EX-13 4 ex13.txt
Bio-Rad Laboratories, Inc. EXHIBIT 13.1 SUMMARY OF OPERATIONS AND SELECTED FINANCIAL DATA (in thousands, except per share data) ________________________________________________________________________________________________________________________ Year Ended December 31, 2001 2000 1999 1998 1997 1996 Net sales $817,509 $725,884 $555,399 $447,863 $432,078 $423,262 Cost of goods sold (1) 356,330 343,364 255,223 202,438 189,331 182,046 ------- ------- ------- ------- ------- ------- Gross profit 461,179 382,520 300,176 245,425 242,747 241,216 Selling, general and administrative expense 272,610 247,613 200,367 172,899 169,956 159,989 Product research and development expense 76,543 68,140 51,210 41,381 46,138 39,580 Purchased in-process research and development expense - - 15,500 - - - Restructuring costs - - - - - 2,700 ------- ------ ------ ------ ------ ------ Income from operations 112,026 66,767 33,099 31,145 26,653 38,947 Other income (expense): Interest expense (24,088) (30,612) (12,741) (3,731) (1,216) (3,027) Other, net (22,969) 9,288 (3,942) 6,814 (2,709) 553 -------- -------- -------- ------- ------- ------- Income before taxes, extraordinary charge and cumulative effect of change in accounting principle 64,969 45,443 16,416 34,228 22,728 36,473 Provision for income taxes 20,790 13,633 4,695 9,926 6,364 9,118 ------ ------ ------ ------ ------ ------ Income before extraordinary charge and cumulative effect of change in accounting principle 44,179 31,810 11,721 24,302 16,364 27,355 Extraordinary charge (2) - - - - - (1,176) Cumulative effect of change in accounting principle (3) - (710) - - - - -------- -------- -------- -------- -------- -------- Net income $ 44,179 $ 31,100 $ 11,721 $ 24,302 $ 16,364 $ 26,179 ======== ======== ======== ======== ======== ======== Basic earnings per share before extraordinary charge and cumulative effect of change in accounting principle (4) $1.79 $1.30 $0.48 $0.99 $0.67 $1.12 Extraordinary charge (2)(4) - - - - - (0.05) Cumulative effect of change in accounting principle (3)(4) - (0.03) - - - - -------- -------- -------- -------- -------- -------- Basic earnings per share (4) $1.79 $1.27 $0.48 $0.99 $0.67 $1.07 ======== ======== ======== ======== ======== ======== Weighted average common shares (4) 24,648 24,422 24,220 24,528 24,520 24,546 Cash dividends paid per common share - - - - - - Total assets $684,028 $646,278 $668,862 $367,299 $351,876 $284,925 Long-term debt, net of current maturities $188,423 $203,360 $239,211 $ 42,339 $ 38,952 $ 6,721 _______________________________________________________________________________________________________________________ (1) In 1996, cost of goods sold includes a charge of approximately $2,100 for a write-down of inventory associated with restructuring costs. (2) Extraordinary charge for redemption of subordinated debt: 1996 - $1,176, net of tax effect of $817. (3) Cummulative effect on prior years (to 12/31/99) of accounting change per SEC Staff Accounting Bulletin 101, on Revenue Recognition, net of tax effect of $515. (4) Restated to give effect to a stock split in the form of a 100% stock dividend in 2002.
1 Bio-Rad Laboratories, Inc. Consolidated Balance Sheets (in thousands)
________________________________________________________________________________________ December 31, Assets 2001 2000 Current Assets: Cash and cash equivalents $ 47,129 $ 13,954 Accounts receivable, less allowance of $11,509 in 2001 and $10,255 in 2000 194,400 182,242 Inventories: Raw materials 33,488 32,993 Work in process 28,715 30,071 Finished goods 76,976 69,455 ------- ------- Total inventories 139,179 132,519 Deferred tax assets 27,537 20,770 Prepaid expenses and other current assets 22,583 20,183 ------- ------- Total current assets 430,828 369,668 Property, Plant and Equipment: Land and improvements 9,658 8,337 Buildings and leasehold improvements 75,231 66,039 Equipment 191,284 180,827 ------- ------- Total property, plant and equipment 276,173 255,203 Accumulated depreciation (143,199) (136,171) ------- ------- Net property, plant and equipment 132,974 119,032 Goodwill, net of accumulated amortization of $21,736 in 2001 and $13,990 in 2000 75,873 90,970 Other Assets 44,353 66,608 -------- -------- Total Assets $684,028 $646,278 ======== ======== ________________________________________________________________________________________
The accompanying notes are an integral part of these statements. 2 Bio-Rad Laboratories, Inc. Consolidated Balance Sheets (in thousands, except share data)
__________________________________________________________________________________________ December 31, Liabilities and Stockholders' Equity 2001 2000 Current Liabilities: Accounts payable $ 64,903 $ 62,965 Accrued payroll and employee benefits 58,434 52,354 Notes payable 4,211 6,490 Current maturities of long-term debt 5,720 11,656 Sales, income and other taxes payable 18,633 8,413 Other current liabilities 47,205 47,430 ------- ------- Total current liabilities 199,106 189,308 Long-Term Debt, net of current maturities 188,423 203,360 Deferred Tax Liabilities 12,622 8,992 ------- ------- Total liabilities 400,151 401,660 Commitments and Contingent Liabilities - - Stockholders' Equity: Preferred stock, $0.0001 par value, 7,500,000 shares authorized; none outstanding - - Class A common stock, $0.0001 par value, 50,000,000 shares authorized; outstanding 2001 - 20,166,636; 2000 - 20,084,400 2 2 Class B common stock, $0.0001 par value, 20,000,000 shares authorized; outstanding 2001 - 4,826,562; 2000 - 4,871,856 - - Additional paid-in capital 32,171 31,596 Class A treasury stock, 161,336 shares in 2001 and 488,998 shares in 2000 at cost (1,863) (5,415) Retained earnings 276,554 231,821 Accumulated other comprehensive loss: Currency translation and other (22,987) (13,386) -------- -------- Total stockholders' equity 283,877 244,618 -------- -------- Total Liabilities and Stockholders' Equity $684,028 $646,278 ======== ======== __________________________________________________________________________________________
The accompanying notes are an integral part of these statements. 3 Bio-Rad Laboratories, Inc. Consolidated Statements of Income (in thousands, except per share data)
______________________________________________________________________________________________________________________ Year Ended December 31, 2001 2000 1999 Net sales $817,509 $725,884 $555,399 Cost of goods sold 356,330 343,364 255,223 ------- ------- ------- Gross profit 461,179 382,520 300,176 Selling, general and administrative expense 272,610 247,613 200,367 Product research and development expense 76,543 68,140 51,210 Purchased in-process research and development expense - - 15,500 ------- ------- ------- Income from operations 112,026 66,767 33,099 Other income (expense): Interest expense (24,088) (30,612) (12,741) Other, net (22,969) 9,288 (3,942) ------- ------- ------- Income before taxes and cumulative effect of change in accounting principle 64,969 45,443 16,416 Provision for income taxes 20,790 13,633 4,695 ------- ------- ------- Income before cumulative effect of change in accounting principle 44,179 31,810 11,721 Cumulative effect of accounting change, net of taxes of $515 (see Note 1) - (710) - -------- -------- -------- Net income $ 44,179 $ 31,100 $ 11,721 ======== ======== ======== Basic earnings per share: Income before cumulative effect of change in accounting principle $1.79 $1.30 $0.48 Cumulative effect of accounting change - (0.03) - --------- -------- -------- Net income $1.79 $1.27 $0.48 ========= ======== ======== Weighted average common shares 24,648 24,422 24,220 ========= ======== ======== Diluted earnings per share: Income before cumulative effect of change in accounting principle $1.74 $1.30 $0.48 Cumulative effect of accounting change - (0.03) - --------- -------- -------- Net income $1.74 $1.27 $0.48 ========= ======== ======== Weighted average common shares 25,442 24,568 24,330 ========= ======== ======== _______________________________________________________________________________________________________________________
The accompanying notes are an integral part of these statements. 4 Bio-Rad Laboratories, Inc. Consolidated Statements of Cash Flows (in thousands)
________________________________________________________________________________________________________ Year Ended December 31, 2001 2000 1999 Cash flows from operating activities: Cash received from customers $787,179 $707,046 $527,132 Cash paid to suppliers and employees (665,572) (636,054) (453,266) Interest paid (22,064) (23,873) (9,307) Income tax payments (5,296) (12,294) (17,237) Miscellaneous (payments) receipts 5,248 (10,578) (2,341) -------- -------- -------- Net cash provided by operating activities 99,495 24,247 44,981 Cash flows from investing activities: Capital expenditures, net (43,228) (31,406) (27,275) Payments for acquisitions (4,650) - (202,828) Proceeds from divestitures - 34,118 - Purchases of marketable securities and investments (567) (326) (2,216) Sales of marketable securities and investments 497 795 6,600 Foreign currency hedges, net 410 6,115 2,401 ------- ------- -------- Net cash provided by (used in) investing activities (47,538) 9,296 (223,318) Cash flows from financing activities: Net payments on notes payable (1,884) (4,325) (13,493) Long-term borrowings 74,250 438,487 353,108 Payments on long-term debt (97,209) (473,278) (151,788) Arrangement and other fees for long-term acquisition financing - (4,500) (5,008) Proceeds from issuance of common stock 575 305 343 Purchase of treasury stock (261) (378) (2,233) Reissuance of treasury stock 4,367 2,083 1,322 ------- ------- ------- Net cash provided by (used in) financing activities (20,162) (41,606) 182,251 Effect of exchange rate changes on cash 1,380 4,930 3,092 Net increase (decrease) in cash and cash equivalents 33,175 (3,133) 7,006 Cash and cash equivalents at beginning of year 13,954 17,087 10,081 -------- -------- -------- Cash and cash equivalents at end of year $ 47,129 $ 13,954 $ 17,087 ======== ======== ======== ________________________________________________________________________________________________________
The accompanying notes are an integral part of these statements. 5 Bio-Rad Laboratories, Inc. Consolidated Statements of Changes in Stockholders' Equity (in thousands)
