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 March 31, 2003, 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 ( )
Indicate by check mark whether the Registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2). Yes (X) No ( )
At May 5, 2003, 40,760,448 shares of the Company's Common Stock (par value
$.01) were outstanding.
TECHNE CORPORATION
FORM 10-Q
MARCH 31, 2003
INDEX
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as of March 31,
2003 (unaudited) and June 30, 2002 3
Consolidated Statements of Earnings for the
quarter and nine months ended March 31, 2003
and 2002 (unaudited) 4
Consolidated Statements of Cash Flows for the
nine months ended March 31, 2003 and 2002 (unaudited) 5
Notes to Consolidated Financial Statements (unaudited) 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 11
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 15
ITEM 4. CONTROLS AND PROCEDURES 15
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 16
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 16
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 16
ITEM 5. OTHER INFORMATION 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 16
SIGNATURES 17
2
PART I. FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
TECHNE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
3/31/03 6/30/02
------------ ------------
ASSETS
Cash and cash equivalents $ 26,836,002 $ 26,392,480
Short-term available-for-sale investments 76,775,269 70,671,341
Trade accounts receivable (net) 18,733,954 16,913,002
Interest receivable 2,210,218 2,500,616
Inventories 6,558,346 6,077,035
Deferred income taxes 4,104,000 3,762,000
Income taxes receivable -- 1,845,421
Prepaid expenses 1,262,314 915,854
------------ ------------
Total current assets 136,480,103 129,077,749
Property and equipment (net) 81,543,402 70,312,602
Goodwill (net) (Note B) 12,540,000 12,540,000
Intangible assets (net) (Note B) 4,902,562 6,357,000
Deferred income taxes 8,824,000 9,400,000
Other long-term assets 7,915,190 10,559,608
------------ ------------
$252,205,257 $238,246,959
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Trade accounts payable $ 3,296,090 $ 4,326,359
Salaries, wages and related
accounts payable 2,145,726 2,873,505
Other accounts payable and
accrued expenses 3,176,955 6,480,023
Income taxes payable 3,586,653 --
Current portion of long-term debt 1,220,415 949,637
------------ ------------
Total current liabilities 13,425,839 14,629,524
Long-term debt, less current portion 16,163,560 17,100,652
------------ ------------
Total liabilities 29,589,399 31,730,176
Commitments and contingencies (Note E)
Common stock, par value $.01 per
share; authorized 100,000,000; issued
and outstanding 40,855,948 and
41,562,136, respectively 408,559 415,621
Additional paid-in capital 61,086,736 58,584,103
Retained earnings 159,211,735 147,369,149
Accumulated other comprehensive income 1,908,828 147,910
------------ ------------
Total stockholders' equity 222,615,858 206,516,783
------------ ------------
$252,205,257 $238,246,959
============ ============
See notes to consolidated financial statements (unaudited).
3
TECHNE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
QUARTER ENDED NINE MONTHS ENDED
------------------------ --------------------------
3/31/03 3/31/02 3/31/03 3/31/02
----------- ----------- ------------ ------------
Net sales $37,736,518 $34,285,276 $105,584,968 $ 95,264,853
Cost of sales 8,756,163 8,392,165 25,817,172 23,968,392
----------- ----------- ------------ ------------
Gross margin 28,980,355 25,893,111 79,767,796 71,296,461
Operating expenses:
Selling, general and
administrative 4,705,923 4,469,162 14,557,695 13,913,188
Research and
development 5,285,180 4,442,057 15,097,517 12,741,064
Amortization of
intangible assets 484,813 2,137,312 1,454,438 6,411,935
Interest expense 178,274 323,719 797,499 997,243
Interest income (732,060) (886,595) (2,226,483) (2,762,607)
Other non-operating
income/expense (net) (59,313) 57,544 74,385 (16,690)
----------- ----------- ------------ ------------
9,862,817 10,543,199 29,755,051 31,284,133
----------- ----------- ------------ ------------
Earnings before
income taxes 19,117,538 15,349,912 50,012,745 40,012,328
Income taxes 6,724,000 4,776,000 17,293,000 12,579,000
----------- ----------- ------------ ------------
Net earnings $12,393,538 $10,573,912 $ 32,719,745 $ 27,433,328
=========== =========== ============ ============
Earnings per share:
Basic $ 0.30 $ 0.25 $ 0.79 $ 0.66
Diluted $ 0.30 $ 0.25 $ 0.78 $ 0.65
Weighted average common
shares outstanding:
Basic 41,296,620 41,544,110 41,369,059 41,488,383
Diluted 41,990,671 42,524,992 42,198,103 42,531,964
See notes to consolidated financial statements (unaudited).
