UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
Amendment No. 1
☒ |
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended June 30, 2019, or
☐ |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period
from to
Commission file number 0-17272
BIO-TECHNE CORPORATION
(Exact name of registrant as specified in its charter)
Minnesota |
|
41-1427402 |
(State or other jurisdiction of incorporation or organization) |
|
(I.R.S. Employer Identification No.) |
|
|
|
614 McKinley Place N.E. Minneapolis, MN 55413 |
|
(612) 379-8854 |
(Address of principal executive offices) (Zip Code) |
|
(Registrant's telephone number, including area code) |
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered |
Common Stock, $0.01 par value |
TECH |
The NASDAQ Stock Market LLC |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer |
|
☒ |
|
Accelerated filer |
|
☐ |
|
|
|
|
|||
Non-accelerated filer |
|
☐ |
|
Smaller reporting company |
|
☐ |
|
|
|
|
|
|
|
|
|
|
|
Emerging growth company |
|
☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
As of December 31, 2018 the aggregate market value of the Common Stock held by non-affiliates of the Registrant was $5.5 billion based upon the closing sale price as reported on The Nasdaq Stock Market ($144.72 per share). Shares of Common Stock held by each officer and director and by each person who owns 5% or more of the outstanding Common Stock have been excluded.
As of August 26, 2019, 38,063,504 shares of the Company’s Common Stock ($0.01 par value) were outstanding.
EXPLANATORY NOTE
This Amendment No. 1 on Form 10-K/A (“Amendment No. 1”) amends Bio-Techne Corporation’s (the “Company”) Annual Report on Form 10-K for the fiscal year ended June 30, 2019, as filed with the Securities and Exchange Commission (“SEC”) on August 28, 2019 (the “Original Filing”), solely to provide a revised version of KPMG LLP’s (“KPMG”) report, which corrects certain clerical items and a statement in the previously filed version that KPMG did not express an opinion on the Company’s internal controls over financial reporting, and makes a clerical correction in Item 9A to conform the name of the entity the Company acquired on June 4, 2019 to the Company’s consolidated financial statements. These changes to the filed version of KPMG's report included in the original filing do not affect KPMG's unqualified opinion on the Company's consolidated financial statements or KPMG's unqualified opinion on internal control over financial reporting included in the Original Filing and this Amendment No. 1.
As required by Rule 12b-15 under the Securities Exchange Act of 1934, as amended, this Amendment No. 1 includes a new consent of KPMG (Exhibit 23.1), new certifications from the Company's principal executive officer (Exhibit 31.1) and principal financial officer (Exhibit 31.2) and new Section 1350 certifications (Exhibit 32.1 and 32.2) dated as of the date of filing of this Amendment No. 1.
This Amendment No. 1 consists solely of the preceding cover page, this explanatory note, Part II., Item 8., “Consolidated Financial Statements and Supplementary Data,” in its entirety, Part IV., Item 15., “Exhibits and Financial Statement Schedules,” in its entirety, the signature page, and the new certifications from the Company’s principal executive officer and principal financial officer. Except as expressly set forth above, this Amendment does not, and does not purport to, amend, update or restate the information in any other item of the Original Filing.
Amendment No. 1 speaks as of the date of the Original Filing, does not reflect events that may have occurred after the date of the Original Filing and does not modify or update in any way the disclosures made in the Original Filing, except as described above. Amendment No. 1 should be read in conjunction with the Original Filing and with the Company’s subsequent filings with the SEC.
