SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2007, 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 41-427402
(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, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the
Securities Exchange Act.
Large accelerated filer (X) Accelerated filer ( ) Non-accelerated filer ( )
Indicate by check mark whether the Registrant is a shell company (as defined
in Exchange Act Rule 12b-2). ( ) Yes (X) No
At November 5, 2007, 39,511,745 shares of the Company's Common Stock (par
value $.01) were outstanding.
TECHNE CORPORATION
FORM 10-Q
SEPTEMBER 30, 2007
INDEX
PAGE NO.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (unaudited)
Condensed Consolidated Balance Sheets as of
September 30, 2007 and June 30, 2007 3
Condensed Consolidated Statements of Earnings for
the Quarter Ended September 30, 2007 and 2006 4
Condensed Consolidated Statements of Cash Flows
for the Quarter Ended September 30, 2007 and 2006 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 15
ITEM 4. CONTROLS AND PROCEDURES 16
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 16
ITEN 1A. RISK FACTORS 16
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND
USE OF PROCEEDS 16
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS 17
ITEM 5. OTHER INFORMATION 17
ITEM 6. EXHIBITS 17
SIGNATURES 18
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)
9/30/07 6/30/07
-------- --------
ASSETS
Cash and cash equivalents $144,745 $135,485
Short-term available-for-sale investments 36,249 29,289
Trade accounts receivable, net 30,673 29,559
Other receivables 1,362 1,407
Inventories 9,281 8,757
Deferred income taxes 7,746 7,446
Prepaid expenses 1,153 895
-------- --------
Total current assets 231,209 212,838
Available-for-sale investments 97,851 91,433
Property and equipment, net 93,385 91,535
Goodwill, net 25,068 25,068
Intangible assets, net 4,811 5,099
Deferred income taxes 4,257 4,362
Investments in unconsolidated entities 23,909 24,165
Other assets 566 344
-------- --------
$481,056 $454,844
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Trade accounts payable $ 5,447 $ 5,098
Salaries, wages and related accruals 3,397 6,013
Other accounts payable and accrued expenses 1,932 1,836
Income taxes payable 4,024 4,246
-------- --------
Total current liabilities 14,800 17,193
-------- --------
Common stock, par value $.01 per share;
authorized 100,000,000; issued and
outstanding 39,524,378 and 39,455,677,
respectively 395 395
Additional paid-in capital 112,904 109,993
Retained earnings 337,411 314,339
Accumulated other comprehensive income 15,546 12,924
-------- --------
Total stockholders' equity 466,256 437,651
-------- --------
$481,056 $454,844
======== ========
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
-------------------
9/30/07 9/30/06
-------- --------
Net sales $ 57,987 $ 52,351
Cost of sales 12,104 11,237
-------- --------
Gross margin 45,883 41,114
-------- --------
Operating expenses:
Selling, general and administrative 8,090 7,067
Research and development 5,181 4,855
Amortization of intangible assets 288 403
-------- --------
Total operating expenses 13,559 12,325
-------- --------
Operating income 32,324 28,789
-------- --------
Other expense (income):
Interest expense -- 268
Interest income (2,998) (1,676)
Other non-operating expense, net 569 485
-------- --------
Total other income (2,429) (923)
-------- --------
Earnings before income taxes 34,753 29,712
Income taxes 11,681 10,081
-------- --------
Net earnings $ 23,072 $ 19,631
======== ========
Earnings per share:
Basic $ 0.58 $ 0.50
Diluted $ 0.58 $ 0.50
Weighted average common shares outstanding:
Basic 39,489 39,379
Diluted 39,587 39,469
See notes to condensed consolidated financial statements.