4
TECHNE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
NINE MONTHS ENDED
--------------------------
3/31/03 3/31/02
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 32,719,745 $ 27,433,328
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 4,769,475 9,439,663
Deferred income taxes 242,000 (757,000)
Losses by equity method investees 2,279,712 1,041,068
Other 364,707 330,957
Change in current assets and current
liabilities:
Trade accounts and interest receivable (1,250,602) (1,962,671)
Inventories (447,975) (505,363)
Prepaid expenses (335,890) (331,805)
Trade and other accounts payable (4,382,315) (3,745,346)
Salaries, wages and related accounts (739,780) 170,001
Income taxes payable 5,936,251 15,090
------------ ------------
Net cash provided by operating activities 39,155,328 31,127,922
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (14,513,514) (13,942,179)
Real estate deposit -- (1,999,000)
Purchase of short-term available-for-
sale investments (53,440,000) (39,419,571)
Proceeds from sale of short-term
available-for-sale investments 48,375,072 32,902,541
Increase in other long-term assets -- (3,034,103)
------------ ------------
Net cash used in investing activities (19,578,442) (25,492,312)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock 1,531,978 328,873
Repurchase of common stock (20,481,567) (485,010)
Payments on long-term debt (666,314) (660,259)
------------ ------------
Net cash used in financing activities (19,615,903) (816,396)
------------ ------------
Effect of exchange rate changes on cash 482,539 54,801
------------ ------------
Net increase in cash and cash equivalents 443,522 4,874,015
Cash and cash equivalents at beginning of period 26,392,480 21,267,791
------------ ------------
Cash and cash equivalents at end of period $ 26,836,002 $ 26,141,806
============ ============
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:
3/31/03 6/30/02
------------ ------------
ACCOUNTS RECEIVABLE
Accounts receivable $ 19,000,954 $ 17,176,002
Less allowance for doubtful accounts 267,000 263,000
------------ ------------
NET ACCOUNTS RECEIVABLE $ 18,733,954 $ 16,913,002
============ ============
INVENTORIES
Raw materials $ 2,795,314 $ 2,785,949
Supplies 129,446 118,895
Finished goods 3,633,586 3,172,191
------------ ------------
TOTAL INVENTORIES $ 6,558,346 $ 6,077,035
============ ============
PROPERTY AND EQUIPMENT
Land $ 2,998,800 $ 1,571,000
Buildings and improvements 64,929,704 63,541,408
Building construction in progress 17,769,501 7,728,660
Laboratory equipment 16,267,535 16,694,898
Office equipment 3,098,116 4,263,512
Leasehold improvements 512,725 497,087
------------ ------------
105,576,381 94,296,565
Less accumulated depreciation and
amortization 24,032,979 23,983,963
------------ ------------
NET PROPERTY AND EQUIPMENT $ 81,543,402 $ 70,312,602
============ ============
6
3/31/03 6/30/02
------------ ------------
GOODWILL $ 38,845,547 $ 38,845,547
Less accumulated amortization 26,305,547 26,305,547
------------ ------------
NET GOODWILL $ 12,540,000 $ 12,540,000
============ ============
INTANGIBLE ASSETS
Customer list $ 18,010,000 $ 18,010,000
Technology licensing agreements 500,000 500,000
Acquisition costs 229,542 229,542
------------ ------------
18,739,542 18,739,542
Less accumulated amortization 13,836,980 12,382,542
------------ ------------
NET INTANGIBLE ASSETS $ 4,902,562 $ 6,357,000
============ ============
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 $4.9 million, respectively, at March 31, 2003.
