BIO-TECHNE Corp - Quarter Report: 2015 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

For the quarterly period ended September 30, 2015, or

For the transition period from                      to                    

Commission file number 0-17272

BIO-TECHNE CORPORATION

(Exact name of registrant as specified in its charter)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer", "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the Registrant is a shell company (as defined in Exchange Act Rule 12b-2).    ☐  Yes    ☒  No

At November 6, 2015, 37,191,353 shares of the Company's Common Stock (par value $0.01) were outstanding.

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

AND COMPREHENSIVE INCOME

Bio-Techne Corporation and Subsidiaries

(in thousands, except per share data)

(unaudited)

See Notes to Condensed Consolidated Financial Statements.

CONDENSED CONSOLIDATED BALANCE SHEETS

Bio-Techne Corporation and Subsidiaries

(in thousands, except share and per share data)

See Notes to Condensed Consolidated Financial Statements.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Bio-Techne Corporation and Subsidiaries

(in thousands)

(unaudited)

See Notes to Condensed Consolidated Financial Statements.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Bio-Techne Corporation and Subsidiaries

(unaudited)

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

Bio-Techne Corporation and its subsidiaries operate worldwide with three reportable business segments, Biotechnology, Clinical Controls and Protein Platforms, all of which service the life science and diagnostic markets. The Biotechnology reporting segment provides proteins, antibodies, immunoassays, flow cytometry products, intracellular signaling products, and biologically active chemical compounds used in biological research. The Clinical Controls reporting segment provides a range of hematology controls, calibrators, and products used as proficiency testing tools by clinical laboratories and proficiency certifying agencies. The Protein Platforms reporting segment develops and commercializes proprietary systems and consumables for protein analysis.

RECENT ACQUISITIONS

A key component of the Company's strategy is to augment internal growth at existing businesses with complementary acquisitions.

On July 8, 2015, the Clinical Controls segment completed the acquisition of Cliniqa Corporation (Cliniqa), for a purchase price of approximately $83.0 million, net of cash acquired and net working capital adjustments. The acquisition was financed primarily with cash from our line-of-credit facility. Cliniqa specializes in the manufacturing and commercialization of quality controls and calibrators as well as bulk reagents used in the clinical diagnostic market. Proforma results are not presented as this acquisition is not considered material to our consolidated results of operations.  

RESULTS OF OPERATIONS

Consolidated net sales increased 4% for the quarter ended September 30, 2015 compared to the quarter ended September 30, 2014. Consolidated net sales for the quarter ended September 30, 2015 were affected by the Cliniqa acquisition. Consolidated net sales for quarter ended September 30, 2014 were affected by the timing of CyVek acquisition (November 3, 2014) and the ProteinSimple acquisition (July 31, 2014). Organic growth was 2% versus the prior year, with currency translation having a negative impact of 4% and acquisitions contributing 6%.

Consolidated net earnings decreased 10% for the quarter ended September 30, 2015 compared to the same prior-year period result mainly due to the timing of prior year acquisitions, increased acquisition-related intangible amortization, and costs recognized upon sale of acquired inventory and acquisition-related expenses.

The adjusted financial measures discussed below quantify the impact the following events had on reported net sales, gross margin percentages, operating income and net earnings for the quarter ended September 30, 2015 as compared to the same prior-year period:

- the acquisitions of Cliniqa in the current fiscal year, the acquisitions of Novus, ProteinSimple, and Cyvek in fiscal year 2014, and acquisitions of prior years, including the impact of amortizing intangible assets and the recognition of costs upon the sale of inventory written-up to fair value;

- fluctuations in exchange rates used to convert transactions in foreign currencies (primarily the Euro, British pound sterling, Canadian dollar, Chinese yuan, and Japanese yen) to U.S. dollars;

These adjusted financial measures are not prepared in accordance with generally accepted accounting principles (GAAP) and may be different from adjusted financial measures used by other companies. Adjusted financial measures should not be considered as a substitute for, or superior to, measures of financial performance prepared in accordance with GAAP. The Company views these adjusted financial measures to be helpful in assessing the Company's ongoing operating results. In addition, these adjusted financial measures facilitate internal comparisons to historical operating results and comparisons to competitors' operating results. The Company includes these adjusted financial measures in this quarterly report because we believe they are useful to investors in allowing for greater transparency related to supplemental information we use in our financial and operational analysis.

Net Sales

Gross Margins

Consolidated gross margins for the quarters ended September 30, 2015 and 2014 were 67.1% and 67.4%, respectively. Consolidated gross margins for the quarters ended September 30, 2015 and 2014 were negatively impacted as a result of purchase accounting related to inventory and intangible assets acquired in the current and prior fiscal years. Under purchase accounting, inventory is valued at fair value less expected selling and marketing costs, resulting in reduced margins in future periods as the inventory is sold.

