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, 2008, 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
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 a large accelerated filer,
an accelerated filer a non-accelerated filer, or a smaller reporting company.
See definition of "large accelerated filer", "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer (X) Accelerated filer ( ) Non-accelerated filer ( )
Smaller reporting company ( )
Indicate by check mark whether the Registrant is a shell company (as defined
in Exchange Act Rule 12b-2). ( ) Yes (X) No
At February 5, 2009, 37,489,441 shares of the Company's Common Stock (par
value $.01) were outstanding.
TECHNE CORPORATION
FORM 10-Q
DECEMBER 31, 2008
INDEX
PAGE NO.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (unaudited)
Condensed Consolidated Balance Sheets as of December
31, 2008 and June 30, 2008 3
Condensed Consolidated Statements of Earnings for the
Quarter and Six Months Ended December 31, 2008 and 2007 4
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended December 31, 2008 and 2007 5
Notes to Condensed Consolidated Financial Statements 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 18
ITEN 1A. RISK FACTORS 18
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE
OF PROCEEDS 18
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 18
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
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
(unaudited)
12/31/08 6/30/08
-------- --------
ASSETS
Cash and cash equivalents $119,595 $166,992
Short-term available-for-sale investments 24,366 39,353
Trade accounts receivable, net 24,852 31,747
Other receivables 1,715 1,585
Income taxes receivable 2,986 --
Inventories 9,877 9,515
Deferred income taxes 8,992 8,433
Prepaid expenses 740 808
-------- --------
Total current assets 193,123 258,433
-------- --------
Available-for-sale investments 85,493 87,384
Property and equipment, net 98,352 101,722
Goodwill 25,068 25,068
Intangible assets, net 3,484 3,964
Deferred income taxes 4,270 5,055
Investments in unconsolidated entities 22,864 24,749
Other assets 876 994
-------- --------
$433,530 $507,369
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Trade accounts payable $ 4,041 $ 4,343
Salaries, wages and related accruals 4,076 8,584
Other accounts payable and accrued expenses 2,175 1,768
Income taxes payable 2,744 5,544
-------- --------
Total current liabilities 13,036 20,239
-------- --------
Common stock, par value $.01 per share;
authorized 100,000,000; issued and outstanding
37,487,641 and 38,643,480, respectively 375 386
Additional paid-in capital 117,575 115,408
Retained earnings 323,614 359,208
Accumulated other comprehensive (loss) income (21,070) 12,128
-------- --------
Total stockholders' equity 420,494 487,130
-------- --------
$433,530 $507,369
======== ========
See notes to condensed consolidated financial statements.
3
TECHNE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands, except per share data)
(unaudited)
QUARTER ENDED SIX MONTHS ENDED
------------------ ------------------
12/31/08 12/31/07 12/31/08 12/31/07
-------- -------- -------- --------
Net sales $ 61,876 $ 62,142 $131,200 $120,129
Cost of sales 13,430 12,751 26,516 24,855
-------- -------- -------- --------
Gross margin 48,446 49,391 104,684 95,274
-------- -------- -------- --------
Operating expenses:
Selling, general and administrative 9,703 10,645 18,543 18,735
Research and development 5,846 5,562 11,756 10,743
Amortization of intangible assets 240 282 480 570
-------- -------- -------- --------
Total operating expenses 15,789 16,489 30,779 30,048
-------- -------- -------- --------
Operating income 32,657 32,902 73,905 65,226
-------- -------- -------- --------
Other income (expense):
Interest income 2,205 3,252 5,092 6,250
Other non-operating expense, net (712) (573) (1,899) (1,142)
-------- -------- -------- --------
Total other income 1,493 2,679 3,193 5,108
-------- -------- -------- --------
Earnings before income taxes 34,150 35,581 77,098 70,334
Income taxes 10,528 11,942 24,883 23,623
-------- -------- -------- --------
Net earnings $ 23,622 $ 23,639 $ 52,215 $ 46,711
======== ======== ======== ========
Earnings per share:
Basic $ 0.62 $ 0.60 $ 1.36 $ 1.18
Diluted $ 0.62 $ 0.60 $ 1.36 $ 1.18
Cash dividends per common share $ 0.25 $ -- $ 0.25 $ --
Weighted average common
shares outstanding:
Basic 37,894 39,395 38,259 39,442
Diluted 37,992 39,497 38,370 39,542
See notes to condensed consolidated financial statements.
