BIO-TECHNE Corp (TECH) FY 2022 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
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 life science reagents, instruments and services for the research and clinical diagnostic markets worldwide. With our deep product portfolio and application expertise, we 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.
We manage the business in two operating segments – our Protein Sciences segment and our Diagnostics and Genomics segment. Our Protein Sciences segment is a leading developer and manufacturer of high-quality biological reagents used in all aspects of life science research, diagnostics and cell and gene therapy. This segment also includes proteomic analytical tools, both manual and automated, that offer researchers and pharmaceutical manufacturers efficient and streamlined options for automated western blot and multiplexed ELISA workflow. Our Diagnostics and Genomics segment develops and manufactures diagnostic products, including controls, calibrators, and diagnostic assays for the regulated diagnostics market, exosome-based molecular diagnostic assays, advanced tissue-based in-situ hybridization assays for spatial genomic and tissue biopsy analysis, and genetic and oncology kits for research and clinical applications.
RECENT ACQUISITIONS
A key component of the Company's strategy is to augment internal growth at existing businesses with complementary acquisitions. The Company did not make any acquisitions in fiscal year 2022. As disclosed in Note 1, the Company made a $25 million investment in a forward contract, which allows the Company to acquire Wilson Wolf based on certain revenue or EBITDA thresholds being met. As further disclosed in Note 13, the Company closed on the acquisition of Namocell, Inc on July 1, 2022.
OVERALL RESULTS
Operational Update
For fiscal 2022, consolidated net sales increased 19% as compared to fiscal 2021. Organic growth was 17%, with acquisitions having a favorable impact of 3% and foreign currency translation having an unfavorable impact of 1%. Organic revenue growth was broad based and driven by overall execution of the Company's long-term growth strategy.
Consolidated earnings, including non-controlling interest, increased 88% compared to fiscal 2021. The increase in earnings was driven by non-operating mark-to-market gain of $16 million on our ChemoCentryx investment in fiscal year 2022, compared to a loss on the investment of $67.9 million in the prior fiscal year. Additionally, fiscal year 2022 had adjustments of $20.4 million of benefit related to contingent considerations as compared to a charge of $5.3 million in the prior fiscal year. After adjusting for acquisition related costs, intangibles amortization, stock-based compensation,
32
Table of Contents
restructuring costs, the gain on investment, and impact from partially-owned consolidated subsidiaries, adjusted net earnings increased 18% in fiscal 2022 as compared to fiscal 2021. Adjusted earnings growth was primarily driven by sales growth.
For fiscal 2021, consolidated net sales increased 26% as compared to fiscal 2020. Organic growth was 22%, with currency translation and acquisitions having a 3% and 1% impact on revenue respectively. Organic revenue growth was broad based and driven by accelerated momentum of the Company's long-term growth strategy as well as customer site closures in the latter half of fiscal 2020 due to the COVID-19 pandemic.
For fiscal 2021, consolidated earnings, including non-controlling interest, decreased 39% compared to fiscal 2020. The decrease in earnings was primarily due to a non-operating loss of approximately $67.9 million on our ChemoCentryx investment, compared to a gain on investment of $137 million in the last fiscal year. After adjusting for acquisition related costs, intangibles amortization, stock-based compensation, restructuring costs, the loss on investment, certain income tax items in both years, and non-controlling interest, adjusted net earnings increased 52% in fiscal 2021 as compared to fiscal 2020. Adjusted earnings growth was driven by the reopening of customer sites closing during the latter half of fiscal 2020, volume leverage, operational productivity, and product mix.
Business Strategy Update
Environmental
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. The Company was also focused on evaluating how climate change impacts from our business operations might be measured and mitigated, with the plan of integrating consideration of greenhouse gas emissions and other climate variables into those key business strategies.
In response to the COVID-19 pandemic, the Company took additional steps to monitor and strengthen our supply chain to maintain an uninterrupted supply of our critical products and services. The Company has maintained these procedures while incorporating additional considerations regarding potential adverse weather events associated with climate change.
