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, 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
(Address of principal telephone number,
executive offices) (Zip Code) including area 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 February 6, 2004, 41,078,776 shares of the Company's Common Stock (par
value $.01) were outstanding.
1
TECHNE CORPORATION
FORM 10-Q
DECEMBER 31, 2003
INDEX
PAGE NO.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as of December 31,
2003 (unaudited) and June 30, 2003 3
Consolidated Statements of Earnings for the quarter
and six months ended December 31, 2003 and 2002 (unaudited) 4
Consolidated Statements of Cash Flows for the six months
ended December 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 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 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 16
SIGNATURE 16
2
PART I. FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
TECHNE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
(unaudited)
12/31/03 6/30/03
-------- --------
ASSETS
Cash and cash equivalents $ 47,972 $ 39,371
Short-term available-for-sale investments 102,347 78,130
Trade accounts receivable, net 16,950 18,387
Interest receivable 1,830 2,054
Inventories 7,144 6,332
Deferred income taxes 4,531 4,237
Prepaid expenses 1,120 1,004
-------- --------
Total current assets 181,894 149,515
Property and equipment, net 81,707 81,166
Goodwill, net 12,540 12,540
Intangible assets, net 3,619 4,418
Deferred income taxes 8,366 8,715
Other long-term assets 5,655 6,923
-------- --------
$293,781 $263,277
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Trade accounts payable $ 3,722 $ 2,216
Salaries, wages and related accounts payable 1,981 1,781
Other accounts payable and accrued expenses 1,538 2,605
Income taxes payable 4,072 2,972
Current portion of long-term debt 1,259 1,234
-------- --------
Total current liabilities 12,572 10,808
Long-term debt, less current portion 15,219 15,852
-------- --------
Total liabilities 27,791 26,660
-------- --------
Commitments and contingencies (Note D)
Common stock, par value $.01 per
share; authorized 100,000,000; issued
and outstanding 41,039,576 and
40,913,226, respectively 410 409
Additional paid-in capital 65,483 63,279
Retained earnings 194,751 169,809
Accumulated other comprehensive income 5,346 3,120
-------- --------
Total stockholders' equity 265,990 236,617
-------- --------
$293,781 $263,277
======== ========
See notes to consolidated financial statements (unaudited).
3
TECHNE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(dollars in thousands, except per share data)
(unaudited)
QUARTER ENDED SIX MONTHS ENDED
------------------ ------------------
12/31/03 12/31/02 12/31/03 12/31/02
-------- -------- -------- --------
Net sales $ 38,264 $ 33,300 $ 76,257 $ 67,848
Cost of sales 8,441 8,371 17,104 17,061
-------- -------- -------- --------
Gross margin 29,823 24,929 59,153 50,787
Operating expenses:
Selling, general and
administrative 5,519 4,901 10,602 9,852
Research and development 5,450 4,979 10,413 9,812
Amortization of intangible assets 399 485 799 969
Interest expense 172 296 347 619
Interest income (762) (704) (1,488) (1,494)
Other non-operating expense, net 20 (16) 98 134
-------- -------- -------- --------
10,798 9,941 20,771 19,892
-------- -------- -------- --------
Earnings before income taxes 19,025 14,988 38,382 30,895
Income taxes 6,655 5,107 13,440 10,569
-------- -------- -------- --------
Net earnings $ 12,370 $ 9,881 $ 24,942 $ 20,326
======== ======== ======== ========
Earnings per share:
Basic $ 0.30 $ 0.24 $ 0.61 $ 0.49
Diluted $ 0.30 $ 0.23 $ 0.60 $ 0.48
Weighted average common
shares outstanding:
Basic 41,035 41,445 41,000 41,404
Diluted 41,653 42,316 41,627 42,300
See notes to consolidated financial statements (unaudited).
