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 September 30, 2004, 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 of (I.R.S. Employer Identification No.)
incorporation or organization)
614 MCKINLEY PLACE N.E. (612) 379-8854
MINNEAPOLIS, MN 55413 (Registrant's telephone number,
(Address of principal (Zip Code) including area code)
executive offices)
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 November 3, 2004, 41,313,732 shares of the Company's Common Stock (par
value $.01) were outstanding.
TECHNE CORPORATION
FORM 10-Q
SEPTEMBER 30, 2004
INDEX
PAGE NO.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as of September 30, 2004
(unaudited) and June 30, 2004 3
Consolidated Statements of Earnings for the quarter ended
September 30, 2004 and 2003 (unaudited) 4
Consolidated Statements of Cash Flows for the three months
ended September 30, 2004 and 2003 (unaudited) 5
Notes to Consolidated Financial Statements (unaudited) 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 9
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 13
ITEM 4. CONTROLS AND PROCEDURES 14
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 14
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF
EQUITY SECURITIES 14
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS 15
ITEM 5. OTHER INFORMATION 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 15
SIGNATURE 16
2
PART I. FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
TECHNE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
(unaudited)
9/30/04 6/30/04
-------- --------
ASSETS
Cash and cash equivalents $ 62,240 $ 51,201
Short-term available-for-sale investments 44,276 42,534
Trade accounts receivable, net 18,715 20,262
Interest receivable 939 837
Inventories 7,874 7,457
Deferred income taxes 4,926 4,820
Prepaid expenses 989 954
-------- --------
Total current assets 139,959 128,065
Available-for-sale investments 89,546 82,858
Property and equipment, net 79,753 80,504
Goodwill, net 12,540 12,540
Intangible assets, net 2,514 2,819
Deferred income taxes 7,591 7,843
Investments 8,410 8,484
Other long-term assets 2,308 2,347
-------- --------
$342,621 $325,460
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Trade accounts payable $ 3,726 $ 2,695
Salaries, wages and related accounts payable 2,911 3,416
Other accounts payable and accrued expenses 2,537 1,152
Income taxes payable 4,960 4,915
Current portion of long-term debt 1,299 1,281
-------- --------
Total current liabilities 15,433 13,459
Long-term debt, less current portion 14,244 14,576
-------- --------
Total liabilities 29,677 28,035
-------- --------
Commitments and contingencies (Note D)
Common stock, par value $.01 per share;
authorized 100,000,000; issued and outstanding
41,189,532 and 41,154,922, respectively 412 412
Additional paid-in capital 70,225 68,960
Retained earnings 236,875 222,728
Accumulated other comprehensive income 5,432 5,325
-------- --------
Total stockholders' equity 312,944 297,425
-------- --------
$342,621 $325,460
======== ========
See notes to consolidated financial statements (unaudited).
3
TECHNE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands, except per share data)
(unaudited)
QUARTER ENDED
----------------------
9/30/04 9/30/03
------- -------
Net sales $40,919 $37,993
Cost of sales 8,887 8,663
------- -------
Gross margin 32,032 29,330
------- -------
Operating expenses:
Selling, general and administrative 5,634 5,083
Research and development 4,688 4,963
Amortization of intangible assets 305 400
------- -------
Total operating expenses 10,627 10,446
------- -------
Operating income 21,405 18,884
Other expense (income):
Interest expense 245 175
Interest income (1,053) (726)
Other non-operating expense (income), net 466 78
------- -------
Total other expense (income) (342) (473)
------- -------
Earnings before income taxes 21,747 19,357
Income taxes 7,555 6,785
------- -------
Net earnings $14,192 $12,572
======= =======
Earnings per share:
Basic $ 0.34 $ 0.31
Diluted $ 0.34 $ 0.30
Weighted average common shares outstanding:
Basic 41,169 40,965
Diluted 41,676 41,600
See notes to consolidated financial statements (unaudited).
