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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 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 February 3, 2005, 41,319,155 shares of the Company's Common Stock (par
value $.01) were outstanding.
TECHNE CORPORATION
FORM 10-Q
DECEMBER 31, 2004
INDEX
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as of December 31, 2004
(unaudited) and June 30, 2004 3
Consolidated Statements of Earnings for the quarter
and six months ended December 31, 2004 and 2003 (unaudited) 4
Consolidated Statements of Cash Flows for the six months
ended December 31, 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 10
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 16
ITEM 4. CONTROLS AND PROCEDURES 17
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 17
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 17
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS 18
ITEM 5. OTHER INFORMATION 18
ITEM 6. EXHIBITS 18
SIGNATURES 19
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)
12/31/04 6/30/04
-------- -------
ASSETS
Cash and cash equivalents $ 69,626 $ 51,201
Short-term available-for-sale investments 47,104 42,534
Trade accounts receivable, net 18,801 20,262
Interest receivable 944 837
Inventories 8,079 7,457
Deferred income taxes 5,035 4,820
Prepaid expenses 982 954
-------- --------
Total current assets 150,571 128,065
Available-for-sale investments 97,033 82,858
Property and equipment, net 79,119 80,504
Goodwill, net 12,540 12,540
Intangible assets, net 2,208 2,819
Deferred income taxes 7,426 7,843
Investments 8,320 8,484
Other long-term assets 2,270 2,347
-------- --------
$359,487 $325,460
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Trade accounts payable $ 3,256 $ 2,695
Salaries, wages and related accounts payable 2,923 3,416
Other accounts payable and accrued expenses 1,358 1,152
Income taxes payable 4,406 4,915
Current portion of long-term debt 1,271 1,281
-------- --------
Total current liabilities 13,214 13,459
Long-term debt, less current portion 13,958 14,576
-------- --------
Total liabilities 27,172 28,035
-------- --------
Commitments and contingencies (Note D)
Common stock, par value $.01 per share;
authorized 100,000,000; issued and outstanding
41,319,155 and 41,154,922, respectively 413 412
Additional paid-in capital 71,944 68,960
Retained earnings 251,809 222,728
Accumulated other comprehensive income 8,149 5,325
-------- --------
Total stockholders' equity 332,315 297,425
-------- --------
$359,487 $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 SIX MONTHS ENDED
------------------ ------------------
12/31/04 12/31/03 12/31/04 12/31/03
-------- -------- -------- --------
Net sales $42,247 $38,264 $83,166 $76,257
Cost of sales 8,941 8,441 17,828 17,104
------- ------- ------- -------
Gross margin 33,306 29,823 65,338 59,153
------- ------- ------- -------
Operating expenses:
Selling, general and administrative 6,290 5,519 11,924 10,602
Research and development 4,619 5,450 9,307 10,413
Amortization of intangible assets 306 399 611 799
------- ------- ------- -------
Total operating expenses 11,215 11,368 21,842 21,814
------- ------- ------- -------
Operating income 22,091 18,455 43,496 37,339
Other expense (income):
Interest expense 178 172 423 347
Interest income (1,189) (762) (2,242) (1,488)
Other non-operating expense
(income), net 416 20 882 98
------- ------- ------- -------
Total other income (595) (570) (937) (1,043)
------- ------- ------- -------
Earnings before income taxes 22,686 19,025 44,433 38,382
Income taxes 7,752 6,655 15,307 13,440
------- ------- ------- -------
Net earnings $14,934 $12,370 $29,126 $24,942
======= ======= ======= =======
Earnings per share:
Basic $ 0.36 $ 0.30 $ 0.71 $ 0.61
Diluted $ 0.36 $ 0.30 $ 0.70 $ 0.60
Weighted average common shares outstanding:
Basic 41,279 41,035 41,224 41,000
Diluted 41,681 41,653 41,678 41,627
See notes to consolidated financial statements (unaudited).
