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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 1998
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ______________ to ______________
Commission file number 1-9957
DIAGNOSTIC PRODUCTS CORPORATION
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-2802182
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5700 WEST 96TH STREET
LOS ANGELES, CALIFORNIA 90045
(Address of principal executive offices)
Registrant's telephone number: (310) 645-8200
NO CHANGE
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ]
The number of shares of Common Stock, no par value, outstanding as of
September 30, 1998, was 13,800,737.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
DIAGNOSTIC PRODUCTS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(In thousands, except per share data) Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------- ---------------------------------
1998 1997 1998 1997
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SALES ............................. $ 48,773 $ 46,399 $ 144,155 $ 137,562
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COSTS AND EXPENSES:
Cost of sales ................... 21,454 20,485 63,278 60,336
Selling ......................... 9,356 9,174 27,462 27,794
Research and development ........ 5,470 5,109 16,640 14,597
General and administrative ...... 5,422 5,300 17,328 16,451
Equity in income of affiliates .. (273) (114) (897) (810)
Interest income-net ............. (141) (137) (349) (443)
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Total costs and expenses ........ 41,288 39,817 123,462 117,925
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INCOME BEFORE INCOME TAXES ........ 7,485 6,582 20,693 19,637
PROVISION FOR INCOME TAXES ........ 2,090 1,460 6,000 4,960
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NET INCOME ........................ $ 5,395 $ 5,122 $ 14,693 $ 14,677
============= ============= ============= =============
EARNINGSPER SHARE:
BASIC ........................... $ .39 $ .38 $ 1.07 $ 1.08
DILUTED ......................... .39 .37 1.06 1.06
AVERAGE SHARES OUTSTANDING:
BASIC ........................... 13,792 13,646 13,772 13,624
DILUTIVE EFFECT OF STOCK OPTIONS 131 255 153 256
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DILUTED ......................... 13,923 13,901 13,925 13,880
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DIAGNOSTIC PRODUCTS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
(Dollars in Thousands) September 30, December 31,
1998 1997
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ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 20,247 $ 20,372
Accounts receivable-net of allowance for
doubtful accounts of $118 and $131 52,787 45,798
Inventories 53,639 49,038
Prepaid expenses and other current assets 512 405
Deferred income taxes 3,303 3,303
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Total current assets 130,488 118,916
PROPERTY, PLANT AND EQUIPMENT:
Land and buildings 35,006 30,854
Machinery and equipment 57,685 50,005
Leasehold improvements 7,135 7,075
Construction in progress 857 736
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Total 100,683 88,670
Less accumulated depreciation and amortization 48,065 41,576
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Property, plant and equipment - net 52,618 47,094
SALES-TYPE AND OPERATING LEASES 31,710 26,875
DEFERRED INCOME TAXES 1,442 1,442
INVESTMENTS IN AFFILIATES 14,542 13,905
EXCESS OF COST OVER NET ASSETS ACQUIRED-
Net of amortization of $8,201 and $7,368 14,506 13,948
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TOTAL ASSETS $ 245,306 $ 222,180
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 20,188 $ 15,547
Accounts payable 17,241 14,562
Accrued liabilities 4,927 5,986
Income taxes payable 3,524 (210)
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Total current liabilities 45,880 35,885
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common Stock-no par value, authorized 30,000,000 shares;
outstanding 13,800,737 shares and 13,717,072 shares. 40,190 38,527
Retained earnings 169,015 159,278
Foreign currency translation adjustment (9,779) (11,510)
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Total shareholders' equity 199,426 186,295
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 245,306 $ 222,180
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DIAGNOSTIC PRODUCTS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(Dollars in Thousands) Nine Months Ended
September 30,
--------------------------------
1998 1997
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 14,693 $ 14,677
Adjustments to reconcile net income to net cash
flows from operating activities:
Depreciation and amortization 15,006 11,157
Equity in undistributed income of
unconsolidated affiliates (637) (809)
Accounts receivable (5,549) (6,128)
Inventories (3,527) (7,217)
Prepaid expenses and other current assets (107) (99)
Accounts payable 1,630 2,040
Accrued liabilities (1,059) (941)
Income taxes payable 3,440 (138)
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Net Cash Flows from Operating Activities 23,890 12,542
CASH FLOWS FROM (USED FOR) INVESTING ACTIVITIES:
Additions to property, plant and equipment (7,624) (7,922)
Sales-type and operating leases (12,846) (7,551)
Investment in affiliated companies (2,612) (46)
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Net Cash Flows from (used for) Investing Activities (23,082) (15,519)
CASH FLOWS FROM (USED FOR) FINANCING ACTIVITIES:
Borrowing 2,706 6,605
Proceeds from exercise of stock options 1,663 1,176
Cash dividends paid (4,956) (4,904)
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Net Cash Flows from (used for) Financing Activities (587) 2,877
EFFECT OF EXCHANGE RATE CHANGES ON CASH (346) (657)
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (125) (757)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 20,372 13,781
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 20,247 $ 13,024
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DIAGNOSTIC PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1-BASIS OF PRESENTATION
The information for the nine months ended September 30, 1998 and 1997 has not
been audited by independent accountants, but includes all adjustments
(consisting of normal recurring accruals) which are, in the opinion of
management, necessary to a fair statement of the results for such periods.
