BIO-TECHNE Corp (TECH) FY 2024 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. As disclosed in Note 4, the Company completed the acquisition of Lunaphore for $169.7 million, in a cash-free, debt-free acquisition. We also purchased a 19.9% investment in Wilson Wolf in fiscal 2023 and, as disclosed in Note 1, will acquire the remaining shares in Wilson Wolf by the end of calendar year 2027, or earlier depending on the achievement of certain future milestones.
OVERALL RESULTS
Operational Update
For fiscal 2024, consolidated net sales increased 2% to $1.2 billion as compared to fiscal 2023. Organic growth was 1%, with acquisitions having a favorable impact of 1%. Foreign currency translation and a business held-for sale did not have a material impact. Organic revenue growth was primarily driven by strong commercial execution in our Diagnostics and Genomics segment.
Consolidated net earnings, including non-controlling interest, decreased 41% compared to fiscal 2023. The decrease in earnings was driven by a non-recurring gain on the sale of our ChemoCentryx investment, a non-recurring gain on the sale of our investment in Changzhou Eminence Biotechnology Co., Ltd. (Eminence), and a non-recurring benefit related to the fair value of contingent consideration during fiscal 2023. The decrease in fiscal 2024 was also impacted by impairment of assets held-for-sale, restructuring charges, and CEO transition related charges. After adjusting for cost recognized upon
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sale of acquired inventory, intangibles amortization, acquisition-related costs, certain litigation charges, gain on sale of investments, stock-based compensation, restructuring and restructuring-related costs, impairment of assets held-for-sale, impact of business held-for-sale, and impact from partially-owned consolidated subsidiaries, adjusted net earnings attributable to Bio-Techne decreased 11% in fiscal 2024 as compared to fiscal 2023. Adjusted net earnings attributable to Bio-Techne was primarily impacted by the acquisition of Lunaphore and unfavorable volume leverage within Protein Sciences.
For fiscal 2023, consolidated net sales increased 3% as compared to fiscal 2022. Organic growth was 5%, with foreign currency translation having an unfavorable impact of 2% and acquisitions having an immaterial impact. Organic revenue growth was primarily driven by consumable growth in both our Diagnostics and Genomics and Protein Sciences segments.
Consolidated earnings, including non-controlling interest, increased 8% compared to fiscal 2022. The increase in earnings was driven by a gain on the sale of our ChemoCentryx investment and a gain on the sale of our investment in Eminence. After adjusting for acquisition related costs, intangibles amortization, stock-based compensation, restructuring costs, gain on investments, and impact from partially-owned consolidated subsidiaries, adjusted net earnings attributable to Bio-Techne decreased 1% in fiscal 2023 as compared to fiscal 2022. Adjusted net earnings attributable to Bio-Techne was primarily impacted by foreign currency exchange and strategic growth investments including the Namocell acquisition.
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, Chinese yuan, and Swiss franc) into U.S. dollars.
Consolidated net sales growth was as follows:
| | | | | | | | |
|---|---|---|---|---|---|---|---|
| | Year Ended June 30, | ||||||
| | 2024 | 2023 | 2022 | ||||
| | | | | | | | |
| Organic sales growth | 1 | % | 5 | % | 17 | % | |
| Acquisitions sales growth | 1 | % | 0 | % | 3 | % | |
| Impact of foreign currency fluctuations | 0 | % | (2) | % | (1) | % | |
| Impact of business held for sale | | 0 | % | — | % | — | % |
| Consolidated net sales growth | 2 | % | 3 | % | 19 | % |
Consolidated net sales by segment were as follows (in thousands):
| | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|
| | Year Ended June 30, | ||||||||
| | 2024 | 2023 | 2022 | ||||||
| Protein Sciences | | $ | 830,902 | | $ | 845,747 | | $ | 832,311 |
| Diagnostics and Genomics | | 326,392 | | 292,602 | | 274,843 | |||
| Other revenue(1) | | | 4,153 | | | — | | | — |
| Intersegment | | (2,387) | | (1,647) | | (1,555) | |||
| Consolidated net sales | | $ | 1,159,060 | | $ | 1,136,702 | | $ | 1,105,599 |
(1) Since December 31, 2023, the Company has a business that has met the held-for-sale criteria. The year ended June 30, 2024 includes the six-month results of this business held-for-sale for the period starting December 31, 2023 through June 30, 2024 while the business has met the held-for-sale criteria.
