<DOCUMENT>
<TYPE>EX-13
<SEQUENCE>4
<FILENAME>exhib13.txt
<TEXT>
Bio-Rad Laboratories, Inc.
<table>
<caption>
SUMMARY OF OPERATIONS AND SELECTED FINANCIAL DATA (in thousands, except per share data)
_______________________________________________________________________________________________________________
Year Ended December 31,
2002 2001 2000 1999 1998
<s> <c> <c> <c> <c> <c>
Net sales $892,720 $817,509 $725,884 $555,399 $447,863
Cost of goods sold 383,235 362,140 348,450 259,573 206,796
------- ------- ------- ------- -------
Gross profit 509,485 455,369 377,434 295,826 241,067
Selling, general and administrative expense 289,175 264,745 245,866 195,944 168,424
Product research and development expense 82,935 76,543 68,140 66,710 41,381
Goodwill amortization - 7,746 8,109 3,813 2,068
Loss (gain) on divestitures - 5,150 (21,845) - -
Interest expense 28,207 24,088 30,612 12,741 3,731
Foreign exchange losses (gains) 5,441 2,097 420 886 (22)
Other, net (678) 10,031 689 (684) (8,743)
Income before taxes and cumulative effect ------- ------- ------- ------- -------
of change in accounting principle 104,405 64,969 45,443 16,416 34,228
Provision for income taxes (36,542) (20,790) (13,633) (4,695) (9,926)
------- ------- ------- ------- -------
Income before cumulative effect
of change in accounting principle 67,863 44,179 31,810 11,721 24,302
Cumulative effect of change in
accounting principle (1) - - (710) - -
------- ------- ------- ------- -------
Net income $ 67,863 $ 44,179 $ 31,100 $ 11,721 $ 24,302
======= ======= ======= ======= =======
Basic earnings per share before cumulative effect
of change in accounting principle (2) $2.70 $1.79 $1.30 $0.48 $0.99
Cumulative effect of change in accounting
principle (1) (2) - - (0.03) - -
------- ------- ------- ------- -------
Basic earnings per share (2) $2.70 $1.79 $1.27 $0.48 $0.99
======= ======= ======= ======= =======
Diluted earnings per share before cumulative effect
of change in accounting principle (2) $2.61 $1.74 $1.30 $0.48 $0.99
Cumulative effect of change in accounting
principle (1) (2) - - (0.03) - -
------- ------- ------- ------- -------
Diluted earnings per share (2) $2.61 $1.74 $1.27 $0.48 $0.99
======= ======= ======= ======= =======
Cash dividends paid per common share - - - - -
Total assets $720,703 $684,028 $646,278 $668,862 $367,299
Long-term debt, net of current maturities $105,768 $188,423 $203,360 $239,211 $ 42,339
_______________________________________________________________________________________________________________
(1) Cummulative effect of accounting change per SEC Staff Accounting Bulletin 101, on Revenue Recognition.
(2) Restated to give effect to a stock split in the form of a 100% stock dividend in 2002.
</table>
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Bio-Rad Laboratories, Inc.
Consolidated Balance Sheets
(in thousands)
<table>
<caption>
________________________________________________________________________________________
December 31,
Assets 2002 2001
<s>
Current Assets: <c> <c>
Cash and cash equivalents $ 27,733 $ 47,129
Accounts receivable, less allowance of $12,122
in 2002 and $11,509 in 2001 212,282 194,400
Inventories, net:
Raw materials 40,559 33,488
Work in process 30,790 28,715
Finished goods 95,023 76,976
------- -------
Total inventories 166,372 139,179
Deferred tax assets 37,052 27,537
Prepaid expenses and other current assets 22,357 22,583
------- -------
Total current assets 465,796 430,828
Property, Plant and Equipment:
Land and improvements 9,572 9,658
Buildings and leasehold improvements 80,531 75,231
Equipment 239,404 191,284
------- -------
Total property, plant and equipment 329,507 276,173
Accumulated depreciation (187,272) (143,199)
------- -------
Net property, plant and equipment 142,235 132,974
Goodwill, net of accumulated amortization of
$21,736 in 2002 and $21,736 in 2001 69,519 77,703
Other Assets 43,153 42,523
------- -------
Total Assets $720,703 $684,028
======= =======
________________________________________________________________________________________
The accompanying notes are an integral part of these statements.
</table>
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Bio-Rad Laboratories, Inc.
Consolidated Balance Sheets (in thousands, except share data)
<table>
<caption>
__________________________________________________________________________________________
December 31,
Liabilities and Stockholders' Equity 2002 2001
<s> <c> <c>
Current Liabilities:
Accounts payable $ 75,233 $ 64,903
Accrued payroll and employee benefits 72,213 58,434
Notes payable 6,726 4,211
Current maturities of long-term debt 760 5,720
Sales, income and other taxes payable 17,019 18,633
Other current liabilities 50,058 47,205
------- -------
Total current liabilities 222,009 199,106
Long-Term Debt, net of current maturities 105,768 188,423
Deferred Tax Liabilities 9,839 12,622
------- -------
Total liabilities 337,616 400,151
------- -------
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 2002 - 20,402,462;
2001 - 20,166,636 2 2
Class B common stock, $0.0001 par value, 20,000,000 shares
authorized; outstanding 2002 - 4,846,942;
2001 - 4,826,562 1 -
Additional paid-in capital 36,141 32,171
Class A treasury stock, zero shares in 2002 and
161,336 shares in 2001 at cost - (1,863)
Retained earnings 344,841 276,554
Accumulated other comprehensive income (loss):
Currency translation and other 2,102 (22,987)
------- -------
Total stockholders' equity 383,087 283,877
------- -------
Total Liabilities and Stockholders' Equity $720,703 $684,028
======= =======
__________________________________________________________________________________________
The accompanying notes are an integral part of these statements.
</table>
3
<page>
<table>
<caption>
Bio-Rad Laboratories, Inc.
Consolidated Statements of Income (in thousands, except per share data)
______________________________________________________________________________________________________________________
Year Ended December 31,
2002 2001 2000
<s> <c> <c> <c>
Net sales $892,720 $817,509 $725,884
Cost of goods sold 383,235 362,140 348,450
------- ------- -------
Gross profit 509,485 455,369 377,434
Selling, general and administrative expense 289,175 264,745 245,866
Product research and development expense 82,935 76,543 68,140
Goodwill amortization - 7,746 8,109
Loss (gain) on divestitures - 5,150 (21,845)
Interest expense 28,207 24,088 30,612
Foreign exchange losses 5,441 2,097 420
Other, net (678) 10,031 689
------- ------- -------
Income before taxes and cumulative effect of change
in accounting principle 104,405 64,969 45,443
Provision for income taxes (36,542) (20,790) (13,633)
------- ------- -------
Income before cumulative effect of change in
accounting principle 67,863 44,179 31,810
Cumulative effect of accounting change,
net of taxes of $515 (see Note 1) - - (710)
------- ------- -------
Net income $ 67,863 $ 44,179 $ 31,100
Basic earnings per share: ======= ======= =======
Income before cumulative effect of change in
accounting principle $2.70 $1.79 $1.30
Cumulative effect of accounting change - - (0.03)
------- ------- -------
Net income $2.70 $1.79 $1.27
======= ======= =======
Weighted average common shares 25,104 24,648 24,422
======= ======= =======
Diluted earnings per share:
Income before cumulative effect of change in
accounting principle $2.61 $1.74 $1.30
Cumulative effect of accounting change - - (0.03)
------- ------- -------
Net income $2.61 $1.74 $1.27
======= ======= =======
Weighted average common shares 26,021 25,442 24,568
======= ======= =======
_______________________________________________________________________________________________________________________
The accompanying notes are an integral part of these statements.
