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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 October 2, 2004 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
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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 8,838,706 Common shares outstanding as of October 29, 2004.
1
NEW BRUNSWICK SCIENTIFIC CO., INC.
Index
PAGE
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets -
October 2, 2004 and December 31, 2003 3
Consolidated Statements of Operations -
Three and Nine Months Ended October 2, 2004 and
September 27, 2003 4
Consolidated Statements of Cash Flows -
Nine Months Ended October 2, 2004 and
September 27, 2003 5
Consolidated Statements of Comprehensive Income (Loss) -
Three and Nine Months Ended October 2, 2004 and
September 27, 2003 6
Notes to 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 20
Item 4. Controls and Procedures 20
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
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. 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
------
October 2, December 31,
2004 2003
------------ --------------
Current Assets:
Cash and cash equivalents. . . . . . . . . . . . . . . $ 9,782 $ 10,536
Accounts receivable, net . . . . . . . . . . . . . . . 10,293 10,012
Inventories:
Raw materials and sub-assemblies . . . . . . . . . . 6,862 5,194
Work-in-process. . . . . . . . . . . . . . . . . . . 2,287 2,088
Finished goods . . . . . . . . . . . . . . . . . . . 4,786 5,022
------------ --------------
Total inventories. . . . . . . . . . . . . . . . . 13,935 12,304
Deferred income taxes. . . . . . . . . . . . . . . . . 324 299
Prepaid expenses and other current assets. . . . . . . 1,071 1,049
------------ --------------
Total current assets . . . . . . . . . . . . . . . . 35,405 34,200
------------ --------------
Property, plant and equipment, net . . . . . . . . . . . 6,157 6,478
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . 8,220 8,147
Other assets . . . . . . . . . . . . . . . . . . . . . . 2,577 2,496
------------ --------------
$ 52,359 $ 51,321
============ ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
---------------------------------------
Current Liabilities:
- --------------------------------------------------------
Current installments of long-term debt . . . . . . . . $ 1,683 $ 1,661
Accounts payable and accrued expenses. . . . . . . . . 7,561 7,260
------------ --------------
Total current liabilities. . . . . . . . . . . . . . 9,244 8,921
------------ --------------
Long-term debt, net of current installments. . . . . . . 7,091 7,675
Other liabilities. . . . . . . . . . . . . . . . . . . . 2,311 2,866
Commitments and contingencies
Shareholders' equity:
Common stock, $0.0625 par;
authorized 25,000,000 shares; issued and outstanding,
2004 - 8,790,268 and 2003 - 8,636,865 . . . . . . . . 549 540
Capital in excess of par . . . . . . . . . . . . . . . 52,483 51,817
Accumulated deficit. . . . . . . . . . . . . . . . . . (18,041) (18,879)
Accumulated other comprehensive loss . . . . . . . . . (1,255) (1,585)
Notes receivable from exercise of stock options. . . . (23) ( 34)
------------ --------------
Total shareholders' equity . . . . . . . . . . . . . 33,713 31,859
------------ --------------
$ 52,359 $ 51,321
============ ==============
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 Nine Months Ended
October 2, September 27, October 2, September 27,
2004 2003 2004 2003
-------------------- ------------------- ------------ ---------------
Net sales. . . . . . . . . . . . . . . . . . . . . . . $ 15,192 $ 11,478 $ 44,719 $ 33,810
Operating costs and expenses:
Cost of sales. . . . . . . . . . . . . . . . . . . . 9,223 7,009 26,797 21,693
Selling, general and administrative expenses . . . . 4,540 4,016 13,243 12,165
Research, development and engineering expenses . . . 902 775 2,778 2,526
-------------------- ------------------- ------------ ---------------
Total operating costs and expenses . . . . . . . . 14,665 11,800 42,818 36,384
-------------------- ------------------- ------------ ---------------
Income (loss) from operations. . . . . . . . . . . . . 527 (322) 1,901 (2,574)
Other income (expense):
Interest income. . . . . . . . . . . . . . . . . . . 22 12 57 49
Interest expense . . . . . . . . . . . . . . . . . . (165) (114) (500) (334)
Other, net . . . . . . . . . . . . . . . . . . . . . (1) (35) (70) 95
-------------------- ------------------- ------------ ---------------
(144) (137) (513) (190)
-------------------- ------------------- ------------ ---------------
Income (loss) before income tax expense (benefit). . . 383 (459) 1,388 (2,764)
Income tax expense (benefit) . . . . . . . . . . . . . 149 263 550 (415)
-------------------- ------------------- ------------ ---------------
Net income (loss). . . . . . . . . . . . . . . . . . . $ 234 $ (722) $ 838 $ (2,349)
==================== =================== ============ ===============
Basic net income (loss) per share. . . . . . . . . . . $ 0.03 $ (0.08) $ 0.10 $ (0.27)
==================== =================== ============ ===============
Diluted net income (loss) per share. . . . . . . . . . $ 0.03 $ (0.08) $ 0.09 $ (0.27)
==================== =================== ============ ===============
Basic weighted average number of shares outstanding. . 8,768 8,606 8,709 8,584
==================== =================== ============ ===============
Diluted weighted average number of shares outstanding. 8,899 8,606 8,857 8,584
==================== =================== ============ ===============
See notes to unaudited consolidated financial statements.
