SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2005, or
( ) 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 0-17272
__________________
TECHNE CORPORATION
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1427402
(State or other jurisdiction of ) (I.R.S. Employer Identification No.)
incorporation or organization
614 MCKINLEY PLACE N.E. (612) 379-8854
MINNEAPOLIS, MN 55413 (Registrant's telephone number,
(Address of principal including area code)
executive offices) (Zip 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 is an accelerated filer
(as defined in Exchange Act Rule 12b-2). Yes (X) No ( )
Indicate by check mark whether the Registrant is a shell company (as defined
in Exchange Act Rule 12b-2). ( ) Yes (X) No
At November 3, 2005, 38,874,389 shares of the Company's Common Stock (par
value $.01) were outstanding.
TECHNE CORPORATION
FORM 10-Q
SEPTEMBER 30, 2005
INDEX
PAGE NO.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as of September 30, 2005
(unaudited) and June 30, 2005 3
Consolidated Statements of Earnings for the Quarter
Ended September 30, 2005 and 2004 (unaudited) 4
Consolidated Statements of Cash Flows for the Quarter
Ended September 30, 2005 and 2004 (unaudited) 5
Notes to Consolidated Financial Statements (unaudited) 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 18
ITEM 4. CONTROLS AND PROCEDURES 19
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 19
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 19
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 20
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS 20
ITEM 5. OTHER INFORMATION 20
ITEM 6. EXHIBITS 20
SIGNATURES 21
2
PART I. FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
TECHNE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
(unaudited)
9/30/05 6/30/05
-------- --------
ASSETS
Cash and cash equivalents $ 76,516 $ 80,344
Short-term available-for-sale investments 18,725 16,790
Trade accounts receivable, net 22,460 22,041
Other receivables 652 1,681
Inventories 9,982 7,758
Deferred income taxes 5,176 5,467
Prepaid expenses 923 900
-------- --------
Total current assets 134,434 134,981
Available-for-sale investments 48,452 41,871
Property and equipment, net 88,640 89,036
Goodwill, net 25,316 12,540
Intangible assets, net 8,189 1,598
Deferred income taxes 4,914 6,524
Investments 7,975 8,096
Other long-term assets 565 617
-------- --------
$318,485 $295,263
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Trade accounts payable $ 3,768 $ 2,715
Salaries, wages and related accruals 2,544 4,895
Other accounts payable and accrued expenses 2,650 1,360
Income taxes payable 2,530 3,808
Current portion of long-term debt 1,238 1,238
-------- --------
Total current liabilities 12,730 14,016
-------- --------
Long-term debt, less current portion 13,078 13,378
-------- --------
Total liabilities 25,808 27,394
-------- --------
Commitments and contingencies
Common stock, par value $.01 per share;
authorized 100,000,000; issued and outstanding
38,870,639 and 38,636,658, respectively 389 386
Additional paid-in capital 87,573 78,804
Retained earnings 202,050 185,049
Accumulated other comprehensive income 2,665 3,630
-------- --------
Total stockholders' equity 292,677 267,869
-------- --------
$318,485 $295,263
======== ========
See notes to consolidated financial statements (unaudited).
3
TECHNE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands, except per share data)
(unaudited)
QUARTER ENDED
------------------
9/30/05 9/30/04
-------- --------
Net sales $ 47,709 $ 40,919
Cost of sales 11,096 8,887
-------- --------
Gross margin 36,613 32,032
Operating expenses:
Selling, general and administrative 6,454 5,634
Research and development 4,717 4,688
Amortization of intangible assets 492 305
-------- --------
Total operating expenses 11,663 10,627
-------- --------
Operating income 24,950 21,405
-------- --------
Other expense (income):
Interest expense 223 245
Interest income (974) (1,053)
Other, net 211 466
-------- --------
Total other income (540) (342)
-------- --------
Earnings before income taxes 25,490 21,747
Income taxes 8,489 7,555
-------- --------
Net earnings $ 17,001 $ 14,192
======== ========
Earnings per share:
Basic $ 0.44 $ 0.34
Diluted $ 0.43 $ 0.34
Weighted average common shares outstanding:
Basic 38,754 41,169
Diluted 39,669 41,676
See notes to consolidated financial statements (unaudited).
4
TECHNE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
QUARTER ENDED
------------------
9/30/05 9/30/04
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 17,001 $ 14,192
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 1,723 1,519
Deferred income taxes (275) 145
Share-based compensation expense 270 --
Losses by equity method investee 82 74
Other 52 40
Change in operating assets and operating
liabilities, net of acquisitions:
Trade accounts and other receivables 61 1,583
Inventories 84 (423)
Prepaid expenses (16) (36)
Trade, other accounts payable and
accrued expenses 523 1,264
Salaries, wages and related accruals (1,029) 62
Income taxes payable (1,231) 24
-------- --------
Net cash provided by operating activities 17,245 18,444
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (752) (463)
Purchase of available-for-sale investments (16,265) (37,455)
Proceeds from sales of available-for-
sale investments 6,520 19,505
Proceeds from maturities of available-for-
sale investments 2,940 10,730
Acquisitions, net of cash acquired (19,587) --
-------- --------
Net cash used in investing activities (27,144) (7,683)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock 7,032 793
Tax benefit from stock option exercises 1,469 119
Purchase of common stock for stock bonus plans (1,292) (260)
Payments on long-term debt (300) (314)
-------- --------
Net cash provided by financing activities 6,909 338
-------- --------
Effect of exchange rate changes on cash (838) (60)
-------- --------
Net (decrease) increase in cash and
cash equivalents (3,828) 11,039
Cash and cash equivalents at beginning of period 80,344 51,201
-------- --------
Cash and cash equivalents at end of period $ 76,516 $ 62,240
======== ========
See notes to consolidated financial statements (unaudited).
