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SECURITIES AND EXCHANGE COMMISSION    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 March 31, 2004 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  California
    
    95-2802182(State or other jurisdiction of
    
    (IRS Employerincorporation or organization)
    
    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 is an accelerated filer (as
defined in Exchange Act Rule 12b-2). [ YES X ] [NO   ] 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   ] The number of shares of Common Stock, no par value, outstanding as of May 4,
2004, was 29,058,846.




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TABLE OF CONTENTS  PART I. FINANCIAL INFORMATIONITEM I. FINANCIAL STATEMENTSCONSOLIDATED STATEMENTS OF INCOMECONSOLIDATED BALANCE SHEETSCONSOLIDATED STATEMENTS OF CASH FLOWSNOTES TO CONSOLIDATED FINANCIAL STATEMENTSITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKITEM 4. CONTROLS AND PROCEDURESPART II. OTHER INFORMATIONITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.SIGNATURESEXHIBIT INDEXEXHIBIT 31.1EXHIBIT 32.1EXHIBIT 32.1    Table of Contents  
 PART I. FINANCIAL INFORMATION 
 ITEM I. FINANCIAL STATEMENTS 
 DIAGNOSTIC PRODUCTS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(unaudited) (Amounts In Thousands, Except Per Share Data) Three Months EndedMarch 31,2004
    
    2003SALES:Non-Affiliated Customers
    
    $
    96,974
    
    
    $
    80,247Unconsolidated Affiliates
    
    
    9,109
    
    
    
    6,633Total Sales
    
    
    106,083
    
    
    
    86,880COST OF SALES
    
    
    46,022
    
    
    
    36,556Gross Profit
    
    
    60,061
    
    
    
    50,324OPERATING EXPENSES:Selling
    
    
    18,727
    
    
    
    15,433Research and Development
    
    
    11,424
    
    
    
    10,003General and Administrative
    
    
    9,665
    
    
    
    8,599Equity in Income of Affiliates
    
    
    (2,130
    )
    
    
    (1,458
    )OPERATING
EXPENSES - NET
    
    
    37,686
    
    
    
    32,577OPERATING INCOME
    
    
    22,375
    
    
    
    17,747Interest/Other (Expense) Income - Net
    
    
    (369
    )
    
    
    29INCOME BEFORE INCOME TAXES
AND MINORITY INTEREST
    
    
    22,006
    
    
    
    17,776PROVISION FOR INCOME TAXES
    
    
    6,602
    
    
    
    5,155MINORITY INTEREST
    
    
    (53
    )
    
    
    (86
    )NET INCOME
    
    $
    15,457
    
    
    $
    12,707EARNINGS PER SHARE:BASIC
    
    $
    .53
    
    
    $
    .44DILUTED
    
    $
    .52
    
    
    $
    .43WEIGHTED AVERAGE SHARES OUTSTANDING:BASIC
    
    
    28,972
    
    
    
    28,622DILUTED
    
    
    29,944
    
    
    
    29,544
 SEE ACCOMPANYING NOTES TO

CONSOLIDATED FINANCIAL STATEMENTS. 2




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DIAGNOSTIC PRODUCTS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited) March 31,
    
    December 31,(Dollars in Thousands)
    
    2004
    
    2003AssetsCURRENT ASSETS:Cash and cash equivalents
    
    $
    66,407
    
    
    $
    69,843Accounts receivable (including receivables from unconsolidated
affiliates of $11,611 and $6,701, respectively)  net of
allowance
for doubtful accounts of $3,267 and $3,195, respectively
    
    
    98,373
    
    
    
    90,310Inventories
    
    
    89,220
    
    
    
    86,502Prepaid expenses and other current assets
    
    
    5,071
    
    
    
    5,500Deferred income taxes
    
    
    5,148
    
    
    
    5,413Total current assets
    
    
    264,219
    
    
    
    257,568PROPERTY, PLANT, AND EQUIPMENT:Land and buildings
    
    
    58,998
    
    
    
    58,711Machinery and equipment
    
    
    85,813
    
    
    
    79,638Leasehold improvements
    
    
    9,439
    
    
    
    9,384Construction in progress
    
    
    33,817
    
    
    
    30,111Total
    
    
    188,067
    
    
    
    177,844Less accumulated depreciation and amortization
    
    
    (76,479
    )
    
    
    (73,424
    )Property, plant, and equipment  net
    
    
    111,588
    
    
    
    104,420INSTRUMENTS  net
    
    
    74,494
    
    
    
    77,230DEFERRED INCOME TAXES
    
    
    15
    
    
    
