Business context and reporting period
Bio-Techne Corporation develops and sells biotechnology research and diagnostic products, clinical controls and protein-analysis instruments. This Form 10-K reports the fiscal year ended June 30, 2016, with comparisons to fiscal 2015 and 2014; the request metadata’s “2015 Q4” does not match the filing period.
Fiscal 2016 revenue mix was Biotechnology 64%, Clinical Controls 21% and Protein Platforms 15%. The company acquired Cliniqa in July 2015 and Zephyrus in March 2016. After year-end, it acquired Italian distributor Space and Advanced Cell Diagnostics (ACD).
Financial performance and liquidity
| Metric | FY2016 | FY2015 |
|---|---|---|
| Net sales | $499.0 million | $452.2 million |
| Operating income | $150.6 million | $147.0 million |
| Net earnings | $104.5 million | $107.7 million |
| Diluted EPS | $2.80 | $2.89 |
| Operating cash flow | $143.9 million | $139.4 million |
| Capital expenditures | $16.9 million | $19.9 million |
- Reported gross margin was 67.5%, compared with 67.9%; adjusted gross margin, excluding acquired-inventory charges and intangible amortization, was 70.8% versus 71.6%.
- Cash, cash equivalents and short-term available-for-sale investments totaled $95.8 million at June 30, 2016, down from $110.9 million. Working capital was $199.7 million, versus $208.5 million.
- Long-term debt obligations were $91.5 million at year-end; the balance sheet also reported $3.8 million of current related-party notes payable. The company generated $143.9 million in operating cash flow and paid $47.6 million in dividends.
- Adjusted net earnings, a non-GAAP measure, were $134.3 million, up 3% from $130.8 million. The company cautions that adjusted measures are not substitutes for GAAP results.
Changes versus the prior comparable period
- Sales grew 10% overall: 6% organic growth, a 6% contribution from acquisitions and a 2% adverse currency impact. Growth was reported in all three segments.
- Biotechnology sales rose 3% to $317.3 million; organic growth was 6%, partly offset by currency. Clinical Controls sales rose 34% to $104.5 million, with $26.6 million from Cliniqa. Protein Platforms sales rose 17% to $77.3 million, including 14% organic growth.
- GAAP net earnings fell 3% and diluted EPS declined from $2.89 to $2.80, despite higher sales. Management attributed adjusted earnings growth to revenue gains, partly offset by product mix and currency effects.
- Acquisition-related intangible amortization, acquired-inventory costs, stock-based compensation and acquisition expenses weighed on reported results. FY2016 also lacked the $8.3 million non-taxable CyVek investment gain recorded in FY2015.
Outlook, risks and unusual items
- Management said it expected available funds, operating cash generation and credit availability to cover operating needs, facility expansion, capital additions and dividends for at least the next 12 months. Planned FY2017 capital additions were approximately $20 million. The filing gives no specific revenue or earnings guidance.
- Following the ACD acquisition on August 1, 2016, Bio-Techne entered a new $400 million revolving credit facility and had drawn $250 million by August 26, 2016. ACD consideration was $250 million cash plus up to $75 million contingent consideration. This materially increased financing and variable-rate debt exposure after year-end.
- The filing identifies a material weakness in internal controls over financial reporting, including deficiencies in IT general controls and controls over completeness and accuracy of financial data. Management and the auditor concluded controls were ineffective at June 30, 2016; the auditor issued an adverse opinion on internal controls, while issuing an unqualified opinion on the financial statements. Remediation was planned for fiscal 2017, but not yet established as effective.
- Management reported that the new ERP system, implemented at Minneapolis in July 2016, had disrupted shipping and invoicing and was expected to affect revenue in the short term; further rollout could create additional disruption.
- Other stated risks include acquisition integration and impairment, foreign exchange and international market exposure, research-funding and reimbursement pressures, competition, product development and regulatory requirements, intellectual-property disputes, and dependence on manufacturing and suppliers. The company reported no legal proceedings expected to have a material adverse effect.
- The company’s 14% investment in ChemoCentryx was valued at $28.6 million at June 30, 2016, down from $52.3 million a year earlier; management treated the decline as temporary. The filing also notes $24 million of excess protein, antibody and chemical inventory not valued because of uncertainty over salability.
Important facts for investors to verify
- Whether the material weakness is remediated and whether ERP implementation and controls operate effectively after fiscal year-end.
- ACD’s post-acquisition revenue contribution, integration progress, contingent consideration and resulting debt, interest expense and covenant headroom.
- Underlying segment growth and margins, especially the effects of acquisition mix, currency, research funding and clinical reimbursement pressures.
- Cash conversion, working-capital trends, valuation of the ChemoCentryx investment and realizability of acquired goodwill and intangible assets.