</table>
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<page>
Bio-Rad Laboratories, Inc.
Consolidated Statements of Cash Flows (in thousands)
<table>
<caption>
________________________________________________________________________________________________________
Year Ended December 31,
2002 2001 2000
<s>
Cash flows from operating activities: <c> <c> <c>
Cash received from customers $885,835 $787,179 $707,046
Cash paid to suppliers and employees (711,341) (665,572) (636,054)
Interest paid (25,832) (22,064) (23,873)
Income tax payments (43,939) (5,296) (12,294)
Miscellaneous receipts (payments) 112 5,248 (10,578)
------- ------- -------
Net cash provided by operating activities 104,835 99,495 24,247
Cash flows from investing activities:
Capital expenditures, net (42,224) (43,228) (31,406)
Payments for acquisitions (8,568) (4,650) -
Proceeds from divestitures - - 34,118
Purchases of marketable securities and investments (1,887) (567) (326)
Sales of marketable securities and investments 493 497 795
Foreign currency hedges, net (2,270) 410 6,115
------- ------- -------
Net cash provided by (used in) investing activities (54,456) (47,538) 9,296
Cash flows from financing activities:
Net borrowings (payments) on notes payable 5,031 (1,884) (4,325)
Long-term borrowings 44,025 74,250 438,487
Payments on long-term debt (133,517) (97,209) (473,278)
Arrangement and other fees for
long-term acquisition financing - - (4,500)
Proceeds from issuance of common stock 3,970 575 305
Purchase of treasury stock - (261) (378)
Reissuance of treasury stock 2,287 4,367 2,083
------- ------- -------
Net cash used in financing activities (78,204) (20,162) (41,606)
Effect of exchange rate changes on cash 8,429 1,380 4,930
------- ------- -------
Net increase (decrease) in cash and cash equivalents (19,396) 33,175 (3,133)
Cash and cash equivalents at beginning of year 47,129 13,954 17,087
------- ------- -------
Cash and cash equivalents at end of year $ 27,733 $ 47,129 $ 13,954
======= ======= =======
________________________________________________________________________________________________________
</table>
The accompanying notes are an integral part of these statements.
5
<page>
Bio-Rad Laboratories, Inc.
Consolidated Statements of Changes in Stockholders' Equity
(in thousands)
______________________________________________________________________
Year Ended December 31,
2002 2001 2000
Common Stock, $0.0001 par value:
Balance at beginning of year $ 2 $ 2 $ 2
Issuance of common stock 1 - -
Balance at end of year 3 2 2
Additional Paid-In Capital:
Balance at beginning of year 32,171 31,596 31,291
Issuance of common stock 3,970 575 305
Balance at end of year 36,141 32,171 31,596
Treasury Stock:
Balance at beginning of year (1,863) (5,415) (7,392)
Purchase of treasury stock - (261) (378)
Reissuance of treasury stock 1,863 3,813 2,355
Balance at end of year - (1,863) (5,415)
Retained Earnings:
Balance at beginning of year 276,554 231,821 200,993
Net income 67,863 44,179 31,100
Reissuance of treasury stock at
more than (less than) cost 424 554 (272)
Balance at end of year 344,841 276,554 231,821
Accumulated Other
Comprehensive Income (Loss):
Balance at beginning of year (22,987) (13,386) (4,780)
Other comprehensive income (loss) 25,089 (9,601) (8,606)
Balance at end of year 2,102 (22,987) (13,386)
________ ________ ________
Total Stockholders' Equity $383,087 $283,877 $244,618
======== ======== ========
Comprehensive Income, net of tax:
Net income $ 67,863 $ 44,179 $ 31,100
Currency translation adjustments 25,241 (9,458) (8,804)
Net unrealized holding gains(losses) (59) (12) 533
Reclassification adjustments for
gains included in net income (93) (131) (335)
-------- -------- --------
Total Comprehensive Income $ 92,952 $ 34,578 $ 22,494
======== ======== ========
_________________________________________________________________________
The accompanying notes are an integral part of these statements.
6
<page>
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
transactions. The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
Reclassifications
Beginning January 1, 2002, the Company has classified freight
costs related to shipping and handling as part of cost of goods
sold rather than in selling, general and administrative expense
as allowed by Financial Accounting Standards Board Emerging
Issues Task Force Issue No. 00-10, "Accounting for Shipping and
Handling Fees and Costs." Prior period shipping costs have been
reclassified to conform to the current year presentation. See
"Shipping and Handling".
The Company has changed the presentation of the income statement
to eliminate the subtotal "Income from Operations" and provide
further clarification of items previously grouped in "Other,
net."
Certain other items have been reclassified to conform to the
current year-end presentation.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and highly liquid
investments 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 cash and cash
equivalents and trade accounts receivable. Cash and cash
equivalents are placed with major financial institutions. 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
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<page>
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.
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.
Beginning January 1, 2002, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 142, "Goodwill and
Other Intangible Assets" which provides that goodwill is no
longer subject to amortization over its useful life. Goodwill is
assessed annually for impairment applying a fair-value based test
or whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable (see Note 5).
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
(see Note 7).
8
<page>
Revenue Recognition
Bio-Rad recognizes revenues when persuasive evidence of an
arrangement exists, the sales price is fixed or determinable and
collectibility is probable. Generally, these criteria are met at
the time product is shipped.
During the fourth quarter of 2000, the Company changed its
revenue recognition policies with regard to certain complex
instruments sold within the Life Science segment that require
installation at the customer site and customer acceptance 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 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.
Shipping and Handling
Pursuant to Financial Accounting Standards Board (FASB) 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. Related freight costs are
included in cost of goods sold.
Sales Returns and Warranty
At the time the related revenue is recognized, a provision is
recognized for estimated product returns.
The Company warrants certain equipment against defects in design,
materials and workmanship, generally for one year. Upon shipment
of that equipment, the Company establishes, as part of cost of goods
sold, a provision for the expected costs of such warranty.
Components of the warranty accrual, included in Other current
liabilities, were as follows (in millions):
January 1, 2002 $ 6.1
Provision for warranty 9.0
Actual warranty costs (8.0)
----
December 31, 2002 $ 7.1
====
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.
9
<page>
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
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. The Company does not use
derivative financial instruments for speculative or trading purposes.
In accordance with SFAS No. 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. Exchange gains and losses on these contracts are
net of premiums and discounts. The resulting gains or losses offset
exchange losses or gains on the related receivables and payables.
The cash flows related to these contracts are classified as cash flows
from investing activities in the Statement of Cash Flows.
