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 September 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 October 30, 1998 <S> <C> Class A Common Stock, Par Value $1.00 per share 9,970,579 Class B Common Stock, Par Value $1.00 per share 2,455,999 </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 Nine Months Ended September 30, September 30, 1998 1997 1998 1997 <S> <C> <C> <C> <C> NET SALES . . . . . . . . . . . . . . . . . . $ 98,982 $ 99,491 $323,054 $311,097 Cost of goods sold . . . . . . . . . . . . . 45,405 44,656 146,544 135,400 GROSS PROFIT . . . . . . . . . . . . . . . . 53,577 54,835 176,510 175,697 Selling, general and administrative expense . 41,042 39,935 123,610 121,202 Product research and development expense . . 10,243 10,991 30,784 33,004 INCOME FROM OPERATIONS . . . . . . . . . . . 2,292 3,909 22,116 21,491 Interest expense . . . . . . . . . . . . . . (941) (219) (2,817) (779) Investment income, net. . . . . . . . . . . . 1,955 420 7,585 1,318 Other, net . . . . . . . . . . . . . . . . . (577) (480) (1,722) (1,187) INCOME BEFORE TAXES . . . . . . . . . . . . . 2,729 3,630 25,162 20,843 Provision for income taxes . . . . . . . . . 791 1,016 7,297 5,836 NET INCOME . . . . . . . . . . . . . . . . . $ 1,938 $ 2,614 $ 17,865 $ 15,007 ======== ======== ======== ======== Basic earnings per share: Net income . . . . . . . . . . . . . . . . $0.16 $0.21 $1.46 $1.22 ======== ======== ======== ======== Weighted average common shares . . . . . . 12,302 12,264 12,259 12,278 ======== ======== ======== ======== Diluted earnings per share: Net income . . . . . . . . . . . . . . . . $0.16 $0.21 $1.44 $1.21 ======== ======== ======== ======== Weighted average common shares . . . . . . 12,394 12,397 12,381 12,419 ======== ======== ======== ======== </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> September 30, December 31, 1998 1997 (Unaudited) <S> <C> <C> ASSETS: Cash and cash equivalents . . . . . . . . . . . . . . . . $ 8,335 $ 10,843 Accounts receivable . . . . . . . . . . . . . . . . . . . 96,397 96,965 Inventories . . . . . . . . . . . . . . . . . . . . . . . 96,927 91,428 Prepaid expenses, taxes and other current assets. . . . . 28,489 28,182 Total current assets . . . . . . . . . . . . . . . . . 230,148 227,418 Net property, plant and equipment . . . . . . . . . . . . 80,111 78,678 Marketable securities . . . . . . . . . . . . . . . . . . 7,835 18,092 Other assets . . . . . . . . . . . . . . . . . . . . . . 43,523 27,688 Total assets . . . . . . . . . . . . . . . . . . . . $361,617 $351,876 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY: Notes payable and current maturities of long-term debt. . $ 10,001 $10,802 Accounts payable . . . . . . . . . . . . . . . . . . . . 22,295 32,385 Accrued payroll and employee benefits . . . . . . . . . . 27,131 24,825 Sales, income and other taxes payable . . . . . . . . . . 6,476 5,055 Other current liabilities . . . . . . . . . . . . . . . . 28,513 27,715 Total current liabilities . . . . . . . . . . . . . . 94,416 100,782 Long-term debt, net of current maturities . . . . . . . . 38,731 38,952 Deferred tax liabilities . . . . . . . . . . . . . . . . 16,504 15,465 Total liabilities . . . . . . . . . . . . . . . . . . 149,651 155,199 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 - 9,970,579 at September 30, 1998 and 9,824,509 at December 31, 1997 . . . . . . . . . . 9,971 9,825 Class B common stock, $1.00 par value, 6,000,000 shares authorized; outstanding - 2,455,999 at September 30, 1998 and 2,596,069 at December 31, 1997 . . . . . . . . . . 2,456 2,596 Additional paid-in capital . . . . . . . . . . . . . . . 18,478 18,426 Class A treasury stock, 123,648 shares at September 30, 1998 and 193,539 shares at December 31, 1997 at cost . . . . (3,309) (5,206) Class B treasury stock, 30,000 shares at December 31, 1997 at cost . . . . . . . . . . . . . . . . . . . . . . . . -- (800) Retained earnings . . . . . . . . . . . . . . . . . . . . 183,506 167,182 Accumulated other comprehensive income: Currency translation . . . . . . . . . . . . . . . . . (298) (1,149) Net unrealized holding gain on marketable securities . 1,162 5,803 Total stockholders' equity . . . . . . . . . . . . . . 211,966 196,677 Total liabilities and stockholders' equity . . . . $361,617 $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> Nine Months Ended September 30, 1998 1997 <S> <C> <C> Cash flows from operating activities: Cash received from customers . . . . . . . . . . . . $323,661 $310,386 Cash paid to suppliers and employees . . . . . . . . (298,711) (283,612) Interest paid. . . . . . . . . . . . . . . . . . . . (2,680) (804) Income tax payments. . . . . . . . . . . . . . . . . (6,580) (9,539) Miscellaneous receipts . . . . . . . . . . . . . . . 170 80 Net cash provided by operating activities. . . . . . 15,860 16,511 Cash flows from investing activities: Capital expenditures, net. . . . . . . . . . . . . . (14,415) (16,092) Payments for acquisitions. . . . . . . . . . . . . . -- (787) Purchases of marketable securities and investments . (17,922) (6,198) Sales of marketable securities and investments . . . 