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

tech20170930_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549


FORM 10-Q

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

 

For the quarterly period ended September 30, 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 

 


BIO-TECHNE CORPORATION

(Exact name of registrant as specified in its charter)


 

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)

 


 

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

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) 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 3, 2017, 37,462,178 shares of the Company's Common Stock (par value $0.01) were outstanding.

 

 

 

 

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

13

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

19

 

 

 

Item 4.

Controls and Procedures

20

 

 

 

PART II: OTHER INFORMATION

 

 

 

Item 1.

Legal Proceedings

21

 

 

 

Item 1A.

Risk Factors

21

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

21

 

 

 

Item 5.

Other Information

21

 

 

 

Item 6.

Exhibits

21

 

 

 

 

SIGNATURES

22

 

 

 

 

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)

 

   

Quarter Ended

 
   

September 30,

 
   

2017

   

2016

 

Net sales

  $ 144,613     $ 130,581  

Cost of sales

    46,745       43,236  

Gross margin

    97,868       87,345  

Operating expenses:

               

Selling, general and administrative

    58,289       45,424  

Research and development

    13,548       12,765  

Total operating expenses

    71,837       58,189  

Operating income

    26,031       29,156  

Other (expense) income

    (3,064

)

    (1,371

)

Earnings before income taxes

    22,967       27,785  

Income taxes

    7,104       8,942  

Net earnings

  $ 15,863     $ 18,843  

Other comprehensive (loss) income:

               

Foreign currency translation adjustments

    6,968       (3,234

)

Unrealized gains and losses on available-for-sale investments, net of tax of $4,576 and $(171), respectively

    (7,792

)

    9,714  

Other comprehensive (loss) income

    (824

)

    6,480  

Comprehensive income

  $ 15,039     $ 25,323  

Earnings per share:

               

Basic

  $ 0.42     $ 0.51  

Diluted

  $ 0.42     $ 0.50  

Cash dividends per common share:

  $ 0.32     $ 0.32  

Weighted average common shares outstanding:

               

Basic

    37,376       37,281  

Diluted

    37,705       37,473  

 

See Notes to Condensed Consolidated Financial Statements.

 

1

 

 

CONDENSED CONSOLIDATED BALANCE SHEETS

Bio-Techne Corporation and Subsidiaries

(in thousands, except share and per share data)

 

   

September 30,
2017
(unaudited)

   

June 30,
2017

 

ASSETS

               

Current assets:

               

Cash and cash equivalents

  $ 72,464     $ 91,612  

Short-term available-for-sale investments

    50,261       66,102  

Accounts receivable, less allowance for doubtful accounts of $1,329 and $696, respectively

    107,325       116,830  

Inventories

    66,532       60,151  

Prepaid expenses

    10,576       13,330  

Total current assets

    307,158       348,025  

Property and equipment, net

    136,846       135,124  

Goodwill

    587,780       579,026  

Intangible assets, net

    451,024       452,042  

Other assets

    44,572       44,002  

Total assets

  $ 1,527,380     $ 1,558,219  

LIABILITIES AND SHAREHOLDERS' EQUITY

               

Current liabilities:

               

Trade accounts payable

  $ 15,082     $ 16,856  

Salaries, wages and related accruals

    22,740       26,602  

Accrued expenses

    19,435       18,518  

Deferred revenue

    5,374       5,968  

Income taxes payable

    3,500       2,478  

Contingent consideration payable

    40,900       65,100  

Total current liabilities

    107,031       135,522  

Deferred income taxes

    116,784       120,596  

Long-term debt obligations

    337,500       343,771  

Long-term contingent consideration payable

    -       3,300  

Other long-term liabilities

    6,255       5,403  

Shareholders' equity:

               

Common stock, par value $.01 per share; authorized 100,000,000; issued and outstanding 37,409,328 and 37,356,041, respectively

    374       374  

Additional paid-in capital

    206,761       199,161  

Retained earnings

    802,434       799,027  

Accumulated other comprehensive loss

    (49,759

)

    (48,935

)

Total shareholders' equity

    959,810       949,627  

Total liabilities and shareholders’ equity

  $ 1,527,380     $ 1,558,219  

 

See Notes to Condensed Consolidated Financial Statements.

 

2

 

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Bio-Techne Corporation and Subsidiaries

(in thousands)

(unaudited)

 

   

Quarter Ended

 
   

September 30,

 
   

2017

   

2016

 

CASH FLOWS FROM OPERATING ACTIVITIES:

               

Net earnings

  $ 15,863     $ 18,843  

Adjustments to reconcile net earnings to net cash provided by operating activities:

               

Depreciation and amortization

    15,423       13,644  

Costs recognized on sale of acquired inventory

    318       1,344  

Deferred income taxes

    (2,184

)

    (1,170

)

Stock-based compensation expense

    3,795       3,190  

Fair value adjustment to contingent consideration payable

    7,500       1,900  

Other operating activity

    277       (1,249

)

