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May 11, 2020, 6:38 a.m. EDT

10-Q: BIO-TECHNE CORP

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(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.

OVERVIEW

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 the 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.

RECENT ACQUISITIONS

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 nine months ended March 31, 2020. Refer to the prior year Annual Report on Form 10-K for additional disclosure regarding the Company's recent acquisitions.

RESULTS OF OPERATIONS

Operational Update

Consolidated net sales increased 5% and 8% for the quarter and nine months ended March 31, 2020 compared to the same prior year periods. Organic growth for the quarter and nine months ended March 31, 2020 was 6% and 8%, respectively, compared to the same prior year periods. Foreign currency translation had an unfavorable impact of 1% in both comparative periods while acquisitions contributed an immaterial amount in the three months ended March 31, 2020 and 1% in the nine months ended March 31, 2020.

Consolidated net earnings decreased to $36.4 million for the quarter ended March 31, 2020 from $44.7 million due to approximately $12 million in gains on available-for-sale investments in the prior year. Net earnings increased to $170.5 million for the nine months ended March 31, 2020 compared to $79.6 million in the same prior year period due to approximately a $110 million gain recorded on available-for-sale investments in the current year.

COVID-19 Business Update

The Company is impacted by the COVID-19 pandemic and accordingly, updated its risk factors in Item 1A "Risk Factors" of this form 10-Q.

COVID-19 negatively impacted sales growth during the third quarter of fiscal year 2020 due to numerous customer site shutdowns that occurred in our academia and Bio-Pharma end-markets, particularly in the last several weeks of the quarter. We estimate these customer site shutdowns negatively impacted our third quarter fiscal year 2020 sales by approximately 3%. Customer site shutdowns will continue to have a negative impact on sales while they remain in effect, and we are currently unable to forecast the impact given uncertainty over the duration of the COVID-19 pandemic. Longer term, we are anticipating a positive outlook for future sales growth resulting from expected future funding increases within life-science research in response to the current pandemic.

The Company has responded to COVID-19 by developing resources for SARS-CoV-2 detection, cytokine monitoring, and drug discovery, all which provide critical support in understanding the mechanisms of infection and developing effective treatments. The Company continues to pursue available opportunities to partner in the fight against COVID-19, which may partially offset the impact of our customer site closures.

Earnings per share (EPS) and Adjusted EPS was negatively impacted by COVID-19 by an estimated $0.07-$0.09 in the third quarter of fiscal 2020. The COVID-19 impact on EPS and adjusted EPS was primarily due to the sales impacts described above. We anticipate the short- and long-term impacts of COVID-19 on EPS and adjusted EPS to be similar to that of sales growth.

The Company remains in a strong financial position with sufficient available cash to meet its current obligations as well as access to additional funding, if necessary, through our long-term debt agreement. We did not experience any material changes to our March 31, 2020 Balance Sheet resulting from COVID-19 for items such as additional reserves or asset impairments resulting from the pandemic.

The Company remains fully operational as we abide by local "stay at home" orders across the world. To achieve this, the Company is utilizing a remote workforce where possible. For employees who are unable to work remotely, the Company adopted significant protective measures at our sites, including staggered shifts, and distancing and hygiene best practices recommended by the Center for Disease Control (CDC). In addition, the Company has taken additional steps to monitor and strengthen our supply chain to maintain an uninterrupted supply of our critical products and services.

Net Sales

Consolidated net sales for the quarter and nine months ended March 31, 2020 were $194.7 million and $562.9 million, respectively, an increase of 5% and 8% from the same prior year periods. Organic growth for the quarter and nine months ended March 31, 2020 was 6% and 8%, respectively, compared to the same prior year periods. Foreign currency translation had an unfavorable impact of 1% in both comparative periods while acquisitions contributed an immaterial amount in the three months ended March 31, 2020 and 1% in the nine months ended March 31, 2020. For the quarter and nine months ended March 31, 2020 the Company experienced broad based revenue growth in North America and China across end markets despite the COVID-19 impacts discussed in the update above.

