UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended April 1, 2006
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-6994
NEW BRUNSWICK SCIENTIFIC CO., INC.
----------------------------------
(Exact name of registrant as specified in its charter)
New Jersey 22-1630072
- -------------------------------------------------------------- ------------------------------------
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
44 Talmadge Road
Edison, New Jersey 08817
- -------------------------------------------------------------- ------------------------------------
(Address of principal executive offices) (Zip Code)
(732) 287-1200
---------------
(Registrant's telephone number, including area code)
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 a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange act. (Check
one):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated
filer [X]
Indicate by checkmark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
There are 9,126,514 Common shares outstanding as of April 12, 2006.
1
NEW BRUNSWICK SCIENTIFIC CO., INC.
Index
PART I - FINANCIAL STATEMENTS
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets - April 1, 2006 and December 31, 2005 4
Consolidated Statements of Operations - Three Months Ended
April 1, 2006 and April 2, 2005 5
Consolidated Statements of Cash Flows -
Three Months Ended April 1, 2006 and April 2, 2005 6
Consolidated Statements of Comprehensive Income (Loss) -
Three Months Ended April 1, 2006 and April 2, 2005 8
Notes to Unaudited Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition 15
Item 3. Qualitative and Quantitative Disclosures about Market Risk 20
Item 4. Controls and Procedures 20
PART II
Item 1. Legal Proceedings 21
Item 1A. Risk Factors 21
Item 6. Exhibits 21
Signatures 22
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 New Brunswick Scientific Co., Inc. and its
subsidiaries. The forward-looking statements involve a number of risks and
uncertainties, including but not limited to, changes in economic conditions,
demand for our products, pricing pressures, intense competition in the
industries in which we operate, the need for us to keep pace with technological
developments and timely respond to changes in our customer needs, our dependence
on third party suppliers, the effect on foreign sales of currency fluctuations,
acceptance of new products, our labor relations and our customers and other
factors identified in our 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. We undertakes no obligation to publicly update or review any
forward-looking information, whether as a result of new information, future
developments or otherwise. Unless the context requires otherwise, references in
this quarterly report on Form 10-Q to "Company", "we," "us," and "our" refer to
New Brunswick Scientific Co., Inc. and its subsidiaries.
2
PART I - FINANCIAL STATEMENTS.
NEW BRUNSWICK SCIENTIFIC CO., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
(Unaudited)
ASSETS
------
April 1, December 31,
2006 2005
--------- ---------
Current assets:
Cash and cash equivalents $ 8,859 $ 11,351
Accounts receivable, net 11,867 11,989
Inventories:
Raw materials and sub-assemblies 7,880 7,123
Work-in-process 2,745 2,120
Finished goods 4,107 3,912
--------- ---------
Total inventories 14,732 13,155
Deferred income taxes 548 543
Prepaid expenses and other current assets 1,653 1,211
--------- ---------
Total current assets 37,659 38,249
--------- ---------
Property, plant and equipment, net 6,723 6,595
Goodwill 7,938 7,864
Deferred income taxes 326 326
Other assets 1,927 1,932
--------- ---------
Total assets $ 54,573 $ 54,966
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current installments of long-term debt $ 4,526 $ 4,597
Accounts payable and accrued expenses 8,834 10,782
--------- ---------
Total current liabilities 13,360 15,379
--------- ---------
Long-term debt, net of current installments 1,280 1,389
Other liabilities 1,325 1,480
--------- ---------
Total liabilities 15,965 18,248
Commitments and contingencies
Shareholders' equity:
Common stock, $0.0625 par; authorized 25,000,000 shares;issued and outstanding:
2006 - 9,121,738 shares; 2005 - 9,006,922 shares 570 563
Capital in excess of par 54,080 53,423
Accumulated deficit (14,186) (14,769)
Accumulated other comprehensive loss (1,846) (2,489)
Notes receivable from exercise of stock options (10) (10)
--------- ---------
Total shareholders' equity 38,608 36,718
--------- ---------
Total liabilities and shareholders' equity $ 54,573 $$54,966
========= =========
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
April 1, April 2,
2006 2005
---------- ----------
Net sales $ 16,967 $ 16,108
Operating costs and expenses:
Cost of sales 10,060 9,806
Selling, general and administrative expenses 4,626 4,522
Research, development and engineering expenses 1,286 1,137
---------- ----------
Total operating costs and expenses 15,972 15,465
---------- ----------
Income from operations 995 643
Other income (expense):
Interest income 88 53
Interest expense (90) (36)
Other, net (30) 19
---------- ----------
(32) 36
---------- ----------
Income before income tax expense 963 679
Income tax expense 380 272
---------- ----------
Net income $ 583 $ 407
========== ==========
Basic income per share $ 0.06 $ 0.05
========== ==========
Diluted income per share $ 0.06 $ 0.05
========== ==========
Basic weighted average number of shares
outstanding 9,050 8,896
========== ==========
Diluted weighted average number of shares
outstanding 9,117 8,990
========== ==========
See notes to unaudited consolidated financial statements.
