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| TECH > SEC Filings for TECH > Form 10-K on 28-Aug-2009 | All Recent SEC Filings |
28-Aug-2009
Annual Report
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 sales and consolidated net earnings increased 2.5% and 1.6%, respectively, for fiscal 2009 as compared to fiscal 2008. Consolidated net sales and consolidated net earnings in fiscal 2009 were unfavorably affected by the strengthening of the U.S. dollar as compared to foreign currencies. The unfavorable impact on consolidated net sales in fiscal 2009 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 $8.6 million. The unfavorable impact on consolidated net earnings in fiscal 2009 of the change from the prior year in exchange rates used to convert foreign currency financial statements to U. S. dollars was $4.5 million.
Consolidated net sales and consolidated net earnings increased 15.2% and 21.7%, respectively, for fiscal 2008 as compared to fiscal 2007. The favorable impact on consolidated net sales of the change from the prior year in exchange rates used to convert sales in foreign currencies into U.S. dollars was $6.4 million for fiscal 2008. The favorable impact on fiscal 2008 consolidated net earnings, as compared to fiscal 2007, from changes in exchange rates used to convert foreign currency financial statements to U.S. dollars was $1.3 million.
Results of Operations
Net sales (in thousands):
Year Ended June 30,
2009 2008 2007
-------- -------- --------
Biotechnology $173,913 $165,663 $146,614
R&D Europe 72,541 75,735 61,766
Hematology 17,502 16,022 15,102
-------- -------- --------
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Consolidated net sales for fiscal 2009 were $264.0 million, an increase of $6.5 million (2.5%) from fiscal 2008. Consolidated net sales were unfavorably affected by the strength of the U.S. dollar as compared to foreign currencies. Excluding the effect of changes in foreign currency exchange rates, consolidated net sales increased 5.9% in fiscal 2009 from fiscal 2008. Included in consolidated net sales in fiscal 2009 were $3.4 million of sales of new biotechnology products, which had their first sale in fiscal 2009.
Biotechnology net sales in fiscal 2009 increased $8.3 million (5.0%) from fiscal 2008. The majority of the biotechnology net sales increase was from increased sales volume. Biotechnology net sales to international distributors, pharmaceutical/biotechnology customers and academic customers increased 6.2%, 4.7% and 3.9%, respectively, in fiscal 2009 from fiscal 2008. R&D Europe net sales decreased $3.2 million (4.2%) in fiscal 2009. R&D Europe net sales increased 7.2% for fiscal 2009 when measured at currency rates in effect in fiscal 2008, mainly as a result of increased sales volume. Hematology net sales in fiscal 2009 increased $1.5 million (9.2%) mainly due to increased sales volume.
Consolidated net sales for fiscal 2008 were $257.4 million, an increase of $33.9 million (15.2%) from fiscal 2007. Consolidated net sales were favorably affected by the strength of foreign currencies as compared to the U.S. dollar. Excluding the effect of changes in foreign currency exchange rates, consolidated net sales increased 12.3% for fiscal 2008.
Biotechnology net sales in fiscal 2008 increased $19.0 million (13.0%) from fiscal 2007. The majority of the biotechnology net sales increase was from increased sales volume, including shipments to diagnostic customers. Increased sales to diagnostic customers positively affected biotechnology net sales in fiscal 2008. Excluding sales to diagnostic customers, biotechnology net sales increased 12.4% for fiscal 2008 as compared to the prior fiscal year. Biotechnology net sales to international distributors, pharmaceutical/biotechnology customers and academic customers increased 14.5%, 10.0% and 7.7%, respectively, in fiscal 2008 from fiscal 2007. R&D Europe net sales increased $14.0 million (22.6%) in fiscal 2008. R&D Europe net sales increased 12.2% for fiscal 2008 when measured at currency rates in effect in fiscal 2007, mainly as a result of increased sales volume. Hematology net sales in fiscal 2008 increased $920,000 (6.1%) mainly due to increased sales volume.
