tech20180630_10k.htm
 

 

Table of Contents


UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549


FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended June 30, 2018, or

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period

from                      to

 

Commission file number 0-17272


BIO-TECHNE CORPORATION

(Exact name of registrant as specified in its charter)


 

Minnesota

 

41-1427402

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

   

614 McKinley Place N.E.

Minneapolis, MN 55413

 

(612) 379-8854

(Address of principal executive offices) (Zip Code)

 

(Registrant's telephone number, including area code)


 

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

 

Name of each exchange on which registered

Common Stock, $0.01 par value

 

The NASDAQ Stock Market LLC

 

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes ☒  No ☐

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.   Yes ☐  No ☒

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes ☒  No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes ☒  No ☐

 

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    ☒

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

  Large accelerated filer

 

 ☒

  

Accelerated filer

 

 

 

 

 

  Non-accelerated filer

 

 ☐

  

Smaller reporting company

 

             
       

Emerging growth company

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes ☐  No ☒

 

As of December 31, 2017 the aggregate market value of the Common Stock held by non-affiliates of the Registrant was $3.4 billion based upon the closing sale price as reported on The Nasdaq Stock Market ($129.55 per share). Shares of Common Stock held by each officer and director and by each person who owns 5% or more of the outstanding Common Stock have been excluded.

 

As of August 23, 2018, 37,731,348 shares of the Company’s Common Stock ($0.01 par value) were outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the Company’s Proxy Statement for its 2018 Annual Meeting of Shareholders are incorporated by reference into Part III.

 


 

 

 

TABLE OF CONTENTS

 

 

 

 

 

 

Page

PART I

 

 

 

Item 1.

Business

1

 

 

 

Item 1A.

Risk Factors

10

 

 

 

Item 1B.

Unresolved Staff Comments

18

 

 

 

Item 2.

Properties

18

 

 

 

Item 3.

Legal Proceedings

18
     

Item 4.

Mine Safety Disclosures

18
     

PART II

 

 

 

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

19

 

 

 

Item 6.

Selected Financial Data

21

 

 

 

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

22

 

  

  

Item 7A.

Quantitative and Qualitative Disclosures about Market Risk

34

 

 

 

Item 8.

Financial Statements and Supplementary Data

35

     

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

67
     

Item 9A.

Controls and Procedures

67
     

Item 9B.

Other Information

68

 

 

 

PART III

 

 

 

Item 10.

Directors, Executive Officers

69

 

 

 

Item 11.

Executive Compensation

69

 

 

 

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters

69

 

 

 

Item 13.

Certain Relationships and Related Transactions, and Director Independence

69

 

 

 

Item 14.

Principal Accounting Fees and Services

69

     

PART IV

Item 15.

Exhibits, Financial Statement Schedules

70
     
 

SIGNATURES

71

 

 

 

PART I

 

ITEM 1. BUSINESS

 

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.

 

During our fiscal year 2018, we operated with three reporting segments – our Biotechnology, Protein Platforms and Diagnostics Divisions. Our Biotechnology Division is a leader in providing high quality consumables and services used for conducting laboratory experiments by both industry and academic scientists within the biotechnology and biomedical life sciences fields, all under the primary brands of R&D Systems, Novus Biologicals, Tocris Bioscience, Atlanta Biologicals, Trevigen, and Advanced Cell Diagnostics. Our Protein Platforms Division focuses on developing and supplying instrumentation and related consumables designed to simplify protein analysis processes along with single cell protein analysis, all under the ProteinSimple brand. Through our Diagnostics Division, we serve the clinical markets with regulated products such as controls, calibrators, reagents and immunoassays intended for diagnostic uses.    

 

We are a Minnesota corporation with our global headquarters in Minneapolis, Minnesota. We originally were founded over forty years ago, in 1976, as Research and Diagnostic Systems, Inc. We became a publicly traded company in 1985 through a merger with Techne Corporation, now Bio-Techne Corporation. Our common stock is listed on the NASDAQ under the symbol “TECH.” We operate globally, with offices in multiple locations in the United States, Europe, and Asia. Today, our product line extends to over 300,000 manufactured products in state of the art facilities to accommodate many of our manufacturing needs.

 

Our historical focus was on providing high quality proteins, antibodies and immunoassays to the life science research market and hematology controls to the diagnostics market. Beginning in 2012, and accelerating over the last three years, we implemented a strategy to accelerate growth in part by acquiring businesses and product portfolios that leveraged and diversified our existing product lines, filled portfolio gaps with differentiated high growth businesses, and expanded our geographic scope. From 2012 through August 27, 2018 we have acquired 15 companies, eight of which expanded our Biotechnology segment both geographically and through product diversification, three that formed our Protein Platforms segment, and four of which expanded the reach of our Diagnostics segment.

 

Recognizing the importance of an integrated, global approach to meeting our mission and accomplishing our strategies, we have over the past several years unified our brands and recent acquisitions under a single global brand, Bio-Techne.

 

We are committed to providing the life sciences community with innovative, high-quality scientific tools that allow our customers to make extraordinary discoveries. Our mission is to build “epic tools for epic science.” We intend to build on Bio-Techne’s past accomplishments, high product quality reputation and sound financial position by executing strategies that position us to serve as the standard for biological content in the research market, and to leverage that leadership position to enter the diagnostics and other adjacent markets. Our strategies include:

 

Continued innovation in core products. Through collaborations with key opinion leaders, participation in scientific discussions and societies, and leveraging our internal talent we expect to be able to convert our continued significant investment in our research and development activities to be first-to-market with quality products that are at the leading edge of life science researchers’ needs.

 

1

 

Market and geographic expansion. We will continue to expand our sales staff and distribution channels globally in order to increase our global presence and make it easier for customers to transact with us. We will also leverage our existing portfolio to expand our product offerings into novel research fields and further into diagnostics and therapeutics markets.

 

Operational excellence. In recognition of the increased size and scale of the organization, we continue to redesign our development and operational processes to effectively and efficiently support our expanding businesses.

 

Talent recruitment and retention. We strive to recruit, train and retain the most talented staff to implement all of our strategies effectively.

 

Targeted acquisitions and investments. We will continue to leverage our strong balance sheet to gain access to new technologies and products that improve our competitiveness in the current market, meet customers’ expanding work flow needs and allow us to enter adjacent markets.

 

OUR PRODUCTS AND MARKETS

 

In fiscal 2018, net sales from Bio-Techne’s Biotechnology, Protein Platforms and Diagnostics segments represented 66%, 17%, and 17% of consolidated net sales, respectively. Financial information relating to Bio-Techne’s segments is incorporated herein by reference to Note 11 to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

 

Biotechnology Segment

 

Biotechnology Segment Products

 

Through our Biotechnology segment, we are one of the world's leading suppliers of specialized proteins, such as cytokines and growth factors, immunoassays, antibodies and related reagents, to the biotechnology research community. We also sell in situ hybridization, media and other cell culture products and reagents. Our combined chemical and biological reagents portfolio provides high quality tools which customers can use in solving the complexity of important biological pathways and glean knowledge that may lead to a more complete understanding of biological processes, and, ultimately, to the development of novel strategies to address different pathologies.

 

Additionally, a number of our products have the potential to serve as predictive biomarkers and therapeutic targets for a variety of human diseases and conditions including cancer, autoimmunity, diabetes, hypertension, obesity, inflammation, neurological disorders, and kidney failure. Immunoassays can also be useful in clinical diagnostics. In fact, we have received Food and Drug Administration (FDA) marketing clearance for a few of our immunoassays for use as in vitro diagnostic devices. In addition to being useful research tools, our RNA in situ hybridization assays have diagnostics applications as well, and several are currently being cleared with the FDA in partnership with diagnostics instrument manufacturers and pharmaceutical companies.

 

Biotechnology Segment Customers and Distribution Methods

 

We sell our Biotechnology products directly to customers who are primarily located in North America, Europe and China. We have a sales and marketing partnership agreement with Fisher Scientific in order to bolster our market presence in North America and leverage the transactional efficiencies offered by the large Fisher organization. We also sell through third party distributors in China, Japan, certain eastern European countries and the rest of the world. Our sales are widely distributed, and no single end-user customer accounted for more than 10% of Biotechnology's net sales during fiscal 2018, 2017 or 2016.

 

2

 

Biotechnology Segment Competitors

 

A number of companies supply the worldwide market for protein-related and chemically-based research and diagnostic reagents, including GE Healthcare Life Sciences, BD Biosciences, Merck KGaA/EMD Chemicals, Inc., PeproTech, Inc., Abcam plc., and Thermo Fisher Scientific, Inc. Market success is primarily dependent upon product quality, selection, price and reputation. We believe we are one of the leading world-wide suppliers of cytokine and growth factors in the research market. We further believe that the expansion of our product offering, the recognized quality of our products, and the continued demand for protein-related and chemically-based research reagents will allow us to remain competitive in the growing biotechnology research and diagnostic markets.

 

Biotechnology Manufacturing

 

We are not dependent on key or sole source suppliers for most of our products in the Biotechnology segment. We develop and manufacture the majority of our proteins using recombinant DNA technology, thus significantly reducing our reliance on outside resources. Our antibodies are produced using a variety of technologies including traditional animal immunization and hybridoma technology as well as recombinant antibody techniques. Our in situ hybridization and chemical-based small molecule products are synthesized from widely available products. We typically have several outside sources for all critical raw materials necessary for the manufacture of our products.

 

The majority of our Biotechnology products are shipped within one day of receipt of the customers' orders. Consequently, we had no significant backlog of orders for our Biotechnology segment products as of the date of this Annual Report on Form 10-K or as of a comparable date for fiscal 2017.

 

Protein Platforms Segment

 

Proteins are important for understanding disease because they are the functional units that carry out specific tasks in every cell. Altered levels of certain proteins can prevent the cell from performing its intended function, produce the energy it requires, maintain its morphology or survive within the tissue. However, protein analysis is complex given the varied and unique three-dimensional structure of the many proteins of interest. Our Protein Platforms segment develops, manufactures and sells tools to simplify protein analysis while at the same time achieving more quantitative and reproducible results.

 

Protein Platforms Segment Products

 

Our Protein Platforms business has an array of platforms useful in various areas of protein analysis.

 

Developers of biologics-based drugs are required by regulatory agencies, such as FDA, to develop robust processes to ensure that the specific biologic of interest can be identified and characterized accurately and then consistently and reliably produced. Our Biologics tools help researchers interrogate protein purity and identify contaminants during the development and production of biologics by measuring some elements of protein identity, purity and heterogeneity.

 

The Western blot, or Western, is one of the most widely-used assays for protein analysis and identification today, and is used by molecular biologists, biochemists and clinicians to determine if a specific protein is present in a sample. Our Simple Western platform is a fully-automated Western blot analytical technique that can identify and quantify a protein of interest in a more sensitive, automated and less time-intensive manner.

 

A common assay used in research and clinical diagnostics is the ELISA, or enzyme-linked immunosorbent assay. The SimplePlex platform is a transformative immunoassay technology which integrates an innovatively designed microfluidic cartridge with a state-of-the-art analyzer to deliver a bench-top immunoassay system that is more sensitive than a manual multi-well place based ELISA with none of the traditional challenges of assay design or repeatability.

 

The Single Cell Western platform and related reagents perform western blot assays on individual cells versus an entire cell population. With this tool, customers can elucidate the properties of individual cells to better understand cell behavior that can shape the overall cell population response in a disease or normal state.

 

3

 

Protein Platforms Segment Customers and Distribution Methods

 

Our customers for this segment include researchers in academia as well as by investigators in industry, such as pharmaceutical and biotech companies. Our biologics line of products is used primarily by production and quality control departments at biotech and pharmaceutical companies. We sell our Protein Platforms products directly to customers who are primarily located in North America, western Europe and Japan. We also sell through third party distributors in China, southern Europe and the rest of the world. Our sales are widely distributed, and no single end-user customer accounted for more than 10% of Protein Platforms' net sales during fiscal 2018, 2017 or 2016.

 

Protein Platforms Segment Competitors

 

Our Simple Western platform is a complete replacement for the traditional manual Western blot. As a result, we face competition from the vendors that supply instruments and reagents to traditional Western blot users. These competitors include Bio-Rad Laboratories, GE Healthcare, Merck KGaA, PerkinElmer and Thermo Fisher Scientific. All of these vendors provide elements of the traditional work flow. Similarly, our SimplePlex platform replaces the traditional manual ELISA assay as well as some flow cytometry-based multiplex immunoassays; competitors include those who supply instruments and reagents for ELISAs, including Meso Scale Discovery, PerkinElmer, Thermo Fisher, Luminex, Millipore, Molecular Devices, Tecan BioTek, and Bio-Rad Laboratories. The primary competitors for our Biologics instrumentation are Agilent Technologies, Danaher and PerkinElmer, as well as GE Healthcare, Shimadzu, Thermo Fisher and Waters. We believe our competitive position is strong due to the unique aspects of our products and our product quality.

 

Protein Platforms Segment Manufacturing

 

We manufacture our products for this division at various locations in the United States and Canada. We manufacture our own components where we believe it adds significant value, but we rely on suppliers for the manufacture of some of the consumables, components, subassemblies and autosamplers used with, or included in, our systems, which are manufactured to our specifications. We are not dependent on any one supplier and are not required to carry significant amounts of inventory to assure ourselves of a continuous allotment of goods from suppliers. We conduct all final testing and inspection of our products. We have established a quality control program, including a set of standard manufacturing and documentation procedures.

