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| TECH > SEC Filings for TECH > Form 10-Q on 7-May-2009 | All Recent SEC Filings |
7-May-2009
Quarterly Report
Results of Operations for the Quarter and Nine Months Ended March 31, 2009 and 2008
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.
Overall Results
Consolidated net earnings decreased 6.6% and increased 4.7% for the quarter and nine months ended March 31, 2009, respectively, compared to the same prior-year periods. 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 and third quarters 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 $3.6 million and $6.4 million for the quarter and nine months ended March 31, 2009, respectively. The unfavorable impact on consolidated net earnings of the change from the prior year in exchange rates used to convert foreign currency financial statements to U.S. dollars was $1.5 million and $3.3 million for the quarter and nine months ended March 31, 2009, respectively. In the first nine months of fiscal 2009, the Company generated cash of $81.0 million from operating activities, paid cash of $88.7 million for the repurchase and retirement of common stock, paid cash dividends of $18.9 million and had cash, cash equivalents and available-for-sale investments of $234 million at March 31, 2009 compared to $294 million at June 30, 2008.
Net Sales
Consolidated net sales for the quarter and nine months ended March 31, 2009 were $67.9 million and $199.1 million, respectively, a decrease of $1.7 million (2.4%) and an increase of $9.4 million (5.0%), respectively, from the quarter and nine months ended March 31, 2008. Excluding the effect of changes in foreign currency exchange rates, consolidated net sales increased 2.9% and 8.3% for the quarter and nine months ended March 31, 2009, respectively, from the comparable prior-year periods. Included in consolidated net sales for the quarter and nine months ended March 31, 2009 was $1.3 million and $2.2 million, respectively, of sales of new biotechnology products which had their first sale in fiscal 2009.
Biotechnology net sales increased $49,000 (0.1%) and $8.5 million (6.9%), respectively, for the quarter and nine months ended March 31, 2009, primarily from increased sales volume during the first half of the fiscal year. North American sales to industrial pharmaceutical and biotechnology customers declined approximately 5% during the third quarter of fiscal 2009. Biotechnology sales to academic and Pacific Rim distributors grew about 3% during the same period. The Company attributes the lower third quarter sales growth rate to customer caution in a time of economic uncertainty.
R&D Europe net sales decreased $1.9 million (9.6%) and $184,000 (0.3%) for the quarter and nine months ended March 31, 2009, respectively, from the comparable prior-year periods. R&D Europe's net sales increased 8.5% and 11.3%, respectively, for the quarter and nine months ended March 31, 2009, 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 $3.3 million and $7.9 million, respectively, in the quarter and nine months ended March 31, 2009 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 $6.9 million and $14.3 million for the quarter and nine months ended March 31, 2009, respectively, as a result of the change in exchange rates used to convert British pound sterling to U.S. dollars.
Hematology sales increased $228,000 (5.4%) and $1.1 million (9.3%) for the quarter and nine months ended March 31, 2009, respectively, compared to the same prior-year periods, as a result of increased sales volume.
The Company has long-term targeted annual sales growth goals for each of its business segments that it uses for internal planning purposes. 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. Actual results could vary materially from these long-term goals, especially in specific quarters and periods due to general economic conditions and other uncertainties and 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 NINE MONTHS ENDED
---------------- ------------------
3/31/09 3/31/08 3/31/09 3/31/08
------- ------- -------- --------
Biotechnology 79.4% 79.8% 79.3% 79.8%
R&D Europe 48.6% 56.9% 53.0% 56.1%
Hematology 47.6% 41.4% 45.1% 40.8%
Consolidated gross margin 78.9% 79.7% 79.5% 79.4%
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Consolidated gross margins, as a percentage of consolidated net sales, decreased from 79.7% for the quarter ended March 31, 2008 to 78.9% for the quarter ended March 31, 2009. 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 79.4% for the nine months ended March 31, 2008 to 79.5% for the nine months ended March 31, 2009.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were composed of the following
(in thousands):
QUARTER ENDED NINE MONTHS ENDED
---------------- -----------------
3/31/09 3/31/08 3/31/09 3/31/08
------- ------- ------- -------
Biotechnology $ 4,262 $ 5,257 $14,821 $15,415
R&D Europe 1,714 2,311 6,091 7,172
Hematology 310 489 1,144 1,443
Corporate 775 937 3,548 3,699
------- ------- ------- -------
Total selling, general and
administrative expenses $ 7,061 $ 8,994 $25,604 $27,729
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Selling, general and administrative expenses for the quarter and nine months ended March 31, 2009 decreased $1.9 million (21.5%) and $2.1 million (7.7%), respectively, from the same prior-year periods. The decrease in selling, general and administrative expenses from the comparable prior-year periods were the result of the following (in thousands):
QUARTER NINE MONTHS
-------- -----------
Change in exchange rates to convert
foreign expenses to U.S. dollars ($ 651) ($1,538)
Reduction in profit sharing expense (1,326) (1,943)
Other, including annual wage, salary and
benefits increases 44 1,356
-------- ---------
($1,933) ($2,125)
======== =========
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The reduction in profit sharing expense for the quarter and nine months ended March 31, 2009 was directly related to the Company's results for the periods. The Company's annual contribution to its profit sharing plans, in which all qualified employees participate, is based on the percentage increase in sales and after tax earnings from the prior year.