13,791 2,401 Foreign currency hedges, net . . . . . . . . . . . . 20 2,734 Net cash used in investing activities. . . . . . . . (18,526) (17,942) Cash flows from financing activities: Net borrowings under line-of-credit arrangements . . (400) (599) Long-term borrowings . . . . . . . . . . . . . . . . 108,910 31,375 Payments on long-term debt . . . . . . . . . . . . . (109,345) (33,563) Proceeds from issuance of common stock . . . . . . . 58 1,258 Treasury stock activity, net . . . . . . . . . . . . 1,156 (3,764) Net cash provided by (used in) financing activities. 379 (5,293) Effect of exchange rate changes on cash . . . . . . . . . (221) 2,006 Net decrease in cash and cash equivalents . . . . . . . . (2,508) (4,718) Cash and cash equivalents at beginning of period. . . . . 10,843 9,390 Cash and cash equivalents at end of period. . . . . . . . $ 8,335 $ 4,672 ======== ======== Reconciliation of net income to net cash provided by operating activities: Net income . . . . . . . . . . . . . . . . . . . . . . $ 17,865 $ 15,007 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization. . . . . . . . . . . 15,276 13,147 Foreign currency hedge transactions, net . . . . . (20) (2,918) Gains on disposition of marketable securities. . . (7,518) (927) Decrease in accounts receivable. . . . . . . . . . 1,622 2,993 Increase in inventories. . . . . . . . . . . . . . (5,451) (14,302) Increase in other current assets . . . . . . . . . (203) (4,381) Increase (decrease) in accounts payable and other current liabilities. . . . . . . . . . . . . . . (6,978) 8,941 Increase in income taxes payable . . . . . . . . . 1,054 598 Other. . . . . . . . . . . . . . . . . . . . . . . 213 (1,647) Net cash provided by operating activities . . . . . . . . $ 15,860 $ 16,511 ======== ======== </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> September 30, December 31, 1998 1997 (in thousands) <S> <C> <C> Raw materials $ 30,638 $ 27,257 Work in process 22,256 21,242 Finished goods 44,033 42,929 $ 96,927 $ 91,428 ======== ======== </TABLE> 3. PROPERTY, PLANT AND EQUIPMENT <TABLE> The principal components of property, plant and equipment are as follows: <CAPTION> September 30, December 31, 1998 1997 (in thousands) <S> <C> <C> Land and improvements $ 8,057 $ 8,057 Buildings and leasehold improvements 55,980 55,477 Equipment 127,827 115,097 191,864 178,631 Accumulated depreciation (111,753) (99,953) Net property, plant and equipment $ 80,111 $ 78,678 ======== ======== </TABLE> 4
4. INVESTMENT IN AFFILIATES Beginning in December 1997, Bio-Rad began investing in Instrumentation Laboratory, S.p.A. ("IL"), an Italian based clinical diagnostics company with fiscal 1997 revenues in excess of $200 million. At September 30, 1998, Bio-Rad held approximately 25% of the outstanding stock of IL. Grupo CH- Werfen, S.A., a privately held company based in Spain, controls over 50% of the outstanding stock of IL. Approximately 29% of the outstanding stock of IL is available in the U.S. evidenced by American Depository Shares (Nasdq:ILABY). The most recently published financial statements for IL are as of February 28, 1998. Prior to September 1998, Bio-Rad classified the investment as Marketable Securities. Given the limited availability of financial information and the low volume of shares traded in recent months, Bio-Rad management does not believe there is a sufficient liquid market for IL stock. Accordingly, the investment has been reclassified to Other Assets. Additionally, since Bio-Rad does not have the ability to significantly influence the operating and financial policies of IL, the investment has been recorded as its cost of $17,739,000. 5. 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. 6. EARNINGS PER SHARE Weighted average shares used for diluted earnings per share include the dilutive effect of outstanding stock options of 92,000 and 133,000 shares for the quarters ended September 30, 1998 and 1997, respectively. For the corresponding year-to-date periods, weighted average shares used for diluted earnings per share include the dilutive effect of outstanding stock options of 122,000 and 141,000 shares, respectively. Options to purchase 140,000 and 130,000 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 September 30, 1998. 5
7. 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. <TABLE> The components of the Company's total comprehensive income were: <CAPTION> Three Months Ended Nine Months Ended September 30, September 30, 1998 1997 1998 1997 (in thousands) <S> <C> <C> <C> <C> Net income $ 1,938 $ 2,614 $17,865 $15,007 Currency translation adjustments 1,828 (1,297) 851 (4,228) Net unrealized holding gains (losses) (739) 1,596 696 3,975 Reclassification adjustments for gains included in net income (1,337) (342) (5,337) (927) Total comprehensive income $ 1,690 $ 2,571 $14,075 $13,827 </TABLE> Included in comprehensive income for the three months and nine months ended September 30, 1998 is $712,000 and ($652,000), respectively, of gains (losses) related to the reclassification of IL from Marketable Securities to Other Assets (see Note 4). 8. 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 6