4
NEW BRUNSWICK SCIENTIFIC CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three Months Ended
April 1, April 2,
2006 2005
---------- ----------
Cash flows from operating activities:
Net income $ 583 $ 407
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 362 308
Share-based compensation 73 -
Deferred income taxes (5) 47
Change in fair value of interest rate swaps (24) (117)
Change in related balance sheet accounts:
Accounts and notes receivable 330 (1,270)
Inventories (1,438) (950)
Prepaid expenses and other current assets (416) (589)
Other assets 279 (154)
Accounts payable and accrued expenses (2,291) 1,262
Advance payments from customers 252 150
Other liabilities (149) (108)
---------- ----------
Net cash used in operating activities (2,444) (1,014)
---------- ----------
Cash flows used in investing activities:
Additions to property, plant and equipment (465) (188)
Proceeds from sale of equipment 6 -
---------- ----------
Net cash used in investing activities (459) (188)
---------- ----------
Cash flows from financing activities:
Tax benefits from share-based compensation 181 -
Repayments of long-term debt (196) (207)
Proceeds from issue of shares under stock purchase and option plans 410 240
Payments on notes receivable related to exercised stock options - 11
---------- ----------
Net cash provided by financing activities 395 44
---------- ----------
Net effect of exchange rate changes on cash 16 (16)
---------- ----------
Net decrease in cash and cash equivalents (2,492) (1,174)
Cash and cash equivalents at beginning of period 11,351 10,846
---------- ----------
Cash and cash equivalents at end of period $ 8,859 $ 9,672
========== ==========
See notes to unaudited consolidated financial statements.
5
NEW BRUNSWICK SCIENTIFIC CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(In thousands)
(Unaudited)
Three Months Ended
April 1, April 2,
2006 2005
--------- ---------
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 147 $ 157
Income taxes $ 535 $ 218
Supplemental Schedule of Non-Cash Financing Activates:
During the three months ended April 1, 2006, we retired 37,591 shares of Common
Stock that were tendered to us upon the exercise of certain employee stock
options. The market price of these shares aggregated $298,000.
See notes to unaudited consolidated financial statements.
6
NEW BRUNSWICK SCIENTIFIC CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
(Unaudited)
Three Months Ended
April 1, April 2,
2006 2005
------ ------
Net income $ 583 $ 407
Other comprehensive income (loss):
Foreign currency translation adjustment 637 (561)
Change in fair value of interest rate swaps 6 -
------ ------
Comprehensive income (loss) $1,226 $(154)
====== ------
See notes to unaudited consolidated financial statements.
7
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 April 1, 2006 and the results of its operations for the three months ended
April 1, 2006 and April 2, 2005 and its cash flows for the three months ended
April 1, 2006 and April 2, 2005. 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 our annual report on Form 10-K for the year ended December 31,
2005.
Note 2 - Interest rate swaps:
We account for our derivative and hedging transactions in accordance with SFAS
No. 133, "Accounting for Derivative Instruments and Certain Hedging Activities"
and SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities". SFAS No. 133 and SFAS No. 138 require that all derivative
instruments be recorded on the balance sheet at their respective fair values.