4
TECHNE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
THREE MONTHS ENDED
-------------------
9/30/07 9/30/06
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 23,072 $ 19,631
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 1,692 1,665
Deferred income taxes (192) (95)
Stock-based compensation expense 170 165
Excess tax benefit from stock option exercises (328) (24)
Losses by equity method investees 257 127
Other 19 2
Change in operating assets and operating
liabilities, net of acquisitions:
Trade accounts and other receivables (670) (443)
Inventories (490) (132)
Prepaid expenses (250) (94)
Trade, other accounts payable and accrued expenses 397 88
Salaries, wages and related accruals (1,139) (1,019)
Income taxes payable 99 (484)
-------- --------
Net cash provided by operating activities 22,637 19,387
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (3,230) (1,899)
Purchase of available-for-sale investments (19,190) (4,275)
Proceeds from sales of available-for-sale investments 1,235 1,234
Proceeds from maturities of available-for-sale
investments 4,900 1,320
Increase in other assets (243) --
Increase in investments in unconsolidated entities -- (7,200)
-------- --------
Net cash used in investing activities (16,528) (10,820)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock 2,319 146
Excess tax benefit from stock option exercises 328 24
Purchase of common stock for stock bonus plans (1,494) (1,222)
Payments on long-term debt -- (292)
-------- --------
Net cash provided (used) by financing activities 1,153 (1,344)
-------- --------
Effect of exchange rate changes on cash 1,998 970
-------- --------
Net increase in cash and cash equivalents 9,260 8,193
Cash and cash equivalents at beginning of period 135,485 89,634
-------- --------
Cash and cash equivalents at end of period $144,745 $ 97,827
======== ========
See notes to condensed consolidated financial statements.
5
TECHNE CORPORATION & SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
A. BASIS OF PRESENTATION:
The 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 unaudited condensed 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 Company's Annual Report on Form 10-K for fiscal 2007. 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 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, 2007 included in the Company's Annual Report to Shareholders for
fiscal 2007.
Recent Accounting Pronouncements:
In June 2006, the FASB issued Interpretation No. 48 (FIN 48), Accounting for
Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109.
Effective July 1, 2007, the Company adopted FIN 48. FIN 48 requires that a
position taken or expected to be taken in a tax return be recognized in the
financial statements when it is more likely than not that the position would
be sustained upon examination by tax authorities. A recognized tax position
is then measured at the largest amount of benefit that is greater than fifty
percent likely of being realized upon ultimate settlement. Adoption of FIN 48
did not materially impact the consolidated financials statements for the
quarter ended September 30, 2007.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. The
Statement establishes a single authoritative definition of fair value, sets
out a framework for measuring fair value, and requires additional disclosures
about fair value measurements. SFAS No. 157 applies only to fair value
measurements that are already required or permitted by other accounting
standards and is effective for the Company in fiscal 2009. The Company is
currently evaluating the impact of adopting SFAS No. 157.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities. The Statement permits entities to
choose to measure certain financial instruments at fair value. Unrealized
gains and losses on items for which the fair value option has been elected
are reported in earnings at each subsequent reporting date. SFAS No. 159 is
effective for the Company in fiscal 2009. The Company is currently evaluating
the impact of adopting SFAS No. 159.
6
Certain consolidated balance sheet captions appearing in this interim report
are as follows (in thousands):
9/30/07 6/30/07
-------- --------
TRADE ACCOUNTS RECEIVABLE
Trade accounts receivable $ 30,817 $ 29,700
Less allowance for doubtful accounts 144 141
-------- --------
NET TRADE ACCOUNTS RECEIVABLE $ 30,673 $ 29,559
======== ========
INVENTORIES
Raw materials $ 3,712 $ 3,821
Supplies 108 125
Finished goods 5,461 4,811
-------- --------
TOTAL INVENTORIES $ 9,281 $ 8,757
======== ========
PROPERTY AND EQUIPMENT
Land $ 4,214 $ 4,214
Buildings and improvements 100,946 100,617
Building construction in progress 5,660 3,205
Laboratory equipment 20,950 20,657
Office equipment 4,580 4,407
Leasehold improvements 978 975
-------- --------
137,328 134,075
Less accumulated depreciation and amortization 43,943 42,540
-------- --------
NET PROPERTY AND EQUIPMENT $ 93,385 $ 91,535
======== ========
INTANGIBLE ASSETS
Customer relationships $ 20,200 $ 20,200
Technology 4,213 4,213
Trade names and trademarks 1,396 1,396
Supplier relationships 14 14
-------- --------
25,823 25,823
Less accumulated amortization 21,012 20,724
-------- --------
NET INTANGIBLE ASSETS $ 4,811 $ 5,099
======== ========
ACCUMULATED OTHER COMPREHENSIVE INCOME:
Foreign currency translation adjustments $ 15,617 $ 13,400
Unrealized losses on available-for-sale investments (71) (476)
-------- --------
TOTAL ACCUMULATED OTHER COMPREHENSIVE INCOME $ 15,546 $ 12,924
======== ========
B. EARNINGS PER SHARE:
Shares used in the earnings per share computations are as follows (in
thousands):
QUARTER ENDED
-------------------
9/30/07 9/30/06
-------- --------
Weighted average common shares outstanding-basic 39,489 39,379
Dilutive effect of stock options and warrants 98 90
-------- --------
Weighted average common shares outstanding-diluted 39,587 39,469
======== ========
7
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 46,000 and 37,000 for the quarters
ended September 30, 2007, and 2006, respectively.
