Business context and reporting period
Techne Corporation (identified in the request as BIO-TECHNE Corp) filed this unaudited Form 10-Q for the fiscal third quarter and nine months ended March 31, 2011. Its businesses develop, manufacture and sell biotechnology research and diagnostic products, distribute biotechnology products in Europe, and sell hematology controls and calibrators.
Financial performance and position
- Quarterly results: Revenue was $76.3 million, up 8.5% year over year; operating income was $44.7 million, up 7.4%. Net earnings were $31.1 million, down 4.1%, and diluted EPS was $0.84 versus $0.87.
- Nine-month results: Revenue was $211.9 million, up 4.7%; operating income was $120.5 million, up 2.6%. Net earnings were $84.0 million, essentially unchanged (+0.1%), and diluted EPS was $2.26 versus $2.25.
- Margins: Consolidated gross margin was 79.2% for the quarter and 78.2% for the nine months, compared with 79.5% and 79.9%, respectively, a year earlier. Nine-month margin pressure reflected product mix in biotechnology and hematology and exchange-rate effects in R&D Europe.
- Cash flow: Nine-month operating cash flow was $92.5 million versus $79.5 million. Investing activities used $5.2 million, including $2.4 million of capital expenditures; financing activities used $28.0 million, including $29.7 million of dividends paid.
- Liquidity and debt: Cash and cash equivalents were $158.6 million and available-for-sale investments totaled $219.1 million at March 31, 2011, or $377.7 million combined, versus $310.0 million at June 30, 2010. Current assets were $276.7 million and current liabilities $16.5 million. The filing reports no borrowings; the company had a $750,000 unsecured credit line.
- Shareholder distributions: Nine-month dividends were $0.80 per share. A further $0.27 per share dividend, approximately $10.0 million, was announced for payment in May 2011.
Material changes versus the prior comparable period
- Quarterly revenue growth was driven mainly by higher biotechnology sales volume. Biotechnology sales rose 8.1% for the quarter; China sales grew 46.0%. R&D Europe revenue rose 10.5% as reported, and hematology revenue rose 4.3%.
- Quarterly earnings declined despite higher sales partly because the prior-year quarter included a $4.7 million tax benefit related to a foreign-currency tax loss on repatriated R&D Europe earnings. Excluding that benefit, the prior-year effective tax rate would have been 33.1%, compared with 31.6% in the current quarter.
- Nine-month sales and earnings were adversely affected by currency movements; management estimated an unfavorable impact of $1.9 million on sales and $529,000 on net earnings.
- Quarterly selling, general and administrative expense increased 20.4%, primarily due to higher profit-sharing expense, acquisition-related legal costs, and the timing of annual catalog printing. Nine-month R&D expense increased 3.4%, mainly due to personnel and supply costs for product development.
Outlook, commentary, risks and unusual items
- Management expected the fiscal 2011 effective tax rate to be approximately 31%–32% and forecast approximately $2.3 million of capital expenditures for the remainder of the fiscal year. The filing gives no specific revenue or earnings guidance.
- Management said existing funds, operating cash flow, and investment maturities or sales should support working capital, capital spending, dividends, repurchases, investments and acquisitions. After quarter-end, the company acquired Boston Biochem assets for approximately $8 million and Tocris Holdings for approximately $124 million, both funded with cash on hand and sales of available-for-sale investments. Tocris reported calendar 2010 revenue of approximately $18 million; Boston Biochem’s combined product sales were approximately $2.5 million.
- Key disclosed risks include product acceptance and development, research spending by customers, competition and pricing, economic conditions, currency fluctuations, regulation and intellectual-property litigation, personnel retention, and expansion in China.
- A patent dispute with Streck remained under appeal. The company had been enjoined from making and selling the products at issue after a court ruling; the court had allowed sale of on-hand inventory through December 20, 2010. A jury had awarded Streck approximately $170,000 including costs. The company said it did not expect resolution to materially affect its financial statements.
- Available-for-sale fixed-income securities were exposed to interest-rate risk. Management’s hypothetical 10% U.S. dollar appreciation scenario estimated a $2.4 million annualized reduction in translated earnings, a $9.1 million decrease in translated foreign net assets, and $616,000 of additional transaction losses.
Important facts for investors to verify
- Whether the Tocris and Boston Biochem acquisitions integrate as expected and how their purchase accounting affects subsequent results and liquidity.
- Developments in the Streck appeal, the continuing impact of the injunction, and any effect on hematology product sales.
- Whether revenue growth, gross margins, and foreign-exchange impacts develop in line with the trends and sensitivities described.
- Whether the expected 31%–32% tax rate and remainder-of-year capital spending estimate are achieved.
- The source filing reports effective disclosure controls and no material change in internal control over financial reporting during the quarter; verify subsequent filings for changes.