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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q

x  Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2002

o  Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from __________ to _____________

Commission file number 1-9957

Diagnostic Products Corporation

(Exact name of registrant as specified in its charter)
     
California   95-2802182
(State or other jurisdiction of
incorporation or organization)
  (IRS Employer
Identification No.)

5700 West 96th Street
Los Angeles, California 90045

(Address of principal executive offices)

Registrant’s telephone number: (310) 645-8200

No change

(Former name, former address, and former fiscal year, if changed since last report)

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 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

[YES ü ]     [NO  ]

The number of shares of Common Stock, no par value, outstanding as of September 30, 2002, was 28,546,259.



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TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF INCOME
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED STATEMENTS OF CASH FLOWS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 4. CONTROLS AND PROCEDURES
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
SIGNATURES
EXHIBIT INDEX
EXHIBIT 99.1


Table of Contents

PART I. FINANCIAL INFORMATION

ITEM I. FINANCIAL STATEMENTS

DIAGNOSTIC PRODUCTS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME

(unaudited)

                                   
      Three Months Ended   Nine Months Ended
      September 30,   September 30,
     
 
(In Thousands, except per share data)   2002   2001   2002   2001
   
 
 
 
SALES:
                               
 
Non-Affiliated Customers
  $ 72,251     $ 62,072     $ 215,967     $ 188,435  
 
Unconsolidated Affiliates
    7,185       5,794       22,808       20,026  
 
   
     
     
     
 
 
Total Sales
    79,436       67,866       238,775       208,461  
COST OF SALES
    34,229       28,849       100,590       89,061  
 
   
     
     
     
 
 
Gross Profit
    45,207       39,017       138,185       119,400  
 
   
     
     
     
 
OPERATING EXPENSES:
                               
Selling
    13,189       12,352       39,950       37,188  
Research and Development
    9,326       7,786       27,355       24,073  
General and Administrative
    7,240       6,270       21,457       19,068  
Equity in Income of Affiliates
    (604 )     (626 )     (2,434 )     (2,227 )
 
   
     
     
     
 
OPERATING EXPENSES — NET
    29,151       25,782       86,328       78,102  
 
   
     
     
     
 
 
OPERATING INCOME
    16,056       13,235       51,857       41,298  
Interest/Other Income (Expense) — Net
    (2,352 )     238       (1,922 )     (462 )
 
   
     
     
     
 
INCOME BEFORE TAXES AND MINORITY INTEREST
    13,704       13,473       49,935       40,836  
PROVISION FOR INCOME TAXES
    4,248       4,176       15,480       12,495  
MINORITY INTEREST
    (450 )     166       (308 )     649  
 
   
     
     
     
 
 
NET INCOME
  $ 9,906     $ 9,131     $ 34,763     $ 27,692  
 
   
     
     
     
 
EARNINGS PER SHARE:
                               
 
BASIC
  $ .35     $ .32     $ 1.22     $ .99  
 
DILUTED
  $ .34     $ .31     $ 1.17     $ .94  
WEIGHTED-AVERAGE SHARES OUTSTANDING:
                               
 
BASIC
    28,540       28,221       28,456       28,064  
 
DILUTED
    29,506       29,601       29,619       29,364  

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DIAGNOSTIC PRODUCTS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

(unaudited)

                   
      September 30,   December 31,
(Dollars in Thousands)   2002   2001
   
 
Assets
               
CURRENT ASSETS:
               
 
Cash and cash equivalents
  $ 42,967     $ 31,834  
 
Accounts receivable (including receivables from unconsolidated affiliates of $9,941 and $6,635) — net of allowance for doubtful accounts of $2,076 and $1,719, respectively
    77,255       74,630  
 
Inventories
    73,365       62,815  
 
Prepaid expenses and other current assets
    4,289       981  
 
Deferred income taxes
    3,225       3,225  
 
   
     
 
 
Total current assets
    201,101       173,485  
PROPERTY, PLANT, AND EQUIPMENT:
               
 
Land and buildings
    52,568       49,922  
 
Machinery and equipment
    68,138       64,650  
 
Leasehold improvements
    10,711       7,242  
 
Construction in progress
    2,461       6,278  
 
   
     
 
 
Total
    133,878       128,092  
 
Less accumulated depreciation and amortization
    (65,857 )     (63,989 )
 