4
TECHNE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
THREE MONTHS
ENDED
--------------------
9/30/04 9/30/03
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $14,192 $12,572
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 1,519 1,494
Deferred income taxes 145 9
Losses by equity method investees 74 608
Other 40 122
Change in operating assets and operating liabilities:
Trade accounts and interest receivable 1,583 457
Inventories (423) (265)
Prepaid expenses (36) (308)
Trade and other accounts payable 1,264 (402)
Salaries, wages and related accounts 62 308
Income taxes payable 143 733
------- -------
Net cash provided by operating activities 18,563 15,328
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (463) (1,312)
Purchase of available-for-sale investments (37,455) (21,775)
Proceeds from sale or maturity of available-for-sale
investments 30,235 11,871
Increase in other long-term assets -- (400)
------- -------
Net cash used in investing activities (7,683) (11,616)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock 793 1,003
Purchase of common stock for stock bonus plans (260) --
Payments on long-term debt (314) (302)
------- -------
Net cash provided by financing activities 219 701
------- -------
Effect of exchange rate changes on cash (60) 236
------- -------
Net increase in cash and cash equivalents 11,039 4,649
Cash and cash equivalents at beginning of period 51,201 39,371
------- -------
Cash and cash equivalents at end of period $62,240 $44,020
======= =======
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 2004. 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, 2004 included
in the Company's Annual Report to Shareholders for fiscal 2004.
Reclassification: The Company has reclassified available-for-sale investments
with contractual maturities of greater than one year at June 30, 2004, as long-
term assets to conform with the current quarter presentation. The
reclassification had no impact on net earnings, earnings per share or
stockholders' equity as previously reported.
Certain consolidated balance sheet captions appearing in this interim report
are as follows (in thousands):
9/30/04 6/30/04
------- -------
TRADE ACCOUNTS RECEIVABLE
Trade accounts receivable $18,875 $20,495
Less allowance for doubtful accounts 160 233
------- -------
NET TRADE ACCOUNTS RECEIVABLE $18,715 $20,262
======= =======
INVENTORIES
Raw materials $ 3,610 $ 3,062
Supplies 136 138
Finished goods 4,128 4,257
------- -------
TOTAL INVENTORIES $ 7,874 $ 7,457
======= =======
PROPERTY AND EQUIPMENT
Land $ 3,264 $ 3,264
Buildings and improvements 77,347 77,333
Building construction in progress 8,329 8,329
Laboratory equipment 17,364 17,081
Office equipment 3,431 3,367
Leasehold improvements 709 627
------- -------
110,444 110,001
Less accumulated depreciation and amortization 30,691 29,497
------- -------
NET PROPERTY AND EQUIPMENT $79,753 $80,504
======= =======
GOODWILL $38,846 $38,846
Less accumulated amortization 26,306 26,306
------- -------
NET GOODWILL $12,540 $12,540
======= =======
6
9/30/04 6/30/04
------- -------
INTANGIBLE ASSETS
Customer list $18,010 $18,010
Technology licensing agreements 730 730
------- -------
18,740 18,740
Less accumulated amortization 16,226 15,921
------- -------
NET INTANGIBLE ASSETS $ 2,514 $ 2,819
======= =======
B. EARNINGS PER SHARE:
Shares used in the earnings per share computations are as follows (in
thousands):
QUARTER ENDED
--------------------
9/30/04 9/30/03
------- -------
Weighted average common shares outstanding-basic 41,169 40,965
Dilutive effect of stock options and warrants 507 635
------- -------
Weighted average common shares outstanding-diluted 41,676 41,600
======= =======
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 68,000 and 516,000 for the quarters ended
September 30, 2004, and 2003, respectively.
Subsequent to September 30, 2004, warrants for 120,000 shares of Techne
common stock were exercised for $1.4 million.
C. SEGMENT INFORMATION:
Following is financial information relating to the Company's operating
segments (in thousands):
QUARTER ENDED
--------------------
9/30/04 9/30/03
------- -------
External sales
Hematology $ 4,013 $ 4,281
Biotechnology 25,887 24,032
R&D Systems Europe 11,019 9,680
------- -------
Total external sales $40,919 $37,993
======= =======
Intersegment sales
Hematology $ -- $ --
Biotechnology 4,804 4,621
R&D Systems Europe -- --
------- -------
Total intersegment sales $ 4,804 $ 4,621
======= =======
Earnings before income taxes
Hematology $ 1,252 $ 1,430
Biotechnology 17,168 15,828
R&D Systems Europe 4,398 3,349
Corporate and other (1,071) (1,250)
------- -------
Total earnings before income taxes $21,747 $19,357
======= =======
7
D. CONTINGENCIES:
The Company's tax returns are subject to audit by various governmental
entities in the normal course of business. The Company had received an audit
assessment of $1.75 million, plus interest, from the State of Minnesota for
fiscal years 2000 to 2002. The Company appealed the assessment and in
October 2004, reached a settlement with the State of Minnesota for $525,000,
plus interest of $81,000. The settlement amount of $525,000 was fully
accrued for at June 30, 2004.
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
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 (in thousands,
except per share data):
QUARTER ENDED
--------------------
9/30/04 9/30/03
------- -------
Net earnings:
As reported $14,192 $12,572
Less employee stock-based compensation,
net of tax effect 504 94
------- -------
Pro forma $13,688 $12,478
======= =======
Basic earnings per share:
As reported $ 0.34 $ 0.31
Less employee stock-based compensation,
net of tax effect 0.01 0.01
------- -------
Pro forma $ 0.33 $ 0.30
======= =======
Diluted earnings per share:
As reported $ 0.34 $ 0.30
Less employee stock-based compensation,
net of tax effect 0.01 0.00
------- -------
Pro forma $ 0.33 $ 0.30
======= =======
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
--------------------
9/30/04 9/30/03
------- -------
Dividend yield -- --
Expected annualized volatility 56% 49%-52%
Risk free interest rates 3.2%-3.4% 4.1%-4.4%
Expected lives 4 years 7 year
8
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations Quarter Ended September 30, 2004
vs. Quarter Ended September 30, 2003
Overview
TECHNE Corporation (the Company) has two operating subsidiaries: Research and
Diagnostic Systems, Inc. (R&D Systems) and R&D Systems Europe Ltd. (R&D
Europe). R&D Systems, located in Minneapolis, Minnesota, has two operating
segments: its Biotechnology Division and its Hematology Division. The
Biotechnology Division develops and manufactures purified cytokines
(proteins), antibodies and assay kits which are sold to biomedical
researchers and clinical research laboratories. The Hematology Division
develops and manufactures whole blood hematology controls and calibrators
which are sold to hospitals and clinical laboratories to check the
performance of hematology instruments to assure the accuracy of hematology
test results. R&D Europe, the Company's third operating segment, located in
Abingdon, England, is the European distributor of R&D Systems' biotechnology
products. R&D Europe has a sales subsidiary, R&D Systems GmbH, in Germany and
a sales office in France.
Overall Results
Consolidated net earnings increased 13% for the quarter ended September 30,
2004 compared to the quarter ended September 30, 2003. The primary reason
for the increase was an 8% sales increase from the prior year. The favorable
impact on consolidated net earnings of the strengthening of the British pound
as compared to the U.S. dollar for R&D Europe results was $314,000 for the
quarter ended September 30, 2004. The Company generated cash of $18.3
million from operating activities in the first three months of fiscal 2004
and cash, cash equivalents and available-for-sale investments were
$196 million at September 30, 2004 compared to $177 million at June 30, 2004.
Net Sales
Net sales for the quarter ended September 30, 2004 were $40.9 million, an
increase of $2.9 million (8%) from the quarter ended September 30, 2003. R&D
Systems' Biotechnology Division net sales increased $1.9 million (8%) for the
quarter ended September 30, 2004. R&D Europe net sales increased $1.3
million (14%) for the quarter ended September 30, 2004. Approximately $1.2
million of the increase in R&D Europe net sales for the quarter was the
result of favorable exchange rates used in converting British pounds to U.S.
dollars. In British pounds, R&D Europe net sales increased 2% for the
quarter ended September 30, 2004. R&D Systems' Hematology Division net sales
decreased $268,000 (6%) for the quarter ended September 30, 2004. The
decrease in Hematology Division sales for the quarter was primarily due to a
decrease in freight revenue as a result of a large survey customer paying
freight charges directly to the shipper rather than through the Company and
the change to a new distributor in France.
