10-K 1 tech20150630_10k.htm FORM 10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-K

 

X    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended June 30, 2015

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ________to __________

 

Commission File Number: 000-17272

 

BIO-TECHNE CORPORATION

(Exact name of Registrant as specified in its charter)

 

 

Minnesota

41-1427402

 

(State of Incorporation) 

(IRS Employer Identification No.)

 

 

 

 

614 McKinley Place N.E., Minneapolis, MN 

55413-2610

 

(Address of principal executive offices) 

(Zip Code)

                                                                

Registrant’s telephone number: (612) 379-8854

 

Securities registered pursuant to Section 12(b) of the Act: Common Stock, $0.01 par value

Name of each exchange on which registered: The Nasdaq Stock Market LLC

(Nasdaq Global Select Market)

 

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes (X) No ( )

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ( )  No (X)

 

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 (X) No ( )

 

Indicate by check mark whether the registrants 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). Yes (X) No ( )

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ( )

 

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.

   Large accelerated filer (X) Accelerated filer ( ) Non-accelerated filer ( ) Small reporting company ( )

 

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

 

The aggregate market value of the Common Stock held by non-affiliates of the Registrant, based upon the closing sale price on December 31, 2014 as reported on The Nasdaq Stock Market ($92.40 per share) was approximately $3.4 billion. Shares of Common Stock held by each officer and director and by each person who owns 5% or more of the outstanding Common Stock have been excluded.

 

Shares of $0.01 par value Common Stock outstanding at August 26, 2015: 37,167,171

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the Company’s Proxy Statement for its 2015 Annual Meeting of Shareholders are incorporated by reference into Part III.

 

 
 

 

 

TABLE OF CONTENTS

       

 

  Page

PART I

     

Item 1.

Business

1

 
       

Item 1A.

Risk Factors

12

 
        

Item 1B.

Unresolved Staff Comments

18

 
       

Item 2.

Properties

18

 
       

Item 3.

Legal Proceedings

19

 
       

Item 4.

Mine Safety Disclosures

19

 
       

PART II

     

Item 5.

Market for the Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities

20  
       

Item 6.

Selected Financial Data

22

 
       

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

23  
       

Item 7A.

Quantitative and Qualitative Disclosures about Market Risk

33

 
       

Item 8.

Financial Statements and Supplementary Data

34

 
       

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

56  
       

Item 9A.

Controls and Procedures

56

 
       

Item 9B.

Other Information

57

 
       

PART III

     

Item 10.

Directors, Executive Officers and Corporate Governance

57

 
       

Item 11.

Executive Compensation

57

 
       

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters

57  
       

Item 13.

Certain Relationships and Related Transactions, and Director Independence

58

 
       

Item 14.

Principal Accounting Fees and Services

59

 
       

PART IV

     

Item 15.

Exhibits, Financial Statement Schedules

59

 
       
       

SIGNATURES

 

60

 

 

 

 

 

 

PART I

 

ITEM 1. BUSINESS

 

 

OVERVIEW

 

Bio-Techne and its subsidiaries, collectively doing business as Bio-Techne (Bio-Techne, we, our, us or the Company) develop, manufacture and sell biotechnology reagents, instruments and clinical diagnostic products worldwide. With our deep product portfolio and application expertise, Bio-Techne is a leader in providing specialized proteins, including cytokines and growth factors, antibodies, related immunoassays, biologically active small molecules and other reagents to the research, diagnostics and clinical controls markets. With recent acquisitions, we also support our customers with instrumentation designed to simplify key protein analysis processes.

 

A Minneapolis, Minnesota-based company, Bio-Techne originally was founded as Research and Diagnostic Systems, Inc. (R&D Systems) in 1976. Techne Corporation, a public entity at the time, acquired R&D Systems in 1985 and through this action made R&D Systems a public company. The initial products focused on the hematology blood controls and calibrators market but soon expanded through the creation of the Biotechnology Division to include reagents used in life science research. We further expanded the product portfolio through a series of acquisitions, including, the Amgen Inc. research business in 1991, the Genzyme Corporation research business in 1998, Fortron Bio Science, Inc. and BiosPacific, Inc. (BiosPacific) in 2005, and Boston Biochem, Inc. and Tocris Holdings Limited (Tocris) in 2011. In fiscal 2014, we strengthened our Clinical Controls solutions by acquiring Bionostics Holdings Limited (Bionostics). We also increased our Biotechnology segment offerings through the acquisition of Shanghai-based PrimeGene Bio-Tech Co. (PrimeGene) and Novus Biologicals LLC (Novus Biologicals) in 2014. Also in 2014, we acquired ProteinSimple and CyVek, Inc., both with innovative instrument platforms useful for protein analysis, and which together form our new Protein Platforms segment. Following the 2015 fiscal year, in July 2015, we acquired Cliniqa Corporation, which specializes in the manufacturing and commercialization of quality controls and calibrators as well as bulk reagents used in the clinical diagnostic market to further expand and complement our Clinical Controls solutions. With these recent investments, we are able to scale our business and expand our product portfilio as well as geographic markets.

 

Recognizing the importance of a unified and global approach to meeting our mission and accomplishing our strategies, in fiscal 2014 we implemented a new global brand, Bio-Techne. In November 2014 we also changed the name of the parent corporation from Techne Corporation to Bio-Techne Corporation. The Bio-Techne name is derived from the Greek words “Bio,” or “life,” and “Techne,” or “the application of knowledge to practical matters.” The combination of these words and their meanings capture the essence of Bio-Techne, its products and mission. The Bio-Techne name solidifies the new strategic direction for the Company, and also unifies all of our brands under one complete portfolio.

 

We operate globally, with offices in multiple locations in the United States, Europe and China. Today, our product line extends to over 275,000 products with state of the art facilities to accommodate many of our manufacturing needs.

 

We are committed to providing the life sciences community with innovative, high-quality scientific tools to better understand biological processes and drive discovery. We intend to build on Bio-Techne’s past accomplishments, high quality reputation and sound financial position by executing strategies that position us to become the standard for biological content in the research market, and to leverage that leadership position to enter the diagnostics and other adjacent markets. Our strategies include:

 

 

 

Continued innovation in core products. Through collaborations with key opinion leaders and participation in scientific discussions and associations, we expect to leverage our continued significant investment in our research and development activities to be first-to-market with quality products that are at the leading edge of life science researchers’ needs.

 

 

 

Investments in targeted acquisitions. We intend to leverage our strong balance sheet to gain access to new technologies and products that improve our competitiveness in the current market, meet customers’ expanding work flow needs and allow us to enter adjacent markets.

 

 
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Expansion of geographic footprint. We will continue to expand our sales staff and distribution channels globally in order to increase our global presence and make it easier for customers to transact with us.

     
 

 

Realignment of resources. In recognition of the increased size and scale of the organization, we intend to redesign our development and operational resources to create greater efficiencies throughout the organization.

 

 

 

Talent recruitment and retention. We will recruit, train and retain the most talented staff to implement all of our strategies effectively.

 

 

OUR PRODUCTS AND MARKETS

 

Currently Bio-Techne operates worldwide and has three reportable business segments, the Biotechnology, Clinical Controls and Protein Platforms divisions. The Biotechnology reporting segment develops, manufactures and sells biotechnology research and diagnostic products world-wide. The Clinical Controls reporting segment develops and manufactures controls and calibrators for the global clinical market. And the Protein Platforms reporting segment develops and commercializes proprietary systems and consumables for protein analysis. In fiscal 2015, net sales from Bio-Techne’s Biotechnology, Clinical Controls and Protein Platforms segments represented 72.1%, 13.3% and 14.6% of consolidated net sales, respectively. Financial information relating to Bio-Techne’s segments is incorporated herein by reference to Note L to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

 

Biotechnology Segment

 

Through our Biotechnology segment, we are one of the world’s leading suppliers of specialized proteins, such as cytokines, growth factors, immunoassays, antibodies and related reagents, to the biotechnology research community. We isolate and produce proteins in a pure form either from the native cells or through recombinant DNA technology. With the acquisition of Tocris in April 2011, we added chemically-based products to our Biotechnology segment. Our combined chemical and biological reagents portfolio provides new tools which customers can use in solving the complexity of important biological pathways and glean knowledge which may lead to a fuller understanding of biological processes and ultimately to the development of novel strategies to address different pathologies.

 

 

Biotechnology Segment Products

 

Proteins. We develop and manufacture in-house a range of cytokines, growth factors and enzymes, extracted from natural sources or produced using recombinant DNA technology. We produce and characterize all protein products to a high degree of purity and biological activity. The growing interest by academic and commercial researchers in cytokines is largely due to the profound effect that tiny amounts of a cytokine can have on cell’s and tissues. Cytokines are intercellular messengers and, as a result, act as signaling agents by interacting with specific receptors on the affected cells and trigger events that can lead to significant changes in a cell behavior. Enzymes are proteins which act as biological catalysts that accelerate chemical reactions. Most enzymes, including proteases, kinases and phosphatases, are proteins that modify the structure and function of other proteins and in turn affect cell behavior and function. Additionally, both enzymes and cytokines have the potential to serve as predictive biomarkers and therapeutic targets for a variety of diseases and conditions including cancer, Alzheimer’s, arthritis, autoimmunity, diabetes, hypertension, obesity, inflammation, AIDS and influenza.

 

Antibodies. Antibodies are specialized proteins produced by the immune system of an animal that recognize and bind to target molecules. We produce our polyclonal antibodies in animals (primarily goats, sheep and rabbits), purifying them from the animals’ blood. We derive monoclonal antibodies from immortalized rodent cell lines using hybridoma technology, isolating them from cell culture medium, or we manufacture them through recombinant DNA technology. The flow cytometry product line includes fluorochrome labeled antibodies and kits that are used to determine the immuno-phenotypic properties of cells from different tissues.

 

 
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Immunoassays. We market a variety of immunoassays on different testing platforms, including microtiter-plate based kits sold under the trade name Quantikine®, multiplex immunoassays based on encoded bead technology and immunoassays based on planar spotted surfaces. Researchers use these immunoassay products to quantify the level of a specific protein in biological fluids, such as serum, plasma, or urine. Protein quantification is an integral component of basic research, as potential diagnostic tools for various diseases and as a valuable indicator of the effects of new therapeutic compounds in the drug discovery process. Immunoassays can also be useful in clinical diagnostics. We have received Food and Drug Administration (FDA) marketing clearance for erythropoietin (EPO), transferrin receptor (TfR) and Beta2-microglobulin (b2M) immunoassays for use as in vitro diagnostic devices.

 

Small Molecule Chemically-based Products. These products include small natural or synthetic chemical compounds used by investigators as agonists, antagonists and/or inhibitors of various biological functions. Used in concert with other Company products, they provide additional tools to elucidate key pathways of cellular functions and can provide insight into the drug discovery process.

 

Biotechnology Segment Customers and Distribution Methods

 

We sell our biotechnology products directly to customers who are primarily located in North America, western Europe and China. We have a sales and marketing partnership agreement with Fisher Scientific in order to bolster our market presence in North America and leverage the transactional efficiencies offered by the large Fisher organization. We also sell through third party distributors in China, Japan, southern Europe and the rest of the world. Our sales are widely distributed, and no single end-user customer accounted for more than 10% of Biotechnology’s net sales during fiscal 2015, 2014 or 2013.

 

Biotechnology Segment Competitors

 

A number of companies supply the worldwide market for protein related and chemically-based research reagents, including GE Healthcare Life Sciences, BD Biosciences, Merck KGaA/EMD Chemicals, Inc., PeproTech, Inc., Santa Cruz Biotechnology, Inc., Abcam plc., Thermo Fisher Scientific, Inc., Cayman Chemical Company and Enzo Biochem, Inc. Market success is primarily dependent upon product quality, selection and reputation. We believe we are one of the leading world-wide suppliers of cytokine related products in the research market. We further believe that the expanding line of our products, their recognized quality, and the growing demand for protein related and chemically-based research reagents will allow us to remain competitive in the growing biotechnology research and diagnostic market.

 

Biotechnology Segment Manufacturing

 

We develop and manufacture the majority of our cytokines using recombinant DNA technology, thus significantly reducing our reliance on outside resources. Tocris chemical-based products are synthesized from widely available products. We typically have several outside sources for all critical raw materials necessary for the manufacture of our products.

 

The majority of our Biotechnology products are shipped within one day of receipt of the customers’ orders. Consequently, we had no significant backlog of orders for our Biotechnology segment products as of the date of this Annual Report on Form 10-K or as of a comparable date for fiscal 2014.