In fiscal 2024, Protein Sciences segment net sales decreased 2% compared to fiscal 2023. A business within the Protein Sciences Segment met the criteria as held-for-sale since December 31, 2023. The exclusion of third and fourth quarter of
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fiscal 2024 sales related to a held-for-sale business reduced sales by 1%. Organic revenue for the segment declined 2% for the fiscal year, with foreign currency exchange having a favorable 1% impact on revenue. Segment revenue was impacted by broad based headwinds.
In fiscal 2024, Diagnostics and Genomics segment net sales increased 12% compared to fiscal 2023. Organic growth for the segment was 6%, with acquisitions having a 5% impact and foreign currency exchange having a favorable impact of 1% on revenue growth. Segment growth was driven by broad based molecular diagnostics performance and Lunaphore.
In fiscal 2023, Protein Sciences segment net sales increased 2% compared to fiscal 2022. Organic growth for the segment was 4% for the fiscal year, with currency translation having an unfavorable impact of 2% on revenue and acquisitions having an immaterial impact on revenue growth. Segment growth was driven by growth in consumable revenue to BioPharma (especially those developing cell and gene therapies) and Academic customers within the Americas and Europe.
In fiscal 2023, Diagnostics and Genomics segment net sales increased 6% compared to fiscal 2022. Organic growth for the segment was 8% with currency translation having an unfavorable impact of 2%. Segment growth was driven by growth in consumable revenue from our Spatial Biology platform and an increase in service revenue related to our ExoDx Prostate test.
Gross Margins
Consolidated gross margins were 66.4%, 67.7%, and 68.4% in fiscal 2024, 2023, and 2022. Consolidated gross margins were impacted by revenue. Excluding the impact of acquired inventory sold, amortization of intangibles, stock compensation expense, restructuring and restructuring-related costs, impact of business held-for-sale, and the impact of partially-owned consolidated subsidiaries, adjusted gross margins were 71.0%, 71.7%, and 72.5% in fiscal 2024, 2023, and 2022, respectively. Fiscal 2024 consolidated gross margin was impacted by the Lunaphore acquisition when compared to the prior period. Fiscal 2023 consolidated gross margin was unfavorably impacted by foreign currency exchange and strategic growth investments including the Namocell acquisition when compared to fiscal 2022. Consolidated gross margins for fiscal 2022 were impacted as a result of volume leverage and product mix, partially offset by additional investments made in the business to support future growth.
A reconciliation of the reported consolidated gross margin percentages, adjusted for acquired inventory sold, intangible amortization included in cost of sales, restructuring and restructuring-related expenses, and impact of business held-for-sale is as follows:
| | | | | | | | |
|---|---|---|---|---|---|---|---|
| | | | | | | | |
| | | Year Ended June 30, | | ||||
| | | 2024 | 2023 | 2022 | |||
| | | | | | | | |
| Consolidated gross margin percentage | | 66.4 | % | 67.7 | % | 68.4 | % |
| Identified adjustments: | | | | ||||
| Costs recognized upon sale of acquired inventory | | 0.1 | % | 0.0 | % | 0.1 | % |
| Amortization of intangibles | | 4.0 | % | 4.0 | % | 3.7 | % |
| Stock compensation expense - COGS | | 0.1 | % | 0.1 | % | 0.1 | % |
| Restructuring and restructuring-related costs | | 0.3 | % | — | % | — | % |
| Impact of partially-owned consolidated subsidiaries(1) | | — | % | (0.1) | % | 0.2 | % |
| Impact of business held-for-sale(2) | | 0.1 | % | — | % | — | % |
| Non-GAAP adjusted gross margin percentage | | 71.0 | % | 71.7 | % | 72.5 | % |
(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 and the full fiscal year of 2022.
