Measured Approach

TECHE CORPORATION (NASDAQ:TECH) Data as of: 11/20/2009

Industry: Biotechnology & Drugs

Current Data
Current Price $67.12 PEG 1.4
Market Cap ($M) 2499.98 EPS TTM ($) $2.76
Shares Outstanding (M) 37.2450 P/E TTM 24.3
Institutional Holdings % 78.6 EPS Estimated 2010 ($) $2.97
Insider Holdings % 6.8 P/Estimated EPS 22.6
Beta 0.70 MA Value ($) $89.72
Latest Quarter Reported 09/30/2009 Dividend Yield % 1.5

Techne Corporation (TECH) is a mid-cap biotechnology company that offers a good

risk/reward profile. It is engaged in the development and manufacture of biotechnology
products and hematology calibrators and controls. The company appears to be richly
priced as compared to its competitors. However, we think this is a hidden gem.

The company's strengths include a strong financial position with no long-term debt and
cash in excess of current liabilities, expanding profit margins and outstanding return on
equity.

Quick Facts

The results are in for the first quarter and Techne reported a decline in net earnings of
6.4% to $26.8 million ($0.72 per diluted share). In the prior year quarter, the company
reported net income of $28.6 million or $0.74 per diluted share. Consolidated net sales
for the quarter were $66.5 million, a 4.0% decrease from $69.32 million in the year-ago
quarter. Four analysts estimated revenues of $66.70 million for the quarter.

TECH announced that its Board of Directors has decided to pay a dividend of $0.26 per
share for the quarter ended September 30, 2009. The quarterly dividend will be payable
November 23, 2009 to all common shareholders of record on November 9, 2009. Future
cash dividends will be considered by the Board of Directors on a quarterly basis.

From the company’s FY2009 10K:

“TECHNE’s sales and earnings again reached record levels in fiscal 2009, despite difficult
world economic conditions. Regardless of the economic environment, our long-term
investment in the people, equipment and facilities that generate new product
development continues to be the primary driver of our business, as it has for many
years.

Here are some of the highlights of our fiscal 2009 performance:

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© Copyright 2009 Ronald Sommer. All Rights Reserved.
• Net earnings were $105.2 million or $2.78 per diluted share, an EPS increase of 5.3%,
as compared with net earnings of $103.6 million, or $2.64 per diluted share in fiscal
2008. Foreign currency fluctuations negatively affected net earnings by $4.5 million (12
cents per share), resulting from strength in the U.S. dollar vs. the euro and British pound
sterling. Net earnings were also affected by lower investment yields that reduced
interest income by $4.6 million (9 cents per share after tax).
• Net sales increased 2.5% to $264.0 million, compared with sales of $257.4 million, in
Fiscal 2008. Organic revenue growth, net of foreign currency exchange rate changes,
was
5.9% vs. 12.3% last year.
• Gross margins for fiscal 2009 were 79.0%, down from 79.5% last year, primarily due to
currency impacts; operating margin was 57.1%, up from 56.1%; and return on sales was
39.9%, down from 40.2% due to the severe decline in interest income.
• Return on average invested capital (ROIC) was 22.3% in fiscal 2009, generating more
than 11% of economic value for our shareholders, when compared with TECHNE’s cost
of capital of approximately 11%.
• Return on average equity was also 22.3% (the same as ROIC since we have no debt)
and return on average assets was 21.5% for the year.
• Net cash provided by operations was $111.3 million and we returned $118.8 million
to shareholders during the year; $28.2 million in dividends and $90.6 million through
purchases of 1.4 million shares of our common stock at an average purchase price of
$63.82 per share. We closed the year with $264.8 million in cash and available-for-sale
investments.
• We introduced 1,419 new products during fiscal 2009, bringing our product total to
nearly 14,000 products. Revenues from these new products amounted to $3.4 million in
their first year, representing greater than expected first year sales.
Our Biotechnology segment, which represented 65.9% of TECHNE revenues in fiscal
2009, grew 5.0% for the year vs. 13.0% in fiscal 2008, reflecting the pronounced
slowdown in the world economy. In that regard, key customer segment revenue growth
rates were: Bio/Pharmaceutical 4.7%, International Distributors 6.2% and the Academic
market 3.9%. R&D Systems Europe (R&D Europe), which represented 27.5% of TECHNE’s
US dollar revenues in fiscal 2009, declined 4.2% during the year, as the result of
currency translations, primarily the euro and the British pound sterling, both of which
weakened significantly versus the US dollar in fiscal 2009. Organically, excluding
currency effects, R&D Europe grew 7.2% for the year, compared with 12.2% in fiscal
2008. Thus far, biotechnology research in both European academic institutions and
bio/pharmaceutical companies has been less severely impacted by the world recession
than comparable institutions in the United States.”

