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TECH > SEC Filings for TECH > Form 10-Q on 10-May-2013All Recent SEC Filings

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Form 10-Q for TECHNE CORP /MN/


10-May-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

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 TECHNE Corporation's wholly-owned subsidiaries, Research and Diagnostic Systems, Inc. (R&D Systems), Boston Biochem, Inc. (Boston Biochem), and BiosPacific, Inc. (BiosPacific). TECHNE Corporation's European biotechnology operations are conducted through its wholly-owned U.K. subsidiaries, R&D Systems Europe Ltd. (R&D Europe) and Tocris Holdings Limited (Tocris). R&D Europe has a sales subsidiary, R&D Systems GmbH, in Germany and a sales office in France. TECHNE Corporation distributes its biotechnology products in China through its wholly-owned subsidiary, R&D Systems China Co., Ltd. (R&D China). R&D China has a sales subsidiary, R&D Systems Hong Kong Ltd., in Hong Kong.

The Company has two reportable segments based on the nature of its products (biotechnology and hematology). R&D Systems' Biotechnology Division, R&D Europe, Tocris, R&D China, BiosPacific and Boston Biochem operating segments are included in the biotechnology reporting segment. The Company's biotechnology reporting segment develops, manufactures and sells biotechnology research and diagnostic products world-wide. The Company's hematology reporting segment, which consists of R&D Systems' Hematology Division, develops and manufactures hematology controls and calibrators for sale world-wide.

RESULTS OF OPERATIONS

Consolidated net sales decreased 3.1% and consolidated net earnings increased 4.3%, respectively, for the quarter ended March 31, 2013 compared to the quarter ended March 31, 2012. Consolidated net sales and consolidated net earnings decreased 2.0% and 1.1%, respectively, for the nine months ended March 31, 2013 compared to the nine months ended March 31, 2012. Consolidated net sales for the quarter and nine months ended March 31, 2013 were unfavorably affected by changes in foreign currency exchange rates from the same prior-year periods. A stronger U.S. dollar as compared to foreign currencies reduced sales by $122,000 and $2.6 million in the quarter and nine-month periods ended March 31, 2013, from the comparable prior-year periods.

Net Sales

Consolidated net sales for the quarter and nine months ended March 31, 2013 were $81.0 million and $231 million, respectively, decreases of $2.6 million (3.1%) and $4.8 million (2.0%) from the quarter and nine months ended March 31, 2012, respectively. Excluding the effect of the change from the comparable prior-year period in exchange rates used to convert sales in foreign currencies (primarily British pound sterling, euros and Chinese yuan), consolidated net sales for the quarter and nine months ended March 31, 2013 decreased 3.0% and 0.9%, respectively, from comparable prior-year periods. Included in consolidated net sales for the quarter and nine months ended March 31, 2013 were $694,000 and $1.4 million, respectively, of sales of new biotechnology products that had their first sale in fiscal 2013.

Net sales by reportable segment were as follows (in thousands):

                                       Quarter Ended            Nine Months Ended
                                         March 31,                  March 31,
                                     2013         2012         2013          2012
          Biotechnology            $ 75,285     $ 78,180     $ 214,416     $ 220,291
          Hematology                  5,707        5,441        16,684        15,588

          Consolidated net sales   $ 80,992     $ 83,621     $ 231,100     $ 235,879


Table of Contents

Biotechnology segment net sales decreased $2.9 million (3.7%) and $5.9 million (2.7%) for the quarter and nine months ended March 31, 2013, respectively, compared to the same prior-year periods. The decrease in the quarter ended March 31, 2013 was affected by one less ship day as compared to the third quarter of the prior fiscal year and also included the Easter holiday, which was in the fourth quarter of the prior fiscal year. The decrease in net sales for the nine months ended March 31, 2013 was affected by two less ship days in the nine-month period, the Easter holiday and changes in exchange rates from the comparable prior-year periods, which impacted sales by $2.6 million, as noted above.