5
TECHNE CORPORATION & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
A. BASIS OF PRESENTATION:
The unaudited 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
unaudited consolidated financial statements reflect all adjustments which
are, in the opinion of management, necessary to 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 2005. The
Company follows these policies in preparation of the interim unaudited
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 unaudited 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,
2005 included in the Company's Annual Report to Shareholders for fiscal 2005.
Effective July 1, 2005, the Company, through its R&D Systems subsidiary,
acquired Fortron Bio Science, Inc., a developer and manufacturer of
monoclonal and polyclonal antibodies, antigens and other biological reagents
located in Morrisville, North Carolina. R&D Systems simultaneously acquired
BiosPacific, Inc., a worldwide supplier of biologics to manufacturers of in
vitro diagnostic systems (IVDs) and immunodiagnostic kits, located in
Emeryville, California. BiosPacific is the primary distributor of Fortron
products. Fortron and BiosPacific had shared a unique strategic relationship
since 1992 that combined Fortron's development and manufacturing excellence
with BiosPacific's marketing and sales expertise. Fortron and BiosPacific
generated combined revenues of approximately $8.7 million in calendar 2004.
The acquisitions will enhance R&D Systems' ability to serve the diagnostics
industry. All of the shares of privately-held Fortron and substantially all
of the assets of privately-held BiosPacific were acquired for an aggregate
$20.0 million in cash. R&D Systems also assumed certain liabilities of
BiosPacific, and incurred transaction expenses. The acquisition was accounted
for under the purchase method. The fair value of tangible assets acquired,
net of liabilities assumed, was approximately $141,000. The Company
allocated approximately $12.8 million of the purchase price to goodwill and
$7.1 million to other intangible assets.
Recent Accounting Pronouncements:
In December 2004, the Financial Accounting Standards Board (FASB) issued
Statement of Accounting Standards No. 123 (Revised 2004) (SFAS No. 123R),
Share-Based Payment. SFAS No. 123R is a revision of FASB Statement No. 123,
"Accounting for Stock-Based Compensation" and supersedes Accounting
Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to
Employees" and its related implementation guidance. The Statement focuses
primarily on accounting for transactions in which an entity obtains employee
services through share-based payment transactions. The Company adopted the
standard as of July 1, 2005 (see Note D).
6
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs". The
Statement amends Accounting Research Bulletin No. 43 to clarify the
accounting for abnormal amounts of idle facility expense, freight, handling
costs and spoilage. The Statement also requires the allocation of fixed
production overheads to inventory be based on normal production capacity.
The Company adopted the standard as of July 1, 2005. The adoption did not
have an impact on the Company's consolidated financial statements.
In December 2004, the FASB issued Staff Position No. 109-1, "Application of
FASB Statement No. 109 (SFAS 109), Accounting for Income Taxes, to the Tax
Deduction on Qualified Production Activities Provided by the American Jobs
Creation Act of 2004" (FSP 109-1). FSP 109-1 clarifies that the
manufacturer's deduction provided for under the American Jobs Creation Act of
2004 (AJCA) should be accounted for as a special deduction in accordance with
SFAS 109 and not as a tax rate reduction. The Company accounted for the
manufacturer's deduction for the quarter ended September 30, 2005 as provided
for in FSP 109-1. The deduction reduced income tax expense approximately
$200,000 for the quarter ended September 30, 2005
The FASB also issued Staff Position No. 109-2, "Accounting and Disclosure
Guidance for the Foreign Earnings Repatriation Provision within the American
Jobs Creation Act of 2004" (FSP 109-2). The AJCA introduces a special one-
time dividends received deduction on the repatriation of certain foreign
earnings to a U.S. taxpayer provided certain criteria are met. The Company
periodically evaluates the possibility of repatriating foreign earnings. At
the present time, deferred taxes have not been recorded on undistributed
earnings of foreign subsidiaries as the amounts are considered permanently
invested. If the Company decides to repatriate foreign earnings a one-time
charge may be recorded for the deferred taxes.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections." The Statement replaces APB Opinion No. 20, "Accounting
Changes" and SFAS No. 3, "Reporting Accounting Changes in Interim Financial
Statements." SFAS No. 154 requires companies to apply voluntary changes in
accounting principles retrospectively whenever practicable. The requirements
are effective for the Company beginning in fiscal 2007. Adoption of the
Statement is not expected to have a significant impact on the Company's
consolidated financial statements.
Reclassifications:
Certain reclassifications have been made to the prior year consolidated
financials statements to conform to the current year presentation. These
reclassifications had no impact on net earnings or stockholders' equity as
previously reported.
Certain consolidated balance sheet captions appearing in this interim report
are as follows (in thousands):
9/30/05 6/30/05
-------- --------
TRADE ACCOUNTS RECEIVABLE
Trade accounts receivable $ 22,577 $ 22,159
Less allowance for doubtful accounts 117 118
-------- --------
NET TRADE ACCOUNTS RECEIVABLE $ 22,460 $ 22,041
======== ========
INVENTORIES
Raw materials $ 3,259 $ 3,127
Supplies 127 135
Finished goods 6,596 4,496
-------- --------
TOTAL INVENTORIES $ 9,982 $ 7,758
======== ========
7
9/30/05 6/30/05
-------- --------
PROPERTY AND EQUIPMENT
Land $ 4,214 $ 4,214
Buildings and improvements 88,042 87,232
Building construction in progress 8,597 9,195
Laboratory equipment 18,468 17,926
Office equipment 3,567 3,545
Leasehold improvements 750 711
-------- --------
123,638 122,823
Less accumulated depreciation and amortization 34,998 33,787
-------- --------
NET PROPERTY AND EQUIPMENT $ 88,640 $ 89,036
======== ========
GOODWILL $ 51,622 $ 38,846
Less accumulated amortization 26,306 26,306
-------- --------
NET GOODWILL $ 25,316 $ 12,540
======== ========
INTANGIBLE ASSETS
Customer relationships $ 23,683 $ 18,010
Technology licensing agreements 730 730
Trade names and trademarks 1,396 --
Supplier relationships 14 --
-------- --------
25,823 18,740
Less accumulated amortization 17,634 17,142
-------- --------
NET INTANGIBLE ASSETS $ 8,189 $ 1,598
======== ========
ACCUMULATED OTHER COMPREHENSIVE INCOME:
Foreign currency translation adjustments $ 3,094 $ 3,983
Unrealized losses on available-for-
sale investments (308) (271)
Unrealized loss on equity investment (121) (82)
-------- --------
TOTAL ACCUMULATED OTHER COMPREHENSIVE INCOME $ 2,665 $ 3,630
======== ========
B. EARNINGS PER SHARE:
Shares used in the earnings per share computations are as follows (in
thousands):
QUARTER ENDED
------------------
9/30/05 9/30/04
-------- --------
Weighted average common shares outstanding-basic 38,754 41,169
Dilutive effect of forward contract (see Note E) 489 --
Dilutive effect of stock options and warrants 426 507
-------- --------
Weighted average common shares outstanding-diluted 39,669 41,676
======== ========
The dilutive effect of stock options and warrants in the above table excludes
all options for which the exercise price was higher than the average market
price for the period. The number of potentially dilutive option shares
excluded from the calculation was 78,000 and 68,000 for the quarters ended
September 30, 2005 and 2004, respectively.
8
C. SEGMENT INFORMATION:
The Company has three reportable operating segments based on the nature of
products and geographic location: biotechnology, R&D Systems Europe and
hematology. The biotechnology segment consists of R&D Systems' Biotechnology
Division, Fortron Bio Science, Inc. and BiosPacific, Inc. which develop,
manufacture and sell biotechnology research and diagnostic products world-
wide. R&D Systems Europe distributes Biotechnology Division products
throughout Europe. The hematology segment develops and manufactures
hematology controls and calibrators for sale world-wide.
Following is financial information relating to the Company's operating
segments (in thousands):
QUARTER ENDED
------------------
9/30/05 9/30/04
-------- --------
External sales
Biotechnology $ 32,300 $ 25,887
R&D Systems Europe 11,875 11,019
Hematology 3,534 4,013
-------- --------
Total external sales 47,709 40,919
Intersegment sales - Biotechnology 5,299 4,804
-------- --------
Total sales 53,008 45,723
Less intersegment sales (5,299) (4,804)
-------- --------
Total consolidated net sales $ 47,709 $ 40,919
======== ========
Earnings before income taxes
Biotechnology $ 20,758 $ 17,168
R&D Systems Europe 4,800 4,398
Hematology 897 1,252
Corporate and other (965) (1,071)
-------- --------
Total earnings before income taxes $ 25,490 $ 21,747
======== ========
D. STOCK OPTIONS:
As permitted through June 30, 2005 by Statement of Financial Accounting
Standards (SFAS) No. 123, the Company elected to continue following the
guidance of Accounting Principles Board (APB) Opinion No. 25 for measurement
and recognition of stock-based transactions with employees. Through June 30,
2005, no compensation cost had been recognized for stock options granted to
employees under the plans because the exercise price of all options granted
was at least equal to the fair value of the common stock at the date of
grant. In December 2004, the Financial Accounting Standards Board (FASB)
issued Statement of Accounting Standards No. 123 (Revised 2004) (SFAS No.
123R), "Share-Based Payment." SFAS No. 123R is a revision of FASB Statement
No. 123, "Accounting for Stock-Based Compensation" and supersedes Accounting
Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to
Employees" and its related implementation guidance. The Statement focuses
primarily on accounting for transactions in which an entity obtains employee
services through share-based payment transactions. SFAS No. 123R requires a
public entity to measure the cost of employee services received in exchange
for the award of equity instruments based on the fair value of the award at
the date of grant. The cost will be recognized over the period during which
an employee is required to provide services in exchange for the award.
9
The Company adopted SFAS No. 123R as of July 1, 2005 using the modified
prospective transition method. Under that transition method, compensation
cost recognized in the first quarter of fiscal 2006 includes: (1)
compensation cost for all share-based payments granted prior to, but not yet
vested as of June 30, 2005, based on the grant date fair value calculated in
accordance with the original provisions of SFAS No. 123, and (2) compensation
cost for all share-based payments granted subsequent to June 30, 2005, based
on the grant-date fair value calculated in accordance with the provisions of
SFAS No. 123R. Results for prior periods have not been restated.
As a result of adopting SFAS No. 123R, the Company's earnings before income
taxes and net earnings for the quarter ended September 30, 2005 was $270,000
and $212,000 less than if it had continue to account for share-based
compensation under APB Opinion No. 25. The adoption of SFAS No. 123R had no
significant effect on basic and diluted earnings per share for the quarter
ended September 30, 2005. Stock option exercises are satisfied through the
issuance of new shares.
