6.25% and LIBOR was 3.34%.
All of the Company's domestic assets, which are not otherwise subject to lien,
have been pledged as security for any borrowings under the Bank Agreement. The
Bank Agreement contains various business and financial covenants including among
other things, a debt service ratio, a net worth covenant and a ratio of total
liabilities to tangible net worth. The Company is in compliance with its
covenants pursuant to the Bank Agreement at July 2, 2005.
9
The following amounts were outstanding and available under the Bank Agreement
(in thousands):
July 2, 2005 December 31, 2004
--------------------------------------- -----------------
Total
Line Available Outstanding Outstanding
------- -------------- -------------- ---------------
Acquisitions $10,000 $ 4,639 $5,361(a) $5,634(a)
Equipment loans 2,500 1,936 564(b) 646(b)
Working capital and
letters of credit 5,000 5,000 - 9(c)
Foreign exchange
transactions 10,000 10,000 - -
------- -------- ------ ------
$27,500 $21,575 $5,925 $6,289
======= ======== ====== =====
<FN>
- -----------------
(a) $4,200,000 in 2005 and $4,366,000 in 2004 at fixed interest of 8% per annum and $1,161,000 in 2005 and $1,268,000 in
2004 at fixed interest of 4.46% per annum through the use of interest rate swap agreements
(b) Interest fixed at 4.14% per annum through the use of an interest rate swap agreement
(c) Letters of credit
At July 2, 2005 and December 31, 2004, the interest rate swaps referred to above
had aggregate negative fair values of $147,000 and $264,000, respectively, and
are included in Other Liabilities in the accompanying consolidated balance
sheets. The interest rate swaps have the same notional values as the related
debt and expire on the same dates as the related debt.
In November 1999, the Company issued notes in the amount of 250,000 ($392,500
at the date of acquisition) in connection with the acquisition of DJM
Cryo-Research Group. The notes bear interest at 6%. Accrued interest is
payable annually and principal is payable in five equal annual installments
which commenced in November 2003. At July 2, 2005 and December 31, 2004, the
balance due on the notes was 150,000 ($265,000) and 150,000 ($288,000),
respectively.
In November 2003, the Company issued notes in the amount of 975,000 ($1,645,000
at the date of acquisition) in connection with the acquisition of RS Biotech.
The notes bear interest, payable semi-annually at the lower of 6% or the base
rate of the Bank of Scotland. Principal is payable 487,500 on the first and
second anniversary, respectively, of the acquisition. At July 2, 2005 and
December 31, 2004, the balance due on the notes was 487,500 ($862,000) and
487,500 ($936,000), respectively.
The Company is a party to first and second mortgages on the facility of the
Company's Netherlands subsidiary, which bear interest of 5.50% and 5.45%,
respectively, per annum. During the terms of the mortgages, the Company is
obligated to make monthly payments of interest and quarterly payments of
principal. At July 2, 2005, $88,000 and $121,000 was outstanding under the
first and second mortgages, respectively, and at December 31, 2004, $124,000 and
$153,000 was outstanding under the first and second mortgages, respectively.
Each mortgage requires 80 equal quarterly payments of principal.
10
Note 6 - Shareholders' Equity:
At July 2, 2005, the Company has stock-based employee compensation plans, which
it accounts for in accordance with the provisions of Accounting Principles Board
(APB) Opinion No. 25, "Accounting for Stock Issued to Employees", and related
interpretations. As such, compensation expense is recorded on the date of grant
only if the current market price of the underlying stock exceeds the exercise
price. No stock-based employee compensation cost is reflected in net income, as
all options granted under those plans had an exercise price equal to the market
value of the underlying common stock on the date of grant. The Company has
adopted the disclosure standards of Statement of Financial Accounting Standards
(SFAS) No. 123, "Accounting for Stock-Based Compensation", which requires the
Company to provide pro forma net income and pro forma earnings per share
disclosures for employee stock option grants made in 1995 and future years as if
the fair-value-based method of accounting for stock options as defined in SFAS
No. 123 had been applied.
