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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




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FORM 10-Q

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


For the quarterly period ended September 30, 2003

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
(State or other jurisdiction of
incorporation or organization)
    
    95-2802182
(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 þ      NO o

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).

YES þ      NO o

The number of shares of Common Stock, no par value, outstanding as of October
31, 2003, was 28,825,425.



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TABLE OF CONTENTS



|                              |                                                                                               |  |  |  |  |  |  | 
|----------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION
|                              | ITEM I. 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 31.1                 
|EXHIBIT 31.2                 
|EXHIBIT 32.1                 



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PART I. FINANCIAL INFORMATION




ITEM I. FINANCIAL STATEMENTS

DIAGNOSTIC PRODUCTS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)

(Dollars In Thousands, except per share data)Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2003
    
    2002
    
    2003
    
    2002SALES:Non-Affiliated Customers
    
    $
    87,483
    
    
    $
    72,227
    
    
    $
    255,916
    
    
    $
    215,780Unconsolidated Affiliates
    
    
    6,254
    
    
    
    7,185
    
    
    
    20,652
    
    
    
    22,808Total Sales
    
    
    93,737
    
    
    
    79,412
    
    
    
    276,568
    
    
    
    238,588COST OF SALES
    
    
    41,335
    
    
    
    34,229
    
    
    
    117,855
    
    
    
    100,590Gross Profit
    
    
    52,402
    
    
    
    45,183
    
    
    
    158,713
    
    
    
    137,998OPERATING EXPENSES:Selling
    
    
    15,649
    
    
    
    13,165
    
    
    
    46,704
    
    
    
    39,763Research and Development
    
    
    10,037
    
    
    
    9,326
    
    
    
    30,087
    
    
    
    27,355General and Administrative
    
    
    8,401
    
    
    
    7,240
    
    
    
    25,309
    
    
    
    21,457Sale of Product Line
    
    
    (4,218
    )
    
    
    
    
    
    
    (4,218
    )Equity in Income of Affiliates
    
    
    (1,280
    )
    
    
    (604
    )
    
    
    (4,201
    )
    
    
    (2,434
    )OPERATING EXPENSES  NET
    
    
    28,589
    
    
    
    29,127
    
    
    
    93,681
    
    
    
    86,141OPERATING INCOME
    
    
    23,813
    
    
    
    16,056
    
    
    
    65,032
    
    
    
    51,857Interest/Other Income (Expense)  Net
    
    
    283
    
    
    
    (2,352
    )
    
    
    436
    
    
    
    (1,922
    )INCOME BEFORE TAXES
AND MINORITY INTEREST
    
    
    24,096
    
    
    
    13,704
    
    
    
    65,468
    
    
    
    49,935PROVISION FOR INCOME TAXES
    
    
    6,988
    
    
    
    4,248
    
    
    
    18,986
    
    
    
    15,480MINORITY INTEREST
    
    
    143
    
    
    
    (450
    )
    
    
    189
    
    
    
    (308
    )NET INCOME
    
    $
    16,965
    
    
    $
    9,906
    
    
    $
    46,293
    
    
    $
    34,763EARNINGS PER SHARE:BASIC
    
    $
    .59
    
    
    $
    .35
    
    
    $
    1.61
    
    
    $
    1.22DILUTED
    
    $
    .57
    
    
    $
    .34
    
    
    $
    1.56
    
    
    $
    1.17WEIGHTED-AVERAGE SHARES OUTSTANDING:BASIC
    
    
    28,760
    
    
    
    28,540
    
    
    
    28,691
    
    
    
    28,456DILUTED
    
    
    29,697
    
    
    
    29,506
    
    
    
    29,638
    
    
    
    29,619


See Accompanying Notes to Consolidated Financial Statements

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DIAGNOSTIC PRODUCTS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)

(Dollars in Thousands)September 30,
    
    December 31,2003
    
    2002AssetsCURRENT ASSETS:Cash and cash equivalents
    
    $
    56,871
    
    
    $
    54,284Accounts receivable (including receivables from unconsolidated
affiliates of $7,075 and $7,256, respectively)  net of allowance
for doubtful accounts of $2,612 and $2,181, respectively
    
    
    87,097
    
    
    
    78,676Inventories
    
    
    83,885
    
    
    
    75,860Prepaid expenses and other current assets
    
    
    6,186
    
    
    
    5,542Deferred income taxes
    
    
    4,153
    
    
    
    5,616Total current assets
    
    
    238,192
    
    
    
    219,978PROPERTY, PLANT, AND EQUIPMENT:Land and buildings
    
    
    56,800
    
    
    
    54,021Machinery and equipment
    
    
    75,679
    
    
    
    69,069Leasehold improvements
    
    
    9,341
    
    
    
