(EDGAR Online via COMTEX) -- 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, 2019. 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.
Bio-Techne and its subsidiaries, collectively doing business as Bio-Techne Corporation (Bio-Techne, we, our, us or the Company) develop, manufacture and sell biotechnology reagents, instruments and services for the research and clinical diagnostic markets worldwide. With our deep product portfolio and application expertise, we strive to provide the life sciences community with innovative, high-quality scientific tools to better understand biological processes and drive discovery of diagnostic and therapeutic products.
Consistent with above, we have operated with two segments - our Protein Sciences segment and our Diagnostics and Genomics segment during fiscal year 2020. Our Protein Sciences segment is a leading developer and manufacturer of high-quality purified proteins and reagent solutions, most notably cytokines and growth factors, antibodies, immunoassays, biologically active small molecule compounds, tissue culture reagents and T-Cell activation technologies. This segment also includes protein analysis solutions that offer researchers efficient and streamlined options for automated western blot and multiplexed ELISA workflow. Our Genomics and Diagnostics segment develops and manufactures diagnostic products, including FDA-regulated controls, calibrators, blood gas and clinical chemistry controls and other reagents for OEM and clinical customers, as well as a portfolio of clinical molecular diagnostic oncology assays, including the ExoDx(R)Prostate(IntelliScore) test for prostate cancer diagnosis. This segment also manufactures and sells advanced tissue-based in-situ hybridization assays (ISH) for research and clinical use.
A key component of the Company's strategy is to augment internal growth at existing businesses with complementary acquisitions. The Company did not make any acquisitions in the six months ended December 31, 2019. Refer to the prior year Annual Report on form 10-K for additional disclosure regarding the Company's recent acquisitions.
RESULTS OF OPERATIONS
Consolidated net sales increased 6% and 9% for the quarter and six months ended December 31, 2019 compared to the same prior year periods. Organic growth for the quarter and six months ended December 31, 2019 was 6% and 9%, respectively, compared to the same prior year periods, with acquisitions contributing 1% and foreign currency translation having an unfavorable impact of 1% in both comparative periods.
Consolidated net earnings increased to $119.6 million and $134.0 million for the quarter and six months ended December 31, 2019, respectively, as compared to $17.6 million and $35.0 million in the same prior year periods, which are attributable to current period gains on available-for-sale investments (approximately $121 million and $110 million for the quarter and six months ended December 31, 2019, respectively).
Consolidated net sales for the quarter and six months ended December 31, 2019 were $184.9 million and $368.2 million, respectively, an increase of 6% and 9% from the same prior year periods. Organic growth for the quarter and six months ended December 31, 2019 was 6% and 9%, respectively, compared to the same prior year periods, with acquisitions contributing 1% and foreign currency translation having an unfavorable impact of 1% in both comparative periods.
For the quarter and six months ended December 31, 2019 the Company experienced broad based revenue growth in North America across end markets with China achieving organic revenue growth in excess of 20%.
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Consolidated gross margins for the quarter and six months ended December 31, 2019 were 65.6% and 65.1% respectively, compared to 64.8% and 65.4% for the same prior year periods. 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. Excluding the impact of acquired inventory sold, stock compensation expense, and amortization of intangibles, adjusted gross margins quarter and six months ended December 31, 2019 were 70.6% and 70.0% , respectively compared to 70.9% and 71.4% for the quarter and six months ended December 31, 2018, respectively. Both consolidated gross margins and non-GAAP adjusted gross margins were negatively impacted by unfavorable product mix and foreign exchange rates as compared to the prior year.
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 Six Months Ended December 31, December 31, 2019 2018 2019 2018 Consolidated gross margin percentage 65.6 % 64.8 % 65.1 % 65.4 % Identified adjustments: Costs recognized upon sale of acquired inventory - 0.5 % - 0.6 % Amortization of intangibles 4.7 % 5.6 % 4.7 % 5.4 % Stock compensation expense - COGS 0.3 % - 0.2 % - Non-GAAP adjusted gross margin percentage 70.6 % 70.9 % 70.0 % 71.4 %
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $4.4 million (7%) and $6.4 million (5%) for the quarter and six months ended December 31, 2019, respectively, from the same prior year periods. Selling, general, and administrative expense for both the quarter and six months ended December 31, 2019 was impacted by additional employees to scale our businesses. Additionally, selling, general, and administrative expense for the quarter ended December 31, 2019 was impacted by the timing of stock compensation expense from certain new vesting requirements added to the fiscal 2020 stock awards issued in the first quarter.