The following table illustrates the effect on net income and per share amounts
if the Company had applied the fair value recognition provisions of SFAS No. 123
to stock-based employee compensation (in thousands, except per share amounts):
Three Months Ended Six Months Ended
July 2, July 3, July 2, July 3,
2005 2004 2005 2004
-------------------- ------------------ -------- ------------
Restated(1) Restated(1)
Net income as reported $ 4 $ 432 $ 411 $ 712
Deduct: Total stock-based employee
compensation expense determined under fair
value based method, net of related tax effects 94 86 173 157
-------------------- ------------------ -------- ------------
Pro forma net (loss) income $ (90) $ 346 $ 238 $ 555
==================== ================== ======== ============
(Loss) income per share:
Basic-as reported $ 0.00 $ 0.05 $ 0.05 $ 0.08
==================== ================== ======== ============
Basic-pro forma $ (0.01) $ 0.04 $ 0.03 $ 0.06
==================== ================== ======== ============
Diluted-as reported $ 0.00 $ 0.05 $ 0.05 $ 0.08
==================== ================== ======== ============
Diluted-pro forma $ (0.01) $ 0.04 $ 0.03 $ 0.06
==================== ================== ======== ============
<FN>
(1)See Note 2, "Restatement of Consolidated Financial Statements" of the Notes to Unaudited
Consolidated Financial Statements.
11
The fair value of each stock option granted during the period is estimated on
the date of grant using the Black-Scholes option pricing model with the
following assumptions:
Three Months Ended Six Months Ended
July 2, July 3, July 2, July 3,
2005 2004 2005 2004
------------------ ------------------ --------- ---------
Expected life (years) N/A 6.0 6.0 6.0
Expected volatility N/A 51.07% 40.35% 51.07%
Expected dividend yield N/A - - -
Risk-free interest rate N/A 4.85% 3.99% 4.85%
Weighed average fair value of options
granted during the period N/A $ 6.07 $ 6.14 $ 6.07
Note 7 - Pension plan:
Components of net period benefit cost for the three and six months ended July 2,
2005 and July 3, 2004 are as follows (in thousands):
Three Months Ended Six Months Ended
July 2, July 3, July 2, July 3,
2005 2004 2005 2004
-------------------- ------------------ --------- ---------
Service cost $ 88 $ 95 $ 176 $ 190
Interest cost 124 120 248 240
Expected return on plan assets (132) (118) (264) (233)
Amortization of net obligation 5 5 10 10
Amortization of prior service costs (1) (1) (2) (2)
Amortization of net loss 48 54 96 108
-------------------- ------------------ --------- ---------
Net periodic pension cost $ 132 $ 155 $ 264 $ 313
==================== ================== ========= =========
The Company previously disclosed in its financial statements for the year ended
December 31, 2004, that it expects to contribute $1,022,000 to its pension plan
in 2005. As of July 2, 2005, $511,000 of contributions have been made.
The Company has a defined contribution plan for its U.S. employees, with a
specified matching Company contribution. The expense to the Company for the
three and six months ended July 2, 2005 and July 3, 2004 was $42,000 and
$83,000, respectively for the 2005 periods and $35,000 and $73,000,
respectively, for the 2004 periods.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
The following is Management's Discussion and Analysis of significant factors
that have affected the Company's operating results and financial condition
during the three and six month periods ended July 2, 2005 and July 3, 2004,
respectively, which should be read in conjunction with the Company's December
31, 2004 Form 10-K.
RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS
As further described in Note 2 of the Notes to Unaudited Consolidated
Financial Statements, on March 21, 2005, the Company announced that certain of
its historical 2004 and earlier financial statements required restatement.
Consequently, Management's Discussion and Analysis of Financial Condition and
Results of Operations for the three and six months ended July 3, 2004 is being
restated.