Change in operating assets and operating liabilities, net of acquisition:

               

Trade accounts and other receivables

    9,550       (10,176

)

Inventories

    (5,446

)

    (2,414

)

Prepaid expenses

    48       605  

Trade accounts payable and accrued expenses

    (563

)

    4,132  

Salaries, wages and related accruals

    (3,635

)

    (6,373

)

Income taxes payable

    3,750       3,947  

Net cash provided by operating activities

    44,696       26,223  
                 

CASH FLOWS FROM INVESTING ACTIVITIES:

               

Acquisitions, net of cash acquired

    (10,634

)

    (253,193

)

Proceeds from maturities of available-for-sale investments

    3,502       -  

Purchases of available-for-sale investments

    -       (6,836

)

Additions to property and equipment

    (5,273

)

    (2,442

)

Net cash used in investing activities

    (12,405

)

    (262,471

)

                 

CASH FLOWS FROM FINANCING ACTIVITIES:

               

Cash dividends

    (11,958

)

    (11,932

)

Proceeds from stock option exercises

    3,806       2,026  

Excess tax benefit from stock option exercises

    -       253  

Borrowings under line-of-credit agreement

    -       343,500  

Payments on line-of-credit

    (6,000

)

    (91,513

)

Payments of Contingent consideration

    (35,000

)

    -  

Other financing

    (1,802

)

    (171

)

Net cash (used in) provided by financing activities

    (50,954

)

    242,163  
                 

Effect of exchange rate changes on cash and cash equivalents

    (485

)

    (563

)

Net increase (decrease) in cash and cash equivalents

    (19,148

)

    5,352  

Cash and cash equivalents at beginning of period

    91,612       64,237  

Cash and cash equivalents at end of period

  $ 72,464     $ 69,589  

 

See Notes to Condensed Consolidated Financial Statements.

 

3

 

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Bio-Techne Corporation and Subsidiaries

(unaudited)

 

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 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 was as follows:

 

   

Quarter Ended September 30, 2016

 
   

As Previously

                 
   

Reported

   

Adjustment

   

As Revised

 

Cost of sales

  $ 46,111     $ (2,875

)

  $ 43,236  

Selling, general and administrative

    46,263       (839

)

    45,424  

Other (expense) income

    (1,314

)

    (57

)

    (1,371

)

Earnings before income taxes

    24,128       3,657       27,785  

Income taxes

    7,845       1,097       8,942  

Net earnings

    16,283       2,560       18,843  

Comprehensive income

    22,763       2,560       25,323  

 

The revisions had no impact to net cash provided by operating activities or financing activities. The revisions decreased cash used by investing activities by $5.8 million with a corresponding change to the cumulative translation adjustment line item. The impact of this revision to the individual line items within our unaudited consolidated statement of cash flows for the quarter ended September 30, 2016 was as follows:

 

   

Quarter Ended September 30, 2016

 
    As Previously              
    Reported     Adjustment     As Revised  

Costs recognized on the sale of acquired inventory

  $ 4,219     $ (2,875

)

  $ 1,344  

Other operating (1)

    262       (1,666

)

    (1,249

)

Changes in salaries, wages and related accruals

    (7,257

)

    884       (6,373

)

Changes in income tax payable

    2,850       1,097       3,947  

Acquisitions, net of cash acquired

    (259,004

)

    5,811       (253,193

)

Cumulative translation adjustment

    5,248       (5,811

)

    (563

)

 

(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

 

4

 

 

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. In addition to expanded disclosures associated with the new standard, the Company is continuing to assess the impact on our consolidated financial statements. 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 currently anticipate that we will adopt the standards using cumulative catch-up transition method.

 

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 result 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.

 

5

 

 

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 September 30, 2017 and June 30, 2017 were $50.3 million and $66.1 million, respectively. The 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 remaining difference is due to a decrease in the fair value of the Company's investment in ChemoCentryx, Inc. (CCXI). The cost basis of the Company's investment in CCXI at September 30, 2017 and June 30, 2017 was $29.5 million.

 

Inventories:

 

Inventories consist of (in thousands):

 

   

September 30,

   

June 30,

 
   

2017

   

2017

 

Raw materials

  $ 24,535     $ 22,074  

Finished goods

    41,997       38,077  

Inventories, net

  $ 66,532     $ 60,151  

 

Property and Equipment:

 

Property and equipment consist of (in thousands):

 

   

September 30,

   

June 30,

 
   

2017

   

2017

 

Land

  $ 6,270     $ 6,270  

Buildings and improvements

    159,025       158,495  

Machinery and equipment

    104,783       98,596  

Property and equipment, cost

    270,078       263,361  

Accumulated depreciation and amortization

    (133,232

)

    (128,237

)

Property and equipment, net

  $ 136,846     $ 135,124  

 

6

 

 

Intangible Assets:

 

Intangible assets consist of (in thousands):

   

September 30,

   

June 30,

 
   

2017

   

2017

 

