Business Context and Reporting Period
Company: TECHNE CORPORATION (BIO-TECHNE Corp)
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Quarter and nine months ended March 31, 1999
Business Overview: The Company operates through two primary subsidiaries: Research and Diagnostic Systems, Inc. (R&D Systems) in Minneapolis and R&D Systems Europe Ltd. in Abingdon, England. Operations are divided into Biotechnology (cytokines, antibodies, assay kits) and Hematology (controls and calibrators) divisions. The Company also consolidates ChemoCentryx, Inc. (CCX), a drug development company in which it holds approximately 44% ownership.
Key Financial Metrics
| Metric | Quarter Ended 3/31/99 | Quarter Ended 3/31/98 | Nine Months Ended 3/31/99 | Nine Months Ended 3/31/98 |
|---|---|---|---|---|
| Sales | $23,789,055 | $17,698,472 | $66,588,506 | $48,708,472 |
| Gross Margin | $16,619,950 (69.9%) | $12,207,506 (69.0%) | $46,576,271 (70.0%) | $33,785,744 (69.4%) |
| Net Earnings | $4,537,003 | $4,022,658 | $11,648,694 | $10,413,024 |
| Diluted EPS | $0.22 | $0.20 | $0.56 | $0.53 |
| Cash & Equivalents | $11,258,651 | $12,139,591 | $11,258,651 | $12,139,591 |
| Short-term Investments | $14,495,879 | $15,321,935 | $14,495,879 | $15,321,935 |
| Total Assets | $120,450,713 | $72,918,881 | $120,450,713 | $72,918,881 |
| Operating Cash Flow (9mo) | $17,301,928 (vs. $13,581,620 prior year) |
Material Changes vs. Prior Period
- Revenue Growth: Sales increased 34% for the quarter and 37% for the nine-month period. Growth was driven by the July 1, 1998 acquisition of Genzyme Corporation's research products business and increased sales of cytokines and antibodies.
- Profitability: Net earnings rose 13% for the quarter and 12% for the nine-month period. Earnings before taxes increased due to higher divisional earnings, partially offset by net losses from the consolidated subsidiary CCX.
- Balance Sheet Expansion: Total assets increased significantly from $72.9 million to $120.5 million, primarily due to the recognition of intangible assets (Goodwill and Customer List) from the Genzyme acquisition.
- Amortization: Amortization expense surged from $9,662 to $2,394,662 for the quarter due to the Genzyme acquisition assets.
- Inventory: Inventories increased from $3.8 million to $7.2 million, reflecting the acquisition of Genzyme inventory.
Guidance, Outlook, Risks, and Unusual Items
- Real Estate Acquisition: The Company entered into agreements to acquire real estate in Minneapolis for approximately $28 million. A $4 million cash deposit and 100,000 shares of stock were placed in escrow, with closing expected in July 1999. The remainder is expected to be financed via mortgage.
- Investment in CCX: The Company purchased $4 million of preferred stock in ChemoCentryx, Inc. (CCX) and is obligated to purchase up to an additional $1 million upon milestone achievement. CCX operations are consolidated, contributing net losses of $139,548 (quarter) and $751,886 (nine months).
- Stock Repurchases: The Board authorized the repurchase of up to $10 million of common stock. Through May 3, 1999, 575,600 shares had been repurchased for $6.9 million.
- Risks:
- Y2K Compliance: The Company is upgrading systems to be Y2K compliant by mid-1999. While no significant deficiencies have been identified, delays or supplier failures could materially affect operations.
- Customer Conversion: Success depends on converting Genzyme customers to R&D Systems products.
- Market Competition: Risks include price competition in cytokine research products and the success of new product introductions.
- Liquidity: The Company holds $25.8 million in cash and short-term investments. It maintains an unsecured line of credit of $750,000 with no current borrowings.
Investor Verification Checklist
- Genzyme Integration: Verify the rate of customer conversion from Genzyme products to R&D Systems products and the impact on gross margins.
- Real Estate Financing: Confirm the terms and closing of the $28 million real estate acquisition scheduled for July 1999.
- CCX Performance: Monitor the financial performance and milestone achievements of ChemoCentryx, Inc., which currently contributes net losses.
- Amortization Impact: Assess the long-term impact of the $7.2 million amortization expense recorded in the nine-month period on future earnings.
- Y2K Mitigation: Review the status of Y2K system upgrades and contingency plans for third-party suppliers.