Specifically, the Company determined that the restatement was required
because of a misapplication of SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities" as it applies to three interest rate swaps
that were entered into in 1999 and 2004 to fix the interest rates on variable
rate debt incurred primarily for acquisitions in 1999 and 2003.
The required changes affected the previously filed financial
statements for the years ended December 31, 2001, 2002 and 2003 as well as for
the 2003 quarters and the 2004 quarters through October 2, 2004.
The foregoing restatement adjustments did not affect the Company's
reported cash and cash equivalents, or related cash flows, or income (loss) from
operations in any of the above periods.
Results of Operations
---------------------
EXECUTIVE OVERVIEW
- -------------------
The Company is a leading provider of a wide variety of research equipment and
scientific instruments for the life sciences used to create, maintain and
control the physical and biochemical conditions required for the growth,
detection and storage of microorganisms.
The Company's products are used for medical, biological, chemical and
environmental research and for the commercial development of antibiotics,
proteins, hormones, enzymes, monoclonal antibodies, agricultural products,
fuels, vitamins, vaccines and other substances.
The Company sells its equipment to pharmaceutical companies, agricultural and
chemical companies, other industrial customers engaged in biotechnology, and to
medical schools, universities, research institutes, hospitals, private
13
laboratories and laboratories of federal, state and municipal government
departments and agencies in the United States. While only a small percentage of
the Company's sales are made directly to United States government departments
and agencies, its domestic business is significantly affected by government
expenditures and grants for research to educational research institutions and to
industry. The Company also sells its equipment both directly (primarily in
Western Europe) and through scientific equipment dealers to foreign companies,
institutions and governments. Foreign sales may be affected by U.S. export
control regulations applicable to scientific equipment.
Fisher Scientific, the Company's largest customer, is the exclusive U.S.
distributor of the Company's C-Line and I-Series biological shakers and is the
exclusive dealer for the Company's CO2 incubators in the U.S. Fisher Scientific
is also the exclusive distributor of the Company's C-Line shakers in certain
European countries and has a broader distribution arrangement with the Company
in Canada and in France.
NET SALES
- ----------
The following table summarizes consolidated backlog, net orders and net sales
for the three and six months ended July 2, 2005 and July 3, 2004 (in thousands
of dollars):
Three Months Ended
July 2, July 3, Decrease) %
2005 2004 Increase Change
------------------- -------- ----------- -------
Backlog - beginning $ 7,987 $ 9,884 $ (1,897) (19.2)%
Add net orders received 16,198 14,735 1,463 9.9
Less net sales 15,180 14,905 275 1.8
------------------- -------- ----------- -------
Backlog - ending $ 9,005 $ 9,714 $ (709) (7.3)%
=================== ======== =========== =======
Six Months Ended
July 2, July 3, (Decrease) %
2005 2004 Increase Change
----------------- -------- ----------- -------
Backlog - beginning $ 8,376 $ 9,018 $ (642) (7.1)%
Add net orders received 31,917 30,223 1,694 5.6
Less net sales 31,288 29,527 1,761 6.0
----------------- -------- ----------- -------
Backlog - ending $ 9,005 $ 9,714 $ (709) (7.3)%
================= ======== =========== =======
Net sales increased $275,000 or 1.8% to $15,180,000 for the three months ended
July 2, 2005 from $14,905,000 in the prior year period with both U.S. and
international sales each increasing slightly and the effect of foreign currency
translation accounting for approximately half of the increase. For the six
months ended July 2, 2005, net sales increased $1,761,000 or 6.0% to $31,288,000
from $29,527,000 for the first six months of 2004. The overall increase in
sales for the 2005 six month period was due principally to higher shipments of
fermentation equipment, ultra low temperature freezers and CO2 incubators. Also,
the effect of foreign currency translation increased sales by $385,000. For the
2005 six month period sales in the U.S. declined 2.4% due to the continuing
slowdown in purchases of research equipment by industry and government funded
14
enterprises while international sales, with particular strength in Europe,
increased 12.5%. Orders during the 2005 three and six month periods increased
9.9% and 5.6%, respectively, while backlog decreased 7.3%. The decrease in
backlog is attributable to the shortening of lead times required to manufacture
equipment as a result of the Company's continuing efforts to implement lean
manufacturing techniques.