Research and Development Expenses
Research and development expenses were composed of the following (in
thousands):
QUARTER ENDED NINE MONTHS ENDED
---------------- -----------------
3/31/09 3/31/08 3/31/09 3/31/08
------- ------- ------- -------
Biotechnology $ 5,622 $ 5,640 $16,982 $16,010
Hematology 187 199 583 572
------- ------- ------- -------
Total research and development expenses $ 5,809 $ 5,839 $17,565 $16,582
======= ======= ======= =======
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Interest Income
Interest income decreased $1.6 million and $2.8 million for the quarter and nine months ended March 31, 2009, respectively, from the comparable prior- year periods, primarily as a result of lower rates of return on cash and available-for-sale investments and, to a lesser extent to lower cash and available-for-sale investment balances.
Other Non-operating Expense and Income
Other non-operating expense and income consists mainly of foreign currency
transaction gains and losses, rental income, building expenses related to
rental property, and the Company's share of losses by equity method
investees.
QUARTER ENDED NINE MONTHS ENDED
---------------- -----------------
3/31/09 3/31/08 3/31/09 3/31/08
------- ------- ------- -------
Foreign currency (losses) gains ($ 239) $ 462 ($ 719) $ 779
Rental income 115 91 345 269
Real estate taxes, depreciation
and utilities (573) (633) (1,677) (1,777)
Losses by equity method investees (406) (343) (951) (836)
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Total other non-operating expense ($1,103) ($ 423) ($3,002) ($1,565)
======= ======= ======= =======
Income Taxes
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Income taxes for both the quarter and nine months ended March 31, 2009 were provided at rates of 32.3% of consolidated earnings before income taxes, compared to 31.2% and 32.7% of consolidated earnings before income taxes for the quarter and nine months ended March 31, 2008. Income tax expense for the first nine months of fiscal 2009 benefited from the renewal of the U.S. research and development credit. Included in income tax expense for the nine months ended March 31, 2009 was a $354,000 credit for the January to June 2008 period. The effective rate in the quarter ended March 31, 2008, was positively impacted by changes in state apportionment estimates. 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. The Company expects its fiscal 2009 effective income tax rate to range from approximately 32.0% to 33.0%.
Liquidity and Capital Resources
At March 31, 2009, cash and cash equivalents and available-for-sale investments were $234 million compared to $294 million at June 30, 2008. Cash and cash equivalents at March 31, 2009 and June 30, 2008 included $100.4 million (70.0 million British pounds) and $116.6 million (58.5 million British pounds), 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 $81.0 million from operating activities in the first nine months of fiscal 2009 compared to $82.1 million in the first nine months of fiscal 2008. The decrease from the prior year was primarily due to a decrease in salary, wages and related accruals and income taxes payable partially offset by an increase in consolidated net earnings in the current year of $3.6 million.
Cash Flows From Investing Activities
Capital expenditures for fixed assets for the first nine months of fiscal 2009 and 2008 were $3.2 million and $6.9 million, respectively. Included in capital expenditures for the first nine months of fiscal 2009 and 2008 was $781,000 and $4.6 million for building renovation and construction, respectively. The remaining capital additions in the first nine months of fiscal 2009 and 2008 were for laboratory and computer equipment. Capital expenditures in the remainder of fiscal 2009 are expected to be approximately $3.0 million and are expected to be financed through currently available funds and cash generated from operating activities.
During the nine months ended March 31, 2009, the Company purchased $40.5 million and had sales or maturities of $68.9 million of available-for-sale investments. During the nine months ended March 31, 2008, the Company purchased $42.9 million and had sales or maturities of $43.9 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 nine months ended March 31, 2009, 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 March 31, 2009, the Company's net investment in Nephromics was $4.6 million.
During the nine months ended March 31, 2008, the Company invested an additional $300,000 in Hemerus Medical, LLC and 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 $930,000 and $2.6 million was received during the nine months ended March 31, 2009 and 2008, respectively, from the exercise of stock options. The Company also recognized excess tax benefits from stock option exercises of $80,000 and $409,000 for the nine months ended March 31, 2009 and 2008, respectively.
During the first nine 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.
During the first nine months of fiscal 2009, the Company purchased and retired approximately 1.4 million shares of common stock at a market value of $88.9 million of which $88.7 million was disbursed prior to March 31, 2009. During the first nine months of fiscal 2008, the Company purchased and retired approximately 758,000 shares of common stock at a market value of $49.3 million of which $47.8 million was disbursed prior to March 31, 2008.
During the nine months ended March 31, 2009, the Company paid cash dividends of $18.9 million to all common shareholders. On April 28, 2009, the Company announced the payment of an additional $0.25 per share cash dividend. The dividend of approximately $9.3 million will be payable May 22, 2009 to all common shareholders of record on May 8, 2009.
Contractual Obligations
There were no material changes outside the ordinary course of business in the Company's contractual obligations during the nine months ended March 31, 2009.
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.
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, the Company's adoption and impact of recent accounting pronouncements 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, the number of business or selling days in a period 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.
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