The financial impact of potential environmental regulations pertaining to carbon emissions or the integration of climate change impacts into our core business strategies are not expected to materially alter the Company’s near-term financial results. Additionally, the Company is creating a cross-functional internal council to evaluate potential long-term business impacts while driving long-term sustainability solutions.
Digital
In driving our four key business strategies, the Company utilizes digital networks and systems for data transmission, transaction processing, and storing of electronic information. As disclosed in “Item 1A. Risk Factors”, increased cybersecurity attack activity poses a risk for our business. In response to this risk, the Company actively completes system patching and required maintenance, performs internal and third-party employee training, monitors network and system activity, and completes data backups for our systems. However, even with the Company’s procedures performed, our digital networks and systems are still potentially vulnerable to cyberattacks.
The financial impact of our cybersecurity initiatives and activities are ongoing and not expected to have a material impact on our financial results. However, the impact on our business operations and financial results from a material cyber breach would be unknown and dependent on the nature of the breach.
RESULTS OF OPERATIONS
Net Sales
Consolidated organic net sales exclude the impact of companies acquired during the first 12 months post-acquisition 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.
33
Table of Contents
Consolidated net sales growth was as follows:
| | | | | | | | |
|---|---|---|---|---|---|---|---|
| | Year Ended June 30, | ||||||
| | 2022 | 2021 | 2020 | ||||
| | | | | | | | |
| Organic sales growth | 17 | % | 22 | % | 4 | % | |
| Acquisitions sales growth | 3 | % | 1 | % | 0 | % | |
| Impact of foreign currency fluctuations | (1) | % | 3 | % | 0 | % | |
| Consolidated net sales growth | 19 | % | 26 | % | 4 | % |
Consolidated net sales by segment were as follows (in thousands):
| | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|
| | Year Ended June 30, | ||||||||
| | 2022 | 2021 | 2020 | ||||||
| Protein Sciences | | $ | 832,311 | | $ | 704,564 | | $ | 555,352 |
| Diagnostics and Genomics | | 274,843 | | 227,744 | | 184,549 | |||
| Intersegment | | (1,555) | | (1,276) | | (1,210) | |||
| Consolidated net sales | | $ | 1,105,599 | | $ | 931,032 | | $ | 738,691 |
In fiscal 2022, Protein Sciences segment net sales increased 18% compared to fiscal 2021. Organic growth for the segment was 19% for the fiscal year, with currency translation having an unfavorable 1% impact on revenue.
Overall segment growth was driven by strong BioPharma demand resulting in broad-based growth across our proteomic research reagents and analytical tools.
In fiscal 2022, Diagnostics and Genomics segment net sales increased 21% compared to fiscal 2021. Organic growth for the segment was 10% with acquisitions contributing 11% and currency translation having an immaterial impact on revenue growth.
Segment growth was driven by the full year impact of the Asuragen acquisition and organic growth. Organic growth was driven by an exclusive agreement entered into for development, finalization and commercialization of our ExoTRU kidney transplant rejection test, and continued strength in our diagnostic reagent product lines.
In fiscal 2021, Protein Sciences segment net sales increased 27% compared to fiscal 2020. Organic growth for the segment was 24% for the fiscal year, with foreign currency translation having a favorable impact of 3%, and acquisitions contributing an immaterial amount.
Overall segment growth was driven by continued market acceptance of our portfolio of productivity enhancing solutions across end-markets and geographies combined with the reopening of customer sites that were closed in the latter half of fiscal 2020 due to COVID-19.
In fiscal 2021, Diagnostics and Genomics segment net sales increased 23% compared to fiscal 2020. Organic growth was 18% with acquisitions and foreign currency having a favorable impact of 4% and 1% impact on revenue, respectively.
Overall segment revenue growth was driven by broad based organic growth across product lines and geographies and the acquisition of Asuragen in the fourth quarter of fiscal year 2021. RNAscope products had an exceptional year in both the Academia and Bio-Pharma end markets, while the Exosome product line also provided year over year growth despite navigating limitations and/or customer avoidance of non-essential medical procedures throughout fiscal 2021 associated with the COVID-19 pandemic.