______________________________________________________________________ Year Ended December 31, 2001 2000 1999 Common Stock, $0.0001 par value: Balance at beginning of year $ 2 $ 2 $ 2 Issuance of common stock - - - Balance at end of year 2 2 2 Additional Paid-In Capital: Balance at beginning of year 31,596 31,291 30,948 Issuance of common stock 575 305 343 Balance at end of year 32,171 31,596 31,291 Treasury Stock: Balance at beginning of year (5,415) (7,392) (7,047) Purchase of treasury stock (261) (378) (2,233) Reissuance of treasury stock 3,813 2,355 1,888 Balance at end of year (1,863) (5,415) (7,392) Retained Earnings: Balance at beginning of year 231,821 200,993 189,838 Net income 44,179 31,100 11,721 Reissuance of treasury stock at more than (less than) cost 554 (272) (566) Balance at end of year 276,554 231,821 200,993 Accumulated Other Comprehensive Income (Loss): Balance at beginning of year (13,386) (4,780) 593 Other comprehensive loss (9,601) (8,606) (5,373) Balance at end of year (22,987) (13,386) (4,780) ________ ________ ________ Total Stockholders' Equity $283,877 $244,618 $220,114 ======== ======== ======== Comprehensive Income, net of tax: Net income $ 44,179 $ 31,100 $ 11,721 Currency translation adjustments (9,458) (8,804) (4,833) Net unrealized holding gains(losses) (12) 533 66 Reclassification adjustments for gains included in net income (131) (335) (606) -------- -------- -------- Total Comprehensive Income $ 34,578 $ 22,494 $ 6,348 ======== ======== ======== _________________________________________________________________________
The accompanying notes are an integral part of these statements. 6 Bio-Rad Laboratories, Inc. Notes to Consolidated Financial Statements ________________________________________________________________ 1. Significant Accounting Policies Basis of Presentation The consolidated financial statements include the accounts of Bio-Rad Laboratories, Inc. and all subsidiaries (Bio-Rad or the Company) after elimination of intercompany balances and trans- actions. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts report- ed in the financial statements and accompanying notes. Changes in such estimates may affect amounts reported in the future. Reclassifications Certain prior period amounts have been reclassified to conform with the current year presentation. Cash and Cash Equivalents Cash and cash equivalents consist of cash and highly liquid in- vestments with original maturities of three months or less which are readily convertible into cash. Cash equivalents are stated at cost, which approximates fair market value. Concentration of Credit Risk Financial instruments that potentially subject the Company to concentration of credit risk consist primarily of trade accounts receivable. The Company performs credit evaluation procedures and with the exception of certain developing countries, generally does not require collateral. As a result of increased risk in these countries, some Bio-Rad sales are subject to collateral letters of credit. Credit risk is limited due to the large number of customers and their dispersion across many geographic areas. However, a significant amount of trade receivables are with national healthcare systems in countries within the European Economic Community. The Company does not currently anticipate a credit risk associated with these receivables. Inventory Valuation Inventories are valued at the lower of average cost or market and include material, labor and overhead costs. Management periodically reviews the need for an inventory obsolescence reserve. In evaluating this reserve, technology changes, competition, customer demand and manufacturing quality are considered. 7 Property, Plant and Equipment Property, plant and equipment are carried at historical cost. Included in property, plant and equipment is reagent rental equipment. The Company provides these instruments to its customers for use with the Company's reagents. Depreciation is computed on a straight-line basis over the estimated useful lives of the assets. Buildings and leasehold improvements are amortized over 15-30 years or the lives of the leases or improvements, whichever is shorter. Equipment is depreciated over 3-12 years. Goodwill Goodwill, representing the excess of the cost over the net tangible and identifiable intangible assets of acquired businesses, is stated at cost and through December 31, 2001 has been amortized on a straight-line basis over the estimated future periods to be benefited, typically ten to fifteen years. Goodwill, other intangibles and other long-lived assets are periodically reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Beginning January 1, 2002, the Company will adopt Statement of Financial Accounting Standards 142, "Goodwill and Other Intangible Assets" which provides that goodwill is no longer subject to amortization over its useful life. Goodwill will be subject to an annual assessment for impairment applying a fair-value based test. Income Taxes The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of temporary differences between carrying amounts and tax bases of assets and liabilities. Revenue Recognition and Warranty Bio-Rad recognizes revenues when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable and collectibility is probable. Generally, these criteria are met at the time product is shipped. Provision is made at the time the related revenue is recognized for estimated product returns and other offerings which may occur under programs the Company has with its customers. During the fourth quarter of 2000, the Company modified its revenue recognition policies with regard to certain complex instruments that require factory installation at the customer site to comply with guidelines outlined by the Securities and Exchange Commission in Staff Accounting Bulletin No. 101. The effects of the change in revenue recognition policies, as of January 1, 2000, are reported as the cumulative effect of an 8 accounting change in the fourth quarter of 2000 amounting to $0.7 million. This change did not have a significant effect on previously reported quarterly or prior years' income. The Company warrants certain equipment against defects in design, materials and workmanship, generally for one year. Upon shipment of equipment sold which includes a warranty, the Company establishes, as part of cost of goods sold, a provision for the expected costs of such warranty. Shipping and Handling Pursuant to Financial Accounting Standards Board Emerging Issues Task Force Issue No. 00-10, "Accounting for Shipping and Handling Fees and Costs," the Company classifies all freight billed to customers as net sales. These costs amounted to $7.9 million, $6.9 million, and $5.9 million for 2001, 2000, and 1999, respectively. Related freight costs are included in selling, general and administrative expenses as the responsibility for negotiating sales terms rests with the sales organization and not manufacturing. Research and Development Internal research and development costs are expensed as incurred. Third-party research and development costs are expensed when the contracted work has been performed or as milestone results have been achieved. Foreign Currency Translation Balance sheet accounts of international subsidiaries are translated at the current exchange rate as of the end of the accounting period. Income statement items are translated at average exchange rates. The resulting translation adjustment is recorded as a separate component of stockholders' equity. Forward Exchange Contracts The Company does not use derivative financial instruments for speculative or trading purposes. As part of distributing its products, the Company regularly enters into intercompany transactions. The Company enters into forward foreign exchange contracts to hedge against future movements in foreign exchange rates that affect foreign currency denominated intercompany receivables and payables. In accordance with Statement of Financial Accounting Standards 133 "Accounting for Derivative Instruments and Hedging Activities," the Company does not seek hedge accounting treatment for these contracts. As a result, these contracts, generally with maturity dates of 90 days or less and related primarily to currencies of industrial countries, are marked to market at each balance sheet date. The resulting gains or losses are included in other income and expense and offset exchange losses or gains on the related receivables and payables. Exchange gains and losses on these contracts are net of premiums and discounts 9 which result from interest rate differentials between the U.S. and the countries of the currencies being traded. The cash flows related to these contracts are classified as cash flows from investing activities in the Statement of Cash Flows. Stock Compensation Plans Stock-based compensation is recognized using the intrinsic value method. For disclosure purposes, pro forma net income and earnings per share are provided as if the fair value method had been applied. Earnings Per Share Basic earnings per share are calculated on the basis of the weighted average number of common shares outstanding for each period. Diluted earnings