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. 7
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 Nine Months Ended Year Ended September 30, September 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 45.9 44.9 45.4 43.5 44.3 Gross profit 54.1 55.1 54.6 56.5 55.7 Selling, general and administrative 41.5 40.2 38.3 39.0 38.7 Product research and development 10.3 11.0 9.5 10.6 10.8 Income from operations 2.3 3.9 6.8 6.9 6.2 ===== ===== ===== ===== ===== </TABLE> Three Months Ended September 30, 1998 Compared to Three Months Ended September 30, 1997 Corporate Results - Sales, Margins and Expenses Net sales (sales) in the third quarter of 1998 were $99.0 million compared to $99.5 million in the third quarter of 1997. For the third quarter of 1998, the effect of a strengthened U.S. dollar reduced international sales by approximately $3.1 million when compared to sales based upon 1997 exchange rates. Sales increased in Clinical Diagnostics and Life Science, and decreased in Analytical Instruments. Eliminating the effects of a strengthened U.S. dollar, sales increased 12% in Clinical Diagnostics, 5% in Life Science and were down 24% in Analytical Instruments. In the third quarter of 1998 all 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 slowdown in the markets it serves. Approximately half of the increase in Clinical Diagnostics sales growth can be directly attributed to the acquisition of the Chiron Diagnostics controls business in the fourth quarter of 1997. 8
Consolidated gross margins were 54.1% for the third quarter of 1998 compared to 55.1% for the third quarter of 1997 and 55.7% for all of 1997. Gross margins were impacted by the strengthening U.S. dollar and declined in the Clinical Diagnostics and Analytical Instruments 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) rose to 41.5% of sales in the third quarter of 1998 from 40.2% of sales in the comparable period of 1997. Management still believes that moderating SG&A growth is a significant long-term objective. While the current quarter in not reflective of this goal, the year 1998 should be. The current investments in systems and processes are more efficiently accomplished when sustained rather than managed for short-term profitability. For the third quarter of 1998, the Company met its objective to have SG&A grow slower than sales in both the Life Science and Clinical Diagnostics segments. Product research and development expense (R&D) decreased from the third quarter of 1997, both in absolute dollars and as a percent of sales. Compared to the third quarter of 1997, only the Clinical Diagnostics segment increased R&D spending, and 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 has monitored R&D spending to maintain an appropriate growth rate. Corporate Results - Non-Operating Items Interest expense was $722,000 more in the third quarter of 1998 than the comparable period of 1997 principally as a result of higher average borrowings. Borrowings increased in connection with the acquisition in the fourth quarter of 1997 and the investments in Instrumentation Laboratory in the second quarter of 1998. During the third quarter, cash receipts for sales of marketable securities funded the investments and at the end of the quarter, borrowings had returned to approximately the same level as year-end 1997. Investment income in both years includes gains on sales of marketable securities and interest income from short-term investments. During the third quarter of 1998, Bio-Rad realized significant investment income, $2.0 million, as it continued to realign its investment in marketable securities in order to increase its position in Instrumentation Laboratory (see Note 4). Net other income and expense in the third quarter of 1998 is primarily goodwill amortization. No significant items were 9
included in net other income and expense for the third quarter of 1997. The Company's effective tax rate for the third 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 loss carryforwards are exhausted the benefits realized will decline in comparison to prior periods and the effective tax rate will rise. Nine Months Ended September 30, 1998 Compared to Nine Months Ended September 30, 1997 Corporate Results - Sales, Margins and Expenses Sales for the nine month period ended September 30, 1998 were $323.1 million compared to $311.1 million in the comparable period of 1997, an increase of 4%. For the first nine months of 1998, the effect of a strengthened U.S. dollar reduced international sales by approximately $10.6 million compared to sales based upon 1997 exchange rates. Sales increased 13% in Clinical Diagnostics, were flat in Life Science and decreased 7% in Analytical Instruments. 