34
Table of Contents
Gross Margins
Consolidated gross margins were 68.4%, 68.0%, and 65.4% in fiscal 2022, 2021, and 2020. Consolidated gross margins were positively impacted as a result of broad based revenue growth. Excluding the impact of acquired inventory sold, amortization of intangibles, stock compensation expense, and the impact of partially-owned consolidated subsidiaries, adjusted gross margins were 72.5%, 72.3%, and 70.3% in fiscal 2022, 2021, and 2020 respectively. Fiscal 2022 adjusted gross margin was positively impacted by volume leverage and product mix, partially offset by additional investments made in the business to support future growth, when compared to fiscal 2020 and fiscal 2019.
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, | | ||||
| | 2022 | 2021 | 2020 | |||
| | | | | | | |
| Consolidated gross margin percentage | 68.4 | % | 68.0 | % | 65.4 | % |
| Identified adjustments: | | | ||||
| Costs recognized upon sale of acquired inventory | 0.1 | % | 0.2 | % | — | % |
| Amortization of intangibles | 3.7 | % | 3.8 | % | 4.7 | % |
| Stock compensation expense - COGS | 0.1 | % | 0.2 | % | 0.2 | % |
| Impact of partially owned consolidated subsidiaries(1) | 0.2 | % | 0.1 | % | — | % |
| Non-GAAP adjusted gross margin percentage | 72.5 | % | 72.3 | % | 70.3 | % |
(1)Adjusted gross margin percentages for fiscal 2021 have been updated for comparability to fiscal 2022 for the inclusion of the impact of partially-owned consolidated subsidiaries on the Company’s adjusted gross margin percentage.
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 two segments. Segment gross margins, as a percentage of net sales, were as follows:
| | | | | | | | |
|---|---|---|---|---|---|---|---|
| | Year Ended June 30, | ||||||
| | | 2022 | 2021 | 2020 | |||
| | | | | | | | |
| Protein Sciences | 75.5 | % | 76.0 | % | 75.0 | % | |
| Diagnostics and Genomics | 63.1 | % | 60.5 | % | 55.6 | % |
The changes in the Protein Sciences segment’s gross margin percentage for fiscal 2022 as compared to fiscal 2021 and 2020 was primarily attributable to mix of product sales within the segment.
The increase in the Diagnostics and Genomics segment’s gross margin for fiscal 2022 as compared to fiscal 2021 and fiscal 2020 was primarily due to volume leverage.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $47.8 million (15%) in fiscal 2022 when compared to fiscal 2021. Selling, general, and administrative expenses increased primarily due to the full year impact of prior year’s Asuragen acquisition and strategic investments made in the business to support future growth.
Selling, general and administrative expenses increased $64.4 million (25%) in fiscal 2021 when compared to fiscal 2020. Selling, general, and administrative expenses increased primarily due to investments made by the Company to support volume growth within each of the segments as well as additional expenses related to the acquisition of Asuragen, Inc.
35
Table of Contents
Consolidated selling, general and administrative expenses were composed of the following (in thousands):
| | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|
| | Year Ended June 30, | ||||||||
| | | 2022 | | 2021 | | 2020 | |||
| | | | | | | | | | |
| Protein Sciences | | $ | 195,328 | | $ | 159,489 | | $ | 138,792 |
| Diagnostics and Genomics | | 93,578 | | 75,160 | | 65,407 | |||
| Total segment expenses | | 288,906 | | 234,649 | | 204,199 | |||
| Amortization of intangibles | | 32,492 | | 27,788 | | 26,358 | |||
| Acquisition related expenses | | (19,082) | | 7,097 | | 415 | |||
| Eminence impairment(1) | | | 18,715 | | | — | | | — |
| Gain on escrow litigation | | — | | — | | (7,159) | |||
| Restructuring costs | | 1,640 | | 142 | | 87 | |||
| Stock-based compensation | | 45,085 | | 50,200 | | 32,667 | |||
| Corporate selling, general and administrative expenses | | 5,010 | | 5,075 | | 4,016 | |||
| Total selling, general and administrative expenses | | $ | 372,766 | | $ | 324,951 | | $ | 260,583 |
(1)Refer to the Goodwill Impairment section within the Critical Accounting Policies for further details on the Eminence impairment.
