TECH 10-Q Quarter ended March 31, 2012

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

For the quarterly period ended March 31, 2012,

or

For the transition period from to

Commission file number 0-17272

TECHNE CORPORATION

(Exact name of registrant as specified in its charter)

(612) 379-8854

(Registrant’s telephone number, including area code)

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

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.

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

At May 3, 2012, 36,825,963 shares of the Company’s Common Stock (par value $0.01) were outstanding.

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TABL E OF CONTENTS

PART I. FINANCIAL INFORMATION

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TECHNE Corporation and Subsidiaries

(in thousands, except per share data)

(unaudited)

See Notes to Condensed Consolidated Financial Statements.

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TECHNE Corporation and Subsidiaries

(in thousands, except share and per share data)

See Notes to Condensed Consolidated Financial Statements.

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TECHNE Corporation and Subsidiaries

(in thousands)

(unaudited)

See Notes to Condensed Consolidated Financial Statements.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

TECHNE Corporation and Subsidiaries

(unaudited)

A. Basis of presentation:

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

A summary of significant accounting policies followed by the Company is detailed in the Company’s Annual Report on Form 10-K for fiscal 2011. The Company follows these policies in preparation of the interim unaudited condensed consolidated financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. These interim unaudited condensed consolidated financial statements should be read in conjunction with the Company’s Consolidated Financial Statements and Notes thereto for the fiscal year ended June 30, 2011, included in the Company’s Annual Report on Form 10-K for fiscal 2011.

Certain reclassifications have been made to prior years’ Condensed Consolidated Financial Statements to conform to the current year presentation. The Company reclassified prior years’ amortization expense as appropriate based upon the nature of the related intangible asset to cost of sales or selling, general and administrative expense. These reclassifications had no impact on net earnings or shareholders’ equity as previously reported.

B. Available-for-sale investments:

The Company’s available-for-sale investments at March 31, 2012 are carried at fair value and are valued using quoted market prices in active markets (Level 1 input) for identical assets and liabilities.

In September 2011, the Company entered into a $10.0 million loan agreement with ChemoCentryx, Inc. (CCXI), one of the Company’s equity investees. The loan agreement contained a number of conversion features contingent upon CCXI obtaining future debt or equity financing. The agreement also included a $5.0 million commitment by the Company to participate in a private placement in the event of a successful public offering of CCXI shares. At December 31, 2011, the loan was carried at fair value (Level 3 input) and included in “Long-term available-for-sale investments”. The Company’s $14.3 million equity investment in CCXI was included in “Long-term investments in unconsolidated entities”.

On February 8, 2012, CCXI completed its initial public offering (IPO) at $10 per share. Upon the close of the IPO, the Company’s investment in CCXI’s Preferred Shares and the loan, plus accrued interest, converted into CCXI common stock. The Company invested an additional $5.0 million in the private placement, as discussed above, and received ten year warrants to purchase 150,000 shares of CCXI common stock at $20 per share. At March 31, 2012, the Company holds an approximate 18.0% interest in CCXI and the investment is included in “Short-term available-for-sale investments” at fair-value (Level 1 input) of $66.5 million. The unrealized gain on the Company’s investment in CCXI of $37.0 million, net of income tax, is included in “Accumulated other comprehensive income” at March 31, 2012.

Activity related to available-for-sale investments with Level 3 inputs were as follows (in thousands):

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C. Inventories:

Inventories consist of (in thousands):

D. Property and equipment:

Property and equipment consist of (in thousands):

E. Intangible assets and goodwill:

Intangible assets consist of (in thousands):

The change in the carrying amount of net intangible assets for the nine months ended March 31, 2012 resulted from amortization expense and currency translation. Amortization expense related to technologies included in cost of sales was $750,000 and $2.3 million, respectively, for the quarter and nine months ended March 31, 2012, and $108,000 and $326,000 for the quarter and nine months ended March 31, 2011, respectively. Amortization expense related to trade names, customer relationships, and the non-compete agreement included in selling, general and administrative expense was $518,000 and $1.6 million for the quarter and nine months ended March 31, 2012, respectively, and $62,000 and $185,000 for the quarter and nine months ended March 31, 2011, respectively.

The change in the carrying amount of goodwill for the nine months ended March 31, 2012 resulted from currency translation.

