BIO-TECHNE Corp - Quarter Report: 2017 December (Form 10-Q)

 

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

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FORM 10-Q

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended December 31, 2017, or

 

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                      to                    

 

Commission file number 0-17272 

 

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BIO-TECHNE CORPORATION

(Exact name of registrant as specified in its charter)

 

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Minnesota	41-1427402
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
614 McKinley Place N.E. Minneapolis, MN 55413	(612) 379-8854
(Address of principal executive offices) (Zip Code)	(Registrant's telephone number, including area code)

 

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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.

 

Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

 

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

 

At February 2, 2018, 37,474,011 shares of the Company's Common Stock (par value $0.01) were outstanding.

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TABLE OF CONTENTS

 

		Page
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)		1
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations		15
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		22
Item 4.	Controls and Procedures		23
PART II: OTHER INFORMATION
Item 1.	Legal Proceedings		24
Item 1A.	Risk Factors		24
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		24
Item 5.	Other Information		24
Item 6.	Exhibits		24
	SIGNATURES		25

 

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		Quarter Ended								Six Months Ended
		December 31,								December 31,
		2017				2016				2017				2016
Net sales		$	154,153			$	131,807			$	298,766			$	262,388
Cost of sales			52,319				43,664				99,064				86,901
Gross margin			101,834				88,143				199,702				175,487
Operating expenses:
Selling, general and administrative			63,775				56,981				122,064				102,405
Research and development			13,911				13,281				27,459				26,046
Total operating expenses			77,686				70,262				149,523				128,451
Operating income			24,148				17,881				50,179				47,036
Other income (expense)			(2,417	)			(2,693	)			(5,480	)			(4,064	)
Earnings before income taxes			21,731				15,188				44,699				42,972
Income tax expense (benefit)			(27,116	)			7,721				(20,011	)			16,663
Net earnings		$	48,847			$	7,467			$	64,710			$	26,309
Other comprehensive income:
Foreign currency translation adjustments			1,524				(10,066	)			8,492				(13,301	)
Unrealized gain (loss) on available-for-sale investments, net of tax of $799, $(1,889), $5,375, and $(2,060), respectively			(8,582	)			6,778				(16,374	)			16,486
Other comprehensive (loss) income			(7,058	)			(3,288	)			(7,882	)			3,185
Comprehensive income (loss)		$	41,789			$	4,179			$	56,828			$	29,494
Earnings per share:
Basic		$	1.30			$	0.20			$	1.73			$	0.70
Diluted		$	1.29			$	0.20			$	1.71			$	0.70
Cash dividends per common share:		$	0.32			$	0.32			$	0.64			$	0.64
Weighted average common shares outstanding:
Basic			37,449				37,308				37,412				37,294
Diluted			37,926				37,478				37,816				37,475

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		December 31, 2017 (unaudited)				June 30, 2017
ASSETS
Current assets:
Cash and cash equivalents		$	121,458			$	91,612
Short-term available-for-sale investments			40,927				66,102
Accounts receivable, less allowance for doubtful accounts of $905 and $696, respectively			98,498				116,830
Inventories			68,280				60,151
Prepaid expenses and other			16,923				13,330
Total current assets			346,086				348,025
Property and equipment, net			138,461				135,124
Goodwill			589,101				579,026
Intangible assets, net			438,360				452,042
Other assets			43,414				44,002
Total assets		$	1,555,422			$	1,558,219
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable		$	11,318			$	16,856
Salaries, wages and related accruals			26,537				26,602
Accrued expenses			14,508				18,518
Deferred revenue			6,016				5,968
Income taxes payable			-				2,478
Contingent consideration payable			53,300				65,100
Total current liabilities			111,679				135,522
Deferred income taxes			74,103				120,596
Long-term debt obligations			362,500				343,771
Long-term contingent consideration payable			-				3,300
Other long-term liabilities			9,321				5,403
Shareholders' equity:
Common stock, par value $.01 per share; authorized 100,000,000; issued and outstanding 37,469,896 and 37,356,041, respectively			375				374
Additional paid-in capital			214,697				199,161
Retained earnings			839,564				799,027
Accumulated other comprehensive loss			(56,817	)			(48,935	)
Total shareholders' equity			997,819				949,627
Total liabilities and shareholders’ equity		$	1,555,422			$	1,558,219

