BIO-TECHNE CORPORATION — Form 10-Q Summary
Business context and period: This unaudited filing covers the first quarter of fiscal 2015, ended September 30, 2014, with comparisons to the quarter ended September 30, 2013. Bio-Techne supplies products and systems to life-science research and diagnostic markets. Its reportable segments are Biotechnology, Clinical Controls, and Protein Platforms. Results include the July 2014 acquisitions of Novus and ProteinSimple.
Financial performance
| Metric | Quarter ended September 30, 2014 | Comparable 2013 period |
|---|---|---|
| Net sales | $108.5 million | $85.7 million |
| Gross margin | $73.1 million; 67.4% | $61.1 million; 71.3% |
| Operating income | $35.2 million | $39.4 million |
| Net earnings | $23.9 million | $27.4 million |
| Diluted earnings per share | $0.64 | $0.74 |
| Operating cash flow | $35.7 million | $32.6 million |
| Capital expenditures | $4.9 million | $3.8 million |
Reported sales grew 27% year over year; management reported organic growth of 3%, with 24% growth from acquisitions. Adjusted net earnings, a non-GAAP measure that excludes specified acquisition-related costs and related tax effects, were $31.7 million versus $30.5 million, up 4%.
Liquidity, debt, and financial position
- At September 30, 2014, cash and cash equivalents were $98.2 million; available-for-sale investments totaled $36.1 million. Together, cash and investments were approximately $134 million, versus $367 million at June 30, 2014.
- Long-term debt was $112 million, with an additional $5.9 million current related-party note payable and $7.0 million long-term related-party note payable. The company drew $125 million under a new $150 million revolving facility to help fund ProteinSimple and repaid $13 million during the quarter. The facility matures July 31, 2019 and includes customary covenants.
- Management said available cash and operating cash generation were expected to cover operating needs, facility expansion, capital additions, and dividends for at least the next 12 months. Capital expenditures for the remainder of fiscal 2015 were expected to be approximately $20 million.
- Quarterly cash dividends were $0.31 per share. A subsequent $0.32-per-share dividend was announced for payment in November 2014.
Material changes and management commentary
- Novus was acquired July 2 for approximately $60 million, funded with cash. ProteinSimple was acquired July 31 for approximately $300 million, funded with cash and the revolving facility. The acquisitions added $20.3 million of sales in the quarter; the acquired businesses reported net losses of $0.2 million for Novus and $1.8 million for ProteinSimple, including acquisition-related amortization and inventory costs.
- Gross margin declined to 67.4% from 71.3%. Management’s adjusted gross margin, excluding identified acquired-inventory costs and intangible amortization, was 72.1% versus 74.4%; the decline was attributed primarily to acquisition-related product mix. Excluding acquisitions, management said gross margins were essentially flat.
- Operating expenses rose substantially, including acquired-company expenses, higher acquisition-related intangible amortization, acquisition costs, and increased investment in commercial and administrative resources. Management attributed the decrease in reported net earnings mainly to acquisition-related amortization, inventory costs, and expenses.
- Organic sales were strong in Asia but below fiscal 2014 growth rates, which management linked to delayed release of Chinese research funding amid government audits. North American bio/pharma sales were strong, while academic sales faced funding pressures. Europe declined, particularly in Germany, amid delayed customer projects.
- Segment sales were $81.5 million for Biotechnology (11% reported growth; 1% organic), $14.1 million for Clinical Controls (13% reported; 10% organic), and $12.9 million for Protein Platforms. ProteinSimple’s pro forma revenue growth was 33%, according to management.
Outlook, contingencies, and risks
- Management expected the fiscal 2015 income tax rate to range from 30% to 32%. No specific revenue or earnings guidance was provided in the filing.
- On November 3, 2014, after quarter-end, the company acquired CyVek. It paid approximately $62 million at closing, funded with cash and $38 million of revolving-credit borrowings, and may owe up to $35 million based on product revenue through May 2018, plus a potential payment tied to 2020 revenue above $100 million.
- Available-for-sale investments included a $28.5 million investment in ChemoCentryx; a 10% decrease in its market value would reduce fair value by approximately $2.8 million. Foreign-currency exposure is also material: approximately 27% of quarterly sales were denominated in foreign currencies. The filing estimated that a hypothetical 10% U.S. dollar appreciation against specified currencies would reduce annualized translated earnings by $2.2 million and foreign-subsidiary net assets by $18.5 million, and cause $1.2 million of additional transaction losses.
- Disclosed risks include acquisition integration and purchase-accounting effects, currency movements, competition, product acceptance, reliance on manufacturing operations, and economic and funding conditions. The company also cited potential compliance costs and supply constraints related to conflict-minerals rules, and implementation risks for its new enterprise resource planning system.
- The company reported no material-adverse-effect legal proceedings, no reportable off-balance-sheet arrangements, and no material changes to contractual obligations outside the ordinary course. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether acquired businesses deliver the expected growth and synergies, and how acquisition-related costs affect reported versus adjusted profitability.
- Whether organic growth improves, particularly in Europe, North American academia, and China, and whether acquisition-driven growth is sustainable.
- Cash use, debt repayment, covenant headroom, and financing needs following ProteinSimple and the subsequent CyVek acquisition and contingent payments.
- The persistence of gross-margin pressure and the impact of acquisition-related amortization and inventory charges.
- Valuation and volatility of the ChemoCentryx investment, foreign-exchange sensitivity, and execution of planned capital spending and ERP implementation.