    10,022Construction in progress
    
    
    27,420
    
    
    
    2,487Total
    
    
    169,240
    
    
    
    135,599Less accumulated depreciation and amortization
    
    
    (71,512
    )
    
    
    (65,714
    )Property, plant, and equipment  net
    
    
    97,728
    
    
    
    69,885SALES-TYPE AND OPERATING LEASES  net
    
    
    75,124
    
    
    
    66,653DEFERRED INCOME TAXES
    
    
    1,367
    
    
    
    1,367INVESTMENTS IN AFFILIATED COMPANIES
    
    
    28,683
    
    
    
    22,245OTHER ASSETS
    
    
    4,915GOODWILL  Net of accumulated amortization of $11,908
and $11,896
    
    
    13,386
    
    
    
    13,319TOTAL ASSETS
    
    $
    459,395
    
    
    $
    393,447Liabilities and Shareholders EquityCURRENT LIABILITIES:Accounts payable
    
    $
    17,962
    
    
    $
    15,608Accrued liabilities
    
    
    30,747
    
    
    
    27,039Income taxes payable
    
    
    8,456
    
    
    
    4,955Notes payable
    
    
    21,265
    
    
    
    19,727Total current liabilities
    
    
    78,430
    
    
    
    67,329MINORITY INTEREST
    
    
    2,722
    
    
    
    2,554SHAREHOLDERS EQUITY:Common Stock-no par value, authorized 60,000,000 shares;
outstanding 28,792,205 shares and 28,603,779 shares, respectively
    
    
    63,556
    
    
    
    60,807Retained earnings
    
    
    322,358
    
    
    
    281,228Accumulated other comprehensive loss
    
    
    (7,671
    )
    
    
    (18,471
    )Total shareholders equity
    
    
    378,243
    
    
    
    323,564TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    459,395
    
    
    $
    393,447


See Accompanying Notes to Consolidated Financial Statements

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DIAGNOSTIC PRODUCTS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)

Nine Months Ended(Dollars in
Thousands)
    
    September 30,2003
    
    2002CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    46,293
    
    
    $
    34,763Adjustments to reconcile net income to net cash
flows from operating activities:Depreciation and amortization
    
    
    25,444
    
    
    
    21,413Equity in undistributed income of unconsolidated affiliates
    
    
    (3,754
    )
    
    
    (2,434
    )Deferred income taxes
    
    
    755
    
    
    
    Changes in operating assets and liabilities:Accounts receivable
    
    
    (4,010
    )
    
    
    (6,001
    )Inventories
    
    
    (6,004
    )
    
    
    (9,852
    )Prepaid expenses and other current assets
    
    
    (3,601
    )
    
    
    (1,860
    )Accounts payable
    
    
    (1,419
    )
    
    
    (4,816
    )Accrued liabilities
    
    
    2,354
    
    
    
    10,207Income taxes payable
    
    
    3,085
    
    
    
    836Net cash flows from operating activities
    
    
    59,143
    
    
    
    42,256CASH FLOWS USED FOR INVESTING ACTIVITIES:Additions to property, plant, and equipment
    
    
    (32,695
    )
    
    
    (8,095
    )Sales-type and operating leases
    
    
    (17,610
    )
    
    
    (21,628
    )Investment in affiliated companies
    
    
    
    
    
    
    (1,373
    )Net cash flows used for investing activities
    
    
    (50,305
    )
    
    
    (31,096
    )CASH FLOWS FROM FINANCING ACTIVITIES:Repayment of notes payable-net
    
    
    (699
    )
    
    
    (1,034
    )Proceeds from exercise of stock options
    
    
    2,749
    
    
    
    3,180Cash dividends paid
    
    
    (5,164
    )
    
    
    (5,116
    )Net cash flows used for financing activities
    
    
    (3,114
    )
    
    
    (2,970
    )EFFECT OF EXCHANGE RATE CHANGES ON CASH
    
    
    (3,137
    )
    
    
    2,943NET INCREASE IN CASH AND CASH EQUIVALENTS
    
    
    2,587
    
    
    
    11,133CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
    
    
    54,284
    
    
    
    31,834CASH AND CASH EQUIVALENTS
AT END OF PERIOD
    
    $
    56,871
    
    
    $
    42,967


See Accompanying Notes to Consolidated Financial Statements

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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, 2003
and 2002 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 2002 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, 2003 are not necessarily indicative of the results to be expected for the
year ending December 31, 2003. 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.

Pro Forma Stock-Based Compensation

The Company has stock option plans under which options have been granted at
exercise prices equal to the market price at the date of grant. Options
granted vest over periods of three to nine years and expire ten years from the
date of grant.