    255INVESTMENTS IN AFFILIATED COMPANIES
    
    
    31,361
    
    
    
    29,822OTHER
ASSETS  net
    
    
    11,813
    
    
    
    4,864GOODWILL Net of accumulated amortization of $11,943
and $12,190, respectively
    
    
    13,415
    
    
    
    13,423TOTAL ASSETS
    
    $
    506,905
    
    
    $
    487,582Liabilities and Shareholders EquityCURRENT LIABILITIES:Notes payable
    
    $
    16,687
    
    
    $
    19,369Accounts payable
    
    
    21,031
    
    
    
    20,983Accrued liabilities
    
    
    35,921
    
    
    
    32,136Income taxes payable
    
    
    10,449
    
    
    
    9,246Total current liabilities
    
    
    84,088
    
    
    
    81,734MINORITY INTEREST
    
    
    2,741
    
    
    
    2,848SHAREHOLDERS EQUITY:Common Stockno par value, authorized 60,000,000 shares
at March 31, 2004 and December 31, 2003; outstanding
29,027,846 shares and 28,907,969 shares, respectively
    
    
    69,116
    
    
    
    66,758Retained earnings
    
    
    349,849
    
    
    
    336,129Accumulated other comprehensive income
    
    
    1,111
    
    
    
    113Total shareholders equity
    
    
    420,076
    
    
    
    403,000TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    506,905
    
    
    $
    487,582
 SEE ACCOMPANYING NOTES TO

CONSOLIDATED FINANCIAL STATEMENTS. 3




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DIAGNOSTIC PRODUCTS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited) Three Months EndedMarch 31,(Dollars in Thousands)
    
    2004
    
    2003CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    15,457
    
    
    $
    12,707Adjustments to reconcile net income to net cash
flows from operating activities:Depreciation and amortization
    
    
    7,774
    
    
    
    8,355Deferred income taxes
    
    
    260Equity in undistributed income of unconsolidated affiliates
    
    
    (1,787
    )
    
    
    (1,458
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    (8,629
    )
    
    
    (4,385
    )Inventories
    
    
    (2,426
    )
    
    
    (658
    )Prepaid expenses and other current assets
    
    
    395
    
    
    
    2,811Other assets
    
    
    (1,250
    )Accounts payable
    
    
    1,926
    
    
    
    (2,120
    )Accrued liabilities
    
    
    (1,999
    )
    
    
    (4,639
    )Income taxes payable
    
    
    1,133
    
    
    
    2,289Net cash flows from operating activities
    
    
    10,854
    
    
    
    12,902CASH FLOWS USED FOR INVESTING ACTIVITIES:Additions to property, plant, and equipment
    
    
    (9,744
    )
    
    
    (24,773
    )Instruments
    
    
    (3,012
    )
    
    
    (7,262
    )Net cash flows used for investing activities
    
    
    (12,756
    )
    
    
    (32,035
    )CASH FLOWS USED FOR FINANCING ACTIVITIES:Repayments of notes payable-net
    
    
    (2,253
    )
    
    
    (955
    )Proceeds from exercise of stock options
    
    
    2,358
    
    
    
    632Cash dividends paid
    
    
    (1,737
    )
    
    
    (1,717
    )Net cash flows used for financing activities
    
    
    (1,632
    )
    
    
    (2,040
    )EFFECT OF EXCHANGE RATE CHANGES ON CASH
    
    
    98
    
    
    
    34NET DECREASE IN CASH AND CASH EQUIVALENTS
    
    
    (3,436
    )
    
    
    (21,139
    )CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
    
    
    69,843
    
    
    
    54,284CASH AND CASH EQUIVALENTS
AT END OF PERIOD
    
    $
    66,407
    
    
    $
    33,145
 SEE ACCOMPANYING NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS. 4




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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 months ended March 31, 2004 and 2003 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
2003 Annual Report on Form 10-K as filed with the Securities and Exchange
Commission. The results of operations for the three-month period ended March 31, 2004 are
not necessarily indicative of the results to be expected for the year ending
December 31, 2004. 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. Note 2  Inventories Inventories by major categories are summarized as follows: March 31,
    
    December 31,(Dollars in Thousands)
    
    2004
    
    2003Raw materials
    
    $
    38,759
    
    
    $
    39,145Work in process
    
    
    40,201
    
    
    
    38,761Finished goods
    
    
    10,260
    
    
    
