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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended September 30, 2002

OR

For the transition period from ____________ to ____________

Commission File Number 0-22879

BIORELIANCE CORPORATION
(Exact name of the registrant as specified in its charter)

Registrant’s telephone number, including area code:
(301) 738-1000

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   X        NO       

As of October 15, 2002, 8,453,592 shares of registrant’s common stock, par value $.01 per share, were outstanding.

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BIORELIANCE CORPORATION

TABLE OF CONTENTS

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BIORELIANCE CORPORATION

CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)

The accompanying notes are an integral part of these consolidated financial statements.

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BIORELIANCE CORPORATION

CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)

The accompanying notes are an integral part of these consolidated financial statements.

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BIORELIANCE CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

The accompanying notes are an integral part of these consolidated financial statements.

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BIORELIANCE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

(1) Description of the Business

     BioReliance Corporation (the Corporation) is a contract service organization that provides testing and development, and manufacturing services for biologics and other biomedical products to biotechnology and pharmaceutical companies worldwide.

(2) Interim Financial Statements Presentation

     The accompanying interim financial statements are unaudited and have been prepared by the Corporation pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) regarding interim financial reporting. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements, and therefore these consolidated financial statements should be read in conjunction with the audited consolidated financial statements, and related notes thereto, included in the Corporation’s Annual Report on Form 10-K. In the opinion of management, the unaudited consolidated financial statements for the three-month and nine-month periods ended September 30, 2001 and 2002 include all normal and recurring adjustments that are necessary for a fair presentation of the results of the interim period. The results of operations for the three-month and nine-month periods ended September 30, 2001 and 2002 are not necessarily indicative of the results for the entire year ending December 31, 2002.

(3) Net Income Per Share

     The Corporation calculates earnings per share (EPS) on both a basic and diluted basis. Dilutive securities are excluded from the computation in periods in which they have an anti-dilutive effect. Net income available to common stockholders and common equivalent stockholders is equal to net income for all periods presented.

     The following table represents reconciliations between the weighted average common stock outstanding used in basic EPS and the weighted average common and common equivalent shares outstanding used in diluted EPS for each of the periods presented (in thousands):

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(4) Segment Information

     Summarized financial information concerning the Corporation’s reportable segments for the three months and nine months ended September 30 is shown in the following table (in thousands):

     Summarized financial information concerning the Corporation’s revenue and gross profit by geographic region for the three months and nine months ended September 30 is shown in the following table (in thousands):

(5) New Accounting Pronouncements

     In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. (FAS) 141, “Business Combinations” (FAS 141) and FAS 142, “Goodwill and Other Intangible Assets” (FAS 142). FAS 141 addresses the initial recognition and measurement of goodwill and other intangible assets acquired in a business combination. FAS 142 addresses the initial recognition and measurement of intangible assets acquired outside of a business combination, whether acquired individually or with a group of other assets, and the accounting and reporting for goodwill and other intangibles subsequent to their acquisition. These standards require all future business combinations to be accounted for using the purchase method of accounting. Goodwill will no longer be amortized but instead will be subject to impairment tests at least annually. The Corporation was required to adopt FAS 141 and FAS 142 on a prospective basis as of January 1, 2002; however, certain provisions

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of these new standards may also apply to any acquisitions concluded after June 30, 2001. The initial adoption of this guidance did not have a material impact on the Corporation’s results of operations or financial position. The guidance may impact the way in which the Corporation will account for future transactions.

     In October 2001, the FASB issued FAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (FAS 144). FAS 144 supercedes FASB Statement No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of”. FAS 144 applies to all long-lived assets (including discontinued operations) and consequently amends Accounting Principles Board Opinion No. 30, “Reporting Results of Operations-Reporting the Effects of Disposal of a Segment of a Business”. The Corporation adopted FAS 144 on January 1, 2002. The initial adoption of this guidance has not had a material impact on the Corporation’s results of operations or financial position.

     In April 2002, the FASB issued FAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections” (FAS 145). FAS 145 rescinds FAS No. 4, “Reporting Gains and Losses from Extinguishment of Debt”, and an amendment of that statement, FAS No. 64, “Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements”. FAS No. 145 also rescinds FAS No. 44, “Accounting for Intangible Assets of Motor Carriers” and amends FAS No. 13, “Accounting for Leases”, to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. FAS 145 also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. The Corporation does not believe that adoption of FAS No. 145 will have a material impact on its results of operations or financial position.

     In June 2002, the Financial Accounting Standards Board issued FAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (FAS 146). FAS 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” The provisions of this Statement are effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. The Corporation does not expect application of this Statement to have a material impact on the Corporation’s financial statements.

