Business context and reporting period
Techne Corporation (now BIO-TECHNE Corp) filed this unaudited Form 10-Q for its fiscal second quarter and six months ended December 31, 2011. The company develops, manufactures, and sells biotechnology research and diagnostic products and hematology controls and calibrators. Its reportable segments are biotechnology and hematology. Amounts below are in U.S. dollars; financial statement figures are in millions unless otherwise indicated.
Financial performance
| Metric | Quarter ended Dec. 31, 2011 | Quarter ended Dec. 31, 2010 | Six months ended Dec. 31, 2011 | Six months ended Dec. 31, 2010 |
|---|---|---|---|---|
| Net sales | $74.7 | $67.7 | $152.3 | $135.7 |
| Gross margin | $55.2; 73.9% | $52.4; 77.4% | $113.6; 74.6% | $105.0; 77.4% |
| Operating income | $37.7 | $37.4 | $78.6 | $75.7 |
| Net earnings | $25.8 | $26.5 | $53.3 | $52.9 |
| Diluted EPS | $0.70 | $0.71 | $1.44 | $1.42 |
- Quarterly sales grew 10.3%, but earnings before tax grew only 0.5%; six-month sales rose 12.2% and earnings before tax 2.3%. Net earnings declined 2.7% for the quarter and rose 0.8% for the six months.
- Acquired Boston Biochem and Tocris businesses contributed $5.5 million of quarterly sales and $11.1 million for the six months. Excluding acquisitions and currency effects, consolidated sales increased 1.8% and 2.5%, respectively. Favorable currency translation added $0.2 million to quarterly sales and $2.1 million to six-month sales.
- Biotechnology sales increased 10.7% for the quarter and 12.7% for the six months; excluding acquisitions and currency effects, growth was 1.5% and 2.2%. Hematology sales rose 4.9% and 6.5%, respectively. U.S. academic biotechnology sales declined 4.1% for the quarter and 3.3% for the six months; China sales grew strongly.
- Consolidated gross margin fell 3.5 percentage points in both comparison periods. Acquired-inventory accounting reduced margins by $1.8 million for the quarter and $3.9 million for the six months; amortization of acquired technology reduced them by a further $0.7 million and $1.5 million.
- SG&A increased 26.4% for the quarter and 33.6% for the six months, principally due to acquired-company expenses, acquired intangible amortization, and higher profit-sharing expense. R&D expense increased modestly, reflecting personnel and supply costs for product development.
- Effective tax rates were 31.8% for the quarter and 31.9% for the six months, versus 29.6% and 31.0% in the prior-year periods. The earlier quarter benefited from a $0.7 million R&D tax credit related to prior periods.
Cash flow, balance sheet, and capital
- Six-month operating cash flow was $54.9 million, down from $60.1 million. Management attributed the decrease mainly to timing of tax payments and deferred taxes.
- Investing cash flow was a $11.3 million outflow, including $3.3 million of capital expenditures. Financing cash flow was a $39.0 million outflow, including $20.4 million of dividends and $17.7 million of repurchases.
- At December 31, cash and cash equivalents were $81.0 million; available-for-sale investments were $204.9 million, for combined cash and investments of approximately $286 million. Total assets were $624.2 million and shareholders’ equity $597.5 million. No debt was reported; the company had an unused $0.75 million unsecured credit line.
- Current assets were $227.2 million and current liabilities $14.1 million. Cash and investments provide substantial liquidity. Management said available funds, operating cash generation, and investment maturities or sales should cover needs for at least the next 12 months.
- Cash dividends were $0.55 per share for the six months. A further $0.28 per-share dividend, approximately $10.3 million in total, was announced for payment in February 2012. The company repurchased and retired 263,027 shares during the six months at a market value of $18.2 million.
- Capital expenditures for the remainder of fiscal 2012 were expected to be approximately $4.2 million.
Outlook, risks, and unusual items
- Management expected the fiscal 2012 effective tax rate to be approximately 31%–33%. No revenue or earnings guidance was provided in the filing.
- Techne held a $10 million loan receivable from equity investee ChemoCentryx (CCX), carried at fair value using Level 3 valuation inputs, and had committed to invest another $5 million if CCX completed a successful public offering. CCX had filed for an IPO. At an assumed $14 IPO price, the company estimated its CCX investment’s fair value at approximately $81 million, implying a $51.7 million unrealized gain; this outcome was contingent on the offering and market price. The company agreed not to sell CCX shares for 180 days after an IPO. A potential $1.8 million after-tax benefit from reversing a valuation allowance was also contingent on a successful IPO.
- Key stated risks included product acceptance, economic conditions, competition, manufacturing reliance, foreign exchange, integration of acquisitions, personnel, regulation, intellectual property, credit risk, investment portfolio values, and financing success at investees. Approximately 31% of six-month sales were denominated in foreign currencies; management quantified potential effects of a hypothetical 10% U.S. dollar appreciation.
- In the Streck patent dispute, the Federal Circuit affirmed the infringement finding and permanent injunction in January 2012. The company had sought rehearing and a stay of the mandate. Management stated it did not expect the proceedings to materially affect the consolidated financial statements.
- Disclosure controls were assessed as effective, and the filing reported no material change in internal control over financial reporting or material change in risk factors.
Important facts for investors to verify
- Whether underlying sales growth improves beyond the 1.8% quarterly rate excluding acquisitions and currency effects, particularly given weaker academic demand.
- How quickly acquisition-related inventory charges and intangible amortization subside, and whether margins recover.
- CCX IPO status, valuation assumptions, potential tax effects, and the impact of the 180-day lockup; the estimated gain was not realized at the filing date.
- Developments in the Streck litigation and the commercial or financial consequences of the permanent injunction.
- Progress on cash generation, planned capital spending, dividends, and share repurchases relative to the company’s substantial investment portfolio and liquidity needs.