SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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 (I.R.S. Employer
of incorporation or organization) Identification No.)
614 MCKINLEY PLACE N.E. (612) 379-8854
MINNEAPOLIS, MN 55413 (Registrant's telephone number,
(Address of principal including area code
executive offices) (Zip Code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes (X) No ( )
Indicate by check mark whether the Registrant is an accelerated filer
(as defined in Exchange Act Rule
12b-2). Yes (X) No ( )
At May 7, 2004, 41,099,922 shares of the Company's Common Stock (par value
$.01) were outstanding.
1
TECHNE CORPORATION
FORM 10-Q
MARCH 31, 2004
INDEX
PAGE NO.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as of March 31,
2004 (unaudited) and June 30, 2003 3
Consolidated Statements of Earnings for the quarter
and nine months ended March 31, 2004 and 2003 (unaudited) 4
Consolidated Statements of Cash Flows for the nine months
ended March 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 14
ITEM 4. CONTROLS AND PROCEDURES 15
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 16
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND
ISSUER PURCHASES OF EQUITY SECURITIES 16
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 16
ITEM 5. OTHER INFORMATION 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 17
SIGNATURE 17
2
PART I. FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
TECHNE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
(unaudited)
3/31/04 6/30/03
--------- ---------
ASSETS
Cash and cash equivalents $ 51,726 $ 39,371
Short-term available-for-sale investments 111,871 78,130
Trade accounts receivable, net 20,562 18,387
Interest receivable 1,986 2,054
Inventories 7,295 6,332
Deferred income taxes 4,643 4,237
Prepaid expenses 1,225 1,004
--------- ---------
Total current assets 199,308 149,515
Property and equipment, net 81,354 81,166
Goodwill, net 12,540 12,540
Intangible assets, net 3,219 4,418
Deferred income taxes 8,147 8,715
Other long-term assets 8,035 6,923
--------- ---------
$ 312,603 $ 263,277
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Trade accounts payable $ 3,531 $ 2,216
Salaries, wages and related accounts payable 3,220 1,781
Other accounts payable and accrued expenses 1,013 2,605
Income taxes payable 5,268 2,972
Current portion of long-term debt 1,268 1,234
--------- ---------
Total current liabilities 14,300 10,808
Long-term debt, less current portion 14,900 15,852
--------- ---------
Total liabilities 29,200 26,660
--------- ---------
Commitments and contingencies (Note D)
Common stock, par value $.01 per
share; authorized 100,000,000; issued
and outstanding 41,089,222 and
40,913,226, respectively 411 409
Additional paid-in capital 67,332 63,279
Retained earnings 209,362 169,809
Accumulated other comprehensive income 6,298 3,120
--------- ---------
Total stockholders' equity 283,403 236,617
--------- ---------
$ 312,603 $ 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 NINE MONTHS ENDED
----------------- -------------------
3/31/04 3/31/03 3/31/04 3/31/03
------- ------- -------- --------
Net sales $42,541 $37,737 $118,798 $105,585
Cost of sales 8,946 8,756 26,050 25,817
------- ------- -------- --------
Gross margin 33,595 28,981 92,748 79,768
Operating expenses:
Selling, general and
administrative 5,456 4,706 16,058 14,558
Research and development 5,082 5,286 15,495 15,098
Amortization of intangible assets 400 485 1,199 1,454
Interest expense 167 178 514 797
Interest income (853) (732) (2,341) (2,226)
Other non-operating expense
(income), net 415 (60) 513 74
------- ------- -------- --------
10,667 9,863 31,438 29,755
------- ------- -------- --------
Earnings before income taxes 22,928 19,118 61,310 50,013
Income taxes 8,309 6,724 21,749 17,293
------- ------- -------- --------
Net earnings $14,619 $12,394 $ 39,561 $ 32,720
======= ======= ======== ========
Earnings per share:
Basic $ 0.36 $ 0.30 $ 0.96 $ 0.79
Diluted $ 0.35 $ 0.30 $ 0.95 $ 0.78
Weighted average common
shares outstanding:
Basic 41,072 41,297 41,024 41,369
Diluted 41,752 41,991 41,668 42,198
See notes to consolidated financial statements (unaudited).