ANALYSIS OF THE BALANCE SHEET

The schedule below shows the year-end balance sheets for the years between June 30,
2005 and June 30, 2009 and for the twelve month period ending September 30, 2009.
Accounts receivable and inventory comprise approximately 16 percent of the business’s

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© Copyright 2009 Ronald Sommer. All Rights Reserved.
current assets. Cash and short-term investments comprise approximately 81 percent of
current assets. The amount of current assets has been steadily increasing throughout
the period shown.

Fixed assets (net property, plant and equipment) include all of the company’s
production machinery and equipment. As of September 30, 2009, they made up
approximately 48 percent of the company’s non-current assets. Other non-current
assets include long-term investments (36 percent of non-current assets) and
goodwill/intangibles (14 percent of non-current assets.)

Overall, the business’s total assets have increased approximately 65 percent during the
period June 30, 2005 to September 30, 2009. The increase in total assets has been due
primarily to increases in cash and short-term investments.

Current liabilities are comprised about equally of accounts payable and other current
liabilities. Total current liabilities are $16.0 million, as of September 30, 2009.

As the business’s earnings steadily increased, so did its equity. The company nearly
doubled its booked equity during the period presented below.
Balance Sheet
(Amounts in Millions)
TTM FYE FYE FYE FYE FYE
Assets 09/30/09 06/30/09 06/30/08 06/30/07 06/30/06 06/30/05
Cash 174.80 160.90 167.00 135.50 89.60 80.30
ST Investments 52.50 41.90 39.40 29.30 19.20 16.80
Accounts Receivable 31.70 31.20 33.30 31.00 25.10 23.70
Inventory 12.50 11.30 9.50 8.80 9.00 7.80
Other Current Assets 10.40 10.20 9.20 8.30 6.90 6.40
Total Current Assets 281.90 255.50 258.40 212.80 149.80 135.00
Net Property, Plant & Equip. 98.80 100.10 101.70 91.50 88.80 89.00
LT Investments 74.40 84.00 112.10 115.60 94.90 50.00
Goodwill/Intangibles 27.80 28.10 29.00 30.20 32.00 14.10
Other LT Assets 4.10 4.40 6.00 4.70 5.00 7.10
Total Assets 487.00 472.00 507.40 454.80 370.50 295.30

Liabilities
Accounts Payable 8.00 7.50 6.10 6.90 5.50 4.10
Short Term Debt 0.00 0.00 0.00 0.00 1.20 1.20
Other Current Liabilities 8.10 8.10 14.10 10.30 11.30 8.70
Total Current Liabilities 16.00 15.50 20.20 17.20 18.00 14.00
LT Debt 0.00 0.00 0.00 0.00 12.20 13.40
Other LT Liabilities 0.00 0.00 0.00 0.00 0.00 0.00
Total Liabilities 16.00 15.50 20.20 17.20 30.20 27.40
Preferred Stock 0.00 0.00 0.00 0.00 0.00 0.00
Common Stock Equity 471.00 456.50 487.10 437.70 340.30 267.90
Total Liabilities & Equity 487.00 472.00 507.30 454.90 370.50 295.30
Book Value Per Share 12.65 12.08 12.45 11.11 8.71 6.64

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© Copyright 2009 Ronald Sommer. All Rights Reserved.
ANALYSIS OF THE INCOME STATEMENT

As part of my analysis, I have analyzed the business’s income statements for the years
ending June 30, 2005 through June 30, 2009 and for the twelve month period ending
September 30, 2009.

Revenues have increased from $178.7 million to $261.2 million during the period under
study. Throughout this period, the gross profit percentage has remained remarkably
stable, and high, ranging from 77.4 percent to 79.4 percent. The result is a 45 percent
increase in gross margin dollars for the twelve month period ending September 30, 2009
as compared for the FYE June 30, 2005.

Operating expenses have averaged approximately 43 percent of revenues during the

reporting period. Operating expenses are stable in relation to revenues.

Because the company has had basically the same cost structure throughout the
reporting period, as revenues increased by 46 percent, pre-tax earnings have increased
approximately 52 percent.

Income Statement
Amounts in Millions
TTM FYE FYE FYE FYE FYE
09/30/09 06/30/09 06/30/08 06/30/07 06/30/06 06/30/05
Sales 261.20 264.00 257.40 223.50 202.60 178.70
Cost of Goods Sold 55.30 55.50 52.90 46.70 45.70 36.80
Gross Income 205.90 208.50 204.50 176.80 156.90 141.90
Depreciation & Amortization 0.80 1.00 1.10 1.60 2.00 1.20
Research/Development 23.80 23.60 22.40 20.10 18.80 18.40
Interest Expense 0.00 0.00 0.00 0.00 0.00 0.80
Unusual Expenses/(Income) 0.00 0.00 0.40 0.00 0.00 0.00
Total Operating Expenses 112.40 113.20 113.50 90.90 89.40 77.60
Operating Income 148.70 150.80 143.90 132.60 113.20 101.10
Interest Expense - Non-Op. 0.00 0.00 0.00 1.10 1.00 0.00
Other Expenses/(Income) (3.30) (4.60) (9.90) 2.60 1.00 1.20
Pretax Income 152.10 155.40 153.80 128.90 111.20 99.90
Income Taxes 48.70 50.10 50.30 43.80 37.80 33.80
Income After Taxes 103.40 105.20 103.60 85.10 73.40 66.10
Adjustments to Income 0.00 0.00 0.00 0.00 0.00 0.00
Income for Primary EPS 103.40 105.20 103.60 85.10 73.40 66.10
Nonrecurring Items 0.00 0.00 0.00 0.00 0.00 0.00
Net Income 103.40 105.20 103.60 85.10 73.40 66.10
EPS Basic 2.76 2.78 2.65 2.16 1.88 1.64
EPS Diluted 2.76 2.78 2.64 2.15 1.85 1.62

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© Copyright 2009 Ronald Sommer. All Rights Reserved.
INDUSTRY COMPARATIVE ANALYSIS

The following schedule presents a comparative ratio analysis of TECH and the industry
median for the Biotechnology & Drug industry. Four categories of ratios (profitability,
liquidity, debt management and asset management) have been used to compare the
operating results of the subject company with that of the industry median.

Gross profit margin reflects the pricing decisions of a company as well as the costs of the
materials needed to produce their product(s) or service(s). It is the ratio of the gross
income of a company (sales less cost of goods sold) to its sales for the same period. The
greater this margin is and the more stable it is over time, the greater the company’s
expected profitability.

The average operating margin ratio examines the relationship between sales and
management-controllable costs before interest, taxes, and non-operating expenses. The
operating margin is the ratio of operating income (sales less operating expenses) to
sales for the same period. You ideally would like to see a high operating margin that is
steady over time.

