10-Q 1 form10q2q2005.txt NBSC FORM 10-Q 2Q2005 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For The Quarter Ended July 2, 2005 Commission File No. 0-6994 ------ NEW BRUNSWICK SCIENTIFIC CO., INC. State of Incorporation - New Jersey E. I. #22-1630072 ---------- ----------- 44 Talmadge Road, Edison, N.J. 08818-4005 Registrant's Telephone Number: 732-287-1200 ------------ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding twelve (12) months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past ninety (90) days. Yes X No __ -- Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes No X - There are 8,995,515 Common shares outstanding as of July 29, 2005. 1
NEW BRUNSWICK SCIENTIFIC CO., INC. Index PAGE ---- PART I - FINANCIAL INFORMATION Item 1. Financial Statements (unaudited) Consolidated Balance Sheets - July 2, 2005 and December 31, 2004 3 Consolidated Statements of Operations - Three and Six Months Ended July 2, 2005 and July 3, 2004 4 Consolidated Statements of Cash Flows - Six Months Ended July 2, 2005 and July 3, 2004 5 Consolidated Statements of Comprehensive (Loss) Income - Three and Six Months Ended July 2, 2005 and July 3, 2004 6 Notes to Unaudited Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 13 Item 3. Qualitative and Quantitative Disclosures about Market Risk 19 Item 4. Controls and Procedures 19 PART II - OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders 21 Item 6. Exhibits and Reports and Form 8-K 21 Signatures 22 Exhibit 31(a) Exhibit 31(b) Exhibit 32
FORWARD-LOOKING STATEMENTS This document contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may be identified by words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates," "will" or words of similar meaning and include, but are not limited to, statements about the expected future business and financial performance of the Company. The forward-looking statements involve a number of risks and uncertainties, including but not limited to, changes in economic conditions, demand for the Company's products, pricing pressures, intense competition in the industries in which the Company operates, the need for the Company to keep pace with technological developments and timely respond to changes in customer needs, the Company's dependence on third party suppliers, the effect on foreign sales of currency fluctuations, acceptance of new products, the labor relations of the Company and its customers and other factors identified in the Company's Securities and Exchange Commission filings. Forward-looking statements are based on management's current expectations and assumptions, which are inherently subject to uncertainties, risks and changes in circumstances that are difficult to predict. Actual outcomes and results may differ materially from these expectations and assumptions due to changes in global political, economic, business, competitive, market, regulatory and other factors. The Company undertakes no obligation to publicly update or review any forward-looking information, whether as a result of new information, future developments or otherwise. 2 PART I - FINANCIAL INFORMATION NEW BRUNSWICK SCIENTIFIC CO., INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except per share amounts) (Unaudited) ASSETS ------ July 2, December 31, 2005 2004 ----------- ---------- Current Assets: Cash and cash equivalents $10,347 $10,846 Accounts receivable, net 9,103 11,332 Inventories: Raw materials and sub-assemblies 7,483 6,914 Work-in-process 2,556 1,366 Finished goods 3,636 3,859 ------- ------- Total inventories 13,675 12,139 Deferred income taxes 1,076 1,089 Prepaid expenses and other current assets 1,424 1,143 ------- ------- Total current assets 35,625 36,549 ------ ------ Property, plant and equipment, net 6,055 6,495 Goodwill 8,082 8,769 Other assets 1,932 1,982 ------ ------ Total assets $51,694 $53,795 ====== ====== LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ Current Liabilities: Current installments of long-term debt $ 1,684 $ 1,759 Accounts payable and accrued expenses 7,060 7,592 ------- ------- Total current liabilities 8,744 9,351 ------- ------- Long-term debt, net of current installments 5,594 6,022 Other liabilities 2,117 2,467 ------- ------- Total liabilities 16,455 17,840 Commitments and contingencies Shareholders' equity: Common stock, $0.0625 par; authorized 25,000,000 shares; issued and outstanding, 2005 - 8,990,262 and 2004 - 8,866,262 562 554 Capital in excess of par 53,333 52,793 Accumulated deficit (16,852) (17,263) Accumulated other comprehensive loss (1,792) (106) Notes receivable from exercise of stock options (12) (23) ------ ------- Total shareholders' equity 35,239 35,955 ------ ------ Total liabilities and shareholders' equity $51,694 $53,795 ====== ====== See notes to unaudited consolidated financial statements. 3 NEW BRUNSWICK SCIENTIFIC CO., INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) (Unaudited)
Three Months Ended Six Months Ended July 2, July 3, July 2, July 3, 2005 2004 2005 2004 -------------------- ------------------ --------- ------------ Restated(1) Restated(1) Net sales $ 15,180 $ 14,905 $ 31,288 $ 29,527 Operating costs and expenses: Cost of sales 9,267 8,883 19,073 17,574 Selling, general and administrative expenses 4,601 4,431 9,123 8,703 Research, development and engineering expenses 1,239 973 2,376 1,876 -------------------- ------------------ --------- ------------ Total operating costs and expenses 15,107 14,287 30,572 28,153 -------------------- ------------------ --------- ------------ Income from operations 73 618 716 1,374 Other income (expense): Interest income 58 17 111 35 Interest (expense) credit (145) 56 (181) (155) Other, net 2 (5) 21 (69) -------------------- ------------------ --------- ------------ (85) 68 (49) (189) -------------------- ------------------ --------- ------------ (Loss) income before income tax (benefit) expense (12) 686 667 1,185 Income tax (benefit) expense (16) 254 256 473 -------------------- ------------------ --------- ------------ Net income $ 4 $ 432 $ 411 $ 712 ==================== ================== ========= ============ Basic income per share $ 0.00 $ 0.05 $ 0.05 $ 0.08 ==================== ================== ========= ============ Diluted income per share $ 0.00 $ 0.05 $ 0.05 $ 0.08 ==================== ================== ========= ============ Basic weighted average number of shares outstanding 8,951 8,714 8,922 8,681 ==================== ================== ========= ============ Diluted weighted average number of shares outstanding 9,002 8,882 8,988 8,837 ==================== ================== ========= ============ (1)See Note 2, "Restatement of Consolidated Financial Statements" of the Notes to Unaudited Consolidated Financial Statements.
