TECHNE Corporation (now BIO-TECHNE) — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2012, the first quarter of fiscal 2013. Amounts are in U.S. dollars; financial statement amounts are in thousands unless stated otherwise.
Business context
The company develops, manufactures, and sells biotechnology products and hematology calibrators and controls. It reports two segments: biotechnology and hematology. The filing was submitted under the name TECHNE Corporation.
Financial performance
| Metric | Quarter ended Sep. 30, 2012 | Prior-year quarter | Change |
|---|---|---|---|
| Net sales | $75.0 million | $77.6 million | Down 3.3% |
| Gross margin | $55.6 million; 74.1% | $58.4 million; 75.2% | Margin down 1.1 percentage points |
| Operating income | $37.8 million | $40.9 million | Down 7.7% |
| Net earnings | $25.7 million | $27.5 million | Down 6.7% |
| Diluted EPS | $0.70 | $0.74 | Down 5.4% |
| Operating cash flow | $29.3 million | $34.4 million | Down $5.2 million |
Biotechnology sales were $69.5 million, down 3.9%; hematology sales were $5.5 million, up 4.3%. Biotechnology gross margin was 76.1%, versus 77.2%; hematology gross margin was 48.5%, versus 48.2%. The company paid dividends of $0.28 per share during the quarter, compared with $0.27 a year earlier.
Financial position and liquidity
- At September 30, cash and cash equivalents were $130.8 million; available-for-sale investments totaled $274.0 million. Combined cash and investments were approximately $405 million, compared with $413 million at June 30, 2012.
- Current assets were $350.1 million and current liabilities were $22.9 million. The balance sheet lists no borrowings or other debt; verify whether any debt exists outside the presented balance-sheet lines.
- Shareholders’ equity was $680.6 million. Total assets were $712.6 million.
- Operating cash flow was $29.3 million; capital expenditures were $2.5 million. Investing activities used $5.9 million and financing activities used $10.7 million. Cash increased by $14.1 million to $130.8 million.
- The company said available funds, operating cash generation, and investment maturities or sales should meet its needs for at least the next 12 months.
Material changes and management commentary
- Management attributed $1.9 million of the sales decline to unfavorable foreign-exchange movements; excluding currency effects, consolidated sales fell 0.9%. The quarter also had one fewer selling day.
- Biotechnology sales declined in U.S. industrial, pharmaceutical and biotechnology customers (down 5.0%) and U.S. academic customers (down 4.0%); China grew 25.1% and Europe grew 3.1%, excluding currency effects.
- Research and development expense increased 11.8% to $7.5 million, mainly from personnel and supply costs related to development and launch of biotechnology products. Selling, general and administrative expense decreased 4.1%, primarily due to lower profit-sharing expense.
- Operating cash flow declined from the prior-year quarter, mainly because of lower earnings and timing differences in receipts and payments.
- The fair value of the company’s ChemoCentryx (CCXI) investment was $73.5 million, down from $94.7 million at June 30. The quarter included a $13.6 million after-tax unrealized loss on available-for-sale investments, partly offset by a $3.9 million favorable foreign-currency translation adjustment.
Outlook, risks, and other notable items
- Capital expenditures for the remainder of fiscal 2013 were expected to be approximately $26.2 million, including $20 million for Minneapolis expansion and a new U.K. facility; completion was expected in fiscal 2014. Management expected to fund spending from available funds and operating cash flow.
- On October 25, 2012, the company announced a $0.30-per-share dividend, approximately $11.0 million, payable November 19 to shareholders of record November 5.
- In October 2012, the company increased its share-repurchase authorization by $100 million. It made no open-market repurchases in the quarter; employee stock-plan purchases were reported separately.
- Key risks identified include currency movements, economic instability in Europe, competition, product acceptance, reliance on internal manufacturing, regulation, intellectual property, investment-portfolio credit and market-value risk, and delays or costs in facility projects. The company does not use forward contracts to hedge forecast intercompany currency exposures.
- A hypothetical 10% decline in CCXI’s share price would reduce investment fair value by $7.4 million. A hypothetical 10% U.S. dollar appreciation against the euro, pound, and yuan was estimated to reduce annualized earnings translation by $2.1 million and foreign net-asset translation by $15.7 million, with additional transaction losses of $0.5 million.
- No material legal proceedings or material changes to previously disclosed risk factors were reported. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether biotechnology demand weakness in U.S. industrial and academic markets continued after the quarter.
- The subsequent valuation and concentration risk of the $73.5 million CCXI holding, and the impact of investment fair-value changes on comprehensive income and equity.
- Progress, total cost, and timing of the Minneapolis and U.K. facility projects, including whether planned capital spending was completed as expected.
- Whether foreign-exchange movements continued to affect reported sales, margins, and translated earnings.
- The company’s subsequent dividend and repurchase activity and its liquidity relative to planned investment and capital-return commitments.