If compensation cost for employee options granted under the Company's stock
option plans had been determined based on the fair value at the grant dates,
consistent with the methods provided in SFAS No. 123 for periods prior to the
adoption of SFAS No. 123R, the Company's net earnings and earnings per share
would have been as follows (in thousands, except per share data):
QUARTER ENDED
-------------
9/30/04
--------
Net earnings:
As reported $ 14,192
Plus employee stock-based compensation expense
included in net earnings --
Less employee stock-based compensation,
net of tax effect 504
--------
Pro forma $ 13,688
========
Basic earnings per share:
As reported $ 0.34
Plus employee stock-based compensation expense
included in net earnings --
Less employee stock-based compensation,
net of tax effect 0.01
--------
Pro forma $ 0.33
========
Diluted earnings per share:
As reported $ 0.34
Plus employee stock-based compensation expense
included in net earnings --
Less employee stock-based compensation,
net of tax effect 0.01
--------
Pro forma $ 0.33
========
The fair value of options granted under the Company's stock option plans were
estimated on the date of grant using the Black-Scholes option-pricing model
with the following assumptions used:
QUARTER ENDED
------------------
9/30/05 9/30/04
-------- --------
Dividend yield -- --
Expected annualized volatility 37%-53% 56%
Risk free interest rates 4.0%-4.1% 3.2%-3.4%
Expected lives 4-6 years 4 years
Weighted average fair value of options granted $25.22 $19.37
As of September 30, 2005, there was $567,000 of total unrecognized
compensation cost related to nonvested stock options. This cost is expected
to be recognized over a weighted average period of one year.
10
E. STOCK REPURCHASE:
In March 2005, the Company repurchased approximately 2.9 million shares of
its common stock under an accelerated stock buyback ("ASB") transaction for
an initial value of approximately $100 million ($34.45 per share). The
transaction was completed under a privately negotiated contract with an
investment bank. The investment bank borrowed the 2.9 million shares to
complete the transaction and will purchase the replacement shares in the open
market over a nine-month period beginning in March 2005. The ASB agreement is
subject to a market price adjustment provision based upon the volume weighted
average price during the nine-month period. At the settlement of the
contract, expected in December 2005, the Company will receive or pay the
price adjustment. The ASB agreement can be settled, at the Company's option,
in cash or shares of the Company's common stock and, accordingly the contract
was classified as equity. The purchase price adjustment will be reflected in
stockholders equity at the time of settlement. At an average market price of
$48.00 (which approximated the average market price from the transaction date
through September 30, 2005), the settlement amount for the contract would be
approximately $23.3 million or about 489,000 shares.
Approximately 1.8 million of the shares repurchased are subject to a collar,
which effectively sets a minimum and maximum price the Company will be
obligated to pay for such shares. The collar was established in exchange for
an up-front payment of $3.5 million. The minimum and maximum price for the
1.8 million shares is approximately $39.00 and $41.00, respectively. The
maximum additional amount that could be required to be paid related to the
shares subject to the collar is $8.5 million or about 215,000 shares. The
adjusted price of the remaining 1.1 million repurchased shares will be based
upon the difference between the volume weighted average price during the
nine-month period and the initial $34.45 per share payment. For each $1.00
change in the average market price during the nine-month period, the
Company's obligation under the uncollared portion of the agreement would
increase or decrease by $1.1 million. Should the Company elect to settle
the ASB agreement in shares, each $1.00 increase in the average market price
over $48.00 during the nine-month period will increase the number of shares
required for settlement under the uncollared portion of the agreement, but
reduce the number of shares required by the collared portion of the contract
by a net amount of about 13,000 shares.
The positive effect of the reduction in outstanding shares on earnings per
diluted share was $.03 for the quarter ended September 30, 2005.
F. COMPREHENSIVE INCOME:
Comprehensive income and the components of other comprehensive income (loss)
were as follows (in thousands):
QUARTER ENDED
------------------
9/30/05 9/30/04
-------- --------
Net earnings $ 17,001 $ 14,192
Other comprehensive gain (loss):
Foreign currency translation adjustments (889) (68)
Unrealized gain (loss) on available-
for-sale investments (37) 175
Unrealized loss on equity investment (39) --
-------- --------
Comprehensive income $ 16,036 $ 14,299
======== ========
11
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations for the Quarter Ended September 30, 2005
and the Quarter Ended September 30, 2004
Overview
TECHNE Corporation (the Company) has two operating subsidiaries: Research and
Diagnostic Systems, Inc. (R&D Systems) and R&D Systems Europe Ltd. (R&D
Europe). R&D Systems, located in Minneapolis, Minnesota, has two divisions:
its Biotechnology Division and its Hematology Division. The Biotechnology
Division develops and manufactures purified cytokines (proteins), antibodies
and assay kits which are sold to biomedical researchers and clinical research
laboratories. The Hematology Division develops and manufactures whole blood
hematology controls and calibrators which are sold to hospitals and clinical
laboratories to check the performance of hematology instruments to assure the
accuracy of hematology test results. R&D Systems acquired two subsidiaries
effective July 1, 2005, Fortron Bio Science, Inc., (Fortron) a developer and
manufacturer of monoclonal and polyclonal antibodies, antigens and other
biological reagents, located in Morrisville, North Carolina and BiosPacific,
Inc., (BiosPacific) a worldwide supplier of biologics to manufacturers of in
vitro diagnostic systems (IVDs) and immunodiagnostic kits, located in
Emeryville, California. The operations of Fortron were transferred to the
Company's Minneapolis facility during the quarter ended September 30, 2005.
BiosPacific will continue to operate out of its Emeryville office. R&D
Europe, located in Abingdon, England, is the European distributor of R&D
Systems' biotechnology products. R&D Europe has a sales subsidiary, R&D
Systems GmbH, in Germany and a sales office in France.
Overall Results
Consolidated net earnings increased 19.8% for the quarter ended September 30,
2005 compared to the quarter ended September 30, 2004. The primary reason
for the increase was increased net sales. Consolidated net sales for the
quarter ended September 30, 2005, increased 16.6% from the same period in the
prior year. The unfavorable impact on consolidated net sales and
consolidated net earnings of the change in exchange rates used to convert R&D
Europe results from British pounds to U.S. dollars was $245,000 and $68,000
for the quarter ended September 30, 2005, respectively. The Company
generated cash of $17.2 million from operating activities in the first three
months of fiscal 2006 and cash, cash equivalents and available-for-sale
investments were $143.7 million at September 30, 2005 compared to $139.0
million at June 30, 2005.
