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, 1999. 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 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 ___ 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, 1999 <S> <C> Class A Common Stock, Par Value $1.00 per share 9,974,862 Class B Common Stock, Par Value $1.00 per share 2,487,716 </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, 1999 1998 1999 1998 <S> <C> <C> <C> <C> NET SALES . . . . . . . . . . . . . . . . . . $115,794 $107,898 $241,532 $224,072 Cost of goods sold . . . . . . . . . . . . . 50,553 49,041 106,109 101,139 GROSS PROFIT . . . . . . . . . . . . . . . . 65,241 58,857 135,423 122,933 Selling, general and administrative expense . 41,805 41,511 84,822 82,568 Product research and development expense . . 10,916 10,629 21,450 20,541 INCOME FROM OPERATIONS . . . . . . . . . . . 12,520 6,717 29,151 19,824 Interest expense . . . . . . . . . . . . . . (807) (1,091) (1,703) (1,876) Investment income, net . . . . . . . . . . . 349 4,856 423 5,630 Other, net . . . . . . . . . . . . . . . . . (1,025) (409) (1,705) (1,145) INCOME BEFORE TAXES . . . . . . . . . . . . . 11,037 10,073 26,166 22,433 Provision for income taxes . . . . . . . . . 3,156 2,922 7,483 6,506 NET INCOME . . . . . . . . . . . . . . . . . $ 7,881 $ 7,151 $ 18,683 $ 15,927 ======== ======== ======== ======== Basic earnings per share: Net income . . . . . . . . . . . . . . . . $0.65 $0.58 $1.54 $1.30 ======== ======== ======== ======== Weighted average common shares . . . . . . 12,095 12,263 12,102 12,237 ======== ======== ======== ======== Diluted earnings per share: Net income . . . . . . . . . . . . . . . . $0.65 $0.58 $1.54 $1.29 ======== ======== ======== ======== Weighted average common shares . . . . . . 12,176 12,414 12,144 12,376 ======== ======== ======== ======== </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, 1999 1998 (Unaudited) <S> <C> <C> ASSETS: Cash and cash equivalents . . . . . . . . . . . . . . $ 11,595 $ 10,081 Accounts receivable . . . . . . . . . . . . . . . . . 104,929 106,010 Inventories . . . . . . . . . . . . . . . . . . . . . 91,687 92,411 Prepaid expenses, taxes and other current assets . . . 26,787 26,887 Total current assets . . . . . . . . . . . . . . . 234,998 235,389 Net property, plant and equipment . . . . . . . . . . 82,845 82,130 Marketable securities . . . . . . . . . . . . . . . . 6,879 6,174 Other assets . . . . . . . . . . . . . . . . . . . . . 46,590 43,606 Total assets . . . . . . . . . . . . . . . . . . $371,312 $367,299 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY: Notes payable and current maturities of long-term debt $ 6,986 $ 9,393 Accounts payable . . . . . . . . . . . . . . . . . . . 23,528 26,706 Accrued payroll and employee benefits . . . . . . . . 24,274 27,351 Sales, income and other taxes payable . . . . . . . . 2,975 6,396 Other current liabilities . . . . . . . . . . . . . . 27,442 27,398 Total current liabilities . . . . . . . . . . . . . 85,205 97,244 Long-term debt, net of current maturities . . . . . . 42,248 42,339 Deferred tax liabilities . . . . . . . . . . . . . . . 15,102 13,382 Total liabilities . . . . . . . . . . . . . . . . . 142,555 152,965 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 - 9,974,862 at June 30, 1999 and 9,973,679 at December 31, 1998 . . . . . . . . . 9,975 9,974 Class B common stock, $1.00 par value, 6,000,000 shares authorized; outstanding - 2,487,716 at June 30, 1999 and 2,452,899 at December 31, 1998 . . . . . . . . . 2,488 2,453 Additional paid-in capital . . . . . . . . . . . . . . 18,779 18,523 Class A treasury stock, 364,111 shares at June 30, 1999 and 306,368 shares at December 31, 1998 at cost . . (8,023) (7,047) Retained earnings . . . . . . . . . . . . . . . . . . 208,014 189,838 Accumulated other comprehensive income: Currency translation . . . . . . . . . . . . . . . . (3,210) 92 Net unrealized holding gain on marketable securities 734 501 Total stockholders' equity . . . . . . . . . . . . 228,757 214,334 Total liabilities and stockholders' equity . . . $371,312 $367,299 ======== ======== </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, 1999 1998 <S> <C> <C> Cash flows from operating activities: Cash received from customers . . . . . . . . . . . . . . . $234,532 $217,238 Cash paid to suppliers and employees . . . . . . . . . . . (210,815) (204,528) Interest paid. . . . . . . . . . . . . . . . . . . . . . . (1,800) (1,850) Income tax payments . . . . . . . . . . . . . . . . . . . (8,829) (3,322) Miscellaneous receipts (payments). . . . . . . . . . . . . 21 (151) Net cash provided by operating activities. . . . . . . . . 13,109 7,387 Cash flows from investing activities: Capital expenditures, net. . . . . . . . . . . . . . . . . (10,967) (8,205) Purchases of marketable securities and investments . . . . (1,597) (16,067) Sales of marketable securities and investments . . . . . . 937 7,284 Foreign currency hedges, net . . . . . . . . . . . . . . . 