Certain information and footnote disclosure normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been omitted pursuant to the requirements of the Securities and
Exchange Commission, although the Company believes that the disclosures included
in these financial statements are adequate to make the information not
misleading.
The consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
1997 annual report on Form 10-K as filed with the Securities and Exchange
Commission.
The results of operations for the nine-month period ended September 30, 1998 are
not necessarily indicative of the results to be expected for the year ending
December 31, 1998.
Basic earnings per share is computed by dividing net income by the average
number of shares outstanding. Diluted earnings per share includes the dilutive
effect of stock options.
NOTE 2-INVENTORIES
Inventories by major categories are summarized as follows:
(In Thousands)
September 30, December 31,
1998 1997
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Raw materials $ 19,382 $ 17,814
Work in process 18,957 18,073
Finished goods 15,300 13,151
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Total $ 53,639 $ 49,038
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NOTE 3-COMPREHENSIVE INCOME
Comprehensive income is summarized as follows:
(In Thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
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1998 1997 1998 1997
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Net income $ 5,395 $ 5,122 $ 14,693 $ 14,677
Foreign currency translation adjustment 1,754 (1,162) 1,731 (5,498)
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Comprehensive income $ 7,149 $ 3,960 $ 16,424 $ 9,179
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The Company does not provide for U.S. income taxes on foreign currency
translation adjustments because it does not provide for such taxes on
undistributed earnings of foreign subsidiaries.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
For the third quarter and nine months ended September 30, 1998, the Company's
sales increased 5.1% to $48.8 million and 4.8% to $144 million, respectively,
compared to the comparable periods in 1997. Unit sales of IMMULITE test kits
increased 32% and 27% in the third quarter and first nine months of 1998,
respectively, over the comparable 1997 periods. The Company shipped 224 IMMULITE
systems in the third quarter, including 59 of the new generation IMMULITE 2000
which was introduced in March 1998. For the nine month period, the Company
shipped 468 IMMULITE One systems and 158 IMMULITE 2000 systems, bringing the
total worldwide shipments of IMMULITE systems to approximately 3,700. The
Company expects to have shipped approximately 300 IMMULITE 2000 systems
(including 67 systems shipped in 1997) by year-end, while continuing to
experience demand for the IMMULITE One. This installed base of instruments and
an expanding test kit menu are expected to support continued growth in the
coming year.
Sales of the Company's mature RIA products declined approximately 9% in the 1998
third quarter compared to the 1997 third quarter. The Company expects RIA
revenues to account for less than 25% of the total sales for the 1998 fiscal
year (compared to 30% in 1997), so further declines in sales of this product
line will have less of an impact on overall reported sales in the future.
Sales to Asia (principally Korea), which represent approximately 10% of total
sales, declined approximately 5% and 8% in the third quarter and first nine
months of 1998, respectively, compared to the comparable periods in 1997, due to
the economic instability of that region.
