TECHNE Corporation (now BIO-TECHNE) — FY2011 Form 10-K
Reporting period: Fiscal year ended June 30, 2011, compared with fiscal 2010 and 2009. Although the request references “2010 Q4,” this filing is an annual report for FY2011; it also reports quarterly results, including FY2011 Q4.
Business context
The company develops, manufactures, and sells biotechnology research and diagnostic products and hematology controls and calibrators. Biotechnology represented 93% of FY2011 sales; hematology represented 7%. The company reorganized segment reporting into biotechnology and hematology, with prior periods recast to match.
Two acquisitions expanded the biotechnology portfolio: Boston Biochem’s assets for approximately $7.9 million cash on April 1, 2011, and Tocris for approximately $123.9 million cash on April 28, 2011. Tocris shareholders’ £7.5 million escrow was held for 18 months. Acquired businesses contributed $4.7 million of reported FY2011 revenue.
Financial performance and position
| Metric | FY2011 | FY2010 | Change / context |
|---|---|---|---|
| Net sales | $290.0 million | $269.0 million | Up 7.8%; up 5.9% excluding acquisitions and currency effects |
| Gross margin | 77.6% | 79.6% | Down 2.0 percentage points |
| Operating income | $163.1 million | $156.3 million | Operating margin was 56.2%, versus 58.1% |
| Net earnings | $112.3 million | $109.8 million | Up 2.3% |
| Diluted EPS | $3.02 | $2.94 | Up 2.7% |
| Operating cash flow | $127.2 million | $111.3 million | Up $15.9 million |
| Capital expenditures | $3.6 million | $4.6 million | FY2012 plan: approximately $7.4 million |
Biotechnology sales rose 7.8% to $270.3 million and hematology sales rose 7.0% to $19.7 million. FY2011’s effective tax rate was 31.9%. FY2010 net earnings included a $4.7 million tax benefit related to repatriation of foreign earnings; excluding that benefit, FY2010’s effective tax rate would have been 32.8%.
At June 30, 2011, cash and cash equivalents were $77.6 million and available-for-sale investments totaled $195.2 million, for approximately $272.8 million in cash and investments. Working capital was $212.2 million; total assets were $617.7 million and shareholders’ equity was $586.1 million. There were no borrowings outstanding. The only disclosed credit facility was an unused $750,000 line expiring October 31, 2011. The filing reports no material off-balance-sheet arrangements.
Cash used in investing activities was $114.2 million, including $131.8 million for acquisitions, net of cash acquired. The company paid $39.7 million in dividends, or $1.07 per share, and ended the year with $50.6 million remaining under its share-repurchase authorization.
Material changes versus FY2010
- Revenue growth accelerated, supported primarily by higher sales volume and the addition of Boston Biochem and Tocris. Excluding acquisitions and currency, consolidated sales grew 5.9%.
- Gross margin fell to 77.6%, partly because acquisition accounting increased acquired inventory values by $25.7 million and added acquired-technology amortization to cost of sales. Approximately $1.8 million of acquired-inventory write-up and $455,000 of acquired-technology amortization were charged in FY2011.
- SG&A rose 9.8% to $35.9 million, including $1.7 million of acquisition-related professional and other costs and $945,000 of acquired-company expenses. R&D increased 3.4% to $26.0 million; the company introduced 1,646 new biotechnology products.
- Goodwill increased from $25.1 million to $86.6 million and net intangible assets from $2.0 million to $52.3 million, principally due to acquisitions. Total assets rose to $617.7 million from $518.8 million.
- FY2010 earnings benefited from the one-time $4.7 million tax benefit, complicating year-over-year net-income comparisons. FY2011 benefited from a $431,000 research-credit amount related to January–June 2010.
Outlook, risks, and unusual items
- Management expected FY2012 income tax rates of 31%–33% and planned approximately $7.4 million in capital additions, funded from available cash and operating cash flow. No specific revenue or earnings forecast was provided.
- Management stated that available funds, operating cash generation, and investment maturities should meet foreseeable operating and capital needs. Seasonality, limited order backlog, customer research-budget changes, and government funding variability may affect results.
- Key risks include intense competition and pricing pressure; dependence on new-product development and customer acceptance; manufacturing disruption or product defects; foreign-currency exposure; regulatory compliance; and retaining qualified personnel.
- Acquisition integration, retention of key employees, realization of expected synergies, and the risk of impairment are material uncertainties. At year-end, the carrying values of the recently acquired Tocris and Boston Biochem reporting units approximated their estimated fair values.
- Foreign-currency exposure is meaningful: approximately 30% of consolidated sales were made in foreign currencies. A hypothetical 10% U.S. dollar appreciation against the euro, pound, and yuan would have reduced translated FY2011 earnings by an estimated $2.5 million, before other effects.
- A patent dispute with Streck involved an injunction affecting certain reticulocyte hematology-control products. TECHNE appealed adverse decisions; management did not expect resolution to materially affect the financial statements.
- The auditor issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded disclosure controls were effective.
Important facts for investors to verify
- How much of subsequent growth and margin performance came from Tocris and Boston Biochem versus organic sales, and whether acquisition synergies were realized.
- Whether acquisition-related inventory charges and amortization continue to weigh on margins, and whether goodwill or intangible assets require impairment.
- Cash conversion and liquidity after the acquisitions, including the composition, credit quality, and maturities of the $195.2 million investment portfolio.
- The outcome and financial implications of the Streck patent appeal and any resulting product or sales restrictions.
- Whether FY2012 tax-rate and capital-spending expectations were achieved; the filing provides no clear revenue or earnings guidance.