BIO-TECHNE CORPORATION — Form 10-Q Summary
Reporting period: Quarter and six months ended December 31, 2018 (fiscal 2019 Q2), compared with the periods ended December 31, 2017. Amounts below are U.S. dollars; financial statement amounts are in millions unless otherwise noted.
Business context and results
Bio-Techne supplies life-science and diagnostic products and services. It reported two segments: Protein Sciences and Diagnostics and Genomics. The company realigned its five operating segments into these two reporting segments in fiscal 2019.
| Metric | Quarter 2018 | Quarter 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $174.5 | $154.2 | $337.5 | $298.8 |
| Gross margin | 64.8% | 66.1% | 65.4% | 66.8% |
| Operating income | $33.6 | $24.1 | $59.4 | $50.2 |
| Net earnings | $17.6 | $48.8 | $35.0 | $64.7 |
| Diluted EPS | $0.45 | $1.29 | $0.90 | $1.71 |
| Operating cash flow | — | $86.0 | $83.9 |
Performance changes and drivers
- Revenue increased 13% in both the quarter and six-month period. Organic growth was 11% and 10%, respectively; acquisitions added 3% and 4%, while foreign currency reduced growth by 1% in each period.
- Protein Sciences revenue rose 16% in both periods, with 14% organic growth. Diagnostics and Genomics revenue grew 6% in the quarter and 3% over six months; organic growth was 2% and 0%. ExosomeDx contributed to the latter segment’s reported growth.
- GAAP gross margin declined year over year, primarily reflecting acquisition-related inventory charges and intangible amortization. Company-reported adjusted gross margin, excluding those items, was 70.9% for the quarter and 71.4% for six months, up 0.7 and 0.3 percentage points, respectively.
- GAAP net earnings fell substantially, largely because the prior-year periods included a $33.5 million U.S. tax-reform benefit. Fiscal 2019 results also included investment losses of $7.2 million for the quarter and $9.4 million for six months, following accounting changes that moved fair-value changes on certain equity investments into earnings.
- Operating income rose despite increased acquisition amortization and stock compensation. The Diagnostics and Genomics segment’s operating margin was negative 2.7% for the quarter and 1.9% for six months; management attributed pressure to newly acquired, lower-margin businesses, particularly ExosomeDx.
Cash, debt and liquidity
- At December 31, 2018, cash and cash equivalents were $85.9 million and short-term investments were $70.6 million, totaling $156.5 million, versus $181.8 million at June 30, 2018. Current assets were $379.9 million and current liabilities $87.4 million.
- Debt outstanding under the credit agreement was $545.8 million. The agreement, entered into August 1, 2018, includes a $600 million revolving facility (with a potential $200 million increase) and a $250 million term loan, and matures August 1, 2023. Borrowings carry variable interest; the company entered into swaps on $380 million of notional debt to reduce rate variability.
- Operating cash flow was $86.0 million. Investing activities used $301.7 million, including $272.3 million for acquisitions; financing activities provided $181.3 million. Cash declined by $36.1 million during the six months.
- Management said available cash, operating cash generation and unused revolving credit were expected to meet operating, investment and dividend needs for at least the next 12 months. Remaining fiscal 2019 capital expenditures were expected to be approximately $15 million.
Acquisitions, outlook and risks
- Bio-Techne acquired Quad Technologies for approximately $20.5 million net of acquired cash, plus contingent consideration of up to $51 million, and Exosome Diagnostics for approximately $251.8 million net of acquired cash, plus contingent consideration of up to $325 million. Purchase-price allocations remained preliminary. The recognized contingent consideration liability was $6.0 million at December 31, 2018.
- Management expected the fiscal 2019 income tax rate, excluding discrete items, to range from 23% to 26% for the remainder of the year. No broader revenue or earnings guidance was provided in the filing.
- Key risks include integrating acquisitions; obtaining and maintaining public and private reimbursement for ExosomeDx’s EPI prostate test; healthcare billing, laboratory certification and other regulatory compliance; and protection of health information. The filing also identifies foreign currency, investment-value, competition, product acceptance and facility-expansion risks.
- The company held a $44.9 million investment in ChemoCentryx; a 10% decline in its market value would reduce fair value by approximately $4.5 million. About 30% of quarterly revenue was generated in foreign currencies.
- Disclosure controls were assessed as effective at December 31, 2018. Internal-control changes related to the acquisitions had not yet been fully evaluated. The company reported no material legal proceedings expected to adversely affect it.
Important facts for investors to verify
- Whether ExosomeDx’s EPI test secures reimbursement coverage and achieves commercial adoption, and the related compliance and privacy obligations.
- How much of revenue growth is organic and sustainable, particularly in Protein Sciences and China, versus acquisition-driven.
- The effect of acquisition amortization, integration costs and lower-margin acquired operations on GAAP margins and earnings.
- Debt repayment capacity, variable-rate exposure, covenant headroom and the possible cash cost of acquisition earnouts.
- Investment valuation volatility and the durability of reported earnings excluding the prior-year tax benefit and current-period investment losses.
- Whether planned capital expenditures, dividends and other cash needs remain supported by operating cash flow and available credit.