(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 the above, 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 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 obtained a controlling interest in Eminence as disclosed in Note 4 during the six months ended December 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
Consolidated net sales increased 21% and 16% for the quarter and six months ended December 31, 2020 compared to the same prior year periods. Organic growth for the quarter and six months ended December 31, 2020 was 19% and 15%, respectively, as compared to the same prior year periods. Foreign currency translation having a favorable impact of 2% for the quarter ended December 31, 2020 and a 1% favorable impact for the six months ended December 31, 2020 as compared to the same prior year periods. Acquisitions contributed an immaterial impact in both the three and six months ended December 31, 2020.
Consolidated net earnings attributable to Bio-Techne decreased to $46.3 million and $79.7 million for the quarter and six months ended December 31, 2020, respectively, as compared to $119.6 million and $134.0 million in the same prior year periods. The reduction in net earnings attributable to Bio-Techne is primarily due to non-recurring gains on available-for-sale investments of approximately $121 million and $110 million in the quarter and six months ended December 31, 2019, respectively.
COVID-19 Business Update
During the three and six months ended December 31, 2020, 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 our customer sites, the development of a robust COVID-19 product and service offering, and the Company's ongoing efforts to utilize and expand upon our portfolio of products and services to enable solutions for this evolving pandemic have helped the Company achieve record growth in both the three and six months ended December 31, 2020. COVID-19 product offerings favorably impacted both the three and six months ended December 31, 2020 by approximately 3% when compared to the prior year. We are currently unable to forecast future short-term impacts related to COVID-19 due to the ongoing and evolving nature of the pandemic, but anticipate a positive long-term outlook for sales growth resulting from expected future funding increases within life-science research in response to the current pandemic.
Adjusted EPS was favorably impacted by our COVID-19 product offerings 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 December 31, 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 and six months ended December 31, 2020 were $224.3 million and $428.5 million, respectively, an increase of 21% and 16% from the same prior year periods. Organic growth for the quarter and six months ended December 31, 2020 was 19% and 15%, respectively, compared to the same prior year periods. Foreign currency translation having a favorable impact of 2% for the quarter ended December 31, 2020 and a 1% favorable impact for the six months ended December 31, 2020 as compared to the same prior year periods. Acquisitions contributed an immaterial impact in both the three and six months ended December 31, 2020.
For the quarter and six months ended December 31, 2020 the Company experienced broad based revenue growth witch each major geography achieving double digit organic growth.
Consolidated gross margins for the quarter and six months ended December 31, 2020 were 67.3% and 67.4% respectively, compared to 65.6% and 65.1% 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 for the quarter and six months ended December 31, 2020 were 71.5% and 71.7% , respectively compared to 70.6% and 70.0% for the quarter and six months ended December 31, 2019, respectively. Both consolidated gross margins and non-GAAP adjusted gross margins were positively impacted by volume leverage 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, 2020 2019 2020 2019 Consolidated gross margin percentage 67.3 % 65.6 % 67.4 % 65.1 % Identified adjustments: Costs recognized upon sale of acquired inventory - - - - Amortization of intangibles 3.9 % 4.7 % 4.0 % 4.7 % Stock compensation expense - COGS 0.3 % 0.3 % 0.3 % 0.2 % Non-GAAP adjusted gross margin percentage 71.5 % 70.6 % 71.7 % 70.0 %
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $15.1 million (22%) and $18.7 million (14%) for the quarter and six months ended December 31, 2020, respectively, from the same prior year periods. Selling, general, and administrative expense for both the quarter and six months ended December 31, 2020 was impacted by additional stock compensation expense, increases in the number of employees to support sales growth, and additional investments made by the Company to further scale our businesses.
Research and Development Expenses
Research and development expenses were $16.8 million and $32.8 million for the quarter and six months ended December 31, 2020, respectively, compared to $16.4 million and $32.5 million for the comparative prior year periods. The expense remained relatively consistent across periods due to similar investments into new products and services made in each comparative period.
Segment Results Protein Sciences Quarter Ended Six Months Ended December 31, December 31, 2020 2019 2020 2019 Net sales (in thousands) $ 172,179 $ 141,517 $ 326,625 $ 282,512 Operating income margin percentage 46.6 % 43.0 % 46.1 % 42.6 %
Protein Science's net sales for the quarter and six months ended December 31, 2020 were $172.2 million and $326.6 million, respectively, with reported growth of 22% and 16% compared to the same prior year periods. Organic growth for the quarter and six months ended December 31, 2020 was 19% and 14%, respectively, when compared to the prior year. Currency exchange had a favorable impact of 3% and 2% for the quarter and six months ended December 31, 2020, respectively, while acquisitions contributed an immaterial amount. Segment growth was broad-based across all regions and product categories for both the quarter and six months ended December 31, 2020.
The operating margin for the quarter and six months ended December 31, 2020 was 46.6% and 46.1%, respectively, compared to 43.0% and 42.6% for the same prior year periods. Operating income margin was positively impacted by volume leverage and cost management.
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Diagnostics and Genomics Quarter Ended Six Months Ended December 31, December 31, 2020 2019 2020 2019 Net sales (in thousands) $ 52,469 $ 43,846 $ 102,595 $ 86,397 Operating income margin percentage 15.5 % 2.2 % 16.4 % 2.2 %
Diagnostics and Genomics' net sales for the quarter and six months ended December 31, 2020 were $52.5 million and $102.6 million, respectively, compared to $43.9 million and $86.4 million for the same prior year period. Organic growth for the quarter and six months ended December 31, 2020 was 19% and 18%, respectively, with currency exchange having a 1% impact on revenue in both periods. Segment growth was broad-based and especially strong in our RNAscope products for both the quarter and six months ended December 31, 2020.