GROSS MARGIN
- -------------
The following table shows gross profit and gross margin for the three and six
months ended July 2, 2005 and July 3, 2004 (in thousands of dollars):
Three Months Ended Six Months Ended
July 2, July 3, July 2, July 3,
2005 2004 2005 2004
-------------------- ------------------ --------- ---------
Net sales $ 15,180 $ 14,905 $ 31,288 $ 29,527
Cost of sales 9,267 8,883 19,073 17,574
-------------------- ------------------ --------- ---------
Gross profit $ 5,913 $ 6,022 $ 12,215 $ 11,953
==================== ================== ========= =========
Gross margin 39.0% 40.4% 39.0% 40.5%
==================== ================== ========= =========
The decrease in gross margin to 39.0% for the 2005 second quarter from 40.4% in
the second quarter of 2004 and the decrease to 39.0% for the first six months of
2005 from 40.5% for the first six months of 2004 was due primarily to aggressive
competitive discounting, less favorable product mix and the increased percentage
of international sales, a portion of which are sold through dealers and
distributors which require higher discounts than when sold on a direct basis as
in the U.S. or to a large degree through the Company's European subsidiaries.
For the six month period, gross margin decreases from these factors were
partially offset by higher absorption of overhead as a result of the increased
volume.
SELLING, GENERAL AND ADMINISTRATIVE
- --------------------------------------
Selling, general and administrative expenses increased $170,000 or 3.8% to
$4,601,000 during the 2005 quarter from $4,431,000 during the second quarter of
2004 and increased $420,000 or 4.8% to $9,123,000 during the six months ended
July 2, 2005 from $8,703,000 for the first six months of 2004. The increase
during the second quarter of 2005 was primarily due to $61,000 of expenses
related to compliance with the requirements of Section 404 of the
Sarbanes-Oxley Act (SOX 404) and $43,000 to the effect of foreign currency
translation. The increase for the six month period ended July 2, 2005 from the
comparable period of 2004 was primarily due to $189,000 related to complying
with SOX 404 and $127,000 due to the effect of foreign currency translation.
RESEARCH, DEVELOPMENT AND ENGINEERING
- ----------------------------------------
Research, development and engineering expenses increased $266,000 or 27.3% to
$1,239,000 during the 2005 second quarter from $973,000 during the comparable
15
2004 quarter. For the 2005 six months, expenses increased $500,000 or 26.7% to
$2,376,000 from $1,876,000 for the first six months of 2004. The increases for
both periods are due to the Company's new product development program, primarily
the cost of outsourcing of certain engineering efforts, the cost of prototypes
and the addition of personnel, in order to meet an aggressive development
schedule.
INTEREST INCOME
- ---------------
Interest income increased to $58,000 during the 2005 quarter from $17,000 during
the second quarter of 2004 and increased to $111,000 during the 2005 six months
from $35,000 for the first six months of 2004 due primarily to rising interest
rates on invested cash.
INTEREST EXPENSE
- -----------------
Interest expense increased to $145,000 during the quarter ended July 2, 2005
from a negative interest amount of $56,000 for the second quarter of 2004 due to
a lower level of average outstanding debt during the 2005 quarter as well as the
positive effect of the change in the fair value of interest rate swaps of
$226,000 in 2004 (reduction in interest expense) versus zero in the 2005
quarter. For the six month period ended July 2, 2005 interest expense increased
to $181,000 from $155,000 for the comparable 2004 period due to the positive
effect of interest rate swaps which amounted to $117,000 in the 2005 period
compared with $180,000 in the 2004 period. Excluding the effect of the interest
rate swaps, interest expense decreased $25,000 and $37,000 during the 2005 three
and six month periods, respectively, due to the lower level of outstanding debt.