4
TECHNE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
SIX MONTHS ENDED
-------------------
12/31/08 12/31/07
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 52,215 $ 46,711
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 3,875 3,383
Deferred income taxes (648) (844)
Stock-based compensation expense 1,240 1,586
Excess tax benefit from stock option exercises (72) (400)
Losses by equity method investees 545 493
Other 217 42
Change in operating assets and operating liabilities:
Trade accounts and other receivables 4,011 697
Inventories (1,078) (971)
Prepaid expenses 14 (93)
Trade, other accounts payable and accrued expenses 202 324
Salaries, wages and related accruals (2,696) 561
Income taxes payable/receivable (4,520) 1,172
-------- --------
Net cash provided by operating activities 53,305 52,661
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (2,117) (5,747)
Purchase of available-for-sale investments (40,473) (30,860)
Proceeds from sales of available-for-sale investments 36,439 11,475
Proceeds from maturities of available-for-sale
investments 23,475 6,240
Increase in other assets -- (498)
Increase in investments in unconsolidated entities -- (1,423)
Distribution from unconsolidated entity 1,340 --
-------- --------
Net cash provided by (used in) investing activities 18,664 (20,813)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock 856 2,585
Excess tax benefit from stock option exercises 72 400
Purchase of common stock for stock bonus plans (1,681) (1,494)
Dividends paid (9,507) --
Repurchase and retirement of common stock (78,313) (19,607)
-------- --------
Net cash used in financing activities (88,573) (18,116)
-------- --------
Effect of exchange rate changes on cash (30,793) (560)
-------- --------
Net (decrease) increase in cash and cash equivalents (47,397) 13,172
Cash and cash equivalents at beginning of period 166,992 135,485
-------- --------
Cash and cash equivalents at end of period $119,595 $148,657
======== ========
See notes to condensed consolidated financial statements.
5
TECHNE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
A. BASIS OF PRESENTATION:
The interim unaudited condensed 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 interim unaudited condensed consolidated financial statements
reflect all adjustments which are, in the opinion of management, necessary
for 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 Company's Annual Report on Form 10-K for fiscal 2008. The
Company follows these policies in preparation of the interim unaudited
condensed 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 interim unaudited condensed
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, 2008 included in the Company's Annual Report to
Shareholders for fiscal 2008.
Certain consolidated balance sheet captions appearing in this interim report
are as follows (in thousands):
12/31/08 6/30/08
-------- --------
TRADE ACCOUNTS RECEIVABLE
Trade accounts receivable $ 25,086 $ 31,900
Less allowance for doubtful accounts 234 153
-------- --------
NET TRADE ACCOUNTS RECEIVABLE $ 24,852 $ 31,747
======== ========
INVENTORIES
Raw materials $ 4,483 $ 3,962
Supplies 165 123
Finished goods 5,229 5,430
-------- --------
TOTAL INVENTORIES $ 9,877 $ 9,515
======== ========
PROPERTY AND EQUIPMENT
Land $ 5,235 $ 5,608
Buildings and improvements 114,786 116,107
Laboratory equipment 24,004 22,826
Office equipment 4,906 4,856
-------- --------
148,931 149,397
Less accumulated depreciation and amortization 50,579 47,675
-------- --------
NET PROPERTY AND EQUIPMENT $ 98,352 $101,722
======== ========
INTANGIBLE ASSETS
Customer relationships $ 1,966 $ 1,966
Technology 3,483 3,483
Trade names 1,396 1,396
-------- --------
6,845 6,845
Less accumulated amortization 3,361 2,881
-------- --------
NET INTANGIBLE ASSETS $ 3,484 $ 3,964
======== ========
6
12/31/08 6/30/08
-------- --------
ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME
Foreign currency translation adjustments ($20,908) $ 13,733
Unrealized losses on available-for-sale investments (162) (1,605)
-------- --------
TOTAL ACCUMULATED OTHER COMPREHENSIVE
(LOSS) INCOME ($21,070) $ 12,128
======== ========
B. INVESTMENTS IN AUCTION-RATE SECURITIES:
At June 30, 2008, the Company held $8.7 million par value of investments in
auction-rate securities which were classified as long-term available-for-sale
investments. All of the Company's auction-rate securities were rated A or
above and consisted of specifically identifiable tax-free municipal revenue
bonds where the underlying credit could be specifically evaluated and rated.
At June 30, 2008, the Company determined that several of its investments in
auction-rate securities were temporarily impaired and reduced the value of
its auction-rate investments to $5.8 million. The reduction in value, net of
taxes, was reflected in accumulated other comprehensive income, a component
of stockholders' equity. In September 2008, the Company sold all of its
auction-rate securities at par value.
