BIO-TECHNE CORPORATION — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2016 (first quarter of fiscal 2017); filed November 9, 2016. Amounts below are in U.S. dollars unless stated otherwise.
Business context and results
Bio-Techne supplies products and systems for life-science research and diagnostics through its Biotechnology, Diagnostics, and Protein Platforms segments. Results include Space, acquired July 1, 2016, and Advanced Cell Diagnostics (ACD), acquired August 1, 2016.
| Metric | Q1 FY2017 | Q1 FY2016 | Change / context |
|---|---|---|---|
| Net sales | $130.6 million | $112.4 million | +16%; management reported 10% organic growth, 7% acquisition contribution, and 1% adverse currency impact |
| Gross margin | $84.5 million; 64.7% | $75.4 million; 67.1% | Reported margin down 2.4 percentage points; adjusted margin was 71.0% versus 70.6% |
| Operating income | $25.4 million | $31.0 million | Down about 18% |
| Net earnings | $16.3 million | $22.7 million | Down about 28% based on the financial statements; diluted EPS was $0.43 versus $0.61 |
| Adjusted net earnings | $31.6 million | $29.4 million | Up 7.5%; company-defined non-GAAP measure |
| Operating cash flow | $26.5 million | $31.8 million | Lower year over year, primarily reflecting working-capital movements |
| Cash and available-for-sale investments | $122.0 million | $95.8 million at June 30, 2016 | Includes $38.5 million fair value of CCXI shares |
| Debt | $343.5 million long-term debt | $130.0 million at June 30, 2016 | Borrowings under new $400 million revolving facility |
| Quarterly dividend | $0.32 per share | $0.32 per share | Company announced another $0.32 dividend payable November 28, 2016 |
Segments and material changes
- Biotechnology: Sales of $86.8 million, up 15%; organic growth was 6%. Segment operating margin was 48.9% versus 51.9%, with management citing lower-margin acquisitions, including ACD.
- Diagnostics: Sales of $24.2 million, up 19%, all organic. Margin increased to 26.0% from 23.1%, aided by volume leverage; favorable timing of OEM orders also contributed to sales growth.
- Protein Platforms: Sales of $19.6 million, up 20%; organic growth was 20%. Margin improved to 1.1% from negative 7.2%, primarily from volume leverage.
- Acquisition accounting and related expenses weighed on reported results: $4.2 million of acquired-inventory costs, $10.2 million of acquisition-related intangible amortization, and $4.4 million of acquisition-related expenses were reported in segment reconciliation. SG&A also included a $1.9 million ACD contingent-consideration fair-value expense.
- Other expense was $1.3 million versus other income of $0.8 million a year earlier; interest expense rose to $1.3 million from $0.5 million, reflecting increased borrowing.
Liquidity, debt, and outlook
The company acquired ACD for approximately $250 million net of cash, plus contingent consideration of up to $75 million, and acquired Space for approximately $9 million. Acquisition spending drove investing cash outflow of $268.3 million, financed primarily by borrowings. The revolving facility matures July 28, 2021, has a $400 million commitment with a possible $200 million increase subject to conditions, and includes customary covenants. At quarter-end, reported borrowings were $343.5 million.
Management said available cash, operating cash generation, and remaining credit capacity should meet operating, investment, dividend, and working-capital needs for at least the next 12 months. Capital expenditures for the remainder of fiscal 2017 were expected to be approximately $20 million. The company expected a 30%–32% effective tax rate for the remainder of fiscal 2017, excluding contingent-consideration fair-value adjustments. No specific revenue or earnings guidance was provided in the filing.
Risks, contingencies, and unusual items
- ACD earn-outs could total up to $75 million, based on revenue thresholds for calendar 2016 and 2017; the quarter-end fair value was $40.1 million. Zephyrus and CyVek also have contingent consideration, with disclosed fair values of $6.9 million and $35 million, respectively.
- The $38.5 million CCXI investment is exposed to market-price volatility; a hypothetical 10% decline would reduce fair value by approximately $3.8 million. Foreign currency movements also pose risk; 28% of quarterly sales were made in foreign currencies.
- Management identified acquisition integration, competition, product acceptance, manufacturing reliance, currency movements, regulation, intellectual property, and investment-portfolio risks, among others. The filing reported no material legal proceedings and no material change to previously disclosed risk factors.
- Control weakness: Previously identified material weaknesses in internal control over financial reporting had not been remediated as of September 30, 2016. Management concluded disclosure controls and procedures were not effective; remediation and testing were ongoing.
- The filing’s discussion says net earnings declined 20%, but the reported statements show $16.3 million versus $22.7 million, a decline of about 28%. The MD&A also gives operating cash flow as $26.1 million and $31.9 million, while the cash-flow statement reports $26.5 million and $31.8 million. These differences should be reconciled.
Most important facts for investors to verify
- Reconcile the filing’s stated net-earnings decline and operating-cash-flow figures with the financial statements.
- Track whether ACD and other acquisitions deliver expected growth and whether acquisition-related charges and lower segment margins moderate.
- Review debt repayment capacity, facility covenant headroom, and the timing and amount of contingent-consideration payments.
- Assess the valuation and concentration risk of the CCXI investment and the impact of currency movements.
- Monitor remediation and independent testing of the disclosed material weaknesses in internal control.