 

Clinical Controls Segment

 

Proper diagnosis of many illnesses requires a thorough and accurate analysis of a patient’s blood cells, which is usually done with automated or semi-automated hematology instruments. Our Clinical Controls segment develops and manufactures controls and calibrators for instruments in the global clinical market.

 

Clinical Controls Segment Products

 

We derive our hematology controls and calibrators from various cellular components of blood which have been stabilized. These control and calibrator products ensure that hematology instruments are performing accurately and reliably.

 

 
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We offer a wide range of hematology controls and calibrators for both impedance and laser type cell counters. We also supply hematology control products for use as proficiency testing tools by laboratory certifying authorities in a number of states and countries. We believe our products have improved stability and versatility and a longer shelf life than most of those of our competitors. We also offer clinical controls for blood glucose and blood gas devices, as well as coagulation device control products.

 

Clinical Controls Segment Customers and Distribution Methods

 

Original Equipment Manufacturer (OEM) agreements represent the largest market for our clinical controls products. In fiscal 2015, 2014 and 2013, OEM agreements accounted for $41.1 million, $41.2 million, and $10.8 million, respectively, or 9%, 12%, and 3% of total consolidated net sales in each fiscal year, respectively. The increase in fiscal 2014 was a result of the acquisition of Bionostics. We sell our clinical control products directly to customers in the United States and primarily through distributors in the rest of the world. One OEM customer accounted for approximately 13% and 14% of Clinical Controls’ net sales during fiscal 2015 and 2014, respectively. No single customer accounted for more than 10% of Clinical Controls’ net sales in fiscal 2013.     

 

Clinical Controls Segment Competitors

 

Competition is intense in the clinical controls business. The market is composed of manufacturers of laboratory reagents, chemicals and coagulation products and independent blood control manufacturers in addition to instrument manufacturers. The principal clinical diagnostic control competitors for our products in this segment are Abbott Diagnostics, Beckman Coulter, Inc., Bio-Rad Laboratories, Inc., Streck, Inc., Siemens Healthcare Diagnostics Inc. and Sysmex Corporation. We believe we are the third largest supplier of hematology controls in the marketplace behind Beckman Coulter, Inc. and Streck, Inc. We compete based primarily on product performance, quality, and price.

 

Clinical Controls Segment Manufacturing

 

The primary raw material for our clinical controls products is whole blood. We purchase human blood from commercial blood banks, and porcine and bovine blood from nearby meat processing plants. After we receive raw blood, we separate it into its cellular components, and then process and stabilize it. Although the cost of human blood has increased due to the requirement that it be tested for certain diseases and pathogens prior to use, the higher cost of these materials has not had a material adverse effect on our business. Bio-Techne does not perform its own pathogen testing, as most suppliers test all human blood collected.

 

The majority of the Clinical Control products are shipped based on a preset, recurring schedule. There was no significant backlog of orders for our Clinical Control products as of the date of this Annual Report on Form 10-K or as of a comparable date for fiscal 2014.

 

Protein Platforms Segment

 

Proteins are important for understanding disease because they are the functional units that carry out specific tasks in every cell. Without them, the cell cannot perform its intended function, produce the energy it requires, maintain its shape or survive in its environment. However, proteins are difficult to interrogate because they are large, complex and unique. Our Protein Platforms segment develops, manufactures and sells tools to make protein analysis simpler, more quantitative and reproduceable.

 

Protein Platforms Segment Products

 

The Simple Western Platform. The Western blot, or Western, is one of the most widely-used assay for protein analysis and identification today. Unchanged since its invention in 1979, the Western assay is used by molecular biologists, biochemists and clinicians to determine if a specific protein is present in a sample. This assay is an immunoassay, meaning that it requires a specific antibody in order to correctly identify the protein of interest. The Western blot also shows the researcher the size of the protein identified. Our Simple Western platform is a fully-automated, analytical technique that can identify and quantify a protein of interest in a sample. Like the Western blot, our Simple Western also provides the user with the size of the protein and utilizes antibodies to identify specific proteins in the sample. The Simple Western automates the entire workflow and transforms the Western blot into a gel-free, blot-free assay requiring just 30 minutes of sample prep time. Not only does the Simple Western simplify the workflow, it transforms the Western into a real analytical tool for protein analysis, providing truly quantitative, high quality data. The reproducibility of the assay enables researchers to determine quantitatively how much protein exists in a given sample. As has been demonstrated in numerous experiments conducted by us and our customers, each of our Simple Western products is more sensitive than a traditional Western, meaning that the Simple Western will detect a lower level of target protein in a given sample or allow a researcher to use less sample to run the assay. Multiple proteins can also be assessed in every sample allowing a more holistic view of protein function.

 

 
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SimplePlex Platform. A common assay used in research and clinical diagnostics is the ELISA, or enzyme-linked immunosorbent assay. ELISA tests detect a variety proteins, including cytokines, hormones, bacterial antigens, and antibodies. ELISA tests can be cumbersome and time-consuming, and are not always easy to replicate, especially when attempting to test several proteins in a single assay. The SimplePlex platform is a transformative immunoassay technology which integrates an innovatively designed microfluidic cartridge with a state-of-the-art analyzer to deliver a bench-top immunoassay system that is more sensitive than ELISA with none of the traditional challenges of assay design or repeatability. SimplePlex assays are fully automated, multi-analyte immunoassays that permit the customer to run multiple samples while interrogating multiple analytes in approximately one hour. We believe the SimplePlex technology, along with other immunoassay platforms offered by Bio-Techne, represents the most comprehensive line of immunoassay products to meet customers’ complete workflow in their research and clinical protein applications.

 

Biologics Instrumentation. Biologics are complex protein-based therapeutics, and are transforming the pharmaceutical industry and treatment of many diseases. Biologic drugs are very effective targeted therapeutics for diseases such as arthritis, cancer and diabetes, and their number in development is increasing because of a variety of advances in biochemistry, immunology and biotechnology. Biologics can be monoclonal antibodies, recombinant proteins and vaccines. Developers of biologics are required by regulatory agencies, such as FDA, to develop robust processes to ensure that the specific biologic of interest can be identified and characterized accurately and then consistently and reliably produced. As a result, a suite of complementary analytical approaches are utilized to measure attributes such as identity, biological potency, purity, safety and impurities. These analytical approaches are used throughout the product development process, spanning initial discovery, expression, formulation, process development, quality control and final release. Our Biologics tools help researchers interrogate protein purity and identify contaminants during the development and production of biologics. Our iCE3 system is an analytical tool that measures the charge heterogeneity of proteins. Our micro-flow imaging, or MFI, platform detects both visible (10 µm and larger) and subvisible (below 10 µm) particles. It directly measures the size, shape, count and concentration of particles within the 1 µm to 300 µm size range.

 

Protein Platforms Segment Customers and Distribution Methods.

 

We sell our protein platforms products directly to customers who are primarily located in North America, western Europe and Japan. We also sell through third party distributors in China, southern Europe and the rest of the world. Our sales are widely distributed, and no single end-user customer accounted for more than 10% of Protein Platforms’ net sales during fiscal 2015, 2014 or 2013.

 

Protein Platforms Segment Competitors.

 

Our Simple Western platform is a complete replacement for the traditional Western blot. As a result, we face competition from the vendors that supply instruments and reagents to traditional Western blot users. These competitors include Bio-Rad Laboratories, GE Healthcare, Merck KGaA, PerkinElmer and Thermo Fisher Scientific. All of these vendors provide elements of the traditional work flow. Similarly, our SimplePlex platform replaces the traditional ELISA assay as well as some flow-based multiplex assays; competitors include those who supply instruments and reagents for ELISAs, including Meso Scale Discovery, PerkinElmer, Thermo Fisher, Luminex, Millipore, Molecular Devices, Tecan BioTek, and Bio-Rad Laboratories. The primary competitors for our Biologics instrumentation are Agilent Technologies, Danaher and PerkinElmer, as well as GE Healthcare, Shimadzu, Thermo Fisher and Waters. We believe our competitive position is strong due to the unique aspects of our products and our product quality.

 

Protein Platforms Segment Manufacturing.

 

We manufacture our Simple Western products at our facility in San Jose, California and Minneapolis, Minnesota. Our Biologics instruments and consumables are manufactured at our facilities in Toronto and Ottawa, both located in Ontario, Canada. We manufacture our Simple Plex products at our facility in Wallingford, Connecticut. We manufacture our own components where we believe it adds significant value, but we rely on suppliers for the manufacture of some of the consumables, components, subassemblies and autosamplers used with, or included in, our systems, which are manufactured to our specifications. We are not dependent on any one supplier and are not required to carry significant amounts of inventory to assure ourselves of a continuous allotment of goods from suppliers. We conduct all final testing and inspection of our products. We have established a quality control program, including a set of standard manufacturing and documentation procedures.

 

 
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There was no significant backlog of orders for our Protein Platforms products as of the date of this Annual Report on Form 10-K or as of a comparable date for fiscal 2014.

 

Geographic Information

 

Following is financial information relating to geographic areas (in thousands): 

 

   

Year Ended June 30,

 
   

2015

   

2014

   

2013

 

External sales

                       

United States

  $ 245,217     $ 190,359     $ 164,308  

Europe

    134,077       97,157       88,297  

China

    26,105       18,878       14,106  

Other Asia

    23,806       32,704       28,608  

Rest of world

    23,041       18,665       15,256  

Total external sales

  $ 452,246     $ 357,763     $ 310,575  

 

 

   

As of June 30,

 
   

2015

   

2014

   

2013

 

Long-lived assets

                       

United States and Canada

  $ 119,075     $ 109,790     $ 103,541  

Europe

    11,239       8,340       7,129  

China

    1,286       678       117  

Total long-lived assets

  $ 131,600     $ 118,808     $ 110,787  

 

Net 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. See the description of risks associated with the Company’s foreign subsidiaries in Item 1A of this Annual Report on Form 10-K.

 

 

PRODUCTS UNDER DEVELOPMENT

 

Bio-Techne is engaged in ongoing research and development in all of our major product lines: controls and calibrators, protein analysis instrumentation and related reagents, and cytokines, antibodies, assays, small bioactive molecules and related biotechnology products. We believe that our future success depends, to a large extent, on our ability to keep pace with changing technologies and market needs.

 

In fiscal 2015, Bio-Techne introduced approximately 1,600 new biotechnology products to the life science market. All of these products are for research use only and therefore did not require FDA clearance. We also expect to significantly expand our portfolio of products through acquisitions of existing businesses. However, there is no assurance that any of the products in the research and development phase can be successfully completed or, if completed, can be successfully introduced into the marketplace.

 

 
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Year Ended June 30,

 
   

2015

   

2014

   

2013

 

Research expense (in thousands):

                       

Biotechnology

  $ 28,201     $ 29,189     $ 28,441  

Clinical Controls

    1,628       1,756       816  

Protein Platforms

    11,024       0       0  
    $ 40,853     $ 30,945     $ 29,257  
                         

Percent of net sales

    9

%

    9

%

    9

%

 

 

ACQUISITIONS AND INVESTMENTS

 

Fiscal 2016 Acquisition

 

On July 8, 2015, Bio-Techne acquired all of the outstanding equity of Cliniqa Corporation (Cliniqa). Cliniqa, based in San Marcos, California, specializes in the manufacturing and commercialization of quality controls and calibrators as well as bulk reagents used in the clinical diagnostic market. Its controls and reagents are used in a wide variety of diagnostic tests for such pathologies as cardiac disease, diabetes, cancer, immunological disorders, therapeutic drug monitoring, urine analysis and toxicology. The acquisition further expanded and complemented our clinical controls product lines.

 

Fiscal 2015 Acquisitions

 

On July 31, 2014, Bio-Techne closed on the acquisition of all of the outstanding equity of ProteinSimple for approximately $300 million. The purchase price was adjusted post-closing based on the final levels of cash and working capital of ProteinSimple at closing. Certain ProteinSimple stockholders are subject to non-compete and non-solicitation obligations for three years following the closing. ProteinSimple develops, markets and sells Western-blotting instruments, biologics and reagents. Western blotting remains one of the most frequently practiced life science techniques, and ProteinSimple’s tools allow researchers to perform this basic research technique with greater speed and efficiency. Automation of the Western blotting technique has the potential to drive additional sales of the consumables Bio-Techne already sells, especially antibodies which have been validated for Western blotting applications. The ProteinSimple products became the foundation of our ProteinPlatforms segment.

 

On July 2, 2014, Bio-Techne announced that it had acquired all of the issued and outstanding equity interests of Novus Biologicals, LLC (Novus) for approximately $60.0 million. Novus is a Littleton, Colorado-based supplier of a large portfolio of both outsourced and in-house developed antibodies and other reagents for life science research, delivered through an innovative digital commerce platform. The acquisition further expanded our antibody portfolio, consistent with our long term strategic business plan to serve customers with a complete and quality line of reagents, and became a part of our Biotechnology segment.