Return on equity (book value) examines the financial structure of a firm and its impact
on earnings. Return on equity indicates how much common shareholders earned on
their investment. The level of debt or leverage on the balance sheet has a significant
impact on return on equity during good and bad years. Large differences between
return on assets and return on equity should alert investors to examine closely the
liquidity and financial risk of the company.

The current ratio compares the level of the firm’s most liquid assets—current assets—
against that of its shortest maturity obligations—current liabilities. A high current ratio
indicates a high level of liquidity and, consequently, less risk of immediate financial
trouble. However, too high a current ratio may point to unnecessary investment in
current assets, or an inability on the company’s part to collect accounts receivable, or an
inflated inventory. Circumstances such as these ultimately have a negative impact on
earnings. On the other hand, too low a current ratio implies illiquidity and the potential
for the company to be unable to meet current liabilities in the event of random shocks,
such as strikes, that temporarily reduce the inflow of cash. It is computed by dividing
short-term assets by short-term liabilities for the same period.

Sometimes referred to as the interest coverage ratio, times interest earned is the
traditional measure of a company’s ability to meet its interest payments. It indicates
how well a company is able to generate earnings to pay interest on its debt. The larger
and more stable the ratio, the lower the risk of the company defaulting. In addition, the
higher the ratio, the more flexibility a company has in being able to meet its financial
obligations and have money left over for dividends, expansion, etc. Interest on debt

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© Copyright 2009 Ronald Sommer. All Rights Reserved.
obligations must be paid, regardless of a company’s future potential. Failure to do so
will result in default if the lender is not willing to restructure debt obligations. As this
ratio falls, the risk of a company defaulting on its debt obligations increases. A ratio of
less than one indicates that company’s current earnings are not high enough to meet
their current debt obligations, meaning they will need to liquidate assets to make up the
shortfall or find additional funding.

The ratio of total liabilities to total assets is also referred to as the debt to total assets
ratio, measures the percentage of assets financed by all forms of debt—both current
and long term. The higher the percentage and the greater the potential variability of
earnings translates into a greater potential for the firm to default on its debt obligations.

Long-term debt as a percentage of total capital is a popular measure of a company’s

financial leverage. It compares the level of long-term debt carried by a company to all
sources of long-term financing—long-term debt and stockholder’s equity. A high ratio
indicates high risk. However, just because this ratio is low does not necessarily mean risk
is low. You need to examine the level of current liabilities; if current liabilities are such
that the company cannot meet these obligations, it runs the risk of defaulting, thus
increasing its risk. Long-term debts are liabilities due in a year or more.

Long-term debt as a percentage of total common equity indicates what proportion of

the firm’s capital is derived from debt as compared to equity. A higher percentage of
debt compared to equity increases the volatility of earnings as well as the probability
that the firm will not be able to make its interest payments and default on its debt.
Long-term debts are liabilities due in a year or more.
The accounts receivable turnover measures the effectiveness of the firm’s credit policies
and helps indicate the level of investment in receivables needed to maintain the level of
sales. It tells us how many times each period the company collects or turns into cash its
accounts receivable. The higher the turnover ratio, the shorter the time between the
credit sale and cash collection. A decline in receivables turnover over time is a red flag of
possible reduced demand for the firm’s products, an indication that the company is not
doing as good a job collecting its receivables, or that the company is improperly booking
credit sales in order to boost its revenues.

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© Copyright 2009 Ronald Sommer. All Rights Reserved.
 COMPARATIVE RATIOS
TTM FYE FYE FYE FYE FYE
Profitability 09/30/09 06/30/09 06/30/08 06/30/07 06/30/06 06/30/05
Gross Profit Margin % 78.80 79.00 79.40 79.10 77.40 79.40
Industry Median 51.00 52.80 55.70 53.10 54.10 54.20

Operating Margin % 57.00 57.10 55.90 59.30 55.90 56.60

Industry Median (41.20) (36.00) (39.80) (55.40) (62.70) (68.80)