2,530 1,428 Net cash used in investing activities. . . . . . . . . . . (9,097) (15,560) Cash flows from financing activities: Net payments under line-of-credit arrangements . . . . . . (1,713) (174) Long-term borrowings . . . . . . . . . . . . . . . . . . . 37,250 96,110 Payments on long-term debt . . . . . . . . . . . . . . . . (38,658) (87,433) Proceeds from issuance of common stock . . . . . . . . . . 292 58 Treasury stock activity, net . . . . . . . . . . . . . . . (1,483) 1,150 Net cash provided by (used in) financing activities. . . . (4,312) 9,711 Effect of exchange rate changes on cash . . . . . . . . . . . . 1,814 1,101 Net increase in cash and cash equivalents . . . . . . . . . . . 1,514 2,639 Cash and cash equivalents at beginning of period. . . . . . . . 10,081 10,843 Cash and cash equivalents at end of period. . . . . . . . . . . $ 11,595 $ 13,482 ======== ======== Reconciliation of net income to net cash provided by operating activities: Net income . . . . . . . . . . . . . . . . . . . . . . . . . $ 18,683 $ 15,927 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization . . . . . . . . . . . . . 10,776 10,210 Foreign currency hedge transactions, net . . . . . . . . (2,530) (1,428) Gains on disposition of marketable securities. . . . . . (356) (5,634) Increase in accounts receivable. . . . . . . . . . . . . (3,952) (4,789) Increase in inventories . . . . . . . . . . . . . . . . (1,219) (2,925) (Increase) decrease in other current assets. . . . . . . (685) 708 Decrease in accounts payable and other current liabilities. . . . . . . . . . . . . . . . . . (3,943) (8,238) Increase (decrease) in income taxes payable. . . . . . . (3,159) 3,802 Other. . . . . . . . . . . . . . . . . . . . . . . . . . (506) (246) Net cash provided by operating activities . . . . . . . . . . . $ 13,109 $ 7,387 ======== ======== </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, 1998 (the Company's 1998 Annual Report). Certain amounts in the financial statements of the prior year have been reclassified to be consistent with the 1999 presentation. 2. INVENTORIES <TABLE> The principal components of inventories are as follows: <CAPTION> June 30, December 31, 1999 1998 (in thousands) <S> <C> <C> Raw materials $ 26,870 $ 26,038 Work in process 23,052 21,614 Finished goods 41,765 44,759 $ 91,687 $ 92,411 ======== ======== </TABLE> 3. PROPERTY, PLANT AND EQUIPMENT <TABLE> The principal components of property, plant and equipment are as follows: <CAPTION> June 30, December 31, 1999 1998 (in thousands) <S> <C> <C> Land and improvements $ 8,057 $ 8,057 Buildings and leasehold improvements 56,433 56,280 Equipment 135,023 133,838 199,513 198,175 Accumulated depreciation (116,668) (116,045) Net property, plant and equipment $ 82,845 $ 82,130 ======== ======== </TABLE> 4
4. EARNINGS PER SHARE Weighted average shares used for diluted earnings per share include the dilutive effect of outstanding stock options of 81,000 and 151,000 shares, for the quarters ended June 30, 1999 and 1998, respectively. Weighted average shares used for diluted earnings per share include the dilutive effect of outstanding stock options of 42,000 and 139,000 shares, for the year-to-date periods ended June 30, 1999 and 1998, respectively. Options to purchase 294,000 and 140,000 shares of common stock were outstanding during 1999 and 1998, 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, 1999. 5. COMPREHENSIVE INCOME <TABLE> The components of the Company's total comprehensive income were: <CAPTION> Three Months Ended Six Months Ended June 30, June 30, 1999 1998 1999 1998 (in thousands) <S> <C> <C> <C> <C> Net Income $ 7,881 $ 7,151 $18,683 $15,927 Currency translation adjustments (976) (621) (3,302) (977) Net unrealized holding gains (losses) on securities 875 (985) 486 1,435 Reclassification adjustments for gains included in net income (216) (3,472) (253) (4,000) Total comprehensive income $ 7,564 $ 2,073 $15,614 $12,385 ======= ======= ======= ======= </TABLE> 6. SEGMENT INFORMATION <TABLE> Information regarding industry segments for the three months ended June 30, 1999 and 1998 is as follows (in thousands): <CAPTION> Life Clinical Analytical Science Diagnostics Instruments <S> <C> <C> <C> <C> Segment net sales 1999 $55,857 $44,617 $15,810 1998 49,019 43,277 16,663 Segment profit (loss) 1999 $ 4,885 $ 6,603 $ (142) 1998 1,695 5,506 (1,361) </TABLE> 5
