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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2002, or
( ) 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 0-17272
__________________
TECHNE CORPORATION
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1427402
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
614 MCKINLEY PLACE N.E. (612) 379-8854
MINNEAPOLIS, MN 55413 Registrant's telephone number,
(Address of principal including area code)
executive offices) (Zip Code)
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 ( )
At February 4, 2003, 41,531,998 shares of the Company's Common Stock (par
value $.01) were outstanding.
TECHNE CORPORATION
FORM 10-Q
DECEMBER 31, 2002
INDEX
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as of December 31, 2002
(unaudited) and June 30, 2002 3
Consolidated Statements of Earnings for the quarter and
six months ended December 31, 2002 and 2001 (unaudited) 4
Consolidated Statements of Cash Flows for the six months
ended December 31, 2002 and 2001 (unaudited) 5
Notes to Consolidated Financial Statements (unaudited) 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 10
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 14
ITEM 4. CONTROLS AND PROCEDURES 15
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 15
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 15
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 15
ITEM 5. OTHER INFORMATION 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 16
SIGNATURES 16
2
PART I. FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
TECHNE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
12/31/02 6/30/02
------------ ------------
ASSETS
Cash and cash equivalents $ 28,821,496 $ 26,392,480
Short-term available-for-sale
investments 78,911,716 70,671,341
Trade accounts receivable (net) 14,866,138 16,913,002
Interest receivable 2,151,117 2,500,616
Inventories 6,537,120 6,077,035
Deferred income taxes 3,969,000 3,762,000
Income taxes receivable -- 1,845,421
Prepaid expenses 1,048,312 915,854
------------ ------------
Total current assets 136,304,899 129,077,749
Property and equipment (net) 80,955,464 70,312,602
Goodwill (net) (Note B) 12,540,000 12,540,000
Intangible assets (net) (Note B) 5,387,375 6,357,000
Deferred income taxes 9,186,000 9,400,000
Other long-term assets 8,959,995 10,559,608
------------ ------------
$253,333,733 $238,246,959
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Trade accounts payable $ 3,475,927 $ 4,326,359
Salaries, wages and related
accounts payable 1,352,360 2,873,505
Other accounts payable and accrued
expenses 4,433,950 6,480,023
Income taxes payable 1,261,790 --
Current portion of long-term debt 1,387,725 949,637
------------ ------------
Total current liabilities 11,911,752 14,629,524
Long-term debt, less current portion 16,197,862 17,100,652
------------ ------------
Total liabilities 28,109,614 31,730,176
Commitments and contingencies (Note E)
Common stock, par value $.01 per
share; authorized 100,000,000; issued
and outstanding 41,531,248 and
41,562,136, respectively 415,312 415,621
Additional paid-in capital 61,018,423 58,584,103
Retained earnings 161,428,083 147,369,149
Accumulated other comprehensive income 2,362,301 147,910
------------ ------------
Total stockholders' equity 225,224,119 206,516,783
------------ ------------
$253,333,733 $238,246,959
============ ============
See notes to consolidated financial statements (unaudited).
3
TECHNE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
QUARTER ENDED SIX MONTHS ENDED
------------------------ -----------------------
12/31/02 12/31/01 12/31/02 12/31/01
----------- ----------- ----------- -----------
Net sales $33,300,214 $31,136,911 $67,848,450 $60,979,577
Cost of sales 8,370,754 8,028,285 17,061,009 15,576,227
----------- ----------- ----------- -----------
Gross margin 24,929,460 23,108,626 50,787,441 45,403,350
Operating expenses:
Selling, general and
administrative 4,901,125 4,755,376 9,851,772 9,444,026
Research and
development 4,979,240 4,309,273 9,812,337 8,299,007
Amortization of
intangible assets 484,812 2,137,311 969,625 4,274,623
Interest expense 296,535 334,819 619,225 673,524
Interest income (703,983) (913,287) (1,494,423) (1,876,012)
Other non-operating
income/expense (net) (16,562) 78,499 133,698 (74,234)
----------- ----------- ----------- -----------
9,941,167 10,701,991 19,892,234 20,740,934
----------- ----------- ----------- -----------
Earnings before income
taxes 14,988,293 12,406,635 30,895,207 24,662,416
Income taxes 5,107,000 3,972,000 10,569,000 7,803,000
----------- ----------- ----------- -----------
Net earnings $ 9,881,293 $ 8,434,635 $20,326,207 $16,859,416
=========== =========== =========== ===========
Earnings per share:
Basic $ 0.24 $ 0.20 $ 0.49 $ 0.41
Diluted $ 0.23 $ 0.20 $ 0.48 $ 0.40
Weighted average common
shares outstanding:
Basic 41,444,808 41,486,607 41,403,906 41,461,183
Diluted 42,315,579 42,540,904 42,300,344 42,536,336
See notes to consolidated financial statements (unaudited).
4
TECHNE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
SIX MONTHS ENDED
--------------------------
12/31/02 12/31/01
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 20,326,207 $ 16,859,416
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 3,133,541 6,269,166
Deferred income taxes 20,000 (446,000)
Losses by equity method investees 1,356,474 511,635
Other 243,139 220,638
Change in current assets and current
liabilities:
Trade accounts and interest receivable 2,626,705 1,037,167
Inventories (405,535) (516,417)
Prepaid expenses (117,896) (121,626)
Trade and other accounts payable (3,097,719) (2,722,141)
Salaries, wages and related accounts (1,531,719) (410,695)
Income taxes payable 3,552,691 (1,067,670)
------------ ------------
Net cash provided by operating activities 26,105,888 19,613,473
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (12,765,186) (6,174,608)
Purchase of short-term available-for-
sale investments (41,320,000) (26,214,571)
Proceeds from sale of short-term
available-for-sale investments 34,190,625 24,923,000
Increase in other long-term assets -- (3,000,000)
------------ ------------
Net cash used in investing activities (19,894,561) (10,466,179)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock 1,511,628 155,917
Repurchase of common stock (5,864,890) (485,010)
Payments on long-term debt (464,702) (432,749)
------------ ------------
Net cash used in financing activities (4,817,964) (761,842)
------------ ------------
Effect of exchange rate changes on cash 1,035,653 430,271
------------ ------------
Net increase in cash and cash equivalents 2,429,016 8,815,723
Cash and cash equivalents at beginning of period 26,392,480 21,267,791
------------ ------------
Cash and cash equivalents at end of period $ 28,821,496 $ 30,083,514
============ ============
See notes to consolidated financial statements (unaudited).
5
TECHNE CORPORATION & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
A. BASIS OF PRESENTATION:
The unaudited consolidated financial statements of Techne Corporation and
Subsidiaries (the Company) have been prepared in accordance with accounting
principles generally accepted in the United States of America and with
instructions to Form 10-Q and Article 10 of Regulation S-X. The accompanying
unaudited consolidated financial statements reflect all adjustments which
are, in the opinion of management, necessary to a fair presentation of the
results for the interim periods presented. All such adjustments are of a
normal recurring nature.
A summary of significant accounting policies followed by the Company is
detailed in the Annual Report to Shareholders for fiscal 2002. The Company
follows these policies in preparation of the interim unaudited consolidated
financial statements. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted. It is suggested that these unaudited consolidated
financial statements be read in conjunction with the Company's Consolidated
Financial Statements and Notes thereto for the fiscal year ended June 30,
2002 included in the Company's Annual Report to Shareholders for fiscal 2002.
Certain consolidated balance sheet captions appearing in this interim report
are as follows:
12/31/02 6/30/02
------------ ------------
ACCOUNTS RECEIVABLE
Accounts receivable $ 15,135,138 $ 17,176,002
Less allowance for doubtful accounts 269,000 263,000
------------ ------------
NET ACCOUNTS RECEIVABLE $ 14,866,138 $ 16,913,002
============ ============
INVENTORIES
Raw materials $ 2,856,620 $ 2,785,949
Supplies 126,703 118,895
Finished goods 3,553,797 3,172,191
------------ ------------
TOTAL INVENTORIES $ 6,537,120 $ 6,077,035
============ ============
PROPERTY AND EQUIPMENT
Land $ 2,998,800 $ 1,571,000
Buildings and improvements 65,116,101 63,541,408
Building construction in progress 16,289,583 7,728,660
Laboratory equipment 17,671,674 16,694,898
Office equipment 4,478,383 4,263,512
Leasehold improvements 522,263 497,087
------------ ------------
107,076,804 94,296,565
Less accumulated depreciation
and amortization 26,121,340 23,983,963
------------ ------------
NET PROPERTY AND EQUIPMENT $ 80,955,464 $ 70,312,602
============ ============
GOODWILL AND INTANGIBLE ASSETS
Customer list $ 18,010,000 $ 18,010,000
Technology licensing agreements 500,000 500,000
Goodwill 39,075,089 39,075,089
------------ ------------
57,585,089 57,585,089
Less accumulated amortization 39,657,714 38,688,089
------------ ------------
NET GOODWILL AND INTANGIBLE ASSETS $ 17,927,375 $ 18,897,000
============ ============
6
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. SFAS No. 146 addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
an Activity (including Certain Costs Incurred in a Restructuring). SFAS No.
