UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
| (Mark One) | |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 26, 2004 |
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OR |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to . |
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Commission file Number: 0-26126
SEROLOGICALS CORPORATION
(Exact Name of Registrant as Specified in its Charter)
| Delaware (State or other jurisdiction of incorporation or organization) |
58-2142225 (I.R.S. Employer Identification Number) |
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5655 Spalding Drive Norcross, Georgia (Address of principal executive offices) |
30092 (Zip Code) |
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(678) 728-2000 (Registrant's Telephone Number Including Area Code) |
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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 ý No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes ý No o
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:
| Class |
Outstanding at October 29, 2004 |
|
|---|---|---|
| Common Stock, $0.01 par value per share | 29,604,383 |
INDEX
SEROLOGICALS CORPORATION AND SUBSIDIARIES
| PART I. | |||
| Item 1. Financial Statements | |||
| Unaudited Consolidated Balance Sheets—September 26, 2004 and December 28, 2003 | 3 | ||
| Unaudited Consolidated Statements of Income—For the three and nine months ended September 26, 2004 and September 28, 2003 | 4 | ||
| Unaudited Consolidated Statements of Cash Flows—For the nine months ended September 26, 2004 and September 28, 2003 | 5 | ||
| Unaudited Notes to Consolidated Financial Statements | 6 | ||
| Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations | 16 | ||
| Item 3. Quantitative and Qualitative Disclosures about Market Risk | 24 | ||
| Item 4. Controls and Procedures | 24 | ||
PART II. |
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| Item 1. Legal Proceedings | 25 | ||
| Item 6. Exhibits | 25 | ||
| SIGNATURES | 27 | ||
2
SEROLOGICALS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited and in thousands)
| |
September 26, 2004 |
December 28, 2003 |
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|---|---|---|---|---|---|---|---|---|---|---|
| ASSETS | ||||||||||
| CURRENT ASSETS: | ||||||||||
| Cash and cash equivalents | $ | 50,357 | $ | 48,564 | ||||||
| Trade accounts receivable, net of allowance for doubtful accounts of $785 and $1,214, respectively | 31,096 | 34,126 | ||||||||
| Inventories | 39,195 | 33,826 | ||||||||
| Other current assets | 14,190 | 10,982 | ||||||||
| Discontinued operations | — | 7,019 | ||||||||
| Total current assets | 134,838 | 134,517 | ||||||||
| PROPERTY AND EQUIPMENT, net | 83,562 | 73,204 | ||||||||
| DISCONTINUED OPERATIONS | — | 5,613 | ||||||||
| OTHER ASSETS: | ||||||||||
| Goodwill | 107,022 | 93,577 | ||||||||
| Intangible assets, net | 47,579 | 49,881 | ||||||||
| Other | 6,371 | 1,386 | ||||||||
| Total other assets | 160,972 | 144,844 | ||||||||
| Total assets | $ | 379,372 | $ | 358,178 | ||||||
LIABILITIES AND STOCKHOLDERS' EQUITY |
||||||||||
| CURRENT LIABILITIES: | ||||||||||
| Current maturities of capital lease obligation | $ | 1,842 | $ | — | ||||||
| Accounts payable | 5,453 | 4,547 | ||||||||
| Accrued liabilities | 21,726 | 22,346 | ||||||||
| Discontinued operations | — | 2,864 | ||||||||
| Total current liabilities | 29,021 | 29,757 | ||||||||
| LONG-TERM DEBT: | ||||||||||
| Convertible debentures | 130,782 | 130,916 | ||||||||
| Capital lease obligation, net of current maturities | 1,462 | — | ||||||||
| Total long-term debt | 132,244 | 130,916 | ||||||||