per share are calculated assuming the exercise of certain stock options. Treasury stock is not considered outstanding for purposes of calculating weighted average shares. Fair Value of Financial Instruments The estimated fair value of financial instruments has been determined using available market information or other appropriate valuation methodologies. Estimates are not necessarily indicative of the amounts that could be realized in a current market exchange as considerable judgment is required in interpreting market data used to develop estimates of fair value. The use of different market assumptions or estimation techniques could have a material effect on the estimated fair value amounts. The estimated fair value of Bio-Rad's financial instruments were as follows(in millions): Year Ended December 31, 2001 2000 Carrying Fair Carrying Fair Amount Value Amount Value Other Assets $ 44.4 $ 44.0 $ 66.6 $65.0 Total Long-Term Debt $ 194.1 $ 201.0 $ 215.1 $224.0 Other Assets include financial instruments (e.g., notes receivable) that have fair values based on discounted cash flows, market quotations, and other appropriate valuation techniques. Long-term debt has an estimated fair value based on quoted market prices for the same or similar issues. For certain of the Company's financial instruments, including cash and cash equivalents, accounts receivable, marketable securities, notes payable, accounts payable, and forward exchange contracts, the carrying amounts approximate fair value. 10 2. Acquisitions In July 2001, the Company acquired all the outstanding shares of Helix, Inc., a manufacturer of diagnostic products for the autoimmune market. The business combination was recorded using the purchase method in accordance with Statement of Financial Accounting Standards 141, "Business Combinations." The acquisition cost was not material but did include a premium in excess of the net assets acquired. In October 1999, the Company acquired Pasteur Sanofi Diagnostics S.A., a French corporation (PSD). The Company paid $202.8 million for all of the capital stock of PSD (and certain ancillary assets and assumed liabilities related to PSD). The acquisition was accounted for using the purchase method of accounting. As the Company's 1999 financial statements include only three months of operations of PSD, the following selected unaudited pro forma information is being provided to present a summary of the combined results of Bio-Rad and PSD as if the acquisition had occurred as of January 1, 1998, giving effect to purchase accounting adjustments and actual costs of financing. The pro forma data is for informational purposes only and may not necessarily reflect the results of operations of Bio-Rad had PSD operated as part of the Company for the year ended December 31, 1999 (in millions of dollars, except per share data): Unaudited Pro Forma Year Ended December 31, 1999 Sales $727.9 Net income $6.3 Basic earnings per share $0.26 As a result of the acquisition, the Company recorded $88.6 million of goodwill. Acquired in-process research and development of $15.5 million was charged to expense in the fourth quarter of 1999. Purchase liabilities recorded included approximately $14.0 million for severance and other employee costs and $4.0 million for the consolidation and closure of certain leased facilities. The closure of facilities identified by the Company was completed in fiscal 2000, with lease payments, net of sublease revenues, continuing until all contractual obligations are met. As of December 31, 2001, expenses charged against these reserves were approximately $13.6 million for severance and other employee costs and $2.2 million for facilities and asset related write-offs. 11 3. Divestitures In October 2001, the Company sold the assets and certain liabilities of the Company's spectroscopy business to Digilab LLC. As a result, the Company recorded a loss on the sale of $4.5 million which is included in Other, net. The Company has a 25% interest in Digilab LLC which is included in Other Assets. In July 2000, Accent Semiconductor Technology, Inc. (ASTI) acquired the assets and certain liabilities of the Company's semiconductor and optoelectronic metrology business. The proceeds of approximately $36.0 million included $27.0 million in cash, an $8.0 million unsecured note receivable due in five years and an 18% equity interest in ASTI. The Company used $17.0 million of the cash proceeds to reduce borrowings on the term loan portion of the Senior Credit facility. The equity interest in ASTI is included in Other Assets on the cost method. 4. Investment in Affiliates In December 1997, Bio-Rad began investing in Instrumentation Laboratory, S.p.A. (IL), an Italian based clinical diagnostics company. At December 31, 2001, Bio-Rad held approximately 13% of the outstanding stock of IL. A privately held company based in Spain controls approximately 84% of the outstanding stock of IL. In April 2001, IL offered 46.5 million newly issued ordinary shares at 1.29 Euros per share ($1.16) to all registered shareholders. No shareholders other than the controlling shareholder subscribed. In consideration for the new shares, the controlling shareholder relieved IL of 60 million Euros of debt. In December 2001, the controlling shareholder offered to purchase for cash certain American Depository Shares (ADS) of IL for $0.50 per ADS. This tender offer was issued in an attempt to remove IL as a Securities and Exchange Commission (SEC) registrant. The tender offer did not result in the removal of IL as a SEC registrant. The most recently filed financial statements for IL are as of November 30, 2000. As a result of its interest in IL, the Company has had certain discussions with IL management. Based on a combination of many factors, including the lack of current financial information and IL's continued losses, the Company has determined that its investment has been permanently impaired. As such, the Company valued its investment in IL at $9.5 million as of December 31, 2001. This amount reflects a $9.4 million write-down since December 31, 2000, which has been recorded in Other, net. Although management believes that this investment is realizable, there is a possibility that future events may cause further impairment of this investment. 12 5. Notes Payable and Long-Term Debt Notes payable include local credit lines maintained by the Company's subsidiaries aggregating approximately $25.3 million, of which $21.1 million was unused at December 31, 2001. At December 31, 2000 these lines aggregated approximately $25.6 million, of which $19.1 million was unused. The weighted average interest rate on these lines was 5.43% and 7.29% at December 31, 2001 and 2000, respectively. The Company guarantees most of these credit lines. The principal components of Long-Term Debt are as follows(in millions): Year Ended December 31, 2001 2000 Senior Credit Agreement: Term loan $ 42.5 $ 63.0 Revolving credit facility - 1.8 Senior Subordinated Notes 148.7 148.5 Other debt 1.6 - Capitalized leases 1.3 1.8 -------- ------- 194.1 215.1 Less current maturities 5.7 11.7 -------- ------- Long-Term Debt $ 188.4 $ 203.4 ======== ======= In September 1999, the Company entered into a $200.0 million Senior Credit Agreement due in 2004 to finance the acquisition of PSD and certain related assets and to provide funds for working capital needs. The Senior Credit Agreement included a term loan and revolving facility, each in the amount of $100.0 million. The term loan has since been reduced through permanent repayments to $42.5 million. 1999 debt issue costs related to these financings were $8.6 million. The term loan and revolving facility are secured by an interest in the Company's assets through September 2004. Interest on both loans is based upon either the Eurodollar, the Federal Funds effective or corporate based (prime) rate. The term loan interest rate was 3.54% at December 31, 2001. The interest rate on the revolving facility at December 31, 2001 was 5.00%. A commitment fee ranging from .25% to .50% annually is charged on the daily unused portion of the revolving credit facility. The Company sold $150.0 million aggregate principal amount of Senior Subordinated Notes due in 2007 under an indenture dated February 17, 2000. The notes were offered at 98.832% of par and pay a fixed rate of interest of 11.625% per year. The notes may be redeemed after February 14, 2004 and before February 15, 2005 in whole or part at a redemption price of 105.813%; for the interim period to February 15, 2006 at 102.906%; thereafter at 100%. The Company's obligations under the notes are not secured and rank junior to all the Company's existing and future senior debt. 13 The Senior Credit Agreement (including amendments) and the Senior Subordinated Notes require the Company, among other things, to comply with certain financial ratios and covenants. The Company was in compliance with all financial ratios as of December 31, 2001 and 2000. These agreements also contain certain other restrictions, including limitations on payments of cash dividends, sales of assets, incurrence of indebtedness, the creation of liens, making certain investments and engaging in sale/leaseback transactions. Maturities of long-term debt at December 31, 2001, are as follows: 2002 - $5.7 million; 2003 - $18.6 million; 2004 - $21.1 million; 2005 - $0; 2006 - $0; thereafter - $148.7 million. 