Bio-Techne Corporation — FY2017 Form 10-K
Period note: The filing covers the fiscal year ended June 30, 2017, with quarterly data including Q4 FY2017. This differs from the request metadata’s “2016 Q4.” Unless noted otherwise, amounts below are U.S. dollars.
Business context and reporting period
Bio-Techne develops, manufactures and sells biotechnology research tools, protein-analysis instruments and consumables, and clinical diagnostic controls and reagents. Its reporting segments are Biotechnology, Protein Platforms and Diagnostics. FY2017 sales mix was 65%, 16% and 19%, respectively. The year included the acquisitions of Advanced Cell Diagnostics (ACD) and Space Import-Export.
Financial performance and liquidity
| Metric | FY2017 | FY2016 | Change or context |
|---|---|---|---|
| Net sales | $563.0 million | $499.0 million | Up 13%; organic growth 6%, acquisitions +8%, currency −1% |
| Gross margin | 66.5% | 67.5% | Adjusted for acquired-inventory costs and intangible amortization: 71.2% vs. 70.8% |
| Operating income | $120.6 million | $150.6 million | Down 20% |
| Net earnings | $76.1 million | $104.5 million | Down 27% |
| Diluted EPS | $2.03 | $2.80 | Down 28% |
| Operating cash flow | $143.4 million | $143.9 million | Approximately flat; capital expenditures were $15.2 million |
| Cash, cash equivalents and short-term investments | $157.7 million | $95.8 million | Includes $59.6 million fair value of ChemoCentryx investment |
| Long-term debt | $343.8 million | $91.5 million | Borrowings principally supported ACD acquisition and investment activity |
| Working capital | $212.5 million | $199.7 million | Up from prior year |
Segment sales were $364.5 million in Biotechnology (+15%), $91.5 million in Protein Platforms (+18%) and $107.1 million in Diagnostics (+3%). Protein Platforms’ organic growth was 19%; Diagnostics was affected by the timing of OEM shipments. FY2017 non-GAAP adjusted net earnings were $139.5 million, up 4% from $134.3 million; this measure excludes, among other items, acquisition-related costs, acquired-intangible amortization and stock-based compensation.
Q4 FY2017 sales were $156.6 million versus $134.8 million in Q4 FY2016; net earnings were $27.6 million versus $25.6 million.
Material changes versus the prior comparable year
- Sales growth reflected both 6% organic growth and acquisitions, particularly ACD; the company reported growth in all three segments.
- GAAP earnings fell despite higher sales. SG&A rose $59.6 million, including acquisition-related costs, higher contingent-consideration valuation expense, amortization and increased commercial and administrative investment. Net interest expense increased to $7.1 million from $1.5 million.
- FY2017 included an $18.4 million increase in the fair value of contingent consideration and $4.5 million of related nondeductible tax expense. The effective tax rate rose to 32.0% from 29.2%.
- Cash and investments increased, while debt rose substantially following the ACD acquisition. The company drew $368.5 million and repaid $116.5 million on its credit facility during the year.
Outlook, risks and unusual items
- No specific FY2018 revenue or earnings guidance is provided. Management cited ongoing product innovation, international expansion, operational efficiencies and targeted acquisitions as strategic priorities. Planned FY2018 capital additions were approximately $23.8 million; management expected available cash, operating cash generation and credit availability to meet foreseeable needs.
- The $400 million revolving credit facility matures July 2021 and carries variable interest. Covenants include minimum interest coverage of 3.0x and maximum total leverage of 3.5x. Debt may limit financial flexibility and increase exposure to rate rises; default could restrict dividends.
- Management and the auditor identified material weaknesses in internal control over financial reporting, involving monitoring, information flow and IT general controls, especially at certain acquired businesses. Management and the auditor concluded controls were ineffective at June 30, 2017; the auditor issued an adverse opinion on internal controls, but an unqualified opinion on the financial statements. Management expected remediation during FY2018, subject to successful implementation and testing.
- In Q4, the company corrected purchase-accounting errors related to ACD that affected previously reported quarterly cost of sales, SG&A, interest and tax amounts. Management said the errors were not material to individual prior quarters and that there was no impact to FY2017 year-to-date GAAP results. The filing also reports goodwill of $579.0 million, or 37% of total assets; the annual impairment test found substantial headroom, but estimates are sensitive to forecasts and discount rates.
- Key business risks include acquisition integration and impairment, competitive and pricing pressures, customer research funding and OEM order timing, foreign exchange, global operations, intellectual-property claims, cybersecurity and operational disruption. The filing reports no legal proceedings expected to have a material adverse effect.
- After year-end, CyVek met a revenue milestone, resulting in a $34.0 million payment in July 2017; Bio-Techne acquired Trevigen for approximately $11.0 million in September 2017.
Most important facts for investors to verify
- Whether the internal-control remediation plan was completed and independently tested in FY2018, and whether acquired businesses were brought within the control framework.
- How much future earnings and cash flow are affected by acquired-intangible amortization, acquisition costs and contingent-consideration remeasurements, alongside the company’s non-GAAP adjustments.
- Debt repayment pace, variable-rate exposure, covenant headroom and the cash requirements for acquisition-related and other contingent payments.
- Whether organic growth, especially Protein Platforms growth and Diagnostics OEM demand, persisted after FY2017; distinguish organic performance from acquisition-driven growth.
- The valuation and liquidity risks of the $59.6 million ChemoCentryx holding and the $40.0 million Astute Medical investment.