Developed technology

  $ 281,816     $ 276,959  

Trade names

    89,070       87,092  

Customer relationships

    208,785       204,243  

Non-compete agreements

    3,273       3,264  

Patents

    893       633  

Intangible assets

    583,837       572,191  

Accumulated amortization

    (132,813

)

    (120,149

)

Intangible assets, net

  $ 451,024     $ 452,042  

 

Changes to the carrying amount of net intangible assets for the quarter ended September 30, 2017 consist of (in thousands):

 

Beginning balance

  $ 452,042  

Acquisitions

    7,100  

Other additions

    276  

Amortization expense

    (11,379

)

Currency translation

    2,985  

Ending balance

  $ 451,024  

 

The estimated future amortization expense for intangible assets as of September 30, 2017 is as follows (in thousands):

 

2018

  $ 35,025  

2019

    45,708  

2020

    44,453  

2021

    44,085  

2022

    42,344  

Thereafter

    239,409  

Total

  $ 451,024  

 

Goodwill:

 

Changes to the carrying amount of goodwill for the quarter ended September 30, 2017 consist of (in thousands):

 

   

Biotechnology

   

Protein Platforms

   

Diagnostics

   

Total

 

Beginning balance

  $ 254,930     $ 220,826     $ 103,270     $ 579,026  

Acquisitions (Note 3)

    4,595       -       -       4,595  

Currency translation

    1,302       2,857       -       4,159  

Ending balance

  $ 260,827     $ 223,683     $ 103,270     $ 587,780  

 

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 September 30, 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.

 

7

 

 

Other Assets:

 

Other Assets consist of (in thousands):

 

   

September 30,

   

June 30,

 
   

2017

   

2017

 

Investments

  $ 40,385     $ 40,385  

Other

    4,187       3,617  

Other assets

  $ 44,572     $ 44,002  

 

As of September 30, 2017, the Company had $44.6 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 September 30, 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 the results of operations of each acquired business are 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 seller 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):

 

   

Trevigen

 

Current assets, net of cash

  $ 1,662  

Equipment

    139  

Other long-term assets

    15  

Intangible assets:

       

Developed technology

    3,800  

Tradename

    1,400  

Customer relationships

    1,900  

Goodwill

    4,595  

Total assets acquired

    13,511  

Liabilities

    92  

Deferred income taxes, net

    2,785  

Net assets acquired

  $ 10,634  
         

Cash paid, net of cash acquired

  $ 10,634  

 

8

 

 

Tangible assets acquired, net of liabilities assumed, were stated at fair value at the date of acquisitions 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 10 years for developed technology, 12 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):

 

   

Total carrying

value as of

   

Fair Value Measurements Using

Inputs Considered as

 
   

September 30,

2017

   

Level 1

   

Level 2

   

Level 3

 

Assets

                               

Equity securities (1)

  $ 47,247     $ 47,247     $ -     $ -  
                                 

Liabilities

                               

Contingent Consideration

  $ 40,900     $ -     $ -     $ 40,900  

 

   

Total carrying

value as of

   

Fair Value Measurements Using

Inputs Considered as

 
   

June 30, 2017

   

Level 1

   

Level 2

   

Level 3

 

Assets

                               

Equity securities (1)

  $ 59,616     $ 59,616     $ -     $ -  

Corporate bond securities (1)

    2,057       -       2,057       -  

Total Assets

  $ 61,673     $ 59,616     $ 2,057     $ -  
                                 

Liabilities

                               

Contingent Consideration

  $ 68,400     $ -     $ -     $ 68,400  

 

 

(1)

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

 

9

 

 

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. There were no transfers into or out of our Level 2 financial assets during the nine months ended September 30, 2017.   

 

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 are up to $75 million, $7 million and $35 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. During fiscal 2017, a portion of the ACD and Zephyrus liabilities were paid. As of June 30, 2017 the remaining contingent consideration payments are up to $50 million, $3.5 million and $35 million related to the ACD, Zephyrus and CyVek acquisitions, respectively. During the first quarter of fiscal 2018, the $35.0 million contingent liability relating to the CyVek acquisition was satisfied.

 

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 quarter ended September 30, 2017 (in thousands):

 

   

Quarter Ended

 
   

September 30, 2017

 

Fair value at the beginning of period

  $ 68,400  

Payments

    (35,000

)

Change in fair value of contingent consideration

    7,500  

Fair value at the end of period

  $ 40,900  

 

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.

 

10

 

 

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 September 30, 2017, the outstanding balance under the Credit Agreement was $337.5 million. 