4
TECHNE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)
NINE MONTHS ENDED
------------------
3/31/04 3/31/03
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 39,561 $ 32,720
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 4,541 4,769
Deferred income taxes 197 242
Losses by equity method investees 2,150 2,280
Other 320 365
Change in operating assets and operating liabilities:
Trade accounts and interest receivable (1,592) (1,251)
Inventories (835) (448)
Prepaid expenses (364) (336)
Trade and other accounts payable (395) (4,382)
Salaries, wages and related accounts 1,415 (740)
Income taxes payable 3,060 5,936
-------- --------
Net cash provided by operating activities 48,058 39,155
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (3,452) (14,513)
Purchase of short-term available-for-sale investments (97,820) (53,440)
Proceeds from sale or maturity of short-term
available-for-sale investments 63,543 48,375
Increase in other long-term assets (3,400) --
-------- --------
Net cash used in investing activities (41,129) (19,578)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock 3,011 1,532
Repurchase of common stock -- (20,482)
Payments on long-term debt (918) (666)
-------- --------
Net cash provided by (used in) financing activities 2,093 (19,616)
-------- --------
Effect of exchange rate changes on cash 3,333 483
-------- --------
Net increase in cash and cash equivalents 12,355 444
Cash and cash equivalents at beginning of period 39,371 26,392
-------- --------
Cash and cash equivalents at end of period $ 51,726 $ 26,836
======== ========
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):
3/31/04 6/30/03
-------- --------
TRADE ACCOUNTS RECEIVABLE
Trade Accounts receivable $ 20,843 $ 18,655
Less allowance for doubtful accounts 281 268
-------- --------
NET TRADE ACCOUNTS RECEIVABLE $ 20,562 $ 18,387
======== ========
INVENTORIES
Raw materials $ 3,208 $ 2,618
Supplies 111 119
Finished goods 3,976 3,595
-------- --------
TOTAL INVENTORIES $ 7,295 $ 6,332
======== ========
PROPERTY AND EQUIPMENT
Land $ 3,264 $ 2,999
Buildings and improvements 69,746 64,930
Building construction in progress 15,810 18,310
Laboratory equipment 17,031 16,372
Office equipment 3,344 3,106
Leasehold improvements 598 537
-------- --------
109,793 106,254
Less accumulated depreciation and amortization 28,439 25,088
-------- --------
NET PROPERTY AND EQUIPMENT $ 81,354 $ 81,166
======== ========
6
3/31/04 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 730 730
-------- --------
18,740 18,740
Less accumulated amortization 15,521 14,322
-------- --------
NET INTANGIBLE ASSETS $ 3,219 $ 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 were applicable
to the Company for the quarter ended December 31, 2003. The Company assessed
its relationships with ChemoCentryx, Inc. (CCX) and Discovery Genomics, Inc.
(DGI), development stage companies in which the Company had 23% and 38%
equity investments, respectively at March 31, 2004. The Company determined
that neither investment was 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 has determined that none of
the Company's investments in CCX, DGI and the January 2004 investment in
Hemerus Medical, LLC, are required to be consolidated in the Company's
financial statements pursuant to the revised FIN 46.
Subsequent to March 31, 2004, CCX obtained $16.5 million in financing through
the issuance of approximately 6.3 million shares of preferred stock. The
financing included a $1.4 million investment by the Company, which, after the
financing, had a 19.5% equity interest in CCX. CCX plans an additional round
of financing in mid to late May 2004. The Company plans to invest an
additional $3 million in CCX at that time to maintain a 19.9% equity
interest.
B. EARNINGS PER SHARE:
Shares used in the earnings per share computations are as follows (in
thousands):
QUARTER ENDED NINE MONTHS ENDED
------------------ ------------------
3/31/04 3/31/03 3/31/04 3/31/03
-------- -------- -------- --------
Weighted average common shares
outstanding-basic 41,072 41,297 41,024 41,369
Dilutive effect of stock options
and warrants 680 694 644 829
-------- -------- -------- --------
Weighted average common shares
outstanding-diluted 41,752 41,991 41,668 42,198
======== ======== ======== ========
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 61,000 and 362,000 for the quarter and nine
months ended March 31, 2004, respectively, and 586,000 and 563,000 for the
same prior-year periods.