Net Sales
Consolidated net sales for the quarter ended September 30, 2005 were $47.7
million, an increase of $6.8 million (16.6%) from the quarter ended September
30, 2004. Included in consolidated net sales for the quarter ended September
30, 2005 was $2.6 million from Fortron and BiosPacific, which were acquired
effective July 1, 2005. Excluding these sales and the effect of changes in
foreign currency exchange rates, consolidated net sales increased 10.8% for
the quarter ended September 30, 2005.
R&D Systems' Biotechnology Division net sales increased $3.8 million (14.7%)
for the quarter ended September 30, 2005. The Biotechnology Division sales
increase for the quarter was manly the result of $2.6 increased U.S. retail
sales. Sales for the quarter to pharmaceutical/biotechnology customers and
academic customers, the two largest segments of the U.S. market, showed the
greatest revenue growth over the prior year.
12
R&D Europe net sales increased $856,000 (7.8%) for the quarter ended
September 30, 2005. The effect of changes in foreign currency exchange rates
used to convert British pounds to U.S. dollars reduced R&D Europe net sales
approximately $245,000 for the quarter ended September 30, 2005. In British
pounds, R&D Europe net sales increased 10.0% for the quarter ended September
30, 2005.
R&D Systems' Hematology Division net sales decreased $479,000 (11.9%) for the
quarter ended September 30, 2005. During the second quarter of fiscal 2005 a
large OEM customer notified the Hematology Division that they were changing
to a new primary vendor for certain controls and calibrators. Sales to this
customer in the quarter ended September 30, 2005 decreased $554,000 from the
prior-year first quarter. Although the Hematology Division continues to
manufacture products for the customer as a secondary supplier, it is
anticipated that the effect on revenues in the second quarter of fiscal 2006
will be a reduction of approximately $850,000. The reduction in Hematology
Division revenues is not expected to have a significant impact on
consolidated earnings and revenues.
Cost of Sales
The manufacturing process for proteins and antibodies has and may continue to
produce quantities in excess of forecasted usage. The Company values its
manufactured protein and antibody inventory based on a two-year forecast.
Protein and antibody quantities in excess of the two-year usage forecast are
considered impaired and not included in the inventory value. The value of
protein and antibody inventory does not change significantly from quarter to
quarter. Protein and antibody production is generally for high-volume
products or for new products with limited initial sales. The Company
capitalizes protein and antibody costs each period in inventory, however
given the insignificant changes in these inventory balances each quarter,
substantially all manufacturing costs for proteins and antibodies, consisting
largely of wages, benefits, facility and equipment costs, are expensed each
quarter. A change in inventory value as a result of changes in the two-year
forecast is reflected in cost of sales in the period of change.
Manufacturing costs and changes in inventory value for proteins and
antibodies charged to cost of sales were $1.6 million and $1.7 million for
the quarters ended September 30, 2005 and 2004, respectively.
Gross Margins
Gross margins, as a percentage of net sales, were as follows:
QUARTER ENDED
------------------
9/30/05 9/30/04
-------- --------
Biotechnology 77.5% 80.1%
R&D Systems Europe 50.8% 51.8%
Hematology 40.4% 44.7%
Consolidated gross margin 76.7% 78.3%
Consolidated gross margins for the quarter ended September 30, 2005 were
lower than the quarter ended September 30, 2004 mainly as a result of Fortron
and BiosPacific gross margins. Excluding Fortron and BiosPacific,
consolidated gross margins were 79.1% for the quarter ended September 30,
2005. Biotechnology Division gross margins were 80.6% compared to 80.1% for
the quarter ended September 30, 2004. Higher gross margins by the
Biotechnology Division for the quarter offset lower gross margins by R&D
Europe as a result of less favorable exchange rates and lower gross margins
by the Hematology Division as a result of lower incremental sales to offset
fixed costs. Gross margins for Fortron and BiosPacific for the quarter ended
September 30, 2005 were 35.5%. Fortron and BiosPacific gross margins were
negatively affected by purchase accounting related to inventory acquired.
Under purchase accounting, inventory acquired is valued at fair market value
less expected selling and marketing costs. As of the date of acquisition,
the value of the acquired inventory was increased $2.1 million. Included in
Fortron and BiosPacific cost of sales for the quarter was approximately
$575,000 related to the write up of acquired inventory, representing a 22.1%
reduction in Fortron and BiosPacific gross margins. The remaining inventory
valuation adjustment of $1.5 million is expected to be expensed as the
acquired inventory is sold over approximately the next 18 months.
13
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the quarter ended September
30, 2005, increased $820,000 (14.6%) from the same period of last year.
Selling, general and administrative expenses are composed of the following
(in thousands):
QUARTER ENDED
------------------
9/30/05 9/30/04
-------- --------
Biotechnology $ 3,639 $ 2,973
R&D Europe 1,782 1,722
Hematology 384 409
Corporate 649 530
-------- --------
Total selling, general and administrative expenses $ 6,454 $ 5,634
======== ========
Biotechnology selling, general and administrative expenses increased $666,000
(22.4%) for the quarter ended September 30, 2005. Included in this amount
was $367,000 of Fortron and BiosPacific selling, general and administrative
expenses. The remainder of the increase in Biotechnology expenses was
primarily the result of increased profit sharing accrual ($146,000),
increased advertising and promotion expenditures ($57,000) and increased
sales commissions ($35,000).
Included in Corporate selling, general and administrative expenses for the
quarter ended September 30, 2005 was $270,000 of employee stock-based
compensation expense. This additional expense for the quarter was partially
offset by a decrease in legal and consulting expenses of $103,000 and
$72,000, respectively.