4
TECHNE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
SIX MONTHS ENDED
------------------
12/31/04 12/31/03
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $29,126 $24,942
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 3,044 3,008
Deferred income taxes 218 79
Losses by equity method investees 147 1,561
Other 77 216
Change in operating assets and operating liabilities:
Trade accounts and interest receivable 1,831 2,050
Inventories (547) (718)
Prepaid expenses (7) (207)
Trade and other accounts payable 583 320
Salaries, wages and related accounts 53 182
Income taxes payable (620) 1,831
------- -------
Net cash provided by operating activities 33,905 33,264
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (1,001) (2,685)
Purchase of available-for-sale investments (93,840) (62,810)
Proceeds from sales of available-for-sale investments 51,805 25,965
Proceeds from maturities of available-for-sale
investments 23,231 12,173
Increase in other long-term assets -- (400)
------- -------
Net cash used in investing activities (19,805) (27,757)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock 2,501 1,256
Purchase of common stock for stock bonus plans (260) --
Payments on long-term debt (628) (608)
------- -------
Net cash provided by financing activities 1,613 648
------- -------
Effect of exchange rate changes on cash 2,712 2,446
------- -------
Net increase in cash and cash equivalents 18,425 8,601
Cash and cash equivalents at beginning of period 51,201 39,371
------- -------
Cash and cash equivalents at end of period $69,626 $47,972
======= =======
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.
Recent Accounting Pronouncements:
In December 2004, the Financial Accounting Standards Board (FASB) issued
Statement of Accounting Standards No. 123 (Revised 2004) (SFAS No. 123R),
Share-Based Payment. SFAS No. 123R is a revision of FASB Statement No. 123,
Accounting for Stock-Based Compensation and supersedes Accounting Principles
Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees and its
related implementation guidance. The Statement focuses primarily on
accounting for transactions in which an entity obtains employee services
through share-based payment transactions. SFAS No 123R requires a public
entity measure the cost of employee services received in exchange for the
award of equity instruments based on the fair value of the award at the date
of grant. The cost will be recognized over the period during which an
employee is required to provide services in exchange for the award. SFAS No.
123R is effective as of the beginning of the first interim or annual
reporting period that begins after June 15, 2005 and the Company will adopt
the standard in the first quarter of fiscal 2006. While the Company cannot
precisely determine the impact on net earnings as a result of the adoption of
SFAS No 123R, estimated compensation expense related to prior periods can be
found in Note E to the financial statements included in this Form 10-Q and
Note A to the financial statements included in the Company's June 30, 2004
Form 10-K. The ultimate amount of increased compensation expense will be
dependent on the number of option shares granted during the year, their
timing and vesting period and the method used to calculated the fair value of
the awards, among other factors.
In November 2004, the FASB issued SFAS No. 151, Inventory Costs. The
Statement amends Accounting Research Bulletin No. 43 to clarify the
accounting for abnormal amounts of idle facility expense, freight, handling
costs and spoilage. The Statement also requires the allocation of fixed
production overheads to inventory be based on normal production capacity.
SFAS No. 151 is effective for the Company for inventory costs incurred
beginning in fiscal 2006. Adoption of the Statement is not expected to have
a significant impact on the Company's consolidated financial statements.
In December 2004, the FASB issued Staff Position No. 109-1, Application of
FASB Statement No. 109 (SFAS 109), Accounting for Income Taxes, to the Tax
Deduction on Qualified Production Activities Provided by the American Jobs
Creation Act of 2004 (FSP 109-1). FSP 109-1 clarifies that the manufacturer's
deduction provided for under the American Jobs Creation Act of 2004 (AJCA)
should be accounted for as a special deduction in accordance with SFAS 109
and not as a tax rate reduction. The adoption of FSP 109-1 will have no
impact on the Company's results of operations or financial position for
fiscal year 2005 because the manufacturer's deduction is not available to the
Company until fiscal year 2006. The Company is evaluating the effect that the
manufacturer's deduction will have in subsequent years.
6
The FASB also issued Staff Position No. 109-2, Accounting and Disclosure
Guidance for the Foreign Earnings Repatriation Provision within the American
Jobs Creation Act of 2004 (FSP 109-2). The AJCA introduces a special one-time
dividends received deduction on the repatriation of certain foreign earnings
to a U.S. taxpayer provided certain criteria are met. The Company is
currently evaluating the effect of repatriation of foreign earnings on
consolidated financial results. At the present time, deferred taxes have not
been recorded on undistributed earnings of foreign subsidiaries as the
amounts are considered permanently invested. If the Company decides to
repatriate foreign earnings a one-time charge may be recorded for the
deferred taxes.