Gross margins, as a percentage of net sales, were as follows:
Year Ended June 30,
2009 2008 2007
-------- -------- --------
Biotechnology 79.3% 79.7% 79.9%
R&D Europe 51.7% 56.5% 52.9%
Hematology 45.9% 41.0% 43.1%
Consolidated 79.0% 79.5% 79.1%
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The decline in consolidated gross margins for fiscal 2009 was mainly the result of lower gross margins at R&D Europe due to unfavorable exchange rates between a stronger U.S. dollar and weaker euro and British pound sterling. The improvement in consolidated gross margins for fiscal 2008 was the result of higher gross margins at R&D Europe due to favorable exchange rates between a weaker U.S. dollar and stronger euro and British pound sterling and the result of higher sales growth in the Biotechnology Division as compared to the sales growth in the lower margin Hematology Division.
Selling, general and administrative expenses decreased $3.6 million (9.7%) and increased $5.8 million (18.6%) in fiscal 2009 and 2008, respectively. Selling, general and administrative expenses were as follows (in thousands):
Year Ended June 30,
2009 2008 2007
-------- -------- --------
Biotechnology $ 19,035 $ 20,981 $ 17,460
R&D Europe 7,967 9,667 8,756
Hematology 1,463 2,003 1,690
Corporate 4,699 4,064 3,059
-------- -------- --------
$ 33,164 $ 36,715 $ 30,965
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The change from the comparable fiscal year was primarily the result of the
following (in thousands):
Increase/(Decrease)
2009 2008
-------- --------
Profit sharing and bonus expense $ (3,759) $ 1,997
Change in exchange rates to convert
British pounds to U.S dollars (2,024) 311
Legal fees 786 837
Stock-based compensation expense (249) 151
China selling, general and
administrative expense 91 552
Other, including annual wage,
salary and benefit increases 1,604 1,902
-------- --------
$ (3,551) $ 5,750
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The increase in legal fees in both fiscal years was due to ongoing patent interference and infringement litigation. The decrease in stock-based compensation expense in fiscal 2009 was mainly the result of decreased stock volatility and interest rates used to calculate the fair value of options granted. The increase in stock-based compensation expense in fiscal 2008 was due to an increase in the number of stock options granted in fiscal 2008 compared to fiscal 2007 as a result of expanding the Board of Directors by one member. Operations in China were established in late fiscal 2007, resulting in increased expenses in fiscal 2008. The remainder of the change in selling, general and administrative expenses for both fiscal years was mainly the result of annual wage, salary and benefit increases.
Research and development expenses increased $1.2 million (5.2%) and $2.3 million (11.5%) in fiscal 2009 and 2008, respectively, as compared to prior- year periods. The increases were primarily the result of the development of new cytokines, antibodies and assay kits by R&D Systems' Biotechnology Division. The Company introduced over 1,400 new biotechnology products in both fiscal 2009 and 2008, respectively. Research and development expenses are composed of the following (in thousands):
Year Ended June 30,
2009 2008 2007
-------- -------- --------
Biotechnology $ 22,792 $ 21,632 $ 19,333
Hematology 772 762 749
-------- -------- --------
$ 23,564 $ 22,394 $ 20,082
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Amortization of intangible assets. Amortization expense was $1.0 million, $1.1 million and $1.6 million in fiscal 2009, 2008 and 2007, respectively, related mainly to technologies, trade names and customer relationships acquired as a result of acquisitions in fiscal 2006. Intangible assets are being amortized over lives of two to eight years.
Interest income and expense. Interest income for fiscal 2009, 2008 and 2007 was $7.6 million, $12.2 million and $8.4 million, respectively. The decrease in fiscal 2009 from the prior fiscal year was primarily the result of lower rates of return on cash and available-for-sale investments. The increase in fiscal 2008 from the prior year was due to higher cash and investment balances and increased interest rates. Interest expense in fiscal 2007 was $1.1 million. Through October 2006, the Company had a floating interest rate mortgage note outstanding. Fiscal 2007 interest expense included $651,000 of prepayment penalty and $78,000 of unamortized loan origination fees.