Biotechnology segment sales growth (decline), excluding the effect of changes in exchange rates, from the same prior-year periods were as follows:

                                                    Quarter Ended                 Nine Months Ended
                                                      March 31,                       March 31,
                                                 2013            2012            2013             2012
U.S. industrial, pharmaceutical and
biotechnology                                      (2.5 %)         5.6 %           (4.2 %)          5.7 %
U.S. academic                                      (8.5 %)        (5.4 %)          (5.5 %)         (4.9 %)
Europe                                            (10.3 %)        (0.4 %)          (2.0 %)         (0.6 %)
China                                              24.9 %         19.9 %           19.4 %          22.4 %
Pacific rim distributors, excluding China           9.6 %          7.8 %            4.7 %           6.5 %

Biotechnology segment net sales consisted of the following:

                                                          Nine Months
                                                             Ended
                                                           March 31,
                                                             2013
          United States:
          Industrial, pharmaceutical and biotechnology              29 %
          Academic                                                  13 %
          Other                                                     13 %

                                                                    55 %
          Europe                                                    28 %
          China                                                      5 %
          Pacific rim distributors, excluding China                 10 %
          Rest of world                                              2 %

                                                                   100 %

Hematology segment net sales increased $266,000 (4.9%) and $1.1 million (7.0%) for the quarter and nine months ended March 31, 2013, respectively, compared to the same prior-year periods as a result of increased sales volume.

Gross Margins

Fluctuations in gross margins, as a percentage of net sales, are typically the result of changes in foreign currency exchange rates, changes in product mix and seasonality. Such fluctuations are normal and expected to continue in future periods. Gross margins have also been affected by acquisitions completed in prior years.

Segment gross margins, as a percentage of net sales, were as follows:

                                 Quarter Ended           Nine Months Ended
                                   March 31,                 March 31,
                                2013        2012         2013           2012
               Biotechnology     77.5 %      77.7 %         76.4 %       76.9 %
               Hematology        49.0 %      48.7 %         49.0 %       47.8 %
               Consolidated      75.5 %      75.8 %         74.4 %       75.0 %


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The Biotechnology segment gross margin percentage for the quarter ended March 31, 2013 decreased from the same prior-year period primarily due to lower sales volumes. The Biotechnology segment gross margin percentage for the nine months ended March 31, 2013, respectively, decreased from the same prior-year period due to lower sales volumes and unfavorable exchange rates. This negative gross margin impact was partially offset by a decline in the costs recognized upon the sale of inventory acquired in fiscal 2011 which was written-up to fair value. Hematology segment gross margin percentage for the quarter and nine months ended March 31, 2013 increased slightly from the comparable prior-year periods as a result of increased sales volume.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $83,000 (0.8%) and decreased $57,000 (0.2%) for the quarter and nine months ended March 31, 2013 from the same prior-year periods. Selling general and administrative expenses were impacted by decreases in profit sharing expense of $399,000 and $1.1 million for the quarter and nine months ended March 31, 2013, respectively, as compared to the same prior-year periods. The increase in selling, general and administrative expense, excluding the profit sharing impact, was mainly the result of increased marketing wages and consulting related to upgrading the Company's website.

Consolidated selling, general and administrative expenses were composed of the following (in thousands):

                                                       Quarter Ended             Nine Months Ended
                                                         March 31,                   March 31,
                                                     2013         2012          2013           2012
Biotechnology                                       $ 8,941      $ 8,921      $  27,304      $ 27,394
Hematology                                              375          435          1,173         1,315
Unallocated corporate expenses                          666          543          2,789         2,614

Consolidated selling, general and administrative
Expenses                                            $ 9,982      $ 9,899      $  31,266      $ 31,323

The Company hired a new Chief Executive Officer (CEO) effective April 1, 2013. The compensation for the previous CEO was below market, and therefore, the Company will incur higher executive compensation costs as a result. These increases should not be significant in the fiscal year ending June 30, 2013, but could impact financial results beginning in fiscal 2014. This change could also impact other compensation and benefit costs.

Research and Development Expenses

Research and development expenses for the quarter and nine months ended March 31, 2013 increased $97,000 (1.4%) and $1.4 million (7.0%), respectively, from the same prior-year periods. The increase was mainly due to increases in personnel and supply costs associated with the development and release of new high-quality biotechnology products. The Company expects research and development expenses to continue to increase in future periods as a result of its ongoing product development program.

Research and development expenses were composed of the following (in thousands):

                                                       Quarter Ended             Nine Months Ended
                                                         March 31,                   March 31,
                                                     2013         2012          2013           2012
Biotechnology                                       $ 7,015      $ 6,924      $  21,470      $ 20,017
Hematology                                              204          198            604           609

Consolidated research and development expenses      $ 7,219      $ 7,122      $  22,074      $ 20,626


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Impairment Loss on Investments in Unconsolidated Entities

The Company holds a 16.8% ownership interest in Nephromics, Inc. (Nephromics) and accounts for its investment under the equity method of accounting as Nephromics is a limited liability company. During the third quarter of fiscal 2012, Nephromics signed an agreement to sell substantially all of its assets. The sale price included a payment at closing, future payment contingent upon the issuance of certain patents, and royalties on future sublicense income. As a result of the agreement, the Company determined that a portion of its investment in Nephromics was other-than-temporarily impaired and wrote off $2.4 million of this investment during the quarter ended March 31, 2012. The Company's net investment in Nephromics was $505,000 at both March 31, 2013 and June 30, 2012.

The Company held an ownership interest in ACTGen, Inc. (ACTGen), a development stage biotechnology company, through the second quarter of fiscal 2013. During the third quarter of fiscal 2012, the Company determined that the Company's investment in ACTGen was other-than-temporarily impaired and wrote off its remaining investment of $854,000 during the quarter ended March 31, 2012.

Other Non-operating Expense, Net

Other non-operating expense, net, 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. Amounts
were as follows (in thousands):



                                                    Quarter Ended             Nine Months Ended
                                                      March 31,                   March 31,
                                                  2013         2012          2013           2012
Foreign currency gains (losses)                  $  289       $  164       $    360       $   (465 )
Rental income                                       196          150            581            482
Building expenses related to rental property       (572 )       (545 )       (1,558 )       (1,614 )
Losses by equity method investees                   (31 )       (142 )         (114 )         (558 )

Other non-operating expense, net                 $ (118 )     $ (373 )     $   (731 )     $ (2,155 )

Income Taxes

Income taxes for the quarter and nine months ended March 31, 2013 were provided at rates of 25.5% and 29.8%, respectively, of consolidated earnings before income taxes, compared to 26.5% and 30.0% for the same prior-year periods. In January 2013, the U.S. federal credit for research and development was reinstated retroactively for the period of January 2012 through December 2013. Included in income tax expense for both the quarter and nine months ended March 31, 2013 was a $1.2 million credit for research and development expenses compared to a $430,000 credit for research and development expenses for the nine months ended March 31, 2012. Included in income tax expense for the quarter and nine months ended March 31, 2013 were credits to U.S. income tax expense of $1.1 million and $500,000, respectively, related to foreign source income compared to income tax expense of $379,000 and $862,000, respectively, for the same prior-year periods. The income tax credits in fiscal 2013 were due to changes in estimates related to foreign source income. Included in income taxes for the quarter and nine months ended March 31, 2012 was a $3.0 million benefit due to the reversal of a deferred tax valuation allowance on the Company's excess tax basis in investments in unconsolidated entities. The Company determined such valuation allowance was no longer necessary as of March 31, 2012. The Company expects the effective tax rate for the remainder of fiscal 2013 to range from 30% to 32%.

LIQUIDITY AND CAPITAL RESOURCES

At March 31, 2013, cash and cash equivalents and available-for-sale investments were $449 million compared to $413 million at June 30, 2012. Included in available-for-sale-investments at March 31, 2013 was the fair value of the Company's investment in ChemoCentryx, Inc. (CCXI) of $87.5 million. The fair value of the Company's CCXI investment at June 30, 2012 was $94.7 million.


Table of Contents

At March 31, 2013, approximately 60%, 39%, and 1% of the Company's cash and cash equivalents of $151 million are located in the U.S., United Kingdom and China, respectively. At March 31, 2013, approximately 95% of the Company's available-for-sale investment accounts are located in the U.S., with the remaining 5% in China. The Company has either paid U.S. income taxes on its undistributed foreign earnings or intends to indefinitely reinvest the undistributed earnings in the foreign operations.