See notes to unaudited consolidated financial statements. 4 NEW BRUNSWICK SCIENTIFIC CO., INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)
Six Months Ended July 2, July 3, 2005 2004 ------------------ ------------ Cash flows from operating activities: Restated(1) Net income $ 411 $ 712 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization 628 681 Deferred income taxes 51 72 Change in fair value of interest rate swaps (116) (180) Change in related balance sheet accounts: Accounts and notes receivable 1,724 396 Inventories (1,886) (1,492) Prepaid expenses and other current assets (339) (165) Other assets and goodwill (295) (60) Accounts payable and accrued expenses (396) 190 Advance payments from customers 254 (8) Other liabilities (285) (185) ------------------ ------------ Net cash used in operating activities (249) (39) ------------------ ------------ Cash flows used in investing activities: Additions to property, plant and equipment (318) (410) Proceeds from sale of equipment - 32 ------------------ ------------ Net cash used in investing activities (318) (378) ------------------ ------------ Cash flows from financing activities: Repayments of long-term debt (336) (428) Proceeds from issue of shares under stock purchase and option plans 444 412 Payments on notes receivable related to exercised stock options 11 11 ------------------ ------------ Net cash provided by (used in) financing activities 119 (5) ------------------ ------------ Net effect of exchange rate changes on cash ( 51) 3 ------------------ ------------ Net decrease in cash and cash equivalents (499) (419) Cash and cash equivalents at beginning of period 10,846 10,536 ------------------ ------------ Cash and cash equivalents at end of period $ 10,347 $ 10,117 ================== ============ Supplemental disclosure of cash flow information: Cash paid during the period for: Interest $ 285 $ 381 Income taxes $ 731 $ 529 (1)See Note 2, "Restatement of Consolidated Financial Statements" of the Notes to Unaudited Consolidated Financial Statements. See notes to unaudited consolidated financial statements.
5 NEW BRUNSWICK SCIENTIFIC CO., INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (In thousands) (Unaudited)
Three Months Ended Six months Ended July 2, July 3, July 2, July 3, 2005 2004 2005 2004 -------------------- ------------------ --------- ------------ Restated(1) Restated(1) Net income $ 4 $ 432 $ 411 $ 712 Other comprehensive (loss) income: Foreign currency translation adjustment (1,125) 174 (1,686) 342 (1) -------------------- Change in fair value of interest rate swaps - (1) - ------------------ --------- ------------ Comprehensive (loss) income $ (1,122) $ 606 $ (1,276) $ 1,054 ==================== ================== ========= ============ (1)See Note 2, "Restatement of Consolidated Financial Statements" of the Notes to Unaudited Consolidated Financial Statements.
See notes to unaudited consolidated financial statements. 6 NEW BRUNSWICK SCIENTIFIC CO., INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Note 1 - Interim results: In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary to present fairly, the financial position of the Company as of July 2, 2005 and the results of its operations for the three and six months ended July 2, 2005 and July 3, 2004 and its cash flows for the six months ended July 2, 2005 and July 3, 2004. Interim results may not be indicative of the results that may be expected for the year. The accompanying unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 2004. Note 2 - Restatement of consolidated financial statements: On March 21, 2005, the Company announced that certain of its historical financial statements required restatement. Specifically, the Company determined that the restatement was required because of a misapplication of SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities" as it applies to three interest rate swaps that were entered into in 1999 and 2004 to fix the interest rates on variable rate debt incurred primarily for acquisitions in 1999 and 2003. The interest rate swaps were not previously disclosed or accounted for and were not properly designated as effective cash flow hedges, as defined by SFAS No. 133 which went into effect on January 1, 2001. The accounting rules require that changes in the fair value of swaps not properly designated as effective cash flow hedges be recorded as a part of interest expense in each period's statement of operations. The required changes affected the previously filed financial statements for the years ended December 31, 2001, 2002 and 2003, as well as for the 2003 quarters and the 2004 quarters through October 2, 2004. The foregoing restatement adjustments did not affect the Company's reported cash and cash equivalents or income (loss) from operations in any of the above periods. 7 The following table presents the impact of the financial statement adjustments on the Company's previously reported consolidated statements of operations for the three and six months ended July 3, 2004 (in thousands):
Three Months Ended July 3, 2004 ------------------------------- Previously As ------------------------------- Reported Adjustments(1) Restated --------------------------------- --------------- ------------------------------- Income from operations $ 618 $ - $ 618 Other income (expense): Interest income 17 - 17 Interest expense (170) 226 56 Other expense, net (5) - (5) --------------- ------------------------------- (158) 226 68 --------------- ------------------------------- Income before income tax expense (benefit) 460 226 686 Income tax expense (benefit) 164 90 254 --------------- ------------------------------- Net income $ 296 $ 136 $ 432 ================================= =============== =============================== Basic income per share $ 0.03 $ 0.02 $ 0.05 ================================= =============== =============================== Diluted income per share $ 0.03 $ 0.02 $ 0.05 ================================= =============== =============================== Basic weighted average number of shares outstanding 8,714 8,714 8,714 ================================= =============== =============================== Diluted weighted average number of shares outstanding 8,882 8,882 8,882 ================================= =============== =============================== Six Months Ended July 3, 2005 ------------------------------------------- Previously Reported Adjustments(1) As Restated ------------ --------------- ------------- Income from operations $ 1,374 $ - $ 1,374 Other income (expense): Interest income 35 - 35 Interest expense (335) 180 (155) Other expense, net (69) - (69) (369) 180 (189) Income before income tax expense (benefit) 1,005 180 1,185 Income tax expense (benefit) 401 72 473 Net income $ 604 $ 108 $ 712 =============== ============= Basic income per share $ 0.07 $ 0.01 $ 0.08 ============ =============== ============= Diluted income per share $ 0.07 $ 0.01 $ 0.08 ============ =============== ============= Basic weighted average number of shares outstanding 8,681 8,681 8,681 ============ =============== ============= Diluted weighted average number of shares outstanding 8,837 8,837 8,837 ============ =============== ============= (1) Reflects adjustments to interest expense and related deferred tax benefit to correct for the misapplication of SFAS No. 133 as it applies to interest rate swaps entered into in 1999 and 2004 primarily to fix the interest rates on variable rate debt incurred for acquisitions in 1999 and 2003.
Note 3 - Interest rate swaps: On April 1, 2005 the Company put in place the required documentation as prescribed by SFAS No. 133 and designated its three interest rate swaps referred to in Note 2 above as effective interest rate hedges and will therefore avail itself of the hedge accounting rules for the remainder of the lives of the swaps. As such, the negative fair values of the swaps as of the designation date, which aggregated $146,000, will ultimately be recognized into income over the remaining lives of the interest rate swaps as ineffectiveness. On a going forward basis, we have for this past quarter and will continue to measure the ineffectiveness of the hedges based on the hypothetical derivative method as described in DIG Issue G-7. Hedge ineffectiveness measured each quarter will be recognized in operations. The effective changes in the fair value of the swaps subsequent to April 1, 2005 will be shown as an increase or decrease in other comprehensive income on the Company's balance sheet in accordance with the requirements of SFAS No. 133. 