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		Six Months Ended
		December 31,
		2017				2016
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings		$	64,710			$	26,309
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization			31,038				29,250
Costs recognized on sale of acquired inventory			582				2,133
Deferred income taxes			(43,537	)			(4,384	)
Stock-based compensation expense			8,839				7,245
Fair value adjustment to contingent consideration payable			19,900				12,400
Other operating activity			1,556				(1,286	)
Change in operating assets and operating liabilities, net of acquisition:
Trade accounts and other receivables			18,636				(6,406	)
Inventories			(7,513	)			(2,497	)
Prepaid expenses			1,321				235
Trade accounts payable and accrued expenses			(4,736	)			5,248
Salaries, wages and related accruals			454				(256	)
Income taxes payable			(7,372	)			(138	)
Net cash provided by operating activities			83,878				67,853
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, net of cash acquired			(10,644	)			(255,929	)
Proceeds from maturities of available-for-sale investments			6,563				1,592
Purchases of available-for-sale investments			(3,061	)			(1,625	)
Purchases of property and equipment			(11,608	)			(5,295	)
Purchase of equity investment			-				(40,000	)
Net cash used in investing activities			(18,750	)			(301,257	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash dividends			(23,946	)			(23,871	)
Proceeds from stock option exercises			6,699				2,105
Excess tax benefit from stock option exercises			-				305
Borrowings under line-of-credit agreement			25,000				368,410
Payments on line-of-credit			(6,000	)			(116,500	)
Payments of Contingent consideration			(35,000	)			-
Other financing			(2,157	)			(171	)
Net cash (used in) provided by financing activities			(35,404	)			230,278
Effect of exchange rate changes on cash and cash equivalents			122				(2,175	)
Net increase (decrease) in cash and cash equivalents			29,846				(5,301	)
Cash and cash equivalents at beginning of period			91,612				64,237
Cash and cash equivalents at end of period		$	121,458			$	58,936
Supplemental disclosure of cash flow information:
Cash paid for interest		$	3,630			$	3,405
Cash paid for income taxes		$	27,873			$	21,828

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Note 1. Basis of Presentation and Summary of Significant Accounting Policies:

 

The interim consolidated financial statements of Bio-Techne Corporation and subsidiaries, (the Company) presented here have been prepared by the Company and are unaudited. They have been prepared in accordance with accounting principles generally accepted in the United States of America and with instructions to Form 10-Q and Article 10 of Regulation S-X. They reflect all adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. All such adjustments are of a normal recurring nature.

 

Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. These interim unaudited condensed consolidated financial statements should be read in conjunction with the Company's Consolidated Financial Statements and Notes thereto for the fiscal year ended June 30, 2017, included in the Company's Annual Report on Form 10-K for fiscal year 2017. A summary of significant accounting policies followed by the Company is detailed in the Company's Annual Report on Form 10-K for fiscal 2017. The Company follows these policies in preparation of the interim unaudited condensed consolidated financial statements.

 

As disclosed in the June 30, 2017 Form 10-K, during the fourth quarter of fiscal year 2017, management identified certain errors related to purchase accounting items for the Advanced Cell Diagnostics (ACD) acquisition recorded during the first quarter of fiscal year 2017. We concluded that these errors were not material to each of the respective periods. However, we elected to report the corrected amount for the fourth quarter of fiscal year 2017 and revise the previously reported fiscal 2017 quarterly information in future filings to reflect the properly stated amounts. In accordance with ASC 250, we have corrected the prior year financial statements herein.   

 

The impact of this revision on our unaudited consolidated statement of earnings and comprehensive income was as follows:

 

 

 

 

The revisions had no impact to net cash provided by operating, investing, or financing activities. The impact of this revision to the individual line items within our unaudited consolidated statement of cash flows for the six months ended December 31, 2016 was as follows:

 

(1)

Does not cross-foot due to the retrospective adoption of the cash flow presentation of employee taxes paid for shares withheld as part of ASU 2016-09

 

Recently Adopted Accounting Pronouncements

 

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting. This standard includes provisions intended to simplify various aspects related to how share-based payments are accounted for and presented in the financial statements. We adopted this standard on July 1, 2017. The Company expects its reported provision for income taxes to become more volatile, dependent upon market prices and volume of share-based compensation exercises and vesting of options.