   
     
 
 
Property, plant, and equipment — net
    68,021       64,103  
SALES-TYPE AND OPERATING LEASES — net
    62,630       56,570  
DEFERRED INCOME TAXES
    1,111       1,111  
INVESTMENTS IN AFFILIATED COMPANIES
    21,026       17,242  
GOODWILL — Net of accumulated amortization of $11,879 and $11,852, respectively
    13,294       13,256  
 
   
     
 
TOTAL ASSETS
  $ 367,183     $ 325,767  
 
   
     
 
Liabilities and Shareholders’ Equity
               
CURRENT LIABILITIES:
               
 
Notes payable
  $ 17,730     $ 17,014  
 
Accounts payable
    17,321       22,173  
 
Accrued liabilities
    22,809       13,267  
 
Income taxes payable
    4,308       3,336  
 
   
     
 
 
Total current liabilities
    62,168       55,790  
MINORITY INTEREST
    2,633       3,073  
SHAREHOLDERS’ EQUITY:
               
 
Common Stock — no par value, authorized 60,000,000 shares; outstanding 28,546,259 shares and 28,343,170 shares, respectively
    58,248       55,068  
 
Retained earnings
    270,395       240,748  
 
Accumulated other comprehensive loss
    (26,261 )     (28,912 )
 
   
     
 
Total shareholders’ equity
    302,382       266,904  
 
   
     
 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
  $ 367,183     $ 325,767  
 
   
     
 

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DIAGNOSTIC PRODUCTS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

                       
          Nine Months Ended
          September 30,
         
(Dollars in Thousands)   2002   2001
   
 
CASH FLOWS FROM OPERATING ACTIVITIES:
               
 
Net income
  $ 34,763     $ 27,692  
   
Adjustments to reconcile net income to net cash flows from operating activities:
               
     
Depreciation and amortization
    21,413       19,779  
     
Equity in undistributed income of unconsolidated affiliates
    (2,434 )     (2,227 )
 
Changes in operating assets and liabilities:
               
     
Accounts receivable
    (6,001 )     (10,134 )
     
Inventories
    (9,852 )     (4,675 )
     
Prepaid expenses and other current assets
    (1,860 )     (356 )
     
Accounts payable
    (4,816 )     6,839  
     
Accrued liabilities
    10,207       (184 )
     
Income taxes payable
    836       6,605  
 
   
     
 
 
Net cash flows from operating activities
    42,256       43,339  
 
   
     
 
CASH FLOWS USED FOR INVESTING ACTIVITIES:
               
     
Additions to property, plant, and equipment
    (8,095 )     (16,923 )
     
Sales-type and operating leases
    (21,628 )     (24,451 )
     
Investment in affiliated companies
    (1,373 )     (1,231 )
 
   
     
 
 
Net cash flows used for investing activities
    (31,096 )     (42,605 )
 
   
     
 
CASH FLOWS USED FOR FINANCING ACTIVITIES:
               
     
Repayments of notes payable — net
    (1,034 )     (64 )
     
Proceeds from exercise of stock options
    3,180       5,621  
     
Cash dividends paid
    (5,116 )     (5,048 )
 
   
     
 
 
Net cash flows from financing activities
    (2,970 )     509  
 
   
     
 
EFFECT OF EXCHANGE RATE CHANGES ON CASH
    2,943       (773 )
 
   
     
 
NET INCREASE IN CASH AND CASH EQUIVALENTS
    11,133       470  
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
    31,834       26,395  
 
   
     
 
CASH AND CASH EQUIVALENTS AT END OF PERIOD
  $ 42,967     $ 26,865  
 
   
     
 

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DIAGNOSTIC PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 1 — Basis of Presentation

The information for the three and nine-month periods ended September 30, 2002 and 2001 has not been audited by independent public accountants, but includes all adjustments (consisting of normal recurring accruals) that are, in the opinion of management, necessary to a fair statement of the results for such periods.

Certain information and footnote disclosure normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant to the requirements of the Securities and Exchange Commission, although the Company believes that the disclosures included in these financial statements are adequate to make the information not misleading. The consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s 2001 Annual Report on Form 10-K as filed with the Securities and Exchange Commission.