Reclassification:
Effective with the quarter ended September 30, 2004, the Company reclassified
available-for-sale investments with contractual maturities of greater than
one year at June 30, 2004, as long-term assets. 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):
12/31/04 6/30/04
-------- -------
TRADE ACCOUNTS RECEIVABLE
Trade accounts receivable $18,972 $20,495
Less allowance for doubtful accounts 171 233
------- -------
NET TRADE ACCOUNTS RECEIVABLE $18,801 $20,262
======= =======
INVENTORIES
Raw materials $ 3,418 $ 3,062
Supplies 141 138
Finished goods 4,520 4,257
------- -------
TOTAL INVENTORIES $ 8,079 $ 7,457
======= =======
PROPERTY AND EQUIPMENT
Land $ 3,264 $ 3,264
Buildings and improvements 77,374 77,333
Building construction in progress 8,332 8,329
Laboratory equipment 17,698 17,081
Office equipment 3,681 3,367
Leasehold improvements 750 627
------- -------
111,099 110,001
Less accumulated depreciation and amortization 31,980 29,497
------- -------
NET PROPERTY AND EQUIPMENT $79,119 $80,504
======= =======
GOODWILL $38,846 $38,846
Less accumulated amortization 26,306 26,306
------- -------
NET GOODWILL $12,540 $12,540
======= =======
7
12/31/04 6/30/04
-------- -------
INTANGIBLE ASSETS
Customer list $18,010 $18,010
Technology licensing agreements 730 730
------- -------
18,740 18,740
Less accumulated amortization 16,532 15,921
------- -------
NET INTANGIBLE ASSETS $ 2,208 $ 2,819
======= =======
B. EARNINGS PER SHARE:
Shares used in the earnings per share computations are as follows (in
thousands):
QUARTER ENDED SIX MONTHS ENDED
------------------ ------------------
12/31/04 12/31/03 12/31/04 12/31/03
-------- -------- -------- --------
Weighted average common shares
outstanding-basic 41,279 41,035 41,224 41,000
Dilutive effect of stock options
and warrants 402 618 454 627
------- -------- -------- --------
Weighted average common shares
outstanding-diluted 41,681 41,653 41,678 41,627
======= ======== ======== ========
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 74,000 and 80,000 for the quarter and six
months ended December 31, 2004, respectively, and 508,000 and 532,000 for the
same prior-year periods.
On October 28, 2004, warrants to acquire 120,000 shares of 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 SIX MONTHS ENDED
------------------ ------------------
12/31/04 12/31/03 12/31/04 12/31/03
-------- -------- -------- --------
External sales
Hematology $ 4,515 $ 4,454 $ 8,528 $ 8,735
Biotechnology 24,868 22,799 50,755 46,831
R&D Systems Europe 12,864 11,011 23,883 20,691
------- ------- ------- -------
Total external sales $42,247 $38,264 $83,166 $76,257
======= ======= ======= =======
Intersegment sales
Biotechnology $ 5,204 $ 4,967 $10,008 $ 9,588
------- ------- ------- -------
Total intersegment sales $ 5,204 $ 4,967 $10,008 $ 9,588
======= ======= ======= =======
Earnings before income taxes
Hematology $ 1,804 $ 1,611 $ 3,056 $ 3,041
Biotechnology 16,421 14,896 33,589 30,724
R&D Systems Europe 5,331 4,048 9,729 7,397
Corporate and other (870) (1,530) (1,941) (2,780)
------- ------- ------- -------
Total earnings before income taxes $22,686 $19,025 $44,433 $38,382
======= ======= ======= =======
8
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. Interest of $81,000 was included in interest
expense in the first quarter of fiscal 2005.
E. STOCK OPTIONS:
As permitted through June 30, 2005 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. In December 2004,
the Financial Accounting Standards Board issued Statement of Accounting
Standards No. 123 (Revised 2004) (SFAS No. 123R), Share-Based Payment. The
Statement requires the recognition of compensation cost for equity
instruments issued to employees based on the fair value at the date of grant.
SFAS No. 123R is effective as of the beginning of the first interim or annual
reporting period that begins after June 15, 2005 and the Company will adopt
the standard in the first quarter of fiscal 2006.