(2) Since December 31, 2023, the Company has a business that has met the held-for-sale criteria. Fiscal year 2024 includes the six-month results of this business held-for-sale for the period starting December 31, 2023 through June 30, 2024 while the business has met the held-for-sale criteria.
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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, | ||||||
| | | 2024 | 2023 | 2022 | |||
| | | | | | | | |
| Protein Sciences | 75.7 | % | 75.3 | % | 75.5 | % | |
| Diagnostics and Genomics | 58.7 | % | 61.2 | % | 63.1 | % |
The increase in the Protein Sciences segment’s gross margin percentage for fiscal 2024 as compared to fiscal 2023 was primarily attributable to the exclusion of a business held-for-sale. The change in the Protein Sciences segment’s gross margin percentage for fiscal 2023 compared to fiscal 2022 was primarily attributable to mix of product sales within the segment.
The change in the Diagnostics and Genomics segment’s gross margin percentage for fiscal 2024 as compared to fiscal 2023 is due to the Lunaphore acquisition. The change in the Diagnostics and Genomics segment’s gross margin percentage for fiscal 2023 as compared to fiscal 2022 is due to fiscal 2022 revenue related to the ExoTru kidney transplant rejection agreement that did not reoccur in fiscal 2023. Fiscal 2023 compared to fiscal 2022 was also impacted by strategic investments to drive future growth that was partially offset by volume leverage.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $88.0 million (23%) in fiscal 2024 when compared to fiscal 2023. Selling, general, and administrative expenses increased primarily due to the Lunaphore acquisition, impairment of assets held-for-sale, certain litigation charges, restructuring and restructuring-related charges, and CEO transition charges.
Selling, general and administrative expenses increased $5.6 million (2%) in fiscal 2023 when compared to fiscal 2022. Selling, general, and administrative expenses increased primarily due to strategic investments made in the business to support future growth including the Namocell acquisition.
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Consolidated selling, general and administrative expenses were composed of the following (in thousands):
| | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|
| | Year Ended June 30, | ||||||||
| | | 2024 | | 2023 | | 2022 | |||
| | | | | | | | | | |
| Protein Sciences | | $ | 217,595 | | $ | 203,834 | | $ | 195,328 |
| Diagnostics and Genomics | | 127,131 | | 101,805 | | 93,578 | |||
| Total segment expenses | | 344,726 | | 305,639 | | 288,906 | |||
| Amortization of intangibles | | 31,710 | | 32,076 | | 32,492 | |||
| Acquisition related expenses | | 6,980 | | (9,965) | | (19,082) | |||
| Eminence impairment(1) | | | — | | | — | | | 18,715 |
| Legal fees | | | 3,506 | | | — | | | — |
| Restructuring and restructuring-related costs | | 8,896 | | 3,829 | | 1,640 | |||
| Stock-based compensation | | 39,452 | | 40,269 | | 45,085 | |||
| Impairment of assets held-for-sale | | | 21,963 | | | — | | | — |
| Corporate selling, general and administrative expenses | | 9,142 | | 6,530 | | 5,010 | |||
| Total selling, general and administrative expenses | | $ | 466,375 | | $ | 378,378 | | $ | 372,766 |
(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 $4.2 million (5%) and $5.4 million (6%) in fiscal 2024 and 2023, respectively, as compared to prior year periods. The increase in research and development expenses in fiscal 2024 and fiscal 2023 compared to the prior periods was primarily attributable to strategic growth investments including the acquisitions of Lunaphore and Namocell in fiscal 2024 and fiscal 2023, respectively.
