TECH

Business Context and Reporting Period

Company: Techne Corporation (BIO-TECHNE Corp)

Filing Type: Form 10-Q (Quarterly Report)

Reporting Period: Quarter and six months ended December 31, 1998

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 37% equity.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Sales increased 39% for the quarter and 38% for the six months compared to the prior year. This growth was driven by the July 1, 1998, acquisition of Genzyme Corporation's research products business and increased sales of R&D Systems' products to former Genzyme customers.
• Profitability: Net earnings increased 15% for the quarter and 11% for the six months. Earnings before taxes rose primarily due to increased earnings in the Biotechnology, R&D Europe, and Hematology divisions, partially offset by a net loss from the CCX subsidiary.
• Amortization: Amortization expense surged significantly ($2.4M for the quarter, $4.8M for six months) due to the customer list and goodwill associated with the Genzyme acquisition.
• Balance Sheet: Total assets increased from $72.9M to $114.6M, largely due to the addition of intangible assets (Goodwill and Customer Lists) from the acquisition. Cash and short-term investments decreased from $42.7M to $25.8M due to the cash outlay for the acquisition.

Guidance, Outlook, and Risks

• Acquisition Integration: Management expects continued growth from converting Genzyme customers to R&D Systems products. However, success depends on the level of conversion and acceptance of new products.
• Capital Expenditures: Planned capital additions for the remainder of fiscal 1999 are approximately $4.5 million, expected to be financed by available funds and operating cash flow.
• Real Estate Transaction: On January 22, 1999, the Company agreed to acquire its Minneapolis facility for approximately $28 million (paid via stock and cash, with mortgage financing). Closing is expected in July 1999.
• Stock Repurchases: The Board has authorized up to $10 million in stock repurchases. As of February 1, 1999, $6.9 million had been utilized.
• Risks:
  • Y2K Compliance: The Company is upgrading systems to be Y2K compliant by mid-1999. While costs are not expected to be material, delays or supplier failures could adversely affect operations.
  • Market Competition: Risks include price competition in cytokine research products and the success of new product introductions.
  • Foreign Currency: The Company is exposed to foreign currency fluctuations but does not use forward contracts to hedge.

Investor Verification Checklist

• Acquisition Synergies: Verify the rate of customer conversion from Genzyme to R&D Systems products to ensure projected revenue growth materializes.
• CCX Performance: Monitor the financial performance of ChemoCentryx, Inc., as its net losses are currently offsetting consolidated earnings.
• Real Estate Financing: Confirm the terms and closing of the $28 million real estate acquisition and the associated mortgage financing.
• Amortization Impact: Assess the long-term impact of the significant increase in amortization expenses on future operating margins.
• Y2K Readiness: Confirm the completion of system upgrades and the status of supplier compliance to mitigate operational disruption risks.