C. SEGMENT INFORMATION:
The Company has three reportable operating segments based on the nature of
products and geographic location: biotechnology, R&D Systems Europe and
hematology. The biotechnology segment consists of R&D Systems' Biotechnology
Division, Fortron (through June 30, 2007 when it was merged into R&D Systems'
Biotechnology Division), BiosPacific and R&D China, which develop,
manufacture and sell biotechnology research and diagnostic products world-
wide. R&D Systems 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
-------------------
9/30/07 9/30/06
-------- --------
External sales
Biotechnology $ 38,881 $ 35,922
R&D Systems Europe 15,449 12,927
Hematology 3,657 3,502
-------- --------
Total consolidated net sales $ 57,987 $ 52,351
======== ========
Earnings before income taxes
Biotechnology $ 27,367 $ 24,468
R&D Systems Europe 7,752 5,350
Hematology 870 907
Corporate and equity method investees (1,236) (1,013)
-------- --------
Total earnings before income taxes $ 34,753 $ 29,712
======== ========
D. STOCK OPTIONS:
Option activity under the Company's stock option plans during the three
months ended September 30, 2007 was as follows:
WEIGHTED WEIGHTED
AVG. AVG AGGREGATE
SHARES EXERCISE CONTRACTUAL INTRINSIC
(in 000's) PRICE LIFE (Yrs.) VALUE
---------- -------- ----------- ------------
Outstanding at June 30, 2007 423 $43.29
Granted 3 56.83
Exercised (70) 34.01
Forfeited or expired (1) 36.50
----
Outstanding at September
30, 2007 355 $45.23 5.50 $6.3 million
====
Exercisable at September
30, 2007 297 $43.08 5.25 $5.9 million
====
8
The fair value of options granted under the Company's stock option plans were
estimated on the date of grant using the Black-Scholes option-pricing model
with the following assumptions used:
QUARTER ENDED
-------------------
9/30/07 9/30/06
-------- --------
Dividend yield -- --
Expected annualized volatility 24%-30% 31%-35%
Risk free interest rate 4.5%-4.6% 4.9%-5.1%
Expected life 4-5 years 4-5 years
Weighted average fair value of options granted $18.37 $18.29
The Company has not paid cash dividends and does not have any plans to do so,
therefore an expected dividend yield of zero was used to estimate fair value
of options granted. 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 quarters ended
September 30, 2007 and 2006 were $1.9 million and $55,000, respectively.
Stock option exercises are satisfied through the issuance of new shares. The
total fair value of options vested during the quarters ended September 30,
2007 and 2006 were $51,000 and $57,000, respectively.
Stock-based compensation cost of $170,000 and $165,000 was included in
selling, general and administrative expense for the quarters ended September
30, 2007 and 2006, respectively. Compensation cost is recognized using a
straight-line method over the vesting period and is net of estimated
forfeitures. As of September 30, 2007, there was $694,000 of total
unrecognized compensation cost related to nonvested stock options that will
be expensed over fiscal years 2008 through 2010.
E. COMPREHENSIVE INCOME:
Comprehensive income and the components of other comprehensive income were as
follows (in thousands):
QUARTER ENDED
-------------------
9/30/07 9/30/06
-------- --------
Net earnings $ 23,072 $ 19,631
Other comprehensive gain, net of tax effect:
Foreign currency translation adjustments 2,217 806
Unrealized gain on available-for-sale investments 405 576
-------- --------
Comprehensive income $ 25,694 $ 21,013
======== ========
9
F. INCOME TAXES:
The Company adopted FIN 48 on July 1, 2007. The adoption of FIN 48 did not
result in a cumulative effect adjustment to retained earnings upon adoption.
