Business context and reporting period
Techne Corporation, the registrant identified in this filing (company metadata: BIO-TECHNE Corp), filed this Form 10-Q for the quarter and six months ended December 31, 2012. Its two reportable segments are biotechnology products and hematology controls and calibrators. Unless noted otherwise, financial amounts below are in millions of dollars.
Financial performance
| Metric | Quarter ended Dec. 31, 2012 | Six months ended Dec. 31, 2012 |
|---|---|---|
| Net sales | $75.1; +0.6% year over year | $150.1; -1.4% |
| Gross margin | 73.6%, versus 73.9% | 73.8%, versus 74.6% |
| Operating income | $36.9, versus $37.7 | $74.7, versus $78.6 |
| Net earnings | $25.4; -1.7% | $51.0; -4.3% |
| Diluted EPS | $0.69, versus $0.70 | $1.38, versus $1.44 |
| Operating cash flow | Not presented for the quarter | $60.6, versus $54.9 |
For the quarter, biotechnology sales were $69.6 million (-0.3%) and hematology sales were $5.5 million (+12.4%). For the six months, biotechnology sales were $139.1 million (-2.1%) and hematology sales were $11.0 million (+8.2%). The stronger U.S. dollar reduced sales by $0.6 million for the quarter and $2.5 million for the six-month period; excluding currency effects, consolidated sales grew 1.3% and 0.2%, respectively.
Liquidity, investments, and capital
At December 31, cash and cash equivalents were $143.3 million, and available-for-sale investments totaled $271.4 million, for combined cash and investments of approximately $414.7 million (versus $413.0 million at June 30, 2012). Current assets were $359.7 million and current liabilities $21.3 million. The balance sheet shows no borrowings or other debt balance. Shareholders’ equity was $694.6 million.
Six-month investing cash outflow was $14.9 million, including $10.7 million of capital expenditures; financing cash outflow was $21.0 million, principally dividends of $21.4 million. The company repurchased no shares in the period. The filing reports a $69.1 million investment in ChemoCentryx (CCXI), down from $94.7 million at June 30; the six-month unrealized loss on available-for-sale investments was $16.6 million, net of tax.
Changes, outlook, and risks
- Quarterly revenue was modestly higher, but earnings and operating income declined. Six-month revenue and earnings were lower year over year.
- Management attributed weaker biotechnology gross margin mainly to lower sales associated with currency movements; consolidated gross margin fell 0.8 percentage point for the six months. Hematology margin improved on product mix.
- Research and development expense rose 8.3% for the quarter and 10.0% for six months, mainly due to personnel and supply costs for product development. Management expects R&D expense to continue increasing.
- The company was searching for a new CEO. It expected any related SG&A increase to be limited in fiscal 2013, with possible impact beginning in fiscal 2014.
- Management expected a fiscal 2013 effective tax rate of approximately 31%–33%. A retroactive research and development tax credit of approximately $0.975 million was expected to be recorded in the third fiscal quarter.
- Approximately $18 million of additional capital expenditures were expected for the remainder of fiscal 2013, including facility expansion and a new U.K. facility, with completion expected during fiscal 2014. Management said available funds, operating cash flow, and investment maturities or sales should cover needs for at least 12 months.
- Key exposures include foreign exchange movements, interest-rate risk on fixed-income investments, and CCXI share-price volatility; a 10% CCXI price decline would reduce fair value by approximately $6.9 million. Management also cited economic conditions, competition, product acceptance, staffing, regulation, intellectual property, and facility-project execution risks.
- No material legal proceedings or material changes to previously disclosed risk factors were reported. Disclosure controls were deemed effective; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether biotechnology demand, particularly in U.S. industrial/pharmaceutical/biotechnology and academic markets, improves; reported currency-adjusted growth in those categories was negative.
- How continued R&D spending and CEO-related compensation affect operating costs and margins.
- The valuation and concentration risk of the CCXI investment and the performance of the broader investment portfolio.
- Actual timing and cost of planned U.S. and U.K. facility projects, and whether expected capital spending and tax credits are realized.
- Whether cash generation and investment liquidity continue to support dividends and other capital plans.