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TECHNE CORP /MN/ - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL(Edgar Glimpses Via Acquire Media NewsEdge) 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, acquisition activity, governmental license renewals, 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 2014 as compared to fiscal 2013 and 2012: • 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 acquisition of Bionostics Holdings, Ltd. (Bionostics) on July 22, 2013 and Shanghai PrimeGene Bio-Tech Co. (PrimeGene) on April 30, 2014, 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 acquisition of Bionostics and PrimeGene in fiscal 2014, the acquisitions of Novus Biologicals LLC (Novus) and ProteinSimple, which closed in July 2014, and on-going acquisition activity; • 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 • impairment losses related to the Company's investments in unconsolidated entities. 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. 19 -------------------------------------------------------------------------------- Table of Contents 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 two reportable business segments, Biotechnology and Clinical Controls, both of which service the life science and diagnostic markets. 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. OVERALL RESULTS For fiscal 2014, consolidated net sales increased 15% as compared to fiscal 2013. After adjusting for the impact of the Bionostics and PrimeGene acquisitions in fiscal 2014, as well as foreign currency fluctuations, organic sales for the year increased 3%. The growth was broad-based, with the Company achieving organic growth in both 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. For fiscal 2013, consolidated net sales decreased 1% as compared to fiscal 2012. There were no acquisitions made in fiscal 2013 or fiscal 2012 and the impact from foreign currency fluctuation was minimal. The U.S. market in the Biotechnology segment was particularly soft in 2013, with lower National Institute of Health (NIH) funding for our academic customers coupled with industry consolidation in the pharma and biotech markets. Consolidated GAAP net earnings were flat for fiscal 2013 as compared to fiscal 2012. After adjusting for acquisition related costs and certain income tax and impairment items in both years, adjusted net earnings decreased 3% in fiscal 2013 as compared to fiscal 2012. The lower earnings in fiscal 2013 resulted from lower revenue coupled with a 5% increase in research and development investment and a 4% increase in selling, general and administrative costs primarily related to investments made in global commercial resources, administrative infrastructure, and annual wage, salary and benefits increases. 20 -------------------------------------------------------------------------------- Table of Contents RESULTS OF OPERATIONS Net Sales Consolidated organic net sales, excluding 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, were as follows (in thousands): Year Ended June 30, 2014 2013 Consolidated net sales $ 357,763 $ 310,575 Organic sales adjustments: Acquisitions (33,879 ) 0 Impact of foreign currency fluctuations (3,500 ) 0 Consolidated organic net sales $ 320,384 $ 310,575 Organic sales growth 3 % Year Ended June 30, 2013 2012 Consolidated net sales $ 310,575 $ 314,560 Organic sales adjustments: Impact of foreign currency fluctuations 2,637 0 Consolidated organic net sales $ 313,212 $ 314,560 Organic sales growth (decline) (0.4 %) Net sales by reportable segment were as follows (in thousands): Year Ended June 30, 2014 2013 2012 Biotechnology $ 300,578 $ 288,156 $ 293,274 Clinical Controls 57,185 22,419 21,286 $ 357,763 $ 310,575 $ 314,560 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 2013, Biotechnology segment net sales decreased 2% from the prior fiscal year. Biotechnology segment organic net sales, excluding the negative impact of foreign currency fluctuations of $2.6 million, decreased 1% in fiscal 2013, primarily as a result of lower NIH funding and pharma consolidation in the U.S. Included in fiscal 2013 net sales were $2.8 million of sales of new biotechnology products during the fiscal year. Clinical Controls segment net sales increased $34.8 million in fiscal 2014. 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% and 5%, respectively, in fiscal 2014 and 2013 from each of the prior fiscal years, primarily as a result of strong end-market demand and operational execution. Gross Margins Consolidated gross margins were 70%, 74% and 75% in fiscal 2014, 2013 and 2012, respectively. GAAP reported consolidated gross margins were negatively impacted as a result of purchase accounting related to inventory and intangible assets acquired during fiscal 2014 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 74%, 77% and 78% in fiscal 2014, 2013 and 2012, respectively. 21 -------------------------------------------------------------------------------- Table of Contents 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, 2014 2013 2012 Consolidated gross margin percentage 70.3 % 74.4 % 75.0 % Identified adjustments: Costs recognized upon sale of acquired inventory 2.1 % 1.4 % 2.4 % Amortization of intangibles 1.1 % 1.0 % 1.0 % Adjusted gross margin percentage 73.5 % 76.8 % 78.4 % 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 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, 2014 2013 2012 Biotechnology 76.3 % 76.4 % 76.9 % Clinical Controls 38.5 % 49.0 % 48.6 % Consolidated 70.3 % 74.4 % 75.0 % The Clinical Controls segment gross margin percentage for fiscal 2014 was negatively impacted by purchase accounting and intangible asset amortization related to the acquisition of Bionostics in July 2013, as discussed above. Selling, General and Administrative Expenses Selling, general and administrative expenses increased $17.3 million (40%) and $1.7 million (4%) in fiscal 2014 and 2013, respectively. 