7
During the quarter and nine months ended March 31, 2003, the Company
purchased and retired 679,000 and 927,000 shares of Company common stock at a
market value of $14.6 million and $20.5 million, respectively. The effect of
the purchases was a 237,000 and 313,000 reduction in the weighted average
common shares outstanding for the quarter and nine months ended March 31,
2003, respectively. The Board of Directors has authorized the Company,
subject to market conditions and share price, to purchase and retire up to
$40 million of its common stock. From the start of the repurchase program
through May 7, 2004, approximately 2.4 million shares have been purchased at
a market value of $33.2 million.
C. SEGMENT INFORMATION:
Following is financial information relating to the Company's operating
segments (in thousands):
QUARTER ENDED NINE MONTHS ENDED
------------------ ------------------
3/31/04 3/31/03 3/31/04 3/31/03
-------- -------- -------- --------
External sales
Hematology $ 4,069 $ 3,997 $ 12,804 $ 11,757
Biotechnology 26,069 23,642 72,900 66,583
R&D Systems Europe 12,403 10,098 33,094 27,245
-------- -------- -------- --------
Total external sales $ 42,541 $ 37,737 $118,798 $105,585
======== ======== ======== ========
Intersegment sales
Hematology $ -- $ -- $ -- $ --
Biotechnology 5,145 4,874 14,733 13,526
R&D Systems Europe -- 14 -- 37
-------- -------- -------- --------
Total intersegment sales $ 5,145 $ 4,888 $ 14,733 $ 13,563
======== ======== ======== ========
Earnings before income taxes
Hematology $ 1,272 $ 1,339 $ 4,313 $ 3,901
Biotechnology 17,892 15,949 48,616 42,625
R&D Systems Europe 5,105 3,188 12,502 7,322
Corporate and other (1,341) (1,358) (4,121) (3,835)
-------- -------- -------- --------
Total earnings before income taxes $ 22,928 $ 19,118 $ 61,310 $ 50,013
======== ======== ======== ========
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 has filed 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.
8
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 NINE MONTHS ENDED
------------------ ------------------
3/31/04 3/31/03 3/31/04 3/31/03
-------- -------- -------- --------
Net earnings:
As reported $ 14,619 $ 12,394 $ 39,561 $ 32,720
Less employee stock-based
compensation, net of taxes 564 41 2,778 623
-------- -------- -------- --------
Pro forma $ 14,055 $ 12,353 $ 36,783 $ 32,097
======== ======== ======== ========
Basic earnings per share:
As reported $ 0.36 $ 0.30 $ 0.96 $ 0.79
Less employee stock-based
Compensation 0.02 0.00 0.06 0.01
-------- -------- -------- --------
Pro forma $ 0.34 $ 0.30 $ 0.90 $ 0.78
======== ======== ======== ========
Diluted earnings per share:
As reported $ 0.35 $ 0.30 $ 0.95 $ 0.78
Less employee stock-based
Compensation 0.01 0.01 0.07 0.02
-------- -------- -------- --------
Pro forma $ 0.34 $ 0.29 $ 0.88 $ 0.76
======== ======== ======== ========
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 NINE MONTHS ENDED
------------------ --------------------
3/31/04 3/31/03 3/31/04 3/31/03
-------- -------- -------- --------
Dividend yield -- N/A -- --
Expected annualized volatility 48% N/A 48%-53% 48%-53%
Risk free interest rates 4.2% N/A 3.9%-4.4% 4.1%-4.6%
Expected lives 10 years N/A 7-10 years 7-10 years
F. INVESTMENT IN HEMERUS, LLC:
To further the Company's research efforts, effective January 1, 2004, the
Company purchased a 10% interest in Hemerus Medical, LLC (Hemerus) for $3
million. Hemerus 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. The Company accounts for its
investment in Hemerus under the equity method of accounting.
9
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations Quarter and Nine Months Ended March 31, 2004
vs. Quarter and Nine Months Ended March 31, 2003
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.
