UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1998. OR __ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to ____________. Commission file number 1-7928 BIO-RAD LABORATORIES, INC. (Exact name of registrant as specified in its charter) A Delaware Corporation 94-1381833 (State or other jurisdiction (I.R.S. Employer of incorporation) Identification No.) 1000 Alfred Nobel Drive, Hercules, California 94547 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (510) 724-7000 Indicate by check whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 month (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date-- <TABLE> <CAPTION> Shares Outstanding Title of each Class at July 31, 1998 <S> <C> Class A Common Stock, Par Value $1.00 per share 9,960,546 Class B Common Stock, Par Value $1.00 per share 2,466,032 </TABLE>
PART I - FINANCIAL INFORMATION Item 1. Financial Statements. BIO-RAD LABORATORIES, INC. Condensed Consolidated Statements of Income (In thousands, except per share data) (Unaudited) <TABLE> <CAPTION> Three Months Ended Six Months Ended June 30, June 30, 1998 1997 1998 1997 <S> <C> <C> <C> <C> NET SALES . . . . . . . . . . . . . . . . . . $107,898 $105,752 $224,072 $211,606 Cost of goods sold . . . . . . . . . . . . . 49,041 47,031 101,139 90,744 GROSS PROFIT . . . . . . . . . . . . . . . . 58,857 58,721 122,933 120,862 Selling, general and administrative expense . 41,511 40,549 82,568 81,267 Product research and development expense . . 10,629 11,205 20,541 22,013 INCOME FROM OPERATIONS . . . . . . . . . . . 6,717 6,967 19,824 17,582 Interest expense . . . . . . . . . . . . . . (1,091) (275) (1,876) (560) Investment income, net . . . . . . . . . . . 4,856 450 5,630 898 Other, net . . . . . . . . . . . . . . . . . (409) (337) (1,145) (707) INCOME BEFORE TAXES . . . . . . . . . . . . . 10,073 6,805 22,433 17,213 Provision for income taxes . . . . . . . . . 2,922 1,906 6,506 4,820 NET INCOME . . . . . . . . . . . . . . . . . $ 7,151 $ 4,899 $ 15,927 $ 12,393 ======== ======== ======== ======== Basic earnings per share: Net income . . . . . . . . . . . . . . . . $0.58 $0.40 $1.30 $1.01 ======== ======== ======== ======== Weighted average common shares . . . . . . 12,263 12,293 12,237 12,285 ======== ======== ======== ======== Diluted earnings per share: Net income . . . . . . . . . . . . . . . . $0.58 $0.39 $1.29 $1.00 ======== ======== ======== ======== Weighted average common shares . . . . . . 12,414 12,413 12,376 12,429 ======== ======== ======== ======== </TABLE> The accompanying notes are an integral part of these statements. 1
BIO-RAD LABORATORIES, INC. Condensed Consolidated Balance Sheets (In thousands, except share data) <TABLE> <CAPTION> June 30, December 31, 1998 1997 (Unaudited) <S> <C> <C> ASSETS: Cash and cash equivalents . . . . . . . . . . . . . . $ 13,482 $ 10,843 Accounts receivable . . . . . . . . . . . . . . . . . 100,092 96,965 Inventories . . . . . . . . . . . . . . . . . . . . . 93,367 91,428 Prepaid expenses, taxes and other current assets . . . 31,191 28,182 Total current assets . . . . . . . . . . . . . . . 238,132 227,418 Net property, plant and equipment . . . . . . . . . . 77,923 78,678 Marketable securities . . . . . . . . . . . . . . . . 27,717 18,092 Other assets . . . . . . . . . . . . . . . . . . . . . 26,554 27,688 Total assets . . . . . . . . . . . . . . . . . . $370,326 $351,876 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY: Notes payable and current maturities of long-term debt $ 10,422 $ 10,802 Accounts payable . . . . . . . . . . . . . . . . . . . 25,006 32,385 Accrued payroll and employee benefits . . . . . . . . 23,715 24,825 Sales, income and other taxes payable . . . . . . . . 8,166 5,055 Other current liabilities . . . . . . . . . . . . . . 27,702 27,715 Total current liabilities . . . . . . . . . . . . . 95,011 100,782 Long-term debt, net of current maturities . . . . . . 47,835 38,952 Deferred tax liabilities . . . . . . . . . . . . . . . 17,210 15,465 Total liabilities . . . . . . . . . . . . . . . . . 160,056 155,199 STOCKHOLDERS' EQUITY: Preferred stock, $1.00 par value, 2,300,000 shares authorized; none outstanding . . . . . . . . . . . . -- -- Class A common stock, $1.00 par value, 15,000,000 shares authorized; outstanding - 9,960,546 at June 30, 1998 and 9,824,509 at December 31, 1997 . . . . . . . . . 