4
NEW BRUNSWICK SCIENTIFIC CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended
October 2, September 27,
2004 2003
------- -------
Cash flows from operating activities:
Net income (loss) $ 838 $(2,349)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 1,052 903
Gain on sale of property - (201)
Change in related balance sheet accounts:
Accounts and notes receivable (182) 2,014
Inventories (1,554) (1,235)
Prepaid expenses and other current assets (37) (760)
Other assets and Goodwill 75 (177)
Accounts payable and accrued expenses 281 (155)
Advance payments from customers 118 363
Other liabilities (555) (63)
----- ------
Net cash provided by (used in) operating activities 36 (1,660)
----- ------
Cash flows from investing activities:
Additions to property, plant and equipment (748) (963)
Proceeds from sale of property and equipment 32 261
---- ----
Net cash used in investing activities (716) (702)
--- -----
Cash flows from financing activities:
Repayments of long-term debt (620) (227)
Proceeds from issue of shares under stock
purchase and option plans 538 140
Payments on notes receivable related to
exercised stock options 11 11
---- ----
Net cash used in financing activities (71) (76)
----- -----
Net effect of exchange rate changes on cash (3) 112
----- ------
Net decrease in cash and cash equivalents (754) (2,326)
Cash and cash equivalents at beginning of period 10,536 9,718
------ -------
Cash and cash equivalents at end of period $ 9,782 $ 7,392
======= ======
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 488 $ 332
Income taxes 1,118 839
See notes to unaudited consolidated financial statements.
5
NEW BRUNSWICK SCIENTIFIC CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
(Unaudited)
Three Months Ended Nine Months Ended
October 2, September 27, October 2, September 27,
2004 2003 2004 2003
-------------------- ------------------- ----------- ---------------
Net income (loss). . . . . . . . . . . . . $ 234 $ (722) $ 838 $ (2,349)
Other comprehensive income (loss):
Foreign currency translation adjustment. (12) 230 330 756
-------------------- ------------------- ----------- ---------------
Comprehensive income (loss). . . . . . . . $ 222 $ (492) $ 1,168 $ (1,593)
==================== =================== =========== ===============
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 October 2, 2004 and the results of its operations for the three and nine
months ended October 2, 2004 and September 27, 2003 and its cash flows for the
nine months ended October 2, 2004 and September 27, 2003. Interim results may
not be indicative of the results that may be expected for the year.
The accompanying 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, 2003.
Note 2 - Net income (loss) per share:
Basic net income (loss) per share is calculated by dividing net income (loss) by
the weighted average number of shares outstanding. Diluted net income (loss)
per share is calculated by dividing net income (loss) 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, if any, are excluded from the calculation of diluted net
income (loss) per share. As the Company had a loss in 2003, the dilutive effect
of stock options was not considered for that period. Information related to
dilutive and antidilutive stock options is as follows (in thousands of shares):
Three Months Ended Nine Months Ended
October 2, September 27, October 2, September 27,
2004 2003 2004 2003
------------------ ----------------- ---------- -------------
Dilutive effect of stock options 131 - 148 -
Antidilutive stock options . . . 15 326 15 326
Note 3 - Long-term debt and credit agreement:
On March 15, 2002, the Company and Wachovia Bank, National Association (formerly
First Union National Bank) ("the Bank") entered into an amendment to extend
their agreement (the Bank Agreement) by three years to May 31, 2005. The
amendment to the Bank Agreement did not change the maturity date of the then
existing acquisition credit line component related to a 1999 acquisition, which
remains at December 1, 2006. The maturity date of the acquisition credit line
component related to the 2003 acquisition of RS Biotech and the equipment credit
line component are November 2008. On September 26, 2003 the Bank Agreement was
further amended to temporarily ease the financial ratio requirements under the
negative covenant provisions of the Bank Agreement and to reduce the acquisition
line from $12.5 million to $10 million. Among the changes was to omit the
7
requirement to meet the debt service ratio during the period ended September 27,
2003, a change in the minimum equity that must be maintained, as well as the
maintenance of a minimum $3 million cash balance which restriction the Company
expects to be removed on December 31, 2004. In addition, the interest rate on
new borrowings under the Bank Agreement will increase by 50 basis points. At
such time as the Company meets the financial ratios that were in force prior to
this amendment which the Company expects to be December 31, 2004, all of the
terms, financial ratios and requirements as well as interest rates will revert
to what they were prior to the September 26, 2003 amendment. No other
provisions of the Bank Agreement were materially amended. There are no
compensating balance requirements and any borrowings under the Bank Agreement
other than the fixed term debt, bear interest at the bank's prime rate less 75
basis points or LIBOR plus 175 basis points, at the discretion of the Company.
