Techne Corp (TECH) SEC Quarterly Report (10-Q) for Q3 2016

		Quarter Ended
		September 30,
		2016				2015
Net sales		$	130,581			$	112,381
Cost of sales			46,111				36,990
Gross margin			84,470				75,391
Operating expenses:
Selling, general and administrative			46,263				33,040
Research and development			12,765				11,322
Total operating expenses			59,028				44,362
Operating income			25,442				31,028
Other (expense) income			(1,314	)			818
Earnings before income taxes			24,128				31,847
Income taxes			7,845				9,139
Net earnings		$	16,281			$	22,707
Other comprehensive (loss) income:
Foreign currency translation adjustments			(3,234	)			(12,896	)
Unrealized gains and losses on available-for-sale investments, net of tax of ($171) and $3,752, respectively			9,714				(10,125	)
Other comprehensive (loss) income			6,480				(23,021	)
Comprehensive income (loss)		$	22,761			$	(314	)
Earnings per share:
Basic		$	0.44			$	0.61
Diluted		$	0.43			$	0.61
Cash dividends per common share:		$	0.32			$	0.32
Weighted average common shares outstanding:
Basic			37,281				37,169
Diluted			37,473				37,315

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		September 30, 2016 (unaudited)				June 30, 2016
ASSETS
Current assets:
Cash and cash equivalents		$	69,589			$	64,237
Short-term available-for-sale investments			52,381				31,598
Accounts receivable, less allowance for doubtful accounts of $626 and $555, respectively			109,813				93,393
Inventories			70,519				57,102
Prepaid expenses			7,849				7,561
Total current assets			310,151				253,891
Property and equipment, net			133,805				132,362
Intangible assets, net			503,626				310,524
Goodwill			565,789				430,882
Other assets			4,106				1,922
		$	1,517,478			$	1,129,581
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable		$	14,178			$	20,653
Salaries, wages and related accruals			10,110				14,868
Accrued expenses			19,967				8,371
Contingent consideration payable			49,900				0
Income taxes payable			4,646				1,779
Deferred revenue, current			4,484				4,717
Related party note payable, current			3,733				3,759
Total current liabilities			107,016				54,147
Deferred income taxes			135,512				62,837
Long-term debt obligations			343,500				130,000
Long-term contingent consideration payable			32,400				0
Other long-term liabilities			3,654				3,317
Shareholders' equity:
Common stock, par value $.01 per share; authorized 100,000,000; issued and outstanding 37,301,380 and 37, 253,771, respectively			373				372
Additional paid-in capital			184,213				178,760
Retained earnings			774,734				770,553
Accumulated other comprehensive loss			(63,925	)			(70,405	)
Total shareholders' equity			895,369				879,280
		$	1,517,478			$	1,129,581

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		Quarter Ended
		September 30,
		2016				2015
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings		$	16,281			$	22,707
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization			13,644				10,685
Costs recognized on sale of acquired inventory			4,219				1,113
Deferred income taxes			(1,170	)			(1,115	)
Stock-based compensation expense			3,176				2,038
Fair value adjustment to contingent consideration payable			1,900				-
Other			262				26
Change in operating assets and operating liabilities, net of acquisition:
Trade accounts and other receivables			(10,176	)			(3,763	)
Inventories			(2,414	)			(3,176	)
Prepaid expenses			605				(766	)
Trade accounts payable and accrued expenses			4,132				(416	)
Salaries, wages and related accruals			(7,257	)			(1,704	)
Income taxes payable			2,850				6,204
Net cash provided by operating activities			26,502				31,833
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, net of cash acquired			(259,004	)			(82,970	)
Proceeds from available-for-sale investments			-				3,930
Purchases of available for sale investments			(6,836	)			-
Additions to property and equipment			(2,442	)			(6,121	)
Net cash used in investing activities			(268,282	)			(85,161	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash dividends			(11,932	)			(11,894	)
Proceeds from stock option exercises			2,026				1,128
Excess tax benefit from stock option exercises			253				131
Borrowings under line-of-credit agreement			343,500				77,000
Payments on line-of-credit			(91,513	)			(24,500	)
Net cash provided by financing activities			242,334				41,865
Effect of exchange rate changes on cash and cash equivalents			5,248				5,773
Net increase (decrease) in cash and cash equivalents			5,352				(5,690	)
Cash and cash equivalents at beginning of period			64,237				54,532
Cash and cash equivalents at end of period		$	69,589			$	48,842

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Note 1. Basis of Presentation and Summary of Significant Accounting Policies:

The interim consolidated financial statements of Bio-Techne Corporation and subsidiaries, (the Company) presented here have been prepared by the Company and are unaudited. They 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. They 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.

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, 2016, included in the Company's Annual Report on Form 10-K for fiscal 2016. A summary of significant accounting policies followed by the Company is detailed in the Company's Annual Report on Form 10-K for fiscal 2016. The Company follows these policies in preparation of the interim unaudited condensed consolidated financial statements.

Available-For-Sale Investments:

The Company's available-for-sale securities are carried at fair value using Level 1 inputs. The fair value of the Company's available-for-sale investments at September 30, 2016 and June 30, 2016 were $52.4 million and $31.6 million, respectively. The increase was caused by the addition of $5.7 million in securities held by Advanced Cell Diagnostics (ACD), and the investment of $5.2 million of available cash in China into certificates of deposit. The remaining $9.9 million is due to the change in the fair value of the Company's investment in ChemoCentryx, Inc. (CCXI). The amortized cost basis of the Company's investment is CCXI at September 30, 2016 and June 30, 2016 was $29.5 million.

