Bio-Techne Corporation — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended December 31, 2016. The interim financial statements are unaudited. Bio-Techne serves life-science and diagnostic markets through Biotechnology, Diagnostics, and Protein Platforms.
Financial performance
| Metric | Quarter ended Dec. 31, 2016 | Six months ended Dec. 31, 2016 |
|---|---|---|
| Net sales | $131.8 million; +9% year over year | $262.4 million; +12.5% year over year |
| Gross margin | 64.6%, versus 67.5% | 64.6%, versus 67.3% |
| Operating income | $16.1 million, versus $36.0 million | $41.6 million, versus $67.1 million |
| Net earnings | $6.3 million, versus $25.9 million | $22.6 million, versus $48.6 million |
| Diluted EPS | $0.17, versus $0.69 | $0.60, versus $1.30 |
| Operating cash flow | Not presented separately for the quarter | $67.7 million, versus $70.4 million |
Quarterly sales growth was 2% organic, with acquisitions contributing 8% and foreign exchange reducing growth by 1%. For the six-month period, organic growth was 6%; acquisitions contributed 8% and foreign exchange reduced growth by 1%. The filing’s rounded six-month growth descriptions vary; reported sales imply growth of approximately 12.5%.
Company-defined adjusted net earnings, a non-GAAP measure, were $30.4 million for the quarter (down 7.4%) and $62.1 million for six months (down 0.3%). These figures exclude specified acquisition, amortization, stock-compensation, and tax effects and should not be treated as GAAP results.
Segments and material changes
- Biotechnology: Quarterly sales rose 13% to $86.0 million; organic growth was 2%. Segment operating margin fell to 45.9% from 52.7%, mainly reflecting the lower margins of acquisitions, including ACD.
- Diagnostics: Quarterly sales declined 5% to $24.3 million, with OEM order timing cited; six-month sales rose 5%. Quarterly operating margin declined to 23.8% from 28.4%.
- Protein Platforms: Quarterly sales rose 11% to $21.5 million; organic growth was 12%, with strength including the Maurice instrument. Operating margin improved to 8.6% from 7.9%.
Reported earnings declined substantially as acquisition-related intangible amortization, acquired-inventory costs, acquisition expenses, and contingent-consideration remeasurement increased. In the quarter, these included $11.6 million of intangible amortization, $3.8 million of acquired-inventory costs, $10.7 million of acquisition-related expenses, and a $10.5 million contingent-consideration fair-value charge. Gross margin excluding acquired-inventory costs and acquisition-related intangible amortization was 71.0% for both the quarter and six-month period, compared with 70.8% and 70.7%, respectively, in the prior-year periods.
Acquisitions included Space Import-Export, acquired July 1, 2016 for approximately $9 million, and Advanced Cell Diagnostics (ACD), acquired August 1 for approximately $250 million plus up to $75 million contingent consideration. Purchase-price allocations remained preliminary. The company also invested $40 million in Astute Medical in December.
Cash, debt, liquidity, and outlook
- At December 31, cash and cash equivalents were $58.9 million and short-term available-for-sale investments were $56.6 million. Current assets were $294.1 million and current liabilities $120.3 million.
- Long-term debt was $343.7 million, principally borrowings under a new $400 million revolving credit facility maturing in July 2021. The facility can be increased by $200 million subject to conditions. The company drew $368.4 million and repaid $116.5 million on credit lines during the six months.
- Six-month investing cash outflow was $301.3 million, including $255.9 million net cash paid for acquisitions and the $40.0 million Astute investment. Financing cash inflow was $230.4 million; dividends paid were $23.9 million. Cash ended the period at $58.9 million.
- Management expected available cash, operating cash generation, and remaining credit capacity to cover operating needs, facility expansion, capital additions, and dividends for at least the next 12 months. Capital expenditures for the remainder of fiscal 2017 were expected to be approximately $10 million.
- Excluding the effect of contingent-consideration fair-value adjustments, management expected a 30%–32% consolidated income-tax rate for the remainder of fiscal 2017. No specific revenue or earnings guidance was provided.
Risks, contingencies, and controls
- The effective tax rate was 53.4% for the quarter and 40.0% year to date, including $4.5 million of net discrete tax expense; the filing attributes a substantial portion to nondeductible contingent-consideration revaluation.
- Total contingent consideration had a fair value of $92.1 million at December 31, including obligations tied to ACD, CyVek, and Zephyrus. Final payments depend on revenue or sales milestones and could differ from current estimates.
- The $47.1 million fair value of the ChemoCentryx investment was exposed to market-price changes; a 10% decline would reduce fair value by approximately $4.7 million. About 27% of six-month sales were in foreign currencies, creating translation and transaction exposure.
- Management cited decelerating U.S. bio/pharma demand, temporarily weaker China demand amid pending immunotherapy regulation, and timing-related Diagnostics OEM orders. Other stated risks include competition, product acceptance, foreign exchange, regulation, intellectual property, and investment-market or credit risk.
- Disclosure controls and procedures were deemed ineffective at December 31, 2016 because previously identified material weaknesses in internal control over financial reporting had not yet been remediated and tested. Management expected substantial remediation work by the third quarter of fiscal 2017 and final effectiveness testing by fiscal year-end.
Important facts for investors to verify
- Whether ACD and other acquisitions deliver the expected growth and whether their purchase-price allocations or contingent-payment estimates change.
- Underlying organic sales trends and segment margins, especially Biotechnology demand in China and Diagnostics OEM order timing.
- Progress in remediating the disclosed material weaknesses and the results of final control testing.
- Debt repayment capacity, remaining revolver availability, and the effect of variable interest rates and contingent payments on liquidity.
- Changes in the CCXI investment’s market value, foreign-exchange exposure, and the company’s realized tax rate.