Business context and reporting period
Techne Corporation (now BIO-TECHNE Corp.) filed this unaudited Form 10-Q for the quarter ended September 30, 2010, the first quarter of fiscal 2011. The company develops, manufactures and sells biotechnology research and diagnostic products and hematology controls and calibrators. Its reportable segments are Biotechnology, R&D Europe and Hematology. Unless stated otherwise, financial amounts below are in U.S. dollars.
Financial performance and liquidity
| Metric | Quarter ended Sep. 30, 2010 | Prior-year quarter | Change |
|---|---|---|---|
| Net sales | $67.945 million | $66.534 million | +2.1%; +4.0% excluding currency effects |
| Gross profit / margin | $52.704 million / 77.6% | $53.633 million / 80.6% | Profit down $0.929 million; margin down 3.0 percentage points |
| Operating income | $38.363 million | $39.201 million | Down 2.1% |
| Net earnings | $26.373 million | $26.772 million | Down 1.5% |
| Diluted EPS | $0.71 | $0.72 | Down $0.01 |
| Operating cash flow | $30.703 million | $28.029 million | Up $2.674 million |
Cash and cash equivalents were $115.012 million at September 30, 2010, versus $94.139 million at June 30. Available-for-sale investments totaled $219.140 million, bringing cash, cash equivalents and investments to approximately $334 million. Current assets were $233.199 million and current liabilities $16.059 million. The company had no borrowings; its unsecured $750,000 line of credit was unused. No debt balance is reported.
Investing cash outflow was $2.365 million, including $1.052 million of capital expenditures; financing cash outflow was $10.913 million, including $9.629 million of dividends and $1.940 million for settlement of shares purchased and retired in the prior quarter. The quarterly dividend was $0.26 per share, compared with $0.25 a year earlier. Management reported a 32.3% effective tax rate, versus 32.6%.
Material changes and segment results
- Biotechnology sales rose 6.0% to $46.650 million, reflecting higher sales volume. Growth included 9.9% in academic customers, 9.0% among Pacific Rim distributors and 13.5% in China; North American industrial pharmaceutical and biotechnology sales rose 3.1%.
- R&D Europe sales fell 8.1% to $16.391 million, or 1.2% at prior-year exchange rates. Hematology sales increased 5.1% to $4.904 million.
- Consolidated gross margin declined chiefly because of R&D Europe currency translation and lower sales/product mix, as well as weaker segment margins. Biotechnology margin fell to 78.4% from 80.9%, including $220,000 of additional royalty expense and initiation fees; R&D Europe margin fell to 47.4% from 53.5%; Hematology margin fell to 48.8% from 50.3%.
- SG&A declined 6.0% to $7.552 million, partly from lower legal and profit-sharing expense and currency effects. R&D expense rose 7.6% to $6.619 million, mainly from personnel and supply costs for product development.
Outlook, risks and unusual items
Management expected the fiscal 2011 effective tax rate to be approximately 32.0%–33.0% and capital expenditures for the remainder of the fiscal year to be approximately $3.2 million. It said available funds, operating cash flow and investment maturities or sales should meet foreseeable cash and capital needs. A $0.27-per-share dividend, approximately $10 million in total, was announced for payment in November 2010.
Currency movements materially affected reported results: management estimated a $1.2 million unfavorable impact on sales and a $341,000 unfavorable impact on earnings versus the prior-year quarter. A hypothetical 10% U.S. dollar appreciation against the euro, pound and yuan would reduce annualized translated earnings by $2.074 million, translated foreign net assets by $7.687 million, and generate $469,000 of additional transaction losses. The company did not use foreign-exchange forward contracts for the identified exposures. Fixed-income investments are also exposed to interest-rate risk, though the company generally holds them to maturity.
A significant litigation matter concerns Streck patents covering reticulocyte-containing hematology controls. On September 30, 2010, the Nebraska court upheld an adverse jury verdict, reversed the patent-office interference ruling, and entered an injunction; a portion was stayed to permit sale of existing inventory through December 20, 2010. Techne said it would appeal and seek a stay pending appeal, and did not expect the matter to materially affect its consolidated financial statements. Other cited risks include product acceptance and development, customer research spending, competition and pricing, regulation and intellectual-property litigation, personnel, economic conditions, and expansion in China. Management reported no material changes to previously disclosed risk factors and concluded disclosure controls were effective.
Key facts investors should verify
- Progress and outcome of the Streck appeal, injunction stay and any effect on hematology product sales.
- Whether biotechnology growth continues and whether R&D Europe sales and margins recover from currency and mix pressure.
- Future gross margins, particularly the impact of exchange rates, product mix and licensing royalties.
- Realization of the stated tax-rate and capital-expenditure outlook, and continued cash generation and dividend funding.
- Value and maturity profile of the investment portfolio and the company’s exposure to interest-rate and foreign-exchange movements.