BIO-TECHNE Corp quarterly report, Q3 FY2012

Business context and reporting period

Techne Corporation (now associated with the BIO-TECHNE name) filed this unaudited Form 10-Q for the quarter ended March 31, 2012, its fiscal 2012 third quarter, and the nine months then ended. This differs from the request metadata’s “2011 Q3.” The company develops, manufactures and sells biotechnology products and hematology calibrators and controls.

Financial performance and position

For the nine months, operating cash flow was $89.3 million versus $92.5 million a year earlier. Investing activities used $19.1 million and financing activities used $52.2 million. Cash and cash equivalents were $95.3 million at March 31, 2012. Cash plus available-for-sale investments totaled approximately $365 million, including $66.5 million of CCXI shares. The company reported no borrowings on its $750,000 unsecured credit line and no other debt balance in the supplied filing text.

Total current assets were $306.3 million and current liabilities $30.7 million. Dividends paid in the first nine months were $30.7 million; the company also repurchased $21.3 million of shares. Nine-month capital expenditures were $4.9 million.

Changes versus prior comparable periods

• Reported sales rose 9.6% for the quarter and 11.3% for nine months, helped by fiscal 2011 acquisitions of Boston Biochem and Tocris and currency effects. Organic sales growth was 1.8% for the quarter and 2.3% for nine months.
• Biotechnology sales increased 9.9% for the quarter and 11.7% for nine months; hematology sales increased 5.6% and 6.2%, respectively. Biotechnology organic growth was modest, while U.S. academic and European sales declined; China grew strongly.
• Reported gross margin fell to 75.8% from 79.1% for the quarter and to 75.0% from 78.0% for nine months. Management attributed the decline primarily to acquisition-related inventory costs and intangible amortization. Excluding those identified items, adjusted gross margin was 79.0% for the quarter and 78.5% for nine months.
• Net earnings grew more slowly than sales, partly reflecting acquired-inventory costs, higher amortization and investment impairments. Management’s adjusted net earnings, excluding specified acquisition and impairment items and the tax valuation-allowance reversal, were $33.1 million for the quarter and $91.1 million for nine months.
• Cash and investments increased from $273 million at June 30, 2011 to $365 million at March 31, 2012. Shareholders’ equity rose to $644.5 million from $586.1 million.

Outlook, commentary, risks and unusual items

• Management expected the effective tax rate for the remainder of fiscal 2012 to be 31%–33%; the reported quarter and nine-month rates were 26.5% and 30.0%. A $3.0 million tax benefit resulted from reversing a deferred tax valuation allowance, linked to the unrealized gain on CCXI shares.
• Management expected approximately $1.7 million of additional capital expenditures for the remainder of fiscal 2012 and said available funds, operating cash generation, and investment maturities or sales should meet needs for at least 12 months.
• CCXI’s February 2012 IPO converted the company’s loan and preferred-share investment into common shares; the company also invested an additional $5.0 million. Its approximately 18% holding was valued at $66.5 million at quarter-end, with a $37.0 million after-tax unrealized gain in accumulated other comprehensive income. A 10% decline in CCXI’s share value would reduce fair value by approximately $6.6 million.
• The company recorded $3.254 million of investment impairment losses: $2.4 million on Nephromics and $854,000 on ACTGen. Nephromics’ asset sale closed in April 2012; $925,000 of the investment remained at March 31.
• Material risks include acquisition integration, new-product acceptance, competition, foreign-exchange movements, regulation, intellectual property, investment-market and investee financing risks. About 31% of nine-month sales were in foreign currencies. The filing also identifies interest-rate risk in its fixed-income portfolio.
• In a Streck patent case, the Federal Circuit affirmed infringement findings and a permanent injunction; the company’s Supreme Court petition was pending. Management said it did not expect the proceedings to materially affect the consolidated financial statements.
• Management reported effective disclosure controls and no material change in internal control over financial reporting. The filing reported no material changes in contractual obligations or risk factors from the prior annual report.

Important facts for investors to verify

• Confirm the period: the filing covers the quarter ended March 31, 2012, not 2011 Q3.
• Assess how much reported growth reflects acquisitions and currency versus underlying organic demand, especially in academic and European markets.
• Track gross-margin recovery as acquired inventory is sold and acquired intangible amortization continues.
• Evaluate the valuation, concentration and potential volatility of the CCXI investment, including management’s stated intent and ability to sell shares for tax purposes.
• Monitor the Streck litigation and the practical effect of the affirmed injunction on hematology products.
• Review cash conversion, working-capital movements, capital returns and the company’s stated tax-rate and capital-spending outlook.