 

In July 2015, the FASB issued ASU 2015-11, Simplifying the Measurement of Inventory. This provision would require inventory that was previously recorded using first-in, first-out (“FIFO”) to be recorded at lower of cost or net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. We adopted this standard on July 1, 2017. The application of this standard did not have significant impact on our financial statements.

 

Pronouncements Issued But Not Yet Adopted

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. The standard provides revenue recognition guidance for any entity that enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of non-financial assets, unless those contracts are within the scope of other accounting standards. The standard also expands the required financial statement disclosures regarding revenue recognition. The new guidance is effective for us on July 1, 2018. In addition, in March 2016, the FASB issued ASU No. 2016-08, Principal versus Agent Considerations (Reporting Revenue Gross versus Net), in April 2016, the FASB issued ASU No. 2016-10, Identifying Performance Obligations and Licensing, and in May 2016, the FASB issued ASU No. 2016-12, Narrow-Scope Improvements and Practical Expedients. These standards are intended to clarify aspects of ASU No. 2014-09 and are effective for us upon adoption of ASU No. 2014-09.

 

The Company’s approach to implementing the new standard includes performing a detailed review of key contracts representative of its different businesses, and comparing historical accounting policies and practices to the new standard. The guidance permits two methods of adoption, retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the cumulative catch-up transition method). We will adopt the standards using cumulative catch-up transition method.

 

The Company is continuing to assess the impact on our consolidated financial statements by finalizing our location surveys, reviewing unique customer contract terms, and developing processes to manage the changes in the revenue recognition guidance and gather information for the required disclosures. The company expects this process will be complete during the fourth quarter of fiscal year 2018. A majority of the Company’s revenue arrangements are routine sales transactions, which generally consist of a single performance obligation to transfer promised goods or service. Therefore, based on our procedures performed to date it is not expected that application of the new guidance will have a material impact to the Company’s consolidated financial statements.

 

In January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities. The standard is intended to improve the recognition, measurement, presentation and disclosure of financial instruments. This ASU is effective using the modified retrospective approach for annual periods and interim periods within those annual periods beginning after December 15, 2017, which for us is July 1, 2018. Early adoption is permitted. We do not expect the application of this standard to have a significant impact on our results of operations or financial position.

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which amends the existing guidance to require lessees to recognize lease assets and lease liabilities from operating leases on the balance sheet. This ASU is effective using the modified retrospective approach for annual periods and interim periods within those annual periods beginning after December 15, 2018, which for us is July 1, 2019. Early adoption is permitted. We are currently evaluating the impact of the adoption of ASU 2016-02 on our consolidated financial statements.

 

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. The amendments in this update replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses. This update is intended to provide financial statement users with more decision-useful information about the expected credit losses. This ASU is effective for annual periods and interim periods for those annual periods beginning after December 15, 2019, which for us is July 1, 2020. Entities may early adopt beginning after December 15, 2018. We are currently evaluating the impact of the adoption of ASU 2016-13 on our consolidated financial statements.

 

In January 2017, the FASB issued ASU No. 2017-01, Clarifying the Definition of a Business. The standard revises the definition of a business, which affects many areas of accounting such as business combinations and disposals and goodwill impairment. The revised definition of a business will likely result in more acquisitions being accounted for as asset acquisitions, as opposed to business combinations. This ASU is effective for annual periods and interim periods for those annual periods beginning after December 15, 2017, which for us is July 1, 2018. The amendments in this guidance are required to be applied prospectively to transactions occurring on or after the effective date.