On April 1, 2005 we put in place the required documentation as prescribed by
SFAS No. 133 and designated three interest rate swaps as cash flow hedges and
will therefore avail ourselves to 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. Since April 1, 2005, 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 are shown as an increase or
decrease in other comprehensive income on our balance sheet in accordance with
the requirements of SFAS No. 133.
At April 1, 2006 the remaining negative fair values of the swaps aggregated
$1,000. During the three months ended April 1, 2006 and April 2, 2005, the
change in the fair value of the swap agreements recorded as a decrease to
interest expense amounted to $24,000 and $117,000, respectively.
Note 3 - 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
8
us using the treasury stock method. Antidilutive stock options are excluded
from the calculation of diluted income per share. For the three month periods
ended April 1, 2006 and April 2, 2005 there were no stock options that were
antidilutive. The dilutive effect of stock options for the three month periods
ended April 1, 2006 and April 2, 2005 are 67,000 and 94,000 shares,
respectively.
Note 4 - Long-term debt and credit agreement:
We are parties to an agreement with Wachovia Bank, National Association (the
"Bank"), which has had a number of amendments (the "Bank Agreement"), which has
been extended to May 31, 2008, and which provides us 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 our discretion. At April 1, 2006, the Bank's prime
rate was 7.75% and LIBOR was 4.83%.
All of our 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. We are in compliance with our covenants
pursuant to the Bank Agreement at April 1, 2006.
9
The following amounts were outstanding and available under the Bank Agreement
(in thousands):
April 1, 2006 December 31, 2005
---------------- -----------------
Total
Line Available Outstanding Outstanding
------- ---------- ------------- -------------
Acquisitions $10,000 $ 4,997 $ 5,003(a) $ 5,133(a)
Equipment loans 2,500 2,060 440(b) 481(b)
Working capital and letters of credit 5,000 4,971 29(c) 29(c)
Foreign exchange transactions 10,000 10,000 - -
------- ---------- ------------- -------------
$27,500 $ 22,028 $ 5,472 $ 5,643
======= ========== ============= =============
_____________________
(a) $4,003,000 in 2006 and $4,079,000 in 2005 at fixed interest of 8% per
annum and $1,000,000 in 2006 and $1,054,000 in 2005 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 April 1, 2006 and December 31, 2005, the interest rate swaps referred to
above had aggregate negative fair values of $1,000 and $36,000, 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, we 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% which are payable annually and principal
is payable in five equal annual installments which commenced in November 2003.
At April 1, 2006 and December 31, 2005, the balance due on the notes was
100,000 ($174,000) and 100,000 ($172,000), respectively.
We are parties to first and second mortgages on the facility of our Netherlands
subsidiary, which bear interest of 5.50% and 5.45%, respectively, per annum.
During the terms of the mortgages, we are obligated to make monthly payments of
interest and quarterly payments of principal. At April 1, 2006, $76,000 and
$102,000 was outstanding under the first and second mortgages, respectively, and
at December 31, 2005, $80,000 and $107,000 was outstanding under the first and
second mortgages, respectively. Each mortgage requires 80 equal quarterly
payments of principal.
Note 5 - Stock-Based Compensation:
We have non-qualified stock option plans for Officers and Key Employees, 10%
Shareholder Directors and Nonemployee Directors. These plans are administered
10
by the Compensation Committee of the Board of Directors. Options generally vest
over five years from the date of grant. The exercise price of the options
granted under the Nonemployee Directors plan must be at least 85% of the fair
value of our Common Stock at the time the options are granted, all other plans
require the exercise price of the options granted be not less than the fair
market value of our Common Stock at the time the options are granted. Options
may be exercised for a period of up to ten years from the date they are granted.
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 123 (revised 2004),
"Share-Based Payment" ("SFAS 123R"), which replaces "Accounting for Stock-Based
Compensation," ("SFAS 123") and supersedes Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS 123R requires
all sharebased payments to employees, including grants of employee stock
options, to be recognized in the financial statements based on their fair values
beginning with the first annual reporting period that begins after June 15,
2005. Under SFAS 123R, the pro forma disclosures previously permitted under
SFAS 123 are no longer an alternative to financial statement recognition.
