BIO-TECHNE Corporation (filed as TECHNE Corporation) — Form 10-Q
Reporting period: Quarter and six months ended December 31, 2013; second quarter of fiscal 2014. The filing was signed February 4, 2014. Financial figures are unaudited and in U.S. dollars.
Business context and results
The company develops, manufactures and sells biotechnology products and clinical diagnostic controls through its Biotechnology and Clinical Controls segments. Results include Bionostics, acquired July 22, 2013, from its acquisition date.
| Metric | Quarter ended Dec. 31, 2013 | Prior-year quarter | Six months ended Dec. 31, 2013 | Prior-year six months |
|---|---|---|---|---|
| Net sales | $84.0 million | $75.1 million | $169.7 million | $150.1 million |
| Operating income | $35.7 million | $36.9 million | $75.1 million | $74.7 million |
| Net earnings | $25.1 million | $25.4 million | $52.5 million | $51.0 million |
| Diluted EPS | $0.68 | $0.69 | $1.42 | $1.38 |
| Gross margin | 69.7% | 73.6% | 70.5% | 73.8% |
Quarterly sales increased 11.9%, but organic sales grew only 0.4% after excluding Bionostics and currency effects. Six-month reported sales grew 13.0%, versus 2.8% organic growth. Quarterly net earnings declined 1.2%; six-month net earnings rose 2.8%. Management’s adjusted net earnings, which exclude specified acquisition-related inventory costs, intangible amortization and professional fees, were $27.8 million for the quarter and $58.5 million for the six months; these are non-GAAP measures.
- Segments: Quarterly Biotechnology sales were $70.6 million, up 1.3%; Clinical Controls sales were $13.5 million, up $8.0 million, largely reflecting Bionostics. Excluding Bionostics, Clinical Controls sales grew 0.5% for the quarter and 7.0% for the six months.
- Margins and expenses: Reported consolidated gross margin fell 3.9 percentage points in the quarter. Management attributed pressure in part to acquired-inventory costs and intangible amortization; adjusted gross margin, excluding these items, was 72.7% versus 76.2%. SG&A rose 36.2% in the quarter, mainly due to the acquisition, amortization, stock compensation and higher personnel costs. R&D expense increased 7.0%.
Cash flow, liquidity and capital
- Operating cash flow for the six months was $63.9 million, versus $60.6 million a year earlier.
- Investing cash outflow was $113.9 million, including $103.1 million net cash paid for Bionostics. Capital expenditures were $7.5 million.
- Cash and cash equivalents were $98.4 million at December 31, 2013; available-for-sale investments were $251.0 million. Together these totaled approximately $349 million, compared with $465 million at June 30, 2013. The filing reports no borrowings or debt on the balance sheet.
- Current assets were $279.1 million and current liabilities $22.1 million. Shareholders’ equity was $748.5 million.
- The company paid $22.5 million in dividends during the six months and announced a further $0.31 per-share dividend, payable February 28, 2014. No shares were repurchased during the quarter.
Outlook, risks and unusual items
- Management said available funds, operating cash flow and investment maturities or sales should cover expected needs for at least the next 12 months. Remaining fiscal 2014 capital expenditures were estimated at approximately $8.4 million.
- Management expected the fiscal 2014 tax rate to range from 30% to 32% and said R&D expense would continue to increase as product development proceeds.
- The Bionostics acquisition cost $103.1 million net of acquired cash. The company recorded $60.5 million of acquired intangible assets and $56.3 million of goodwill; acquired intangible amortization and inventory step-up costs reduced reported results.
- The company’s ChemoCentryx investment fell in fair value from $89.6 million at June 30 to $36.7 million at December 31, against a $29.5 million cost basis. Six-month unrealized losses on available-for-sale investments were $35.8 million after tax. The filing estimates a further $3.7 million fair-value loss under a 10% decline in ChemoCentryx shares.
- Disclosure controls were deemed ineffective because of a previously identified material weakness in IT general controls, including access and program-change controls affecting financial applications and system-generated revenue and receivables information. Management reported additional testing and documentation and expected remediation testing to be completed by fiscal year-end 2014; it also said additional procedures supported the fairness of the reported financial statements.
- Risks identified include foreign-exchange movements, investment-market and credit risk, product acceptance and competition, regulation, intellectual property, personnel retention, and facility-improvement delays. No material changes to previously disclosed risk factors or material legal proceedings were reported.
Investor verification priorities
- Assess underlying demand: reported growth materially exceeded organic growth, particularly because of Bionostics.
- Track whether gross margins recover as acquired-inventory charges and amortization evolve, and whether higher SG&A and R&D spending is supported by growth.
- Review ChemoCentryx valuation exposure and the impact of investment fair-value changes on comprehensive income and equity.
- Monitor remediation and independent testing of the IT-control material weakness, especially controls supporting revenue and receivables.
- Confirm acquisition integration, cash deployment, and actual capital spending against management’s outlook.