BIO-TECHNE Corp: Form 10-Q for the period ended Dec 31, 2023

CONDITION AND RESULTS OF OPERATIONS

The following management discussion and analysis (“MD&A”) provides information that we believe is useful in understanding our operating results, cash flows and financial condition. We provide quantitative information about the material sales drivers including the effect of acquisitions and changes in foreign currency at the corporate and segment level. We also provide quantitative information about discrete tax items and other significant factors we believe are useful for understanding our results. The MD&A should be read in conjunction with both the unaudited condensed consolidated financial information and related notes included in this Form 10-Q, and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended June 30, 2023. This discussion contains various “Non-GAAP Financial Measures” and also contains various “Forward-Looking Statements” within the meaning of the Private Securities Litigation Reform Act of 1995. We refer readers to the statements entitled “Non-GAAP Financial Measures” and “Forward-Looking Information and Cautionary Statements” located at the end of Item 2 of this report.

OVERVIEW

Bio-Techne and its subsidiaries, collectively doing business as Bio-Techne Corporation (Bio-Techne, we, our, us or the Company) develop, manufacture and sell biotechnology reagents, instruments and services for the research and clinical diagnostic markets worldwide. We use our deep product portfolio and application expertise to develop and sell integral components of scientific investigations into biological processes and molecular diagnostics, revealing the nature, diagnosis, etiology and progression of specific diseases. Our products aid in drug discovery efforts and provide the means for accurate clinical tests and diagnoses.

The Company’s key business strategies for long-term growth and profitability continue to be geographic expansion, core product innovation, acquisitions and talent retention and development. As a Company, we are integrating consideration of greenhouse gas emissions and other environmental variables into our key business strategies. The Company also strives to innovate and improve all aspects of Bio-Techne’s operations, including reducing the environmental impacts of our manufacturing operations. As described in our Corporate Sustainability report, the Company is currently focused on establishing a baseline for emissions so that we can develop appropriate emission reduction targets, as well as reducing our environmental footprint through changes in packaging and shipping materials.

Consistent with the prior year, we have operated with two segments – our Protein Sciences segment and our Diagnostics and Genomics segment – during the second quarter of fiscal 2024. Our Protein Sciences segment is a leading developer and manufacturer of high-quality purified proteins and reagent solutions, most notably cytokines and growth factors, antibodies, immunoassays, biologically active small molecule compounds, tissue culture reagents and T-Cell activation technologies. This segment also includes protein analysis solutions that offer researchers efficient and streamlined options for automated western blot and multiplexed ELISA workflow. Our Diagnostics and Genomics segment develops and manufactures diagnostic products, including FDA-regulated controls, calibrators, blood gas and clinical chemistry controls and other reagents for OEM and clinical customers, as well as a portfolio of clinical molecular diagnostic oncology assays, including the ExoDx®Prostate (IntelliScore) test (EPI) for prostate cancer diagnosis. This segment also manufactures and sells advanced tissue-based in-situ hybridization assays (ISH) for research and clinical use.

RECENT ACQUISITIONS

A key component of the Company's strategy is to augment internal growth at existing businesses with complementary acquisitions. On July 7, 2023, the Company completed the acquisition of Lunaphore Technologies SA (Lunaphore) for $169.7 million in a cash-free, debt-free acquisition. The Lunaphore acquisition adds spatial biology instruments to Bio-Techne’s portfolio to accelerate our leadership position in translational and clinical research markets. Refer to Note 4 for additional disclosure regarding the Company's recent acquisitions.

RESULTS OF OPERATIONS

Operational Update

Consolidated net sales remained flat and increased 2% for the quarter and six months ended December 31, 2023, respectively, compared to the same prior year periods. Organic revenue for the quarter ended December 31, 2023 declined 2% compared to the prior year with acquisitions and foreign currency exchange both having a favorable 1% impact. Organic revenue for the six months ended December

31, 2023 remained flat compared to the same prior year period with acquisitions and foreign currency exchange both having a favorable impact of 1%.