FIN 48 did not materially impact the consolidated financials statements for
the quarter ended September 30, 2007. At September 30, 2007, unrecognized
tax benefits were $126,000, including $53,000 of unrecognized tax benefits
that, if recognized, would affect the effective tax rate. Accrued interest
and penalties were not material at September 30, 2007.
The Company does not believe it is reasonably possible that the total amounts
of unrecognized tax benefits will significantly increase or decrease in the
next twelve months. The Company recognizes interest and penalties related to
unrecognized tax benefits in income tax expense. The Company files income
tax returns in the U.S federal tax jurisdiction, the states of Minnesota and
California, and several jurisdictions outside the U.S. U.S. tax returns for
2004 and subsequent years remain open to examination by the tax authorities.
The Company's major non-U.S. tax jurisdictions are the United Kingdom, France
and Germany, which have tax years open to exam for 2004 and subsequent years.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations for the Quarter Ended September 30, 2007
and the Quarter Ended September 30, 2006
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 subsidiary, Research and Diagnostic Systems, Inc (R&D
Systems). The Company's wholly-owned U.K. subsidiary, R&D Systems Europe
Ltd. (R&D Europe) distributes R&D Systems' biotechnology products throughout
Europe. R&D Europe has a sales subsidiary, R&D Systems GmbH, in Germany and a
sales office in France.
Through June 30, 2007, R&D Systems operated a subsidiary, Fortron Bio
Science, Inc. (Fortron), a developer and manufacturer of monoclonal and
polyclonal antibodies, antigens and other biological reagents. Subsequent to
June 30, 2007, Fortron was merged into R&D Systems. A second R&D Systems
subsidiary, BiosPacific, Inc. (BiosPacific), located in Emeryville,
California, is a worldwide supplier of biologics to manufacturers of in vitro
diagnostic systems and immunodiagnostic kits. In late fiscal 2007, R&D
Systems established a subsidiary, R&D Systems China Co. Ltd. (R&D China), in
Shanghai, China, to distribute biotechnology products throughout China. The
Company began fulfilling orders for its third-party Chinese distributors from
R&D China in August 2007.
The Company has three reportable operating segments based on the nature of
products and geographic location: biotechnology, R&D Systems Europe and
hematology. The biotechnology segment consists of R&D Systems' Biotechnology
Division, Fortron (through June 30, 2007), BiosPacific and R&D China, which
develop, manufacture and sell biotechnology research and diagnostic products
world-wide. R&D Systems 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 earnings increased 17.5% for the quarter ended September 30,
2007 compared to the quarter ended September 30, 2006. The primary reason for
the increase in consolidated net earnings was increased consolidated net
sales. Consolidated net sales for the quarter ended September 30, 2007,
increased 10.8% from the same period in the prior year. The favorable impact
on consolidated net sales of the change from the prior year in exchange rates
used to convert R&D Europe results from British pound sterling to U.S.
dollars was $1.1 million for the quarter ended September 30, 2007. The
favorable impact on consolidated net earnings of the change from the prior
year in exchange rates was $403,000 for the quarter ended September 30, 2007.
The Company generated cash of $22.6 million from operating activities in the
first quarter of fiscal 2008 and cash, cash equivalents and available-for-
sale investments were $279 million at September 30, 2007 compared to $256
million at June 30, 2007.
Net Sales
Consolidated net sales for the quarter ended September 30, 2007 were $58.0
million, an increase of $5.6 million (10.8%) from the quarter ended September
30, 2006. Biotechnology net sales increased $3.0 million (8.2%) for the
quarter ended September 30, 2007 primarily due to $2.9 million in increased
U.S. sales volume by the Biotechnology Division. Sales for the quarter to
pharmaceutical/biotechnology customers and academic customers, the two
largest end-user groups of the Biotechnology Division U.S. market, showed the
greatest revenue growth over the prior year.
R&D Europe net sales increased $2.5 million (19.5%) for the quarter ended
September 30, 2007. The effect of changes from the prior year in foreign
currency exchange rates used to convert British pounds to U.S. dollars
increased R&D Europe net sales approximately $1.1 million for the quarter
ended September 30, 2007. In British pounds, R&D Europe net sales increased
10.7% for the quarter ended September 30, 2007, mainly as a result of
increased sales volume.