 

Fiscal 2014 Investments and Acquisitions

 

After investing $10.0 million in CyVek, Inc. on April 1, 2014, Bio-Techne’s wholly-owned subsidiary, R & D Systems, Inc. acquired all of CyVek’s equity on November 4, 2014 for approximately $60.0 million. Bio-Techne completed the acquisition as a result of CyVek meeting certain pre-agreed commercial milestones. We will pay CyVek stockholders up to an additional $35.0 million based on the revenue generated by CyVek’s products and related products before May 4, 2017. We will also pay CyVek’s stockholders 50% of the amount, if any, by which the revenue from CyVek’s products and related products exceeds $100 million in calendar year 2020. This strategic investment allowed us to offer the SimplePlex platform as part of our Protein Platforms segment, strengthening our market position in the immunoassay market where multiplex testing platforms are becoming more significant.

 

On April 30, 2014, Bio-Techne’s China affiliate, R&D Systems China, acquired PrimeGene for approximately $18.8 million. PrimeGene is a leader in the China market in the development and manufacture of recombinant proteins for research and industrial applications, and has large scale protein manufacturing capabilities to serve the Chinese market as well as global industrial customers. PrimeGene is included in Bio-Techne’s Biotechnology segment.

 

 
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On July 22, 2013, the Company’s R&D Systems subsidiary acquired for approximately $103 million cash all of the outstanding shares of Bionostics. 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 Bio-Techne’s Clinical Controls segment.

 

Prior Investments

 

Bio-Techne has an approximate 14% equity investment in ChemoCentryx, Inc. (CCXI). CCXI is a technology and drug development company working in the area of chemokines. Chemokines are cytokines which regulate the trafficking patterns of leukocytes, the effector cells of the human immune system. Bio-Techne’s investment in CCXI is included in “Short-term available-for-sale investments” at June 30, 2015 and 2014 at fair values of $52.3 million and $37.1 million, respectively.   

 

 

GOVERNMENT REGULATION

 

All manufacturers of clinical diagnostic controls are regulated under the Federal Food, Drug and Cosmetic Act, as amended. All of Bio-Techne’s clinical control products are classified as "in vitro diagnostic products" by the U.S. Food and Drug Administration (FDA). The entire control manufacturing process, from receipt of raw materials to the monitoring of control products through their expiration date, is strictly regulated and documented. FDA inspectors make periodic site inspections of Bio-Techne’s clinical control operations and facilities. Clinical control manufacturing must comply with Quality System Regulations (QSR) as set forth in the FDA’s regulations governing medical devices.

 

Three of Bio-Techne’s immunoassay kits, EPO, TfR and b2M, have FDA clearance to be sold for clinical diagnostic use. Bio-Techne must comply with QSR for the manufacture of these kits. Biotechnology products manufactured in the U.S. and sold for use in the research market do not require FDA clearance. Tocris products are used as research tools and require no regulatory approval for commercialization. However, some of Tocris’ products are considered controlled substances and require government permits to stock such products and to ship them to end-users. Bio-Techne has no reason to believe that these annual permits will not be re-issued.

 

Some of Bio-Techne’s research groups use small amounts of radioactive materials in the form of radioisotopes in their product development activities. Thus, Bio-Techne is subject to regulation and inspection by the Minnesota Department of Health and has been granted a license through August 2016. Bio-Techne has had no difficulties in renewing this license in prior years and has no reason to believe it will not be renewed in the future. If, however, the license was not renewed, it would have minimal effect on Bio-Techne’s business since there are other technologies the research groups could use to replace the use of radioisotopes.

 

Bio-Techne is subject to the medical device excise tax which was included as part of the Affordable Care Act. The tax applies to the sale of medical devices by a manufacturer, producer or importer of the device and is 2.3% of the sale price. The tax applies to Bio-Techne’s in vitro diagnostic products, including its clinical control products and biotechnology clinical diagnostic immunoassay kits. Bio-Techne’s medical device excise tax for fiscal 2015 and 2014 was $0.6 million and $0.5 million, respectively.

 

 

PATENTS AND TRADEMARKS

 

Our success depends at least in part upon our ability to protect our core technologies and intellectual property. To accomplish this, we rely on a combination of intellectual property rights, including patents, trade secrets and trademarks, as well as customary contractual protections. As of June 30, 2015, we had rights to 45 granted patents and approximately 50 pending patent applications, primarily relating to our clinical controls products. Paten protection, if granted, generally has a life of 20 years from the date of the patent application or patent grant. We cannot assure you whether any of our pending patent applications will result in the grant of a patent, whether the examination process will require us to narrow our claims, and whether our claims will provide adequate coverage of our competitors’ products or services. Bio-Techne is not substantially dependent on products for which it has obtained patent protection.

 

 
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In addition to pursuing patents on our products, we also preserve much of our innovation as trade secrets. We have taken steps to protect our intellectual property and proprietary technology by entering into confidentiality agreements and intellectual property assignment agreements with our employees, consultants, corporate partners and, when needed, our advisors. Such agreements may not be enforceable or may not provide meaningful protection for our trade secrets or other proprietary information in the event of unauthorized use or disclosure or other breaches of the agreements, and we may not be able to prevent such unauthorized disclosure. Monitoring unauthorized disclosure is difficult, and we do not know whether the steps we have taken to prevent such disclosure are, or will be, adequate.

 

No assurance can be given that Bio-Techne’s products do not infringe upon patents or proprietary rights owned or claimed by others, particularly for genetically engineered products. Bio-Techne has not conducted a patent infringement study for each of its products. Where we have been contacted by patent holders with certain intellectual property rights, Bio-Techne has entered into licensing agreements with patent holders under which it has the exclusive and/or non-exclusive right to use patented technology as well as the right to manufacture and sell certain patented proteins and related products to the research market. For fiscal 2015, 2014 and 2013, total royalties expensed under these licenses were approximately $4.0 million, $3.5 million and $3.3 million, respectively.

 

Bio-Techne has obtained federal trademark registration for certain of its brand and product names. Bio-Techne believes it has common law trademark rights to certain marks in addition to those which it has registered.

 

 

SEASONALITY OF BUSINESS

 

Biotechnology and Protein Platforms segment products marketed by Bio-Techne historically experience a slowing of sales or of the rate of sales growth during the summer months. Bio-Techne also usually experiences a slowing of sales in all of its reportable segments during the Thanksgiving to New Year holiday period. Bio-Techne believes this seasonality is a result of vacation and academic schedules of its world-wide customer base.

 

 

EMPLOYEES

 

Through its subsidiaries, Bio-Techne employed approximately 1,356 full-time and part-time employees as of June 30, 2015.

 

ENVIRONMENT

 

Compliance with federal, state and local environmental protection laws in the United States, United Kingdom, Germany, China and Hong Kong had no material effect on Bio-Techne in fiscal 2015.

 

 

INVESTOR INFORMATION

 

We are subject to the information requirements of the Securities Exchange Act of 1934 (the Exchange Act). Therefore, we file periodic reports, proxy statements, and other information with the Securities and Exchange Commission (SEC). Such reports, proxy statements, and other information may be obtained by visiting the Public Reference Room of the SEC at 100 F Street, N.E., Room 1580, Washington, DC 20549 or by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an internet site (http://www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically.

 

Financial and other information about us is available on our web site (http://www.bio-techne.com). We make available on our web site copies of our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13 or 15(d) of the Exchange Act as soon as reasonably practicable after filing such material electronically or otherwise furnishing it to the SEC.

 

 
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EXECUTIVE OFFICERS OF THE REGISTRANT

 

Currently, the names, ages, positions and periods of service of each executive officer of the Company are as follows:

 

Name

 

Age

 

Position

 

Officer Since

             

Charles Kummeth

 

 55

 

President, Chief Executive Officer and Director

 

2013

James T. Hippel

 

44

 

Chief Financial Officer

 

2014

Brenda Furlow

 

57

 

Senior Vice President, General Counsel and Secretary

 

2014

J. Fernando Bazan

 

55

 

Chief Technology Officer

 

2013

Marcel Veronneau

 

61

 

Senior Vice President, Clinical Controls

 

1995

David Eansor   54   Senior Vice President, Biotechnology   2014

Robert Gavin

 

48

 

Senior Vice President, Protein Platforms

 

2014

 

Set forth below is information regarding the business experience of each executive officer. There are no family relationships among any of the officers named, nor is there any arrangement or understanding pursuant to which any person was selected as an officer.

 

Charles Kummeth has been President and Chief Executive Officer of the Company since April 1, 2013. Prior to joining the Company, he served as President of Mass Spectrometry and Chromatography at Thermo Fisher Scientific Inc. from September 2011. He was President of that company’s Laboratory Consumables Division from 2009 to September 2011. Prior to joining Thermo Fisher, Mr. Kummeth served in various roles at 3M Corporation, most recently as the Vice President of the company’s Medical Division from 2006 to 2008.

 

James T. Hippel has been Chief Financial Officer of the Company since April 1, 2014. Prior to joining the Company, Mr. Hippel served as Senior Vice President and Chief Financial Officer for Mirion Technologies, Inc., a $300 million global company that provides radiation detection and identification products. Prior to Mirion, Mr. Hippel served as Vice President, Finance at Thermo Fisher Scientific, Inc., leading finance operations for its Mass Spectrometry & Chromatography division and its Laboratory Consumables division. In addition, Mr. Hippel’s experience includes nine years of progressive financial leadership at Honeywell International, within its Aerospace Segment. Mr. Hippel started his career with KPMG LLP and is a CPA (inactive).

 

Brenda Furlow joined the Company as Senior Vice President and General Counsel on August 4, 2014. Most recently, Ms. Furlow was an associate with Alphatech Counsel, SC and served as general counsel to emerging growth technology companies. Ms. Furlow was General Counsel for TomoTherapy, Inc., a global, publicly traded company that manufactured and sold radiation therapy equipment from 2007 to 2011. From 1998 to 2007, Ms. Furlow served as General Counsel for Promega Corporation, a global life sciences company. In addition, Ms. Furlow’s experience includes five years in various positions with a credit union trade association. Ms. Furlow began her legal career as an associate with a Chicago-based law firm.

 

Dr. J. Fernando Bazan was appointed Chief Technical Officer when he joined the Company on August 1, 2013. Dr. Bazan is an adjunct professor at the University of Minnesota School of Medicine and served as Chief Scientific Officer at Neuroscience, Inc., a neuroimmunology startup from 2010 to 2012. From 2003 through 2010, Dr. Bazan served as Senior Scientist at Genentech, Inc. (Roche).

 

Marcel Veronneau was appointed as Vice President, Clinical Controls in March 1995. Prior thereto, he served as Director of Operations for R&D Systems’ Clinical Controls Division since joining the Company in 1993.

 

David Eansor has served as Senior Vice President, Biotechnology since April, 2015. Prior to that, Mr. Eansor was Senior Vice President, Novus Biologicals, since the Company completed its acquisition of Novus on July 2, 2014. From January 2013 until the date of the acquisition, Mr. Eansor was the Senior Vice President of Corporate Development of Novus Biologicals. Prior to joining Novus, Mr. Eansor was the President of the Bioscience Division of Thermo Fisher Scientific. Mr. Eansor was promoted to Division President in early 2010 after 5 years as President of Thermo Fisher’s Life Science Research business.

 

 
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Robert Gavin was appointed Senior Vice President of the Protein Platforms Division in December 2014.  Mr. Gavin had previously been Vice President of Product Development at ProteinSimple, which was acquired by the Company in July, 2014.  Prior to joining ProteinSimple in 2008, Mr. Gavin served as Director of Engineering at MDS Analytical Technologies (previously Molecular Devices, Inc.). Prior to Molecular Devices, Mr. Gavin managed a team of engineers at Affymax Research Institute.   

 

 
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ITEM 1A. RISK FACTORS

 

Statements in this Annual Report on Form 10-K, and elsewhere, that are forward-looking involve risks and uncertainties which may affect the Company’s actual results of operations. Certain of these risks and uncertainties which have affected and, in the future, could affect the Company’s actual results are discussed below. The Company undertakes no obligation to update or revise any forward-looking statements made due to new information or future events. Investors are cautioned not to place undue emphasis on these statements.

 

The following risk factors should be read carefully in connection with evaluation of the Company’s business and any forward-looking statements made in this Annual Report on Form 10-K and elsewhere. Any of the following risks or others discussed in this Annual Report on Form 10-K or the Company’s other SEC filings could materially adversely affect the Company’s business, operating results and financial condition.

