Bio-Techne Corporation — Form 10-Q
Reporting period: Quarter ended September 30, 2018, the first quarter of fiscal 2019. Comparisons are with the quarter ended September 30, 2017 unless otherwise noted. Amounts are in U.S. dollars; financial statement amounts below are in millions except per-share data.
Business context
Bio-Techne supplies life-science and diagnostic products and services through Protein Sciences and Diagnostics and Genomics. During the quarter, it acquired Quad Technologies and Exosome Diagnostics (ExosomeDx). Management realigned its five operating segments into these two reportable segments for fiscal 2019.
Financial performance
| Metric | Q1 FY2019 | Q1 FY2018 |
|---|---|---|
| Net sales | $163.0 million | $144.6 million |
| Gross margin | $107.6 million; 66.0% | $97.9 million; 67.7% |
| Operating income | $25.8 million | $26.0 million |
| Net earnings | $17.4 million | $15.9 million |
| Diluted EPS | $0.45 | $0.42 |
| Operating cash flow | $39.4 million | $44.7 million |
| Capital expenditures | $4.2 million | $5.3 million |
- Sales rose 13% as reported: 10% organic growth, 4% contribution from acquisitions, and a 1% unfavorable foreign-currency impact. Consumables were the largest revenue category at $135.7 million; royalties were $3.7 million.
- Gross margin declined 1.7 percentage points, primarily due to acquisition-related inventory and intangible-asset accounting. The company’s non-GAAP adjusted gross margin was 72.0%, versus 72.1%.
- Operating income was broadly flat despite sales growth. SG&A increased 15% to $67.1 million, including higher stock-based compensation and acquisition costs; R&D increased 9% to $14.8 million.
- Net earnings increased 10%, helped by lower income taxes, volume leverage and productivity, partly offset by acquisition mix and higher stock compensation. The effective tax rate was 1.0%, versus 30.9%, including a $4.2 million net benefit from discrete tax items. Non-GAAP adjusted net earnings were $38.2 million, up 12.5%.
- Protein Sciences sales grew 17% to $126.4 million; segment operating margin improved to 43.2% from 42.7%. Diagnostics and Genomics sales were nearly flat at $36.7 million, while segment margin fell to 6.9% from 19.9%, reflecting lower-margin acquisitions, including ExosomeDx, and shipment timing.
Liquidity, debt and capital allocation
- At September 30, cash and cash equivalents were $94.7 million and short-term investments were $69.0 million. Management reported combined cash and available-for-sale investments of $163.7 million, compared with $181.8 million at June 30.
- Total assets were $1.872 billion, including $704.8 million of goodwill and $632.7 million of net intangible assets. Current assets were $383.1 million and current liabilities $83.4 million.
- Under a new credit agreement maturing August 1, 2023, the company has a $600 million revolving facility, with a potential $200 million increase subject to conditions, and a $250 million term loan. Outstanding borrowings were $561.9 million at quarter-end; rates are variable and financial covenants apply.
- Operating cash flow of $39.4 million was below the prior-year $44.7 million, primarily due to changes in operating assets and liabilities. Acquisitions used $272.2 million of cash; financing activities provided $222.5 million. Cash dividends were $12.1 million, or $0.32 per share.
- Management stated that available cash, operating cash generation and remaining revolver capacity should meet operating, investment and dividend requirements for at least the next 12 months. Capital expenditures for the remainder of fiscal 2019 were expected to be approximately $20 million.
Material changes, outlook and risks
- Quad was acquired July 2 for approximately $20.4 million net of cash acquired, plus up to $51 million in contingent consideration. ExosomeDx was acquired August 1 for approximately $251.8 million net of cash acquired, plus up to $325 million contingent consideration. The purchase-price allocations remained preliminary; the fair value of contingent consideration was $6.8 million at quarter-end.
- Management expected a 23%–26% consolidated tax rate for the remainder of fiscal 2019, excluding discrete items. No broader sales or earnings guidance is provided in the filing text.
- New accounting standards affected reported results: adoption of the investment standard moved equity-security fair-value changes into earnings, producing a $2.2 million loss this quarter and potentially greater net-income volatility. The company recorded a $24.8 million net increase to beginning retained earnings from the cited accounting-standard adoptions.
- Key risks added for ExosomeDx include uncertain public and private reimbursement for its EPI prostate test, healthcare billing and anti-fraud compliance, laboratory licensing and CLIA requirements, and privacy and security obligations involving protected health information. The filing also identifies acquisition integration, competition, currency movements and investment-market fluctuations among relevant risks.
- The company held a $52.1 million investment in ChemoCentryx; a 10% decline in its market value would reduce fair value by approximately $5.2 million. About 28% of quarterly sales were made in foreign currencies. Management reported effective disclosure controls; acquisition-related internal-control changes had not yet been fully evaluated.
Important facts for investors to verify
- Whether ExosomeDx and Quad meet the operational, product-development and financial milestones underlying their contingent consideration, and whether the preliminary acquisition valuations change.
- Progress and timing of reimbursement decisions for the ExosomeDx EPI test, together with related regulatory, laboratory and privacy compliance developments.
- Whether Diagnostics and Genomics margins recover, and how acquisition-related amortization, inventory charges and integration costs affect reported profitability.
- Debt balances, variable interest costs, covenant headroom and liquidity after acquisition spending, alongside the expected capital expenditures and dividend commitments.
- The sustainability of the unusually low quarterly tax rate; management’s stated 23%–26% remainder-of-year rate excludes discrete items.