Research and Development Expenses
Research and development expenses are composed of the following (in
thousands):
QUARTER ENDED
------------------
9/30/05 9/30/04
-------- --------
Biotechnology $ 4,532 $ 4,500
Hematology 185 188
-------- --------
Total research and development expenses $ 4,717 $ 4,688
======== ========
Amortization of Intangible Assets
The Company allocated approximately $12.8 million to goodwill and $7.1
million to other intangible assets arising from the acquisitions of Fortron
and BiosPacific. The other intangible assets, mainly trade names and customer
and supplier relationships, are being amortized over lives of one to eight
years and amortization expense of $272,000 was recorded for the quarter ended
September 30, 2005 related to these assets.
Other Non-operating Expense and Income
Other non-operating expense and income consists mainly of foreign currency
transaction losses, rental income, building expenses related to properties
not used in operations, and the Company's share of losses by Hemerus Medical,
LLC (Hemerus). The Company has a 10% equity interest in Hemerus and accounts
for its investment using the equity method of accounting, as Hemerus is a
limited liability corporation.
14
QUARTER ENDED
------------------
9/30/05 9/30/04
-------- --------
Foreign currency losses $ 28 $ 47
Rental income (342) (19)
Real estate taxes, depreciation and utilities 443 364
Hemerus Medical, LLC losses 82 74
-------- --------
Total other non-operating expense (income) $ 211 $ 466
======== ========
The Company's net investment in Hemerus at September 30, 2005 was $2.6
million. The Company has financial exposure to the losses of Hemerus to the
extent of its net investment in the company. Hemerus' success is dependent,
in part, upon receiving FDA clearance to market its products. If such
clearance is not received, the Company would potentially recognize an
impairment loss to the extent of its remaining net investment.
Income Taxes
Income taxes for the quarter ended September 30, 2005 were provided at a rate
of approximately 33.3% of consolidated earnings before income taxes compared
to 34.7% for the quarter ended September 30, 2004. U.S. federal taxes have
been reduced by the credit for research and development expenditures, the
benefit for extraterritorial income and, for the quarter ended September 30,
2005, the manufacturer's deduction provided for under the American Jobs
Creation Act of 2004. Foreign income taxes have been provided at rates which
approximate the tax rates in the countries in which R&D Europe operates.
Without significant business developments, the Company expects income tax
rates for the remainder of fiscal 2006 to range from 33% to 34%.
Liquidity and Capital Resources
At September 30, 2005, cash and cash equivalents and available-for-sale
investments were $143.7 million compared to $139.0 million at June 30, 2005.
The Company believes it can meet its future cash, working capital and capital
addition requirements through currently available funds, cash generated from
operations and maturities of available-for-sale investments. The Company has
an unsecured line of credit of $750,000. The interest rate on the line of
credit is at prime. There were no borrowings on the line in the prior or
current fiscal year.
Cash Flows From Operating Activities
The Company generated cash of $17.2 million from operating activities in the
first three months of fiscal 2006 compared to $18.4 million in the first
three months of fiscal 2005. The decrease from the prior year was mainly the
result of increased earnings in the current year of $2.8 million offset by a
smaller decrease in trade and other receivables and decreases in salaries,
wages and related accruals and income taxes payable. The smaller decrease in
trade and other receivables for the three months ended September 30, 2005
($61,000) compared to three months ended September 30, 2004 ($1.6 million)
was a result of increased sales and the timing of cash collections in the
first three months of fiscal 2006. The decrease in salaries, wages and
related accruals for the three months ended September 30, 2005 was the result
of $295,000 additional profit sharing payments and approximately $640,000 in
additional salary payments due to the timing of R&D Systems' payroll. The
decrease in income taxes payable for the three months ended September 30,
2005 was mainly the result of approximately $940,000 additional U.S. income
tax payments made during the quarter compared to the first quarter of the
prior year.
15
Cash Flows From Investing Activities
Capital expenditures for fixed assets for the first three months of fiscal
2006 and 2005 were $752,000 and $463,000, respectively. The majority of
capital additions in the first three months of fiscal 2006 and 2005 were for
laboratory and computer equipment. Remaining expenditures in fiscal 2006 for
laboratory and computer equipment are expected to be approximately $1.5
million. The Company also plans an estimated $8.2 million build-out of
laboratory space at its Minneapolis facility and other building improvements
of approximately $500,000 to be completed in fiscal 2006. These expenditures
are expected to be financed through currently available funds and cash
generated from operating activities.
During the three months ended September 30, 2005, the Company purchased $16.3
million and had sales or maturities of $9.5 million of available-for-sale
investments. During the three months ended September 30, 2004, the Company
purchased $37.5 million and had sales or maturities of $30.2 million of
available-for-sale investment. The Company's investment policy is to place
excess cash in bonds and other investments with maturities of less than three
years. The objective of this policy is to obtain the highest possible return
with minimal risk, while keeping the funds accessible.
As described previously, the Company acquired Fortron and BiosPacific
effective July 1, 2005 for an aggregate purchase price of $20 million. Cash
acquired in the transactions was $413,000. The net acquisition cost of $19.6
million was financed through cash and equivalents on hand at July 1, 2005.
Cash Flows From Financing Activities
Cash of $7.0 million and $793,000 was received during the three months ended
September 30, 2005 and 2004, respectively, for the exercise of stock options
for 234,000 and 30,000 shares of common stock. The Company also recognized a
tax benefit from stock options exercised of $1.5 million and $119,000 for the
three months ended September 30, 2005 and 2004, respectively.
During the first three months of fiscal 2005, options for 6,120 shares of
common stock were exercised by the surrender of 1,190 shares of the Company's
common stock with a fair market value of $45,000.