The Company believes it can meet its cash and working capital requirements, facility expansion and capital addition needs and share repurchase, cash dividend, investment and acquisition strategies for at least the next twelve months through currently available funds, cash generated from operations and maturities or sales of available-for-sale investments.

Cash Flows From Operating Activities

The Company generated cash of $93.6 million from operating activities in the first nine months of fiscal 2013 compared to $89.3 million in the first nine months of fiscal 2012. The increase from the prior year was primarily due to changes in income taxes payable as a result of the timing of tax payments, partially offset by decreased net earnings for the period.

Cash Flows From Investing Activities

During the nine months ended March 31, 2013, the Company purchased $89.1 million and had sales or maturities of $80.4 million of available-for-sale investments. During the nine months ended March 31, 2012, the Company purchased $124 million and had sales or maturities of $110 million of available-for-sale investments. The Company's investment policy is to place excess cash in municipal and corporate 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.

Capital expenditures for fixed assets for the first nine months of fiscal 2013 and 2012 were $17.1 million and $4.9 million, respectively. Included in capital expenditures for the first nine months of fiscal 2013 and 2012 was $15.1 million and $2.6 million, respectively, related to expansion and remodeling of office and laboratory space at the Company's Minneapolis, Minnesota facility. The remaining capital additions were mainly for laboratory and computer equipment. Capital expenditures in the remainder of fiscal 2013 are expected to be approximately $9.6 million, including $7.3 million related to expansion space in Minneapolis and the purchase of land for construction of a new facility in the United Kingdom, both of which are expected to be completed during fiscal 2014. Capital expenditures are expected to be financed through currently available funds and cash generated from operating activities.

Cash Flows From Financing Activities

During the first nine months of fiscal 2013 and 2012, the Company paid cash dividends of $32.4 million and $30.7 million, respectively, to all common shareholders. On April 30, 2013, the Company announced the payment of a $0.30 per share cash dividend. The dividend of approximately $11.0 million will be payable May 24, 2013 to all common shareholders of record on May 10, 2013.

Cash of $824,000 and $667,000 was received during the nine months ended March, 2013 and 2012, respectively, from the exercise of stock options. The Company also recognized excess tax benefits from stock option exercises of $69,000 and $51,000 for the nine months ended March 31, 2013 and 2012, respectively.

During the first nine months of fiscal 2013 and 2012, the Company repurchased 8,324 and 13,140 shares of common stock for its employee stock bonus plans at a cost of $573,000 and $907,000, respectively.

During the first nine months of fiscal 2012, the Company repurchased and retired 309,010 shares of common stock at a market value of $21.3 million. The Company did not repurchase any shares during the first nine months of fiscal 2013.


Table of Contents

CONTRACTUAL OBLIGATIONS

There were no material changes outside the ordinary course of business in the Company's contractual obligations during the quarter ended March 31, 2013.

CRITICAL ACCOUNTING POLICIES

The Company's significant accounting policies are discussed in the Company's Annual Report on Form 10-K for fiscal 2012 and are incorporated herein by reference. The application of certain of these policies requires 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, valuation of intangible assets and goodwill and valuation of investments in unconsolidated entities. There have been no significant changes in estimates in fiscal 2013 that would require disclosure. There have been no changes to the Company's policies in fiscal 2013.

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 the effect of changes to accounting policies, the expected effective income tax rate, the amount of capital expenditures for the remainder of the fiscal year, the timeframe for completing facility improvements in the U.S. and the U.K., the source of funding for capital expenditure requirements, the sufficiency of currently available funds for meeting the Company's needs, the impact of fluctuations in foreign currency exchange rates, and expectations regarding gross margin fluctuations, increasing research and development expenses and increasing selling, general and administrative expenses. 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 products, general national and international economic conditions, increased competition, the reliance on internal manufacturing and related operations, the impact of currency exchange rate fluctuations, economic instability in Eurozone countries, the recruitment and retention of qualified personnel, the impact of governmental regulation, maintenance of intellectual property rights, credit risk and fluctuation in the market value of the Company's investment portfolio, unseen delays and expenses related to facility improvements, 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 2012 as filed with the Securities and Exchange Commission.

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