 

Note 6. Accumulated Other Comprehensive Income:

 

Changes in accumulated other comprehensive income (loss), net of tax, for the quarter ended September 30, 2017 consists of (in thousands):

  

   

Unrealized

Gains

(Losses) on

Available-

for-Sale

Investments

   

Foreign

Currency

Translation

Adjustments

   

Total

 

Beginning balance

  $ 18,989     $ (67,924

)

  $ (48,935

)

Other comprehensive income (loss)

    (7,792

)

    6,968       (824

)

Ending balance

  $ 11,197     $ (60,956

)

  $ (49,759

)

 

Note 7. Earnings Per Share:

 

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

 

   

Quarter Ended

September 30,

 
   

2017

   

2016

 

Earnings per share – basic:

               

Net Income

  $ 15,863     $ 18,843  

Income allocated to participating securities

    (10

)

    (13

)

Income available to common shareholders

  $ 15,853     $ 18,830  

Weighted-average shares outstanding

    37,376       37,281  

Earnings per share-basic

  $ 0.42     $ 0.51  
                 

Earnings per share – diluted:

               

Net Income

  $ 15,863     $ 18,843  

Income allocated to participating securities

    (10

)

    (13

)

Income available to common shareholders

  $ 15,853     $ 18,830  

Weighted average common shares outstanding-basic

    37,376       37,281  

Dilutive effect of stock options and restricted stock units

    329       192  

Weighted average common shares outstanding-diluted

    37,705       37,473  

Earnings per share-diluted

  $ 0.42     $ 0.50  

 

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 1.3 million and 1.2 million for the quarter ended September 30, 2017 and 2016, respectively.

 

Note 8. Share-based Compensation:

 

During the quarter ended September 30, 2017 and 2016, the Company granted 0.6 million and 1.0 million stock options at weighted average grant prices of $114.60 and $107.60 and weighted average fair values of $20.47 and $17.98, respectively. During the quarter ended September 30, 2017 and 2016, the Company granted 500 and 64,931 restricted stock units at a weighted average fair value of $122.57 and $109.36, respectively. The Company did not grant any shares of restricted stock during the quarter ended September 30, 2017. During the quarter ended September 30, 2016, the Company granted 16,653 shares of restricted stock at a grant date fair value of $106.59, respectively.

 

11

 

 

Stock options for 32,625 and 22,145 shares of common stock with total intrinsic values of $0.9 million and $0.9 million were exercised during the quarter ended September 30, 2017 and 2016, respectively.

 

Stock-based compensation expense of $3.8 million and $3.2 million was included in selling, general and administrative expenses for the quarter ended September 30, 2017 and 2016, respectively. As of September 30, 2017, there was $32.5 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 2.6 years.

 

Note 9. Other Income / (Expense):

 

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

   

Quarter Ended

 
   

September 30,

 
   

2017

   

2016

 

Interest expense

  $ (2,243

)

  $ (1,400

)

Interest income

    76       49  

Other non-operating income (expense), net

    (897

)

    (20

)

Total other income (expense)

  $ (3,064

)

  $ (1,371

)

 

Note 10. Income Taxes:

 

The Company’s effective income tax rate for the first quarter of fiscal 2018 and 2017 was 30.9% and 32.2% of consolidated earnings before income taxes, respectively. The change in the company’s tax rate for the first quarter of fiscal 2018 compared to first quarter of fiscal 2017 were primarily driven by the jurisdictional mix of earnings.

 

The company recognized net expense related to discrete tax items of $0.4 million during the first quarter of fiscal year 2018 which is a $0.4 million increase compared to the first quarter of fiscal 2017.

 

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):

 

   

Quarter Ended

 
   

September 30,

 
   

2017

   

2016

 

Net sales:

               

Biotechnology

  $ 95,076     $ 86,787  

Protein Platforms

    24,640       19,573  

Diagnostics

    24,986       24,233  

Intersegment

    (89

)

    (12

)

Consolidated net sales

  $ 144,613     $ 130,581  

Operating income:

               

Biotechnology

  $ 44,603     $ 42,480  

Protein Platforms

    3,056       209  

Diagnostics

    5,829       6,303  

Segment operating income

    53,488       48,992  

Costs recognized on sale of acquired inventory

    (318

)

    (1,344

)

Amortization of acquisition related intangible assets

    (11,379

)

    (10,188

)

Acquisition related expenses

    (9,533

)

    (3,532

)

Stock based compensation

    (3,795

)

    (3,190

)

Corporate general, selling, and administrative expenses

    (2,432

)

    (1,582

)

Consolidated operating income

  $ 26,031     $ 29,156  

 

Note 12. Subsequent Events:

 

None.

  

12

 

 

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

 

The following management discussion and analysis (“MD&A”) provides information that we believe is useful in understanding our operating results, cash flows and financial condition. We provide quantitative information about the material sales drivers including the effect of acquisitions and changes in foreign currency at the corporate and segment level. We also provide quantitative information about discrete tax items and other significant factors we believe are useful for understanding our results. The MD&A should be read in conjunction with both the unaudited consolidated financial information and related notes included in this Form 10-Q, and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended June 30, 2017. This discussion contains various “Non-GAAP Financial Measures” and also contains various “Forward-Looking Statements” within the meaning of the Private Securities Litigation Reform Act of 1995. We refer readers to the statements entitled “Non-GAAP Financial Measures” and “Forward-Looking Information and Cautionary Statements” located at the end of Item 2 of this report.