 

In May 2017, the FASB issued ASU No. 2017-09, Scope of Modification Accounting. The standard provides guidance about which changes to the terms or conditions of a share-based payment award require modification accounting, which may result in a different fair value for the award. This ASU is effective for annual periods and interim periods for those annual periods beginning after December 15, 2017, which for us is July 1, 2018. The guidance is required to be applied prospectively to awards modified on or after the effective date. Historically, modifications to our share-based payment awards have been rare. As such, we do not expect the application of this standard to have a significant impact on our results of operations or financial position.

 

 

Note 2. Selected Balance Sheet Data:

 

Available-For-Sale Investments:

 

The fair value of the Company's available-for-sale investments at December 31, 2017 and June 30, 2017 were $40.9 million and $66.1 million, respectively. The fair value of the Company’s investment in ChemoCentryx, Inc (CCXI) decreased $21.7 million from $59.6 at June 30, 2017 to $37.9 million at December 31, 2017. The remaining decrease was caused by the maturities of $2.1 million in corporate bond securities held by Advanced Cell Diagnostics (ACD) and $1.4 million in certificate of deposits held in China. The cost basis of the Company's investment in CCXI at December 31, 2017 and June 30, 2017 was $29.5 million.

 

Inventories:

 

Inventories consist of (in thousands): 

 

Property and Equipment:

 

Property and equipment consist of (in thousands):

 

 

Intangible Assets:

 

Intangible assets consist of (in thousands):

 

Changes to the carrying amount of net intangible assets for the six months ended December 31, 2017 consist of (in thousands):

 

 

The estimated future amortization expense for intangible assets as of December 31, 2017 is as follows (in thousands):

 

 

 

Goodwill:

 

Changes to the carrying amount of goodwill for the six months ended December 31, 2017 consist of (in thousands):

 

 

We evaluate the carrying value of goodwill in the fourth quarter of each year and between annual evaluations if events occur or circumstances change that would indicate a possible impairment. The Company performed a quantitative assessment for all three of its reporting units during the fourth quarter of fiscal year 2017. The quantitative assessment indicated that all of the reporting units had substantial headroom as of June 30, 2017.

 

 

No triggering events were identified during the quarter ended December 31, 2017. There has been no impairment of goodwill since the adoption of Financial Accounting Standards Board (“FASB”) ASC 350 guidance for goodwill and other intangibles on July 1, 2002.

 

Other Assets:

 

Other Assets consist of (in thousands):

 

As of December 31, 2017, the Company had $43.4 million of other assets compared to $44.0 million as of June 30, 2017. Investments include a $40.0 million investment in Astute Medical, Inc. made during the second quarter of fiscal year 2017. This investment is accounted for under the cost-method as we own less than 20% of the outstanding stock and we concluded that we do not have significant influence. Under the cost-method, the fair value is not estimated if there are no identified events or changes in circumstances that may have a significant adverse effect on the fair value of the investment. No such events or changes in circumstances were identified in the period ended December 31, 2017.

 

 

Note 3. Acquisitions:

 

We periodically complete business combinations that align with our business strategy. Acquisitions are accounted for using the acquisition method of accounting, which requires, among other things, that assets acquired and liabilities assumed be recognized at fair value as of the acquisition date and that the results of operations of each acquired business be included in our consolidated statements of comprehensive income from their respective dates of acquisition. Acquisition costs are recorded in selling, general and administrative expenses as incurred.

 

Trevigen Inc.

On September 5, 2017 the Company acquired the stock of Trevigen Inc. for approximately $10.6 million, net of cash received. The Company has had a long-standing business relationship with Trevigen as a distributor of its product line. The goodwill recorded as a result of the acquisition represents the strategic benefits of growing the Company’s product portfolio and the expected revenue growth from increased market penetration. The goodwill is not deductible for income tax purposes. The business became part of the Biotechnology reportable segment in the first quarter of fiscal 2018.

 

Certain estimated fair values are not yet finalized and are subject to change, which could be significant. The Company expects to finalize these during fiscal year 2018 when our valuation models for acquired intangible assets are completed, including the determination of related estimated useful lives. Amounts for acquired inventory, intangible assets, and related deferred tax liabilities, and goodwill remain subject to change. The preliminary estimated fair values of the assets acquired and liabilities assumed are as follows (in thousands):

 

 

 

As summarized in the table, there have been adjustments totaling $1.4 million to goodwill during the measurement period. These adjustments primarily relate to refinements made to acquired intangible asset cash flow models, and updates to opening balance sheet deferred tax assets and liabilities upon completion of the December 31, 2017 income tax return.