Consolidated net earnings attributable to Bio-Techne decreased to $27.5 million for the quarter ended December 31, 2023 as compared to $50.0 million for the quarter ended December 31, 2022. The decrease in net earnings attributable to Bio-Techne is primarily due to an impairment of assets held-for-sale, restructuring charges, the Lunaphore acquisition, unfavorable volume, and product mix. Consolidated net earnings attributable to Bio-Techne decreased to $78.5 million for the six months ended December 31, 2023 as compared to $139.6 million for the six months ended December 31, 2022. Prior year net earnings attributable to Bio-Techne was favorably impacted by a non-recurring gain of $37.2 million on the sale of our ChemoCentryx investment and a non-recurring gain of $11.7 million on the sale of our Eminence investment.

Net Sales

Consolidated net sales for the quarter ended December 31, 2023 remained flat at $272.6 million compared to the same prior year period. Consolidated net sales for the six months ended December 31, 2023 were $549.5 million, an increase of 2% from the same prior year period. Organic revenue for the quarter ended December 31, 2023 declined 2% compared to the prior year with acquisitions and foreign currency exchange both having favorable impact of 1%. Organic revenue for the six months ended December 31, 2023 remained flat compared to the prior year same period with acquisitions and foreign currency exchange both having a favorable impact of 1%. Organic revenue for the quarter and six months ended December 31, 2023 was primarily driven by lower sales from biotech customers and from customers in China.

Gross Margins

Consolidated gross margins for the quarter and six months ended December 31, 2023 were 64.8% and 65.8% respectively, compared to 67.5% and 67.1% for the same prior year periods. Under purchase accounting, inventory is valued at fair value less expected selling and marketing costs, resulting in reduced margins in future periods as the inventory is sold. Excluding the impact of costs recognized upon the sale of acquired inventory, stock compensation expense, amortization of intangibles, restructuring and restructuring-related expenses, and impact of partially-owned consolidated subsidiaries, adjusted gross margins for the quarter and six months ended December 31, 2023 were 69.7% and 70.5%, respectively compared to 71.7% and 71.3% for the quarter and six months ended December 31, 2022, respectively. Both consolidated gross margins and non-GAAP adjusted gross margins for the quarter and six months ended December 31, 2023 were impacted by unfavorable volume and product mix as well as the acquisition of Lunaphore.

A reconciliation of the reported consolidated gross margin percentages, adjusted for acquired inventory sold, intangible amortization, stock compensation expense, and impact of partially-owned consolidated subsidiaries included in cost of sales, is as follows:

(1) Includes the quarterly results of the partially-owned consolidated subsidiary prior to the sale of this partially-owned consolidated subsidiary to a third party in the first fiscal quarter of 2023.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased 24% to $115.7 million and increased 15% to $221.0 million for the quarter and six months ended December 31, 2023, respectively, from the same prior year periods. The increase in expense for the quarter and six months ended December 31, 2023 was primarily due to impairment of assets held-for-sale, restructuring and restructuring-related charges, and the Lunaphore acquisition.

Research and Development Expenses

Research and development expenses increased 2% to $22.9 million and increased 1% to $46.9 million for the quarter and six months ended December 31, 2023, respectively, from the same prior year periods. The increase in expense was due to the timing of strategic growth investments.

Segment Results

Protein Sciences

Protein Sciences’ net sales for the quarter and six months ended December 31, 2023 were $197.7 million and $402.3 million, respectively, with results decreasing 3% and remaining flat, respectively, compared to the same respective prior year periods. Organic revenue for the segment declined 4% for the quarter ended December 31, 2023, with foreign currency exchange having a favorable impact of 1%. Organic growth for the segment declined 1% for the six months ended December 31, 2023, with foreign currency exchange having a favorable impact of 1%. Segment revenue was impacted by unfavorable volume.