Research and Development Expenses
Research and development expenses increased $0.6 Million (4%) and $1.9 million (6%), for the quarter and six month periods ended December 31, 2019, respectively, from the same prior year periods. The increases were driven by recent acquisitions.
Segment Results Protein Sciences Quarter Ended Six Months Ended December 31, December 31, 2019 2018 2019 2018 Net sales (in thousands) $ 141,517 $ 135,462 $ 282,512 $ 261.852 Operating income margin percentage 43.0 % 43.5 % 42.6% 43.4 %
Protein Science's net sales for the quarter and six months ended December 31, 2019 were $141.5 million and $282.5 million, respectively, with reported growth of 4% and 8% compared to the same prior year periods. Organic growth for the quarter and six months ended December 31, 2019 were 4% and 8%, respectively, with acquisitions contributing 1% and currency exchange having an unfavorable impact of 1%. Overall segment growth was driven by consumable products and strong revenue growth in China.
The operating margin for the quarter and six months ended December 31, 2019 were 43.0% and 42.6%, respectively, compared to 43.5% and 43.4% for the same prior year periods. Operating income margin was negatively impacted for both comparative periods by the acquisition of B-Mogen in Q4 of FY19 and unfavorable foreign exchange.
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Diagnostics and Genomics Quarter Ended Six Months Ended December 31, December 31, 2019 2018 2019 2018 Net sales (in thousands) $ 43,846 $ 39,263 $ 86,397 $ 76,010 Operating income margin percentage 2.2% (2.7 )% 2.2 % 1.9 %
Diagnostics and Genomics' net sales for the quarter and six months ended December 31, 2019 were $43.9 million and $86.4 million, respectively, compared to $39.3 million and $76.0 million for the same prior year period. Organic growth for the quarter and six months ended December 31, 2019 was 12% and 14% , respectively, with currency exchange having an immaterial impact. Overall segment revenue growth was driven by strong growth in our RNA scope, BaseScope, and hematology products lines.
The operating margin for the segment was 2.2% for the quarter and six months ended December 31, 2019 compared to (2.7)% and 1.9%, respectively, for the quarter and six months ended December 31, 2018. Operating income margin was favorably impacted in both comparative periods by volume leverage.
Income taxes were at an effective rate of 20.4% and 20.3% of consolidated earnings for the quarter and six month period ended December 31, 2019, respectively, compared to 19.3% and 11.2% for the same prior year periods. The change in the Company's tax rate for the quarter and six months ended December 31, 2019 was driven by the composition and amount of net income across periods and the impact of discrete tax items of $5.4 million and $6.7 million, respectively, compared to prior year discrete tax items of $1.1 million and $5.3 million as further discussed in Note 12.
The forecasted tax rate as of the second fiscal quarter of 2020 before discrete items is 26.2% compared to the prior year forecasted tax rate before discrete items of 24.6%. Excluding the impact of discrete items, the Company expects the consolidated income tax rate for the remainder of fiscal 2020 to range from 24% to 28%.
Net Earning Non-GAAP adjusted consolidated net earnings are as follows: Quarter Ended Six Months Ended December 31, December 31, 2019 2018 2019 2018 Net earnings $ 119,622 $ 17,556 $ 134,018 $ 34,958 Identified adjustments: Costs recognized upon sale of acquired inventory - 935 - 1,869 Amortization of acquisition intangibles 15,108 15,002 30,008 29,278 Acquisition related expenses (787 ) 442 617 3,158 Stock based compensation, inclusive of employer taxes 10,618 6,861 19,418 18,431 Realized (gain)loss on investments and Other (120,449 ) 7,170 (110,047 ) 9,372 Tax impact of above adjustments 24,132 (5,649 ) 17,151 (12,361 ) Tax impact of discrete tax items (5,384 ) (1,110 ) (6,655 ) (5,286 ) Non-GAAP adjusted net earnings $ 42,860 $ 41,207 $ 84,510 $ 79,419 Non-GAAP adjusted net earnings growth 4.0 % 6.1 % 6.4 % 5.8 %
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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 and six months ended December 31, 2019 and December 31, 2018.
Quarter Ended Six Months Ended December 31, December 31, 2019 2018 2019 2018 Reported GAAP tax rate 20.4 % 19.3 % 20.3 % 11.2 % Tax rate impact of: Identified non-GAAP adjustments (2.1 )% (3.4 )% (2.4 )% (2.9 )% Discrete tax items 3.6 % 5.2 % 4.0 % 13.4 % Non-GAAP adjusted tax rate 21.9 % 21.1 % 21.9 % 21.7 %
The difference between the reported GAAP tax rate and non-GAAP tax rate applied to the identified non-GAAP adjustments for the quarter ended December 31, 2019 is primarily a result of discrete tax items, including the tax benefit of stock option exercises.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2019, cash and cash equivalents and available-for-sale investments were $244.0 million compared to $166.0 million as of June 30, 2019. Included in available-for-sale-investments as of December 31, 2019 was the fair value of the Company's investment in ChemoCentryx, Inc. (CCXI) of $100.0 million. The fair value of the Company's CCXI investment at June 30, 2019 was $38.2 million.