 

Changes in economic conditions could negatively impact the Company’s revenues and earnings.

 

The Company’s biotechnology and protein platforms products are sold primarily to research scientists at pharmaceutical and biotechnology companies and at university and government research institutions. Research and development spending by the Company’s customers and the availability of government research funding can fluctuate due to changes in available resources, mergers of pharmaceutical and biotechnology companies, spending priorities, general economic conditions and institutional and governmental budgetary policies. The U.S. and global economies recently experienced a period of economic downturn and have been slow to recover. Such downturns, and other reductions or delays in governmental funding, could cause customers to delay or forego purchases of the Company’s products. The Company carries essentially no backlog of orders and changes in the level of orders received and filled daily can cause fluctuations in quarterly revenues and earnings.

 

The biotechnology and clinical control industries are very competitive, more so recently due to consolidation trends.

 

The Company faces significant competition across all of its product lines and in each market in which it operates. Competitors include companies ranging from start-up companies, which may be able to more quickly respond to customers’ needs, to large multinational companies, which may have greater financial, marketing, operational, and research and development resources than the Company. In addition, consolidation trends in the pharmaceutical and biotechnology industries have served to create fewer customer accounts and to concentrate purchasing decisions for some customers, resulting in increased pricing pressure on the Company. Moreover, customers may believe that consolidated businesses are better able to compete as sole source vendors, and therefore prefer to purchase from such businesses. The entry into the market by manufacturers in China and other low-cost manufacturing locations is also creating increased pricing and competitive pressures, particularly in developing markets. Failure to anticipate and respond to competitors’ actions may impact the Company’s future sales and earnings.

 

The Company’s future growth is dependent on the development of new products in a rapidly changing technological environment.

 

One element of the Company’s growth strategy is to increase revenues through new product releases. As a result, the Company must anticipate industry trends and develop products in advance of customer needs. New product development requires planning, designing and testing at both technological and manufacturing-process levels and may require significant research and development expenditures. There can be no assurance that any products now in development, or that the Company may seek to develop in the future, will achieve feasibility or gain market acceptance. There can also be no assurance that the Company’s competitors will not succeed in developing technologies and products in a more timely and cost effective manner than the Company. If the Company does not appropriately innovate and invest in new technologies, the Company’s technologies will become outdated, rendering the Company’s technologies and products obsolete or noncompetitive. To the extent the company fails to introduce new and innovative products, the Company may lose market share to its competitors, which may be difficult or impossible to regain.

 

 
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Acquisitions and divestures pose financial, management and other risks and challenges.

 

The Company routinely explores acquiring other businesses and assets. From time to time, the Company may also consider disposing of certain assets, subsidiaries, or lines of business. During fiscal 2015, the Company acquired Novus, ProteinSimple, and CyVek, In July 2016, we acquired Cliniqa Corporation. Acquisitions or divestitures present financial, managerial and operational challenges, including diversion of management attention, difficulty with integrating acquired businesses, integration of different corporate cultures or separating personnel and financial and other systems, increased expenses, assumption of unknown liabilities, indemnities, and potential disputes with the buyers or sellers, and the need to evaluate the financial systems of and establish internal controls for acquired entities. There can be no assurance that the Company will engage in any additional acquisitions or divestitures or that the Company will be able to do so on terms that will result in any expected benefits. In addition, acquisitions financed with borrowings could make the Company more vulnerable to business downturns and could negatively affect the Company’s earnings due to higher leverage and interest expense.

 

The Company is subject to risk associated with global operations.

 

The Company engages in business globally, with approximately 46% of the Company’s sales revenue in fiscal 2015 coming from outside the U.S. This subjects the Company to a number of risks, including international economic, political, and labor conditions; tax laws (including U.S. taxes on foreign subsidiaries); increased financial accounting and reporting burdens and complexities; unexpected changes in, or impositions of, legislative or regulatory requirements; failure of laws to protect intellectual property rights adequately; inadequate local infrastructure and difficulties in managing and staffing international operations; delays resulting from difficulty in obtaining export licenses for certain technology; tariffs, quotas and other trade barriers and restrictions; transportation delays; operating in locations with a higher incidence of corruption and fraudulent business practices; and other factors beyond the Company’s control, including terrorism, war, natural disasters, climate change and diseases.

 

The application of laws and regulations implicating global transactions is often unclear and may at times conflict. Compliance with these laws and regulations may involve significant costs or require changes in the Company’s business practices that result in reduced revenue and profitability. Non-compliance could also result in fines, damages, criminal sanctions, prohibited business conduct, and damage to the Company’s reputation. The Company incurs additional legal compliance costs associated with its global operations and could become subject to legal penalties in foreign countries if it does not comply with local laws and regulations, which may be substantially different from those in the U.S.

 

The Company conducts and plans to grow its business in developing markets, which may cause additional operational and legal risk.

 

The Company’s efforts to grow its businesses depends, to a degree, on its success in developing market share in additional geographic markets including, but not limited to, China. In some cases, these countries have greater political and economic volatility and greater vulnerability to infrastructure and labor disruptions than the Company’s other markets. Operating and seeking to expand business in a number of different regions and countries exposes the Company to multiple and potentially conflicting cultural practices, business practices and legal and regulatory requirements.

 

In many foreign countries, particularly in those with developing economies, it may be common to engage in business practices that are prohibited by U.S. regulations applicable to the Company, such as the Foreign Corrupt Practices Act. Although the Company implements policies and procedures designed to ensure compliance with these laws, there can be no assurance that all of the Company’s employees, contractors, and agents, as well as those companies to which the Company outsources certain aspects of its business operations, including those based in foreign countries where practices which violate such U.S. laws may be customary, will comply with the Company’s internal policies. Any such non-compliance, even if prohibited by the Company’s internal policies, could have an adverse effect on the Company’s business and result in significant fines or penalties.

 

 
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The Company is significantly dependent on sales made through foreign subsidiaries which are subject to changes in exchange rates and changes to the strength of foreign governments and economic conditions.

 

Approximately 24% of the Company’s net sales in fiscal 2015 were made through its foreign subsidiaries, which transact their sales in foreign currencies. Any adverse movement in foreign currency exchange rates could, therefore, negatively affect the Company’s revenues and earnings. In fiscal 2015, for example, the exchange rate between the Euro and the US dollar changed materially, resulting in consolidated net sales that were approximately $8.5 million lower in fiscal 2015 when compared to fiscal 2014. Moreover, the financial crisis faced by several Eurozone countries, and the ongoing economic instability in that region, may lead to reduced spending on health care and research by Eurozone governments, which could adversely affect the Company’s European sales, as well as its revenues, financial condition and results of operations.

 

The Company may incur losses as a result of its investments in ChemoCentryx, Inc. and other companies in which it does not have a majority interest, the success of which is largely out of the Company’s control.

 

The Company’s expansion strategies include collaborations and investments in joint ventures and companies developing new products related to the Company’s business. These strategies carry risks that objectives will not be achieved and future earnings will be adversely affected.

 

The Company has an approximate 14% equity investment in ChemoCentryx, Inc. (CCXI) that is valued at $52.3 million on the Company’s June 30, 2015 Consolidated Balance Sheet. CCXI is a biopharmaceutical company focused on discovering, developing and commercializing orally-administered therapeutics to treat autoimmune diseases, inflammatory diseases and cancers. The development of new drugs is a highly risky undertaking. CCXI is dependent on a limited number of products, must achieve favorable clinical trial results, obtain regulatory and marketing approval for these products. CCXI has also incurred significant losses and has yet to achieve profitability.

 

The ownership of CCXI shares is very concentrated, the share price is highly volatile and there is limited trading of the shares. These factors make it possible that the Company could experience future dilution or a decline in the $22.8 million unrealized gain it has on its CCXI investment and/or its original $29.5 million investment in CCXI. At August 26, 2015, the market value of the Company’s investment in CCXI was approximately $44 million.

 

The Company’s success will be dependent on recruiting and retaining highly qualified personnel.

 

Recruiting and retaining qualified scientific, production, sales and marketing, and management personnel are critical to the Company’s success. The Company’s anticipated growth and its expected expansion into areas and activities requiring additional expertise will require the addition of new personnel and the development of additional expertise by existing personnel. The failure to attract and retain such personnel could adversely affect the Company’s business.

 

The Company is dependent on maintaining its intellectual property rights.

 

The Company’s success depends in part on its ability to protect and maintain its intellectual property, including trade secrets. If we fail to protect our intellectual property, third parties may be able to compete more effectively against us, we may lose our technological or competitive advantage, or we may incur substantial litigation costs in our attempts to recover or restrict use of our intellectual property. The Company attempts to protect trade secrets in part through confidentiality agreements, but those agreements can be breached, and if they are, there may not be an adequate remedy. If trade secrets become publicly known, the Company could lose its competitive position.

 

The Company also attempts to protect and maintain intellectual property through the patent process. As of June 30, 2015, we owned or exclusively licensed 45 granted U.S. patents and approximately 50 pending patent applications. We cannot be confident that any of our currently pending or future patent applications will result in granted patents, and we cannot predict how long it will take for such patents to be granted. It is possible that, if patents are granted to us, others will design around our patented technologies. Further, other parties may challenge any patents granted to us and courts or regulatory agencies may hold our patents to be invalid or unenforceable. We may not be successful in defending challenges made against our patents and patent applications. Any successful third-party challenge to our patents could result in the unenforceability or invalidity of such patents. Our ability to establish or maintain a technological or competitive advantage over our competitors may be diminished because of these uncertainties. To the extent our intellectual property offers inadequate protection, or is found to be invalid or unenforceable, we would be exposed to a greater risk of direct competition. If our intellectual property does not provide adequate coverage of our competitors’ products, our competitive position could be adversely affected, as could our business. Both the patent application process and the process of managing patent disputes can be time consuming and expensive.

 

 
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We may be involved in lawsuits to determine the scope, coverage and validity of others’ proprietary rights, or to defend against third-party claims of intellectual property infringement, any of which could be time-intensive and costly and may adversely impact our business.

 

The Company’s success depends in part on its ability to operate without infringing the proprietary rights of others, and to obtain licenses where necessary or appropriate. The Company has obtained and continues to negotiate licenses to produce a number of products claimed to be owned by others. Since the Company has not conducted a patent infringement study for each of its products, it is possible that products of the Company may unintentionally infringe patents of third parties.

 

The Company has been and may in the future be sued by third parties alleging that the Company is infringing their intellectual property rights. These lawsuits are expensive, take significant time, and divert management’s focus from other business concerns. If the Company is found to be infringing the intellectual property of others, it could be required to cease certain activities, alter its products or processes or pay licensing fees. This would cause unexpected costs and delays which may have a material adverse effect on the Company. If the Company is unable to obtain a required license on acceptable terms, or unable to design around any third party patent, it may be unable to sell some of its products and services, which could result in reduced revenue. In addition, if the Company does not prevail, a court may find damages or award other remedies in favor of the opposing party in any of these suits, which may adversely affect the Company’s earnings.

 

The Company has entered into and drawn on a revolving credit facility. The burden of this additional debt could adversely affect the Company, make it more vulnerable to adverse economic or industry conditions, and prevent it from funding its expansion strategy.

 

In connection with the acquisition of ProteinSimple in July 2014, the Company entered into a revolving credit facility, governed by a Credit Agreement dated July 28, 2014. 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 bear interest at a variable rate. As of July 31, 2015, the Company had drawn $73 million under the Credit Agreement.

 

The terms of the Credit Agreement and the burden of the indebtedness incurred thereunder could have negative consequences for us, such as:

 

 

limiting our ability to obtain additional financing to fund our working capital, capital expenditures, debt service requirements, expansion strategy, or other needs;

 

 

increasing the Company’s vulnerability to, and reducing its flexibility in planning for, adverse changes in economic, industry and competitive conditions; and

 

 

increasing the Company’s vulnerability to increases in interest rates.

 

The Credit Agreement also contains negative covenants that limit our ability to engage in specified types of transactions. These covenants limit our ability to, among other things, sell, lease or transfer any properties or assets, with certain exceptions; and enter into certain merger, consolidation or other reorganization transactions, with certain exceptions.

 

A breach of any of these covenants could result in an event of default under our credit facility. Upon the occurrence of an event of default, the lender could elect to declare all amounts outstanding under such facility to be immediately due and payable and terminate all commitments to extend further credit. In addition, the Company would be subject to additional restrictions if an event of default exists under the Credit Agreement, such as a prohibition on the payment of cash dividends.

 

 
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We may experience difficulties implementing our enterprise resource planning system.

