TECHNE Corporation (now Bio-Techne) — Form 10-Q Summary
Business context and period: The filing is by TECHNE Corporation and covers the quarter ended September 30, 2011, the first quarter of fiscal 2012. The company reported biotechnology and hematology businesses. Amounts below are in U.S. dollars; financial statement figures are in thousands unless stated otherwise.
Financial performance and position
| Metric | Quarter ended Sep. 30, 2011 | Prior-year quarter | Change |
|---|---|---|---|
| Net sales | $77.6 million | $67.9 million | +14.2% |
| Gross margin | $58.4 million; 75.2% | $52.6 million; 77.4% | Margin down 2.2 percentage points |
| Operating income | $40.9 million | $38.4 million | +6.7% |
| Net earnings | $27.5 million | $26.4 million | +4.4% |
| Diluted EPS | $0.74 | $0.71 | +4.2% |
| Operating cash flow | $34.4 million | $30.7 million | +$3.7 million |
- Biotechnology sales were $72.3 million, up 14.7%; hematology sales were $5.3 million, up 7.9%. Excluding acquisitions and currency effects, consolidated sales grew 3.2% and biotechnology sales grew 2.8%.
- Cash and cash equivalents were $79.2 million; available-for-sale investments totaled approximately $203.1 million. Combined cash and investments were about $282 million, versus $272.8 million at June 30, 2011.
- Total current assets were $219.0 million and current liabilities $26.2 million. No borrowings were reported; the company had an undrawn $750,000 unsecured credit line.
- Quarter-end shareholders’ equity was $589.4 million. The company paid $10.0 million in dividends and repurchased and retired $10.7 million of stock.
- Operating cash flow was offset in part by $10.4 million of net investing outflow and $21.6 million of financing outflow. Cash increased $1.6 million during the quarter.
Material changes and management commentary
- Acquisitions of Boston Biochem and Tocris, completed in fiscal 2011’s fourth quarter, contributed $5.6 million of quarterly sales. Favorable currency translation added an estimated $1.9 million to sales and $353,000 to net earnings.
- Acquisition-related purchase accounting reduced gross margin by $2.1 million from acquired inventory sold and by $764,000 from acquired-technology amortization. Management attributed the lower consolidated margin largely to these effects.
- Selling, general and administrative expense rose 41.5%, primarily due to $1.6 million of acquired-company expenses, $460,000 of additional acquisition-related amortization, and $885,000 of higher profit-sharing expense. Research and development spending was nearly unchanged.
- Foreign currency losses and other items drove total other expense to $447,000, compared with $590,000 of other income a year earlier.
- In September 2011, the company made a $10 million loan to equity investee ChemoCentryx (CCX), bearing 5% interest and maturing in 2021. Conversion features are contingent on future financing; the company also committed $5 million to a possible CCX private placement if a public offering succeeds.
Outlook, risks and contingencies
- Management expected a fiscal 2012 effective tax rate of approximately 31%–33%; the quarter’s rate was 32.0%.
- Capital expenditures for the remainder of fiscal 2012 were estimated at approximately $6.4 million. Management said available funds, operating cash flow, and investment maturities or sales should meet foreseeable needs, including dividends, repurchases, investments, and acquisitions. No sales or earnings guidance was provided.
- A $0.28-per-share dividend, approximately $10.4 million in total, was announced after quarter-end for payment November 21, 2011.
- Risks cited include product acceptance, competition, economic conditions, manufacturing reliance, currency fluctuations, integration of acquired businesses, talent retention, regulation, intellectual property, investment-portfolio credit and market risk, and financing prospects of investees.
- In the Streck patent dispute, the Federal Circuit issued an October 20, 2011 opinion upholding a district-court priority finding in Streck’s favor; its decision on the infringement-case appeal was still to follow. The company stated it did not expect resolution to materially affect its financial statements.
- The company reported effective disclosure controls and no material change in internal control over financial reporting. It reported no material changes to contractual obligations or risk factors from its fiscal 2011 Form 10-K.
Investor verification points
- Verify the portion of reported growth attributable to acquired businesses and currency, and how underlying organic sales trends develop.
- Monitor whether acquisition-related inventory and amortization charges continue to pressure gross margins, and whether acquired businesses integrate as expected.
- Review the CCX loan’s conversion terms, repayment prospects, and the conditional additional $5 million investment commitment.
- Track the remaining share-repurchase authorization ($39.9 million at September 30, 2011) alongside dividend commitments and planned capital spending.
- Follow the Streck appeal and any effect on hematology products, operations, or potential liabilities; the filing does not provide a final appellate outcome.
- Assess foreign-exchange and investment risks: management’s hypothetical 10% U.S.-dollar appreciation scenario estimated a $2.2 million reduction in annualized translated earnings and a $12.9 million reduction in translated foreign net assets.