 

OVERVIEW

 

Bio-Techne Corporation and its subsidiaries operate worldwide with three reportable business segments, Biotechnology, Protein Platforms and Diagnostics, all of which service the life science and diagnostic markets. The Biotechnology reporting segment develops, manufactures and sells proteins, antibodies, immunoassays, flow cytometry products, intracellular signaling products, as well as biologically active chemical compounds used in biological research and ACD’s in situ hybridization detection products. The Protein Platforms reporting segment develops and commercializes proprietary systems and consumables for protein analysis. The Diagnostics reporting segment develops, manufactures and sells a range of controls and calibrators for various blood chemistry and blood gas clinical instruments, as well as quality controls, diagnostic immunoassays and other bulk and custom reagents for the in vitro diagnostic market. The Diagnostics segment also provides bulk purified proteins, enzymes, disease-state plasmas, infectious disease antigens and processed sera to the clinical diagnostic industry.

 

RECENT ACQUISITIONS

 

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

 

On September 5, 2017 the Company acquired Trevigen Inc. for approximately $10.6 million, net of cash received. The Company has had a long-standing business relationship with Trevigen as a seller of its product line.

 

RESULTS OF OPERATIONS

 

Consolidated net sales increased 11% for the quarter ended September 30, 2017 compared to the same prior year period. Organic growth was 8% for quarter ended September 30, 2017 compared to the same prior year period, with acquisitions contributing 2% and foreign currency translation having a positive impact of 1%.

 

Consolidated net earnings decreased 16% for the quarter ended September 30, 2017 compared to the same prior year period primarily due to increased acquisition-related expenses, interest expense and additional investments in commercial resources and administrative infrastructure, including increased stock based compensation.

 

Net Sales

 

Consolidated net sales for the quarter ended September 30, 2017 were $144.6 million, an increase of 11% from the same prior year period. Organic growth for quarter ended September 30, 2017 was 8%. Reported net sales for the quarter ended September 30, 2017 included growth from acquisitions of 2% and a positive impact from foreign currency translation of 1%.

 

For quarter ended September 30, 2017 by geography, sales in the US grew in mid-single digits, with growth comparable in both the BioPharma and Academia end-markets. Europe sales grew over 10% organically, with low-double digit growth in both BioPharma and Academia. China sales grew approximately 20% organically, with our Western brands growing over 30% with similar contributions from both our instrument and reagent portfolios. Sales in Japan grew over 20% while the rest of the Asia-Pacific region grew nearly 30%, led by South Korea. Note that all references made to growth rates by region and end-market exclude OEM sales, which primarily occur in our Diagnostics segment.

 

13

 

 

Gross Margins

 

Consolidated gross margins for the quarter ended September 30, 2017 and September 30, 2016 were 67.7% and 66.9%, respectively. The increase in consolidated gross margin for the quarter ended September 30, 2017 was driven primarily by higher volume leverage and product mix. The increase in consolidated gross margin was partially offset by the negative impacts from purchase accounting related intangible assets acquired in the current and prior fiscal years.

 

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:

 

   

Quarter Ended

 
   

September 30,

 
   

2017

   

2016

 

Consolidated gross margin percentage

    67.7

%

    66.9

%

Identified adjustments:

               

Costs recognized upon sale of acquired inventory

    0.2

%

    1.0

%

Amortization of intangibles

    4.2

%

    3.1

%

Non-GAAP adjusted gross margin percentage

    72.1

%

    71.0

%

 

Consolidated non-GAAP adjusted gross margins were 72.1% for the quarter ended September 30, 2017, up 1.1% from the prior year due to higher volume leverage and product mix.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses increased $12.9 million (28%) for the quarter ended September 30, 2017 from the same prior year period.

 

The increase for the quarter ended September 30, 2017 was driven by additional investments in global commercial resources and administrative infrastructure, including increased stock based compensation. The remaining increase was driven by additional acquisition-related expenses, including a $7.5 million change in the fair value of contingent consideration related to ACD.

 

Research and Development Expenses

 

Research and development expenses for the quarter ended September 30, 2017 increased $0.8 million (6%) from the same prior year period.

 

Segment Results

 

Biotechnology

 

   

Quarter Ended

 
   

September 30,

 
   

2017

   

2016

 

Net sales (in thousands)

  $ 95,076     $ 86,787  

Operating income margin percentage

    46.9

%

    48.9

%

  

Biotechnology’s net sales for the quarter ended September 30, 2017 were $95.1 million with reported growth of 10% compared to the same prior year period. Organic growth for the quarter ended September 30, 2017 was 6% with acquisitions contributing 3% and currency translation having a favorable impact of 1%. Segment growth was driven by the antibody and ACD product categories. Antibody growth was led by a 30% increase in revenue from the Novus brand. ACD experienced over 40% growth that was driven by rapid research market adoption of its RNA-ISH technology.

