Business context and reporting period
Techne Corporation (identified in the request as BIO-TECHNE Corp.) filed this unaudited Form 10-Q for the quarter and six months ended December 31, 2010, its fiscal 2011 second quarter. 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.
Financial results and position
Unless otherwise noted, amounts are in millions of dollars. Quarter and six-month comparisons are against the corresponding prior-year periods.
- Revenue: Second-quarter sales were $67.7 million, up 3.3% (5.1% excluding currency effects). Six-month sales were $135.7 million, up 2.7% (4.5% excluding currency effects).
- Profit: Quarterly net earnings were $26.5 million, up 7.3%, and diluted EPS was $0.71 versus $0.66. Six-month net earnings were $52.9 million, up 2.7%, and diluted EPS was $1.42 versus $1.38.
- Margins: Consolidated gross margin was 77.5% for the quarter, down from 79.7%, and 77.5% for six months, down from 80.1%. Operating income was $37.4 million for the quarter and $75.7 million for six months.
- Cash flow: Operating cash flow for six months was $60.1 million, compared with $56.3 million. Investing activities used $2.6 million; financing activities used $18.0 million, including $19.6 million of dividends.
- Liquidity and debt: Cash and cash equivalents were $135.9 million and available-for-sale investments totaled $217.7 million, or about $353.5 million combined, at December 31. Current assets were $253.6 million and current liabilities $13.7 million. The filing reports no borrowings on its $750,000 unsecured credit line in the current or prior fiscal year; no other debt balance is reported.
- Capital returns: The company paid $0.53 per share in dividends during the six months and announced a further $0.27-per-share dividend payable February 28, 2011. It also paid $1.9 million to settle shares repurchased in the prior fiscal year; no shares were repurchased during the reported quarter.
Material changes versus the prior comparable period
- Biotechnology sales increased 4.8% in the quarter and 5.4% for six months, supported by higher sales volume. China sales grew 19.2% and 16.4%, respectively. Hematology sales rose 7.0% and 6.0%.
- R&D Europe sales declined 0.7% in the quarter and 4.3% for six months as reported, but increased 5.5% and 2.2% at prior-year exchange rates. Currency translation reduced consolidated sales by $1.2 million for the quarter and $2.4 million for six months.
- Lower gross-margin percentages reflected product mix, currency effects, and new biotechnology licensing costs. R&D Europe and Hematology margins also declined year over year.
- SG&A declined 7.1% for the quarter and 6.6% for six months, reflecting lower legal, catalog-printing, and other costs. R&D expense increased 3.3% and 5.4%, mainly due to personnel and supply costs for product development.
- The effective tax rate fell to 29.6% for the quarter and 31.0% for six months, versus 32.6% in both prior-year periods. A $898,000 benefit from renewal of the U.S. R&D credit included $659,000 attributable to earlier periods.
Outlook, commentary, risks and unusual items
- Management expected a fiscal 2011 effective tax rate of approximately 31%–32% and about $3.7 million of capital expenditures in the remainder of the fiscal year.
- Management stated that available funds, operating cash generation, and investment maturities or sales should meet foreseeable cash, working-capital, capital, dividend, repurchase, investment, and acquisition needs.
- Key risks cited include foreign-exchange movements, product acceptance and customer research spending, competition and pricing, regulation and intellectual-property litigation, product-development results, and the company’s expansion in China. Management quantified a hypothetical 10% U.S. dollar appreciation against the euro, pound, and yuan as reducing annualized translated earnings by $2.2 million, foreign net assets by $8.1 million, and causing $422,000 of additional transaction losses.
- Streck patent litigation remains a notable contingency. A court upheld an adverse jury verdict and reversed the USPTO interference ruling; an injunction barred making and selling the products at issue, with a temporary inventory-sale allowance through December 20, 2010. The company appealed and stated it did not expect resolution to materially affect its consolidated financial statements.
- Available-for-sale fixed-income securities were $218 million and are exposed to interest-rate risk. The company generally holds them to maturity. It reported no material change in contractual obligations and no material change to previously disclosed risk factors.
Important facts for investors to verify
- Track whether sales growth, particularly in Biotechnology and China, continues and whether R&D Europe’s reported results remain affected by currency translation.
- Assess whether gross-margin pressure from product mix, royalties, and exchange rates persists.
- Verify the outcome and commercial impact of the Streck litigation and injunction appeal.
- Check the sustainability of the lower effective tax rate, including the effect of the R&D credit and production-activities deduction.
- Monitor liquidity and the composition, maturity, and interest-rate exposure of the substantial investment portfolio, as well as planned capital spending and shareholder distributions.