The Company has a line-of-credit and term loan governed by a Credit Agreement dated August 1, 2018. See Note 6 to the Condensed Consolidated Financial Statements for a description of the Credit Agreement.
The Company has contingent consideration payments of up to $325 million, $51 million, and $38 million relating to the Exosome, Quad, and B-MoGen acquisitions. The fair value of the remaining payments is $12.6 million as of December 31, 2019.
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 $111.0 million from operating activities in the six months ended December 31, 2019 compared to $86.0 million in the six months ended December 31, 2018. The increase from the prior year was primarily due to timing of cash payments on operating assets and liabilities.
Cash Flows From Investing Activities
We continue to make investments in our business, including capital expenditures. During the six months ended December 31, 2019, the Company received $50.4 million relating to selling a portion of our CCXI shares and $18.0 million from the maturities of certificates of deposit compared to $5.3 million from proceeds from the maturity of certificates of deposit in the six months ended December 31, 2018. Additionally, the Company did not make any cash payments for acquisitions in the six months ended December 31, 2019 compared to $272.3 million paid in the six months ended December 31, 2019 for the Quad and ExosomeDx acquisitions.
Capital expenditures for fixed assets for the six months ended December 31, 2019 and December 31, 2018 were $25.1 million and $8.8 million, respectively. Capital expenditures for the remainder of fiscal 2020 are expected to be approximately $35 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 six months ended December 31, 2019 and December 31, 2018, the Company paid cash dividends of $24.4 million and $24.2 million, respectively, to all common shareholders. On February 4, 2020, the Company announced the payment of a $0.32 per share cash dividend, or approximately $12.2 million, will be payable February 28, 2020 to all common shareholders of record on February 14, 2020.
Cash of $27.2 million and $18.9 million was received during the six months ended December 31, 2019 and 2018, respectively, from the exercise of stock options.
During the six months ended December 31, 2019, the Company made payments of $122.3 million towards the balance of its line-of-credit facility and term loan. During the six months ended December 31, 2018 the Company made payments of $339.0 million towards the balance of its previous line-of-credit facility, borrowed $330.0 million and $250.0 million under its new line-of-credit facility and term loan, respectively. The Company also made payments of $34.3 million towards the balance of its new line-of-credit facility and term loan, in the six months ended December 31, 2018.
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OFF-BALANCE SHEET ARRANGEMENTS
The Company has no reportable off-balance sheet arrangements as defined in Item 303(a)(4) of Regulation S-K.
Other than the contingent consideration associated with the Exosome, Quad, and B-MoGen and acquisitions, there were no material changes outside the ordinary course of business in the Company's contractual obligations during the quarter or six months ended December 31, 2019.
CRITICAL ACCOUNTING POLICIES
The Company's significant accounting policies are discussed in the Company's Annual Report on Form 10-K/A for fiscal 2019 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 quarter or six months ended December 31, 2019 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:
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 measure of organic growth represents revenue growth excluding revenue from acquisitions within the preceding 12 months as well as the impact of foreign currency. Excluding these measures provides more useful period-to-period comparison of revenue results as it excludes the impact of foreign currency exchange rates, which can vary significantly from period to period, and revenue from acquisitions that would not be included in the comparable prior period
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, inclusive of changes in the fair value of contingent consideration. 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 inclusive of the changes in the fair value of contingent consideration, 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.
The Company's non-GAAP adjusted net earnings also excludes stock-based compensation expense, which is inclusive the employer portion of payroll taxes of those stock awards, restructuring, impairments of equity method investments, gain and losses from investments, other non-recurring assessments and certain adjustments to income tax expense. Stock-based compensation is excluded from non-GAAP adjusted net earnings because of the nature of this charge, specifically the varying available valuation methodologies, subjective assumptions, and the variety of award types. Impairments of equity investments are excluded as they are not part of our day-to-day operating decisions. Additionally, gains and losses from other investments that are either isolated or cannot be expected to occur again with any predictability are excluded. Costs related to restructuring activities and other non-recurring assessments, including reducing overhead and consolidating facilities, are excluded because we believe they are not indicative of our normal operating costs. 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.
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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:
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Feb 06, 2020
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