Form 10-Q for BIO-TECHNE CORP
Bio-Techne Corporation and its subsidiaries operate worldwide and, with the acquisition of ProteinSimple in July 2014, the Company has three reportable business segments, Biotechnology, Clinical Controls and Protein Platforms, all of which service the life science and diagnostic markets. The Biotechnology reporting segment provides proteins, antibodies, immunoassays, flow cytometry products, intracellular signaling products, and biologically active chemical compounds used in biological research. The Clinical Controls reporting segment provides a range of hematology controls, calibrators, and products used as proficiency testing tools by clinical laboratories and proficiency certifying agencies. The Protein Platforms reporting segment develops and commercializes proprietary systems and consumables for protein analysis.
A key component of the Company’s strategy is to augment internal growth at existing businesses with complementary acquisitions.
On July 2, 2014, the Biotechnology segment completed the acquisition of Novus Holdings, LLC (Novus), including its subsidiary, Novus Biologicals, LLC, for a purchase price of approximately $60.0 million, net of cash acquired and net working capital adjustments. The acquisition was financed with cash and cash equivalents on hand. Novus is a supplier of a large portfolio of both outsourced and in-house developed antibodies and other reagents for life science research, delivered through an innovative digital commerce platform. Novus’ revenues totaled $19.0 million in calendar year 2013.
On July 31, 2014, the Protein Platforms segment completed the acquisition of ProteinSimple for a purchase price of approximately $300 million, net of cash acquired and net working capital adjustments. The acquisition was financed with cash on hand and a $150 million revolving line-of-credit facility, of which $125 million was initially drawn to fund the acquisition. ProteinSimple develops, markets and sells Western-blotting instruments, Biologics instruments, and reagents. ProteinSimple’s revenues totaled $51 million in calendar year 2013.
On November 3, 2014, the Protein Platforms segment acquired 100% of CyVek, Inc.
(CyVek) through a merger. The Company had previously invested $10.0 million in CyVek in fiscal 2014 for approximately 19.9% of the outstanding voting stock of CyVek. On November 3, 2014, the Company made an initial payment of approximately $60.0 million to the other stockholders of CyVek. The payment was partially funded through additional borrowings under the Company’s line-of-credit facility.
The Company will also pay CyVek’s previous stockholders up to $35.0 million based on the revenue generated by CyVek’s products before May 3, 2017 (30 months from the closing of the Merger). The Company will also pay CyVek’s previous stockholders 50% of the amount, if any, by which the revenue from CyVek’s products and related products exceeds $100 million in calendar year 2020. CyVek has developed a transformative immunoassay technology which integrates an innovatively designed microfluidic cartridge with a state-of-the-art analyzer to deliver the most advanced and efficient bench top immunoassay system.
RESULTS OF OPERATIONS
Consolidated net sales increased 19% and 26% for the quarter and nine months ended March 31, 2015, respectively, compared to the same prior-year periods. Consolidated net sales for the quarter and nine months ended March 31, 2015 were affected by the Novus and ProteinSimple acquisitions, both of which closed in July 2014, the CyVek acquisition in November 2014 and the acquisition of PrimeGene in April 2014. Included in consolidated net sales for the quarter and nine months ended March 31, 2015 were $21.9 million and $68.2 million of acquisition-related net sales. Changes in foreign currency exchange rates from the same prior-year period had a negative 4% and negative 2% impact on consolidated net sales for the quarter and nine months ended March 31, 2015, respectively.
Consolidated net earnings decreased 23% and 3% for the quarter and nine months ended March 31, 2015 compared to the same prior-year periods. Included in net earnings for the nine months ended March 31, 2015 was an $8.3 million pre-tax gain on the Company’s previous investment in CyVek. In a business combination achieved in stages, the acquirer is required to re-measure its previously held equity interest in the acquiree at its acquisition-date fair value and recognize the resulting gain or loss, if any, in earnings. Consequently, the gain was triggered in the second quarter of fiscal 2015 as a result of the Company’s purchase of the remaining 80.1% interest in CyVek.
The adjusted financial measures discussed below quantify the impact the following events had on reported net sales, gross margin percentages, operating income and net earnings for the quarter and nine months ended March 31, 2015 as compared to the same prior-year period:
– the acquisitions of ProteinSimple, Novus and CyVek in the current fiscal year and acquisitions in the prior year, including the impact of amortizing intangible assets and the recognition of costs upon the sale of inventory written-up to fair value;
– fluctuations in exchange rates used to convert transactions in foreign currencies (primarily the Euro, British pound sterling, Canadian dollar and Chinese yuan) to U.S. dollars when referencing organic revenue growth;
– income tax impacts of research and development credits, U.S. state income tax adjustments, and additional income taxes from deemed dividends.