Research and Development Expenses
Research and development expenses increased $16.5 million (23%) and $5.4 million (8%) in fiscal 2022 and 2021, respectively, as compared to prior year periods. The increase in research and development expenses in fiscal 2022 as compared to 2021 was primarily attributable to strategic growth investments and the Asuragen acquisition in the fourth quarter of fiscal 2021. The increase in research and development expenses in fiscal 2021 as compared to fiscal 2020 was primarily attributable to continued investment in future growth platforms of the Company and recent acquisitions.
| | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|
| | Year Ended June 30, | ||||||||
| | | 2022 | | 2021 | | 2020 | |||
| | | | | | | | | | |
| Protein Sciences | | $ | 56,370 | | $ | 46,361 | | $ | 43,022 |
| Diagnostics and Genomics | | 30,770 | | 24,242 | | 22,170 | |||
| Total segment expenses | | 87,140 | | 70,603 | | 65,192 | |||
| Unallocated corporate expenses | | — | | — | | — | |||
| Total research and development expenses | | $ | 87,140 | | $ | 70,603 | | $ | 65,192 |
Net Interest Income / (Expense)
Net interest income/(expense) for fiscal 2022, 2021, and 2020 was ($10.5) million, $(13.5) million, and $(18.6) million, respectively. Net interest expense in fiscal 2022 decreased when compared to fiscal 2021 due to a reduction in our average long-term debt, which coincided with a reduction in the notional amount on our variable interest derivative.
Net interest expense in fiscal 2021 decreased when compared to fiscal 2020 due to a reduction in our average long-term debt, which coincided with a reduction in the notional amount on our variable interest derivative.
36
Table of Contents
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 gains and losses on investments as follows (in thousands):
| | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|
| | Year Ended June 30, | ||||||||
| | | 2022 | | 2021 | | 2020 | |||
| | | | | | | | | | |
| Foreign currency gains (losses) | | $ | 699 | | $ | (6,650) | | $ | 1,703 |
| Rental income | | 599 | | 1,036 | | 1,140 | |||
| Real estate taxes, depreciation and utilities | | (2,035) | | (1,845) | | (1,915) | |||
| Gain (loss) on investment | | 15,186 | | (68,047) | | 137,508 | |||
| Miscellaneous (expense) income | | 862 | | (136) | | (786) | |||
| Other non-operating income (expense), net | | $ | 15,311 | | $ | (75,642) | | $ | 137,650 |
During fiscal 2022, the Company recognized gains of $16.1 million related to changes in fair value associated with changes in the stock price of our ChemoCentryx, Inc. (CCXI) investment. Additionally, the Company recognized losses of $1.1 million related to changes in fair value associated with changes in the stock price of our exchange traded investment grade bond funds. As described in Note 13, on August 4, 2022, the Company sold all of its shares in CCXI.
During fiscal 2021, the Company recognized losses of $67.9 million related to changes in fair value associated with changes in the stock price of our ChemoCentryx, Inc. (CCXI) investment.
During fiscal 2020, the Company recognized gains of $137.5 million related to changes in fair value associated with changes in the stock price of our ChemoCentryx, Inc. (CCXI) investment.
Income Taxes
Income taxes for fiscal 2022, 2021, and 2020 were at effective rates of 12.7%, 5.8%, and 17.1%, respectively, of consolidated earnings before income taxes. The change in the effective tax rate for fiscal 2022 compared to fiscal 2021 was driven by a mix of increased net income and the dilutive effect the increased net income has on the favorable rate benefits, which are mainly related to share-based compensation. The Company had share-based compensation excess tax benefits of $29.3 million in fiscal 2022. The Company’s discrete tax benefits in fiscal 2021 primarily related to share-based compensation excess tax benefits of $28.1 million. The Company’s discrete tax benefits in fiscal 2020 primarily related to share-based compensation excess tax benefits of $17.7 million.
