Bio-Techne - 10-Q quarterly report FY2011 Q1

 

(Exact name of registrant as specified in its charter)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yesþ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the Registrant is a shell company (as defined in Exchange Act Rule 12b-2). o Yes þ No

At November 3, 2010, 37,083,725 shares of the Company’s Common Stock (par value $0.01) were outstanding.

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The interim unaudited condensed consolidated financial statements of Techne Corporation and Subsidiaries (the Company) have been prepared in accordance with accounting principles generally accepted in the United States of America and with instructions to Form 10-Q and Article 10 of Regulation S-X. The accompanying interim unaudited condensed consolidated financial statements reflect all adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. All such adjustments are of a normal recurring nature.

A summary of significant accounting policies followed by the Company is detailed in the Company’s Annual Report on Form 10-K for fiscal 2010. The Company follows these policies in preparation of the interim unaudited condensed consolidated financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. These interim unaudited condensed consolidated financial statements should be read in conjunction with the Company’s Consolidated Financial Statements and Notes thereto for the fiscal year ended June 30, 2010, included in the Company’s Annual Report on Form 10-K for fiscal 2010.

The Company’s available-for-sale securities of $219 million at September 30, 2010 are carried at fair value and are valued using quoted market prices in active markets (Level 1 input) for identical assets and liabilities.

In June 2009, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 167, now codified as Accounting Standards Codification (ASC) Topic 810, Consolidation.This statement amends the consolidation guidance applicable to variable interest entities and is effective for the Company beginning July 1, 2010. The adoption of the ASC did not have a material impact on the Company’s consolidated financial statements.

Certain consolidated balance sheet captions appearing in this interim report are as follows (in thousands):

Shares used in the earnings per share computations are as follows (in thousands):

The dilutive effect of stock options and warrants in the above table excludes all options for which the aggregate exercise proceeds exceeded the average market price for the period. The number of potentially dilutive option shares excluded from the calculation was 105,000 and 28,000 for the quarters ended September 30, 2010 and 2009, respectively.

The Company has three reportable operating segments based on the nature of products and geographic location: biotechnology, R&D Systems Europe Ltd. (R&D Europe), and hematology. The biotechnology segment consists of R&D Systems, Inc. (R&D Systems) Biotechnology Division, BiosPacific, Inc. (BiosPacific) and R&D Systems China Co. Ltd. (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.

Following is financial information relating to the Company’s operating segments (in thousands):

Option activity under the Company’s stock option plans during the quarter ended September 30, 2010 was as follows:

The fair value of options granted under the Company’s stock option plans were estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions used:

The dividend yield is based on the Company’s historical annual cash dividend divided by the market value of the Company’s Common Stock. The expected annualized volatility is based on the Company’s historical stock price over a period equivalent to the expected life of the option granted. The risk-free interest rate is based on U.S. Treasury constant maturity interest rates with a term consistent with the expected life of the options granted. Separate groups of employees that have similar historical exercise behavior with regard to option exercise timing and forfeiture rates are considered separately in determining option fair value.

The total intrinsic value of options exercised during the quarters ended September 30, 2010 and 2009 was $317,000 and $16,000, respectively. Stock option exercises were satisfied through the issuance of new shares. The total fair value of options vested during the quarters ended September 30, 2010 and 2009 was $49,000 and $21,000, respectively.

Stock-based compensation cost of $136,000 and $102,000 was included in selling, general and administrative expense for the quarters ended September 30, 2010 and 2009, respectively. Compensation cost is recognized using a straight-line method over the vesting period and is net of estimated forfeitures. As of September 30, 2010, there were 73,000 non-vested options outstanding with a weighted average grant date fair value of $12.15. As of September 30, 2010, there was $750,000 of total unrecognized compensation cost related to non-vested stock options that will be expensed in fiscal 2011 through 2014.

Comprehensive income was as follows (in thousands):

Accumulated other comprehensive loss consists of (in thousands):

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.

Consolidated net sales increased 2.1% and consolidated net earnings decreased 1.5% for the quarter ended September 30, 2010 compared to the quarter ended September 30, 2009. Consolidated net sales and net earnings were negatively affected by changes in exchange rates from the prior year used to convert consolidated net sales and consolidated net earnings in foreign currencies into U.S. dollars. The unfavorable impact on consolidated net sales 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 $1.2 million for the quarter ended September 30, 2010. The unfavorable impact on consolidated net earnings of the change from the prior year in exchange rates used to convert foreign currency financial statements to U.S. dollars was $341,000 for the quarter ended September 30, 2010. In the first three months of fiscal 2011, the Company generated cash of $30.7 million from operating activities, paid cash dividends of $9.6 million, and paid $1.9 million for the repurchase of stock. At September 30, 2010 the Company had cash, cash equivalents and available-for-sale investments of $334 million compared to $310 million at June 30, 2010.

Consolidated net sales for the quarter ended September 30, 2010 were $67.9 million, an increase of $1.4 million (2.1%) from the quarter ended September 30, 2009. Excluding the effect of changes in foreign currency exchange rates, consolidated net sales increased 4.0% for the quarter ended September 30, 2010, from the comparable prior-year period. Included in consolidated net sales for the quarter ended September 30, 2010 was $214,000 of sales of new biotechnology products which had their first sale in fiscal 2011.

Biotechnology net sales increased $2.6 million (6.0%) for the quarter ended September 30, 2010 compared to the same prior-year period. The increase in the quarter was mainly the result of increased sales volume. North American biotechnology sales to industrial pharmaceutical and biotechnology customers increased 3.1% during the quarter ended September 30, 2010. Biotechnology sales to academic customers, Pacific Rim distributors and sales in China grew 9.9%, 9.0% and 13.5%, respectively, during the first quarter of fiscal 2011 compared to the same prior-year period.

R&D Europe net sales decreased $1.4 million (8.1%) for the quarter ended September 30, 2010 from the comparable prior-year period. R&D Europe net sales decreased 1.2% for the quarter ended September 30, 2010 when measured at currency rates in effect in the comparable prior-year period. Approximately 74% of R&D Europe sales are in non-British pound sterling currencies (mainly euros). The change in exchange rates used to convert sales in such other currencies to British pounds sterling had an unfavorable impact on consolidated net sales of approximately $285,000 for the quarter ended September 30, 2010. In addition, consolidated net sales were impacted unfavorably by $944,000 for the quarter ended September 30, 2010 as a result of the change in exchange rates used to convert British pound sterling to U.S. dollars.

Hematology sales increased $236,000 (5.1%) for the quarter ended September 30, 2010 compared to the same prior-year period, as a result of increased sales volume.

Consolidated gross margin for the quarter ended September 30, 2010 decreased $929,000 from the quarter ended September 30, 2009. Biotechnology gross margin increased $797,000 for the quarter ended September 30, 2010 as a result of increased net sales partially offset by a decrease in gross margin percentage. Fiscal 2011 first quarter R&D Europe gross margin decreased $1.8 million compared to the quarter ended September 30, 2009. Approximately $1.2 million of the decrease in R&D Europe gross margin was the result of changes in exchange rates used to translate sales in foreign currencies into U.S. dollars. Approximately 13.9% and 6.3% of consolidated net sales for the quarter ended September 30, 2010 were made in euro and British pound sterling, respectively. The average euro exchange rate declined 9.0% against the U.S. dollar for the quarter ended September 30, 2010 (€:$1.31) compared to the same prior-year period (€:$1.44). The average British pound sterling exchange rate declined 4.3% against the U.S. dollar for the quarter ended September 30, 2010 (£:$1.56) compared to the same prior-year period (£:$1.63). The remainder of the R&D Europe decrease in gross margin was the result of decreased net sales and changes in product mix.

Gross margins, as a percentage of net sales, were as follows:

Consolidated gross margin, as a percentage of consolidated net sales, was 77.6% for the quarter ended September 30, 2010, compared to 80.6% for the quarter ended September 30, 2009. R&D Europe gross margin percentage for the quarter ended September 30, 2010 was 47.4% compared to 53.5%, mainly as a result of the effect of exchange rate changes on net sales discussed above. Biotechnology gross margin percentage was 78.4% for the quarter ended September 30, 2010 compared to 80.9% for the quarter ended September 30, 2009. The decrease in the Biotechnology gross margin percentage was mainly the result of changes in product mix and $220,000 additional royalty expense and royalty initiation fees related to new licensing agreements. The decrease in Hematology gross margin percentage to 48.8% for the quarter ended September 30, 2010 from 50.3% was the result of changes in product mix.

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

Selling, general and administrative expenses for the quarter ended September 30, 2010 decreased $486,000 (6.0%) from the same prior-year period. The decrease in selling, general and administrative expense for the quarter ended September 30, 2010 resulted from lower legal expense of $108,000, lower profit sharing expense of $224,000 and the effect of the change in the exchange rate used to convert R&D Europe expenses from British pounds and euros into U.S. dollars of $134,000.

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

Research and development expenses for the quarter ended September 30, 2010 increased $465,000 (7.6%) from the quarter ended September 30, 2009. The increase in research and development expenses was mainly due to increases in personnel and supply costs associated with the continuous development and release of new high-quality biotechnology products.

Interest income decreased $321,000 for the quarter ended September 30, 2010 from the comparable prior-year period, primarily as a result of lower rates of return on cash and available-for-sale investments, offset in part by higher cash and available-for-sale investment balances.

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.

Income taxes for the quarter ended September 30, 2010 were provided at a rate of 32.3% of consolidated earnings before income taxes as compared to 32.6% for the same prior-year period. The improvement in the tax rate for the quarter ended September 30, 2010 was the result of an increase in the deduction for qualified production activities partially offset by the expiration of the U.S. credit for research and development expenses on December 31, 2009. Foreign income taxes have been provided at rates that approximate the tax rates in the countries in which R&D Europe and R&D China operate. The Company expects its fiscal 2011 effective income tax rate to range from approximately 32.0% to 33.0%.

At September 30, 2010, cash and cash equivalents and available-for-sale investments were $334 million compared to $310 million at June 30, 2010. The Company believes it can meet its cash, working capital and capital addition requirements for the foreseeable future through currently available funds, cash generated from operations and maturities or sales of available-for-sale investments. The Company has an unsecured line of credit of $750,000. The interest rate on the line of credit is at prime. There were no borrowings on the line in the prior or current fiscal year.

The Company generated cash of $30.7 million from operating activities in the first quarter of fiscal 2011 compared to $28.0 million in the first quarter of fiscal 2010. The increase from the prior year was primarily due to changes in operating assets and liabilities.

Capital expenditures for fixed assets for the first quarter of fiscal 2011 and 2010 were $1.1 million and $563,000, respectively. The capital additions were mainly for laboratory and computer equipment. Capital expenditures in the remainder of fiscal 2011 are expected to be approximately $3.2 million and are expected to be financed through currently available funds and cash generated from operating activities.

During the quarter ended September 30, 2010, the Company purchased $42.9 million and had sales or maturities of $41.6 million of available-for-sale investments. During the quarter ended September 30, 2009, the Company purchased $6.4 million and had sales or maturities of $5.3 million of available-for-sale investment. The Company’s investment policy is to place excess cash in 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.

Cash of $867,000 and $22,000 was received during the quarters ended September 30, 2010 and 2009, respectively, from the exercise of stock options. The Company also recognized excess tax benefits from stock option exercises of $83,000 and $10,000 for the quarters ended September 30, 2010 and 2009, respectively.

During the first quarters of fiscal 2011 and 2010, the Company purchased 4,923 and 9,827 shares of common stock for its employee stock bonus plans at a cost of $294,000 and $607,000, respectively.

During the first quarter of fiscal 2011 and 2010, the Company paid cash dividends of $9.6 million and $9.3 million, respectively, to all common shareholders. On October 28, 2010, the Company announced the payment of a $0.27 per share cash dividend. The dividend of approximately $10.0 million will be payable November 22, 2010 to all common shareholders of record on November 8, 2010.

During the first quarter of fiscal 2011, the Company disbursed $1.9 million for the settlement of common stock purchased and retired during the fourth quarter of fiscal 2010.

There were no material changes outside the ordinary course of business in the Company’s contractual obligations during the quarter ended September 30, 2010.

The Company’s significant accounting policies are discussed in the Company’s Annual Report on Form 10-K for fiscal 2010. 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 goodwill and valuation of investments in unconsolidated entities. There have been no significant changes in estimates in fiscal 2011 that would require disclosure. There have been no changes to the Company’s policies in fiscal 2011.

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 effective tax rate, pending litigation, the amount of capital expenditures for the remainder of the fiscal year and the sufficiency of currently available funds for meeting the Company’s needs. 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 biotechnology and hematology products, the levels and particular directions of research by the Company’s customers, the impact of the growing number of producers of biotechnology research products and related price competition, general economic conditions, the impact of currency exchange rate fluctuations, the costs and results of research and product development efforts of the Company and of companies in which the Company has invested or with which it has formed strategic relationships, the impact of governmental regulation and intellectual property litigation, the recruitment and retention of qualified personnel, the number of business or selling days in a period, the success of financing efforts by companies in which the Company has invested, and the success of the Company’s expansion into China. For additional information concerning such factors, see the Company’s Annual Report on Form 10-K for fiscal 2010 as filed with the Securities and Exchange Commission.

At September 30, 2010, the Company had a portfolio of fixed income securities, excluding those classified as cash and cash equivalents, of $219 million. These securities, like all fixed income instruments, are subject to interest rate risk and will decline in value if market interest rates increase. However, because the Company’s fixed income securities are classified as available-for-sale, no gains or losses are recognized by the Company in its consolidated statements of earnings due to changes in interest rates unless such securities are sold prior to maturity. The Company generally holds its fixed income securities until maturity and, historically, has not recorded any material gains or losses on any sale prior to maturity.

The Company operates internationally, and thus is subject to potentially adverse movements in foreign currency rate changes. For the quarter ended September 30, 2010, approximately 26.9% of consolidated net sales were made in foreign currencies including 13.9% in euros, 6.3% in British pound sterling, 2.8% in Chinese yuan and the remaining 3.9% in other European currencies. As a result, the Company is exposed to market risk mainly from foreign exchange rate fluctuations of the euro, British pound sterling and the Chinese yuan as compared to the U.S. dollar because the financial position and operating results of the Company’s foreign operations are translated into U.S. dollars for consolidation.

Month-end average exchange rates between the British pound sterling, euro and Chinese yuan and the U.S. dollar, which have not been weighted for actual sales volume in the applicable months in the periods, were as follows:

The Company’s exposure to foreign exchange rate fluctuations also arises from trade receivables and intercompany payables denominated in one currency in the financial statements, but receivable or payable in another currency. At September 30, 2010, the Company had the following trade receivable and intercompany payables denominated in one currency but receivable or payable in another currency (in thousands):

All of the above balances are revolving in nature and are not deemed to be long-term balances. The Company does not enter into foreign exchange forward contracts to reduce its exposure to foreign currency rate changes on forecasted intercompany foreign currency denominated balance sheet positions. Foreign currency transaction gains and losses are included in “Other non-operating expense” in the consolidated statement of earnings. The effect of translating net assets of foreign subsidiaries into U.S. dollars are recorded on the consolidated balance sheet as part of “Accumulated other comprehensive income.”

The effects of a hypothetical simultaneous 10% appreciation in the U.S. dollar from September 30, 2010 levels against the euro, British pound sterling and Chinese yuan are as follows (in thousands):

As of the end of the period covered by this report, the Company conducted an evaluation, under the supervision and with the participation of the principal executive officer and principal financial officer, of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 as amended (the Exchange Act)). Based on this evaluation, the principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures are effective to ensure that material information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. There was no change in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the Company’s most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

In a previously disclosed lawsuit filed by Streck, Inc. (Streck), venued in the U.S. District Court for the District of Nebraska (the Nebraska Court), Streck alleged patent infringement involving certain patents issued to Streck relating to the addition of reticulocytes to hematology controls. Streck was seeking a royalty on sales of integrated hematology controls containing reticulocytes. The Company has reason to believe that R&D Systems, and not Streck, first invented the inventions claimed in these patents and several other patents issued to Streck. As a result, the Company requested, and in 2007 the U.S. Patent and Trademark Office (USPTO) declared, an interference to determine priority of invention between a patent application filed by R&D Systems and five Streck patents, including each of the patents involved in the lawsuit. On November 2, 2009, the interference board ordered that judgment for the Company and against Streck be entered, finding that R&D Systems was the first to invent the integrated hematology controls containing reticulocytes.

The judgment, if upheld by the Federal Circuit Court of Appeals, will constitute cancellation of all claims of the five Streck patents involving the addition of reticulocytes to hematology controls. Such cancellation may moot an earlier jury decision on October 28, 2009, at the conclusion of trial in the Nebraska Court, that the Company did not meet its burden of demonstrating by clear and convincing evidence that the Streck patents were invalid. The jury also found that a reasonable license royalty rate was 12.5%, and that R&D Systems did not willfully infringe, resulting in a final judgment in favor of Streck in the amount of approximately $160,000 including court related costs. On September 30, 2010, the Nebraska Court upheld the jury verdict and, in a related action, reversed the ruling of the USPTO interference board. The Nebraska Court entered an injunction prohibiting the making and selling of the products that are the subject of the lawsuit, but stayed a portion of the injunction to allow the Company to continue to sell its current inventory

until December 20, 2010. The Company will appeal the adverse decisions of the Nebraska Court, and will ask the Federal Circuit Court of Appeals to stay the injunction pending its review and disposition of the Company’s appeal. If the Company’s appeal is successful, after cancellation of the Streck patents, the Company may be issued a patent covering integrated hematology controls containing reticulocytes. The Company does not believe the resolution of the above proceedings will have a material impact on the Company’s consolidated financial statements.

There have been no material changes from the risk factors previously disclosed in Part I, Item 1A, “Risk Factors,” of the Company’s Annual Report on Form 10-K for the year ended June 30, 2010.

The following table sets forth the repurchases of Company common stock for the quarter ended September 30, 2010:

In April 2009, the Company authorized a plan for the repurchase and retirement of $60 million of its common stock. The plan does not have an expiration date.

None.

None.

See “exhibit index” following the signature page.

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.