Chief Financial Officer’s Report
Our operating cash flow improved in 2013 and we expect it to broadly return to historic levels in 2014.
Dr. Rudolf Eugster
Chief Financial Officer
Sales reached CHF 388.3 million (2012: CHF 391.1 million) and were therefore 0.1 % above the prior-year level in local currency terms and 0.7 % lower in Swiss francs. The performance of the two business segments differed considerably. While sales in the Partnering Business increased by 5.8 % in local currencies, those in the Life Sciences Business were 3.7 % below the prioryear level due to lower instrument sales in established markets. The Tecan Group increased sales in local currencies in the second half by 0.8 % after they were 0.5 % below the prior-year level in the first half of the year.
The reader is referred to the “Life Sciences Business” and “Partnering Business” sections of this Annual Report for a detailed description of the business performance of the individual segments.
In Europe, sales in local currencies increased 0.8 % compared to the previous year, which equates to a rise of 1.8 % in Swiss francs. In light of the continuing challenging economic situation in some European countries, sales in the Life Sciences Business were below the prior-year level. By contrast, the Partnering Business posted strong growth. Growth in the Partnering Business accelerated further in the second half, driven by instrument deliveries to Dako. Sales in the Life Sciences Business also improved slightly. In the second half, sales in Europe were 6.1 % higher, or 5.1% higher in local currencies, than in the prior-year period.
Tecan’s sales in North America increased by 0.8 % in local currencies in 2013, but were 0.2 % below the prior-year level in Swiss francs. The components business, which forms part of the Partnering Business, recorded an increase in sales. In the Life Sciences Business, sales were below the prior-year level in North America, as public budget cuts and the government shutdown in October had a negative impact on the market. Tecan’s sales rose by 0.7 % in local currencies in the second half, and were 1.7 % below the prior-year period in Swiss francs. The Life Sciences Business also posted growth in local currencies over the same period.
In China, sales increased in both business segments at a clearly double-digit percentage rate to over CHF 25 million, and continued to accelerate in the second half. Overall, sales in Asia only grew 0.5 % in local currencies and were 6.1 % below the prior-year level in Swiss francs. Exchange rate movements of the yen versus the Swiss franc had a highly negative impact on sales in Japan. Sales in the Partnering Business increased in Asia, while in the Life Sciences Business, declining sales were posted in Japan and the Asia-Pacific region.
Recurring sales of consumables and services increased by 10.6 % in the year under review, or by 11.3 % in local currencies. Their contribution to total sales rose to 34.1 %, the highest level in the Company’s history (2012: 30.6 %). As part of this figure, sales of consumables again grew at a high double-digit percentage rate, by 25.7 % and by 26.3 % in local currencies to a share of 11.5 % of total sales (2012: 9.1 %). The growth rate in the second half was around 37 %.
Order entry in 2013 rose by 1.9 % in local currencies to CHF 386.1 million (2012: CHF 382.3 million), which corresponds to growth of 1.0 % in Swiss francs.
Gross profit amounted to 189.6 million Swiss Francs, which was 8.8 million or 4.5 % below the prior-year figure. The reported gross profit margin was 48.8 % (2012: 50.7 %).
The biggest impact on the gross profit margin was a mix effect with more sales coming from our Partnering Business and – in both segments – sales of Services and Consumables increased. Although they have a higher profitability on an EBIT level they come with a lower gross margin.
Despite the tough economic environment, we were able to slightly increase our prices overall.
We recorded less costs of an OEM development program which had a negative effect on our gross profit margin in 2012. However, this positive effect in 2013 was offset by the medical device tax in the US and higher non-standard cost of sales.
Operating expenses less cost of sales
Overall, operating expenses less cost of sales decreased by 10.0 million Swiss francs or 6.8 %. Operating expenses totaled 136.7 million or 35.2 % of sales – compared with 146.7 million or 37.4 % of sales in the prior-year period.