<TABLE> Information regarding industry segments for the six months ended June 30, 1999 and 1998 is as follows (in thousands): <CAPTION> Life Clinical Analytical Science Diagnostics Instruments <S> <C> <C> <C> <C> Segment net sales 1999 $116,061 $92,633 $34,114 1998 103,781 86,179 35,958 Segment profit (loss) 1999 $ 11,732 $15,681 $ 762 1998 8,239 10,577 (622) </TABLE> <TABLE> Inter-segment sales are primarily between Life Science and Clinical Diagnostics and are priced to give Life Science a representative gross margin. The following reconciles total segment profit to consolidated income before taxes: <CAPTION> Three Months Ended Six Months Ended June 30, June 30, 1999 1998 1999 1998 (in thousands) <S> <C> <C> <C> <C> Total segment profit $11,346 $ 5,840 $28,175 $18,194 Gross profit on inter-segment sales (231) (534) (637) (904) Net corporate operating, interest and other expense not allocated to segments (427) (89) (1,795) (487) Investment income, net 349 4,856 423 5,630 Consolidated income before taxes $11,037 $10,073 $26,166 $22,433 ======= ======= ======= ======= </TABLE> 7. SUBSEQUENT EVENT On July 3, 1999, Bio-Rad reached an agreement to acquire Pasteur Sanofi Diagnostics (PSD) from Sanofi-Synthlabo S.A. and Institut Pasteur, the shareholders of PSD. Bio-Rad will acquire 100% of the shares of PSD and certain other ancillary assets for a purchase price not to exceed $210 million. Bio-Rad has received a commitment for $300 million in new credit facilities to finance the acquisition. Finalization of the transaction is expected to occur on October 1, 1999, subject to customary conditions, including the receipt of all necessary regulatory approvals and certain other consents. 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, 1998. <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, 1999 1998 1999 1998 1998 <S> <C> <C> <C> <C> <C> Net sales 100.0 100.0 100.0 100.0 100.0 Cost of goods sold 43.7 45.5 43.9 45.1 45.8 Gross profit 56.3 54.5 56.1 54.9 54.2 Selling, general and administrative 36.1 38.4 35.1 36.9 37.8 Product research and development 9.4 9.9 8.9 9.2 9.4 Income from operations 10.8 6.2 12.1 8.8 7.0 ===== ===== ===== ===== ===== Net income 6.8 6.6 7.7 7.1 5.5 ===== ===== ===== ===== ===== </TABLE> 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 the successful integration of PSD, increased competition, technological development, access to necessary intellectual property, the ability to achieve management objectives, government regulation, the continued performance of business partners (particularly in relation to the Year 2000 issue),and the monetary policies of various countries. Three Months Ended June 30, 1999 Compared to Three Months Ended June 30, 1998 Corporate Results - Sales, Margins and Expenses Net sales (sales) in the second quarter of 1999 reached $115.8 million compared to $107.9 million in the second quarter of 1998. Sales increased 13.9% in Life Science and 3.1% in Clinical Diagnostics when compared to the second quarter of 1998. The 7
growth in Life Science is attributed to its core products and especially to its imaging products. Clinical Diagnostics experienced growth in its diabetes and quality control product lines. Sales for the Analytical Instruments segment declined 5.1% in the second quarter of 1999 when compared to the prior year. The decline is attributed to the slowdown in the markets served by the Analytical Instruments segment, especially the market for semiconductor test and manufacturing instruments. Consolidated gross margins were 56.3% for the second quarter of 1999 compared to 54.5% for the second quarter of 1998 and 54.2% for all of 1998. Gross margins improved in each reporting segment. The improvements in Life Science gross margin are attributed to a stronger Japanese currency improving the U.S. dollar value of sales and improved manufacturing overhead absorption from increased sales volume. Analytical Instruments' margins improved from cost containment in response to the industry slowdown. Also the prior period included some one time costs to initiate its new direct European sales and service operations. Selling, general and administrative expense (SG&A) decreased to 36.1% of sales in the second quarter of 1999 from 38.4% of sales in the comparable period of 1998. Both Analytical Instruments and Clinical Diagnostics reduced SG&A spending in the second quarter of 1999 when compared to 1998. Life Science increased SG&A spending but at a rate half that of sales growth. Product research and development expense (R&D) increased 3% from the second quarter of 1998. Compared to the second quarter of 1998, both Life Science and Clinical Diagnostics increased R&D spending. Analytical Instruments reduced its R&D spending. Corporate Results - Non-Operating Items Interest expense has declined consistent with lower average borrowings when compared to the second quarter of 1998. Investment income in both years includes gains on sales of marketable securities; however, as planned, investment activity in 1999 has decreased since the size of the marketable securities portfolio was reduced in 1998. Net other income and expense in both years includes net goodwill amortization and non-operating legal costs. The Company's effective tax rate was 29% for the second quarter of both 1999 and 1998. The tax rate for both years reflects the utilization of loss carryforwards, foreign sales corporation benefits and foreign tax credits. These benefits are not expected to continue indefinitely and, subject to completion of the PSD acquisition, may change. No determination of the impact to the Company's effective tax rate from the pending acquisition has been made. 8