9,961 9,825 Class B common stock, $1.00 par value, 6,000,000 shares authorized; outstanding - 2,466,032 at June 30, 1998 and 2,596,069 at December 31, 1997 . . . . . . . . . 2,466 2,596 Additional paid-in capital . . . . . . . . . . . . . . 18,478 18,426 Class A treasury stock, 140,398 shares at June 30, 1998 and 193,539 shares at December 31, 1997 at cost . . (3,776) (5,206) Class B treasury stock, 30,000 shares at December 31, 1997 at cost . . . . . . . . . . . . . . . . . . . . . . -- (800) Retained earnings . . . . . . . . . . . . . . . . . . 182,029 167,182 Accumulated other comprehensive income: Currency translation . . . . . . . . . . . . . . . . (2,126) (1,149) Net unrealized holding gain on marketable securities 3,238 5,803 Total stockholders' equity . . . . . . . . . . . . 210,270 196,677 Total liabilities and stockholders' equity . . . $370,326 $351,876 ======== ======== </TABLE> The accompanying notes are an integral part of these statements. 2
BIO-RAD LABORATORIES, INC. Condensed Consolidated Statements of Cash Flows (In thousands) (Unaudited) <TABLE> <CAPTION> Six Months Ended June 30, 1998 1997 <S> <C> <C> Cash flows from operating activities: Cash received from customers . . . . . . . . . . . . . . . $217,238 $205,601 Cash paid to suppliers and employees . . . . . . . . . . . (204,528) (192,327) Interest paid. . . . . . . . . . . . . . . . . . . . . . . (1,850) (584) Income tax payments . . . . . . . . . . . . . . . . . . . (3,322) (6,371) Miscellaneous receipts (payments). . . . . . . . . . . . . (151) 268 Net cash provided by operating activities. . . . . . . . . 7,387 6,587 Cash flows from investing activities: Capital expenditures, net. . . . . . . . . . . . . . . . . (8,205) (9,051) Purchases of marketable securities and investments . . . . (16,067) (3,000) Sales of marketable securities and investments . . . . . . 7,284 1,660 Foreign currency hedges, net . . . . . . . . . . . . . . . 1,428 2,076 Net cash used in investing activities. . . . . . . . . . . (15,560) (8,315) Cash flows from financing activities: Net borrowings under line-of-credit arrangements. . . . . (174) 1,446 Long-term borrowings . . . . . . . . . . . . . . . . . . 96,110 15,375 Payments on long-term debt. . . . . . . . . . . . . . . . (87,433) (20,113) Proceeds from issuance of common stock. . . . . . . . . . 58 1,172 Treasury stock activity, net. . . . . . . . . . . . . . . 1,150 (1,504) Net cash provided by (used in) financing activities. . . . 9,711 (3,624) Effect of exchange rate changes on cash . . . . . . . . . . . . 1,101 1,445 Net increase (decrease) in cash and cash equivalents. . . . . . 2,639 (3,907) Cash and cash equivalents at beginning of period. . . . . . . . 10,843 9,390 Cash and cash equivalents at end of period. . . . . . . . . . . $ 13,482 $ 5,483 ======== ======== Reconciliation of net income to net cash provided by operating activities: Net income . . . . . . . . . . . . . . . . . . . . . . . . . $ 15,927 $ 12,393 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization . . . . . . . . . . . . . 10,210 8,955 Foreign currency hedge transactions, net . . . . . . . . (1,428) (2,260) Gains on disposition of marketable securities. . . . . . (5,634) (585) Increase in accounts receivable. . . . . . . . . . . . . (4,789) (3,108) Increase in inventories . . . . . . . . . . . . . . . . (2,925) (9,095) (Increase) decrease in other current assets. . . . . . . 708 (902) Increase (decrease) in accounts payable and other current liabilities. . . . . . . . . . . . . . . . . . (8,238) 3,383 Increase (decrease in income taxes payable . . . . . . . 3,802 (1,604) Other. . . . . . . . . . . . . . . . . . . . . . . . . . (246) (590) Net cash provided by operating activities . . . . . . . . . . . $ 7,387 $ 6,587 ======== ======== </TABLE> The accompanying notes are an integral part of these statements. 3
