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TECH > SEC Filings for TECH > Form 10-K on 29-Aug-2013All Recent SEC Filings

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Form 10-K for TECHNE CORP /MN/


29-Aug-2013

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING INFORMATION

This report contains forward-looking statements, which are based on the Company's current assumptions and expectations. The principal forward-looking statements in this report include: the Company's expectations regarding product releases, governmental license renewals, future income tax rates, capital expenditures, the performance of the Company's investments, future dividend declarations, the construction and lease of certain facilities, the adequacy of owned and leased property for future operations, fluctuations in the Company's financial results and sufficiency of capital resources to meet the Company's foreseeable future cash and working capital requirements.

All such forward-looking statements are intended to enjoy the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, as amended. Although the Company believes there is a reasonable basis for the forward-looking statements, the Company's actual results could be materially different. The most important factors which could cause the Company's actual results to differ from forward-looking statements are set forth in the Company's description of risk factors in Item 1A to this Annual Report on Form 10-K.

Forward-looking statements speak only as of the date they are made, and the Company does not undertake any obligation to update any forward-looking statements.

USE OF ADJUSTED FINANCIAL MEASURES:

The adjusted financial measures used in this Annual Report on Form 10-K quantify the impact the following events had on reported net sales, gross margin percentages and net earnings for fiscal 2013 as compared to fiscal 2012 and 2011:

fluctuations in exchange rates used to convert transactions in foreign currencies (primarily the Euro, British pound sterling and Chinese yuan) to U.S. dollars;

the acquisitions of Boston Biochem, Inc. on April 1, 2011 and Tocris Holdings Limited on April 28, 2011, including the impact of amortizing intangible assets and the recognition of costs upon the sale of inventory written-up to fair value;

professional fees and other costs incurred as part of the acquisitions of Boston Biochem, Inc. and Tocris Holdings Limited in fiscal 2011 and the acquisition of Bionostics Holdings Limited in July 2013;

impairment losses related to the Company's investments in unconsolidated entities; and

income tax adjustments related to the reversal of valuation allowances on deferred tax assets and the reinstatement of the U.S. credit for research and development expenditures.

These adjusted financial measures are not prepared in accordance with generally accepted accounting principles (GAAP) and may be different from adjusted financial measures used by other companies. Adjusted financial measures should not be considered as a substitute for, or superior to, measures of financial performance prepared in accordance with GAAP. The Company views these adjusted financial measures to be helpful in assessing the Company's ongoing operating results. In addition, these adjusted financial measures facilitate our internal comparisons to historical operating results and comparisons to competitors' operating results. These adjusted financial measures are included in this Annual Report on Form 10-K because the Company believes they are useful to investors in allowing for greater transparency related to supplemental information used in the Company's financial and operational analysis. Investors are encouraged to review the reconciliations of adjusted financial measures used in this Annual Report on Form 10-K to their most directly comparable GAAP financial measures.


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OVERVIEW

Techne Corporation and subsidiaries (the Company) are engaged in the development, manufacture and sale of biotechnology products and clinical diagnostic controls. These activities are conducted domestically through its wholly-owned subsidiaries, R&D Systems, Inc. (R&D Systems), Boston Biochem, Inc. (Boston Biochem) and BiosPacific, Inc. (BiosPacific). The Company'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. The Company 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 clinical controls). R&D Systems' Biotechnology Division, R&D Europe, Tocris, R&D China, BiosPacific and Boston Biochem 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 clinical controls reporting segment, which consists of R&D Systems' Clinical Controls Division, develops and manufactures controls and calibrators for sale world-wide.

OVERALL RESULTS

Consolidated net sales decreased 1.3% and consolidated net earnings were flat for fiscal 2013 as compared to fiscal 2012. Consolidated net earnings for fiscal 2013 included $4.5 million of costs recognized upon the sale of inventory acquired in fiscal 2011 that was written-up to fair value compared to $7.6 million in fiscal 2012. Consolidated net earnings in fiscal 2012 included impairment losses of $3.3 million recorded on two of the Company's investments in unconsolidated entities and a $3.0 million tax benefit from the reversal of deferred tax valuation allowances.

Consolidated net sales increased 8.5% and consolidated net earnings were flat for fiscal 2012 as compared to fiscal 2011. Consolidated net sales in fiscal 2012 were impacted by the acquisitions of Boston Biochem and Tocris during the fourth quarter of fiscal 2011. Included in fiscal 2012 and fiscal 2011 consolidated net sales were $19.4 million and $4.7 million, respectively, of acquisition-related net sales. Consolidated net earnings for fiscal 2012 included $7.6 million of costs recognized upon the sale of inventory that was written-up to fair value at the time of the acquisitions and $5.1 million amortization of intangible assets compared to $1.8 million and $1.5 million, respectively, in fiscal 2011.

RESULTS OF OPERATIONS

Net Sales

Consolidated organic net sales, excluding the impact of the acquisitions in
fiscal 2011 and the effect of the change from the prior year in exchange rates
used to convert sales in foreign currencies (primarily British pound sterling,
euros and Chinese yuan) into U.S. dollars, were as follows (in thousands):



                                                      Year Ended June 30,
                                                     2013            2012
         Consolidated net sales                    $ 310,575       $ 314,560
         Organic sales adjustments:
         Impact of foreign currency fluctuations       2,637               0

         Consolidated organic net sales            $ 313,212       $ 314,560

         Organic sales growth                           (0.4 %)


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                                                      Year Ended June 30,
                                                      2012           2011
          Consolidated net sales                    $ 314,560      $ 289,962
          Organic sales adjustments:
          Acquisitions                                (19,385 )            0
          Impact of foreign currency fluctuations          27              0

          Consolidated organic net sales            $ 295,202      $ 289,962

          Organic sales growth                            1.8 %

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

                                             Year Ended June 30,
                                      2013          2012          2011
                Biotechnology       $ 288,156     $ 293,274     $ 270,287
                Clinical Controls      22,419        21,286        19,675

                                    $ 310,575     $ 314,560     $ 289,962

Biotechnology segment net sales decreased $5.1 million (1.8%) and increased $23.0 million (8.5%), respectively, in fiscal 2013 and fiscal 2012 from each of the prior fiscal years. Biotechnology segment organic net sales decreased $2.5 million (0.8%) in fiscal 2013 primarily as a result of decreased sales volume in the U.S. Biotechnology segment organic net sales increased $3.6 million (1.3%) in fiscal 2012, primarily as a result of increased sales volume. Included in fiscal 2013 and 2012 net sales were $2.8 million and $2.7 million, respectively, of sales of new biotechnology products which had their first sale in each of the fiscal years.

Biotechnology segment organic sales growth from the same prior-year periods was as follows:

                                                          Year Ended June 30,
                                                          2013             2012
    U.S. industrial, pharmaceutical and biotechnology        (2.6 %)         3.2 %
    U.S. academic                                            (5.9 %)        (5.1 %)
    Europe                                                    0.1 %         (1.5 %)
    China                                                    18.9 %         21.6 %
    Pacific rim distributors, excluding China                 3.5 %          7.0 %

Biotechnology segment net sales consisted of the following:

                                                           Year Ended
                                                            June 30,
                                                              2013
           United States
           Industrial, pharmaceutical and biotechnology             29 %
           Academic                                                 13 %
           Other                                                    13 %

                                                                    55 %
           Europe                                                   28 %
           China                                                     5 %
           Pacific rim distributors, excluding China                 9 %
           Rest of world                                             3 %

                                                                   100 %

Clinical controls segment net sales increased $1.1 million (5.3%) and $1.6 million (8.2%), respectively, in fiscal 2013 and 2012 from each of the prior fiscal years, primarily as a result of increased sales volume.


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Gross Margins

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

Consolidated gross margins for fiscal 2013 and 2012 were negatively impacted as a result of purchase accounting related to inventory and intangible assets acquired during the fourth quarter of fiscal 2011. Under purchase accounting, inventory is valued at fair value less expected selling and marketing costs, resulting in reduced margins in future periods as the inventory is sold.

A reconciliation of the reported consolidated gross margin percentages, adjusted for acquired inventory sold and intangible amortization included in cost of sales, is as follows:

                                                            Year Ended June 30,
                                                        2013        2012        2011
    Consolidated gross margin percentage                 74.4 %      75.0 %      77.6 %
    Identified adjustments:
    Costs recognized upon sale of acquired inventory      1.4 %       2.4 %       0.6 %
    Amortization of intangibles                           1.0 %       1.0 %       0.3 %

    Adjusted gross margin percentage                     76.8 %      78.4 %      78.5 %

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

                                            Year Ended June 30,
                                        2013        2012        2011
                   Biotechnology         76.4 %      76.9 %      79.8 %
                   Clinical Controls     49.0 %      48.6 %      47.0 %
                   Consolidated          74.4 %      75.0 %      77.6 %

The Biotechnology segment gross margin percentages for fiscal 2013 and 2012 were negatively impacted by purchase accounting and intangible asset amortization as discussed above. The clinical controls segment gross margin percentages changed from the comparable prior-year periods as a result of changes in product mix.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $1.7 million (4.1%) and $5.8 million (16.1%) in fiscal 2013 and 2012, respectively. The increase in fiscal 2013 was the results of $607,000 of professional fees related to the acquisition of Bionostics Holdings Limited, which was completed in early fiscal 2014 and $500,000 of professional fees related to the design and engineering for a new facility in the U.K. A decision was made in late fiscal 2013 to pursue other options related to the facilities in the U.K. These increases in fiscal 2013 were offset by a decrease of $1.1 million in profit sharing and bonuses as compared to fiscal 2012. The remaining increase in fiscal 2013 was the result of increased executive compensation and marketing wages and consulting related to upgrading the Company's website. The increase in fiscal 2012 resulted primarily from $3.3 million of additional expenses of the companies acquired in late fiscal 2011 and an increase in customer relationships and trade name amortization of $1.5 million as a result of the acquisitions. The remainder of the change in selling, general and administrative expenses for fiscal 2012 was mainly the result of annual wage, salary and benefit increases.


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

                                                   Year Ended June 30,
                                              2013         2012         2011
           Biotechnology                    $ 37,421     $ 36,453     $ 30,058
           Clinical Controls                   1,561        1,697        1,451
           Unallocated corporate expenses      4,402        3,533        4,388

                                            $ 43,384     $ 41,683     $ 35,897

Research and Development Expenses

Research and development expenses increased $1.3 million (4.8%) and $1.9 million (7.4%) in fiscal 2013 and 2012, respectively, as compared to prior-year periods. The increases were primarily the result of the development of new proteins, antibodies and assay kits by R&D Systems' Biotechnology Division and product development by Boston Biochem and Tocris. The Company introduced approximately 2,100 and 1,800 new biotechnology products in fiscal 2013 and 2012, respectively. Research and development expenses are composed of the following (in thousands):

                                             Year Ended June 30,
                                        2013         2012         2011
                  Biotechnology       $ 28,441     $ 27,112     $ 25,176
                  Clinical Controls        816          800          809

                                      $ 29,257     $ 27,912     $ 25,985

Interest Income

Interest income for fiscal 2013, 2012 and 2011 was $2.6 million, $2.6 million and $3.8 million, respectively. Interest income in fiscal 2013 remained flat from fiscal 2012 as a result of increased cash balances offset by lower interest rates. The decrease in fiscal 2012 from the prior fiscal year was primarily the result of lower cash and available-for-sale debt securities as a result of the acquisitions in late fiscal 2011.

Impairment Loss on Investments in Unconsolidated Entities

The Company has a 16.8% ownership interest 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. During 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 in fiscal 2012. The Company's net investment in Nephromics was $505,000 at both June 30, 2013 and 2012, respectively.

The Company held an ownership interest in ACTGen, Inc. (ACTGen), a development stage biotechnology company located in Japan through October 2012. During 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.


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Other Non-operating Expense, Net

Other non-operating expense, net, consists of foreign currency transaction gains
and losses, rental income, building expenses related to rental property and the
Company's share of gains and losses from equity method investees as follows (in
thousands):



                                                          Year Ended June 30,
                                                    2013          2012          2011
  Foreign currency gains (losses)                 $    339      $ (1,362 )    $    844
  Rental income                                        830           693           549
  Real estate taxes, depreciation and utilities     (2,192 )      (2,127 )      (2,293 )
  Net gain (loss) from equity method investees         570          (603 )        (926 )

                                                  $   (453 )    $ (3,399 )    $ (1,826 )

The Company has a 6.5% ownership percentage in H2Equity (formerly Hemerus Medical, LLC). The Company accounts for its investment in H2Equity under the equity method of accounting as H2Equity is a limited liability company. During fiscal 2012, H2Equity entered into an agreement to sell substantially all of its assets. The sale closed in April 2013. The Company received a $1.1 million distribution at closing and recorded a gain of $708,000 which is included in "Net gain (loss) from equity investments" above.

Income Taxes

Income taxes for fiscal 2013, 2012 and 2011 were provided at rates of 29.9%, 30.7% and 31.9%, respectively, of consolidated earnings before income taxes. In January 2013, the U.S. federal credit for research and development was reinstated for the period of January 2012 through December 2013. As a result, a credit of $431,000 for January 2012 to June 2012 was included in fiscal 2013 income taxes.

Included in income taxes in fiscal 2012 was a $3.0 million benefit due to the reversal of a deferred tax valuation allowance on the excess tax basis in the Company's investments in unconsolidated entities. The Company determined such valuation allowance was no longer necessary and included the benefit in fiscal 2012 income taxes. Excluding this benefit, the effective tax rate for fiscal 2012 would have been 32.6%. In addition, the fiscal 2012 consolidated tax rate was negatively impacted by the expiration of the U.S. research and development credit on December 31, 2011.

The fiscal 2011 consolidated tax rate was positively impacted by the renewal of the U.S. research and development credit for the January to December 2011 period. Fiscal 2011 included $431,000 of credit for research and development for the January to June 2010 period.

