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, 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) Delaware 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 October 31, 1999 <S> <C> Class A Common Stock, Par Value $1.00 per share 9,977,762 Class B Common Stock, Par Value $1.00 per share 2,484,816 </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, 1999 1998 1999 1998 <S> <C> <C> <C> <C> NET SALES . . . . . . . . . . . . . . . . . . $113,527 $ 98,982 $355,059 $323,054 Cost of goods sold . . . . . . . . . . . . . 51,899 45,405 158,008 146,544 GROSS PROFIT . . . . . . . . . . . . . . . . 61,628 53,577 197,051 176,510 Selling, general and administrative expense . 43,618 41,042 128,440 123,610 Product research and development expense . . 10,999 10,243 32,449 30,784 INCOME FROM OPERATIONS . . . . . . . . . . . 7,011 2,292 36,162 22,116 Interest expense . . . . . . . . . . . . . . (755) (941) (2,458) (2,817) Investment income, net. . . . . . . . . . . . 516 1,955 939 7,585 Other, net . . . . . . . . . . . . . . . . . (815) (577) (2,520) (1,722) INCOME BEFORE TAXES . . . . . . . . . . . . . 5,957 2,729 32,123 25,162 Provision for income taxes . . . . . . . . . 1,704 791 9,187 7,297 NET INCOME . . . . . . . . . . . . . . . . . $ 4,253 $ 1,938 $ 22,936 $ 17,865 ======== ======== ======== ======== Basic earnings per share: Net income . . . . . . . . . . . . . . . . $0.35 $0.16 $1.89 $1.46 ======== ======== ======== ======== Weighted average common shares . . . . . . 12,111 12,302 12,105 12,259 ======== ======== ======== ======== Diluted earnings per share: Net income . . . . . . . . . . . . . . . . $0.35 $0.16 $1.89 $1.44 ======== ======== ======== ======== Weighted average common shares . . . . . . 12,195 12,394 12,164 12,381 ======== ======== ======== ======== </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, 1999 1998 (Unaudited) <S> <C> <C> ASSETS: Cash and cash equivalents . . . . . . . . . . . . . . . . $ 11,826 $ 10,081 Accounts receivable . . . . . . . . . . . . . . . . . . . 105,213 106,010 Inventories . . . . . . . . . . . . . . . . . . . . . . . 96,385 92,411 Prepaid expenses, taxes and other current assets. . . . . 26,927 26,887 Total current assets . . . . . . . . . . . . . . . . . 240,351 235,389 Net property, plant and equipment . . . . . . . . . . . . 85,005 82,130 Marketable securities . . . . . . . . . . . . . . . . . . 1,539 6,174 Other assets . . . . . . . . . . . . . . . . . . . . . . 49,236 43,606 Total assets . . . . . . . . . . . . . . . . . . . . $376,131 $367,299 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY: Notes payable and current maturities of long-term debt. . $ 9,747 $ 9,393 Accounts payable . . . . . . . . . . . . . . . . . . . . 22,348 26,706 Accrued payroll and employee benefits . . . . . . . . . . 30,379 27,351 Sales, income and other taxes payable . . . . . . . . . . 2,059 6,396 Other current liabilities . . . . . . . . . . . . . . . . 27,541 27,398 Total current liabilities . . . . . . . . . . . . . . 92,074 97,244 Long-term debt, net of current maturities . . . . . . . . 35,367 42,339 Deferred tax liabilities . . . . . . . . . . . . . . . . 14,494 13,382 Total liabilities . . . . . . . . . . . . . . . . . . 141,935 152,965 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 - 9,977,762 at September 30, 1999 and 9,973,679 at December 31, 1998 . . . . . . . . . . 9,978 9,974 Class B common stock, $1.00 par value, 6,000,000 shares authorized; outstanding - 2,484,816 at September 30, 1999 and 2,452,899 at December 31, 1998 . . . . . . . . . . 2,485 2,453 Additional paid-in capital . . . . . . . . . . . . . . . 18,779 18,523 Class A treasury stock, 348,080 shares at September 30, 1999 and 306,368 shares at December 31, 1998 at cost . . . . (7,670) (7,047) Retained earnings . . . . . . . . . . . . . . . . . . . . 212,201 189,838 Accumulated other comprehensive income: Currency translation . . . . . . . . . . . . . . . . . (1,540) 92 Net unrealized holding gain (loss)on marketable securities . . . . . . . . . . . . . . . . . . . . . (37) 501 Total stockholders' equity . . . . . . . . . . . . . . 