BIO-RAD LABORATORIES, INC. Notes to Condensed Consolidated Financial Statements (Unaudited) 1. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements of Bio-Rad Laboratories, Inc. ("Bio-Rad" or the "Company"), reflect all adjustments which are, in the opinion of management, necessary to a fair statement of the results of the interim periods presented. All such adjustments are of a normal recurring nature. The condensed consolidated financial statements should be read in conjunction with the notes to consolidated financial statements contained in the Company's Annual Report for the year ended December 31, 1997 (the Company's 1997 Annual Report). Certain amounts in the financial statements of the prior year have been reclassified to be consistent with the 1998 presentation. 2. INVENTORIES <TABLE> The principal components of inventories are as follows: <CAPTION> June 30, December 31, 1998 1997 (in thousands) <S> <C> <C> Raw materials $ 29,968 $ 27,257 Work in process 20,173 21,242 Finished goods 43,226 42,929 $ 93,367 $ 91,428 ======== ======== </TABLE> 3. PROPERTY, PLANT AND EQUIPMENT <TABLE> The principal components of property, plant and equipment are as follows: <CAPTION> June 30, December 31, 1998 1997 (in thousands) <S> <C> <C> Land and improvements $ 8,057 $ 8,057 Buildings and leasehold improvements 55,655 55,477 Equipment 120,338 115,097 184,050 178,631 Accumulated depreciation (106,127) (99,953) Net property, plant and equipment $ 77,923 $ 78,678 ======== ======== </TABLE> 4
4. LONG-TERM DEBT The Company entered into a $100 million revolving credit agreement on May 15, 1998, replacing the $60 million credit agreement previously in place. The new agreement provides for borrowings on an unsecured basis through May 15, 2003. Interest is based upon Eurodollar or prime rates. 5. EARNINGS PER SHARE Weighted average shares used for diluted earnings per share include the dilutive effect of outstanding stock options of 151,000 and 120,000 shares for the quarters ended June 30, 1998 and 1997, respectively. Weighted average shares used for diluted earnings per share include the dilutive effect of outstanding stock options of 139,000 and 144,000 shares for the year-to-date periods ended June 30, 1998 and 1997, respectively. Options to purchase 140,000 and 122,000 shares of common stock were outstanding during 1998 and 1997, respectively, but were excluded from the computation of diluted earnings per share because the exercise price of the options was greater than the average market price of the common shares. The options were still outstanding at June 30, 1998. 6. COMPREHENSIVE INCOME In the first quarter of 1998, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income." Comprehensive income is defined as the change in equity of a business during a period from transactions and other events and circumstances from non-owner sources. Under SFAS No. 130, the term "comprehensive income" is used to describe the total of net earnings plus other comprehensive income which, for the Company, includes foreign currency translation adjustments and unrealized gains and losses on marketable securities classified as available-for-sale. The adoption of SFAS No. 130 did not impact the calculation of net income or earnings per share nor did it impact reported assets, liabilities or total stockholders' equity. It did impact the presentation of the components of stockholders' equity within the balance sheet and will result in the presentation of the components of comprehensive income within an annual financial statement, which must be displayed with the same prominence as other financial statements. 5
<TABLE> The components of the Company's total comprehensive income were: <CAPTION> Three Months Ended Six Months Ended June 30, June 30, 1998 1997 1998 1997 (in thousands) <S> <C> <C> <C> <C> Net income $ 7,151 $ 4,899 $15,927 $12,393 Currency translation adjustments (621) 137 (977) (2,931) Net unrealized holding gains (losses) (985) 2,126 1,435 2,379 Reclassification adjustments for gains included in net income (3,472) (272) (4,000) (585) Total comprehensive income $ 2,073 $ 6,890 $12,385 $11,256 </TABLE> 7. NEW FINANCIAL ACCOUNTING STANDARD In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," effective for fiscal years beginning after June 15, 1999, with early adoption permitted. This statement establishes accounting and reporting standards requiring companies to record all derivatives on the balance sheet as either assets or liabilities and measure those instruments at fair value. The manner in which companies are to record gains or losses resulting from changes in the values of those derivatives depends on the use of the derivative and whether it qualifies for hedge accounting. The Company has not yet quantified the impacts of adopting SFAS No. 133 on its financial statements and has not determined the timing of adoption of SFAS No. 133. 6
ITEM 2. Management's Discussion and Analysis of Results of Operations and Financial Condition. This discussion should be read in conjunction with the information contained both in this report and in the Company's Consolidated Financial Statements for the year ended December 31, 1997. <TABLE> The following table shows operating income and expense items as a percentage of net sales: <CAPTION> Three Months Ended Six Months Ended Year Ended June 30, June 30, December 31, 1998 1997 1998 1997 1997 <S> <C> <C> <C> <C> <C> Net sales 100.0 100.0 100.0 100.0 100.0 Cost of goods sold 45.5 44.5 45.1 42.9 44.3 Gross profit 54.5 55.5 54.9 57.1 55.7 Selling, general and administrative 38.4 38.3 36.9 38.4 38.7 Product research and development 9.9 10.6 9.2 10.4 10.8 Income from operations 6.2 6.6 8.8 8.3 6.2 ===== ===== ===== ===== ===== </TABLE> Three Months Ended June 30, 1998 Compared to Three Months Ended June 30, 1997 Corporate Results - Sales, Margins and Expenses Net sales (sales) in the second quarter of 1998 were $107.9 million compared to $105.8 million in the second quarter of 1997. For the second quarter of 1998, the effect of a strengthened U.S. dollar reduced international sales by approximately $2.9 million when compared to sales based upon 1997 exchange rates. Sales increased in Clinical Diagnostics, were flat in Life Science and decreased in Analytical Instruments. Eliminating the effects of a strengthened U.S. dollar, sales increased 16% in Clinical Diagnostics, 2% in Life Science and were down 10% in Analytical Instruments. Both the Analytical Instruments and Life Science segments have been negatively impacted by the economic conditions in Asia. In addition to Asia, the Analytical Instruments segment has been impacted by a general slow down in the markets it serves. Approximately half of the increase in Clinical Diagnostics sale growth can be directly attributed to the acquisition of the Chiron Diagnostics controls business in the fourth quarter of 1997. 7
Consolidated gross margins were 54.5% for the second quarter of 1998 compared to 55.5% for the second quarter of 1997 and 55.7% for all of 1997. Gross margins were impacted by the strengthening U.S. dollar and declined in all three of the Company's segments. Diagnostic margins declined, in part, from the Chiron acquisition, where several supply agreements existed to wholesale diagnostic controls. Analytical Instruments margins are negatively impacted by the absorption of period costs over a smaller sales amount. Selling, general and administrative expense (SG&A) at 38.4% of sales in the second quarter of 1998 is virtually unchanged from 38.3% of sales in the comparable period of 1997. To improve overall profitability, one of the long-term objectives of management is to control SG&A growth as a fraction of sales growth. Product research and development expense (R&D) decreased from the second quarter of 1997, both in absolute dollars and as a percent of sales. Compared to the second quarter of 1997, both Clinical Diagnostics and Analytical Instruments increased R&D spending although Clinical Diagnostics increased spending at a rate less than sales growth. As part of the Company's continuing commitment to long-term growth, 1997 was a year of expanding R&D. In 1998, management plans to continue R&D spending, but monitor it to maintain an appropriate growth rate. Corporate Results - Non-Operating Items Interest expense was $816,000 more in the second quarter of 1998 than the comparable period of 1997 principally as a result of higher average borrowings. Borrowings increased in connection with acquisitions in the fourth quarter of 1997 and investments in the second quarter of 1998. Investment income in both years includes gains on sales of marketable securities and interest income from short-term investments. During the second quarter of 1998, Bio-Rad realized significant investment income, $4.9 million, as it realigned its investment in marketable securities in order to increase its position in Instrumentation Laboratory. Net other income and expense in the second quarter of 1998 is primarily goodwill amortization. Net other income and expense in the second quarter of 1997 was primarily net exchange losses and goodwill amortization. The Company's effective tax rate for the second quarter of 1998 was 29% compared to 28% for all of 1997. The tax rate for both years reflects the utilization of loss carryforwards, foreign sales corporation benefits and foreign tax credits. However, as 8