    8,596Total
    
    $
    89,220
    
    
    $
    86,502
 Note 3  Goodwill and Intangibles Goodwill results primarily from the Companys purchase of certain of its
foreign distributors. Intangible assets at March 31, 2004 consist of purchased
technology licenses totaling $11,813,000, which is net of accumulated
amortization of $187,000. Of that amount, approximately $4.8 million
represents licenses purchased during the second quarter of 2003. Amortization
expense for the 2003 licenses for the quarter ended March 31, 2004 totaled
$44,000 and for each of the next five fiscal years is estimated to be $181,000,
$233,000, $293,000, $449,000, and $535,000, respectively. The remaining
licenses totaling approximately $7 million were purchased at the end of the
first quarter of 2004 and will be amortized in future periods based on the
underlying estimated benefit derived. 5




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Note 4  Comprehensive Income

Comprehensive income is summarized as follows:

Three Months Ended March 31,(Dollars in Thousands)
    
    2004
    
    2003Net income
    
    $
    15,457
    
    
    $
    12,707Foreign currency translation adjustment
    
    
    (638
    )
    
    
    2,343Unrealized gain on foreign exchange
contracts
Net of tax impact
    
    
    1,636Comprehensive income
    
    $
    16,455
    
    
    $
    15,050


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 5  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, 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:

Three Months EndedMarch 31,(Dollars in Thousands)
    
    2004
    
    2003Sales:IMMULITE (includes service)
    
    $
    96,266
    
    
    $
    75,653Radioimmunoassay (RIA)
    
    
    6,405
    
    
    
    6,793Other (Includes DPC and non-DPC products)
    
    
    3,412
    
    
    
    4,434$
    106,083
    
    
    $
    86,880


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 areas 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 Limited
    
    DPC Biermann
    
    DPC Medlab
    
    
    
    
    
    Less:IntersegmentUnited States
    
    (United Kingdom)
    
    (German Group)*
    
    (Brazilian Group)*
    
    Other
    
    Elimination
    
    Total(Dollars in Thousands)Three Months Ended March 31, 2004Sales
    
    $
    65,172
    
    
    $
    20,611
    
    
    $
    14,552
    
    
    $
    7,852
    
    
    $
    25,013
    
    
    $
    (27,117
    )
    
    $
    106,083Net income
    
    
    7,301
    
    
    
    4,747
    
    
    
    680
    
    
    
    (121
    )
    
    
    2,744
    
    
    
    106
    
    
    
    15,457Three Months Ended March 31, 2003Sales
    
    $
    56,678
    
    
    $
    15,073
    
    
    $
    12,675
    
    
    $
    6,202
    
    
    $
    21,144
    
    
    $
    (24,892
    )
    
    $
    86,880Net income
    
    
    7,024
    
    
    
    2,883
    
    
    
    420
    
    
    
    (197
    )
    
    
    2,427
    
    
    
    150
    
    
    
    12,707


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

6



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Note 6  Pro Forma Stock-Based Compensation The Company has stock option plans under which options have historically 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 EndedMarch 312004
    
    2003Net Earnings:As Reported
    
    $
    15,457
    
    
    $
    12,707Pro Forma expense
    
    
    (673
    )
    
    
    (738
    )Pro Forma
    
    $
    14,784
    
    
    $
    11,969Net Earnings Per ShareBasic:As Reported
    
    $
    0.53
    
    
    $
    0.44Pro Forma Adjustment
    
    
    (0.02
    )
    
    
    (0.02
    )Pro Forma
    
    $
    0.51
    
    
    $
    0.42Diluted:As Reported
    
    $
    0.52
    
    
    $
    0.43Pro Forma Adjustment
    
    
    (0.03
    )
    
    
    (0.02
    )Pro Forma
    
    $
    0.49
    
    
    $
    0.41
 Note 7  New Accounting Pronouncements In January 2003, the FASB issued FASB Interpretation No. (FIN) 46,
Consolidation of Variable Interest Entities (FIN 46). In December 2003,
FIN 46 was replaced by FASB interpretation No. 46R Consolidation of Variable
Interest Entities. FIN 46R clarifies the application of Accounting Research
Bulletin No. 51, Consolidated Financial Statements, to certain entities in
which equity investors do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for the entity to
finance its activities without additional subordinate financial support from
other parties. FIN 46R requires an enterprise to consolidate a variable
interest entity if that enterprise will absorb a majority of the entitys
expected losses, is entitled to receive a majority of the entitys expected
residual returns, or both. FIN 46R was effective for special-purpose
entities being evaluated under FIN 46R for consolidation on December 31, 2003
and was effective for all other entities being evaluated on March 31, 2004.
The adoption of FIN 46R did not have a material impact on the Companys
financial position or results of operations. 7