OTHER INCOME (EXPENSE), NET
- ------------------------------
The following table details other income (expense), net for the three and six
month periods ended July 2, 2005 and July 3, 2004 (in thousands):
Three Months Ended Six Months Ended
July 2, July 3, July 2, July 3,
2005 2004 2005 2004
-------------------- ------------------ --------- ---------
Gain (loss) on foreign currency transactions (a) $ 16 $ 39 $ 48 $ (10)
Bank fees (11) (11) (21) (23)
Loss on sale of fixed assets - (30) - (30)
Other, net (3) (3) (6) (6)
-------------------- ------------------ --------- ---------
Total other income (expense), net $ 2 $ (5) $ 21 $ (69)
==================== ================== ========= =========
_______________________
<FN>
(a) Realized foreign exchange gains and losses which relate primarily to the settlement of
purchases in the normal course of business between the Company's United States and
European operating companies.
16
INCOME TAX EXPENSE
- --------------------
For the Quarter ended July 2, 2005, the income tax benefit of $16,000 on a
pretax loss of $12,000 resulted from a slight decrease in the expected effective
tax rate for the year, based on projected U.S. and foreign results, as
calculated at July 2, 2005. The decrease in the Company's effective income tax
rate to 38.4% for the six months ended July 2, 2005 from 39.9% for the first six
months of 2004 is due to the higher ratio of income in 2005 from the Company's
European subsidiaries to its total income and the related effect of lower
foreign income tax rates than the Company's effective U.S. income tax rate.
FINANCIAL CONDITION
-------------------
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
CONTRACTUAL OBLIGATIONS
The Company's contractual obligations and commitments principally include
obligations associated with its outstanding indebtedness and future minimum
operating lease obligations as set forth in the following table:
Payments Due by Period
(In thousands)
------------------------
Contractual obligations:
Less than 1-3 4-5 More than
Total 1 Year Years Years 5 Years
------------------------ ---------- ------ ------ ----------
Long-term debt,
obligations (a) $ 7,278 $ 1,684 $5,534 $ 60 $ -
Operating lease obligations (b) 3,519 815 1,462 625 617
Purchase obligations(c) 6,852 6,716 136 - -
Other long-term liabilities (d) 530 - 530 - -
------------------------ ---------- ------ ------ ----------
Total contractual cash
Obligations $ 18,179 $ 9,215 $7,662 $ 685 $ 617
======================== ========== ====== ====== ==========
<FN>
(a) Consists primarily of debt incurred for acquisitions financed under the Company's Bank
Agreement and of notes due to the sellers of businesses acquired by the Company.
(b) Primarily reflects (on a gross basis before sublet income) lease obligations for five
premises in the United Kingdom, two of which have been sublet. Both of the subleased premises
have been sublet for the entire terms of their leases. One has a lease expiration date of 2014
and an annual rental of 99,750 ($176,000 at July 2, 2005). The second sublet premises has a
lease expiration date of September 28, 2009 and an annual rental of 45,000 ($80,000 at July 2,
2005).
(c) Primarily includes commitments for raw materials and services related to the Company's
production of equipment at its various manufacturing facilities.
(d) Represents a contingent liability for an earnout related to the acquisition of RS Biotech
provided a minimum number of units of CO2 Incubators are sold. The Company believes that the
payment of such additional consideration is determinable beyond a reasonable doubt and as such
has recorded the amount as a liability and as additional purchase price.
17
OPERATING ACTIVITIES
- --------------------
Cash and cash equivalents decreased $499,000 to $10,347,000 at July 2, 2005 from
$10,846,000 at December 31, 2004. Net cash used in operating activities
amounted to $249,000. The overall factors primarily affecting operating cash
flows during the six month period ended July 2, 2005 were (i) an increase in
inventories due primarily to a buildup in preparation for the 2-week summer
production shutdown, preparation for the release of new products and the
production of some large fermentation equipment for delivery in the third
quarter, (ii) an increase in prepaid expenses and other current assets,
primarily insurance and taxes, (iii) a decrease in accounts payable and accrued
liabilities, and (iv) a decrease in other liabilities, partially offset by (i)
net income of $411,000 as adjusted for non-cash items such as depreciation and
amortization, deferred income taxes and a gain from the change in fair value of
interest rate swaps, (ii) a decrease in accounts and notes receivable, and (iii)
an increase in advance payments from customers.