6. Income Taxes The U.S. and international components of income before taxes are as follows: Year Ended December 31, 2001 2000 1999 (in millions) U.S. $ (4.8) $ 6.4 $ 15.2 International 69.8 39.0 1.2 ------ ------ ------ Income before taxes and cumulative effect of change in accounting principle $ 65.0 $ 45.4 $ 16.4 ====== ====== ====== The provision (benefit) for income taxes consists of: Year Ended December 31, 2001 2000 1999 Current: (in millions) U.S. Federal $ 2.8 $ (4.6) $ 4.6 International 23.7 15.3 8.3 U.S. State .4 .6 .9 ------ ------ ------ 26.9 11.3 13.8 Deferred (6.1) 2.3 (9.1) ------ ------ ------ Provision for income taxes $ 20.8 $ 13.6 $ 4.7 ====== ====== ====== The Company's income tax provision differs from the amount computed by applying the U.S. federal statutory rate to income before taxes as follows: 14 Year Ended December 31, 2001 2000 1999 U.S. statutory tax rate 35% 35% 35% State taxes, net of federal income tax benefit (1) 2 2 Foreign Sales Corporation tax benefit (4) (3) (10) Difference between U.S. and foreign tax rates (net of foreign tax credits) (5) (1) 12 Loss carryforwards utilized (1) - (5) Amortization of goodwill 4 1 4 Foreign losses not benefited 1 4 31 Increase(decrease) in tax reserves 3 (1) (40) Foreign exchange loss recognized - (6) - Other - (1) - --- --- --- Provision for income taxes 32% 30% 29% === === === Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of deferred tax assets and liabilities are as follows: Year Ended December 31, 2001 2000 Deferred Tax Assets: (in millions) Reserves for obsolete inventory, warranty and bad debts $ 11.7 $ 11.8 Elimination of intercompany profit 5.8 3.8 Tax benefit of foreign loss carryforwards 7.1 12.6 Basis difference in investment 3.1 - Other 12.6 9.6 ------ ------ 40.3 37.8 Valuation allowance (12.8) (17.0) ------ ------ Deferred Tax Assets $ 27.5 $ 20.8 ====== ====== Deferred Tax Liabilities: Deferred gain on condemnation $ 3.9 $ 3.5 Depreciation 2.5 1.3 Development cost of Hercules facility 1.5 1.5 Other 4.7 2.7 ------ ------ Deferred Tax Liabilities $ 12.6 $ 9.0 ====== ====== 15 At December 31, 2001, Bio-Rad's international subsidiaries had combined net operating loss carryforwards of $19.9 million. A portion of these loss carryforwards will expire in the following years: 2002 - $0.5 million; and 2005 - $0.3 million. The remainder of these loss carryforwards have no expiration date. The utilization of these carryforwards is limited to the separate taxable income of each individual subsidiary. The valuation allowance is needed to reduce the deferred tax assets to an amount that is more likely than not to be realized. The net change in the valuation allowance in 2001 was a decrease of $4.2 million, primarily resulting from a utilization of tax loss carryforwards. The net change in 2000 was a decrease of $7.1 million primarily resulting from the utilization of tax loss carryforwards. Utilization of carryforwards acquired as part of the acquisition of PSD which were not valued at the acquisition date adjusted the recorded goodwill by approximately $3.7 million and $5.8 million for 2001 and 2000, respectively. Bio-Rad does not provide for taxes which would be payable if the cumulative undistributed earnings of its international subsidiaries, approximately $79.3 million at December 31, 2001, were remitted to the U.S. parent company. Unless it becomes advantageous for tax or foreign exchange reasons to remit a subsidiary's earnings, such earnings are indefinitely reinvested in subsidiary operations. The withholding tax and U.S. federal income taxes on these earnings, if remitted, would in large part be offset by tax credits. 7. Stockholders' Equity Subsequent Events At a special shareholders' meeting held on February 4, 2002, the shareholders voted to reduce the par value of common stock and preferred stock from $1.00 per share to $.0001 per share and to increase the number of authorized shares of capital stock from 23,300,000 to 77,500,000 shares. An adjustment was made in the Company's stockholders' equity section to reflect the reduction of par value by increasing paid-in capital. Class A common shares authorized were increased from 15,000,000 shares to 50,000,000 shares and Class B common shares authorized were increased from 6,000,000 to 20,000,000. Authorized shares of preferred stock were increased from 2,300,000 to 7,500,000. On February 6, 2002, the Company's Board of Directors authorized a two-for-one stock split effected in the form of a 100% stock dividend. As a result of the stock split, the accompanying financial statements reflect an increase in the number of outstanding shares of common stock and the transfer of the par value of these shares from paid-in capital. All share and per share amounts have been restated to reflect the retroactive effect of the stock split. 16 Stock Classification The Company's outstanding stock consists of Class A Common Stock (Class A) and Class B Common Stock (Class B). Each share of Class A and Class B participates equally in the earnings of Bio-Rad, and is identical in most respects except that Class A has limited voting rights. Each share of Class A is entitled to one-tenth of a vote on most matters, and each share of Class B is entitled to one vote. Additionally, Class A stockholders are entitled to elect 25% of the Board of Directors and Class B stockholders are entitled to elect the balance of the directors. Cash dividends may be paid on Class A shares without paying a cash dividend on Class B shares but no cash dividend may be paid on Class B shares unless at least an equal cash dividend is paid on Class A shares. Class B shares are convertible at any time into Class A shares on a one-for-one basis at the option of the stockholder. 8. Stock Option and Purchase Plans Stock Option Plans Bio-Rad maintains incentive and non-qualified stock option plans for officers and certain other key employees. No stock options have been issued to non-employees. Under the Amended 1994 Stock Option Plan (the Plan), the Company may grant options to its employees for up to 3,550,000 shares of common stock provided that no option shall be granted after March 1, 2004. Under the plans, Class A and Class B options are granted at prices not less than fair market value on the date of grant, are exercisable on a cumulative basis at a rate not greater than 25% per annum commencing one year after the date of grant. Under an amendment to the Plan effective September 19, 2000, options expire ten years after the grant date with the exception of options granted in 1999 which expire five years after the grant date. Options granted after January 1, 2001 will vest in increments of 20% over a five-year period on the yearly anniversary date of the grant. No options were granted in 2001. The Company has made no charge to income with respect to any stock options. At the time options are exercised, the par value of the shares is credited to common stock and the excess is credited to additional paid-in capital. The Company may receive income tax benefits from the exercise of non-qualified stock options and from certain dispositions of stock received by employees under qualified or incentive stock options. The fair value of each option granted since January 1, 1995, was estimated on the date of the grant using the Black-Scholes option-pricing model with the following assumptions for grants in 2000 and 1999, respectively: no dividend yield for all periods; weighted average expected lives of 4.1 years in 2000 and 3.9 in 1999; expected volatility of 30% and 34%; and risk-free interest rates of 6.71% and 4.79% for 2000 and 1999, respectively. 17 Activity under the plans is summarized below (amounts reported in the Price columns represent the weighted average exercise price): Year Ended December 31, 2001 2000 1999 Shares Price Shares Price Shares Price Outstanding at beginning of year 1,921,778 $11.90 1,290,230 $12.09 1,122,094 $11.87 Granted - - 1,061,890 11.26 332,160 9.95 Exercised (287,622) 12.81 (130,500) 9.48 (121,828) 4.24 Forfeited (36,385) 10.61 (222,676) 12.31 (39,424) 12.55 Expired (25,070) 13.06 (77,166) 9.11 (2,772) 3.69 --------- --------- --------- Outstanding at end of year 1,572,701 $11.72 1,921,778 $11.90 1,290,230 $12.09 ========= ========= ========= Options exercisable at year-end 672,266 $12.60 544,096 $13.46 561,650 $12.36 ======= ======= ======= Weighted average fair value of options granted during the year $ - $3.46 $3.23 ===== ===== ===== The following summarizes information about stock options outstanding at December 31, 2001: Options Outstanding Options Exercisable Number Weighted Average Number Range of Outstanding Remaining Weighted Average Exercisable Weighted Average Exercise Prices at 12/31/01 Contractual Life Exercise Price at 12/31/01 Exercise Price $ 9.50 - $10.45 220,631 3.77 years $ 9.79 91,633 $ 9.73 $10.75 - $10.75 515,856 8.72 10.75 99,365 10.75 $11.25 - $11.94 521,852 7.53 11.69 204,220 11.56 $12.38 - $17.94 314,362 4.24 14.71 277,048 14.99 --------- ------- 1,572,701 6.73 11.72 672,266 12.60 ========= =======