37
Table of Contents
Net Earnings
Non-GAAP adjusted consolidated net earnings and earnings per share are as follows (in thousands):
| | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|
| | | | | | | | | | |
| | Year Ended June 30, | | |||||||
| | 2022 | | 2021 | | 2020 | ||||
| | | | | | | | | | |
| Net earnings before taxes - GAAP | $ | 301,386 | | $ | 148,175 | | $ | 276,477 | |
| Identified adjustments attributable to Bio-Techne: | | | | | | ||||
| Costs recognized upon sale of acquired inventory | 1,596 | | 1,565 | | — | | |||
| Amortization of intangibles | 73,054 | | 64,239 | | 60,865 | | |||
| Acquisition related expenses | (18,694) | | 7,489 | | 793 | | |||
| Gain on escrow settlement | — | | — | | (7,170) | | |||
| Eminence impairment | | 18,715 | | | — | | | | |
| Stock based compensation, inclusive of employer taxes | 46,401 | | 51,846 | | 34,262 | | |||
| Restructuring costs | 1,640 | | 142 | | 87 | | |||
| Investment (gain) loss and other | (16,171) | | 68,391 | | (136,716) | | |||
| Impact of partially owned subsidiaries(1) | 2,675 | | 1,390 | | — | | |||
| Earnings before taxes - Adjusted | $ | 410,602 | | $ | 343,237 | | $ | 228,598 | |
| | | | | | | | | | |
| Non-GAAP tax rate | 21.2 | % | 20.2 | % | 21.6 | % | |||
| Non-GAAP tax expense | 87,090 | | 69,478 | | 49,280 | | |||
| Non-GAAP adjusted net earnings attributable to Bio-Techne(1) | $ | 323,512 | | 273,759 | | 179,318 | | ||
| Earnings per share - diluted - Adjusted | 7.89 | | 6.76 | | 4.55 | |
(1)Adjusted consolidated net earnings and earnings per share for fiscal 2021 have been updated for comparability to fiscal 2022 for the inclusion of the impact of partially-owned consolidated subsidiaries on the Company’s adjusted consolidated net earnings and earnings per share.
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, 2022, 2021, and 2020.
| | | | | | | |
|---|---|---|---|---|---|---|
| | | | | | | |
| | Year Ended June 30, | | ||||
| | 2022 | | 2021 | | 2020 | |
| | | | | | | |
| GAAP effective tax rate | 12.7 | % | 5.8 | % | 17.1 | % |
| Discrete items | 11.3 | 19.0 | 7.0 | | ||
| Long-term GAAP tax rate | 24.0 | % | 24.8 | % | 24.1 | |
| | | | | | | |
| Rate impact items | | |||||
| Stock based compensation | (1.9) | % | (5.7) | % | (2.4) | % |
| Acquisition costs | (0.0) | (0.2) | 0.4 | | ||
| Change in fair value of investments | (0.1) | 0.5 | (0.4) | | ||
| Other | (0.8) | 0.8 | (0.1) | | ||
| Total rate impact items | (2.8) | % | (4.6) | % | (2.5) | % |
| Non-GAAP adjusted tax rate(1) | 21.2 | % | 20.2 | % | 21.6 | % |
Refer to Note 11 for additional discussion relating to the change in discrete tax items between fiscal 2022 and fiscal 2021.
38
Table of Contents
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and available-for-sale investments at June 30, 2022 were $247.0 million compared to $231.6 million at June 30, 2021. Included in available-for-sale investments at June 30, 2022 and June 30, 2021 was the fair value of the Company’s investment in CCXI of $36.0 million and $20.0 million, respectively, as well as the Company’s exchange traded investment grade bond funds of $23.9 million as of June 30, 2022. The Company purchased these bond funds during the year ended June 30, 2022.
At June 30, 2022, approximately 31% of the Company’s cash and equivalent account balances of $172.6 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, 2022, approximately 48% of the Company’s available-for-sale investment account balances of $74.5 million were located in the U.S., with the remaining 32% in Canada and 20% 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.