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Note 8  Commitments and Contingent Liabilities The Company is continuing to
cooperate with the SEC and the United States Justice
Department in their review of certain improper payments by the Companys
Chinese subsidiary first discovered internally by the Company in the fourth
quarter of 2002. The Company is also continuing to evaluate its internal
policies and procedures to promote compliance with applicable laws. The
Companys activities in this regard resulted in the termination of the general
manager of the Chinese subsidiary in the first quarter of 2004 as a
result of his failure to follow payment-related procedures implemented on the advice of outside
counsel. An independent committee of the Board continues to oversee
these issues and is conducting an inquiry. Government and other actions
related to this matter may have a material adverse
effect on future operations in China. For the year ended December 31, 2003,
the Chinese subsidiary had sales of $9.8 million. In the first quarter of 2004
the Companys Chinese subsidiary had sales of $2.1 million. In the fourth
quarter of 2002, the Company accrued $1.5 million for actual and estimated
costs to resolve this matter. As of March 31, 2004, $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 other Chinese tax-related
matters. Additional legal expenses of approximately $884,000 and $33,000 have
been incurred and charged to general and administrative expense during the year
ended December 31, 2003 and quarter ended March 31, 2004, respectively. It is
anticipated that legal fees for issues related to China will increase in the
remainder of 2004. In February 2004, the Company was informed by the FDA that, based on
inspectional findings that included data integrity and procedural issues, the
Company was subject to the FDAs Application Integrity Policy. The FDA
suspended its review of all applications submitted by the Company and will
defer the review of any future applications until the FDA determines that the
Company has resolved these issues. The resolution process consists of
developing and implementing a corrective action plan that will be audited by a
third party and reviewed by the FDA. The Company believes that 12 months is a
reasonable time for such actions to take place. During this time, the Company
is not restricted by the FDA with regard to introducing new tests outside of
the United States. However, the Companys inability to introduce new tests in
the United States pending resolution of this matter may have a negative impact
on its future sales and profits. 
 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 dependence on sole suppliers for key chemical
components in the IMMULITE assays;
    
    the Companys ability to address and resolve issues relating to the
FDAs Application Integrity Policy;
    
    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, the
Public Company Accounting Oversight Board, or the American Institute of
Certified Public Accountants; and 8




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
    
    the effects of governmental or other actions relating to certain
payments by the Companys Chinese subsidiary. Overview DPC develops and manufactures automated diagnostic test systems and related
reagent test kits that are used by hospital, reference, and physicians office
laboratories throughout the world. The Companys principal product line,
IMMULITE, is a fully automated, computer-driven modular system that uses
specialized proprietary software to provide rapid, accurate test results that
reduce the customers labor and reagent costs. The Companys immunoassay tests
provide critical information useful to physicians in the diagnosis, monitoring,
management, and prevention of various diseases. DPC manufactures over 400 immunodiagnostic test kits (also called reagents or
assays) using several different technologies and assay formats. The IMMULITE
instruments are closed systems, meaning that they will not perform other
manufacturers tests. Accordingly, a major factor in the successful marketing
of these systems is the ability to offer a broad menu of assays. In addition
to the IMMULITE assays, we sell a broad range of tests based on other
technologies that can be performed manually using the customers own laboratory
equipment, such as radioimmunoassay (RIA) and enzyme immunoassay (EIA) tests. In addition to breadth of menu, major competitive factors for the IMMULITE
instruments include time-to-first result (how quickly the instrument performs
the test), ease of use, and overall cost effectiveness. Because of these
competitive factors and the rapid technological developments that characterize
the industry, the Company devotes approximately 10% of its annual revenues to
research and development activities, all of which are expensed as incurred. The Companys products are sold throughout the world directly through
affiliated and independent distributors. Historically, foreign sales
(including U.S. export sales, sales to non-consolidated subsidiaries and
independent distributors, and sales of consolidated subsidiaries) have
accounted for more than 70% of revenues; although, in recent years, domestic
sales growth has outpaced foreign sales growth. The Company derives revenues from two principal sources: reagent (test kit)
sales and IMMULITE instrument placements. The Company recognizes sales of test
kits upon shipment and transfer of title to the customer. IMMULITE instruments are placed with customers under many different types of
arrangements that generally fall into the following categories: sale, lease,
reagent rental, and soft placement. The Company sells instruments directly to
end-users, to third party leasing companies that lease the instruments to
end-users, and to independent distributors that then resell the instruments to
their customers. Instrument sales, which represent the smallest component of
placements, are recognized upon shipment and transfer of title. The Company
also sells instruments under sales-type leases, which are recorded as revenue
upon shipment in an amount equal to the present value of the future minimum
lease payments to be received over the lease term. Many instruments are placed other than by outright sale or capital lease. The
Company enters into various types of operating lease arrangements with
customers that generally provide for terms of three to five years and periodic
rental payments. Revenue on these types of leases is recognized on a pro rata
basis over the term of the lease. When an instrument is placed on a reagent
rental basis, the customer agrees to pay a mark-up on reagents, but is not
charged for the instrument. The Company also places instruments at no charge
to the customer (soft placement) subject to the customers agreement to
purchase a minimum amount of reagents. In reagent rentals and soft placements,
the only revenue recognized is based on reagent shipments. Under operating
lease, rental, and soft placements, DPC continues to own the instrument that is
placed with the customer. These instruments are generally amortized on a
straight-line basis over five years and maintenance costs are expensed as
incurred. The Company also enters into service contracts with customers and
recognizes service revenue over the related contract life (related costs are
expensed as incurred). Two important indicators used by management to evaluate financial performance
are instrument shipments and reagent utilization. The number of IMMULITE
instruments that the Company reports as being shipped in any period is net of
returned instruments, such as returns at the end of a lease or rental or
trade-ins on the purchase of a new model. The Company refurbishes and seeks to
place returned instruments at reduced prices. Because of the different methods
in which instruments are placed, total instrument sales vary from period to
period based on the relative mix of placement methods, and such sales do not
necessarily have a direct correlation to the number of instruments shipped
during the period. 9