| DEFERRED INCOME TAXES | 20,115 | 18,181 | ||||||||
| OTHER LIABILITIES | 149 | 180 | ||||||||
| DISCONTINUED OPERATIONS | — | 172 | ||||||||
| STOCKHOLDERS' EQUITY: | ||||||||||
| Preferred stock | — | — | ||||||||
| Common stock | 284 | 281 | ||||||||
| Additional paid-in capital | 125,561 | 121,130 | ||||||||
| Retained earnings | 87,838 | 73,717 | ||||||||
| Accumulated other comprehensive income | 4,507 | 4,191 | ||||||||
| Less: common stock held in treasury | (20,347 | ) | (20,347 | ) | ||||||
| Total stockholders' equity | 197,843 | 178,972 | ||||||||
| Total liabilities and stockholders' equity | $ | 379,372 | $ | 358,178 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
3
SEROLOGICALS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited and in thousands, except share and per share amounts)
| |
Three Months Ended |
Nine Months Ended |
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|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
September 26, 2004 |
September 28, 2003 |
September 26, 2004 |
September 28, 2003 |
||||||||||
| NET REVENUES | $ | 46,294 | $ | 42,010 | $ | 126,761 | $ | 100,555 | ||||||
| Cost of revenues | 21,313 | 18,714 | 57,379 | 46,276 | ||||||||||
| GROSS PROFIT | 24,981 | 23,296 | 69,382 | 54,279 | ||||||||||
| OPERATING EXPENSES: | ||||||||||||||
| Selling, general and administrative | 12,997 | 12,826 | 38,029 | 31,116 | ||||||||||
| Research and development | 1,930 | 1,628 | 6,112 | 4,298 | ||||||||||
| Amortization of intangibles | 655 | 630 | 2,064 | 1,551 | ||||||||||
| Special charges | — | 504 | — | 1,844 | ||||||||||
| OPERATING INCOME | 9,399 | 7,708 | 23,177 | 15,470 | ||||||||||
| Other expense (income), net | 25 | 61 | (231 | ) | 248 | |||||||||
| Write-off of deferred financing costs | — | 4,112 | — | 4,492 | ||||||||||
| Interest expense | 1,281 | 1,469 | 3,527 | 3,096 | ||||||||||
| Interest income | (225 | ) | (70 | ) | (582 | ) | (143 | ) | ||||||
| INCOME FROM CONTINUING OPERATIONS | 8,318 | 2,136 | 20,463 | 7,777 | ||||||||||
| PROVISION FOR INCOME TAXES | 2,579 | 742 | 6,343 | 2,725 | ||||||||||
| NET INCOME FROM CONTINUING OPERATIONS | 5,739 | 1,394 | 14,120 | 5,052 | ||||||||||
| Loss from discontinued operations | — | (7,930 | ) | — | (8,435 | ) | ||||||||
| NET INCOME (LOSS) | $ | 5,739 | $ | (6,536 | ) | $ | 14,120 | $ | (3,383 | ) | ||||
| BASIC EARNINGS (LOSS) PER SHARE: | ||||||||||||||
| Continuing operations | $ | 0.23 | $ | 0.06 | $ | 0.57 | $ | 0.21 | ||||||
| Discontinued operations | — | (0.32 | ) | — | (0.34 | ) | ||||||||
| Net income (loss) | $ | 0.23 | $ | (0.26 | ) | $ | 0.57 | $ | (0.13 | ) | ||||
| DILUTED EARNINGS (LOSS) PER SHARE: | ||||||||||||||
| Continuing operations | $ | 0.19 | $ | 0.06 | $ | 0.48 | $ | 0.20 | ||||||
| Discontinued operations | — | (0.32 | ) | — | (0.34 | ) | ||||||||
| Net income (loss) | $ | 0.19 | $ | (0.26 | ) | $ | 0.48 | $ | (0.14 | ) | ||||
| WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING: | ||||||||||||||
| Basic | 25,034,437 | 24,567,487 | 24,943,488 | 24,502,089 | ||||||||||
| Diluted | 34,428,253 | 25,059,584 | 34,305,938 | 24,873,651 | ||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
4
SEROLOGICALS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited and in thousands)
| |
Nine Months Ended |
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|---|---|---|---|---|---|---|---|---|---|---|
| |
September 26, 2004 |
September 28, 2003 |
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| OPERATING ACTIVITIES: | ||||||||||
| Net income (loss) | $ | 14,120 | $ | (3,383 | ) | |||||
| Loss from discontinued operations | — | (8,435 | ) | |||||||