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 compared to $0.6 million in fiscal 2013. The remaining increase in selling, general and administrative expenses in fiscal 2014 and in fiscal 2013 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, 2014 2013 2012 Biotechnology $ 42,863 $ 37,421 $ 36,453 Clinical Controls 9,765 1,561 1,697 Unallocated corporate expenses 8,088 4,402 3,533 $ 60,716 $ 43,384 $ 41,683 22 -------------------------------------------------------------------------------- Table of Contents Research and Development Expenses Research and development expenses increased $1.7 million (6%) and $1.3 million (5%) in fiscal 2014 and 2013, respectively, as compared to prior-year periods. Included in research and development expense in fiscal 2014 was $0.9 million of expenses by the companies acquired during fiscal 2014. The remaining increases for fiscal 2014 and 2013 were primarily the result of the development of new proteins, antibodies and assay kits within the Biotechnology segment. The Company introduced approximately 1,600 and 2,100 new biotechnology products in fiscal 2014 and 2013, respectively. Research and development expenses are composed of the following (in thousands): Year Ended June 30, 2014 2013 2012 Biotechnology $ 29,189 $ 28,441 $ 27,112 Clinical Controls 1,756 816 800 $ 30,945 $ 29,257 $ 27,912 Interest Income Interest income for fiscal 2014, 2013 and 2012 was $2.7 million, $2.6 million and $2.6 million, respectively. Interest income in fiscal 2014 remained flat from fiscal 2013 as a result of lower cash balances during the fiscal year as a result of the acquisition of Bionostics in the first quarter of fiscal 2014. Interest income in fiscal 2013 remained flat from fiscal 2012 as a result of increased cash balances offset by lower interest rates. As discussed further in "Liquidity and Capital Resources" below, with the opening of a debt facility in July 2014 to partially fund the acquisition of ProteinSimple, the Company expects to incur net interest expense as opposed to net interest income in fiscal 2015. 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, 2014 2013 2012 Foreign currency (losses) gains $ (128 ) $ 339 $ (1,362 ) Rental income 1,026 830 693 Real estate taxes, depreciation and utilities (1,940 ) (2,192 ) (2,127 ) Net gain (loss) from equity method investees 0 570 (603 ) $ (1,042 ) $ (453 ) $ (3,399 ) Income Taxes Income taxes for fiscal 2014, 2013 and 2012 were provided at rates of 31.3%, 29.9% and 30.7%, respectively, of consolidated earnings before income taxes. 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. Included in income taxes in fiscal 2012 was a $3.0 million benefit due to the reversal of a deferred tax valuation allowance on the excess tax basis in the Company's investments in unconsolidated entities. The Company determined such valuation allowance was no longer necessary and included the benefit in fiscal 2012 income taxes. In addition, the fiscal 2012 consolidated tax rate was negatively impacted by the expiration of the U.S. research and development credit on December 31, 2011. 23 -------------------------------------------------------------------------------- Table of Contents 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, 2014 2013 2012 Net earnings $ 110,948 $ 112,561 $ 112,331 Identified adjustments: Costs recognized upon sale of acquired inventory 7,479 4,501 7,573 Amortization of intangibles 10,267 5,061 5,094 Professional and other acquisition related costs 2,247 607 0 Impairment loss on investments 0 0 3,254 Tax impact of above adjustments (5,305 ) (2,596 ) (4,668 ) Tax impact of research and development credit (476 ) (1,392 ) (465 ) Tax impact of foreign source income 165 (710 ) 1,058 Tax benefit from reversal of valuation allowance 0 0 (3,016 ) Adjusted net earnings $ 125,325 $ 118,032 $ 121,161 Adjusted net earnings growth (decline) 6 % (3 %) 4 % LIQUIDITY AND CAPITAL RESOURCES Cash, cash equivalents and available-for-sale investments at June 30, 2014 were $367 million compared to $465 million at June 30, 2013. Included in available-for-sale investments at June 30, 2014 and 2013 was the fair value of the Company's investment in CCXI of $37.1 million and $89.6 million, respectively. At June 30, 2014, approximately 76%, 21%, and 3% of the Company's cash and equivalent account balances of $319 million were located in the U.S., U.K. and China, respectively. At June 30, 2014, approximately 84% of the Company's available-for-sale investment accounts are located in the U.S., with the remaining 16% in China. 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. 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 and cash generated from operations. Subsequent to June 30, 2014, the Company acquired Novus for approximately $60.0 million and ProteinSimple for approximately $300 million. The Novus acquisition was financed through cash on hand. The purchase of ProteinSimple was financed through cash on hand and a $150 million revolving line of credit facility that was opened in July 2014, of which $125 million was initially drawn to fund the acquisition. 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. 24 -------------------------------------------------------------------------------- Table of Contents Cash Flows From Operating Activities The Company generated cash from operations of $137 million, $124 million and $127 million in fiscal 2014, 2013 and 2012, respectively. The increase in cash generated from operating activities in fiscal 2014 as 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 option expense. Operating cash flow also benefitted from the timing of certain trade receivable cash receipts, trade payable cash disbursements, and income tax payments. The decrease in cash generated from operating activities in fiscal 2013 as compared to fiscal 2012 was mainly the result of decrease in net earnings and changes in working capital. 