Other non-operating (expense) income consists mainly of foreign currency transaction gains and losses, rental income, building expenses related to rental property, the Company's share of losses by equity method investees as follows (in thousands):
Year Ended June 30,
2009 2008 2007
------- ------- -------
Foreign currency (losses) gains $ (34) $ 807 $ (82)
Rental income 481 404 686
Real estate taxes, depreciation
and utilities (2,208) (2,315) (2,212)
Losses by equity method investees (1,290) (1,140) (966)
Impairment loss on marketable
equity security -- (400) --
------- ------- -------
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The Company has two equity method of accounting investments in limited liability companies, Hemerus Medical, LLC (Hemerus) and Nephromics, LLC (Nephromics). See Cash flows from investing activities following.
The Company has an investment in the common stock of Immunicon Corporation (IMMC), a publicly-held company primarily focused on the development and sale of cancer diagnostic and research products and services. In June 2008, IMMC filed for relief under Chapter 11 of the U.S. Bankruptcy Code and announced the sale of substantially all of its assets. The Company determined that the reduction in market value of its investment in IMMC was other-than-temporary and wrote off its investment in fiscal 2008.
Income taxes for fiscal 2009, 2008 and 2007 were provided at rates of approximately 32.3%, 32.7% and 34.0%, respectively, of consolidated earnings before income taxes. The fiscal 2009 consolidated tax rate was positively impacted by the renewal of the U.S. research and development credit. The fiscal 2009 credit included $354,000 of credit for the January to June 2008 period. The fiscal 2008 consolidated tax rate was positively impacted by changes in state apportionment percentages partially offset by the reduction of the credit for research and development expenditures as a result of the delayed renewal of the credit. U.S. federal taxes have been reduced by the benefit for extraterritorial income through December 2006 and the manufacturer's deduction provided for under the American Jobs Creation Act of 2004. Foreign income taxes have been provided at rates which approximate the tax rates in the countries in which R&D Europe and R&D China operate. The Company expects income tax rates for fiscal 2010 to range from 32% to 33%.
QUARTERLY FINANCIAL INFORMATION (Unaudited)
(in thousands, except per share data)
Fiscal 2009 Fiscal 2008
First Second Third Fourth First Second Third Fourth
Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. Qtr.
------- ------- ------- ------- ------- ------- ------- -------
Net sales $69,324 $61,876 $67,866 $64,890 $57,987 $62,142 $69,522 $67,769
Gross margin 56,238 48,446 53,550 50,234 45,883 49,391 55,376 53,881
Earnings
before taxes 42,948 34,150 40,841 37,424 34,753 35,581 42,992 40,505
Income taxes 14,355 10,528 13,200 12,038 11,681 11,942 13,402 13,248
Net earnings 28,593 23,622 27,641 25,386 23,072 23,639 29,590 27,257
Basic earnings
per share 0.74 0.62 0.74 0.68 0.58 0.60 0.76 0.70
Diluted earnings
per share 0.74 0.62 0.74 0.68 0.58 0.60 0.76 0.70
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Liquidity and Capital Resources
Cash, cash equivalents and available-for-sale investments at June 30, 2009 were $264.8 million compared to $293.7 million at June 30, 2008. The Company has an unsecured line of credit of $750,000 available at June 30, 2009 which expires on October 31, 2009. The interest rate charged on the line of credit is a floating rate at the one month London interbank offered rate (Libor) plus 1.75%. There were no borrowings on the line in the current or prior fiscal year.
Management of the Company expects to be able to meet its foreseeable future cash and working capital requirements for operations, facility expansion and capital additions through currently available funds, cash generated from operations and maturities of available-for-sale investments.
Cash flows from operating activities
The Company generated cash from operations of $111.3 million, $115.3 million and $90.5 million in fiscal 2009, 2008 and 2007, respectively. The decrease in cash generated from operating activities in fiscal 2009 as compared to fiscal 2008 was mainly the result of changes in operating assets and liabilities offset by increased net earnings of $1.7 million. In fiscal 2009, changes in operating assets and liabilities negatively impacted net cash from operating activities by $4.1 million compared to a positive impact in fiscal 2008 of $2.2 million as a result of changes in the timing of cash payments and receipts.