C. FAIR VALUE MEASUREMENTS:
In September 2006, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 157, "Fair Value
Measurements" ("SFAS 157"). SFAS 157 defines fair value, establishes a
framework for measuring fair value and expands disclosures about fair value
measurements. Effective July 1, 2008, the Company adopted the provisions of
SFAS 157 related to financial assets and liabilities, as well as other assets
and liabilities carried at fair value on a recurring basis. These provisions,
which have been applied prospectively, did not have a material impact on the
Company's consolidated financial statements. Certain other provisions of SFAS
157 related to other nonfinancial assets and liabilities will be effective
for the Company on July 1, 2009, and will be applied prospectively. The
adoption of the provisions of SFAS 157 related to other nonfinancial assets
and liabilities is not expected to have a material impact on the consolidated
financial statements of the Company.
SFAS 157 defines three levels of inputs that may be used to measure fair
value and requires that the assets or liabilities carried at fair value be
disclosed by the input level under which they were valued. The input levels
defined under SFAS 157 are as follows:
Level 1: Quoted market prices in active markets for identical assets
and liabilities.
Level 2: Observable inputs other than defined in Level 1, such as
quoted prices for similar assets or liabilities; quoted prices in
markets that are not active; or other inputs that are observable or can
be corroborated by observable market data for substantially the full
term of the assets or liabilities.
Level 3: Unobservable inputs that are not corroborated by observable
market data.
The following table summarizes financial assets and liabilities that are
measured at fair value on a recurring basis as of December 31, 2008 (in
thousands):
Level 1
---------
Available-for-sale securities $109,859
7
D. EARNINGS PER SHARE:
Shares used in the earnings per share computations are as follows (in
thousands):
QUARTER ENDED SIX MONTHS ENDED
------------------ ------------------
12/31/08 12/31/07 12/31/08 12/31/07
-------- -------- -------- --------
Weighted average common shares
outstanding-basic 37,894 39,395 38,259 39,442
Dilutive effect of stock options
and warrants 98 102 111 100
-------- -------- -------- --------
Weighted average common shares
outstanding-diluted 37,992 39,497 38,370 39,542
======== ======== ======== ========.
The dilutive effect of stock options and warrants in the above table excludes
all options for which the aggregate exercise proceeds exceeded the average
market price for the period. The number of potentially dilutive option
shares excluded from the calculation was 61,000 and 37,000 for the quarter
and six months ended December 31, 2008, respectively, and 41,000 for both the
quarter and six months ended December 31, 2007.
E. SEGMENT INFORMATION:
The Company has three reportable operating segments based on the nature of
products and geographic location: biotechnology, R&D Systems Europe Ltd. (R&D
Europe), and hematology. The biotechnology segment consists of R&D Systems,
Inc. (R&D Systems) Biotechnology Division, BiosPacific, Inc. (BiosPacific)
and R&D Systems China Co. Ltd. (R&D China), which develop, manufacture and
sell biotechnology research and diagnostic products world-wide. R&D Europe
distributes Biotechnology Division products throughout Europe. The hematology
segment develops and manufactures hematology controls and calibrators for
sale world-wide.
Following is financial information relating to the Company's operating
segments (in thousands):
QUARTER ENDED SIX MONTHS ENDED
------------------ ------------------
12/31/08 12/31/07 12/31/08 12/31/07
-------- -------- -------- --------
External sales
Biotechnology $ 40,332 $ 39,143 $ 86,469 $ 78,024
R&D Europe 17,284 19,027 36,225 34,476
Hematology 4,260 3,972 8,506 7,629
-------- -------- -------- --------
Total consolidated net sales $ 61,876 $ 62,142 $131,200 $120,129
======== ======== ======== ========
Earnings before income taxes
Biotechnology $ 27,249 $ 27,074 $ 60,588 $ 54,441
R&D Europe 7,817 9,876 17,539 17,628
Hematology 1,345 1,140 2,695 2,010
Corporate and equity method
investees (2,261) (2,509) (3,724) (3,745)
-------- -------- -------- --------
Total earnings before income taxes $ 34,150 $ 35,581 $ 77,098 $ 70,334
======== ======== ======== ========
8
F. STOCK OPTIONS:
Option activity under the Company's stock option plans during the six months
ended December 31, 2008 was as follows:
WEIGHTED WEIGHTED
AVG. AVG. AGGREGATE
SHARES EXERCISE CONTRACTUAL INTRINSIC
(in 000's) PRICE LIFE (Yrs.) VALUE
---------- -------- ----------- ---------
Outstanding at June 30, 2008 372 $47.36
Granted 37 $66.16
Exercised (18) $48.64
Forfeited or expired -- --
----
Outstanding at December 31, 2008 391 $49.07 5.08 $6.2 million
====
Exercisable at December 31, 2008 362 $48.23 5.08 $6.0 million
====
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
------------------ ------------------
12/31/08 12/31/07 12/31/08 12/31/07
-------- -------- -------- --------
Dividend yield -- -- -- --
Expected annualized volatility 37% 46% 24%-37% 24%-46%
Risk free interest rate 3.2% 4.2% 3.2%-3.5% 4.2%-4.6%
Expected life 8 years 8 years 8 years 7 years
Weighted average fair value of
options granted $30.70 $37.12 $30.26 $35.75
The Company declared and paid its first ever dividend during the quarter
ended December 31, 2008. As the Company had not established a practice of
paying dividends, an expected dividend yield of zero was used to estimate the
fair value of options granted. This assumption may be subject to change for
valuing future option grants if the Company continues to pay dividends. The
expected annualized volatility is based on the Company's historical stock
price over a period equivalent to the expected life of the option granted.