234,196 214,334 Total liabilities and stockholders' equity . . . . $376,131 $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> Nine Months Ended September 30, 1999 1998 <S> <C> <C> Cash flows from operating activities: Cash received from customers . . . . . . . . . . . . $350,345 $323,661 Cash paid to suppliers and employees . . . . . . . . (311,890) (298,711) Interest paid. . . . . . . . . . . . . . . . . . . . (2,508) (2,680) Income tax payments. . . . . . . . . . . . . . . . . (12,987) (6,580) Miscellaneous receipts (payments). . . . . . . . . . (47) 170 Net cash provided by operating activities. . . . . . 22,913 15,860 Cash flows from investing activities: Capital expenditures, net. . . . . . . . . . . . . . (17,809) (14,415) Purchases of marketable securities and investments . (2,148) (17,922) Sales of marketable securities and investments . . . 6,230 13,791 Foreign currency hedges, net . . . . . . . . . . . . 1,585 20 Net cash used in investing activities. . . . . . . . (12,142) (18,526) Cash flows from financing activities: Net borrowings under line-of-credit arrangements . . (143) (400) Long-term borrowings . . . . . . . . . . . . . . . . 94,225 108,910 Payments on long-term debt . . . . . . . . . . . . . (103,032) (109,345) Proceeds from issuance of common stock . . . . . . . 292 58 Treasury stock activity, net . . . . . . . . . . . . (1,196) 1,156 Net cash provided by (used in) financing activities. (9,854) 379 Effect of exchange rate changes on cash . . . . . . . . . 828 (221) Net increase (decrease) in cash and cash equivalents. . . 1,745 (2,508) Cash and cash equivalents at beginning of period. . . . . 10,081 10,843 Cash and cash equivalents at end of period. . . . . . . . $l1,826 $ 8,335 ======= ======= Reconciliation of net income to net cash provided by operating activities: Net income . . . . . . . . . . . . . . . . . . . . . . $ 22,936 $ 17,865 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization. . . . . . . . . . . 16,589 15,276 Foreign currency hedge transactions, net . . . . . (1,585) (20) Gains on disposition of marketable securities. . . (870) (7,518) (Increase) decrease in accounts receivable . . . . (2,268) 1,622 Increase in inventories . . . . . . . . . . . . . (4,800) (5,451) Increase in other current assets . . . . . . . . . (733) (203) Increase (decrease) in accounts payable and other current liabilities. . . . . . . . . . . . . . . 1,126 (6,978) Increase (decrease) in income taxes payable. . . . (5,232) 1,054 Other. . . . . . . . . . . . . . . . . . . . . . . (2,250) 213 Net cash provided by operating activities . . . . . . . . $ 22,913 $ 15,860 ======= ======= </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 The principal components of inventories are as follows: <TABLE> <CAPTION> September 30, December 31, 1999 1998 (in thousands) <S> <C> <C> Raw materials $ 26,168 $ 26,038 Work in process 19,404 21,614 Finished goods 50,813 44,759 $ 96,385 $ 92,411 ======== ======== </TABLE> 3. PROPERTY, PLANT AND EQUIPMENT The principal components of property, plant and equipment are as follows: <TABLE> <CAPTION> September 30, December 31, 1999 1998 (in thousands) <S> <C> <C> Land and improvements $ 8,057 $ 8,057 Buildings and leasehold improvements 58,078 56,280 Equipment 138,873 133,838 205,008 198,175 Accumulated depreciation (120,003) (116,045) Net property, plant and equipment $ 85,005 $ 82,130 ======== ======== </TABLE> 4
4. LONG TERM DEBT The Company entered into a $200 million credit facility (consisting of a $100 million term loan and a $100 million revolving credit line) on September 30, 1999, replacing the $100 million credit agreement previously in place. The new facility provides for borrowings on a secured basis through September 30, 2004. Interest is based upon the Eurocurrency rate, the Federal Funds Effective rate or Bank One's base rate. The Company also entered into a $100 million Senior Subordinated Credit Agreement on September 30, 1999. This agreement has a one year term and provides for an automatic rollover for an additional term expiring September 30, 2005. The agreement requires warrants to be placed in escrow equal to 10% of the Company's fully diluted stock. The lenders are entitled to receive these warrants in 25% quarterly increments beginning April 1, 2000. The warrants entitle the holder to purchase the Company's stock at 10% over the September 30, 1999 closing stock price. The warrants expire September 30, 2009. Interest is based upon LIBOR plus 6.0% for the first 180 days of the agreement. The incremental rate increases 0.5% every quarter thereafter to a maximum of 18.0%. The lenders have placed restrictions on 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. The Company is also required to comply with certain financial ratios. 