The pro forma effects of implementation of SFAS No. 142 to prior periods
would be as follows:
QUARTER ENDED NINE MONTHS ENDED
------------------------ ------------------------
3/31/03 3/31/02 3/31/03 3/31/02
----------- ----------- ----------- -----------
Reported net income $12,393,538 $10,573,912 $32,719,745 $27,433,328
Goodwill amortization,
net of tax -- 1,018,500 -- 3,056,500
----------- ----------- ----------- -----------
Adjusted net income $12,393,538 $11,592,412 $32,719,745 $30,489,828
=========== =========== =========== ===========
Reported basic
earnings per share $ 0.30 $ 0.25 $ 0.79 $ 0.66
Goodwill amortization 0.00 0.03 0.00 0.07
----------- ----------- ----------- -----------
Adjusted basic
earnings per share $ 0.30 $ 0.28 $ 0.79 $ 0.73
=========== =========== =========== ===========
Reported diluted
earnings per share $ 0.30 $ 0.25 $ 0.78 $ 0.65
Goodwill amortization 0.00 0.02 0.00 0.07
----------- ----------- ----------- -----------
Adjusted diluted
earnings per share $ 0.30 $ 0.27 $ 0.78 $ 0.72
=========== =========== =========== ===========
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
March 31, 2003 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 three months) $ 485
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 NINE MONTHS ENDED
---------------------- ----------------------
3/31/03 3/31/02 3/31/03 3/31/02
---------- ---------- ---------- ----------
Weighted average common
shares outstanding-basic 41,296,620 41,544,110 41,369,059 41,488,383
Dilutive effect of stock
options and warrants 694,051 980,882 829,044 1,043,581
---------- ---------- ---------- ----------
Weighted average common
shares outstanding-diluted 41,990,671 42,524,992 42,198,103 42,531,964
========== ========== ========== ==========
The dilutive effect of stock options and warrants in the above table excludes
all options for which the exercise price was higher than the average market
price for the period. The number of potentially dilutive option shares
excluded from the calculation were 585,920 and 581,310 at March 31, 2003 and
2002, respectively.
During the quarter ended March 31, 2003, the Company purchased and retired
679,000 shares of Company common stock at a market value of $14,616,677. The
effect of the purchases was a 236,700 reduction in the weighted average
common shares outstanding for the quarter ended March 31, 2003. The full
impact of the above purchases will be reflected in the fourth quarter
weighted average common shares outstanding.
8
During the first nine months of fiscal 2003 and 2002, the Company purchased
and retired 926,500 and 20,000 shares of Company common stock at a market
value of $20,481,567 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 May 1, 2003, 2,397,700 shares have been
purchased at a market value of $33,176,069.
D. SEGMENT INFORMATION:
Following is financial information relating to the Company's operating
segments:
QUARTER ENDED NINE MONTHS ENDED
------------------------ -------------------------
3/31/03 3/31/02 3/31/03 3/31/02
----------- ----------- ------------ -----------
External sales
Hematology $ 3,996,260 $ 3,630,788 $ 11,756,641 $11,103,610
Biotechnology 23,642,089 22,701,874 66,583,212 61,786,231
R&D Systems Europe 10,098,169 7,952,614 27,245,115 22,375,012
----------- ----------- ------------ -----------
Total external sales $37,736,518 $34,285,276 $105,584,968 $95,264,853
=========== =========== ============ ===========
Intersegment sales
Hematology $ -- $ -- $ -- $ --
Biotechnology 4,874,133 4,586,030 13,525,573 12,532,307
R&D Systems Europe 13,565 17,865 37,045 47,300
----------- ----------- ------------ -----------
Total intersegment sales $ 4,887,698 $ 4,603,895 $ 13,562,618 $12,579,607
=========== =========== ============ ===========
Earnings before
income taxes
Hematology $ 1,338,726 $ 1,068,211 $ 3,901,042 $ 3,462,170
Biotechnology 15,955,208 13,787,428 42,649,248 34,919,770
R&D Systems Europe 3,187,534 1,671,832 7,322,252 4,488,280
Corporate and other (1,363,930) (1,177,559) (3,859,797) (2,857,892)
----------- ----------- ------------ -----------
Total earnings before
income taxes $19,117,538 $15,349,912 $ 50,012,745 $40,012,328
=========== =========== ============ ===========
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
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.