 

Tangible assets acquired, net of liabilities assumed, were recorded at fair value on the date of close based on management's assessment. The purchase price allocated to developed technology, trade names, and customer relationships was based on management's forecasted cash inflows and outflows and using a relief-from-royalty and a multi-period excess earnings method to calculate the fair value of assets purchased. The developed technology is being amortized with the expense reflected in cost of goods sold in the Condensed Consolidated Statement of Earnings and Comprehensive Income. Amortization expense related to trade names, and customer relationships is reflected in selling, general and administrative expenses in the Consolidated Statement of Earnings and Comprehensive Income. The preliminary amortization periods for intangible assets acquired in fiscal 2018 are estimated to be 13 years for developed technology, 11 years for customer relationships, and 1.5 years for trade names. The deferred income tax liability represents the net amount of the estimated future impact of adjustments for costs to be recognized upon the sale of acquired inventory that was written up to fair value and intangible asset amortization, both of which are not deductible for income tax purposes.

 

 

Note 4. Fair Value Measurements:

 

The Company’s financial instruments include cash and cash equivalents, available for sale investments, accounts receivable, accounts payable, contingent consideration obligations, and long-term debt.

 

Fair value is defined as the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. This standard also establishes a hierarchy for inputs used in measuring fair value. This standard maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs market participants would use in valuing the asset or liability based on market data obtained from independent sources. Unobservable inputs are inputs that reflect our assumptions about the factors market participants would use in valuing the asset or liability based upon the best information available in the circumstances.

 

The categorization of financial assets and liabilities within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The hierarchy is broken down into three levels. Level 1 inputs are quoted prices in active markets for identical assets or liabilities. Level 2 inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs (other than quoted prices) that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable for the asset or liability and their fair values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable. Level 3 may also include certain investment securities for which there is limited market activity or a decrease in the observability of market pricing for the investments, such that the determination of fair value requires significant judgment or estimation.

 

The following tables provide information by level for financial assets and liabilities that are measured at fair value on a recurring basis (in thousands):

 

 

 

 

(1)

Included in available-for-sale investments on the balance sheet

 

Our available for sale securities are measured at fair value using quoted market prices in active markets for identical assets and are therefore classified as Level 1 assets. We value our Level 2 assets using inputs that are based on market indices of similar assets within an active market. All of our Level 2 assets have maturity dates of less than one year.

 

The use of different assumptions, applying different judgment to matters that inherently are subjective and changes in future market conditions could result in different estimates of fair value of our securities or contingent consideration, currently and in the future. If market conditions deteriorate, we may incur impairment charges for securities in our investment portfolio. We may also incur changes to our contingent consideration liability as discussed below.

 

In connection with the Advanced Cell Diagnostics (ACD) acquisition (fiscal 2017), as well as the Zephyrus and CyVek acquisitions (fiscal 2016), we are required to make contingent payments, subject to the entities achieving certain sales and revenue thresholds. The contingent consideration payments were up to $75.0 million, $7.0 million and $35.0 million related to the ACD, Zephyrus and CyVek acquisitions, respectively. The fair value of the liabilities for the contingent payments recognized upon each acquisition as part of the purchase accounting opening balance sheet totaled $78.5 million ($37.0 million for ACD, $6.5 million for Zephyrus and $35.0 million for CyVek) and was estimated by discounting to present value the probability-weighted contingent payments expected to be made. Assumptions used in these calculation units sold, expected revenue, discount rate and various probability factors. The ultimate settlement of contingent consideration could deviate from current estimates based on the actual results of these financial measures. This liability is considered to be a Level 3 financial liability that is re-measured each reporting period. The change in fair value of contingent consideration for these acquisitions is included in general and administrative expense.