The Company has target annual sales growth rates for each of its business
segments. The target sales growth rates, which are based on historical sales
growth, are 10%-11% for biotechnology, 7%-8% for R&D Europe (in constant
currency) and 1%-2% for hematology. Based on the relative size of each
segment, the consolidated target annual growth rate is 8%-10% excluding the
effect of changes in exchange rates.
Gross Margins
Gross margins, as a percentage of net sales, were as follows:
QUARTER ENDED
-------------------
9/30/07 9/30/06
-------- --------
Biotechnology 80.2% 79.6%
R&D Europe 54.6% 52.2%
Hematology 38.2% 40.1%
Consolidated gross margin 79.1% 78.5%
Consolidated gross margins, as a percentage of net sales, increased primarily
due to an increase in R&D Europe gross margins and a change in sales mix from
lower margin hematology sales to higher margin biotechnology sales as a
result of different sales growth rates. R&D Europe's gross margin
percentages for the quarter ended September 30, 2007 were greater than the
comparable prior-year period as a result of favorable exchange rates.
The Company values its manufactured protein and antibody inventory based on a
two-year forecast. Quantities in excess of the two-year forecast are
considered impaired and not included in the inventory value. Sales of
previously impaired protein and antibody inventory for the quarters ended
September 30, 2007 and 2006 were not material.
11
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the quarter ended September
30, 2007, increased $1.0 million (14.5%) from the same period of last year.
Selling, general and administrative expenses are composed of the following
(in thousands):
QUARTER ENDED
-------------------
9/30/07 9/30/06
-------- --------
Biotechnology $ 4,624 $ 4,013
R&D Europe 2,262 2,020
Hematology 467 398
Corporate 737 636
-------- --------
Total selling, general and administrative expenses $ 8,090 $ 7,067
======== ========
Biotechnology selling, general and administrative expenses increased $611,000
(15.2%) for the quarter ended September 30, 2007. The increase for the
quarter was due to a $205,000 increase in profit sharing expense from the
same prior-year quarter and R&D China selling, general and administrative
expenses of $99,000 for the quarter ended September 30, 2007. The remainder
of the increase was mainly the result of annual wage and salary increases and
the hiring of two additional marketing and administrative personnel.
The increase in R&D Europe selling, general and administrative expenses of
$242,000 (12.0%) for the quarter ended September 30, 2007 was primarily due
to the change in exchange rates from the prior year used to convert from
British pound sterling to U.S. dollars. In British pound sterling, R&D
Europe selling, general and administrative expenses increased 3.7% for the
quarter ended September 30, 2007.
Research and Development Expenses
Research and development expenses are composed of the following (in
thousands):
QUARTER ENDED
-------------------
9/30/07 9/30/06
-------- --------
Biotechnology $ 5,002 $ 4,675
Hematology 179 180
-------- --------
Total research and development expenses $ 5,181 $ 4,855
======== =======
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
-------------------
9/30/07 9/30/06
-------- --------
Foreign currency (gains) losses $ (164) $ 147
Rental income (67) (299)
Real estate taxes, depreciation and utilities 544 510
Hemerus Medical, LLC losses 131 127
Nephromics, LLC losses 125 --
-------- --------
Total other non-operating expense $ 569 $ 485
======== ========
12
The Company currently holds an 18% equity interest in Hemerus Medical, LLC
(Hemerus) and at September 30, 2007, the Company's net investment in Hemerus
was $3.0 million. The Company accounts for its investment in Hemerus using
the equity method of accounting because Hemerus is a limited liability
company. The Company has financial exposure to the losses of Hemerus to the
extent of its net investment in that entity. Hemerus' success is dependent,
in part, upon its ability to raise financing and to receiving Federal Drug
Administration (FDA) clearance to market its products. If such financing or
FDA clearance is not received, the Company would potentially recognize an
impairment loss to the extent of its remaining net investment.
In September 2006, the Company invested $7.2 million for an 18% equity
interest in Nephromics, LLC (Nephromics). The Company accounts for its
investment in Nephromics using the equity method of accounting because
Nephromics is a limited liability company. At September 30, 2007, the
Company's net investment in Nephromics was $6.6 million. The Company has
financial exposure to any losses of Nephromics to the extent of its net
investment in that entity.