| Income from continuing operations | 14,120 | 5,052 | ||||||||
| Adjustments to reconcile net income from continuing operations to net cash provided by operating activities: | ||||||||||
| Depreciation and amortization | 7,919 | 6,351 | ||||||||
| Tax benefit from exercise of stock options | 1,281 | 190 | ||||||||
| Deferred and other compensation | 35 | 62 | ||||||||
| Deferred income tax provision | 1,299 | 1,109 | ||||||||
| Non-cash special charges and write-off of deferred financing costs | — | 6,402 | ||||||||
| Changes in operating assets and liabilities: | ||||||||||
| Trade accounts receivable, net | 3,109 | (8 | ) | |||||||
| Inventories | (5,208 | ) | (8,336 | ) | ||||||
| Other current assets | (55 | ) | (4,395 | ) | ||||||
| Accounts payable | 887 | (1,598 | ) | |||||||
| Accrued liabilities | (1,928 | ) | 1,379 | |||||||
| Other, net | (204 | ) | (2,921 | ) | ||||||
| Total adjustments | 7,135 | (1,765 | ) | |||||||
| Net cash provided by operating activities | 21,255 | 3,287 | ||||||||
| INVESTING ACTIVITIES: | ||||||||||
| Purchase of property and equipment | (14,767 | ) | (9,572 | ) | ||||||
| Purchase of businesses, net of cash received | (12,440 | ) | (97,097 | ) | ||||||
| Disposition of business | 3,500 | — | ||||||||
| Other | (164 | ) | — | |||||||
| Net cash used in investing activities | (23,871 | ) | (106,669 | ) | ||||||
| FINANCING ACTIVITIES: | ||||||||||
| Proceeds (payments) on long-term debt and capital leases | 3,304 | (385 | ) | |||||||
| Proceeds from stock plans | 3,118 | 803 | ||||||||
| Proceeds from convertible debentures | — | 130,000 | ||||||||
| Proceeds from term loan | — | 82,500 | ||||||||
| Repayment of term loan | — | (82,500 | ) | |||||||
| Payment of debt issuance costs | — | (8,706 | ) | |||||||
| Net cash provided by financing activities | 6,422 | 121,712 | ||||||||
| Net cash (used in) provided by discontinued operations | (1,538 | ) | 9,843 | |||||||
| Effects of exchange rate changes on cash and cash equivalents | (475 | ) | (1,536 | ) | ||||||
| NET INCREASE IN CASH AND CASH EQUIVALENTS | 1,793 | 26,637 | ||||||||
| CASH AND CASH EQUIVALENTS, beginning of period | 48,564 | 15,242 | ||||||||
| CASH AND CASH EQUIVALENTS, end of period | $ | 50,357 | $ | 41,879 | ||||||
| Supplemental Disclosures: | ||||||||||
| Interest paid, net of amounts capitalized | $ | 4,053 | $ | 2,735 | ||||||
| Income taxes paid | $ | 2,652 | $ | 2,287 | ||||||
| Non-Cash Investing and Financing Activities: | ||||||||||
| Stock acquired by employees in lieu of cash bonus | $ | 58 | $ | 138 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
5
SEROLOGICALS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 26, 2004
(UNAUDITED)
1. ORGANIZATION AND BASIS OF PRESENTATION
Organization
Serologicals Corporation, a Delaware corporation (together with its subsidiaries, "we", the "Company" or "Serologicals"), with facilities in North America, Europe, and Australia, is a global provider of biological products, enabling technologies and services to a diverse customer base that includes major life science companies and leading research institutions. Our customers use our products, technologies and services in a wide variety of their activities, including basic research, drug discovery, diagnosis and bio-manufacturing. Our products, technologies and services are essential tools for research in key disciplines, including neurology, oncology, hematology, immunology, cardiology, proteomics, infectious diseases, cell signaling and molecular biology. In addition, we believe we are the world's leading provider of monoclonal antibodies for the blood typing industry.