Due to the significance of foreign sales, the Company is subject to currency
risks based on the relative strength or weakness of the U.S. dollar. In periods
when the U.S. dollar is strengthening, such as during the past two years, the
effect of the translation of the financial statements of consolidated foreign
affiliates is generally that of lower sales and net income. Additionally, due to
intense competition, the Company's foreign distributors are unable to increase
prices to offset the negative effect when the U.S. dollar is strong. The value
of the U.S. dollar relative to other currencies did not have a significant
impact on results in the third quarter of 1998.
Cost of sales remained at approximately 44% of sales in the third quarter and
nine month periods of 1998 and 1997.
Total operating expenses (selling, R&D, and G&A) as a percentage of sales
decreased slightly in the third quarter from 42.2% in 1997 to 41.5% in 1998,
reflecting the end of pre-launch expenses for the IMMULITE 2000 and modest
operating leverage. For the nine month periods, total operating expenses as a
percentage of sales decreased slightly from 42.8% in 1997 to 42.6% in 1998.
Included in general and administrative expenses is the amortization of the
excess of cost over net assets acquired and minority interest.
Equity in income of affiliates represents the Company's share of earnings of
non-consolidated affiliates, principally the 45%-owned Italian distributor.
Net interest income represents the excess of interest income and interest on
equipment contracts over interest expense.
The Company's effective tax rate includes Federal, state and foreign taxes. The
tax provision increased from 25.3% of income before income taxes in the first
nine months of 1997 to 29% in the comparable 1998 period due to utilization of
net operating loss carryforwards and foreign tax credits in 1997 which are not
available in 1998.
Net income for the third quarter of 1998 increased 5.3% over the third quarter
of 1997 due to the increase in sales. For the first nine months of 1998,
however, net income increased nominally over the first nine months of 1997 due
to the 12% decline in 1998 first quarter net income over the 1997 first quarter.
LIQUIDITY
The Company has adequate working capital and sources of capital (including an
unused $20 million unsecured line of credit) to carry on its current business
and to meet its existing and expected future capital requirements. Net cash flow
from operating activities was $23.9 million in the first nine months of 1998
compared to $12.5 million in 1997. Additions to property, plant and equipment
in 1998 were $7.6 million compared to $7.9 million in 1997. Cash used for the
placement of IMMULITE systems under sales-type and operating
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leases (for periods of generally three to five years) increased 70% from $7.6
million for the first nine months of 1997 to $12.8 million for the first nine
months of 1998. The Company had notes payable (consisting of bank borrowings by
the Company's foreign consolidated subsidiaries) of $20.2 million at September
30, 1998 compared to $15.6 million at December 31, 1997.
The Company's foreign operations, particularly, at this time, its operations in
Brazil, are subject to risks, such as currency devaluations, associated with
political and economic instability.
The Company's current quarterly cash dividend is $.12 per share.
On October 14, 1998 the Company announced a plan under which it may repurchase
up to one million shares of its common stock from time to time in open market
transactions. The purchases may be discontinued at any time. The Company will
utilize existing cash and bank borrowings to finance any such purchases.
EURO CONVERSION
The Company has significant sales in European countries (the "participating
countries") which will be converting to a common legal currency (the "euro")
beginning January 1, 1999. During the transition period of January 1, 1999 to
January 1, 2002, public and private parties may pay for goods and services using
either the euro or the local currency. During the transition period, conversion
rates will not be computed directly from one local currency to another. Instead,
local currencies will be converted first to a euro denomination and then to the
second local currency.
The Company is in the early stages of assessing the potential impact of the euro
conversion on its business and operations. The Company will initially address
the euro conversion by creating a price list of its products in each
participating country based on the euro to facilitate purchases in euro or local
currency. The Company is also reviewing its information and business systems,
and those of its European affiliates, to determine the modifications that will
be necessary to process orders in the euro currency. Due to the existence of
many unknown variables at this early stage, it is not at this time possible for
the Company to predict the precise implications of the euro conversion on its
operations.
YEAR 2000
The Company has a program to address Year 2000 readiness of its information and
business systems at the Los Angeles, DPC Cirrus and Euro DPC facilities, which
account for the majority of its manufacturing and business operations. This
program is more than half-way completed. The Company has tested all critical
systems and has performed routine testing of work stations. Work stations that
require corrective software have been identified and the Company's goal, subject
to timely software manufacturer support, is to complete the remediation efforts
by June 1999. The costs incurred to date and expected to be incurred in the
future related to the evaluation and remediation efforts are not material.