These adjusted financial measures are not prepared in accordance with generally accepted accounting principles (GAAP) and may be different from adjusted financial measures used by other companies. Adjusted financial measures should not be considered as a substitute for, or superior to, measures of financial performance prepared in accordance with GAAP. The Company views these adjusted financial measures to be helpful in assessing the Company’s ongoing operating results. In addition, these adjusted financial measures facilitate internal comparisons to historical operating results and comparisons to competitors’ operating results. The Company includes these adjusted financial measures in this quarterly report because we believe they are useful to investors in allowing for greater transparency related to supplemental information we use in our financial and operational analysis.
Consolidated net sales for the quarter and nine months ended March 31, 2015 were $114.2 million and $334.6 million, respectively, increases of 19% and 26% from the same prior-year periods. Organic growth for the quarter and nine months ended March 31, 2015 was 0% and 2%, respectively. The third quarter and nine month reported net sales included 23% and 26% growth from acquisitions, and a negative impact of 4% and 2% from foreign exchange translation, respectively.
Consolidated gross margins for the quarter and nine months ended March 31, 2015 were 69.5% and 68.2%, compared to 71.3% and 70.8%, respectively, for the comparable prior-year periods. Consolidated gross margins for the periods were negatively impacted as a result of purchase accounting related to inventory and intangible assets acquired in the current and prior fiscal years. Under purchase accounting, inventory is valued at fair value less expected selling and marketing costs, resulting in reduced margins in future periods as the inventory is sold.
A reconciliation of the reported consolidated gross margin percentages, adjusted for acquired inventory sold and intangible amortization included in cost of sales, is as follows:
Quarter Ended Nine Months Ended March 31, March 31, 2015 2014 2015 2014 Consolidated gross margin percentage 69.5 % 71.3 % 68.2 % 70.8 % Identified adjustments Costs recognized upon sale of acquired inventory 0.8 % 1.2 % 1.6 % 1.6 % Amortization of intangibles 2.2 % 1.1 % 2.1 % 1.2 % Adjusted gross margin percentage 72.5 % 73.6 % 71.9 % 73.6 %
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $14.4 million (98%) and $45.3 million (104%) for the quarter and nine months ended March 31, 2015 from the same prior-year periods. The increase for the quarter ended March 31, 2015 was mainly a result of $10.0 million of selling, general and administrative expenses by companies acquired since the prior year, and a $4.1 million increase in intangible amortization related to these acquisitions. The remainder of the increase in selling, general and administrative expense was due primarily to additional investment in commercial resources and administrative infrastructure, including higher stock compensation expense.
Research and Development Expenses
Research and development expenses for the quarter and nine months ended March 31, 2015 increased $3.2 million (42%) and $6.7 million (29%) from the same prior-year periods due mainly to expenses by companies acquired during the quarter and nine months.
Segment Results Biotechnology Quarter Ended Nine Months Ended March 31, March 31, 2015 2014 2015 2014 Net sales (in thousands) $ 83,154 $ 80,134 $ 242,573 $ 223,882 Operating income margin 55.6 % 57.6 % 52.5 % 56.0 %
Clinical Controls Quarter Ended Nine Months Ended March 31, March 31, 2015 2014 2015 2014 Net sales (in thousands) $ 15,368 $ 15,421 $ 43,161 $ 41,358 Operating income margin 30.0 % 31.8 % 30.0 % 30.5 %
Protein Platforms Quarter Ended Nine Months Ended March 31, March 31, 2015 2014 2015 2014 Net sales (in thousands) $ 15,669 n/a $ 49,061 n/a Operating income margin (10.9 %) n/a 9.1 % n/a
Net Earnings Adjusted consolidated net earnings are as follows: Quarter Ended Nine Months Ended March 31, March 31, 2015 2014 2015 2014 Net earnings $ 24,290 $ 31,641 $ 81,406 $ 84,124 Identified adjustments: Costs recognized upon sale of acquired inventory 897 1,177 5,252 4,312 Amortization of intangibles 6,751 2,605 19,337 7,380 Acquisition related expenses 335 395 3,906 927 Gain on investment 0 0 (8,300 ) 0 Tax impact of above adjustments (2,549 ) (1,169 ) (8,886 ) (3,552 ) Tax impact of research and development credit 0 0 (910 ) (476 ) Tax impact of U.S. state adjustments and other 2,321 0 2,321 0 Net earnings - adjusted $ 32,045 $ 34,649 $ 94,126 $ 92,715 Adjusted net earnings growth (8 %) 2 %
At March 31, 2015, cash and cash equivalents and available-for-sale investments were $160 million compared to $363 million at June 30, 2014. Included in available-for-sale-investments at March 31, 2015 was the fair value of the Company’s investment in ChemoCentryx, Inc. (CCXI) of $48.0 million. The fair value of the Company’s CCXI investment at June 30, 2014 was $37.1 million.