The results of operations for the three and nine-month periods ended September 30, 2002 are not necessarily indicative of the results to be expected for the year ending December 31, 2002. Basic earnings per share is computed by dividing net income by the weighted-average number of shares outstanding. Diluted earnings per share includes the dilutive effect of stock options.

The accompanying December 31, 2001 balance sheet contains a reclassification of amounts included in the Company’s 2001 Annual Report on Form 10-K to conform to the September 30, 2002 presentation. Current liabilities at December 31, 2001 totaled $55,790,000 in the accompanying December 31, 2001 balance sheet, compared with $58,863,000 reported in the Annual Report on Form 10-K, reflecting a $3,073,000 reclassification of minority interest to a separate financial statement line item.

Note 2 — Inventories

Inventories by major categories are summarized as follows:

                 
    September 30,   December 31,
(Dollars in Thousands)   2002   2001
   
 
Raw materials
  $ 33,102     $ 27,884  
Work in process
    29,633       23,611  
Finished goods
    10,630       11,320  
 
   
     
 
Total
  $ 73,365     $ 62,815  
 
   
     
 

Note 3 — Comprehensive Income

Comprehensive income is summarized as follows:

                                 
    Three Months Ended   Nine Months Ended
    September 30,   September 30,
   
 
(Dollars in Thousands)   2002   2001   2002   2001
   
 
 
 
Net income
  $ 9,906     $ 9,131     $ 34,763     $ 27,692  
Foreign currency translation adjustment
    (3,266 )     1,502       2,651       (3,851 )
 
   
     
     
     
 
Comprehensive income
  $ 6,640     $ 10,633     $ 37,414     $ 23,841  
 
   
     
     
     
 

The Company does not provide for U.S. income taxes on foreign currency translation adjustments because it does not provide for such taxes on undistributed earnings of foreign subsidiaries.

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Note 4 — Segment and Product Line Information

The Company considers its manufactured instruments and medical immunodiagnostic test kits as one operating segment, as the kits are required to run the instruments and utilize similar technology and instrument manufacturing processes. The Company manufactures its instruments and kits principally from facilities in the United States and the United Kingdom. Kits and instruments are sold to hospitals, medical centers, clinics, physicians, and other clinical laboratories throughout the world through a network of distributors, including consolidated distributors located in the United Kingdom, Germany, Czech Republic, Poland, Slovenia, Spain, The Netherlands, Belgium, Luxembourg, Finland, Norway, France, Australia, New Zealand, China, Brazil, Uruguay, Bolivia, Venezuela, Costa Rica, Panama, Sweden, Latvia, Lithuania, Estonia, and Denmark.

The Company sells its instruments and immunodiagnostic test kits under several product lines. Product line sales information is as follows:

                                 
    Three Months Ended   Nine Months Ended
    September 30,   September 30,
   
 
(Dollars in Thousands)   2002   2001   2002   2001
   
 
 
 
Sales:
                               
IMMULITE (includes service)
  $ 68,127     $ 54,767     $ 202,276     $ 168,209  
Radioimmunoassay (“RIA”)
    7,276       8,676       23,043       25,895  
Other (Includes DPC and non-DPC products)
    4,033       4,423       13,456       14,357  
 
   
     
     
     
 
 
  $ 79,436     $ 67,866     $ 238,775     $ 208,461  
 
   
     
     
     
 

The Company is organized and managed by geographic area. Transactions between geographic segments are accounted for as normal sales for internal reporting and management purposes with all intercompany amounts eliminated in consolidation. Sales are attributed to geographic area based on the location from which the instrument or kit is shipped to the customer. Information reviewed by the Company’s chief operating decision maker on significant geographic segments is prepared on the same basis as the consolidated financial statements and is as follows:

                                                         
            Euro/DPC   DPC   DPC                        
            Limited   Biermann   Medlab           Less:        
    United   (United   (German   (Brazilian           Intersegment        
(Dollars in Thousands)   States   Kingdom)   Group)*   Group)*   Other   Elimination   Total
   
 
 
 
 
 
 
Three Months Ended September 30, 2002
                                               
Sales
  $ 53,537     $ 11,155     $ 10,259     $ 7,054     $ 16,918     $ (19,487 )   $ 79,436  
Net income (loss)
    7,704       2,264       34       (1,022 )     439       487       9,906  
 