The increase in cash generated from operating activities in fiscal 2008 as compared to fiscal 2007 was mainly the result of increased net earnings of $18.4 million. In addition, changes in operating assets and liabilities in fiscal 2008 positively impacted net cash from operating activities by $2.2 million compared to a negative impact in fiscal 2007 of $3.0 million as a result of changes in the timing of cash payments and receipts.
Cash flows from investing activities
Capital additions consist of the following (in thousands):
Year Ended June 30,
2009 2008 2007
-------- -------- --------
Laboratory, manufacturing, and
computer equipment $ 2,573 $ 3,010 $ 2,484
Construction/renovation 1,810 5,012 5,592
Property purchases 2,173 8,343 --
-------- -------- --------
$ 6,556 $ 16,365 $ 8,076
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Included in fiscal 2009, 2008 and 2007 capital additions were approximately $1.8 million, $4.3 million and $5.6 million, respectively, related to the construction and renovation of laboratory space at the Company's Minneapolis facility. The additional construction in fiscal 2008 was for the build out of rental space for tenants. Construction was financed through available cash. In fiscal 2009, the Company purchased two parking lots adjacent to its Minneapolis facility for $2.2 million. In fiscal 2008, the Company purchased the facility it had been leasing for its R&D Europe operations in Abingdon, England for $8.3 million. The property purchases were financed through available cash. Capital additions for laboratory, manufacturing and computer equipment and space renovations planned for fiscal 2010 are expected to be approximately $6.1 million and are expected to be financed through currently available cash and cash generated from operations.
The Company's net (sales) purchases of available-for-sale investments in fiscal 2009, 2008 and 2007 were ($26.5) million, $8.6 million and $23.8 million, respectively. The Company's investment policy is to place excess cash in municipal and corporate bonds with the objective of obtaining the highest possible return while minimizing risk and keeping the funds accessible.
Additional investments in unconsolidated entities were as follows (in thousands):
Year Ended June 30,
2009 2008 2007
-------- -------- --------
ACTGen, Inc. $ -- $ 1,423 $ --
Hemerus -- 300 700
Nephromics -- -- 7,200
-------- -------- --------
$ -- $ 1,723 $ 7,900
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In fiscal 2008, the Company invested $1.4 million for a 19% interest in ACTGen, Inc. (ACTGen), a development stage biotechnology company located in Japan. The Company's net investment in ACTGen at June 30, 2009 and 2008 was $1.2 million and $1.3 million, respectively.
In fiscal 2004, the Company purchased a 10% interest in Hemerus for $3 million. In fiscal years 2006 through 2008, the Company invested an additional $1.75 million in Hemerus, increasing its ownership percentage to 19%. In fiscal 2009, as a result of Hemerus repurchasing and retiring a third party's membership units, the Company's ownership percentage increased to 22%. The Company's net investment in Hemerus at June 30, 2009 and 2008 was $2.2 million and $2.9 million, respectively. Hemerus' success is dependent on its ability to market its products and to obtain adequate financing. The Company has financial exposure to any losses of Hemerus to the extent of its net investment.
In fiscal 2007, the Company invested $7.2 million for an 18% equity interest in Nephromics. In fiscal 2008, Nephromics issued additional membership units which reduced the Company's ownership percentage to 16.8%. In fiscal 2009, the Company received a $1.3 million distribution from Nephromics. At June 30, 2009 and 2008, the Company's net investment in Nephromics was $4.5 million and $6.2 million, respectively. The Company has financial exposure to any losses of Nephromics to the extent of its net investment.
All of the above investments were financed through cash and equivalents on hand.
Cash flows from financing activities
The Company received $953,000, $3.1 million and $2.7 million for the exercise of options for 21,000, 86,000 and 78,000 shares of common stock in fiscal 2009, 2008 and 2007, respectively. The Company recognized excess tax benefits from stock option exercises of $107,000, $524,000 and $534,000 in fiscal 2009, 2008 and 2007, respectively.