In the first three months of fiscal 2006 and 2005, the Company purchased
22,541 shares and 6,410 shares of common stock for its employee Stock Bonus
Plans at a cost of $1.3 million and $260,000, respectively.
The Company has never paid cash dividends and has no plans to do so in fiscal
2006.
Critical Accounting Policies
The Company's significant accounting policies are discussed in the Company's
Annual Report on Form 10-K for fiscal 2005. There have been no changes to
these policies in fiscal 2006. The application of certain of these policies
require judgments and estimates that can affect the results of operations and
financial position of the Company. Judgements and estimates are used for,
but not limited to, accounting for the allowance for doubtful accounts,
inventory valuation and allowances, impairment of goodwill, intangibles and
other long-lived assets, accounting for investments and income taxes.
16
Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board (FASB) issued
Statement of Accounting Standards No. 123 (Revised 2004) (SFAS No. 123R),
"Share-Based Payment." SFAS No. 123R is a revision of FASB Statement No. 123,
"Accounting for Stock-Based Compensation" and supersedes Accounting
Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to
Employees" and its related implementation guidance. The Statement focuses
primarily on accounting for transactions in which an entity obtains employee
services through share-based payment transactions. The Company adopted the
standard as of July 1, 2005 (see Note D).
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs." The
Statement amends Accounting Research Bulletin No. 43 to clarify the
accounting for abnormal amounts of idle facility expense, freight, handling
costs and spoilage. The Statement also requires the allocation of fixed
production overheads to inventory be based on normal production capacity.
The Company adopted the standard as of July 1, 2005. The adoption did not
have an impact on the Company's consolidated financial statements.
In December 2004, the FASB issued Staff Position No. 109-1, "Application of
FASB Statement No. 109 (SFAS 109), Accounting for Income Taxes, to the Tax
Deduction on Qualified Production Activities Provided by the American Jobs
Creation Act of 2004" (FSP 109-1). FSP 109-1 clarifies that the
manufacturer's deduction provided for under the American Jobs Creation Act of
2004 (AJCA) should be accounted for as a special deduction in accordance with
SFAS 109 and not as a tax rate reduction. The Company accounted for the
manufacturer's deduction for the quarter ended September 30, 2005 as provided
for in FSP 109-1. The deduction reduced income tax expense approximately
$200,000 for the quarter ended September 30, 2005
The FASB also issued Staff Position No. 109-2, "Accounting and Disclosure
Guidance for the Foreign Earnings Repatriation Provision within the American
Jobs Creation Act of 2004" (FSP 109-2). The AJCA introduces a special one-
time dividends received deduction on the repatriation of certain foreign
earnings to a U.S. taxpayer provided certain criteria are met. The Company
periodically evaluates the possibility of repatriating foreign earnings. At
the present time, deferred taxes have not been recorded on undistributed
earnings of foreign subsidiaries as the amounts are considered permanently
invested. If the Company decides to repatriate foreign earnings a one-time
charge may be recorded for the deferred taxes.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections." The Statement replaces APB Opinion No. 20, "Accounting
Changes" and SFAS No. 3, "Reporting Accounting Changes in Interim Financial
Statements." SFAS No. 154 requires companies to apply voluntary changes in
accounting principles retrospectively whenever practicable. The requirements
are effective for the Company beginning in fiscal 2007. Adoption of the
Statement is not expected to have a significant impact on the Company's
consolidated financial statements.
Forward Looking Information and Cautionary Statements
This filing contains forward-looking statements within the meaning of the
Private Litigation Reform Act. These statements, including the Company's
expectations as to the estimated compensation expense resulting from stock
option expensing, the expected effective tax rate, expected capital
expenditures and the margin impact of the recent acquisitions, involve risks
and uncertainties which may affect the actual results of operations. The
following important factors, among others, have affected and, in the future,
could affect the Company's actual results: the integration of the recent
acquisitions, the introduction and acceptance of new biotechnology and
hematology products, the levels and particular directions of research by the
Company's customers, the impact of the growing number of producers of
biotechnology research products and related price competition, the retention
of hematology OEM (private label) and proficiency survey business, the impact
of currency exchange rate fluctuations, and the costs and results of research
and product development efforts of the Company and of companies in which the
Company has invested or with which it has formed strategic relationships.
For additional information concerning such factors, see the Company's Annual
Report on Form 10-K as filed with the Securities and Exchange Commission.
17
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At September 30, 2005, the Company had a professionally managed investment
portfolio of fixed income securities, excluding those classified as cash and
cash equivalents, of $67.2 million. These securities, like all fixed income
instruments, are subject to interest rate risk and will decline in value if
market interest rates increase.
The Company operates internationally, and thus is subject to potentially
adverse movements in foreign currency rate changes. The Company is exposed to
market risk from foreign exchange rate fluctuations of the euro and the
British pound to the U.S. dollar as the financial position and operating
results of the Company's U.K. subsidiary and European operations are
translated into U.S. dollars for consolidation. At the current level of R&D
Europe operating results, a 10% increase or decrease in the average exchange
rate used to translate operating results into U.S. dollars would have an
approximate $1.3 million effect on consolidated operating income annually.
The Company's exposure to foreign exchange rate fluctuations also arises from
transferring funds from the U.K. subsidiary to the U.S. subsidiary and from
transferring funds from the German subsidiary and French sales office to the
U.K. subsidiary. At September 30, 2005 and 2004, the Company had $352,000 and
$406,000, respectively, of dollar denominated intercompany debt at its U.K.
subsidiary. At September 30, 2005 and 2004, the U.K. subsidiary had $495,000
and zero, respectively, of dollar denominated intercompany debt from its
European operations. These intercompany balances are revolving in nature and
are not deemed to be long-term balances. The Company's U.K. subsidiary
recognized net foreign currency losses of 15,000 British pounds ($28,000) and
net foreign currency gains of 22,000 British pounds ($40,000) for the
quarters ended September 30, 2005 and 2004, respectively. The Company's
German subsidiary recognized net foreign currency losses of zero and 72,000
euro ($87,000) for the quarters ended September 30, 2005 and 2004,
respectively. The Company does not enter into foreign exchange forward
contracts to reduce its exposure to foreign currency rate changes on
intercompany foreign currency denominated balance sheet positions.