U.S. federal taxes have been reduced by the manufacturer's deduction provided for under the American Jobs Creation Act of 2004 and the U.S. federal credit for research and development. Foreign income taxes have been provided at rates which approximate the tax rates in the countries in which R&D Europe, Tocris and R&D China operate. The Company expects income tax rates for fiscal 2014 to range from 30% to 32%.


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Net Earnings

Adjusted consolidated net earnings are as follows (in thousands):



                                                                 Year Ended June 30,
                                                         2013            2012           2011
Net earnings                                           $ 112,561       $ 112,331      $ 112,302
Identified adjustments:
Costs recognized upon sale of acquired inventory           4,501           7,573          1,835
Amortization of intangibles                                5,061           5,094          1,465
Professional and other acquisition related costs             607               0          1,735
Impairment loss on investments                                 0           3,254              0
Tax impact of above adjustments                           (2,596 )        (4,668 )       (1,119 )
Tax impact of research and development credit             (1,392 )          (465 )       (1,329 )
Tax impact of foreign source income                         (710 )         1,058          1,130
Tax benefit from reversal of valuation allowance               0          (3,016 )            0

Adjusted net earnings                                  $ 118,032       $ 121,161      $ 116,019

Adjusted net earnings growth                                (2.6 %)          4.4 %          9.5 %

QUARTERLY FINANCIAL INFORMATION (Unaudited)

(in thousands, except per share data)



                                                Fiscal 2013                                          Fiscal 2012
                               First        Second       Third        Fourth       First        Second       Third           Fourth
                                Qtr.         Qtr.         Qtr.         Qtr.         Qtr.         Qtr.         Qtr.            Qtr.
Net sales                     $ 75,025     $ 75,083     $ 80,992     $ 79,475     $ 77,596     $ 74,662     $ 83,621        $ 78,681
Gross margin                    55,583       55,263       61,147       59,117       58,387       55,170       63,383          58,864
Earnings before taxes           37,986       37,446       44,466       40,764       40,500       37,873       43,205 (1)      40,617
Income taxes                    12,318       12,082       11,348       12,353       12,979       12,060       11,449 (2)      13,376
Net earnings                    25,668       25,364       33,118       28,411       27,521       25,813       31,756          27,241
Basic earnings per share          0.70         0.69         0.90         0.77         0.74         0.70         0.86            0.74
Diluted earnings per share        0.70         0.69         0.90         0.77         0.74         0.70         0.86            0.74

(1) Includes $3.3 million impairment loss on investments in unconsolidated entities.

(2) Includes $3.0 million benefit from reversal of deferred tax valuation allowance.

LIQUIDITY AND CAPITAL RESOURCES

Cash, cash equivalents and available-for-sale investments at June 30, 2013 were $465 million compared to $413 million at June 30, 2012. Included in available-for-sale investments at June 30, 2013 and 2012 was the fair value of the Company's investment in ChemoCentryx, Inc. (CCXI) of $89.6 million and $94.7 million, respectively.

At June 30, 2013, approximately 78%, 21%, and 1% of the Company's cash and equivalent account balances of $164 million are located in the U.S., United Kingdom and China, respectively. At June 30, 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. taxes on its undistributed foreign earnings or intends to indefinitely reinvest the undistributed earnings in the foreign operations. Management of the Company expects to be able to meet its foreseeable future cash and working capital requirements for operations, facility expansion, capital additions and acquisitions at each of its geographical locations through currently available funds, cash generated from operations and maturities of available-for-sale investments.


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Cash Flows From Operating Activities

The Company generated cash from operations of $124 million, $127 million and $127 million in fiscal 2013, 2012 and 2011, respectively. The decrease in cash generated from operating activities in fiscal 2013 as compared to fiscal 2012 was mainly the result of decrease in net earnings and changes in working capital.

The slight decrease in cash generated from operating activities in fiscal 2012 as compared to fiscal 2011 was mainly the result of an increase in net earnings after adjustment for non-cash expenses, offset by a decrease in income taxes payable due to the timing of tax deposits.

Cash Flows From Investing Activities

The Company's net purchases (sales) of available-for-sale investments in fiscal 2013, 2012 and 2011 were $9.1 million, $15.3 million and ($22.2) 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.

Capital additions consist of the following (in thousands):

                                                             Year Ended June 30,
                                                         2013        2012        2011
   Laboratory, manufacturing, and computer equipment   $  2,882     $ 2,521     $ 2,605
   Construction/renovation                               19,572       3,496       1,025

                                                       $ 22,454     $ 6,017     $ 3,630

Construction/renovation for fiscal 2013 included $18.0 million related to the renovation of a building on the Company's Minneapolis campus which is expected to be completed by mid-fiscal 2014.

. . .

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