BIO-Techne Corporation — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended December 31, 2014; comparisons are with the periods ended December 31, 2013. Dollar amounts are in millions unless noted.
Business context and key results
BIO-Techne supplies products and platforms for life-science research and diagnostics through Biotechnology, Clinical Controls, and Protein Platforms. The current-period results include Novus and ProteinSimple, acquired in July 2014, and CyVek, acquired in November 2014; prior-year acquisitions also affected comparisons.
| Metric | Quarter | Six months |
|---|---|---|
| Net sales | $111.9; up 33% | $220.4; up 30% |
| Organic sales growth | 4% | 3% |
| Gross margin | 67.7%, versus 69.7% | 67.5%, versus 70.5% |
| Operating income | $34.6, versus $35.7 | $69.8, versus $75.1 |
| Net earnings | $33.2, versus $25.1 | $57.1, versus $52.5 |
| Diluted EPS | $0.89, versus $0.68 | $1.54, versus $1.42 |
| Operating cash flow | Not provided for the quarter | $71.4, versus $63.9 |
Performance, margins, and material changes
- Acquisitions contributed $26.0 million of quarterly sales and $43.6 million for the six months; foreign exchange reduced reported sales growth by 2 and 1 percentage points, respectively.
- Reported gross margin declined year over year. Excluding acquisition-related inventory costs and intangible amortization, adjusted gross margin was 71.0% for the quarter and 71.5% for the six months, down 0.5 and 0.9 percentage points. Management attributed the adjusted decline mainly to acquired-business product mix; excluding acquisitions, gross margins were essentially flat.
- Operating expenses increased substantially, including higher acquired-company costs, acquisition-related amortization and expenses, commercial and administrative investment, and stock compensation. Operating income fell despite sales growth.
- Quarterly net earnings included an $8.3 million non-taxable gain from remeasuring BIO-Techne’s prior CyVek investment at acquisition-date fair value. The company’s adjusted net earnings, a non-GAAP measure, were $30.3 million for the quarter, up 10%, and $62.8 million for the six months, up 8%.
- Biotechnology quarterly sales grew 10% (5% organically); its operating margin declined to 50.3% from 54.0%, largely due to Novus product mix and infrastructure investment. Clinical Controls sales grew 2% in the quarter and its operating margin was 27.9%, versus 27.4%. Protein Platforms reported $20.3 million of quarterly sales and a 17.6% operating margin; the filing reports 33% pro forma quarterly revenue growth for ProteinSimple.
Cash, debt, liquidity, and capital allocation
- At December 31, 2014, cash and cash equivalents were $93.0 million and available-for-sale investments totaled $51.1 million, for $144 million combined. Combined cash and investments were $367 million at June 30, 2014; acquisition spending was the principal driver of the decline.
- Operating cash flow for the six months was $71.4 million. Investing cash use was $417.8 million, including $420.1 million of acquisitions; financing provided $128.0 million, including $163 million of credit-facility borrowings and $19 million of repayments.
- Long-term debt was $144 million at period-end, drawn under a $150 million revolving facility maturing July 31, 2019. The facility may be increased by up to $150 million, subject to conditions. The balance sheet also includes a $35 million long-term contingent-consideration liability for CyVek.
- Management expected available cash and operating cash generation to cover operating needs, facility expansion, capital additions, and dividends for at least the next 12 months. Capital spending for the remainder of fiscal 2015 was estimated at approximately $12 million. A $0.32-per-share dividend was announced for payment in February 2015.
Outlook, risks, and unusual items
- No specific revenue or earnings guidance is provided. Management described market conditions as mixed: strong China growth, low North American and European organic growth overall, strength in some U.S. customer categories, and European bio/pharma project delays.
- CyVek consideration includes up to $35 million based on revenue through May 3, 2017, plus a potential payment equal to 50% of revenue from CyVek and related products above $100 million in calendar 2020. The filing records $35 million as the present value of contingent payments at December 31, 2014.
- Market risks include foreign-exchange exposure and volatility in the CCXI investment. A 10% decline in CCXI’s market value would reduce its fair value by approximately $4.3 million. A hypothetical 10% U.S.-dollar appreciation against specified currencies would reduce annualized translated earnings by $2.6 million and foreign net assets by $32.2 million, with $1.1 million of additional transaction losses.
- Management cited risks including product acceptance, competition, manufacturing reliance, currency and economic conditions, personnel, regulation, intellectual property, investment-portfolio credit and market risk, and facility-improvement delays. The company reported no material changes to previously disclosed risk factors, no material adverse legal proceedings, and no reportable off-balance-sheet arrangements.
Important facts for investors to verify
- How much of sales growth and future earnings is attributable to acquired businesses versus organic growth, and whether acquired businesses meet expected growth and margin targets.
- Whether operating margins recover as acquisition-related inventory costs and amortization affect results, and how ongoing commercial, R&D, and infrastructure spending develops.
- The terms, performance triggers, and ultimate amount of CyVek contingent payments, including the 2020 revenue threshold.
- Liquidity and leverage after the acquisition-driven cash decline, including compliance with credit-facility covenants and the company’s capacity to fund dividends and planned capital spending.
- The valuation and concentration risk of the $43.4 million CCXI investment, and the financial effects of foreign-exchange movements.