The Company conducts operations of its Research segment through Chemicon International, Inc. ("Chemicon"), which was acquired in April 2003. Chemicon provides a broad range of specialty reagents, kits, antibodies and molecular biology tools to biotechnology, pharmaceutical and academic researchers working in the areas of neuroscience, infectious diseases, stem cell biology, cancer, drug discovery and proteomics. Chemicon is also a leading supplier of monoclonal antibodies, conjugates, antibody blends and kits for use in diagnostic laboratories. Chemicon, headquartered in Temecula, California, has manufacturing and distribution operations in California, Australia and the United Kingdom.
The Company manufactures Cell Culture and Diagnostic products in facilities located in North America and the United Kingdom. The Company operates protein fractionation facilities located in Kankakee, Illinois and Toronto, Ontario and has a third facility in Lawrence, Kansas which is currently undergoing process validation. These facilities provide a variety of highly purified proteins used in diagnostic reagents and cell culture media components for use in the development and manufacturing of biotechnology products. Additionally, these facilities produce a line of highly purified animal proteins known as cell culture media components that are used primarily by biopharmaceutical and biotechnology companies as nutrient additives in cell culture media. The Company's most significant product within the Cell Culture Segment is EX-CYTE®, which is produced through a patented manufacturing process. EX-CYTE® is a concentrated solution of cholesterol, lipoproteins and fatty acids that is used, in combination with other cell culture supplements, to reduce or replace animal serum in cell culture processes. Other key products within the Cell Culture segment include proprietary bovine serum albumin, human recombinant insulin and other products used principally in mammalian cell culture.
In July 2004, the Company completed the acquisition of AltaGen Biosciences, Inc., the parent company of Sierra BioSource, Inc. (together referred to as "Sierra") (see Note 2, "Acquisitions", below). Sierra, based in Morgan Hill, California offers research and development services in the areas of cellular and molecular biology, immunology, animal pharmacology, monoclonal antibodies and recombinant proteins, as well as in specialty cell culture development and purification. Revenues and expenses associated with services provided to external customers are included in the Cell Culture segment. Certain internal research and development efforts undertaken by Sierra dedicated to internal cell culture applications are included in Operating Expenses under the category Research and Development Expense in the statements of income from the acquisition date.
6
The Company manufactures monoclonal antibodies in its Livingston, Scotland facility. The monoclonal antibodies are used in diagnostic products such as blood typing reagents and in controls for diagnostic tests for certain infectious diseases. The Company also operates a facility in Milford, Massachusetts that includes a central distribution facility as well as operations related to production of substrates used in diagnostic assays. The key products within the diagnostic segment are monoclonal antibodies used in blood typing reagents and diagnostic antibodies.
Basis of Presentation
The accompanying unaudited consolidated financial statements include the accounts of Serologicals and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. The accompanying statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and the instructions to Form 10-Q of the Securities Exchange Act of 1934. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, the accompanying unaudited consolidated financial statements reflect all adjustments, which are of a normal recurring nature, to present fairly Serologicals' financial position, results of operations and cash flows at the dates and for the periods presented. Interim results of operations are not necessarily indicative of results to be expected for the full year. The interim financial statements should be read in conjunction with the audited consolidated financial statements as of December 28, 2003 and the notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 28, 2003, as amended by the Company's Annual Report on Form 10-K/A (Amendment No. 1) filed on June 4, 2004.
Financial statements for all periods presented have been reclassified to separately report results of discontinued operations from results of continuing operations (Note 3). Disclosures included herein pertain to the Company's continuing operations unless otherwise noted.
Certain prior year amounts have been reclassified to conform to the current year presentation.
Inventories
Inventories are stated at the lower of cost or market, cost being determined on a first-in, first-out basis. Market for product inventories is net realizable value.