 

We are implementing a new enterprise resource planning (“ERP”) system. Our ERP system is critical to our ability to accurately maintain books and records, record transactions, provide important information to our management and prepare our financial statements. The implementation of the new ERP system requires the investment of significant financial and human resources. In addition, we may not be able to successfully complete the implementation of the new ERP system without experiencing difficulties. Any disruptions, delays or deficiencies in the design and implementation of the new ERP system could adversely affect our ability to process orders, ship products, provide services and customer support, send invoices and track payments, fulfill contractual obligations or otherwise operate our business.

 

The Company’s business is subject to governmental laws and regulations.

 

The Company’s operations are subject to regulation by various US federal, state and international agencies. Laws and regulations enacted and enforced by these agencies impact all aspects of the Company’s operations including design, development, manufacturing, labeling, selling and the importing and exporting of products across international borders. Any changes to laws and regulations governing such activities could have an effect on the Company’s operations and ability to obtain regulatory clearance or approval of the Company’s products. If the Company fails to comply with any of these regulations, it may become subject to fines, penalties or actions that could impact development, manufacturing and distribution and/or increase costs or reduce sales. The approval process applicable to clinical control products and certain immunoassay kits that may be developed by the Company may take a year or more. Delays in obtaining approvals could adversely affect the marketing of new products developed by the Company, and negatively affect the Company’s revenues.

 

As a multinational corporation, the Company is subject to the tax laws and regulations of U.S. federal, state and local governments and of several international jurisdictions. From time to time, new tax legislation may be implemented which could adversely affect current or future tax filings or negatively impact the Company’s effective tax rate and thus increase future tax payments.

 

The Company relies heavily on internal manufacturing and related operations to produce, package and distribute its products.

 

The Company’s internal quality control, packaging and distribution operations support the majority of the Company’s sales. Since certain Company products must comply with Food and Drug Administration Quality System Regulations and because in all instances, the Company creates value for its customers through the development of high-quality products, any significant decline in quality or disruption of operations for any reason, particularly at the Minneapolis facility, could adversely affect sales and customer relationships, and therefore adversely affect the business. While the Company has taken certain steps to manage these operational risks, and while insurance coverage may reimburse, in whole or in part, for losses related to such disruptions, the Company’s future sales growth and earnings may be adversely affected by perceived disruption risks or actual disruptions.

 

The design and manufacture of products involves certain inherent risks. Manufacturing or design defects could lead to recalls, litigation or alerts relating to the Company’s products. A recall could result in significant costs and damage to the Company’s reputation which could reduce demand, particularly for certain of its regulated products.

 

Disruptions in the supply and cost of raw materials could reduce the Company’s earnings, cash flow, and ability to meet customers’ needs.

 

The Company’s products are made from a wide variety of raw materials that are generally available from alternate sources of supply. However, some of the Company’s products are available only from a single supplier. If such suppliers were to limit or terminate production or otherwise fail to supply these materials for any reason, such failures could have a material adverse impact on the Company’s product sales and business. In addition, price increases for raw materials could adversely affect the Company’s earnings and cash flow.

 

 
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Increased exposure to product liability claims could adversely affect the Company’s earnings.

 

Product liability is a major risk in testing and marketing biotechnology and pharmaceutical products offered by the Company’s customers. Currently these risks are primarily borne by the Company’s customers. As the Company’s products and services are further integrated into customers’ production processes, the Company may become increasingly exposed to product liability and other claims in the event that the use of its products or services is alleged to have resulted in adverse effects. There can be no assurance that a future product liability claim or series of claims brought against the Company would not have an adverse effect on the Company’s business or the results of operations. The Company’s business may be materially and adversely affected by a successful product liability claim or claims in excess of any insurance coverage that it may have. In addition, product liability claims, regardless of their merits, could be costly, divert management’s attention, and adversely affect the Company’s reputation and demand for its products.

 

Any such product liability claims brought against the Company could be significant and any adverse determination may result in liabilities in excess of the Company’s insurance coverage. Although the Company carries product liability insurance, it cannot be certain that current insurance will be sufficient to cover these claims or that it can be maintained on acceptable terms, if at all.

 

Cyber security risks and the failure to maintain the confidentiality, integrity, and availability of the Company’s computer hardware, software, and Internet applications and related tools and functions could result in damage to the Company’s reputation and/or subject the Company to costs, fines, or lawsuits.

 

The integrity and protection of the Company’s own data, and that of its customers and employees, is critical to the Company’s business. The regulatory environment governing information, security and privacy laws is increasingly demanding and continues to evolve. Maintaining compliance with applicable security and privacy regulations may increase the Company’s operating costs and/or adversely impact the Company’s ability to market its products and services to customers. Although the Company’s computer and communications hardware is protected through physical and software safeguards, it is still vulnerable to fire, storm, flood, power loss, earthquakes, telecommunications failures, physical or software break-ins, software viruses, and similar events. These events could lead to the unauthorized access, disclosure and use of non-public information. The techniques used by criminal elements to attack computer systems are sophisticated, change frequently and may originate from less regulated and remote areas of the world. As a result, the Company may not be able to address these techniques proactively or implement adequate preventative measures. If the Company’s computer systems are compromised, it could be subject to fines, damages, litigation, and enforcement actions, customers could curtail or cease using its applications, and the Company could lose trade secrets, the occurrence of which could harm its business.

 

We are now subject to regulations related to “conflict minerals” which may cause us to incur additional expenses and could limit the supply and increase the cost of certain metals used in manufacturing our products.

 

With our acquisitions of ProteinSimple and CyVek in 2014, we now manufacture and sell products that may be covered under the Securities and Exchange Commission’s (SEC) rule regarding “conflict minerals.”  We are now required to determine whether these products contain conflict minerals, and, if so, to perform an extensive inquiry into our supply chain in an effort to determine whether or not such conflict minerals originate from the Democratic Republic of Congo (DRC) or an adjoining country. Under the regulations, we are required to file a report with the SEC by May 31, 2017, to disclose and report whether or not such conflict minerals originate from the DRC or an adjoining country.  Complying with this regulation could affect sourcing at competitive prices and availability in sufficient quantities of certain minerals used in the manufacture of our products, including tantalum, tin, gold and tungsten. The number of suppliers who provide conflict-free minerals may be limited. In addition, there may be material costs associated with complying with the disclosure requirements, such as costs related to determining the source of certain minerals used in our products, as well as costs of possible changes to products, processes, or sources of supply as a consequence of such verification activities.  We may not be able to sufficiently verify the origins of the relevant minerals used in our products through the due diligence procedures that we implement, which may harm our reputation. In addition, we may encounter challenges to satisfy those customers who require that all of the components of our products be certified as conflict-free, which could place us at a competitive disadvantage if we are unable to do so.

 

 
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ITEM 1B. UNRESOLVED STAFF COMMENTS

 

There are no unresolved staff comments as of the date of this report.

 

 

ITEM 2. PROPERTIES

 

The Company owns the facilities that its headquarters and R&D Systems subsidiary occupy in Minneapolis, Minnesota. The Minneapolis facilities are utilized by both the Company’s Clinical Controls and Biotechnology segments.

 

The Minneapolis complex includes approximately 800,000 square feet of space in several adjoining buildings. Bio-Techne uses approximately 625,000 square feet of the complex for administrative, research, manufacturing, shipping and warehousing activities. The Company is currently leasing or plans to lease the remaining space in the complex as retail and office space.

 

The Company owns approximately 649 acres of farmland, including buildings, in southeast Minnesota. A portion of the land and buildings are leased to third parties as cropland and for a dairy operation. The remaining property is used by the Company to house animals for polyclonal antibody production for its Biotechnology segment.

 

Rental income from the above properties was $1.0 million, $1.0 million, and $0.8 million in fiscal 2015, 2014, and 2013, respectively.

 

The Company owns the 17,000 square foot facility that its R&D Europe subsidiary occupies in Abingdon, England. This facility is utilized by the Company’s Biotechnology and Protein Platforms segments. 

 

The Company leases the following facilities, all of which are utilized by the Company’s Biotechnology segment with the exception of the location used by the Company’s Bionostics subsidiary (Clinical Control segment), and the ProteinSimple and CyVek sites which support the Protein Platforms segment:

 

Subsidiary

 

Location

 

Type

 

Square Feet

 
               

R&D Systems Europe Ltd.

 

Langely, U.K.

 

Warehouse

 

14,300

 

R&D Systems GmbH

 

Wiesbaden-Nordenstadt, Germany

 

Office space

 

4,200

 

BiosPacific, Inc.

 

Emeryville, California

 

Office space

 

3,000

 

R&D Systems China Co., Ltd.

 

Shanghai and Bejing, China

 

Office/warehouse

 

5,700

 

Bio-Techne Hong Kong, Ltd.

 

Hong Kong

 

Office space

 

1,200

 

Boston Biochem, Inc.

 

Cambridge, Massachusetts

 

Office/lab

 

7,400

 

Tocris Crookson Limited

 

Bristol, United Kingdom

 

Office/manufacturing/lab/warehouse

 

40,900

 

Shanghai PrimeGene Bio-Tech Co., Ltd.

 

Shanghai, China

 

Office/manufacturing/lab

 

13,700

 

Bionostics, Inc.

 

Devens, Massachusetts

 

Office/manufacturing

 

48,000

 
Novus Biologicals, LLC   Littleton, Colorado   Office/warehouse   22,500  
ProteinSimple   Santa Clara, California   Office/manufacturing/warehouse   167,000  
ProteinSimple Canada   Ottawa and Toronto, Canada   Office/manufacturing/warehouse   10,000  
ProteinSimple Japan   Tokyo, Japan   Office   3,500  
CyVek Inc.   Wallingford, Connecticut   Office/manufacturing/warehouse   17,500  

 

The Company is currently pursuing new lease space for its Tocris operations. The Company believes the owned and leased properties, other than the Tocris facility, are adequate to meet its occupancy needs in the foreseeable future.

 

 
18

 

 

ITEM 3. LEGAL PROCEEDINGS

 

As of August 26, 2015, the Company is not a party to any legal proceedings that, individually or in the aggregate, are reasonably expected to have a material adverse effect on the Company’s business, results of operations, financial condition or cash flows.

 

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

 
19

 

 

PART II

 

 

ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER

MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Market Price of Common Stock

 

The Company’s common stock trades on the NASDAQ Global Select Market under the symbol "TECH." The following table sets forth for the periods indicated the high and low sales price per share for the Company’s common stock as reported by the NASDAQ Global Select Market.

 

   

Fiscal 2015 Price

   

Fiscal 2014 Price

 
   

High

   

Low

   

High

   

Low

 
                                 

1st Quarter

  $ 97.15     $ 89.03     $ 83.83     $ 69.30  

2nd Quarter

    95.89       86.01       94.78       77.14  

3rd Quarter

    101.60       87.24       96.96       82.51  

4th Quarter

    103.56       95.37       93.06       82.63  

 

Holders of Common Stock and Dividends Paid

 

As of August 26, 2015, there were over 31,000 beneficial shareholders of the Company’s common stock and over 150 shareholders of record. The Company paid quarterly cash dividends totaling $47.1 million, $45.4 million and $43.5 million in fiscal 2015, 2014 and 2013, respectively. The Board of Directors periodically considers the payment of cash dividends, and there is no guarantee that the Company will pay comparable cash dividends, or any cash dividends, in the future. The Company entered into a revolving line of credit in July 2014, which would prohibit payment of dividends to Company shareholders in the event of a default thereunder. The Credit Agreement that governs the revolving line of credit contains customary events of default.

 

Issuer Purchases of Equity Securities

 

There was no share repurchase activity by the Company in fiscal 2015. The maximum approximate dollar value of shares that may yet be purchased under the Company’s existing stock repurchase plan is approximately $125 million. The plan does not have an expiration date.

 

 
20

 

 

 

Stock Performance Graph

 

The following chart compares the cumulative total shareholder return on the Company’s common stock with the S&P Midcap 400 Index and the S&P 400 Biotechnology Index. The comparison assumes $100 was invested on the last trading day before July 1, 2010 in the Company’s common stock and in each of the foregoing indices and assumes reinvestment of dividends.