4
TECHNE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)
SIX MONTHS ENDED
------------------
12/31/03 12/31/02
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 24,942 $ 20,326
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 3,008 3,134
Deferred income taxes 79 20
Losses by equity method investees 1,561 1,356
Other 216 243
Change in operating assets and operating liabilities:
Trade accounts and interest receivable 2,050 2,627
Inventories (718) (405)
Prepaid expenses (207) (118)
Trade and other accounts payable 320 (3,098)
Salaries, wages and related accounts 182 (1,532)
Income taxes payable 1,831 3,553
-------- --------
Net cash provided by operating activities 33,264 26,106
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (2,685) (12,766)
Purchase of short-term available-for-sale investments (62,810) (41,320)
Proceeds from sale or maturity of short-term
available-for-sale investments 38,138 34,191
Increase in other long-term assets (400) --
-------- --------
Net cash used in investing activities (27,757) (19,895)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock 1,256 1,512
Repurchase of common stock -- (5,865)
Payments on long-term debt (608) (465)
-------- --------
Net cash provided by (used in) financing activities 648 (4,818)
-------- --------
Effect of exchange rate changes on cash 2,446 1,036
-------- --------
Net increase in cash and cash equivalents 8,601 2,429
Cash and cash equivalents at beginning of period 39,371 26,392
-------- --------
Cash and cash equivalents at end of period $ 47,972 $ 28,821
======== ========
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 2003. 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. These unaudited consolidated financial statements
should be read in conjunction with the Company's Consolidated Financial
Statements and Notes thereto for the fiscal year ended June 30, 2003 included
in the Company's Annual Report to Shareholders for fiscal 2003.
Certain consolidated balance sheet captions appearing in this interim report
are as follows (in thousands):
12/31/03 6/30/03
-------- --------
ACCOUNTS RECEIVABLE
Accounts receivable $ 17,227 $ 18,655
Less allowance for doubtful accounts 277 268
-------- --------
NET ACCOUNTS RECEIVABLE $ 16,950 $ 18,387
======== ========
INVENTORIES
Raw materials $ 3,125 $ 2,618
Supplies 107 119
Finished goods 3,912 3,595
-------- --------
TOTAL INVENTORIES $ 7,144 $ 6,332
======== ========
PROPERTY AND EQUIPMENT
Land $ 3,264 $ 2,999
Buildings and improvements 67,877 64,930
Building construction in progress 17,112 18,310
Laboratory equipment 16,879 16,372
Office equipment 3,317 3,106
Leasehold improvements 579 537
-------- --------
109,028 106,254
Less accumulated depreciation and amortization 27,321 25,088
-------- --------
NET PROPERTY AND EQUIPMENT $ 81,707 $ 81,166
======== ========
6
12/31/03 6/30/03
-------- --------
GOODWILL $ 38,846 $ 38,846
Less accumulated amortization 26,306 26,306
-------- --------
NET GOODWILL $ 12,540 $ 12,540
======== ========
INTANGIBLE ASSETS
Customer list $ 18,010 $ 18,010
Technology licensing agreements 500 500
Acquisition costs 230 230
-------- --------
18,740 18,740
Less accumulated amortization 15,121 14,322
-------- --------
NET INTANGIBLE ASSETS $ 3,619 $ 4,418
======== ========
In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities.
FIN 46 addresses the consolidation by businesses of variable interest
entities and requires businesses to consolidate a variable interest entity if
it has a variable interest that will absorb a majority of the entity's
expected losses if they occur, or receive a majority of the entity's expected
returns if they occur, or both. FIN 46 is effective for variable interest
entities created after January 31, 2003. For variable interest entities
created prior to January 31, 2003, the provisions of FIN 46 are applicable to
the Company for the quarter ended December 31, 2003. The Company has
assessed its relationships with ChemoCentryx, Inc. and Discovery Genomics,
Inc., development stage companies in which the Company has 26% and 39% equity
investments, respectively. The Company has determined that neither
investment is required to be consolidated in the Company's financial
statements pursuant to FIN 46. In December 2003, the FASB revised FIN 46.
The Company is required to follow the revised FIN 46 guidance for the quarter
ended March 31, 2004. The Company is currently evaluating the impact of the
revised interpretation on its investments in ChemoCentryx, Inc., Discovery
Genomics, Inc. and the January 2004 investment in Hemerus Medical, LLC.