8 At July 2, 2005 the remaining negative fair values of the swaps had increased by $1,000 and aggregated $147,000. During the three and six months ended July 2, 2005 and July 3, 2004, respectively, the change in the fair value of the swap agreements recorded as a decrease to interest expense amounted to zero and $117,000, respectively, for the 2005 periods and $226,000 and $180,000, respectively, for the 2004 periods. Note 4 - Income per share: Basic income per share is calculated by dividing net income by the weighted average number of shares outstanding. Diluted income per share is calculated by dividing net income by the sum of the weighted average number of shares outstanding plus the dilutive effect of stock options which have been issued by the Company using the treasury stock method. Antidilutive options are excluded from the calculation of diluted income per share. The dilutive effect of stock options for the three and six month periods ended July 2, 2005 and July 3, 2004 is 50,668 and 66,115 shares, respectively, for the 2005 periods and 168,000 and 156,000 shares, respectively, for the 2004 periods. Stock options to purchase 153,700 and 151,500 shares of common stock are excluded from the income per share calculation for the three and six month periods ended July 2, 2005, respectively, because their inclusion would also be antidilutive. There were no options excluded from the calculation for the three and six month periods ended July 3, 2004. Note 5 - Long-term debt and credit agreement: The Company and Wachovia Bank, National Association (the "Bank") are parties to an agreement, which has had a number of amendments (the "Bank Agreement"), which has been extended to May 31, 2008, and which provides the Company with a credit facility for acquisitions, equipment loans, working capital and letters of credit, and foreign exchange transactions. The maturity of the outstanding debt incurred related to the acquisition portion of the credit facility with respect to a 1999 acquisition is December 1, 2006, and with respect to a 2003 acquisition is November 1, 2008. The maturity date of the outstanding debt incurred related to the equipment loan portion of the credit facility is November 1, 2008. There are no compensating balance requirements and any borrowings under the Bank Agreement bear interest at the Bank's prime rate less 125 basis points or Libor plus 125 basis points, at the discretion of the Company. At July 2, 2005, the Bank's prime rate was 6.25% and LIBOR was 3.34%. All of the Company's domestic assets, which are not otherwise subject to lien, have been pledged as security for any borrowings under the Bank Agreement. The Bank Agreement contains various business and financial covenants including among other things, a debt service ratio, a net worth covenant and a ratio of total liabilities to tangible net worth. The Company is in compliance with its covenants pursuant to the Bank Agreement at July 2, 2005. 9 The following amounts were outstanding and available under the Bank Agreement (in thousands):
July 2, 2005 December 31, 2004 --------------------------------------- ----------------- Total Line Available Outstanding Outstanding ------- -------------- -------------- --------------- Acquisitions $10,000 $ 4,639 $5,361(a) $5,634(a) Equipment loans 2,500 1,936 564(b) 646(b) Working capital and letters of credit 5,000 5,000 - 9(c) Foreign exchange transactions 10,000 10,000 - - ------- -------- ------ ------ $27,500 $21,575 $5,925 $6,289 ======= ======== ====== ===== ----------------- (a) $4,200,000 in 2005 and $4,366,000 in 2004 at fixed interest of 8% per annum and $1,161,000 in 2005 and $1,268,000 in 2004 at fixed interest of 4.46% per annum through the use of interest rate swap agreements (b) Interest fixed at 4.14% per annum through the use of an interest rate swap agreement (c) Letters of credit
At July 2, 2005 and December 31, 2004, the interest rate swaps referred to above had aggregate negative fair values of $147,000 and $264,000, respectively, and are included in Other Liabilities in the accompanying consolidated balance sheets. The interest rate swaps have the same notional values as the related debt and expire on the same dates as the related debt. In November 1999, the Company issued notes in the amount of 250,000 ($392,500 at the date of acquisition) in connection with the acquisition of DJM Cryo-Research Group. The notes bear interest at 6%. Accrued interest is payable annually and principal is payable in five equal annual installments which commenced in November 2003. At July 2, 2005 and December 31, 2004, the balance due on the notes was 150,000 ($265,000) and 150,000 ($288,000), respectively. In November 2003, the Company issued notes in the amount of 975,000 ($1,645,000 at the date of acquisition) in connection with the acquisition of RS Biotech. The notes bear interest, payable semi-annually at the lower of 6% or the base rate of the Bank of Scotland. Principal is payable 487,500 on the first and second anniversary, respectively, of the acquisition. At July 2, 2005 and December 31, 2004, the balance due on the notes was 487,500 ($862,000) and 487,500 ($936,000), respectively. The Company is a party to first and second mortgages on the facility of the Company's Netherlands subsidiary, which bear interest of 5.50% and 5.45%, respectively, per annum. During the terms of the mortgages, the Company is obligated to make monthly payments of interest and quarterly payments of principal. At July 2, 2005, $88,000 and $121,000 was outstanding under the first and second mortgages, respectively, and at December 31, 2004, $124,000 and $153,000 was outstanding under the first and second mortgages, respectively. Each mortgage requires 80 equal quarterly payments of principal. 10 Note 6 - Shareholders' Equity: At July 2, 2005, the Company has stock-based employee compensation plans, which it accounts for in accordance with the provisions of Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees", and related interpretations. As such, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeds the exercise price. No stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The Company has adopted the disclosure standards of Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation", which requires the Company to provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants made in 1995 and future years as if the fair-value-based method of accounting for stock options as defined in SFAS No. 123 had been applied. The following table illustrates the effect on net income and per share amounts if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation (in thousands, except per share amounts):
Three Months Ended Six Months Ended July 2, July 3, July 2, July 3, 2005 2004 2005 2004 -------------------- ------------------ -------- ------------ Restated(1) Restated(1) Net income as reported $ 4 $ 432 $ 411 $ 712 Deduct: Total stock-based employee compensation expense determined under fair value based method, net of related tax effects 94 86 173 157 -------------------- ------------------ -------- ------------ Pro forma net (loss) income $ (90) $ 346 $ 238 $ 555 ==================== ================== ======== ============ (Loss) income per share: Basic-as reported $ 0.00 $ 0.05 $ 0.05 $ 0.08 ==================== ================== ======== ============ Basic-pro forma $ (0.01) $ 0.04 $ 0.03 $ 0.06 ==================== ================== ======== ============ Diluted-as reported $ 0.00 $ 0.05 $ 0.05 $ 0.08 ==================== ================== ======== ============ Diluted-pro forma $ (0.01) $ 0.04 $ 0.03 $ 0.06 ==================== ================== ======== ============ (1)See Note 2, "Restatement of Consolidated Financial Statements" of the Notes to Unaudited Consolidated Financial Statements. 11