 

The operating income margin for the quarter ended September 30, 2017 was 46.9% compared to 48.9% for the same prior year period. The decrease in operating income margin is the result of lower margin acquisitions made in this segment, namely ACD, as well as due to strategic investments made throughout the past year.

 

14

 

 

Protein Platforms

 

   

Quarter Ended

 
   

September 30,

 
   

2017

   

2016

 

Net sales (in thousands)

  $ 24,640     $ 19,573  

Operating income margin percentage

    12.4

%

    1.1

%

 

Protein Platforms’ net sales for the quarter ended September 30, 2017 were $24.6 million with reported growth of 26% compared to the same prior year period. Organic growth for the quarter ended September 30, 2017 was 25% with currency translation having a favorable impact of 1%. For the quarter ended September 30, 2017, growth for the segment was broad-based regionally and led by the Biologics product line. The Simple Western and Simple Plex product lines were also key contributors to the revenue increase, delivering over 20% and 100% growth from the same prior year period, respectively.

 

Operating income margin was 12.4% for the quarter ended September 30, 2017 compared to 1.1% for the same prior year period. The higher segment operating margin percentage was primarily attributable to higher volume leverage and favorable product mix

 

Diagnostics

 

   

Quarter Ended

 
   

September 30,

 
   

2017

   

2016

 

Net sales (in thousands)

  $ 24,986     $ 24,233  

Operating income margin percentage

    23.3

%

    26.0

%

 

Diagnostics’ net sales for the quarter ended September 30, 2017 were $25.0 million, an increase of 3% compared to the same prior year period. Mid-single digit sales growth in blood and glucose-based controls was partially offset by the timing of OEM shipments from the diagnostic components product lines.

 

Operating income margin for the segment was 23.3% for the quarter ended September 30, 2017 compared to 26.0% for the same prior year period. The lower operating margin percentage was primarily attributable to lower margin mix of product sales.

 

Income Taxes

 

Income taxes for the quarter ended September 30, 2017 were at an effective rate of 30.9% of consolidated earnings before income taxes compared to 32.2% for the quarter ended September 30, 2016. The change in the company’s tax rate for the first quarter of fiscal 2018 compared to first quarter of fiscal 2017 were primarily driven by the jurisdictional mix of earnings.

 

The forecasted tax rate as of the first quarter of fiscal 2018 before discrete items is 29.5% compared to the prior year forecasted tax rate as of the first quarter of fiscal 2017 before discrete items of 30.1%. The 0.6% reduction in the rate is primarily due to changes in the jurisdictional mix of earnings. Excluding the impact of discrete items, the Company expects the consolidated income tax rate for the remainder of fiscal 2018 to range from 29% to 31%.

 

Net Earnings

 

Non-GAAP adjusted consolidated net earnings are as follows:

 

   

Quarter Ended

 
   

September 30,

 
   

2017

   

2016 (1)

 

Net earnings

  $ 15,863     $ 18,843  

Identified adjustments:

               

Costs recognized upon sale of acquired inventory

    318       1,344  

Amortization of acquisition intangibles

    11,379       10,188  

Acquisition related expenses

    9,619       3,587  

Stock based compensation

    3,795       3,190  

Tax impact of above adjustments

    (5,121

)

    (5,196

)

Tax impact of discrete tax items and other foreign adjustments

    (1,875

)

    (318

)

Non-GAAP adjusted net earnings

  $ 33,978     $ 31,638  

Non-GAAP adjusted net earnings growth

    7.4

%

    7.5

%

 

  (1) The fiscal 2016 net earnings, costs recognized upon sale of acquired inventory, acquisition related expenses, and tax impact of above adjustments line items have been updated for the revisions discussed in Note 1. There was no impact to the previously reported total Non-GAAP adjusted net earnings.

 

15

 

 

Depending on the nature of discrete tax items, our reported tax rate may not be consistent on a period to period basis. The Company independently calculates a non-GAAP adjusted tax rate considering the impact of discrete items and jurisdictional mix of the identified non-GAAP adjustments. The following table summarizes the reported GAAP tax rate and the effective Non-GAAP adjusted tax rate for the quarter ended September 30, 2017 and September 30, 2016.

 

   

Quarter Ended

 
   

September 30,

 
   

2017

   

2016

 

Reported GAAP tax rate

    30.9

%

    32.2

%

Tax rate impact of:

               

Identified non-GAAP adjustments

    (5.5

%)

    (1.5 %)

Discrete tax items and other foreign adjustments

    3.9

%

    0.7

%

Non-GAAP adjusted tax rate

    29.3

%

    31.4

%

 

The difference between the reported GAAP tax rate and non-GAAP tax rate applied to the identified non-GAAP adjustments for the quarter ended September 30, 2017 is primarily a result of the revaluation of contingent consideration. The Company recorded acquisition related expense of $7.5 million related to the change in fair value of contingent consideration, which is not tax deductible, during the quarter ended September 30, 2017.