Pursuant to Statement of Financial Accounting Standards (SFAS) No. 123,
Accounting for Stock-Based Compensation, the Company has elected to account
for its employee stock options under Accounting Principles Board (APB)
Opinion No. 25, Accounting for Stock Issued to Employees, which recognizes
expense based on the intrinsic value at the date of grant. As stock options
have been issued with exercise prices equal to the respective market prices at
grant date, no compensation expense has resulted. In December 2002, the
Financial Accounting Standards Board (FASB) issued SFAS No. 148, Accounting
for Stock-Based CompensationTransition and Disclosure, an amendment of FASB
Statement No. 123, which provides alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. SFAS No. 148 also amends the disclosure requirements of
SFAS No. 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The
Company elected to maintain the intrinsic method of accounting for stock
options under APB No. 25. Had compensation cost for all options granted been
determined based on the fair value at grant date consistent with SFAS No. 123,
the Companys net earnings and earnings per share would have been as follows:

(Amounts in Thousands, except per share data)Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2003
    
    2002
    
    2003
    
    2002Net EarningsAs Reported
    
    $
    16,965
    
    
    $
    9,906
    
    
    $
    46,293
    
    
    $
    34,763Pro Forma expense
    
    
    (745
    )
    
    
    (673
    )
    
    
    (2,221
    )
    
    
    (2,019
    )Pro Forma
    
    $
    16,220
    
    
    $
    9,233
    
    
    $
    44,072
    
    
    $
    32,744Net Earnings Per ShareBasic:As Reported
    
    $
    0.59
    
    
    $
    0.35
    
    
    $
    1.61
    
    
    $
    1.22Pro Forma Adjustment
    
    
    (0.03
    )
    
    
    (0.02
    )
    
    
    (0.08
    )
    
    
    (0.07
    )Pro Forma
    
    $
    0.56
    
    
    $
    0.33
    
    
    $
    1.53
    
    
    $
    1.15Diluted:As Reported
    
    $
    0.57
    
    
    $
    0.34
    
    
    $
    1.56
    
    
    $
    1.17Pro Forma Adjustment
    
    
    (0.03
    )
    
    
    (0.02
    )
    
    
    (0.07
    )
    
    
    (0.07
    )Pro Forma
    
    $
    0.54
    
    
    $
    0.32
    
    
    $
    1.49
    
    
    $
    1.10


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Note 2  Inventories

Inventories by major categories are summarized as follows:

(Dollars in
Thousands)
    
    September 30,
    
    December 31,2003
    
    2002Raw materials
    
    $
    36,663
    
    
    $
    35,257Work in process
    
    
    37,876
    
    
    
    30,814Finished goods
    
    
    9,346
    
    
    
    9,789Total
    
    $
    83,885
    
    
    $
    75,860


Note 3  Comprehensive Income

Comprehensive income is summarized as follows:

Three Months Ended
    
    Nine Months Ended(Dollars in
Thousands)
    
    September 30,
    
    September 30,2003
    
    2002
    
    2003
    
    2002Net income
    
    $
    16,965
    
    
    $
    9,906
    
    
    $
    46,293
    
    
    $
    34,763Foreign currency translation adjustment
    
    
    (824
    )
    
    
    (3,266
    )
    
    
    10,800
    
    
    
    2,651Comprehensive income
    
    $
    16,141
    
    
    $
    6,640
    
    
    $
    57,093
    
    
    $
    37,414


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.

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, Croatia, Slovenia, Spain, The Netherlands, Belgium,
Luxemborg, 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:

(Dollars in
Thousands)
    
    Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2003
    
    2002
    
    2003
    
    2002Sales:IMMULITE (including service)
    
    $
    82,875
    
    
    $
    68,103
    
    
    $
    243,703
    
    
    $
    202,094Radioimmunoassay (RIA)
    
    
    6,572
    
    
    
    7,276
    
    
    
    20,300
    
    
    
    23,043Other (Includes DPC and
non-DPC products)
    
    
    4,290
    
    
    
    4,033
    
    
    
    12,565
    
    
    
    13,451$
    93,737
    
    
    $
    79,412
    
    
    $
    276,568
    
    
    $
    238,588


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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
    
    DPCLimited
    
    Biermann
    
    Medlab
    
    
    
    
    
    Less:United
    
    (United
    
    (German
    
    (Brazilian
    
    
    
    
    
    IntersegmentStates
    
    Kingdom)
    
    Group)*
    
    Group)*
    
    Other
    
    Elimination
    
    Total(Dollars in Thousands)Three Months Ended September 30, 2003Sales
    
    $
    59,825
    
    
    $
    16,324
    
    
    $
    12,661
    
    
    $
    8,752
    
    
    $
    20,701
    
    
    $
    (24,526
    )
    
    $
    93,737Net income (loss)
    
    
    10,972
    
    
    
    3,113
    
    
    
    504
    
    
    