The fair value of each stock option granted during the period is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:
Three Months Ended Six Months Ended July 2, July 3, July 2, July 3, 2005 2004 2005 2004 ------------------ ------------------ --------- --------- Expected life (years) N/A 6.0 6.0 6.0 Expected volatility N/A 51.07% 40.35% 51.07% Expected dividend yield N/A - - - Risk-free interest rate N/A 4.85% 3.99% 4.85% Weighed average fair value of options granted during the period N/A $ 6.07 $ 6.14 $ 6.07
Note 7 - Pension plan: Components of net period benefit cost for the three and six months ended July 2, 2005 and July 3, 2004 are as follows (in thousands):
Three Months Ended Six Months Ended July 2, July 3, July 2, July 3, 2005 2004 2005 2004 -------------------- ------------------ --------- --------- Service cost $ 88 $ 95 $ 176 $ 190 Interest cost 124 120 248 240 Expected return on plan assets (132) (118) (264) (233) Amortization of net obligation 5 5 10 10 Amortization of prior service costs (1) (1) (2) (2) Amortization of net loss 48 54 96 108 -------------------- ------------------ --------- --------- Net periodic pension cost $ 132 $ 155 $ 264 $ 313 ==================== ================== ========= =========
The Company previously disclosed in its financial statements for the year ended December 31, 2004, that it expects to contribute $1,022,000 to its pension plan in 2005. As of July 2, 2005, $511,000 of contributions have been made. The Company has a defined contribution plan for its U.S. employees, with a specified matching Company contribution. The expense to the Company for the three and six months ended July 2, 2005 and July 3, 2004 was $42,000 and $83,000, respectively for the 2005 periods and $35,000 and $73,000, respectively, for the 2004 periods. 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The following is Management's Discussion and Analysis of significant factors that have affected the Company's operating results and financial condition during the three and six month periods ended July 2, 2005 and July 3, 2004, respectively, which should be read in conjunction with the Company's December 31, 2004 Form 10-K. RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS As further described in Note 2 of the Notes to Unaudited Consolidated Financial Statements, on March 21, 2005, the Company announced that certain of its historical 2004 and earlier financial statements required restatement. Consequently, Management's Discussion and Analysis of Financial Condition and Results of Operations for the three and six months ended July 3, 2004 is being restated. Specifically, the Company determined that the restatement was required because of a misapplication of SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities" as it applies to three interest rate swaps that were entered into in 1999 and 2004 to fix the interest rates on variable rate debt incurred primarily for acquisitions in 1999 and 2003. The required changes affected the previously filed financial statements for the years ended December 31, 2001, 2002 and 2003 as well as for the 2003 quarters and the 2004 quarters through October 2, 2004. The foregoing restatement adjustments did not affect the Company's reported cash and cash equivalents, or related cash flows, or income (loss) from operations in any of the above periods. Results of Operations --------------------- EXECUTIVE OVERVIEW ------------------- The Company is a leading provider of a wide variety of research equipment and scientific instruments for the life sciences used to create, maintain and control the physical and biochemical conditions required for the growth, detection and storage of microorganisms. The Company's products are used for medical, biological, chemical and environmental research and for the commercial development of antibiotics, proteins, hormones, enzymes, monoclonal antibodies, agricultural products, fuels, vitamins, vaccines and other substances. The Company sells its equipment to pharmaceutical companies, agricultural and chemical companies, other industrial customers engaged in biotechnology, and to medical schools, universities, research institutes, hospitals, private 13 laboratories and laboratories of federal, state and municipal government departments and agencies in the United States. While only a small percentage of the Company's sales are made directly to United States government departments and agencies, its domestic business is significantly affected by government expenditures and grants for research to educational research institutions and to industry. The Company also sells its equipment both directly (primarily in Western Europe) and through scientific equipment dealers to foreign companies, institutions and governments. Foreign sales may be affected by U.S. export control regulations applicable to scientific equipment. Fisher Scientific, the Company's largest customer, is the exclusive U.S. distributor of the Company's C-Line and I-Series biological shakers and is the exclusive dealer for the Company's CO2 incubators in the U.S. Fisher Scientific is also the exclusive distributor of the Company's C-Line shakers in certain European countries and has a broader distribution arrangement with the Company in Canada and in France. NET SALES ---------- The following table summarizes consolidated backlog, net orders and net sales for the three and six months ended July 2, 2005 and July 3, 2004 (in thousands of dollars):
Three Months Ended July 2, July 3, Decrease) % 2005 2004 Increase Change ------------------- -------- ----------- ------- Backlog - beginning $ 7,987 $ 9,884 $ (1,897) (19.2)% Add net orders received 16,198 14,735 1,463 9.9 Less net sales 15,180 14,905 275 1.8 ------------------- -------- ----------- ------- Backlog - ending $ 9,005 $ 9,714 $ (709) (7.3)% =================== ======== =========== =======