At October 2, 2004, the bank's prime rate was 4.750% and LIBOR was 1.840%. 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. At October 2, 2004 the Company is in
compliance with its covenants pursuant to the Bank Agreement, as amended, and
currently anticipates to be in compliance with such covenants for the next 12
months.
At October 2, 2004, the following amounts were outstanding and available under
the Bank Agreement (in thousands):
Total
Line Outstanding Available
------- ------------- ----------
Acquisitions. . . . $10,000 $ 5,714(a) $ 4,286
Equipment loans . . 2,000 674(b) 1,326
Working capital and
letters of credit 5,000 23(c) 4,977
Foreign exchange
transactions. . . 10,000 254 9,746
------- ------------- ----------
$27,000 $ 6,665 $ 20,335
======= ============= ==========
(a) $4,411,000 at 8% per annum and $1,303,000 at 4.96% per annum
(b) Interest at 4.64%
(c) Letters of credit
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% which are payable annually
and principal is payable in five equal annual installments which commenced in
November 2003. At October 2, 2004, the balance of the notes was 200,000
($360,000).
8
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 and are payable 487,500 on the first and second
anniversary, respectively, of the acquisition. At October 2, 2004, the balance
due on the notes was 975,000 ($1,753,000).
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 October 2, 2004, $120,000 and $153,000 were outstanding under the
first and second mortgages, respectively, and at September 27, 2003, $137,000
and $162,000 were outstanding under the first and second mortgages,
respectively. Each mortgage requires 80 equal quarterly payments of principal.
Note 4 - Contingencies:
In June 2003, the U.S. Department of Commerce notified the Company that it
believed the Company may have failed to comply with certain export control
requirements in connection with certain equipment sales to Asia. The applicable
statutory framework gave the Commerce Department authority to impose civil
monetary penalties (up to a maximum of $176,000 based on the agency's
preliminary assessment) and other sanctions. The Company responded to the
agency's invitation to settle the matter informally and provided an explanation
of the transactions in question and information about the Company's compliance
measures. On August 30, 2004, the company reached a settlement with the U.S.
Department Commerce and paid a civil penalty of $51,000, all of which had been
previously accrued by the Company.
Note 5 - Stockholders' Equity:
On February 20, 2003, the Company declared a 10% stock dividend, which was paid
on May 15, 2003 to shareholders of record as of April 18, 2003. The weighted
average number of shares outstanding used in the computation of basic and
diluted income (loss) per share for the 2003 period has been restated to reflect
this dividend.