We adopted the new standard effective January 1, 2006 and have selected the
Black-Scholes method of valuation for share-based compensation. We have adopted
the modified prospective transition method which requires that compensation cost
be recorded, as earned, for all unvested stock options and restricted stock
outstanding at the beginning of the first quarter of adoption of SFAS 123R. The
charge is being recognized in cost of sales, selling, general and administrative
expenses and research, development and engineering expenses over the remaining
service period after the adoption date based on the options' original estimate
of fair value.
The following table summarizes option activity for the three months ended April
1, 2006:
TABLE>
Weighted
Average Aggregate
Weighted Remaining Intrinsic
Average Contract Value
Stock Exercise Term (in
Options Price (in years) thousands)
--------- ------ ---------- -----------
Outstanding at December 31, 2005 591,920 $ 4.93
Granted at exercise prices which equaled the fair market value on the date of grant 107,000 7.14
Exercised (147,792) 4.58
Forfeited (375) 4.53
---------
Outstanding at April 1, 2006 550,753 $ 5.45 3.61 $ 1,597
=========
Exercisable at April 1, 2006 208,327 $ 4.46 2.01 $ 588
=========
For grants during the three months ended April 1, 2006, our weighted average
assumptions for expected volatility, dividends, expected term until exercise,
and risk-free interest rate were 48.08%, 0%, 4.5 years and 4.53%, respectively.
Expected volatility is based on historical volatility of our Common Stock. The
11
expected term of options is estimated based on our historical exercise rate and
forfeiture rates are estimated based on employment termination experience. The
risk-free rate is based on U.S. Treasury yields for securities in effect at the
time of grant with terms approximating the expected term until exercise of the
option. We granted options in the three months ended April 1, 2006 with a fair
value of $3.23 per option. In the three months ended April 1, 2006, we recorded
pre-tax share-based compensation for options of $66,000 which is included in our
income before income tax for the period. Had we not adopted SFAS 123R basic and
diluted income per share would have been $.07 for the three months ended April
1, 2006. We capitalized $7,000 of compensation costs into inventory as of April
1, 2006. As of April 1, 2006, there was $877,000 of total unrecognized
compensation cost related to unvested options that we expect to recognize over a
weighted average period of 44 months. We utilize newly issued shares to satisfy
the exercise of stock options. Prior to the adoption of SFAS 123R, we applied
the intrinsic-value-based method of accounting prescribed by APB 25, "Accounting
for Stock Issued to Employees", and related interpretations, to account for
stock options granted to employees. Under this method, compensation cost was
recorded only if the market price of the underlying common stock on the date of
grant exceeded the exercise price. SFAS 123, "Accounting for Stock-Based
Compensation", established accounting and disclosure requirements using a
fair-value-based method of accounting for stock-based employee compensation
plans. As permitted by SFAS 123, we elected to continue to apply the
intrinsic-value-based method of accounting described above, and adopted only the
disclosure requirements of SFAS 123, as amended, which were similar in most
respects to SFAS 123R, with the exception of option forfeitures, which we
accounted for as they occurred.
The following table illustrates the pro forma effect on our net income and net
income per share as if we had adopted the fair value-based method of accounting
for stock-based compensation under SFAS 123 for the three months ended April 2,
2005 (in thousands, except per share amounts):
Three Months Ended
April 2,
2005
-----
Net income as reported $ 407
Deduct: Total stock-based employee
compensation expense determined under fair
value based method, net of related tax effects 78
-----
Pro forma net income $ 329
=====
Income per share:
Basic-as reported $0.05
=====
Basic-pro forma $0.04
=====
Diluted-as reported $0.05
=====
Diluted-pro forma $0.04
=====
12
The fair value for each stock option granted was estimated at the date of grant
using a Black-Scholes option-pricing model. For grants during the three months
ended April 2, 2005, our weighted average assumptions for expected volatility,
dividends, expected life, and risk-free interest rate were 40.35%, 0%, 6 years
and 3.99%, respectively. Options granted in the three months ended April 2,
2005 had a fair value of $2.79 per option.