Six Months Ended July 2, July 3, (Decrease) % 2005 2004 Increase Change ----------------- -------- ----------- ------- Backlog - beginning $ 8,376 $ 9,018 $ (642) (7.1)% Add net orders received 31,917 30,223 1,694 5.6 Less net sales 31,288 29,527 1,761 6.0 ----------------- -------- ----------- ------- Backlog - ending $ 9,005 $ 9,714 $ (709) (7.3)% ================= ======== =========== =======
Net sales increased $275,000 or 1.8% to $15,180,000 for the three months ended July 2, 2005 from $14,905,000 in the prior year period with both U.S. and international sales each increasing slightly and the effect of foreign currency translation accounting for approximately half of the increase. For the six months ended July 2, 2005, net sales increased $1,761,000 or 6.0% to $31,288,000 from $29,527,000 for the first six months of 2004. The overall increase in sales for the 2005 six month period was due principally to higher shipments of fermentation equipment, ultra low temperature freezers and CO2 incubators. Also, the effect of foreign currency translation increased sales by $385,000. For the 2005 six month period sales in the U.S. declined 2.4% due to the continuing slowdown in purchases of research equipment by industry and government funded 14 enterprises while international sales, with particular strength in Europe, increased 12.5%. Orders during the 2005 three and six month periods increased 9.9% and 5.6%, respectively, while backlog decreased 7.3%. The decrease in backlog is attributable to the shortening of lead times required to manufacture equipment as a result of the Company's continuing efforts to implement lean manufacturing techniques. GROSS MARGIN ------------- The following table shows gross profit and gross margin for the three and six months ended July 2, 2005 and July 3, 2004 (in thousands of dollars):
Three Months Ended Six Months Ended July 2, July 3, July 2, July 3, 2005 2004 2005 2004 -------------------- ------------------ --------- --------- Net sales $ 15,180 $ 14,905 $ 31,288 $ 29,527 Cost of sales 9,267 8,883 19,073 17,574 -------------------- ------------------ --------- --------- Gross profit $ 5,913 $ 6,022 $ 12,215 $ 11,953 ==================== ================== ========= ========= Gross margin 39.0% 40.4% 39.0% 40.5% ==================== ================== ========= =========
The decrease in gross margin to 39.0% for the 2005 second quarter from 40.4% in the second quarter of 2004 and the decrease to 39.0% for the first six months of 2005 from 40.5% for the first six months of 2004 was due primarily to aggressive competitive discounting, less favorable product mix and the increased percentage of international sales, a portion of which are sold through dealers and distributors which require higher discounts than when sold on a direct basis as in the U.S. or to a large degree through the Company's European subsidiaries. For the six month period, gross margin decreases from these factors were partially offset by higher absorption of overhead as a result of the increased volume. SELLING, GENERAL AND ADMINISTRATIVE -------------------------------------- Selling, general and administrative expenses increased $170,000 or 3.8% to $4,601,000 during the 2005 quarter from $4,431,000 during the second quarter of 2004 and increased $420,000 or 4.8% to $9,123,000 during the six months ended July 2, 2005 from $8,703,000 for the first six months of 2004. The increase during the second quarter of 2005 was primarily due to $61,000 of expenses related to compliance with the requirements of Section 404 of the Sarbanes-Oxley Act (SOX 404) and $43,000 to the effect of foreign currency translation. The increase for the six month period ended July 2, 2005 from the comparable period of 2004 was primarily due to $189,000 related to complying with SOX 404 and $127,000 due to the effect of foreign currency translation. RESEARCH, DEVELOPMENT AND ENGINEERING ---------------------------------------- Research, development and engineering expenses increased $266,000 or 27.3% to $1,239,000 during the 2005 second quarter from $973,000 during the comparable 15 2004 quarter. For the 2005 six months, expenses increased $500,000 or 26.7% to $2,376,000 from $1,876,000 for the first six months of 2004. The increases for both periods are due to the Company's new product development program, primarily the cost of outsourcing of certain engineering efforts, the cost of prototypes and the addition of personnel, in order to meet an aggressive development schedule. INTEREST INCOME --------------- Interest income increased to $58,000 during the 2005 quarter from $17,000 during the second quarter of 2004 and increased to $111,000 during the 2005 six months from $35,000 for the first six months of 2004 due primarily to rising interest rates on invested cash. INTEREST EXPENSE ----------------- Interest expense increased to $145,000 during the quarter ended July 2, 2005 from a negative interest amount of $56,000 for the second quarter of 2004 due to a lower level of average outstanding debt during the 2005 quarter as well as the positive effect of the change in the fair value of interest rate swaps of $226,000 in 2004 (reduction in interest expense) versus zero in the 2005 quarter. For the six month period ended July 2, 2005 interest expense increased to $181,000 from $155,000 for the comparable 2004 period due to the positive effect of interest rate swaps which amounted to $117,000 in the 2005 period compared with $180,000 in the 2004 period. Excluding the effect of the interest rate swaps, interest expense decreased $25,000 and $37,000 during the 2005 three and six month periods, respectively, due to the lower level of outstanding debt. OTHER INCOME (EXPENSE), NET ------------------------------ The following table details other income (expense), net for the three and six month periods ended July 2, 2005 and July 3, 2004 (in thousands):
Three Months Ended Six Months Ended July 2, July 3, July 2, July 3, 2005 2004 2005 2004 -------------------- ------------------ --------- --------- Gain (loss) on foreign currency transactions (a) $ 16 $ 39 $ 48 $ (10) Bank fees (11) (11) (21) (23) Loss on sale of fixed assets - (30) - (30) Other, net (3) (3) (6) (6) -------------------- ------------------ --------- --------- Total other income (expense), net $ 2 $ (5) $ 21 $ (69) ==================== ================== ========= ========= _______________________ (a) Realized foreign exchange gains and losses which relate primarily to the settlement of purchases in the normal course of business between the Company's United States and European operating companies.