The risk-free interest rate is based on U.S. Treasury constant maturity
interest rate with a term consistent with the expected life of the options
granted. Separate groups of employees that have similar historical exercise
behavior with regard to option exercise timing and forfeiture rates are
considered separately in determining option fair value.
The total intrinsic value of options exercised during the quarter and six
months ended December 31, 2008 was $22,000 and $552,000, respectively. The
total intrinsic value of options exercised during the quarter and six months
ended December 31, 2007 was $107,000 and $2.0 million, respectively. Stock
option exercises were satisfied through the issuance of new shares. The
total fair value of options vested during both the quarter and six months
ended December 31, 2008 was $1.1 million. The total fair value of options
vested during both the quarter and six months ended December 31, 2007 was
$1.5 million.
Stock-based compensation cost of $1.1 million and $1.2 million was included
in selling, general and administrative expense for the quarter and six months
ended December 31, 2008, respectively. Stock-based compensation cost of $1.4
million and $1.6 million was included in selling, general and administrative
expense for the quarter and six months ended December 31, 2007, respectively.
Compensation cost is recognized using a straight-line method over the vesting
period and is net of estimated forfeitures. Options granted in the quarters
ended December 31, 2008 and 2007 were fully vested at the time of grant. As
of December 31, 2008, there was $310,000 of total unrecognized compensation
cost related to non-vested stock options that will be expensed in fiscal
years 2009 and 2010.
9
G. COMPREHENSIVE INCOME:
Comprehensive income and the components of other comprehensive income were as
follows (in thousands):
QUARTER ENDED SIX MONTHS ENDED
------------------ ------------------
12/31/08 12/31/07 12/31/08 12/31/07
-------- -------- -------- --------
Net earnings $ 23,622 $ 23,639 $ 52,215 $ 46,711
Other comprehensive income:
Foreign currency translation
adjustments (20,510) (2,906) (34,641) (689)
Unrealized (loss) gain on
available-for-sale investments,
net of tax (19) 256 1,443 661
-------- -------- -------- --------
Comprehensive income $ 3,093 $ 20,989 $ 19,017 $ 46,683
======== ======== ======== ========
H. DIVIDEND
On October 23, 2008, the Company announced the payment of a $0.25 per share
cash dividend. The dividend of $9.5 million was paid November 17, 2008 to
all common shareholders of record on November 3, 2008.
I. SUBSEQUENT EVENT
On February 3, 2009, the Company announced the payment of a $0.25 per share
cash dividend. The dividend of approximately $9.4 million will be payable
February 27, 2009 to all common shareholders of record on February 13, 2009.
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, 2008 and 2007
Overview
TECHNE Corporation and Subsidiaries (the Company) are engaged in the
development, manufacture and sale of biotechnology products and hematology
calibrators and controls. These activities are conducted domestically through
its wholly-owned subsidiaries, Research and Diagnostic Systems, Inc (R&D
Systems) and BiosPacific, Inc. (BiosPacific). The Company distributes
biotechnology products in Europe through its wholly-owned U.K. subsidiary,
R&D Systems Europe Ltd. (R&D Europe). R&D Europe has a sales subsidiary, R&D
Systems GmbH, in Germany and a sales office in France. The Company
distributes biotechnology products in China through its wholly-owned
subsidiary, R&D Systems China, Co. Ltd. (R&D China).
The Company has three reportable operating segments based on the nature of
products and geographic location: biotechnology, R&D Europe and hematology.
The biotechnology segment consists of R&D Systems' Biotechnology Division,
BiosPacific and R&D China, which develop, manufacture and sell biotechnology
research and diagnostic products world-wide. R&D Europe distributes
Biotechnology Division products throughout Europe. The hematology segment
develops and manufactures hematology controls and calibrators for sale world-
wide.