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 $325.3 million, $352.2 million, and $205.2 million in fiscal 2022, 2021, and 2020 respectively. The decrease in cash generated from operating activities in fiscal 2022 as compared to fiscal 2021 was mainly a result of changes in the timing of cash payments on certain operating assets and liabilities, largely offset by an increase in year over year net earnings. The increase in cash generated from operating activities in fiscal 2021 as compared to fiscal 2020 was mainly a result of an increase in year over year operating income of $79.9 million and a $29.3 million benefit to operating cash from year-over-year changes in operating assets and liabilities as well as a non-cash stock-based compensation expense of $16.6 million.
Cash Flows From Investing Activities
We continue to make investments in our business, including capital expenditures. There are no cash payments for acquisitions during fiscal year 2022. The Company acquired Eminence Biotechnology and Asuragen, Inc. during fiscal year 2021 for a total of approximately $225.4 million, net of cash acquired. The Company did not make any acquisitions in fiscal 2020.
The Company’s net proceeds (outflow) from the purchase, sale and maturity of available-for-sale investments in fiscal 2022, 2021, and 2020 were $(26.9) million, $26.7 million, and $76.9 million, respectively. The decrease in fiscal 2022 compared to fiscal 2021 was driven by the purchase of the exchange traded investment grade bond funds, which have a cost basis of $25.0 million. The decrease in fiscal 2021 compared to fiscal 2020 was driven by the sale of a portion of the CCXI investment in fiscal year 2020, which did not reoccur in fiscal year 2021. The Company’s investment policy is to place excess cash in certificates of deposit with the objective of obtaining the highest possible return while minimizing risk and keeping the funds accessible.
Capital additions in fiscal year 2022, 2021, and 2020 were $44.9 million, $44.3 million, and $51.7 million. Fiscal 2022 capital expenditures related to investments in new buildings, machinery, and IT equipment. Fiscal 2021 capital expenditures related to investments in new buildings, in particular, the Company’s GMP manufacturing facility. Capital additions planned for fiscal 2023 are approximately $62 million and are expected to be financed through currently available cash and cash generated from operations. Increase in expected additions in fiscal 2023 is related to increasing capacity to meet expected sales growth across the Company.
39
Table of Contents
During the year ended June 30, 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 Corporation (Wilson Wolf) if certain annual revenue or EBITDA thresholds are met. The Company is currently forecasting the first option payment of $231 million to occur in fiscal 2023 with the second option payment of approximately $1 billion plus potential contingent consideration occurring between fiscal 2026 and fiscal 2028.
Cash Flows From Financing Activities
In fiscal 2022, 2021, and 2020, the Company paid cash dividends of $50.2 million, $49.6 million, $48.9 million, respectively. The Board of Directors periodically considers the payment of cash dividends.
The Company received $77.2 million, $65.1 million, $71.0 million, for the exercise of options for 613,000, 627,000, 743,000 shares of common stock in fiscal 2022, 2021 and 2020, respectively.
During fiscal 2022, 2021, and 2020, the Company repurchased $161.0 million, $43.2 million, and $50.1 million, respectively, in share repurchases included as a cash outflow within Financing Activities.
During fiscal 2022, 2021, and 2020, the Company drew $90.0 million, $256.0 million, and $40.0 million, respectively, under its revolving line-of-credit facility. Repayments of $175.5 million, $271.5 million, and $188.5 million were made on its line-of-credit in fiscal 2022, 2021, and 2020, respectively.
During fiscal 2022, the Company made $4.0 million in cash payments towards the Quad contingent consideration liability. Of the $4.0 million in total payments, $0.7 million is classified as financing on the statement of cash flows. The remaining $3.3 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 2021, there were no payments related to contingent consideration classified as financing activities. The Company made $0.3 million in contingent consideration payments, which were classified within operating activities. During fiscal 2020, the Company made $4.4 million ($4 million for Quad and $0.4 million for B-MoGen) in cash payments towards the Quad, Exosome, and B-MoGen contingent consideration liabilities. Of the $4.4 million in total payments, $3.4 million is classified as financing on the statement of cash flows. The remaining $1 million is recorded as operating on the statement of cash flows.