16 INCOME TAX EXPENSE -------------------- For the Quarter ended July 2, 2005, the income tax benefit of $16,000 on a pretax loss of $12,000 resulted from a slight decrease in the expected effective tax rate for the year, based on projected U.S. and foreign results, as calculated at July 2, 2005. The decrease in the Company's effective income tax rate to 38.4% for the six months ended July 2, 2005 from 39.9% for the first six months of 2004 is due to the higher ratio of income in 2005 from the Company's European subsidiaries to its total income and the related effect of lower foreign income tax rates than the Company's effective U.S. income tax rate. FINANCIAL CONDITION ------------------- LIQUIDITY AND CAPITAL RESOURCES ------------------------------- CONTRACTUAL OBLIGATIONS The Company's contractual obligations and commitments principally include obligations associated with its outstanding indebtedness and future minimum operating lease obligations as set forth in the following table:
Payments Due by Period (In thousands) ------------------------ Contractual obligations: Less than 1-3 4-5 More than Total 1 Year Years Years 5 Years ------------------------ ---------- ------ ------ ---------- Long-term debt, obligations (a) $ 7,278 $ 1,684 $5,534 $ 60 $ - Operating lease obligations (b) 3,519 815 1,462 625 617 Purchase obligations(c) 6,852 6,716 136 - - Other long-term liabilities (d) 530 - 530 - - ------------------------ ---------- ------ ------ ---------- Total contractual cash Obligations $ 18,179 $ 9,215 $7,662 $ 685 $ 617 ======================== ========== ====== ====== ========== (a) Consists primarily of debt incurred for acquisitions financed under the Company's Bank Agreement and of notes due to the sellers of businesses acquired by the Company. (b) Primarily reflects (on a gross basis before sublet income) lease obligations for five premises in the United Kingdom, two of which have been sublet. Both of the subleased premises have been sublet for the entire terms of their leases. One has a lease expiration date of 2014 and an annual rental of 99,750 ($176,000 at July 2, 2005). The second sublet premises has a lease expiration date of September 28, 2009 and an annual rental of 45,000 ($80,000 at July 2, 2005). (c) Primarily includes commitments for raw materials and services related to the Company's production of equipment at its various manufacturing facilities. (d) Represents a contingent liability for an earnout related to the acquisition of RS Biotech provided a minimum number of units of CO2 Incubators are sold. The Company believes that the payment of such additional consideration is determinable beyond a reasonable doubt and as such has recorded the amount as a liability and as additional purchase price.
17 OPERATING ACTIVITIES -------------------- Cash and cash equivalents decreased $499,000 to $10,347,000 at July 2, 2005 from $10,846,000 at December 31, 2004. Net cash used in operating activities amounted to $249,000. The overall factors primarily affecting operating cash flows during the six month period ended July 2, 2005 were (i) an increase in inventories due primarily to a buildup in preparation for the 2-week summer production shutdown, preparation for the release of new products and the production of some large fermentation equipment for delivery in the third quarter, (ii) an increase in prepaid expenses and other current assets, primarily insurance and taxes, (iii) a decrease in accounts payable and accrued liabilities, and (iv) a decrease in other liabilities, partially offset by (i) net income of $411,000 as adjusted for non-cash items such as depreciation and amortization, deferred income taxes and a gain from the change in fair value of interest rate swaps, (ii) a decrease in accounts and notes receivable, and (iii) an increase in advance payments from customers. INVESTING ACTIVITIES -------------------- In the 2005 period, net cash used in investing activities of $318,000 was as a result of normal additions to property, plant and equipment. FINANCING ACTIVITIES --------------------- In the 2005 period, cash flows provided by financing activities totaled $119,000 and primarily consisted of proceeds from the issue of shares under stock purchase and option plans that totaled $444,000, which was partially offset by repayments of long-term debt of $336,000. BANK AGREEMENT --------------- The Company and Wachovia Bank, National Association (the "Bank") are parties to an agreement, which has had a number of amendments (the "Bank Agreement"), which has been extended to May 31, 2008, and which provides the Company with a credit facility for acquisitions, equipment loans, working capital and letters of credit, and foreign exchange transactions. The maturity of the outstanding debt incurred related to the acquisition portion of the credit facility with respect to a 1999 acquisition is December 1, 2006, and with respect to a 2003 acquisition is November 1, 2008. The maturity date of the outstanding debt incurred related to the equipment loan portion of the credit facility is November 1, 2008. There are no compensating balance requirements and any borrowings under the Bank Agreement bear interest at the Bank's prime rate less 125 basis points or Libor plus 125 basis points, at the discretion of the Company. At July 2, 2005, the Bank's prime rate was 6.25% and LIBOR was 3.34%. 