The operating margin was 40.3% and 41.7% for the quarter and six months ended December 31, 2023, respectively, compared to 43.8% and 43.6% in both comparative prior year periods. The segment’s operating margin impacted by unfavorable volume and product mix.

Diagnostics and Genomics

Diagnostics and Genomics' net sales for the quarter and six months ended December 31, 2023 were $75.4 million and $148.2 million, respectively, with increased net sales of 11% and 7% compared to the same respective prior year periods. Organic growth for the segment for the quarter ended December 31, 2023 was 5% from the prior year, with acquisitions contributing 5% and foreign currency exchange having a favorable impact of 1%. Organic growth for the six months ended December 31, 2023 was 3% compared to the prior year, with acquisitions contributing 4% and foreign currency exchange having an immaterial impact. Segment results were driven by Spatial Biology and Molecular Diagnostics products, as well as the Lunaphore acquisition.

The operating margin for the segment was 6.0% and 3.4% for the quarter and six months ended December 31, 2023, respectively, compared to 12.2% and 12.3% in both comparative prior year periods. The segment’s operating margin was unfavorably impacted due to the acquisition of Lunaphore.

Income Taxes

Income taxes were at an effective rate of 17.7% and 5.4% of consolidated earnings for the quarter and six month period ended December 31, 2023, respectively, compared to 24.7% and 17.9% for the same respective prior year periods. The change in the Company’s tax rate for the quarter and six months ended December 31, 2023 was driven by the composition and amount of net income across periods and the impact of discrete tax benefits of $2.8 million and $16.3 million, respectively, compared to prior year discrete tax expense of $4.6 million and benefit of $3.2 million as further discussed in Note 12.

The forecasted tax rate as of the second fiscal quarter of 2024 before discrete items is 23.4% compared to the prior year forecasted tax rate before discrete items of 21.2%. Excluding the impact of discrete items, the Company expects the consolidated income tax rate for the remainder of fiscal 2024 to range from 23% to 27%.

Net Earnings

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

(1) Includes the quarterly results of the partially-owned consolidated subsidiary prior to the sale of this partially-owned consolidated subsidiary to a third party.

Depending on the nature of discrete tax items, our reported tax rate may not be consistent on a period-to-period basis. The Company independently calculates a non-GAAP adjusted tax rate considering the impact of discrete items and jurisdictional mix of the identified non-GAAP adjustments. The following table summarizes the reported GAAP tax rate and the effective non-GAAP adjusted tax rate for the quarter and six months ended December 31, 2023 and December 31, 2022.

The difference between the reported GAAP tax rate and non-GAAP tax rate applied to the identified non-GAAP adjustments for the quarter ended December 31, 2023 is primarily a result of discrete tax items, including the tax benefit of stock option exercises.

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents and available-for-sale investments were $135.7 million as of December 31, 2023, compared to $204.3 million as of June 30, 2023. Included in the available-for-sale-investments as December 31, 2023 is $5.5 million of short-term certificates of deposit. Included in the available-for-sale investments as of June 30, 2023 was the fair value of the Company’s investment in exchange traded investment grade bond funds of $23.7 million. During the first fiscal quarter of 2024, the Company sold its investment in exchange traded investment grade bond funds.

The Company has a line-of-credit governed by a Credit Agreement dated August 31, 2022 that will mature on August 1, 2027. This Credit Agreement amended and restated the Company’s previous credit agreement that was entered into on August 1, 2018 and would have matured on August 1, 2023. As of December 31, 2023, there is $553 million available on the line-of-credit. See Note 6 to the Condensed Consolidated Financial Statements for a description of the Credit Agreement.

During fiscal year 2022, the Company paid $25 million to enter into a two-part forward contract which requires the Company to purchase the full equity interest in Wilson Wolf if certain annual revenue or EBITDA thresholds are met. During the third fiscal quarter of 2023, Wilson Wolf met the required threshold for the first part of the forward contract. A payment of $232 million was made during the third fiscal quarter of 2023. The Company is currently forecasting the second option payment of approximately $1 billion plus potential contingent consideration to occur between fiscal 2026 and fiscal 2028.