Consolidated research and development expenses were composed of the following (in thousands):
| | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|
| | Year Ended June 30, | ||||||||
| | | 2024 | | 2023 | | 2022 | |||
| | | | | | | | | | |
| Protein Sciences | | $ | 56,911 | | $ | 58,251 | | $ | 56,370 |
| Diagnostics and Genomics | | 39,753 | | 34,242 | | 30,770 | |||
| Total research and development expenses | | $ | 96,664 | | $ | 92,493 | | $ | 87,140 |
Net Interest Income / (Expense)
Net interest income/(expense) for fiscal 2024, 2023, and 2022 was ($12.4) million, $(7.8) million, and $(10.5) million, respectively. During fiscal 2024, average monthly outstanding debt was higher than fiscal 2023 leading to increased interest expense compared to fiscal 2023.
Net interest expense in fiscal 2023 decreased when compared to fiscal 2022 due to a favorable rate on a forward starting interest rate swap as disclosed in Note 5 that went into effect in fiscal year 2023.
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Other Non-Operating Income / (Expense), Net
Other non-operating income/(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, | ||||||||
| | | 2024 | | 2023 | | 2022 | |||
| | | | | | | | | | |
| Foreign currency gains (losses) | | $ | (726) | | $ | 676 | | $ | 699 |
| Rental income | | 305 | | 426 | | 599 | |||
| Real estate taxes, depreciation and utilities | | (1,630) | | (1,810) | | (2,035) | |||
| Gain on investment | | 283 | | 49,328 | | 15,186 | |||
| Loss on equity method investment | | | (6,841) | | | (1,143) | | | — |
| Miscellaneous (expense) income | | 25 | | 43 | | 862 | |||
| Other non-operating income (expense), net | | $ | (8,584) | | $ | 47,520 | | $ | 15,311 |
During fiscal 2024, the Company recognized a gain of $0.3 million related to the sale of our exchange traded bond funds. Additionally, the Company recognized losses of $6.8 million related to our equity method investment in Wilson Wolf.
During fiscal 2023, the Company recognized gains of $37.2 million related to the sale of our ChemoCentryx, Inc. (CCXI) investment, $11.7 million related to the sale of our Eminence investment, and a gain of $0.4 million related to the change in fair value of our exchange traded bond funds. Additionally, the Company recognized losses of $1.1 million related to our equity method investment in Wilson Wolf.
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 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. On August 4, 2022, the Company sold all of its shares in CCXI.
Income Taxes
Income taxes for fiscal 2024, 2023, and 2022 were at effective rates of 9.5%, 15.7%, and 12.7%, respectively, of consolidated earnings before income taxes. The change in the effective tax rate for fiscal 2024 compared to fiscal 2023 was driven by share-based compensation as the number of stock option exercises increased compared to the prior year comparative period. The Company had share-based compensation excess tax benefits of $18.4 million in fiscal 2024. The Company’s discrete tax benefits in fiscal 2023 primarily related to share-based compensation excess tax benefits of $12.3 million. The Company’s discrete tax benefits in fiscal 2022 primarily related to share-based compensation excess tax benefits of $29.3 million.
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Net Earnings
Non-GAAP adjusted consolidated net earnings and earnings per share are as follows (in thousands):
| | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|
| | | | | | | | | | | |
| | | Year Ended June 30, | | |||||||
| | | 2024 | | 2023 | | 2022 | ||||
| | | | | | | | | | | |
| Net earnings before taxes - GAAP | | $ | 185,689 | | $ | 338,659 | | $ | 301,386 | |
| Identified adjustments attributable to Bio-Techne: | | | | | | | ||||
| Costs recognized upon sale of acquired inventory | | 729 | | 400 | | 1,596 | | |||
| Amortization of intangibles | | 78,318 | | 76,413 | | 73,054 | | |||
| Amortization of Wilson Wolf intangible assets and acquired inventory | | | 15,686 | | | 2,805 | | | — | |
| Acquisition related expenses and other | | 7,564 | | (9,147) | | (18,694) | | |||
| Certain litigation charges | | | 3,506 | | | — | | | — | |
| Eminence impairment | | | — | | | — | | | 18,715 | |
| Gain on sale of partially-owned consolidated subsidiaries | | | — | | | (11,682) | | | — | |
| Stock based compensation, inclusive of employer taxes | | 40,277 | | 41,217 | | 46,401 | | |||
| Restructuring and restructuring-related costs | | 12,245 | | 3,829 | | 1,640 | | |||
| Investment gain and other non-operating | | (283) | | (37,646) | | (16,171) | | |||
| Impairment of assets held-for-sale | | | 21,963 | | | — | | | — | |
| Impact of partially-owned subsidiaries(1) | | — | | (420) | | 2,675 | | |||
| Impact of business held-for-sale(2) | | | (525) | | | — | | | — | |
| Earnings before taxes - Adjusted(1,2) | | $ | 365,169 | | $ | 404,428 | | $ | 410,602 | |
| | | | | | | | | | | |
| Non-GAAP tax rate | | 22.0 | % | 20.5 | % | 21.2 | % | |||
| Non-GAAP tax expense | | $ | 80,420 | | $ | 82,948 | | $ | 87,090 | |
| Non-GAAP adjusted net earnings attributable to Bio-Techne(1,2) | | $ | 284,749 | | $ | 321,480 | | $ | 323,512 | |
| Earnings per share - diluted - Adjusted(1,2) | | $ | 1.77 | | $ | 1.99 | | $ | 1.97 | |
(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.