146 requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. Under EITF 94-3, a
liability for an exit cost was recognized at the date of an entity's
commitment to an exit plan. SFAS No. 146 will be effective for exit or
disposal activities that are initiated by the Company after December 31,
2002.
In December 2002, the FASB issued SFAS No. 148, Stock Compensation. SFAS No.
148 provides alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based employee compensation.
In addition, SFAS No. 148 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 does not plan to change their method of accounting for stock-based
employee compensation. The Company will make the required interim disclosures
effective with the quarter ending March 31, 2003.
B. GOODWILL AND INTANGIBLE ASSETS:
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141, Business
Combinations and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No.
141 applies to all business combinations initiated after June 30, 2001 and
prohibits the use of the pooling-of-interests method of accounting. SFAS No.
142 requires that ratable amortization of goodwill and certain intangible
assets be replaced with periodic tests of the goodwill's impairment and that
other intangible assets be amortized over their useful lives unless these
lives are determined to be indefinite. The Company assessed the
recoverability of its goodwill and other intangibles upon the adoption of
SFAS No. 142 and determined no impairment existed at July 1, 2002. The
Company used cash flow and fair value methodologies to assess impairment.
The Company had net goodwill and other intangible assets of approximately
$12.5 million and $5.4 million, respectively, at December 31, 2002.
The pro forma effects of implementation of SFAS No. 142 to prior periods
would be as follows:
QUARTER ENDED SIX MONTHS ENDED
---------------------- ------------------------
12/31/02 12/31/01 12/31/02 12/31/01
---------- ---------- ----------- -----------
Reported net income $9,881,293 $8,434,635 $20,326,207 $16,859,416
Goodwill amortization,
net of tax -- 1,019,500 -- 2,038,000
---------- ---------- ----------- -----------
Adjusted net income $9,881,293 $9,454,135 $20,326,207 $18,897,416
========== ========== =========== ===========
Reported basic earnings
per share $ 0.24 $ 0.20 $ 0.49 $ 0.41
Goodwill amortization 0.00 0.03 0.00 0.05
---------- ---------- ----------- -----------
Adjusted basic earnings
per share $ 0.24 $ 0.23 $ 0.49 $ 0.46
========== ========== =========== ===========
Reported diluted earnings
per share $ 0.23 $ 0.20 $ 0.48 $ 0.40
Goodwill amortization 0.00 0.02 0.00 0.04
---------- ---------- ----------- -----------
Adjusted diluted earnings
per share $ 0.23 $ 0.22 $ 0.48 $ 0.44
========== ========== =========== ===========
7
YEAR ENDED
-------------------------------------
6/30/02 6/30/01 6/30/00
----------- ----------- -----------
Reported net income $27,129,669 $34,045,376 $26,582,797
Goodwill amortization, net of tax 4,076,000 4,076,000 4,076,000
----------- ----------- -----------
Adjusted net income $31,205,669 $38,121,376 $30,658,797
=========== =========== ===========
Reported basic earnings per share $ 0.65 $ 0.82 $ 0.65
Goodwill amortization 0.10 0.10 0.10
----------- ----------- -----------
Adjusted basic earnings per share $ 0.75 $ 0.92 $ 0.75
=========== =========== ===========
Reported diluted earnings per share $ 0.64 $ 0.80 $ 0.63
Goodwill amortization 0.09 0.09 0.10
----------- ----------- -----------
Adjusted diluted earnings per share $ 0.73 $ 0.89 $ 0.73
=========== =========== ===========
The estimated future amortization expense for other intangible assets as of
December 31, 2002 for the remainder of fiscal year 2003 and the five
succeeding fiscal years is as follows (in thousands):
Estimated
Amortization
Year ended June 30 Expense
- ------------------- ------------
2003 (remaining six months) $ 970
2004 1,599
2005 1,221
2006 881
2007 541
2008 175
C. EARNINGS PER SHARE:
Shares used in the earnings per share computations are as follows:
QUARTER ENDED SIX MONTHS ENDED
---------------------- ----------------------
12/31/02 12/31/01 12/31/02 12/31/01
---------- ---------- ---------- ----------
Weighted average common
shares outstanding-basic 41,444,808 41,486,607 41,403,906 41,461,183
Dilutive effect of stock
options and warrants 870,771 1,054,297 896,438 1,075,153
---------- ---------- ---------- ----------
Weighted average common
shares outstanding-diluted 42,315,579 42,540,904 42,300,344 42,536,336
========== ========== ========== ==========
8
D. SEGMENT INFORMATION:
Following is financial information relating to the Company's operating
segments:
QUARTER ENDED SIX MONTHS ENDED
------------------------ ------------------------
12/31/02 12/31/01 12/31/02 12/31/01
----------- ----------- ----------- -----------
External sales
Hematology $ 3,986,601 $ 3,823,229 $ 7,760,381 $ 7,472,822
Biotechnology 20,453,677 19,718,623 42,941,123 39,084,357
R&D Systems Europe 8,859,936 7,595,059 17,146,946 14,422,398
----------- ----------- ----------- -----------
Total external sales $33,300,214 $31,136,911 $67,848,450 $60,979,577
=========== =========== =========== ===========
Intersegment sales
Hematology $ -- $ -- $ -- $ --
Biotechnology 4,501,122 4,128,793 8,651,440 7,946,277
R&D Systems Europe 9,515 9,950 23,480 29,435
----------- ----------- ----------- -----------
Total intersegment sales $ 4,510,637 $ 4,138,743 $ 8,674,920 $ 7,975,712
=========== =========== =========== ===========
Earnings before
income taxes
Hematology $ 1,397,779 $ 1,254,284 $ 2,562,316 $ 2,393,959
Biotechnology 12,449,296 10,552,117 26,694,040 21,132,342
R&D Systems Europe 2,323,845 1,388,050 4,134,718 2,816,448
Corporate and other (1,182,627) (787,816) (2,495,867) (1,680,333)
----------- ----------- ----------- -----------
Total earnings before
income taxes $14,988,293 $12,406,635 $30,895,207 $24,662,416
=========== =========== =========== ===========
E. CONTINGENCIES:
Portions of the Company's short-term available-for-sale investments were held
in brokerage accounts carried by a clearing firm which in late September 2001
was placed in bankruptcy. The trustee appointed pursuant to the Securities
Investor Protection Act has released to the Company cash and securities
representing approximately 99% of the total value of the accounts and has
withheld securities and cash equivalents in the amount of approximately
$250,000 pending resolution of the bankruptcy proceeding. Management
believes that all of its securities and cash equivalents will be returned to
the Company as the trustee has available the assets of customers' accounts,
SIPC insurance and third party insurance. Accordingly, no impairment loss
has been recognized at this time.
F. PROPERTY ACQUISITION:
In December 2002, the Company purchased approximately 649 acres of farmland,
including buildings, in southeastern Minnesota for $2.7 million in cash. The
property was purchased to house goats used in the Company's polyclonal
antibody production. Currently the Company houses over 700 goats in two
barns that it donated in 1997 and 2001, respectively, to the University of
Minnesota College of Veterinary Medicine. These facilities are near capacity
and additional space is required.
G. MODIFICATION OF LOAN AGREEMENT:
As of December 31, 2002, the Company's long-term debt consisted of a mortgage
note payable. The interest rate on the mortgage note was fixed at 7% through
November 2002. The terms of the note payable were modified in December 2002
to include a floating interest rate at the one month LIBOR rate plus 2.5%
with a floor of 4%. The floating interest rate on the mortgage note payable
was below the 4% floor as of December 31, 2002.
9
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations Quarter and Six Months Ended December 31, 2002
vs. Quarter and Six Months Ended December 31, 2001
Overview
Techne Corporation (the Company) has two operating subsidiaries: Research
and Diagnostic Systems, Inc. (R&D Systems) located in Minneapolis, Minnesota
and R&D Systems Europe Ltd. (R&D Europe) located in Abingdon, England. R&D
Systems has two divisions: Biotechnology and Hematology. The Biotechnology
Division's principal products are purified cytokines (proteins), antibodies
and assay kits, which are sold primarily to biomedical researchers at
pharmaceutical companies and academic and government research laboratories.
The Hematology Division's principal products are whole blood hematology
controls and calibrators which are sold to hospital and clinical laboratories
to check the performance of their hematology instruments to assure the
accuracy of hematology test results. R&D Europe sells R&D Systems'
biotechnology products in Europe directly, through a branch office in France
and through a sales subsidiary in Germany. The Company also had a foreign
sales corporation, Techne Export Inc., which was dissolved in fiscal 2002.
Net Sales
Net sales for the quarter ended December 31, 2002 were $33,300,214, an
increase of $2,163,303 (7%) from the quarter ended December 31, 2001. Net
sales for the six months ended December 31, 2002 increased $6,868,873 (11%)
from $60,979,577 to $67,848,450. R&D Systems' Biotechnology Division net
sales increased $735,054 (4%) and $3,856,766 (10%) and R&D Systems'
Hematology Division net sales increased $163,372 (4%) and $287,559 (4%) for
the quarter and six months ended December 31, 2002, respectively. R&D Europe
net sales increased $1,264,877 (17%) and $2,724,548 (19%) for the quarter and
six months ended December 31, 2002. In British pounds, R&D Europe's net
sales increased 7% and 10% for the quarter and six months.
The slowing of the Company's sales growth as compared to prior-year periods
from a 16% growth rate in the first quarter of the current fiscal year to 7%
in the current quarter was primarily due to the unexpected reduction in R&D
Systems' Biotechnology Division sales growth. Biotechnology Division's sales
for the second quarter of fiscal 2003 increased 4% from last year compared to
a 16% increase in the first quarter of fiscal 2003. The decline in sales
growth occurred across all major product lines and customer segments and can
be attributed mainly to economic factors and the timing of the Christmas and
New Year holidays, which fell in the middle of the work week. Competitive
factors are not believed to have had an impact on the second quarter decline
in sales growth.
Gross margins
Gross margins for the second quarter of fiscal 2003 were 74.9% compared to
74.2% for the same quarter in fiscal 2002. Gross margins for the six months
ended December 31, 2002 were 74.9% compared to 74.5% for the same period in
fiscal 2002.
Biotechnology Division margins increased slightly from 78.0% to 78.3% for the
quarter, but decreased slightly from 78.6% to 78.3% for the six months ended
December 31, 2002. R&D Europe gross margins increased from 35.6% to 40.4%
10
for the quarter and from 35.9% to 40.1% for the six months ended December 31,
2002 as a result of exchange rate changes. Hematology Division gross margins
increased from 44.4% to 47.0% for the quarter and from 43.7% to 45.2% for the
six months ended December 31, 2002 as a result of lower raw material costs.
Blood costs during the first half of last fiscal year were high due to supply
shortages.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $145,749 (3%) and
$407,746 (4%) from the second quarter and first six months of last year,
respectively.
Research and Development Expenses
Research and development expenses increased $669,967 (16%) and $1,513,330
(18%) for the quarter and six months ended December 31, 2002. Included in
research and development expenses are losses by ChemoCentryx, Inc. (CCX) and
Discovery Genomics, Inc. (DGI), development stage companies in which the
Company has invested. Research and development expenses are composed of the
following:
QUARTER ENDED SIX MONTHS ENDED
---------------------- ----------------------
12/31/02 12/31/01 12/31/02 12/31/01
---------- ---------- ---------- ----------
R&D Systems' expenses $4,320,409 $3,927,123 $8,455,863 $7,787,372
Chemocentryx, Inc. losses 496,233 277,309 1,015,377 360,860
Discovery Genomics losses 162,598 104,841 341,097 150,775
---------- ---------- ---------- ----------
Total research and
development expenses $4,979,240 $4,309,273 $9,812,337 $8,299,007
========== ========== ========== ==========
Excluding CCX and DGI losses, research and development expenses for the
second quarter and first six months of fiscal 2003 increased $393,286 (10%)
and $668,491 (9%), respectively.
Amortization of Intangible Assets
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141, Business
Combinations and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No.
141 applies to all business combinations initiated after June 30, 2001 and
prohibits the use of the pooling-of-interests method of accounting. SFAS No.
142 requires that ratable amortization of goodwill and certain intangible
assets be replaced with periodic tests of the goodwill's impairment and that
other intangible assets be amortized over their useful lives unless these
lives are determined to be indefinite. The Company assessed the
recoverability of its goodwill and other intangibles upon the adoption of
SFAS No. 142 and determined no impairment existed at July 1, 2002. The
Company used cash flow and fair value methodologies to assess impairment.
The Company had net goodwill and other intangible assets of approximately
$12.5 million and $5.4 million, respectively, at December 31, 2002.
11
The pro forma effects of implementation of SFAS No. 142 to prior periods
would be as follows:
QUARTER ENDED SIX MONTHS ENDED
---------------------- ------------------------
12/31/02 12/31/01 12/31/02 12/31/01
---------- ---------- ----------- -----------
Reported net income $9,881,293 $8,434,635 $20,326,207 $16,859,416
Goodwill amortization,
net of tax -- 1,019,500 -- 2,038,000
---------- ---------- ----------- -----------
Adjusted net income $9,881,293 $9,454,135 $20,326,207 $18,897,416
========== ========== =========== ===========
Reported basic earnings
per share $ 0.24 $ 0.20 $ 0.49 $ 0.41
Goodwill amortization 0.00 0.03 0.00 0.05
---------- ---------- ----------- -----------
Adjusted basic earnings
per share $ 0.24 $ 0.23 $ 0.49 $ 0.46
========== ========== =========== ===========
Reported diluted earnings
per share $ 0.23 $ 0.20 $ 0.48 $ 0.40
Goodwill amortization 0.00 0.02 0.00 0.04
---------- ---------- ----------- -----------
Adjusted diluted earnings
per share $ 0.23 $ 0.22 $ 0.48 $ 0.44
========== ========== =========== ===========
YEAR ENDED
-------------------------------------
6/30/02 6/30/01 6/30/00
----------- ----------- -----------
Reported net income $27,129,669 $34,045,376 $26,582,797
Goodwill amortization, net of tax 4,076,000 4,076,000 4,076,000
----------- ----------- -----------
Adjusted net income $31,205,669 $38,121,376 $30,658,797
=========== =========== ===========
Reported basic earnings per share $ 0.65 $ 0.82 $ 0.65
Goodwill amortization 0.10 0.10 0.10
----------- ----------- -----------
Adjusted basic earnings per share $ 0.75 $ 0.92 $ 0.75
=========== =========== ===========
Reported diluted earnings per share $ 0.64 $ 0.80 $ 0.63
Goodwill amortization 0.09 0.09 0.10
----------- ----------- -----------
Adjusted diluted earnings per share $ 0.73 $ 0.89 $ 0.73
=========== =========== ===========
Other Non-operating Income/Expenses
Other non-operating income/expenses consist mainly of foreign currency
transaction gains and losses and real estate and utility expenses related
to properties under construction/renovation.
Net Earnings
Earnings before income taxes increased $2,581,658 from $12,406,635 in the
second quarter of fiscal 2002 to $14,988,293 in the second quarter of fiscal
2003. Earnings before income taxes for the six months increased $6,232,791
from $24,662,416 to $30,895,207. The increase in earnings before income
taxes was due primarily to the increase in sales and reduction in goodwill
amortization.
Income taxes for the quarter and six months ended December 31, 2002 were
provided at a rate of approximately 34% of consolidated pretax earnings
compared to 32% for the prior-year periods. The increase in the tax rate was
primarily the result of increased losses by CCX and DGI for which there are
no tax benefits, decreased tax exempt interest income and changes in state
income tax regulations. U.S. federal taxes have been reduced by the credit
for research and development expenditures and the benefit for foreign sales.