Management of the Company expects to be able to meet its cash and working capital requirements for operations, facility expansion, capital additions, and cash dividends for the foreseeable future, and at least the next 12 months, through currently available cash, cash generated from operations, and remaining credit available on its existing revolving line of credit.

Cash Flows From Operating Activities

The Company generated cash of $142.5 million from operating activities in the six months ended December 31, 2023 compared to $120.5 million in the six months ended December 31, 2022. The increase from the prior year was primarily due to favorable timing of payments on certain operating assets and liabilities.

Cash Flows From Investing Activities

We continue to make investments in our business, including capital expenditures.

Capital expenditures for fixed assets for the six months ended December 31, 2023 and December 31, 2022 were $28.5 million and $15.7 million, respectively. Capital expenditures for the remainder of fiscal 2024 are expected to be approximately $26 million. Capital expenditures are expected to be financed through currently available funds and cash generated from operating activities. Expected additions in fiscal 2024 are related to increasing capacity to meet expected sales growth across the Company.

During the first fiscal quarter of 2024, the Company acquired Lunaphore Technologies SA for $169.7 million, compared to the acquisition of Namocell, Inc for $101.2 million, net of cash acquired, in the comparative prior year period. There was a net working capital payment to the Lunaphore shareholders as part of the acquisition of $3.3 million during the quarter ended December 31, 2023.

During the six months ended December 31, 2022, the Company sold its remaining shares in Eminence, its partially-owned consolidated subsidiary, for $17.8 million. There were no comparable transactions in the six months ended December 31, 2023.

During the first fiscal quarter of 2024, the Company sold its exchange traded investment grade bond funds for $23.8 million. In the first fiscal quarter of 2023, the Company sold its remaining shares in its investment in CCXI for $73.2 million. The Company also sold certificates of deposit for $26.5 million during the six months ended December 31, 2022.

During the six months ended December 31, 2023 and December 31, 2022, purchase of available-for-sale investments was $5.5 million and $20.5 million, respectively.

During the first fiscal quarter of 2024, the Company received a $2.1 million tax distribution from its equity method investee. There were no comparable activities in the comparative period.

Cash Flows From Financing Activities

During the six months ended December 31, 2023 and December 31, 2022, the Company paid cash dividends of $25.2 million and $25.1 million, respectively, to all common shareholders. On February 1, 2024, the Company announced the payment of an $0.08 per share cash dividend, or approximately $12.6 million, will be payable February 26, 2024, to all common shareholders of record on February 12, 2024.

Cash of $19.7 million and $17.0 million was received during the six months ended December 31, 2023 and December 31, 2022, respectively, from the exercise of stock options.

During the six months ended December 31, 2023 and December 31, 2022, the Company made repayments of $128.0 million and $505.7 million, respectively, on its long-term debt balance. The Company drew $225.0 million and $449.7 million under its revolving line-of-credit facility during the six months ended December 31, 2023 and December 31, 2022, respectively.

There were $80.0 million of share repurchases during the six months ended December 31, 2023 included as a cash outflow within financing activities. During the six months ended December 31, 2022, the Company repurchased $19.6 million in share repurchases included as a cash outflow within financing activities.

During the six months ended December 31, 2023 and December 31, 2022, the Company paid $21.3 million and $17.9 million related to taxes on restricted stock units and stock options exercised through net share settlements classified as financing activities.

The decrease in other financing activity during the six months ended December 31, 2023 compared to the six months ended December 31, 2022 is primarily related to fees for the amended Credit Agreement that occurred in the first quarter of fiscal 2023. There were no such payments during the six months ended December 31, 2023.