During fiscal 2022, 2021 and 2020, the Company paid $23.5 million, $19.3 million and $3.8 million, respectively, for taxes remitted on behalf of participants in net share settlement transactions and restricted stock units. This is included as a cash outflow within the other financing activities line of the consolidated statements of cash flows.
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,
40
Table of Contents
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 generally the primary asset identified and therefore estimated using the multi-period excess earnings method. The multi-period excess earnings method model estimates revenues and cash flows derived from the primary asset and then deducts portions of the cash flow that can be attributed to supporting assets, such as Trade Names and in-process research and development, that contributed to the generation of the cash flows. The resulting cash flow, which is attributable solely to the primary asset acquired, is then discounted at a rate of return commensurate with the risk of the asset to calculate a present value. The Trade Name is generally calculated 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. In-process research and development assets are valued using the multi-period excess earnings method when the cash flows from the in-process research and development assets are separately identifiable from the primary asset. In circumstances that Customer Relationship assets are identified that are not the primary asset, they are valued using the distributor model income approach, which isolates revenues and cash flow associated with the sales and distribution function of the entity and attributable to customer-related assets, which are then discounted at a rate of return commensurate with the risk of the asset to calculate a present value.
We estimate the fair value of liabilities for contingent consideration by discounting to present value the probability weighted contingent payments expected to be made. For potential payments related to financial performance based milestones, projected revenue and/or EBITDA amounts, volatility and discount rates assumptions are included in the estimated amounts. For potential payments related to product development milestones, the fair value is based on the probability of achievement of such milestones. 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 $822.1 million as of June 30, 2022, which represented 36% 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.
41
Table of Contents
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.
In the first quarter of fiscal 2022, the Company combined the management of the Exosome Diagnostics and Asuragen reporting units, both of which are included in the Diagnostics and Genomics operating segment. In conjunction with the combination of the reporting units, a qualitative goodwill impairment assessment was performed. The qualitative assessment identified no indicators of impairment.
In the second quarter of fiscal 2022, Changzhou Eminence Biotechnology Co., Ltd. (Eminence) notified the Company of its need for additional capital to execute its growth plan. The Company first attempted to find outside equity financing support for the Eminence investment but was unable to do so. The Company then reviewed the additional financing needs required to successfully ramp Eminence’s business, which ultimately did not meet the Company’s return on capital requirements. Therefore, the Company did not provide additional funding to Eminence. As a result of not obtaining additional financing, Eminence notified the Company of its plans to cease operations and liquidate its business.
Given the upcoming liquidation process to dispose of the Eminence assets, the Company identified a triggering event and performed impairment testing during the second quarter of fiscal 2022. The impairment testing resulted in a full impairment of the Eminence goodwill and intangible assets, which resulted in charges of $8.3 million and $8.6 million, respectively, for the year ended June 30, 2022. The Company also recognized inventory and fixed asset impairment charges of $0.9 million and $0.9 million, respectively. The Company recorded the impairment charges within the General and Administrative line in the Consolidated Income Statement. The impairment charges recorded within Net Earnings Attributable to Bio-Techne were reduced by approximately $8 million recorded within Net Earnings Attributable to Noncontrolling Interests. The remaining net tangible assets of Eminence included in our Consolidated Balance Sheet as of June 30 2022, were $4.3 million and primarily consisted of fixed assets and related deposits of $3.1 million, inventory of $0.6 million, receivables of $0.4 million, and other current assets of $0.1 million. The Company also had $4.5 million related to current liabilities. The Company holds a financial interest of approximately 57.4% in those tangible assets in the upcoming liquidation process.
2022 Goodwill Impairment Analyses
In completing our 2022 annual goodwill impairment analyses, we elected to perform a quantitative assessment for all five 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.
The result of our quantitative assessment indicated that all of the reporting units had a substantial amount of headroom as of April 1, 2022. 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. The Company did not identify any triggering events after our annual
42
Table of Contents
goodwill impairment through June 30, 2022, the date of our consolidated balance sheet, that would require an additional goodwill impairment assessment to be performed.