    326
    
    
    
    2,130
    
    
    
    (80
    )
    
    
    16,965Three Months Ended September 30, 2002Sales
    
    $
    53,537
    
    
    $
    11,155
    
    
    $
    10,259
    
    
    $
    7,054
    
    
    $
    16,894
    
    
    $
    (19,487
    )
    
    $
    79,412Net income (loss)
    
    
    7,704
    
    
    
    2,264
    
    
    
    34
    
    
    
    (1,022
    )
    
    
    439
    
    
    
    487
    
    
    
    9,906(Dollars in Thousands)Nine Months Ended September 30, 2003Sales
    
    $
    177,958
    
    
    $
    48,201
    
    
    $
    38,348
    
    
    $
    22,696
    
    
    $
    63,870
    
    
    $
    (74,505
    )
    
    $
    276,568Net income (loss)
    
    
    27,854
    
    
    
    9,339
    
    
    
    1,310
    
    
    
    429
    
    
    
    7,372
    
    
    
    (11
    )
    
    
    46,293Nine Months Ended September 30, 2002Sales
    
    $
    169,544
    
    
    $
    32,695
    
    
    $
    29,488
    
    
    $
    23,289
    
    
    $
    51,232
    
    
    $
    (67,660
    )
    
    $
    238,588Net income (loss)
    
    
    24,275
    
    
    
    6,675
    
    
    
    488
    
    
    
    (699
    )
    
    
    3,584
    
    
    
    440
    
    
    
    34,763(Dollars in Thousands)Total AssetsSeptember 30, 2003
    
    $
    489,466
    
    
    $
    56,444
    
    
    $
    53,716
    
    
    $
    28,514
    
    
    $
    83,666
    
    
    $
    (252,411
    )
    
    $
    459,395December 31, 2002
    
    
    416,758
    
    
    
    44,958
    
    
    
    49,071
    
    
    
    21,055
    
    
    
    69,932
    
    
    
    (208,327
    )
    
    
    393,447


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

Note 5  New Accounting Pronouncements

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. As required, the
Company will apply provisions of SFAS No. 146 prospectively to exit or disposal
activities, if any, initiated after December 31, 2002.

During November 2002, the Financial Accounting Standards Board issued FASB
Interpretation No. 45, Guarantors Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others, which is
an interpretation of FASB Statements No. 5, 57, and 107 and rescission of FASB
Interpretation No. 34. The initial recognition and measurement provisions of
this Interpretation are applicable on a prospective basis to guarantees issued
or modified after December 31, 2002, and the disclosure requirements are
effective for financial statements of periods ending after December 15, 2002.
This interpretation addresses the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under guarantees,
and also clarifies the requirements related to the recognition of a liability

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by a guarantor at the inception of a guarantee for the obligations the
guarantor has undertaken in issuing that guarantee. The Company does not
currently provide any third-party guarantees.

On April 30, 2003, the Financial Accounting Standards Board issued SFAS No.
149, Amendment of Statement 133 on Derivative Instruments and Hedging
Activities. SFAS No. 149 amends and clarifies accounting for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities under SFAS No. 133. The new guidance
amends SFAS No. 133 for decisions made as part of the Derivatives
Implementation Group (DIG) process that effectively required amendments to
SFAS No. 133, and decisions made in connection with other FASB projects dealing
with financial instruments and in connection with implementation issues raised
in relation to the application of the definition of a derivative and
characteristics of a derivative that contains financing components. In
addition, it clarifies when a derivative contains a financing component that
warrants special reporting in the statement of cash flows. SFAS No. 149 is
effective for contracts entered into or modified after June 30, 2003 and for
hedging relationships designated after June 30, 2003. As required, the Company
will apply the provisions of SFAS No. 149 prospectively to contracts entered
into or modified after June 30, 2003 and for hedging relationships designated
after June 30, 2003.

In May 2003, the Financial Accounting Standards Board issued SFAS No. 150
Accounting for Financial Instruments with the Characteristics of Both
Liabilities and Equities. SFAS No. 150 establishes standards regarding the
manner in which an issuer classifies and measures certain types of financial
instruments having characteristics of both liabilities and equity. Pursuant to
SFAS No. 150, such freestanding financial instruments (i.e., those entered into
separately from an entitys other financial instruments or equity transactions
or that are legally detachable and separately exercisable) must be classified
as liabilities or, in some cases, assets. In addition, SFAS No. 150 requires
that financial instruments containing obligations to repurchase the issuing
entitys equity shares and, under certain circumstances, obligations that are
settled by delivery of the issuers shares be classified as liabilities.
Certain provisions of SFAS No. 150 have been indefinitely deferred; however,
the Statement is generally effective for financial instruments entered into or
modified after May 31, 2003 and for other instruments at the beginning of the
first interim period beginning after June 15, 2003. The Company does not
currently have any financial instruments that will be impacted by SFAS No. 150.

