Business Context and Reporting Period
Company: TECHNE Corporation (BIO-TECHNE Corp)
Filing Type: Form 10-K (Annual Report)
Period Ended: June 30, 1999
Overview: TECHNE is a holding company with two primary operating subsidiaries: Research and Diagnostic Systems, Inc. (R&D Systems) in Minneapolis, MN, and R&D Systems Europe Ltd. in Abingdon, England. The company operates in two main segments: Hematology (controls and calibrators for blood analysis) and Biotechnology (cytokines, antibodies, and assay kits for research and clinical diagnostics). A significant event during the period was the acquisition of Genzyme Corporation's research products business on July 1, 1998, which established the company as a leading supplier of cytokine products.
Key Financial Metrics
| Metric | Fiscal 1999 | Fiscal 1998 | Fiscal 1997 |
|---|---|---|---|
| Net Sales | $90,901,000 | $67,291,000 | $60,924,000 |
| Gross Margin | 69.9% | 70.3% | 68.7% |
| Net Earnings | $16,656,000 | $15,183,000 | $10,882,000 |
| Diluted EPS | $0.81 | $0.77 | $0.56 |
| Operating Cash Flow | $28,422,000 | $20,875,000 | $12,477,000 |
| Capital Expenditures | $5,564,000 | $2,780,000 | $4,243,000 |
| Long-Term Debt | $0 | $0 | $0 |
| Cash & Equivalents | $12,769,000 | $26,114,000 | $8,598,000 |
| Short-Term Investments | $16,345,000 | $15,322,000 | $16,154,000 |
| Current Ratio | 3.78 | 7.84 | 8.12 |
Note: All figures are in thousands unless otherwise noted. The company had no long-term debt as of June 30, 1999, but entered into a $20.4 million mortgage on July 1, 1999, to finance a real estate purchase.
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 35% to $90.9 million, driven primarily by the Genzyme acquisition and organic growth in the Biotechnology Division (which grew 37%).
- Profitability: Net earnings rose 10% to $16.7 million despite a significant increase in amortization expenses ($9.6 million) related to the Genzyme acquisition.
- Margin Compression: Gross margin decreased slightly from 70.3% to 69.9%. The Biotechnology Division margin dropped from 72.9% to 70.8% due to lower gross profit on acquired Genzyme inventory and write-offs of obsolete packaging.
- Expense Increases: Selling, general, and administrative (SG&A) expenses rose 10% due to added sales personnel and marketing. R&D expenses increased 13% to $12.0 million.
- Liquidity: Cash and cash equivalents decreased 30% year-over-year, largely due to the $24.8 million cash outlay for the Genzyme acquisition and a $4 million deposit on real estate.
Guidance, Outlook, and Risks
Management Commentary and Outlook
- Expansion: The company plans to continue developing new cytokines, antibodies, and assay kits. Capital additions for fiscal 2000 are expected to be approximately $8.8 million.
- Real Estate: On July 1, 1999, the company purchased its Minneapolis headquarters for approximately $28 million, financing $20.4 million via a 15-year mortgage.
- Investments: The company holds a 43% equity interest in ChemoCentryx, Inc. (CCX), recognizing 100% of CCX's losses. It is obligated to purchase up to an additional $1 million of CCX stock in fiscal 2000 upon milestone achievement.
Risks and Contingencies
- Legal Proceedings: The company is involved in patent infringement litigation with Streck Laboratories regarding hematology controls. The case is stayed, and a trial is unlikely in fiscal 2000.
- Regulatory: Products are subject to FDA regulation. Delays in approvals for new diagnostic kits could adversely affect revenue.
- Competition: Intense competition exists in both hematology controls and biotechnology research markets from major pharmaceutical companies and specialized firms.
- Year 2000 (Y2K): The company believes it is Y2K compliant, but risks remain regarding third-party suppliers and customers.
Investor Verification Checklist
- Genzyme Integration: Verify the success of converting Genzyme customers to R&D Systems products and the impact of inventory write-offs on future margins.
- Real Estate Financing: Confirm the terms and impact of the new $20.4 million mortgage taken out immediately after the fiscal year-end.
- ChemoCentryx Investment: Monitor the financial performance of CCX and the potential obligation to invest an additional $1 million in fiscal 2000.
- Patent Litigation: Track the status of the lawsuit with Streck Laboratories, as a negative outcome could impact the Hematology Division.
- Stock Repurchases: Note the company's active share repurchase program ($3.9 million in fiscal 1999) and its impact on diluted share count.