Item 8. |
1 |
|
|
|
|
Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 38 |
Item 9A. |
38 |
|
|
|
|
Item 15. |
40 |
|
|
|
|
|
42 |
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME
Bio-Techne Corporation and Subsidiaries
(in thousands, except per share data)
Year Ended June 30, |
||||||||||||
2019 |
2018 |
2017 |
||||||||||
Net sales |
$ | 714,006 | $ | 642,993 | $ | 563,003 | ||||||
Cost of sales |
240,515 | 210,850 | 188,462 | |||||||||
Gross margin |
473,491 | 432,143 | 374,541 | |||||||||
Operating expenses: |
||||||||||||
Selling, general and administrative |
264,359 | 240,636 | 200,443 | |||||||||
Research and development |
62,413 | 55,329 | 53,514 | |||||||||
Total operating expenses |
326,772 | 295,965 | 253,957 | |||||||||
Operating income |
146,719 | 136,178 | 120,584 | |||||||||
Other income (expense): |
||||||||||||
Interest expense |
(21,705 |
) |
(10,188 |
) |
(7,361 |
) |
||||||
Interest income |
569 | 409 | 304 | |||||||||
Other non-operating income (expense), net |
(13,568 |
) |
(447 |
) |
(1,566 |
) |
||||||
Total other income (expense), net |
(34,704 |
) |
(10,226 |
) |
(8,623 |
) |
||||||
Earnings before income taxes |
112,015 | 125,952 | 111,961 | |||||||||
Income taxes (benefit) |
15,943 |
|
(198) |
|
35,875 | |||||||
Net earnings |
96,072 | 126,150 | 76,086 | |||||||||
Other comprehensive income (loss): |
||||||||||||
Foreign currency translation adjustments |
(4,487 |
) |
(1,572 |
) |
(3,061 |
) |
||||||
Unrealized gains (losses) on derivative instruments - cash flow hedges, net of tax of $2,921 in FY19 | (9,537 | ) | - | - | ||||||||
Unrealized gains (losses) on available-for-sale investments, net of tax of $398 in FY18 and $(6,501) in FY17 |
- | 5,693 | 24,531 | |||||||||
Other comprehensive income (loss) |
(14,024 | ) | 4,121 | 21,470 | ||||||||
Comprehensive income |
$ | 82,048 | 130,271 | $ | 97,556 | |||||||
Earnings per share: |
||||||||||||
Basic |
$ | 2.54 | $ | 3.36 | $ | 2.04 | ||||||
Diluted |
$ | 2.47 | $ | 3.31 | $ | 2.03 | ||||||
Weighted average common shares outstanding: |
||||||||||||
Basic |
37,781 | 37,476 | 37,313 | |||||||||
Diluted |
38,892 | 38,055 | 37,500 |
See Notes to Consolidated Financial Statements.
CONSOLIDATED BALANCE SHEETS
Bio-Techne Corporation and Subsidiaries
(in thousands, except share and per share data)
June 30, |
||||||||
2019 |
2018 |
|||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 100,886 | $ | 121,990 | ||||
Short-term available-for-sale investments |
65,147 | 59,764 | ||||||
Accounts receivable, less allowance for doubtful accounts of $980 and $839, respectively |
137,466 | 120,296 | ||||||
Inventories |
91,050 | 85,648 | ||||||
Other current assets |
18,058 | 10,668 | ||||||
Total current assets |
412,607 | 398,366 | ||||||
Property and equipment, net |
154,039 | 145,348 | ||||||
Goodwill |
732,667 | 597,890 | ||||||
Intangible assets, net |
579,429 | 446,332 | ||||||
Other assets |
5,668 | 5,266 | ||||||
Total assets |
$ | 1,884,410 | $ | 1,593,202 | ||||
LIABILITIES AND SHAREHOLDERS' EQUITY |
||||||||
Current liabilities: |
||||||||
Trade accounts payable |
$ | 16,210 | $ | 18,452 | ||||
Salaries, wages and related accruals |
28,638 | 23,710 | ||||||
Accrued expenses |
26,389 | 20,361 | ||||||
Contract liabilities |
9,084 | 8,109 | ||||||
Income taxes payable |
5,764 | 8,878 | ||||||
Contingent consideration payable |
3,400 | - | ||||||
Current portion of long-term debt obligations | 12,500 | - | ||||||
Total current liabilities |
101,985 | 79,510 | ||||||
Deferred income taxes |
89,754 | 86,293 | ||||||
Long-term debt obligations |
492,660 | 339,000 | ||||||
Long-term contingent consideration payable |
9,200 | - | ||||||
Other long-term liabilities |
25,222 | 9,338 | ||||||
Shareholders' equity: |
||||||||
Undesignated capital stock, no par; authorized 5,000,000 shares; none issued or outstanding |
- | - | ||||||
Common stock, par value $.01 a share; authorized 100,000,000 shares; issued and outstanding 37,934,040 and 37,607,500 shares, respectively |
379 | 376 | ||||||
Additional paid-in capital |
316,797 | 246,568 | ||||||
Retained earnings |
931,934 |
876,931 | ||||||
Accumulated other comprehensive loss |
(83,521 |
) |
(44,814 |
) |
||||
Total shareholders' equity |
1,165,589 | 1,079,061 | ||||||
Total liabilities and shareholders’ equity |
$ | 1,884,410 | $ | 1,593,202 |
See Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Bio-Techne Corporation and Subsidiaries
(in thousands)
Common Stock |