 

As of June 30, 2017 the remaining contingent consideration payments were up to $50.0 million, $3.5 million and $35.0 million related to the ACD, Zephyrus and CyVek acquisitions, respectively. During the first quarter of fiscal 2018, a cash payment of $35.0 million was made towards to the contingent consideration liability relating to the CyVek acquisition. During the second quarter of fiscal 2018, the Company determined that certain sales and revenue thresholds were met for ACD. The Company expects to make a $50.0 million cash payment towards this liability in the third quarter of fiscal 2018.

 

The following table presents a reconciliation of the liability measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the six months ended December 31, 2017 (in thousands):

 

 

Fair value measurements of other financial instruments – The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practicable to estimate fair value.

 

Cash and cash equivalents, certificates of deposit, accounts receivable, and accounts payable – The carrying amounts reported in the consolidated balance sheets approximate fair value because of the short-term nature of these items.

 

 

Long-term debt – The carrying amounts reported in the consolidated balance sheets for the amount drawn on our line-of-credit facility approximates fair value because our interest rate is variable and reflects current market rates.

 

 

Note 5. Debt and Other Financing Arrangements:

 

In fiscal 2017, the Company entered into a revolving line-of-credit facility governed by a Credit Agreement (the Credit Agreement) dated July 28, 2016. The Credit Agreement provides for a revolving credit facility of $400 million, which can be increased by an additional $200 million subject to certain conditions. Borrowings under the Credit Agreement may be used for working capital and expenditures of the Company and its subsidiaries, including financing permitted acquisitions. Borrowings under the Credit Agreement for base rate loans bear interest at a variable rate equal to the greater of (i) the prime commercial rate, (ii) the per annum federal funds rate plus 0.5%, or (iii) LIBOR + 1.00% - 1.75% depending on the existing total leverage ratio of Debt to Earnings Before Interest, Taxes, Depreciation and Amortization (as defined in the Credit Agreement). The annualized fee for any unused portion of the credit facility is currently 25 basis points.

 

The Credit Agreement matures on July 28, 2021 and contains customary restrictive and financial covenants and customary events of default. As of December 31, 2017, the outstanding balance under the Credit Agreement was $362.5 million. 

 

 

Note 6. Accumulated Other Comprehensive Income:

 

Changes in accumulated other comprehensive income (loss), net of tax, for the six months ended December 31, 2017 consists of (in thousands):

  

 

 

Note 7. Earnings Per Share:

 

The following table reflects the calculation of basic and diluted earnings per share (in thousands, except per share amounts):

 

 

The dilutive effect of stock options and restricted stock units in the above table excludes all options for which the aggregate exercise proceeds exceeded the average market price for the period. The number of potentially dilutive option shares excluded from the calculation was 1.6 million and 2.0 million for the quarter ended December 31, 2017 and 2016, respectively and 1.7 million and 2.0 million for the six months ended December 31, 2017 and 2016, respectively.

 

 

 

Note 8. Share-based Compensation:

 

During the six months ended December 31, 2017 and 2016, the Company granted 1.0 million and 1.1 million stock options at weighted average grant prices of $118.97 and $107.40 and weighted average fair values of $21.58 and $18.13, respectively. During the six months ended December 31, 2017 and 2016, the Company granted 35,674 and 64,931 restricted stock units at weighted average fair values of $125.02 and $109.36, respectively. During the six months ended December 31, 2017 and 2016, the Company granted 20,106 and 23,965 shares of restricted at grant date fair values of $125.05 and $104.94, respectively.

 

Stock options for 70,069 and 23,145 shares of common stock with total intrinsic values of $2.8 million and $1.0 million were exercised during the six months ended December 31, 2017 and 2016, respectively.

 

Stock-based compensation expense of $5.0 million and $4.1 million was included in selling, general and administrative expenses for the quarter ended December 31, 2017 and 2016, respectively. Stock-based compensation expense of $8.8 million and $7.2 million was included in selling, general and administrative expenses for the six months ended December 31, 2017 and 2016, respectively. As of December 31, 2017, there was $40.2 million of unrecognized compensation cost related to non-vested stock options, non-vested restricted stock units and non-vested restricted stock. The weighted average period over which the compensation cost is expected to be recognized is 2.5 years.