Stock Compensation Plans
At December 31, 2002, the Company has stock-based employee
compensation plans which are described more fully in Note 9. The
Company applies the recognition and measurement principles of APB
Opinion No. 25, "Accounting for Stock Issued to Employees," and
related interpretations in accounting for those plans. No stock-based
employee compensation expense is reflected in net income as all
options granted under those plans had an exercise price equal to or
greater than the market value of the underlying common stock on the
date of grant.
10
<page>
Had compensation cost for stock option grants been determined pursuant
to SFAS No. 123, "Accounting for Stock-Based Compensation," the
Company's pro forma net income and earnings per share would have been
as follows (in millions, except per share data):
Year Ended December 31,
2002 2001 2000
Net income, as reported $ 67.9 $ 44.2 $ 31.1
Deduct: Total stock-based
employee compensation expense
determined under fair value
methods for all awards, net
of related tax effects (1.8) (1.3) (1.2)
----- ----- -----
Pro forma net income $ 66.1 $ 42.9 $ 29.9
===== ===== =====
Earnings per share:
Basic-as reported $ 2.70 $ 1.79 $ 1.27
Basic-pro forma $ 2.63 $ 1.74 $ 1.22
Diluted-as reported $ 2.61 $ 1.74 $ 1.27
Diluted-pro forma $ 2.55 $ 1.69 $ 1.23
Earnings Per Share
The Company calculates basic earnings per share (EPS) and diluted EPS
in accordance with SFAS No. 128, "Earnings per Share." Basic EPS is
computed by dividing net income (loss) by the weighted average number
of common shares outstanding for that period. Diluted EPS takes into
account the effect of dilutive instruments, such as stock options, and
uses the average share price for the period in determining the number
of common stock equivalents that are to be added to the weighted
average number of shares outstanding. Common stock equivalents are
excluded from the diluted earnings per share calculation if the effect
would be anti-dilutive. 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.
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<page>
The estimated fair value of Bio-Rad's financial instruments were as
follows(in millions):
Year Ended December 31,
2002 2001
Carrying Fair Carrying Fair
Amount Value Amount Value
Notes receivable
and other $ 36.0 $ 37.2 $ 41.1 $ 40.9
Total Long-Term Debt $ 106.5 $ 131.8 $ 194.1 $201.0
Financial instruments (e.g., notes receivable) that have fair values
based on discounted cash flows, market quotations, and other
appropriate valuation techniques are included in Other Assets. 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, and accounts payable, the carrying amounts approximate
fair value.
New Financial Accounting Standards
On January 1, 2002, the Company adopted SFAS No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets." SFAS No. 144
supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of," but retains its
fundamental provision for recognizing and measuring impairment of
long-lived assets to be held and used. This statement requires that
all long-lived assets to be disposed of by sale be carried at the
lower of carrying amount or fair value less cost to sell, and that
depreciation cease to be recorded on such assets. SFAS No. 144
standardizes the accounting and presentation requirements for all
long-lived assets to be disposed of by sale, and supersedes previous
guidance for discontinued operations of business segments. The
initial adoption of SFAS No. 144 did not have any impact on the
consolidated financial statements of the Company.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and
Technical Corrections." One of the major changes of this statement is
to change the accounting for the classification of gains and losses
from the extinguishment of debt. The Company adopted SFAS No. 145 as
of January 1, 2002 and will follow APB 30, "Reporting the Results of
Operations -- Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events
and Transactions" in determining whether such extinguishment of debt
may be classified as extraordinary. As a result of adoption, the
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<page>
expenses incurred in the repurchase of outstanding debt on the open
market has been included in interest expense. No other impact from
adoption was recognized.
In April 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which addresses
accounting for restructuring and similar costs. SFAS No. 146
supersedes previous accounting guidance, principally Emerging Issues
Task Force Issue No. 94-3 "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (Including
Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires
that the liability for costs associated with an exit cost or disposal
activity be recognized when the liability is incurred. Under Issue
94-3, a liability for an exit cost was recognized at the date of the
Company's commitment to an exit plan. SFAS No. 146 also establishes
that the liability should initially be measured and recorded at fair
value. Accordingly, SFAS No. 146 may affect the timing of recognizing
future restructuring costs as well as the amounts recognized. The
Company will adopt the provisions of SFAS No. 146 for restructuring
activities after December 31, 2002.
On December 31, 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure, an Amendment of
FASB Statement No. 123." This statement provides alternative methods
of transition for companies who voluntarily change to the fair value-
based method of accounting for stock-based employee compensation in
accordance with SFAS No. 123, "Accounting for Stock-Based
Compensation." The statement requires prominent disclosures in both
annual and interim financial statements about the method of accounting
for stock-based compensation and the effect of the method used on
reported results. The Company has adopted the disclosure requirements
as required by the statement.
The Company continues to account for stock-based compensation using
the intrinsic value method in accordance with the provisions of
Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees," elected under SFAS No. 123, as amended. As a
result, the adoption of SFAS No. 148 did not have any impact on the
consolidated financial statements of the Company (see Note 9).
2. Acquisitions
On June 28, 2002, the Company purchased for cash the microarray and
robotics technologies business of Virtek Biotech Inc., a subsidiary of
Virtek Vision International Inc. of Waterloo, Ontario, Canada.
Bio-Rad acquired the assets for approximately $7 million and has
included these operations in its Life Science segment. The Company
has completed its evaluation of purchased assets and has not assigned
any value to goodwill. Assets purchased include amortizable patents
and other intangible assets totaling $4.1 million with a weighted
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average amortization period of 5 years (see Note 5).
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 SFAS No. 141, "Business Combinations." The
acquisition cost was not material but did include a premium in excess
of the net assets acquired.
In connection with an acquisition made by the Company in 1999,
liabilities of approximately $14.0 million for severance and other
employee costs and $4.0 million for the consolidation and closure of
certain leased facilities were recorded. 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, 2002 all costs associated
with the initial liabilities had been incurred. The actual costs were
approximately $0.7 million less than the initial accrual. This
difference was recorded as a reduction to expenses in 2002.
3. Divestitures
In October 2001, the Company sold the assets and certain liabilities
of the Company's spectroscopy business to Digilab LLC. In the first
quarter of 2001, the Company recorded a $4.5 million non-cash pre-tax
charge reflecting the estimated impact of its intent to sell the
spectroscopy instrument business. In the third quarter of 2001, the
Company had a write-down of $0.7 million on the value of a related
production facility.
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 note receivable and the equity interest in ASTI are
included in Other Assets. The equity interest is accounted for under
the cost method of accounting.
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, 2002, 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.
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<page>
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, 2001.
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 other than temporarily
impaired. As such, the Company valued its investment in IL at $6.4
million as of December 31, 2002. This amount reflects a $3.0 million
write-down since December 31, 2001, which has been recorded in Other,
net. The Company recorded a $9.4 million write-down of its investment
in IL during 2001. Although management believes that this investment
is realizable, there is a possibility that future events may cause
further impairment of this investment.