Inventories at September 26, 2004 and December 28, 2003 consisted of the following (in thousands):
| |
2004 |
2003 |
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|---|---|---|---|---|---|---|---|
| Raw materials | $ | 12,195 | $ | 9,097 | |||
| Work in process | 9,278 | 10,554 | |||||
| Finished goods | 17,722 | 14,175 | |||||
| Total | $ | 39,195 | $ | 33,826 | |||
Derivative Financial Instruments
On October 17, 2003, the Company entered into interest rate swap agreements relating to $70.0 million principal amount of its 4.75% Convertible Senior Subordinated Debentures due August 15, 2033 (the "Debentures"). The objective of the swaps is to convert the 4.75% fixed interest rate on this portion of the Debentures to a variable interest rate based on the 6-month LIBOR at the end of each interest period plus a spread of 66 basis points. The gain or loss from changes in the fair value of the swaps is expected to offset the gain or loss from the changes in the fair value of the cash flows from the interest payments of 54% of the Debentures throughout the expected life of the
7
Debentures. At September 26, 2004 and December 28, 2003, the fair market value of the interest rate swaps was an asset of $0.8 million and $0.9 million, respectively. The fair value of the interest rate swaps was included in "Other assets" at September 26, 2004 and December 28, 2003 in the accompanying Consolidated Balance Sheets. The Company analyzed ineffectiveness on the swaps as of September 26, 2004 and determined that ineffectiveness was immaterial. This interest rate swaps were designated and qualified as a fair value hedge in accordance with Statement of Financial Accounting Standards No. 133, "Accounting for Derivatives and Hedging Activities" and related interpretations and amendments. The Company has presented the carrying value of the Debentures net of the fair value of the swaps as follows (in thousands):
| |
September 26, 2004 |
December 28, 2003 |
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|---|---|---|---|---|---|---|
| Face value of Debentures | $ | 130,000 | $ | 130,000 | ||
| Fair market value of swaps | 782 | 916 | ||||
| Carrying value of Debentures | $ | 130,782 | $ | 130,916 | ||
Earnings per Share
Basic earnings per share are calculated by dividing net income by the weighted average number of common shares outstanding during the period. The calculation of diluted earnings per share is similar to basic earnings per share, except that net income is adjusted by the after-tax interest expense on the Debentures that are dilutive and the weighted average number of shares includes the dilutive effect of stock options, stock awards, and Debentures. The dilutive effect of the Debentures was included in diluted earnings per share for the three and nine months ended September 26, 2004.
8
The following table sets forth the calculation of basic and diluted earnings per share (in thousands, except per share amounts):
| |
Three Months Ended |
Nine Months Ended |
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|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
Sept. 26, 2004 |
Sept. 28, 2003 |
Sept. 26, 2004 |
Sept. 28, 2003 |
|||||||||||
| Numerator: | |||||||||||||||
| Basic net income from continuing operations | $ | 5,739 | $ | 1,394 | $ | 14,120 | $ | 5,052 | |||||||
| Plus: interest expense on Debentures, net of tax | 807 | — | 2,303 | — | |||||||||||
| Diluted net income from continuing operations, as adjusted | 6,546 | 1,394 | 16,423 | 5,052 | |||||||||||
| Loss from discontinued operations | — | (7,930 | ) | — | (8,435 | ) | |||||||||
| Plus: interest expense on Debentures, net of tax | — | — | — | — | |||||||||||
| Diluted loss from discontinued operations, as adjusted | — | (7,930 | ) | — | (8,435 | ) | |||||||||
| Basic net income (loss) | 5,739 | (6,536 | ) | 14,120 | (3,383 | ) | |||||||||
| Plus: interest expense on Debentures, net of tax | 807 | — | 2,303 | — | |||||||||||
| Diluted net income (loss), as adjusted | $ | 6,546 | $ | (6,536 | ) | $ | 16,423 | $ | (3,383 | ) | |||||
| Denominator: | |||||||||||||||
| Basic earnings (loss) per share—weighted average shares outstanding | 25,034 | 24,567 | 24,943 | 24,502 | |||||||||||
| Effect of dilutive securities: | |||||||||||||||
| Debentures | 8,790 | — | 8,790 | — | |||||||||||
| Stock options | 575 | 470 | |||||||||||||