Additional |
Retained |
Accumulated |
|||||||||||||||||||||
Shares |
Amount |
Capital |
Earnings |
Income(Loss) |
Total |
|||||||||||||||||||
Balances at June 30, 2016 |
37,254 | $ | 372 | $ | 178,760 | $ | 770,553 | $ | (70,405 |
) |
$ | 879,280 | ||||||||||||
Net earnings |
76,086 | 76,086 | ||||||||||||||||||||||
Other comprehensive income (loss) |
21,470 | 21,470 |
|
|||||||||||||||||||||
Surrender and retirement of stock to exercise options |
(3 |
) |
- | (275 |
) |
(275 |
) |
|||||||||||||||||
Common stock issued for exercise of options |
63 | 2 | 4,509 | 4,511 | ||||||||||||||||||||
Common stock issued for restricted stock awards |
31 | - | - | (287 |
) |
(287 |
) |
|||||||||||||||||
Cash dividends |
(47,325 |
) |
(47,325 |
) |
||||||||||||||||||||
Stock-based compensation expense |
14,418 | 14,418 | ||||||||||||||||||||||
Tax benefit from exercise of stock options |
514 | 514 | ||||||||||||||||||||||
Common stock issued to employee stock purchase plan |
11 | - | 1,022 | 1,022 | ||||||||||||||||||||
Employee stock purchase plan expense |
213 | 213 | ||||||||||||||||||||||
Balances at June 30, 2017 |
37,356 | $ | 374 | $ | 199,161 | $ | 799,027 | $ | (48,935 |
) |
$ | 949,627 | ||||||||||||
Net earnings |
126,150 | 126,150 | ||||||||||||||||||||||
Other comprehensive income (loss) |
4,121 | 4,121 | ||||||||||||||||||||||
Common stock issued for exercise of options |
204 | 2 | 17,661 | 17,663 |
|
|||||||||||||||||||
Common stock issued for restricted stock awards |
34 | - | - | (273 |
) |
(273 | ) | |||||||||||||||||
Cash dividends |
- | (47,973 |
) |
(47,973 |
) |
|||||||||||||||||||
Stock-based compensation expense |
27,959 | 27,959 |
|
|||||||||||||||||||||
Common stock issued to employee stock purchase plan |
14 | - | 1,506 | 1,506 | ||||||||||||||||||||
Employee stock purchase plan expense |
281 | 281 | ||||||||||||||||||||||
Balances at June 30, 2018 |
37,608 | $ | 376 | $ | 246,568 | $ | 876,931 | $ | (44,814 |
) |
$ | 1,079,061 | ||||||||||||
Cumulative effect adjustments due to adoption of new accounting standards and other | 25,276 | (24,682 | ) | 594 | ||||||||||||||||||||
Net earnings |
96,072 | 96,072 | ||||||||||||||||||||||
Other comprehensive income (loss) |
(14,024 | ) | (14,024 | ) | ||||||||||||||||||||
Share repurchases | (95 | ) | (1 | ) | (15,404 | ) | (15,405 | ) | ||||||||||||||||
Common stock issued for exercise of options |
382 |
4 | 36,272 | 36,276 | ||||||||||||||||||||
Common stock issued for restricted stock awards |
29 | - | (2,575 | ) | (2,575 | ) | ||||||||||||||||||
Cash dividends |
(48,366 | ) | (48,364 | ) | ||||||||||||||||||||
Stock-based compensation expense |
31,775 | 31,775 | ||||||||||||||||||||||
Common stock issued to employee stock purchase plan |
10 | - | 1,676 |
1,676 |
||||||||||||||||||||
Employee stock purchase plan expense |
505 | 505 | ||||||||||||||||||||||
Balances at June 30, 2019 |
37,934 | $ | 379 | $ | 316,797 | $ | 931,934 | $ | (83,521 | ) | $ | 1,165,589 |
See Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Bio-Techne Corporation and Subsidiaries
(in thousands)
Year Ended June 30, |
||||||||||||
2019 |
2018 |
2017 |
||||||||||
Cash flows from operating activities: |
||||||||||||
Net earnings |
$ | 96,072 | $ | 126,150 | $ | 76,086 | ||||||
Adjustments to reconcile net earnings to net cash provided by operating activities: |
||||||||||||
Depreciation and amortization |
78,171 | 64,463 | 60,036 | |||||||||
Costs recognized on sale of acquired inventory |
3,739 | 2,455 | 3,037 | |||||||||
Deferred income taxes |
(13,582 |
) |
(46,716 |
) |
(3,433 |
) |
||||||
Stock-based compensation expense |
32,280 | 28,240 | 14,631 | |||||||||
Fair value adjustment to contingent consideration payable |
(2,000 | ) | 20,100 | 18,400 | ||||||||
Contingent consideration payments |
- |
|
(26,600 |
) |
(11,800 |
) |
||||||
Gain on investment, net |
(3,702 | ) | (397 |
) |
- | |||||||
Fair value adjustment on available for sale investments | 16,067 | - | - | |||||||||
Other operating activity |
2,325 | 776 | 2,215 | |||||||||
Change in operating assets and liabilities, net of acquisitions: |
||||||||||||
Trade accounts and other receivables |
(15,000 |
) |
(2,700 |
) |
(19,686 |
) |
||||||
Inventories |
(13,647 |
) |
(13,327 |
) |
(732 |
) |
||||||
Prepaid expenses |
(698 | ) | 2,782 | (2,088 |
) |
|||||||
Trade accounts payable and accrued expenses |
6,101 | 5,026 | 5,695 | |||||||||
Salaries, wages and related accruals |
5,013 |
|
(89 |
) |
661 | |||||||