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 decreases in Analytical Instruments are attributed to a general slowdown in the markets it serves. The declining market has reversed the small growth experienced earlier in 1998 in the products sold into the semiconductor test and manufacturing equipment market. System orders have been delayed as the number of new fabrication facilities and lines has been reduced, the principle market for the Company's semiconductor products. Consolidated gross margins were 54.6% for the first nine months of 1998 compared to 56.5% for the first nine 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 38.3% of sales in the first nine months of 1998 from 39.0% of sales in the comparable period of 1997. The strengthened U.S. dollar reduced international SG&A by approximately $3.6 million or 1.1% of sales. To improve overall 10
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 2%, and SG&A for Analytical Instruments decreased by 2% when compared to 1997. Clinical Diagnostics increased SG&A spending but at a lower rate than the sales growth rate. 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 nine months of 1997, both in absolute dollars and as a percent of sales. Compared to the first nine months of 1997, Clinical Diagnostics and Analytical Instruments increased R&D spending by approximately $500,000 and $200,000, respectively. 1997 was a year of expanding R&D, especially in the Life Science segment where two products, the Molecular Imager FX Imager and MicroRadiance, were completed and launched in 1998. In 1998, Life Science has curtailed several projects which did not currently offer the appropriate commercial opportunities. Corporate Results - Non-operating Items Interest expense was $2.0 million more in the first nine months of 1998 than the comparable period of 1997 principally as a result of higher average borrowings. Average borrowings increased in connection with the acquisition in the fourth quarter of 1997 and the investments in Instrumentation Laboratory 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 and third quarters of 1998, Bio- Rad realized significant investment income, $6.8 million, as it sold some of its investment in marketable securities in order to increase its position in Instrumentation Laboratory (see Note 4). Net other income and expense in the first nine months of 1998 includes goodwill amortization and non-operating legal costs. Net other income and expense in the first nine months of 1997 was primarily net exchange losses, goodwill amortization and non- operating legal costs. As expected, the Company's effective tax rate increased from 28% to 29% for the first nine months 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. 11
Financial Condition At September 30, 1998, the Company had available $8.3 million in cash and cash equivalents, $62.0 million under its principal revolving credit agreement and marketable securities with a market value of $7.8 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 5). Cash provided by operating activities provided the Company with the majority of the cash flow necessary to support investing activities. During the second and third quarters the Company realized investment income by selling a portion of its investment portfolio. Gains on any sales in the fourth quarter are not expected to match the second or third quarters. The cash generated by these sales was used to increase 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 25% of Instrumentation Laboratory (see Note 4). At September 30, 1998, consolidated accounts receivable decreased by $0.6 million from December 31, 1997. The decrease is less than would be expected as a result of the Company deciding to factor less in Southern Europe and a slowdown in payments in Asia. At September 30, 1998, consolidated net inventories were $5.5 million higher than at December 31, 1997. The increase in inventory occurred in all three of the Company's segments. The largest increase was in the Life Science segment. This segment has been negatively effected by the economic conditions in Asia, and has increased inventory of some product lines for new products and to meet expected fourth quarter demand. 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 October 1998, the Company has repurchased 261,800 shares of Class A common stock and 30,000 shares of Class B common stock for a total of $7.8 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. 12