At October 2, 2004, 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 (loss), 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
9
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 (loss) 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 Nine Months Ended
October 2, September 27, October 2, September 27,
2004 2003 2004 2003
------------------- ------------------- ----------- ---------------
Net income (loss), as reported:. . . . . . . . . $ 234 $ (722) $ 838 $ (2,349)
Deduct: Total stock-based employee
compensation expense determined under fair
value based method, net of related tax effects. 61 176 218 419
------------------- ------------------- ----------- ---------------
Pro forma net income (loss) . . . . . . . . . . . $ 173 $ (898) $ 620 $ (2,768)
=================== =================== =========== ===============
Net income (loss) per share:
Basic-as reported . . . . . . . . . . . . . . . $ 0.03 $ (0.08) $ 0.10 $ (0.27)
=================== =================== =========== ===============
Basic-pro forma . . . . . . . . . . . . . . . . $ 0.02 $ (0.10) $ 0.07 $ (0.32)
=================== =================== =========== ===============
Diluted-as reported . . . . . . . . . . . . . . $ 0.03 $ (0.08) $ 0.09 $ (0.27)
=================== =================== =========== ===============
Diluted-pro forma . . . . . . . . . . . . . . . $ 0.02 $ (0.10) $ 0.07 $ (0.32)
=================== =================== =========== ===============
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 Nine Months Ended
October 2, September 27, October 2, September 27,
2004 2003 2004 2003
------------ --------------- ----------- --------------
Expected life (years). . . . . . . . . NA NA 6.0 6.0
Expected volatility. . . . . . . . . . NA NA 51.07% 75.80%
Expected dividend yield. . . . . . . . NA NA - -
Risk-free interest rate. . . . . . . . NA NA 4.85% 3.10%
Weighed average fair value of options. NA NA $ 6.07 $ 4.90
Granted during the period
Note 6 - Investment in Antyra Inc.:
The Company has an equity investment in Antyra Inc. (formerly DGI
BioTechnologies, Inc) ("Antyra") that was written down to zero in 2001. Antyra
had anticipated closing a significant financing transaction with an investment
group during the first half of 2003, however, the financing with this group did
not take place. On May 12, 2003, Antyra closed on certain new short-term
10
financing. Under the terms of the agreement, Antyra issued preferred shares in
exchange for a $200,000 cash infusion from an investment group consisting of
certain members of Antyra management and other investors and warrants to
BankInvest (an existing equity investor) to purchase up to $100,000 of Antyra
preferred stock exercisable through October 2003. At October 31, 2003,
BankInvest chose not to exercise the warrant and it has expired. The agreement
includes a provision that if such warrant is not exercised, the investment group
has the right, but not the obligation, to invest an additional $100,000 in
preferred stock under the same terms as the BankInvest warrant, $80,000 of which
they exercised. Additionally, under the terms of the agreement, the Company
agreed to accept additional shares of Antyra preferred stock on a monthly basis
in lieu of the next 12 months of rent payments due the Company from Antyra (rent
is due at $12,367 per month). For financial reporting purposes, the Company is
attributing no value to the shares received under this arrangement. The Company
has also guaranteed certain equipment lease obligations of Antyra, which are
accrued for and total $8,000 as of October 2, 2004. The Company believes that
any amount recorded would not be probable of recovery based on its estimate that
the previous short-term financing, as well as some additional short-term
financing received in 2004, together with its expected limited revenues during
2004, should only enable Antyra to continue operating as a going concern into
the first half of 2005 without additional funding. As a result of the
short-term financing obtained by Antyra in 2004, the Company's fully diluted
interest in Antyra was reduced and will increase to approximately 16% upon the
receipt of additional Antyra stock in lieu of rent through April 2005.
Antyra has limited operating capital and consequently, its continued viability
and existence is dependent upon its raising additional capital by the middle of
2005.
Note 7 - Pension plan:
Components of net period benefit cost for the three and nine months ended
October 2, 2004 and September 27, 2003 are as follows (in thousands):
Three Months Ended Nine Months Ended
October 2, September 27, October 2, September 27,
2004 2003 2004 2003
-------------------- ------------------- ------------ ---------------
Service cost. . . . . . . . . . . . $ 95 $ 78 $ 285 $ 234
Interest cost . . . . . . . . . . . 120 120 360 360
Expected return on plan assets. . . (118) (96) (351) (288)
Amortization of net obligation. . . 5 5 15 15
Amortization of prior service costs (1) (1) (3) (3)
Amortization of the net (gain) loss 54 65 162 195
-------------------- ------------------- ------------ ---------------
Net periodic pension cost . . . . . $ 155 $ 171 $ 468 $ 513
==================== =================== ============ ===============
The Company previously disclosed in its financial statements for the year ended
December 31, 2003, that it expects to contribute $1,040,000 to its pension plan
in 2004. As of October 2, 2004, $1,040,000 of contributions have been made.
11
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 nine months ended October 2, 2004 and September 27, 2003 was $34,000
and $107,000, respectively for the 2004 periods and $33,000 and $119,000,
respectively, for the 2003 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 nine-month periods ended October 2, 2004 and September 27,
2003, respectively, which should be read in conjunction with the Company's
December 31, 2003 Form 10-K.
Results of Operations
---------------------
EXECUTIVE OVERVIEW
- -------------------
The year 2003 was a very difficult one for the Company and for our industry as
capital spending by pharmaceutical companies declined significantly due to
tightened budgets and the acquisition of equipment by biotechnology companies
decreased due to their inability to raise funds in the financial markets. At the
same time, although government funding of the NIH and other agencies increased,
a large portion of their budgets were directed toward security as a consequence
of the September 11, 2001 terrorist attacks rather than to research. The Company
began to experience a turnaround from this negative situation during the fourth
quarter of 2003 during which it returned to profitability after three successive
quarterly losses. This trend has continued during 2004 as the Company has
experienced a significant increase in net sales and solid profitability compared
with the first nine months of 2003 during which it sustained a large net loss.