In fiscal 2009, 2008 and 2007, the Company purchased 22,637, 23,641 and 24,400 shares of common stock, respectively, for its employee Stock Bonus Plans at a cost of $1.7 million, $1.5 million and $1.2 million, respectively.
In fiscal 2008, the Board of Directors authorized the Company to purchase up to $150 million of its common stock and in fiscal 2009 increased the authorization by $60 million. In fiscal 2009 and 2008, the Company purchased and retired 1.4 million and 899,000 shares of common stock at market values of $90.6 million and $58.7 million, respectively. Approximately $67.5 million remained available for purchase under these authorizations at June 30, 2009.
In fiscal 2009, the Company paid three quarterly cash dividends of $0.25 per share per quarter totaling $28.2 million. The Board of Directors plans to periodically consider the payment of cash dividends.
In fiscal 2007, the Company paid off its mortgage debt. The total payment of $13.8 million included a prepayment penalty of $651,000 which is included in interest expense in the consolidated statement of earnings for fiscal 2007.
Contractual Obligations
The following table summarizes the Company's contractual obligations and
commercial commitments as of June 30, 2009 (in thousands):
Payments Due by Period
Less than 1-3 3-5 After
Total 1 Year Years Years 5 Years
------- --------- ----- ----- -------
Operating leases $ 867 $ 332 $ 344 $ 174 $ 17
Minimum royalty payments 166 166 -- -- --
------- --------- ----- ----- -------
$ 1,033 $ 498 $ 344 $ 174 $ 17
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The above table does not include any reserves for income taxes under the Financial Accounting Standards Board (FASB) Interpretation No. 48, Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109, as the Company is unable to reasonably predict the ultimate amount or timing of settlement of any reserve for income taxes.
Off-balance Sheet Arrangements
The Company is not a party to any off-balance sheet transactions, arrangements or obligations that have, or are reasonably likely to have, a current or future material effect on the Company's financial condition, changes in the financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Critical Accounting Policies
Management's discussion and analysis of the Company's financial condition and results of operations are based upon the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, management evaluates its estimates. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
The Company has identified the policies outlined below as critical to its business operations and an understanding of results of operations. The listing is not intended to be a comprehensive list of all accounting policies.
Valuation of available-for-sale investments. The Company considers all of its marketable securities available-for-sale and reports them at fair market value. Fair market values are based on quoted market prices. Unrealized gains and losses on available-for-sale investments are excluded from income, but are included, net of taxes, in other comprehensive income. If an "other-than- temporary" impairment is determined to exist, the difference between the value of the investment recorded in the financial statements and the Company's current estimate of fair value is recognized as a charge to earnings in the period in which the impairment is determined. Net unrealized gains on available-for-sale investments at June 30, 2009 were $874,000.
Valuation of inventory. Inventories are stated at the lower of cost (first- in, first-out method) or market. The Company regularly reviews inventory on hand for slow-moving and obsolete inventory, inventory not meeting quality control standards and inventory subject to expiration.
To meet strict customer quality standards, the Company has established a highly controlled manufacturing process for proteins and antibodies. New protein and antibody products require the initial manufacture of multiple batches to determine if quality standards can be consistently met. In addition, the Company will produce larger batches of established products than current sales requirements due to economies of scale. The manufacturing process for proteins and antibodies, therefore, has and will continue to produce quantities in excess of forecasted usage. The Company values its manufactured protein and antibody inventory based on a two-year forecast. The establishment of a two-year forecast requires considerable judgment. Protein and antibody quantities in excess of the two-year usage forecast are considered impaired and not included in the inventory value. The value of protein and antibody inventory reserved at June 30, 2009 was $17.7 million.
Valuation of goodwill. The Company is required to perform an annual review for impairment of goodwill in accordance with FASB Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets. Goodwill is considered to be impaired if it is determined that the carrying amount of the reporting unit exceeds its fair value. Assessing the impairment of goodwill requires the Company to make judgments regarding the fair value of the net assets of its reporting units and the allocation of the carrying amount of shared assets to the reporting units. The Company's annual assessment included comparison of the carrying amount of the net assets of a reporting unit, including goodwill, to the fair value of the reporting unit. . . .
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