 

There was no significant backlog of orders for our Protein Platforms products as of the date of this Annual Report on Form 10-K or as of a comparable date for fiscal 2017.

 

Diagnostics Segment

 

Diagnostics Segment Products

 

This segment includes blood chemistry and blood gas quality controls, hematology instrument controls, diagnostic immunoassays, and other bulk and custom reagents for the in vitro diagnostic market worldwide. Often we manufacture these reagents on a custom basis to optimize their use in a customer's diagnostic assay. We supply these reagents in various formats including liquid, frozen, or in lyophilized form.

 

Diagnostics Segment Customers and Distribution Methods

 

Original Equipment Manufacturer (OEM) agreements represent the largest market for our historical diagnostics products. In fiscal 2018, 2017 and 2016, OEM agreements accounted for $62.8 million, $60.7 million, and $54.2 million, or 57%, 57%, and 52% of division net sales in each fiscal year, respectively. We sell some of our diagnostics products directly to customers and, in Europe and Asia, also through distributors. One OEM customer accounted for approximately 12% of the Diagnostics Division's net sales during fiscal year 2017. This customer did not amount to 10% or more of the Company's consolidated net sales during fiscal year 2017. No customer accounted for more than 10% of the Diagnostics Division’s net sales during fiscal years 2018 or 2016.

 

 

 

4

 

Diagnostics Segment Competitors

 

We believe we are the third largest supplier of hematology controls in the marketplace behind Beckman Coulter, Inc. and Streck, Inc. For our other control and calibrator products, the principal competitors are Abbott Diagnostics, Beckman Coulter, Inc., Bio-Rad Laboratories, Inc., Siemens Healthcare Diagnostics Inc. and Sysmex Corporation. We compete based primarily on product performance, quality, and price. SeraCare, HyTest Ltd and Thermo Fisher Scientific are additional competitors in the clinical diagnostic manufacturing and reagents markets.

 

Diagnostics Segment Manufacturing

 

The primary raw material for our hematology controls products is whole blood. We purchase human blood from commercial blood banks, and porcine and bovine blood from nearby meat processing plants. Although the cost of human blood has increased due to the requirement that it be tested for certain diseases and pathogens prior to use, the higher cost of these materials has not had a material adverse effect on our business thus far. Other controls are derived from various bodily fluids or cells from different animal species, which are then processed in-house to isolate the product of interest or from other bulk reagent suppliers that specialize in certain products. Our other reagent products are manufactured using a variety of suppliers, with no supplier representing a material portion of our business.

 

Most of the hematology controls products are shipped based on a preset, recurring schedule. However, the majority of our business in this segment are large orders shipped based on our customers' needs; we are highly dependent on our customers’ demand and inventory controls. Consequently, our revenues can vary significantly from quarter to quarter and year to year. There was no significant backlog of orders for our Diagnostics products as of the date of this Annual Report on Form 10-K or as of a comparable date for fiscal 2017.

 

Geographic Information

 

Following is financial information relating to geographic areas (in thousands): 

 

   

Year Ended June 30,

 
   

2018

   

2017

   

2016

 

Net sales:

                       

United States

  $ 346,293     $ 313,195     $ 275,859  

EMEA, excluding U.K.

    148,599       125,126       103,060  

U.K.

    33,704       28,401       28,307  

APAC, excluding Greater China

    48,392       41,463       38,137  

Greater China

    47,950       39,078       36,199  

Rest of world

    18,055       15,740       17,461  

Total net sales

  $ 642,993     $ 563,003     $ 499,023  

  

   

Year ended June 30,

 

 

 

2018

   

2017

 
Long-lived assets:                

United States and Canada

  $ 129,360     $ 119,859  

Europe

    14,597       14,100  

China

    1,391       1,165  

Total long-lived assets

  $ 145,348     $ 135,124  

Intangible assets:

               

United States and Canada

  $ 417,430     $ 424,579  

Europe

    21,386       18,710  

China

    7,516       8,753  

Total intangible assets

  $ 446,332     $ 452,042  

 

5

 

Net sales are attributed to countries based on the location of the customer or distributor. Long-lived assets are comprised of land, buildings and improvements and equipment, net of accumulated depreciation. See the description of risks associated with the Company's foreign subsidiaries in Item 1A of this Annual Report on Form 10-K.  

 

PRODUCTS UNDER DEVELOPMENT

 

Bio-Techne is engaged in continuous research and development in all of our major product lines. We believe that our future success depends, to a large extent, on our ability to keep pace with changing technologies and market needs.

 

In fiscal 2018, Bio-Techne introduced approximately 1,500 new products. We also expect to significantly expand our portfolio of products through acquisitions as well as continued product development in our existing businesses. However, there is no assurance that any of the products in the research and development phase can be successfully completed or, if completed, can be successfully introduced into the marketplace.

  

   

Year Ended June 30,

 
   

2018

   

2017

   

2016

 

Research and development expense:

                       

Biotechnology

  $ 35,895     $ 35,507     $ 26,981  

Protein Platforms

    15,348       14,424       14,610  

Diagnostics

    3,848       3,583       3,596  

Corporate

    238       -       -  

Total research and development expense

  $ 55,329     $ 53,514     $ 45,187  
                         

Percent of net sales

    9

%

    10

%

    9

%

  

PATENTS AND TRADEMARKS

 

Our success depends in part upon our ability to protect our core technologies and intellectual property. To accomplish this, we rely on a combination of intellectual property rights, including patents, trade secrets and trademarks, as well as customary contractual protections.

 

As of June 30, 2018, we had rights to 152 granted patents and approximately 82 pending patent applications.  With respect to our Protein Platforms segment and the Biotechnology segment’s genomic in situ hybridization product line, the protection is primarily through pending patent applications and issued patents.  Patent protection, if granted, generally has a life of 20 years from the date of the patent application or patent grant. We cannot provide assurance that any of our pending patent applications will result in the grant of a patent, whether the examination process will require us to narrow our claims, and whether our claims will provide adequate coverage of our competitors' products or services.

 

In addition to pursuing patents on our products, we also preserve much of our innovation as trade secrets, particularly in the Biotechnology segment. We have taken steps to protect our intellectual property and proprietary technology by entering into confidentiality agreements and intellectual property assignment agreements with our employees, consultants, corporate partners and, when needed, our advisors. Such agreements may not be enforceable or may not provide meaningful protection for our trade secrets or other proprietary information in the event of unauthorized use or disclosure or other breaches of the agreements, and we may not be able to prevent such unauthorized disclosure. Monitoring unauthorized disclosure is difficult, and we do not know whether the steps we have taken to prevent such disclosure are, or will be, adequate.

 

No assurance can be given that Bio-Techne's products do not infringe upon patents or proprietary rights owned or claimed by others. Bio-Techne has not conducted a patent infringement study for each of its products. Where we have been contacted by patent holders with certain intellectual property rights, Bio-Techne typically has entered into licensing agreements with patent holders under which it has the exclusive and/or non-exclusive right to use patented technology as well as the right to manufacture and sell certain patented products to the research market. In addition, certain of our products are covered by licenses from third parties to supplement our own patent portfolio.

 

6

 

Bio-Techne has obtained federal trademark registration for certain of its brand and product names. Bio-Techne believes it has common law trademark rights to certain marks in addition to those which it has registered.

 

SEASONALITY OF BUSINESS

 

Bio-Techne believes there is some seasonality as a result of vacation and academic schedules of its worldwide customer base, particularly for the Biotechnology and Protein Platforms Segments. A majority of Diagnostics segment products are manufactured in large bulk lots and sold on a schedule set by the customer. Consequently, sales for that segment can be unpredictable, although not necessarily based on seasonality. As a result, we can experience material and sometimes unpredictable fluctuations in our revenue for this segment.

 

LAWS AND REGULATIONS

 

Our operations, and some of the products we offer, are subject to a number of complex and stringent laws and regulations governing the production, marketing, handling, transportation and distribution of chemicals, drugs and other similar products, including the operating and security standards of the Food and Drug Administration, the Drug Enforcement Administration, and various comparable state and foreign agencies. As Bio-Techne’s businesses also include export and import activities, we are subject to pertinent laws enforced by the U.S. Departments of Commerce, State and Treasury. While we believe we are in compliance in all material respects with such laws and regulations, any noncompliance could result in substantial fines or otherwise restrict our ability to provide competitive distribution services and thereby have an adverse effect on our financial condition. To date, none has had a material impact on our operations.

 

We are subject to laws and regulations governing government contracts, and failure to address these laws and regulations or comply with government contracts could harm our business by a reduction in revenue associated with these customers. We have agreements relating to the sale of our products to government entities and, as a result, we are subject to various statutes and regulations that apply to companies doing business with the government. We are also subject to investigation for compliance with the regulations governing government contracts. A failure to comply with these regulations could result in suspension of these contracts, criminal, civil and administrative penalties or debarment.

 

EMPLOYEES

 

Through its subsidiaries, Bio-Techne employed approximately 2,000 full-time and part-time employees as of June 30, 2018.

 

INVESTOR INFORMATION

 

We are subject to the information requirements of the Securities Exchange Act of 1934 (the Exchange Act). Therefore, we file periodic reports, proxy statements, and other information with the Securities and Exchange Commission (SEC). The SEC maintains an internet site (http://www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically.

 

Financial and other information about us is available on our web site (http://www.bio-techne.com/investors). We make available on our web site copies of our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13 or 15(d) of the Exchange Act as soon as reasonably practicable after filing such material electronically or otherwise furnishing it to the SEC.

 

7

 

EXECUTIVE OFFICERS OF THE REGISTRANT

 

Currently, the names, ages, positions and periods of service of each executive officer of the Company are as follows:

 

Name

  

Age

  

Position

  

Officer Since

 

 

 

 

 

 

 

Charles Kummeth

  

58

  

President, Chief Executive Officer and Director

  

2013

James T. Hippel

  

47

  

Chief Financial Officer

  

2014

Brenda Furlow

  

60

  

Senior Vice President, General Counsel and Secretary

  

2014

David Eansor

  

57

  

President, Protein Sciences

  

2014

Kim Kelderman

 

50

 

President, Diagnostics and Genomics

 

2018

 

Set forth below is information regarding the business experience of each executive officer. There are no family relationships among any of the officers named, nor is there any arrangement or understanding pursuant to which any person was selected as an officer.

 

Charles Kummeth has been President and Chief Executive Officer of the Company since April 1, 2013. Prior to joining the Company, he served as President of Mass Spectrometry and Chromatography at Thermo Fisher Scientific Inc. from September 2011. He was President of that company's Laboratory Consumables Division from 2009 to September 2011. Prior to joining Thermo Fisher, Mr. Kummeth served in various roles at 3M Corporation, most recently as the Vice President of the company's Medical Division from 2006 to 2008.

 

James T. Hippel has been Chief Financial Officer of the Company since April 1, 2014. Prior to joining the Company, Mr. Hippel served as Senior Vice President and Chief Financial Officer for Mirion Technologies, Inc., a $300 million global company that provides radiation detection and identification products. Prior to Mirion, Mr. Hippel served as Vice President, Finance at Thermo Fisher Scientific, Inc., leading finance operations for its Mass Spectrometry & Chromatography division and its Laboratory Consumables division. In addition, Mr. Hippel's experience includes nine years of progressive financial leadership at Honeywell International, within its Aerospace Segment. Mr. Hippel started his career with KPMG LLP.

 

David Eansor is President, Protein Sciences, effective July 1, 2018. Prior to that, he served as Senior Vice President, Biotechnology Division since April 2015 and as Senior Vice President, Novus Biologicals, since the Company completed its acquisition of Novus on July 2, 2014. From January 2013 until the date of the acquisition, Mr. Eansor was the Senior Vice President of Corporate Development of Novus Biologicals. Prior to joining Novus, Mr. Eansor was the President of the Bioscience Division of Thermo Fisher Scientific. Mr. Eansor was promoted to Division President in early 2010 after 5 years as President of Thermo Fisher's Life Science Research business.

    

Kim Kelderman joined Bio-Techne on April 30, 2018 as President, Diagnostics and Genomics. Prior to Bio-Techne, Mr. Kelderman was employed at Thermo Fisher Scientific where he led three different businesses of increasing scale and complexity. For the last three years, Mr. Kelderman managed the Platforms and Content of the Genetic Sciences Division, where he was responsible for the Instrumentation, Software, Consumables and Assays businesses, and brands such as Applied Biosystems and legacy Affymetrix. Before joining Thermo Fisher, Kim served as Senior Segment Leader at Becton Dickinson, managing the global Blood Tubes “Vacutainer” business.

 

Brenda Furlow joined the Company as General Counsel and Secretary on August 4, 2014. Most recently, Ms. Furlow was affiliated with Alphatech Counsel, SC and served as general counsel to emerging growth technology companies. Ms. Furlow was General Counsel for TomoTherapy, Inc., a global, publicly traded company that manufactured and sold radiation therapy equipment from 2007 to 2011. From 1998 to 2007, Ms. Furlow served as General Counsel for Promega Corporation, a global life sciences company.