 

 

 
21

 

 

ITEM 6. SELECTED FINANCIAL DATA

 (dollars in thousands, except per share data)

 

Income and Share Data:

 

2015 (1)

   

2014 (2)

   

2013

   

2012

   

2011 (3)

 
                                         

Net sales

  $ 452,246     $ 357,763     $ 310,575     $ 314,560     $ 289,962  

Operating income

    147,023       159,750       158,469       166,209       163,055  

Earnings before income taxes (4)

    154,162       161,392       160,662       162,195       164,981  

Net earnings

    107,735       110,948       112,561       112,331       112,302  

Diluted earnings per share

    2.89       3.00       3.05       3.04       3.02  

Average common and common equivalent shares - diluted (in thousands)

    37,231       37,005       36,900       37,006       37,172  

 

Balance Sheet Data as of June 30:

 

2015

   

2014

   

2013

   

2012

   

2011

 
                                         

Cash, cash equivalents and short-term available-for-sale investments

    110,921     $ 363,354     $ 332,937     $ 268,986     $ 140,813  

Working capital

    208,515       443,022       377,432       310,757       212,229  

Total assets

    1,063,360       862,491       778,098       719,324       617,670  

Total shareholders’ equity

    846,935       795,265       737,541       674,442       586,122  

 

Cash Flow Data:

 

2015

   

2014

   

2013

   

2012

   

2011

 
                                         

Net cash provided by operating activities

  $ 139,359     $ 136,762     $ 123,562     $ 126,746     $ 127,194  

Capital expenditures

    19,904       13,821       22,454       6,017       3,630  

Cash dividends declared per share

    1.27       1.23       1.18       1.11       1.07  

 

Employee Data as of June 30:

 

2015

   

2014

   

2013

   

2012

   

2011

 
                                         

Employees

    1,356       967       789       783       763  

 

(1)

The Company acquired Novus Holdings LLC (Novus) on July 2, 2014, ProteinSimple on July 31, 2014, and CyVek Inc. on November 3, 2014.

 

(2)

The Company acquired Bionostics Holdings, Ltd on July 22, 2013 and Shanghai PrimeGene Bio-Tech Co. on April 30, 2014.

 

(3)

The Company acquired Boston Biochem, Inc. on April 1, 2011 and Tocris Holdings Limited and subsidiaries on April 28, 2011.

 

(4)

Earnings before income taxes included acquisition related expenses related to amortization of intangibles, costs recognized on sale of acquired inventories and professional fees associated with acquisition activity, as follows: 2015 - $37.6 million; 2014 - $20.0 million; 2013 - $10.2 million; 2012 - $12.7 million; 2011 - $5.0 million; 2010.

 

 
22

 

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

 

 

FORWARD-LOOKING INFORMATION

 

This report contains forward-looking statements, which are based on the Company’s current assumptions and expectations. The principal forward-looking statements in this report include the Company’s expectations regarding product releases and strategy, future financial results, acquisition activity, the competitive environment, currency fluctuation and exchange rates, capital expenditures, the performance of the Company’s investments, future dividend declarations, the construction and lease of certain facilities, the adequacy of owned and leased property for future operations, anticipated financial results and sufficiency of capital resources to meet the Company’s foreseeable future cash and working capital requirements.

 

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

 

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

 

 

USE OF ADJUSTED FINANCIAL MEASURES

 

The adjusted financial measures used in this Annual Report on Form 10-K quantify the impact the following events had on reported net sales, gross margin percentages and net earnings for fiscal 2015 as compared to fiscal 2014 and 2013:

 

 

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

 

 

the acquisitions in fiscal 2015 of CyVek, Inc. (CyVek) on November 4, 2014, ProteinSimple on July 31, 2014, and Novus Biologicals, LLC (Novus) on July 1, 2014 and in fiscal 2014 of Shanghai-based PrimeGene Bio-Tech Co. (PrimeGene) on April 30, 2014 and Bionostics Holdings, Ltd. (Bionostics) on July 22, 2013 including the impact of amortizing intangible assets and the recognition of costs upon the sale of inventory written-up to fair value;

 

 

professional fees and other costs incurred as part of the acquisitions of CyVek, ProteinSimple, and Novus in fiscal 2015 and of Bionostics and PrimeGene in fiscal 2014;

 

 

income tax adjustments related to the reinstatement of the U.S. credit for research and development expenditures in fiscal 2013, the expiration of the credit on December 31, 2013, and the reversal of valuation allowances on deferred tax assets in fiscal 2012; and

 

 

the gain on the purchase of CyVek

 

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

 

 
23

 

 

OVERVIEW

 

Bio-Techne develops, manufactures and sells biotechnology products and clinical diagnostic controls worldwide. With our 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.

 

Bio-Techne operates worldwide and has three reportable segments based on the nature of products; they are Biotechnology, Clinical Controls and Protein Platforms. The Biotechnology reporting segment develops, manufactures and sells biotechnology research and diagnostic products world-wide. The Clinical Controls reporting segment develops and manufactures controls and calibrators for the global clinical market. The Protein Platforms reporting segment includes the product lines associated with the acquisitions of ProteinSimple in July, 2014 and CyVek in November, 2014, both of which expand the Company’s solutions that it can offer its customers by developing and commercializing proprietary systems and consumables for protein analysis.

 

 

OVERALL RESULTS

 

For fiscal 2015, consolidated net sales increased 26% as compared to fiscal 2014. After adjusting for the impact of the Novus, ProteinSimple and CyVek acquisitions in fiscal 2015, as well as foreign currency fluctuations, organic sales for the year increased 4% with currency translation having a negative impact of 2% and acquisitions contributing 25% to the revenue growth. The organic growth was broad-based, with the Company achieving growth in both the Biotechnology and Clinical Controls reporting segments. A strong bio-pharma end-market in the US and significant government funding of life science research in China were the biggest contributing factors impacting organic growth.

 

Consolidated GAAP net earnings decreased 3% for fiscal 2015 as compared to fiscal 2014. After adjusting for acquisition related costs and certain income tax items in both years, adjusted net earnings increased 1% in fiscal 2015 as compared to fiscal 2014. Adjusted earnings growth was driven by increased organic sales and contribution from acquisitions partially offset by a negative impact from foreign currency translation.

 

For fiscal 2014, consolidated net sales increased 15% as compared to fiscal 2013. After adjusting for the 11% impact of the Bionostics and PrimeGene acquisitions in fiscal 2014, as well as 2% positive impact of foreign currency fluctuations, organic sales for the year increased 3%. The growth was broad-based, with the Company achieving organic growth in both the Biotechnology and Clinical Controls reporting segments and in most regions of the world. Commercial investments made globally in fiscal 2014, especially in China, were the biggest contributing factor impacting organic revenue growth.

 

Consolidated GAAP net earnings decreased 1% for fiscal 2014 as compared to fiscal 2013. After adjusting for acquisition related costs and certain income tax items in both years, adjusted net earnings increased 6% in fiscal 2014 as compared to fiscal 2013. Adjusted earnings growth was driven by increased sales partially offset by a lower margin mix from the acquired Bionostics business, as well as investments made in commercial operations and administrative infrastructure during fiscal 2014.

 

 
24

 

 

RESULTS OF OPERATIONS

 

Net Sales

 

Consolidated organic net sales exclude the impact of net sales contributed by companies acquired during the fiscal year and the effect of the change from the prior year in exchange rates used to convert sales in foreign currencies (primarily British pound sterling, euros and Chinese yuan) into U.S. dollars.

 

Consolidated net sales growth was as follows:

 

   

Year Ended June 30,

 
   

2015

   

2014

 
                 

Organic sales growth

    4

%

    3

%

Acquisitions sales growth

    25

%

    11

%

Impact of foreign currency fluctuations

    -2

%

    2

%

Consolidated net sales growth (may not foot due to rounding)

    26

%

    15

%

 

 

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

 

   

Year Ended June 30,

 
   

2015

   

2014

   

2013

 
                         

Biotechnology

  $ 325,897     $ 300,578     $ 288,156  

Clinical Controls

    60,377       57,185       22,419  

Protein Platforms

    66,247       0       0  

Intersegment

    (273

)

    0       0  

Consolidated net sales

  $ 452,247     $ 357,763     $ 310,575  

 

In fiscal 2015, Biotechnology segment net sales increased 8% from the prior fiscal year. Included in fiscal 2015 Biotechnology segment net sales was $18.5 million generated by the acquisition of Novus Biologicals in July 2014 and the negative impact of foreign currency fluctuations of $8.5 million. Excluding these amounts, organic net sales for the segment increased 3% in fiscal 2015, driven by a strong bio-pharma end-market in the US and significant government funding of life science research in China. The academia and government end-market in the U.S. continued to improve sequentially each quarter in 2015, which the Company capitalized on through its distribution partnership with Fisher Scientific. In Europe, most countries experienced growth in 2015, but this growth was negated by the timing of research cycles experienced by the Company’s large pharma customers located in Germany. The Pacific Rim regions delivered modest growth, with the exception of Japan, where the devaluation of the yen versus the US dollar encouraged local distributors to hold lower levels of inventory than in the prior year.

 

In fiscal 2015, Clinical Controls segment net sales increased 6%, with organic sales contributing 5% to growth and the acquisition of Bionostics contributing 1% to growth.   Growth came equally from solid demand for both the segment’s hematology-based controls and blood glucose/gas-based controls attributable to close relationships with our OEM customers.

 

In fiscal 2015, the new Protein Platforms segment generated net sales of $66.2 million. This segment includes the ProteinSimple product lines associated with the acquisitions of ProteinSimple in July, 2014 and CyVek in November, 2014, both of which expand the Company’s solutions that it can offer its customers by developing and commercializing proprietary systems and consumables for protein analysis.

 

In fiscal 2014, Biotechnology segment net sales increased 4% from the prior fiscal year. Included in fiscal 2014 Biotechnology segment net sales was $0.7 million from the acquisition of PrimeGene in April 2014 and the positive impact of foreign currency fluctuations of $3.5 million. Excluding these amounts, organic net sales for the segment increased 3% in fiscal 2014, driven by the commercial investments made in China, solid execution from our Pacific Rim distributors, and a robust pharma and biotech market in the U.S. U.S. academic customers still suffered from decreases in NIH funding, but sales to these customers stabilized sequentially throughout fiscal 2014. Included in fiscal 2014 net sales were $3.4 million of sales of new biotechnology products released during the fiscal year.

 

In fiscal 2014, Clinical Controls segment net sales increased $34.8 million, or 61% from the prior fiscal year. Included in Clinical Controls segment net sales was $33.1 million from the acquisition of Bionostics in July 2013. Clinical Controls segment organic net sales increased 7% in fiscal 2014 from each of the prior fiscal year, primarily as a result of strong end-market demand and operational execution.

 

 
25

 

 

Gross Margins

 

Consolidated gross margins were 68%, 70% and 74% in fiscal 2015, 2014 and 2013, respectively. GAAP reported consolidated gross margins were negatively impacted as a result of purchase accounting related to inventory and intangible assets acquired during fiscal 2015, 2014, 2013 and prior years. Under purchase accounting, inventory is valued at fair value less expected selling and marketing costs, resulting in reduced margins in future periods as the inventory is sold. Excluding the impact of acquired inventory sold and amortization of intangibles, adjusted gross margins were 72%, 74% and 77% in fiscal 2015, 2014 and 2013, respectively.

 

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

 

   

Year Ended June 30,

 
   

2015

   

2014

   

2013

 
                         

Consolidated gross margin percentage

    67.9

%

    70.3

%

    74.4

%

Identified adjustments:

                       

Costs recognized upon sale of acquired inventory

    1.5

%

    2.1

%

    1.4

%

Amortization of intangibles

    2.1

%

    1.1

%

    1.0

%

Adjusted gross margin percentage

    71.6

%

    73.5

%

    76.8

%

 

Fluctuations in adjusted gross margins, as a percentage of net sales, have primarily resulted from changes in foreign currency exchange rates and changes in product mix. In fiscal 2015, the biggest impact to gross margin, as compared to fiscal 2014, was the change in product mix associated with the acquisitions of Novus, ProteinSimple, and CyVek. In fiscal 2014, the biggest impact to gross margin, as compared to fiscal 2013, was the change in product mix associated with the acquisition of Bionostics. We expect that, in the future, gross margins will continue to be impacted by future acquisitions as well as by the introduction and growth of lower-priced brands that will differentiate from our current premium brands, and allow the Company to better compete in more price-sensitive markets.

 

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

 

   

Year Ended June 30,

 
   

2015

   

2014

   

2013

 
                         

Biotechnology

    77.8

%

    76.3

%

    76.4

%

Clinical Controls

    40.1

%

    38.5

%

    49.0

%

Protein Platforms

    57.8

%

               

Consolidated

    67.9

%

    70.3

%

    74.4

%

 

The Biotechnology segment gross margin percentage for fiscal 2015 was negatively impacted by purchase accounting and intangible asset amortization related to the Novus acquisition in July 2014, as well as foreign currency translation, as discussed above. The Clinical Controls segment gross margin percentage for fiscal 2015 and 2014 was negatively impacted by purchase accounting and intangible asset amortization related to the acquisition of Bionostics in July 2013, as discussed above, as well as reduced pricing for it’s glucose-based control products

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses increased $58.7 million (97%) and $17.3 million (40%) in fiscal 2015 and 2014, respectively. The increase in fiscal 2015 was mainly the result of the acquisitions of Novus, ProteinSimple, and CyVek including $37.1 million of selling, general and administrative expenses by the acquired companies and an increase of $10.5 million of intangible amortization compared to fiscal 2014. Selling, general and administrative expenses in fiscal 2015 also included $4.5 million of acquisition related professional fees. The remaining increase in selling, general and administrative expenses in fiscal 2015 included investments made in global commercial resources, administrative infrastructure, non-cash stock based compensation, and annual wage, salary and benefits increases.