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     Certain statements made in this Report on Form 10-Q are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include, without limitation, any statement that may predict, forecast, indicate, or imply future results, performance, or achievements, which generally are not historical in nature, and may contain the words “believe”, “anticipate”, “expect”, “estimate”, “project”, “will be”, “will continue”, “will likely result”, or similar words or phrases. Forward-looking statements in this Report on Form 10-Q include, among others, statements regarding:

	•		the anticipated growth of revenue and improvement in profit margins,
	•		the Corporation’s ability to use additional capacity in its manufacturing facility and the effect on earnings of underutilization of this facility,
	•		the Corporation’s plans to expand capacity in both its testing and development and manufacturing business segments, including the timing and completion of any such expansion,
	•		the anticipated increase in selling, general and administrative expenses and the hiring of new employees,
	•		plans to improve the Corporation’s information systems and sales and marketing infrastructure,
	•		the anticipated leveling off of research and development expenses,
	•		the amount and impact of a change in tax rates,
	•		the Corporation’s ability to fund its operations with existing cash, cash flows from operations and its line of credit, and
	•		the impact of foreign currency exchange rate fluctuations on the Corporation.

     Forward-looking statements involve risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. The risks and uncertainties are detailed from time to time in reports filed by BioReliance with the SEC, including in its Forms 10-K.

     As and when made, management believes that these forward-looking statements are reasonable. The Corporation undertakes no obligation to revise or publicly release the results of any revision to these forward-looking statements. Therefore, readers are cautioned not to place undue reliance on these forward-looking statements since new risk factors emerge from time to time and it is not possible for management to predict all such risk factors, nor can it assess the impact of all such risk factors on the Corporation’s business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

     The following discussion and analysis of the Corporation’s financial condition and results of operations should be read in conjunction with the Corporation’s consolidated financial statements and related notes thereto included elsewhere in this Form 10-Q.

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Results of Operations
(Dollars in tables are in thousands)

     For the three months ended September 30, 2002, the Corporation had gross revenue of $21.6 million, an increase of 16% over gross revenue of $18.6 million for the three months ended September 30, 2001. Earnings per share for the three months ended September 30, 2002 were $0.36 (diluted) compared with $0.26 (diluted) for the three months ended September 30, 2001.

     For the nine months ended September 30, 2002, the Corporation had gross revenue of $61.3 million, an increase of 22% over gross revenue of $50.2 million for the nine months ended September 30, 2001. Earnings per share for the nine months ended September 30, 2002 were $0.91 (diluted) compared with $0.41 (diluted) for the nine months ended September 30, 2001.

Gross Revenue by Segment

     The following table shows a comparison of revenue by operational segment for the three months and nine months ended September 30, 2001 and 2002:

     The increases in testing and development revenue for the three months and nine months ended September 30, 2002 are due primarily to the continued increases in the rates of new orders, both in the U.S. and Europe. The increase in U.S. testing and development revenue results from increases in both biologics testing services and toxicology services. Additionally, U.S. testing and development revenue for the three months and nine months ended September 30, 2002 includes an adjustment of approximately $150,000 relating to long-term contracts. The increase in European testing and development revenue was driven by increases in revenue generated in all major service areas.

     The increases in manufacturing revenue for the three months and nine months ended September 30, 2002 represent increases in both the U.S. and Europe. U.S. increases are attributable to increases in virtually all manufacturing services as a result of the continued ramp-up of the Corporation’s U.S. manufacturing facility. Revenue growth for the three months and nine months ended September 30, 2002 continued to be impacted by project delays resulting from client requests for additional process development and client regulatory issues.

     Price increases provided a relatively minor portion of the revenue increases in both of the Corporation’s business segments for the three months and nine months ended September 30, 2002.

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     Approximately 20% of the Corporation’s manufacturing revenue for the three and nine months ended September 30, 2002, resulted from work performed under the Corporation’s smallpox vaccine contracts. Approximately 7% and 6% of the Corporation’s total revenue for the three months and nine months ended September 30, 2002, respectively, resulted from work performed under these smallpox vaccine contracts. Work under these contracts is subject to government prime contractor-issued task orders, contract amendments and potential expansion and acceleration; thus, the future revenue related to these contracts cannot be predicted with certainty. As with all government related contracts, these contracts are subject to termination by the government at any time.

Gross Revenue by Geographic Region

     The following table shows a comparison of revenue by geographic region for the three months and nine months ended September 30, 2001 and 2002:

     The increases in revenue generated in the United States for the three months and nine months ended September 30, 2002 resulted from increases in orders, which fueled increased revenue from both the testing and development and manufacturing segments. Revenue generated in the United States for the three and nine months ended September 30, 2002 includes an adjustment of approximately $150,000 relating to long-term contracts.

     The increases in revenue generated in Europe for the three months and nine months ended September 30, 2002 reflect an increase in revenue generated both in the Corporation’s U.K. and German facilities. As the German facility continues to run near capacity, revenue fluctuations in that facility are primarily attributable to different pricing structures among contracts, and revenue growth, if any, will likely be modest for the remainder of 2002.