Overall Results
Consolidated net earnings increased 18% and 21% for the quarter and nine
months ended March 31, 2004 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 nine months ended March 31, 2004,
increased 13% from the same periods in the prior-year. Gross margins, as a
percent of net sales increased from 77% and 76% for the quarter and nine
months ended March 31, 2003, respectively, to 79% and 78% for the quarter and
nine months ended March 31, 2004, respectively. The impact on consolidated
net earnings of higher exchange rates used to convert R&D Europe results from
British pounds to U.S. dollars was $519,000 and $853,000 for the quarter and
nine months ended March 31, 2004, respectively. The Company generated cash
of $48.1 million from operating activities in the first nine months of fiscal
2004 and cash, cash equivalents and short-term available-for-sale investments
were $164 million at March 31, 2004 compared to $118 million at June 30,
2003.
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.
10
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.
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.
Net Sales
Net sales for the quarter ended March 31, 2004 were $42.5 million, an
increase of $4.8 million (13%) from the quarter ended March 31, 2003. Net
sales for the nine months ended March 31, 2004 increased $13.2 million (13%)
from $105.6 million to $118.8 million. R&D Systems' Biotechnology Division
net sales increased $2.4 million (10%) and $6.3 million (9%), respectively,
for the quarter and nine months ended March 31, 2004. R&D Europe net sales
increased $2.3 million (23%) and $5.8 million (21%) for the quarter and nine
months ended March 31, 2004, respectively. The larger than normal increase
in R&D Europe net sales was the result of higher exchange rates used in
converting British pounds to U.S. dollars. The effect of foreign exchange
rates on R&D Europe's net sales for the quarter and nine months ended March
31, 2004 was $1.7 million and $3.0 million, respectively. R&D Systems'
Hematology Division net sales increased $72,000 (2%) and $1.0 million (9%),
respectively, for the quarter and nine months ended March 31, 2004. The
higher than usual growth in Hematology Division sales for the nine months was
primarily due to a distributor added in January 2003 and increased sales to
OEM customers.
Gross margins
Gross margins for the third quarter of fiscal 2004 were 79.0% compared to
76.8% for the same quarter in fiscal 2003. Gross margins for the nine months
ended March 31, 2004 were 78.1% compared to 75.6% 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 43.0% and 41.2% for the
quarter and nine months ended March 31, 2003 to 53.8% and 51.3% for the
quarter and nine months ended March 31, 2004, 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 $496,000 and $1.3 million,
respectively, in the quarter and nine months ended March 31, 2003 under this
agreement. Biotechnology Division gross margins increased slightly from
80.0% and 78.9% for the quarter and nine months ended March 31, 2003 to 80.4%
and 79.9% for the quarter and nine months ended March 31, 2004, respectively.
Hematology Division gross margins remained steady at 45.1% and 45.9% for the
quarter and nine months ended March 31, 2004 compared to 45.4% and 45.3% for
the quarter and nine months ended March 31, 2003, respectively.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $750,000 (16%) and
$1.5 million (10%) from the third quarter and first nine months of last year.
11
QUARTER ENDED NINE MONTHS ENDED
------------------ ------------------
3/31/04 3/31/03 3/31/04 3/31/03
-------- -------- -------- --------
R&D Systems, Inc. $ 3,356 $ 3,011 $ 9,730 $ 9,330
R&D Europe 1,805 1,544 5,395 4,719
Corporate expenses 295 151 933 509
-------- -------- -------- --------
Total selling, general and
administrative $ 5,456 $ 4,706 $ 16,058 $ 14,558
======== ======== ======== ========
R&D Systems' selling, general and administrative expenses increased $345,000
(11%) and $400,000 (4%) for the quarter and nine months ended March 31, 2004,
respectively. The majority of the increase for the quarter and nine months
was a result of an increase in profit sharing accrual in the third quarter of
fiscal 2004. R&D Europe's selling, general and administrative expenses
increased $261,000 (17%) and $676,000 (14%) for the quarter and nine months
ended March 31, 2004, 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 British pounds to U.S. dollars. In
British pounds, R&D Europe's selling, general and administrative expenses
increased 13,000 (1%) and 131,000 (4%) for the quarter and nine months
ended March 31, 2004, respectively. Corporate expenses increased $144,000 and
$424,000, respectively, for the quarter and nine months ended March 31, 2004
as compared to the same prior-year periods. The increase for the quarter was
largely the result of consulting fees incurred associated with compliance
with Sarbanes-Oxley ($63,000), higher audit and accounting related fees
($26,000), and higher directors' and officers' (D&O) liability insurance
premiums ($14,000). The increase for the nine months was the result of
Sarbanes-Oxley consulting fees ($172,000), higher audit and accounting
related fees ($103,000), and D&O premium increases ($101,000).