5. EARNINGS PER SHARE Weighted average shares used for diluted earnings per share include the dilutive effect of outstanding stock options of 84,000 and 92,000 shares, for the quarters ended September 30, 1999 and 1998, respectively. Weighted average shares used for diluted earnings per share include the dilutive effect of outstanding stock options of 59,000 and 122,000 shares, for the year-to-date periods ended September 30, 1999 and 1998, respectively. Options to purchase 262,000 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 September 30, 1999. 5
6. COMPREHENSIVE INCOME The components of the Company's total comprehensive income were: <TABLE> <CAPTION> Three Months Ended Nine Months Ended September 30, September 30, 1999 1998 1999 1998 (in thousands) <S> <C> <C> <C> <C> Net income $ 4,253 $ 1,938 $22,936 $17,865 Currency translation adjustments 1,670 1,828 (1,632) 851 Net unrealized holding gains (losses) (404) (739) 82 696 Reclassification adjustments for gains included in net income (367) (1,337) (620) (5,337) Total comprehensive income $ 5,152 $ 1,690 $20,766 $14,075 </TABLE> 7. SEGMENT INFORMATION Information regarding industry segments for the three months ended September 30, 1999 and 1998 is as follows (in thousands): <TABLE> <CAPTION> Life Clinical Analytical Science Diagnostics Instruments <S> <C> <C> <C> <C> Segment net sales 1999 $53,416 $45,478 $15,002 1998 48,040 40,049 12,163 Segment profit (loss) 1999 $ 1,976 $ 5,091 $ 180 1998 1,124 3,988 (2,802) </TABLE> Information regarding industry segments for the nine months ended September 30, 1999 and 1998 is as follows (in thousands): <TABLE> <CAPTION> Life Clinical Analytical Science Diagnostics Instruments <S> <C> <C> <C> <C> Segment net sales 1999 $169,477 $138,111 $49,116 1998 151,821 126,228 48,121 Segment profit (loss) 1999 $ 13,708 $20,772 $ 942 1998 9,366 14,565 (3,424) </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: <TABLE> <CAPTION> Three Months Ended Nine Months Ended September 30, September 30, 1999 1998 1999 1998 (in thousands) <S> <C> <C> <C> <C> Total segment profit $7,247 $2,313 $35,422 $20,507 Gross profit on inter-segment sales (176) (671) (813) (1,575) Net corporate operating, interest and other expense not allocated to segments (1,630) (868) (3,425) (1,355) Investment income, net 516 1,955 939 7,585 Consolidated income before taxes $5,957 $2,729 $32,123 $25,162 ====== ======= ======= ======= </TABLE> 6
8. SUBSEQUENT EVENT On October 1, 1999, Bio-Rad acquired Pasteur Sanofi Diagnostics S.A., a French corporation ("PSD"), from its shareholders, Sanofi-Synthelabo S.A. and Institut Pasteur. Bio-Rad acquired 100% of the capital stock of PSD (and certain ancillary assets and assumed liabilities related to PSD) for a purchase price, subject to post-closing adjustments, not to exceed $210 million. The cash purchase price was financed through a $200 million credit facility and a $100 million Senior Subordinated Credit Agreement (see Note 4). The acquisition of PSD and the related financing were recorded as of October 1, 1999, the effective date of the transaction. 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, 1998. Pro-forma information regarding the acquisition of Pasteur Sanofi Diagnostics S.A.("PSD") is included in the Company's Form 8-K dated October 1, 1999. The following table shows operating income and expense items as a percentage of net sales: <TABLE> <CAPTION> Three Months Ended Nine Months Ended Year Ended September 30, September 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 45.7 45.9 44.5 45.4 45.8 Gross profit 54.3 54.1 55.5 54.6 54.2 Selling, general and administrative 38.4 41.5 36.2 38.3 37.8 Product research and development 9.7 10.3 9.1 9.5 9.4 Income from operations 6.2 2.3 10.2 6.8 7.0 ===== ===== ===== ===== ===== Net Income 3.7 2.0 6.5 5.5 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. 8
