BIO-TECHNE (Techne Corporation) — FY2014 Form 10-K
Reporting period: Fiscal year ended June 30, 2014. The filing is an annual report, not a standalone fourth-quarter report; quarterly results are not clearly provided in the supplied text. The company develops and sells biotechnology research and diagnostic products and clinical controls, through Biotechnology and Clinical Controls segments.
Financial performance
| Metric | FY2014 | FY2013 | Change / context |
|---|---|---|---|
| Net sales | $357.8 million | $310.6 million | Up 15% reported; up 3% organically after acquisition and currency adjustments |
| Operating income | $159.8 million | $158.5 million | Up less than 1%; operating margin about 44.6%, versus 51.0% |
| Gross margin | 70.3% | 74.4% | Lower largely due to acquired inventory accounting, amortization, and Bionostics’ lower-margin mix; adjusted gross margin was 73.5% versus 76.8% (non-GAAP) |
| Net earnings | $110.9 million | $112.6 million | Down about 1% |
| Diluted EPS | $3.00 | $3.05 | Down about 2% |
| Operating cash flow | $136.8 million | $123.6 million | Up about 11% |
| Capital expenditures | $13.8 million | $22.5 million | Lower, following major campus renovation spending in FY2013 |
Biotechnology generated $300.6 million, or 84% of FY2014 sales; Clinical Controls generated $57.2 million, or 16%. Biotechnology sales rose 4% reported and 3% organically. Clinical Controls sales rose substantially following the Bionostics acquisition; segment organic growth was 7%. Segment gross margins were 76.3% for Biotechnology and 38.5% for Clinical Controls.
Research and development expense was $30.9 million, about 9% of sales, versus $29.3 million. Selling, general and administrative expense increased 40% to $60.7 million, reflecting acquisitions, amortization, acquisition costs, and investment in commercial and administrative resources.
Liquidity, capital and balance sheet
- At June 30, 2014, cash and cash equivalents were $318.6 million and short-term available-for-sale investments were $44.8 million. Including $3.6 million of long-term available-for-sale investments, these totaled about $366.9 million. The company’s selected-data measure of cash and short-term investments was $363.4 million.
- Working capital was $443.0 million; total assets were $862.5 million and shareholders’ equity was $795.3 million.
- At year-end, the balance sheet included $12.9 million of related-party notes payable, primarily associated with PrimeGene. The $150 million revolving facility was entered into after year-end to help fund ProteinSimple; $125 million was drawn on July 31, 2014. Management expected net interest expense in FY2015.
- Cash dividends paid were $45.4 million, or $1.23 per share, up from $43.5 million and $1.18 per share. No share repurchases occurred in FY2014.
Material changes, outlook and unusual items
- FY2014 sales growth included $33.9 million of acquired sales and a $3.5 million favorable currency effect; organic growth was 3%. Reported net earnings were nearly flat, while adjusted net earnings rose 6% to $125.3 million. Adjusted figures exclude specified acquisition, tax, inventory and amortization items and are non-GAAP.
- Bionostics was acquired in July 2013 for about $103 million; PrimeGene was acquired in April 2014 for about $18.8 million. These deals expanded clinical controls and recombinant protein offerings, respectively.
- After year-end, Novus was acquired for about $60 million and ProteinSimple for about $300 million. ProteinSimple was partly funded by the new revolving credit facility.
- The company invested $10 million for an approximately 19.9% stake in CyVek. If specified commercial milestones are met, the company is to acquire the remaining shares, with an initial payment of $60 million and potential additional payments, including up to $35 million tied to revenue and a further revenue-based payment tied to 2020 sales.
- The fair value of the ChemoCentryx investment fell to $37.1 million at year-end from $89.6 million a year earlier. The decline was reflected primarily in other comprehensive income; the company reported no FY2014 impairment charge on investments.
- Management identified commercial expansion, product innovation, targeted acquisitions and international growth as priorities. It planned about $16.2 million of FY2015 capital expenditures, including UK facility work. No specific earnings or revenue guidance was provided in the filing text.
Risks and contingencies
Key risks include research-funding variability and customer spending, intense competition and pricing pressure, dependence on continued product innovation, acquisition integration and execution, foreign exchange exposure, regulatory requirements, manufacturing or supply disruptions, intellectual-property claims, product liability, and cybersecurity. Approximately 47% of sales were outside the United States; about 30% of sales were transacted in foreign currencies. A hypothetical 10% U.S. dollar appreciation against the euro, pound and yuan was estimated to reduce translated FY2014 earnings by $2.6 million, before other effects.
The credit facility has variable interest rates and financial covenants, including minimum interest coverage of 4.0x and maximum total leverage of 3.5x. A default could restrict actions including cash dividends. The CyVek transaction and contingent payments are conditional, not assured obligations at their maximum amounts. The company reported no legal proceedings expected to have a material adverse effect. Its auditor and management concluded internal control over financial reporting was effective at June 30, 2014; management said a prior-year IT-controls material weakness had been remediated.
Important facts for investors to verify
- Whether the 3% organic sales growth and adjusted earnings improvement persist, and how the acquisitions affect reported versus organic growth.
- Whether gross margins recover or remain pressured by Bionostics mix, purchase-accounting charges, amortization and lower-priced offerings.
- Post-acquisition cash, debt, interest expense and covenant headroom after the Novus and ProteinSimple transactions.
- CyVek milestone achievement, acquisition completion status and the amount and timing of any contingent consideration.
- The valuation and liquidity of the ChemoCentryx investment, as well as the risks and performance of other minority investments.