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 SIX MONTHS ENDED
------------------ ------------------
12/31/04 12/31/03 12/31/04 12/31/03
-------- -------- -------- --------
Net earnings:
As reported $14,934 $12,370 $29,126 $24,942
Less employee stock-based
compensation, net of tax effect 694 2,120 1,198 2,214
------- ------- ------- -------
Pro forma $14,240 $10,250 $27,928 $22,728
======= ======= ======= =======
Basic earnings per share:
As reported $ 0.36 $ 0.30 $ 0.71 $ 0.61
Less employee stock-based
compensation, net of tax effect 0.02 0.05 0.03 0.06
------- ------- ------- -------
Pro forma $ 0.34 $ 0.25 $ 0.68 $ 0.55
======= ======= ======= =======
Diluted earnings per share:
As reported $ 0.36 $ 0.30 $ 0.70 $ 0.60
Less employee stock-based
compensation, net of tax effect 0.02 0.05 0.03 0.05
------- ------- ------- -------
Pro forma $ 0.34 $ 0.25 $ 0.67 $ 0.55
======= ======= ======= =======
9
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
------------------ ------------------
12/31/04 12/31/03 12/31/04 12/31/03
-------- -------- -------- --------
Dividend yield -- -- -- --
Expected annualized volatility 52% 48%-53% 52%-56% 48%-53%
Risk free interest rates 3.7%-3.9% 3.9%-4.3% 3.2%-3.9% 3.9%-4.4%
Expected lives 7 years 7 years 6 years 7 years
F. SUBSEQUENT EVENT
On January 3, 2005, the Company acquired property adjacent to its Minneapolis
facility for $10.4 million, $2 million of which was deposited in escrow in
fiscal 2002. The remaining purchase price was funded through cash on hand.
A portion of 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.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations for the Quarter and Six Months Ended December 31,
2004 and the Quarter and Six Months Ended December 31, 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 21% and 17% for the quarter and six
months ended December 31, 2004 compared to the quarter and six months ended
December 31, 2003. The primary reason for the increase was increased net
sales. Net sales for the quarter and six months ended December 31, 2004,
increased 10% and 9%, respectively, from the same periods in 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
$306,000 and $620,000 for the quarter and six months ended December 31, 2004,
respectively. The Company generated cash of $33.9 million from operating
activities in the first six months of fiscal 2004 and cash, cash equivalents
and available-for-sale investments were $214 million at December 31, 2004
compared to $177 million at June 30, 2004.
10
Net Sales
Net sales for the quarter ended December 31, 2004 were $42.2 million, an
increase of $4 million (10%) from the quarter ended December 31, 2003. Net
sales for the six months ended December 31, 2004 were $83.2 million, an
increase of $6.9 million (9%) from the prior-year period. Excluding the
effect of changes in foreign currency exchange rates, consolidated net sales
increased 7% and 6% for the quarter and six months ended December 31, 2004.
R&D Systems' Biotechnology Division net sales increased $2.1 million (9%) and
$3.9 million (8%), respectively for the quarter and six months ended December
31, 2004. R&D Europe net sales increased $1.9 million (17%) and $3.2 million
(15%) for the quarter and six months ended December 31, 2004, respectively.
Approximately $1.1 million and $2.2 million of the increase in R&D Europe net
sales for the quarter and six months 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 7% and 4% for the quarter and six months ended
December 31, 2004. R&D Systems' Hematology Division net sales increased
$61,000 (1%) for the quarter, while net sales for the six months ended
December 31, 2004, decreased $207,000 (2%).
During the second quarter of fiscal 2005 a large OEM customer notified the
Hematology Division that they were changing to a new primary vendor for
certain controls and calibrators. Although the Hematology Division will
continue to manufacture products for the customer as a secondary supplier, it
is anticipated that the effect on revenues will be a reduction of
approximately $450,000 and $850,000 in the third and fourth quarters of
fiscal 2005, respectively. The reduction in Hematology Division revenues is
not expected to have a significant impact on consolidated earnings and
revenues.
Cost of Sales
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.
Protein and antibody quantities in excess of the two-year usage forecast are
considered impaired and not included in the inventory value. The value of
protein and antibody inventory does not change significantly from quarter to
quarter. Protein and antibody production is generally for high-volume
products or for new products with limited initial sales. The Company
capitalizes protein and antibody costs each period in inventory, however
given the insignificant changes in these inventory balances each quarter,
substantially all manufacturing costs for proteins and antibodies, consisting
largely of wages, benefits, facility and equipment costs, are expensed each
quarter. A change in inventory value as a result of changes in the two-year
forecast is reflected in cost of sales in the period of change.