Research and Development Expenses
Research and development expenses decreased $204,000 (4%) for the quarter
ended March 31, 2004 and increased $397,000 (3%) for the nine months ended
March 31, 2004, as compared to the quarter and nine months ended March 31,
2003. Included in research and development expenses are the Company's share
of losses by ChemoCentryx, Inc. (CCX), Discovery Genomics, Inc. (DGI), and
Hemerus Medical, LLC (Hemerus), companies in which the Company has invested.
Research and development expenses are composed of the following (in
thousands):
QUARTER ENDED NINE MONTHS ENDED
------------------ ------------------
3/31/04 3/31/03 3/31/04 3/31/03
-------- -------- -------- --------
R&D Systems' expenses $ 4,493 $ 4,362 $ 13,345 $ 12,818
ChemoCentryx, Inc. losses 519 793 1,783 1,808
Discovery Genomics, Inc. losses 47 131 344 472
Hemerus Medical, LLC losses 23 -- 23 --
-------- -------- -------- --------
Total research and
development expenses $ 5,082 $ 5,286 $ 15,495 $ 15,098
======== ======== ======== ========
Excluding CCX, DGI and Hemerus losses, research and development expenses for
the quarter and nine months ended March 31, 2004 increased $131,000 (3%) and
$527,000 (4%), respectively.
The Company's net investments in CCX, DGI and Hemerus at March 31, 2004 were
$728,000, $1,544,000 and $2,977,000, respectively. The Company has financial
exposure to the losses of CCX, DGI and Hemerus to the extent of its net
investment in each of the companies. As development stage companies, 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. Hemerus'
success is dependent, in part, upon receiving FDA approval to market its
products. If such approval is not received, 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 NINE MONTHS ENDED
------------------ ------------------
3/31/04 3/31/03 3/31/04 3/31/03
-------- -------- -------- --------
Foreign currency (gains)/losses $ 85 $ (200) $ (128) $ (279)
Rental income (20) (19) (85) (25)
Real estate taxes/utilities 350 159 726 378
-------- -------- -------- --------
Total other non-operating
(income)/expense $ 415 $ (60) $ 513 $ 74
======== ======== ======== ========
Income Taxes
Income taxes for the quarter and nine months ended March 31, 2004 were
provided at a rate of approximately 36% and 35%, respectively, of
consolidated earnings before income taxes compared to 35% for the quarter and
nine months ended March 31, 2003. 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 March 31, 2004, cash and cash equivalents and short-term available-for-
sale investments were $163.6 million compared to $117.5 million 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 $48.1 million from operating activities in the
first nine months of fiscal 2004 compared to $39.2 million for the first nine
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 $4.4 million was paid in the first
nine months of last year.
Cash Flows From Investing Activities
Capital expenditures for fixed assets for the first nine months of fiscal
2004 and 2003 were $3.5 million and $14.5 million, respectively. Included in
fiscal 2004 and 2003 capital additions was $2.2 million and $2.7 million,
respectively, related to property in southeast Minnesota. The Company
acquired the property in fiscal 2003 and in fiscal 2004 constructed
additional facilities at this site to house goats used in the production of
its antibodies. Also included in the first nine months of fiscal 2003
capital additions was $202,000 for the completion of a parking ramp and $10.6
million for renovation and construction of property in Minneapolis. The
remaining capital additions in the first nine 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 $500,000 and are expected to be financed
through currently available funds and cash generated from operating
activities. Costs to finish the renovation of the 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 nine months ended March 31, 2004 the Company purchased $97.8
million and had sales or maturities of $63.5 million of short-term available-
for-sale investments. During the nine months ended March 31, 2003, the
Company purchased $53.4 million and had sales or maturities of $48.4 million
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.
