(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, 2020. 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 prior year, we have operated with two segments - our Protein Sciences segment and our Diagnostics and Genomics segment during fiscal year 2021. 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 (EPI) 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 three months ended September 30, 2020. 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 11% for the quarter ended September 30, 2020 compared to the same prior year period. Organic growth was 10% for the quarter ended September 30, 2020 compared to the same prior year period, with foreign currency exchange having a favorable impact of 1% on revenue growth.
Consolidated net earnings increased to $33.4 million for the quarter ended September 30, 2020 compared to the $14.4 million in same prior year period. The consolidated net earnings increase was driven by higher operating income due to sales volume leverage and cost management
COVID-19 Business Update
During the first quarter of fiscal year 2021, we experienced a significant increase in the number of customer sites that were either fully or partially opened when compared to prior periods during the COVID-19 pandemic. The reopening of customer sites and demand for our portfolio of life science tools and diagnostic reagents enabled the Company to return to sales volumes experienced prior to the onset of the pandemic. However, we are unable to forecast if any customer sites may reclose given rising COVID-19 cases occurring in certain regions. We are anticipating a positive long-term outlook for sales growth resulting from expected future funding increases within life-science research in response to the current pandemic.
The Company has responded to the pandemic by leveraging our deep product portfolio and scientific expertise to develop a robust COVID-19 product and service offering that provides critical support for both clinical care and therapeutic development. The Company's ongoing efforts to utilize and expand upon our portfolio of products and services to enable solutions for this evolving pandemic may partially offset the impacts of any future customer site closures.
Adjusted EPS was favorably impacted in the current quarter when compared to prior periods during the COVID-19 pandemic due to increased sales volumes as described above. We anticipate the short- and long-term impacts of COVID-19 on adjusted EPS to be similar to that of sales growth.
The Company remains in a strong financial position with sufficient available cash as well as access to additional funding, if necessary, through our long-term debt agreement. We did not experience any material changes to our September 30, 2020 Balance Sheet resulting from COVID-19 for items such as additional reserves or asset impairments.
The Company remains fully operational as we abide by local COVID-19 safety regulations across the world. To achieve this, certain employees are working remotely and the Company has adopted significant protective measures for our employees on site, including staggered shifts, social distancing and hygiene best practices recommended by the Centers 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.
Consolidated net sales for the quarter ended September 30, 2020 were $204.2 million, an increase of 11% from the same prior year period. Organic growth was 10% for the quarter ended September 30, 2020 compared to the same prior year period, with foreign currency exchange having a favorable impact of 1% on sales growth.
For the quarter ended September 30, 2020 by geography, the Company experienced broad based revenue growth across products in both operating segments and in each major geographical region.
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Consolidated gross margins for the quarter ended September 30, 2020 and September 30, 2019 were 67.4% and 64.6%, respectively. 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 stock compensation expense, and amortization of intangibles, adjusted gross margins were 71.9% and 69.5% for the quarter ended September 30, 2020 and 2019, respectively. Both consolidated gross margins and non-GAAP adjusted gross margins were positively impacted by product mix and volume leverage for the quarter ended September 30, 2020 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 September 30, 2020 2019 Consolidated gross margin percentage 67.4 % 64.6 % Identified adjustments: Amortization of intangibles 4.2 % 4.7 % Stock compensation expense - COGS 0.3 % 0.2 % Non-GAAP adjusted gross margin percentage 71.9 % 69.5 %
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $3.6 million (5%) for the quarter ended September 30, 2020 from the same prior year period. The increase in expense was primarily driven by higher year over year stock compensation expense.
Research and Development Expenses
Research and development expenses were $16.0 million for the quarter ended September 30, 2020 compared to $16.1 million from the same prior year period. The expense remained consistent across periods due to similar investments into new products and services made in both periods.
Segment Results Protein Sciences Quarter Ended September 30, 2020 2019 Net sales (in thousands) $ 154,446 $ 140,995 Operating margin percentage 45.6 % 42.2 %
Protein Science's net sales for the quarter ended September 30, 2020 were $154.6 million with reported growth of 10% compared to the same prior year period. Organic growth for the quarter ended September 30, 2020 was 8% with foreign currency having a favorable impact of 2%. Segment growth was broad-based and especially strong in the Simple Western and Simple Plex product categories.
The operating margin for the quarter ended September 30, 2020 was 45.6% compared to 42.2% for the same prior year period. Operating income margin was positively impacted by volume leverage and cost management.
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Diagnostics and Genomics Quarter Ended September 30, 2020 2019 Net sales (in thousands) $ 50,125 $ 42,552 Operating margin percentage 17.3 % 2.1 %
Diagnostics and Genomics' net sales for the quarter ended September 30, 2020 were $50.1 million compared to $42.6 million for the same prior year period. Organic growth for the quarter ended September 30, 2020 was 17% with currency exchange having an favorable impact of 1%. Segment growth was broad-based and especially strong in our RNAscope products.
The operating margin for the segment was 17.3% for the quarter ended September 30, 2020 compared to 2.1 % for the same prior year period. Operating income margin was positively impacted by volume leverage.