Inventories:

Inventories consist of (in thousands):

The increase from June 30 is primarily due to $12.8 million of additional inventory at ACD, which is adjusted to its fair value as of the date of acquisition. At both September 30, 2016 and June 30, 2016, the Company had approximately $24 million of excess protein, antibody and chemically-based inventory on hand which was not valued.

Property and Equipment:

Property and equipment consist of (in thousands):

Intangible Assets:

Intangible assets consist of (in thousands):

Changes to the carrying amount of net intangible assets for the quarter ended September 30, 2016 consist of (in thousands):

The estimated future amortization expense for intangible assets as of September 30, 2016 is as follows (in thousands):

Goodwill:

Changes to the carrying amount of goodwill for the quarter ended September 30, 2016 consist of (in thousands):

Pronouncements Issued But Not Yet Adopted

In May 2014, the FASB issued guidance addressing how revenue is recognized from contracts with customers and related disclosures. This standard supersedes existing revenue recognition requirements and most industry-specific guidance. This standard was initially expected to be effective for us beginning July 1, 2017, and provides for either full retrospective adoption or a modified retrospective adoption by which the cumulative effect of the change is recognized in retained earnings at the date of initial application. In July 2015, the FASB approved the deferral of the effective date of this standard by one year, and allows for adoption either at July 1, 2017 or July 1, 2018. We intend to elect the deferred adoption date of July 1, 2018. We are currently evaluating the requirements of this guidance, and have not yet determined the implementation method nor the impact on our consolidated financial statements.

In February 2016, the FASB issued guidance which requires recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. This guidance is effective for us beginning July 1, 2019, with early adoption permitted. The provisions of this guidance are to be applied using a modified retrospective approach, which requires application of the guidance for all periods presented. We are currently evaluating the impact that this guidance will have on our consolidated financial statements.

In March 2016, the FASB issued guidance which simplifies several aspects of the accounting for share-based payment transactions, including certain income tax consequences, classifications on the statement of cash flows, and accounting for forfeitures. The guidance is effective for us beginning July 1, 2017, and early application is permitted. We are currently evaluating the adoption date and the effects this standard will have on our consolidated financial statements.

Note 2. Acquisitions:

The Company's acquisitions have historically been made at prices above the fair value of the acquired identifiable assets, resulting in goodwill. The goodwill is due to strategic benefits of growing the Company's product portfolio, expected revenue growth from the increased market penetration from future products and customers, and expectations of synergies that will be realized by combining the businesses. Acquisitions have been accounted for using the purchase method of accounting and the acquired companies' results have been included in the accompanying financial statements from their respective dates of acquisition. Acquisition costs are recorded in selling, general and administrative expenses as incurred.

Zephyrus Biosciences, Inc.

On March 14, 2016, the Company acquired Zephyrus Biosciences, Inc. (Zephyrus) for $8 million in cash and up to $7 million in contingent consideration. Zephyrus provides research tools to enable protein analysis at the single cell level. Addressing the burgeoning single cell analysis market, Zephyrus's first product, Milo™, enables western blotting on individual cells for the first time.

In connection with the Zephyrus acquisition, the Company initially recorded $7.4 million of in process research and development which was not amortized. This amount was revalued to $8.3 million and converted to developed technology during the quarter. This reclassification occurred because the sale of product associated with the technology was completed during the quarter.

The Company will pay Zephyrus former shareholders an additional $3.5 million if and when 10 instruments are sold prior to the 3 year anniversary of the closing date (March 14, 2019). In addition, the Company will pay Zephyrus former shareholders an additional $3.5 million if and when $3 million in cumulative sales are generated within 4.5 yrs of the closing date (September 14, 2020). We have established an initial estimate of the fair value of these contingent consideration payments to be $6.9 million in total. This fair value was estimated using a Monte Carlo simulation, the significant inputs of which included projected revenues and unit sales, volatility considerations with respect to these projections, and present value discount factors.

The goodwill recorded as a result of the Zephyrus 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.

Space Import-Export, Srl

On July 1, 2016 Bio-Techne acquired Space Import-Export, Srl (Space) of Milan, Italy for the equivalent of approximately $9 million. Space is a long and trusted partner of Bio-Techne, distributing its products since 1985 and creating a very effective and visible presence in the Italian market.

The goodwill recorded as a result of the Space acquisition represents the strategic benefits of the expected revenue growth from increased market penetration from future customers. The goodwill is not deductible for income tax purposes.

Advanced Cell Diagnostics

On August 1, 2016, Bio-Techne closed on the acquisition of ACD for approximately $250 million, net of cash received, plus contingent consideration of up to $75 million as follows:

●	$25 million can be earned if calendar year 2016 revenues equal or exceed $30 million.

●	an additional $50 million can be earned if calendar year 2017 revenues equal or exceed $45 million.

If the revenue hurdle related to the 2016 calendar year is not met, the $25 million can be earned if the calendar year 2017 revenue hurdle is met. If the 2016 revenue hurdle is met, and calendar year 2017 revenues exceed $40 million but are less than $45 million, a reduced earn-out payment will be made for calendar year 2017, calculated on a sliding scale.

Based on specifics above, management estimated the fair value of the contingent consideration payable using a Monte Carlo simulation, the significant inputs of which included projected revenues, volatility considerations with respect to these projections, and present value discount factors. This simulation resulted in a valuation of $38.2 million and $40.1 million as of the August 1, 2016 (the acquisition date) and September 30, 2016, respectively. The change of $1.9 million was recorded as an expense to selling, general, and administrative expenses during the quarter ended September 30, 2016.