INVESTING ACTIVITIES
- --------------------
In the 2005 period, net cash used in investing activities of $318,000 was as a
result of normal additions to property, plant and equipment.
FINANCING ACTIVITIES
- ---------------------
In the 2005 period, cash flows provided by financing activities totaled $119,000
and primarily consisted of proceeds from the issue of shares under stock
purchase and option plans that totaled $444,000, which was partially offset by
repayments of long-term debt of $336,000.
BANK AGREEMENT
- ---------------
The Company and Wachovia Bank, National Association (the "Bank") are parties to
an agreement, which has had a number of amendments (the "Bank Agreement"), which
has been extended to May 31, 2008, and which provides the Company with a credit
facility for acquisitions, equipment loans, working capital and letters of
credit, and foreign exchange transactions. The maturity of the outstanding debt
incurred related to the acquisition portion of the credit facility with respect
to a 1999 acquisition is December 1, 2006, and with respect to a 2003
acquisition is November 1, 2008. The maturity date of the outstanding debt
incurred related to the equipment loan portion of the credit facility is
November 1, 2008. There are no compensating balance requirements and any
borrowings under the Bank Agreement bear interest at the Bank's prime rate less
125 basis points or Libor plus 125 basis points, at the discretion of the
Company. At July 2, 2005, the Bank's prime rate was 6.25% and LIBOR was 3.34%.
18
Since the Bank Agreement requires that all borrowings be at variable interest
rates, the Bank provides the Company with a mechanism to fix interest rates on
borrowings by use of interest rate swaps. At July 2, 2005 the Company had three
interest rate swaps in place to fix the interest rates, primarily for debt
incurred for acquisitions in 1999 and 2003.
All of the Company's domestic assets, which are not otherwise subject to lien,
have been pledged as security for any borrowings under the Bank Agreement. The
Bank Agreement contains various business and financial covenants including among
other things, a debt service ratio, a net worth covenant and a ratio of total
liabilities to tangible net worth. The Company is in compliance with its
covenants pursuant to the Bank Agreement at July 2, 2005 and currently
anticipates to be in compliance with such covenants during the next 12 months.
CRITICAL ACCOUNTING POLICIES
- ------------------------------
No changes have been made in the Company's critical accounting policies during
the six months ended July 2, 2005.
RECENTLY ISSUED ACCOUNTING STANDARD
- -----------------------------------
In December, 2004, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 123 (revised 2004), "Share-Based Payment" ("SFAS No. 123R"). SFAS No. 123R
addresses the accounting for transactions in which an enterprise receives
employee services in exchange for (a) equity instruments of the enterprise or
(b) liabilities that are based on the fair value of the enterprise's equity
instruments or that may be settled by the issuance of such equity instruments.
SFAS No. 123R supersedes APB No. 25 and requires that such transactions be
accounted for using a fair-value based method. SFAS No. 123R requires companies
to recognize an expense for compensation cost related to share-based payment
arrangements including stock options and employee stock purchase plans. The
Company was required to implement the proposed standard no later than July 1,
2005. The cumulative effect of adoption, applied on a modified prospective
basis, would be measured and recognized on July 1, 2005. On April 14, 2005, the
Securities and Exchange Commission deferred the effective date of SFAS No. 123R
to annual periods beginning after June 15, 2005, which would require the Company
to adopt SFAS No. 123R effective January 1, 2006. The Company is currently
evaluating option valuation methodologies and assumptions related to its stock
compensation plans. Current estimates of option values using the Black Scholes
method may not be indicative of results from valuation methodologies ultimately
adopted.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
- -------------------------------------------------------------------
The information required by Item 3 has been disclosed in Item 7 of the Company's
Annual Report on Form 10-K for the year ended December 31, 2004. There has been
no material change in the disclosures regarding market risk.