Three Months Ended September 30, 1999 Compared to Three Months Ended September 30, 1998 Corporate Results - Sales, Margins and Expenses Net sales (sales) in the third quarter of 1999 reached $113.5 million compared to $99.0 million in the third quarter of 1998. Sales increased 11.2% in Life Science, 13.6% in Clinical Diagnostics, and 23.3% in Analytical Instruments when compared to the third quarter of 1998. The growth in Life Science is attributed to a broad line of core products, especially molecular biology devices, imaging products and process chromatography. Clinical Diagnostics experienced growth in its quality control product lines and its diabetes line. The increase in Analytical Instruments is attributed to the Company's semiconductor test and manufacturing instruments, which were adversely impacted during an industry slowdown for most of the second half of 1998. Consolidated gross margins were 54.3% for the third quarter of 1999 compared to 54.1% for the third quarter of 1998 and 54.2% for all of 1998. Gross margins were virtually unchanged in Life Science, rose significantly in Analytical Instruments and declined in Diagnostics. The improvements in Analytical Instruments gross margin are attributed to increased sales volume absorbing manufacturing overhead costs, and a stronger Japanese currency improving the average US dollar sales price received. Clinical Diagnostics margins were impacted by rising costs for purchased equipment bought in a foreign currency and increases in the placement of reagent rental equipment, as this segment's "next generation" diabetes testing equipment replaces instruments previously fully depreciated. Selling, general and administrative expense (SG&A) decreased to 38.4% of sales in the third quarter of 1999 from 41.5% of sales in the comparable period of 1998. Both Analytical Instruments and Clinical Diagnostics had no increase in SG&A spending in the third quarter of 1999 when compared to 1998. Life Science increased SG&A spending but at a rate much slower than sales growth. The long-term goal for management remains a consistent gradual reduction in SG&A spending as a percent of sales. Product research and development expense (R&D) increased 7.3% in absolute dollars from the third quarter of 1998, but decreased overall as a percentage of sales. Compared to the third quarter of 1998, both Life Science and Clinical Diagnostics increased R&D spending. Analytical Instruments reduced its R&D spending. 9
Corporate Results - Non-Operating Items Interest expense has declined consistent with lower average borrowings when compared to the third quarter of 1998. Borrowings will increase due to the purchase of PSD. Accordingly, interest expense will also increase significantly. Investment income in both years includes gains on sales of marketable securities. The third quarter of 1999 includes an additional reduction in the Company's marketable securities portfolio to reduce debt further prior to entering into the new credit facilities necessitated by the acquisition of PSD. 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 third 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, will change. A determination of the impact to the Company's effective tax rate from the pending acquisition has not been completed; however, the rate may rise as limitations may be imposed on the deductibility of some level of interest expense and the amortization of certain intangibles. Nine Months Ended September 30, 1999 Compared to Nine Months Ended September 30, 1998 Corporate Results - Sales Margins and Expenses Sales for the nine month period ended September 30, 1999 were $355.1 million compared to $323.1 million in the comparable period of 1998, an increase of 9.9%. For the first nine months of 1999, the effect from a slightly weakened U.S. dollar added $1.7 million to sales, accounting for only 0.5% of the sales growth when compared to sales based upon the 1998 exchange rates. Sales have increased 11.6% for Life Science, 9.4% for Clinical Diagnostics, and 2.1% for Analytical Instruments. Life Science sales increased across a broad line of core products, especially its imaging products. Clinical Diagnostics sales continue to grow for its quality control and diabetes product lines. The Company's Analytical Instruments segment remains flat with the prior year as the first half of 1999 saw a decline that was offset by third quarter increases. Consolidated gross margins were 55.5% for the first nine months of 1999 compared to 54.6% for the first nine months of 1998 and 54.2% for all of 1998. Life Science margins improved slightly on better than planned sales. Clinical Diagnostics margins increased 1% due to a change in the product mix towards higher margin products. Analytical Instruments margins improved on higher sales and continued manufacturing overhead reductions. SG&A decreased to 36.2% of sales in the first nine months of 1999 from 38.3% of sales in the comparable period of 1998. To improve 10