 

8

 

FORWARD-LOOKING INFORMATION AND CAUTIONARY STATEMENTS

 

This report contains forward-looking statements, which are based on the Company's current assumptions and expectations. The principal forward-looking statements in this report include the Company's expectations regarding product releases and strategy, future financial results, acquisition activity, the competitive environment, currency fluctuation and exchange rates, capital expenditures, the performance of the Company's investments, future dividend declarations, the construction and lease of certain facilities, the adequacy of owned and leased property for future operations, anticipated financial results and sufficiency of capital resources to meet the Company's foreseeable future cash and working capital requirements.

 

 

All such forward-looking statements are intended to enjoy the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, as amended. Although the Company believes there is a reasonable basis for the forward-looking statements, the Company's actual results could be materially different. The most important factors which could cause the Company's actual results to differ from forward-looking statements are set forth in the Company's description of risk factors in Item 1A to this Annual Report on Form 10-K.

 

Forward-looking statements speak only as of the date they are made, and the Company does not undertake any obligation to update any forward-looking statements.

 

9

 

ITEM 1A. RISK FACTORS

 

Statements in this Annual Report on Form 10-K and elsewhere that are forward-looking involve risks and uncertainties which may affect the Company's actual results of operations. Certain of these risks and uncertainties, which have affected and, in the future, could affect the Company's actual results are discussed below. The Company undertakes no obligation to update or revise any forward-looking statements made due to new information or future events. Investors are cautioned not to place undue emphasis on these statements.

 

The following risk factors should be read carefully in connection with evaluation of the Company's business and any forward-looking statements made in this Annual Report on Form 10-K and elsewhere. See the section entitled “forward-looking statements” set forth above. Any of the following risks or others discussed in this Annual Report on Form 10-K or the Company's other SEC filings could materially adversely affect the Company's business, operating results and financial condition.

 

It may be difficult for us to implement our strategies for revenue growth in light of competitive challenges.

 

We face significant competition across many of our product lines. Competitors include companies ranging from start-up companies, which may be able to more quickly respond to customers' needs, to large multinational companies, which may have greater financial, marketing, operational, and research and development resources than the Company. In addition, consolidation trends in the pharmaceutical, biotechnology and diagnostics industries have served to create fewer customer accounts and to concentrate purchasing decisions for some customers, resulting in increased pricing pressure on the Company. Moreover, customers may believe that consolidated businesses are better able to compete as sole source vendors, and therefore prefer to purchase from such businesses. The entry into the market by manufacturers in China, India and other low-cost manufacturing locations is also creating increased pricing and competitive pressures, particularly in developing markets. Failure to anticipate and respond to competitors' actions may impact the Company's future sales and earnings.

 

To address this issue, we are pursuing a number of strategies to maintain and improve our revenue growth, including:

 

 

strengthening our presence in selected geographic markets;

 

allocating research and development funding to products with higher growth prospects;

 

developing new applications for our technologies;

 

continuing key opinion leader initiatives;

 

finding new markets for our products;

 

acquiring new products and business in growing or novel markets; and

 

continuing the development of commercial tools and infrastructure to increase and support cross-selling opportunities of products and services to take advantage of our depth in product offerings.

 

We may not be able to successfully implement these strategies, and these strategies may not result in the expected growth of our business.

 

Our acquisition growth strategy poses financial, management and other risks and challenges.

 

We routinely explore acquiring other businesses and assets, and have completed fifteen acquisitions and several investments in the last six years. However, we may be unable to identify or complete promising acquisitions for many reasons, including competition among buyers, the high valuations of businesses in our industry, the need for regulatory and other approvals, and availability of capital. There can be no assurance that we will engage in any additional acquisitions or that we will be able to do so on terms that will result in any expected benefits. In addition, acquisitions financed with borrowings could make us more vulnerable to business downturns and could negatively affect our earnings due to higher leverage and interest expense.

 

10

 

Our inability to complete acquisitions or to successfully integrate any new or previous acquisitions could have a material adverse effect on our business. 

 

Our business strategy includes the acquisition of technologies and businesses that complement or augment our existing products and services. Certain acquisitions may be difficult to complete for a number of reasons, including the need for antitrust and/or other regulatory approvals. Any acquisition we may complete may be made at a substantial premium over the fair value of the net identifiable assets of the acquired company. When we do identify and consummate acquisitions, we may face financial, managerial and operational challenges, including diversion of management attention, difficulty with integrating acquired businesses, integration of different corporate cultures, increased expenses, assumption of unknown liabilities, indemnities, potential disputes with the sellers, and the need to evaluate the financial systems of and establish internal controls for acquired entities. Further, we may not be able to integrate acquired businesses successfully into our existing businesses, make such businesses profitable, or realize anticipated cost savings or synergies, if any, from these acquisitions, which could adversely affect our business.

 

We may be required to record a significant charge to earnings if our goodwill and other amortizable intangible assets, or other investments become impaired.

 

We are required under generally accepted accounting principles to test goodwill for impairment at least annually and to review our goodwill, amortizable intangible assets, and other assets acquired through merger and acquisition activity, for impairment when events or changes in circumstance indicate the carrying value may not be recoverable. Factors that could lead to impairment of goodwill, amortizable intangible assets, and other assets acquired via acquisitions include significant adverse changes in the business climate and actual or projected operating results (affecting our company as a whole or affecting any particular segment) and declines in the financial condition of our business. We may be required in the future to record additional charges to earnings if our goodwill, amortizable intangible assets or other investments become impaired. Any such charge would adversely impact our financial results.

 

In addition, the Company's expansion strategies include collaborations and investments in joint ventures and companies developing new products related to the Company's business. These strategies carry risks that objectives will not be achieved and future earnings will be adversely affected. For example, the Company has an approximate 8% equity investment in publicly traded ChemoCentryx, Inc. (Nasdaq: CCXI) that is valued at $54.3 million as of June 30, 2018. The ownership of CCXI shares is very concentrated, the share price is highly volatile and there is limited trading of the shares. In fiscal 2017, we also invested and held a minority interest in privately-held Astute Medical, Inc. (Astute), a diagnostics company developing new diagnostics tests relating to kidney injury. In fiscal 2018, Astute was acquired by a third party and we realized a loss $16.2 million on our investment.

 

Significant developments stemming from the U.S. administration or the U.K.’s referendum on membership in the EU could have an adverse effect on us.

 

The U.S. administration has called for substantial changes to trade agreements, such as the North American Free Trade Agreement (NAFTA), and has imposed significant increases on tariffs on goods imported into the United States, particularly from China. The administration has also indicated an intention to ask Congress to make significant changes, replacement or elimination of the Patient Protection and Affordable Care Act, and government negotiation/regulation of drug prices paid by government programs. Changes in U.S. social, political, regulatory and economic conditions or laws and policies governing the health care system and drug prices, foreign trade, manufacturing, and development and investment in the territories and countries where we or our customers operate could adversely affect our operating results and our business.

 

Additionally, in a referendum vote held on June 23, 2016, the United Kingdom (UK) voted to leave the European Union (EU). Subsequently, on March 29, 2017, the UK invoked Article 50 of the Lisbon Treaty to formally begin the withdrawal process. The impact of this action has caused and may continue to cause global economic uncertainty and currency exchange rate fluctuations. Although it is unknown what the terms of the UK’s future relationship with the EU will be, it is possible that there will be disruption to the UK and EU economies, as well as greater restrictions on imports and exports between the UK and the EU and increased regulatory and tax complexities. Any of these factors could adversely affect customer demand, our relationships with customers and suppliers, and our business and financial results, particularly since our European headquarters and shipping facilities are currently located in the UK. Additionally, attracting and retaining qualified employees who are citizens of EU countries to our UK facilities may be more difficult given the uncertainties resulting from the UK withdrawal.

 

11

 

Changes in governmental regulations may reduce demand for our products or increase our expenses. 

 

We compete in many markets in which we and our customers must comply with federal, state, local and international regulations, such as environmental, health and safety and food and drug regulations. We develop, configure and market our products to meet customer needs created by those regulations. Any significant change in regulations could reduce demand for our products or increase our expenses. For example, many of our instruments are marketed to the pharmaceutical industry for use in discovering and developing drugs. Changes in the U.S. Food and Drug Administration’s regulation of the drug discovery and development process could have an adverse effect on the demand for these products.

 

We are subject to laws and regulations governing government contracts, and failure to address these laws and regulations or comply with government contracts could harm our business by leading to a reduction in revenue associated with these customers.

 

We have agreements relating to the sale of our products to government entities in the U.S. and elsewhere and, as a result, we are subject to various statutes and regulations that apply to companies doing business with the government. The laws governing government contracts differ from the laws governing private contracts and government contracts may contain pricing terms and conditions that are not applicable to private contracts. We are also subject to investigation for compliance with the regulations governing government contracts. A failure to comply with these regulations could result in suspension of these contracts, criminal, civil and administrative penalties or debarment.

 

We are required to comply with a wide variety of laws and regulations, and are subject to regulation by various federal, state and foreign agencies. 

 

We are subject to various local, state, federal, foreign and transnational laws and regulations, which include the operating and security standards of the U.S. Federal Drug Administration (the FDA), the U.S. Drug Enforcement Agency (the DEA), the U.S. Department of Health and Human Services (the DHHS), and other comparable agencies and, in the future, any changes to such laws and regulations could adversely affect us. In particular, we are subject to laws and regulations concerning current good manufacturing practices and drug safety. Our subsidiaries may be required to register for permits and/or licenses with, and may be required to comply with the laws and regulations of, the DEA, the FDA, the DHHS, foreign agencies and/or comparable state agencies as well as certain accrediting bodies depending upon the type of operations and location of product distribution, manufacturing and sale. The manufacture, distribution and marketing of many of our products and services, including medical devices and pharma services, are subject to extensive ongoing regulation by the FDA, the DEA, and other equivalent local, state, federal and non-U.S. regulatory authorities. In addition, we are subject to inspections by these regulatory authorities. Failure by us or by our customers to comply with the requirements of these regulatory authorities, including without limitation, remediating any inspectional observations to the satisfaction of these regulatory authorities, could result in warning letters, product recalls or seizures, monetary sanctions, injunctions to halt manufacture and distribution, restrictions on our operations, civil or criminal sanctions, or withdrawal of existing or denial of pending approvals, including those relating to products or facilities. In addition, such a failure could expose us to contractual or product liability claims, contractual claims from our customers, including claims for reimbursement for lost or damaged active pharmaceutical ingredients, as well as ongoing remediation and increased compliance costs, any or all of which could be significant. We are the sole manufacturer of a number of products for many of our customers and a negative regulatory event could impact our customers' ability to provide products to their customers.

 

We are also subject to a variety of federal, state, local and international laws and regulations that govern, among other things, the importation and exportation of products, the handling, transportation and manufacture of substances that could be classified as hazardous, and our business practices in the U.S. and abroad such as anti-corruption and anti-competition laws. Any noncompliance by us with applicable laws and regulations or the failure to maintain, renew or obtain necessary permits and licenses could result in criminal, civil and administrative penalties and could have an adverse effect on our results of operations. 

 

12

 

We are subject to financial, operating, legal and compliance risk associated with global operations.

 

We engage in business globally, with approximately 46% of our sales revenue in fiscal 2018 coming from outside the U.S. In addition, one of our strategies is to expand geographically, particularly in China, India and in developing countries, both through distribution and through direct operations. This subjects us to a number of risks, including international economic, political, and labor conditions; currency fluctuations; tax laws (including U.S. taxes on foreign subsidiaries); increased financial accounting and reporting burdens and complexities; unexpected changes in, or impositions of, legislative or regulatory requirements; failure of laws to protect intellectual property rights adequately; inadequate local infrastructure and difficulties in managing and staffing international operations; delays resulting from difficulty in obtaining export licenses for certain technology; tariffs, quotas and other trade barriers and restrictions; transportation delays; operating in locations with a higher incidence of corruption and fraudulent business practices; and other factors beyond our control, including terrorism, war, natural disasters, climate change and diseases.

 

The application of laws and regulations implicating global transactions is often unclear and may at times conflict. Compliance with these laws and regulations may involve significant costs or require changes in our business practices that result in reduced revenue and profitability. Non-compliance could also result in fines, damages, criminal sanctions, prohibited business conduct, and damage to our reputation. We incur additional legal compliance costs associated with our global operations and could become subject to legal penalties in foreign countries if we do not comply with local laws and regulations, which may be substantially different from those in the U.S.

 

We continue to expand our operations in countries with developing economies, where it may be common to engage in business practices that are prohibited by U.S. regulations applicable to the Company, such as the Foreign Corrupt Practices Act. Although we implement policies and procedures designed to ensure compliance with these laws, there can be no assurance that all of our employees, contractors, and agents, as well as those companies to which we outsource certain aspects of our business operations, including those based in foreign countries where practices which violate such U.S. laws may be customary, will comply with our internal policies. Any such non-compliance, even if prohibited by our internal policies, could have an adverse effect on our business and result in significant fines or penalties.

  

Changes in economic conditions could negatively impact our revenues and earnings.

 

Our biotechnology and protein platforms products are sold primarily to research scientists at pharmaceutical and biotechnology companies and at university and government research institutions. Research and development spending by our customers and the availability of government research funding can fluctuate due to changes in available resources, mergers of pharmaceutical and biotechnology companies, spending priorities, general economic conditions and institutional and governmental budgetary policies. Our diagnostics segment products are intended primarily for the medical diagnostics market, which relies largely on government healthcare-related policies and funding. Changes in government reimbursement for certain diagnostic tests or reductions in overall healthcare spending could negatively impact us directly or our customers and, correspondingly, our sales to them. Several years ago, the U.S. and global economies experienced a period of economic downturn and have been slow to recover in some parts of the world. Such downturns, and other reductions or delays in governmental funding, could cause customers to delay or forego purchases of our products. We carry essentially no backlog of orders and changes in the level of orders received and filled daily can cause fluctuations in quarterly revenues and earnings.