Income taxes payable |
(9,520 | ) | 10,204 | 699 | ||||||||
Net cash provided by operating activities |
181,619 | 170,367 | 143,721 | |||||||||
Cash flows from investing activities: |
||||||||||||
Proceeds from sale and maturities of available-for-sale investments |
21,579 | 36,390 | 6,079 | |||||||||
Purchase of available-for-sale investments |
(43,475 | ) | (8,571 |
) |
(3,069 |
) |
||||||
Additions to property and equipment |
(25,411 |
) |
(20,934 |
) |
(15,179 |
) |
||||||
Acquisitions, net of cash acquired |
(289,492 |
) |
(67,851 |
) |
(253,785 |
) |
||||||
Investment in unconsolidated entity |
- | 21,574 | (40,000 |
) |
||||||||
Other investing activities |
- | 680 | - | |||||||||
Net cash used in investing activities |
(336,799 |
) |
(38,712 |
) |
(305,954 |
) |
||||||
Cash flows from financing activities: |
||||||||||||
Cash dividends |
(48,364 |
) |
(47,973 |
) |
(47,325 |
) |
||||||
Proceeds from stock option exercises |
37,950 | 19,170 | 5,257 | |||||||||
Re-purchases of common stock | (15,405 | ) | - | - | ||||||||
Excess tax benefit from stock option exercises |
- | - | 514 | |||||||||
Borrowings under line-of-credit agreement |
580,000 | 55,000 | 368,500 | |||||||||
Payments on line-of-credit |
(413,500 |
) |
(59,500 |
) |
(116,500 |
) |
||||||
Contingent consideration payments |
- |
|
(61,900 |
) |
(20,316 |
) |
||||||
Other financing activities |
(6,297 |
) |
(3,985 |
) |
(1,017 |
) |
||||||
Net cash provided by (used in) financing activities |
134,384 |
|
(99,188 |
) |
189,113 | |||||||
Effect of exchange rate changes on cash and cash equivalents |
(308 |
) |
(2,089 |
) |
495 | |||||||
Net change in cash and cash equivalents |
(21,104 | ) | 30,378 | 27,375 | ||||||||
Cash and cash equivalents at beginning of year |
121,990 | 91,612 | 64,237 | |||||||||
Cash and cash equivalents at end of year |
$ | 100,886 | $ | 121,990 | $ | 91,612 |
See Notes to Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Bio-Techne Corporation and Subsidiaries
Years ended June 30, 2019, 2018 and 2017
Note 1. Description of Business and Summary of Significant Accounting Policies:
Description of business: Bio-Techne and its subsidiaries, collectively doing business as Bio-Techne Corporation (the Company), develop, manufacture and sell 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.
Use of estimates: The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. These estimates include the valuation of accounts receivable, available-for-sale investments, inventory, intangible assets, contingent consideration, stock-based compensation and income taxes. Actual results could differ from these estimates.
Principles of consolidation: The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated.
Translation of foreign financial statements: Assets and liabilities of the Company's foreign operations are translated at year-end rates of exchange and the resulting gains and losses arising from the translation of net assets located outside the U.S. are recorded as other comprehensive income (loss) on the consolidated statements of earnings and comprehensive income. The cumulative translation adjustment is a component of accumulated other comprehensive loss on the consolidated balance sheets. Foreign statements of earnings are translated at the average rate of exchange for the year. Foreign currency transaction gains and losses are included in other non-operating expense in the consolidated statements of earnings and comprehensive income.
Revenue recognition: The Company adopted ASC 606 - Revenue from Contracts with Customers on July 1, 2018 using the modified retrospective transition approach. ASC 606 provides revenue recognition guidance for any entity that enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of non-financial assets, unless those contracts are within the scope of other accounting standards. The core principle of ASC 606 is that revenue should be recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Refer to the Recently Adopted Accounting Pronouncements section of Note 1 for additional information regarding our adoption of ASC 606 and and Note 2 for additional information regarding our revenue recognition policy under ASC 606.
Research and development: Research and development expenditures are expensed as incurred. Development activities generally relate to creating new products, improving or creating variations of existing products, or modifying existing products to meet new applications.