9
In March 2002, the Company purchased property adjacent to its Minneapolis
facility for approximately $8.9 million. In fiscal 2000, the Company paid $2
million and issued warrants to purchase 120,000 shares of common stock as a
deposit on the acquisition. The warrants were valued at $858,000. The
remaining $6 million of the purchase price was financed through cash on hand.
In addition, the Company paid $1,999,000 in March 2002 as a nonrefundable
deposit on an option, which expires in 2005, to purchase additional adjacent
property. In fiscal 2000, the Company paid an original $1,000 deposit on
this option.
G. MODIFICATION OF LOAN AGREEMENT:
As of March 31, 2003, 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 March 31, 2003.
H. STOCK OPTIONS:
As permitted by Statement of Financial Accounting Standards (SFAS) No. 123,
the Company has elected to continue following the guidance of Accounting
Principles Board (APB) Opinion No. 25 for measurement and recognition of
stock-based transactions with employees. No compensation cost has been
recognized for stock options granted to employees under the plans because the
exercise price of all options granted was at least equal to the fair value of
the common stock at the date of grant.
If compensation cost for employee options granted under the Company's stock
option plans had been determined based on the fair value at the grant dates,
consistent with the methods provided in SFAS No. 123 the Company's net
earnings and earnings per share would have been as follows:
QUARTER ENDED NINE MONTHS ENDED
------------------------ ------------------------
3/31/03 3/31/02 3/31/03 3/31/02
----------- ----------- ----------- -----------
Net earnings:
As reported $12,393,538 $10,573,912 $32,719,745 $27,433,328
Less employee stock-
based compensation,
net of taxes 40,588 136,047 622,248 994,767
----------- ----------- ----------- -----------
Pro forma $12,352,950 $10,437,865 $32,097,497 $26,438,561
=========== =========== =========== ===========
Basic earnings per share:
As reported $ 0.30 $ 0.25 $ 0.79 $ 0.66
Less employee stock-
based compensation 0.00 0.00 0.01 0.02
----------- ----------- ----------- -----------
Pro forma $ 0.30 $ 0.25 $ 0.78 $ 0.64
=========== =========== =========== ===========
Diluted earnings
per share:
As reported $ 0.30 $ 0.25 $ 0.78 $ 0.65
Less employee stock-
based compensation 0.01 0.00 0.02 0.03
----------- ----------- ----------- -----------
Pro forma $ 0.29 $ 0.25 $ 0.76 $ 0.62
=========== =========== =========== ===========
The fair value of options granted under the Company's stock option plans were
estimated on the date of grant using the Black-Scholes option-pricing model
with the following assumptions used: no dividend yield, expected volatility
of between 41% and 99%, risk-free interest rates between 4.2% and 6.1% and
expected lives between 7 and 10 years.
10
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations Quarter and Nine Months Ended March 31, 2003
vs. Quarter and Nine Months Ended March 31, 2002
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 March 31, 2003 were $37,736,518, an increase
of $3,451,242 (10%) from the quarter ended March 31, 2002. Net sales for the
nine months ended March 31, 2003 increased $10,320,115 (11%) from $95,264,853
to $105,584,968. R&D Systems' Biotechnology Division net sales increased
$940,215 (4%) and $4,796,981 (8%) and R&D Systems' Hematology Division net
sales increased $365,472 (10%) and $653,031 (6%) for the quarter and nine
months ended March 31, 2003, respectively. R&D Europe net sales increased
$2,145,555 (27%) and $4,870,103 (22%) for the quarter and nine months ended
March 31, 2003. In British pounds, R&D Europe's net sales increased 13% and
11% for the quarter and nine 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 second quarter and 10% in the current quarter was primarily due to the
reduction in R&D Systems' Biotechnology Division sales growth. Biotechnology
Division sales for the second and third quarter of fiscal 2003 increased 3.7%
and 4.1%, respectively from last year compared to a 16.1% increase in the
first quarter of fiscal 2003. The decline in sales growth rates occurred
across all major product lines and customer segments and can be attributed
mainly to economic factors. The increase in the year-over-year growth rate
for the Biotechnology Division from 3.7% in the second quarter to 4.1% in the
third quarter was mainly the result of increased sales growth to its largest
customer segment, pharmaceutical and biotechnology research companies.