(2) Since December 31, 2023, the Company has a business that has met the held-for-sale criteria. The year ended June 30, 2024 includes the six-month results of this business held-for-sale for the period starting December 31, 2023 through June 30, 2024 while the business has met the held-for-sale criteria.
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
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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, 2024, 2023, and 2022.
| | | | | | | | |
|---|---|---|---|---|---|---|---|
| | | | | | | | |
| | | Year Ended June 30, | | ||||
| | | 2024 | | 2023 | | 2022 | |
| | | | | | | | |
| GAAP effective tax rate | | 9.5 | % | 15.7 | % | 12.7 | % |
| Discrete items | | 14.0 | 3.4 | 11.3 | | ||
| Impact of non-taxable net gain | | — | | 0.7 | | — | |
| Long-term GAAP tax rate | | 23.5 | % | 19.8 | % | 24.0 | % |
| | | | | | | | |
| Rate impact items | | | |||||
| Stock based compensation | | (2.5) | % | (1.4) | % | (1.9) | % |
| Other | | 1.0 | 2.1 | (0.9) | | ||
| Total rate impact items | | (1.5) | % | 0.7 | % | (2.8) | % |
| Non-GAAP adjusted tax rate | | 22.0 | % | 20.5 | % | 21.2 | % |
Refer to Note 12 for additional discussion relating to the change in discrete tax items between fiscal 2024 and fiscal 2023.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and available-for-sale investments at June 30, 2024 were $152.9 million compared to $204.3 million at June 30, 2023. Included in the available-for-sale investments was certificates of deposit that have contractual maturity dates within one year of $1.1 million as of June 30, 2024. There were no certificiates of deposit in the prior comparable period. As of June 30, 2023, there was $23.7 million included in the available-for-sale investments related to the fair value of the Company’s investment in exchange traded investment grade bond funds.
At June 30, 2024, approximately 28% of the Company’s cash and cash equivalent account balances of $42.2 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, 2024, all of the Company’s available-for-sale investment account balances of $1.1 million were located in Europe.
At June 30, 2024, we had $319 million in borrowings under the revolving credit facility, resulting in $681 million of unutilized availability under our revolving credit facility.
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 $299.0 million, $254.4 million, and $325.3 million in fiscal 2024, 2023, and 2022 respectively. The increase in cash generated from operating activities in fiscal 2024 as compared to fiscal 2023 was mainly a result of changes in the timing of cash payments on certain operating assets and liabilities. The decrease in cash generated from operating activities in fiscal 2023 as compared to fiscal 2022 was mainly a result of changes in net earnings and changes in the timing of cash payments on certain operating assets and liabilities.
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Cash Flows From Investing Activities
We continue to make investments in our business, including capital expenditures to enable revenue growth.
During fiscal year 2024, the Company acquired Lunaphore for $169.7 million in cash-free, debt-free acquisition. During fiscal year 2023, the Company acquired Namocell for $101.2 million, net of cash acquired. There were no acquisitions in fiscal year 2022.