Advertising costs: Advertising expenses were $4.1 million, $3.8 million, and $4.5 million for fiscal 2019, 2018, and 2017 respectively. The Company expenses advertising expenses as incurred.
Income taxes: The Company uses the asset and liability method of accounting for income taxes. Deferred tax assets and liabilities are recognized to record the income tax effect of temporary differences between the tax basis and financial reporting basis of assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Tax positions taken or expected to be taken in a tax return are recognized in the financial statements when it is more likely than not that the position would be sustained upon examination by tax authorities. A recognized tax position is then measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. The Company recognizes interest and penalties related to unrecognized tax benefits in income tax expense.
See Note 11 for additional information regarding income taxes.
Comprehensive income: Comprehensive income includes charges and credits to shareholders' equity that are not the result of transactions with shareholders. Our total comprehensive income consists of net income, unrealized gains and losses on cash flow hedges, and foreign currency translation adjustments. The items of comprehensive income, with the exception of net income, are included in accumulated other comprehensive loss in the consolidated balance sheets and statements of shareholders' equity.
Cash and cash equivalents: Cash and cash equivalents include cash on hand and highly-liquid investments with original maturities of three months or less.
Available-for-sale investments: Available-for-sale investments consist of debt instruments with original maturities of generally three months to six months and equity securities. Available-for-sale investments are recorded based on trade-date. The Company considers all of its marketable securities available-for-sale and reports them at fair value. Unrealized gains and losses on available-for-sale securities are included within other income (expense) in fiscal 2019 as the Company adopted ASU 2018-02 on July 1, 2018, as further described in the Recently Adopted Accounting Pronouncements section of Note 1. Unrealized gains or losses on available-for-sale securities were recorded within comprehensive income in fiscal years 2018 and 2017.
Trade accounts receivable: Trade accounts receivable are initially recorded at the invoiced amount upon the sale of goods or services to customers, and they do not bear interest. They are stated net of allowances for doubtful accounts, which represent estimated losses resulting from the inability of customers to make the required payments. When determining the allowances for doubtful accounts, we take several factors into consideration, including the overall composition of accounts receivable aging, our prior history of accounts receivable write-offs, the type of customer and our day-to-day knowledge of specific customers. Changes in the allowances for doubtful accounts are included in selling, general and administrative (SG&A) expense in our consolidated statements of earnings and comprehensive income. The point at which uncollected accounts are written off varies by type of customer.
Inventories: Inventories are stated at the lower of cost (first-in, first-out method) or net realizable value. The Company regularly reviews inventory on hand for slow-moving and obsolete inventory, inventory not meeting quality control standards and inventory subject to expiration.
For certain proteins, antibodies, and chemically based manufactured products, the Company produces larger batches of established products than current sales requirements due to economies of scale through a highly controlled manufacturing process. Accordingly, the manufacturing process for these products has and will continue to produce quantities in excess of forecasted usage. The Company forecasts usage for its products based on several factors including historical demand, current market dynamics, and technological advances. The Company forecasts product usage on an individual product level for a period that is consistent with our ability to reasonably forecast inventory usage for that product. There have been no material changes to the Company’s estimates of the net realizable value for excess and obsolete inventory or other types of inventory reserve and inventory cost adjustments in the fiscal years presented. Additionally, current and historical reserves recorded to reduce the cost of inventory to its net realizable value become part of the new cost basis for the inventory item in accordance with ASC 330 - Inventory.
Property and equipment: Property and equipment are recorded at cost. Equipment is depreciated using the straight-line method over an estimated useful life of 3 to 5 years. Buildings, building improvements and leasehold improvements are amortized over estimated useful lives of 5 to 40 years.
Contingent Consideration: Contingent Consideration relates to the potential payment for an acquisition that is contingent upon the achievement of the acquired business meeting certain product development milestones and/or certain financial performance milestones. The Company records contingent consideration at fair value at the date of acquisition based on the consideration expected to be transferred. For potential payments related to financial performance milestones, we use a real option model in calculating the fair value of the contingent consideration liabilities. The assumptions utilized in the calculation based on financial performance milestones include projected revenue and/or EBITDA amounts, volatility and discount rates. For potential payments related to product development milestones, we estimated the fair value based on the probability of achievement of such milestones. The assumptions utilized in the calculation of the acquisition date fair value include probability of success and the discount rates. Contingent consideration involves certain assumptions requiring significant judgment and actual results may differ from assumed and estimated amounts. Contingent consideration is remeasured each reporting period, and subsequent changes in fair value, including accretion for the passage of time, are recognized within selling, general and administrative in the consolidated statement of earnings and comprehensive income
Intangibles assets: Intangible assets are stated at historical cost less accumulated amortization. Amortization expense is generally determined on the straight-line basis over periods ranging from 1 year to 20 years. 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. If our estimate of an asset's remaining useful life is revised, the remaining carrying amount of the asset is amortized prospectively over the revised remaining useful life. In the current year, the Company has identified no such events.