Gross margins
Gross margins for the third quarter of fiscal 2003 were 76.8% compared to
75.5% for the same quarter in fiscal 2002. Gross margins for the nine months
ended March 31, 2003 were 75.6% compared to 74.8% for the same period in
fiscal 2002.
11
Biotechnology Division margins increased slightly from 79.5% to 80.0% for the
quarter, but remained steady at 78.9% for the nine months ended March 31.
R&D Europe gross margins increased from 35.8% to 43.0% for the quarter and
from 35.8% to 41.2% for the nine months ended March 31, 2003 as a result of
favorable exchange rate changes due to the weakening of the U.S. dollar to
the British pound sterling. Hematology Division gross margins increased from
41.5% to 45.4% for the quarter and from 43.0% to 45.3% for the nine months
ended March 31, 2003 as a result of lower raw material costs. Blood costs
during the first three quarters of last fiscal year were high due to supply
shortages.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $236,761 (5%) and
$644,507 (5%) from the third quarter and first nine months of last year,
respectively.
Research and Development Expenses
Research and development expenses increased $843,123 (19%) and $2,356,453
(18%) for the quarter and nine months ended March 31, 2003. Included in
research and development expenses are the Company's share of 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 NINE MONTHS ENDED
---------------------- ------------------------
3/31/03 3/31/02 3/31/03 3/31/02
---------- ---------- ----------- -----------
R&D Systems' expenses $4,361,942 $3,912,624 $12,817,805 $11,699,996
Chemocentryx, Inc. losses 792,163 388,640 1,807,540 749,500
Discovery Genomics, Inc.
losses 131,075 140,793 472,172 291,568
---------- ---------- ----------- -----------
Total research and
development expenses $5,285,180 $4,442,057 $15,097,517 $12,741,064
========== ========== =========== ===========
Excluding CCX and DGI losses, research and development expenses for the third
quarter and first nine months of fiscal 2003 increased $449,318 (11%) and
$1,117,809 (10%), 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 $4.9 million, respectively, at March 31, 2003.
12
The pro forma effects of implementation of SFAS No. 142 to prior periods
would be as follows:
QUARTER ENDED NINE MONTHS ENDED
------------------------ ------------------------
3/31/03 3/31/02 3/31/03 3/31/02
----------- ----------- ----------- -----------
Reported net income $12,393,538 $10,573,912 $32,719,745 $27,433,328
Goodwill amortization,
net of tax -- 1,018,500 -- 3,056,500
----------- ----------- ----------- -----------
Adjusted net income $12,393,538 $11,592,412 $32,719,745 $30,489,828
=========== =========== =========== ===========
Reported basic
earnings per share $ 0.30 $ 0.25 $ 0.79 $ 0.66
Goodwill amortization 0.00 0.03 0.00 0.07
----------- ----------- ----------- -----------
Adjusted basic
earnings per share $ 0.30 $ 0.28 $ 0.79 $ 0.73
=========== =========== =========== ===========
Reported diluted
earnings per share $ 0.30 $ 0.25 $ 0.78 $ 0.65
Goodwill amortization 0.00 0.02 0.00 0.07
----------- ----------- ----------- -----------
Adjusted diluted
earnings per share $ 0.30 $ 0.27 $ 0.78 $ 0.72
=========== =========== =========== ===========
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/expense consists mainly of foreign currency
transaction gains and losses, rental income, and real estate taxes and
utility expenses related to properties under construction/renovation.