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
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. 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.
13
NET SALES
- ----------
The following table summarizes consolidated backlog, orders and net sales for
the three and nine months ended October 2, 2004 and September 27, 2003 (in
thousands of dollars):
Three Months Ended
October 2, September 27, %
2004 2003 Increase Change
------------------- --------------- ---------- -------
Backlog - beginning $ 9,714 $ 6,097 $ 3,617 59.3%
Add orders received 14,800 13,875 925 6.7
Less net sales. . . 15,192 11,478 3,714 32.4
------------------- --------------- ---------- -------
Backlog - ending. . $ 9,322 $ 8,494 $ 828 9.7%
=================== =============== ========== =======
Nine Months Ended
October 2,. . . . September 27, %
2004 2003 Increase Change
------------------- --------------- ---------- -------
Backlog - beginning $ 9,018 $ 6,668 $ 2,350 35.2%
Add orders received 45,023 35,636 9,387 26.3
Less net sales. . . 44,719 33,810 10,909 32.3
------------------- --------------- ---------- -------
Backlog - ending. . $ 9,322 $ 8,494 $ 828 9.7%
=================== =============== ========== =======
Net sales increased $3,714,000 or 32.4% to $15,192,000 for the three months
ended October 2, 2004 from $11,478,000 in the prior year period and increased
$10,909,000 or 32.3% to $44,719,000 in the 2004 nine month period from
$33,810,000 in 2003. Net sales increased 16.7% in the U.S. and 50.2%
internationally for the third quarter of 2004 and increased 16.7% in the U.S.
and 48.4% internationally for the 2004 nine-month period. The increase in
sales for both the quarter and year to date periods was due principally to
higher unit volume aided by the recovery in the economy, both in the United
States and internationally, as the market for Life Science equipment rebounded
from the last couple of years and as more government funding for research has
begun to flow. Net sales also benefited from the inclusion of $1.1 million and
$3.5 million, respectively, for the 2004 quarter and nine month period in sales
of RS Biotech, which was acquired in November 2003. In addition, $250,000 and
$1,019,000, respectively, for the 2004 quarter and nine month period resulted
from the dollar's weakness when the net sales of the Company's UK and European
subsidiaries were translated into dollars. Excluding the foreign exchange
effect, international sales increased 45.5% and 42.3%, respectively, for the
quarter and nine-month periods ended October 2, 2004. The increase in net sales
involved most of the Company's product lines.
Orders increased during the third quarter and first nine months of 2004 for the
reasons discussed above relating to the increase in net sales and due to the
continued demand for the Company's cell culture, shaker, CO2 incubators and
freezer products.
14
GROSS MARGIN
- -------------
The following table shows gross profit and gross margin for the three and nine
months ended October 2, 2004 and September 27, 2003 (in thousands of dollars):
Three Months Ended Nine Months Ended
October 2, September 27, October 2, September 27,
2004 2003 2004 2003
-------------------- ------------------- ------------ --------------------
Net sales . . $ 15,192 $ 11,478 $ 44,719 $ 33,810
Cost of sales 9,223 7,009 26,797 21,693
-------------------- ------------------- ------------ --------------------
Gross profit. $ 5,969 $ 4,469 $ 17,922 $ 12,117
==================== =================== ============ ====================
Gross margin. 39.3% 38.9% 40.1% 35.8%
The increase in gross margin to 39.3% for the 2004 quarter from 38.9% in 2003
and the increase to 40.1% from 35.8% for the 2004 nine month period was due
primarily to the effect of increased absorption of manufacturing overhead due to
greater manufacturing activity as a result of higher sales volumes, partially
offset by a $150,000 write-down of inventory of the Company's Agar Sterilizer
product line that the Company discontinued during the third quarter of 2004, as
a result of a change in a number of regulatory compliance issues, which would
have necessitated an extensive redesign of the product and was deemed not to be
warranted due to the insignificant amount of sales generated by the product.
Other factors which negatively affected margins were significant increases in
steel prices and higher transportation costs due to fuel surcharges.