Manufacturing costs and changes in inventory value for proteins and
antibodies charged to cost of sales were $1.6 million and $1.6 million for
the quarters ended December 31, 2004 and 2003, respectively. For the six
months ended December 31, 2004 and 2003, manufacturing costs and changes in
inventory value for proteins and antibodies charged to cost of sales were
$3.3 million and $3.1 million, respectively.
Gross Margins
Gross margins, as a percentage of net sales, were as follows:
QUARTER ENDED SIX MONTHS ENDED
------------------ ------------------
12/31/04 12/31/03 12/31/04 12/31/03
-------- -------- -------- --------
Hematology Division 52.1% 47.4% 48.6% 46.3%
Biotechnology Division 79.8% 80.1% 80.0% 79.7%
R&D Systems Europe 54.0% 50.4% 53.0% 49.8%
Consolidated 78.8% 77.9% 78.6% 77.6%
11
Consolidated gross margins for the quarter and six months ended December 31,
2004 improved from the quarter and six months ended December 31, 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 for the quarter and six months
ended December 31, 2004, increased $771,000 (14%) and $1,322,000 (12%),
respectively from the same periods of last year.
QUARTER ENDED SIX MONTHS ENDED
------------------ ------------------
12/31/04 12/31/03 12/31/04 12/31/03
-------- -------- -------- --------
Hematology Division $ 436 $ 383 $ 845 $ 774
Biotechnology Division 3,415 2,949 6,388 5,600
R&D Europe 2,194 1,891 3,916 3,590
Corporate expenses 245 296 775 638
------- ------- ------- -------
Total selling, general and
administrative $ 6,290 $ 5,519 $11,924 $10,602
======= ======= ======= =======
Biotechnology Division selling, general and administrative expenses increased
$466,000 (16%) and $788,000 (14%) for the quarter and six months ended
December 31, 2004. The majority of the increase was a result of increased
personnel costs related to annual wage increases and additional sales and
marketing personnel (increases of $222,000 and $438,000 for the quarter and
six months, respectively) and increased advertising and promotion
expenditures (increases of $85,000 and $100,000 for the quarter and six
months, respectively). The increase in R&D Europe selling, general and
administrative expenses of $303,000 and $326,000 for the quarter and six
months ended December 31, 2004, was primarily the result of the change in
foreign currency exchange rates used to convert results from British pounds
to U.S. dollars. R&D Europe selling, general and administrative expenses
increased 69,000 British pounds for the quarter and decreased 31,000 British
pounds for the six months ended December 31, 2004. Corporate expenses
increased for the six months ended December 31, 2004 as a result of increased
legal ($100,000) and consulting fees ($72,000) in the first quarter of fiscal
2005.
Research and Development Expenses
Research and development expenses are composed of the following (in
thousands):
QUARTER ENDED SIX MONTHS ENDED
------------------ ------------------
12/31/04 12/31/03 12/31/04 12/31/03
-------- -------- -------- --------
Hematology Division expenses $ 189 $ 190 $ 377 $ 381
Biotechnology Division expenses 4,430 4,307 8,930 8,471
ChemoCentryx, Inc. losses -- 828 -- 1,264
Discovery Genomics, Inc. losses -- 125 -- 297
------- ------- ------- -------
Total research and development
Expenses $ 4,619 $ 5,450 $ 9,307 $10,413
======= ======= ======= =======
Research and development expenses decreased $831,000 (15%) and $1.1 million
(11%) for the quarter and six months ended December 31, 2004, respectively.
Included in research and development expenses for the quarter and six months
ended December 31, 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 December 31, 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 and six months ended
December 31, 2004 increased $122,000 (3%) and $455,000 (5%), respectively,
mainly as a result of wage increases.
12
Other Non-operating Expense and Income
Other non-operating expense and income consists mainly of foreign currency
transaction gains, 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.