Impairment of long-lived assets and amortizable intangibles: We evaluate the recoverability of property, plant, equipment and amortizable intangibles whenever events or changes in circumstances indicate that an asset's carrying amount may not be recoverable. Such circumstances could include, but are not limited to, (1) a significant decrease in the market value of an asset, (2) a significant adverse change in the extent or manner in which an asset is used or in its physical condition, or (3) an accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of an asset. We compare the carrying amount of the asset to the estimated undiscounted future cash flows associated with it. If the sum of the expected future net cash flows is less than the carrying value of the asset being evaluated, an impairment loss would be recognized. The impairment loss would be calculated as the amount by which the carrying value of the asset exceeds the fair value of the asset. As quoted market prices are not available for the majority of our assets, the estimate of fair value is based on various valuation techniques, including the discounted value of estimated future cash flows.
The evaluation of asset impairment requires us to make assumptions about future cash flows over the life of the asset being evaluated. These assumptions require significant judgment and actual results may differ from assumed and estimated amounts. No triggering events were identified and no impairments were recorded for property, plant, and equipment or amortizable intangibles during fiscal years 2017, 2018, and 2019.
Impairment of goodwill: We evaluate the carrying value of goodwill during the fourth quarter each year and between annual evaluations if events occur or circumstances change that would indicate a possible impairment. Such circumstances could include, but are not limited to, (1) a significant adverse change in legal factors or in business climate, (2) unanticipated competition, (3) an adverse action or assessment by a regulator, or (4) an adverse change in market conditions that are indicative of a decline in the fair value of the assets.
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.
2019 Goodwill Impairment Analyses
At the beginning of the quarter ended March 31, 2019, the Company realigned the management of certain business processes between reporting units within the same reportable segment. A goodwill allocation was performed between the impacted reporting units based on the relative fair value of the processes realigned. In conjunction with the realignment, a quantitative goodwill impairment assessment was performed both prior to and subsequent to the realignment. The quantitative assessment indicated that all of the impacted reporting units had substantial headroom both prior to and subsequent to the realignment.
Because our quantitative analysis performed as of January 1, 2019 included all of our reporting units, except for our recent acquisition, Exosome, which is a separate reporting unit that was not impacted by the business process realignment, the summation of the calculated reporting units’ fair values combined with the fair value of the Exosome acquisition, was compared to our consolidated fair value, as indicated by our market capitalization, to evaluate the reasonableness of our calculations.
The quantitative assessments completed as of January 1, 2019 indicated that all tested reporting units had a substantial amount of headroom. 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 has elected April 1 as our annual goodwill impairment date for the Exosome reporting unit. The Company has historically completed our goodwill impairment assessment of our legacy reporting units as of June 30. To better align with our annual internal planning and operating cycle and the underlying changes in our organizational model and business, we changed our annual goodwill impairment assessment for all legacy reporting units to be as of April 1. Given the substantial headroom in our legacy reporting units and the time period the assessment was performed relative to the most recent quantitative analysis, management does not consider the change in our annual impairment assessment to be material to the consolidated financial statements or to constitute a material change in the application of our goodwill accounting principle.
In conducting our annual goodwill impairment test, we elected to perform a qualitative assessment to determine whether changes in events or circumstances since our most recent quantitative test for goodwill impairment indicated that it is more likely than not that the fair value of a reporting unit is less than its carrying amount.
Based on its annual analysis, the Company determined there was no indication of impairment of goodwill. Further, no triggering events or items beyond the realignment discussed above were identified in the year ended June 30, 2019 that would require an additional goodwill impairment assessment beyond our required annual goodwill impairment assessment.
2018 and 2017 Goodwill Impairment Analyses
In completing our 2018 and 2017 annual goodwill impairment analyses, we elected to perform a quantitative assessment for all of our reporting units. A quantitative assessment involves comparing the carrying value of the reporting unit, including goodwill, to its estimated fair value. Carrying value is based on the assets and liabilities associated with the operations of the reporting unit, which often requires the allocation of shared or corporate items among reporting units. In accordance with ASU 2017- 04, a goodwill impairment charge is recorded for the amount by which the carrying value of a reporting unit exceeds the fair value of the reporting unit. In determining the fair values of our reporting units, we utilized the income approach. The income approach is a valuation technique under which we estimated future cash flows using the reporting unit’s financial forecast from the perspective of an unrelated market participant. Using historical trending and internal forecasting techniques, we projected revenue and applied our fixed and variable cost experience rates to the projected revenue to arrive at the future cash flows. A terminal value was then applied to the projected cash flow stream. Future estimated cash flows were discounted to their present value to calculate the estimated fair value. The discount rate used was the value- weighted average of our estimated cost of capital derived using both known and estimated customary market metrics. In determining the estimated fair value of a reporting unit, we were required to estimate a number of factors, including projected operating results, terminal growth rates, economic conditions, anticipated future cash flows, the discount rate and the allocation of shared or corporate items.