Foreign income taxes have been provided at rates which approximate the tax
rates in the United Kingdom, France and Germany.
12
Liquidity and Capital Resources
At December 31, 2002, cash and cash equivalents and short-term available-for-
sale investments were $107,733,212 compared to $97,063,821 at June 30, 2002.
The Company believes it can meet its future cash, working capital and capital
addition requirements through currently available funds, cash generated from
operations and maturities of short-term available-for-sale investments. The
Company has an unsecured line of credit of $750,000. The interest rate on
the line of credit is at prime. There were no borrowings on the line in the
prior or current fiscal years.
Cash Flows From Operating Activities
The Company generated cash of $26,105,888 from operating activities in the
first six months of fiscal 2003 compared to $19,613,473 for the first six
months of fiscal 2002. The increase was mainly the result of increased
earnings after adjustment for noncash items and increased income taxes
payable.
Cash Flows From Investing Activities
Capital expenditures for fixed assets for the first six months of fiscal 2003
and 2002 were $12,765,186 and $6,174,608, respectively. Included in the
first six months of fiscal 2003 capital additions was $9 million for
renovation of property purchased in fiscal 2002 and the construction of an
infill joining the property with R&D Systems' existing property. Also
included in the first six months of fiscal 2003 capital additions was $2.7
million for the purchase of property in southeastern Minnesota as described
previously in Note F. Included in the first six months of fiscal 2003 and
2002 capital additions were $202,000 and $4.2 million, respectively, for
construction of a parking ramp. The remaining capital additions in the first
six months of fiscal fiscal 2003 and 2002 were for laboratory and computer
equipment and remodeling of laboratory space.
Remaining expenditures in fiscal 2003 for laboratory and computer equipment
are expected to cost approximately $500,000 and are expected to be financed
through currently available funds and cash generated from operating
activities. Costs to finish the renovation of the property purchased in
fiscal 2002 and the construction of the infill are estimated at approximately
$8 million with completion expected in fiscal 2004. The renovation costs
and construction of the infill are expected to be financed through currently
available funds, cash generated from operating activities and maturities of
short-term available-for-sale investments.
During the six months ended December 31, 2002 the Company purchased
$41,320,000 and sold $34,190,625 of short-term available-for-sale
investments. During the six months ended December 31, 2001, the Company
purchased $26,214,571 and sold $24,923,000 of short-term available-for-sale
investments. The Company's investment policy is to place excess cash in
short-term bonds and other short-term investments. The objective of this
policy is to obtain the highest possible return with minimal risk, while
keeping the funds accessible.
During the first six months of fiscal 2002, the Company invested $3 million
in Discovery Genomics, Inc.
Cash Flows From Financing Activities
Cash of $1,511,628 and $155,917 was received during the six months ended
December 31, 2002 and 2001, respectively, for the exercise of options for
109,050 and 24,950 shares of common stock. During the first six months of
fiscal 2003 and 2002 options for 120,000 and 80,000 shares of common stock
13
were exercised by the surrender of 12,438 and 7,654 shares of the Company's
common stock with a fair market values of $404,981 and $224,968,
respectively.
During the first six months of fiscal 2003 and 2002, the Company purchased
and retired 247,500 and 20,000 shares of Company common stock at a market
value of $5,864,890 and $485,010, respectively. The Board of Directors has
authorized the Company, subject to market conditions and share price, to
purchase and retire up to $40 million of its common stock. From the start of
the repurchase program through February 1, 2003, 1,618,700 shares have been
purchased at a market value of $16,528,387.
The Company has never paid cash dividends and has no plans to do so in fiscal
2003.
New Accounting Pronouncements
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. SFAS No. 146 addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
an Activity (including Certain Costs Incurred in a Restructuring). SFAS No.
146 requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. Under EITF 94-3, a
liability for an exit cost was recognized at the date of an entity's
commitment to an exit plan. SFAS No. 146 will be effective for exit or
disposal activities that are initiated by the Company after December 31,
2002.
In December 2002, the FASB issued SFAS No. 148, Stock Compensation. SFAS No.
148 provides alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based employee compensation.
