BIO-TECHNE CORPORATION — Form 10-Q Summary
Period clarification: The filing covers the quarter and nine months ended March 31, 2016 (fiscal 2016 third quarter), although the request metadata says “2015 Q3.” Filed May 10, 2016. Amounts below are in U.S. dollars; financial statement amounts are rounded to millions unless noted.
Business context and reporting period
Bio-Techne serves life-science research and diagnostic markets through Biotechnology, Clinical Controls, and Protein Platforms. The filing is unaudited and reports the three and nine months ended March 31, 2016, compared with the same periods in 2015.
Key financial metrics
| Metric | Quarter ended Mar. 31, 2016 | Quarter ended Mar. 31, 2015 | Nine months ended Mar. 31, 2016 | Nine months ended Mar. 31, 2015 |
|---|---|---|---|---|
| Net sales | $131.0m | $114.2m | $364.3m | $334.6m |
| Gross margin | 68.7% | 69.5% | 67.8% | 68.2% |
| Operating income | $43.5m | $39.4m | $110.6m | $109.2m |
| Net earnings | $30.3m | $24.3m | $78.9m | $81.4m |
| Diluted EPS | $0.81 | $0.65 | $2.11 | $2.19 |
| Operating cash flow | Not separately reported | Not separately reported | $107.5m | $102.2m |
- Quarterly sales increased 15%; reported nine-month sales increased 9%. Excluding acquisition timing and foreign exchange, management reported organic growth of 8% for the quarter and 5% year to date. Currency translation reduced sales growth by 1% and 2%, respectively.
- Quarterly net earnings rose 25%; nine-month net earnings fell 3%. The prior-year nine-month period included an $8.3m pre-tax gain associated with the CyVek acquisition.
- Reported gross margin declined 0.8 percentage points in the quarter and 0.4 points year to date. Management’s adjusted gross margin, excluding acquired-inventory costs and acquisition-related intangible amortization, was 71.6% for the quarter and 71.0% year to date, down 0.9 points from the comparable prior periods.
- Nine-month cash from investing was a $104.0m outflow, principally reflecting acquisitions and $13.8m of capital expenditures. Financing provided $9.0m net; dividends paid were $35.7m.
- At March 31, cash and cash equivalents were $65.7m and short-term available-for-sale investments were $18.9m. Current assets were $236.7m versus current liabilities of $46.6m.
- Long-term debt obligations were $157.8m, including $115.5m drawn under the $150m revolving credit facility, plus acquisition-related contingent and deferred payments. The facility matures July 31, 2019.
Material changes versus prior comparable periods
- Quarterly segment sales were $81.4m in Biotechnology (up 4%), $29.9m in Clinical Controls (up 50%), and $19.7m in Protein Platforms (up 26%). Clinical Controls’ reported increase primarily reflects the Cliniqa acquisition; organic segment growth was negative 1%. Protein Platforms’ quarterly organic growth was 26%.
- For the nine-month period, segment sales were $233.0m in Biotechnology, $76.0m in Clinical Controls, and $55.3m in Protein Platforms. Cliniqa added $20.1m in sales during the period.
- Cliniqa was acquired in July 2015 for approximately $82.9m net of cash acquired; it was primarily financed through the credit facility. Zephyrus Biosciences was acquired in March 2016 for approximately $8.0m upfront, with $3.5m of recorded contingent consideration. Zephyrus contributed no sales in the reported quarter.
- Quarterly SG&A increased 21%, reflecting acquisition-related costs, higher stock compensation, and investment in commercial resources and infrastructure. R&D increased 4% for the quarter and 12% for the nine months.
Outlook, management commentary, risks, and unusual items
- Management said available cash and operating cash generation should meet operating, working-capital, facility-expansion, capital-addition, and dividend needs for at least the next 12 months. Remaining fiscal 2016 capital expenditures were estimated at approximately $4.2m.
- Management cited strong Biotechnology demand in China and U.S. bio/pharma markets. Japan was weak, which management attributed to delayed release of government research funding. Clinical Controls faced order and delivery timing volatility; Protein Platforms’ commercial transition showed indications of success.
- The filing provides no specific consolidated revenue or earnings guidance.
- Available-for-sale investment losses included a $32.6m after-tax unrealized loss for the nine months, primarily associated with ChemoCentryx (CCXI). The company classified the CCXI impairment as temporary and retained it in other comprehensive income. The investment’s March 31 fair value was $18.9m; a 10% decline would reduce fair value by approximately $1.9m.
- Management identified foreign-exchange exposure, acquisition integration and purchase-accounting effects, product acceptance and competition, manufacturing reliance, intellectual-property protection, regulation, and investment-portfolio market and credit risk among factors that could affect results. A hypothetical 10% U.S. dollar appreciation against specified currencies was estimated to reduce annualized translated earnings by $3.1m, translated foreign net assets by $24.9m, and add $9.1m of transaction losses.
- CyVek contingent payments could reach $35m based on revenue through May 2017, with an additional payment tied to 2020 revenue; $35.0m was recorded as a long-term liability. Zephyrus has up to $7.0m of potential contingent payments; $3.5m was recorded. No material legal proceedings or material changes to previously disclosed risk factors were reported.
- Disclosure controls were deemed effective. Management was still evaluating internal controls for the Cliniqa and Zephyrus acquisitions. No reportable off-balance-sheet arrangements were disclosed.
Important facts for investors to verify
- Confirm the period: the filing is for fiscal Q3 2016, not 2015 Q3.
- Assess how much reported growth reflects acquisitions versus organic performance, particularly Cliniqa’s contribution and the negative organic growth in Clinical Controls.
- Track gross-margin trends and the ongoing effects of acquired inventory costs, intangible amortization, and product mix.
- Review CCXI’s valuation and impairment assessment, alongside the significant unrealized investment loss recorded outside net earnings.
- Monitor debt, contingent acquisition obligations, cash generation, and the planned capital spending and dividends.