The operating margin for the segment was 15.5% for the quarter and 16.4% for the six months ended December 31, 2020 compared to 2.2% in both comparative prior year periods. Operating income margin was favorably impacted in both comparative periods by volume leverage and cost management.
Income taxes were at an effective rate of 18.1% and 16.9% of consolidated earnings for the quarter and six month period ended December 31, 2020, respectively, compared to 20.4% and 20.3% for the same prior year periods. The change in the Company's tax rate for the quarter and six months ended December 31, 2020 was driven by the composition and amount of net income across periods and the impact of discrete tax items of $3.7 million and $7.8 million, respectively, compared to prior year discrete tax items of $5.4 million and $6.7 million as further discussed in Note 12.
The forecasted tax rate as of the second fiscal quarter of 2021 before discrete items is 25.1% compared to the prior year forecasted tax rate before discrete items of 26.2%. 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 Six Months Ended December 31, December 31, 2020 2019 2020 2019 Net earnings - GAAP attributable to Bio-Techne $ 46,274 $ 119,622 $ 79,668 $ 134,018 Identified adjustments attributable to Bio-Techne: Costs recognized upon sale of acquired inventory 11 - 11 - Amortization of acquisition intangibles 14,994 15,108 30,495 30,008 Acquisition related expenses 4,514 (787 ) 4,746 617 Stock based compensation, inclusive of employer taxes 16,225 10,618 29,558 19,418 Restructuring costs 142 - 142 - Realized (gain)loss on investments and other (10,197 ) (120,449 ) (5,846 ) (110,047 ) Tax impact of above adjustments (3,041 ) 24,132 (7,936 ) 17,151 Tax impact of discrete tax items(1) (3,674 ) (5,384 ) (7,826 ) (6,655 ) Non-GAAP adjusted net earnings attributable to Bio-Techne $ 65,248 $ 42,860 $ 123,012 $ 84,510 Non-GAAP adjusted net earnings growth attributable to Bio-Techne 52.2 % 4.0 % 45.6 % 6.4 %
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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, 2020 and December 31, 2019.
Quarter Ended Six Months Ended December 31, December 31, 2020 2019 2020 2019 Reported GAAP tax rate 20.4 % 20.4 % 20.3 % 20.3 % Tax rate impact of: Identified non-GAAP adjustments (6.3 )% (2.1 )% (7.9 )% (2.4 )% Discrete tax items(1) 6.5 % 3.6 % 8.2 % 4.0 % Non-GAAP adjusted tax rate 20.6 % 21.9 % 20.6 % 21.9 %
(1) The fiscal 2021 non-GAAP adjusted net earnings for the quarter ended December 31, 2020 has been normalized for the tax rate impact a return to historical growth patterns seen prior to the onset of the COVID-19 pandemic which occurred on a more condensed timeline than previously forecasted. Accordingly, the Company re-casted the first quarter results using the Company's effective tax rate for the first six months of fiscal 2021.
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, 2020 is primarily a result of discrete tax items, including the tax benefit of stock option exercises.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents and available-for-sale investments were $165.5 million and $117.4 million as of December 31, 2020, respectively, compared to $146.6 million and $124.3 million as of June 30, 2020. Included in available-for-sale-investments was the fair value of the Company's investment in ChemoCentryx, Inc. (CCXI) which was $94.2 million as of December 31, 2020 and $87.8 million as of June 30, 2020.
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 remaining potential contingent consideration payments of up to $47 million and $38 million relating to the Quad, and B-MoGen acquisitions as of December 31, 2020. The fair value of the remaining payments is $10.6 million as of December 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 $155.3 million from operating activities in the six months ended December 31, 2020 compared to $111.0 million in the six months ended December 31, 2019. The increase from the prior year was primarily due to changes in net earnings and the fair value adjustment on available for sale investments.
Cash Flows From Investing Activities
We continue to make investments in our business, including capital expenditures. The Company received $43.1 million from the maturities of certificates of deposit compared to $18.0 million from proceeds from the maturity of certificates of deposit in the six months ended December 31, 2019. Additionally, the Company received $50.4 million relating to the selling a portion of our CCXI shares during the six months ended December 31, 2019. The Company made cash payments of $9.8 million net of cash acquired for the Eminence acquisition in the first half of fiscal 2021 and did not make any cash payments for acquisitions during the prior year period.
Capital expenditures for fixed assets for the six months ended December 31, 2020 and December 31, 2019 were $22.4 million and $25.1 million, respectively. Capital expenditures for the remainder of fiscal 2021 are expected to be approximately $20 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, 2020 and December 31, 2019, the Company paid cash dividends of $24.7 million and $24.4 million, respectively, to all common shareholders. On February 2, 2021, the Company announced the payment of a $0.32 per share cash dividend, or approximately $12.4 million, will be payable February 26, 2021 to all common shareholders of record on February 12, 2021.
Cash of $32.3 million and $27.2 million was received during the six months ended December 31, 2020 and 2019, respectively, from the exercise of stock options.
During the six months ended December 31, 2020, the Company made payments of $125.3 million towards the balance of its line-of-credit facility and term loan. 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.
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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 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, 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 quarter or six months ended December 31, 2020 that would require disclosure nor have there been any material 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, 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 net earnings also excludes, in total and on a per share basis, 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. For the Eminence acquisition, amortization expense and costs of acquired inventory were adjusted in the net earnings calculation based on the Company's ownership percentage to calculate the adjusted net earnings per share attributable to Bio-Techne. 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 . . .
Feb 08, 2021
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