Independent of the Year 2000 issue, over the last 16 months the Company has been
engaged in an ongoing program to upgrade its information systems.
In September 1998, the Company commenced a testing and validation program of the
information and business systems of certain of its foreign subsidiaries and its
affiliates. The Company expects this program to be completed with respect to
wholly owned affiliates by June 1999. Each affiliate is responsible for eval-
uating and correcting its own computer systems.
The Company presently believes that, with conversions to new computer systems
and modifications to existing software, the Year 2000 issue will not pose
significant operational problems for the Company. However, if such conversions
and modifications are not completed timely by the Company or any of its
affiliates, or by significant third parties with whom the Company does business,
such as communications and power providers, the Year 2000 issue could have a
material impact on the operations of the Company.
The Company also has a program to determine whether its instrumentation products
are Year 2000 compliant. The IMMULITE 2000 instrument, which the Company began
shipping in March 1998, is Year 2000 compliant. The Company has determined
that the IMMULITE One instrument is not Year 2000 compliant and has so informed
the FDA. The software used in the IMMULITE One has a two-digit year field which
must be changed to a four-digit field. As part of its routine, on-going software
development, the Company is developing software for the IMMULITE One that will
be Year 2000 compliant. The Company's goal is to be able to offer software and
hardware upgrades to make the IMMULITE One Year 2000 compliant to its customers
by March 31, 1999. The incremental costs incurred to date and expected to be
incurred to upgrade the software are not material.
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In addition to the software upgrades, some older instruments may require
hardware modifications or replacements to make them Year 2000 compliant. The
Company is working with its hardware vendors to be able to provide its customers
with the necessary modifications or replacements. The Company is also providing
customer support and customer satisfaction services to all of its customers
regarding Year 2000 issues. The Company does not believe that costs related to
hardware upgrades or replacements will be material.
While the Company currently expects that it will be able to bring the IMMULITE
One into Year 2000 compliance on a timely basis, if the Company encounters
unforeseen problems or delays it could be subject to legal claims (with or
without merit), increased warranty costs, or customer dissatisfaction which
could result in a material adverse effect on the Company's business, financial
condition and results of operations.
FORWARD LOOKING STATEMENTS
Except for the historical information contained herein, this report contains
forward looking statements (identified by the words "estimate," "project,"
"anticipate," "plan," "expect," "intend," "believe," "hope" and similar
expressions) which are based upon Management's current expectations and speak
only as of the date made. These forward looking statements are subject to risks,
uncertainties and factors that could cause actual results to differ materially
from the results anticipated in the forward looking statements. These risks and
uncertainties include the degree of customer demand for the Company's products,
customer acceptance of the IMMULITE 2000 and other new products, the Company's
ability to keep abreast of technological innovations, the risks inherent in the
development and release of new products (such as delays, unforeseen costs and
technical difficulties), competitive pressures, currency risks based on the
relative strength or weakness of the U.S. dollar, health care regulation and
cost containment measures, euro conversions, Year 2000 issues and political and
economic instability in certain foreign markets.
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION.
SHAREHOLDER PROPOSALS
If a shareholder submits a proposal at the Company's annual meeting of
shareholders to be held in May 1999 otherwise than pursuant to Rule 14a-8 under
the Securities Exchange Act of 1934 and does not provide notice of such proposal
to the Company by February 10, 1999, the holders of any proxy solicited by the
Company's board of directors for use at such meeting will have discretionary
authority to vote with respect to such proposal as to which timely notice is
not given.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K. None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DIAGNOSTIC PRODUCTS CORPORATION
(Registrant)
OCTOBER 28, 1998 /s/ SIGI ZIERING
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Date Sigi Ziering, Ph.D., Chairman of the Board
Chief Executive Officer
OCTOBER 28, 1998 /s/ JULIAN R. BOCKSERMAN
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Date Julian R. Bockserman, Vice President
Chief Financial Officer
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