Business context and reporting period
Techne Corporation, now associated with BIO-TECHNE Corp, filed this unaudited Form 10-Q for the quarter ended September 30, 2013 (the first quarter of fiscal 2014). The company reported Biotechnology and Clinical Controls segments. Unless stated otherwise, financial figures below are in millions of U.S. dollars.
Key financial metrics
| Metric | Q1 FY2014 | Q1 FY2013 | Change |
|---|---|---|---|
| Net sales | $85.7 | $75.0 | +14.2% |
| Gross margin | $61.1; 71.3% | $55.6; 74.1% | Margin down 2.8 percentage points |
| Operating income | $39.4 | $37.8 | +4.2% |
| Net earnings | $27.4 | $25.7 | +6.9% |
| Diluted EPS | $0.74 | $0.70 | +$0.04 |
| Operating cash flow | $32.6 | $29.3 | +$3.3 |
Organic sales growth, excluding Bionostics and currency effects, was 5.1%. Biotechnology sales grew 5.3% to $73.2 million; Clinical Controls sales were $12.5 million, up $7.0 million, including the acquisition. The filing attributes $6.2 million of quarterly sales to Bionostics and $0.6 million of reported sales growth to favorable currency movements.
Operating expenses were $21.7 million, up from $17.8 million. Selling, general and administrative expense rose 35.8% to $14.0 million, principally due to Bionostics-related costs and amortization, acquisition professional fees, increased executive compensation and additional sales staff. Research and development expense increased 3.4% to $7.7 million. The effective tax rate was 30.8%, versus 32.4%.
Liquidity, cash flow and balance sheet
Cash and cash equivalents were $83.9 million at September 30, 2013, versus $163.8 million at June 30. Available-for-sale investments totaled approximately $239 million, down from $302 million; together with cash, liquidity was approximately $323 million, compared with $465 million at fiscal year-end. The company reported no debt in the presented balance sheet.
Investing cash outflow was $105.1 million, including $103.0 million paid for Bionostics, funded from cash on hand. Financing cash outflow was $9.9 million, primarily dividends of $11.1 million. Capital expenditures were $3.8 million. Management said available funds, operating cash generation and investment maturities or sales should cover requirements for at least the next 12 months.
Shareholders’ equity was $726.8 million, compared with $737.5 million at June 30. Total comprehensive income was a loss of $1.4 million despite net earnings, largely because of $36.8 million in after-tax unrealized losses on available-for-sale investments. The company’s ChemoCentryx investment fell in fair value from $89.6 million to $35.2 million during the quarter; its cost basis remained $29.5 million.
Material changes, outlook and risks
- On July 22, 2013, the company acquired Bionostics for $103.0 million net of cash acquired. Preliminary purchase accounting included $60.5 million of intangibles and $56.8 million of goodwill. Bionostics contributed $6.2 million in sales and a $16,000 net loss from the acquisition date; the reported quarter included acquisition-related inventory costs and intangible amortization.
- Reported gross margin declined to 71.3% from 74.1%; management cited acquisition-related inventory costs and intangible amortization, as well as product mix and currency. Adjusting for identified acquired-inventory costs and intangible amortization, gross margin was 74.4%, versus 76.8%.
- Management expected fiscal 2014 remaining-period capital expenditures of approximately $12.5 million, including $6.5 million for Minneapolis facility expansion, and an income tax rate of 30%–32%. It expected research and development expenses to continue increasing. No specific revenue or earnings guidance was provided.
- The company disclosed a material weakness in general IT controls affecting access to financial systems and program-change controls. Disclosure controls were therefore not effective at quarter-end. Management had begun enhanced testing and documentation, but stated the weakness was not yet fully remediated; it targeted completing remediation testing by fiscal year-end. Additional post-closing procedures were performed, and management concluded the financial statements fairly presented the results.
- Risks highlighted include product acceptance and competition, economic conditions including Eurozone instability, foreign exchange exposure, reliance on internal manufacturing, regulation and intellectual property, investment portfolio credit and market risk, and execution of facility improvements. No material change to previously disclosed risk factors was reported, and no material adverse legal proceedings were identified.
Important facts for investors to verify
- Whether the Bionostics acquisition delivers expected growth and integration benefits, and how preliminary purchase-price allocations may change.
- Whether organic sales momentum—particularly regional Biotechnology results and Clinical Controls growth—continues after acquisition and shipment-timing effects.
- How gross margins evolve as acquired inventory is sold and acquired intangible amortization continues.
- Progress and completion of remediation of the disclosed IT-controls material weakness, including effects on revenue and receivables controls.
- Changes in the fair value and risk exposure of the investment portfolio, especially the ChemoCentryx holding, and resulting effects on comprehensive income and liquidity.
- Actual capital expenditures, facility-expansion timing, cash generation and dividend funding relative to management’s expectations.