March 8, 2006
Mr. Jim B. Rosenberg
Senior Assistant Chief Accountant
Securities and Exchange Commission
Division of Corporate Finance
Washington, DC 20549
Re: Techne Corporation
Form 10-K for the Year Ended June 30, 2005
File No. 000-17272
Dear Mr. Rosenberg:
This letter is in response to the comment letter received by us dated
February 28, 2006, concerning comments to our Form 10-K for the year ended
June 30, 2005.
In connection with this response, Techne acknowledges that:
- - the company is responsible for the adequacy and accuracy of the
disclosures in the filing;
- - staff comments or changes to disclosure in response to staff comments
do not foreclose the Commission from taking any action with respect
to the filing; and
- - the company may not assert staff comments as a defense in any
proceeding initiated by the Commission or any person under federal
securities laws of the United States.
COMMENT AND RESPONSE:
Valuation of inventory, page 22
1. Comment:
Please provide to us in disclosure type format a more detailed discussion
regarding the facts and circumstances that have resulted in such a large
excess of protein and antibody inventory at period end in each of the
last two years. Please include a discussion of what happened between the
time you decided to manufacture this inventory and the date that it was
determined that a portion of this inventory needed to be written off.
Please tell us about sales of this inventory that had previously been
written off including their effect on the financial statements and the
amounts for each of the years presented.
Response:
Background:
The most important factors in producing proteins and antibodies are
quality and consistency. Customers who use the products in scientific
experiments rely on the Company's product to be of the highest quality
and of consistent purity and activity. If the products do not meet these
standards, it could result in inconclusive or erroneous experiment
results, and could effect conclusions made by the customer during the
experiment and/or could result in the expense of repeating the
experiment.
Once a new product has been developed and the procedures and protocols
for manufacturing the product have been established, the Company produces
two to three lots (batches) of each product in order to determine that
the product can be made consistently. If these lots meet strict quality
control standards they will become inventory on hand, most likely
resulting in excess inventory on hand.
Manufacturing of an established product can result in differing
quantities of finished product. Because the manufacturing process is
scientific in nature, many factors can affect the yield obtained from a
particular manufactured lot of product, including temperature, quality of
raw materials, the person manufacturing the product and/or the equipment
used. This means that at the start of the manufacturing process, it is
not known how much finished product will result. In addition, because of
the large number of proteins and antibodies the Company offers, it is
more efficient to produce larger lots of each product in order to reduce
the number of lots needed to be manufactured in a particular time period.
The manufacturing process for proteins and antibodies, therefore, has
produced, and may continue to produce quantities in excess of forecasted
useage. This is a result of the above noted variables involved in the
manufacturing process.
Protein and antibody production is generally for high-volume products or
for new products with limited initial sales. Techne releases a
significant number of new proteins and antibodies each year. The Company
had over 1,200 proteins and antibodies for which the first sale was in
fiscal 2005 out of a total of over 5,900 protein and antibody products.
Excess inventory of proteins and antibodies at June 30, 2005 and 2004 was
$10.2 million and $8.6 million, respectively. The majority of the excess
inventory ($8.7 million and $7.3 million at June 30, 2005 and 2004,
respectively) was from protein and antibody products that individually
had sales of less than $25,000 for the year. These are slow moving and/or
newer products for which the likelihood of selling all or a majority of
the inventory on hand is highly uncertain and therefore, based on a two-
year volume forecast, only a small percentage of the inventory on hand is
included on the balance sheet.
In summary, excess protein and antibody inventory is the result of
producing several lots of all new products to establish consistency, the
uncertainty of yields for finished products and the efficiency of
producing larger lots.
As noted above, the Company values its protein and antibody inventory
based on a two-year volume forecast. The Company's methodology for
inventory valuation is consistent with Accounting Research Bulletin #43,
Chapter 4, paragraph 8 that requires inventories be carried at the lower
of cost or market and paragraph 9 that addresses the computation of
market value of inventories. While the Company performs a lower of cost
or market analysis on an individual protein and antibody basis, it does
not directly write-down those items for which inventory quantities exceed
expected two-year sales volume. Rather, non-valued inventory is tracked
in total and in a manner akin to establishing a valuation account for the
entire protein and antibody inventory.
Changes in the rolling two-year forecast are reflected in cost of sales
in the period of change and could result in:
- - previously valued inventory not being subsequently valued if a change
in estimated future sales volume is less than previously estimated,
and/or
- - value being assigned to inventories not previously valued.
An analysis of changes in fiscal year 2005 protein and antibody inventory
balances follows, which reconciles the causes of changes in both the
portion of protein and antibody inventories valued and the portion not
valued.
Protein/Antibody Inventory (in $000's):
% of
Valued Total Unvalued Total
------ ------ -------- ------
Beginning inventory 6/30/04 1,757 16.9% 8,645 10,402
Cost of sales (1,354) (1,354)
Current manufacturing costs
charged to inventory 858 2,312 3,170
Write up of previously
unvalued inventory 962 (962) --
Write down of previously
valued inventory (205) 205 --
------ ------ ------
Ending inventory 6/30/05 2,018 16.5% 10,200 12,218
====== ====== ======
During fiscal 2005, $962,000 of value was assigned to products
manufactured in previous years, but not previously valued. This amount
is approximately .3% of assets, 2.6% of fiscal year 2005 cost of goods
sold and 1.0% of pre-tax income.
We have reviewed both the qualitative and quantitative impacts of the
write-up and we believe that these amounts are immaterial to the
Company's consolidated results of operations, financial position, assets
and stockholders' equity. The effect of the write up of previously
unvalued inventory in fiscal 2003 and 2004 was also immaterial.
The percentage of inventory valued remained consistent over the year as
compared to total protein and antibody inventory and has declined over
the past four years from 18.9% at June 30, 2001 as a result of the
increased number of products offered since that time. The changes to
protein and antibody inventory valued are also consistent with the
Company's increased sales of these products.
Protein and Antibody
---------------------
Inventory % of
(in 000's) Valued Sales Sales
--------- ------ ------
6/30/05 2,018 70,613 2.86
6/30/04 1,757 61,772 2.84
6/30/03 1,504 58,032 2.59
6/30/02 1,348 52,434 2.57
Disclosure:
We will expand our future disclosure regarding valuation of inventories
to include the substance of the following paragraph:
"To meet strict customer quality standards, the Company has established a
highly controlled manufacturing process for proteins and antibodies. New
protein and antibody 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 proteins and antibodies, therefore, has and
will continue to produce quantities in excess of the Company's two-year
forecasted useage. The Company records a lower of cost or market
adjustment for those quantities that are in excess of a two-year demand.
Due to changes in the Company's forecast, reserves for previously written
off inventories may be reversed in subsequent years. For the years ended
June 30, 200X, 200X and 200X, these amounts were not material to the
Company's consolidated results of operations, consolidated financial
position, assets or stockholders equity.
************
We hope that we have adequately addressed your Comment Letter dated February
28, 2006.
Sincerely,
/s/ Thomas E. Oland
Thomas E. Oland
President and Chief Executive Officer
/s/ Gregory J. Melsen
Gregory J. Melsen
Chief Financial Officer
Cc: Andy LaFrence, KPMG
Melodie Rose, Fredrikson & Byron