B. EARNINGS PER SHARE:
Shares used in the earnings per share computations are as follows (in
thousands):
QUARTER ENDED SIX MONTHS ENDED
------------------ ------------------
12/31/03 12/31/02 12/31/03 12/31/02
-------- -------- -------- --------
Weighted average common shares
outstanding-basic 41,035 41,445 41,000 41,404
Dilutive effect of stock options
and warrants 618 871 627 896
-------- -------- -------- --------
Weighted average common shares
outstanding-diluted 41,653 42,316 41,627 42,300
======== ======== ======== ========
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 was 508,000 and 512,000 for the quarter and six
months ended December 31, 2003, respectively, and 532,000 and 551,000 for the
same prior year periods.
During the six months ended December 31, 2002, the Company purchased and
retired 248,000 shares of Company common stock at a market value of
$5,865,000. The effect of the purchases was a 248,000 and 229,000 reduction
in the weighted average common shares outstanding for the quarter and six
months ended December 31, 2002, 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 7, 2004, approximately 2,398,000
shares have been purchased at a market value of $33,176,000.
7
C. SEGMENT INFORMATION:
Following is financial information relating to the Company's operating
segments (in thousands):
QUARTER ENDED SIX MONTHS ENDED
------------------ ------------------
12/31/03 12/31/02 12/31/03 12/31/02
-------- -------- -------- --------
External sales
Hematology $ 4,454 $ 3,986 $ 8,735 $ 7,760
Biotechnology 22,799 20,454 46,831 42,941
R&D Systems Europe 11,011 8,860 20,691 17,147
-------- -------- -------- --------
Total external sales $ 38,264 $ 33,300 $ 76,257 $ 67,848
======== ======== ======== ========
Intersegment sales
Hematology $ -- $ -- $ -- $ --
Biotechnology 4,967 4,501 9,588 8,651
R&D Systems Europe -- 9 -- 23
-------- -------- -------- --------
Total intersegment sales $ 4,967 $ 4,510 $ 9,588 $ 8,674
======== ======== ======== ========
Earnings before income taxes
Hematology $ 1,611 $ 1,397 $ 3,041 $ 2,562
Biotechnology 14,896 12,432 30,724 26,676
R&D Systems Europe 4,048 2,323 7,397 4,134
Corporate and other (1,530) (1,164) (2,780) (2,477)
-------- -------- -------- --------
Total earnings before income taxes $ 19,025 $ 14,988 $ 38,382 $ 30,895
======== ======== ======== ========
D. CONTINGENCIES:
The Company's tax returns are subject to audit by various governmental
entities in the normal course of business. The Company has received an audit
assessment of $1.75 million, plus interest, from the State of Minnesota for
fiscal years 2000 to 2003. Under issue is the Company's method for
determining Minnesota taxable income. The Company will be filing an appeal
with the Minnesota Department of Revenue for abatement of the assessment. The
Company believes that the ultimate resolution of the matter will not
materially effect the consolidated financial position or operations of the
Company.
E. 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
consistent with the methods provided in SFAS No. 123, the Company's net
earnings and earnings per share would have been as follows (in thousands,
except per share data):
8
QUARTER ENDED SIX MONTHS ENDED
------------------ ------------------
12/31/03 12/31/02 12/31/03 12/31/02
-------- -------- -------- --------
Net earnings:
As reported $ 12,370 $ 9,881 $ 24,942 $ 20,326
Less employee stock-based
compensation, net of taxes 2,120 409 2,214 528
-------- -------- -------- --------
Pro forma $ 10,250 $ 9,472 $ 22,728 $ 19,798
======== ======== ======== ========
Basic earnings per share:
As reported $ 0.30 $ 0.24 $ 0.61 $ 0.49
Less employee stock-based
compensation 0.05 0.01 0.06 0.01
-------- -------- -------- --------
Pro forma $ 0.25 $ 0.23 $ 0.55 $ 0.48
======== ======== ======== ========
Diluted earnings per share:
As reported $ 0.30 $ 0.23 $ 0.60 $ 0.48
Less employee stock-based
compensation 0.05 0.01 0.05 0.01
-------- -------- -------- --------
Pro forma $ 0.25 $ 0.22 $ 0.55 $ 0.47
======== ======== ======== ========
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:
QUARTER ENDED SIX MONTHS ENDED
------------------ ----------------------
12/31/03 12/31/02 12/31/03 12/31/02
-------- -------- ---------- ----------
Dividend yield -- -- -- --
Expected volatility 48%-53% 49% 48%-53% 49%-52%
Risk free interest rates 3.9%-4.3% 4.2% 3.9%-4.4% 4.2%-4.5%
Expected lives 7-10 years 10 years 7-10 years 7-10 years
F. SUBSEQUENT EVENT:
Effective January 1, 2004, Techne purchased a 10% interest in Hemerus
Medical, LLC for $3 million. Hemerus Medical, LLC was formed in March 2001
and has acquired and is developing technology for the separation of
leukocytes from blood and blood components. Leukoreduced blood is important
in blood transfusion. Hemerus owns two patents and has several patent
applications pending and is currently pursuing FDA approval to market its
products in the U.S. In parallel with this investment, R&D Systems entered
into a Joint Research Agreement with Hemerus. The research will involve
joint projects to explore the use of Hemerus's filter technology to
applications within R&D Systems' Hematology and Biotechnology Divisions.
Such applications, if any, may have commercial potential in other laboratory
environments.
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, 2003
vs. Quarter and Six Months Ended December 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.
Critical Accounting Policies
The Company's significant accounting policies are discussed in the Company's
Annual Report to Shareholders for fiscal 2003. The application of certain of
these policies requires judgments and estimates that can affect the results
of operations and financial position of the Company. Management believes the
following accounting policies are critical to the preparation of the
consolidated financial statements. The following should be read in
conjunction with the more complete discussion of the Company's accounting
policies included in the Annual Report to Shareholders for fiscal 2003.
Accounts receivable. The Company continually monitors collections from its
customers and maintains a provision for estimated credit losses based upon
historical experience and specific collection issues that have been
identified. If financial conditions of the Company's customers were to
deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required.
Inventory. The manufacturing process for proteins and antibodies has and may
continue to produce quantities in excess of forecasted usage. The Company
values its manufactured protein and antibody inventory based on a two-year
sales forecast. Any significant changes in product demand or market
conditions could have an impact on the value of inventories and the change in
value would be reflected in cost of sales in the period of the change.
10
Income taxes. The Company's tax returns are subject to audit by various
governmental entities in the normal course of business. Audits can involve
complex issues, which may require extended periods of time to resolve. The
Company believes that adequate provisions for income taxes have been made in
the consolidated financial statements.
Overall Results
Consolidated net earnings increased 25% and 23% for the quarter and six
months ended December 31, 2003 compared to the same prior year periods. The
primary reasons for the increases were increased net sales and improved gross
margins. Net sales for the quarter and six months ended December 31, 2003,
increased 15% and 12%, respectively, from the same periods in the prior year.
Gross margins, as a percent of sales increased from 75% for the quarter and
six months ended December 31, 2002 to 78% for the quarter and six months
ended December 31, 2003. The impact on consolidated net earnings of higher
exchange rates used to convert R&D Europe results from pounds to dollars was
$253,000 and $335,000 for the quarter and six months ended December 31, 2003,
respectively. The Company generated cash of $33.3 million from operating
activities in the first six months of fiscal 2004 and cash, cash equivalents
and short-term available-for-sale investments were $150 million at December
31, 2003 compared to $118 million at June 30, 2003.
Net Sales
Net sales for the quarter ended December 31, 2003 were $38,264,000, an
increase of $4,964,000 (15%) from the quarter ended December 31, 2002. Net
sales for the six months ended December 31, 2003 increased $8,409,000 (12%)
from $67,848,000 to $76,257,000. R&D Systems' Biotechnology Division net
sales increased $2,345,000 (11%) and $3,890,000 (9%), respectively, for the
quarter and six months ended December 31, 2003. R&D Systems' Hematology
Division net sales increased $468,000 (12%) and $975,000 (13%), respectively,
for the quarter and six months ended December 31, 2003. The higher than
usual growth in Hematology Division sales was primarily due to a distributor
added in January 2003 that generated sales of $166,000 and $326,000 for the
quarter and six months ended December 31, 2003, respectively, and $99,000 and
$362,000, respectively, in increased sales to OEM customers in the same
periods. R&D Europe net sales increased $2,151,000 (24%) and $3,544,000
(21%) for the quarter and six months ended December 31, 2003, respectively.
In British pounds, R&D Europe's net sales increased 13% for both the quarter
and six months.
Gross margins
Gross margins for the second quarter of fiscal 2004 were 77.9% compared to
74.9% for the same quarter in fiscal 2003. Gross margins for the six months
ended December 31, 2003 were 77.6% compared to 74.9% for the same period in
fiscal 2003. The majority of the increase in margin percentage was the
result of R&D Europe's gross margins increasing from 40.3% and 40.1% for the
quarter and six months ended December 31, 2002 to 50.4% and 49.8% for the
quarter and six months ended December 31, 2003, respectively. This increase
was due to favorable exchange rates as a result of a weaker U.S. dollar to
the British pound and the expiration, on June 30, 2003, of a five-year, 5%
royalty agreement associated with the purchase of Genzyme, Inc.'s reagent
business in fiscal 1999. R&D Europe expensed $436,000 and $844,000,
respectively, in the quarter and six months ended December 31, 2002 under
this agreement. In addition, Biotechnology Division gross margins increased
from 78.1% and 78.3% for the quarter and six months ended December 31, 2002
to 80.1% and 79.7% for the quarter and six months ended December 31, 2003,
respectively. Hematology Division gross margins increased from 47.0% and
45.2% for the quarter and six months ended December 31, 2002 to 47.4% and
46.3% for the quarter and six months ended December 31, 2003, respectively.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $618,000 (13%) and
$750,000 (8%) from the second quarter and first six months of last year.
11
QUARTER ENDED SIX MONTHS ENDED
------------------ ------------------
12/31/03 12/31/02 12/31/03 12/31/02
-------- -------- -------- --------
R&D Systems, Inc. $ 3,332 $ 3,207 $ 6,374 $ 6,319
R&D Europe 1,891 1,563 3,590 3,175
Corporate expenses 296 131 638 358
-------- -------- -------- --------
Total selling, general and
administrative $ 5,519 $ 4,901 $ 10,602 $ 9,852
======== ======== ======== ========
R&D Europe's selling, general and administrative expenses increased $328,000
(21%) and $415,000 (13%) for the quarter and six months ended December 31,
2003, respectively, as compared to the same prior year periods. Most of this
increase was the result of higher exchange rates used to convert R&D Europe's
expenses from pounds to dollars. In British pound sterling, R&D Europe's
selling, general and administrative expenses increased 101,000 pounds (10%)
and 118,000 pounds (6%) for the quarter and six months ended December 31, 2003,
respectively, as a result of increased wages and printing costs. Techne's
corporate expenses increased $165,000 and $280,000, respectively, for the
quarter and six months ended December 31, 2003 as compared to the same prior
year periods. The increase for the quarter was the result of higher
directors' and officers' insurance (D&O) premium increases ($44,000) and
consulting fees associated with compliance with Sarbanes-Oxley ($109,000).
The increase for the six months was the result of higher audit and related
fees ($76,000), D&O premium increases ($87,000) and Sarbanes-Oxley consulting
fees ($109,000).