Income taxes for the quarter ended September 30, 2020 were at an effective rate of 15.1% of consolidated earnings before income taxes compared to 19.1% for the quarter ended September 30, 2019. The change in the Company's tax rate for the quarter ended September 30, 2020 was driven by discrete tax items of $4.2 million compared to prior year discrete tax items of $1.3 million as further discussed in Note 12.
The forecasted tax rate as of the first fiscal quarter of 2021 before discrete items is 25.7% compared to the prior year forecasted tax rate before discrete items of 26.3%. Excluding the impact of discrete items, the Company expects the consolidated income tax rate for the remainder of fiscal 2021 to range from 24% to 28%.
Net Earnings Non-GAAP adjusted consolidated net earnings are as follows: Quarter Ended September 30, 2020 2019 Net earnings $ 33,395 $ 14,398 Identified adjustments: Amortization of acquisition intangibles 15,501 14,901 Acquisition related expenses 230 1,404 Stock-based compensation, inclusive of employer taxes 13,333 8,800 Realized and unrealized (gain)loss on investments 4,351 10,401 Tax impact of above adjustments (5,514 ) (6,982 ) Tax impact of discrete tax items (4,151 ) (1,271 ) Non-GAAP adjusted net earnings $ 57,145 $ 41,651 Non-GAAP adjusted net earnings growth 37.2 % 9.0 %
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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 ended September 30, 2020 and September 30, 2019.
Quarter Ended September 30, 2020 2019 Reported GAAP tax rate 15.1 % 19.1 % Tax rate impact of: Identified non-GAAP adjustments (4.2 )% (4.3 )% Discrete tax items 10.6 % 7.1 % Non-GAAP adjusted tax rate 21.5 % 21.9 %
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, 2020 is primarily a result of discrete tax items, including the tax benefit of stock option exercises.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2020, cash and cash equivalents and available-for-sale investments were $169.4 million compared to $146.6 million as of June 30, 2020. Included in available-for-sale-investments as of September 30, 2020 was the fair value of the Company's investment in ChemoCentryx, Inc. (CCXI) of $83.5 million. The fair value of the Company's CCXI investment at June 30, 2020 was $87.8 million.
The Company has a line-of-credit and term loan governed by a Credit Agreement dated August 1, 2018. 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 $51 million and $38 million relating to the Quad and B-MoGen acquisitions. The fair value of the remaining payments is $6.0 million as of September 30, 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 $66.0 million from operating activities in the first quarter of fiscal 2021 compared to $40.5 million in the first quarter of fiscal 2020. The increase from the prior year was primarily due to higher net earnings and the timing of cash payments on certain operating assets and liabilities.
Cash Flows From Investing Activities
We continue to make investments in our business, including capital expenditures.
Capital expenditures for fixed assets for the first quarter of fiscal 2021 and 2020 were $10.9 million and $10.5 million, respectively. Capital expenditures for the remainder of fiscal 2021 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 first quarter of fiscal 2021 and 2020, the Company paid cash dividends of $12.3 million and $12.2 million, respectively, to all common shareholders. On November 5, 2020, the Company announced the payment of a $0.32 per share cash dividend, or approximately $12.3 million, will be payable November 27, 2020 to all common shareholders of record on November 16, 2020.
Cash of $15.4 million and $9.0 million was received during the first quarter of fiscal 2021 and 2020, respectively, from the exercise of stock options.
During the first quarter of fiscal 2021, the Company made payments of $33.1 million payment towards the balance of its line-of-credit facility. During the first quarter of fiscal 2020, the Company made payments of $19.1 million towards the balance of its line-of-credit facility.
During the first quarter of fiscal 2021, the Company made $4.9 million in other financing payments, primarily related to taxes paid on restricted stock units. During the first quarter of fiscal 2020, the Company made other financing payments of $1.9 million.
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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 Quad and B-MoGen acquisitions, there were no material changes outside the ordinary course of business in the Company's contractual obligations during the quarter ended September 30, 2020.
CRITICAL ACCOUNTING POLICIES
The Company's significant accounting policies are discussed in the Company's Annual Report on Form 10-K for fiscal 2020 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 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:
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 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, adjusted operating margin, and adjusted net earnings, in total and on a per share basis, exclude the costs recognized upon the sale of acquired inventory, amortization of acquisition intangibles, acquisition related expenses inclusive of the changes in fair value of contingent consideration, and other non-recurring items including non-recurring costs and gains. The Company excludes amortization of purchased intangible assets, purchase accounting adjustments, including costs recognized upon the sale of acquired inventory and acquisition-related expenses inclusive of the changes in fair value contingent consideration, and other non-recurring items including gains or losses on legal settlements and one-time assessments 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 operating margin and adjusted net earnings, in total and on a per share basis, also excludes stock-based compensation expense, which is inclusive of the employer portion of payroll taxes on those stock awards, restructuring, impairments of equity method investments, gain and losses from investments, 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, variety of award types, and unpredictability of amount and timing of employer related tax obligations. 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, 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.
Readers are encouraged to review the reconciliations of the adjusted financial measures used in management's discussion and analysis of the financial condition of the Company to their most directly comparable GAAP financial measures provided within the Company's consolidated financial statements.
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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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Nov 09, 2020
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