Bio-Techne(TECH) - 2019 Q4 - Annual Report

Part I Business Bio-Techne develops and sells life science reagents, instruments, and services across two segments, Protein Sciences and Diagnostics and Genomics, with a strategy focused on innovation, market expansion, and acquisitions - Bio-Techne operates through two primary segments: Protein Sciences and Diagnostics and Genomics[15] FY2019 Net Sales by Segment | Segment | % of Consolidated Net Sales | | :--- | :--- | | Protein Sciences | 76% | | Diagnostics and Genomics | 24% | - The company's growth strategy includes innovation in core products, market expansion (especially in cell and gene therapy), talent retention, and targeted acquisitions[18][20][22] Net Sales by Geographic Area (in thousands of US dollars) | Region | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | United States | $391,191 | $346,293 | $313,195 | | EMEA, excluding U.K. | $155,821 | $148,599 | $125,126 | | U.K. | $34,975 | $33,704 | $28,401 | | APAC, excluding Greater China | $52,913 | $48,392 | $41,463 | | Greater China | $57,799 | $47,950 | $39,078 | | Rest of world | $21,307 | $18,055 | $15,740 | | Total net sales | $714,006 | $642,993 | $563,003 | Research and Development Expense (in thousands of US dollars) | Segment | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Protein Sciences Segment | $40,735 | $40,996 | $41,334 | | Diagnostics & Genomics Segment | $21,678 | $14,095 | $12,180 | | Total R&D Expense | $62,413 | $55,329 | $53,514 | | Percent of net sales | 9% | 9% | 10% | - As of June 30, 2019, the company employed approximately 2,250 full-time and part-time employees[57] Risk Factors The company faces risks from intense competition, acquisition integration, political and regulatory changes, global operations, cybersecurity, and financial market volatility - The company faces significant competition from both small, agile start-ups and large multinational corporations with greater resources, leading to pricing pressure[75] - The acquisition growth strategy presents risks, including difficulty in identifying and integrating targets, potential for goodwill impairment, and financial strain from borrowings[77][79][80] - Political and economic uncertainty, particularly from the U.S. administration's trade policies and the UK's withdrawal from the EU (Brexit), could adversely affect business operations and financial results[82][83] - Global operations (approximately 45% of FY2019 sales from outside the U.S.) expose the company to risks such as currency fluctuations, complex tax laws, regulatory changes, and compliance with laws like the Foreign Corrupt Practices Act[89][91] - The company's Exosome Diagnostics' EPI test faces risks related to securing and maintaining reimbursement coverage from government and private payers, and compliance with healthcare regulations like CLIA and HIPAA[102][103][105] - Cybersecurity threats and failure to protect customer and employee data could result in reputational damage, fines, and lawsuits, with increased risk due to evolving data privacy laws like the EU's GDPR[96][97] Unresolved Staff Comments The company reports no unresolved staff comments as of the report date - There are no unresolved staff comments as of the report date[123] Properties Bio-Techne owns its Minneapolis headquarters and other key facilities, leasing additional global sites for operations, all considered adequate for future needs - The company owns its main facilities in Minneapolis, MN, which total approximately 800,000 square feet and are used for administrative, research, manufacturing, and warehousing activities[125][126] Material Leased Facilities | Subsidiary | Location | Type | Square Feet | | :--- | :--- | :--- | :--- | | ProteinSimple | San Jose, California | Office/manufacturing/warehouse | 167,000 | | Cliniqa | San Marcos, California | Office/manufacturing/warehouse | 62,200 | | Bionostics | Devens, Massachusetts | Office/manufacturing | 48,000 | | Advanced Cell Diagnostics | Newark, California | Office/manufacturing/warehouse | 46,500 | | Tocris | Bristol, United Kingdom | Office/manufacturing/lab/warehouse | 30,000 | Legal Proceedings As of August 28, 2019, the company is not involved in any legal proceedings expected to materially adversely affect its business or financial condition - The Company is not currently a party to any legal proceedings expected to have a material adverse effect on its business[131] Mine Safety Disclosures This item is not applicable to the company - Not applicable[133] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities As of August 2019, Bio-Techne had over 43,000 shareholders, paid $48.4 million in dividends, and repurchased shares to offset dilution from stock options Annual Cash Dividends Paid (in millions of US dollars) | Fiscal Year | Total Dividends Paid (millions) | | :--- | :--- | | 2019 | $48.4 | | 2018 | $48.0 | | 2017 | $47.7 | - In fiscal 2019, the company repurchased 95,000 shares for $15.4 million at an average price of $162.15 per share[137] - As of June 30, 2019, approximately $42 million was authorized for future share purchases under a new stock repurchase program designed to offset dilution from stock option exercises[137] Selected Financial Data A five-year financial summary highlights net sales growth to $714.0 million, fluctuating net earnings, total assets increasing to $1.88 billion, and a growing employee count Five-Year Selected Financial Data (dollars in thousands, except per share data) | Metric | 2019 | 2018 | 2017 | 2016 | 2015 | | :--- | :--- | :--- | :--- | :--- | :--- | | Net sales | $714,006 | $642,993 | $563,003 | $499,023 | $452,246 | | Operating income | $146,719 | $136,178 | $120,584 | $150,593 | $147,023 | | Net earnings | $96,072 | $126,150 | $76,086 | $104,476 | $107,735 | | Diluted EPS | $2.47 | $3.31 | $2.03 | $2.80 | $2.89 | | Total assets | $1,884,410 | $1,593,202 | $1,558,219 | $1,129,581 | $1,063,360 | | Net cash from ops | $181,619 | $170,367 | $143,721 | $144,157 | $139,359 | | Employees | 2,255 | 1,943 | 1,789 | 1,560 | 1,356 | Management's Discussion and Analysis of Financial Condition and Results of Operations FY2019 consolidated net sales grew 11% to $714.0 million, driven by organic growth and acquisitions, while GAAP net earnings decreased due to investment losses and acquisition expenses Consolidated Net Sales Growth Breakdown | Component | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Organic sales growth | 10% | 9% | 6% | | Acquisitions sales growth | 2% | 3% | 8% | | Impact of foreign currency | (1)% | 2% | (1)% | | Consolidated net sales growth | 11% | 14% | 13% | - The Protein Sciences segment's net sales increased 13% in FY2019, with 13% organic growth, driven by strong performance in antibodies, cell therapy consumables, and instrument product categories[154] - The Diagnostics and Genomics segment's net sales increased 7% in FY2019, with 4% organic growth, primarily driven by strong RNAscope product sales[155] Gross Margin Reconciliation (GAAP to Non-GAAP) | Metric | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Consolidated gross margin % | 66.3% | 67.2% | 66.5% | | Costs recognized upon sale of acquired inventory | 0.5% | 0.4% | 0.6% | | Amortization of intangibles | 4.7% | 3.9% | 4.1% | | Non-GAAP adjusted gross margin % | 71.5% | 71.5% | 71.2% | - In fiscal 2019, the company recognized a $16.1 million unrealized loss on its ChemoCentryx (CCXI) investment, which was a primary driver of the $13.6 million in 'Other non-operating expense, net'[170] - The company's effective tax rate was 14.2% in FY2019, compared to (0.2)% in FY2018, with the change driven by a significant one-time net tax benefit of $33.0 million related to the Tax Act in 2018[172] - During fiscal 2019, the company acquired Quad Technologies, Exosome Diagnostics, and B-MoGen, financing the transactions partly through a new credit facility that includes a $600 million revolver and a $250 million term loan[182] Quantitative and Qualitative Disclosures about Market Risk The company faces market risk from foreign currency fluctuations, with 27% of FY2019 net sales in foreign currencies, where a 10% USD appreciation would significantly impact earnings and net assets - Approximately 27% of consolidated net sales in fiscal 2019 were made in foreign currencies, exposing the company to market risk from exchange rate fluctuations[228] Impact of Hypothetical 10% U.S. Dollar Appreciation (in thousands of US dollars) | Impact Area | Decrease in Value | | :--- | :--- | | Decrease in translation of 2019 earnings into U.S. dollars | $3,810 | | Decrease in translation of net assets of foreign subsidiaries | $43,242 | | Additional transaction losses | $4,484 | Financial Statements and Supplementary Data This section presents audited consolidated financial statements for FY2017-2019, with notes on accounting policies and acquisitions, and an unqualified auditor's opinion on financial statements and internal controls Consolidated Financial Statements The consolidated financial statements show FY2019 net sales of $714.0 million, net earnings of $96.1 million, total assets of $1.88 billion, and $181.6 million in operating cash flow Consolidated Statement of Earnings Highlights - FY2019 (in thousands of US dollars) | Line Item | Amount | | :--- | :--- | | Net sales | $714,006 | | Gross margin | $473,491 | | Operating income | $146,719 | | Net earnings | $96,072 | | Diluted EPS | $2.47 | Consolidated Balance Sheet Highlights - June 30, 2019 (in thousands of US dollars) | Line Item | Amount | | :--- | :--- | | Total current assets | $412,607 | | Goodwill | $732,667 | | Total assets | $1,884,410 | | Total current liabilities | $101,985 | | Long-term debt obligations | $492,660 | | Total shareholders' equity | $1,165,589 | Consolidated Statement of Cash Flows Highlights - FY2019 (in thousands of US dollars) | Line Item | Amount | | :--- | :--- | | Net cash provided