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An important measure of the penetration of IMMULITE reagent sales is the
average amount of reagent sales 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 average
reagent utilization for a fiscal period by dividing IMMULITE reagent sales for
the period by the total number of instruments shipped as of the end of the
previous fiscal period. Results of Operations SUMMARY FINANCIAL DATA (Dollars in thousands, except for share data) Q1 2004
    
    % change
    
    Q1 2003Sales
    
    $
    106,083
    
    
    
    22.1
    %
    
    $
    86,880Gross Profit
    
    
    60,061
    
    
    
    
    
    
    
    50,324% of sales
    
    
    56.6
    %
    
    
    
    
    
    
    57.9
    %Operating Expenses:Selling
    
    
    18,727
    
    
    
    
    
    
    
    15,433Research and Development
    
    
    11,424
    
    
    
    
    
    
    
    10,003General and Administrative
    
    
    9,665
    
    
    
    
    
    
    
    8,599Equity in Income of Affiliates
    
    
    (2,130
    )
    
    
    
    
    
    
    (1,458
    )Total Operating Expenses
    
    
    37,686
    
    
    
    15.7
    %
    
    
    32,577% of sales
    
    
    35.4
    %
    
    
    
    
    
    
    37.5
    %Operating Income
    
    
    22,375
    
    
    
    26.1
    %
    
    
    17,747% of sales
    
    
    21.1
    %
    
    
    
    
    
    
    20.4
    %Interest/Other (Expense) Income net
    
    
    (369
    )
    
    
    
    
    
    
    29Income Before Income Taxes and
Minority interest
    
    
    22,006
    
    
    
    
    
    
    
    17,776Provision for Income Taxes
    
    
    6,602
    
    
    
    
    
    
    
    5,155Income Tax Rate
    
    
    30.0
    %
    
    
    
    
    
    
    29.0
    %Minority Interest
    
    
    (53
    )
    
    
    
    
    
    
    (86
    )Net Income
    
    $
    15,457
    
    
    
    21.6
    %
    
    $
    12,707Earnings per share:Basic
    
    $
    .53
    
    
    
    
    
    
    $
    .44Diluted
    
    $
    .52
    
    
    
    
    
    
    $
    .43
 Sales The Companys sales increased 22% in the first quarter of 2004 to $106.1
million compared to sales of $86.9 million in the first quarter of 2003. Sales
of all IMMULITE products, instruments, service, and reagents in the first
quarter of 2004 was $96.3 million, a 27% increase over 2003. In the first
quarter of 2004, IMMULITE products represented 91% of sales versus 87% in 2003.
Various categories of IMMULITE product line sales in the first quarter of 2004
and 2003 are shown in the following chart: IMMULITE Product Line Sales (000s omitted) 2004
    
    2003Sales
    
    % change from 2003
    
    SalesIMMULITE 2000Reagents
    
    $
    54,977
    
    
    
    33.1
    %
    
    $
    41,295Instruments and Service
    
    
    10,009
    
    
    
    90.9
    
    
    
    5,242Total
    
    $
    64,986
    
    
    