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998 Corporate Results - Sales Margins and Expenses Sales in the first half of 1999 were $241.5 million compared to $224.1 million in the first half of 1998, an increase of 7.8%. For the first half of 1999, the effect from a slightly weakened U.S. dollar added $1.0 million to sales, when compared to sales based upon the 1998 exchange rates. Sales increased 11.8% for Life Science and 7.5% for Clinical Diagnostics. Sales of the Company's Analytical Instruments declined 5.1%. Life Science sales increased in its core products and its imaging products. Clinical Diagnostics sales grew in its quality control and diabetes product lines. The market remains slow for the Company's Analytical Instruments segment, especially semiconductor test and manufacturing equipment. Consolidated gross margins were 56.1% for the first six months of 1999 compared to 54.9% for the first six months of 1998 and 54.2% for all of 1998. Life Science margins improved on better than planned sales, which caused an improvement in overhead absorption, and a strengthening Japanese Yen, which translates to an improvement in U.S. dollar sales value. Clinical Diagnostics improvements are related to reducing manufacturing expenses and activities related to a developing product line. Analytical Instruments margins improved on lower sales due to continuing cost reductions. SG&A decreased to 35.1% of sales in the first half of 1999 from 36.9% of sales in the comparable period of 1998. To improve overall profitability, one of the long-term objectives of management is to control SG&A growth as a fraction of sales growth. The Life Science segment grew SG&A expenditures at only 60% of sales growth. Clinical Diagnostics expenditures were virtually unchanged and Analytical Instruments expenditures declined for the first six months of 1999. Consolidated R&D increased 4% in the first half of 1999 compared to the first half of 1998. Life Science and Clinical Diagnostics each expended R&D investments in line with overall profit goals. Analytical Instruments R&D expenditures declined principally in the semiconductor product line where the slowdown in semiconductor capital spending affords the opportunity to balance R&D expenditures with current sales activity. Corporate Results - Non-operating Items Interest expense was $1.7 million, a slight decline from the prior year, as a result of lower average borrowings. 9
Investment income includes gains on sales of marketable securities and interest income from short term investments. Investment income in both years includes gains on sales of marketable securities, however, as planned, investment activity in 1999 has decreased since the size of the marketable securities portfolio was reduced in 1998. Net other income and expense in the first half of 1999 and 1998 includes goodwill amortization and non-operating legal costs. The Company's effective tax rate is unchanged at 29% for the first half of 1999. The tax rate for both years reflects the utilization of loss carryforwards, foreign sales corporation benefits and foreign tax credits. These benefits are not expected to continue indefinitely and, subject to completion of the PSD acquisition, may change. No determination of the impact to the Company's effective tax rate from the pending acquisition has been made. Financial Condition At June 30, 1999, the Company had available $11.6 million in cash and cash equivalents, $58.0 million under its principal revolving credit agreement and marketable securities with a market value of $6.9 million, a majority of which could be readily converted to cash. Operating activities and cash on hand provided the Company with the cash flow necessary to support current investing and financing activities. On July 3, 1999, the Company reached an agreement to purchase PSD and its holdings including some ancillary assets from Sanofi- Synthlabo S.A. and Institut Pasteur (see Note 7). The purchase price, including repayment of PSD's outstanding debt, shall not exceed $210 million. Bio-Rad has received a commitment for $300 million in new credit facilities to finance the acquisition. At the date of closing, estimated to be October 1, 1999, the Company will be substantially leveraged and the amount of debt could materially impact the financial condition of the Company should management's plan for operating the new entity not be successful. The lender will place conditions on the loans which could limit the Company's ability to: borrow further, service this and other debt, make expenditures for capital improvements, pay dividends, repurchase the Company's own stock and/or make strategic and tactical investments in support of operating the business. At June 30, 1999, consolidated accounts receivable decreased by $1.0 million from December 31, 1998. This reflects an increase of $3.9 million offset by foreign exchange rate decline of $4.9 million. The increase is a result of second quarter 1999 sales being weighted more heavily toward the end of the period when compared to the fourth quarter of 1998. 10