10
Overall Results
Consolidated net sales and net earnings for the quarter ended December 31,
2008 were comparable to the quarter ended December 31, 2007. Consolidated
net sales and net earnings for the six months ended December 31, 2008
increased 9.2% and 11.8%, respectively, compared to the six months ended
December 31, 2007. Consolidated net sales and net earnings were unfavorably
affected by the strengthening of the U.S. dollar as compared to foreign
currencies in the second quarter of fiscal 2009. The unfavorable impact on
consolidated net sales of the change from the prior year in exchange rates
used to convert sales in foreign currencies (primarily British pounds
sterling and Euros) into U.S. dollars was $3.4 million and $2.7 million for
the quarter and six months ended December 31, 2008, respectively. The
unfavorable impact on consolidated net earnings of the change from the prior
year in exchange rates (primarily British pounds sterling) used to convert
foreign currency financial statements to U.S. dollars was $1.5 million and
$1.8 million for the quarter and six months ended December 31, 2008,
respectively. In the first six months of fiscal 2009, the Company generated
cash of $53.3 million from operating activities, paid cash of $78.3 million
for the repurchase and retirement of common stock, paid cash dividends of
$9.5 million and had cash, cash equivalents and available-for-sale
investments of $229 million at December 31, 2008 compared to $294 million at
June 30, 2008.
Net Sales
Consolidated net sales for the quarter and six months ended December 31, 2008
were $61.9 million and $131.2 million, respectively, a decrease of $266,000
(0.4%) and an increase of $11.1 million (9.2%), respectively, from the
quarter and six months ended December 31, 2007. Excluding the effect of
changes in foreign currency exchange rates, consolidated net sales increased
5.0% and 11.5% for the quarter and six months ended December 31, 2008,
respectively, from the comparable prior-year periods. Included in
consolidated net sales for the quarter and six months ended December 31, 2008
was $645,000 and $910,000, respectively, of sales of new biotechnology
products which had their first sale in fiscal 2009.
Biotechnology net sales increased $1.2 million (3.0%) and $8.4 million
(10.8%), respectively, for the quarter and six months ended December 31,
2008, primarily from increased sales volume. North American sales to
industrial and academic customers grew less than 2.0% during the second
quarter of fiscal 2009. The Company attributes the lower second quarter
sales growth rate to customer caution in a time of economic uncertainty.
R&D Europe net sales decreased $1.7 million (9.2%) for the quarter and
increased $1.7 million (5.1%) for the six months ended December 31, 2008,
respectively, from the comparable prior-year periods. R&D Europe's net sales
increased 8.6% and 13.0%, respectively, for the quarter and six months ended
December 31, 2008, when measured at currency rates in effect in the
comparable prior-year period, mainly as a result of increased sales volume.
Approximately 75% of R&D Europe sales are in non-British pound sterling
currencies (mainly Euro) which had a favorable impact on consolidated net
sales of approximately $2.2 million and $4.6 million, respectively, in the
quarter and six months ended December 31, 2008 as a result of the change in
exchange rates used to convert sales in other currencies to British pounds
sterling. This favorable impact was offset by an unfavorable impact on
consolidated net sales of approximately $5.6 million and $7.3 million for the
quarter and six months ended December 31, 2008, respectively, as a result of
the change in exchange rates used to convert British pound sterling to U.S.
dollars.
Hematology sales increased $288,000 (7.2%) and $877,000 (11.5%) for the
quarter and six months ended December 31, 2008, respectively, compared to the
same prior-year periods, as a result of increased sales volume.
11
The Company has long-term targeted annual sales growth goals for each of its
business segments. The targeted sales growth goals, which are based on
historical sales growth, are 10%-12% for biotechnology, 7%-9% for R&D Europe
(in constant currency) and 1%-2% for hematology. Based on the relative size
of each segment, the consolidated targeted annual growth goal is 8%-10%,
excluding the effect of changes in exchange rates. The Company believes that
these are reasonable long-term goals, however, the Company recognizes that
actual results may vary in given quarters and periods due to general economic
conditions and other factors including those identified in the Forward
Looking and Cautionary Statements section below.
Gross Margins
Gross margins, as a percentage of net sales, were as follows:
QUARTER ENDED SIX MONTHS ENDED
------------------ ------------------
12/31/08 12/31/07 12/31/08 12/31/07
-------- -------- -------- --------
Biotechnology 77.2% 79.4% 79.2% 79.8%
R&D Europe 52.1% 56.4% 55.3% 55.6%
Hematology 43.5% 42.7% 43.9% 40.5%
Consolidated gross margin 78.3% 79.5% 79.8% 79.3%
Consolidated gross margins, as a percentage of consolidated net sales,
decreased from 79.5% for the quarter ended December 31, 2007 to 78.3% for the
quarter ended December 31, 2008. This decrease was primarily caused by lower
gross margins in Europe resulting from unfavorable exchange rates.