SELLING, GENERAL AND ADMINISTRATIVE
- --------------------------------------
As a result of the foreign exchange translation effect of the weak dollar on the
expenses of the Company's European subsidiaries, the inclusion of the operating
expenses of RS Biotech, acquired in November 2003 and a severance payment to
the Company's European Managing Director, which amounted to approximately
$346,000, selling, general and administrative expenses increased $524,000 for
the three months ended October 2, 2004 compared with the three months ended
September 27, 2003 and increased $1,078,000 for the nine months ended October 2,
2004 compared with the first nine months of 2003.
RESEARCH, DEVELOPMENT AND ENGINEERING
- ----------------------------------------
As a result of the foreign exchange translation effect of the weak dollar on the
expenses of the Company's European manufacturing subsidiaries and the inclusion
of the expenses of RS Biotech acquired in November 2003, R&D and Engineering
expenses increased $127,000 and $252,000, respectively, for the three months and
nine months ended October 2, 2004 compared with the three months and nine months
ended September 27, 2003.
15
INTEREST EXPENSE
- -----------------
Interest expense increased in the 2004 quarter and nine months due to the higher
level of debt, which was incurred during the latter part of 2003 to finance the
acquisition of RS Biotech and the purchase of certain equipment.
OTHER (EXPENSE) INCOME, NET
- ------------------------------
The following table details other (expense) income, net for the three and nine
months ended October 2, 2004 and September 27, 2003, (in thousands):
Three Months Ended Nine Months Ended
October 2, September 27, October 2, September 27,
2004 2003 2004 2003
-------------------- ------------------- ------------ ---------------
Gain (loss) on assets sold, primarily property . $ 2 $ - $ (28) $ 201
Gain (loss) on foreign currency transactions (a) 10 (20) - (87)
Bank fees. . . . . . . . . . . . . . . . . . . . (11) (10) (34) (28)
Other, net . . . . . . . . . . . . . . . . . . . (2) (5) (8) 9
-------------------- ------------------- ------------ ---------------
Total other (expense) income, net. . . . . . $ (1) $ (35) $ (70) $ 95
==================== =================== ============ ===============
(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.
INCOME TAX EXPENSE
- --------------------
The Company's effective income tax rate of 38.9% and 39.6%, respectively, for
the three and nine months ended October 2, 2004 is slightly higher than might
otherwise be expected due to losses incurred by one of the Company's European
subsidiaries for which no tax benefit was provided due to the inability to
carryback the losses. For the three months ended September 27, 2003, $263,000
of income tax expense was provided despite a pre tax loss of $459,000. The need
for a tax expense rather than a tax benefit for the quarter resulted from the
current estimated losses at that time of the Company's foreign subsidiaries for
the balance of 2003. At the end of the second quarter of 2003, based on loss
estimates for the full year for those subsidiaries, it appeared that an overall
effective tax benefit rate of 30% would be necessary for the year. However, an
updated fourth quarter estimate, together with actual third quarter results for
those subsidiaries, indicated that a tax benefit rate of 15% for the year ended
December 31, 2003 would be required. Since the ability to carryback losses was
limited, no financial tax benefit was recognized for certain of the losses
incurred. Consequently, the reduction in the effective tax benefit rate of 30%
used for the first six months of 2003 to 15% resulted in a tax expense of
$263,000 for the third quarter of 2003 in order to reflect an effective tax
benefit of 15% for the nine months ended September 27, 2003.
During the nine months ended September 27, 2003 when the Company sustained
losses, its effective tax benefit rate of 15.0% was lower than what might be
expected due to the inability to carryback losses incurred by the Company's
European subsidiaries, resulting in no financial tax benefit for those losses in
16
2003, partially offset by an increase in the effective tax rate for state income
taxes.
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 3-5 More than
Total. .1 Year Years Years 5 Years
- ------------------------------- ------------------------ ------ ---------- --------
Long-term debt,
obligations (a) . . . . . . . $ 8,774 $1,683 $ 6,582 $ 509 $ -
Operating lease obligations (b) 3,647 781 1,460 789 617
Purchase obligations(c) . . . . 5,561 5,351 210 - -
Other long-term liabilities (d) 611 67 544 - -
------------------------ ------ ---------- -------- ----
Total contractual cash
obligations . . . . . . . . . $ 18,593 $7,882 $ 8,796 $ 1,298 $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 ($179,000 at October 2, 2004). The second sublet
premises has a lease expiration date of September 28, 2009 and an annual rental of 45,000
($81,000 at October 2, 2004).
(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.
CASH
- ----
Cash and cash equivalents decreased $754,000 to $9,782,000 at October 2, 2004
from $10,536,000 at December 31, 2003. Net cash provided by operating
activities amounted to $36,000. Net income of $838,000 and depreciation of
$1,052,000 were principally offset by an increase in inventories of $1,554.000.