Three Months Ended September 30, 2001
                                               
Sales
  $ 51,088     $ 9,753     $ 7,919     $ 7,294     $ 13,517     $ (21,705 )   $ 67,866  
Net income (loss)
    4,837       1,620       139       211       2,924       (600 )     9,131  
                                                         
            Euro/DPC   DPC   DPC                        
            Limited   Biermann   Medlab           Less:        
    United   (United   (German   (Brazilian           Intersegment        
(Dollars in Thousands)   States   Kingdom)   Group)*   Group)*   Other   Elimination   Total
   
 
 
 
 
 
 
Nine Months Ended September 30, 2002
                                               
Sales
  $ 169,544     $ 32,695     $ 29,488     $ 23,289     $ 51,419     $ (67,660 )   $ 238,775  
Net income (loss)
    24,275       6,675       488       (699 )     3,584       440       34,763  
 
Nine Months Ended September 30, 2001
                                               
Sales
  $ 154,986     $ 27,359     $ 24,455     $ 21,994     $ 41,430     $ (61,763 )   $ 208,461  
Net income (loss)
    14,384       4,377       577       824       9,330       (1,800 )     27,692  

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            Euro/DPC   DPC   DPC                        
            Limited   Biermann   Medlab           Less:        
    United   (United   (German   (Brazilian           Intersegment        
(Dollars in Thousands)   States   Kingdom)   Group)*   Group)*   Other   Elimination   Total

 
 
 
 
 
 
 
Total Assets
                                                       
June 30, 2002
  $ 397,862     $ 40,970     $ 45,878     $ 21,549     $ 67,903     $ (204,533 )   $ 369,629  
December 31, 2001
    349,158       38,003       38,860       23,036       57,912       (181,202 )     325,767  


*   DPC Biermann includes the Company’s operations in Germany, the Czech Republic, Slovenia, and Poland. DPC Medlab includes the Company’s operations in Brazil, Uruguay, Venezuela, Costa Rica, and Panama.

Note 5 — New Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations,” and SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. SFAS No. 142 changes the accounting for goodwill from an amortization method to an impairment-only approach. Amortization of goodwill ceased upon adoption of this statement. In addition, the standard includes provisions for the reclassification of certain existing recognized intangibles as goodwill, reassessment of the useful lives of existing recognized intangibles, reclassification of certain intangibles out of previously reported goodwill, and the identification of reporting units for purposes of assessing potential future impairments of goodwill. Under SFAS Nos. 141 and 142, goodwill and other intangibles are initially assessed for impairment upon adoption of the statements with subsequent assessments required annually and when there is reason to suspect that their values have been diminished or impaired, with any corresponding write-downs recognized as necessary.

In connection with the adoption of SFAS No. 141, the Company evaluated its intangibles including goodwill and determined that reclassification of such balances was not necessary. Accordingly, the Company’s intangibles consist solely of goodwill generated in connection with the purchase of certain of its affiliates. Effective January 1, 2002, the Company adopted SFAS No. 142. Accordingly, amortization of goodwill ceased, effective January 1, 2002, and would have been $270,000 in the third quarter and $800,000 in the first nine months of 2002 had the non-amortization provisions of SFAS No. 142 not been adopted. Pro forma net income for the three-month period ended September 30, 2001, had the non-amortization provisions of SFAS No. 142 been applied to that period, would have been $9,333,000, an increase of $202,000 on an after-tax basis, or $.32 per diluted share versus the $9,131,000 or $.31 per diluted share actually reported. Pro forma net income for the nine-month period ended September 30, 2001 would have been $28,268,000, an increase of $576,000 on an after-tax basis, or $.96 per diluted share versus the $27,692,000 or $.94 per diluted share actually reported. As required under SFAS No. 142, the Company has completed the required transitional impairment testing and does not believe impairment of its goodwill is necessary.

During the third quarter of 2001, the Financial Accounting Standards Board issued SFAS No. 143, “Accounting for Asset Retirement Obligations,” and SFAS No. 144, “Accounting for the Impairment and Disposal of Long-Lived Assets.” These new standards clarify and supersede existing guidance for the reporting and accounting for asset impairments and asset retirements. SFAS No. 143 will be effective for the Company beginning January 1, 2003. The Company does not believe that the impact of SFAS No. 143 will be material to the Company’s consolidated financial statements or results of operations. The Company adopted SFAS No. 144 effective January 1, 2002. The adoption of this standard did not have a material impact on the Company’s consolidated financial position and results of operations.