18 Employee Stock Purchase Plan Under the Amended and Restated 1988 Employee Stock Purchase Plan (the Plan), the Company has authorized the sale of 1,490,000 shares of Class A to eligible employees. The purchase price of the shares under the Plan is the lesser of 85% of the fair market value on the first day of each calendar quarter, or 85% of the fair market value on the last day of each calendar quarter. Employees may designate up to 10% of their compensation for the purchase of stock. Under the Plan, the Company sold 88,982 shares for $1.2 million, 114,202 shares for $1.1 million, and 117,524 shares for $1.1 million to employees in 2001, 2000 and 1999, respectively. At December 31, 2001, 7,545 shares remained authorized under the Plan. The fair value of the employees' purchase rights since 1995 was estimated using the Black-Scholes model with the following assumptions for 2001, 2000 and 1999, respectively: no dividend yield for all periods; an expected life of three months for all periods; expected volatility ranging from 35% to 57%, from 28% to 43% and from 22% to 35%; and risk-free interest rates ranging from 2.36% to 5.68%, from 5.45% to 6.46% and from 4.28% to 4.88%. The weighted average fair value of those purchase rights granted in 2001, 2000 and 1999 was $4.48, $2.55 and $2.37, respectively. Pro Forma Disclosures If compensation cost for the Company's stock-based compensation plans had been determined based upon the fair value at grant dates for awards under those plans, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below (in millions, except per share data): Year Ended December 31, 2001 2000 1999 Net income As reported $44.2 $31.1 $11.7 Pro forma $42.9 $29.9 $10.5 Diluted earnings per As reported $1.74 $1.27 $0.48 share Pro forma $1.69 $1.23 $0.43 Since employee stock options vest over several years, and additional grants are likely to be made in the future, the disclosures may not be representative of the effects on reported pro forma net income or earnings per share in future years. 9. Earnings Per Share Weighted average shares used for diluted earnings per share include the dilutive effect of outstanding stock options of 794,000, 146,000 and 110,000 shares, for the years ended December 31, 2001, 2000 and 1999, respectively. There were no anti-dilutive shares for 2001. Options to purchase 401,000 and 522,000 shares of common stock were outstanding during 2000 and 1999, 19 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. 10. Other Income and Expense Other, net includes the following income and (expense) components: Year Ended December 31, 2001 2000 1999 (in millions) Amortization of goodwill $ (7.7) $ (8.1) $ (3.8) Exchange losses (2.1) (0.4) (0.9) Other non-operating litigation expenses, net 2.1 (3.3) 0.1 Gain on sale of fixed assets - 5.1 - Write-down of investments (10.9) - - Loss on sale of spectroscopy business (4.5) - - Gain on sale of semiconductor business - 16.7 - Miscellaneous other items 0.1 (0.7) 0.7 ------- ------ ------- Other, net $ (23.0) $ 9.3 $ (3.9) ======= ====== ======= Non-operating litigation expenses represent net fees incurred and reserves established to defend or negotiate intellectual property issues. Management does not believe that the outcome of these actions will have a material adverse effect on the future results of operations or the financial position of the Company. The Company will continue to incur costs relating to these issues. Exchange gains (losses) include premiums and discounts on forward foreign exchange contracts and mark-to-market adjustments on foreign exchange contracts. 20 11. Supplemental Cash Flow Information The reconciliation of net income to net cash provided by operating activities is as follows: Year Ended December 31, 2001 2000 1999 (in millions) Net income $ 44.2 $ 31.1 $ 11.7 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 32.6 33.7 23.1 Amortization 8.7 9.5 4.4 Foreign currency hedge transactions, net (0.4) (6.1) (2.4) Gains on dispositions of marketable securities (0.2) (0.5) (0.9) Increase in accounts receivable, net (22.6) (0.3) (16.1) (Increase) decrease in inventories (14.0) (18.9) 4.1 (Increase) decrease in other current assets (2.8) 0.9 5.6 Increase (decrease) in accounts payable and other current liabilities 11.7 (0.6) 26.2 Increase (decrease) in income taxes payable 17.6 (4.6) 4.8 Increase (decrease) in deferred taxes (1.7) 3.4 (16.9) Gain on sale of semiconductor business and fixed assets - (21.8) - Loss on sale of spectroscopy business and write-down of investments 15.4 - - Other 11.0 (1.6) 1.4 ------ ------ ------ Net cash provided by operating activities $ 99.5 $ 24.2 $ 45.0 ====== ====== ======
12. Commitments and Contingent Liabilities Rents and Leases Net rental expense under operating leases was $15.8 million in 2001, $13.0 million in 2000 and $13.6 million in 1999. Leases are principally for facilities and automobiles. Annual future minimum lease payments at December 31, 2001, under operating leases are as follows: 2002 - $12.8 million; 2003 - $8.9 million; 2004 - $6.2 million; 2005 - $4.8 million; 2006 - $3.8 million; subsequent to 2006 - $5.7 million. Deferred Profit Sharing Retirement Plan The Company has a profit sharing plan covering substantially all U.S. employees. Contributions are made at the discretion of the Board of Directors. Bio-Rad has no liability other than for the current year's contribution. Contributions charged to income were $4.7 million, $4.8 million and $4.0 million in 2001, 2000 and 1999, respectively. 21 Foreign Exchange Contracts The Company enters into forward foreign exchange contracts as an economic hedge against foreign currency denominated intercompany receivables and payables. At December 31, 2001, the Company had contracts maturing in January through March 2002 to sell foreign currency with a nominal value of $51.3 million and an unrealized loss of $0.5 million. Contracts to purchase foreign currency had a nominal value of $22.7 million and an unrealized loss of $0.3 million. Insurance The Company carries a deductible for workers' compensation. Accruals for losses are based on the Company's claims experience and actuarial assumptions followed in the insurance industry. Actual losses could differ from accrued amounts. Letters of Credit In the ordinary course of business, the Company is at times required to post letters of credit. These letters of credit are required by certain insurance companies to ensure payments of certain charges. The Company was contingently liable for approximately $2.5 million of standby letters of credit with a bank as of December 31, 2001. Taxes Settlement of open tax years, as well as tax issues in other countries where the Company conducts its businesses, is not expected to have a material effect on the consolidated financial position or liquidity of the Company and, in the opinion of management, adequate provision has been made for income and franchise taxes for all years under examination or subject to future examination. 13. Legal Proceedings The Company is a party to various claims, legal actions and complaints arising in the ordinary course of business. In the opinion of management, the outcome of these claims, legal actions and complaints will not have a material adverse effect on the future results of operations or the financial position of the Company. 14. Segment Information Bio-Rad is a multinational manufacturer and worldwide distributor of life science research products and clinical diagnostics products. Bio-Rad has two reportable segments: Life Science and Clinical Diagnostics. These reportable segments are strategic business lines that offer different products and services and require different marketing strategies. The Life Science segment develops, manufactures, sells and services liquid chromatography, electrophoresis, gene amplification and transformation, imaging and image analysis, nucleic acid sample preparation, industrial 22 microbiology and immunodiagnostics products. These products are sold to university and medical school laboratories, pharmaceutical and biotechnology companies, food testing laboratories and government and industrial research facilities. The Clinical Diagnostics segment develops, manufactures, sells and services automated test systems, informatics systems, test kits and specialized quality controls for the healthcare market. These products are sold to reference laboratories, hospital laboratories, state newborn screening facilities, physicians office laboratories, and insurance and forensic testing laboratories. The remainder of the Company's former Analytical Instruments segment is included in other operations. The material product lines of this segment were sold in 2000 and 2001(see Note 3). The accounting policies of the segments are the same as those described in Significant Accounting Policies (see Note 1). Segment profit or loss used for corporate management purposes includes an allocation of corporate expense based upon sales and an allocation of interest expense based upon accounts receivable and inventories. Segments are expected to manage only assets completely under their control. Accordingly, segment assets include primarily accounts receivable, inventories and gross machinery and equipment. Information regarding industry segments at December 31, 2001, 2000 and 1999 and for the years then ended is as follows (in millions): Life Clinical Other Science Diagnostics Operations Segment net sales 2001 $382.2 $417.9 $20.4 2000 267.3 409.0 53.1 1999 238.0 251.8 68.0 Allocated interest expense 2001 $ 9.3 $ 14.3 $ 0.5 2000 9.3 19.4 1.9 1999 3.8 7.8 1.2 Depreciation and 2001 $ 7.2 $ 26.2 $ 0.4 amortization 2000 6.4 25.7 0.9 1999 8.0 15.5 1.3 Segment profit (loss) 2001 $ 74.2 $ 27.4 $(5.3) 2000 14.1 25.3 (2.4) 1999 16.6 18.7 2.9 Segment assets 2001 $194.2 $302.2 $ 3.4 2000 152.2 308.4 14.4 1999 131.7 320.4 35.4 Capital expenditures 2001 $ 10.0 $ 23.9 $ 0.1 2000 6.8 27.5 0.8 1999 10.7 13.4 1.4 Inter-segment sales are included in segment net sales. Inter-segment sales are primarily from Life Science to Clinical Diagnostics and are priced to give Life Science a market representative gross margin. This represents the 23 difference between total segment net sales and consolidated net sales. The difference between total segment allocated interest expense, depreciation and amortization, and capital expenditures and the corresponding consolidated amounts is attributable to the Company's corporate headquarters. The following reconciles total segment profit to consolidated income before taxes and cumulative effect of change in accounting principle: Year Ended December 31, 2001 2000 1999 (in millions) Total segment profit $ 96.3 $37.0 $38.2 Gross profit on inter-segment sales (1.4) (1.8) (1.2) Other, net (23.0) 9.3 (3.9) Purchased in-process research and development - - (15.5) Net corporate operating, interest and other income and expense not allocated to segments (6.9) 0.9 (1.2) ------ ----- ----- Consolidated income before taxes and cumulative effect of change in accounting principle $ 65.0 $45.4 $16.4 ====== ===== ===== The following reconciles total segment assets to consolidated total assets: December 31, 2001 2000 1999 (in millions) Total segment assets $499.8 $475.0 $487.5 Cash and other current assets 97.2 54.9 58.5 Net property, plant and equipment excluding segment specific gross machinery and equipment (33.3) (41.2) (41.4) Goodwill 75.9 91.0 105.4 Other long-term assets 44.4 66.6 58.9 ------ ------ ------ Total assets $684.0 $646.3 $668.9 ====== ====== ====== 24 The following presents sales to external customers by geographic area based primarily on the location of the use of the product or service: Year Ended December 31, 2001 2000 1999 (in millions) Europe $341.7 $275.1 $189.0 Pacific Rim 127.5 128.3 110.7 United States 296.9 274.5 231.7 Other (primarily Canada and Latin America) 51.4 48.0 24.0 ------ ------ ------ Total net sales $817.5 $725.9 $555.4 ====== ====== ====== The following presents long-lived assets by geographic area based upon the location of the asset: Year Ended December 31, 2001 2000 1999 (in millions) Europe $ 25.3 $ 26.7 $ 34.1 Pacific Rim 6.4 6.5 6.9 United States 217.0 239.8 247.3 Other(primarily Canada and Latin America) 4.5 3.6 1.8 ------ ------ ------ Total long-lived assets $253.2 $276.6 $290.1 ====== ====== ====== 15. Quarterly Financial Data - (unaudited) Summarized quarterly financial data for 2001 and 2000 are as follows (in millions, except per share data): First Second Third Fourth Quarter Quarter Quarter Quarter 2001 Net sales $202.7 $195.3 $186.1 $233.4 Gross profit 111.4 109.7 106.2 133.9 Net income 8.6 11.6 7.0 17.0 Basic earnings per share $0.35 $0.47 $0.29 $0.69 Diluted earnings per share $0.34 $0.46 $0.28 $0.66 2000 Net sales $185.5 $186.8 $175.8 $177.8 Gross profit 98.7 99.6 91.7 92.5 Net income 2.9 5.1 13.9 9.2 Basic earnings per share $0.12 $0.21 $0.57 $0.37 Diluted earnings per share $0.12 $0.21 $0.57 $0.37 25 16. Information Concerning Common Stock - (unaudited) The Company's Class A and Class B Common Stock are listed on the American Stock Exchange with the symbols BIO and BIO.B, respectively. The following sets forth, for the periods indicated, the high and low prices for the Company's Class A and Class B Common Stock. Class A Class B High Low High Low 2001 First Quarter 21.00 14.88 20.25 15.00 Second Quarter 25.65 17.05 24.75 19.75 Third Quarter 28.88 21.00 27.00 22.50 Fourth Quarter 33.00 22.85 32.50 22.50 2000 First Quarter 16.50 10.63 16.63 11.32 Second Quarter 13.63 10.50 14.13 10.75 Third Quarter 12.50 10.50 12.13 10.75 Fourth Quarter 17.00 11.10 16.75 11.94 On March 8, 2002 the Company had 975 holders of record of Class A Common Stock and 222 holders of record of Class B Common Stock. Bio-Rad has never paid a cash dividend and has no present plans to pay cash dividends. 26 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders and Board of Directors of Bio-Rad Laboratories, Inc.: We have audited the accompanying consolidated balance sheets of Bio-Rad Laboratories, Inc. (a Delaware Corporation) and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of income, cash flows and changes in stockholders' equity for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Bio-Rad Laboratories, Inc. and subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States. ARTHUR ANDERSEN LLP San Francisco, California February 4, 2002, except for Note 7, as to which the date is February 6, 2002 27 Bio-Rad Laboratories, Inc. Management's Discussion and Analysis ______________________________________________________________________ MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION This discussion should be read in conjunction with the information contained in the Company's Consolidated Financial Statements and the accompanying notes which are an integral part of the statements. References are to the Notes to Consolidated Financial Statements. Other than statements of historical fact, statements made in this Annual Report include forward looking statements, such as statements with respect to the Company's future financial performance, operating results, plans and objectives. We have based these forward looking statements on our current expectations and projections about future events. However, actual results may differ materially from those currently anticipated depending on a variety of risk factors including among other things: our ability to successfully develop and market new products; our reliance on and access to necessary intellectual property; our substantial leverage and ability to service our debt; competition in and government regulation of the industries in which we operate; and the monetary policies of various countries. We undertake no obligation to publicly update or revise any forward looking statements, whether as a result of new information, future events, or otherwise. The following shows operating income and expense items as a percentage of net sales: Year Ended December 31, 2001 2000 1999 Net sales 100.0 100.0 100.0 Cost of goods sold 43.6 47.3 46.0 Gross profit 56.4 52.7 54.0 Selling, general and administrative expense 33.3 34.1 36.0 Product research and development expense 9.4 9.4 9.2 Purchased in-process research and development - - 2.8 ----- ----- ----- Income from operations 13.7 9.2 6.0 ===== ===== ===== Net income 5.4 4.3 2.1 ===== ===== ===== Results in 2001 include a full year's sales of a significant new product, the BSE (Bovine Spongiform Encepthalophy) test in the Life Science segment and the divestiture in October 2001 of the last material product line of the Company's former Analytical Instruments segment, the spectroscopy business (see Note 3). 28 Critical Accounting Policies and Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and contingencies as of the date of the financial statements and reported amounts of revenues and expenses during the reporting periods. The Company evaluates its estimates on an on-going basis. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates. In December 2001, the Securities and Exchange Commission (SEC) gave cautionary advice to all registrants to list their three to five most "critical accounting policies" in the Management Discussion and Analysis section. The SEC indicated that a "critical accounting policy" is one which is both important to the portrayal of the Company's financial condition and results and requires management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. The Company has identified the following accounting principles as the most critical for our financial disclosure: Accounting for Income Taxes. As part of the process of preparing Bio-Rad's consolidated financial statements management is required to estimate the Company's income taxes in each of the jurisdictions in which the Company operates. This process involves estimating Bio-Rad's actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within the consolidated balance sheet. Management must then assess the likelihood that the deferred tax assets will be recovered from future taxable income and to the extent management believes that recovery is not likely, a valuation allowance must be established. To the extent management establishes a valuation allowance or increases this allowance in a period, an expense within the tax provision in the statement of operations must be included. Significant management judgment is required in determining the provision for income taxes, deferred tax assets and liabilities and any valuation allowance recorded against the net deferred tax assets. The Company has recorded a valuation allowance of $12.8 million as of December 31, 2001, due to uncertainties related to the Company's ability to utilize some of the deferred tax assets, primarily consisting of certain net operating losses carried forward, before they expire. The valuation allowance is based on management's estimates of taxable income by jurisdiction in which Bio-Rad operates and the period over which the deferred tax assets will be recoverable. In the event that actual results differ from these estimates or these estimates are adjusted in future periods an additional valuation allowance may need to be established which could materially impact 29 Bio-Rad's financial position and results of operations. Valuation of Long-lived and Intangible Assets and Goodwill. The Company assesses the impairment of identifiable intangibles, long-lived assets and related goodwill and enterprise level goodwill whenever events or changes in circumstances indicated that the carrying value may not be recoverable. Factors the Company considers important which could trigger an impairment review include the following: - significant under-performance relative to expected historical or projected future operating results; - significant changes in the manner of use of the acquired assets or the strategy for the Company's overall business; - significant negative industry or economic trends. When the Company determines that the carrying value of intangibles, long- lived assets and related goodwill and enterprise level goodwill may not be recoverable based upon the existence of one or more of the above indicators of impairment, the Company measures any impairment based on a projected discounted cash flow method using a discount rate determined by management to be commensurate with the risk inherent in Bio-Rad's current business model. In 2002, Statement of Financial Accounting Standards 142, "Goodwill and Other Intangible Assets" (SFAS 142) became effective and as a result, the Company will cease to amortize approximately $75.9 million of goodwill. The Company had recorded approximately $7.7 million of amortization on these amounts during 2001. In lieu of amortization, the Company is required to perform an initial impairment review of goodwill in 2002 and an annual impairment review thereafter. The Company expects to complete the initial review during the second quarter of 2002. Bio-Rad currently does not expect to record an impairment charge upon completion of the initial impairment review. However, there can be no assurance that at the time the review is completed a material impairment charge will not be recorded. Valuation of Inventories. The Company values inventory at the lower of the actual cost to purchase and/or manufacture the inventory or the current estimated market value to the inventory. The Company regularly reviews inventory quantities on hand and records a provision for excess and obsolete inventory based primarily on an estimated forecast of product demand and production requirements for the next twelve months. In addition, our industry is characterized by technological change, frequent new product development and product obsolescence that could result in an increase in the amount of obsolete inventory quantities on hand. Additionally, the Company's estimates of future product demand may prove to be inaccurate, in which case the Company may have understated or overstated the provision required for excess and obsolete inventory. In the future, if inventory is determined to be overvalued, the Company would be required to recognize such costs in our cost of goods sold at the time of such determination. Likewise, if inventory is determined to be undervalued, the 30 Company may have over-reported cost of goods sold in previous periods and would be required to recognize such additional operating income at the time of sale. Therefore, although the Company makes every effort to ensure the accuracy of its forecasts of future product demand, any significant unanticipated changes in demand or technological developments could have a significant impact on the value of its inventory and reported operating results. Corporate Results -- Sales, Margins and Expenses Bio-Rad net sales for the year 2001 reached $817.5 million, an increase of 13% over the prior period. The year 2001 benefited from sales of the Company's BSE test which had negligible sales in the year 2000. Divestitures in the Analytical Instruments and Diagnostics segments along with a strengthening U.S. Dollar had the effect of lowering the Company's overall sales growth on a comparative basis. Adjusting for divestitures and the impact of currency, the growth in sales for the year 2001 was 25%. The Life Science segment had sales growth of 43% which includes sales of the BSE test and the negative impact of a strengthening dollar on international sales. Adjusting for currency and the industrial technology product line (BSE), the core Life Science products segment had real growth in the range of 15% to 20%. Product offerings with major contributions were proteomics and amplification equipment and reagents. The Diagnostics segment had growth of 2% before adjusting for divestitures and the negative impact from a strengthening dollar. After adjustment for these two factors, the Diagnostics segment had adjusted growth of 10%. Product lines demonstrating the most growth were the quality controls business, blood virus and diabetes monitoring. Bio-Rad's net sales for 2000 were $725.9 million, an increase of 30.7% over the prior year. The year 2000 benefited from the inclusion of twelve months sales of PSD versus 1999 which included sales for the fourth quarter only. The year 2000 was negatively impacted by a strengthening U.S. Dollar, the divestiture of the semiconductor product line and cessation of a distribution agreement. Adjusting for the above significant items, sales growth would have been 8.4% using the 1999 pro-forma/acquisition sales of $727.9 million. The Life Science segment in 2000 had growth of 17.9% adjusted for currency. The increase reflects increases in the sales of laboratory devices and consumables. The Diagnostics segment had growth of 5.4% adjusted for currency, the acquisition of PSD and product line divestitures. Product lines contributing to this growth were Bio-Rad's quality control business, genetic tests and improved penetration for the PSD product line in North America and Asia. Analytical Instrument sales decreased because of the divestiture of the semiconductor business as well as a decline in sales of the Company's spectroscopy product lines. Consolidated gross margins in 2001 were 56.4%, an improvement over 2000 reflecting several favorable factors. Life Science margins improved as a result of an improved sales mix in favor of reagents whose margins are 31 generally higher than that of the apparatus and equipment and favorable manufacturing overhead absorption from increased manufacturing activity without an equivalent increase in fixed factory spending. Diagnostics margins improved due to lower royalty costs on manufactured products, improved manufacturing efficiencies in France (where production facilities are shared with Life Science), the settlement of a royalty dispute providing a one-time increase in royalty income, and overall lower manufacturing costs in the quality control product lines. The positive results noted above were partially offset by the negative impact of a strengthening dollar on U.S. manufactured products sold into international markets. Consolidated gross margins in 2000 were 52.7% compared to 54.0% for the year 1999. The inclusion of a full year's operations of the PSD product lines reduced the Company's margins as these products have overall lower margins than the Company's other Diagnostics products. Excluding the PSD products, the remaining Diagnostics products had a decline of 1% on higher manufacturing and service costs. The Life Science segment had no change in gross margin as favorable manufacturing overhead absorption was offset by the negative impact from declining margins on international sales. Consolidated selling, general and administrative (SG&A) expense declined to 33.3% of sales in 2001 from 34.1% in the prior year. Spending increased in absolute dollars in each segment except Analytical Instruments. Life Science expenditures represent additions to sales and marketing headcount, increased customer support services and a continuing investment in e-commerce. Diagnostics expenditures focused on organizational changes and realigning the business after the acquisition of PSD as well as some strategic marketing initiatives in support of new product development. General and administrative expenses increased throughout the Company as internationally the Company replaced distributors with locally owned affiliates and expanded infrastructure to support a wider presence. The Company has increased its communication and information technology capabilities at higher operating and depreciation cost as new systems come on line replacing inadequate legacy systems. SG&A decreased to 34.1% of sales from 36.0%, for the year 2000. Both the Life Science and Diagnostics segments grew SG&A expense at a rate lower than sales growth in the year 2000. The Company made the efficient use of SG&A expense a priority after the PSD acquisition. The Company implemented Financial Accounting Standards Board Emerging Issues Task Force, Issue 00- 10 related to standardizing the method for recording shipping and handling charges billed separately to customers. All periods presented have been adjusted to consistently apply the gross method. There is no impact on either income from operations or net income in any period presented, only increased sales and an equivalent increase in selling expense. Product research and development expense (R&D) in 2001 increased by 12% or $8.4 million. As a percentage of sales, R&D expense was 9.4%, the same percentage as in 2000. Life Science increased both the breadth of projects and the spending rate to accelerate the development of new products and applications for proteomic and genomic researchers, pharmaceutical 32 discovery, and food testing markets. Diagnostics expenditures increased on a significant project which will require a substantial allocation of R&D funds through 2003. Other areas of emphasis are blood screening and expanding the available products in the quality control product line. Product R&D expense in 2000 increased by 33.1% or $16.9 million, which includes a full year's expense associated with the acquired PSD business. As a percentage of sales R&D expense rose to 9.4% of sales from 9.2% in the prior year as both the Life Science and Diagnostics segments have large long-term projects and current opportunities including improvements to the existing industrial diagnostic testing product line related to the increased demand for BSE tests. Corporate Results -- Non-Operating Items Interest expense decreased by $6.5 million for the year 2001 as the Company repaid debt and benefited from overall lower average borrowing costs on its variable rate debt. Interest expense as a percentage of sales represents 2.9% and 4.2% for the years 2001 and 2000, respectively. Net other income and expense for 2001 (see Note 10) includes a non-cash write-down of an investment in a closely held foreign company and other investees, goodwill amortization, income related to a legal dispute previously provided for that was unnecessary upon settlement with the other party, other non- operating legal costs, and a non-cash loss on the disposition of the spectroscopy equipment business (see Note 3). Net other income and expense for the year 2000 includes a gain on the sale of the semiconductor manufacturing and test equipment business, non- operating legal costs, and settlement costs