CRITICAL ACCOUNTING POLICIES

The Company's significant accounting policies are discussed in the Company's Annual Report on Form 10-K for fiscal 2023 and are incorporated herein by reference. The application of certain of these policies requires judgments and estimates that can affect the results of operations and financial position of the Company. Judgments and estimates are used for, but not limited to, valuation of available-for-sale investments, inventory valuation and allowances, valuation of intangible assets and goodwill and valuation of investments in unconsolidated entities. There have been no significant changes in estimates in the quarter or six months ended December 31, 2023 that would require disclosure nor have there been any changes to the Company's policies.

NON-GAAP FINANCIAL MEASURES

This Quarterly Report on Form 10-Q, including “Management’s Discussion and Analysis of Financial Condition and Results of Operation” in Item 2, contains financial measures that have not been calculated in accordance with accounting principles generally accepted in the U.S. (GAAP). These non-GAAP measures include:

• Organic revenue
• Adjusted gross margin
• Adjusted operating margin
• Adjusted net earnings
• Adjusted effective tax rate

We provide these measures as additional information regarding our operating results. We use these non-GAAP measures internally to evaluate our performance and in making financial and operational decisions, including with respect to incentive compensation. We believe that our presentation of these measures provides investors with greater transparency with respect to our results of operations and that these measures are useful for period-to-period comparison of results.

Our non-GAAP financial measure of organic revenue represents revenue growth excluding revenue from acquisitions within the preceding 12 months, the impact of foreign currency, as well as the impact of partially-owned consolidated subsidiaries. Excluding these measures provides more useful period-to-period comparison of revenue results as it excludes the impact of foreign currency exchange rates, which can vary significantly from period to period, and revenue from acquisitions that would not be included in the comparable prior period. Revenues from partially-owned subsidiaries consolidated in our financial statements are also excluded from our organic revenue calculation, as those revenues are not fully attributable to the Company. There was no revenue from partially-owned consolidated subsidiaries for the quarter ended December 31, 2023 due to the sale of Changzhou Eminence Biotechnology Co., Ltd. (Eminence) in the first quarter of fiscal 2023. Revenue from partially-owned consolidated subsidiaries was $2.0 million for the six months ended December 31, 2022.

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 stock-based compensation, which is inclusive of the employer portion of payroll taxes on those stock awards, the costs recognized upon the sale of acquired inventory, amortization of acquisition intangibles, restructuring and restructuring-related costs, and other non-recurring items including non-recurring costs, goodwill and long-lived asset impairments, and gains. Stock-based compensation is excluded from non-GAAP adjusted net earnings because of the nature of this charge, specifically the varying available valuation methodologies, subjection assumptions, variety of award types, and unpredictability of amount and timing of employer related tax obligations. The Company excludes amortization of purchased intangible assets, purchase accounting adjustments, including costs recognized upon the sale of acquired inventory and acquisition-related expenses inclusive of the changes in fair value contingent consideration, and other non-recurring items including gains or losses on legal settlements, goodwill and long-lived asset impairment charges, and one-time assessments from this measure because they occur as a result of specific events, and are not reflective of our internal investments, the costs of developing, producing, supporting and selling our products, and the other ongoing costs to support our operating structure. Additionally, these amounts can vary significantly from period to period based on current activity. Costs related to restructuring and restructuring-related activities, including reducing overhead and consolidating facilities, are excluded because we believe they are not indicative of our normal operating costs. The Company also excludes revenue and expense attributable to partially-owned consolidated subsidiaries in the calculation of our non-GAAP financial measures as the revenues and expenses are not fully attributable to the Company.