A reconciliation of the reported consolidated gross margin percentages, adjusted for acquired inventory sold and intangible amortization included in cost of sales, is as follows:

Consolidated adjusted gross margins were 70.6% for the quarter ended September 30, 2015, down 150 basis points from the prior year due to the product mix change associated with the recent acquisition of Cliniqa and the Protein Platforms acquisitions made in fiscal year 2015. Excluding acquisitions, gross margins were essentially flat compared to last year.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $4.3 million (15%) for the quarter ended September 30, 2015 from the same prior-year period. The increase for the quarter ended September 30, 2015 was mainly a result of $1.4 million of selling, general and administrative expenses from the Cliniqa and CyVek acquisitions which were acquired after July of last year, a $1.7 million increase in acquisition intangible amortization, and $0.7 million increase in stock-based compensation expense. The remainder of the increase in selling, general and administrative expense was due primarily to additional investment in commercial resources and administrative infrastructure.

Research and Development Expenses

Research and development expenses for the quarter ended September 30, 2015 increased $2.2 million (24%) from the same prior-year period due mainly to expenses by companies acquired since the prior year.

Segment Results

As previously mentioned, beginning in the first quarter of fiscal 2016, the Clinical Controls segment includes the financial results of the Company’s BiosPacific business. Historically, this business was managed and reported as part of the Biotechnology segment. The recent acquisition of Cliniqa and its commonality of customer and end markets with BiosPacifc influenced this management and reporting change. All comparisons to prior periods reflect the new reporting structure as if it existed in the prior reporting periods.

Biotechnology

Biotechnology net sales for the quarter ended September 30, 2015 were $75.7 million, a decrease of 1% due to the impact of foreign exchange translation. Organic growth was 4% for the quarter ended September 30, 2015. Operating income for the segment decreased 3% for the quarter ended September 30, 2015 and operating margin was 51.9%, a decline of 100 basis points from the prior year. The lower operating income margin percentage is attributable to the impact of foreign currency translation.

Clinical Controls

Clinical Controls net sales for the quarter ended September 30, 2015 were $20.4 million, with reported growth of 7% compared to the same prior-year period and an organic decline of 11%. Organic decline for the quarter in this segment excludes the impact of $3.4 million of Cliniqa’s net sales for the quarter. Revenue decreased due to the timing of OEM shipment schedules, and therefore the Company believes the first quarter results are not indicative of the current market conditions or future revenue growth expectations for this segment.

Operating income for the segment decreased 23% for the quarter ended September 30, 2015 and operating margin was 23.1%, compared to 31.9% for the same prior-year period. The lower operating income margin was partly attributable to lower volume leverage on fixed cost and the acquisition of Cliniqa, which currently has a lower margin profile than our organic businesses.

Protein Platforms

Net sales for Protein Platforms for the quarter ended September 30, 2015, were $16.3 million, with reported growth of 26%. Revenue from acquisitions, which for ProteinSimple was the month of July and for CyVek was the entire quarter, accounted for approximately 21% of the growth. Foreign exchange translation negatively impacted revenues by 5%, with organic growth at 10%.  Organic growth for the quarter was driven by the biologics product line, as well as by consumable sales within the Simple Western product line.

Operating income margin for the quarter was -7.2% compared to 20.1% for the same prior-year period. The additional month we owned ProteinSimple this year, that being July, had relatively lower sales, as many instrument businesses do in the first month of a quarter. The month of July still had the normal operating expense run rates. Also, operating expenses at CyVek were not included in the prior year quarter ended September 30, 2014 because the acquisition occurred in November, 2014. In summary, ProteinSimple's July, 2015 results, together with the exclusion of CyVek's first quarter, 2015 results, added $2 million of revenue for the quarter year-over-year, but decreased adjusted operating income by approximately $3.9 million. 

Income Taxes

Income taxes for the quarter ended September 30, 2015 were at an effective rate of 28.7% of consolidated earnings before income taxes compared to 30.9% for the quarter ended September 30, 2014. The effective tax rate for the quarter ended September 30, 2015 decreased by 239 basis points due to a one-time benefit of foreign deferred tax adjustments. The Company expects the consolidated income tax rate for the remainder of fiscal 2016 to range from 30% to 32%.

Net Earnings

Adjusted consolidated net earnings are as follows:

LIQUIDITY AND CAPITAL RESOURCES

At September 30, 2015, cash and cash equivalents and available-for-sale investments were $87 million compared to $111 million at June 30, 2015. Included in available-for-sale-investments at September 30, 2015 was the fair value of the Company's investment in ChemoCentryx, Inc. (CCXI) of $38.4 million. The fair value of the Company's CCXI investment at June 30, 2015 was $52.3 million.

The Company has a revolving line of credit governed by a Credit Agreement dated July 28, 2014. See Note 8 to the Condensed Consolidated Financial Statements for a description of the Credit Agreement.

Management of the Company expects to be able to meet its cash and working capital requirements for operations, facility expansion, capital additions, and cash dividends for the foreseeable future, and at least the next 12 months, through currently available cash and cash generated from operations.

Cash Flows From Operating Activities

The Company generated cash of $31.9 million from operating activities in the first quarter of fiscal 2016 compared to $35.7 million in the first quarter of fiscal 2015. The decrease from the prior year was primarily due to decreased net earnings after adjustment for non-cash expenses related to depreciation, amortization and cost recognized on sale of acquired inventory.

Cash Flows From Investing Activities

On July 8, 2015, the Company acquired all of the issued and outstanding equity interests of Cliniqa Corporation (Cliniqa) for a net purchase price of approximately $83.0 million. The acquisition was financed primarily through our revolving line-of-credit facility.

On July 2, 2014, the Company acquired, for a net purchase price of approximately $60.0 million cash, all of the issued and outstanding equity interests of Novus Holdings LLC (Novus), including its subsidiary, Novus Biologicals, LLC. The acquisition was financed through cash and cash equivalents on hand.

On July 31, 2014, the Company acquired ProteinSimple for a net purchase price of approximately $300 million. The transaction was financed through cash on hand and a revolving line-of-credit facility.

Maturities of available for sale securities for the first quarter of fiscal 2016 and 2015 were $3.9 million and $9.9 million, respectively.

Capital expenditures for fixed assets for the first quarter of fiscal 2016 and 2015 were $6.1 million and $4.9 million, respectively. Included in capital expenditures for the first quarter of fiscal 2016 was $3.3 million for leasehold improvements by our Bristol, England location for a new building to expand capacity. The remaining capital additions were mainly for laboratory and computer equipment. Capital expenditures for the remainder of fiscal 2016 are expected to be approximately $14 million. Capital expenditures are expected to be financed through currently available funds and cash generated from operating activities.

Cash Flows From Financing Activities

During the first quarter of fiscal 2016 and 2015, the Company paid cash dividends of $11.9 million and $11.5 million, respectively, to all common shareholders. On October 29, 2015, the Company announced the payment of a $0.32 per share cash dividend, or approximately $11.9 million, will be payable November 27, 2015 to all common shareholders of record on November 13, 2015.

Cash of $1.1 million and $1.9 million was received during the first quarter of fiscal 2016 and 2015, respectively, from the exercise of stock options.

During the first quarter of fiscal 2016, the Company drew $77.0 million under its revolving line-of-credit facility to fund its acquisition of Cliniqa. During the first quarter of fiscal 2015, the Company drew $125 million under its revolving line-of-credit facility to fund its acquisition of ProteinSimple. The Company made payments on the line-of-credit of $24.5 million and $13.0 million during the first quarter of fiscal 2016 and 2015, respectively.

OFF-BALANCE SHEET ARRANGEMENTS

The Company has no reportable off-balance sheet arrangements as defined in Item 303(a)(4) of Regulation S-K.

CONTRACTUAL OBLIGATIONS

There were no material changes outside the ordinary course of business in the Company's contractual obligations during the quarter ended September 30, 2015.

CRITICAL ACCOUNTING POLICIES

The Company's significant accounting policies are discussed in the Company's Annual Report on Form 10-K for fiscal 2015 and are incorporated herein by reference. The application of certain of these policies requires judgments and estimates that can affect the results of operations and financial position of the Company. Judgments and estimates are used for, but not limited to, valuation of available-for-sale investments, inventory valuation and allowances, valuation of intangible assets and goodwill and valuation of investments in unconsolidated entities. There have been no significant changes in estimates in fiscal 2016 that would require disclosure. There have been no changes to the Company's policies in the first quarter of fiscal 2016.