Note 6  Commitments and Contingent Liabilities

In the fourth quarter of 2002, the Company discovered internally that its
Chinese subsidiary had made certain improper payments that may have violated
foreign and U.S. laws. An independent investigation by the audit committee
concluded that no senior management of the Company was involved and that there
are no apparent similar issues with respect to the Companys other foreign
operations. The Company has implemented additional policies and procedures to
ensure compliance with applicable laws and the Company is cooperating with the
SEC in its review of this matter. The termination of the improper payments in
China may have a significant adverse effect on sales in China. For the year
ended December 31, 2002, the Chinese subsidiary had revenues of approximately
$9.0 million, less than 3% of total sales. In the fourth quarter of 2002, the
Company accrued $1.5 million for actual and estimated costs to resolve this
matter. As of September 30, 2003, $1.4 million remains in
the accrual, which consists principally of estimated penalties and/or
fines that the Company may incur to resolve this matter. In addition, the Company recorded a charge of $1.4 million to its 2002 fourth
quarter tax provision related to the possible non-deductibility of the payments
in China. During the third quarter of 2003, the Company recorded an
additional charge of $0.9 million to its income tax provision for
this and related tax matters. Additional legal expenses of approximately $775,000 have been
incurred and charged to general and administrative expense during the nine
month period ended September 30, 2003.

8



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##### Table of Contents








|        |                                                                                      
|------- | -------------------------------------------------------------------------------------
|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;
| | - |  | --------------------------------------------------------------------------------------------



| |  |  | environmental risks related to substances regulated by various federal, state, and international laws;
| | - |  | ------------------------------------------------------------------------------------------------------



| |  |  | 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;
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | political and economic instability in certain foreign markets;
| | - |  | --------------------------------------------------------------



| |  |  | changes in accounting standards promulgated by the Financial
Accounting Standards Board, the Securities and Exchange Commission, or
the American Institute of Certified Public Accountants; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the effects of governmental or other actions relating to certain
payments by the Companys Chinese subsidiary.
| | - |  | --------------------------------------------------------------------------------------------------------------

Results of Operations

The sale of IMMULITE products continues to drive the Companys performance.
The Companys sales increased 18.0% in the third quarter of 2003 to $93.7
million compared to sales of $79.4 million in the third quarter of 2002. In
the first nine months of 2003, the Companys sales increased 15.9% to $276.6
million from $238.6 million in the first nine months of 2002. Sales of all
IMMULITE products (instruments and reagents) in the third quarter of 2003 were
$82.9 million, a 22% increase over the third quarter of 2002. In the first
nine months of 2003, sales of all IMMULITE products were $243.7 million, a 21%
increase over the same period of 2002. Sales of IMMULITE products represented
88% of third quarter 2003 sales, compared to 86% of third quarter 2002 sales.
In the first nine months of 2003, sales of IMMULITE products represented 88% of
sales versus 85% in the same period of 2002. Various categories of IMMULITE
product line sales in the third quarter and in the first nine months of 2003
and 2002 are shown in the following chart:

IMMULITE Product Line Sales
    
    Three Months ended September 30,
    
    Nine Months ended September 30,(Dollars In
Thousands)
    
    2003
    
    2002
    
    2003
    
    2002% change
    
    
    
    
    
    
    
    
    
    % changeSales
    
    from 2002
    
    Sales
    
    Sales
    
    from 2002
    
    SalesIMMULITE 2000Reagents
    
    $
    45,250
    
    
    
    42.2
    %
    
    $
    31,819
    
    
    $
    132,677
    
    
    
    43.7
    %
    
    $
    92,326Instruments and
Service
    
    
    6,523
    
    
    
    (22.4
    %)
    
    
    8,411
    
    
    
    19,669
    
    
    
    (16.2
    %)
    
    
    23,456Total
    
    $
    51,773
    
    
    
    28.7
    %
    
    $
    40,230
    
    
    $
    152,346
    
    
    
    31.6
    %
    
    $
    115,782IMMULITE (including
IMMULITE 1000)Reagents
    
    $
    25,835
    
    
    
    9.1
    %
    
    $
    23,682
    
    
    $
    77,721
    
    
    
    7.2
    %
    
    $
    72,502Instruments and
Service
    
    
    5,267
    
    
    
    25.7
    %
    
    
    4,191
    
    
    
    13,636
    
    
    
    (1.3
    %)
    
    
    13,810Total
    
    $
    31,102
    
    
    
    11.6
    %
    
    $
    27,873
    
    
    $
    91,357
    
    
    
    5.9
    %
    
    $
    86,312IMMULITEProduct Line Sales
    
    $
    82,875
    
    
    