by operating activities | $181,619 | | Net cash used in investing activities | ($336,799) | | Net cash provided by financing activities | $134,384 | Notes to Consolidated Financial Statements The notes detail accounting policies, including ASC 606 adoption, FY2019 acquisitions, fair value measurements for contingent consideration, the new credit facility, income tax provisions, and segment performance - The company adopted ASC 606 (Revenue from Contracts with Customers) on July 1, 2018, with no material impact on the consolidated financial statements[272] - In fiscal 2019, the company acquired Quad Technologies, Exosome Diagnostics, and B-MoGen, with the acquisition of Exosome Diagnostics involving approximately $251.6 million in cash and up to $325.0 million in contingent consideration[301][302][307] - As of June 30, 2019, the company had a contingent consideration liability of $12.6 million, measured at fair value using significant unobservable (Level 3) inputs[329][335] - On August 1, 2018, the company entered into a new credit agreement providing a $600 million revolving credit facility and a $250 million term loan, with an outstanding balance of $505.2 million as of June 30, 2019[338][339] Segment Operating Income (in thousands of US dollars) | Segment | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Protein Sciences | $240,919 | $209,880 | $184,095 | | Diagnostics and Genomics | $10,079 | $35,496 | $29,291 | | Total Segment Operating Income | $250,998 | $245,376 | $213,386 | Report of Independent Registered Public Accounting Firm KPMG LLP issued an unqualified opinion on Bio-Techne's FY2019 financial statements and internal controls, highlighting fair value measurements of acquired intangibles and contingent consideration as critical audit matters - The auditor, KPMG LLP, issued an unqualified opinion, concluding that the financial statements are presented fairly in conformity with U.S. GAAP[384] - KPMG LLP issued an unqualified opinion on the effectiveness of the Company's internal control over financial reporting as of June 30, 2019[385][400] - Critical audit matters identified were the initial fair value measurement of developed technology and trade name intangible assets, and the fair value measurement of contingent consideration liabilities related to the fiscal 2019 acquisitions, due to the high degree of subjectivity and judgment required[390][391][395] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants regarding accounting and financial disclosure - None reported[407] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of June 30, 2019, excluding recently acquired entities from the internal control assessment - The CEO and CFO concluded that disclosure controls and procedures were effective as of June 30, 2019[409] - Management concluded that internal control over financial reporting was effective as of June 30, 2019, based on the COSO framework[414] - The assessment of internal control over financial reporting excluded the fiscal 2019 acquisitions of Quad, Exosome, and B-Mogen, as permitted[413] Other Information The company reports no other information for this item - None[420] Part III Directors, Executive Officers and Corporate Governance Information for this item is incorporated by reference from the company's 2019 Proxy Statement - Information is incorporated by reference from the Company's 2019 Proxy Statement[423] Executive Compensation Information for this item is incorporated by reference from the company's 2019 Proxy Statement - Information is incorporated by reference from the Company's 2019 Proxy Statement[425] Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters Information for this item is incorporated by reference from the company's 2019 Proxy Statement - Information is incorporated by reference from the Company's 2019 Proxy Statement[426] Certain Relationships and Related Transactions, and Director Independence Information for this item is incorporated by reference from the company's 2019 Proxy Statement - Information is incorporated by reference from the Company's 2019 Proxy Statement[427] Principal Accounting Fees and Services Information for this item is incorporated by reference from the company's 2019 Proxy Statement - Information is incorporated by reference from the Company's 2019 Proxy Statement[429] Part IV Exhibits, Financial Statement Schedules This section lists the consolidated financial statements, schedules, and exhibits filed as part of the Form 10-K, with most schedules omitted and many exhibits incorporated by reference - This section lists the Consolidated Financial Statements filed as part of the report[433] - All financial statement schedules have been omitted because they are not applicable, not material, or the information is already present in the financial statements or notes[434] - An index of exhibits is provided, including governance documents, credit agreements, and certifications by the CEO and CFO[437][439]