Net Earnings
Earnings before income taxes increased $3,767,626 from $15,349,912 in the
third quarter of fiscal 2002 to $19,117,538 in the third quarter of fiscal
2003. Earnings before income taxes for the nine months increased $10,000,417
from $40,012,328 to $50,012,745. 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 nine months ended March 31, 2003 were
provided at a rate of approximately 35% of consolidated pretax earnings
compared to 31% 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.
13
Liquidity and Capital Resources
At March 31, 2003, cash and cash equivalents and short-term available-for-
sale investments were $103,611,271 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 $39,155,328 from operating activities in the
first nine months of fiscal 2003 compared to $31,127,922 for the first nine
months of fiscal 2002. The increase was mainly the result of increased
earnings after adjustment for noncash items and increased income taxes
payable. The increase in income taxes payable was the result of higher U.S.
taxable income in the first nine months of fiscal 2003 ($2,169,000 increase
in income taxes payable compared to fiscal 2002) and lower income tax
deposits made in the first nine months of fiscal 2003 ($3,489,000 less than
made in the first nine months of fiscal 2002).
Cash Flows From Investing Activities
Capital expenditures for fixed assets for the first nine months of fiscal
2003 and 2002 were $14,513,514 and $13,942,179, respectively. Included in
fiscal 2003 capital additions was $10.6 million for renovation of property
purchased in fiscal 2002 and the construction of an infill connecting this
property to R&D Systems' existing property, $202,000 for the completion of
the parking ramp and $2.7 million for the purchase of property in
southeastern Minnesota as described previously in Note F. Included in
capital additions for the first nine months of fiscal 2002 was $6 million for
property acquired in Minneapolis, $701,000 for renovation of the property and
construction of the infill and $5.1 million for construction of a parking
ramp. The remaining capital additions in the first nine 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
$7 million with completion expected in fiscal 2004. The majority of the
work to complete the projects will take place in fiscal 2004. The renovation
and 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 nine months ended March 31, 2003 the Company purchased $53,440,000
and sold $48,375,072 of short-term available-for-sale investments. During
the nine months ended March 31, 2002, the Company purchased $39,419,571 and
sold $32,902,541 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 nine months of fiscal 2002, the Company invested $3 million
in Discovery Genomics, Inc.
Cash Flows From Financing Activities
Cash of $1,531,978 and $328,873 was received during the nine months ended
March 31, 2003 and 2002, respectively, for the exercise of options for
112,750 and 86,800 shares of common stock. During the first nine months of
fiscal 2003 and 2002 options for 120,000 and 80,000 shares of common stock
14
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 nine months of fiscal 2003 and 2002, the Company purchased
and retired 926,500 and 20,000 shares of Company common stock at a market
value of $20,481,567 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 May 1, 2003, 2,397,700 shares have been
purchased at a market value of $33,176,069.
The Company has never paid cash dividends and has no plans to do so in fiscal
2003.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At March 31, 2003, the Company had a professionally managed investment
portfolio of fixed income securities, excluding those classified as cash and
cash equivalents, of $76,775,269. 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 March 31, 2003, 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 March 31, 2003.
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.
15
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
None
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 by the Company's customers, the impact of the growing
number of producers of biotechnology 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.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS
See exhibit index following.
B. REPORTS ON FORM 8-K
Form 8-K dated May 1, 2003 furnishing pursuant to Item 12, the
Registrant's press release reporting earnings for the third quarter
of fiscal 2003.
16
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: May 13, 2003 /s/ Thomas E. Oland
--------------------------------
President, Chief Executive and
Chief Financial Officer
17
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 and
auditors (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: May 13, 2003
/s/ Thomas E. Oland
- -------------------------------
Thomas E. Oland
Chief Executive Officer and
Chief Financial Officer
18
EXHIBIT INDEX
TO
FORM 10-Q
TECHNE CORPORATION
Exhibit # Description
- ----------- -------------------
99 Certification
19