    21.7
    %
    
    $
    68,103
    
    
    $
    243,703
    
    
    
    20.6
    %
    
    $
    202,094


9



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##### Table of Contents



The Company shipped a total of 198 IMMULITE systems during the third quarter of
2003, including 113 IMMULITE 2000 systems and 85 IMMULITE One and 1000 systems.
The total base of IMMULITE systems shipped grew to 8,768, including 2,768
IMMULITE 2000 systems. In the third quarter of 2002 the Company shipped a
total of 259 IMMULITE systems, including 141 IMMULITE 2000 systems. The
placement of IMMULITE 2000 systems may have been adversely impacted by the
Companys announcement of its intention to begin shipment of the IMMULITE 2500
in the first quarter of 2004. The IMMULITE 2500 will have a significantly
reduced response time on certain tests. This may make the IMMULITE 2500 more
appropriate for certain types of customers, however the Company will continue
to produce the IMMULITE 2000.

The reduction in the number of IMMULITE 2000 instruments shipped resulted in
lower IMMULITE 2000 instrument revenue in the third quarter of 2003 as compared
to the third quarter of 2002. It is anticipated that for the year the Company
will ship closer to 500 IMMULITE 2000 instruments rather than the 600
previously expected. Instruments are placed in customer locations based on
many different forms of agreements. In general, instruments are sold, rented,
or placed in a customers laboratory with an agreement to purchase a certain
amount of reagents. Instrument revenue will vary based on the method of
instrument placement. In the United States, the Company has placed more
instruments in the first nine months of 2003 based on minimum reagent usage
commitments that are reflected in reagent revenues only.

One measure of the penetration of reagent sales is the average amount of
reagents sold per instrument shipped. It takes a number of weeks or months
after an instrument is shipped for it to become fully functional with regard to
reagent utilization. The Company calculates quarterly reagent utilization per
instrument by dividing the reagent sales for the current quarter by the total
number of instruments shipped as of the end of the previous quarter. For the
third quarter of 2003, IMMULITE 2000 reagent utilization per instrument was
$17,043 and IMMULITE reagent utilization per instrument was $4,368 as compared
to the third quarter of 2002, when they were $16,209 and $4,379 respectively.
Increases in utilization on the IMMULITE 2000 are in part a result of a larger
test menu including Hepatitis B tests and the strength of the Euro and the
Brazilian Real relative to the dollar. The drop in average utilization per
instrument on the IMMULITE is expected to continue as high volume IMMULITE
installations are replaced with IMMULITE 2000s and incremental IMMULITE
placements go into lower volume environments.

Sales of the Companys RIA products declined approximately 10% in the third
quarter of 2003, representing 7% of sales, compared to 9% of sales in the third
quarter of 2002. This trend is expected to continue. Sales of other DPC
products, including non-IMMULITE allergy reagents, increased by 9% from the
third quarter of 2002 and remained at 3% of sales. Sales of non-DPC products,
primarily through consolidated international affiliates, increased slightly in
the third quarter of 2003 and remained at 2% of sales.

In the third quarter of 2003, sales to domestic customers grew by 24%, and
increased to 29% of total sales, due to increased penetration into most
customer segments, including a positive response to the Companys Hepatitis B
assays. Sales to foreign customers grew at 16%. Due to the significance of
foreign sales (71% of total sales), in particular in Europe and Brazil, 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, and when the dollar weakens
the effect is the opposite, higher sales and net income. In the third
quarter of 2003, the strengthening of the Euro and the Real had a positive impact on
sales of approximately 7%. 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.

Gross profit as a percentage of sales decreased to 55.9% in the third quarter
of 2003 from 56.9% in the third quarter of 2002. The decrease in gross margin
was due in part to an increase in manufacturing cost in Los Angeles related to
systems conversions, which should not continue, a decrease in instrument
manufacturing volume in New Jersey, and increased cost of goods in China. In
the first nine months of 2003 gross profit as a percentage of sales was 57.4%,
slightly less than 57.8% in the first nine months of 2002. Gross margins are
also impacted by product mix, customer mix, and currency movements.

Selling expense increased by 19% in dollar terms and as a percentage of sales
increased slightly to 16.7 % in the third quarter of 2003 from 16.6% in 2002.
In the first nine months of 2003 selling expense increased by 17% and increased
as a percent of sales as well, to 16.9% from 16.7% in 2002. The increase in
selling expense was primarily related to the increase in sales and the strength
of the Euro. Research and development expense increased by 8% in the third
quarter of 2003 but decreased to 10.7% of sales in the third quarter of 2003
from 11.7% in the third quarter of 2002. In the first nine months of 2003
research and development expense increased by 10% and decreased as a percent of
sales to 10.9% from 11.5% in 2002.