Expected volatility is based on historical volatility of our Common Stock; the
expected life represents the weighted average period of time that options
granted are expected to be outstanding giving consideration to vesting schedules
and our historical exercise patterns; and the risk-free rate is based on the
U.S. Treasury yield curve in effect at the time of grant for periods
corresponding with the expected life of the option.
Prior to the adoption of SFAS 123R, we presented all tax benefits of deductions
resulting from the exercise of stock options as operating cash flows in the
Statement of Cash Flows. SFAS 123R requires that the cash flows resulting from
tax benefits resulting from tax deductions in excess of the compensation cost
recognized for those options (excess tax benefits) be classified as financing
cash flows. Cash received and tax benefit realized from stock option exercised
for the three months ended April 1, 2006 was $410,000 and $181,000,
respectively.
In November 2005, the FASB issued FASB Staff Position 123(R)-3, "Transition
Election Related to Accounting for the Tax Effects of Share-based Payment
Awards" ("FSP 123R-3"). FSP 123R-3 provides an elective alternative transition
method of calculating the additional paid-in capital pool ("APIC POOL") of
excess tax benefits available to absorb tax deficiencies recognized subsequent
to the adoption of SFAS 123R to the method otherwise required by paragraph 81 of
SFAS 123R. We have concluded that we will use the alternative method allowed by
FSP 123R-3.
Note 6 - Pension plan:
Components of net periodic benefit cost for the three months ended April 1, 2006
and April 2, 2005 are as follows (in thousands):
Three Months Ended
April 1, April 2,
2006 2005
------ ------
Service cost $ 109 $ 88
Interest cost 132 124
Expected return on plan assets (136) (132)
Amortization of net obligation 5 5
Amortization of prior service costs (1) (1)
Amortization of net loss 60 48
------ ------
Net periodic pension cost $ 169 $ 132
====== ======
We previously disclosed in our financial statements for the year ended December
31, 2005, that we expect to contribute $800,000 to our pension plan in 2006.
Subsequently during our annual Pension Trustee's meeting with our actuary, it
13
was decided to increase the contribution to $1,020,000. As of April 1, 2006,
$255,000 of contributions have been made.
We have a defined contribution plan for our U.S. employees, with a specified
matching employer contribution. The employer's expense for the three month
period ended April 1, 2006 and April 2, 2005 was $49,000 and $41,000,
respectively.
Note 7 - Subsequent Event:
On April 28, 2006, through our wholly owned subsidiary RS Biotech Laboratory
Equipment Limited ("RS Biotech"), we purchased land and building located in
Irvine, Scotland in the United Kingdom for 640,000 ($1,147,000). The purchase
price was paid with cash on hand.
We will be moving the operations of RS Biotech into this new facility and
therewith vacate the former leased facility of RS Biotech. We anticipate that
we will take a charge of approximately 15,000 in the second quarter of 2006 for
the writeoff of leasehold improvements and other costs related to vacating the
leased facility.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following is Management's Discussion and Analysis of significant factors
that have affected our operating results and financial condition during the
three month periods ended April 1, 2006 and April 2, 2005, respectively, which
should be read in conjunction with our Annual Report on Form 10-K for the year
ended December 31, 2005.
We previously reported on Form 8-K that on April 28, 2006, through our wholly
owned subsidiary RS Biotech Laboratory Equipment Limited ("RS Biotech"), we
purchased land and building located in Irvine, Scotland in the United Kingdom
for 640,000 ($1,147,000). The purchase price was paid with cash on hand.
We will be moving the operations of RS Biotech into this new facility and
therewith vacate the former leased facility of RS Biotech. We anticipate that
we will take a charge of approximately 15,000 in the second quarter of 2006 for
the writeoff of leasehold improvements and other costs related to vacating the
leased facility.
We are in the process of implementing our enterprise resource planning system
("ERP System"). This implementation is expected to be completed over the next
three years and includes changes that involve internal controls over financial
reporting. Although we expect this implementation to proceed without any
material adverse effects, the possibility exists that the migration to our ERP
System could adversely affect our internal controls, our disclosure controls and
procedures or our results of operations in future periods.
RESULTS OF OPERATIONS
---------------------
EXECUTIVE OVERVIEW
- -------------------
We are 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.