related to cancelling a financing arrangement. All years include exchange gains and losses from non-speculative forward foreign exchange contracts which hedge the exposure of intercompany receivables and payables. The exchange gain or loss results from the estimating inherent in projecting intercompany balances and transaction costs. Bio-Rad's consolidated effective tax rate was 32%, 30% and 29% in 2001, 2000 and 1999, respectively. The tax rate for all years reflects the utilization of loss carryforwards, foreign sales corporation benefits and foreign tax credits. The effective tax rate rose in 2001 as a result of an increase in tax reserves (see Note 6). Financial Condition As a result of the debt service obligations undertaken related to the acquisition of PSD, the Company has a risk of limited liquidity and capital resources. The Company has reduced its debt to equity ratio from 119% at December 31, 1999 to 70% at December 31, 2001. The Company has a Senior Credit Facility of $142.5 million consisting of a $100.0 million revolving facility and a $42.5 million term loan (reduced from an initial $100.0 million), allowing for borrowings on a secured basis to September 2004. In February 2000, the Company completed the sale of 33 $150.0 million aggregate principal amount of Senior Subordinated Notes due 2007. These notes may be redeemed after February 14, 2004 and before February 15, 2005 in whole or part at a redemption price of 105.813%; for the interim period to February 15, 2006 at 102.906%; thereafter at 100%. 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. At December 31, 2001, the Company had available $47.1 million in cash and cash equivalents, $21.1 million under its international lines of credit, and $100.0 million under its principal revolving credit agreement (see Note 5). Management believes that this availability, together with cash flow from operations, will be adequate to meet the Company's current objectives for operations, including research and development and any necessary investments in facilities and equipment. Net cash provided by operations was $99.5 million, $24.2 million and $45.0 million in 2001, 2000 and 1999, respectively. The largest contributing factors to the improvement in net cash provided are the Company's 2001 sales growth and overall lower spending (as a percentage of sales) for manufacturing and SG&A. Consolidated net accounts receivable increased $12.2 million in 2001 when compared to 2000. This increase is attributable to increased sales. Net receivable days outstanding declined as the geographic sales mix had higher sales in Europe and the United States who generally require less financing than other regions. Also, credit and collection policies have been more fully integrated from 2000 after the PSD acquisition. Bio-Rad's management regularly reviews the allowance for uncollectible receivables and believes net receivables are fully realizable. For the year ended December 31, 2001, consolidated inventories rose $6.7 million to $139.2 million. The Life Science segment had inventory increases in line with sales activity. The component of inventory at international locations declined as weakened local currencies caused the value of foreign manufactured goods to decline in U.S. dollar terms. Management regularly reviews the impact of obsolescence on current inventory caused by the introduction of new products. Management will continue its focus on inventory control to moderate capital requirements. A valuation reserve is necessary for deferred tax assets (see Note 6) primarily because realization of tax benefits attributable to foreign loss carryforwards is uncertain. Net capital expenditures in 2001 totaled $43.2 million compared to $31.4 million and $27.3 million in 2000 and 1999, respectively. The Company is currently reviewing plans to either build or lease additional facilities at or near its Northern California headquarters. Should the Company decide to build on its own property, the capital requirement necessary is in the 34 range of $30-$40 million dollars and is in addition to annual requirements for manufacturing equipment, reagent rental equipment and information technology improvements. Expenditures in all years include clinical diagnostic equipment placed with customers to be used with the Company's diagnostic reagents. Management regularly approves capital spending in the normal course of business. The Company continues to review possible acquisitions to expand both its Life Science and Diagnostics segments. The Company routinely meets with the principals or brokers of the subject companies. Currently no discussions involving a material acquisition have progressed beyond the most initial phases. Should the Company make a material acquisition it would most likely require an increase in borrowed funds, further increasing its financial leverage. On February 4, 2002 at a special meeting of the Company's shareholders, a resolution to increase the number of authorized Class A and Class B common shares to 50,000,000 and 20,000,000, respectively and a resolution to reduce the par value of common and preferred stock from $1.00 to $0.0001 were adopted along with several other technical provisions which will update and streamline the Company's charter. On February 6, 2002, at its regular meeting the Board of Directors approved a two-for-one stock split to be effected in the form of a 100% dividend, for holders of record on February 25, 2002. Retroactive adjustments have been made as appropriate to common stock and per share amounts for all years presented. Through December 31, 2001, the Company has cumulatively repurchased 1,179,272 shares of Class A Common Stock and 60,000 shares of Class B Common Stock for a total of $14.7 million. The Company's credit agreements restrict the Company's ability to repurchase its own stock. Share repurchases made during 2001 amounted to $0.3 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. Euro - A New European Currency On January 1, 2002, the Euro became the common currency in participating countries of the European Union. This has 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 to monitor the changes required to continue to do business in the European Union. The Company does not expect the changes to 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. 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. 35 Financial Risk Management Bio-Rad uses derivative financial instruments to reduce the Company's exposure to fluctuations in foreign exchange rates and, on occasion, interest rates. No derivative financial instruments are entered into for the purpose of speculating or trading. Company policy limits all derivative positions exclusively to reducing risk by hedging an underlying economic exposure. In most cases, derivative investments do not qualify for hedge accounting treatment under Statement of Financial Accounting Standards 133, "Accounting for Derivative Instruments and Hedging Activities". Derivative instruments used in these transactions will be valued at fair value and changes in fair value will be included in reported earnings. Bio-Rad operates and conducts business in many countries and is exposed to movements in foreign currency exchange rates. Additionally, Bio-Rad's consolidated net equity is impacted by the conversion of the net assets of international subsidiaries for which the functional currency is not the U.S. Dollar. Foreign currency exposures are managed on a centralized basis by the Company's Treasury Department. This allows for the netting of natural offsets and lowers transaction costs and exposures. Bio-Rad currently makes more than 50% of its sales outside the United States and weakening in one currency can often be offset by strengthening in another. Bio-Rad typically enters into forward exchange contracts to sell its foreign currency. Contracts are entered into typically for 30 to 60 days, primarily in British Sterling, Japanese Yen and the Euro or related currencies. The costs are recognized in income monthly and generally are the reciprocal of the change in underlying assets. Bio-Rad does not hold any derivative contracts that hedge its foreign currency denominated net asset exposures. Bio-Rad uses sensitivity analysis to assess the market risk associated with its foreign currency exchange risk. Market risk is the potential change in fair value of derivative positions from an adverse movement in currency exchange rates. As of December 31, 2001, the Company's market risk was not significant. The Company's long-term debt consists mostly of fixed rate instruments in order to minimize earnings volatility related to interest expense. While the Company has used derivative instruments in the past, it did not hold any interest rate derivative contracts at December 31, 2001. The current strategy is to manage interest costs using a mix of fixed and variable debt. New Financial Accounting Standards In June 2001, the Financial Accounting Standards Board issued SFAS 142, "Goodwill and Other Intangible Assets," which requires that goodwill and intangible assets with indefinite useful lives no longer be amortized but instead be reviewed annually for impairment using a fair-value based 36 approach. Intangible assets that have a finite life will continue to be amortized over their respective estimated useful lives. The Company will adopt provisions of SFAS 142 beginning January 1, 2002. Amortization expense for fiscal year 2001, 2000 and 1999 was $7.7 million, $8.1 million and $3.8 million, respectively. The Company is currently implementing the transition and annual procedures called for in SFAS 142. An impairment greater than prior years' goodwill amortization is not anticipated based on the limited review completed to date. 37