Gross Margins
Gross margins, as a percentage of net sales, were as follows:
QUARTER ENDED
--------------------
9/30/04 9/30/03
------- -------
Hematology Division 44.7% 45.2%
Biotechnology Division 80.1% 79.4%
R&D Systems Europe 51.8% 49.2%
Consolidated 78.3% 77.2%
9
Consolidated gross margins for the quarter ended September 30, 2004 improved
from the quarter ended September 30, 2003 mainly as a result of lower cost of
sales at R&D Europe due to favorable exchange rates as a result of a weaker
U.S. dollar to the British pound.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $551,000 (11%) from
the first quarter of last year.
QUARTER ENDED
--------------------
9/30/04 9/30/03
------- -------
Hematology Division $ 409 $ 391
Biotechnology Division 2,973 2,651
R&D Europe 1,722 1,699
Corporate expenses 530 342
------- -------
Total selling, general and administrative $ 5,634 $ 5,083
======= =======
Biotechnology Divisions selling, general and administrative expenses
increased $322,000 (12%) for the quarter ended September 30, 2004. The
majority of the increase was a result of increased personnel costs related to
annual wage increases and the addition of sales and marketing positions
($172,000), increased profit sharing and stock bonus accruals ($52,000) and
increased medical costs ($40,000). Corporate expenses increased $188,000 for
the quarter ended September 30, 2004 largely as a result of increased legal
($100,000) and consulting fees ($72,000).
Research and Development Expenses
Research and development expenses are composed of the following (in
thousands):
QUARTER ENDED
--------------------
9/30/04 9/30/03
------- -------
Hematology Division expenses $ 188 $ 191
Biotechnology Division expenses 4,500 4,164
ChemoCentryx, Inc. losses -- 436
Discovery Genomics, Inc. losses -- 172
------- -------
Total research and development expenses $ 4,688 $ 4,963
======= =======
Research and development expenses decreased $275,000 (6%) for the quarter
ended September 30, 2004. Included in research and development expenses for
the quarter ended September 30 2003 were the Company's share of losses by
ChemoCentryx, Inc. (CCX) and Discovery Genomics, Inc. (DGI), companies in
which the Company has invested. In May 2004, the Company changed from the
equity method to the cost method of accounting for its investment in CCX and
no longer records its share of CCX losses in its consolidated results. The
change to the cost method of accounting for CCX was the result of the
Company's ownership percentage declining below 20% and qualitative factors
which indicated that the Company does not exercise significant influence over
the operations of CCX. The Company's net investment in CCX at September 30,
2004 was $5.1 million. In the fourth quarter of fiscal 2004, the Company
wrote off its investment in DGI as an impairment loss. Excluding CCX and DGI
losses, research and development expenses for the quarter ended September 30,
2004 increased $333,000 (8%).
Other Non-operating Income/Expense
Other non-operating income/expense consists mainly of foreign currency
transaction gains and losses, rental income, real estate taxes, depreciation
and utility expenses related to properties not used in operations, and the
Company's share of losses by Hemerus Medical, LLC (Hemerus), in which the
Company invested in January 2004. As Hemerus is a limited liability
corporation, the Company is required to account for its investment using the
equity method of accounting.
10
QUARTER ENDED
--------------------
9/30/04 9/30/03
------- -------
Foreign currency (gains)/losses $ 47 $ (84)
Rental income (19) (19)
Real estate taxes/utilities 364 181
Hemerus Medical, LLC losses 74 --
------- -------
Total other non-operating (income)/expense $ 466 $ 78
======= =======
The Company's net investment in Hemerus at September 30, 2004 was $2.9
million. The Company has financial exposure to the losses of Hemerus to the
extent of its net investment in the company. Hemerus' success is dependent,
in part, upon receiving FDA clearance to market its products. If such
clearance is not received, the Company would potentially recognize an
impairment loss to the extent of its remaining net investment.