    

13

 

Over the past two years we identified and remediated material weaknesses in our internal control over financial reporting which, if recurring, could harm our operating results or cause us to fail to meet our reporting obligations.

 

Our management is responsible for establishing and maintaining adequate internal control over our financial reporting, as defined in Rule 13a-15(f) under the Securities Exchange Act. At the beginning of fiscal 2017 management identified material weaknesses in our internal control over financial reporting. A material weakness is defined as a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. As a result of these material weaknesses, our management concluded that our internal control over financial reporting was not effective based on criteria set forth by the Committee of Sponsoring Organization of the Treadway Commission in Internal Control-An Integrated Framework (2013 Framework) for the years ended June 30, 2016 and 2017. In fiscal 2018 we completed a remediation plan that addressed these material weaknesses. As we continue to grow and acquire additional business, we may fail to implement effective internal controls for our recently acquired operations that result in additional material weaknesses, and harm our operating results or cause us to fail to meet our reporting obligations. Inadequate internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our common shares.

 

Our success will be dependent on recruiting and retaining highly qualified personnel and creating a new culture that includes the employees joining through acquisition.

 

Recruiting and retaining qualified scientific, production, sales and marketing, and management personnel are critical to our success. Our anticipated growth and its expected expansion into areas and activities requiring additional expertise will require the addition of new personnel and the development of additional expertise by existing personnel. We also operate in several geographic locations where competition for talent is strong, making employee retention particularly challenging in those locations. For example, some of our fastest growing businesses are located in northern California and eastern Massachusetts, both of which currently are experiencing low unemployment and a competitive environment for finding and retaining talent. Our growth by acquisition also creates challenges in retaining employees. As we integrate past and future acquisitions and evolve our corporate culture to incorporate the new workforces, some employees may not find such integration or cultural changes appealing. The failure to attract and retain such personnel could adversely affect our business.

 

Cyber security risks and the failure to maintain the confidentiality, integrity, and availability of our computer hardware, software, and Internet applications and related tools and functions could result in damage to our reputation and/or subject us to costs, fines, or lawsuits.

 

The integrity and protection of our own data, and that of our customers and employees, is critical to our business. The regulatory environment governing information, security and privacy laws is increasingly demanding and continues to evolve. Maintaining compliance with applicable security and privacy regulations may increase our operating costs and/or adversely impact our ability to market our products and services to customers. Although our computer and communications hardware are protected through physical and software safeguards, it is still vulnerable to fire, storm, flood, power loss, earthquakes, telecommunications failures, physical or software break-ins, software viruses, and similar events. These events could lead to the unauthorized access, disclosure and use of non-public information. The techniques used by criminal elements to attack computer systems are sophisticated, change frequently and may originate from less regulated and remote areas of the world. As a result, we may not be able to address these techniques proactively or implement adequate preventative measures. If our computer systems are compromised, we could be subject to fines, damages, litigation, and enforcement actions, customers could curtail or cease using its applications, and we could lose trade secrets, the occurrence of which could harm our business.

  

We are dependent on maintaining our intellectual property rights.

 

Our success depends in part on our ability to protect and maintain our intellectual property, including trade secrets. If we fail to protect our intellectual property, third parties may be able to compete more effectively against us, we may lose our technological or competitive advantage, or we may incur substantial litigation costs in our attempts to recover or restrict use of our intellectual property. We attempt to protect trade secrets in part through confidentiality agreements, but those agreements can be breached, and if they are, there may not be an adequate remedy. If trade secrets become publicly known, we could lose our competitive position.

 

14

 

We also attempt to protect and maintain intellectual property through the patent process. As of June 30, 2018, we owned or exclusively licensed 152 granted U.S. patents and approximately 82 pending patent applications. We cannot be confident that any of our currently pending or future patent applications will result in granted patents, and we cannot predict how long it will take for such patents to be granted. It is possible that, if patents are granted to us, others will design around our patented technologies. Further, other parties may challenge any patents granted to us and courts or regulatory agencies may hold our patents to be invalid or unenforceable. We may not be successful in defending challenges made against our patents and patent applications. Any successful third-party challenge to our patents could result in the unenforceability or invalidity of such patents. Our ability to establish or maintain a technological or competitive advantage over our competitors may be diminished because of these uncertainties. To the extent our intellectual property offers inadequate protection, or is found to be invalid or unenforceable, we would be exposed to a greater risk of direct competition. If our intellectual property does not provide adequate coverage of our competitors' products, our competitive position could be adversely affected, as could our business. Both the patent application process and the process of managing patent disputes can be time consuming and expensive.

 

We may be involved in disputes to determine the scope, coverage and validity of others' proprietary rights, or to defend against third-party claims of intellectual property infringement, any of which could be time-intensive and costly and may adversely impact our business.

 

Our success depends in part on its ability to operate without infringing the proprietary rights of others, and to obtain licenses where necessary or appropriate. We have obtained and continue to negotiate licenses to produce a number of products claimed to be owned by others. Since we have not conducted a patent infringement study for each of our products, it is possible that some of our products may unintentionally infringe patents of third parties.

 

We have been and may in the future be sued by third parties alleging that we are infringing their intellectual property rights. These lawsuits are expensive, take significant time, and divert management's focus from other business concerns. If we are found to be infringing the intellectual property of others, we could be required to cease certain activities, alter our products or processes or pay licensing fees. This could cause unexpected costs and delays which may have a material adverse effect on us. If we are unable to obtain a required license on acceptable terms, or unable to design around any third party patent, we may be unable to sell some of our products and services, which could result in reduced revenue. In addition, if we do not prevail, a court may find damages or award other remedies in favor of the opposing party in any of these suits, which may adversely affect our earnings.

 

The Company relies heavily on internal manufacturing and related operations to produce, package and distribute its products which, if disrupted, could materially impair our business operations.

 

The Company's internal quality control, packaging and distribution operations support the majority of the Company's sales. Since certain Company products must comply with Food and Drug Administration Quality System Regulations and because in all instances, the Company creates value for its customers through the development of high-quality products, any significant decline in quality or disruption of operations for any reason, particularly at the Minneapolis facility, could adversely affect sales and customer relationships, and therefore adversely affect the business. While the Company has taken certain steps to manage these operational risks, and while insurance coverage may reimburse, in whole or in part, for losses related to such disruptions, the Company's future sales growth and earnings may be adversely affected by perceived disruption risks or actual disruptions.

 

Our business could be adversely affected by disruptions at our sites.

 

We rely upon our manufacturing operations to produce many of the products we sell and our warehouse facilities to store products, pending sale. Any significant disruption of those operations for any reason, such as strikes or other labor unrest, power interruptions, fire, hurricanes or other events beyond our control could adversely affect our sales and customer relationships and therefore adversely affect our business. We have significant operations in California, near major earthquake faults, which make us susceptible to earthquake risk. Although most of our raw materials are available from a number of potential suppliers, our operations also depend upon our ability to obtain raw materials at reasonable prices. If we are unable to obtain the materials we need at a reasonable price, we may not be able to produce certain of our products or we may not be able to produce certain of these products at a marketable price, which could have an adverse effect on our results of operations.

 

15

 

Fluctuations in our effective tax rate may adversely affect our results of operations and cash flows.

 

As a global company, we are subject to taxation in numerous countries, states and other jurisdictions. In particular, we are affected by the impact of changes to tax laws or related authoritative interpretations in the United States, including tax reform under the Tax Cuts and Jobs Act (the “Tax Act”) signed by the President of the United States on December 22, 2017, which includes broad and complex changes to the United States tax code and the state tax response to the Tax Act.  Reasonable estimates were used in determining several of the components of the impact of the Tax Act, including our fiscal 2018 deferred income tax activity and the amount of post-1986 foreign deferred earnings subject to the repatriation toll charge.  In addition, certain provisions of the Tax Act including the Base Erosion Anti-abuse Tax (BEAT) and the provision designed to tax currently global intangible low-tax income (GILTI) are effective for the Company in the year beginning July 1, 2018.   We are still analyzing certain aspects of the Tax Act and refining our calculations, which could potentially affect the measurement of our deferred tax balances and the amount of the repatriation toll charge liability, and ultimately cause us to revise our initial estimates in future periods. In addition, changes in interpretations, assumptions and guidance regarding the Tax Act, as well as the potential for technical corrections, could have a material impact on our effective tax rate in future periods.

 

In preparing our financial statements, we record the amount of tax that is payable in each of the countries, states and other jurisdictions in which we operate. Our future effective tax rate, however, may be lower or higher than experienced in the past due to numerous factors, including a change in the mix of our profitability from country to country, changes in accounting for income taxes and recently enacted and future changes in tax laws in jurisdictions in which we operate. Any of these factors could cause us to experience an effective tax rate significantly different from previous periods or our current expectations, which could have an adverse effect on our business, results of operations and cash flows.

 

Because we rely heavily on third-party package-delivery services, a significant disruption in these services or significant increases in prices may disrupt our ability to ship products, increase our costs and lower our profitability.

 

We ship a significant portion of our products to our customers through independent package delivery companies, such as FedEx in the U.S. and DHL in Europe. If one or more of these third-party package-delivery providers were to experience a major work stoppage, preventing our products from being delivered in a timely fashion or causing us to incur additional shipping costs we could not pass on to our customers, our costs could increase and our relationships with certain of our customers could be adversely affected. In addition, if one or more of these third-party package-delivery providers were to increase prices, and we were not able to find comparable alternatives or make adjustments in our delivery network, our profitability could be adversely affected.

 

As a multinational corporation, we are exposed to fluctuations in currency exchange rates, which could adversely affect our cash flows and results of operations.

 

International markets contribute a substantial portion of our revenues, and we intend to continue expanding our presence in these regions. The exposure to fluctuations in currency exchange rates takes on different forms. International revenues and costs are subject to the risk that fluctuations in exchange rates could adversely affect our reported revenues and profitability when translated into U.S. dollars for financial reporting purposes. These fluctuations could also adversely affect the demand for products and services provided by us. As a multinational corporation, our businesses occasionally invoice third-party customers in currencies other than the one in which they primarily do business (the "functional currency"). Movements in the invoiced currency relative to the functional currency could adversely impact our cash flows and our results of operations. As our international sales grow, exposure to fluctuations in currency exchange rates could have a larger effect on our financial results. In fiscal 2018, currency translation had a favorable effect of $12.7 million on revenues due to the weakening of the U.S. dollar relative to other currencies in which the company sells products and services.

 

We have entered into and drawn on a revolving credit facility. The burden of this additional debt could adversely affect us, make us more vulnerable to adverse economic or industry conditions, and prevent us from funding our expansion strategy.

 

In connection with the acquisition of Exosome Diagnostics on August 1, 2018, we used a new credit facility governed by a Credit Agreement entered into on July 28, 2018. The Credit Agreement provides for a revolving credit facility of $600 million, which can be increased by an additional $200 million subject to certain conditions, and a term loan of $250 million. Borrowings under the Credit Agreement bear interest at a variable rate. As of August 24, 2018, the Company had drawn $330 million under the Credit Agreement.

 

The terms of the Credit Agreement and the burden of the indebtedness incurred thereunder could have negative consequences for us, such as:

 

 

limiting our ability to obtain additional financing to fund our working capital, capital expenditures, debt service requirements, expansion strategy, or other needs;

 

increasing our vulnerability to, and reducing our flexibility in planning for, adverse changes in economic, industry and competitive conditions; and

 

increasing our vulnerability to increases in interest rates.

 

16

 

The Credit Agreement also contains negative covenants that limit our ability to engage in specified types of transactions. These covenants limit our ability to, among other things, sell, lease or transfer any properties or assets, with certain exceptions; and enter into certain merger, consolidation or other reorganization transactions, with certain exceptions.

 

A breach of any of these covenants could result in an event of default under our credit facility. Upon the occurrence of an event of default, the lender could elect to declare all amounts outstanding under such facility to be immediately due and payable and terminate all commitments to extend further credit. In addition, the Company would be subject to additional restrictions if an event of default exists under the Credit Agreement, such as a prohibition on the payment of cash dividends.

 

Our share price will fluctuate.

 

Over the last several years, stock markets in general and our common stock in particular have experienced significant price and volume volatility. Both the market price and the daily trading volume of our common stock may continue to be subject to significant fluctuations due not only to general stock market conditions but also to a change in sentiment in the market regarding our operations and business prospects. In addition to the risk factors discussed above, the price and volume volatility of our common stock may be affected by:

 

 

operating results that vary from our financial guidance or the expectations of securities analysts and investors;

 

the financial performance of the major end markets that we target;

 

the operating and securities price performance of companies that investors consider to be comparable to us;

 

announcements of strategic developments, acquisitions and other material events by us or our competitors; and

 

changes in global financial markets and global economies and general market conditions, such as interest or foreign exchange rates, commodity and equity prices and the value of financial assets.

 

Dividends on our common stock could be reduced or eliminated in the future.