Research and Development Expenses
Research and development expenses increased $471,000 (9%) and $601,000 (6%)
for the quarter and six months ended December 31, 2003 as compared to the
quarter and six months ended December 31, 2002. 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 (in thousands):
QUARTER ENDED SIX MONTHS ENDED
------------------ ------------------
12/31/03 12/31/02 12/31/03 12/31/02
-------- -------- -------- --------
R&D Systems' expenses $ 4,497 $ 4,320 $ 8,852 $ 8,456
ChemoCentryx, Inc. losses 828 496 1,264 1,015
Discovery Genomics, Inc. losses 125 163 297 341
-------- -------- -------- --------
Total research and
development expenses $ 5,450 $ 4,979 $ 10,413 $ 9,812
======== ======== ======== ========
Excluding CCX and DGI losses, research and development expenses for the
quarter and six months ended December 31, 2003 increased $177,000 (4%) and
$396,000 (5%), respectively.
The Company's net investment in CCX and DGI at December 31, 2003 was
$1,247,000 and $1,590,000, respectively. The Company has financial exposure
to the losses of CCX and DGI to the extent of its net investment in each of
the companies. In addition, as development stage companies, both CCX and DGI
are dependent on their ability to raise additional funds to continue their
research and development efforts. If such funding were unavailable or
inadequate to fund operations, the Company would potentially recognize an
impairment loss to the extent of its remaining net investment.
12
Other Non-operating Income/Expense
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.
QUARTER ENDED SIX MONTHS ENDED
------------------ ------------------
12/31/03 12/31/02 12/31/03 12/31/02
-------- -------- -------- --------
Foreign currency (gains)/losses $ (129) $ (128) $ (213) $ (79)
Rental income (46) (6) (65) (6)
Real estate taxes/utilities 195 118 376 219
-------- -------- -------- --------
Total other non-operating
(income)/expense $ 20 $ (16) $ 98 $ 134
======== ======== ======== ========
Income Taxes
Income taxes for the quarter and six months ended December 31, 2003 were
provided at a rate of approximately 35% of consolidated earnings before
income taxes compared to 34% for the quarter and six months ended December
31, 2002. 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 countries in which R&D Europe operates. Without significant business
developments, the Company expects income tax rates for the remainder of
fiscal 2004 to range from 35% to 36%.
Liquidity and Capital Resources
At December 31, 2003, cash and cash equivalents and short-term available-for-
sale investments were $150,319,000 compared to $117,501,000 at June 30, 2003.
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 year.
Cash Flows From Operating Activities
The Company generated cash of $33,264,000 from operating activities in the
first six months of fiscal 2004 compared to $26,106,000 for the first six
months of fiscal 2003. The increase was mainly the result of increased
earnings in the current year and the conclusion of the royalty agreement with
Genzyme, Inc. discussed above under which $3 million was paid in the first
six months of last year.
Cash Flows From Investing Activities
Capital expenditures for fixed assets for the first six months of fiscal 2004
and 2003 were $2,685,000 and $12,766,000, respectively. Included in the
first six months of fiscal 2004 and 2003 capital additions were $202,000, and
$9 million, respectively, for renovation and construction of property in
Minneapolis. Also included in fiscal 2004 and 2003 capital additions was
$1.7 and $2.7 million related to property in southeast Minnesota. The
Company is currently constructing additional facilities at this site to house
goats used in the production of its antibodies. Included in fiscal 2003
capital additions was $202,000 for the completion of a parking ramp. The
remaining capital additions in the first six months of fiscal 2004 and 2003
were for laboratory and computer equipment and remodeling of laboratory
space.
13
Remaining expenditures in fiscal 2004 for laboratory and computer equipment
are expected to be approximately $1 million and are expected to be financed
through currently available funds and cash generated from operating
activities. Costs to finish construction of the goat facilities in southeast
Minnesota are expected to be approximately $300,000 with completion in the
third quarter of fiscal 2004. Costs to finish the renovation of the
Minneapolis property are estimated at approximately $8 million and will be
completed over the next several years as additional laboratory space is
needed for the Company's operations. All construction is expected to be
financed through currently available funds and cash generated from operating
activities.