During the first fiscal quarter of 2023, the Company sold its remaining shares in Eminence, its partially-owned consolidated subsidiary, for $17.8 million. There were no sales of businesses in fiscal 2024 or 2022.
In the first fiscal quarter of 2023, the Company sold its remaining shares in its investment in CCXI for $73.2 million. There were no comparable activities in fiscal 2024 and 2022.
The Company’s net proceeds (outflow) from the purchase, sale and maturity of available-for-sale investments in fiscal 2024, 2023, and 2022 were $22.6 million, $14.7 million, and $(26.9) million, respectively. During fiscal year 2024, the Company’s proceeds in available-for-sale investments relates to the sale of our exchange traded investment grade bond funds. The proceeds during fiscal year 2023 relates to the sale of excess cash in certificates of deposit that matured. The outflow of cash in fiscal year 2022 compared to fiscal year 2024 and fiscal year 2023 was driven by the purchase of the exchange traded investment grade bond funds in fiscal year 2022, which had a cost basis of $25.0 million, that did not reoccur in the comparative periods. 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 2024, 2023, and 2022 were $62.9 million, $38.2 million, and $44.9 million. Fiscal 2024 capital expenditures related to investments in new buildings, machinery, construction in progress, and IT equipment. Fiscal 2023 capital expenditures related to investments in new buildings, machinery, and IT equipment. Capital additions planned for fiscal 2025 are approximately $48 million and are expected to be financed through currently available cash and cash generated from operations.
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 if certain annual revenue or EBITDA thresholds are met. During fiscal year 2023, Wilson Wolf met the EBITDA target and the Company paid an additional $232 million to acquire 19.9% of Wilson Wolf. Since the first part of the forward contract has been triggered, the second part of the forward contract will automatically trigger, which requires the Company to acquire the remaining 80.1% of Wilson Wolf on December 31, 2027. The second part of the contract would be accelerated in advance of December 31, 2027 if Wilson Wolf meets certain financial milestones. As of June 30, 2024, the second milestones have not been met. The second option payment of approximately $1 billion plus potential contingent consideration is forecasted to occur between fiscal 2026 and fiscal 2028. During fiscal 2024, the Company received tax distributions from Wilson Wolf of $7.0 million.
Cash Flows From Financing Activities
In fiscal 2024, 2023, and 2022, the Company paid cash dividends of $50.4 million, $50.3 million, $50.2 million, respectively. The Board of Directors periodically considers the payment of cash dividends.
The Company received $60.9 million, $29.8 million, $77.2 million, for the exercise of options for 2,240,000, 1,578,000, and 2,450,000 shares of common stock in fiscal 2024, 2023 and 2022, respectively.
During fiscal 2024, 2023, and 2022, the Company repurchased $80.0 million, $19.6 million, and $161.0 million, respectively, in share repurchases included as a cash outflow within Financing Activities.
During fiscal 2024, 2023, and 2022, the Company drew $225.0 million, $619.7 million, and $90.0 million, respectively, under its revolving line-of-credit facility. Repayments of $256.0 million, $525.7 million, and $175.5 million were made on its line-of-credit in fiscal 2024, 2023, and 2022, respectively.
There were no payments during fiscal 2024 nor fiscal 2023 for contingent consideration. 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
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payments, $0.7 million is classified as financing on the statement of cash flows. The remaining $3.3 million was 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 2024, 2023 and 2022, the Company paid $21.9 million, $28.9 million and $23.5 million, respectively, for taxes remitted on behalf of participants in net share settlement transactions and restricted stock units.
The other financing activity during fiscal 2023 is primarily related to fees for the amended Credit Agreement that occurred in the first fiscal quarter. There was no comparable activity in fiscal 2024 or fiscal 2022.
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 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
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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 $972.7 million as of June 30, 2024, 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.
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.