Our 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.
Well sell our equipment to pharmaceutical companies, agricultural and chemical
companies, other industrial customers engaged in biotechnology, and to medical
schools, universities, research institutes, hospitals, private laboratories and
laboratories of federal, state and municipal government departments and agencies
in the United States. While only a small percentage of our sales are made
directly to United States government departments and agencies, our domestic
business is significantly affected by government expenditures and grants for
research to educational research institutions and to industry. We also sell our
15
equipment both directly (primarily in 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, our largest customer, is the exclusive U.S. distributor of
our C-Line, E-Series and I-Series biological shakers and is the exclusive dealer
for our CO2 incubators in the U.S. Fisher Scientific is also the exclusive
distributor of our C-Line shakers in certain European countries and has a
broader distribution arrangement with us in Canada and in France.
NET SALES
- ----------
The following table summarizes consolidated backlog, net orders and net sales
for the three months ended April 1, 2006 and April 2, 2005 (in thousands of
dollars):
Three Months Ended
April 1, April 2, Decrease) %
2006 2005 Increase Change
------- ------- --------- ------
Backlog - beginning $10,776 $ 8,376 $ 2,400 28.7
Add net orders received 16,612 15,719 893 5.7
Less net sales 16,967 16,108 859 5.3
------- ------- ---------
Backlog - ending $10,421 $ 7,987 $ 2,434 30.5
======= ======= =========
Net sales increased $859,000 or 5.3% to $16,967,000 in the 2006 quarter from
$16,108,000 in the 2005 quarter. International sales increased 11.1% while
domestic sales decreased 3.4%. Due to the strengthening of the dollar during
the quarter, the effect of foreign currency translation negatively affected net
sales during the 2006 quarter by $592,000 or 3.7% of net sales when compared
with the 2005 quarter. The overall increase in net sales for the first quarter
of 2005 was due principally to higher shipments of fermentation equipment, ultra
low temperature freezers and CO2 incubators. Orders during the 2006 quarter
increased 5.7%, and the backlog increased 30.5%. The increase in backlog is
attributable to an increase in orders for our shakers, fermentation equipment
and freezer ultra low temperature freezer products during the 2006 quarter.
16
GROSS MARGIN
- -------------
The following table shows gross profit and gross margin for the three months
ended April 1, 2006 and April 2, 2005 (in thousands of dollars):
Three Months Ended
April 1, April 2
2006 2005
-------- --------
Net sales $16,967 $16,108
Cost of sales 10,060 9,806
-------- --------
Gross profit $ 6,907 $ 6,302
======== ========
Gross margin 40.7% 39.1%
======== ========
The increase in gross margin to 40.7% for the 2006 quarter from 39.1% in the
2005 quarter was due primarily to (i) greater absorption of overhead due to the
increased production at our factories (ii) a favorable product mix and (iii)
most of the sales increase being direct sales to end-users for which we realize
greater margins than on sales to distributors. The 2005 quarter was negatively
impacted by effects of our aggressive pricing strategy, which was aimed at
gaining market share for certain products in select markets. In the 2006
quarter we capitalized $7,000 of compensation costs associated with the adoption
of SFAS 123R into inventory as of April 1, 2006.
SELLING, GENERAL AND ADMINISTRATIVE
- --------------------------------------
Selling, general and administrative expenses increased $104,000 or 2.3% to
$4,626,000 during the 2006 quarter from $4,522,000 during the 2005 quarter. The
increase for the 2006 quarter from the comparable period of 2005 was primarily
due to (i) training and maintenance costs associated with our enterprise
resource planning system; (ii) increased personnel and related cost associated
with our sales and service groups and (iii) a share-based compensation charge of
$61,000 associated with the adoption of SFAS 123R. Partially offsetting these
increases was a $146,000 benefit from the foreign currency translation effect of
the stronger US dollar. The 2005 quarter was negatively impacted by $128,000 of
consulting costs related to Sarbanes-Oxley Section 404 compliance.