In April 2002, the Financial Accounting Standards Board issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” SFAS No. 145 rescinds or amends, effective immediately, several other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. In July 2002, the Financial Accounting Standards Board issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” The standard requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Examples of costs covered by the standard include lease termination costs and certain employee severance costs

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that are associated with a restructuring, discontinued operation, plant closing, or other exit or disposal activity. SFAS No. 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002.

The Company does not believe that SFAS Nos. 145 and 146 will have a material impact to its consolidated financial position or results or operations.

Note 6 — Related Party Transaction

On April 1, 2002, the Company amended its lease relating to 116,000 square feet of its Los Angeles facility. The original lease expires on December 31, 2002. The amendment extends the term of the lease for two years through December 31, 2004 and increases the rent to approximately $.75 from $.70 per square foot, for a total annual rent of $1,035,000. The Company also has the option to extend the term for two years at $.79 per square foot. The lease is with a partnership comprised of Michael Ziering, CEO and director, Ira Ziering, VP and director, Marilyn Ziering, VP, and other children of Mrs. Ziering who are shareholders of the Company. The rent was determined on the basis of an independent appraisal, and the terms of the lease amendment were approved unanimously by the non-interested members of the board of directors.

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ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

Except for the historical information contained herein, this report and the following discussion in particular contain forward-looking statements (identified by the words “estimate,” “project,” “anticipate,” “plan,” “expect,” “intend,” “believe,” “hope,” and similar expressions), which are based upon management’s current expectations and speak only as of the date made. These forward-looking statements are subject to risks, uncertainties, and factors that could cause actual results to differ materially from the results anticipated in the forward-looking statements. These risks and uncertainties include:

          the Company’s ability to successfully market new and existing products;
 
          the Company’s ability to keep abreast of technological innovations and successfully incorporate them into new products;
 
          the Company’s current dependence on sole suppliers for key chemical components in the IMMULITE assays;
 
          the risks inherent in the development and release of new products, such as delays, unforeseen costs, technical difficulties, and regulatory approvals;
 
          competitive pressures, including technological advances and patents obtained by competitors;
 
          currency risks based on the relative strength or weakness of the U.S. dollar;
 
          domestic and foreign governmental health care regulation and cost containment measures; and
 
          political and economic instability in certain foreign markets.

Results of Operations

The Company’s sales increased 17.0% in the third quarter ended September 30, 2002 to $79.4 million compared to sales of $67.9 million in the third quarter of 2001. Sales increased 14.5 % to $238.8 million in the first nine months of 2002 from $208.5 million in the first nine months of 2001. Sales of all IMMULITE products (instruments, parts, service, and reagents) in the three and nine months ended September 30, 2002 were $68.1 million and $202.3 million, increases of 24.4% and 20.3% over the corresponding periods of 2001. Sales of IMMULITE PRODUCTS represented 84.7% of sales in the first nine months of 2002, compared to 80.7% of sales in the first nine months of 2001.

IMMULITE reagents represented $55.5 million of 2002 third quarter sales, a 22.5% increase over the third quarter of 2001 and $165.0 million of sales in the first nine months of 2001, a 24.3% increase over the first nine months of 2001. Sales of IMMULITE systems (including service revenue and parts) were $12.6 million in the 2002 third quarter, up 33.3% from the third quarter of 2001. Instrument sales were $9.8 million or 12.4% of sales in the third quarter of 2002 versus $7.8 million or 11.5% of sales in 2001. As instruments are sold at a lower gross margin than reagents this shift negatively impacted gross margins in 2002. In the first nine months of 2002, sales of IMMULITE systems (including service revenue and parts) increased 5.1% to $37.3 million compared to the first nine months of 2001. The Company shipped a total of 259 IMMULITE systems during the third quarter of 2002, including 141 IMMULITE 2000 systems and 118 IMMULITE One systems. The total base of IMMULITE systems shipped grew to almost 7,900 including over 2,200 of the IMMULITE 2000 systems. The number of instruments shipped is important as the Company’s instruments can only use the Company’s reagents and thus provide an ongoing revenue stream.