2021 Goodwill Impairment Analyses
In completing our 2021 annual goodwill impairment analyses, we elected to perform a quantitative assessment for each of our five 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 2021 quantitative analyses included all of our reporting units, the summation of our reporting units’ fair values, as indicated by our discounted cash flow calculations, were compared to our consolidated fair value, as indicated by our market capitalization, to evaluate the reasonableness of our calculations. 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.
The quantitative assessment completed as of April 1, 2021 indicated that all of the reporting units had a substantial amount of headroom. Accordingly, the Company determined there was no indication of impairment of goodwill in our annual goodwill impairment analysis. Further, no triggering events were identified in the year ended June 30, 2021 that would require an additional goodwill impairment assessment beyond our required annual goodwill impairment assessment.
2020 Goodwill Impairment Analyses
In completing our 2020 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 2020 quantitative analyses included all of our reporting units, the summation of our reporting units’ fair values, as indicated by our discounted cash flow calculations, were compared to our consolidated fair value, as indicated by our market capitalization, to evaluate the reasonableness of our calculations. 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.
43
Table of Contents
The quantitative assessment completed as of April 1, 2020 indicated that all of the reporting units had a substantial amount of headroom. Accordingly, the Company determined there was no indication of impairment of goodwill in our annual goodwill impairment analysis. Further, no triggering events were identified in the year ended June 30, 2020 that would require an additional goodwill impairment assessment beyond our required annual goodwill impairment assessment.
NEW ACCOUNTING PRONOUNCEMENTS
Information regarding the accounting policies adopted during fiscal 2022 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.
SUBSEQUENT EVENTS
On July 1, 2022, the Company completed the acquisition of Namocell, Inc. for approximately $100 million, plus contingent consideration of up to $25 million upon the achievement of certain future milestones.
On August 4, 2022, the Company sold its remaining shares of CCXI for approximately $73.3 million. The cost basis of the investment was $6.6 million.
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:
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Organic growth |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Adjusted gross margin |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Adjusted operating margin |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Adjusted net earnings |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Adjusted effective tax rate |
We provide these measures as additional information regarding our operating results. We use these non-GAAP measures internally to evaluate our performance and in making financial and operational decisions, including with respect to incentive compensation. We believe that our presentation of these measures provides investors with greater transparency with respect to our results of operations and that these measures are useful for period-to-period comparison of results.
Our non-GAAP financial measure of organic growth represents revenue growth excluding revenue from acquisitions within the preceding 12 months, 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. Revenue 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. Revenue from partially-owned subsidiaries was $4.6 million for the year ended June 30, 2022.
44
Table of Contents
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, the costs recognized upon the sale of acquired inventory, amortization of acquisition intangibles, acquisition related expenses inclusive of the changes in fair value of contingent consideration, and other non-recurring items including non-recurring costs, 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. 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 stock-based compensation expense, which is inclusive of the employer portion of payroll taxes on those stock awards, restructuring, impairments of equity method investments, gain and losses from investments, and certain adjustments to income tax expense. Impairments of equity investments are excluded as they are not part of our day-to-day operating decisions. Additionally, gains and losses from other investments that are either isolated or cannot be expected to occur again with any predictability are excluded. Costs related to restructuring activities, including reducing overhead and consolidating facilities, are excluded because we believe they are not indicative of our normal operating costs. The Company independently calculates a non-GAAP adjusted tax rate to be applied to the identified non-GAAP adjustments considering the impact of discrete items on these adjustments and the jurisdictional mix of the adjustments. In addition, the tax impact of other discrete and non-recurring charges which impact our reported GAAP tax rate are adjusted from net earnings. We believe these tax items can significantly affect the period-over-period assessment of operating results and not necessarily reflect costs and/or income associated with historical trends and future results.
The Company periodically reassesses the components of our non-GAAP adjustments for changes in how we evaluate our performance, changes in how we make financial and operational decisions, and considers the use of these measures by our competitors and peers to ensure the adjustments are still relevant and meaningful.
Readers are encouraged to review the reconciliations of the adjusted financial measures used in management’s discussion and analysis of the financial condition of the Company to their most directly comparable GAAP financial measures provided within the Company’s consolidated financial statements.
45
Table of Contents