Income Taxes
Income taxes for the quarters ended September 30, 2007 and 2006 were provided
at rates of 33.6% and 33.9%, respectively, of consolidated earnings before
income taxes. U.S. federal taxes have been reduced by the credit for
research and development expenditures, the benefit for extraterritorial
income through December 2006 and the manufacturer's deduction available under
the American Jobs Creation Act of 2004. 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 significant business developments,
the Company expects income tax rates for the remainder of fiscal 2008 to
range from approximately 33.5% to 34.5%.
Liquidity and Capital Resources
At September 30, 2007, cash and cash equivalents and available-for-sale
investments were $279 million compared to $256 million at June 30, 2007. 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 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 $22.6 million from operating activities in the
first quarter of fiscal 2008 compared to $19.4 million in the first quarter
of fiscal 2007. The increase from the prior year was primarily due to an
increase in net earnings in the current year of $3.4 million.
Cash Flows From Investing Activities
Capital expenditures for fixed assets for the first quarter of fiscal 2008
and 2007 were $3.2 million and $1.9 million, respectively. Included in
capital expenditures for the first quarter of fiscal 2008 and 2007 were $2.7
million and $1.6 million, respectively, for building renovation and
construction. The remaining capital additions in the first quarter of fiscal
2008 and 2007 were for laboratory and computer equipment. Expenditures for
laboratory and computer equipment in the remainder of fiscal 2008 are
expected to be approximately $2.5 million. The Company is currently
constructing additional laboratory space and renovating laboratory space at
its Minneapolis facility. Additional construction costs are estimated at
$1.0 million and are expected to be completed in fiscal 2008. These
expenditures are expected to be financed through currently available funds
and cash generated from operating activities.
13
During the quarter ended September 30, 2007, the Company purchased $19.2
million and had sales or maturities of $6.1 million of available-for-sale
investments. During the quarter ended September 30, 2006, the Company
purchased $4.3 million and had sales or maturities of $2.6 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
with minimal risk, while keeping the funds accessible.
In September 2006, the Company invested $7.2 million for an 18% equity
interest in Nephromics, LLC. The investment was financed through cash and
equivalents on hand.
Cash Flows From Financing Activities
Cash of $2.3 million and $146,000 was received during the quarters ended
September 30, 2007 and 2006, respectively, from the exercise of stock
options. The Company also recognized excess tax benefits from stock option
exercises of $328,000 and $24,000 for the quarters ended September 30, 2007
and 2006, respectively.
In the first quarter of fiscal 2008 and 2007, the Company purchased 23,641
shares and 22,400 shares of common stock, respectively, for its employee
stock bonus plans at a cost of $ 1.5 millions and $1.2 million, respectively.
The Company has never paid cash dividends and has no plans to do so in fiscal
2008.
Critical Accounting Policies
The Company's significant accounting policies are discussed in the
Company's Annual Report on Form 10-K for fiscal 2007. The application of
certain of these policies require judgments and estimates that can affect the
results of operations and financial position of the Company. Judgements and
estimates are used for, but not limited to, accounting for the allowance for
doubtful accounts, inventory valuation and allowances, impairment of
goodwill, intangibles and other long-lived assets, accounting for investments
and income taxes. There have been no significant changes in estimates in
fiscal 2008 which would require disclosure. There have been no changes to
the Company's policies in fiscal 2008.
Recent Accounting Pronouncements
In June 2006, the FASB issued Interpretation No. 48 (FIN 48), Accounting for
Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109.
Effective July 1, 2007, the Company adopted FIN 48. FIN 48 requires that a
position taken or expected to be taken in a tax return be recognized in the
financial statements when it is more likely than not that the position would
be sustained upon examination by tax authorities. A recognized tax position
is then measured at the largest amount of benefit that is greater than fifty
percent likely of being realized upon ultimate settlement.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. The
Statement establishes a single authoritative definition of fair value, sets
out a framework for measuring fair value, and requires additional disclosures
about fair value measurements. SFAS No. 157 applies only to fair value
measurements that are already required or permitted by other accounting
standards and is effective for the Company in fiscal 2009. The Company is
currently evaluating the impact of adopting SFAS No. 157.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities. The Statement permits entities to
choose to measure certain financial instruments at fair value. Unrealized
gains and losses on items for which the fair value option has been elected
are reported in earnings at each subsequent reporting date. SFAS No. 159 is
effective for the Company in fiscal 2009. The Company is currently evaluating
the impact of adopting SFAS No. 159.