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F. Investments in unconsolidated entities:

The Company holds a 16.8% ownership interest in Nephromics, Inc. (Nephromics) and accounts for its investment under the equity method of accounting as Nephromics is a limited liability company. During the quarter ended March 31, 2012, Nephromics entered into an agreement to sell substantially all of its assets. The transaction closed in April, 2012. As a result, the Company determined that a portion of its investment in Nephromics was other than temporarily impaired and wrote off $2.4 million of this investment during the quarter ended March 31, 2012. At March 31, 2012, the Company’s remaining investment in Nephromics was $925,000.

The Company holds a 13.6% ownership interest in ACTGen, Inc. (ACTGen), a development stage biotechnology company. During the quarter ended March 31, 2012, the Company determined, based on ACTGen financial results for calendar 2011 and its current operational and funding status, that the Company’s investment in ACTGen was other than temporarily impaired and wrote off its remaining investment of $854,000.

G. Share-based compensation:

Option activity under the Company’s stock option plans during the nine months ended March 31, 2012 was as follows:

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

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

The weighted average per share fair value of options granted during the quarter and nine months ended March 31, 2012 was $12.48 and $14.14, respectively. The weighted average per share fair value of options granted during the nine months ended March 31, 2011 was $15.02. No options were granted during the quarter ended March 31, 2011. The total intrinsic value of options exercised during the quarter and nine months ended March 31, 2012 was $236,000 and $270,000, respectively. The total intrinsic value of options exercised during the nine months ended March 31, 2011 was $1.8 million. No options were exercised during the quarter ended March 31, 2011. The total fair value of options vested during the nine months ended March 31, 2012 and 2011 was $698,000 and $677,000, respectively. No options vested during the quarters ended March 31, 2012 and 2011.

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Stock-based compensation cost of $241,000 and $1.4 million was included in selling, general and administrative expense for the quarter and nine months ended March 31, 2012, respectively. Stock-based compensation cost of $87,000 and $937,000 was included in selling, general and administrative expense for the quarter and nine months ended March 31, 2011, respectively. Compensation cost is recognized using a straight-line method over the vesting period and is net of estimated forfeitures. As of March 31, 2012, there was $2.4 million of total unrecognized compensation cost related to non-vested stock options. The weighted average period over which the compensation cost is expected to be recognized is 1.3 years.

H. Income taxes:

Income taxes for the quarter and nine months ended March 31, 2012 were provided at rates of 26.5% and 30.0% of consolidated earnings before income taxes, compared to 31.6% and 31.2% for the same prior-year periods. Included in income taxes for the quarter and nine months ended March 31, 2012 was a $3.0 million benefit due to the reversal of a deferred tax valuation allowance on the Company’s excess tax basis in investments in unconsolidated entities. The Company determined such valuation allowance was no longer necessary as a result of the Company’s unrealized gain on its CCXI investment at March 31, 2012. The Company has the intent and ability to sell a portion of its CCXI investment and realize a long-term capital gain to offset long-term capital losses from its investments in unconsolidated entities.

I. Earnings per share:

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

The dilutive effect of stock options in the above table excludes all options for which the aggregate exercise proceeds exceeded the average market price for the period. The number of potentially dilutive option shares excluded from the calculation was 222,000 for both the quarter and nine months ended March 31, 2012, and 69,000 and 70,000 for the quarter and nine months ended March 31, 2011, respectively.

J. Segment information:

The Company has two reportable segments based on the nature of products: biotechnology and hematology. Following is financial information relating to the Company’s reportable segments (in thousands):

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K. Comprehensive income:

Comprehensive income was as follows (in thousands):

Accumulated other comprehensive income (loss) consists of (in thousands):

L. Supplemental disclosure of cash flow information and noncash investing and financing activities:

During the nine months ended March 31, 2012, the Company’s cost basis investment in CCXI was converted to an available-for-sale investment carried at fair value (See Note B).

M. Recent accounting pronouncements:

In June 2011, the FASB issued Accounting Standards Update (ASU) No. 2011-05 Comprehensive Income under an amendment to Topic 220. Under this update, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. ASU No. 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders' equity. The update does not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The Company must comply with ASU No. 2011-05 for the quarter ended September 30, 2012. The Company does not believe this update will have a material impact on the Company’s consolidated financial statements.