Income Taxes
Income taxes for the quarter ended September 30, 2004 were provided at a rate
of approximately 34.7% of consolidated earnings before income taxes compared
to 35.1% for the quarter ended September 30, 2003. U.S. federal taxes have
been reduced by the benefit for extraterritorial income. 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 2005 to range from 35% to 36%.
Liquidity and Capital Resources
At September 30, 2004, cash and cash equivalents and available-
for-sale investments were $196.1 million compared to $176.6 million at June
30, 2004. 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 $18.3 million from operating activities in the
first quarter of fiscal 2005 compared to $15.3 million for the first quarter
of fiscal 2004. The increase was mainly the result of increased earnings in
the current year, a larger decrease in accounts receivable in the quarter
ended September 30, 2004 compared to the quarter ended September 30, 2003,
and an increase in other accounts payable and accrued expenses for the
quarter ended September 30, 2004 compared to a decrease in the quarter ended
September 30, 2003. The larger decrease in accounts receivable was the
result of higher cash collections during the quarter ended September 30, 2004
as compared to the first quarter of last year. The decrease in other
accounts payable and accrued expenses in the prior year was a result of the
final payment of $1.7 million in August 2003, under a royalty agreement that
expired on June 30, 2003.
Cash Flows From Investing Activities
Capital expenditures for fixed assets for the first quarter of fiscal 2005
and 2004 were $.5 million and $1.3 million, respectively. Included in fiscal
2004 capital additions was $935,000 related to property in southeast
Minnesota. The Company acquired the property in fiscal 2003 and in fiscal
2004 constructed additional facilities at this site. The remaining capital
additions in the first quarter of fiscal 2005 and 2004 were for laboratory
and computer equipment and remodeling of laboratory space.
11
Remaining expenditures in fiscal 2005 for laboratory and computer equipment
are expected to be approximately $1.5 million. The Company also plans an
estimated $8 million build out of laboratory space at its Minneapolis
facility in late fiscal 2005 and early 2006. These expenditures are expected
to be financed through currently available funds and cash generated from
operating activities. The Company has an option to purchase property
adjacent to its Minneapolis facility, which expires on January 1, 2005. The
option price is approximately $10.4 million of which $2 million was deposited
in escrow in fiscal 2002. The Company plans to exercise this option and
finance the purchase of the property through currently available funds and
cash generated from operations. The property is currently leased to third
parties and the Company plans to continue to lease out the building until the
space is needed for its own operations.
During the quarter ended September 30, 2004 the Company purchased $37.5
million and had sales or maturities of $30.2 million of
available-for-sale investments. During the quarter ended September 30, 2003,
the Company purchased $21.8 million and had sales or maturities of $11.9
million of available-for-sale investments. The Company's
investment policy is to place excess cash in bonds and other
investments with maturities of less than three years. 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 $793,000 and $1 million was received during the quarters ended
September 30, 2004 and 2003, respectively, for the exercise of options for
30,000 and 116,000 shares of common stock. During the first three months of
fiscal 2005 options for 6,120 shares of common stock were exercised by the
surrender of 1,190 shares of the Company's common stock with a fair market
value of $45,000.
In September 2004, the Company purchased 6,410 shares of common stock for its
employee Stock Bonus Plans. These shares, along with 17,411 previously
purchased shares, were issued to the Company's Stock Bonus Plans on September
15, 2004, to settle the fiscal 2004 accrued liability balance of $966,000.
The Company has never paid cash dividends and has no plans to do so in fiscal
2005.
Critical Accounting Policies
The Company's significant accounting policies are discussed in the Company's
Annual Report to Shareholders for fiscal 2004. 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 2004.
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
forecast. Any protein and antibody quantities in excess of its two-year
usage forecast is considered impaired and not included in the inventory
value. 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.
Goodwill, intangible and other long-lived assets. The Company periodically
assesses the impairment of goodwill, intangible and other long-lived assets.
If any such assets were determined to be impaired, the carrying value of the
asset would be written down to its fair value.
12
Investments. The accounting treatment (cost or equity method) of the
Company's equity investments in start-up and early development stage
companies is dependent on a number of factors, including, but not limited to,
the Company's ownership percentage and the Company's ability to exercise
significant influence over the operations and financial policies of the
investee.
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. See also Note D to these financial
statements.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At September 30, 2004, the Company had a professionally managed investment
portfolio of fixed income securities, excluding those classified as cash and
cash equivalents, of $133.8 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 $1.2 million effect on consolidated operating income annually.
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 sales office to the
U.K. subsidiary. At September 30, 2004 and 2003, the Company had $406,000 and
$750,000, respectively, of dollar denominated intercompany debt at its U.K.
subsidiary. At September 30, 2004 and 2003, the U.K. subsidiary had zero and
$715,000, respectively, 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 22,000 British pounds ($40,000) and
49,000 British pounds ($84,000) for the quarters ended September 30, 2004 and
2003, respectively. The Company's German subsidiary recognized net foreign
currency losses of 72,000 euros ($87,000) for the quarter ended September 30,
2004. 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 September 30, 2004, the Company's long-term debt of $14.2 million
consisted of a mortgage note payable with 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 September 30, 2004.
13
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, 2004.
ITEM 2 - CHANGES IN SECURITIES, USE OF PROCEEDS AND
ISSUER PURCHASES OF EQUITY SECURITIES
The following table sets forth the repurchases of Company Common Stock for
the quarter ended September 30, 2004.
Maximum
Total Number of Approximate
Shares Purchased Dollar Value of
as Part of Shares that May
Total Number Average Publicly Announced Yet Be Purchased
of Shares Price Paid Plans or Under the Plans
Period Purchased Per Share Programs or Programs
- ---------------- ------------ ---------- ------------------ ----------------
7/1/04 - 7/31/04 0 -- 0 $6.8 million
8/1/04 - 8/31/04 0 -- 0 $6.8 million
9/1/04 - 9/30/04 6,410 40.50 0 $6.8 million
The shares purchased in September 2004 were contributed to the Company's
employee Stock Bonus Plans.
In May 1995, the Company announced a plan to purchase and retire its Common
Stock. Repurchases of $40 million were authorized as follows: May 1995 - $5
million; April 1997 - $5 million; January 2001 - $10 million; October 2002 -
$20 million. The plan does not have an expiration date.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None.
14
ITEM 4 - SUBMISSION OF MATTERS TO VOTE OF SHAREHOLDERS
(a)The Annual Meeting of the Registrant's shareholders was held on Thursday,
October 21, 2004.
(b)A proposal to set the number of directors at six was adopted by a vote of
37,332,935 in favor with 136,798 shares against, 21,769 shares abstaining
and no shares represented broker nonvotes.
(c)Proxies for the Annual Meeting were solicited pursuant to Regulation 14A
under the Securities Exchange Act of 1934. There was no solicitation in
opposition to management's nominees as listed in the Proxy Statement, and
all such nominees were elected, as follows:
Nominee For Withheld
------------------- ---------- ----------
Thomas E. Oland 36,453,014 1,038,488
Roger C. Lucas 26,205,875 11,285,627
Howard V. O'Connell 35,950,965 1,540,537
G. Arthur Herbert 35,952,530 1,538,972
Randolph C. Steer 35,959,177 1,532,325
Robert V. Baumgartner 35,958,688 1,532,814
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 October 21, 2004 furnishing pursuant to Item 2.02, the
Registrant's press release reporting earnings for the first quarter of
fiscal 2005 and segment information for the quarter ended September 30,
2004.
Form 8-K dated October 21, 2004 filed pursuant to Item 5.02, announcing
the resignation of Dr. Christopher S. Henney from the Registrant's Board
of Directors.
15
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: November 12, 2004 /s/ Thomas E. Oland
------------------------------
President, Chief Executive and
Chief Financial Officer
EXHIBIT INDEX
TO
FORM 10-Q
TECHNE CORPORATION
Exhibit # Description
- --------- ------------
31 Section 302 Certification
32 Section 906 Certification