 

For the past 10 years, our Board has consistently declared quarterly dividends of $0.25 to $0.32 cents per share. In the future, our Board may determine to reduce or eliminate our common stock dividend in order to fund investments for growth, repurchase shares or conserve capital resources.

 

17

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

 

There are no unresolved staff comments as of the date of this report.

  

ITEM 2. PROPERTIES

 

The Company owns the facilities that its headquarters and R&D Systems subsidiary occupy in Minneapolis, Minnesota. The Minneapolis facilities are utilized by both the Company's Biotechnology and Diagnostics segments.

 

The Minneapolis complex includes approximately 800,000 square feet of space in several adjoining buildings. Bio-Techne uses approximately 625,000 square feet of the complex for administrative, research, manufacturing, shipping and warehousing activities. The Company is currently leasing or plans to lease the remaining space in the complex as retail and office space.

  

The Company owns a 17,000 square foot facility that its Bio-Techne Europe subsidiary occupies in Abingdon, England. This facility is utilized by the Company's Biotechnology and Protein Platforms segments.

 

Additionally, the Company owns a 34,000 square foot facility that its Atlanta Biologicals subsidiary occupies in Flowery Branch, Georgia. This facility is utilized by the Company’s Biotechnology segment.

 

The Company leases the following material facilities, all of which are primarily utilized by the Company's Biotechnology segment with the exception of the locations used by the Company's ProteinSimple and CyVek subsidiaries, which support the Protein Platforms segment and the Bionostics, Cliniqa and Exosome Diagnostics subsidiaries (Diagnostics segment). Certain locations are not named because they were not significant individually or in the aggregate as of the date of this report.

 

Subsidiary

  

Location

  

Type

  

Square Feet

  

  

  

  

  

  

  

  

  

Bio-Techne Europe

  

Langley, United Kingdom

  

Warehouse

  

14,300

  

Bio-Techne China

  

Shanghai and Beijing, China

  

Office/warehouse

  

10,700

  

Boston Biochem

  

Cambridge, Massachusetts

  

Office/lab

  

7,400

  

Tocris

  

Bristol, United Kingdom

  

Office/manufacturing/lab/warehouse

  

30,000

  

PrimeGene

  

Shanghai, China

  

Office/manufacturing/lab

  

20,600

  

Bionostics

  

Devens, Massachusetts

  

Office/manufacturing

  

48,000

  

Novus Biologicals

 

Littleton, Colorado

 

Office/warehouse

 

22,500

 

ProteinSimple

 

San Jose, California

 

Office/manufacturing/warehouse

 

167,000

 

ProteinSimple Canada

 

Ottawa and Toronto, Canada

 

Office/manufacturing/warehouse

 

13,900

 

CyVek

 

Wallingford, Connecticut

 

Office/manufacturing/warehouse

 

17,500

 

Cliniqa

 

San Marcos, California

 

Office/manufacturing/warehouse

 

62,200

 

Advanced Cell Diagnostics

 

Newark, California

 

Office/manufacturing/warehouse

 

46,500

 

Eurocell Diagnostics

 

Rennes, France

 

Office/warehouse

 

11,000

 

 

The Company believes the owned and leased properties are adequate to meet its occupancy needs in the foreseeable future.

  

ITEM 3. LEGAL PROCEEDINGS

 

As of August 27, 2018, the Company is not a party to any legal proceedings that, individually or in the aggregate, are reasonably expected to have a material adverse effect on the Company's business, results of operations, financial condition or cash flows.

  

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

18

 

PART II

 

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED SHAREHOLDER

MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Market Price of Common Stock

 

The Company's common stock trades on the NASDAQ Global Select Market under the symbol "TECH." The following table sets forth for the periods indicated the high and low sales price per share for the Company's common stock as reported by the NASDAQ Global Select Market.

 

   

Fiscal 2018 Price

   

Fiscal 2017 Price

 
   

High

   

Low

   

High

   

Low

 
                                 

First Quarter

  $ 124.00     $ 112.33     $ 117.42     $ 103.99  

Second Quarter

    136.39       120.61       112.20       98.92  

Third Quarter

    151.89       128.06       108.58       95.68  

Fourth Quarter

    166.81       142.66       119.98       98.22  

 

Holders of Common Stock and Dividends Paid

 

As of August 17, 2018, there were over 40,000 beneficial shareholders of the Company's common stock and over 425 shareholders of record. The Company paid quarterly cash dividends totaling $48.0 million, $47.7 million and $47.6 million in fiscal 2018, 2017 and 2016, respectively. The Board of Directors periodically considers the payment of cash dividends, and there is no guarantee that the Company will pay comparable cash dividends, or any cash dividends, in the future. The Company entered into a revolving line of credit in July 2016, which would prohibit payment of dividends to Company shareholders in the event of a default thereunder. The Credit Agreement that governs the revolving line of credit contains customary events of default.

 

In connection with the acquisition of Exosome Diagnostics, Inc. on August 1, 2018, the Company entered into a new credit facility that provides for a revolving credit facility of $600 million, which can be increased by an additional $200 million subject to certain conditions, and a term loan of $250 million.  The credit facility is governed by a Credit Agreement dated August 1, 2018 and matures on August 1, 2023.  The Credit Agreement that governs the revolving line of credit contains customary events of default and would prohibit payment of dividends to Company shareholders in the event of a default thereunder.

 

Issuer Purchases of Equity Securities

 

There was no share repurchase activity by the Company in fiscal 2018. As of June 30, 2018, the maximum approximate dollar value of shares that may yet be purchased under the Company's existing stock repurchase plan is approximately $125 million. The plan does not have an expiration date.

  

19

 

Stock Performance Graph

 

The following chart compares the cumulative total shareholder return on the Company's common stock with the S&P Midcap 400 Index, the S&P 400 Biotechnology Index, and the S&P 400 MidCap Life Sciences Tools and Services Index.  We have included in the chart the S&P 400 MidCap Life Sciences Tools and Services Index, which we expect will replace the S&P 400 Biotechnology Index in our chart in future years as this index now only includes one company.  The comparison assumes $100 was invested on the last trading day before July 1, 2013 in the Company's common stock and in each of the foregoing indices and assumes reinvestment of dividends.

 

  

 

 

20

 

ITEM 6. SELECTED FINANCIAL DATA

 (dollars in thousands, except per share data)

 

Income and Share Data:

 

2018(1)

   

2017(2)

   

2016(3)

   

2015(4)

   

2014(5)

 
                                         

Net sales

  $ 642,993     $ 563,003     $ 499,023     $ 452,246     $ 357,763  

Operating income

    136,178       120,584       150,593       147,023       159,750  

Earnings before income taxes (6)

    125,952       111,961       147,481       154,162       161,392  

Net earnings

    126,150       76,086       104,476       107,735       110,948  

Diluted earnings per share

    3.31       2.03       2.80       2.89       3.00  

Average common and common equivalent shares - diluted (in thousands)

    38,055       37,500       37,326       37,231       37,005  

 

Balance Sheet Data as of June 30:

 

2018

   

2017

   

2016

   

2015

   

2014

 
                                         

Cash, cash equivalents and short-term available-for-sale investments

    181,754     $ 157,714     $ 95,835     $ 110,921     $ 363,354  

Working capital

    318,856       212,503       199,744       208,515       443,022  

Total assets

    1,593,202       1,558,219       1,129,581       1,063,360       862,491  

Total shareholders' equity

    1,079,061       949,627       879,280       846,935       795,265  

 

Cash Flow Data:

 

2018

   

2017

   

2016

   

2015

   

2014

 
                                         

Net cash provided by operating activities

  $ 170,367     $ 143,721     $ 144,157     $ 139,359     $ 136,762  

Capital expenditures

    20,934       15,179       16,898       19,905       13,821  

Cash dividends declared per share

    1.28       1.28       1.28       1.27       1.23  

 

Employee Data as of June 30:

 

2018

   

2017

   

2016

   

2015

   

2014

 
                                         

Employees

    1,943       1,789       1,560       1,356       967  

 

(1)

The Company acquired Trevigen on September 5, 2017, Atlanta Biologicals on January 2, 2018, and Eurocell Diagnostics on February 1, 2018.

 

(2)

The Company acquired Space on July 1, 2016, and Advanced Cell Diagnostics on August 1, 2016.

 

(3)

The Company acquired Cliniqa on July 8, 2015, and Zephyrus on March 21, 2016.

 

(4)

The Company acquired Novus Biologicals on July 2, 2014, ProteinSimple on July 31, 2014, and CyVek on November 3, 2014.

 

(5)

The Company acquired Bionostics on July 22, 2013, and PrimeGene on April 30, 2014.

 

(6)

Earnings before income taxes included acquisition related expenses related to amortization of intangibles, costs recognized on sale of acquired inventories and professional fees associated with acquisition activity, as follows: 2018 - $74.2 million; 2017 - $73.2 million; 2016 - $37.6 million; 2015 - $37.6 million; 2014 - $20.0 million.

 

21

 

ITEM 7. 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 the consolidated financial information and related notes included in this Form 10-K. 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” located at the end of this MD&A and “Forward-Looking Information and Cautionary Statements” and “Risk Factors” within Items 1 and 1A of this Form 10-K.

 

OVERVIEW

 

Bio-Techne develops, manufactures and sells biotechnology products and clinical diagnostic controls worldwide. With our deep product portfolio and application expertise, Bio-Techne is a leader in providing specialized proteins, including cytokines and growth factors, and related immunoassays, small molecules and other reagents to the research, diagnostics and clinical controls markets.

 

Bio-Techne operates worldwide with three reportable business segments, Biotechnology, Protein Platforms, and Diagnostics, all of which service the life science and diagnostics markets. The Biotechnology reporting segment provides consumables used for conducting laboratory experiments by both industry and academic scientists within the biotechnology and biomedical life science fields including proteins, antibodies, immunoassays, flow cytometry products, intracellular signaling products, and biologically active chemical compounds. The Protein Platforms reporting segment develops and commercializes proprietary systems and consumables for protein analysis. The Diagnostics reporting segment reporting segment provides a range of controls and calibrators used with diagnostic equipment and as proficiency testing tools, as well as other reagents incorporated into diagnostic kits.

  

OVERALL RESULTS

 

For fiscal 2018, consolidated net sales increased 14% as compared to fiscal 2017. After adjusting for the impacts of the Trevigen, Atlanta Biologicals and Eurocell acquisitions in fiscal 2018, as well as foreign currency fluctuations, organic sales for the year increased 9% with currency translation contributing 2% and acquisitions contributing 3%. The organic growth was broad-based as the Company achieved high-single digit growth in the US with contributions from both the Academic and Bio-Pharma end-markets. Europe sales grew in the mid-teens with growth in both the Academic and Bio-Pharma end-markets. China sales grew nearly 25% and Japan sales grew in the mid-teens while the rest of the Asia-Pacific region grew in the high-teens.

 

Consolidated GAAP net earnings increased 65% for fiscal 2018 as compared to fiscal 2017. After adjusting for acquisition related costs, stock-based compensation, and certain income tax items in both years, adjusted net earnings increased 24% in fiscal 2018 as compared to fiscal 2017. Adjusted earnings growth was driven by strong volume leverage and the benefit from tax reform, which was partially offset by negative business mix, lower margin acquisitions, and investments in global commercial resources and administrative infrastructure.

 

For fiscal 2017, consolidated net sales increased 13% as compared to fiscal 2016. After adjusting for the impacts of the Space and Advanced Cell Diagnostics (ACD) acquisitions in fiscal 2017, as well as foreign currency fluctuations, organic sales for the year increased 6% with currency translation having a negative impact of 1% and acquisitions contributing 8%. The organic growth was broad-based, with the Company achieving growth in all three of its reporting segments. A strong Bio-Pharma end-market in the US and Europe and additional market demand for Protein Platforms instruments were the biggest contributing factors to organic growth.

 

Consolidated GAAP net earnings decreased 27% for fiscal 2017 as compared to fiscal 2016. After adjusting for acquisition related costs, stock-based compensation, and certain income tax items in both years, adjusted net earnings increased 4% in fiscal 2017 as compared to fiscal 2016. Adjusted earnings growth was driven by strong volume leverage, which was offset by negative mix and a negative impact from foreign currency translation.

 

22

 

RESULTS OF OPERATIONS

 

Net Sales

 

Consolidated organic net sales exclude the impact of net sales contributed by companies acquired during the fiscal year and the effect of the change from the prior year in exchange rates used to convert sales in foreign currencies (primarily the euro, British pound sterling, and Chinese yuan) into U.S. dollars.

 

Consolidated net sales growth was as follows:

  

   

Year Ended June 30,

 
   

2018

   

2017

   

2016

 
                         

Organic sales growth

    9

%

    6

%

    6

%

Acquisitions sales growth

    3

%

    8

%

    6

%

Impact of foreign currency fluctuations

    2

%

    (1

)%

    (2

)%

Consolidated net sales growth

    14

%

    13

%

    10

%

 

 

Consolidated net sales by reportable segment were as follows (in thousands): 

 

   

Year Ended June 30,

 
   

2018

   

2017

   

2016

 
                         

Biotechnology

  $ 421,536     $ 364,504     $ 317,340  

Protein Platforms

    111,885       91,464       77,324  

Diagnostics

    110,108       107,139       104,484  

Intersegment

    (536

)

    (104

)

    (125

)

Consolidated net sales

  $ 642,993     $ 563,003     $ 499,023  

 

 

In fiscal 2018, Biotechnology segment net sales increased 16% compared to fiscal 2017. Organic growth for the segment was 9% for the fiscal year, with acquisitions contributing 4% and foreign currency translation having a favorable impact of 3%. Continued strength from ACD, a fiscal 2017 acquisition, and the proteins and assays product categories drove growth.