In September 2011, the FASB issued ASU No. 2011-08 Intangibles – Goodwill and Other under an amendment to Topic 350 , which permits an entity to make a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount before applying the two-step goodwill impairment test. If an entity concludes that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, it would not be required to perform the two-step impairment test for that reporting unit. The update is effective for the Company for annual and interim goodwill impairment tests for fiscal 2013. Early adoption is permitted. The Company plans to adopt ASU No. 2011-08 for its fiscal 2012 annual goodwill impairment test. The Company does not believe this update will have a material impact on the Company’s consolidated financial statements.

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CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

TECHNE Corporation and subsidiaries (the Company) are engaged in the development, manufacture and sale of biotechnology products and hematology calibrators and controls. These activities are conducted domestically through its wholly-owned subsidiaries, Research and Diagnostic Systems, Inc. (R&D Systems), Boston Biochem, Inc. (Boston Biochem), and BiosPacific, Inc. (BiosPacific). The Company’s European biotechnology operations are conducted through its wholly-owned U.K. subsidiaries, R&D Systems Europe Ltd. (R&D Europe) and Tocris Holdings Limited (Tocris). R&D Europe has a sales subsidiary, R&D Systems GmbH, in Germany and a sales office in France. The Company distributes its biotechnology products in China through its wholly-owned subsidiary, R&D Systems China Co., Ltd. (R&D China). R&D China has a sales subsidiary, R&D Systems Hong Kong Ltd., in Hong Kong.

The Company has two reportable segments based on the nature of its products: biotechnology and hematology. R&D Systems' Biotechnology Division, R&D Europe, Tocris, R&D China, BiosPacific and Boston Biochem operating segments are included in the biotechnology reporting segment. The Company’s biotechnology reporting segment develops, manufactures and sells biotechnology research and diagnostic products world-wide. The Company’s hematology reporting segment, which consists of R&D Systems’ Hematology Division, develops and manufactures hematology controls and calibrators for sale world-wide.

RESULTS OF OPERATIONS

Consolidated net sales and consolidated net earnings increased 9.6% and 2.2%, respectively for the quarter ended March 31, 2012 compared to the quarter ended March 31, 2011. Consolidated net sales and consolidated net earnings increased 11.3% and 1.3%, respectively for the nine months ended March 31, 2012 compared to the nine months ended March 31, 2011. Consolidated net sales and consolidated net earnings for the quarter and nine months ended March 31, 2012 were favorably impacted by the acquisitions of Boston Biochem and Tocris during the fourth quarter of fiscal 2011. Consolidated net sales for the quarter and nine months ended March 31, 2012 were also favorably affected by changes in exchange rates from the same prior-year periods. Consolidated net earnings for the quarter and nine months ended March 31, 2012 were affected by recognition of the costs assigned to inventory in purchase accounting and impairment losses recorded on two of the Company’s investments in unconsolidated entities, partially offset by the reversal of a deferred tax asset valuation allowance.

Net sales

Consolidated net sales for the quarter and nine months ended March 31, 2012 were $83.6 million and $236 million, respectively, increases of $7.3 million (9.6%) and $24.0 million (11.3%) from the quarter and nine months ended March 31, 2011. Consolidated organic net sales, excluding the impact of the acquisitions and the effect of the change from the prior year in exchange rates used to convert sales in foreign currencies (primarily British pounds sterling, euros and Chinese yuan) into U.S. dollars, were as follows (in thousands):

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

Biotechnology segment net sales increased $7.1 million (9.9%) and $23.1 million (11.7%) for the quarter and nine months ended March 31, 2012, respectively, compared to the same prior-year periods. Biotechnology segment organic sales increased $1.0 million (1.5%) and $3.9 million (2.0%), respectively, for the quarter and nine months ended March 31, 2012. This increase primarily resulted from increased sales volume. Included in consolidated net sales for the quarter and nine months ended March 31, 2012, were $865,000 and $1.7 million, respectively, of sales of new biotechnology products that had their first sale in fiscal 2012.

Biotechnology segment organic sales growth from the same prior-year periods were as follows:

Biotechnology segment net sales consisted of the following:

Hematology segment net sales increased $290,000 (5.6%) and $905,000 (6.2%), respectively, for the quarter and nine months ended March 31, 2012 compared to the same prior-year periods as a result of increased sales volume.

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Gross margins

Consolidated gross margin percentages for the quarter and nine months ended March 31, 2012 were negatively impacted as a result of purchase accounting related to inventory and intangible assets acquired during the fourth quarter of fiscal 2011. Under purchase accounting, inventory acquired is valued at fair value less expected selling and marketing costs, resulting in reduced margins in future periods as the inventory is sold.

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: