filings.toolsItem 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME
Techne Corporation and Subsidiaries
(in thousands, except per share data)
| Year Ended June 30, | ||||||||||||
| 2014 | 2013 | 2012 | ||||||||||
| Net sales | $ | 357,763 | $ | 310,575 | $ | 314,560 | ||||||
| Cost of sales | 106,352 | 79,465 | 78,756 | |||||||||
| Gross margin | 251,411 | 231,110 | 235,804 | |||||||||
| Operating expenses: | ||||||||||||
| Selling, general and administrative | 60,716 | 43,384 | 41,683 | |||||||||
| Research and development | 30,945 | 29,257 | 27,912 | |||||||||
| Total operating expenses | 91,661 | 72,641 | 69,595 | |||||||||
| Operating income | 159,750 | 158,469 | 166,209 | |||||||||
| Other income (expense): | ||||||||||||
| Interest income | 2,684 | 2,646 | 2,639 | |||||||||
| Impairment losses on investments | 0 | 0 | (3,254 | ) | ||||||||
| Other non-operating expense, net | (1,042 | ) | (453 | ) | (3,399 | ) | ||||||
| Total other income (expense) | 1,642 | 2,193 | (4,014 | ) | ||||||||
| Earnings before income taxes | 161,392 | 160,662 | 162,195 | |||||||||
| Income taxes | 50,444 | 48,101 | 49,864 | |||||||||
| Net earnings | 110,948 | 112,561 | 112,331 | |||||||||
| Other comprehensive income (loss): | ||||||||||||
| Foreign currency translation adjustments | 15,819 | (3,538 | ) | (3,804 | ) | |||||||
| Unrealized (losses) gains on available-for-sale investments, net of tax of ($17,110), ($2,129) and $23,422, respectively | (35,760 | ) | (3,684 | ) | 41,870 | |||||||
| Other comprehensive (loss) income | (19,941 | ) | (7,222 | ) | 38,066 | |||||||
| Comprehensive income | $ | 91,007 | $ | 105,339 | $ | 150,397 | ||||||
| Earnings per share: | ||||||||||||
| Basic | $ | 3.01 | $ | 3.06 | $ | 3.04 | ||||||
| Diluted | $ | 3.00 | $ | 3.05 | $ | 3.04 | ||||||
| Cash dividends per common share: | $ | 1.23 | $ | 1.18 | $ | 1.11 | ||||||
| Weighted average common shares outstanding: | ||||||||||||
| Basic | 36,890 | 36,836 | 36,939 | |||||||||
| Diluted | 37,005 | 36,900 | 37,006 |
See Notes to Consolidated Financial Statements.
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CONSOLIDATED BALANCE SHEETS
Techne Corporation and Subsidiaries
(in thousands, except share and per share data)
| June 30, | ||||||||
| 2014 | 2013 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 318,568 | $ | 163,786 | ||||
| Short-term available-for-sale investments | 44,786 | 169,151 | ||||||
| Trade accounts receivable, less allowance for doubtful accounts of $487 and $428, respectively | 47,874 | 38,183 | ||||||
| Other receivables | 7,127 | 1,992 | ||||||
| Deferred income taxes | 9,623 | 0 | ||||||
| Inventories | 38,847 | 34,877 | ||||||
| Prepaid expenses | 2,588 | 1,527 | ||||||
| Total current assets | 469,413 | 409,516 | ||||||
| Available-for-sale investments | 3,575 | 132,376 | ||||||
| Property and equipment, net | 117,120 | 108,756 | ||||||
| Goodwill | 151,473 | 84,336 | ||||||
| Intangible assets, net | 108,776 | 40,552 | ||||||
| Investments in unconsolidated entities | 10,446 | 531 | ||||||
| Other assets | 1,688 | 2,031 | ||||||
| $ | 862,491 | $ | 778,098 | |||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Trade accounts payable | $ | 9,652 | $ | 6,236 | ||||
| Salaries, wages and related accruals | 6,158 | 4,025 | ||||||
| Accrued expenses | 4,136 | 9,603 | ||||||
| Income taxes payable | 496 | 2,276 | ||||||
| Related party note payable, current | 5,949 | 0 | ||||||
| Deferred income taxes | 0 | 9,944 | ||||||
| Total current liabilities | 26,391 | 32,084 | ||||||
| Deferred income taxes | 33,838 | 8,473 | ||||||
| Related party note payable, long-term | 6,997 | 0 | ||||||
| Commitments and contingencies (Note I) | ||||||||
| Shareholders’ equity: | ||||||||
| Undesignated capital stock, no par; authorized 5,000,000 shares; none issued or outstanding | 0 | 0 | ||||||
| Common stock, par value $.01 a share; authorized 100,000,000 shares; issued and outstanding 37,002,203 and 36,834,678 shares, respectively | 370 | 368 | ||||||
| Additional paid-in capital | 147,004 | 134,895 | ||||||
| Retained earnings | 653,279 | 587,725 | ||||||
| Accumulated other comprehensive (loss) income | (5,388 | ) | 14,553 | |||||
| Total shareholders’ equity | 795,265 | 737,541 | ||||||
| $ | 862,491 | $ | 778,098 | |||||
See Notes to Consolidated Financial Statements.