Sales of the Company’s mature RIA products decreased approximately 16.1% in the third quarter of 2002 to $7.3 million from $8.7 million in 2001. In the first nine months of 2002, RIA declined 11.0% from $25.9 million in 2001. Sales of other DPC products, including allergy reagents, represented approximately 3% of sales in each of the three and nine month periods ended September 30, 2002. Sales of non-DPC products represented 2% of sales in the three and nine month periods ending September 30, 2002.

In the third quarter of 2002, domestic sales grew at 17.3%, to 28.0% of total sales, while foreign sales grew at 17.0%. In the first nine months of 2002, domestic sales grew at 15.5% to 27.6% of total sales, while international sales grew at 14.2%. The growth in domestic sales reflects continued penetration of large laboratory accounts and group purchasing organizations and the growth of a distributor of the Company’s products in the physician’s office laboratory market.

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Due to the significance of foreign sales (72% of total sales), in particular in Europe and South America, the Company is subject to currency risks based on the relative strength or weakness of the U.S. Dollar. In periods when the U.S. Dollar is strengthening, the effect of the translation of the financial statements of consolidated foreign affiliates is that of lower sales and net income. Had the value of the U.S. dollar relative to other currencies remained constant with the third quarter of 2001, sales for the three month period of 2002 would have increased 0.6% less over the 2001 period. Over the nine-month period of 2002 sales would have increased an additional 1.2% when compared to the same period of 2001. Due to intense competition, the Company’s foreign distributors are generally unable to increase prices to offset the negative effect when the U.S. dollar is strong. During the three and nine-month period, the U.S. Dollar weakened relative to the Euro but strengthened significantly relative to the Brazilian Real.

Gross profit as a percentage of sales decreased to 56.9% in the third quarter 2002 from 57.5% in the third quarter of 2001 and increased to 57.9% in the first nine months of 2002 from 57.3% in the first nine months of 2001. The decrease in gross margin in the third quarter of 2002 was due in part to the significant decline in the Brazilian Real relative to the U.S. Dollar causing the cost of goods sold in Brazil to increase, an increase in instrument sales as a percent of total sales and an increase in the number of instruments rented or placed in customer locations by unconsolidated affiliates. The increase in gross margin in the first nine months of 2002 was in part related to the increase in reagent sales as a percent of total sales.

The Company believes that because it sells to its affiliates in dollars, a strengthening dollar as well as potential increases in product sales through distribution agreements in the United States could put pressure on gross margins in the future.

Selling expense increased in absolute terms in the third quarter and first nine months of 2002 as a result of the higher level of sales, however it fell as a percent of sales in both periods. Research and development expenses increased in absolute dollars in the third quarter and the first nine months of 2002 relative to the third quarter and the first nine months of 2001, and increased as a percentage of sales in the third quarter to 11.7% but fell slightly in the nine month period of 2002 to 11.5%. The increase in expense reflects the increased number of ongoing research and development projects. General and administrative expenses increased in the third quarter and in the first nine months of 2002, but decreased as a percent of sales to 9.1% in the third quarter and 9.0% in the nine month period. It is expected that general and administrative expenses will exceed historical levels in the future.

Equity in income of affiliates represents the Company’s share of earnings of non-consolidated affiliates, principally the 45%-owned Italian distributor. This amount decreased to $604,000 in the third quarter of 2002 from $626,000 in the third quarter of 2001. In the first nine months of 2002, this amount increased to $2.4 million from $2.2 million for the comparable period in 2001.

Interest/other income (expense) — net includes interest income, interest expense, and foreign exchange transaction losses and gains. In the third quarter of 2002, the Company had other expenses of $2.4 million versus income of $238,000 in 2001. In the first nine months of 2002, the Company had other expenses of $1.9 million versus expenses of $462,000 in the same period of 2001. The third quarter of 2002 included a $2.1 million foreign currency transaction loss versus a $146,000 foreign currency gain in 2001. The first nine months of 2002 contained a foreign currency transaction loss of $1.5 million versus a loss of $862,000 in the first nine months of 2001.

The Company’s effective tax rate includes Federal, state, and foreign taxes. The Company’s tax rate remained at 31.0% in the third quarter of 2002, the same as the third quarter of 2001. The rate increased to 31.0% in the first nine months of 2002, from 30.6% in the same period in 2001.