FORWARD LOOKING INFORMATION AND CAUTIONARY STATEMENTS

This quarterly report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include those regarding the Company's expectations as to the effect of changes to accounting policies, the amount of capital expenditures for the remainder of the fiscal year, the source of funding for capital expenditure requirements, the sufficiency of currently available funds for meeting the Company's needs, the impact of fluctuations in foreign currency exchange rates, and expectations regarding gross margin fluctuations, increasing research and development expenses, increasing selling, general and administrative expenses and income tax rates. These statements involve risks and uncertainties that may affect the actual results of operations. The following important factors, among others, have affected and, in the future, could affect the Company's actual results: the introduction and acceptance of new products, general national and international economic conditions, increased competition, the reliance on internal manufacturing and related operations, the impact of currency exchange rate fluctuations, economic instability in Eurozone countries, the recruitment and retention of qualified personnel, the impact of governmental regulation, maintenance of intellectual property rights, credit risk and fluctuation in the market value of the Company's investment portfolio, unseen delays and expenses related to facility improvements, and the success of financing efforts by companies in which the Company has invested. For additional information concerning such factors, see the Company's Annual Report on Form 10-K for fiscal 2015 as filed with the Securities and Exchange Commission.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

At September 30, 2015, the Company held an investment in the common stock of CCXI. The investment was included in short-term available-for-sale investments at its fair value of $38.4 million. At September 30, 2015, the potential loss in fair value due to a 10% decrease in the market value of CCXI was $3.8 million.

The Company operates internationally, and thus is subject to potentially adverse movements in foreign currency exchange rates. For the quarter ended September 30, 2015, approximately 27% of consolidated net sales were made in foreign currencies, including 12% in euros, 5% in British pound sterling, 5% in Chinese yuan and the remaining 5% in other currencies. The Company is exposed to market risk mainly from foreign exchange rate fluctuations of the euro, British pound sterling, the Chinese yuan, and the Canadian dollar, as compared to the U.S. dollar as the financial position and operating results of the Company's foreign operations are translated into U.S. dollars for consolidation.

Month-end average exchange rates between the British pound sterling, euro, Chinese yuan and Canadian dollar, which have not been weighted for actual sales volume in the applicable months in the periods, to the U.S. dollar were as follows:

The Company's exposure to foreign exchange rate fluctuations also arises from trade receivables, trade payables and intercompany payables denominated in one currency in the financial statements, but receivable or payable in another currency. At September 30, 2015, the Company had the following trade receivables, trade payables and intercompany payables denominated in one currency but receivable or payable in another currency (in thousands):

All of the above balances are revolving in nature and are not deemed to be long-term balances. The Company does not enter into foreign exchange forward contracts to reduce its exposure to foreign currency rate changes on forecasted intercompany foreign currency denominated balance sheet positions. Foreign currency transaction gains and losses are included in "Other non-operating expense" in the Consolidated Statement of Earnings and Comprehensive Income. The effect of translating net assets of foreign subsidiaries into U.S. dollars are recorded on the Consolidated Balance Sheet as part of "Accumulated other comprehensive income."

The effects of a hypothetical simultaneous 10% appreciation in the U.S. dollar from September 30, 2015 levels against the euro, British pound sterling, Chinese yuan and Canadian dollar are as follows (in thousands):

ITEM 4. CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures.

As of the end of the period covered by this report, the Company’s management conducted an evaluation, under the supervision and with the participation of the principal executive officer and principal financial officer, of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 as amended (the Exchange Act)).

Based on this evaluation, the principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures are effective to ensure that material information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

(b) Changes in internal controls over financial reporting.

There was no change in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the Company’s most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. We are in the process of evaluating internal controls over financial reporting for those acquisitions completed in fiscal 2015, including Protein Platforms.

As previously announced, we acquired Cliniqa on July 8, 2015. We have not fully evaluated any changes in internal control over financial reporting associated with this acquisition and therefore any material changes that may result from this acquisition have not been disclosed in this report. We intend to disclose all material changes resulting from this acquisition within or prior to the time of our first annual assessment of internal control over financial reporting that is required to include this entity.

The results reported in this quarterly report include those of Cliniqa.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

As of November 9, 2015, the Company is not a party to any legal proceedings that, individually or in the aggregate, are reasonably expected to have a material adverse effect on the Company's business, results of operations, financial condition or cash flows.

ITEM 1A. RISK FACTORS

There have been no material changes from the risk factors previously disclosed in Part I, Item 1A, "Risk Factors," of the Company’s Annual Report on Form 10-K for the year ended June 30, 2015.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

There was no share repurchase activity by the Company in the quarter ended September 30, 2015. The maximum approximate dollar value of shares that may yet be purchased under the Company's existing stock repurchase plan is approximately $125 million. The plan does not have an expiration date.

ITEM 5. OTHER INFORMATION

On November 6, 2015, the Company issued an amended Code of Ethics and Business Conduct, which is included as Exhibit 14.1 to this quarterly report and which is also posted on the Company's website at www.bio-techne.com.

ITEM 6. EXHIBITS

See "exhibit index" following the signature page.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

EXHIBIT INDEX

TO

FORM 10-Q

BIO-TECHNE CORPORATION

* Management contract or compensatory plan or arrangement.

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