The quantitative assessment completed as of June 30, 2018 and 2017 indicated that all of the reporting units had a substantial amount of headroom. This impairment assessment is sensitive to changes in forecasted cash flows, as well as our selected discount rate. Changes in the reporting unit’s results, forecast assumptions and estimates could materially affect the estimation of the fair value of the reporting units.
There has been no impairment of goodwill since the adoption of Financial Accounting Standards Board (“FASB”) ASC 350 guidance for goodwill and other intangibles on July 1, 2002.
Investments in unconsolidated entities: The Company periodically invests in the equity of start-up and early development stage companies. The accounting treatment of each investment (cost method or equity method) is dependent upon a number of factors, including, but not limited to, the Company's share in the equity of the investee and the Company's ability to exercise significant influence over the operating and financial policies of the investee.
Other Significant Accounting Policies
The following table includes a reference to additional significant accounting policies that are described in other notes to the financial statements, including the note number:
Policy |
Note |
|||
Fair value measurements |
5 | |||
Earnings per share |
9 | |||
Share-based compensation |
10 | |||
Reportable segments |
12 |
Recently Adopted Accounting Pronouncements
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (ASC 606). On July 1, 2018, the Company adopted ASC 606 using the modified retrospective method for all contracts. Results for reporting periods beginning July 1, 2018 are presented under ASC 606, while prior period amounts were not adjusted and continue to be reported in accordance with the Company’s historic accounting under Topic 605, Revenue Recognition. The impact of the adoption of ASC 606 was not material to the Company's consolidated financial statements and therefore the periods reported under ASC 606 and ASC 605 are considered comparable in all material respects.
In January 2016, the FASB issued ASU No. 2016-01 Recognition and Measurement of Financial Assets and Financial Liabilities. The standard is intended to improve the recognition, measurement, presentation and disclosure of financial instruments. Among other changes, there will no longer be an available-for-sale classification for which changes in fair value are currently reported in other comprehensive income for equity securities with readily determinable fair values. Equity investments with readily determinable fair values will be measured at fair value with changes in fair value recognized in net income. ASU 2016-01 was effective for us on July 1, 2018 which required a cumulative effect adjustment to opening retained earnings to be recorded for equity investments with readily determinable fair values. As of the adoption date, we held publicly traded equity investments with a fair value of $54.3 million in a net unrealized gain position of $35.4 million, and having an associated deferred tax liability of $8.3 million. We recorded a cumulative-effect adjustment of $27.1 million to decrease Accumulated Other Comprehensive Income (AOCI) with a corresponding increase to retained earnings for the amount of unrealized gains, net of tax as of the beginning of fiscal year 2019. As a result of the implementation of ASU 2016-01, effective on July 1, 2018 unrealized gains and losses in equity investments with readily determinable fair values are recorded on the Consolidated Statement of Income within other (expense) income. We recorded a gain in other (expense) income of $12.3 million and $2.9 million for the quarter and nine month period ended March 31, 2019 as a result of adopting this standard. The implementation of ASU 2016-01 is expected to increase volatility in our net income as the volatility previously recorded in Other Comprehensive Income (OCI) related to changes in the fair market value of available-for-sale equity investments will now be reflected in net income effective with the adoption date.
In February 2018, the FASB issued ASU No. 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The standard allows companies to make an election to reclassify from Accumulated Other Comprehensive Income (AOCI) to retained earnings the stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017. This ASU is effective for annual and interim periods beginning after December 15, 2018, which for us is July 1, 2019. Early adoption is permitted. We elected to early adopt ASU 2018-02 on July 1, 2018. We use a specific identification approach to release the income tax effects in AOCI. As a result of adopting this standard, we recorded a cumulative effect adjustment to increase AOCI by $2.4 million with a corresponding decrease to retained earnings. We recorded the impacts of adopting ASU 2018-02 prior to recording the impacts of adopting ASU 2016-01 and included state income tax related effects in the amounts reclassified to retained earnings.