Consolidated gross margins, as a percentage of consolidated net sales
increased slightly from 79.3% for the six months ended December 31, 2007 to
79.8% for the six months ended December 31, 2008.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were composed of the following
(in thousands):
QUARTER ENDED SIX MONTHS ENDED
------------------ ------------------
12/31/08 12/31/07 12/31/08 12/31/07
-------- -------- -------- --------
Biotechnology $ 5,418 $ 5,534 $ 10,559 $ 10,158
R&D Europe 2,094 2,599 4,377 4,861
Hematology 398 487 834 954
Corporate 1,793 2,025 2,773 2,762
-------- -------- -------- --------
Total selling, general and
administrative expenses $ 9,703 $ 10,645 $ 18,543 $ 18,735
======== ======== ======== ========
Selling, general and administrative expenses for the quarter and six months
ended December 31, 2008 decreased $942,000 (8.9%) and $192,000 (1.0%),
respectively, from the same prior-year periods. The decrease in selling,
general and administrative expenses from the comparable prior-year periods
were the result of the following (in thousands):
QUARTER SIX MONTHS
------- ----------
Change in exchange rates to convert
foreign expenses to U.S. dollars ($ 685) ($ 887)
Reduction in profit sharing expense (670) (617)
Other, including annual wage, salary
and benefits increases 413 1,312
------- -------
($ 942) ($ 192)
======= =======
12
Research and Development Expenses
Research and development expenses were composed of the following (in
thousands):
QUARTER ENDED SIX MONTHS ENDED
------------------ ------------------
12/31/08 12/31/07 12/31/08 12/31/07
-------- -------- -------- --------
Biotechnology $ 5,643 $ 5,368 $ 11,360 $ 10,370
Hematology 203 194 396 373
-------- -------- -------- --------
Total research and development
expenses $ 5,846 $ 5,562 $ 11,756 $ 10,743
======== ======== ======== ========
The increase in Biotechnology research and development expenses was primarily
due to additional research personnel added during fiscal 2008 and annual wage
and salary increases from the comparable prior-year period.
Interest Income
Interest income decreased $1.0 million and $1.2 million for the quarter and
six months ended December 31, 2008, respectively, from the comparable prior-
year periods, primarily as a result of lower rates of return on cash and
available-for-sale investments and to a lesser extent to lower cash and
available-for-sale investment balances.
Other Non-operating Expense and Income
Other non-operating expense and income consists mainly of foreign currency
transaction gains and losses, rental income, building expenses related to
rental property, and the Company's share of losses by equity method
investees.
QUARTER ENDED SIX MONTHS ENDED
------------------ ------------------
12/31/08 12/31/07 12/31/08 12/31/07
-------- -------- -------- --------
Foreign currency (losses) gains ($ 6) $ 153 ($ 480) $ 317
Rental income 131 111 230 178
Real estate taxes, depreciation
and utilities (551) (600) (1,104) (1,144)
Losses by equity method investees (286) (237) (545) (493)
-------- -------- -------- --------
Total other non-operating expense ($ 712)($ 573)($ 1,899)($ 1,142)
======== ======== ======== ========
Income Taxes
Income taxes for the quarter and six months ended December 31, 2008 were
provided at rates of 30.8% and 32.3%, respectively, of consolidated earnings
before income taxes, compared to 33.6% of consolidated earnings before income
taxes for both the quarter and six months ended December 31, 2007. Income tax
expense in the second quarter of fiscal 2009 benefited from the renewal of
the U.S. research and development credit. The $695,000 credit for the
quarter ended December 31, 2008, included credit for the January to June 2008
period in addition to a credit for the current-year six month period.
Foreign income taxes have been provided at rates that approximate the tax
rates in the countries in which R&D Europe and R&D China operate. Without
other significant business developments, the Company expects its fiscal 2009
effective income tax rate to range from approximately 32.5% to 33.5%.
13
Liquidity and Capital Resources
At December 31, 2008, cash and cash equivalents and available-for-sale
investments were $229 million compared to $294 million at June 30, 2008.
Cash and cash equivalents at December 31, 2008 and June 30, 2008 included
$98.3 million (67.4 million British pounds sterling) and $116.6 million (58.5
million British pound sterling), respectively, at R&D Europe. 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 or sales of 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 $53.3 million from operating activities in the
first six months of fiscal 2009 compared to $52.7 million in the first six
months of fiscal 2008. The increase from the prior year was primarily due to
an increase in consolidated net earnings in the current year of $5.5 million
offset by decreases in salary, wages and other accruals and income taxes
payable.