The Company continues to regularly review acquisition opportunities; currently no material acquisitions have reached a stage beyond exploratory discussions. Euro - A New European Currency Beginning January 1, 1999, certain member countries of the European Union have planned to fix the conversion rates between their national currencies and a common currency, the "Euro," that will become a legal currency on that date. Over the period January 1, 1999 through January 1, 2002 participating countries will gradually transition from their national currencies, which will still exist at January 1, 1999, to the Euro. This transition will have business implications including the need to adjust internal systems to accommodate the Euro and cross border price transparency. A group of Corporate and European managers have been assigned the task of preparing and accommodating the changes required to continue to do business in the European Union. The Company does not presently expect that the efforts involved will have a material impact on operations, financial position or liquidity. There will be increased competitive pressures and marketing strategies will need to be continuously evaluated until the transition is complete. As a result of competitive forces and emerging government regulations, the Company cannot guarantee that all problems will be foreseen and remediated, and that no material disruption will occur. Year 2000 The Year 2000 issue is the result of computer programs being written using two rather than four digits to define the date. Failure to recognize "00" as the year 2000 could result in a temporary inability to conduct normal business activities. Bio-Rad currently operates in a decentralized processing environment. The Company, with the assistance of outside consultants and contractors, has begun phased identification, remediation, replacement, validation and notification processes to minimize the potential disruption to business from information technology and non-information technology systems. The project start-up, inventory and assessment phases are generally complete. For each location remediations or scheduled replacements will be completed prior to the Year 2000 deadline. As a contingency plan, certain locations have been identified to act as central processing centers to ensure each major region of the world will have access to processing capabilities to meet customer requirements. Bio-Rad's manufactured products have also been undergoing assessment for Year 2000 readiness. Customers and investors can review the Year 2000 readiness status of the Company's products on its web site, http://www.bio-rad.com. 13
The Company has identified significant suppliers and is requesting information from them regarding the Year 2000 readiness of their products or services. The Company has not yet received enough responses to ascertain that a material adverse impact can be avoided. It is not possible at this time to value the amount of business that might be lost as a result of Bio-Rad's business partners' failure to deliver products and services after December 31, 1999. Additionally, global infrastructure comprised of banking, transportation, communication, power generation and ordinary and necessary governmental activities are critical to the Company's operations. Should any of these suppliers not be fully functional after 1999 the negative impact to the Company would be significant and material. The expenditures required in 1998 and 1999 to replace and remediate Year 2000 non-compliant Bio-Rad information technology systems, including equipment, is estimated at $8 million and primarily deals with distribution system capabilities worldwide. Approximately half of these costs have been incurred to date. Hardware and software purchased and installed in connection with these projects will provide both Year 2000 readiness and significant additional functionality. Manufacturing systems have been remediated at a cost that is not material to Bio-Rad overall and have been included in operating results in 1997 and 1998. While some systems enhancements or modifications have been delayed to allow for the more significant Year 2000 remediation to be completed, weighing both cost and benefit, Bio-Rad management believes this is a prudent response. The Company as of this date has not identified the "most likely worst case Year 2000 scenario." That scenario will be largely dependent on the response from the Company's significant worldwide suppliers and its assessment of preparedness of the global infrastructure, including multiple national governments. During the first half of 1999 the Company will review a contingency plan based on the aforementioned significant supplier responses and global infrastructure preparedness. Forward Looking Statements 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 including increased competition, the ability to achieve management objectives (especially related to SG&A and inventory), government regulation, the continued performance of business partners (particularly in relation to the Year 2000 issue), and the monetary policies of various countries. 14
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. 10.5 Amended and Restated 1988 Employee Stock Purchase Plan. 27.1 Financial Data Schedule. (b) Reports on Form 8-K There were no reports on Form 8-K for the quarter ended September 30, 1998. 15
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: November 10, 1998 /s/ Thomas C. Chesterman Thomas C. Chesterman, Vice President, Chief Financial Officer Date: November 10, 1998 /s/ James R. Stark James R. Stark, Corporate Controller 16