    39.6
    %
    
    $
    46,537IMMULITE (including IMMULITE 1000)Reagents
    
    $
    27,107
    
    
    
    7.3
    %
    
    $
    25,257Instruments and Service
    
    
    4,173
    
    
    
    8.1
    
    
    
    3,859Total
    
    $
    31,280
    
    
    
    7.4
    %
    
    $
    29,116IMMULITE Product Line Sales
    
    $
    96,266
    
    
    
    27.3
    %
    
    $
    75,653
 10




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The Company shipped a total of 209 IMMULITE systems during the first quarter of
2004, including 158 IMMULITE 2000 systems and 51 IMMULITE 1000 systems. The
total base of IMMULITE systems shipped grew to 9,242, including 3,102 IMMULITE
2000 systems. In the first quarter of 2003 the Company shipped a total of 216
IMMULITE systems, including 141 IMMULITE 2000 systems. The reduction in the number of IMMULITE 1000s shipped is a result of the time
that the IMMULITE 1000 and its predecessor system, the IMMULITE, have been
available in the market, which is over ten years. The Company also ships
IMMULITE systems that have been returned by customers and refurbished by the
Company. These refurbished systems are not included in the Companys count of
units shipped. In the fourth quarter of 2003 the Company reduced the price of
the IMMULITE 2000 in anticipation of the release of the IMMULITE 2500 in early
2004. The IMMULITE 2000 has a longer sales process than the IMMULITE 1000 due
to its higher sales price, and the IMMULITE 2000 experiences a longer time
delay between instrument placement and the ramp-up of reagent sales. The
Company expects to experience a similar sales cycle and reagent ramp-up cycle
with the IMMULITE 2500 as with the IMMULITE 2000. The 2500, which will reduce
the time it takes to get a result for certain tests, most importantly tests for
the emergency room to aid in the diagnosis of cardiac conditions, will be sold
at a higher price than the IMMULITE 2000, and sales of the 2500 may erode sales
of the 2000. The IMMULITE 2500 will be released in May 2004. The Company has
74 tests which have been approved by the FDA for introduction on the IMMULITE
2500. The increase in IMMULITE 2000 instrument and service revenue is due to a
greater number of instruments being sold rather than rented or soft placed and
an increase in revenue from service and parts. Included in IMMULITE 2000
equipment sales is revenue relating to the Companys sample management system
(SMS), a sample handling device that can be attached to the IMMULITE 2000. The
increase in IMMULITE instrument and service revenue was primarily due to an
increase in service revenue. For the first quarter of 2004, IMMULITE 2000 reagent utilization per instrument
was $18,674 and IMMULITE reagent utilization per instrument was $4,452 as
compared to the first quarter of 2003, when they were $17,217 and $4,383,
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 relative to the dollar. The slight increase in utilization on the
IMMULITE is a result of the strength of the Euro relative to the dollar. A
drop in average utilization per instrument on the IMMULITE is expected 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 6% in the first
quarter of 2004, representing 6% of sales, compared to 8% of sales in the first
quarter of 2003. This trend is expected to continue. Sales of other DPC
products declined to $1.8 million in the first quarter of 2004 from $3.1
million in the first quarter of 2003. The primary reason for this was a
decline in the Companys micro-plate allergy product line. The Company ceased
manufacturing this product line at the end of 2003 because of the availability
of allergy testing on the IMMULITE 2000. These sales will continue to decline
as inventories are depleted. Sales of non-DPC products, primarily through its
consolidated international affiliates, increased 22% in the first quarter of
2004 to $1.6 million and remained at 2% of sales. In the first quarter of 2004, sales to domestic customers grew by 21%, and
remained at 28% of total sales. The increase in domestic sales was due to
increased penetration into most customer segments. Foreign sales (including
U.S. export sales, sales to non-consolidated foreign subsidiaries, and sales of
consolidated subsidiaries) as a percentage of total sales were approximately
72% in the first quarter of 2004 and 2003. Europe, the Companys principal
foreign market, represented 50% of sales in the first quarter of 2004 and 48%
of sales in 2003. Sales in the Companys German subsidiary, which includes the
Czech Republic and Poland, increased 15% primarily as a result of the strength
of the Euro. Sales in the Brazil region, which includes certain other Central
and South American countries, accounted for approximately 7% of total sales in
the first quarter of 2004, an increase of 27% over the first quarter of 2003.
Much of this increase came from the strengthening of the Brazilian Real
relative to the U.S. dollar. In the past few years, the Real has been very
volatile relative to the dollar. Due to the significance of foreign sales, 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 translation of
financial statements of consolidated affiliates is that of lower sales and net
income. In periods where the dollar is weakening, the impact is the reverse.
Based on comparative exchange rates in the first quarter of 2004 and 2003, the
dollar weakened relative to the Euro and the Brazilian Real. The Companys
hedging strategy 11




