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TECH > SEC Filings for TECH > Form 10-Q on 12-Nov-2013All Recent SEC Filings

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Form 10-Q for TECHNE CORP /MN/


12-Nov-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 clinical diagnostic controls. These activities are conducted domestically through Techne Corporation's wholly-owned subsidiaries, R&D Systems, Inc. (R&D Systems), Boston Biochem, Inc. (Boston Biochem), BiosPacific, Inc. (BiosPacific) and Bionostics, Inc. (Bionostics). 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 clinical controls). 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 clinical controls reporting segment, which consists of R&D Systems' Clinical Controls Division and Bionostics, develops and manufactures controls and calibrators for sale world-wide.

RESULTS OF OPERATIONS

Consolidated net sales increased 14.2% and consolidated net earnings increased 6.9%, respectively, for the quarter ended September 30, 2013 compared to the quarter ended September 30, 2012. Consolidated net sales for the quarter ended September 30, 2013 were affected by the Bionostics acquisition, which closed in July 2013, and changes in foreign currency exchange rates from the same prior-year period. Included in consolidated net sales for the quarter ended September 30, 2013 were $6.2 million of acquisition-related net sales. A weaker U.S. dollar as compared to foreign currencies increased sales by $610,000 in the quarter ended September 30, 2013, from the comparable prior-year period.

Net Sales

Consolidated organic net sales, excluding the impact of the acquisition during
the quarter ended September 30, 2013 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):



                                                        Quarter Ended
                                                        September 30,
                                                      2013          2012
          Consolidated net sales                    $ 85,668      $ 75,025
          Organic sales adjustments:
          Acquisition                                 (6,220 )           0
          Impact of foreign currency fluctuations       (610 )           0

          Consolidated organic net sales            $ 78,838      $ 75,025

          Organic sales growth                           5.1 %        (0.9 %)


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

                                                 Quarter Ended
                                                 September 30,
                                               2013         2012
                    Biotechnology            $ 73,190     $ 69,503
                    Clinical Controls          12,478        5,522

                    Consolidated net sales   $ 85,668     $ 75,025

Biotechnology segment net sales increased $3.7 million (5.3%) for the quarter ended September 30, 2013 compared to the same prior-year period. The increase in net sales for the quarter ended September 30, 2013 was affected by changes in exchange rates from the comparable prior-year periods, which impacted sales by $610,000, as noted above. Included in consolidated net sales for the quarter ended September 30, 2013 were $224,000 of sales of new biotechnology products that had their first sale in fiscal 2014.

Biotechnology segment sales growth (decline) from the same prior-year period were as follows:

                                                      Reported                   Excluding Currency Impact
                                                   Quarter Ended                       Quarter Ended
                                                   September 30,                       September 30,
                                              2013             2012               2013               2012
U.S. industrial, pharmaceutical
and biotechnology                                6.3 %             (5.0 %)            6.3 %              (5.0 %)
U.S. academic                                  (11.8 %)            (4.0 %)          (11.8 %)             (4.0 %)
Europe                                           5.4 %             (6.5 %)            1.5 %               3.1 %
China                                           41.8 %             23.4 %            38.2 %              25.1 %
Pacific rim distributors, excluding China       13.9 %        Unchanged              13.9 %         Unchanged

Biotechnology segment net sales consisted of the following:

                                                            Quarter
                                                             Ended
                                                         September 30,
                                                             2013
         United States:
         Industrial, pharmaceutical and biotechnology                30 %
         Academic                                                    12 %
         Other                                                       13 %

                                                                     55 %
         Europe                                                      28 %
         China                                                        6 %
         Pacific rim distributors, excluding China                    9 %
         Rest of world                                                2 %

                                                                    100 %

The Clinical Controls segment net sales increased $7.0 million for the quarter ended September 30, 2013 compared to the same prior-year period. The increase in net sales for the quarter ended September 30, 2013 was affected by the acquisition of Bionostics during the quarter. Organic sales growth was $736,000 (13.3%) for the quarter ended September 30, 2013 as a result of the timing of shipments at both the beginning and the end of the quarter.


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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, changes in product mix and seasonality. Such fluctuations are normal and expected to continue in future periods.

Consolidated gross margins for the quarters ended September 30, 2013 and 2012 were negatively impacted as a result of purchase accounting related to inventory and intangible assets acquired in the current and prior fiscal years. 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:

                                                             Quarter Ended
                                                             September 30,
                                                            2013        2012
        Consolidated gross margin percentage                 71.3 %      74.1 %
        Identified adjustments
        Costs recognized upon sale of acquired inventory      2.0 %       1.7 %
        Amortization of intangibles                           1.1 %       1.0 %

        Adjusted gross margin percentage                     74.4 %      76.8 %

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

                                             Quarter Ended
                                             September 30,
                                            2013        2012
                       Biotechnology         76.7 %      76.1 %
                       Clinical Controls     39.9 %      48.5 %
                       Consolidated          71.3 %      74.1 %

The Biotechnology segment gross margin percentage for the quarter ended September 30, 2013 increased from the same prior-year period primarily due to higher sales volume and a decline in the costs recognized upon the sale of inventory acquired in fiscal 2011 which was written-up to fair value. The Clinical Controls segment gross margin percentage for the quarter ended September 30, 2013 decreased from the comparable prior-year period mainly as a result of intangible amortization and cost recognized upon the sale of inventory acquired during the quarter ended September 30, 2013.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $3.7 million (35.8%) for the quarter ended September 30, 2013 from the same prior-year period. The increase for the quarter ended September 30, 2013 was mainly a result of the Bionostics acquisition, including $532,000 of acquisition related professional fees, $1.1 million of selling, general and administrative expense by Bionostics and an increase of $736,000 of intangible amortization. Selling, general and administrative expenses included $569,000 and $303,000 of stock compensation expense for the quarters ended September 30, 2013 and 2012, respectively. The remainder of the increase in selling, general and administrative expense was due primarily to increased executive compensation and additional sales staff added since the first quarter of fiscals 2013.


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

                                                                  Quarter Ended
                                                                  September 30,
                                                                2013         2012
  Biotechnology                                               $ 10,018     $  9,140
  Clinical Controls                                              2,310          419
  Unallocated corporate expenses                                 1,693          769

  Consolidated selling, general and administrative expenses   $ 14,021     $ 10,328

Research and Development Expenses

Research and development expenses for the quarter ended September 30, 2013 increased $250,000 (3.4%) from the same prior-year period. The increase was mainly due to research and development by Bionostics. 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
                                                             September 30,
                                                           2013        2012
         Biotechnology                                    $ 7,294     $ 7,259
         Clinical Controls                                    408         193

         Consolidated research and development expenses   $ 7,702     $ 7,452

Interest Income

Interest income for the quarters ended September 30, 2013 and 2012 were $567,000 and $661,000, respectively. The decrease was primarily due to lower cash balances as a result of the Bionostics acquisition during the quarter ended September 30, 2013.

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
                                                           September 30,
                                                          2013        2012
          Foreign currency gains (losses)                $   51      $  (78 )
          Rental income                                     210         170
          Building expenses related to rental property     (565 )      (529 )
          Losses by equity method investees                   0         (41 )

          Other non-operating expense, net               $ (304 )    $ (478 )

Income Taxes

Income taxes for the quarters ended September 30, 2013 and 2012 were provided at rates of 30.8% and 32.4%, respectively, of consolidated earnings before income taxes. The decrease in the effective tax rate was primarily the result of decreased tax rates in the U.K. and the increased percentage of pretax income from foreign operations, which are subject to lower income tax rates than U.S. operations. The Company expects the income tax rate for the remainder of fiscal 2014 to range from 30% to 32%.


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Net Earnings

Adjusted consolidated net earnings are as follows:



                                                             Quarter Ended
                                                             September 30,
                                                           2013          2012
      Net earnings                                       $ 27,428      $ 25,668
      Identified adjustments:
      Costs recognized upon sale of acquired inventory      1,731         1,264
      Amortization of intangibles                           2,188         1,272
      Acquisition related professional fees                   532             0
      Tax impact of above adjustments                      (1,173 )        (679 )

      Net earnings-adjusted                              $ 30,706      $ 27,525

LIQUIDITY AND CAPITAL RESOURCES

At September 30, 2013, cash and cash equivalents and available-for-sale investments were $323 million compared to $465 million at June 30, 2013. Included in available-for-sale-investments at September 30, 2013 was the fair value of the Company's investment in ChemoCentryx, Inc. (CCXI) of $35.2 million. The fair value of the Company's CCXI investment at June 30, 2013 was $89.6 million.

At September 30, 2013, approximately 45%, 51%, and 4% of the Company's cash and cash equivalents of $83.9 million are located in the U.S., United Kingdom and China, respectively. At September 30, 2013, approximately 94% of the Company's available-for-sale investment accounts are located in the U.S., with the remaining 6% 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 $32.6 million from operating activities in the first quarter of fiscal 2014 compared to $29.3 million in the first quarter of fiscal 2013. The increase from the prior year was primarily due to increased net earnings for the quarter adjusted for non-cash expenses related to depreciation and amortization.

Cash Flows From Investing Activities

On July 22, 2013, the Company's R&D Systems subsidiary acquired, for $103 million cash, all of the outstanding shares of Bionostics Holdings, Ltd. (Bionostics) and its U.S. operating subsidiary, Bionostics, Inc. Bionostics is a global leader in the development, manufacture and distribution of control solutions that verify the proper operation of in-vitro diagnostic devices primarily utilized in point of care blood glucose and blood gas testing. The acquisition was financed through cash and cash equivalents on hand.

During the quarter ended September 30, 2013, the Company purchased $27.0 million and had sales or maturities of $28.8 million of available-for-sale investments. During the quarter ended September 30, 2012, the Company purchased $21.1 million and had sales or maturities of $17.8 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.


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Capital expenditures for fixed assets for the first quarter of fiscal 2014 and 2013 were $3.8 million and $2.5 million, respectively. Included in capital expenditures for the first quarter of fiscal 2014 and 2013 was $2.8 million and $2.0 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 2014 are expected to be approximately $12.5 million, including $6.5 million related to expansion space in Minneapolis which is 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 quarter of fiscal 2014 and 2013, the Company paid cash dividends of $11.1 million and $10.3 million, respectively, to all common shareholders. On October 31, 2013, the Company announced the payment of a $0.31 per share cash dividend. The dividend of approximately $11.4 million will be payable November 25, 2013 to all common shareholders of record on November 12, 2013.

Cash of $1.1 million and $136,000 was received during the quarters ended September 30, 2013 and 2012, respectively, from the exercise of stock options. The Company also recognized excess tax benefits from stock option exercises of $4,000 and $1,000 for the quarters ended September 30, 2013 and 2012, respectively.

During the first quarter of fiscal 2013, the Company repurchased 8,324 shares of common stock for its employee stock bonus plans at a cost of $573,000. No contribution to the employee stock bonus plan was made during the first quarter of fiscal 2014.

CONTRACTUAL OBLIGATIONS

There were no material changes outside the ordinary course of business in the Company's contractual obligations during the quarter ended September 30, 2013.

CRITICAL ACCOUNTING POLICIES

The Company's significant accounting policies are discussed in the Company's Annual Report on Form 10-K for fiscal 2013 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 2014 that would require disclosure. There have been no changes to the Company's policies in fiscal 2014.


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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 amount of capital expenditures for the remainder of the fiscal year, the timeframe for completing facility improvements in the U.S., 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, increasing selling, general and administrative expenses and income tax rates. 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 2013 as filed with the Securities and Exchange Commission.

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