10



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##### Table of Contents



General and administrative expenses increased by 16% in the third quarter of
2003 compared to the third quarter of 2002 and decreased as a percentage of
sales to 9.0% in 2003, from 9.1% in 2002. In the first nine months of 2003
general and administrative expenses increased 18%, to 9.2% of sales from 9.0%
in 2002. Included in general and administrative expenses in the first nine
months of 2003 was approximately $775,000 in legal fees related to the
Companys internal investigation of certain payments by its Companys Chinese
subsidiary. Although a review of this matter is ongoing, those expenses were
significantly lower at approximately $25,000 in the third quarter. See note 6
of notes to consolidated financial statements for a discussion of the Chinese
subsidiary matter. The strong Euro also resulted in higher general and
administrative expenses.

Effective July 1st, 2003, the Company sold its PathoDx product line of manual
tests to Remel, Inc. for $4.9 million. The Company will continue to
manufacture the products for Remel for a period of up to two years. During
this period the Company will assist Remel in developing the expertise to take
over the manufacturing process. The Company was paid $4.4 million at closing
and the remaining $500,000 is being withheld until the manufacturing process
has been transitioned. In the third quarter the Company recognized a $4.2
million gain, which is included as a component of operating income.

Equity in income of affiliates represents the Companys share of earnings of
non-consolidated affiliates, principally the 45%-owned Italian distributor.
This amount increased to $1.3 million in the third quarter of 2003 from
$600,000 in the third quarter of 2002, and in the first nine months of 2003
this amount increased to $4.2 million from $2.4 million in 2002. The increases
were due primarily to increased income in the Companys Italian distributor.

Interest/other income (expense)-net includes interest income, interest expense,
and foreign exchange transaction losses and gains. The net amount was income
of $283,000 in the third quarter of 2003 versus expense of $2.4 million in
2002. This was due in part to foreign currency transaction gains of $1,000 in
2003 versus losses of $2.2 million in 2002. Additionally, interest and other
income was $282,000 in 2003 versus an expense of $210,000 in 2002. Foreign
currency transaction gains were $1.1 million in the first nine months of 2003
versus a loss of $1.5 million in 2002. Interest and other income was an
expense of $675,000 in the first nine months of 2003 versus $467,000 in 2002.

The Companys effective tax rate includes federal, state, and foreign taxes.
The Companys income tax rate decreased to 29.0% in the third quarter and first
nine months of 2003 from 31.0% in the third quarter and first nine months of
2002.

Net income increased 71% to $17 million in the third quarter of 2003 or $.57
per diluted share from $9.9 million or $.34 per diluted share in the third
quarter of 2002. Net income for the first nine months of 2003 increased 33% to
$46.3 million or $1.56 per diluted share from $34.8 million or $1.17 per
diluted share in 2002. Included in the 2003 results is a gain of $4.2 million
in operating income from the sale of the PathoDx product line, which had a
positive impact on net income of $.10 per share.

Contractual Obligations and Commitments

The Companys contractual obligations and commitments have not changed
significantly from those disclosed in Item 7 of the Companys annual report on
form 10-K for the year ended December 31, 2002.

Critical Accounting Policies

Managements beliefs regarding significant accounting policies have not changed
significantly from those disclosed in Item 7 of the Companys Annual Report on
Form 10-K for the year ended December 31, 2002.

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. At September
30, 2003 and December 31, 2002, the Company had cash and cash equivalents of
$56.9 million and $54.3 million, respectively. Net cash flow from operating
activities was $59.1 million in the first nine months of 2003 and $42.3 million
in the first nine months of 2002. The increase is a result of net income,
depreciation and amortization, and other non-cash items of $15.0 million and a
decrease in cash used by changes in operating assets and liabilities of $1.8
million. Additions to property, plant, and equipment in the first nine months
of 2003 were $32.7 million, compared to $8.1 million in the first nine months
of 2002. The increase was primarily due to the purchase of a new corporate
headquarters building

11



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##### Table of Contents



for approximately $22 million in cash. An additional $8-10 million is expected
to be spent to fit out this building. It is anticipated that it will be
occupied in mid 2004. Cash flow used for the placement of IMMULITE systems
under sales-type and operating leases was $17.6 million in the first nine
months of 2003 compared to $21.6 million in the first nine months of 2002.
These leases typically have periods ranging from three to five years. The
Company decreased borrowings in its foreign affiliates by $700,000 in the first
nine months of 2003 and by $1.0 million in the first nine months of 2002.