5. Goodwill and Other Intangible Assets
In June 2001, the Financial Accounting Standards Board (FASB) issued
SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and
Other Intangible Assets." SFAS No. 141 requires that all business
combinations initiated after June 30, 2001 be accounted for under the
purchase method of accounting and addresses the initial recognition
and measurement of goodwill and other intangible assets acquired in a
business combination. SFAS No. 142 addresses the initial recognition
and measurement of goodwill and other intangible assets subsequent to
their acquisition. SFAS No. 142 provides that intangible assets with
finite useful lives will be amortized and that goodwill and intangible
assets with indefinite lives will not be amortized, but will be
required to be tested at least annually for impairment.
The Company adopted SFAS No. 142 on January 1, 2002. At that date,
the Company stopped the amortization of goodwill, with a net carrying
value of $77.7 million, and annual amortization of approximately $8
million that had resulted from purchases of businesses completed prior
to the adoption of SFAS No. 141. The transition impairment test for
goodwill was performed as of January 1, 2002 and no impairment loss
was recorded. Additionally, intangible assets that do not meet the
criteria for recognition apart from goodwill must be reclassified to
goodwill. As a result of the Company's analysis, no reclassification
of intangible assets to goodwill was required.
15
<page>
Had the Company been accounting for its goodwill under SFAS No. 142
for all periods presented, the Company's net income and net income per
share would have been as follows (in millions):
Year Ended December 31,
2002 2001 2000
Reported net income $ 67.9 $ 44.2 $ 31.1
Add back goodwill amortization,
net of tax - 5.3 5.7
---- ---- ----
Pro forma adjusted net income $ 67.9 $ 49.5 $ 36.8
==== ==== ====
Basic earnings per share:
Reported basic earnings
per share $ 2.70 $ 1.79 $ 1.27
Goodwill amortization, net of tax - 0.21 0.23
Pro forma adjusted basic ---- ---- ----
earnings per share $ 2.70 $ 2.00 $ 1.50
Diluted earnings per share: ==== ==== ====
Reported diluted earnings
per share $ 2.61 $ 1.74 $ 1.27
Goodwill amortization, net of tax - 0.21 0.23
Pro forma adjusted diluted ---- ---- ----
earnings per share $ 2.61 $ 1.95 $ 1.50
==== ==== ====
The changes in the carrying amount of goodwill for the years ended
December 31, 2002 and 2001 are as follows (in millions):
Life Clinical Other
Science Diagnostics Operations
December 31, 2000 $ 38.2 $ 54.6 $ -
Amortization (3.7) (4.1) -
Acquired goodwill - 1.4 1.4
Tax adjustments (4.8) (5.3) -
---- ---- ----
December 31, 2001 $ 29.7 $ 46.6 $ 1.4
Tax adjustments (3.9) (4.3) -
---- ---- ----
December 31, 2002 $ 25.8 $ 42.3 $ 1.4
==== ==== ====
Goodwill balances and goodwill amortization have been included in
corporate for segment reporting purposes in Note 15.
Identifiable intangible assets of $7.1 million, net of $8.9 million
of accumulated amortization are included in Other Assets and have
remaining useful lives ranging from one to ten years. The Company
has no intangible assets with indefinite lives.
16
<page>
6. Notes Payable and Long-Term Debt
Notes payable include local credit lines maintained by the Company's
subsidiaries aggregating approximately $30.9 million, of which $24.2
million was unused at December 31, 2002. At December 31, 2001 these
lines aggregated approximately $25.3 million, of which $21.1 million
was unused. The weighted average interest rate on these lines was
9.1% and 5.43% at December 31, 2002 and 2001, respectively. Bio-Rad
Laboratories, Inc. guarantees most of these credit lines.
The principal components of Long-Term Debt are as follows (in
millions):
Year Ended December 31,
2002 2001
Senior Subordinated Notes $ 105.3 $ 148.7
Senior Credit Agreement:
Term loan - 42.5
Revolving credit facility - -
Other debt 1.1 1.6
Capitalized leases 0.2 1.3
----- -----
106.6 194.1
Less current maturities 0.8 5.7
----- -----
Long-Term Debt $ 105.8 $ 188.4
===== =====
In September 1999, the Company entered into a $200.0 million Senior
Credit Agreement due in 2004 to finance the acquisition of Pasteur
Sanofi Diagnostics 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 fully repaid.
The revolving facility is secured by an interest in the Company's
assets through September 2004. Interest varies upon a number of
factors including the duration of the specific borrowing and is based
upon either the Eurodollar, the Federal Funds effective or the
Company's corporate based rate. The interest rate on the revolving
facility at December 31, 2002 was 4.50%. 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 Company has the option to redeem
any or all of the notes at any time prior to February 15, 2004 at a
redemption price equal to 100% of the principal amount of the notes
plus the applicable premium plus accrued and unpaid interest and
certain other charges. The notes may be redeemed after February 14,
17
<page>
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 debt is non-callable until February
2004. The Company's obligations under the notes are not secured and
rank junior to all the Company's existing and future senior debt.
During 2002, the Company repurchased in the open market $43.9 million
(par value) of its Senior Subordinated debt. The price paid includes
interest to February 2004. The total amount of interest, unamortized
debt issue cost and unamortized original issue discount recognized as
a result of the repurchase was $6.9 million and has been included in
interest expense.
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, 2002 and 2001.
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, 2002, are as follows:
2003 - $0.8 million; 2004 - $0.5 million; 2005 - $0; 2006 - $0;
2007 - $105.3 million; thereafter - $0.
7. Income Taxes
The U.S. and international components of income (loss) before
taxes are as follows (in millions):
Year Ended December 31,
2002 2001 2000
U.S. $ 37.6 $ (4.8) $ 6.4
International 66.8 69.8 39.0
----- ----- -----
Income before taxes and
cumulative effect of change
in accounting principle $104.4 $ 65.0 $ 45.4
===== ===== =====
18
<page>
The provision (benefit) for income taxes consists of (in millions):
Year Ended December 31,
2002 2001 2000
Current:
U.S. Federal $ 11.8 $ 2.8 $ (4.6)
International 30.8 23.7 15.3
U.S. State 1.0 0.4 0.6
---- ---- ----
43.6 26.9 11.3
Deferred:
U.S. Federal $ (2.3) $ 0.2 $ 1.4
International (4.2) (5.3) 0.5
U.S. State (0.6) (1.0) 0.4
---- ---- ----
(7.1) (6.1) 2.3
---- ---- ----
Provision for income taxes $ 36.5 $ 20.8 $ 13.6
==== ==== ====
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:
Year Ended December 31,
2002 2001 2000
U.S. statutory tax rate 35% 35% 35%
State taxes, net of
federal income tax benefit - (1) 2
Foreign Sales Corporation/EIE
tax benefit (2) (4) (3)
Difference between U.S. and
foreign tax rates (net of
foreign tax credits) 2 (10) (1)
Loss carryforwards utilized (1) (1) -
Amortization of goodwill - 4 1
Foreign losses not benefited 2 1 4
Capital loss not benefited 1 5 -
Increase(decrease) in
tax reserves (1) 3 (1)
Foreign exchange loss
recognized - - (6)
Other (1) - (1)
--- --- ---
Provision for income taxes 35% 32% 30%
=== === ===
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
19
<page>
assets and liabilities are as follows (in millions):
Year Ended December 31,
2002 2001
Deferred Tax Assets:
Reserves for obsolete inventory,
warranty and bad debts $ 11.5 $ 11.7
Elimination of intercompany profit 7.8 5.8
Tax benefit of loss carryforwards 8.5 7.1
Basis difference in investment 4.1 3.1
State tax credit carryforward 4.5 4.5
Other 13.6 12.6
----- -----
50.0 44.8
Valuation allowance (12.9) (17.3)
----- -----
Deferred Tax Assets $ 37.1 $ 27.5
Deferred Tax Liabilities: ===== =====
Deferred gain on condemnation $ 2.9 $ 3.9
Depreciation 1.7 2.5
Development cost of Hercules
facility 1.5 1.5
Other 3.7 4.7
----- -----
Deferred Tax Liabilities $ 9.8 $ 12.6
===== =====
At December 31, 2002, Bio-Rad's international subsidiaries had
combined net operating loss carryforwards of $11.4 million. A
portion of these loss carryforwards will expire in the following
years: 2005 - $0.3 million; and 2007 - $0.9 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.