Minority interest is the 44% minority owner’s interest in the earnings or losses of the Company’s consolidated Brazilian affiliate. This was a $450,000 income item (allocation of losses) in the third quarter of 2002 due to losses in the Brazilian affiliate related to the decline in the Real relative to the dollar, versus an expense item (allocation of income) of $166,000 in the third quarter of 2001 when the Brazilian affiliate was profitable.

Net income increased 8.5% to $9.9 million in the third quarter of 2002 or $.34 per diluted share from $9.1 million or $.31 per diluted share in the third quarter of 2001. Net income increased 26% in the first nine months of 2002 to $34.8 million or $ 1.17 per diluted share from $27.7 million or $.94 per diluted share in 2001.

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Liquidity and Capital Resources

The Company has adequate working capital and sources of capital to carry on its current business and to meet its existing capital requirements. The Company’s principal source of liquidity is net cash flow from operating activities which was $42.2 million in the first nine months of 2002 and $43.3 million in the first nine months of 2001. Additions to property, plant, and equipment in the first nine months of 2002 were $8.1 million, principally the result of the Company’s new computer systems in Los Angeles and Europe. Cash flow used for the placement of IMMULITE systems under sales-type and operating leases was $21.6 million in the first nine months of 2002 compared to $24.4 million in the first nine months of 2001. These leases have periods ranging from three to five years. The Company decreased borrowings by $1.0 million in the first nine months of 2002 and by $64,000 in the first nine months of 2001. The Company is considering the acquisition of additional real property in Los Angeles to accommodate its future expansion.

The Company’s foreign operations are subject to risks, such as currency devaluations, associated with political and economic instability. See discussion above under “Results of Operations.”

The Company continues to upgrade its computer systems. Expenditures for this activity are anticipated to be less than $1 million for the remainder of 2002, and it has no other material commitments for capital expenditures in 2002.

The Company has a $20 million domestic unsecured line of credit under which there were no borrowings outstanding at September 30, 2002 or December 31, 2001. The Company had other notes payable (consisting of bank borrowings by the Company’s foreign consolidated subsidiaries payable in their local currency, some of which are guaranteed by the Company) of $17.7 million at September 30, 2002, compared to $17.0 million at December 31, 2001. The Company received $3.2 million from the exercise of stock options in the first nine months of 2002 versus $5.6 million in the first nine months of 2001. The Company has paid a quarterly cash dividend of $.06 per share, on a split-adjusted basis, since 1995.

Critical Accounting Policies

Management’s beliefs regarding significant accounting policies have not changed significantly from those discussed in Item 7 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2001.

Contractual Obligations and Commitments

On April 1, 2002, the Company amended its lease relating to 116,000 square feet of its Los Angeles facility. The original lease expires on December 31, 2002. The amendment extends the term of the lease for two years through December 31, 2004 and increases the rent to approximately $.75 from $.70 per square foot, for a total annual rent of $1,035,000. The Company also has the option to extend the term for two years at $.79 per square foot. The lease is with a partnership comprised of Michael Ziering, CEO and director, and Ira Ziering, VP and director, Marilyn Ziering, VP, and other children of Mrs. Ziering who are shareholders of the Company. The rent was determined on the basis of an independent appraisal, and the terms of the lease amendment were approved unanimously by the non-interested members of the board of directors. The Company decided not to sign a long-term lease for this facility so that it will have the flexibility to consider all options to meets its future space requirements.

Euro Conversion

The Company has significant sales to European countries (the “participating countries”), which converted to a common legal currency (the “Euro”) on January 1, 2002. The conversion to the Euro has eliminated currency exchange risk among the participating countries.

The Company sells its products in the participating countries through affiliated and non-affiliated distributors that determine sales prices in their respective territories. The use of a single currency in the participating countries may ultimately affect this variable pricing in the various European markets because of price transparency. Nevertheless, other market factors such as local taxes, customer preferences, and product assortment may reduce the need for price equalization.

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New Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations” and SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. SFAS No. 142 changes the accounting for goodwill from an amortization method to an impairment-only approach. Amortization of goodwill ceased upon adoption of this statement. In addition, the standard includes provisions for the reclassification of certain existing recognized intangibles as goodwill, reassessment of the useful lives of existing recognized intangibles, reclassification of certain intangibles out of previously reported goodwill, and the identification of reporting units for purposes of assessing potential future impairments of goodwill. Under SFAS Nos. 141 and 142, goodwill and other intangibles are initially assessed for impairment upon adoption of the statements with subsequent assessments required annually and when there is reason to suspect that their values have been diminished or impaired, with any corresponding write-downs recognized as necessary.