QUARTER ENDED SIX MONTHS ENDED
------------------ ------------------
12/31/04 12/31/03 12/31/04 12/31/03
-------- -------- -------- --------
Foreign currency gains $ (82) $ (129) $ (35) $ (213)
Rental income (53) (46) (72) (65)
Real estate taxes/utilities 478 195 842 376
Hemerus Medical, LLC losses 73 -- 147 --
------- ------- ------- -------
Total other non-operating
expense (income) $ 416 $ 20 $ 882 $ 98
======= ======= ======= =======
The Company's net investment in Hemerus at December 31, 2004 was $2.8
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 and six months ended December 31, 2004 were
provided at rates of approximately 34.2% and 34.4% of consolidated earnings
before income taxes compared to 35.0% for both the quarter and six months
ended December 31, 2003. The decrease in the effective tax rate was due to
the reduction of non-deductible losses by CCX and DGI. U.S. federal taxes
have been reduced by the credit for research and development expenditures and
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 34%
to 36%.
Liquidity and Capital Resources
At December 31, 2004, cash and cash equivalents and available-for-sale
investments were $213.8 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 $33.9 million from operating activities in the
first six months of fiscal 2005 compared to $33.3 million in the first six
months of fiscal 2004. The increase was mainly the result of increased
earnings in the current year partially offset by a decrease in income taxes
payable. The decrease in income taxes payable was the result of
approximately $4.0 million in additional tax payments made in the first six
months of fiscal 2005 compared to the first six months of last year.
13
Cash Flows From Investing Activities
Capital expenditures for fixed assets for the first six months of fiscal 2005
and 2004 were $1.0 million and $2.7 million, respectively. Included in fiscal
2004 capital additions was $1.7 million 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 six months of fiscal 2005 and 2004 were for laboratory
and computer equipment and remodeling of laboratory space.
Remaining expenditures in fiscal 2005 for laboratory and computer equipment
are expected to be approximately $1.0 million. The Company acquired property
in Minneapolis in January 2005 for $10.4 million, $2 million of which was
deposited in escrow in fiscal 2002. The remaining purchase price was
financed through cash on hand. The Company also plans, in late fiscal 2005
and early fiscal 2006, an estimated $8 million build-out of laboratory space
at its Minneapolis facility and construction of an $800,000 barn on its
property in southeast Minnesota. These expenditures are expected to be
financed through currently available funds and cash generated from operating
activities.
During the six months ended December 31, 2004, the Company purchased $93.8
million and had sales or maturities of $75.0 million of available-for-sale
investments. During the six months ended December 31, 2003, the Company
purchased $62.8 million and had sales or maturities of $38.1 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 $1.4 million was received during the six months ended December 31,
2004 for the exercise of warrants to purchase 120,000 shares of common stock.
Cash of $1.1 million and $1.3 million was received during the six months
ended December 31, 2004 and 2003, respectively, for the exercise of options
for 39,000 and 126,000 shares of common stock. During the first six 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 the first six months of fiscal 2005, 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.
14
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.
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.
Recent Accounting Pronouncements:
In December 2004, the Financial Accounting Standards Board (FASB) issued
Statement of Accounting Standards No. 123 (Revised 2004) (SFAS No. 123R),
Share-Based Payment. SFAS No. 123R is a revision of FASB Statement No. 123,
Accounting for Stock-Based Compensation and supersedes Accounting Principles
Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees and its
related implementation guidance. The Statement focuses primarily on
accounting for transactions in which an entity obtains employee services
through share-based payment transactions. SFAS No 123R requires a public
entity measure the cost of employee services received in exchange for the
award of equity instruments based on the fair value of the award at the date
of grant. The cost will be recognized over the period during which an
employee is required to provide services in exchange for the award. SFAS No.
123R is effective as of the beginning of the first interim or annual
reporting period that begins after June 15, 2005 and the Company will adopt
the standard in the first quarter of fiscal 2006. While the Company cannot
precisely determine the impact on net earnings as a result of the adoption of
SFAS No 123R, estimated compensation expense related to prior periods can be
found in Note E to the financial statements included in this Form 10-Q and
Note A to the financial statements included in the Company's June 30, 2004
Form 10-K. The ultimate amount of increased compensation expense will be
dependent on the number of option shares granted during the year, their
timing and vesting period and the method used to calculated the fair value of
the awards, among other factors.
In November 2004, the FASB issued SFAS No. 151, Inventory Costs. The
Statement amends Accounting Research Bulletin No. 43 to clarify the
accounting for abnormal amounts of idle facility expense, freight, handling
costs and spoilage. The Statement also requires the allocation of fixed
production overheads to inventory be based on normal production capacity.