 

 
26

 

 

The increase in fiscal 2014 was mainly the result of the acquisitions of Bionostics and PrimeGene, including $4.2 million of selling, general and administrative expenses by the acquired companies and an increase of $4.0 million of intangible amortization. Selling, general and administrative expenses in fiscal 2014 also included $2.2 million of acquisition related professional fees. The remaining increase in selling, general and administrative expenses in fiscal 2014 included investments made in global commercial resources, administrative infrastructure, and annual wage, salary and benefits increases. 

 

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

 

   

Year Ended June 30,

 
   

2015

   

2014

   

2013

 
                         

Biotechnology

  $ 59,359     $ 42,863     $ 37,421  

Clinical Controls

    10,278       9,765       1,561  

Protein Platforms

    39,144                  

Unallocated corporate expenses

    10,620       8,088       4,402  
    $ 119,401     $ 60,716     $ 43,384  

 

Research and Development Expenses

 

Research and development expenses increased $9.9 million (32%) and $1.7 million (6%) in fiscal 2015 and 2014, respectively, as compared to prior-year periods. Included in research and development expense in fiscal 2015 and 2014 was $11.0 million and $0.9 million of expenses by the companies acquired during fiscal 2015 and 2014, respectively. The remaining expenditures for fiscal 2015 and 2014 were primarily related to the development of new proteins, antibodies and assay kits within the Biotechnology segment, although fiscal 2015 research and development expenses were slightly lower within the Biotechnology segment than in prior years. The Company introduced approximately 1,600 new biotechnology products in fiscal 2015 and in fiscal 2014. Research and development expenses were composed of the following (in thousands):

 

   

Year Ended June 30,

 
   

2015

   

2014

   

2013

 
                         

Biotechnology

  $ 28,001     $ 29,189     $ 28,441  

Clinical Controls

    1,828       1,756       816  

Protein Platforms

    11,023                  
    $ 40,852     $ 30,945     $ 29,257  

 

Net Interest Income (Expense)

 

Net interest income/(expense) for fiscal 2015, 2014 and 2013 was ($0.9) million, $2.7 million, and $2.6 million respectively. Net interest expense in fiscal 2015 resulted from the opening of a debt facility in July 2014 to partially fund the acquisitions of Novus, ProteinSimple, and CyVek. Interest income in fiscal 2014 remained flat from fiscal 2013 due to an increase in cash flow slightly offset by cash used for the acquisition of Bionostics in the first quarter of fiscal 2014.

 

 
27

 

 

Other Non-operating Expense, Net

 

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

 

   

Year Ended June 30,

 
   

2015

   

2014

   

2013

 
                         

Foreign currency (losses) gains

  $ 372     $ (128

)

  $ 339  

Rental income

    1,014       1,026       830  

Real estate taxes, depreciation and utilities

    (2,547

)

    (1,940

)

    (2,192

)

Net gain (loss) from equity method investees

    8,300       0       570  
    $ 7,139     $ (1,042

)

  $ (453

)

 

Other non-operating expenses, net for the twelve months ended June 30, 2015 included a non-taxable gain of $8.3 million on the Company’s previous investment in CyVek discussed above.

 

Income Taxes

 

Income taxes for fiscal 2015, 2014 and 2013 were provided at rates of 30.1%, 31.3%, and 29.9%, respectively, of consolidated earnings before income taxes. The impact of prior year acquisitions resulted in a net increase in the rate due to additional anticipated state tax filings in comparison to prior year. This increase was offset by other discrete items including the non-taxable CyVek gain as well as an increased tax benefit resulting from a dividend paid from R&D Systems Europe.

 

In January 2013, the U.S. federal credit for research and development was reinstated for the period of January 2012 through December 2013. As a result, fiscal 2014 included a credit of $0.5 million for the period of July 2013 through December 2013, while fiscal 2013 included a credit of $1.4 million for the period of January 2012 to June 2013.

 

U.S. federal taxes have been reduced by the manufacturer’s deduction provided for under the American Jobs Creation Act of 2004 and the U.S. federal credit for research and development. Foreign income taxes have been provided at rates which approximate the tax rates in the countries in which the Company has operations.

 

Net Earnings

 

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

 

   

Year Ended June 30,

 
   

2015

   

2014

   

2013

 
                         

Net earnings

  $ 107,735     $ 110,948     $ 112,561  

Identified adjustments:

                       

Costs recognized upon sale of acquired inventory

    6,958       7,479       4,501  

Amortization of intangibles

    26,169       10,267       5,061  

Professional and other acquisition related costs

    4,519       2,247       607  

Gain in investments

    (8,300

)

    0       0  

Tax impact of above adjustments

    (11,735

)

    (5,305

)

    (2,596

)

Tax impact of research and development credit

    (910

)

    (476

)

    (1,392

)

Tax impact of deemed dividend and state and foreign adjustments

    2,321       165       (710  

Adjusted net earnings

  $ 126,758     $ 125,325     $ 118,032  
                         

Adjusted net earnings growth

    1

%

    6

%

       

 

 

LIQUIDITY AND CAPITAL RESOURCES

 

Cash, cash equivalents and available-for-sale investments at June 30, 2015 were $111 million compared to $367 million at June 30, 2014. Included in available-for-sale investments at June 30, 2015 and June 30, 2014 was the fair value of the Company’s investment in CCXI of $52.3 million and 37.1 million, respectively.

 

At June 30, 2015, approximately 42%, 23%, and 15% of the Company’s cash and equivalent account balances of $55 million were located in the U.S., China, and Canada respectively with the remainder located in the U.K. and other European countries. At June 30, 2015, approximately 93% of the Company’s available-for-sale investment accounts are located in the U.S., with the remaining 7% in China.

 

 
28

 

 

The Company has either paid U.S. taxes on its undistributed foreign earnings or intends to indefinitely reinvest the undistributed earnings in the foreign operations or expects the earnings will be remitted in a tax neutral transaction. Management of the Company expects to be able to meet its cash and working capital requirements for operations, facility expansion, capital additions, and cash dividends for the foreseeable future, and at least the next 12 months, through currently available funds including funds available through our line-of-credit and cash generated from operations.

 

During fiscal 2015, the Company acquired Novus, ProteinSimple, and CyVek for approximately $60 million, $300 million and $95 million, respectively. The Novus acquisition was financed through cash on hand. The purchases of ProteinSimple and CyVek were financed through cash on hand and a $150 million revolving line of credit facility that was opened in July 2014. This senior unsecured revolving credit facility has a term of five years with an adjustable interest rate equal to the greater of (i) the prime commercial rate, (ii) the per annum federal funds rate plus 0.5%, or (iii) LIBOR + 1.00% - 1.75% depending on the existing total leverage ratio of Debt to EBITDA (as defined in the Credit Agreement governing the revolving credit facility). The financial covenants of the revolving credit facility require the Company to maintain a minimum Interest Coverage Ratio, defined as the ratio of EBIT to cash interest expense, of 4.0x and a maximum total leverage ratio of 3.5x. The annualized fee for any unused portion of the credit facility is 15 basis points.

 

Future acquisition strategies may or may not require additional borrowings under the line of credit facility or other outside sources of funding.

 

Cash Flows From Operating Activities

 

The Company generated cash from operations of $139 million, $137 million and $124 million in fiscal 2015, 2014 and 2013, respectively. The increase in cash generated from operating activities in fiscal 2015 as compared to fiscal 2014 and in fiscal 2014 compared to fiscal 2013 was mainly the result of increase in net earnings after adjustment for non-cash expenses related to depreciation, amortization, costs recognized on sale of acquired inventory, and stock based compensation expense. Operating cash flow also benefitted from the timing of certain trade receivable cash receipts, trade payable cash disbursements, and income tax payments in fiscal 2014 compared to fiscal 2013.

 

Cash Flows From Investing Activities

 

On July 22, 2013, the Company acquired for cash all of the outstanding shares of Bionostics for a net purchase price of approximately $103 million. The acquisition was financed through cash and cash equivalents on hand. On April 30, 2014, the Company acquired all of the ownership interest of PrimeGene for a net purchase price of approximately $18.8 million. The Company paid approximately $6.0 million at closing, with the remaining purchase price payable over fiscal years 2015 to 2017. The acquisition cash payment was financed through cash and cash equivalents on hand and sale of certain short-term available-for-sale investments.

 

On July 2, 2014, the Company acquired, for a net purchase price of approximately $60 million cash, all of the issued and outstanding equity interests of Novus Holdings LLC (Novus), including its subsidiary, Novus Biologicals, LLC. The acquisition was financed through cash and cash equivalents on hand.

 

On July 31, 2014, the Company acquired ProteinSimple for a net purchase price of approximately $300 million. The transaction was financed through cash on hand and a revolving line-of-credit facility.

 

On November 3, 2014, the Company acquired CyVek for a net cash payment of $60 million on the date of acquisition and certain future contingent payments of approximately $35 million. The cash paid at the acquisition date was financed through cash on hand and a revolving line-of-credit facility.

 

The Company’s net proceeds from the purchase, sale and maturity of available-for-sale investments in fiscal 2015, 2014 and 2013 were $13 million, $184 million and ($9) million, respectively. Most of the Company’s available-for-sale investments in the U.S. (other than its investment in CCXI) were liquidated by fiscal 2014 year-end to prepare for the July purchase of Novus and ProteinSimple. The Company’s investment policy is to place excess cash in municipal and corporate bonds with the objective of obtaining the highest possible return while minimizing risk and keeping the funds accessible.

 

 
29

 

 

Capital additions consisted of the following (in thousands):

 

   

Year Ended June 30,

 
   

2015

   

2014

   

2013

 
                         

Laboratory, manufacturing, and computer equipment

  $ 9,213     $ 6,626     $ 2,882  

Construction/renovation

    10,691       7,195       19,572  
    $ 19,904     $ 13,821     $ 22,454  

 

Construction/renovation for fiscal 2015 included $3.8 million related to the relocation and expansion of the Company’s Tocris facilities in the U.K. Construction and renovation for fiscal 2014 and 2013 included $6.5 million and $18.0 million, respectively, related to the renovation of a building on the Company’s Minneapolis campus which was completed in fiscal 2014. Capital additions planned for fiscal 2016 are approximately $20 million and are expected to be financed through currently available cash and cash generated from operations. Included in the planned fiscal 2016 capital expenditures are approximately $5.6 million for leasehold improvements and equipment needed to complete the relocation and expansion of the Company’s Tocris facilities in the U.K.

 

Cash Flows From Financing Activities

 

In fiscal 2015, 2014 and 2013, the Company paid cash dividends of $47.1 million, $45.4 million and $43.5 million, respectively. The Board of Directors periodically considers the payment of cash dividends.

 

The Company received $9.7 million, $8.3 million, and $1.1 million for the exercise of options for 241,000, 141,000, and 22,000 shares of common stock in fiscal 2015, 2014 and 2013, respectively. The Company recognized excess tax benefits from stock option exercises of $0.6 million, $0.3 million, $0.1 million in fiscal 2015, 2014 and 2013, respectively.

 

In fiscal 2013, the Company purchased 8,324 shares of common stock, for its employee stock bonus plans at a cost of $0.6 million.

 

During fiscal 2015, the Company drew $163 million under its revolving line-of-credit facility to partially fund its acquisitions of ProteinSimple and CyVek. The Company made payments on the line-of-credit and other debt of $95 million.

 

In April 2009, the Board of Directors authorized a plan for the repurchase and retirement of $60 million of its common stock. In October 2012, the Board of Directors increased the amount authorized under the plan by $100 million. The plan does not have an expiration date. In fiscal 2013, the Company purchased and retired 28,000 and shares of common stock at market values of $1.8 million. There were no stock repurchases in fiscal 2015 or 2014. At June 30, 2015, approximately $125 million remained available for purchase under the above authorizations. There were no share repurchase activity by the Company in fiscal 2015.