The Company’s non-GAAP adjusted operating margin and adjusted net earnings, in total and on a per share basis, also excludes acquisition related expenses inclusive of the changes in fair value of contingent consideration, gain and losses from investments, as they are not part of our day-to-day operating decisions (excluding our equity method investment in Wilson Wolf as it is certain to be acquired in the future) and certain adjustments to income tax expense. Additionally, gains and losses from other investments that are either isolated or cannot be expected to occur again with any predictability are excluded. The Company independently calculates a non-GAAP adjusted tax rate to be applied to the identified non-GAAP adjustments considering the impact of discrete items on these adjustments and the jurisdictional mix of the adjustments. In addition, the tax impact of other discrete and non-recurring charges which impact our reported GAAP tax rate are adjusted from net earnings. We believe these tax items can significantly affect the period-over-period assessment of operating results and not necessarily reflect costs and/or income associated with historical trends and future results.

The Company periodically reassesses the components of our non-GAAP adjustments for changes in how we evaluate our performance, changes in how we make financial and operational decisions, and considers the use of these measures by our competitors and peers to ensure the adjustments are still relevant and meaningful.

Readers are encouraged to review the reconciliations of the adjusted financial measures used in management's discussion and analysis of the financial condition of the Company to their most directly comparable GAAP financial measures provided within the Company's consolidated financial statements.

FORWARD LOOKING INFORMATION AND CAUTIONARY STATEMENTS

This quarterly report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include those regarding the Company's expectations as to the effect of changes to accounting policies, the amount of capital expenditures for the remainder of the fiscal year, the source of funding for capital expenditure requirements, the sufficiency of currently available funds for meeting the Company's needs, the impact of fluctuations in foreign currency exchange rates, and expectations regarding gross margin fluctuations, increasing research and development expenses, increasing selling, general and administrative expenses and income tax rates. These statements involve risks and uncertainties that may affect the actual results of operations. The following important factors, among others, have affected and, in the future, could affect the Company's actual results: integration of newly acquired businesses, the introduction and acceptance of new products, general national and international economic, political, regulatory, and other conditions, increased competition, the reliance on internal manufacturing and related operations, supply chain challenges, the impact of currency exchange rate fluctuations, the recruitment and retention of qualified personnel, the impact of governmental regulation, maintenance of intellectual property rights, credit risk and fluctuation in the market value of the Company's investment portfolio, and unseen delays and expenses related to facility construction and improvements. For additional information concerning such factors, see the Company's Annual Report on Form 10-K for fiscal 2023 as filed with the Securities and Exchange Commission and Part II. Item 1A below.

The Company operates internationally, and thus is subject to potentially adverse movements in foreign currency exchange rates. For the quarter ended December 31, 2023, approximately 39% of consolidated net sales were made in foreign currencies, including 15% in euros, 4% in British pound sterling, 6% in Chinese yuan, 3% in Canadian dollars, and the remaining 11% in other currencies. The Company is exposed to market risk mainly from foreign exchange rate fluctuations of the euro, British pound sterling, the Chinese yuan, and the 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 average exchange rates between the British pound sterling, euro, Chinese yuan, Canadian dollar, and Swiss franc which have not been weighted for actual sales volume in the applicable months in the periods, to the U.S. dollar were as follows:

The Company's exposure to foreign exchange rate fluctuations also arises from trade receivables, trade payables and intercompany payables denominated in one currency in the financial statements, but receivable or payable in another currency. The effects of a hypothetical simultaneous 10% appreciation in the U.S. dollar from December 31, 2023 levels against the euro, British pound sterling, Chinese yuan and Canadian dollar are as follows (in thousands):

(a) Evaluation of disclosure controls and procedures.

The Company maintains disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). The Company's management has evaluated, with the participation of its Chief Executive Officer and Chief Financial Officer, the effectiveness of the design and operation of its disclosure controls and procedures as of the end of the period covered in this Quarterly Report on Form 10-Q. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2023, our disclosure controls and procedures were effective.

(b) Changes in internal controls over financial reporting.

There were no changes in the Company's internal control over financial reporting during the second quarter of fiscal 2024 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

During the quarter and six months ended December 31, 2023, there have been no material changes from the risk factors found in Part I, Item 1A, "Risk Factors," of the Company's Annual Report on Form 10-K for the year ended June 30, 2023.