BIO-TECHNE CORPORATION — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended December 31, 2017. Amounts are in millions of dollars except per-share data. The company operates Biotechnology, Protein Platforms, and Diagnostics businesses serving life-science and diagnostic markets.
Financial performance
| Metric | Quarter ended Dec. 31, 2017 | Quarter ended Dec. 31, 2016 | Six months ended Dec. 31, 2017 | Six months ended Dec. 31, 2016 |
|---|---|---|---|---|
| Net sales | $154.2 | $131.8 | $298.8 | $262.4 |
| Gross margin | $101.8; 66.1% | $88.1; 66.9% | $199.7; 66.8% | $175.5; 66.9% |
| Operating income | $24.1 | $17.9 | $50.2 | $47.0 |
| Net earnings | $48.8 | $7.5 | $64.7 | $26.3 |
| Diluted EPS | $1.29 | $0.20 | $1.71 | $0.70 |
- Sales increased 17% for the quarter and 14% for the six-month period. Organic growth was 14% and 11%, respectively; acquisitions contributed 1%, and foreign currency translation contributed 2% in each period.
- Reported net earnings growth was substantially affected by a provisional $33.5 million tax benefit from the Tax Cuts and Jobs Act. Non-GAAP adjusted net earnings were $38.9 million for the quarter, up 27.8%, and $75.1 million for six months, up 21.0%.
- Quarterly gross margin declined primarily because of unfavorable product mix. Adjusted gross margin was 70.2% for the quarter versus 71.0%, and 71.1% for six months versus 71.0%.
- For six months, operating cash flow was $83.9 million, versus $67.9 million; investing cash outflow was $18.8 million, versus $301.3 million; and financing cash outflow was $35.4 million, versus financing inflow of $230.3 million.
Segments
- Biotechnology: Quarterly sales of $101.4 million, up 18%; operating margin was 45.6%, versus 45.9%. ACD RNA-ISH product sales grew over 40%.
- Protein Platforms: Quarterly sales of $29.4 million, up 36%; operating margin improved to 20.8% from 8.6%, reflecting volume leverage and operational productivity.
- Diagnostics: Quarterly sales of $23.4 million, down 4%; operating margin fell to 16.1% from 23.8%. Management cited timing of large OEM orders, product mix, and lower volume leverage.
Financial position and material changes
- At December 31, cash and cash equivalents were $121.5 million and short-term available-for-sale investments were $40.9 million. Current assets were $346.1 million and current liabilities were $111.7 million.
- Long-term debt was $362.5 million under a $400 million revolving facility maturing July 2021. The company said available cash, operating cash generation, and remaining facility capacity should cover requirements for at least the next 12 months.
- Cash and investments totaled $162.4 million, compared with $157.7 million at June 30, 2017. The CCXI investment represented $37.9 million of short-term investments, down from $59.6 million; a 10% decline in its market value would reduce fair value by about $3.8 million.
- Contingent consideration was valued at $53.3 million, including a $50.0 million expected ACD payment. A $35.0 million payment related to CyVek was made during the six months; management expected to pay the ACD amount in fiscal Q3 2018.
- Quarterly dividends were $0.32 per share. The company announced another $0.32 dividend, payable March 2, 2018. No share repurchases occurred during the quarter.
- Trevigen was acquired on September 5, 2017 for approximately $10.6 million net of cash. After the reporting date, Bio-Techne acquired Atlanta Biologicals and Scientific Ventures for approximately $50 million on January 2, 2018, and Eurocell Diagnostics for approximately $7.5 million on February 1, 2018.
Outlook, risks, and unusual items
- Excluding discrete items, management expected the consolidated income tax rate for the remainder of fiscal 2018 to be 24%–26%. The provisional Tax Act benefit included a $37.0 million deferred-tax remeasurement benefit and a $3.5 million transition-tax expense; estimates remained subject to refinement. The company had not yet reasonably estimated the GILTI provision’s effect.
- Capital expenditures were $11.6 million for the first six months; management expected approximately $11.7 million for the remainder of fiscal 2018, mainly for facility expansion and laboratory and computer equipment.
- Management cited product mix, acquisition-related costs, commercial and administrative investment, currency movements, competition, product acceptance, manufacturing operations, regulation, and investment-value fluctuations among factors that could affect results.
- The filing reports that previously identified material weaknesses in internal control over financial reporting had not been fully remediated. Management concluded disclosure controls and procedures were not effective as of December 31, 2017; further testing was needed to validate remediation.
- Comparative fiscal 2017 quarterly figures were revised for immaterial purchase-accounting errors related to the ACD acquisition. The filing states the revisions did not affect net cash flows.
Important facts for investors to verify
- How the provisional Tax Act accounting, including transition tax and GILTI treatment, is finalized and affects subsequent effective tax rates.
- Whether internal-control material weaknesses are remediated and validated through testing.
- Timing and settlement of the expected $50 million ACD contingent-consideration payment, and the assumptions behind its fair value.
- Integration, purchase accounting, and financial contribution of the recent Trevigen, Atlanta Biologicals, Scientific Ventures, and Eurocell acquisitions.
- Exposure to the volatile CCXI investment and the company’s ability to manage debt, liquidity, and foreign-exchange risks.