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CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
Techne Corporation and Subsidiaries
(in thousands)
| Common Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Compre- hensive Income(Loss) | Total | ||||||||||||||||||||
| Shares | Amount | |||||||||||||||||||||||
| Balances at June 30, 2011 | 37,153 | $ | 371 | $ | 129,312 | $ | 472,730 | $ | (16,291 | ) | $ | 586,122 | ||||||||||||
| Net earnings | 112,331 | 112,331 | ||||||||||||||||||||||
| Other comprehensive income | 38,066 | 38,066 | ||||||||||||||||||||||
| Common stock issued for exercise of options | 17 | 0 | 847 | 847 | ||||||||||||||||||||
| Repurchase of common stock | (344 | ) | (3 | ) | (23,595 | ) | (23,598 | ) | ||||||||||||||||
| Cash dividends | (41,018 | ) | (41,018 | ) | ||||||||||||||||||||
| Stock-based compensation expense | 1,641 | 1,641 | ||||||||||||||||||||||
| Tax benefit from exercise of stock options | 51 | 51 | ||||||||||||||||||||||
| Balances at June 30, 2012 | 36,826 | 368 | 131,851 | 520,448 | 21,775 | 674,442 | ||||||||||||||||||
| Net earnings | 112,561 | 112,561 | ||||||||||||||||||||||
| Other comprehensive loss | (7,222 | ) | (7,222 | ) | ||||||||||||||||||||
| Common stock issued for exercise of options | 22 | 0 | 1,105 | 1,105 | ||||||||||||||||||||
| Common stock issued for restricted stock award | 15 | 0 | 0 | |||||||||||||||||||||
| Repurchase of common stock | (28 | ) | (0 | ) | (1,821 | ) | (1,821 | ) | ||||||||||||||||
| Cash dividends | (43,463 | ) | (43,463 | ) | ||||||||||||||||||||
| Stock-based compensation expense | 1,864 | 1,864 | ||||||||||||||||||||||
| Tax benefit from exercise of stock options | 75 | 75 | ||||||||||||||||||||||
| Balances at June 30, 2013 | 36,835 | 368 | 134,895 | 587,725 | 14,553 | 737,541 | ||||||||||||||||||
| Net earnings | 110,948 | 110,948 | ||||||||||||||||||||||
| Other comprehensive loss | (19,941 | ) | (19,941 | ) | ||||||||||||||||||||
| Surrender and retirement of stock to exercise options | (1 | ) | (0 | ) | (56 | ) | (56 | ) | ||||||||||||||||
| Common stock issued for exercise of options | 142 | 2 | 8,380 | 8,382 | ||||||||||||||||||||
| Common stock issued for restricted stock awards | 26 | 0 | 0 | |||||||||||||||||||||
| Cash dividends | (45,394 | ) | (45,394 | ) | ||||||||||||||||||||
| Stock-based compensation expense | 3,523 | 3,523 | ||||||||||||||||||||||
| Tax benefit from exercise of stock options | 262 | 262 | ||||||||||||||||||||||
| Balances at June 30, 2014 | 37,002 | $ | 370 | $ | 147,004 | $ | 653,279 | $ | (5,388 | ) | $ | 795,265 | ||||||||||||
See Notes to Consolidated Financial Statements.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
Techne Corporation and Subsidiaries
(in thousands)
| Year Ended June 30, | ||||||||||||
| 2014 | 2013 | 2012 | ||||||||||
| Cash flows from operating activities: | ||||||||||||
| Net earnings | $ | 110,948 | $ | 112,561 | $ | 112,331 | ||||||
| Adjustments to reconcile net earnings to net cash provided by operating activities: | ||||||||||||
| Depreciation and amortization | 19,175 | 12,321 | 12,467 | |||||||||
| Costs recognized on sale of acquired inventory | 7,480 | 4,501 | 7,573 | |||||||||
| Deferred income taxes | (2,853 | ) | (2,534 | ) | (7,363 | ) | ||||||
| Stock-based compensation expense | 3,523 | 1,864 | 1,641 | |||||||||
| Excess tax benefit from stock option exercises | (262 | ) | (75 | ) | (51 | ) | ||||||
| Impairment losses on investments | 0 | 0 | 3,254 | |||||||||
| Net (gain) loss from equity method investees | 0 | (570 | ) | 603 | ||||||||
| Other | 592 | 763 | 230 | |||||||||
| Change in operating assets and liabilities, net of acquisitions: | ||||||||||||
| Trade accounts and other receivables | 1,145 | (2,334 | ) | (2,096 | ) | |||||||
| Inventories | (2,895 | ) | (2,216 | ) | (1,577 | ) | ||||||
| Prepaid expenses | (554 | ) | (33 | ) | (476 | ) | ||||||
| Trade accounts payable and accrued expenses | 1,368 | 243 | 1,581 | |||||||||
| Salaries, wages and related accruals | 1,034 | (92 | ) | 686 | ||||||||
| Income taxes payable | (1,939 | ) | (837 | ) | (2,057 | ) | ||||||
| Net cash provided by operating activities | 136,762 | 123,562 | 126,746 | |||||||||
| Cash flows from investing activities: | ||||||||||||
| Purchase of available-for-sale investments | (106,746 | ) | (112,712 | ) | (147,011 | ) | ||||||
| Proceeds from sale of available-for-sale investments | 229,975 | 41,507 | 64,291 | |||||||||
| Proceeds from maturities of available-for-sale investments | 59,435 | 62,103 | 67,435 | |||||||||
| Additions to property and equipment | (13,821 | ) | (22,454 | ) | (6,017 | ) | ||||||
| Acquisitions, net of cash acquired | (109,180 | ) | 0 | 0 | ||||||||
| Investment in unconsolidated entity | (10,000 | ) | 0 | 0 | ||||||||
| Other | 25 | 352 | (366 | ) | ||||||||
| Net cash provided by (used in) investing activities | 49,688 | (31,204 | ) | (21,668 | ) | |||||||
| Cash flows from financing activities: | ||||||||||||
| Cash dividends | (45,394 | ) | (43,463 | ) | (41,018 | ) | ||||||
| Proceeds from stock option exercises | 8,326 | 1,105 | 847 | |||||||||
| Excess tax benefit from stock option exercises | 262 | 75 | 51 | |||||||||
| Purchase of common stock for stock bonus plans | 0 | (573 | ) | (907 | ) | |||||||
| Repurchase of common stock | 0 | (1,821 | ) | (23,598 | ) | |||||||
| Net cash used in financing activities | (36,806 | ) | (44,677 | ) | (64,625 | ) | ||||||
| Effect of exchange rate changes on cash and cash equivalents | 5,138 | (570 | ) | (1,391 | ) | |||||||
| Net change in cash and cash equivalents | 154,782 | 47,111 | 39,062 | |||||||||
| Cash and cash equivalents at beginning of year | 163,786 | 116,675 | 77,613 | |||||||||
| Cash and cash equivalents at end of year | $ | 318,568 | $ | 163,786 | $ | 116,675 | ||||||
See Notes to Consolidated Financial Statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Techne Corporation and Subsidiaries
Years ended June 30, 2014, 2013 and 2012
A. Description of Business and Summary of Significant Accounting Policies:
Description of business: Techne Corporation and subsidiaries, collectively doing business as Bio-Techne, (the Company) develop, manufacture and sell biotechnology products and clinical diagnostic controls worldwide. With its deep product portfolio and application expertise, Bio-Techne is a leader in providing specialized proteins, including cytokines and growth factors, and related immunoassays, small molecules and other reagents to the research, diagnostics and clinical controls markets.
Estimates: The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. These estimates include the valuation of accounts receivable, available-for-sale investments, inventory, intangible assets, stock based compensation and income taxes. Actual results could differ from these estimates.
Principles of consolidation: The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated.
Translation of foreign financial statements: Assets and liabilities of the Company’s foreign operations are translated at year-end rates of exchange and the resulting gains and losses arising from the translation of net assets located outside the U.S. are recorded as other comprehensive income (loss) on the consolidated statement of earnings and comprehensive income. The cumulative translation adjustment is a component of accumulated other comprehensive income (loss) on the consolidated balance sheets. Foreign statements of earnings are translated at the average rate of exchange for the year. Foreign currency transaction gains and losses are included in other non-operating expense in the consolidated statements of earnings.
Revenue recognition: The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable and collectability is reasonably assured. Payment terms for shipments to end-users are generally net 30 days. Payment terms for distributor shipments may range from 30 to 90 days. Freight charges billed to end-users are included in net sales and freight costs are included in cost of sales. Freight charges on shipments to distributors are paid directly by the distributor. Any claims for credit or return of goods must be made within 10 days of receipt. Revenues are reduced to reflect estimated credits and returns. Sales, use, value-added and other excise taxes are not included in revenue.
Research and development: Research and development expenditures are expensed as incurred. Development activities generally relate to creating new products, improving or creating variations of existing products, or modifying existing products to meet new applications.
Advertising costs: Advertising expenses (including production and communication costs) were $3.4 million, $3.2 million and $3.4 million for fiscal 2014, 2013 and 2012, respectively. The Company expenses advertising expenses as incurred.
Share-based compensation: The cost of employee services received in exchange for the award of equity instruments is based on the fair value of the award at the date of grant. 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. Compensation cost is recognized using a straight-line method over the vesting period and is net of estimated forfeitures. Stock option exercises and stock awards are satisfied through the issuance of new shares.
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Income taxes: The Company uses the asset and liability method of accounting for income taxes. Deferred tax assets and liabilities are recognized to record the income tax effect of temporary differences between the tax basis and financial reporting basis of assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Tax positions taken or expected to be taken in a tax return are recognized in the financial statements when it is more likely than not that the position would be sustained upon examination by tax authorities. A recognized tax position is then measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. The Company recognizes interest and penalties related to unrecognized tax benefits in income tax expense.
Financial instruments not measured at fair value: Certain of the Company’s financial instruments are not measured at fair value but nevertheless are recorded at carrying amounts approximating fair value, based on their short-term nature. These financial instruments include cash and cash equivalents, accounts receivable, accounts payable and other current liabilities.
Cash and equivalents: Cash and cash equivalents include cash on hand and highly-liquid investments with original maturities of three months or less.
Available-for-sale investments: Available-for-sale investments consist of debt instruments with original maturities of generally three months to three years and equity securities. Available-for-sale investments are recorded based on trade-date. The Company considers all of its marketable securities available-for-sale and reports them at fair value. The Company utilizes valuation techniques for determining fair market value which maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. The Company determines fair value based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels:
Level 1 Inputs: Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date.
Level 2 Inputs: Other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability.
Level 3 Inputs: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at measurement date.
Unrealized gains and losses on available-for-sale securities are excluded from income, but are included, net of taxes, in other comprehensive income. If an “other-than-temporary” impairment is determined to exist, the difference between the value of the investment security recorded in the financial statements and the Company’s current estimate of the fair value is recognized as a charge to earnings in the period in which the impairment is determined.
Inventories: Inventories are stated at the lower of cost (first-in, first-out method) or market. The Company regularly reviews inventory on hand for slow-moving and obsolete inventory, inventory not meeting quality control standards and inventory subject to expiration. To meet strict customer quality standards, the Company has established a highly controlled manufacturing process for proteins, antibodies and its chemically-based products. These products require the initial manufacture of multiple batches to determine if quality standards can be consistently met. In addition, the Company will produce larger batches of established products than current sales requirements due to economies of scale. The manufacturing process for these products, therefore, has and will continue to produce quantities in excess of forecasted usage. The Company values its manufactured protein and antibody inventory based on a two-year forecast and its chemically-based products on a five-year forecast. Inventory quantities in excess of the forecast are not valued due to uncertainty over salability. Sales of previously unvalued protein, antibody and chemically-based inventory for fiscal years 2014, 2013 and 2012 were not material.
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Property and equipment: Property and equipment are recorded at cost. Equipment is depreciated using the straight-line method over an estimated useful life of five years. Buildings, building improvements and leasehold improvements are amortized over estimated useful lives of 5 to 40 years. Property and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. In the current year, the Company has identified no such events.
Goodwill: At June 30, 2014 and 2013, the Company had recorded goodwill of $151.5 million and $84.3 million, respectively. The Company tests goodwill at least annually for impairment. The Company completed its annual impairment testing of goodwill and concluded that no impairment existed as of June 30, 2014.
Intangible assets: Intangible assets are being amortized over their estimated useful lives. Intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. In the current year, the Company has identified no such events.
Investments in unconsolidated entities: The Company has equity investments in several start-up and early development stage companies. The accounting treatment of each investment (cost method or equity method) is dependent upon a number of factors, including, but not limited to, the Company’s share in the equity of the investee and the Company’s ability to exercise significant influence over the operating and financial policies of the investee.
B. Acquisitions:
Bionostics Holdings, Ltd.: On July 22, 2013, the Company acquired for 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. Bionostics is included in the Company’s Clinical Controls segment.
In connection with the Bionostics acquisition, the Company recorded $14.4 million of developed technology intangible assets that have an estimated useful life of 9 years, $2.7 million of trade name intangible assets that have an estimated useful life of 5 years, $2.4 million related to non-compete agreements that have an estimated useful life of 3 years, and $41.0 million related to customer relationships that have an estimated useful life of 14 years. The intangible asset amortization is not deductible for income tax purposes.
The goodwill recorded as a result of the Bionostics acquisition represents the strategic benefits of growing the Company’s product portfolio and the expected revenue growth from increased market penetration from future products and customers. The goodwill is not deductible for income tax purposes.
Transaction costs of $0.5 million and $0.6 million were included in the Company’s selling, general and administrative costs during fiscal 2014 and 2013, respectively, related to the Bionostics acquisition.
Shanghai PrimeGene Bio-Tech Co.: On April 30, 2014, the Company acquired all of the ownership interest of Shanghai PrimeGene Bio-Tech Co. (PrimeGene). PrimeGene manufactures recombinant proteins and is included in the Company’s Biotechnology segment. The Company paid approximately $6.0 million at closing, with the remaining purchase price payable over fiscal years 2015 to 2017. The note payable is due to individuals who are currently employed by PrimeGene.
In connection with the PrimeGene acquisition, the Company recorded $2.2 million of developed technology intangible assets that have an estimated useful life of 9 years, $3.0 million of trade name intangible assets that have an estimated useful life of 11 years, $0.3 million related to non-compete agreements that have an estimated useful life of 3 years, and $9.1 million related to customer relationships that have an estimated useful life of 9 years. The intangible asset amortization is not deductible for income tax purposes.
The goodwill recorded as a result of the PrimeGene acquisition represents the strategic benefits of growing the Company’s product portfolio and the expected revenue growth from increased market penetration from future products and customers. The goodwill is not deductible for income tax purposes.
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Transaction costs of $0.4 million were included in the Company’s selling, general and administrative costs during fiscal 2014, related to the PrimeGene acquisition.
The aggregate purchase price of the acquisitions was allocated to the assets acquired and liabilities assumed based on their preliminarily estimated fair values at the date of acquisition. The preliminary estimate of the excess of purchase price over the fair value of net tangible assets acquired was allocated to identifiable intangible assets and goodwill. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed as a result of the acquisitions (in thousands):
| Bionostics | PrimeGene | |||||||
| Current assets | $ | 9,605 | $ | 1,272 | ||||
| Intangible Assets | 60,500 | 14,622 | ||||||
| Goodwill | 56,349 | 5,518 | ||||||
| Equipment | 2,180 | 546 | ||||||
| Total assets acquired | 128,634 | 21,958 | ||||||
| Liabilities | 3,007 | 887 | ||||||
| Deferred income taxes | 22,478 | 2,310 | ||||||
| Net assets acquired | $ | 103,149 | $ | 18,761 | ||||
| Cash paid, net of cash acquired | $ | 103,149 | $ | 6,031 | ||||
| Note payable | 0 | 12,730 | ||||||
| Net purchase price | $ | 103,149 | $ | 18,761 | ||||
Tangible assets acquired, net of liabilities assumed, were stated at fair value at the date of acquisition based on management’s assessment. The purchase price allocated to developed technology, trade names, non-compete agreements and customer relationships was based on management’s forecasted cash inflows and outflows and using a relief-from-royalty and a multi-period excess earnings method to calculate the fair value of assets purchased. The developed technology is being amortized with the expense reflected in cost of goods sold in the Consolidated Statement of Earnings and Comprehensive Income. Amortization expense related to trade names, the non-compete agreement and customer relationships is reflected in selling, general and administrative expenses in the Consolidated Statement of Earnings and Comprehensive Income. The deferred income tax liability represents the estimated future impact of adjustments for the cost to be recognized upon the sale of acquired inventory that was written up to fair value and intangible asset amortization, both of which are not deductible for income tax purposes.
The Company’s consolidated financial statements for fiscal 2014 include Bionostics and PrimeGene net sales of $33.1 million and $0.7 million, respectively and net income of $2.1 million and net loss of $0.1 million, respectively. Included in Bionostics and PrimeGene results for fiscal 2014 were amortization of intangibles of $5.5 million and $0.3 million, respectively, and costs recognized on the sales of acquired inventory of $1.5 million and $0.2 million, respectively.
C. Available-For-Sale Investments:
At June 30, 2014 and 2013, the amortized cost and market value of the Company’s available-for-sale securities by major security type were as follows (in thousands):
| June 30, | ||||||||||||||||
| 2014 | 2013 | |||||||||||||||
| Cost | Market | Cost | Market | |||||||||||||
| State and municipal debt securities | $ | 3,525 | $ | 3,525 | $ | 179,463 | $ | 179,764 | ||||||||
| Corporate debt securities | 100 | 100 | 12,804 | 12,817 | ||||||||||||
| Foreign corporate debt securities | 0 | 0 | 4,484 | 4,490 | ||||||||||||
| Certificates of deposit | 7,639 | 7,639 | 14,809 | 14,809 | ||||||||||||
| Equity securities | 29,472 | 37,097 | 29,472 | 89,647 | ||||||||||||
| $ | 40,736 | $ | 48,361 | $ | 241,032 | $ | 301,527 | |||||||||
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At June 30, 2014 and 2013, all of the Company’s available-for-sale debt securities were valued using Level 2 inputs, while its equity securities were valued using Level 1 inputs. Certificates of deposit are carried at cost and are not subject to the fair value hierarchy. There were no transfers between Level 1 and Level 2 securities during fiscal 2014. Gross unrealized gains on available-for-sale investments were $7.6 million at June 30, 2014. Gross unrealized gains and unrealized losses on available-for-sale investments were $60.7 million and $0.2 million, respectively, at June 30, 2013.
The Company’s investment in equity securities consists of investments in the common stock and warrants of ChemoCentryx, Inc. (CCXI). The warrants are to purchase 150,000 shares of CCXI common stock at $20 per share and expire in February, 2022. The fair value of the warrants as of June 30, 2014 and 2013 were $0.6 million and $1.5 million, respectively, and were valued using Level 2 inputs. At June 30, 2014, the Company holds an approximate 14% interest in CCXI.
Contractual maturities of available-for-sale debt securities are shown below (in thousands). Expected maturities may differ from contractual maturities because borrowers may have the right to recall or prepay obligations with or without call or prepayment penalties.
| Year Ending June 30, 2014: | ||||
| Due within one year | $ | 7,689 | ||
| Due one to five years | 3,575 | |||
| $ | 11,264 | |||
Proceeds from maturities or sales of available-for-sale securities were $290 million, $104 million and $132 million during fiscal 2014, 2013 and 2012, respectively. There were no material realized gains or losses on these sales. Realized gains and losses are determined on the specific identification method.
D. Inventories:
Inventories consist of (in thousands):
| June 30, | ||||||||
| 2014 | 2013 | |||||||
| Raw materials | $ | 9,852 | $ | 5,885 | ||||
| Finished goods | 28,995 | 28,992 | ||||||
| $ | 38,847 | $ | 34,877 | |||||
At June 30, 2014 and 2013, the Company had $30.3 million and $26.0 million, respectively, of excess protein, antibody and chemically-based inventory on hand which was not valued.
E. Property and Equipment:
Property and equipment consist of (in thousands):
| June 30, | ||||||||
| 2014 | 2013 | |||||||
| Cost: | ||||||||
| Land | $ | 7,468 | $ | 7,438 | ||||
| Buildings and improvements | 149,442 | 142,656 | ||||||
| Machinery and equipment | 53,067 | 39,706 | ||||||
| 209,977 | 189,800 | |||||||
| Accumulated depreciation and amortization | (92,857 | ) | (81,044 | ) | ||||
| $ | 117,120 | $ | 108,756 | |||||
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F. Intangible Assets and Goodwill:
Intangible assets and goodwill consist of (in thousands):
| June 30, | ||||||||||||
| Useful Life | 2014 | 2013 | ||||||||||
| Developed technology | 8-12 years | $ | 48,166 | $ | 28,656 | |||||||
| Trade names | 5-15 years | 24,280 | 17,659 | |||||||||
| Customer relationships | 8-14 years | 59,240 | 8,613 | |||||||||
| Non-compete agreement | 3-5 years | 3,109 | 400 | |||||||||
| 134,795 | 55,328 | |||||||||||
| Accumulated amortization | (26,019 | ) | (14,776 | ) | ||||||||
| $ | 108,776 | $ | 40,552 | |||||||||
| Goodwill | $ | 151,473 | $ | 84,336 | ||||||||
The change in the carrying amount of goodwill in fiscal 2014 resulted from the Bionostics and PrimeGene acquisitions and currency translation.
Changes to the carrying amount of net intangible assets consists of (in thousands)
| Year Ended June 30, | ||||||||
| 2014 | 2013 | |||||||
| Beginning balance | $ | 40,552 | $ | 46,476 | ||||
| Acquisitions | 75,122 | 0 | ||||||
| Amortization expense | (10,267 | ) | (5,061 | ) | ||||
| Currency translation | 3,369 | (863 | ) | |||||
| Ending balance | $ | 108,776 | $ | 40,552 | ||||
Amortization expense related to technologies included in cost of sales was $4.2 million, $3.0 million and $3.0 million in fiscal 2014, 2013 and 2012, respectively. Amortization expense related to trade names, customer relationships, and the non-compete agreement included in selling, general and administrative expense was $6.1 million, $2.1 million and $2.1 million in fiscal 2014, 2013 and 2012, respectively.
The estimated future amortization expense for intangible assets as of June 30, 2014 is as follows (in thousands):
| Year Ending June 30: | ||||
| 2015 | $ | 12,187 | ||
| 2016 | 12,168 | |||
| 2017 | 11,340 | |||
| 2018 | 11,204 | |||
| 2019 | 10,698 | |||
| Thereafter | 51,179 | |||
| $ | 108,776 | |||
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G. Investments in Unconsolidated Entities:
On April 1, 2014, the Company entered into an Agreement of Investment and Merger (the Agreement) withCyVek, Inc. (CyVek). Pursuant to the terms of the Agreement, the Company invested $10.0 million in CyVek and received shares of Common Stock representing approximately 19.9% of the outstanding voting stock of CyVek.
If, within twelve months of the date of the Agreement, CyVek meets commercial milestones related to the sale of its products, the Company will acquire CyVek through a merger, with CyVek surviving as a wholly-owned subsidiary of the Company. If the merger is consummated, the Company will make an initial payment of $60.0 million to the other stockholders of CyVek. The purchase price payable at the closing of the merger may be adjusted based on the final levels of cash, indebtedness and transaction expenses of CyVek as of the closing. The Company will also pay CyVek’s other stockholders up to $35.0 million based on the revenue generated by CyVek’s products and related products before the date that is 30 months from the closing of the Merger. The Company will also pay CyVek’s other stockholders 50% of the amount, if any, by which the revenue from CyVek’s products and related products exceeds $100.0 million in calendar year 2020.
The Company has determined that it is not practicable to estimate the fair value of its investment in CyVek as CyVek is a development stage entity. The Company is not aware of any events or changes in circumstances that would materially impact the value of its investment.
H. Commitments and Contingencies:
The Company leases office and warehouse space, vehicles and various office equipment under operating leases. At June 30, 2014, aggregate net minimum rental commitments under non-cancelable leases having an initial or remaining term of more than one year are payable as follows (in thousands):
| Year Ending June 30: | ||||
| 2015 | $ | 1,785 | ||
| 2016 | 1,649 | |||
| 2017 | 1,484 | |||
| 2018 | 1,238 | |||
| 2019 | 814 | |||
| Thereafter | 7,726 | |||
| $ | 14,696 | |||
Total rent expense was approximately $1.6 million, $0.7 million and $0.8 million for the years ended June 30, 2014, 2013 and 2012, respectively.
The Company is routinely subject to claims and involved in legal actions which are incidental to the business of the Company. Although it is difficult to predict the ultimate outcome of these matters, management believes that any ultimate liability will not materially affect the consolidated financial position or results of operations of the Company.
I. Share-based Compensation and Other Benefit Plans:
Equity incentive plan: The Company’s 2010 Equity Incentive Plan (the 2010 Plan) provides for the granting of incentive and nonqualified stock options, restricted stock, restricted stock units, performance shares, performance units and stock appreciation rights. There are 3.0 million shares of common stock authorized for grant under the 2010 Plan. At June 30, 2014, there were 2.3 million shares of common stock available for grant under the 2010 Plan. The maximum term of incentive options granted under the 2010 Plan is ten years. The 2010 Plan replaced the Company’s 1998 Nonqualified Stock Option Plan (the 1998 Plan) and 1997 Incentive Stock Option Plan (the 1997 Plan). The 2010 Plan, the 1998 Plan and the 1997 Plan (collectively, the Plans) are administered by the Board of Directors and its Compensation Committee, which determine the persons who are to receive awards under the Plans, the number of shares subject to each award and the term and exercise price of each award. The number of shares of common stock subject to outstanding awards at June 30, 2014 under the 2010 Plan, the 1998 Plan and the 1997 Plan were 656,000, 151,000, and 9,000, respectively.
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Stock option activity under the Plans for the three years ended June 30, 2014, consists of the following (shares in thousands):
| Shares | Weighted Average Exercise Price | Weighted Avg. Contractual Life (Yrs.) | Aggregate Intrinsic Value | |||||||||||
| Outstanding at June 30, 2011 | 499 | $ | 64.15 | |||||||||||
| Granted | 95 | 71.94 | ||||||||||||
| Forfeited | (2 | ) | 76.15 | |||||||||||
| Exercised | (17 | ) | 50.98 | |||||||||||
| Outstanding at June 30, 2012 | 575 | 65.78 | ||||||||||||
| Granted | 175 | 67.80 | ||||||||||||
| Exercised | (22 | ) | 51.17 | |||||||||||
| Outstanding at June 30, 2013 | 728 | 66.70 | ||||||||||||
| Granted | 251 | 80.88 | ||||||||||||
| Forfeited | (26 | ) | 76.23 | |||||||||||
| Exercised | (142 | ) | 59.07 | |||||||||||
| Outstanding at June 30, 2014 | 811 | $ | 72.11 | 5.4 | $16.6 million | |||||||||
| Exercisable at June 30: | ||||||||||||||
| 2012 | 403 | $ | 62.67 | |||||||||||
| 2013 | 497 | 65.04 | ||||||||||||
| 2014 | 534 | 69.49 | 5.1 | $12.3 million |
The fair values of options granted under the Plans were estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions used:
| Year Ended June 30, | ||||||||||||
| 2014 | 2013 | 2012 | ||||||||||
| Dividend yield | 1.5% | 1.8% | 1.5% | |||||||||
| Expected volatility | 18%-22% | 18%-23% | 22%-23% | |||||||||
| Risk-free interest rates | 1.4%-2.1% | 0.4%-1.4% | 0.9%-2.0% | |||||||||
| Expected lives | 6 years | 5 years | 6 years |
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.
The weighted average fair value of options granted during fiscal 2014, 2013 and 2012 was $14.77, $9.72 and $14.14, respectively. The total intrinsic value of options exercised during fiscal 2014, 2013 and 2012 were $3.7 million, $0.4 million and $0.3 million, respectively. The total fair value of options vested during fiscal 2014, 2013 and 2012 were $2.2 million, $1.5 million and $1.6 million, respectively.
In fiscal 2014 and fiscal 2013, 26,355 and 15,000 restricted common stock shares were granted at weighted average grant date fair values of $86.60 and $67.46 per share, respectively. Non-vested restricted common stock shares at June 30, 2014 and 2013 were 36,355 and 15,000, respectively.
In fiscal 2014, 5,000 restricted stock units were granted at a weighted average grant date fair value of $86.25. The restricted stock units vest over a three year period.
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Stock-based compensation cost of $3.5 million, $1.9 million and $1.6 million was included in selling, general and administrative expense in fiscal 2014, 2013 and 2012, respectively. As of June 30, 2014, there was $5.5 million of unrecognized compensation cost related to non-vested stock options, non-vested restricted stock units and non-vested restricted stock which will be expensed in fiscal 2015 through 2018. The weighted average period over which the compensation cost is expected to be recognized is 1.2 years.
Profit sharing and savings plans: The Company has profit sharing and savings plans for its U.S. employees, which conform to IRS provisions for 401(k) plans. The Company may make profit sharing contributions at the discretion of the Board of Directors. The Company has recorded an expense for contributions to the plans of $0.7 million and $0.8 million for the years ended June 30, 2014 and 2012, respectively. No contribution was charged to operations for fiscal 2013. The Company operates defined contribution pension plans for its U.K. employees. The Company has recorded an expense for contributions to the plans of $0.6 million, $0.6 million and $0.5 million for the years ended June 30, 2014, 2013 and 2012, respectively.
Performance incentive programs: In fiscal 2014, under certain employment agreements and a Management Incentive Plan available to executives officers and certain management personnel, the Company recorded cash bonuses of $0.9 million and granted options for 216,000 shares of common stock, 5,000 restricted stock units and 17,855 shares of restricted common stock. In fiscal 2013 and 2012, under certain employment agreements with executive officers and an executive Incentive Bonus Plan, the Company recorded cash bonuses of $0.3 million and $31,000 and granted options for 132,852 and 22,932 shares of common stock for the years ended June 30, 2013 and 2012, respectively. In addition, in fiscal 2013, 15,000 restricted common stock shares were issued to an executive officer.
J. Income Taxes:
The provisions for income taxes consist of the following (in thousands):
| Year Ended June 30, | ||||||||||||
| 2014 | 2013 | 2012 | ||||||||||
| Earnings before income taxes consist of: | ||||||||||||
| Domestic | $ | 127,681 | $ | 127,491 | $ | 130,009 | ||||||
| Foreign | 33,711 | 33,171 | 32,186 | |||||||||
| $ | 161,392 | $ | 160,662 | $ | 162,195 | |||||||
| Taxes on income consist of: | ||||||||||||
| Currently payable: | ||||||||||||
| Federal | $ | 40,967 | $ | 37,666 | $ | 42,288 | ||||||
| State | 1,709 | 2,012 | 3,065 | |||||||||
| Foreign | 10,668 | 10,758 | 8,891 | |||||||||
| Net deferred: | ||||||||||||
| Federal | (1,137 | ) | (595 | ) | (4,318 | ) | ||||||
| State | (41 | ) | (7 | ) | (149 | ) | ||||||
| Foreign | (1,722 | ) | (1,733 | ) | 87 | |||||||
| $ | 50,444 | $ | 48,101 | $ | 49,864 | |||||||
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The following is a reconciliation of the federal tax calculated at the statutory rate of 35% to the actual income taxes provided (in thousands):
| Year Ended June 30, | ||||||||||||
| 2014 | 2013 | 2012 | ||||||||||
| Computed expected federal income tax expense | $ | 56,487 | $ | 56,232 | $ | 56,768 | ||||||
| State income taxes, net of federal benefit | 1,048 | 1,300 | 2,038 | |||||||||
| Qualified production activity deduction | (3,823 | ) | (3,774 | ) | (3,917 | ) | ||||||
| Research and development tax credit | (476 | ) | (1,392 | ) | (465 | ) | ||||||
| Tax-exempt interest | (654 | ) | (568 | ) | (565 | ) | ||||||
| Foreign tax rate differences | (2,857 | ) | (2,587 | ) | (2,276 | ) | ||||||
| Change in deferred tax valuation allowance | 0 | 0 | (3,016 | ) | ||||||||
| Other | 719 | (1,110 | ) | 1,297 | ||||||||
| $ | 50,444 | $ | 48,101 | $ | 49,864 | |||||||
Temporary differences comprising deferred taxes on the Consolidated Balance Sheets are as follows (in thousands):
| June 30 | ||||||||
| 2014 | 2013 | |||||||
| Inventory | $ | 9,932 | $ | 9,049 | ||||
| Unrealized profit on intercompany sales | 1,959 | 1,973 | ||||||
| Excess tax basis in equity investments | 4,344 | 4,760 | ||||||
| Deferred compensation | 3,295 | 3,161 | ||||||
| Other | 1,129 | 885 | ||||||
| Valuation allowance | (1,806 | ) | 0 | |||||
| Net deferred tax assets | 18,853 | 19,828 | ||||||
| Net unrealized gain on available-for-sale investments | (2,745 | ) | (21,662 | ) | ||||
| Goodwill and intangible asset amortization | (37,641 | ) | (15,195 | ) | ||||
| Depreciation | (2,166 | ) | (701 | ) | ||||
| Other | (516 | ) | (687 | ) | ||||
| Deferred tax liabilities | (43,068 | ) | (38,245 | ) | ||||
| Net deferred tax liabilities | $ | (24,215 | ) | $ | (18,417 | ) | ||
A deferred tax valuation allowance is required when it is more likely than not that all or a portion of deferred tax assets will not be realized. At June 30, 2014, the Company has provided a valuation allowance for potential capital loss carryovers resulting from excess tax basis in certain of its equity investments. The Company believes that it is more likely than not that the results of future operations will generate sufficient taxable income to realize the recorded deferred tax assets.
During fiscal 2013, the Company’s R&D Europe subsidiary declared and paid a dividend of £20 million ($30.7 million) to the Company. The £20 million R&D Europe earnings had previously been taxed in the U.S. and therefore, no additional U.S. tax resulted from the repatriation. Undistributed earnings of the Company’s foreign subsidiaries amounted to approximately $174 million as of June 30, 2014. Deferred taxes have not been provided on such undistributed earnings, as the Company has either paid U.S. taxes on the undistributed earnings or intends to indefinitely reinvest the undistributed earnings in the foreign operations.
The Company’s unrecognized tax benefits at June 30, 2014, 2013 and 2012, including accrued interest and penalties, were not material. The Company does not believe it is reasonably possible that the total amounts of unrecognized tax benefits will significantly increase in the next twelve months. The Company files income tax returns in the U.S federal tax jurisdiction, the states of Minnesota, Massachusetts and California, and several jurisdictions outside the U.S. U.S. tax returns for 2011 and subsequent years remain open to examination by the tax authorities. The Company’s major non-U.S. tax jurisdictions are the United Kingdom, France and Germany, which have tax years open to examination for 2011 and subsequent years, and China, which has calendar year 2014 open to examination.
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K. Earnings Per Share:
The number of shares used to calculate earnings per share are as follows (in thousands, except per share data):
| Year Ended June 30, | ||||||||||||
| 2014 | 2013 | 2012 | ||||||||||
| Net earnings used for basic and diluted earnings per share | $ | 110,948 | $ | 112,561 | $ | 112,331 | ||||||
| Weighted average shares used in basic computation | 36,890 | 36,836 | 36,939 | |||||||||
| Dilutive stock options | 115 | 64 | 67 | |||||||||
| Weighted average shares used in diluted computation | 37,005 | 36,900 | 37,006 | |||||||||
| Basic EPS | $ | 3.01 | $ | 3.06 | $ | 3.04 | ||||||
| Diluted EPS | $ | 3.00 | $ | 3.05 | $ | 3.04 |
The dilutive effect of stock options 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 196,000, 329,000 and 94,000 at June 30, 2014, 2013 and 2012, respectively.
L. Segment Information:
The Company has two reportable segments based on the nature of its products. The Company’s Biotechnology reporting segment develops, manufactures and sells biotechnology research and diagnostic products world-wide. The Company’s Clinical Controls reporting segment develops and manufactures controls and calibrators for sale world-wide. No customer in the Biotechnology segment accounted for more than 10% of the segments net sales for the years ended June 30, 2014, 2013 and 2012. One customer accounted for approximately 14% of Clinical Controls’ net sales during fiscal 2014. No single customer accounted for more than 10% of Clinical Controls’ net sales in fiscal 2013 or 2012. There are no concentrations of business transacted with a particular customer or supplier or concentrations of revenue from a particular product or geographic area that would severely impact the Company in the near term.
The accounting policies of the segments are the same as those described in Note A. In evaluating segment performance, management focuses on sales and earnings before taxes.
Following is financial information relating to the operating segments (in thousands):
| Year Ended June 30, | ||||||||||||
| 2014 | 2013 | 2012 | ||||||||||
| External sales | ||||||||||||
| Biotechnology | $ | 300,578 | $ | 288,156 | $ | 293,274 | ||||||
| Clinical Controls | 57,185 | 22,419 | 21,286 | |||||||||
| Consolidated net sales | $ | 357,763 | $ | 310,575 | $ | 314,560 | ||||||
| Earnings before taxes | ||||||||||||
| Biotechnology | $ | 159,220 | $ | 156,910 | $ | 162,763 | ||||||
| Clinical Controls | 10,643 | 8,746 | 8,002 | |||||||||
| Segment earnings before taxes | 169,863 | 165,656 | 170,765 | |||||||||
| Corporate | (8,471 | ) | (4,994 | ) | (8,570 | ) | ||||||
| Consolidated earnings before taxes | $ | 161,392 | $ | 160,662 | $ | 162,195 | ||||||
| Goodwill | ||||||||||||
| Biotechnology | $ | 95,124 | $ | 84,336 | $ | 85,682 | ||||||
| Clinical Controls | 56,349 | 0 | 0 | |||||||||
| Consolidated goodwill | $ | 151,473 | $ | 84,336 | $ | 85,682 | ||||||
| Intangible assets, net | ||||||||||||
| Biotechnology | $ | 53,778 | $ | 40,552 | $ | 46,476 | ||||||
| Clinical Controls | 54,998 | 0 | 0 | |||||||||
| Consolidated intangible assets, net | $ | 108,776 | $ | 40,552 | $ | 46,476 | ||||||
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| Year Ended June 30, | ||||||||||||
| 2014 | 2013 | 2012 | ||||||||||
| Assets | ||||||||||||
| Biotechnology | $ | 685,302 | $ | 580,085 | $ | 529,392 | ||||||
| Clinical Controls | 55,615 | 24,887 | 22,135 | |||||||||
| Segment assets | 740,917 | 604,972 | 551,527 | |||||||||
| Corporate cash and available- for- sale investments | 60,142 | 108,504 | 112,443 | |||||||||
| Corporate property and equipment | 60,350 | 61,296 | 51,587 | |||||||||
| Corporate, other | 1,082 | 3,326 | 3,767 | |||||||||
| Consolidated assets | $ | 862,491 | $ | 778,098 | $ | 719,324 | ||||||
| Depreciation and amortization | ||||||||||||
| Biotechnology | $ | 10,879 | $ | 10,781 | $ | 10,920 | ||||||
| Clinical Controls | 7,205 | 389 | 411 | |||||||||
| Segment depreciation and amortization | 18,084 | 11,170 | 11,331 | |||||||||
| Corporate | 1,091 | 1,151 | 1,136 | |||||||||
| Consolidated depreciation and amortization | $ | 19,175 | $ | 12,321 | $ | 12,467 | ||||||
| Capital purchases | ||||||||||||
| Biotechnology | $ | 4,157 | $ | 3,248 | $ | 4,021 | ||||||
| Clinical Controls | 5,687 | 6,914 | 597 | |||||||||
| Segment capital purchases | 9,844 | 10,162 | 4,618 | |||||||||
| Corporate | 3,977 | 12,292 | 1,399 | |||||||||
| Consolidated capital purchases | $ | 13,821 | $ | 22,454 | $ | 6,017 | ||||||
The other reconciling items include the results of unallocated corporate expenses and the Company’s share of gain (losses) from its equity method investees.