Cash Flows From Investing Activities
Capital expenditures for fixed assets for the first six months of fiscal 2009
and fiscal 2008 were $2.1 million and $5.7 million, respectively. The
capital additions in the first six months of fiscal 2009 were mainly for
laboratory and computer equipment. Included in capital expenditures for the
first six months of fiscal 2008 was $4.3 million for building renovation and
construction. The remaining capital additions in the first six months of
fiscal 2008 were for laboratory and computer equipment. Capital expenditures
in the remainder of fiscal 2009 are expected to be approximately $4.5 million
and are expected to be financed through currently available funds and cash
generated from operating activities.
During the six months ended December 31, 2008, the Company purchased $40.5
million and had sales or maturities of $59.9 million of available-for-sale
investments. During the six months ended December 31, 2007, the Company
purchased $30.9 million and had sales or maturities of $17.7 million of
available-for-sale investment. 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
while minimizing risk and keeping the funds accessible.
During the six months ended December 31, 2008, the Company received a $1.3
million distribution from its investment in Nephromics, LLC (Nephromics).
The Company accounts for its investment in Nephromics under the equity method
of accounting as Nephromics is a limited liability company. At December 31,
2008, the Company's net investment in Nephromics was $4.7 million.
During the six months ended December 31, 2007, the Company invested $1.4
million for a 19% interest in ACTGen, Inc., a development stage biotechnology
company located in Japan.
Cash Flows From Financing Activities
Cash of $856,000 and $2.6 million was received during the six months ended
December 31, 2008 and 2007, respectively, from the exercise of stock options.
The Company also recognized excess tax benefits from stock option exercises
of $72,000 and $400,000 for the six months ended December 31, 2008 and 2007,
respectively.
During the first six months of fiscal 2009 and 2008, the Company purchased
22,637 and 23,641 shares of common stock, respectively, for its employee
stock bonus plans at a cost of $1.7 million and $1.5 million, respectively.
14
During the first six months of fiscal 2009, the Company purchased and retired
approximately 1.2 million shares of common stock at a market value of $78.3
million. During the first six months of fiscal 2008, the Company purchased
and retired approximately 321,000 shares of common stock at a market value of
$20.6 million of which $19.6 million was disbursed prior to December 31,
2007.
On October 23, 2008, the Company announced the payment of a $0.25 per share
cash dividend. The dividend of $9.5 million was paid November 17, 2008 to
all common shareholders of record on November 3, 2008. On February 3, 2009,
the Company announced the payment of a $0.25 per share cash dividend. The
dividend of approximately $9.4 million will be payable February 27, 2009 to
all common shareholders of record on February 13, 2009.
Contractual Obligations
There were no material changes outside the ordinary course of business in the
Company's contractual obligations during the six months ended December 31,
2008.
Critical Accounting Policies
The Company's significant accounting policies are discussed in the Company's
Annual Report on Form 10-K for fiscal 2008. The application of certain of
these policies require judgments and estimates that can affect the results of
operations and financial position of the Company. Judgments and estimates
are used for, but not limited to, valuation of available-for-sale
investments, inventory valuation and allowances, impairment of goodwill,
intangibles and other long-lived assets and valuation of investments in
unconsolidated entities. There have been no significant changes in estimates
in fiscal 2009 which would require disclosure. There have been no changes to
the Company's policies in fiscal 2009.
Recent Accounting Pronouncements
In February 2008, the FASB amended SFAS 157 to defer the effective date of
SFAS 157 for all nonfinancial assets and liabilities that are not remeasured
at fair value on a recurring basis. As disclosed in Note C to the Condensed
Consolidated Financial Statements included in this Form 10-Q, the Company
partially adopted the provisions of SFAS 157 effective in the first quarter
of fiscal 2009. The Company expects to adopt the remaining provisions of SFAS
157 beginning in the first quarter of fiscal 2010. The adoption of the
provisions of SFAS 157 related to other nonfinancial assets and liabilities
is not expected to have a material impact on the consolidated financial
statements.
In December 2007, the FASB issued SFAS No. 141R, Business Combinations, which
replaces SFAS No. 141. The statement retains the purchase method of
accounting for acquisitions, but requires a number of changes, including
changes in the way assets and liabilities are recognized in purchase
accounting. It also changes the recognition of assets acquired and
liabilities assumed arising from contingencies, requires the capitalization
of in-process research and development at fair value, and requires the
expensing of acquisition-related costs as incurred. SFAS No. 141R must be
applied to business combinations consummated by the Company subsequent to
December 15, 2008.