14
Forward Looking Information and Cautionary Statements
This filing contains forward-looking statements within the meaning of the
Private Litigation Reform Act. Forward-looking statements include those
regarding the Company's expectations as to target sales growth rates,
compensation expense resulting from stock option expensing, the effective tax
rate, the sufficiency of currently available funds for meeting the Company's
needs and capital expenditures. 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, 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, 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 as filed with the
Securities and Exchange Commission.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At September 30, 2007, the Company had a professionally managed investment
portfolio of fixed income securities, excluding those classified as cash and
cash equivalents, of $103 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, the British
pound sterling and the Chinese yuan to the U.S. dollar as the financial
position and operating results of the Company's U.K. subsidiary, European
operations and Chinese subsidiary 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 $2.0 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. and Chinese subsidiaries to the U.S.
subsidiary and from transferring funds from the German subsidiary and French
sales office to the U.K. subsidiary. At September 30, 2007 and 2006, the
Company had $3.2 million and $540,000, respectively, of dollar denominated
intercompany debt at its U.K. subsidiary and at September 30, 2007, the
Company had $119,000 dollar denominated intercompany debt at its Chinese
subsidiary. At September 30, 2007 and 2006, the U.K. subsidiary had $481,000
and $345,000, respectively, of dollar denominated intercompany debt from its
European operations. These intercompany balances are revolving in nature and
are not deemed to be long-term balances. The Company's U.K. subsidiary
recognized net foreign currency gains of 96,000 British pound sterling
($198,000) for the quarter ended September 30, 2007 and net foreign currency
losses of 78,000 British pound sterling ($147,000) for the quarter ended
September 30, 2006. The Company's Chinese subsidiary recognized net foreign
currency loss of 255,000 Chinese yuan ($34,000) for the quarter ended
September 30, 2007. 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.
15
ITEM 4 - CONTROLS AND PROCEDURES
As of the end of the period covered by this report, the Company conducted an
evaluation, under the supervision and with the participation of the principal
executive officer and principal financial officer, of the Company's
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-
15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")). Based
on this evaluation, the principal executive officer and principal financial
officer concluded that the Company's disclosure controls and procedures are
effective to ensure that information required to be disclosed by the Company
in reports that it files or submits under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms. There was no change in
the Company's internal control over financial reporting during the Company's
most recently completed fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting.
PART II. OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
None.
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, 2007.
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 September 30, 2007:
Total Number of Maximum Approximate
Shares Purchased Dollar Value of
as Part of Shares that May Yet
Total Number Average Publicly Be Purchased Under
Of Shares Price Paid Announced Plans the Plans or
Period Purchased Per Share or Programs Programs
-------------- ------------ ---------- ---------------- -------------------
7/1/07-7/31/07 0 -- 0 $6.8 million
8/1/07-8/31/07 0 -- 0 $6.8 million
9/1/07-9/30/07 23,641 $63.17 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.
16
ITEM 4 - SUBMISSION OF MATTERS TO VOTE OF SHAREHOLDERS
a. The Annual Meeting of the Registrant's shareholders was held on Thursday,
October 25, 2007.
b. A proposal to set the number of directors at eight was adopted by a vote
of 37,741,059 in favor with 31,683 shares against, and 12,980 shares
abstaining.
c. Proxies for the Annual Meeting were solicited pursuant to Regulation 14A
under the Securities Exchange Act of 1934. There was no solicitation in
opposition to management's nominees as listed in the Proxy Statement, and
all such nominees were elected as follows:
Nominee For Withheld
---------------- ---------- --------
Thomas E. Oland 37,553,591 232,135
Roger C. Lucas 37,360,051 425,675
Howard V. O'Connell 35,339,570 2,446,156
G. Arthur Herbert 37,243,798 541,928
Randolph C. Steer 37,229,939 555,787
Robert V. Baumgartner 37,251,609 534,117
Charles A. Dinarello 37,592,929 192,797
Karen A. Holbrook 37,589,407 196,319
ITEM 5 - OTHER INFORMATION
None.
ITEM 6 - EXHIBITS
See exhibit index following.
17
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: November 8, 2007 /s/ Thomas E. Oland
----------------------------------
President, Chief Executive Officer
November 8, 2007 /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