Selling and marketing expenses were down, despite the increased investments in the sales organization – especially in China, but also in some additional regions. The lowered cost was also helped by the release of some accruals.
Research and development expenses in 2013 amounted to 11.7 % of sales (2012: 13.1 %) or CHF 45.3 million (2012: CHF 51.4 million). All told, research and development activities amounted to CHF 104.1 million gross (2012: CHF 114.6 million), out of which CHF 51.2 million are development costs for OEM partners. This total figure also includes the development costs capitalized in the balance sheet of CHF 10.2 million gross, an increase of CHF 6.2 million over 2012 as development projects progressed and are nearing product launch.
General and administration expenses decreased by 1.6 % due to lower cost on the Corporate level.
Operating profit before interest and taxes (EBIT) increased by 4.0 % to CHF 54.8 million (2012: CHF 52.7 million). The operating profit margin improved by 60 basis points to 14.1 % of sales (2012: 13.5 %), helped by lower research and development expenses as projects near market launch and less cost on the corporate level. Exchange rate movements in major currencies versus the Swiss franc had a negative impact on the operating result. Assuming exchange rates in line with 2012, the operating profit would have reached CHF 56.6 million while the operating profit margin would have stood at 14.5 % of sales.
Financial result and taxes
The financial result increased to CHF 0.7 million (2012: CHF 0.03 million). Exchange rates fluctuated in the reporting period and profits were generated from currency hedging measures. Tecan incurs foreign currency risks on sales, purchases and borrowings denominated in a currency other than the functional currency of the respective subsidiaries. On a consolidated basis, Tecan is also exposed to currency fluctuations between the Swiss franc (CHF) and the functional currencies of its subsidiaries. The two major currencies giving rise to currency risks are the euro (EUR) and the US dollar (USD). Tecan centralizes its foreign currency exposure in a few locations only. The hedging policy is to cover the foreign currency exposure to a certain percentage of the operating activities (forecast sales and purchases). Tecan uses forward exchange contracts, currency options and swaps to hedge its foreign currency risk on specific future foreign currency cash flows. These contracts have maturities of up to 18 months. Tecan does not hedge its net investment in foreign entities and the related foreign currency translation of local earnings.
The tax rate decreased to 17.7 % (2012: 19.6 %).
Net profit and earnings per share
Net profit for the year increased by 7.8 % to CHF 45.7 million in 2013 (2012: CHF 42.4 million). The net profit margin improved by 100 basis points to 11.8 % of sales (2012: 10.8 %). Earnings per share increased to CHF 4.16 (2012: CHF 3.92). On average, a total of 11.0 million shares were outstanding in 2013 (2012: 10.8 million shares).
Balance sheet and equity ratio
Tecan’s equity ratio increased again during the reporting period and reached 72.0 % as of December 31, 2013 (December 31, 2012: 69.4 %). The Company’s share capital stood at CHF 1,144,458 at the reporting date (December 31, 2013), consisting of 11,444,576 registered shares with a nominal value of CHF 0.10 each.
Cash flow from operating activities rose to CHF 27.9 million (2012: CHF 2.4 million). Excluding an OEM development project that Tecan is prefinancing, cash flow from operating activities amounted to CHF 64.6 million (2012: CHF 45.0 million).
Net working capital, excluding the pre-financing of the OEM development was stable and the DSO key figure – the days sales outstanding – improved to 51 days.
In 2013 we made investments of 19.7 million which exceeded the 10.3 million for amortization and depreciation.
Cash flow from financing activities included the dividend payments made in April 2013 in the total amount of 16.5 million and cash inflows of CHF 10.8 million from the sales of treasury shares – mainly due to exercise of stock options.
Cash and Cash equivalents were at 150.4 million Swiss Francs at the end of 2013 compared to CHF 144.5 million at the end of 2012. Net liquidity (cash and cash equivalents minus bank liabilities and loans) increased to CHF 143.4 million (December 31, 2012: CHF 141.3 million).
Dr. Rudolf Eugster
Chief Financial Officer