overall profitability, one of the long-term objectives of management is to control SG&A growth at a fraction of sales growth. The Life Science segment grew SG&A expenditures at only 66% of sales growth. Clinical Diagnostics expenditures remain virtually unchanged and Analytical Instruments expenditures declined for the first nine months of 1999. Consolidated R&D increased 5.4% for the first nine months of 1999 compared to the same period in 1998. Life Science and Clinical Diagnostics each increased R&D investments as planned. Analytical Instruments R&D expenditures declined across most product lines due to the slowdown in the markets served and the decision to adjust R&D expenditures to economic and market conditions. Corporate Results - Non-operating Items Interest expense was $2.5 million, a slight decline from the prior year, as a result of lower average borrowings. Borrowings will increase due to the purchase of PSD. Accordingly, interest expense will also increase significantly. 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. The Company's portfolio was further reduced to lower total borrowings in preparation of the refinancing necessary to conclude the acquisition of PSD. Net other income and expense for the nine months ended September 30, 1999 and 1998 includes goodwill amortization and non-operating legal costs. The Company's effective tax rate is unchanged at 29% for the year ended September 30, 1999. The tax rate for both years reflects the utilization of loss carryforwards, foreign sales corporation benefits and foreign tax credits. No determination of the impact to the Company's effective tax rate from the acquisition of PSD has been completed; however, the rate may rise as limitations may be imposed on the deductibility of some level of interest expense and the amortization of certain intangibles. Financial Condition On July 3, 1999, the Company reached agreement to purchase PSD and all its holdings including some ancillary assets from Sanofi- Synthelabo S.A. and Institut Pasteur (see Note 8). The acquisition was completed on October 1, 1999. The Company became substantially leveraged as it entered into new credit facilities. The Company entered into a $200 million credit facility (consisting of a $100 million term loan and a $100 million revolving credit line) on September 30, 1999, replacing the $100 million credit agreement previously in place. The new facility provides for borrowings on a secured basis 11
through September 30, 2004. Interest is based upon the Eurocurrency rate, the Federal Funds Effective rate or Bank One's base rate. The Company also entered into a $100 million Senior Subordinated Credit Agreement on September 30, 1999. This agreement has a one year term and provides for an automatic rollover for an additional term expiring September 30, 2005. The agreement requires warrants to be placed in escrow equal to 10% of the Company's fully diluted stock. The lenders are entitled to receive these warrants in 25% quarterly increments beginning April 1, 2000. The warrants entitle the holder to purchase the Company's stock at 10% over the September 30, 1999 closing stock price. The warrants expire September 30, 2009. Interest is based upon LIBOR plus 6.0% for the first 180 days of the agreement. The incremental rate increases 0.5% every quarter thereafter to a maximum of 18.0%. The lenders have placed restrictions on 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. The Company is also required to comply with certain financial ratios. The amount of debt undertaken in connection with this acquisition could materially impact the financial condition of the Company should management's plan for operating the new entity not be successful. The Company as of October 1, 1999 had available approximately $50 million under its principal revolving credit agreement and cash and cash equivalents of approximately $12 million. Marketable securities have now been liquidated to a level the Company no longer considers material