Net Profit Margin % 39.60 39.80 40.20 38.10 36.20 37.00

Industry Median (38.00) (38.80) (37.40) (50.20) (59.30) (65.80)

Return on Equity % 23.30 22.30 22.40 21.90 24.10 23.40

Industry Median (13.70) (25.80) (28.40) (26.80) (30.00) (26.00)

Return on Assets % 22.50 21.50 21.50 20.60 22.00 21.30

Industry Median (52.40) (49.00) (42.50) (42.20) (38.00) (39.70)

Liquidity
Quick Ratio (X) 16.80 15.80 12.30 11.90 7.80 9.10
Industry Median 1.80 2.20 3.00 3.30 3.30 3.80

Current Ratio (X) 17.60 16.50 12.80 12.40 8.30 9.60

Industry Median 2.10 2.40 3.30 3.50 3.50 3.90

Payout Ratio (X) 36.20 27.00 0.00 0.00 0.00 0.00

Industry Median 0.00 0.00 0.00 0.00 0.00 0.00

Times Interest Earned (X) na na na 118.20 112.20 125.90

Industry Median (5.30) (6.30) (7.30) (8.40) (6.20) (8.10)

Debt Management
Total Liabilities to Total Assets % 3.30 3.30 4.00 3.80 8.20 9.30
Industry Median 51.40 47.10 38.80 37.00 35.70 30.70

Long-Term Debt to Capital % 0.00 0.00 0.00 0.00 3.50 4.80

Industry Median 0.40 0.90 0.30 0.30 0.90 0.50

Long-Term Debt to Equity % 0.00 0.00 0.00 0.00 3.60 5.00

Industry Median 0.00 0.00 0.00 0.00 0.00 0.00

Asset Management
Receivables Turnover (X) 8.20 8.20 8.00 8.00 8.30 8.00
Industry Median 6.10 6.10 5.70 5.30 5.50 5.60

Inventory Turnover (X) 5.00 5.30 5.80 5.20 5.40 4.80

Industry Median 3.00 3.00 3.00 3.00 2.90 2.90

Asset Turnover (X) 0.60 0.50 0.50 0.50 0.60 0.60

Industry Median 0.50 0.40 0.20 0.20 0.20 0.20

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© Copyright 2009 Ronald Sommer. All Rights Reserved.
VALUATION CONCLUSIONS

We place a target price of $89.72 on the common shares of Techne Corporation. We

recognize this implies very high multiples to forecasted earnings and sales. However, we
feel this target is justified. Though future earnings are supposed to be the chief
determinant of value, we take into consideration a number of other factors. These
factors are considered in determining a capitalization rate.

We consider the long-term prospects of a company. We do not know what the future
will be but there are disconnects between the value of individual companies and an
industry. In the case of Techne, we believe the company’s ability to sustain margins
superior to the industry is a contributing factor to justifying premium multiples.

The role of management is one of those qualitative factors that are difficult to measure.
However, if past is prologue, then a company’s past performance provides some
indication of what we can expect in the future. Techne has consistently reported
growing profits and free cash flow.

There is something to be said for a company that is financially strong and has a sound
capital structure. Stock of a company with a lot of surplus cash and nothing ahead of the
common is clearly a better purchase than another one with the same per share earnings
but large bank loans and senior securities.

One measure of quality is a company’s ability to provide a safe dividend. Though Techne
only recently started paying a dividend, it is well covered by earnings. The current
dividend rate is about 1.5 percent.

Valuation Ratios

Current Industry
Company MA Value Median
Price Earnings 24.30 32.51 14.60
PE to Growth 1.40 2.22 0.70
Price to Book 5.30 7.09 2.70
Price to Sales 9.50 12.80 3.40
Price to Cash Flow 24.10 32.27 12.40
Price to Free Cash Flow 36.70 49.03 13.60

Disclosure: The author has no position in TECH.

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© Copyright 2009 Ronald Sommer. All Rights Reserved.