Business context and reporting period
TECHNE Corporation (now associated with the BIO-TECHNE name) filed this Form 10-K for the fiscal year ended June 30, 2012. The filing is an annual report, not a report for calendar-year 2011 Q4. The company develops and sells biotechnology research and diagnostic products and hematology controls and calibrators. Biotechnology contributed 93% of sales; hematology contributed 7%.
Financial performance
| Metric | FY2012 | FY2011 | Change / context |
|---|---|---|---|
| Net sales | $314.6 million | $290.0 million | Up 8.5%; organic growth was 1.8%, excluding acquisitions and currency effects. |
| Gross margin | 75.0% | 77.6% | Adjusted for acquired-inventory costs and acquired-intangible amortization: 78.4% vs. 78.5%. |
| Operating income | $166.2 million | $163.1 million | Operating margin was 52.8% vs. 56.2%. |
| Net earnings | $112.3 million | $112.3 million | Essentially flat. |
| Diluted EPS | $3.04 | $3.02 | Up slightly. |
| Operating cash flow | $126.7 million | $127.2 million | Nearly unchanged. |
| Cash, cash equivalents and short-term available-for-sale investments | $269.0 million | $140.8 million | Balance-sheet subtotal; total cash and available-for-sale investments, including long-term securities, was about $413.0 million. |
| Working capital / current ratio | $310.8 million / 9.7 | $212.2 million / 12.7 | Strong liquidity; current ratio declined. |
| Debt | No borrowings | No borrowings | $750,000 unsecured credit line was available and unused. |
The company paid $41.0 million in dividends and repurchased $23.6 million of shares in FY2012. Capital expenditures were $6.0 million. Research and development expense was $27.9 million, or 8.9% of sales.
Material changes versus the prior comparable period
- Reported sales growth included $19.4 million of sales from Boston Biochem and Tocris, acquired in April 2011. Organic growth slowed to 1.8% from 5.9% in FY2011.
- Biotechnology organic sales rose 1.3%; China grew 21.6%, while U.S. academic sales fell 5.1% and Europe declined 1.5%. Hematology sales increased 8.2%.
- Gross margin fell mainly because acquisition accounting caused $7.6 million of acquired-inventory costs and $5.1 million of intangible amortization to be recognized. SG&A rose 16.1%, reflecting acquired operations, amortization, and other costs.
- FY2012 included $3.3 million of investment impairment losses and a $3.0 million tax benefit from reversing a deferred-tax valuation allowance. Reported effective tax rate was 30.7%; excluding that benefit, management reported 32.6%.
- The CCXI investment converted to publicly traded common stock after its February 2012 IPO. At June 30, 2012 it was valued at $94.7 million, including a $65.2 million unrealized gain.
Outlook, risks and unusual items
- Management expected FY2013 income tax rates of 31%–33% and estimated approximately $250,000 in medical-device excise tax for FY2013.
- Planned FY2013 capital additions were $43.1 million, including Minneapolis renovations and a new Tocris facility in Bristol, UK, expected to be completed in FY2014. Management expected to fund spending from available cash and operating cash flow.
- Product development remains central to growth: 1,800 new biotechnology products were introduced in FY2012. The filing provides no specific revenue or earnings guidance.
- Key risks include reliance on customer research spending and government funding, intense competition and pricing pressure, foreign-exchange exposure, Eurozone uncertainty, manufacturing disruption, regulatory requirements, and successful integration of acquisitions.
- CCXI’s value is exposed to clinical and commercial development risk, share-price volatility, limited trading, and possible dilution. The filing also recorded impairment write-offs of $2.4 million for Nephromics and $854,000 for ACTGen.
- Patent litigation with Streck resulted in an affirmed permanent injunction affecting certain reticulocyte-containing hematology controls. The company paid $170,000 in June 2012 to satisfy the judgment and court costs.
- Management reported effective disclosure controls and internal control over financial reporting; the auditor gave an unqualified opinion on the financial statements and internal controls.
Important facts for investors to verify
- Confirm how much future growth is organic rather than acquisition-driven, particularly given FY2012 organic sales growth of 1.8%.
- Track margin recovery as acquired-inventory charges and acquisition-related amortization decline, and assess the ongoing effect of higher SG&A.
- Review the valuation and liquidity of the $94.7 million CCXI holding and the sensitivity of reported equity and earnings to market-price changes.
- Assess execution and funding for the $43.1 million planned capital program, while monitoring dividends, repurchases, and cash generation.
- Monitor the consequences of the Streck injunction for hematology products, along with regulatory costs, including the medical-device excise tax.