     The Corporation expects that testing and development revenue will continue to increase in the foreseeable future, and it expects that manufacturing revenue in the U.S. will increase with the Corporation’s smallpox vaccine and other commercial contracts in the U.S. manufacturing facility, but there can be no assurance that any such expectations will prove to be correct. The Corporation is planning for laboratory expansions that would become available to meet anticipated growth in the U.S. and Europe over a two-to-three year period.

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Gross Profit by Operating Segment

     The following table compares gross profit and gross margin by operational segment for the three months and nine months ended September 30, 2001 and 2002:

     The increases in testing and development gross margins for the three months and nine months ended September 30, 2002 were driven by increased gross profits generated in both the U.S. and the U.K. The increased gross profits are a result of increased revenue, combined with lower expenses related to decreased consulting fees, and operating tax credits that pertained largely to prior periods. These decreased costs were only partially offset by increases in variable costs relating to labor, direct materials, and subcontracted work.

     The improvement in manufacturing gross margins for the three months ended September 30, 2002 reflects an increase in gross profits from European manufacturing operations, offset partly by a decrease in U.S. manufacturing margins. U.S. manufacturing margins decreased because of project delays resulting from client requests for additional process development.

     The improvement in manufacturing gross margins for the nine months ended September 30, 2002 is due to a significant decrease in the losses generated in the U.S. as well as an increase in the gross profit from European manufacturing operations. Increased revenue was partially offset by increases in both variable and fixed costs.

     The Corporation expects future revenue growth to exceed cost increases related to its U.S. manufacturing facility, thereby improving gross margins. However, the build-out and validation of this facility has demanded and will continue to demand considerable time and resources, and there are high fixed costs related to the facility. The Corporation continues to utilize substantially less than full capacity in this facility. This facility will likely constrain earnings for the Corporation at least for the foreseeable future. Management cannot predict when, if ever, the facility will generate profits. Without the results of operations of this facility, the Corporation’s total gross margins would have been 52% and 49% respectively for the three months and nine months ended September 30, 2002, as compared to 46% and 43% respectively, for the three months and nine months ended September 30, 2001.

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Gross Profit by Geographic Region

     The following table compares gross profit and gross margin by geographic region for the three months and nine months ended September 30, 2001 and 2002:

     The increase in U.S. gross margins for the nine months ended September 30, 2002 resulted from improved gross profits in the testing and development segment and reduced losses in the manufacturing segment. The increased gross profit is a result of increased revenue, combined with lower expenses related to decreased consulting fees, and operating tax credits that pertained largely to prior periods. These decreased costs were only partially offset by increases in variable costs relating to labor, direct materials, and subcontracted work. The increase in U.S. gross margins for the three months ended September 30, 2002 reflect increases in U.S. testing and development margins, partially offset by decreases in U.S. manufacturing margins, resulting from those factors described above. Without the results of operations of the U.S. manufacturing facility, U.S. gross margins would have been 50% and 48% respectively for the three months and nine months ended September 30, 2002, as compared to 46% and 42% respectively, for the three months and nine months ended September 30, 2001.

     The improvement in European gross margins for the three months and nine months ended September 30, 2002 is attributable to increased profits in both the testing and development and manufacturing segments resulting from continued efficient utilization of capacity, higher revenue, and a more favorable product mix. European gross margins exceeded U.S. gross margins for the three months and nine months ended September 30, 2002, largely because U.S. margins are affected by fixed costs associated with the U.S. manufacturing facility. The U.S. testing and development segment also includes several units with historically low margins, which are not part of the U.K. testing and development business.

     The Corporation expects margins in the testing and development segment, both in the U.S. and Europe, to improve moderately with economies of scale in the foreseeable future. The rate of improvement is expected to be impacted by expenditures related to planned additions to capacity beginning in 2003 in Europe and the U.S.

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Operating Expenses

     The following table shows a comparison of operating expenses, other than cost of sales, for the three months and nine months ended September 30, 2001 and 2002:

     Selling, general and administrative expenses increased for the three months and nine months ended September 30, 2002 primarily due to increases in professional fees associated with special projects and labor and fringe costs. These increases were partially offset by a reduction in the Corporation’s bad debt expense. Selling, general and administrative expenses are expected to increase as the Corporation hires additional administrative staff, implements additional applications for its information systems and makes additional investments for technical sales support and its marketing infrastructure. As a percentage of revenue, selling, general and administrative expenses decreased to 20% and 21% for the three months and nine months ended September 30, 2002 respectively from 21% and 23% for the three months and nine months ended September 30, 2001, respectively. The decrease can be attributed principally to increased revenues, continued programs to control expenses, and the successful integration of past enhancements and expansion in sales, marketing and information systems.

     Research and development expenses represent the investment of internal resources to develop new methods and tests to support the Corporation’s services. The decrease in these expenses is related to a shift in the Corporation’s priorities from undertaking long-term research projects to the development of tests that can be delivered to the clients in a relatively shorter period. The Corporation expects these expenses to remain near these levels for the foreseeable future.

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Non-Operating Expenses

     The following table shows a comparison of non-operating expenses for the three months and nine months ended September 30, 2001 and 2002: