Business context and reporting period
Bio-Techne Corporation’s Form 10-Q covers the quarter and nine months ended March 31, 2017 (fiscal 2017 third quarter), despite the request metadata identifying 2016 Q3. The company serves life-science and diagnostic markets through Biotechnology, Diagnostics, and Protein Platforms. Results include acquisitions of Space Import-Export (July 2016) and Advanced Cell Diagnostics (ACD; August 2016).
Key financial metrics
| Metric | Quarter ended March 31, 2017 | Nine months ended March 31, 2017 |
|---|---|---|
| Net sales | $144.0 million, up 10% | $406.4 million, up 12% |
| Organic sales growth | 4% | 5% |
| Gross margin | 65.4%, versus 68.7% | 64.9%, versus 67.8% |
| Operating income | $32.3 million, versus $43.5 million | $73.9 million, versus $110.6 million |
| Net earnings | $21.4 million, versus $30.3 million | $44.0 million, versus $78.9 million |
| Diluted EPS | $0.57, versus $0.81 | $1.17, versus $2.11 |
| Operating cash flow | Not presented separately for the quarter | $92.6 million, versus $107.5 million |
Reported gross margins include acquisition-related inventory costs and intangible amortization. Excluding those items, adjusted gross margin was 70.8% for the quarter and 70.9% year to date, versus 71.6% and 71.0%. Non-GAAP adjusted net earnings were $36.5 million for the quarter (down 3%) and $98.5 million year to date (down 1.3%).
At March 31, cash and cash equivalents were $59.8 million and short-term available-for-sale investments were $53.8 million, totaling about $113.6 million, versus $95.8 million at June 30, 2016. Long-term debt was $343.6 million, principally borrowings under the $400 million revolving facility; the filing reports $343.5 million outstanding. A separate $14.6 million current related-party note payable relates to the ACD acquisition. Total current liabilities were $142.2 million. Management said available cash, operating cash generation, and remaining revolver capacity should meet needs for at least the next 12 months.
Material changes versus prior comparable periods
- Sales growth reflected 4% organic growth, an 8% contribution from acquisitions, and a 2% adverse foreign-currency effect in the quarter. Year-to-date effects were 5% organic growth, 8% from acquisitions, and a 1% currency headwind.
- Net earnings declined 29% in the quarter and 44% year to date. Management cited acquisition-related amortization, acquired-inventory costs, acquisition expenses, and product mix.
- SG&A rose 36.6% in the quarter and 45.9% year to date; R&D increased 22.5% and 18.7%, respectively. Nine-month acquisition-related expenses included $14.1 million from changes in contingent consideration fair value.
- Biotechnology sales rose 16% in the quarter, but operating margin fell to 47.9% from 55.5%, reflecting lower-margin acquisitions, mix, and investment. Diagnostics sales fell 13% and margin declined to 23.1% from 31.6%, with OEM shipment timing and mix cited. Protein Platforms sales rose 20% and margin improved to 13.8% from 8.1%, primarily from volume leverage.
Outlook, commentary, and risks
- No revenue or earnings guidance is provided. The company expects the fiscal-year remainder tax rate to be 29%–31%, excluding fair-value adjustments to contingent consideration, and approximately $6 million in remaining fiscal 2017 capital expenditures.
- ACD was acquired for approximately $258 million net of cash acquired, plus up to $75 million contingent consideration. The 2016 revenue milestone was met; the 2017 milestone estimate remained subject to change. Remaining contingent consideration fair values totaled about $70.5 million across ACD, CyVek, and Zephyrus.
- The company invested $40 million in Astute Medical, accounted for under the cost method. Its $46.4 million ChemoCentryx investment was exposed to market-price fluctuations; a 10% decline would reduce fair value by an estimated $4.6 million.
- Management identified currency, economic, competitive, regulatory, product-acceptance, intellectual-property, and investment risks. It also noted possible UK/EU economic, trade, regulatory, and currency disruption following Brexit. About 27% of nine-month sales were denominated in foreign currencies.
- Disclosure controls and procedures were concluded to be ineffective at March 31, 2017 because previously identified material weaknesses in internal control over financial reporting were not fully remediated. Management reported substantial remediation progress but said further testing was needed. Controls associated with the Space and ACD acquisitions had not been fully evaluated.
- The filing reports no material legal proceedings and no reportable off-balance-sheet arrangements. No material changes to contractual obligations outside the ordinary course were reported.
Important facts for investors to verify
- Whether revenue growth and ACD’s contribution translate into sustained organic growth and improved margins.
- The final ACD purchase-price allocation, the 2017 revenue milestone outcome, and resulting contingent-consideration payments or remeasurement.
- Progress and testing results for remediation of internal-control material weaknesses, including acquired businesses.
- Liquidity and leverage under the revolving credit agreement, including interest expense and covenant headroom.
- Valuation changes in the ChemoCentryx holding and the Astute Medical investment, as well as foreign-exchange effects.