RESEARCH, DEVELOPMENT AND ENGINEERING
- ----------------------------------------
Research, development and engineering expenses increased $149,000 or 13.1% to
$1,286,000 during the 2006 quarter from $1,137,000 during the comparable 2005
quarter. This increase is due to our 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. The 2006 quarter included a share based compensation charge of $5,000
associated with the adoption of SFAS 123R.
17
INTEREST INCOME
- ----------------
Interest income increased to $88,000 during the 2006 quarter from $53,000 during
the 2005 quarter due primarily to rising interest rates on invested cash.
INTEREST EXPENSE
- -----------------
Interest expense increased to $90,000 during the 2006 quarter from $36,000 for
the 2005 quarter due to the reduction of the favorable change in the fair value
of interest rate swaps of $117,000 in 2005 to $24,000 in the 2006 quarter. Also
contributing to the change was a lower level of average outstanding debt during
the 2006 quarter.
OTHER INCOME (EXPENSE)
- ------------------------
The following table details other income (expense) for the three months ended
April 1, 2006 and April 2, 2005 (in thousands):
Three Months Ended
April 1, April 2,
2006 2005
------ ------
(Loss) gain on foreign currency transactions (a) $ (18) $ 32
Bank fees (10) (8)
Other, net (2) (5)
------ ------
Total other income (expense) $ (30) $ 19
====== ======
_______________________
(a) Foreign exchange gains and losses relate primarily to the settlement of
purchases in the normal course of business between our United States and
European operating companies.
INCOME TAX EXPENSE
- --------------------
For the 2006 quarter we used our expected effective tax rate for the year, based
on projected U.S. and foreign results, which amounted to 39.5%. The slight
decrease in our effective income tax rate from 40.1% for the 2005 quarter is
attributable to a number of factors including: (i) the ratio of income from our
European subsidiaries to our total income and the related effect of lower
foreign income tax rates, (ii) deductibility of certain expenses, and (iii)
utilization of loss carryforwards from certain of our European subsidiaries.
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FINANCIAL CONDITION
-------------------
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
CONTRACTUAL OBLIGATIONS
Our contractual obligations and commitments principally include obligations
associated with our outstanding indebtedness and future minimum operating lease
obligations as of April 1, 2006 are set forth in the following table:
Payments Due by Period
(In thousands)
-----------------------
Contractual obligations:
Less than 1-3 3-5 More than
Total 1 Year Years Years 5 Years
------- ------- ------ ------ --------
Long-term debt,
obligations (a) $ 5,806 $ 4,613 $1,170 $ 23 $ -
Operating lease obligations (b) 3,013 792 1,306 439 476
Purchase obligations(c) 8,634 8,309 325 - -
Other long-term liabilities (d) 87 87 - - -
------- ------- ------ ------ --------
Total contractual cash
Obligations $17,540 $13,801 $2,801 $ 462 $ 476
======= ======= ====== ====== ========
_____________________
(a) Consists primarily of debt incurred for acquisitions financed under our
Bank Agreement and of notes due to the sellers of businesses acquired by us.
(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 ($173,000 at April 1, 2006). The second sublet premises has a lease
expiration date of September 28, 2009 and an annual rental of 45,000 ($78,000
at April 1, 2006).
(c) Primarily includes commitments for raw materials and services related to
production of equipment at our 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. We believed at the date of the acquisition that the payment of such
additional consideration was determinable beyond a reasonable doubt and as such
recorded the amount as a liability and as additional purchase price.
OPERATING ACTIVITIES
- --------------------
Cash and cash equivalents decreased $2,492,000 to $8,859,000 at April 1, 2006
from $11,351,000 at December 31, 2005. Net cash used in operating activities
amounted to $2,444,000 for the three months ended April 1, 2006. The overall
factors primarily affecting operating cash flows during the three months ended
April 1, 2006 were (i) an increase in inventory in order to maintain shipping
levels on our current backlog, (ii) an increase in prepaid expenses and other
current assets, (iii) a decrease in accounts payable and accrued expenses due to
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the timing of purchases and payments on those purchases and iv) a decrease in
other liabilities. Partially offsetting these uses of cash were (i) net income
of $583,000, which gets adjusted for non-cash items such as depreciation and
amortization, share-based compensation and a change in fair value of interest
rate swaps, (ii) a decrease in accounts and notes receivable, (iii) a decrease
in other assets and (iv) an increase in advance payments from customers.