At June 30, 1999, consolidated net inventories were $0.7 million lower than at December 31, 1998. As planned, inventory increased in the Clinical Diagnostics segment. Inventory for the Clinical Diagnostics controls business, a growth area for the Company, has long lead times and large infrequent batch production which is necessary to meet customers requirements. This increase was offset by a decline from foreign exchange rate. Management continues to monitor inventory levels and regularly reviews the impact of obsolescence in current inventory caused by the introduction of new products. Net capital expenditures totaled $11.0 million for the first half of 1999 compared to $8.2 million in the first half of 1998. Capital expenditures include additions of reagent rental equipment placed with Clinical Diagnostic customers who then commit to purchasing the Company's diagnostic reagents for use. The Company has received several offers to sell its owned facility located in Cambridge, Massachusetts. The facility currently houses a portion of the manufacturing and distribution for the Analytical Instruments segment which will require relocation if the building is ultimately sold. The Board of Directors has authorized the Company to repurchase up to $18 million of common stock over an indefinite period of time. From July 1996 through June 1999, the Company has repurchased 567,786 shares of Class A common stock and 30,000 shares of Class B common stock for a total of $14.1 million. It is contemplated that when the PSD acquisition financing is completed, the Company's ability to repurchase its own stock could be limited under the terms of any agreement. Euro - A New European Currency On January 1, 1999, certain member countries of the European Union began to fix the conversion rates between their national currencies and a common currency, the "Euro." Over the period January 1, 1999 through January 1, 2002 participating countries will gradually transition from their national currencies 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 11
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, is well underway with 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 where significant. 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. 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 and now expects certain suppliers not to confirm compliance or to respond timely. A material adverse impact may not 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 85% 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 12
overall; these costs were 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 its response is prudent. 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 Company's significant worldwide suppliers and its assessment of preparedness of the global infrastructure, including multiple national governments. During the remainder of 1999 the Company will formulate and review additional contingency plans based on the aforementioned significant supplier responses and global infrastructure preparedness. The Company is planning to organize a group solely to respond rapidly to Bio-Rad technical information processing and communication exceptions. Included is a reporting mechanism to accelerate to management those issues that might cause a deterioration in Bio-Rad's operations or competitiveness. New Financial Accounting Standards In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities" effective for fiscal years beginning after June 15, 1999. The FASB has now delayed the implementation until 2001. This statement proposes to establish 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 impact of SFAS No. 133 on the Company's financial statements will depend on a variety of factors, including future interpretive guidance from the FASB, the future level of forecasted and actual foreign currency transactions, the extent of the Company's hedging activities, the types of hedging instruments used and the effectiveness of such instruments. However, the Company does not expect the effect of adopting SFAS No. 133 to have a material effect on its financial statements. Item 3. Quantitative and Qualitative Disclosures About Market Risk During the three months and six months ended June 30, 1999, there have been no material changes from the disclosures about market risk provided in the Company's Annual Report on Form 10-K for the year ended December 31, 1998. 13
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. 27.1 Financial Data Schedule. (b) Reports on Form 8-K There were no reports on Form 8-K for the quarter ended June 30, 1999. 14
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 11, 1999 /s/ Thomas C. Chesterman Thomas C. Chesterman, Vice President, Chief Financial Officer Date: August 11, 1999 /s/ James R. Stark James R. Stark, Corporate Controller 15