 

 

Note 9. Other Income / (Expense):

 

The components of other income (expense) in the accompanying Statement of Earnings and Comprehensive Income are as follows: 

 

 

 

 

Note 10. Income Taxes:

 

The Company’s effective income tax rate was (124.7) % and 50.8% for the second quarter of fiscal 2018 and fiscal 2017, respectively and (44.8) % and 38.8% for the first six months of fiscal 2018 and fiscal 2017, respectively. The changes in the company’s tax rate for the second quarter and first six months of fiscal 2018 compared to second quarter and first six months of fiscal 2017 are due primarily to recording the items attributable to the new tax legislation in the U.S. as described below. Also included in the 2018 effective tax rate is discrete tax benefit of $0.3 million and $0.7 million for the second quarter and first six months of fiscal year 2018 for the tax benefit of stock option exercises offset by a net discrete tax expense of $2.9 million and $3.8 million for the second quarter and first six months of fiscal 2018 related to the revaluation of contingent consideration, which is not tax deductible. Discrete tax expense for the second quarter and first six months of fiscal 2017 included $4.6 million of expense related to the revaluation of contingent consideration.

 

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code which will impact our fiscal year ended June30, 2018 including, but not limited to (1) reducing the U.S. federal corporate tax rate, (2) requiring a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries that may electively be paid over eight years, and (3) accelerated first year expensing of certain capital expenditures. The Tax Act reduces the federal corporate tax rate from 35 percent to 21 percent effective January 1, 2018. Internal Revenue Code Section 15 provides that our fiscal year ended June 30, 2018. We calculated a blended corporate tax rate of 28.1 percent for fiscal year 2018, which is based on a proration of the applicable tax rates before and after effective date of the Tax Act. The statutory tax rate of 21 percent will apply for fiscal 2019 and beyond.

 

 

The Tax Act also puts in place new tax laws that will impact our taxable income beginning in fiscal 2019, which include, but are not limited to (1) creating a Base Erosion Anti-abuse Tax (BEAT), which is a new minimum tax, (2) generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries, (3) a new provision designed to tax currently global intangible low-taxed income (GILTI), which allows for the possibility of utilizing foreign tax credits and a deduction equal to 50 percent to offset the income tax liability (subject to some limitations), (4) a provision that could limit the amount of deductible interest expense, (5) the repeal of the domestic production activity deduction, (6) limitations on the deductibility of certain executive compensation, and (7) limitations on the utilization of foreign tax credits to reduce the U.S. income tax liability.

 

Shortly after the Tax Act was enacted, the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (SAB 118) which provides guidance on accounting for the Tax Act’s impact. SAB 118 provides a measurement period, which in no case should extend beyond one year from the Tax Act enactment date, during which a company acting in good faith may complete the accounting for the impacts of the Tax Act under ASC Topic 740. In accordance with SAB 118, the Company must reflect the income tax effects of the Tax Act in the reporting period in which the accounting under ASC Topic 740 is complete.

 

To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete, the Company can determine a reasonable estimate for those effects and record a provisional estimate in the financial statements in the first reporting period in which a reasonable estimate can be determined. If a Company cannot determine a provisional estimate to be included in the financial statements, the Company should continue to apply ASC 740 based on the provisions of the tax laws that were in effect immediately prior to the Tax Act being enacted. If a Company is unable to provide a reasonable estimate of the impacts of the Tax Act in a reporting period, a provisional amount must be recorded in the first reporting period in which a reasonable estimate can be determined.

 

We have recorded a provisional net tax benefit of $33.5 million related to the Tax Act in the period ending December 31, 2017. This provisional net benefit primarily consists of a net benefit of $37.0 million due to the remeasurement of our deferred tax accounts to reflect the corporate rate reduction impact to our net deferred tax balances and a net expense for the transition tax of $3.5 million.

 

Reduction in U.S. Corporate Rate: The Act reduces the U.S. federal statutory corporate tax rate to a blended 28.1 percent in fiscal year ending June 30, 2018 and 21 percent for fiscal year ending June 30, 2019 and beyond. While we are able to make a reasonable estimate of the impact of the reduction in corporate rate, we are continuing to analyze the temporary differences that existed on the date of enactment, the temporary differences originating in the current fiscal year prior to December 22, 2017, and the temporary differences we expect will reverse prior to June 30, 2018.