The Company has a revolving line of credit governed by a Credit Agreement dated July 28, 2014. See Note 3 to the Condensed Consolidated Financial Statements for a description of the Credit Agreement.
Management of the Company expects to be able to meet its cash and working capital requirements for operations, facility expansion, capital additions, and cash dividends for the foreseeable future, and at least the next 12 months, through currently available cash and cash generated from operations.
Cash Flows From Operating Activities
The Company generated cash of $102.2 million from operating activities in the first nine months of fiscal 2015 compared to $98.8 million in the first nine months of fiscal 2014. The increase from the prior year was primarily due to increased net earnings after adjustment for non-cash expenses related to depreciation, amortization, cost recognized on sale of acquired inventory and the gain on the CyVek investment previously discussed.
Cash Flows From Investing Activities
On July 2, 2014, the Company acquired, for a net purchase price of approximately $60 million cash, all of the issued and outstanding equity interests of Novus Holdings LLC (Novus), including its subsidiary, Novus Biologicals, LLC. The acquisition was financed through cash and cash equivalents on hand.
On July 31, 2014, the Company acquired ProteinSimple for a net purchase price of approximately $300 million. The transaction was financed through cash on hand and a revolving line-of-credit facility.
On November 3, 2014, the Company acquired CyVek for a net cash payment of $60 million on the date of acquisition and certain future contingent payments of approximately $35 million. The cash paid at the acquisition date was financed through cash on hand and a revolving line-of-credit facility.
On July 22, 2013, the Company acquired for cash all of the outstanding shares of Bionostics for a net purchase price of approximately $103 million. The acquisition was financed through cash and cash equivalents on hand.
During the nine months ended March 31, 2015, the Company had maturities of $12.0 million of available-for-sale investments. During the nine months ended March 31, 2014, the Company purchased $89.3 million and had sales or maturities of $90.1 million of available-for-sale investments.
Capital expenditures for fixed assets for the first nine months of fiscal 2015 and 2014 were $13.0 million and $11.7 million, respectively. Included in capital expenditures for the first nine months of fiscal 2015 was $4.4 million for leasehold improvements by ProteinSimple for a new building and equipment to expand capacity. Included in capital expenditures for the first nine months of fiscal 2014 was $5.8 million related to expansion and remodeling of office and laboratory space at the Company’s Minneapolis, Minnesota facility. The remaining capital additions were mainly for laboratory and computer equipment. Capital expenditures in the remainder of fiscal 2015 are expected to be approximately $5.0 million. Capital expenditures are expected to be financed through currently available funds and cash generated from operating activities.
Cash Flows From Financing Activities
During the first nine months of fiscal 2015 and 2014, the Company paid cash dividends of $35.2 million and $34.0 million, respectively, to all common shareholders. On May 5, 2015, the Company announced the payment of a $0.32 per share cash dividend. The dividend of approximately $11.9 million will be payable May 28, 2015 to all common shareholders of record on May 15, 2015.
Cash of $9.7 million and $5.1 million was received during the first nine months of fiscal 2015 and 2014, respectively, from the exercise of stock options.
During the first nine months of fiscal 2015, the Company drew $163 million under its revolving line-of-credit facility to partially fund its acquisitions of ProteinSimple and CyVek. The Company made payments on the line-of-credit and other of $21.0 million during the nine months ended March 31, 2015.
OFF-BALANCE SHEET ARRANGEMENTS
The Company has no reportable off-balance sheet arrangements as defined in Item 303(a)(4) of Regulation S-K.
There were no material changes outside the ordinary course of business in the Company’s contractual obligations during the nine months ended March 31, 2015.
CRITICAL ACCOUNTING POLICIES
The Company’s significant accounting policies are discussed in the Company’s Annual Report on Form 10-K for fiscal 2014 and are incorporated herein by reference. The application of certain of these policies requires judgments and estimates that can affect the results of operations and financial position of the Company. Judgments and estimates are used for, but not limited to, valuation of available-for-sale investments, inventory valuation and allowances, valuation of intangible assets and goodwill and valuation of investments in unconsolidated entities. There have been no significant changes in estimates in fiscal 2015 that would require disclosure. There have been no changes to the Company’s policies in the first nine months of fiscal 2015.
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 2014 as filed with the Securities and Exchange Commission.