  

In fiscal 2018, the Protein Platforms segment net sales increased 22% compared to fiscal 2017. Organic growth for the segment was 20% with foreign currency translation having a favorable impact of 2%. Growth was broad-based and led by continued market demand for Simple Western (Wes) instruments and consumables and the Simple Plex (Ella) product lines.

 

In fiscal 2018, Diagnostics segment net sales increased 3% compared to fiscal 2017. Organic growth for the segment was 1% with acquisitions contributing 2%.

 

In fiscal 2017, Biotechnology segment net sales increased 15% compared to fiscal 2016. Organic growth for the segment was 4% for the fiscal year, with acquisitions contributing 13% and foreign currency translation having an unfavorable impact of 2%. Antibody and assay product categories drove growth. The growth in antibodies was led by double-digit growth in the Novus brand. The growth in assays was led by Luminex-based products the Company makes and sells and royalties received from Luminex assay suppliers who use the Company’s content in the production of their assays.

  

23

 

In fiscal 2017, the Protein Platforms segment net sales increased 18% compared to fiscal 2016. Organic growth for the segment was 19% with acquisitions contributing 1% and foreign currency translation having an unfavorable impact of 2%. Growth was broad-based and led by additional market demand for Simple Western (Wes) instruments and consumables, and the Simple Plex (Ella) and Biologics (Maurice) product lines.

 

In fiscal 2017, Diagnostics segment net sales increased 3% compared to fiscal 2016. All results for fiscal 2017 were organic. Timing of OEM orders had a negative impact on fiscal 2017 results. Mid-single digit sales growth in blood and glucose-based controls was partially offset by the timing of OEM shipments from the diagnostic assay and reagent product lines. 

  

Gross Margins

 

Consolidated gross margins were 67.2%, 66.5% and 67.5% in fiscal 2018, 2017 and 2016, respectively. Consolidated gross margins were negatively impacted as a result of purchase accounting related to inventory and intangible assets acquired during fiscal 2018, 2017, 2016 and prior years. 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 and amortization of intangibles, adjusted gross margins were 71.5%, 71.2% and 70.8% in fiscal 2018, 2017 and 2016, respectively.

 

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:

 

   

Year Ended June 30,

 
   

2018

   

2017

   

2016

 
                         

Consolidated gross margin percentage

    67.2

%

    66.5

%

    67.5

%

Identified adjustments:

                       

Costs recognized upon sale of acquired inventory

    0.4

%

    0.6

%

    1.1

%

Amortization of intangibles

    3.9

%

    4.1

%

    2.2

%

Non-GAAP adjusted gross margin percentage

    71.5

%

    71.2

%

    70.8

%

 

 

Fluctuations in adjusted gross margins, as a percentage of net sales, have primarily resulted from changes in foreign currency exchange rates and changes in product mix. We expect that, in the future, gross margins will continue to be impacted by the mix of our portfolio growing at different rates as well as future acquisitions.

 

Management uses adjusted operating results to monitor and evaluate performance of the Company’s three business segments. Since these results are used for this purpose, they are also considered to be prepared in accordance with GAAP. Segment gross margins, as a percentage of net sales, were as follows: 

 

   

Year Ended June 30,

 
   

2018

   

2017

   

2016

 
                         

Biotechnology

    79.4

%

    80.5

%

    80.0

%

Protein Platforms

    69.6

%

    67.6

%

    67.8

%

Diagnostics

    43.5

%

    42.3

%

    44.8

%

 

 

The decrease in the Biotechnology segment’s gross margin percentage for fiscal 2018 was primarily attributable to mix of product sales made in this segment. The improvements in the Protein Platforms and Diagnostics gross margin percentages for fiscal 2018 as compared to fiscal 2017 were due to higher volume leverage and operational productivity.

 

24

 

The Biotechnology improvement for fiscal 2017 as compared to fiscal 2016 was primarily attributable to higher volume leverage and operational productivity. The Diagnostics and Protein Platforms segment gross margin percentages for fiscal 2017 as compared to fiscal 2016 were negatively impacted by lower volume leverage and margin mix of product sales.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses increased $40.2 million (20%) and $59.6 million (42%) in fiscal 2018 and 2017, respectively.

 

The increase in fiscal 2018 was driven by additional investments in global commercial resources and administrative infrastructure, a larger cost base due to acquisitions and $13.6 million of additional stock-based compensation expense of which $8.3 million is from a new retirement policy that permits retirees to continue vesting in certain time-based stock options granted during employment, resulting in accelerated stock compensation expense for those employees meeting the definition of retirement eligible.

 

The increase in fiscal 2017 was driven by additional expenses associated with the Space, ACD and Zephyrus acquisitions including $21.1 million of selling, general and administrative expenses, a $3.0 million increase in acquisition intangible amortization, a $18.4 million change in the fair value of contingent consideration and a $4.6 million increase in other acquisition related costs. The remaining increase in selling, general and administrative expenses in fiscal 2017 was primarily due to additional investments in global commercial resources, administrative infrastructure, including increased stock compensation, and annual wage, salary and benefit increases.

 

Consolidated selling, general and administrative expenses were composed of the following (in thousands):

 

   

Year Ended June 30,

 
   

2018

   

2017

   

2016

 
                         

Biotechnology

  $ 99,655     $ 82,801     $ 58,414  

Protein Platforms

    44,475       37,735       34,186  

Diagnostics

    15,774       13,207       12,781  

Total segment expenses

    159,904       133,743       105,381  

Amortization of intangibles

    21,650       21,328       18,300  

Acquisition related expenses

    24,429       25,789       2,761  
Restructuring costs     376       -       -  

Stock-based compensation

    28,240       14,631       9,430  

Corporate selling, general and administrative expenses

    6,037       4,952       5,007  

Total selling, general and administrative expenses

  $ 240,636     $ 200,443     $ 140,879  

 

 

Research and Development Expenses

 

Research and development expenses increased $1.8 million (3%) and $8.3 million (18%) in fiscal 2018 and 2017, respectively, as compared to prior year periods. The increase in research and development expense in fiscal 2018 and 2017 as compared to fiscal 2016 was due to $10.2 million and $8.6 million of additional expenses from ACD, one of the Company’s fiscal 2017 acquisitions.

 

   

Year Ended June 30,

 
   

2018

   

2017

   

2016

 
                         

Biotechnology

  $ 35,895     $ 35,507     $ 26,981  

Protein Platforms

    15,348       14,424       14,610  

Diagnostics

    3,848       3,583       3,596  
Total segment expenses     55,091       53,514       45,187  

Unallocated corporate expenses

    238       -       -  

Total research and development expenses

  $ 55,329     $ 53,514     $ 45,187  

 

25

 

Net Interest Income / (Expense)

 

Net interest income/(expense) for fiscal 2018, 2017 and 2016 was $(9.8) million, $(7.1) million, and $(1.5) million respectively. Net interest expense in fiscal 2018 increased due to changes in interest rates. Net interest expense in fiscal 2017 increased due to the new revolving credit facility the Company entered into in July 2016 to help fund the acquisition of ACD.

 

Other Non-Operating Expense, Net

 

Other non-operating expense, net, consists of foreign currency transaction gains and losses, rental income, building expenses related to rental property and the Company's share of gains and losses from equity method investees as follows (in thousands):

 

   

Year Ended June 30,

 
   

2018

   

2017

   

2016

 
                         

Foreign currency (losses) gains

  $ (227

)

  $ (636

)

  $ (1,080

)

Rental income

    1,177       947       950  

Real estate taxes, depreciation and utilities

    (1,803

)

    (1,818

)

    (1,762

)

Gain (loss) on investment

    397       -       -  

Miscellaneous (expense) income

    9       (59

)

    279  

Other non-operating income (expense), net

  $ (447

)

  $ (1,566

)

  $ (1,613

)

  

 

During the third quarter fiscal 2018, the Company recognized a $16.2 million impairment on the write-down of its investment in Astute Medical, Inc. (Astute) in anticipation of the amount of cash to be received upon completion of the sale of Astute to a third party. The Astute sale closed in the fourth quarter of fiscal 2018 at the anticipated amount. This loss was offset by a $16.1 million gain on the sale of a portion of the Company’s investment in ChemoCentryx, Inc. (CCXI) and a $0.5 million gain on the sale of investment property in the fourth quarter of fiscal 2018. These gains and losses are included in other income (expense) in the accompanying Consolidated Statements of Earnings and Comprehensive Income.

 

Income Taxes

 

Income taxes for fiscal 2018, 2017 and 2016 were at effective rates of (0.2)%, 32.0%, and 29.2%, respectively, of consolidated earnings before income taxes. The effective rate for June 30, 2018 decreased by 32.2% compared to the prior year. The decrease in the Company’s tax rate for fiscal 2018 was due to the impact of discrete items, primarily the net tax benefit of $33.0 million related to government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). This net tax benefit consisted of $36.5 million due to the re-measurement of the Company’s deferred tax accounts to reflect the U.S. federal corporate tax rate reduction impact to our net deferred tax balances offset by expense for the repatriation tax of $3.3 million. Also impacting the Company’s fiscal 2018 effective tax rate was a $2.2 million tax benefit related to stock option exercises offset by a net discrete tax expense of $4.2 million related to the revaluation of contingent consideration, which is not a tax deductible expense.

 

The effective rate for June 30, 2017 increased by 2.8% compared to the prior year. The increase was primarily due to unfavorable discrete events in fiscal 2017 related to the revaluation of contingent consideration, which is not a tax deductible expense. The Company recognized net expense related to discrete tax items of $3.8 million in fiscal 2017, including $4.5 million in expense related to the revaluation of contingent consideration which is not a tax deductible expense. There were no material discrete tax items in fiscal 2016.

  

U.S. federal taxes have been reduced by the manufacturer's deduction provided for under the American Jobs Creation Act of 2004 and the U.S. federal credit for research and development. Foreign income taxes have been provided at rates which approximate the tax rates in the countries in which the Company has operations, exclusive of permanent items.

 

26

 

Net Earnings

 

Non-GAAP adjusted consolidated net earnings are as follows (in thousands):

 

   

Year Ended June 30,

 
   

2018

   

2017

   

2016

 
                         

Net earnings

  $ 126,150     $ 76,086     $ 104,476  

Identified adjustments:

                       

Costs recognized upon sale of acquired inventory

    2,455       3,037       5,431  

Amortization of intangibles

    46,983       44,393       29,395  

Acquisition related expenses

    24,774       25,789       2,761  

Restructuring costs

    376       -       -  

Stock-based compensation

    28,240       14,631       9,430  

Gain on investment

    (397 )     -       -  

Tax impact of above adjustments

    (21,625

)

    (20,483

)

    (14,551

)

Tax impact of discrete tax items and other foreign adjustments

    (34,360

)

    (3,920

)

    (2,638

)

Non-GAAP adjusted net earnings

  $ 172,596     $ 139,533     $ 134,304  
                         

Non-GAAP adjusted net earnings growth

    24

%

    4

%

    3

%

 

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 periods ended June 30, 2018, 2017, and 2016.

 

   

Year Ended June 30,

 
   

2018

   

2017

   

2016

 
                         

Reported GAAP tax rate

    (0.2

)%

    32.0

%

    29.2

%

Tax rate impact of:

                       

Identified non-GAAP adjustments

    (2.7

)

    (3.8

)

    0.4  

Discrete tax items and other foreign adjustments

    27.3       2.0       1.4  

Non-GAAP adjusted tax rate

    24.4

%

    30.2

%

    30.9

%

 

                       

 

The difference between the reported GAAP tax rate and non-GAAP tax rate applied to the identified non-GAAP adjustments for the fiscal years ended June 30, 2018 is due primarily to recording the items attributable to the new tax legislation in the U.S. which resulted in a $33.0 million tax benefit. Offsetting this benefit is the impact of the revaluation of contingent consideration which is not tax deductible. For the fiscal year ended June 30, 2018, the Company recorded acquisition related expense of $20.1 million related to the change in fair value of contingent consideration.

 

The difference between the reported GAAP tax rate and non-GAAP tax rate applied to the identified non-GAAP adjustments for the fiscal years ended June 30, 2017 is primarily a result of the revaluation of contingent consideration, which is not tax deductible. For the fiscal years ended June 30, 2017, the Company recorded acquisition related expense of $18.4 million related to the change in fair value of contingent consideration.

 

27

 

LIQUIDITY AND CAPITAL RESOURCES

 

Cash, cash equivalents and available-for-sale investments at June 30, 2018 were $181.8 million compared to $157.7 million at June 30, 2017. Included in available-for-sale investments at June 30, 2018 and June 30, 2017 was the fair value of the Company's investment in CCXI of $54.3 million and $59.6 million, respectively.

 

At June 30, 2018, approximately 41% of the Company's cash and equivalent account balances of $122.0 million were located in the U.S., with the remainder located in primarily in Canada, China, the U.K. and other European countries.

  

At June 30, 2018, approximately 91% of the Company's available-for-sale investment account balances of $59.8 million were located in the U.S., with the remaining 9% in China.