to its working capital needs. At September 30, 1999, consolidated accounts receivable decreased by $0.8 million from December 31, 1998. The decrease represents the net impact of a strengthened U.S. dollar lowering foreign denominated receivables and a seasonal slowdown in remittances attributed in part to summer holiday scheduling. At September 30, 1999, consolidated net inventories were $4.0 million higher 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, is characterized by long lead times and large infrequent batch production which is necessary to meet customers requirements. Net capital expenditures totaled $17.9 million for the first nine months of 1999 compared to $14.4 million for the same period of 1998. Capital expenditures include additions of reagent rental equipment placed with Clinical Diagnostic customers who then 12
commit to purchasing the Company's diagnostic reagents for use. 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 September 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. The new credit facilities restrict the Company's ability to repurchase its own stock to an amount not to exceed $5 million in the aggregate in a fiscal year. Share repurchases made during the current fiscal year amount to $2.2 million. 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 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 complete. Remediations or scheduled replacements will be completed for each location prior to the 13
Year 2000 deadline where significant. The Company is reviewing in detail all aspects of the Year 2000 issue for the acquired operations of PSD. Currently, risks appear to be equivalent to those faced by Bio-Rad prior to the acquisition. No materially significant amounts need to be spent on the Year 2000 issue prior to December 31, 1999 as a result of the acquisition. Bio-Rad's manufactured products have also been undergoing assessment for Year 2000 readiness. Certain products Bio-Rad manufactured in the past are not Year 2000 compliant. We have instituted a program to replace relevant products. 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. Over 95% 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; 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 has organized a group solely to respond rapidly to Bio-Rad technical 14
information processing and communication exceptions. The Group is expected to implement a reporting mechanism to quickly inform management about those issues that might cause a deterioration in Bio-Rad's operations or our ability to compete effectively. 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 implementation to fiscal years beginning after June 15, 2000. 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. The Company does not expect the adoption of 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 nine months ended September 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. As a result of the new credit facilities, Bio-Rad has become increasingly exposed to increases in interest rates. The Company will be undertaking a review of its options to fix a portion of its variable interest rate long-term debt during the next several quarters. 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. 4.1 Credit Agreement dated as of September 30, 1999 among Bio-Rad Laboratories, Inc., the lenders named therein, 15
Banc One, N.A., as Administrative Agent, ABN AMRO Bank N.V. as Syndication Agent, and Union Bank of California, N.A. as Documentation Agent. Incorporated by reference from the Exhibit 4.1 to the Company's Form 8-K, dated October 1, 1999. 4.2 Senior Subordinated Credit Agreement dated as of September 30, 1999 among Bio-Rad Laboratories, Inc., the lenders named therein and Banc One Capital Markets, Inc., as Agent. Incorporated by reference from Exhibit 4.2 to the Company's Form 8-K, dated October 1, 1999. 4.3 Warrant Agreement among Bio-Rad Laboratories, Inc. and Banc One Capital Markets, Inc. dated as of September 30, 1999. 27.1 Financial Data Schedule. (b) Reports on Form 8-K Bio-Rad filed Form 8-K dated July 5, 1999, announcing that Bio- Rad Sanofi-Synthelabo S.A. (Sanofi) and Institut Pasteur (IP) have executed an agreement pursuant to which Bio-Rad shall acquire Pasteur Sanofi Diagnostics S.A. from Sanofi and IP for an aggregate purchase price not to exceed $210.00 million in cash.