INVESTING ACTIVITIES
- --------------------
In the 2006 period, net cash used in investing activities of $459,000 was as a
result of normal additions to property, plant and equipment and capitalized
costs related to our new enterprise resource planning system.
On April 28, 2006, through our wholly owned subsidiary RS Biotech Laboratory
Equipment Limited ("RS Biotech"), we purchased land and building located in
Irvine, Scotland in the United Kingdom for 640,000 ($1,147,000). The purchase
price was paid for with cash on hand.
FINANCING ACTIVITIES
- ---------------------
In the 2006 period, cash flows provided by financing activities totaled $395,000
and primarily consisted of proceeds from the issue of shares under stock
purchase and option plans that totaled $410,000, tax benefits from share-based
compensation that totaled $181,000, which was partially offset by repayments of
long-term debt of $196,000.
BANK AGREEMENT
- ---------------
We are parties to an agreement with Wachovia Bank, National Association (the
"Bank"), which has had a number of amendments (the "Bank Agreement"), which has
been extended to May 31, 2008, and which provides us 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. We
expect to repay the $4.5 million due on December 1, 2006 with cash on hand.
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 our discretion. At April 1, 2006, the Bank's prime
rate was 7.75% and LIBOR was 4.83%.
Since the Bank Agreement requires that all borrowings be at variable interest
rates, the Bank provides us with a mechanism to fix interest rates on borrowings
by use of interest rate swaps. At April 1, 2006 we had three interest rate
swaps in place to fix the interest rates, primarily for debt incurred for
acquisitions in 1999 and 2003.
All of our 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
20
other things, a debt service ratio, a net worth covenant and a ratio of total
liabilities to tangible net worth. We were in compliance with its covenants
pursuant to the Bank Agreement at April 1, 2006 and currently anticipate being
in compliance with such covenants during the next 12 months.
CRITICAL ACCOUNTING POLICIES
- ------------------------------
No changes have been made in our critical accounting policies during the three
months ended April 1, 2006 except for the adoption on January 1, 2006 of SFAS
No. 123R. See footnote 5 in the consolidated financial statements for more
information.
21
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The information required by Item 3 has been disclosed in Item 7 of our Annual
Report on Form 10-K for the year ended December 31, 2005. There has been no
material change in the disclosures regarding market risk.
ITEM 4. CONTROLS AND PROCEDURES.
Our Chief Executive Officer and Chief Financial Officer evaluated the
effectiveness of our 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 our disclosure controls
and procedures were effective as of the end of the period covered by this
report. There has been no change in our 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, our internal
control over financial reporting.
22
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
No material legal proceedings are currently pending.
From time to time, we are involved in litigation in the normal course of
business, which we believe, after consultation with counsel, the ultimate
disposition of which will not have a material adverse effect on our consolidated
results of operations or financial position.
ITEM 1A. RISK FACTORS.
There have been no material changes during the three months ended April 1, 2006
from the risk factors reported in our Annual Report on Form 10-K for the year
ended December 31, 2005.
ITEM 6. EXHIBITS.
Exhibit
Number Description
- ------------ ----------------------------------------------------------------
3(a) 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).
3(b) 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.
3(c) 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.
3(d) 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.
23
10.1 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.
10.2 Agreements related to the purchase of land and building at 1
Drummond Crescent, Riverside Business Park, Irvine, Scotland in the United
Kingdom are incorporated herein by reference to the exhibits to our Current
Report on Form 8-K dated April 28, 2006
31.1 Section 302 Certification - Chief Executive Officer.
31.2 Section 302 Certification - Chief Financial Officer.
32 Section 906 Certifications.
SIGNATURES
----------
Pursuant to the requirements of the Secruities 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: May 10, 2006 /s/ David Freedman
------------------
David Freedman
Chairman and
Chief Executive Officer
Date: May 10, 2006 /s/ Thomas Bocchino
-------------------
Thomas Bocchino
Vice President, Finance,
Chief Financial Officer and Treasurer
(Chief Accounting Officer)
24