Net cash used in investing activities was $716,000 (primarily additions to
property, plant and equipment). In addition, net cash used in financing
17
activities was $71,000. Proceeds from the issuance of shares under stock
purchase and option plans of $538,000 were more than offset by the repayment of
long-term debt of $620,000.
OPERATING ACTIVITIES
- ---------------------
The overall factors primarily affecting cash flow during the nine months ended
October 2, 2004 were increases in (i) inventories, which increased $1,554,000,
(ii) accounts and notes receivable and (iii) a decrease in other liabilities
partially offset by (i) net income, (ii) depreciation and amortization, (iii) an
increase in advance payments from customers and (iv) an increase in accounts
payable and accrued expenses. The negative cash flow factors during the 2004
period were primarily driven by the increased volume of business during the
period. Inventories are not expected to increase any further due to the
Company's increased focus on Lean Manufacturing techniques. During the nine
months ended October 2, 2004, the Company disposed of $860,000 of obsolete
inventory and charged that amount to a previously established reserve.
INVESTING ACTIVITIES
- ---------------------
In 2004, net cash used in investing activities was as a result of normal
additions to property, plant and equipment.
FINANCING ACTIVITIES
- ---------------------
In 2004, cash flows from financing activities primarily consisted of repayments
of long-term debt partially offset by proceeds from the issue of shares under
stock purchase and option plans.
BANK AGREEMENT
- ---------------
The Company's agreement (the Bank Agreement) with Wachovia Bank, National
Association (the Bank) was amended on September 26, 2003 to temporarily ease the
financial ratio requirements under the negative covenant provisions of the Bank
Agreement as a consequence of the losses sustained by the Company during the
first nine months of 2003, which if not relaxed, would have resulted in the
Company being in violation of the debt coverage ratio covenant of 1.3 to 1.
Concurrently, the Company and the Bank agreed to reduce the acquisition
component of the line from $12.5 million to $10 million. Among the changes was
to omit the requirement to meet the debt service ratio during the period ended
September 27, 2003 and to modify it slightly for the fourth quarter of 2003 and
for the first three quarters of 2004, a change in the minimum equity that must
be maintained as well as the maintenance of a minimum $3 million cash balance.
In addition, the interest rate on new borrowings under the Bank Agreement will
increase by 50 basis points. At such time as the Company meets the financial
ratios that were in force prior to this amendment for two consecutive quarters
(expected to be December 31, 2004) all of the terms, financial ratios as well as
interest rates will revert to what they were prior to the September 26, 2003
amendment. No other provisions of the Bank Agreement were materially amended.
During the fourth quarter of 2003, the Company, under the Bank Agreement,
borrowed $1,500,000 to fund the cash portion of the RS Biotech acquisition and
18
$825,000 towards the purchase of capital equipment. If the Company continues to
meet the financial ratios under the agreement, its continued ability to borrow
under the Bank Agreement should not be impeded. The Company at present foresees
no need to borrow additional funds under the Bank Agreement during the next
twelve months as any cash requirements including $1,683,000 of debt repayments
are expected to be funded from cash flow or from existing cash balances. At
October 2, 2004 the Company is in compliance with its covenants pursuant to the
Bank Agreement, as amended and expects to be in compliance with such covenants
for the next 12 months.
CRITICAL ACCOUNTING POLICIES
- ------------------------------
No changes have been made in the Company's critical accounting policies during
the nine months ended October 2, 2004.
PROPOSED ACCOUNTING STANDARD
- ------------------------------
On April 22, 2003, the FASB determined that stock-based compensation should be
recognized as a cost in the financial statements and that such cost be measured
according to the fair value of stock options. On March 31, 2004, the FASB issued
an exposure draft on share-based payments, which is a proposed amendment to SFAS
No.123. The proposed statement is anticipated to be finalized in 2004 and
effective some time in 2005. The Company will continue to monitor communications
on this subject from the FASB in order to determine the impact on the Company's
consolidated financial statements.
19
Item 3. Quantitative and Qualitative Disclosures about Market Risk
- --------------------------------------------------------------------------
The information required by Item 2 has been disclosed in Item 7 of the Company's
Annual Report on Form 10-K for the year ended December 31, 2003. There has been
no material change in the disclosures regarding market risk.