Following is financial information relating to geographic areas (in thousands):
| Year Ended June 30, | ||||||||||||
| 2014 | 2013 | 2012 | ||||||||||
| External sales | ||||||||||||
| United States | $ | 190,359 | $ | 164,308 | $ | 172,310 | ||||||
| Europe | 97,157 | 88,297 | 90,142 | |||||||||
| China | 18,878 | 14,106 | 11,378 | |||||||||
| Other Asia | 32,704 | 28,608 | 25,988 | |||||||||
| Rest of world | 18,665 | 15,256 | 14,742 | |||||||||
| Total external sales | $ | 357,763 | $ | 310,575 | $ | 314,560 | ||||||
| Long-lived assets | ||||||||||||
| United States | $ | 109,790 | $ | 103,541 | $ | 87,968 | ||||||
| Europe | 8,340 | 7,129 | 7,528 | |||||||||
| China | 678 | 117 | 141 | |||||||||
| Total long-lived assets | $ | 118,808 | $ | 110,787 | $ | 95,637 | ||||||
External sales are attributed to countries based on the location of the customer or distributor. Long-lived assets are comprised of land, buildings and improvements and equipment, net of accumulated depreciation and other assets.
M. Supplemental Disclosures of Cash Flow Information and Noncash Investing and Financing Activities:
In fiscal 2014, the Company acquired PrimeGene for approximately $18.7 million. Approximately $6.0 million was paid at closing with approximately $12.7 million payable over fiscal years 2015 through 2017.
In fiscal 2014, 2013 and 2012, the Company paid cash for income taxes of $55.2 million, $51.6 million and $58.7 million, respectively.
In fiscal 2014, stock options for 1,077 shares of common stock were exercised by the surrender of 733 shares of common stock at fair market value of $56,000.
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During fiscal 2012, the Company’s cost basis investment in CCXI was converted to an available-for-sale investment carried at fair value.
N. Accumulated Other Comprehensive Income:
Changes in accumulated other comprehensive income (loss), net of tax, for the year ended June 30, 2014 consists of (in thousands):
| Unrealized Gains (Losses) on Available- for-Sale Investments | Foreign Currency Translation Adjustments | Total | ||||||||||
| Beginning balance | $ | 38,834 | $ | (24,281 | ) | $ | 14,553 | |||||
| Other comprehensive income before reclassifications | (35,142 | ) | 15,819 | (19,323 | ) | |||||||
| Reclassifications from accumulated other comprehensive income | (618 | ) | 0 | (618 | ) | |||||||
| Other comprehensive income | (35,760 | ) | 15,819 | (19,941 | ) | |||||||
| Ending balance | $ | 3,074 | $ | (8,462 | ) | $ | (5,388 | ) | ||||
O. Subsequent Events:
On July 2, 2014, the Company acquired all of the issued and outstanding equity interests of Novus Holdings LLC (Novus). The Company paid $60 million for the acquisition. Novus is a supplier of a large portfolio of both outsourced and in-house developed antibodies and other reagents for life science research. The transaction was financed through cash on hand.
On July 31, 2014, the Company acquired ProteinSimple. ProteinSimple develops and commercializes proprietary systems and consumables for protein analysis. ProteinSimple was acquired for approximately $300 million, subject to adjustment following closing based on the final level of working capital of ProteinSimple. The transaction was financed through cash on hand and a revolving line of credit facility governed by a Credit Agreement dated July 28, 2014 (the Credit Agreement).
The Credit Agreement provides for a revolving credit facility of $150 million, which can be increased by an additional $150 million subject to certain conditions. Borrowings under the Credit Agreement may be used for working capital and expenditures of the Company and its subsidiaries, including financing permitted acquisitions. Borrowings under the Credit Agreement bear interest at a variable rate. The Credit Agreement matures on July 31, 2019. The Credit Agreement contains customary restrictive and financial covenants. The Credit Agreement also contains customary events of default. The Company did not make any draws on the Credit Agreement at the closing of the Credit Agreement. On July 31, 2014, the Company drew $125 million on the Credit Agreement in relation to the closing of the ProteinSimple acquisition.
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Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Techne Corporation:
We have audited the accompanying consolidated balance sheets of Techne Corporation and subsidiaries (the Company) as of June 30, 2014 and 2013, and the related consolidated statements of earnings and comprehensive income, shareholders’ equity, and cash flows for each of the years in the three-year period ended June 30, 2014. We also have audited Techne Corporation’s internal control over financial reporting as of June 30, 2014, based on criteria established in Internal Control – Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Techne Corporation’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual report on Internal Controls over Financial Reporting. Our responsibility is to express an opinion on these consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Techne Corporation and subsidiaries as of June 30, 2014 and 2013, and the results of its operations and its cash flows for each of the years in the three-year period ended June 30, 2014, in conformity with U.S. generally accepted accounting principles. Also in our opinion, Techne Corporation maintained, in all material respects, effective internal control over financial reporting as of June 30, 2014, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
KPMG LLP
Minneapolis, Minnesota
August 29, 2014
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