Business context and reporting period
Techne Corporation (the registrant named in this filing) filed this Form 10-K for the fiscal year ended June 30, 2013. The request metadata identifies 2012 Q4, but the filing is an annual report for fiscal 2013; the fourth-quarter figures below are for fiscal 2013 and are compared with fiscal 2012 Q4. The company operated biotechnology and clinical controls segments; biotechnology generated 93% of annual sales.
Financial performance and position
| Metric | FY2013 | FY2012 |
|---|---|---|
| Net sales | $310.6 million | $314.6 million |
| Gross margin | 74.4% | 75.0% |
| Operating income | $158.5 million | $166.2 million |
| Net earnings | $112.6 million | $112.3 million |
| Diluted EPS | $3.05 | $3.04 |
| Cash from operating activities | $123.6 million | $126.7 million |
| Capital expenditures | $22.5 million | $6.0 million |
| Cash dividends paid | $43.5 million | $41.0 million |
At June 30, 2013, cash and cash equivalents were $163.8 million, short-term available-for-sale investments were $169.2 million, and long-term available-for-sale investments were $132.4 million—about $465.3 million combined. Working capital was $377.4 million and the current ratio was 12.8. The balance sheet reports no debt. Total assets were $778.1 million and shareholders’ equity was $737.5 million.
Fiscal 2013 Q4 net sales were $79.5 million versus $78.7 million in fiscal 2012 Q4; net earnings were $28.4 million versus $27.2 million, and diluted EPS was $0.77 versus $0.74.
Material changes versus the prior year
- Annual sales declined 1.3%; management’s currency-adjusted organic sales measure declined 0.4%. Biotechnology sales fell 1.8%, while clinical controls sales rose 5.3%.
- Operating income declined about 4.7%, and gross margin fell 0.6 percentage point. Acquisition-related inventory charges and intangible amortization reduced reported gross margin; adjusted gross margin, a non-GAAP measure, was 76.8% versus 78.4%.
- Net earnings were nearly flat, up about 0.2%. FY2013 included $4.5 million of acquired-inventory costs; FY2012 included $7.6 million of such costs, $3.3 million of investment impairments, and a $3.0 million tax benefit from reversing a deferred-tax valuation allowance.
- Research and development spending rose to $29.3 million, or 9.4% of sales; the company introduced about 2,100 new biotechnology products.
- Capital expenditures rose substantially, chiefly reflecting $18.0 million spent on Minneapolis building renovation. FY2014 capital additions were planned at approximately $16 million.
Outlook, risks and unusual items
- Management expected FY2014 income tax rates of 30%–32%, planned additional product releases, and stated that available funds, operating cash flow and investment maturities should meet foreseeable cash and working-capital needs. No revenue or earnings guidance was provided.
- On July 22, 2013, after year-end, the company acquired Bionostics for approximately $104 million in cash, subject to a working-capital adjustment. It will join the clinical controls segment.
- The company held about 15% of ChemoCentryx (CCXI). The investment’s reported June 30 fair value was $89.6 million; by August 26, 2013, its market value had fallen to $51.2 million. The filing flags volatility and potential further loss in value.
- Management and the auditor identified a material weakness in IT general controls affecting financial applications and system-generated information, including revenue and receivables. Management said additional procedures supported the reported statements, but concluded internal control over financial reporting and disclosure controls were ineffective at June 30, 2013. A remediation plan was underway.
- Other material risks include dependence on new products and research funding, competitive and pricing pressure, foreign-currency exposure, Eurozone uncertainty, regulatory compliance, manufacturing disruption, and investment-market risk. A hypothetical 10% U.S. dollar appreciation against key currencies was estimated to reduce translated earnings by $2.4 million.
- The filing reported no legal proceedings expected to have a material adverse effect and no material off-balance-sheet arrangements. CCXI’s post-year-end share-price decline and acquisition of Bionostics are significant subsequent events.
Important facts for investors to verify
- Whether the IT-control material weakness has been remediated and whether subsequent filings report any related corrections or control deficiencies.
- Post-acquisition Bionostics results, final purchase accounting and the effect of the approximately $104 million cash purchase on liquidity and returns.
- CCXI’s subsequent valuation, concentration in the investment portfolio, and sensitivity of reported earnings and equity to its share price.
- Whether biotechnology organic sales recover, particularly in U.S. academic and industrial markets, and whether clinical controls growth continues.
- How much of the margin decline reflects recurring operating pressures versus acquisition-related inventory costs and intangible amortization.
- Execution and remaining cost of the Minneapolis renovation and the company’s FY2014 capital spending plan.