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 has a $20 million domestic unsecured line of credit under which
there were no borrowings outstanding at September 30, 2003 or December 31,
2002. The Company had other notes payable (consisting of bank borrowings by
the Companys foreign consolidated subsidiaries payable in their local
currency) of $21.3 million at
September 30, 2003 compared to $19.7 million at December 31, 2002. The Company
received $2.7 million from the exercise of stock options in the first nine
months of 2003 versus $3.2 million in the first nine months of 2002. The
Company has paid a quarterly cash dividend of $.06 per share, on a
split-adjusted basis, since 1995.

New Accounting Pronouncements

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. As required, the
Company will apply provisions of SFAS No. 146 prospectively to exit or disposal
activities, if any, initiated after December 31, 2002.

During November 2002, the Financial Accounting Standards Board issued FASB
Interpretation No. 45, Guarantors Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others, which is
an interpretation of FASB Statements No. 5, 57, and 107 and rescission of FASB
Interpretation No. 34. The initial recognition and measurement provisions of
this Interpretation are applicable on a prospective basis to guarantees issued
or modified after December 31, 2002, and the disclosure requirements are
effective for financial statements of periods ending after December 15, 2002.
This interpretation addresses the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under guarantees,
and also clarifies the requirements related to the recognition of a liability
by a guarantor at the inception of a guarantee for the obligations the
guarantor has undertaken in issuing that guarantee. The Company does not
currently provide any third-party guarantees.

On April 30, 2003, the Financial Accounting Standards Board issued SFAS No.
149, Amendment of Statement 133 on Derivative Instruments and Hedging
Activities. SFAS No. 149 amends and clarifies accounting for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities under SFAS No. 133. The new guidance
amends SFAS No. 133 for decisions made as part of the Derivatives
Implementation Group (DIG) process that effectively required amendments to
SFAS No. 133, and decisions made in connection with other FASB projects dealing
with financial instruments and in connection with implementation issues raised
in relation to the application of the definition of a derivative and
characteristics of a derivative that contains financing components. In
addition, it clarifies when a derivative contains a financing component that
warrants special reporting in the statement of cash flows. SFAS No. 149 is
effective for contracts entered into or modified after June 30, 2003 and for
hedging relationships designated after June 30, 2003. As required, the Company
will apply the provisions of SFAS No. 149 prospectively to contracts entered
into or modified after June 30, 2003 and for hedging relationships designated
after June 30, 2003.

In May 2003, the Financial Accounting Standards Board issued SFAS No. 150
Accounting for Financial Instruments with the Characteristics of Both
Liabilities and Equities. SFAS No. 150 establishes standards regarding the
manner in which an issuer classifies and measures certain types of financial
instruments having characteristics of both liabilities and equity. Pursuant to
SFAS No. 150, such freestanding financial instruments (i.e., those entered into
separately from an entitys other financial instruments or equity transactions
or that are legally detachable and separately exercisable) must be classified
as liabilities or, in some cases, assets. In addition, SFAS No. 150 requires
that financial instruments containing obligations to repurchase the issuing

12



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##### Table of Contents



entitys equity shares and, under certain circumstances, obligations that are
settled by delivery of the issuers shares be classified as liabilities.
Certain aspects of SFAS No. 150 have been indefinitely deferred; however, the
Statement is generally effective for financial instruments entered into or
modified after May 31, 2003 and for other instruments at the beginning of the
first interim period beginning after June 15, 2003. The Company does not
currently have any financial instruments that will be impacted by SFAS No. 150.






|        |                                                           
|------- | ----------------------------------------------------------
|ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There has been no material change during the quarter ended September 30, 2003,
from the disclosures about market risk provided in the Companys Annual Report
on Form 10-K for the year ended December 31, 2002.




ITEM 4.  CONTROLS AND PROCEDURES

Based on their evaluation of the Companys disclosure controls and procedures
as of September 30, 2003, 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. There has been no change
in the Companys internal controls over financial reporting identified in
connection with such evaluation that occurred during the Companys last fiscal
quarter that has materially affected, or is reasonably likely to materially
affect, the Companys internal control over financial reporting.




PART II. OTHER INFORMATION






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



| | (a) |  | Exhibits
| | --- |  | --------



| | 31.1 |  | Certificate of Chief Executive Officer
| | ---- |  | --------------------------------------



| | 31.2 |  | Certificate of Chief Financial Officer
| | ---- |  | --------------------------------------



| | 32.1 |  | Section 906 Officers Certification
| | ---- |  | -----------------------------------



| | (b) |  | Reports on Form 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, 2003/s/ James L. Brill

James L. Brill
    
    Vice President-Finance
(Principal Financial and
Accounting Officer)
    
    November 13, 2003


13



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##### Table of Contents






EXHIBIT INDEX

31.1
    
    CERTIFICATE OF CHIEF EXECUTIVE OFFICER31.2
    
    CERTIFICATE OF CHIEF FINANCIAL OFFICER32.1
    
    SECTION 906 OFFICERS CERTIFICATION