At December 31, 2002, Bio-Rad has an unutilized domestic net
operating loss carryforward of $15.6 million. The loss
carryforward will expire in the year 2018. The utilization of
the loss carryforward is limited to Bio-Rad's domestic taxable
income. At December 31, 2002, Bio-Rad has a California tax
credit carryforward of $4.5 million. The credit carryforward has
no expiration date. The utilization of the tax credit
carryforward is limited to the extent Bio-Rad has California
taxable income.
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 2002 was a decrease
of $4.4 million, primarily resulting from a utilization of tax
loss carryforwards. The net change in 2001 was a decrease of
$4.2 million primarily resulting from the utilization of tax loss
carryforwards. Utilization of carryforwards acquired as part of a
20
<page>
1999 acquisition which were fully reserved at the acquisition
date adjusted the recorded goodwill by approximately $8.2 million
and $3.7 million for 2002 and 2001, respectively.
Bio-Rad does not provide for taxes which would be payable if the
cumulative undistributed earnings of its international subsidiaries,
approximately $124 million at December 31, 2002, 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.
8. Stockholders' Equity
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 historical financial
statements reflect the 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.
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.
21
<page>
9. Stock Option and Purchase Plans
Stock Option Plans
The Company maintains incentive and non-qualified stock option plans
for officers and certain other key employees. No options have been
issued to non-employees.
Under the Amended 1994 Stock Option 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. Generally, options
granted have a term of 10 years and vest in increments of 25% per year
over a four-year period on the yearly anniversary date of the grant.
For options granted after January 1, 2001, options vest in increments
of 20% over a five-year period on the yearly anniversary date of the
grant.
Pro forma compensation costs are calculated for the fair value of the
employees' purchase rights, which was estimated using the Black-
Scholes method. For purposes of the pro forma disclosures, the
estimated fair value of the options granted is amortized to expense
over the options' vesting period. There were no options granted in
2001. Assumptions used for 2002 and 2000 grants are as follows: no
dividend yield for all periods; weighted average expected lives of 4.2
years in 2002 and 4.1 years in 2000; expected volatility of 35% and
30%; and risk-free interest rates of 3.99% and 6.71% for 2002 and
2000, respectively. See Note 1 for a description of the effect of the
pro forma compensation expense derived using the fair value method on
the Company's results.
22
<page>
<table>
<caption>
Activity under the plans is summarized below (amounts reported in the Price columns
represent the weighted average exercise price):
Year Ended December 31,
2002 2001 2000
Shares Price Shares Price Shares Price
<s> <c> <c> <c> <c> <c> <c>
Outstanding at beginning of year 1,572,701 $11.80 1,921,778 $11.90 1,290,230 $12.09
Granted 379,500 28.85 - - 1,061,890 11.26
Exercised (350,549) 11.67 (287,622) 12.81 (130,500) 9.48
Forfeited (9,820) 10.90 (36,385) 10.61 (222,676) 12.31
Expired - - (25,070) 13.06 (77,166) 9.11
--------- --------- ---------
Outstanding at end of year 1,591,832 $15.84 1,572,701 $11.72 1,921,778 $11.90
========= ========= =========
Options exercisable at year-end 677,149 $12.39 672,266 $12.60 544,096 $13.46
======= ======= =======
Weighted average fair value of
options granted during the year $9.75 $ - $3.46
==== ==== ====
The following summarizes information about stock options outstanding at December 31, 2002:
Options Outstanding Options Exercisable
Number Weighted Average Number
Range of Outstanding Remaining Weighted Average Exercisable Weighted Average
Exercise Prices at 12/31/02 Contractual Life Exercise Price at 12/31/02 Exercise Price
$ 9.85 - $ 9.85 90,636 1.40 years $ 9.85 47,557 $ 9.85
$10.75 - $10.75 438,516 7.72 10.75 166,254 10.75
$10.83 - $11.97 447,944 6.54 11.78 249,227 11.77
$12.44 - $37.23 614,736 6.85 23.31 214,111 14.55
--------- -------
1,591,832 6.69 15.84 677,149 12.39
========= =======
</table>
23
<page>
Employee Stock Purchase Plan
The Company has an employee stock purchase plan that provides that eligible
employees may contribute up to 10% of their compensation up to $25,000
annually toward the quarterly purchase of the Company's Class A common
stock. The employees purchase price is 85% of the lesser of the fair
market value of the stock on the first business day or the last business
day of each calendar quarter. No compensation expense is recorded in
connection with the plan. The Company has authorized the sale of 1,890,000
shares of common stock under the plan. The Company sold 66,992 shares for
$1.8 million, 88,982 shares for $1.2 million and 114,202 shares for $1.1
million under the plan to employees in 2002, 2001 and 2000, respectively.
At December 31, 2002, 340,553 shares remain 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 2002, 2001
and 2000, respectively: no dividend yield for all periods; an expected
life of three months for all periods; expected volatility ranging from 34%
to 54%, 35% to 57%, and from 28% to 43%; and risk-free interest rates
ranging from 1.50% to 1.68%, 2.36% to 5.68%, and from 5.45% to 6.46%. The
weighted average fair value of those purchase rights granted in 2002, 2001
and 2000 was $8.41, $4.48, and $2.55, respectively.
10. Earnings Per Share
Weighted average shares used for diluted earnings per share include the
dilutive effect of outstanding stock options of 917,000, 794,000 and
146,000 shares, for the years ended December 31, 2002, 2001 and 2000,
respectively.
There were no anti-dilutive shares for 2002 and 2001. Options to purchase
401,000 shares of common stock were outstanding during 2000, 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.
11. Other Income and Expense
Other, net includes the following income and (expense) components
(in millions):
Year Ended December 31,
2002 2001 2000
Write-down of investments $(5.0) $(10.9) $ -
Interest income 4.0 1.3 1.0
Miscellaneous other items 1.7 (0.4) (1.7)
---- ---- ----
Other, net $ 0.7 $(10.0) $(0.7)
==== ==== ====
24
<page>
12. Supplemental Cash Flow Information
The reconciliation of net income to net cash provided by operating
activities is as follows (in millions):
Year Ended December 31,
2002 2001 2000
Net income $ 67.9 $ 44.2 $ 31.1
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 36.9 32.6 33.7
Amortization 1.1 8.7 9.5
Foreign currency hedge transactions, net 2.3 (0.4) (6.1)
Gains on dispositions of marketable securities (0.1) (0.2) (0.5)
Increase in accounts receivable, net (0.7) (22.6) (0.3)
Increase in inventories, net (16.2) (14.0) (18.9)
(Increase) decrease in other current assets (12.3) (2.8) 0.9
Increase (decrease) in accounts payable and
other current liabilities 13.3 11.7 (0.6)
Increase (decrease) in income taxes payable (6.9) 17.6 (4.6)
Increase (decrease) in deferred taxes 12.7 (1.7) 3.4
Gain on sale of semiconductor business
and fixed assets - - (21.8)
Loss on sale of spectroscopy business and
write-down of investments 5.0 15.4 -
Other 1.8 11.0 (1.6)
----- ----- -----
Net cash provided by operating activities $104.8 $ 99.5 $ 24.2
===== ===== =====
13. Commitments and Contingent Liabilities
Rents and Leases
Net rental expense under operating leases was $19.5 million in 2002,
$15.8 million in 2001 and $13.0 million in 2000. Leases are
principally for facilities and automobiles.
Annual future minimum lease payments at December 31, 2002, under
operating leases are as follows: 2003 - $16.8 million; 2004 - $13.7
million; 2005 - $7.7 million; 2006 - $5.9 million; 2007 - $4.7 million;
subsequent to 2007 - $3.8 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 $4.8 million, $4.7
million and $4.8 million in 2002, 2001 and 2000, respectively.
25
<page>
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, 2002, the Company had contracts maturing
in January through March 2003 to sell foreign currency with a nominal value
of $85.1 million and an unrealized loss of $0.1 million. Contracts to
purchase foreign currency had a nominal value of $26.1 million with no
unrealized gain or loss.
Insurance
The Company carries a deductible for workers' compensation and a portion of
its group health insurance cost. Accruals for losses are based on the
Company's claims experience and actuarial assumptions followed in the
insurance industry. Should a greater amount of claims occur compared to the
Company's estimates or cost of medical care increase beyond what has been
anticipated, reserves recorded may not be sufficient and additional charges
to income may be required.
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 $3.3 million of standby letters of
credit with a bank as of December 31, 2002.
Taxes
Settlement of open tax years, as well as tax issues in other countries where
the Company conducts its businesses, are 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.
14. Legal Proceedings
The Company is a party to various claims, legal actions and complaints
arising in the ordinary course of business. The Company does not believe
that any ultimate liability resulting from any of these lawsuits will have a
material adverse effect on its results of operations, financial position or
liquidity. However, the Company cannot give any assurance regarding the
ultimate outcome of these lawsuits and their resolution could be material to
the Company's operating results for any particular period, depending upon
the level of income for the period.
26
<page>
15. 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
reagents, apparatus and instruments used for biological research. 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 2001 and 2000 (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. Goodwill balances and goodwill amortization have been included
in corporate for segment reporting purposes.
Information regarding industry segments at December 31, 2002, 2001
and 2000 and for the years then ended is as follows (in millions):
Life Clinical Other
Science Diagnostics Operations
Segment net sales 2002 $429.5 $455.4 $ 7.8
2001 379.2 417.9 20.4
2000 263.8 409.0 53.1
Allocated interest expense 2002 $ 8.8 $ 12.4 $ 0.1
2001 9.3 14.3 0.5
2000 9.3 19.4 1.9
Depreciation and amortization 2002 $ 8.3 $ 27.4 $ 0.2
2001 7.2 26.2 0.4
2000 6.4 25.7 0.9
Segment profit (loss) 2002 $ 75.2 $ 41.9 $(1.6)
2001 72.8 27.3 (5.3)
2000 14.1 25.3 (2.4)
27
<page>
Segment assets 2002 $225.1 $336.4 $ 4.7
2001 194.2 302.2 3.4
2000 152.2 308.4 14.4
Capital expenditures 2002 $ 10.9 $ 29.7 $ 0.1
2001 10.0 23.9 0.1
2000 6.8 27.5 0.8
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 (in millions):
Year Ended December 31,
2002 2001 2000
Total segment profit $115.5 $94.8 $37.0
Other, net 0.7 (10.0) (0.6)
Gain(loss)on divestitures - (5.2) 21.8
Goodwill amortization - (7.7) (8.1)
Foreign exchange losses (5.4) (2.1) (0.4)
Net corporate operating, interest
and other income and expense
not allocated to segments (6.4) (4.8) (4.3)
Consolidated income before taxes ----- ----- -----
and cumulative effect of change
in accounting principle $104.4 $65.0 $45.4
===== ===== =====
The following reconciles total segment assets to consolidated total assets
(in millions):
December 31,
2002 2001
Total segment assets $566.2 $499.8
Cash and other current assets 87.6 97.2
Net property, plant and equipment
excluding segment specific
gross machinery and equipment (45.8) (33.3)
Goodwill 69.5 77.7
Other long-term assets 43.2 42.6
----- -----
Total assets $720.7 $684.0
===== =====
28
<page>
The following presents sales to external customers by geographic area
based primarily on the location of the use of the product or service
(in millions):
Year Ended December 31,
2002 2001 2000
Europe $368.6 $341.7 $275.1
Pacific Rim 151.9 127.5 128.3
United States 320.4 296.9 274.5
Other(primarily Canada and Latin America) 51.8 51.4 48.0
----- ----- -----
Total sales $892.7 $817.5 $725.9
===== ===== =====
The following presents long-lived assets by geographic area based
upon the location of the asset (in millions):
Year Ended December 31,
2002 2001 2000
Europe $ 31.8 $ 25.3 $ 26.7
Pacific Rim 7.2 6.4 6.5
United States 216.2 217.0 239.8
Other(primarily Canada and Latin America) 5.2 4.5 3.6
----- ----- -----
Total assets $260.4 $253.2 $276.6
===== ===== =====
16. Quarterly Financial Data - (unaudited)
Summarized quarterly financial data for 2002 and 2001 are as follows (in
millions, except per share data):
First Second Third Fourth
Quarter Quarter Quarter Quarter
2002
Net sales $210.2 $214.6 $224.9 $243.0
Gross profit 121.3 122.3 129.0 136.9
Net income 18.8 16.2 16.6 16.3
Basic earnings per share $0.75 $0.65 $0.66 $0.64
Diluted earnings per share $0.73 $0.62 $0.64 $0.62
2001
Net sales $202.7 $195.3 $186.1 $233.4
Gross profit 109.9 108.2 104.8 132.5
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
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INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Bio-Rad Laboratories, Inc.:
We have audited the accompanying consolidated balance sheet of
Bio-Rad Laboratories, Inc. and subsidiaries (the "Company") as
of December 31, 2002, and the related consolidated statements
of income, changes in stockholders' equity, and cash flows for
the year then ended. 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 audit. The consolidated financial statements of the Company
and subsidiaries as of December 31, 2001 and for the years ended
December 31, 2001 and 2000 were audited by other auditors who
have ceased operations. Those auditors expressed an unqualified
opinion on those financial statements in their report dated
February 4, 2002, (February 6, 2002, as to a subsequent event).
