Bio-Techne (Techne Corporation) — Form 10-Q Summary
Business context and period: The filing is for the quarter and nine months ended March 31, 2014 (fiscal Q3 2014), not 2013 Q3 as indicated in the request metadata. The unaudited company operates Biotechnology and Clinical Controls segments. Amounts below are in U.S. dollars; financial figures are rounded to millions unless noted.
Financial performance and position
| Metric | Quarter ended March 31, 2014 | Prior-year quarter | Nine months ended March 31, 2014 | Prior-year nine months |
|---|---|---|---|---|
| Net sales | $95.6 million | $81.0 million | $265.2 million | $231.1 million |
| Operating income | $45.8 million | $43.9 million | $120.9 million | $118.7 million |
| Net earnings | $31.6 million | $33.1 million | $84.1 million | $84.2 million |
| Diluted EPS | $0.85 | $0.90 | $2.27 | $2.28 |
| Gross margin | 71.3% | 75.5% | 70.8% | 74.4% |
| Operating cash flow | — | $98.8 million | $93.6 million |
- Quarterly sales rose 18.0%; nine-month sales rose 14.8%. Organic sales growth, excluding Bionostics and currency effects, was 5.3% for the quarter and 3.6% for the nine months.
- Quarterly net earnings fell 4.5%; nine-month net earnings were essentially unchanged. The quarter’s effective tax rate was 31.3%, versus 25.5% a year earlier; the nine-month rates were 31.0% and 29.8%.
- Reported gross margin declined year over year. Excluding acquired-inventory charges and intangible amortization, adjusted gross margin was 73.6% for the quarter and nine months, versus 77.7% and 76.9%, respectively, in the comparable periods.
- Cash and cash equivalents were $123.6 million at March 31, 2014; available-for-sale investments totaled $247.9 million, for combined cash and investments of about $371 million. Total current assets were $319.5 million and current liabilities $24.4 million.
- Cash and investments were about $94 million lower than at June 30, 2013, principally reflecting the $103.1 million Bionostics acquisition and changes in investment balances. The company reported no debt line item in the balance-sheet figures provided; the filing text does not give a separate debt total.
- For the nine months, investing cash outflow was $114.0 million, including the acquisition and $11.7 million of capital expenditures. Financing cash outflow was $28.8 million, including $33.9 million of dividends. Quarterly and nine-month dividends per share were $0.31 and $0.91.
Material changes and notable items
- Bionostics acquisition: Acquired for $103.1 million net cash on July 22, 2013. It contributed $9.3 million of quarterly and $23.5 million of nine-month sales. Its Clinical Controls segment helped drive segment sales growth, while acquisition-related inventory charges and amortization weighed on margins and earnings.
- Biotechnology sales increased 6.4% for the quarter and 4.4% for the nine months. Clinical Controls sales increased substantially with the acquisition; excluding Bionostics, growth was 7.1% and 7.0%, respectively.
- SG&A rose 46.9% in the quarter and 39.5% for the nine months, reflecting Bionostics, amortization, acquisition-related professional fees, higher stock compensation, and investment in commercial and administrative resources. R&D rose 6.3% and 5.6%; management expects R&D spending to continue increasing.
- Available-for-sale investments included a ChemoCentryx (CCXI) position valued at $42.1 million, down from $89.6 million at June 30, 2013. The nine-month statement reported a $30.4 million after-tax unrealized investment loss within other comprehensive income.
- Subsequent event: On April 1, 2014, the company invested $10 million for about 20% of CyVek. If commercial milestones are met within 12 months, it may acquire CyVek for an initial $60 million, with potential additional payments of up to $35 million and a further revenue-based payment.
Outlook, risks, and controls
- Management said available funds, operating cash generation, and investment maturities or sales should cover cash and working-capital needs, capital additions, dividends, and investments for at least 12 months. Remaining fiscal 2014 capital expenditures were expected to be about $2.8 million.
- Management expected a 30%–32% tax rate for the remainder of fiscal 2014 and expected R&D and SG&A expenses to increase. The filing provides no specific sales or earnings guidance.
- Risks discussed include product acceptance and competition, international economic conditions and currency movements, manufacturing reliance, regulation, intellectual property, investment portfolio credit and market risk, and execution of facility improvements. A hypothetical 10% U.S. dollar appreciation would reduce annualized earnings translation by $2.6 million and foreign net asset translation by $17.0 million; the filing also estimates $1.1 million of additional transaction losses.
- Material control weakness: Disclosure controls were deemed ineffective because of weaknesses in general IT controls over financial-system access and program changes, potentially affecting revenue and accounts-receivable information. Management performed additional procedures and aimed to complete remediation testing by fiscal year-end 2014; it concluded the presented financial statements were fairly stated.
- The company reported no legal proceedings expected to have a material adverse effect and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether organic growth, particularly weakness in U.S. academic sales, persists after separating acquisition and currency effects.
- How quickly Bionostics-related inventory charges and amortization fade, and whether Clinical Controls margins recover.
- Progress and independent confirmation of remediation of the IT-control material weakness.
- CCXI investment valuation and the potential cash commitments and milestone conditions associated with CyVek.
- Cash and investment levels, foreign-currency exposure, and the company’s ability to sustain planned dividends and investment spending.