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Gross Margins

Consolidated gross margins for the quarter and nine months ended March 31, 2020 were 66.8% and 65.7% respectively, compared to 67.4% and 66.1% 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 nine months ended March 31, 2020 were 71.5% and 70.6% , respectively compared to 71.3% and 71.3% for the quarter and nine months ended March 31, 2019, 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               Nine Months Ended
                                                          March 31,                     March 31,
                                                      2020          2019           2020            2019
        Consolidated gross margin percentage             66.8 %        67.4 %         65.7 %          66.1 %
        Identified adjustments:
        Costs recognized upon sale of acquired
        inventory                                           -           0.5 %            -             0.5 %
        Amortization of intangibles                       4.5 %         3.4 %          4.7 %           4.7 %
        Stock compensation expense - COGS                 0.2 %           -            0.2 %             -
        Non-GAAP adjusted gross margin
        percentage                                       71.5 %        71.3 %         70.6 %          71.3 %
        


Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $1.3 million (2%) and $7.7 million (4%) for the quarter and nine months ended March 31, 2020, respectively, from the same prior year periods. Selling, general, and administrative expense for both the quarter and nine months ended March 31, 2020 was impacted by additional employees to scale our businesses.

Research and Development Expenses

Research and development expenses increased $0.4 million (3%) and $2.3 million (5%), for the quarter and nine month periods ended March 31, 2020, respectively, from the same prior year periods. The increases were driven by recent acquisitions.







        Segment Results
        Protein Sciences
                                                  Quarter Ended             Nine Months Ended
                                                    March 31,                   March 31,
                                               2020          2019          2020          2019
        Net sales (in thousands)             $ 145,509     $ 137,935     $ 428,021     $ 399,787
        Operating income margin percentage        44.7 %        45.1 %        43.3 %        44.0 %
        


Protein Science's net sales for the quarter and nine months ended March 31, 2020 were $145.5 million and $428.0 million, respectively, with reported growth of 6% and 7% compared to the same prior year periods. Organic growth for the quarter and nine months ended March 31, 2020 were 6% and 7%, respectively, with acquisitions contributing 1% and currency exchange having an unfavorable impact of 1%. Overall segment growth was driven by strong Bio-Pharma sales in North America and strong overall performance in China, despite dealing with COVID-19 impacts for the majority of the quarter.

The operating margin for the quarter and nine months ended March 31, 2020 were 44.7% and 43.3%, respectively, compared to 45.1% and 44.0% for the same prior year periods. Operating income margin was negatively impacted for both comparative periods by sales mix and the acquisition of B-MoGen in Q4 of FY19.

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        Diagnostics and Genomics
                                                 Quarter Ended            Nine Months Ended
                                                   March 31,                  March 31,
                                               2020         2019         2020          2019
        Net sales (in thousands)             $ 49,411     $ 47,134     $ 135,808     $ 123,144
        Operating income margin percentage       14.3 %        7.6 %         6.6 %         4.1 %
        


Diagnostics and Genomics' net sales for the quarter and nine months ended March 31, 2020 were $49.4 million and $135.8 million, respectively, compared to $47.1 million and $123.1 million for the same prior year period. Organic growth for the quarter and nine months ended March 31, 2020 was 5% and 10%, respectively, with currency exchange having an immaterial impact. Overall segment revenue growth was driven by strong growth in our ExoDx Prostate Test, RNA scope, hematology, and glucose products lines.

The operating margin for the segment was 14.3% and 6.6% for the quarter and nine months ended March 31, 2020, respectively, compared to 7.6% and 4.1%, respectively, for the quarter and nine months ended March 31, 2019. Operating income margin was favorably impacted in both comparative periods by volume leverage and Medicare reimbursement for our ExoDx Prostate Test.

Income Taxes

Income taxes were at an effective rate of 22.2% and 20.7% of consolidated earnings for the quarter and nine month period ended March 31, 2020, respectively, compared to 10.5% and 10.8% for the same prior year periods. The change in the Company's tax rate for the quarter and nine months ended March 31, 2020 was driven by the composition and amount of net income across periods and the impact of discrete tax items of $1.4 million and $8.1 million, respectively, compared to prior year discrete tax items of $6.2 million and $11.4 million as further discussed in Note 12.