As of September 30, 2005, the Company's long-term debt of $13.1 million
consisted of a mortgage note payable with a floating interest rate at the
one-month LIBOR rate plus 2.5% with a floor of 4%. The floating interest
rate on the mortgage note payable was 6.2% as of September 30, 2005.
In March 2005, the Company repurchased approximately 2.9 million shares of
its common stock under an accelerated stock buyback ("ASB") transaction for
an initial value of approximately $100 million ($34.45 per share). The ASB
agreement is subject to a market price adjustment provision based upon the
volume weighted average price during the nine-month period ending in December
2005. In December 2005, the Company will, at its option settle the ASB
agreement in cash or shares of the Company's common stock. At an average
market price of $48.00 (which approximated the average market price from the
transaction date through September 30, 2005), the settlement amount for the
contract would be approximately $23.3 million or about 489,000 shares.
18
Approximately 1.8 million of the shares repurchased are subject to a collar,
which effectively sets a minimum and maximum price the Company will be
obligated to pay for such shares. The collar was established in exchange for
an up-front payment of $3.5 million. The minimum and maximum price for the
1.8 million shares is approximately $39.00 and $41.00, respectively. The
maximum additional amount that could be required to be paid related to the
shares subject to the collar is $8.5 million or about 215,000 shares. The
adjusted price of the remaining 1.1 million repurchased shares will be based
upon the difference between the volume weighted average price during the
nine-month period and the initial $34.45 per share payment. For each $1.00
change in the average market price during the nine-month period, the
Company's obligation under the uncollared portion of the agreement would
increase or decrease by $1.1 million. Should the Company elect to settle the
ASB agreement in shares, each $1.00 increase in the average market price over
$48.00 during the nine-month period will increase the number of shares
required for settlement under the uncollared portion of the agreement, but
reduce the number of shares required by the collared portion of the contract
by a net amount of about 13,000 shares.
ITEM 4 - CONTROLS AND PROCEDURES
As of the end of the period covered by this report, the Company conducted an
evaluation, under the supervision and with the participation of the principal
executive officer and principal financial officer, of the Company's
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-
15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")). Based
on this evaluation, the principal executive officer and principal financial
officer concluded that the Company's disclosure controls and procedures are
effective to ensure that information required to be disclosed by the Company
in reports that it files or submits under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms. There was no changes in
the Company's internal control over financial reporting during the Company's
most recently completed fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting.
PART II. OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
See Item 3 of the Registrant's Annual Report of Form 10-K for the fiscal year
ended June 30, 2005.
ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table sets forth the repurchases of Company common stock for
the quarter ended September 30, 2005:
Total Number Maximum Approximate
Of Shares Dollar Value of
Purchased as Shares that May
Total Number Average Part of Publicly Yet Be Purchased
Of Shares Price Paid Announced Plans Under the Plans
Period Purchased Per Share or Programs or Programs
------ ------------ ---------- ---------------- --------------------
7/1/05-7/31/05 0 -- 0 $6.8 million
8/1/05-8/31/05 0 -- 0 $6.8 million
9/1/05-9/30/05 22,541 $57.32 0 $6.8 million
19
In May 1995, the Company announced a plan to purchase and retire its common
stock. Repurchases of $40 million were authorized as follows: May 1995 - $5
million; April 1997 - $5 million; January 2001 - $10 million; October 2002 -
$20 million. The plan does not have an expiration date.
On February 17, 2005, the Board of Directors of the Company approved the
repurchase of approximately 2.9 million shares of its common stock under an
accelerated stock buyback (ASB) transaction for an initial value of
approximately $100 million. As described above, the agreement is subject to
a market price adjustment which will be settled, at the Company's option, in
cash or shares of the Company's common stock, in December 2005.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 - SUBMISSION OF MATTERS TO VOTE OF SHAREHOLDERS
a. The Annul Meeting of the Registrant's shareholders was held on Thursday,
October 27, 2005.
b. A proposal to set the number of directors at six was adopted by a vote of
33,157,231 in favor with 81,843 shares against, 14,456 shares abstaining
and no shares represented broker nonvotes.
c. Proxies for the Annual Meeting were solicited pursuant to Regulation 14A
under the Securities Exchange Act of 1934. There was no solicitation in
opposition to management's nominees as listed in the Proxy Statement, and
all such nominees were elected, as follows:
Nominee For Withheld
Thomas E. Oland 32,606,959 646,571
Roger C. Lucas 31,643,004 1,610,526
Howard V. O'Connell 31,836,635 1,416,895
G. Arthur Herbert 32,612,736 640,794
Randolph C. Steer 32,616,978 636,552
Robert V. Baumgartner 32,616,682 636,848
ITEM 5 - OTHER INFORMATION
None.
ITEM 6 - EXHIBITS
See exhibit index following.
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TECHNE CORPORATION
(Company)
Date: November 9, 2005 /s/ Thomas E. Oland
-------------------
President, Chief Executive Officer
November 9, 2005 /s/ Gregory J. Melsen
---------------------
Chief Financial Officer
EXHIBIT INDEX
TO
FORM 10-Q
TECHNE CORPORATION
Exhibit # Description
- --------- ---------------------------
31.1 Section 302 Certification
31.2 Section 302 Certification
32.1 Section 906 Certification
32.2 Section 906 Certification