Business context and reporting period
Bio-Techne Corporation’s Form 10-Q covers the quarter ended September 30, 2017, the first quarter of fiscal 2018 (not calendar 2017 Q1). The company operates in Biotechnology, Protein Platforms and Diagnostics, serving life-science and diagnostic markets. It acquired Trevigen Inc. on September 5 for approximately $10.6 million, net of cash acquired.
Financial results and position
| Metric | Quarter ended Sep. 30, 2017 | Prior-year quarter |
|---|---|---|
| Net sales | $144.6 million | $130.6 million |
| Gross margin | $97.9 million; 67.7% | $87.3 million; 66.9% |
| Operating income | $26.0 million | $29.2 million |
| Net earnings | $15.9 million | $18.8 million |
| Diluted EPS | $0.42 | $0.50 |
| Operating cash flow | $44.7 million | $26.2 million |
| Cash and cash equivalents | $72.5 million | $91.6 million at June 30, 2017 |
| Cash plus available-for-sale investments | $122.7 million | $157.7 million at June 30, 2017 |
| Long-term debt | $337.5 million | $343.8 million at June 30, 2017 |
Revenue grew 11% year over year: 8% organic growth, 2% contribution from acquisitions and 1% favorable currency translation. GAAP gross margin improved 0.8 percentage points; non-GAAP adjusted gross margin was 72.1%, up 1.1 points. Cash dividends were $0.32 per share. The company paid $35.0 million of CyVek contingent consideration and $6.0 million against its credit line during the quarter.
Material changes and segment performance
- Net earnings declined 16%, primarily reflecting higher acquisition-related expenses, interest expense, commercial and administrative investment, and stock-based compensation.
- Biotechnology sales rose 10% to $95.1 million; operating margin declined to 46.9% from 48.9%, with acquisitions and strategic investment weighing on margin.
- Protein Platforms sales grew 26% to $24.6 million; operating margin improved to 12.4% from 1.1%, driven by volume leverage and product mix.
- Diagnostics sales increased 3% to $25.0 million; operating margin fell to 23.3% from 26.0%, primarily due to sales mix and OEM shipment timing.
- Operating cash flow increased year over year, mainly due to movements in operating assets and liabilities. Investing cash outflow was $12.4 million, versus $262.5 million in the prior-year quarter, which included major acquisitions.
Outlook, risks and unusual items
- Management expects available cash, operating cash generation and remaining revolving credit availability to meet operating, investment and dividend needs for at least the next 12 months. Approximately $17 million of capital expenditures was expected for the remainder of fiscal 2018.
- Management forecast a 29%–31% income tax rate for the rest of fiscal 2018, excluding discrete items. No specific revenue or earnings guidance is stated.
- Contingent consideration is subject to acquired businesses meeting sales and revenue thresholds. Remaining maximum payments were $50 million for ACD and $3.5 million for Zephyrus; their recorded fair values were $37.6 million and $3.3 million. A $7.5 million increase in contingent consideration fair value was recorded as expense this quarter.
- The company held $47.2 million of ChemoCentryx stock; a 10% market-value decline would reduce fair value by approximately $4.7 million. About 27% of quarterly sales were in foreign currencies, creating currency exposure.
- Prior-year comparative figures were revised for acquisition purchase-accounting errors deemed immaterial to the respective periods. The revision increased prior-year-quarter net earnings from $16.3 million to $18.8 million; reported cash provided by operating and financing activities was unchanged.
- Material weaknesses in internal control over financial reporting were not fully remediated. Management concluded disclosure controls and procedures were not effective as of September 30, 2017; further testing was still required. No material adverse legal proceedings or material off-balance-sheet arrangements were reported.
Important facts for investors to verify
- Track whether sales growth converts into earnings and whether acquisition, amortization and compensation costs moderate.
- Review remediation and testing of the material weaknesses in internal controls, including controls related to acquired businesses.
- Monitor debt, cash and investment balances, contingent-payment estimates, and the market value of the ChemoCentryx holding.
- Confirm the final Trevigen purchase-price allocation: the filing says key fair values, including acquired intangibles and goodwill, remained preliminary.
- Consider the revised prior-year comparison when assessing year-over-year performance; the filing does not provide a clear quantified reconciliation of every operational impact of the revision.