19
Item 4. Controls and Procedures
-----------------------------------
The Company's Chief Executive Officer and Chief Financial Officer evaluated the
effectiveness of the Company's disclosure controls and procedures as of the end
of the period covered by this report. Based on that evaluation, the Chief
Executive Officer and Chief Financial Officer have concluded that the Company's
disclosure controls and procedures were effective as of the end of the period
covered by this report. There has been no change in the Company's internal
control over financial reporting that occurred during the quarter covered by
this report that has materially affected, or is reasonably likely to materially
affect, the Company's internal control over financial reporting.
20
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
- ----------------------------------------------------------------------
a) The Company's held its annual meeting on May 26, 2005
c) The following matters were voted upon at the annual meeting:
(i) To elect three Class III directors of the Company to terms of three
years and one Class I director of the Company to a term of one
year.
The votes cast for each director were as follows:
For Withheld
--- --------
Class III directors-
David Freedman 7,358,606 469,861
Dr. Jerome Birnbaum 7,393,882 434,585
James T. Orcutt 7,411,406 417,061
Class I director-
Kenneth Freedman 6,691,753 1,136,714
(ii) To approve amendments to the Company's Employee Stock Purchase
Plan. The votes cast were as follows:
Approve Disapprove Abstain Broker Nonvotes
------- ---------- ------- ---------------
4,889,586 129,684 19,578 2,789,256
Item 6. Exhibits and Reports on Form 8-K
- ------------------------------------------
a) Exhibits:
(3a) Restated Certificate of Incorporation, as amended is incorporated
herein by reference to Exhibit (4) to the Registrant's Registration Statement on
Form S-8 on file with the commission (No. 33-15606), and with respect to two
amendments to said Restated Certificate of Incorporation, to Exhibit (4b) of
Registrant's Registration Statement on Form S-8 (No. 33-16024).
(3b) Restated By-Laws of the Company, as amended and
restated is incorporated herein by reference to Exhibit (3b) to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 2004.
(3c) Rights Agreement dated as of October 31, 1999 between
New Brunswick Scientific Co., Inc. and American Stock Transfer & Trust Company,
as Rights Agent, which includes the Form of Right Certificate as Exhibit A and
the Summary of Terms of the Rights Agreement as Exhibit B is incorporated herein
by reference to Registrant's Current Report on Form 8-K filed on October 29,
1999.
21
(3d) Amendment to the Restated Certificate of Incorporation
of the Company is incorporated herein by reference to Item 2 of Registrant's
Proxy Statement filed with the Commission on or about April 13, 1999.
(4) See the provisions relating to capital structure in
the Restated Certificate of Incorporation, amendment thereto, incorporated
herein by reference from the Exhibits to the Registration Statements identified
in Exhibit (3) above.
(10) New Brunswick Scientific Co., Inc. Employee Stock Purchase Plan, as
amended, is incorporated herein by reference to Item 2 of Registrant's Proxy
Statement filed with the Commission on April 17, 2005
31(a) Section 302 Certification - CEO
31(b) Section 302 Certification - CFO
32 Section 906 Certifications
b) Reports on Form 8-K during the quarter ended July 2, 2005:
i) Earnings press release for the three months ended April 2, 2005.
ii) Press release announcing the introduction of new products.
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NEW BRUNSWICK SCIENTIFIC CO., INC.
----------------------------------
(Registrant)
Date: August 10, 2005 /s/ David Freedman
------------------
David Freedman
Chairman and
Chief Executive Officer
Date: August 10, 2005 /s/ Samuel Eichenbaum
---------------------
Samuel Eichenbaum
Vice President, Finance,
Chief Financial Officer and Treasurer
(Principal Accounting Officer)
22