Item 4. Controls and Procedures
- -----------------------------------
As required by Rule 13a-15 under the Exchange Act, an evaluation of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures was conducted by the Company's Chief Executive Officer along with
the Company's Chief Financial Officer. Based upon that evaluation, the
Company's Chief Executive Officer and the Company's Chief Financial Officer
concluded that the Company's disclosure controls and procedures are effective as
of the end of the period covered by this Report. There have been no significant
changes in the Company's internal controls or in other factors, which could
significantly affect internal controls during the period ended October 2, 2004.
Disclosure controls and procedures are controls and other procedures that are
designed to ensure that information required to be disclosed in Company reports
filed or submitted under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the Securities and Exchange
Commission's rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed in Company reports filed under the Exchange Act is
accumulated and communicated to management, including the Company's Chief
Executive Officer and Chief Financial Officer as appropriate, to allow timely
decisions regarding disclosure.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
- ------------------------------------------------
a) Exhibits
Exhibit 31(a) Section 302 Certification - CEO
Exhibit 31(b) Section 302 Certification - CFO
Exhibit 32 Section 906 Certifications
b) Reports on Form 8-K during the quarter ended October 2, 2004:
i)Termination of the employment of the Managing Director of the
Company's European operations resulting in a severance payment of
approximately $346,000.
ii)Settlement of previously disclosed claims of the U.S. Department of
Commerce with respect to alleged failures to comply with
certain export control requirements in connection with certain
equipment sales resulting in the payment of a civil penalty of
$51,000.
20
------
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: October 29, 2004 /s/ David Freedman
--------------------
David Freedman
Chairman and
Chief Executive Officer
Date: October 29, 2004 /s/ Samuel Eichenbaum
-----------------------
Samuel Eichenbaum
Vice President, Finance,
Chief Financial Officer
and Treasurer
(Principal Accounting Officer)
21
EXHIBIT 31(A)
CERTIFICATION
I, David Freedman, certify that:
1. I have reviewed this quarterly report on Form 10-Q of New Brunswick
Scientific Co., Inc. (the "Registrant");
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the Registrant as
of, and for, the periods presented in this report;
4. The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
c) disclosed in this report any change in the Registrant's internal control
over financial reporting that occurred during the Registrant's most recent
fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the Registrant's internal control over financial reporting;
and
5. The Registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to the
Registrant's auditors and the audit committee of the Registrant's board of
directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the Registrant's ability to record, process,
summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal control over
financial reporting.
Date: October 29, 2004 /s/ David Freedman
--------------------
Chairman and
Chief Executive Officer
22
EXHIBIT 31(B)
CERTIFICATION
I, Samuel Eichenbaum, certify that:
1. I have reviewed this quarterly report on Form 10-Q of New Brunswick
Scientific Co., Inc. (the "Registrant");
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the Registrant as
of, and for, the periods presented in this report;
4. The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
c) disclosed in this report any change in the Registrant's internal control
over financial reporting that occurred during the Registrant's most recent
fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the Registrant's internal control over financial reporting;
and
5. The Registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to the
Registrant's auditors and the audit committee of the Registrant's board of
directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the Registrant's ability to record, process,
summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal control over
financial reporting.
Date: October 29, 2004 /s/ Samuel Eichenbaum
-----------------------
Vice President, Finance,
Chief Financial Officer
and Treasurer
23
EXHIBIT 32
CERTIFICATIONS
--------------
I, David Freedman, hereby certify that the periodic report being filled
herewith containing financial statements fully complies with the requirements of
section 13(a) or 15(d) of the Securities Exchange Act of 1934 (16 U.S. C. 78m or
78o(d)) and that the information contained in said periodic report fairly
presents, in all material respects, the financial condition and results of
operations of New Brunswick Scientific Co., Inc. for the period covered by said
periodic report.
October 29, 2004 /s/ David Freedman
--------------------
Name: David Freedman
Chairman and
Chief Executive Officer
I, Samuel Eichenbaum, hereby certify that the periodic report being filled
herewith containing financial statements fully complies with the requirements of
section 13(a) or 15(d) of the Securities Exchange Act of 1934 (16 U.S. C. 78m or
78o(d)) and that the information contained in said periodic report fairly
presents, in all material respects, the financial condition and results of
operations of New Brunswick Scientific Co., Inc. for the period covered by said
periodic report.
October 29, 2004 /s/ Samuel Eichenbaum
-----------------------
Name: Samuel Eichenbaum
Vice President, Finance,
Chief Financial Officer
and Treasurer
A signed original of this written statement required by Section 906 has been
provided to New Brunswick Scientific Co., Inc. and will be retained by New
Brunswick Scientific Co., Inc. and furnished to the Securities and Exchange
Commission or its staff upon request.
24