We conducted our audit in accordance with auditing standards
generally accepted in the United States of America. 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 audit provides a reasonable
basis for our opinion.
In our opinion, such 2002 consolidated financial statements present
fairly, in all material respects, the financial position of Bio-Rad
Laboratories, Inc. and subsidiaries as of December 31, 2002, and
the results of their operations and their cash flows for the year
then ended in conformity with accounting principles generally
accepted in the United States of America.
As discussed in Note 5 to the consolidated financial statements, in
2002 the Company changed its method of accounting for goodwill and
intangible assets to conform to Statement of Financial Accounting
Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets."
As discussed above, the consolidated financial statements of the
Company as of and for the years ended December 31, 2001 and 2000
were audited by other auditors who have ceased operations. As
described in Note 5, these consolidated financial statements have
been revised to include the transitional disclosures required by
SFAS No. 142, "Goodwill and Other Intangible Assets," which was
adopted by the Company as of January 1, 2002. Our audit procedures
with respect to the disclosures in Note 5 with respect to 2001 and
2000 included (i) agreeing the previously reported net income to
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the previously issued financial statements and the adjustments to
reported net income representing amortization expense (including
any related tax effects) recognized in those periods related to
goodwill to the Company's underlying records obtained from
management, and (ii) testing the mathematical accuracy of the
reconciliation of adjusted net income to reported net income, and
the related earnings per share amounts. However, we were not
engaged to audit, review, or apply any procedures to the 2001 and
2000 consolidated financial statements of the Company other than
with respect to such disclosures and, accordingly, we do not
express an opinion or any other form of assurance on the 2001 and
2000 consolidated financial statements taken as a whole.
/s/ DELOITTE & TOUCHE LLP
San Francisco, California
February 5, 2003
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This report is a copy of the previously issued report covering
2001, 2000 and 1999. The predecessor auditors have not reissued
their report.
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
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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 that involve risk and uncertainties. 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 gross profit and expense items as a percentage of net
sales:
Year Ended December 31,
2002 2001 2000
Net sales 100.0 100.0 100.0
----- ----- -----
Cost of goods sold 42.9 44.3 48.0
Gross profit 57.1 55.7 52.0
Selling, general and
administrative expense 32.4 32.4 33.9
Product research and
development expense 9.3 9.4 9.4
Net income 7.6 5.4 4.3
Results in 2001 include a full year's sales of a significant new product,
the BSE (Bovine Spongiform Encephalopathy) 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).
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Critical Accounting Policies and Estimates
The accompanying discussion and analysis of the Company's financial
condition and results of operations are based upon the consolidated
financial statements, which have been prepared in accordance with generally
accepted accounting principles in the United States (GAAP). The preparation
of financial statements in conformity with GAAP 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. However,
future events are subject to change and the best estimates and assumptions
are routinely requiring adjustment. 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 $12.9 million as of December 31, 2002, due
to uncertainties related to the Company's ability to utilize some of the
deferred tax assets, primarily consisting of certain net operating losses
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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
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.
Projected future operating results and cash flows of the reporting units
were used to establish the fair value used in evaluating the carrying value
of the associated goodwill. 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 No. 142, "Goodwill and
Other Intangible Assets" (SFAS No. 142) became effective. The Company
adopted SFAS 142 and ceased to amortize approximately $77.7 million of
goodwill. The Company had recorded approximately $7.7 million of
amortization on these amounts during 2001. In lieu of amortization, the
Company was required to perform an initial impairment review of goodwill in
2002 and an annual impairment review thereafter.
Bio-Rad did not record an impairment charge upon completion of the initial
impairment review. However, there can be no assurance that a material
impairment charge will not be recorded in future periods.
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 of 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
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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 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 2002 were $892.7 million, an increase of 9%
over the prior year. The divestiture of the spectroscopy product line in
the fourth quarter of 2001 had the effect of lowering overall growth 2%.
The impact of a weakening U.S. dollar provided growth from net foreign
currency denominated sales of just less than 1% for the full year. Overall
growth for Bio-Rad exceeded 11% when adjusted for divestitures and the
change in translation rates used to convert foreign sales.
The Life Science segment had sales growth of 13%, benefiting from an
approximate 1% increase due to foreign exchange. The majority of growth was
provided by consumables. Modest growth was achieved by apparatus and
instrument sales declined year over year.
The Clinical Diagnostics segment achieved sales growth of 9%, again
benefiting from an approximate 1% increase due to foreign exchange.
Contributing product lines included Diabetes, Autoimmune, Quality Control
products, and Blood Virus products.
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
Clinical Diagnostics and Analytical Instruments segments along with a
strengthening U.S. dollar had the effect of lowering the Company's sales
growth on a comparative basis. Adjusting for divestitures and the impact of
currency, sales growth for the year 2001 was 25%.
The 2002 consolidated gross margins improved to 57.1% from 55.7% in the
prior year. Life Science improved approximately 0.3% based largely on sales
mix as consumables and apparatus with higher margins than instruments
comprised a greater portion of the total sales volume. Clinical Diagnostics
gross margins improved from lower manufacturing overhead spending and a
decrease in provisions for obsolete inventory. Finally, the divestiture of
the spectroscopy product line of the Company's former Analytical Instruments
group also helped contribute as it historically operated at a much lower
gross margin than either Life Science or Clinical Diagnostics.
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Consolidated gross margins in 2001 were 55.7%, an improvement over 2000
reflecting several favorable factors. Life Science margins improved from
changed sales mix as consumables, including the BSE test, made up a larger
portion of total Life Science sales with generally higher margins than
apparatus and equipment. Manufacturing overhead absorption improved due to
increased manufacturing activity without an equivalent increase in fixed
factory spending. Clinical Diagnostics' margins improved due to lower
royalty costs on manufactured products, improved manufacturing efficiencies
in France, 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 selling, general and administrative (SG&A) expense remained
unchanged from the prior year at 32.4% of sales. Spending increased in
absolute dollars in both Life Science and Clinical Diagnostics. The areas
where increases were the largest were in Europe to support the growth that
began in 2001 through the current year. Increases were primarily for
personnel and related expenses, agent commissions and advertising. The
Company invested in both direct sales and sales support personnel. As part
of this effort, the Company also increased its involvement in Eastern
Europe. Asia, excluding Japan, was a second area of emphasis in 2002 for
Bio-Rad. The Company replaced some agents and distributors consolidating
its activities in its wholly owned subsidiaries, with its own personnel.
The Company sees an opportunity to increase sales through greater
penetration and increasing its direct involvement with the customer.
Consolidated SG&A expense declined to 32.4% of sales in 2001 from 33.9% 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. Clinical Diagnostics
expenditures focused on organizational changes and realigning the business
after the acquisition of Pasteur Sanofi Diagnostics 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. As the
Company completes communication and information technology capital programs,
operating and depreciation costs will increase as the new systems replace
fully depreciated legacy systems.