 

Transition Tax: The transition tax is a tax on the previously untaxed accumulated and current earnings and profits (E&P) of certain of our foreign subsidiaries as of December 22, 2017.  In order to determine the amount of the Transition Tax, we must determine, in addition to other factors, the amount of post-1986 E&P of the relevant subsidiaries, as well as the amount of non-U.S. income taxes paid on such earnings.  E&P is similar to retained earnings of the subsidiary, but requires other adjustments to conform to U.S. tax rules.  We are able to make a reasonable estimate of the transition tax and recorded a provisional transition tax obligation of $3.5 million which the Company expects to elect to pay, net of certain tax credit carryforwards, over eight years beginning in fiscal year 2019. $0.3 million of this liability is recorded as current with the remaining $3.2 million classified as a long-term liability within our December 31, 2017 balance sheet. However, we are awaiting further interpretative guidance including information regarding state income tax implications and continuing to gather additional information to more precisely compute the amount of the transition tax. We expect that our estimate will be finalized in advance of the filing of our June 30, 2018 Form 10-K.

 

Global intangible low-taxed income (GILTI): The Tax Act includes a provision designed to currently tax global intangible low-taxed income starting in fiscal 2019. Due to the complexity of the new GILTI tax rules, we are continuing to evaluate this provision of the Tax Act, the application of ASC 740, and are considering available accounting policy alternatives to adopt to either record the U.S. income tax effect of future GILTI inclusions in the period in which they arise or establish deferred taxes with respect to the expected future tax liabilities associated with future GILTI inclusions.  In addition, we are awaiting further interpretive guidance in connection with the computation of the GILTI tax. For these reasons, we are not yet able to reasonably estimate the effect of this provision of the Tax Act.

 

As of June 30, 2017, our practice and intention was to reinvest the earnings in our subsidiaries outside of the U.S., and no U.S. deferred income taxes or foreign withholding taxes were recorded. As of December 31, 2017 we continue to assert that we plan to reinvest these earnings. The transition tax noted above will result in the previously untaxed foreign earnings being included in the federal and state fiscal 2018 taxable income. We are currently analyzing our global working capital requirements and the potential tax liabilities that would be incurred if the non-U.S. subsidiaries distribute cash to the U.S. parent, which include local country withholding tax and potential U.S. state taxation. Therefore, we are not yet able to reasonably estimate the effect of this provision of the Tax Act and have not recorded any withholding or state tax liabilities.

 

 

We are also currently analyzing other provisions of the Tax Act that come into effect for tax years starting July 1, 2018 to determine if these items would impact the effective tax rate. These provisions include BEAT, eliminating U.S. federal income taxes on dividends from foreign subsidiaries, the new provision that could limit the amount of deductible interest expense, the limitations on the deductibility of certain executive compensation, and state tax implications of this federal tax legislation.

 

 

Note 11. Segment Information:

 

The Company's management evaluates segment operating performance based on operating income before certain charges to cost of sales and selling, general and administrative expenses, principally associated with acquisition accounting related to inventory, amortization of acquisition-related intangible assets and other acquisition-related expenses.

 

The following is financial information relating to the Company's reportable segments (in thousands):

 

 

 

 

Note 12. Subsequent Events:

 

On January 2, 2018, Bio-Techne acquired Atlanta Biologicals, Inc. and its affiliated company, Scientific Ventures, Inc for approximately $50 million. The transaction is financed through available cash on hand. Atlanta Biologicals fetal bovine serum (FBS) product line strengthens and complements our current tissue culture reagents offering and furthers our efforts to provide more complete solutions to our research customers. The purchase accounting for this acquisition is in progress.

  

On February 1, 2018 Bio-Techne acquired Eurocell Diagnostics SAS a company based in Rennes, France for approximately $7.5 million. Eurocell sells directly to the laboratory markets in the French region as well as servicing the EMEA markets via a network of distributors. The transaction was financed through cash on hand. The purchase accounting for this acquisition is in progress.

 

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