The annual forecasted tax rate as of the third fiscal quarter of 2020 before discrete items is 26.2% compared to the prior year forecasted tax rate before discrete items of 23.6%. 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             Nine Months Ended
                                                          March 31,                   March 31,
                                                     2020          2019           2020          2019
        Net earnings                               $  36,432     $  44,654     $  170,451     $  79,612
        Identified adjustments:
        Costs recognized upon sale of acquired
        inventory                                          -           935              -         2,804
        Amortization of acquisition intangibles       15,459        14,400         45,467        43,678
        Acquisition related expenses                    (228 )         100            389         3,263
        Stock based compensation, inclusive of
        employer taxes                                 8,088         5,725         27,505        24,151
               Restructuring                              87             -             87             -
        Realized (gain)loss on investments and
        other                                           (410 )     (12,279 )     (110,458 )      (2,907 )
        Tax impact of above adjustments               (3,027 )        (323 )       14,123       (12,683 )
        Tax impact of discrete tax items              (1,431 )      (6,152 )       (8,086 )     (11,439 )
        Non-GAAP adjusted net earnings             $  54,970     $  47,060     $  139,478     $ 126,479
        Non-GAAP adjusted net earnings growth           16.8 %         2.0 %         10.3 %         4.3 %
        


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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 nine months ended March 31, 2020 and March 31, 2019.







                                            Quarter Ended               Nine Months Ended
                                              March 31,                     March 31,
                                           2020        2019          2020                2019
        Reported GAAP tax rate              22.2 %      10.5 %           20.7 %             10.8 %
        Tax rate impact of:
        Identified non-GAAP adjustments     (4.0 )%     (2.9 )%          (2.8 )%            (2.5 )%
        Discrete tax items                   3.1 %      12.3 %            3.8 %             12.8 %
        Non-GAAP adjusted tax rate          21.3 %      19.9 %           21.6 %             21.1 %
        


The difference between the reported GAAP tax rate and non-GAAP tax rate applied to the identified non-GAAP adjustments for the quarter ended March 31, 2020 is primarily a result of discrete tax items, including the tax benefit of stock option exercises.

LIQUIDITY AND CAPITAL RESOURCES

As of March 31, 2020, cash and cash equivalents and available-for-sale investments were $261.1 million compared to $166.0 million as of June 30, 2019. Included in available-for-sale-investments as of March 31, 2020 was the fair value of the Company's investment in ChemoCentryx, Inc. (CCXI) of $70.2 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 $7.9 million as of March 31, 2020.

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 $160.4 million from operating activities in the nine months ended March 31, 2020 compared to $125.7 million in the nine months ended March 31, 2019. The increase from the prior year was primarily due to increases in earnings and 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 nine months ended March 31, 2020, the Company received $78.7 million related to selling a portion of our CCXI shares and $42.1 million from the maturities of certificates of deposit compared to $17.2 million from proceeds from the maturity of certificates of deposit in the nine months ended March 31, 2019. Additionally, the Company did not make any cash payments for acquisitions in the nine months ended March 31, 2020 compared to $272.3 million paid in the nine months ended March 31, 2020 for the Quad and ExosomeDx acquisitions.

Capital expenditures for fixed assets for the nine months ended March 31, 2020 and March 31, 2019 were $34.3 million and $13.7 million, respectively. Capital expenditures for the remainder of fiscal 2020 are expected to be approximately $13 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 nine months ended March 31, 2020 and March 31, 2019, the Company paid cash dividends of $36.6 million and $36.2 million, respectively, to all common shareholders. On April 30, 2020, the Company announced the payment of a $0.32 per share cash dividend, or approximately $12.3 million, will be payable May 22, 2020 to all common shareholders of record on May 11, 2020. During the nine months ended March 31, 2020, the Company repurchased $50.1 million of outstanding common stock.

Cash of $38.5 million and $27.0 million was received during the nine months ended March 31, 2020 and 2019, respectively, from the exercise of stock options.

During the nine months ended March 31, 2020, the Company made payments of $125.4 million towards the balance of its line-of-credit facility and term loan and withdrew $40.0 million on the line-of-credit facility. During the nine months ended March 31, 2019 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 $48.0 million and $9.4 million towards the balance of its new line-of-credit facility and term loan, respectively in the nine months ended March 31, 2019.

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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.

CONTRACTUAL OBLIGATIONS

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 nine months ended March 31, 2020.

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 nine months ended March 31, 2020 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:

Organic Growth

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 . . .

May 11, 2020

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