Product research and development expense (R&D) in 2002 increased by 8.4%
just below the rate of sales (9.2%). The majority of the increase in
absolute dollar spending was in the Life Science segment to support
development activities in the areas of proteomics, amplification, food
testing, microarray technology and process chromatography.
Clinical Diagnostics expenditures remained unchanged. Areas of emphasis for
Clinical Diagnostics includes blood screening, autoimmune testing, genetic
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disorders and expanded offerings for the quality control product line. The
Company plans to reinvest between 9% and 10% of sales in research and
development going forward to support growth.
Product research and development expense 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 efforts represent the development of
new products and applications for proteomic and genomic researchers,
pharmaceutical discovery, and food testing markets. Clinical Diagnostics
expenditures concentrated on new automation for some of the Company's
diagnostic tests for blood screening and expanding the available products in
the quality control product line.
Corporate Results -- Non-Operating Items
Interest expense increased to $28.2 million in the year 2002. Included in
the current year's interest costs is $6.9 million of costs associated with
the open market repurchase of $43.9 million of the Company's Senior
Subordinated Notes. The notes were repurchased in the period September
through December 2002. The costs incurred included a premium to repurchase
the notes, the expensing of unamortized debt issue costs and original issue
discount. Excluding these costs, interest expense declined due to overall
lower borrowings.
Foreign exchange losses for 2002 are principally comprised of exchange gain
and loss on intercompany receivables in Brazil and Russia and the net cost
of the Company's hedging program for the more established European, Asian
and North American currencies.
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. Net other income and expense for 2002 and 2001
primarily includes a non-cash write-down of an investment in a closely held
foreign company and other investments, and interest income.
Bio-Rad's consolidated effective tax rate was 35%, 32% and 30% in 2002, 2001
and 2000, 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 2002, primarily as a result of
increased profitability in countries with higher tax rates, current period
local tax losses which do not provide a consolidated tax benefit and the
effect of proportionally less tax credits on foreign sales and research and
development, when compared to taxable income.
Financial Condition
Historically, the Company's principal capital requirement was for working
capital to fund its internal growth. As a result of the obligations
undertaken in relation to the acquisition of Pasteur Sanofi Diagnostics, the
Company became highly leveraged with a debt to equity ratio at year-end in
1999 of 119%. Since that time the Company has improved its overall
liquidity reducing its debt to equity ratio at year-end 2002 to 30%.
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At December 31, 2002, the Company had available $27.7 million in cash and
cash equivalents, $24.2 million under the international lines of credit and
$100.0 million under the line of credit portion of the Senior Credit
Facility. Management believes that this availability, together with cash
flow from operations, will be adequate to meet the Company's current
objectives for operations, research and development and investment in our
systems and equipment.
Net cash provided by operations was $104.8 million, $99.5 million and $24.2
million in 2002, 2001 and 2000 respectively. The divestiture of the
Analytical Instruments segment, the integration of the Pasteur Sanofi
Diagnostics acquisition, and the introduction of new products (most notable
the BSE test) have all contributed to the improved cash flow from operations
for the Company.
Consolidated net accounts receivable increased by $17.9 million or 9.2%.
The impact of strengthening foreign currencies, in particular, the Euro
versus the U.S. dollar, accounts for the majority of the increase. From
December 31, 2001 to December 31, 2002 the Euro strengthened approximately
18%. European accounts receivable approximated 55% of the Company's year-
end 2002 balance of total receivables. The portion of the increase due to
factors other than currency amounted to approximately $1.5 million.
Bio-Rad's management regularly reviews the allowance for uncollectable
accounts receivable and believes net accounts receivable are fully
realizable.
Consolidated net inventory increased $27.2 million or 19.5%. Again,
strengthening foreign currencies accounted for a majority of the increase in
inventory value. Acquisition of the microarray product line and a
diagnostic supplier added approximately $3 million of the increased
inventories. Inventory growth unrelated to the aforementioned was
concentrated in Life Science consumable products and Clinical Diagnostics
quality controls, which were both significant contributors to the year 2002
sales growth. Inventory in the quality controls area is characterized by
large batch sizes to meet customer specifications. Management routinely
reviews the impact of obsolescence and market prices on current inventory
caused by the introduction of new products, technologies and various pricing
regulations.
Net capital expenditures in 2002 totaled $42.2 million compared to $43.2
million and $31.4 million in 2001 and 2000, respectively. A principal
expenditure in all years was clinical diagnostic equipment placed with
customers to be used with the Company's diagnostic reagents. The Company
began construction late in the third quarter of 2002 of new facilities for
manufacturing, laboratory, and general office use on Company owned land in
the business park where Corporate headquarters, Life Science and Clinical
Diagnostics group operations are now located. The estimated current cost of
the facility is $25 million and is scheduled for occupancy early in the
first quarter of 2004. To December 31, 2002, approximately $2 million has
been capitalized on this project. Other expenditures in the period
represent the Company's investment in business systems to standardize
distribution software, enhance data communication, replace and update
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production equipment and improve equipment and facilities to meet the
necessary Good Manufacturing Practices, (GMP) mandated by the Food and Drug
Administration (FDA) for Clinical Diagnostics and other regulatory bodies as
well as many customers of the Life Science group. It is estimated that the
European In Vitro Diagnostic Directive will increase the burden of
compliance for the Company in Europe and will necessitate continued
compliance expenditures of a capital nature.
During the year 2002, the Company purchased in the open market and retired
$43.9 million of its $150 million (aggregate principal) Senior Subordinated
Notes due in 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% and thereafter at
100%. Repurchases were originally restricted by the terms of the Senior
Credit Facility but that agreement has been amended twice, first to allow a
partial repurchase, and subsequent to year-end, to allow the complete
repurchase of all amounts outstanding. Subsequent to December 31, 2002 and
to date, the Company has redeemed an additional $6.7 million (par value) at
an expense including interest, unamortized issue costs and unamortized
discount of approximately $1.0 million. The Company will assess the
opportunity to retire the remaining outstanding principle balance as the
notes become available.
The Company continues to review possible acquisitions to expand both its
Life Science and Clinical 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.
The Board of Directors has authorized the Company to repurchase up to $18
million of the Company's common stock over an indefinite period of time.
Through December 31, 2002, 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. There were no
share repurchases made during 2002. The repurchase is designed to improve
shareholder value and to satisfy the Company's obligations under the
employee stock purchase and stock option plans.
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 No.
133, "Accounting for Derivative Instruments and Hedging Activities."
Derivative instruments used in these transactions will be valued at fair
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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, 2002, the Company's market risk was not
significant.
The Company's long-term debt consists mostly of fixed rate instruments.
While the Company has used derivative instruments in the past, it did not
hold any interest rate derivative contracts at December 31, 2002. The
current strategy is to lower overall long-term fixed rate instruments with
cash flow from operations and, as needed, use a mix of fixed and variable
rate debt to manage interest costs and limit interest rate expense from any
short-term dramatic change.
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</TEXT>
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