 

LIQUIDITY AND CAPITAL RESOURCES

 

As of September 30, 2017, cash and cash equivalents and available-for-sale investments were $122.7 million compared to $157.7 million as of June 30, 2017. Included in available-for-sale-investments as of September 30, 2017 was the fair value of the Company's investment in ChemoCentryx, Inc. (CCXI) of $47.2 million. The fair value of the Company's CCXI investment at June 30, 2016 was $59.6 million.

 

The Company has a revolving line of credit governed by a Credit Agreement dated July 28, 2016. See Note 5 to the Condensed Consolidated Financial Statements for a description of the Credit Agreement.

 

The Company has contingent consideration payments of up to $50.0 million and $3.5 million related to the ACD and Zephyrus, respectively. The fair values of the remaining payments are $37.6 million and $3.3 million, respectively, as of September 30, 2017.

 

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, cash generated from operations, and remaining credit available on its existing revolving line of credit.

 

Cash Flows From Operating Activities

 

The Company generated cash of $44.7 million from operating activities in the first quarter of fiscal 2018 compared to $26.2 million in the first quarter of fiscal 2017. The increase from the prior year was primarily due to decreases in operating assets and increases in operating liabilities, net of acquisitions.

 

Cash Flows From Investing Activities

 

We continue to make investments in our business, including capital expenditures. Cash paid for acquisitions was lower in the first three months of fiscal 2018 compared to the first three months of fiscal 2018 with net cash paid of $10.6 million for the Trevigen acquisition during the first three months fiscal 2017 compared to $253.2 million for the ACD and Space acquisitions which occurred during the first three months of fiscal 2017.

 

Capital expenditures for fixed assets for the first quarter of fiscal 2018 and 2017 were $5.3 million and $2.4 million, respectively. Capital expenditures for the first quarter of fiscal 2018 were mainly for facility expansion as well as laboratory and computer equipment. Capital expenditures for the remainder of fiscal 2018 are expected to be approximately $17.0 million. Capital expenditures are expected to be financed through currently available funds and cash generated from operating activities.

 

16

 

 

Cash Flows From Financing Activities

 

During the first quarter of fiscal 2018 and 2017, the Company paid cash dividends of $12.0 million and $11.9 million, respectively, to all common shareholders. On October 31, 2017, the Company announced the payment of a $0.32 per share cash dividend, or approximately $12.0 million, will be payable November 24, 2017 to all common shareholders of record on November 10, 2017.

 

Cash of $3.8 million and $2.0 million was received during the first quarter of fiscal 2018 and 2017, respectively, from the exercise of stock options.

 

During the first quarter of fiscal 2018, the Company made a $6.0 million payment towards the balance of its line-of-credit facility. During the first quarter of fiscal 2017, the Company paid the balance of its previous line-of-credit facility in an amount of approximately $91.5 million and drew $343.5 million under its new revolving line-of-credit facility to fund operations and its acquisition of ACD.

 

During the first quarter of fiscal 2018, the Company made $35.0 million in payments towards the CyVek contingent consideration liability. The Company made no payments towards contingent consideration liabilities during the first quarter of fiscal 2017.

 

In accordance with the terms of the purchase agreement, during the first quarter of fiscal 2018, the Company made the final $2.3 million payment for the Space acquisition. This payment is included within other financing activities.

  

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, 2017.

 

CRITICAL ACCOUNTING POLICIES

 

The Company's significant accounting policies are discussed in the Company's Annual Report on Form 10-K for fiscal 2017 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 the first quarter of fiscal 2018 that would require disclosure nor have there been any changes to the Company's policies.

 

NON-GAAP FINANCIAL MEASURES

 

This Quarterly Report on Form 10-Q, including “Management’s Discussion and Analysis of Financial Condition and Results of Operation” in Item 2, contains financial measures that have not been calculated in accordance with accounting principles generally accepted in the U.S. (GAAP). These non-GAAP measures include:

 

● Adjusted gross margin

● Adjusted net earnings

● Adjusted effective tax rate

 

We provide these measures as additional information regarding our operating results. We use these non-GAAP measures internally to evaluate our performance and in making financial and operational decisions, including with respect to incentive compensation. We believe that our presentation of these measures provides investors with greater transparency with respect to our results of operations and that these measures are useful for period-to-period comparison of results.

 

Our non-GAAP financial measures for adjusted gross margin and adjusted net earnings exclude the costs recognized upon the sale of acquired inventory, amortization of acquisition intangibles, and acquisition related expenses. The Company excludes amortization of purchased intangible assets and purchase accounting adjustments, including costs recognized upon the sale of acquired inventory and acquisition-related expenses, from this measure because they occur as a result of specific events, and are not reflective of our internal investments, the costs of developing, producing, supporting and selling our products, and the other ongoing costs to support our operating structure. Additionally, these amounts can vary significantly from period to period based on current activity.