18 Since the Bank Agreement requires that all borrowings be at variable interest rates, the Bank provides the Company with a mechanism to fix interest rates on borrowings by use of interest rate swaps. At July 2, 2005 the Company had three interest rate swaps in place to fix the interest rates, primarily for debt incurred for acquisitions in 1999 and 2003. All of the Company's domestic assets, which are not otherwise subject to lien, have been pledged as security for any borrowings under the Bank Agreement. The Bank Agreement contains various business and financial covenants including among other things, a debt service ratio, a net worth covenant and a ratio of total liabilities to tangible net worth. The Company is in compliance with its covenants pursuant to the Bank Agreement at July 2, 2005 and currently anticipates to be in compliance with such covenants during the next 12 months. CRITICAL ACCOUNTING POLICIES ------------------------------ No changes have been made in the Company's critical accounting policies during the six months ended July 2, 2005. RECENTLY ISSUED ACCOUNTING STANDARD ----------------------------------- In December, 2004, the Financial Accounting Standards Board ("FASB") issued SFAS No. 123 (revised 2004), "Share-Based Payment" ("SFAS No. 123R"). SFAS No. 123R addresses the accounting for transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise's equity instruments or that may be settled by the issuance of such equity instruments. SFAS No. 123R supersedes APB No. 25 and requires that such transactions be accounted for using a fair-value based method. SFAS No. 123R requires companies to recognize an expense for compensation cost related to share-based payment arrangements including stock options and employee stock purchase plans. The Company was required to implement the proposed standard no later than July 1, 2005. The cumulative effect of adoption, applied on a modified prospective basis, would be measured and recognized on July 1, 2005. On April 14, 2005, the Securities and Exchange Commission deferred the effective date of SFAS No. 123R to annual periods beginning after June 15, 2005, which would require the Company to adopt SFAS No. 123R effective January 1, 2006. The Company is currently evaluating option valuation methodologies and assumptions related to its stock compensation plans. Current estimates of option values using the Black Scholes method may not be indicative of results from valuation methodologies ultimately adopted. Item 3. Quantitative and Qualitative Disclosures about Market Risk ------------------------------------------------------------------- The information required by Item 3 has been disclosed in Item 7 of the Company's Annual Report on Form 10-K for the year ended December 31, 2004. There has been no material change in the disclosures regarding market risk. 19 Item 4. Controls and Procedures ----------------------------------- The Company's Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of the Company's disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures were effective as of the end of the period covered by this report. There has been no change in the Company's internal control over financial reporting that occurred during the quarter covered by this report that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. 20 PART II - OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders ---------------------------------------------------------------------- a) The Company's held its annual meeting on May 26, 2005 c) The following matters were voted upon at the annual meeting: (i) To elect three Class III directors of the Company to terms of three years and one Class I director of the Company to a term of one year. The votes cast for each director were as follows: For Withheld --- -------- Class III directors- David Freedman 7,358,606 469,861 Dr. Jerome Birnbaum 7,393,882 434,585 James T. Orcutt 7,411,406 417,061 Class I director- Kenneth Freedman 6,691,753 1,136,714 (ii) To approve amendments to the Company's Employee Stock Purchase Plan. The votes cast were as follows: Approve Disapprove Abstain Broker Nonvotes ------- ---------- ------- --------------- 4,889,586 129,684 19,578 2,789,256 Item 6. Exhibits and Reports on Form 8-K ------------------------------------------ a) Exhibits: (3a) Restated Certificate of Incorporation, as amended is incorporated herein by reference to Exhibit (4) to the Registrant's Registration Statement on Form S-8 on file with the commission (No. 33-15606), and with respect to two amendments to said Restated Certificate of Incorporation, to Exhibit (4b) of Registrant's Registration Statement on Form S-8 (No. 33-16024). (3b) Restated By-Laws of the Company, as amended and restated is incorporated herein by reference to Exhibit (3b) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2004. (3c) Rights Agreement dated as of October 31, 1999 between New Brunswick Scientific Co., Inc. and American Stock Transfer & Trust Company, as Rights Agent, which includes the Form of Right Certificate as Exhibit A and the Summary of Terms of the Rights Agreement as Exhibit B is incorporated herein by reference to Registrant's Current Report on Form 8-K filed on October 29, 1999. 21 (3d) Amendment to the Restated Certificate of Incorporation of the Company is incorporated herein by reference to Item 2 of Registrant's Proxy Statement filed with the Commission on or about April 13, 1999. (4) See the provisions relating to capital structure in the Restated Certificate of Incorporation, amendment thereto, incorporated herein by reference from the Exhibits to the Registration Statements identified in Exhibit (3) above. (10) New Brunswick Scientific Co., Inc. Employee Stock Purchase Plan, as amended, is incorporated herein by reference to Item 2 of Registrant's Proxy Statement filed with the Commission on April 17, 2005 31(a) Section 302 Certification - CEO 31(b) Section 302 Certification - CFO 32 Section 906 Certifications b) Reports on Form 8-K during the quarter ended July 2, 2005: i) Earnings press release for the three months ended April 2, 2005. ii) Press release announcing the introduction of new products. SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NEW BRUNSWICK SCIENTIFIC CO., INC. ---------------------------------- (Registrant) Date: August 10, 2005 /s/ David Freedman ------------------ David Freedman Chairman and Chief Executive Officer Date: August 10, 2005 /s/ Samuel Eichenbaum --------------------- Samuel Eichenbaum Vice President, Finance, Chief Financial Officer and Treasurer (Principal Accounting Officer) 22