In addition, SFAS No. 148 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 does not plan to change their method of accounting for stock-based
employee compensation. The Company will make the required interim disclosures
effective with the quarter ending March 31, 2003.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At December 31, 2002, the Company had a professionally managed investment
portfolio of fixed income securities, excluding those classified as cash and
cash equivalents, of $78,911,716. These securities, like all fixed income
instruments, are subject to interest rate risk and will decline in value if
market interest rates increase. However, the Company has the ability to hold
its fixed income investments until maturity and therefore the Company does
not expect any such increase in interest rates to have an adverse impact on
income or cash flows.
The Company operates internationally, and thus is subject to potentially
adverse movements in foreign currency rate changes. The Company does not
enter into foreign exchange forward contracts to reduce its exposure to
foreign currency rate changes on intercompany foreign currency denominated
balance sheet positions.
As of December 31, 2002, the Company's long-term debt consisted of a mortgage
note payable. The interest rate on the mortgage note was fixed at 7% through
November 2002. The terms of the note payable were modified in December 2002
to include a floating interest rate at the one month LIBOR rate plus 2.5%
with a floor of 4%. The floating interest rate on the mortgage note payable
was below the 4% floor as of December 31, 2002.
14
ITEM 4 - CONTROLS AND PROCEDURES
The Company's Chief Executive and Financial Officer, with the participation
of Company management, has concluded, based on an evaluation within 90 days
of the filing date of this report, that the Company's disclosure controls and
procedures are effective for gathering, analyzing and disclosing information
required to be disclosed in the Company's reports filed under the Securities
Exchange Act of 1934.
Management is not aware of any significant changes in the Company's internal
controls or in other factors that could significantly affect these controls
subsequent to the date of the above mentioned evaluation, including any
significant deficiencies or material weaknesses of internal controls that
would require corrective action.
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
None
ITEM 2 - CHANGES IN SECURITIES
None
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4 - SUBMISSION OF MATTERS TO VOTE OF SHAREHOLDERS
Information relating to the Company's Annual Meeting of Shareholders, held on
October 24, 2002 is contained in the Company's Form 10-Q for the quarter
ended September 30, 2002, which is incorporated herein by reference.
ITEM 5 - OTHER INFORMATION
Forward Looking Information and Cautionary Statements: Statements in this
filing, and elsewhere, which look forward in time involve risks and
uncertainties which may affect the actual results of operations. The
following important factors, among others, have affected and, in the future,
could affect the Company's actual results: the introduction and acceptance
of new biotechnology and hematology products, the levels and particular
directions of research into cytokines by the Company's customers, the impact
of the growing number of producers of cytokine research products and related
price competition, the retention of hematology OEM (private label) and
proficiency survey business, the impact of changes in foreign currency
exchange rates, and the costs and results of research and product development
efforts of the Company and of companies in which the Company has invested or
with which it has formed strategic relationships. For additional information
concerning such factors, see the Company's Annual Report on Form 10-K as
filed with the Securities and Exchange Commission.
15
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS
See exhibit index following.
B. REPORTS ON FORM 8-K
The following report on Form 8-K was filed by the Registrant during
the quarter ended December 31, 2002:
Form 8-K dated November 18, 2002, reporting under Item 4 a change in
the Registrant's certifying accountant.
SIGNATURE
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.
TECHNE CORPORATION
(Company)
Date: February 13, 2003 /s/ Thomas E. Oland
--------------------------------
President, Chief Executive and
Chief Financial Officer
16
CERTIFICATIONS
I, Thomas E. Oland, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Techne
Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and the other
financial information included in this quarterly report, fairly present
in all respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
date of this quarterly report (the "Evaluation Date");
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's board of
directors (or persons performing the equivalent function):
a) all significant deficiencies in the design and operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data and
have identified for the registrant's auditors any material weakness
in internal controls;
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: February 13, 2003
/s/ Thomas E. Oland
- ----------------------
Thomas E. Oland
Chief Executive Officer and
Chief Financial Officer
17
EXHIBIT INDEX
TO
FORM 10-Q
TECHNE CORPORATION
Exhibit # Description
- ----------- ----------------------------
10.1 Form of Indemnification Agreement entered into with each
director and executive officer of the Registrant
99 Certification