loss carryforwards are exhausted the benefits realized will decline in comparison to prior periods and the effective tax rate will rise. Six Months Ended June 30, 1998 Compared to Six Months Ended June 30, 1997 Corporate Results - Sales, Margins and Expenses Sales in the first half of 1998 were $224.1 million compared to $211.6 million in the first half of 1997, an increase of 6%. For the first half of 1998, the effect of a strengthened U.S. dollar reduced international sales by approximately $7.5 million compared to sales based upon 1997 exchange rates. Sales increased 14% in Clinical Diagnostics, 4% in Analytical Instruments and were flat in Life Science. Approximately half of the increase in Clinical Diagnostics sale growth can be directly attributed to the acquisition of the Chiron Diagnostics controls business in the fourth quarter of 1997. Sales increases in Analytical Instruments are attributed to limited growth in the products sold into the semiconductor test and manufacturing equipment market. Consolidated gross margins were 54.9% for the first six months of 1998 compared to 57.1% for the first six months of 1997 and 55.7% for all of 1997. Gross margins declined in all three of the Company's segments. Life Science margins declined as a result of the strengthening dollar in Asia and Europe and price discounting in Europe. Diagnostic margins declined, in part, from the Chiron acquisition, where several supply agreements existed to wholesale diagnostic controls. Also, higher service costs and some price erosion lowered diagnostic margins in the diabetes product line. Analytical Instruments margins were negatively impacted by an increasingly weak semiconductor market and the strengthening dollar. SG&A decreased to 36.9% of sales in the first half of 1998 from 38.4% of sales in the comparable period of 1997. The strengthened U.S. dollar reduced international SG&A by approximately $2.3 million or 1.0% of sales. To improve overall profitability, one of the long-term objectives of management is to control SG&A growth as a fraction of sales growth. On a currency neutral basis, SG&A for Life Science increased by 1%, and SG&A for Analytical Instruments decreased by 2% when compared to 1997. Clinical Diagnostics increased SG&A spending but at a rate far less than sales growth. The 1997 fourth quarter acquisition did not add significantly to the fixed SG&A burden of Clinical Diagnostics. Consolidated R&D decreased from the first half of 1997, both in absolute dollars and as a percent of sales. Compared to the first half of 1997, Clinical Diagnostics and Analytical 9
Instruments increased R&D spending by approximately $200,000 each. As part of the Company's continuing commitment to long- term growth, 1997 was a year of expanding R&D. In 1998, management plans to continue R&D spending, but monitor it to maintain an appropriate growth rate. Corporate Results - Non-operating Items Interest expense was $1.3 million more in the first half of 1998 than the comparable period of 1997 principally as a result of higher average borrowings. Borrowings increased in connection with acquisitions in the fourth quarter of 1997 and investments in the second quarter of 1998. Investment income in both years includes gains on sales of marketable securities and interest income from short-term investments. During the second quarter of 1998, Bio-Rad realized significant investment income, $4.9 million, as it realigned its investment in marketable securities in order to increase its position in Instrumentation Laboratory. Net other income and expense in the first half of 1998 includes goodwill amortization and non-operating legal costs. Net other income and expense in the first half of 1997 was primarily net exchange losses and goodwill amortization. As expected, the Company's effective tax rate increased from 28% to 29% for the first half of 