During the six months ended December 31, 2003 the Company purchased
$62,810,000 and had sales or maturities of $38,138,000 of short-term
available-for-sale investments. During the six months ended December 31,
2002, the Company purchased $41,320,000 and had sales or maturities of
$34,191,000 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.
Cash Flows From Financing Activities
Cash of $1,256,000 and $1,512,000 was received during the six months ended
December 31, 2003 and 2002, respectively, for the exercise of options for
126,000 and 109,000 shares of common stock.
During the first six months of fiscal 2003, the Company purchased and retired
248,000 shares of Company common stock at a market value of $5,865,000. 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 7, 2003,
approximately 2,398,000 shares have been purchased at a market value of
$33,176,000.
The Company has never paid cash dividends and has no plans to do so in fiscal
2004.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At December 31, 2003, the Company had a professionally managed investment
portfolio of fixed income securities, excluding those classified as cash and
cash equivalents, of $102 million. These securities, like all fixed income
instruments, are subject to interest rate risk and will decline in value if
market interest rates increase.
The Company operates internationally, and thus is subject to potentially
adverse movements in foreign currency rate changes. The Company is exposed to
market risk from foreign exchange rate fluctuations of the euro and the
British pound to the U.S. dollar as the financial position and operating
results of the Company's U.K. subsidiary and European operations are
translated into U.S. dollars for consolidation. At the current level of R&D
Europe operating results, a 10% increase or decrease in the average exchange
rate used to translate operating results into U.S. dollars would have an
approximate $1 million effect on consolidated operating results annually.
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The Company's exposure to foreign exchange rate fluctuations also arises from
transferring funds from the U.K. subsidiary to the U.S. subsidiary and from
transferring funds from the German subsidiary and French branch office to the
U.K. subsidiary. At December 31, 2003, the Company had $354,000 of dollar
denominated intercompany debt at its U.K. subsidiary and at December 31,
2003, the U.K. subsidiary had $413,000 of dollar denominated intercompany
debt from its European operations. These intercompany balances are revolving
in nature and are not deemed to be long-term balances. The Company's U.K.
subsidiary recognized net foreign currency gains of 73,000 pounds ($129,000)
for the quarter ended December 31, 2003 and recognized net foreign currency
gains of 79,000 pounds ($128,000) for the quarter ended December 31, 2002.
For the six months ended December 31, 2003 and 2002, the Company's UK
subsidiary recognized net foreign currency gains of 122,000 pounds ($213,000)
and 48,000 pounds ($79,000), respectively. 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, 2003, the Company's long-term debt of $15,219,000
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, 2003.
ITEM 4 - CONTROLS AND PROCEDURES
As of the end of the period covered by this report, the Company conducted an
evaluation, under the supervision and with the participation of the principal
executive officer and principal financial officer, of the Company's
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-
15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")). Based
on this evaluation, the principal executive officer and principal financial
officer concluded that the Company's disclosure controls and procedures are
effective to ensure that information required to be disclosed by the Company
in reports that it files or submits under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms. There was no change in
the Company's internal control over financial reporting during the Company's
most recently completed 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 1 - LEGAL PROCEEDINGS
See Item 3 of the Registrant's Annual Report of Form 10-K for the fiscal year
ended June 30, 2003.
ITEM 2 - CHANGES IN SECURITIES
None
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None
15
ITEM 4 - SUBMISSION OF MATTERS TO VOTE OF SHAREHOLDERS
Information relating to the Company's Annual Meeting of Shareholders, held on
October 23, 2003 is contained in the Company's Form 10-Q for the quarter
ended September 30, 2003, 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 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 January 27, 2004 furnishing pursuant to Item 12, the
Registrant's press release reporting earnings for the second quarter of
fiscal 2004 and segment information for the second quarter and six months
ended December 31, 2003.
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, 2004 /s/ Thomas E. Oland
-------------------------------
President, Chief Executive and
Chief Financial Officer
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EXHIBIT INDEX
TO
FORM 10-Q
TECHNE CORPORATION
Exhibit # Description
- ----------- ----------------------------
31 Section 302 Certification
32 Section 906 Certification
17