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 April 1, 2014, the Company entered into an Agreement of Investment and Merger (the Agreement) with CyVek. Pursuant to the terms of the Agreement, the Company invested $10.0 million in CyVek and received shares of common stock representing approximately 19.9% of the outstanding voting stock of CyVek. The investment was financed through cash and cash equivalents on hand. If, within twelve months of the date of the Agreement, CyVek meets commercial milestones related to the sale of its products and certain other conditions, the Company will acquire CyVek through a merger, with CyVek surviving as a wholly-owned subsidiary of the Company. If the merger is consummated, the Company will make an initial payment of $60.0 million to the other stockholders of CyVek. The purchase price payable at the closing of the merger may be adjusted based on the final levels of cash, indebtedness and transaction expenses of CyVek as of the closing. The Company will also pay CyVek's other stockholders up to $35.0 million based on the revenue generated by CyVek's products and related products before the date that is 30 months from the closing of the Merger. The Company will also pay CyVek's other stockholders 50% of the amount, if any, by which the revenue from CyVek's products and related products exceeds $100 million in calendar year 2020. The Company's net purchases (sales) of available-for-sale investments in fiscal 2014, 2013 and 2012 were ($184) million, $9.1 million and $15.3 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. In fiscal 2015, this policy will be more applicable in non-U.S. jurisdictions as the Company intends to use excess cash from U.S. operation primarily to minimize the outstanding balance on the Company's revolving credit facility. Capital additions consisted of the following (in thousands): Year Ended June 30, 2014 2013 2012 Laboratory, manufacturing, and computer equipment $ 6,626 $ 2,882 $ 2,521 Construction/renovation 7,195 19,572 3,496 $ 13,821 $ 22,454 $ 6,017 Construction/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 2015 are approximately $16.2 million and are expected to be financed through currently available cash and cash generated from operations. Included in the planned fiscal 2015 capital expenditures are approximately $5.0 million for leasehold improvements and equipment needed for the relocation and expansion of the Company's Tocris facilities in the U.K. Another $5.0 million is expected to be funded in fiscal year 2016 to complete the project. 25 -------------------------------------------------------------------------------- Table of Contents Cash Flows From Financing Activities In fiscal 2014, 2013 and 2012, the Company paid cash dividends of $45.4 million, $43.5 million and $41.0 million, respectively. The Board of Directors periodically considers the payment of cash dividends. The Company received $8.3 million, $1.1 million and $0.8 million for the exercise of options for 141,000, 22,000 and 17,000 shares of common stock in fiscal 2014, 2013 and 2012, respectively. The Company recognized excess tax benefits from stock option exercises of $0.3 million, $0.1 million and $0.1 million in fiscal 2014, 2013 and 2012, respectively. In fiscal 2013 and 2012, the Company purchased 8,324 and 13,140 shares of common stock, respectively, for its employee stock bonus plans at a cost of $0.6 million and $0.9 million, respectively. 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 and 2012, the Company purchased and retired 28,000 and 344,000 shares of common stock, respectively, at market values of $1.8 million and $23.6 million. There were no stock repurchases in fiscal 2014. At June 30, 2014, approximately $125 million remained available for purchase under the above authorizations. CONTRACTUAL OBLIGATIONS The following table summarizes the Company's contractual obligations and commercial commitments as of June 30, 2014 (in thousands): Payments Due by Period Less than 1-3 After 5 Total 1 Year Years 3-5 Years Years Operating leases $ 14,696 $ 1,785 $ 3,133 $ 2,052 $ 7,726 Minimum royalty payments 153 153 0 0 0 CyVek acquisition (1) 95,000 60,000 0 35,000 0 $ 109,489 $ 61,938 $ 3,133 $ 37,052 $ 7,726 (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. 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. 26 -------------------------------------------------------------------------------- Table of Contents 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, 2014 were $7.6 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, 2014 was $30.3 million. The fair value of inventory purchased through acquisitions were 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 2014 through the acquisition of Bionostics was increased $1.7 million to $5.7 million. Substantially all of Bionostics acquired inventory was sold as of June 30, 2014. Inventory purchased in fiscal 2014 through the acquisition of PrimeGene was increased $0.8 million to $1.0 million. The increase in value of the PrimeGene inventory remaining at June 30, 2104 was $0.6 million. The value of inventory purchased in fiscal 2011 through acquisitions was increased $25.7 million for a total acquired inventory value of $33.0 million. In addition, the Company acquired inventory that was not valued as part of the purchase price allocation as it was in excess of forecasted usage. The increase in value of the fiscal 2011 acquired inventory remaining at June 30, 2014 was $7.6 million. 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 15 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 $109 million at June 30, 2014. 27 -------------------------------------------------------------------------------- Table of Contents 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, 2014, as the fair values of the Company's reporting units exceeded their carrying values. Goodwill at June 30, 2014 was $151 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. |