The Company tests goodwill for impairment by either performing a qualitative evaluation or a quantitative test. The qualitative evaluation for goodwill is an assessment of factors including reporting unit specific operating results as well as industry and market conditions, overall financial performance, and other relevant events and factors to determine whether it is more likely than not that the fair values of a reporting unit is less than its carrying amount, including goodwill. The Company may elect to bypass the qualitative assessment for its reporting units and perform a quantitative test.
The quantitative impairment test requires us to estimate the fair value of our reporting units based on the income approach. The income approach is a valuation technique under which we estimate 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 project revenue and apply our fixed and variable cost experience rate to the projected revenue to arrive at the future cash flows. A terminal value is then applied to the projected cash flow stream. Future estimated cash flows are discounted to their present value to calculate the estimated fair value. The discount rate used is 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 are 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.
For fiscal 2024, we elected to perform a qualitative analysis for all five reporting units. The Company determined, after performing the qualitative analysis, there was no evidence that it is more likely than not that the fair value was less than the carrying amounts, therefore, it was not necessary to perform a quantitative impairment test in fiscal 2024. During the
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second quarter of fiscal 2024, as part of restructuring actions, certain assets and liabilities associated with a disposal group in our Protein Sciences segment were classified as held-for-sale as of December 31, 2023. Given the upcoming divestiture, the Company identified a triggering event and performed impairment testing during the second half of fiscal 2024. The impairment test resulted in a total impairment charge of $22.0 million, which includes the allocated goodwill, which we have further described within Note 1. The Company did not identify any triggering events after our annual goodwill impairment analysis through June 30, 2024, the date of our consolidated balance sheet, that would require an additional goodwill impairment assessment to be performed.
For fiscal 2023, we elected to perform a qualitative analysis for all five reporting units. The Company determined, after performing the qualitative analysis, there was no evidence that it was more likely than not that the fair value was less than the carrying amounts, therefore, it was not necessary to perform a quantitative impairment test in fiscal 2023. The Company did not identify any triggering events after our annual goodwill impairment analysis through June 30, 2023, the date of our consolidated balance sheet, that would require an additional goodwill impairment assessment to be performed.
In the first quarter of fiscal 2022, the Company combined the management of the Exosome Diagnostics and Asuragen reporting units, both of which were 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 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 held a financial interest of approximately 57.4% in those tangible assets in the liquidation process. As described in Note 1, in the fourth quarter of fiscal 2022, Eminence was able to secure cash deposits on future orders to provide funding for their operations. This delay in liquidation allowed time for securing of additional investor financing which coincided with the sale of the Company's equity shares of Eminence in the first quarter of fiscal 2023.
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 our fiscal 2022 annual goodwill impairment analysis, we elected to perform a quantitative assessment for all five of our reporting units. The result of our quantitative assessment indicated that all of the reporting units had a substantial amount of headroom as of April 1, 2022. The Company did not identify any triggering events after our annual goodwill impairment through June 30, 2022, the date of our consolidated balance sheet, that would require an additional goodwill impairment assessment to be performed.
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NEW ACCOUNTING PRONOUNCEMENTS
Information regarding the accounting policies adopted during fiscal 2024 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 23, 2024, the Company invested $15 million in Spear Bio, an innovative leader in the development and manufacture of ultra-sensitive immunoassays capable of measuring protein biomarkers at attomolar level from sub-microliter sample volume.
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.
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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, the impact of businesses held-for-sale, 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 businesses held-for-sale are excluded from our organic revenue calculation starting on the date they become held-for-sale as those revenues will not be comparative in future periods. 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 in fiscal year 2024 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 year ended June 30, 2023.
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 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. We also exclude certain litigation charges which are facts and circumstances specific including costs to resolve litigation and legal settlement (gains and losses). In some cases, these costs may be a result of litigation matters at acquired companies that were not probable, inestimable, or unresolved at the time of acquisition. 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. 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 as well as revenue and expense attributable to businesses held-for-sale in the calculation of our non-GAAP financial measures.
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), certain adjustments to income tax expense, and other non-recurring items including certain costs related to the transition to a new CEO. Additionally, gains and losses from 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.
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