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reduced the favorable impact of the strong Euro on its profit. The effect of
the changes of exchange rates on sales was a positive 9%. Due to intense
competition, the Companys foreign distributors are generally unable to
increase prices to offset this negative effect when the U.S. dollar is strong. The Company is continuing to
cooperate with the SEC and the United States Justice
Department in their review of certain improper payments by the Companys
subsidiary first discovered internally by the Company in the fourth quarter of
2002. The Company is also continuing to evaluate its internal policies and
procedures to promote compliance with applicable laws. The Companys
activities in this regard resulted in the termination of the general manager of
the Chinese subsidiary in the first quarter of 2004 as a result of his failure to
follow payment-related procedures implemented on the advice of outside counsel. An
independent committee of the Board continues to oversee these issues
and is conducting an inquiry. Government and
other actions related to this matter may have a material adverse effect on
future operations in China. For the year ended December 31, 2003, the Chinese
subsidiary had sales of $9.8 million. In the first quarter of 2004 the
Companys Chinese subsidiary had sales of $2.1 million. In the fourth quarter
of 2002, the Company accrued $1.5 million for actual and estimated costs to
resolve this matter. As of March 31, 2004, $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 other Chinese tax-related
matters. Additional legal expenses of approximately $884,000 and $33,000 have
been incurred and charged to general and administrative expense during the year
ended December 31, 2003 and quarter ended March 31, 2004, respectively. It is
anticipated that legal fees for issues related to China will increase in the
remainder of 2004. In February 2004, the Company was informed by the FDA that, based on
inspectional findings that included data integrity and procedural issues, the
Company was subject to the FDAs Application Integrity Policy. The FDA
suspended its review of all applications submitted by the Company and will
defer the review of any future applications until the FDA determines that the
Company has resolved these issues. The resolution process consists of
developing and implementing a corrective action plan that will be audited by a
third party and reviewed by the FDA. The Company believes that 12 months is a
reasonable time for such actions to take place. During this time, the Company
is not restricted by the FDA with regard to introducing new tests outside of
the United States. However, the Companys inability to introduce new tests in
the United States pending resolution of this matter may have a negative impact
on its future sales and profits. Cost of Sales Gross margin decreased to 56.6% in the first quarter of 2004 from 57.9% in the
first quarter of 2003. This decrease was due in part to a reduction in the
price of the IMMULITE 2000 in anticipation of the release of the IMMULITE 2500,
an increase in the costs of service and manufacturing costs in Los Angeles, an
increase in reagent royalties, and an increase in IMMULITE 2000 instrument
sales. All products manufactured in the United States are dollar-based.
However, a large percentage of these products are sold to company-owned
international distributors, which sell the products in their local currencies.
In periods of a weakening dollar, sales as measured in dollars increase,
resulting in higher gross margins. A strengthening dollar generally results in
lower gross margins at international distributors. Operating Expenses and Other Total operating expenses (selling, research and development, and general and
administrative) as a percentage of sales fell to 35.5% in the first quarter of
2004 from 37.5% in the same period of 2003, although all categories increased
in absolute dollars to support increased levels of sales. Included in general
and administrative expenses was $33,000 in the first quarter of 2004 and
$650,000 in the first quarter of 2003 related to the Companys internal
investigation of certain payments by its Chinese subsidiary. The review of
this matter is ongoing. See Note 8 of Notes to the Consolidated Financial
Statements. Equity in income of affiliates represents the Companys share of earnings in
non-consolidated affiliates, principally the 45%-owned Italian distributor.
The amount increased to $2.1 million in 2004 from $1.5 million in 2003. Interest/other (expense) income-net includes interest income, interest expense,
and foreign exchange transaction losses and gains. The net amount was expense
of $369,000 in the first quarter of 2004 versus income of $29,000 in 2003.
This difference was driven in part by a $705,000 change in foreign currency
transaction 12