 

 

CONTRACTUAL OBLIGATIONS

 

The following table summarizes the Company’s contractual obligations and commercial commitments as of June 30, 2015 (in thousands):

 

           

Payments Due by Period

 
   

Total

   

Less than
1 Year

   

1-2
Years

   

3-4
Years

   

After
5 Years

 

Operating leases

  $ 47,648     $ 5,578     $ 10,883     $ 8,679     $ 22,508  

Minimum royalty payments

    160       160       0       0       0  

CyVek acquisition (1)

    35,000       0       35,000       0       0  
    $ 82,808     $ 5,738     $ 45,883     $ 8,679     $ 22,508  

 

(1)

Amounts represent the maximum potential contingent liability under the CyVek Merger Agreement. In addition, the Company will pay CyVek’s other stockholders up to 50% of the amount, if any, by which revenues of CyVek’s products and related products exceeds $100 million in calendar year 2020.

 

 
30

 

 

OFF-BALANCE SHEET ARRANGEMENTS

 

The Company is not a party to any off-balance sheet transactions, arrangements or obligations that have, or are reasonably likely to have, a current or future material effect on the Company’s financial condition, changes in the financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

 

 

CRITICAL ACCOUNTING POLICIES

 

Management’s discussion and analysis of the Company’s financial condition and results of operations are based upon the Company’s Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, management evaluates its estimates. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

 

The Company has identified the policies outlined below as critical to its business operations and an understanding of results of operations. The listing is not intended to be a comprehensive list of all accounting policies; investors should also refer to Note A to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K .

 

Valuation of Available-For-Sale Investments

 

The Company considers all of its marketable securities available-for-sale and reports them at fair market value. Fair market values are based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. Unrealized gains and losses on available-for-sale investments 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 recorded in the financial statements and the Company’s current estimate of fair value is recognized as a charge to earnings in the period in which the impairment is determined. Net unrealized gains on available-for-sale investments at June 30, 2015 were $14.3 million.

 

Valuation of Inventory

 

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. The establishment of a two-year or five-year forecast requires considerable judgment. Inventory quantities in excess of the forecast are not valued due to uncertainty over salability. The value of protein, antibody and chemically-based product inventory not valued at June 30, 2015 was $24 million.

 

The fair value of inventory purchased through acquisitions was determined based on quantities acquired, selling prices at the date of acquisition and management’s assumptions regarding inventory having future value and the costs to sell such inventories. Inventory purchased in fiscal 2015 through the acquisitions of Novus, ProteinSimple, and CyVek was increased $4.1 million, $1.4 million and $0.1 million respectively. The increase in value of the fiscal 2015 acquired inventory remaining at June 30, 2015 was $2.3 million for Novus. Substantially all of ProteinSimple and CyVek acquired inventory was sold as of June 30, 2015.

 

 
31

 

 

Inventory purchased in fiscal 2014 through the acquisition of Bionostics and PrimeGene was increased $1.7 million to $5.7 million and $0.8 million to $1.0 million, respectively. Substantially all of Bionostics and PrimeGene acquired inventory was sold as of June 30, 2015.

 

Valuation of Intangible Assets and Goodwill

 

When a business is acquired, the purchase price is allocated, as applicable, between tangible assets, identifiable intangible assets and goodwill. Determining the portion of the purchase price allocated to intangible assets requires significant estimates. The fair value of intangible assets acquired, including developed technologies, trade names, customer relationships and non-compete agreements, were based on management’s forecasted cash inflows and outflows using a relief-from-royalty and multi-period excess earnings method with consideration to other factors including an independent valuation of management’s assumptions. Intangible assets are being amortized over their estimated useful lives, ranging from 3 to 20 years. The Company reviews the carrying amount of intangible assets for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Intangible assets, net of accumulated amortization, were $293 million at June 30, 2015.

 

Goodwill recognized in connection with a business acquisition represents the excess of the aggregate purchase price over the fair value of net assets acquired. Goodwill is tested for impairment annually or more frequently if changes in circumstance or the occurrence of events suggest impairment exists. Assessing the impairment of goodwill requires the Company to make judgments regarding the fair value of the net assets of its reporting units and the allocation of the carrying amount of shared assets to the reporting units. The Company’s annual assessment included a qualitative assessment of whether it is more-likely-than-not that a reporting unit’s fair value is less than its carrying value. A significant change in the Company’s market capitalization or in the carrying amount of net assets of a reporting unit could result in an impairment charge in future periods. The Company completed its annual impairment testing of goodwill and concluded that no impairment existed as of June 30, 2015, as the fair values of the Company’s reporting units exceeded their carrying values. Goodwill at June 30, 2015 was $391 million.

 

Valuation of Investments

 

The Company has made equity investments in several start-up and early development stage companies, including CyVek in fiscal 2014. 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. In determining which accounting treatment to apply, the Company must make judgments based upon the quantitative and qualitative aspects of the investment.

 

The Company periodically assesses its equity investments for impairment. Development stage companies of the type the Company has invested in are dependent on their ability to raise additional funds to continue research and development efforts and on receiving patent protection and/or FDA clearance to market their products. If such funding were unavailable or inadequate to fund operations or if patent protection or FDA clearance were not received, the Company would potentially recognize an impairment loss to the extent of its remaining net investment.

 

 
32

 

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES

ABOUT MARKET RISK

 

At the end of fiscal 2015, the Company had a portfolio of equity securities, excluding those classified as cash and cash equivalents, of $56.4 million (see Note 3 to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K). As the Company’s securities are classified as available-for-sale, unrealized gains or losses are recognized by the Company in “Other comprehensive income (loss)” on the Consolidated Statement of Earnings and Comprehensive Income.

 

The Company operates internationally, and thus is subject to potentially adverse movements in foreign currency exchange rates. Approximately 18% of the Company’s consolidated net sales in fiscal 2015 were made in foreign currencies, including 6% in euro, 4% in British pound sterling, 5% in Chinese yuan and the remaining 3% in other European and Asian 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 as the financial position and operating results of the Company’s foreign operations are translated into U.S. dollars for consolidation. In fiscal 2015, for example, the exchange rate between the Euro and the US dollar changed materially, resulting in consolidated net sales that were approximately $8.5 million lower in fiscal 2015 compared to fiscal 2014.

 

Month-end 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:

 

   

Year Ended June 30,

 
   

2015

   

2014

   

2013

 

British pound:

                       

High

  $ 1.69     $ 1.71     $ 1.62  

Low

    1.48       1.52       1.52  

Average

    1.57       1.64       1.57  

Euro:

                       

High

  $ 1.34     $ 1.39     $ 1.36  

Low

    1.08       1.32       1.23  

Average

    1.19       1.36       1.30  

Chinese yuan:

                       

High

  $ .164     $ .165     $ .163  

Low

    .162       .160       .157  

Average

    .163       .163       .160  

 

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 June 30, 2015, the Company had the following trade receivable and intercompany payables denominated in one currency but receivable or payable in another currency (in thousands):

 

      Denominated
Currency
      U. S. Dollar
Equivalent
 

Accounts receivable in:

               

Euros

  £  451     $ 709  

British Pound Sterling

  £  1,529     $ 2,402  
                 

Intercompany payable in:

               

Euros

  £  451     $ 771  

U.S. dollars

  £  2,956     $ 5,057  
U.S. dollars   yuan 20,332     $ 3,305  

 

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 currency forward contracts to reduce its exposure to foreign currency rate changes on forecasted intercompany sales transactions or on intercompany foreign currency denominated balance sheet positions. Foreign currency transaction gains and losses are included in “Other non-operating expense, net” in the Consolidated Statement of Earnings and Comprehensive Income. 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 (loss).”

 

 
 

 

 

The effects of a hypothetical simultaneous 10% appreciation in the U.S. dollar from June 30, 2015 levels against the euro, British pound sterling and Chinese yuan are as follows (in thousands):

 

Decrease in translation of 2015 earnings into U.S. dollars

  $ 3,352  

Decrease in translation of net assets of foreign subsidiaries

    26,808  

Additional transaction losses

    409  

 

 
33

 

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME

Bio-Techne Corporation and Subsidiaries
(in thousands, except per share data)

 

   

Year Ended June 30,

 
   

2015

   

2014

   

2013

 
                         

Net sales

  $ 452,246     $ 357,763     $ 310,575  

Cost of sales

    144,969       106,352       79,465  

Gross margin

    307,277       251,411       231,110  
                         

Operating expenses:

                       

Selling, general and administrative

    119,401       60,716       43,384  

Research and development

    40,853       30,945       29,257  

Total operating expenses

    160,254       91,661       72,641  

Operating income

    147,023       159,750       158,469  
                         

Other income (expense):

                       

Interest expense

    (1,544

)

    0       0  

Interest income

    634       2,684       2,646  

Other non-operating income (expense), net

    8,049       (1,042

)

    (453

)

Total other income (expense)

    7,139       1,642       2,193  

Earnings before income taxes

    154,162       161,392       160,662  

Income taxes

    46,427       50,444       48,101  

Net earnings

    107,735       110,948       112,561  

Other comprehensive income (loss):

                       

Foreign currency translation adjustments

    (36,513 )     15,819       (3,538

)

Unrealized (losses) gains on available-for-sale investments, net of tax of 3,895, ($17,110) and ($2,129), respectively

    11,308       (35,760

)

    (3,684

)

Other comprehensive (loss) income

    (25,205

)

    (19,941

)

    (7,222

)

Comprehensive income

  $ 82,530     $ 91,007     $ 105,339  
                         

Earnings per share:

                       

Basic

  $ 2.90     $ 3.01     $ 3.06  

Diluted

  $ 2.89     $ 3.00     $ 3.05  

Cash dividends per common share:

  $ 1.27     $ 1.23     $ 1.18  

Weighted average common shares outstanding:

                       

Basic

    37,096       36,890       36,836  

Diluted

    37,231       37,005       36,900  

 

See Notes to Consolidated Financial Statements.

 

 
34

 

 

CONSOLIDATED BALANCE SHEETS

Bio-Techne Corporation and Subsidiaries
(in thousands, except share and per share data)

 

   

June 30,

 
   

2015

   

2014

 

ASSETS

               

Current assets:

               

Cash and cash equivalents

  $ 54,532     $ 318,568  

Short-term available-for-sale investments

    56,389       44,786  

Accounts receivable, less allowance for doubtful accounts of $555 and $487, respectively

    70,034       55,001  

Deferred income taxes

    11,511       9,623  

Inventories

    49,577       38,847  

Other current assets

    6,240       2,588  

Total current assets

    248,283       469,413  
                 

Available-for-sale investments

    0       3,575  

Property and equipment, net

    129,749       117,120  

Goodwill

    390,638       151,473  

Intangible assets, net

    292,839       108,776  

Investments in unconsolidated entities

    0       10,446  

Other assets

    1,851       1,688  
    $ 1,063,360     $ 862,491  

LIABILITIES AND SHAREHOLDERS’ EQUITY

               

Current liabilities:

               

Trade accounts payable

  $ 13,443     $ 9,652  

Salaries, wages and related accruals

    10,344       6,158  

Accrued expenses

    6,604       4,136  

Deferred revenue

    3,380       0  

Income taxes payable

    1,972       496  

Related party note payable, current

    4,024       5,949  

Total current liabilities

    39,768       26,391  
                 

Deferred income taxes

    61,429       33,838  

Related party note payable, long-term

    0       6,997  

Long-term debt obligations

    73,000       0  

Contingent consideration payable

    39,024       0  

Other long-term liabilities

    3,204       0  
                 

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 37,152,979 and 37,002,203 shares, respectively

    371       370  

Additional paid-in capital

    163,306       147,004  

Retained earnings

    713,851       653,279  

Accumulated other comprehensive (loss) income

    (30,593

)

    (5,388

)

Total shareholders’ equity

    846,935       795,265  
    $ 1,063,360     $ 862,491  

 

See Notes to Consolidated Financial Statements.

 

 
35

 

 

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
Bio-Techne Corporation and Subsidiaries
(in thousands)

 

   

Common Stock

   

Additional
Paid-in

   

Retained

   

Accumulated
Other
Compre-
hensive

         
   

Shares

   

Amount

   

Capital

   

Earnings

   

Income(Loss)

   

Total

 
                                                 

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  

Net earnings

                            107,735               107,735  

Other comprehensive loss

                                    (25,205

)

    (25,205

)

Surrender and retirement of stock to exercise options

    (0

)

    (0

)

    (31 )                     (31

)

Common stock issued for exercise of options

    141       1       9,761                       9,762  

Common stock issued for restricted stock awards

    10       0               (57

)

            (57

)

Cash dividends

                            (47,106

)

            (47,106

)

Stock-based compensation expense

                    5,918                       5,918  

Tax benefit from exercise of stock options

                    615