Subsequent to March 31, 2004, the Company invested $1.4 million in 546,000
shares of preferred stock of CCX. CCX plans an additional round of financing
in mid to late May 2004. The Company plans to invest an additional $3
million in CCX at that time to maintain a 19.9% equity interest.
Cash Flows From Financing Activities
Cash of $3 million and $1.5 million was received during the nine months ended
March 31, 2004 and 2003, respectively, for the exercise of options for
175,000 and 113,000 shares of common stock. During the first nine months of
fiscal 2004 and 2003, options for 1,000 and 120,000 shares of common stock
were exercised by the surrender of 200 and 12,000 shares of the Company's
common stock with a fair market values of $9,000 and $405,000, respectively.
During the first nine months of fiscal 2003, the Company purchased and
retired 927,000 shares of Company common stock at a market value of $20.5
million. The Board of Directors has authorized the Company, subject to
market conditions and share price, to purchase and retire up to $40 million
of its common stock. From the start of the repurchase program through May 7,
2004, approximately 2.4 million shares have been purchased at a market value
of $33.2 million.
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 March 31, 2004, the Company had a professionally managed investment
portfolio of fixed income securities, excluding those classified as cash and
cash equivalents, of $111.9 million. These securities, like all fixed income
instruments, are subject to interest rate risk and will decline in value if
market interest rates increase.
14
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 $1.1 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 branch office to the
U.K. subsidiary. At March 31, 2004, the Company had $26,000 of dollar
denominated intercompany debt at its U.K. subsidiary and at March 31, 2004,
the U.K. subsidiary had $420,000 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 losses of 46,000 British pounds ($85,000) for
the quarter ended March 31, 2004 and recognized net foreign currency gains of
125,000 British pounds ($200,000) for the quarter ended March 31, 2003. For
the nine months ended March 31, 2004 and 2003, the Company's UK subsidiary
recognized net foreign currency gains of 76,000 British pounds ($128,000) and
173,000 British pounds ($279,000), 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 March 31, 2004, the Company's long-term debt of $14.9 million consisted
of a mortgage note payable. The interest rate on the mortgage note was fixed
at 7% through November 2002. The terms of the note payable were modified in
December 2002 to include a floating interest rate at the one month LIBOR rate
plus 2.5% with a floor of 4%. The floating interest rate on the mortgage
note payable was below the 4% floor as of March 31, 2004.
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.
15
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, USE OF PROCEEDS AND
ISSUER PURCHASES OF EQUITY SECURITIES
The following table sets forth the repurchases of Company Common Stock for
the quarter ended March 31, 2004.
Total Number of Maximum Approximate
Shares Purchased Dollar Value of Shares
Total Number Average as Part of Publicly that May Yet Be
Of Shares Price Paid Announced Plans Purchased Under Period
Purchased Per Share or Programs the Plans or Programs
------------ ---------- ------------------- ----------------------
1/1/04-
1/31/04 0 -- 0 $6.8 million
2/1/04-
2/28/04 0 -- 0 $6.8 million
3/1/04-
3/31/04 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
ITEM 4 - SUBMISSION OF MATTERS TO VOTE OF SHAREHOLDERS
None
ITEM 5 - OTHER INFORMATION
Forward Looking Information and Cautionary Statements: Statements in this
filing, and elsewhere, which look forward in time involve risks and
uncertainties which may affect the actual results of operations. The
following important factors, among others, have affected and, in the future,
could affect the Company's actual results: the introduction and acceptance
of new biotechnology and hematology products, the levels and particular
directions of research by the Company's customers, the impact of the growing
number of producers of biotechnology research products and related price
competition, the retention of hematology OEM (private label) and proficiency
survey business, the impact of changes in foreign currency exchange rates,
and the costs and results of research and product development efforts of the
Company and of companies in which the Company has invested or with which it
has formed strategic relationships. For additional information concerning
such factors, see the Company's Annual Report on Form 10-K as filed with the
Securities and Exchange Commission.
16
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 April 27, 2004 furnishing pursuant to Item 12, the
Registrant's press release reporting earnings for the third quarter of
fiscal 2004 and segment information for the third quarter and nine months
ended March 31, 2004.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TECHNE CORPORATION
(Company)
Date: May 14, 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
17