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##### Table of Contents



losses to a loss of $206,000 in 2004 from a gain of $499,000 in 2003, net of a
reduction in interest expense and other expense of $307,000, which was in part
due to the capitalization of interest related to the Companys construction
projects. Income Taxes and Minority Interest The Companys effective tax rate includes federal, state, and foreign taxes.
The Companys tax rate increased to 30.0% in the first quarter of 2004 from
29.0% in the first quarter of 2003. Net Income Net income increased 22% to $15.5 million in the first quarter of 2004 or $.52
per diluted share from $12.7 million or $.43 per diluted share in the first
quarter of 2003. Contractual Obligations and Commitments The Companys contractual obligations and commitments 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, 2003. Critical Accounting Policies The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. These estimates and assumptions
include, but are not limited to, allowance for bad debts, allowance for slow
moving and obsolete inventories, useful lives selected for depreciating
property, plant, and equipment, valuation allowances for deferred income taxes,
estimates used in the recoverability of long-lived assets, and contingency
reserves established with respect to the Companys Chinese subsidiary. Management
bases its estimates and assumptions on historical experience and on various
other factors that it believes to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities. Management does not believe that any of its estimates involve assumptions about
matters that are highly uncertain or that different reasonable estimates, or
changes in accounting estimates that are reasonably likely to occur, would have
a material impact on the financial statements. To the extent there are
material differences between managements estimates and actual results, future
results of operations will be affected. However, managements experience has
been that the differences between estimates and actual results have been
immaterial, and appropriate adjustments to the consolidated financial
statements are made as soon as the differences become known. 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 March 31,
2004 and December 31, 2003, the Company had cash and cash equivalents of $66.4
million and $69.8 million, respectively. Net cash flow from operating
activities was $10.9 million in the first quarter of 2004 and $12.9 million in
the first quarter of 2003. The decrease is primarily a result of an increase
in accounts receivable and inventories, a smaller reduction in prepaid expenses
and other current assets net of an increase in net income, a reduction in
accounts payable, and a smaller increase in accrued liabilities. Additions to
property, plant, and equipment in the first quarter of 2004 were $9.7 million,
compared to $24.8 million in the first quarter of 2003. In 2003 the increase
in plant, property, and equipment was related to the purchase of a new
corporate headquarters building for approximately $22 million. In 2004 the
increase in plant, property, and equipment was in great part related to the
fitting out of the Companys new corporate headquarters building and the
construction of a new building in Wales. It is anticipated that the Companys
new headquarters will be occupied in the third quarter of 2004, and that the
total fit-out cost will be approximately $20 million, of which approximately
$6.4 million had been spent as of the end of the first quarter. The Companys
new 30,000 square foot building in Wales should be completed in the second
quarter of 2004 at a total cost of approximately $9 million. Cash used for the
placement of IMMULITE systems under sales-type and operating leases and rentals
(for periods of generally three to five years) was $3.0 million in the first
quarter of 2004 compared to $7.3 million in the first quarter of 2003,
reflecting a greater number of 13




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instruments that are sold outright. The Company decreased borrowings by $2.3
million in the first quarter of 2004 and by $1.0 million in the first quarter
of 2003. 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 March 31, 2004 or December 31, 2003.
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 $16.7 million at March 31, 2004
compared to $19.4 million at December 31, 2003. The Company received $2.4
million from the exercise of stock options in the first quarter of 2004 versus
$632,000 in the first quarter of 2003. The Company has paid a quarterly cash
dividend of $.06 per share, on a split-adjusted basis, since 1995. New Accounting Pronouncements In January 2003, the FASB issued FASB Interpretation No. (FIN) 46,
Consolidation of Variable Interest Entities (FIN 46). In December 2003,
FIN 46 was replaced by FASB interpretation No. 46R Consolidation of Variable
Interest Entities. FIN 46R clarifies the application of Accounting Research
Bulletin No. 51, Consolidated Financial Statements, to certain entities in
which equity investors do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for the entity to
finance its activities without additional subordinate financial support from
other parties. FIN 46R requires an enterprise to consolidate a variable
interest entity if that enterprise will absorb a majority of the entitys
expected losses, is entitled to receive a majority of the entitys expected
residual returns, or both. FIN 46R was effective for special-purpose
entities being evaluated under FIN 46R for consolidation on December 31, 2003
and was effective for all other entities being evaluated on March 31, 2004.
The adoption of FIN 46R did not have a material impact on the Companys
financial position or results of operations. 
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There has been no material change during the quarter ended March 31, 2004, from
the disclosures about market risk provided in the Companys Annual Report on
Form 10-K for the year ended December 31, 2003. 
 ITEM 4. CONTROLS AND PROCEDURES Based on their evaluation of the Companys disclosure controls and procedures
as of March 31, 2004, 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 control 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 14




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##### Table of Contents



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
    
    May 10, 2004/s/ James L. Brill
James L. Brill
    
    Vice President-Finance
(Principal Financial and Accounting
Officer)
    
    May 10, 2004
 15




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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