 

The Company has either paid U.S. taxes on its undistributed foreign earnings or intends to indefinitely reinvest the undistributed earnings in the foreign operations or expects the earnings will be remitted in a tax neutral transaction. 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 funds, including funds available through our line-of-credit and cash generated from operations.

 

During fiscal 2018, the Company acquired Trevigen, Atlanta Biologicals and Eurocell Diagnostics for approximately $10.6 million, $51.3 million and $7.3 million, respectively. The acquisitions were financed through a combination of cash on hand and our revolving line of credit facility.

 

During fiscal 2017, the Company acquired Space and ACD for approximately $9.0 million and $258.0 million, respectively. The acquisitions were financed through a combination of cash on hand and our revolving line of credit facility that the Company obtained prior to the closing of the ACD acquisition. The ACD acquisition also included certain future contingent payments of up to $75.0 million due upon the achievement of certain revenue milestones. Additionally, the Company made a $40.0 million equity investment in Astute Medical, Inc.

 

During fiscal 2016, the Company acquired Cliniqa and Zephyrus for approximately $82.9 million and $8.0 million, respectively. These acquisitions were financed with a combination of cash on hand and our revolving line of credit facility. The Zephyrus acquisition consisted of a net cash payment of $8.0 million and certain future contingent payments of up to $7.0 million.

  

On July 2, 2018, the Company acquired QT Holdings Corporation (Quad) for approximately $20 million plus $51 million in potential contingent consideration. On August 1, 2018, the Company acquired Exosome Diagnostics, Inc. (Exosome) for approximately $250 million plus $325 million in potential contingent consideration.   In connection with the acquisition of Exosome Diagnostics on August 1, 2018, the Company entered into a new credit facility governed by a Credit Agreement entered into on August 1, 2018 that matures on August 1, 2023.. The Credit Agreement provides for a revolving credit facility of $600 million, which can be increased by an additional $200 million subject to certain conditions, and a term loan of $250 million. Borrowings under the Credit Agreement bear interest at a variable rate.

 

Future acquisition strategies may or may not require additional borrowings under the line-of-credit facility or other outside sources of funding.

 

Cash Flows From Operating Activities

 

The Company generated cash from operations of $170.4 million, $143.4 million, and $143.9 million in fiscal 2018, 2017 and 2016, respectively. The increase in cash generated from operating activities in fiscal 2018 as compared to fiscal 2017 was mainly the result of higher earnings and decreases in operating assets driven by strong collections of trade accounts receivable and increases in operating liabilities, net of acquisitions.

 

Cash Flows From Investing Activities

 

We continue to make investments in our business, including capital expenditures. Net cash paid for acquisitions of Trevigen, Atlanta Biologicals and Eurocell Diagnostics was $67.9 million in fiscal 2018, a substantial decrease from the net cash paid of $253.8 million for the ACD and Space acquisitions in fiscal 2017. The Company paid net cash of $91.4 million for the Cliniqa and Zephyrus acquisitions during fiscal 2016.

 

28

 

In addition to the ACD and Space acquisitions in fiscal 2017, the Company also invested $40.0 million in Astute Medical, Inc. (Astute) during the second quarter of fiscal 2017. During the fourth quarter of fiscal 2018, Astute was sold to a third party. The Company received a cash payment of $22.5 million upon the closing of the acquisition.

 

The Company's net proceeds from the purchase, sale and maturity of available-for-sale investments in fiscal 2018, 2017, and 2016 were $27.8 million, $3.0 million, and $0.8 million, respectively. The increase in proceeds in fiscal 2018 as compared to fiscal 2017 was driven by the sale of a portion of the Company’s investment in CCXI. The Company's investment policy is to place excess cash in municipal and corporate bonds with the objective of obtaining the highest possible return while minimizing risk and keeping the funds accessible.

  

Capital additions in fiscal year 2018, 2017, and 2016 were $20.9 million, $15.2 million, and $16.9 million. Capital additions planned for fiscal 2019 are approximately $30.7 million and are expected to be financed through currently available cash and cash generated from operations.

 

Cash Flows From Financing Activities

 

In fiscal 2018, 2017, and 2016, the Company paid cash dividends of $48.0 million, $47.3 million, and $47.6 million, respectively. The Board of Directors periodically considers the payment of cash dividends.

 

The Company received $19.2 million, $5.3 million, and $5.4 million, for the exercise of options for 204,000, 63,000, and 69,000 shares of common stock in fiscal 2018, 2017 and 2016, respectively. The Company recognized excess tax benefits from stock option exercises of $0.5 million and $0.6 million in fiscal 2017 and 2016, respectively.

 

During fiscal 2018, the Company drew $55.0 million under its revolving line-of-credit facility to fund its acquisition of Atlanta Biologicals and made repayments on its line-of-credit of $59.5 million.

 

During fiscal 2017, the Company drew $368.5 million under its revolving line-of-credit facility to partially fund its acquisition of ACD and investment in Astute. The Company made payments on the line-of-credit and other debt of $116.5 million.

 

During fiscal 2016, the Company drew $77.0 million under its revolving line-of-credit facility to partially fund its acquisitions of Cliniqa. The Company made payments on the line-of-credit and other debt of $58.5 million.

 

During fiscal 2018, the Company made $88.5 million ($50 million for ACD, $35 million for CyVek, and $3.5 million for Zephyrus) in cash payments towards the ACD, CyVek and Zephyrus contingent consideration liabilities. Of the $88.5 million in total payments, $61.9 million is classified as financing on the statement of cash flows. The remaining $26.6 million is recorded as operating on the statement of cash flows as it represents the consideration liability that exceeds the amount of the contingent consideration liability recognized at the acquisition date.

 

During fiscal 2017, the Company made $28.5 million ($3.5 million for Zephyrus and $25 million for ACD) in cash payments towards the Zephyrus and ACD contingent consideration liabilities after it determined that certain sales and revenue thresholds were met. Of the $28.5 million of total payments, $16.7 million is classified as financing. The financing component represents the portion of the total liability that was recognized at the acquisition date. The remaining $11.8 million is recorded as operating as it represents the consideration liability that exceed the amount of the contingent consideration liability recognized at the acquisition date. Additionally, the Company made payments of $3.6 million to settle outstanding consideration payables related to the PrimeGene acquisition.

 

In accordance with the terms of the purchase agreement, during the first quarter of fiscal 2018, the Company made the final $2.3 million payment for the Space acquisition. This payment is included within other financing activities.

 

In April 2009, the Board of Directors authorized a plan for the repurchase and retirement of $60.0 million of its common stock. In October 2012, the Board of Directors increased the amount authorized under the plan by $100.0 million. The plan does not have an expiration date. There were no stock repurchases in fiscal 2018, 2017, or 2016. As of June 30, 2018, approximately $125.0 million remained available for purchase under the above authorizations.

  

29

 

OFF-BALANCE SHEET ARRANGEMENTS

 

The Company is not a party to any off-balance sheet transactions, arrangements or obligations that have, or are reasonably likely to have, a current or future material effect on the Company's financial condition, changes in the financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

 

CONTRACTUAL OBLIGATIONS

 

The following table summarizes the Company's contractual obligations and commercial commitments as of June 30, 2018 (in thousands):

 

           

Payments Due by Period

 
   

Total

   

Less than
1 Year

   

1-2
Years

   

3-4
Years

   

After
5 Years

 

Long-term debt

  $ 339,000       -       -       339,000       -  

Lease obligations

  $ 90,297     $ 10,654     $ 20,808     $ 20,935     $ 37,900  

Total contractual obligations

  $ 429,297     $ 10,654     $ 20,808     $ 359,935     $ 37,900  

 

 

CRITICAL ACCOUNTING POLICIES

 

Management's discussion and analysis of the Company's financial condition and results of operations are based upon the Company's Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, management evaluates its estimates. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

 

The Company has identified the policies outlined below as critical to its business operations and an understanding of results of operations. The listing is not intended to be a comprehensive list of all accounting policies; investors should also refer to Note 1 to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

 

Business Combinations

 

We allocate the purchase price of acquired businesses to the estimated fair values of the assets acquired and liabilities assumed as of the date of the acquisition. The calculations used to determine the fair value of the long-lived assets acquired, primarily intangible assets, can be complex and require significant judgment. We weigh many factors when completing these estimates including, but not limited to, the nature of the acquired company’s business; its competitive position, strengths, and challenges; its historical financial position and performance; estimated customer retention rates; discount rates; and future plans for the combined entity. We may also engage independent valuation specialists, when necessary, to assist in the fair value calculations for significant acquired long-lived assets.

 

The fair value of acquired technology is estimated, using the relief from royalty method, which calculates the cost savings associated with owning rather than licensing the technology. Assumed royalty rates are applied to the projected revenues for the remaining useful life of the technology to estimate the royalty savings. The fair value of acquired technology may also be estimated using the cost of reproduction method under which the primary components of the technology are identified and the estimated cost to reproduce the technology is calculated based on historical data provided by the acquirees. The fair value of trade names is estimated using the relief from royalty method, which calculates the cost savings associated with owning rather than licensing the trade name. Assumed royalty rates are applied to the projected revenues for the remaining useful life of the trade name to estimate the royalty savings. We generally estimate the fair value of acquired customer relationships using the multi-period excess earnings method. This valuation model estimates revenues and cash flows derived from the asset and then deducts portions of the cash flow that can be attributed to supporting assets, such as a brand name or fixed assets, that contributed to the generation of the cash flows. The resulting cash flow, which is attributable solely to the customer list asset, is then discounted at a rate of return commensurate with the risk of the asset to calculate a present value. The fair value of acquired customer relationships may also be estimated by discounting the estimated cash flows expected to be generated by the assets. Assumptions used in these calculations include same-customer revenue growth rates and estimated customer retention rates based on the acquirees' historical information.

 

30

 

We estimate the fair value of liabilities for contingent consideration by discounting to present value the probability weighted contingent payments expected to be made. Assumptions used in these calculations include discount rates, projected financial results of the acquired businesses based on our most recent internal forecasts, and factors indicating the probability of achieving the forecasted results. The excess of the purchase price over the estimated fair value of the net assets acquired is recorded as goodwill. Goodwill is not amortized, but is subject to impairment testing on at least an annual basis.

 

We are also required to estimate the useful lives of the acquired intangible assets, which determines the amount of acquisition-related amortization expense we will record in future periods. Each reporting period, we evaluate the remaining useful lives of our amortizable intangibles to determine whether events or circumstances warrant a revision to the remaining period of amortization.

 

While we use our best estimates and assumptions, our fair value estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Any adjustments required after the measurement period are recorded in the consolidated statements of earnings.

 

The judgments required in determining the estimated fair values and expected useful lives assigned to each class of assets and liabilities acquired can significantly affect net income. For example, different classes of assets will have useful lives that differ. Consequently, to the extent a longer-lived asset is ascribed greater value than a shorter-lived asset, net income in a given period may be higher. Additionally, assigning a lower value to amortizable intangibles would result in a higher amount assigned to goodwill. As goodwill is not amortized, this would benefit net income in a given period, although goodwill is subject to annual impairment analysis.

 

Impairment of Goodwill

 

Goodwill

 

Goodwill was $597.9 million as of June 30, 2018, which represented 37.5% of total assets. Goodwill is tested for impairment on an annual basis in the fourth quarter of each year, or more frequently if events occur or circumstances change that could indicate a possible impairment.

 

To analyze goodwill for impairment, we must assign our goodwill to individual reporting units. Identification of reporting units includes an analysis of the components that comprise each of our operating segments, which considers, among other things, the manner in which we operate our business and the availability of discrete financial information. Components of an operating segment are aggregated to form one reporting unit if the components have similar economic characteristics. We periodically review our reporting units to ensure that they continue to reflect the manner in which we operate our business.

  

31

 

2018 and 2017 Goodwill Impairment Analyses

 

In completing our 2018 and 2017 annual goodwill impairment analyses, we elected to perform a quantitative assessment for all of our reporting units. A quantitative assessment involves comparing the carrying value of the reporting unit, including goodwill, to its estimated fair value. Carrying value is based on the assets and liabilities associated with the operations of the reporting unit, which often requires the allocation of shared or corporate items among reporting units. In accordance with ASU 2017-04, a goodwill impairment charge is recorded for the amount by which the carrying value of a reporting unit exceeds the fair value of the reporting unit. In determining the fair values of our reporting units, we utilized the income approach. The income approach is a valuation technique under which we estimated future cash flows using the reporting unit's financial forecast from the perspective of an unrelated market participant. Using historical trending and internal forecasting techniques, we projected revenue and applied our fixed and variable cost experience rates to the projected revenue to arrive at the future cash flows. A terminal value was then applied to the projected cash flow stream. Future estimated cash flows were discounted to their present value to calculate the estimated fair value. The discount rate used was the value-weighted average of our estimated cost of capital derived using both known and estimated customary market metrics. In determining the estimated fair value of a reporting unit, we were required to estimate a number of factors, including projected operating results, terminal growth rates, economic conditions, anticipated future cash flows, the discount rate and the allocation of shared or corporate items.

 

Because our 2018 and 2017 quantitative analyses included all of our reporting units, the summation of our reporting units' fair values was compared to our consolidated fair value, as indicated by our market capitalization, to evaluate the reasonableness of our calculations.

 

The quantitative assessment completed as of June 30, 2018 and 2017 indicated that all of the reporting units had a substantial amount of headroom. This impairment assessment is sensitive to changes in forecasted cash flows, as well as our selected discount rate. Changes in the reporting unit's results, forecast assumptions and estimates could materially affect the estimation of the fair value of the reporting units.

 

2016 Goodwill Impairment Analysis

 

The Company used a qualitative test for all reporting units during the fourth quarter for fiscal year 2016. The company elected to utilize a quantitative test for the Protein Platforms reporting unit for fiscal year 2016 using the previously described income approach given that this was a newer reporting unit created primarily through acquisitions. The qualitative analyses for our other reporting units completed during 2016 evaluated factors including, but not limited to, economic, market and industry conditions, cost factors and the overall financial performance of the reporting units. In completing these assessments, we noted no changes in events or circumstances which indicated that it was more likely than not that the fair value of any reporting unit was less than its carrying amount. Based on the testing performed for the Protein Platforms reporting unit, fair value exceeded carrying value by a substantial amount and no adjustment to the carrying value of goodwill was necessary.

 

There has been no impairment of goodwill since the adoption of Financial Accounting Standards Board (“FASB”) ASC 350 guidance for goodwill and other intangibles on July 1, 2002.

  

NEW ACCOUNTING PRONOUNCEMENTS

 

Information regarding the accounting policies adopted during fiscal 2018 and those not yet adopted can be found under caption “Note 1: Description of Business and Summary of Significant Accounting Policies” of the Notes to the Consolidated Financial Statements appear in Item 8 of this report. 

 

32

 

SUBSEQUENT EVENTS

 

On July 2, 2018, the Company acquired QT Holdings Corporation (Quad) for approximately $20 million plus $51 million in potential contingent consideration. On August 1, 2018, the Company acquired Exosome Diagnostics, Inc. (Exosome) for approximately $250 million plus $325 million in potential contingent consideration.

 

In connection with the acquisition of Exosome Diagnostics, Inc. on August 1, 2018, the Company entered into a new credit facility that provides for a revolving credit facility of $600 million, which can be increased by an additional $200 million subject to certain conditions, and a term loan of $250 million.  The credit facility is governed by a Credit Agreement dated August 1, 2018 and matures on August 1, 2023

 

NON-GAAP FINANCIAL MEASURES

 

This Annual Report on Form 10-K, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7, 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 net earnings growth

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 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, and acquisition related expenses. 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, 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, 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 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 we do not have significant influence over these investments and 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.

 

33

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES

ABOUT MARKET RISK

  

The Company operates internationally, and thus is subject to potentially adverse movements in foreign currency exchange rates. Approximately 28% of the Company's consolidated net sales in fiscal 2018 were made in foreign currencies, including 15% in euro, 5% in British pound sterling, 3% in Chinese yuan and the remaining 5% in other currencies. The Company is exposed to market risk primarily from foreign exchange rate fluctuations of the euro, British pound sterling, Chinese yuan and Canadian dollar as compared to the U.S. dollar as the financial position and operating results of the Company's foreign operations are translated into U.S. dollars for consolidation.

 

Month-end exchange rates between the euro, British pound sterling, Chinese yuan, Canadian dollar and the U.S. dollar, which have not been weighted for actual sales volume in the applicable months in the periods, were as follows:

 

   

Year Ended June 30,

 
   

2018

   

2017

   

2016

 

Euro:

                       

High

  $ 1.24     $ 1.14     $ 1.13  

Low

    1.16       1.05       1.10  

Average

    1.20       1.09       1.12  

British pound sterling:

                       

High

  $ 1.42     $ 1.32     $ 1.48  

Low

    1.29       1.22       1.33  

Average

    1.35       1.27       1.42  

Chinese yuan:

                       

High

  $ 0.16     $ 0.15     $ 0.15  

Low

    0.15       0.14       0.15  

Average

    0.15       0.15       0.15  

Canadian dollar:

                       

High

  $ 0.81     $ 0.77     $ 0.78  

Low

    0.76       0.73       0.71  

Average

    0.79       0.75       0.76  

 

The Company's exposure to foreign exchange rate fluctuations also arises from trade receivables and intercompany payables denominated in one currency in the financial statements, but receivable or payable in another currency.

 

The Company does not enter into foreign currency forward contracts to reduce its exposure to foreign currency rate changes on forecasted intercompany sales transactions or on intercompany foreign currency denominated balance sheet positions. Foreign currency transaction gains and losses are included in "Other non-operating expense, net" in the Consolidated Statement of Earnings and Comprehensive Income. The effect of translating net assets of foreign subsidiaries into U.S. dollars are recorded on the Consolidated Balance Sheet as part of "Accumulated other comprehensive income (loss)."

 

The effects of a hypothetical simultaneous 10% appreciation in the U.S. dollar from June 30, 2018 levels against the euro, British pound sterling, Chinese yuan and Canadian dollar are as follows (in thousands):

 

Decrease in translation of 2018 earnings into U.S. dollars

  $ 3,750  

Decrease in translation of net assets of foreign subsidiaries

    40,782  

Additional transaction losses

    1,928  

 

34

 

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME

Bio-Techne Corporation and Subsidiaries
(in thousands, except per share data)

 

   

Year Ended June 30,

 
   

2018

   

2017

   

2016

 
                         

Net sales

  $ 642,993     $ 563,003     $ 499,023  

Cost of sales

    210,850       188,462       162,364  

Gross margin

    432,143       374,541       336,659  
                         

Operating expenses:

                       

Selling, general and administrative

    240,636       200,443       140,879  

Research and development

    55,329       53,514       45,187  

Total operating expenses

    295,965       253,957       186,066  

Operating income

    136,178       120,584       150,593  
                         

Other income (expense):

                       

Interest expense

    (10,188

)

    (7,361

)

    (1,748

)

Interest income

    409       304       249  

Other non-operating income (expense), net

    (447

)

    (1,566

)

    (1,613

)

Total other income (expense)

    (10,226

)

    (8,623

)

    (3,112

)

Earnings before income taxes

    125,952       111,961       147,481  

Income taxes

    (198 )     35,875       43,005  

Net earnings

    126,150       76,086       104,476  

Other comprehensive income (loss):

                       

Foreign currency translation adjustments

    (1,572

)

    (3,061

)

    (19,888

)

Unrealized gains (losses) on available-for-sale investments, net of tax of $398, $(6,501), and $3,794, respectively

    5,693       24,531       (19,924

)

Other comprehensive income (loss)

    4,121       21,470       (39,812

)

Comprehensive income

  $ 130,271     $ 97,556     $ 64,664  
                         

Earnings per share:

                       

Basic

  $ 3.36     $ 2.04     $ 2.81  

Diluted

  $ 3.31     $ 2.03     $ 2.80  

Cash dividends per common share:

  $ 1.28     $ 1.28     $ 1.28  

Weighted average common shares outstanding:

                       

Basic

    37,476       37,313       37,194  

Diluted

    38,055       37,500       37,326  

 

See Notes to Consolidated Financial Statements.

 

35

 

 

CONSOLIDATED BALANCE SHEETS

Bio-Techne Corporation and Subsidiaries
(in thousands, except share and per share data)

 

   

June 30,

 
   

2018

   

2017

 

ASSETS

               

Current assets:

               

Cash and cash equivalents

  $ 121,990     $ 91,612  

Short-term available-for-sale investments

    59,764       66,102  

Accounts receivable, less allowance for doubtful accounts of $839 and $696, respectively

    120,296       116,830  

Inventories

    85,648       60,151  

Other current assets

    10,668       13,330  

Total current assets

    398,366       348,025  
                 

Property and equipment, net

    145,348       135,124  

Goodwill

    597,890       579,026  

Intangible assets, net

    446,332       452,042  

Other assets

    5,266       44,002  

Total assets

  $ 1,593,202     $ 1,558,219  

LIABILITIES AND SHAREHOLDERS' EQUITY

               

Current liabilities:

               

Trade accounts payable

  $ 18,452     $ 16,856  

Salaries, wages and related accruals

    23,710       26,602  

Accrued expenses

    21,403       18,518  

Deferred revenue, current

    7,067       5,968  

Income taxes payable

    8,878       2,478  

Contingent consideration payable

    -       65,100  

Total current liabilities

    79,510       135,522  
                 

Deferred income taxes

    86,293       120,596  

Long-term debt obligations

    339,000       343,771  

Contingent consideration payable

    -       3,300  

Other long-term liabilities

    9,338       5,403  
                 

Shareholders' equity:

               

Undesignated capital stock, no par; authorized 5,000,000 shares; none issued or outstanding

    -       -  

Common stock, par value $.01 a share; authorized 100,000,000 shares; issued and outstanding 37,607,500 and 37,356,041 shares, respectively

    376       374  

Additional paid-in capital

    246,568       199,161  

Retained earnings

    876,931       799,027  

Accumulated other comprehensive loss

    (44,814

)

    (48,935

)

Total shareholders' equity

    1,079,061       949,627  

Total liabilities and shareholders’ equity

  $ 1,593,202     $ 1,558,219  

 

See Notes to Consolidated Financial Statements.

 

36

 

 

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Bio-Techne Corporation and Subsidiaries
(in thousands)
 

 

   

Common Stock

   

Additional
Paid-in

   

Retained

   

Accumulated
Other
Comprehensive

         
   

Shares

   

Amount

   

Capital

   

Earnings

   

Income(Loss)

   

Total

 
                                                 

Balances at June 30, 2015

    37,153     $ 371     $ 163,306     $ 713,851     $ (30,593

)

  $ 846,935  

Net earnings

                            104,476               104,476  

Other comprehensive loss

                                    (39,812

)

    (39,812

)

Surrender and retirement of stock to exercise options

    -       -       (31

)

                    (31

)

Common stock issued for exercise of options

    69       1       4,796                       4,797  

Common stock issued for restricted stock awards

    23       -       -       (167

)

            (167

)

Cash dividends

                            (47,607

)

            (47,607

)

Stock-based compensation expense

                    9,287                       9,287  

Tax benefit from exercise of stock options

                    566                       566  

Common stock issued to employee stock purchase plan

    9       -       692                       692  

Employee stock purchase plan expense

                    144                       144  

Balances at June 30, 2016

    37,254     $ 372     $ 178,760     $ 770,553     $ (70,405

)

  $ 879,280  

Net earnings

                            76,086               76,086  

Other comprehensive income

                                    21,470       21,470  

Surrender and retirement of stock to exercise options

    (3

)

    -       (275

)

                    (275

)

Common stock issued for exercise of options

    63       2       4,509                       4,511  

Common stock issued for restricted stock awards

    31       -       -       (287

)

            (287

)

Cash dividends

                            (47,325

)

            (47,325

)

Stock-based compensation expense

                    14,418                       14,418  

Tax benefit from exercise of stock options

                    514                       514  

Common stock issued to employee stock purchase plan

    11       -       1,022                       1,022  

Employee stock purchase plan expense

                    213                       213  

Balances at June 30, 2017

    37,356     $ 374     $ 199,161     $ 799,027     $ (48,935

)

  $ 949,627  

Net earnings

                            126,150               126,150  

Other comprehensive income

                                    4,121       4,121  

Common stock issued for exercise of options

    204       2       17,661                       17,663  

Common stock issued for restricted stock awards

    34       -       -       (273

)

            (273

)

Cash dividends

                            (47,973

)

            (47,973

)

Stock-based compensation expense

                    27,959                       27,959  

Common stock issued to employee stock purchase plan

    14       -       1,506                       1,506  

Employee stock purchase plan expense

                    281                       281  

Balances at June 30, 2018

    37,608     $ 376     $ 246,568     $ 876,931     $ (44,814

)

  $ 1,079,061  

 

See Notes to Consolidated Financial Statements.

 

37

 

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

Bio-Techne Corporation and Subsidiaries
(in thousands)

 

   

Year Ended June 30,

 
   

2018

   

2017

   

2016

 

Cash flows from operating activities:

                       

Net earnings

  $ 126,150     $ 76,086     $ 104,476  

Adjustments to reconcile net earnings to net cash provided by operating activities:

                       

Depreciation and amortization

    64,463       60,036       42,764  

Costs recognized on sale of acquired inventory

    2,455       3,037       5,431  

Deferred income taxes

    (46,716

)

    (3,433

)

    (2,624

)

Stock-based compensation expense

    28,240       14,631       9,430  

Fair value adjustment to contingent consideration payable

    20,100       18,400       -  

Contingent consideration

    (26,600

)

    (11,800

)

    -  

Gain on investment, net

    (397

)

    -       -  

Other operating activity

    776       2,215       (279

)

Change in operating assets and liabilities, net of acquisitions:

                       

Trade accounts and other receivables

    (2,700

)

    (19,686

)

    (22,981

)

Inventories

    (13,327

)

    (732

)

    (6,626

)

Prepaid expenses

    2,782       (2,088

)

    (381

)

Trade accounts payable and accrued expenses

    5,026       5,695       8,924  

Salaries, wages and related accruals

    (89

)

    661       5,725  

Income taxes payable

    10,204       699       298  

Net cash provided by operating activities

    170,367       143,721       144,157  
                         

Cash flows from investing activities:

                       

Proceeds from sale and maturities of available-for-sale investments

    36,390       6,079       776  

Purchase of available-for-sale investments

    (8,571

)

    (3,069

)

    -  

Additions to property and equipment

    (20,934

)

    (15,179

)

    (16,898

)

Acquisitions, net of cash acquired

    (67,851

)

    (253,785

)

    (91,423

)

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