15
Forward Looking Information and Cautionary Statements
This quarterly report contains forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995. Forward-looking
statements include those regarding the Company's expectations as to target
sales growth goals, the effective tax rate, the amount of capital
expenditures for the remainder of the fiscal year and the sufficiency of
currently available funds for meeting the Company's needs. These statements
involve risks and uncertainties that 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, general economic conditions, the retention of
hematology OEM (private label) and proficiency survey business, the impact of
currency exchange rate fluctuations, 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, the
impact of governmental regulation and intellectual property litigation, the
recruitment and retention of qualified personnel, the success of our
expansion into China and the success of financing efforts by companies in
which the Company has invested. For additional information concerning such
factors, see the Company's Annual Report on Form 10-K for fiscal 2008 as
filed with the Securities and Exchange Commission.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At December 31, 2008, the Company had an investment portfolio of fixed income
securities, excluding those classified as cash and cash equivalents, of $110
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
(approximately 19% of consolidated net sales), the British pound sterling
(approximately 8% of consolidated net sales) and the Chinese yuan
(approximately 2% of consolidated net sales) to the U.S. dollar as the
financial position and operating results of the Company's foreign 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 $2.5 million effect on consolidated operating income
annually.
Month-end average exchange rates between the British pound sterling, euro and
Chinese yuan and the U.S. dollar were a follows:
QUARTER ENDED SIX MONTHS ENDED
------------------ ------------------
12/31/08 12/31/07 12/31/08 12/31/07
-------- -------- -------- --------
British pound sterling $ 1.54 $ 2.04 $ 1.70 $ 2.04
Euro 1.31 1.46 1.40 1.42
Chinese yuan .146 .135 .146 .134
16
The Company's exposure to foreign exchange rate fluctuations also arises from
trade receivables and intercompany payables denominated in one currency in
the financial statements, but receivable or payable in another currency. At
December 31, 2008, the Company had the following trade receivable and
intercompany payables denominated in one currency but receivable or payable
in another currency (in thousands):
DENOMINATED U.S. DOLLAR
CURRENCY EQUIVALENT
----------- -----------
Accounts Receivable in:
Euros 1,007 Br. pound $ 1,470
Other European currencies 507 Br. pound $ 740
Intercompany Payable in:
Euros 162 Br. pound $ 237
U.S. dollars 2,918 Br. pound $ 4,258
U.S. dollars 3,361 Chinese yuan $ 492
All of the above balances are revolving in nature and are not deemed to be
long-term balances.
The Company's subsidiaries recognized net foreign currency gains and (losses)
as follows (in thousands):
QUARTER ENDED SIX MONTHS ENDED
------------------ ------------------
12/31/08 12/31/07 12/31/08 12/31/07
-------- -------- -------- --------
In foreign currency:
R&D Europe (Br. pound) 35 81 (225) 177
R&D China (Chinese yuan) (10) (90) 7 (345)
In U.S. Dollars:
R&D Europe ($ 5) $ 165 ($ 481) $ 363
R&D China (1) (12) 1 (46)
-------- -------- -------- --------
($ 6) $ 153 ($ 480) $ 317
======== ======== ======== ========
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.
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 as amended (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 material 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.
17
PART II. OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
The Company is not engaged in any ongoing pending legal proceedings that the
Company believes is material to its operations.
ITEM 1A. - RISK FACTORS
There have been no material changes from the risk factors previously
disclosed in Part I, Item 1A, "Risk Factors," of the Company's Annual Report
on Form 10-K for the year ended June 30, 2008.
ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table sets forth the repurchases of Company common stock for
the quarter ended December 31, 2008:
Maximum
Approximate
Total Number of Dollar Value of
Total Shares Purchased Shares that May
Number Average as Part of Yet Be Purchased
of Shares Price Paid Publicly Announced Under the Plans
Period Purchased Per Share Plans or Programs or Programs
---------------- --------- ---------- ------------------ ----------------
10/1/08-10/31/08 415,380 $67.01 415,380 $54.7 million
11/1/08-11/30/08 272,499 $64.33 272,499 $37.2 million
12/1/08-12/31/08 271,811 $63.80 271,811 $19.8 million
In November 2007, the Company authorized a plan for the repurchase and
retirement of $150 million of its common stock. The plan does not have an
expiration date.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 - SUBMISSION OF MATTERS TO VOTE OF SHAREHOLDERS
Information relating to the Company's Annual Meeting of Shareholders, held on
October 23, 2008 is contained in the Company's Form 10-Q for the quarter
ended September 30, 2008, which is incorporated herein by reference.
ITEM 5 - OTHER INFORMATION
None.
ITEM 6 - EXHIBITS
See "exhibit index" following the signature page.
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 6, 2009 /s/ Thomas E. Oland
----------------------------------
President, Chief Executive Officer
February 6, 2009 /s/ Gregory J. 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
-------------------
*Filed herewith