 

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The Company’s non-GAAP adjusted net earnings also excludes stock based compensation expense and certain adjustments to income tax expense. Stock based compensation is excluded from non-GAAP adjusted earnings because of the nature of this charge, specifically the varying available valuation methodologies, subjective assumptions, and the variety of award types. The Company independently calculates a non-GAAP adjusted tax rate to be applied to the identified non-GAAP adjustments considering the impact of discrete items on these adjustments and the jurisdictional mix of the adjustments. In addition, the tax impact of other discrete and non-recurring charges which impact our reported GAAP tax rate are adjusted from net earnings. We believe these tax items can significantly affect the period-over period assessment of operating results and not necessarily reflect costs and/or income associated with historical trends and future results

 

The Company periodically reassesses the components of our non-GAAP adjustments for changes in how we evaluate our performance, changes in how we make financial and operational decisions, and considers the use of these measures by our competitors and peers to ensure the adjustments are still relevant and meaningful.

   

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 2017 as filed with the Securities and Exchange Commission and Part II. Item 1A below. 

  

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

As of September 30, 2017, 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 $47.2 million. As of September 30, 2017, the potential loss in fair value due to a 10% decrease in the market value of CCXI was $4.7 million.  

 

The Company operates internationally, and thus is subject to potentially adverse movements in foreign currency exchange rates. For the quarter ended September 30, 2017, approximately 27% of consolidated net sales were made in foreign currencies, including 14% in euros, 4% in British pound sterling, 4% 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:

 

   

Quarter Ended

 
   

September 30,

 
   

2017

   

2016

 

Euro

  $ 1.18     $ 1.12  

British pound sterling

    1.31       1.31  

Chinese yuan

    .150       .150  

Canadian dollar

    .798       .767  

 

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. The effects of a hypothetical simultaneous 10% appreciation in the U.S. dollar from September 30, 2017 levels against the euro, British pound sterling, Chinese yuan and Canadian dollar are as follows (in thousands):

 

Decrease in translation of earnings of foreign subsidiaries (annualized)

  $ 2,866  

Decrease in translation of net assets of foreign subsidiaries

    37,603  

Additional transaction losses

    1,226  

  

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ITEM 4. CONTROLS AND PROCEDURES

 

(a) Evaluation of disclosure controls and procedures.

 

The Company maintains disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). The Company's management has evaluated, with the participation of its Chief Executive Officer and Chief Financial Officer, the effectiveness of the design and operation of its disclosure controls and procedures as of the end of the period covered in this Quarterly Report on Form 10-Q. The material weaknesses in internal control over financial reporting identified in connection with the Company's consolidated financial statements for the year ended June 30, 2017 and described in the Company's Annual Report on Form 10-K for the year ended June 30, 2017 were not fully remediated as of September 30, 2017. Management has prepared a detailed action plan and commented on-going remediation efforts during the first quarter of fiscal 2018. However, further testing of the effectiveness of the Company's controls occurring during the remainder of fiscal 2018 is necessary to validate the completion of the remediation plan. Accordingly, based upon their evaluation, the Company's Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures were not effective as of September 30, 2017.

 

(b) Changes in internal controls over financial reporting.

 

The Company commenced its on-going remediation efforts to address the material weaknesses in internal control over financial reporting described in the Company's Annual Report on Form 10-K for the year-ended June 30, 2017.

 

As previously announced, we acquired Trevigen on September 5, 2017. 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 Trevigen.

 

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PART II. OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

As of November 9, 2017, 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 other material changes from the risk factors previously disclosed in the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2017 and the risk factors found in Part I, Item 1A, "Risk Factors," of the Company's Annual Report on Form 10-K for the year ended June 30, 2017.    

   

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, 2017. 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

 

None. 

  

ITEM 6. EXHIBITS

 

See "exhibit index" following the signature page.

 

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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.

 

 

BIO-TECHNE CORPORATION

 

 

    (Company)

 

 

 

 

Date: November 9, 2017  

/s/ Charles R. Kummeth

 

 

     Charles R. Kummeth

 

 

Principal Executive Officer

 

 

 

 

Date: November 9, 2017  

/s/ James Hippel

 

 

     James Hippel

 

 

Principal Financial Officer

 

 

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EXHIBIT INDEX

TO

FORM 10-Q

 

BIO-TECHNE CORPORATION

 

 Exhibit #

  

Description

 

 

 

31.1

 

Certificate of Chief Executive Officer pursuant to section 302 of the Sarbanes Oxley Act of 2002

 

 

 

31.2

 

Certificate of Chief Financial Officer pursuant to section 302 of the Sarbanes Oxley Act of 2002

 

 

 

32.1

 

Certification of Chief Executive Officer pursuant to section 906 of the Sarbanes Oxley Act of 2002

 

 

 

32.2

 

Certification of Chief Financial Officer pursuant to section 906 of the Sarbanes Oxley Act of 2002

 

 

 

101

 

The following financial statements from the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2017, formatted in Extensible Business Reporting Language (XBRL): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Earnings and Comprehensive Income, (iii) the Condensed Consolidated Statements of Cash Flows, and (iv) Notes to the Condensed Consolidated Financial Statements.

 

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