1998. The tax rate for both years reflects the utilization of loss carryforwards, foreign sales corporation benefits and foreign tax credits. However, as loss carryforwards are exhausted the benefits realized will decline in comparison to prior periods and the effective tax rate will rise. Financial Condition At June 30, 1998, the Company had available $13.5 million in cash and cash equivalents, $53.0 million under its principal revolving credit agreement and marketable securities with a market value of $27.7 million, a majority of which could be readily converted to cash. On May 15, 1998, the Company entered into a new $100 million revolving credit agreement replacing the $60 million revolving credit agreement (see Note 4). Financing activities, principally borrowings under the Company's principal revolving credit agreement, and cash provided by operating activities provided the Company with the cash flow necessary to support investing activities. During the second quarter the Company realized investment income by selling a portion of its investment portfolio. Sales are expected to continue throughout the remainder of the year, however, the magnitude of any gains are not expected to match the second quarter. The cash generated by these sales was used to increase 10
Bio-Rad's holdings in Instrumentation Laboratory, S.p.A., an Italian based clinical diagnostics company with annual revenues of over $200 million. Bio-Rad currently holds as an investment approximately 23% of Instrumentation Laboratory. At June 30, 1998, consolidated accounts receivable increased by $3.1 million from December 31, 1997. Excluding the effects of the strengthened U.S. dollar, accounts receivable increased by $4.8 million. The increase is a result of larger sales late in the quarter when compared to the prior period, the Company deciding to factor less in Southern Europe and a slow down in payments in Asia. At June 30, 1998, consolidated net inventories were $1.9 million higher than at December 31, 1997. The increase in inventory occurred in the Life Science segment and was designed to meet short term requirements as manufacturing process changes are implemented which, by year-end, should result in overall lower inventories. Management continues to monitor inventory levels and regularly reviews the impact of obsolescence in current inventory caused by the introduction of new products. In February 1998, the Board of Directors authorized the Company to repurchase up to an additional $10 million of common stock over an indefinite period of time. This is the third such authorization since July 1996 bringing the total authorized to $18 million. Through July 1998, the Company has repurchased 244,700 shares of Class A common stock and 30,000 shares of Class B common stock for a total of $7.4 million. The repurchase is designed to improve shareholder value and to satisfy the Company's obligations under the employee stock purchase and stock option plans. The Company continues to regularly review acquisition opportunities; currently no material acquisitions have reached a stage beyond exploratory discussions. Other than statements of historical fact, statements made in this report include forward looking statements, such as statements with respect to the Company's future financial performance, operating results, plans and objectives. Actual results may differ materially from those currently anticipated depending on a variety of risk factors. 11
PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits The following documents are filed as part of this report: Exhibit No. 10.12 Credit Agreement dated as of May 15, 1998, by and among the Registrant, the Lenders and The First National Bank of Chicago, as agent. 27.1 Financial Data Schedule. (b) Reports on Form 8-K During the quarter ended June 30, 1998, Bio-Rad filed an amendment to the Form 8-K, dated December 5, 1997, related to the acquisition of assets from Chiron Diagnostics Corporation and Chiron Corporation. 12
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereto duly authorized. BIO-RAD LABORATORIES, INC. (Registrant) Date: August 13, 1998 /s/ Thomas C. Chesterman Thomas C. Chesterman, Vice President, Chief Financial Officer Date: August 13, 1998 /s/ James R. Stark James R. Stark, Corporate Controller 13