In connection with the adoption of SFAS No. 141, the Company evaluated its intangibles including goodwill and determined that reclassification of such balances was not necessary. Accordingly, the Company’s intangibles consist solely of goodwill generated in connection with the purchase of certain of its affiliates. Effective January 1, 2002, the Company adopted SFAS No. 142. Accordingly, amortization of goodwill ceased, effective January 1, 2002, and would have been $270,000 in the third quarter and $800,000 in the first nine months of 2002 had the non-amortization provisions of SFAS No. 142 not been adopted. Pro forma net income for the three-month period ended September 30, 2001, had the non-amortization provisions of SFAS No. 142 been applied to that period, would have been $9,333,000, an increase of $202,000 on an after-tax basis, or $.32 per diluted share versus the $9,131,000 or $.31 per diluted share actually reported. Pro forma net income for the nine-month period ended September 30, 2001 would have been $28,268,000, an increase of $576,000 on an after-tax basis, or $.96 per diluted share versus the $27,692,000 or $.94 per diluted share actually reported. As required under SFAS No. 142, the Company has completed the required transitional impairment testing and does not believe impairment of its goodwill is necessary.

During the third quarter of 2001, the Financial Accounting Standards Board issued SFAS No. 143, “Accounting for Asset Retirement Obligations”, and SFAS No. 144, “Accounting for the Impairment and Disposal of Long-Lived Assets.” These new standards clarify and supersede existing guidance for the reporting and accounting for asset impairments and asset retirements. SFAS No. 143 will be effective for the Company beginning January 1, 2003. The Company does not believe that the impact of SFAS No. 143 will be material to the Company’s consolidated financial statements or results of operations. The Company adopted SFAS No. 144 effective January 1, 2002. The adoption of this standard did not have a material impact on the Company’s consolidated financial position and results of operations.

In April 2002, the Financial Accounting Standards Board issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” SFAS No. 145 rescinds or amends, effective immediately, several other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. In July 2002, the Financial Accounting Standards Board issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” The standard requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Examples of costs covered by the standard include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operation, plant closing, or other exit or disposal activity. SFAS No. 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002.

The Company does not believe that SFAS Nos. 145 and 146 will have a material impact to its consolidated financial position or results or operations.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There has been no material change during the quarter and nine months ended September 30, 2002, from the disclosures about market risk provided in the Company’s Annual Report on Form 10-K for the year ended December 31, 2001.

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ITEM 4. CONTROLS AND PROCEDURES

Based on their evaluation of the Company’s disclosure controls and procedures as of a date within 90 days prior to the filing of this report, the Chief Executive Officer and Chief Financial Officer of the Company have concluded that such disclosure controls and procedures were adequate and effective and designed to ensure that material information relating to the Company and its consolidated subsidiaries would be made known to them by others within those entities. Since the date of such evaluation, there have been no significant changes in internal controls or in other factors that could significantly affect internal controls, including any corrective actions with regard to significant deficiencies and material weaknesses.

PART II. OTHER INFORMATION

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.

        A)    Exhibits

     
99.1
 
Officers Certification

        B)    Forms 8-K — None

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.

DIAGNOSTIC PRODUCTS CORPORATION
(Registrant)
         
/s/ Michael Ziering

Michael Ziering
  President and
Chief Executive Officer and
Chairman of the Board
(Principal Executive Officer)
Director
  November 13, 2002
 
/s/ James L. Brill

James L. Brill
  Vice President-Finance
(Principal Financial and Accounting
Officer)
  November 13, 2002

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CERTIFICATION

I, Michael Ziering, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Diagnostic Products Corporation;

2. Based on my knowledge, this quarterly 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 quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a) designed such disclosure controls and procedures 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 quarterly report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: November 13, 2002

/s/ Michael Ziering

Michael Ziering, Chief Executive Officer

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CERTIFICATION

I, James L. Brill, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Diagnostic Products Corporation;

2. Based on my knowledge, this quarterly 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 quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a) designed such disclosure controls and procedures 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 quarterly report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: November 13, 2002

/s/ James L. Brill

James L. Brill, Chief Financial Officer

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EXHIBIT INDEX

     
99.1   Officer’s Certification

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