SFAS No. 151 is effective for the Company for inventory costs incurred
beginning in fiscal 2006. Adoption of the Statement is not expected to have
a significant impact on the Company's consolidated financial statements.
15
In December 2004, the FASB issued Staff Position No. 109-1, Application of
FASB Statement No. 109 (SFAS 109), Accounting for Income Taxes, to the Tax
Deduction on Qualified Production Activities Provided by the American Jobs
Creation Act of 2004 (FSP 109-1). FSP 109-1 clarifies that the manufacturer's
deduction provided for under the American Jobs Creation Act of 2004 (AJCA)
should be accounted for as a special deduction in accordance with SFAS 109
and not as a tax rate reduction. The adoption of FSP 109-1 will have no
impact on the Company's results of operations or financial position for
fiscal year 2005 because the manufacturer's deduction is not available to the
Company until fiscal year 2006. The Company is evaluating the effect that the
manufacturer's deduction will have in subsequent years.
The FASB also issued Staff Position No. 109-2, Accounting and Disclosure
Guidance for the Foreign Earnings Repatriation Provision within the American
Jobs Creation Act of 2004 (FSP 109-2). The AJCA introduces a special one-time
dividends received deduction on the repatriation of certain foreign earnings
to a U.S. taxpayer provided certain criteria are met. The Company is
currently evaluating the effect of repatriation of foreign earnings on
consolidated financial results. At the present time, deferred taxes have not
been recorded on undistributed earnings of foreign subsidiaries as the
amounts are considered permanently invested. If the Company decides to
repatriate foreign earnings a one-time charge may be recorded for the
deferred taxes.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At December 31, 2004, the Company had a professionally managed investment
portfolio of fixed income securities, excluding those classified as cash and
cash equivalents, of $144 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 December 31, 2004 and 2003, the Company had $22,000 and
$354,000, respectively, of dollar denominated intercompany debt at its U.K.
subsidiary. At December 31, 2004 and 2003, the U.K. subsidiary had $292,000
and $413,000, 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 100,000 British pounds ($198,000)
and 73,000 British pounds ($129,000) for the quarters ended December 31, 2004
and 2003, respectively. For the six months ended December 31, 2004 and 2003,
the Company's U.K. subsidiary recognized net foreign currency gains of 122,000
British pounds($238,000) and 122,000 British pounds ($213,000), respectively.
The Company's German subsidiary recognized net foreign currency losses of
81,000 euros ($116,000) and 153,000 euros ($203,000) for the quarter and six
months ended December 31, 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 December 31, 2004, the Company's long-term debt of $14.0 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 4.7% as of December 31, 2004.
16
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. During the quarter, the
Company separated its Chief Executive Officer and Chief Financial Officer
functions when it appointed Gregory J. Melsen as Vice President of Finance
and Chief Financial Officer. There was no additional 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 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On October 28, 2004 the Company issued 120,000 shares of Common Stock to an
investor for $1.4 million upon exercise of outstanding warrants at $11.89 per
share. The above securities were issued in reliance on the exemption from
registration provided by Rule 506 of Regulation D promulgated under Section
4/(2) of the Securities Act of 1933. The certificate representing the
securities bears a restricted legend.
The following table sets forth the repurchases of Company Common Stock for
the quarter ended December 31, 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
- ---------------- ------------ ---------- ------------------ ----------------
10/1/04-10/31/04 0 -- 0 $6.8 million
11/1/04-11/30/04 0 -- 0 $6.8 million
12/1/04-12/31/04 0 -- 0 $6.8 million
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.
17
ITEM 4 - SUBMISSION OF MATTERS TO VOTE OF SHAREHOLDERS
Information relating to the Company's Annual Meeting of Shareholders, held on
October 21, 2004 is contained in the Company's Form 10-Q for the quarter
ended September 30, 2004, 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
See exhibit index following.
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TECHNE CORPORATION
(Company)
Date: February 8, 2005 /s/ Thomas E. Oland
----------------------------------
President, Chief Executive Officer
February 8, 2005 /s/ Gregory Melsen
----------------------------------
Chief Financial Officer
EXHIBIT INDEX
TO
FORM 10-Q
TECHNE CORPORATION
Exhibit # Description
- --------- -----------
31.1 Section 302 Certification
31.2 Section 302 Certification
32.1 Section 906 Certification
32.2 Section 906 Certification