The following table presents a summary of cumulative effect adjustments to retained earnings due to the adoption of new accounting standards on July 1, 2018 as noted above:
|
|
Cumulative Effect Adjustments to Retained Earnings on July 1, 2018 Increase / (Decrease) |
|
|
Cumulative effect adjustment to retained earnings due to the adoption of the following new accounting standards: |
|
|
|
|
ASU 2014-09 |
|
$ |
98 |
|
ASU 2016-01 |
|
|
27,053 |
|
ASU 2018-02 |
|
|
(2,371 |
) |
Net cumulative effect adjustments to retained earnings on July 1, 2018 due to the adoption of new accounting standards |
|
$ |
24,780 |
|
In January 2017, the FASB issued ASU No. 2017-01, Clarifying the Definition of a Business. The standard revises the definition of a business, which affects many areas of accounting such as business combinations and disposals and goodwill impairment. The revised definition of a business will likely result in more acquisitions being accounted for as asset acquisitions, as opposed to business combinations. We adopted this standard on July 1, 2018, applying the guidance to transactions occurring on or after this date.
In August 2017, the FASB issued ASU No. 2017-12, Targeted Improvements to Accounting for Hedging Activities. The standard changes the designation and measurement guidance for qualifying hedging relationships to better align financial reporting to risk management activities. As part of the guidance, the entire change in fair value of a qualifying hedging instrument will be recorded within other comprehensive income which is then reclassified into earnings in the same period or periods during which the hedged item impacts earnings. Additionally, the gain or loss resulting from the hedging activity will be presented in the same income statement line item as the hedged item. The standard is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2018, which for us is July 1, 2019. Early adoption is permitted. We elected to early adopt ASU 2017-12 on October 1, 2018, prior to the Company entering into cash flow hedges as described in Note 5. The adoption of this standard did not have a material impact on our consolidated financial statements.
Pronouncements Issued but Not Yet Adopted
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which amends the existing guidance to require lessees to recognize lease assets and lease liabilities from operating leases on the balance sheet. This ASU is effective using the modified retrospective approach for annual periods and interim periods within those annual periods beginning after December 15, 2018, which for us is July 1, 2019. Early adoption is permitted. The FASB has issued narrow codification improvements to Leases (Topic 842) through ASU No. 2018-10 and ASU 2019-01. Additionally, the FASB issued ASU 2018-11, allowing an entity to elect a transition method where they do not recast prior periods presented in the financial statements in the period of adoption. The Company plans to elect the transition method allowed for under ASU 2018-11 when adopting Leases (Topic 842). The Company has completed detailed reviews over all lease agreements, assessed internal control impacts for ongoing lease accounting changes, and completed internal control testing and validation procedures over our new lease accounting software. The Company does not expect this standard to have a material impact on its consolidated statements of earnings and comprehensive income. The Company does expect an increase of approximately $82 million for lease assets and liabilities and an immaterial impact to retained earnings in our Consolidated Balance Sheet.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. The amendment in this update replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses on instruments within its scope, including trade and loan receivables and available-for-sale debt securities. This update is intended to provide financial statement users with more decision-useful information about the expected credit losses. This ASU is effective for annual periods and interim periods for those annual periods beginning after December 15, 2019, which for us is July 1, 2020. Entities may early adopt beginning after December 15, 2018. We are currently evaluating the impact of the adoption of ASU 2016-13 on our consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-15, Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The standard aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The accounting for the service element of a hosting arrangement that is a service contract is not affected by the new standard. This ASU is effective for annual periods and interim periods for those annual periods beginning after December 15, 2019, which for us is July 1, 2020 and may be adopted retrospectively or prospectively to eligible costs incurred on or after the date the guidance is first applied. We are currently evaluating the impact of the adoption of ASU 2018-15 on our consolidated financial statements and anticipate that we will adopt the standard prospectively.
Note 2. Revenue Recognition:
Consumables revenues consist of single-use products and are recognized at a point in time following the transfer of control of such products to the customer, which generally occurs upon shipment. Instruments revenues typically consist of longer-lived assets that, for the substantial majority of sales, are recognized at a point in time in a manner similar to consumables. The vast majority of service revenues consist of extended warranty contracts, post contract support (“PCS”), and custom development projects that are recognized over time as either the customers receive and consume the benefits of such services simultaneously or the underlying asset being developed has no alternative use for the Company at contract inception and the Company has an enforceable right to payment for the portion of the performance completed. The remaining service revenues were not material to the period and consist of laboratory services recognized at point in time. Given the Company does not have significant historical experience collecting payments from Medicare or insurance providers, the Company considered the variable consideration for such services to be constrained as it would not be probable that a significant amount of revenue would not need to be reversed in future periods for the services provided. Accordingly, the Company did not record revenue upon completion of the performance obligation, but rather upon cash receipt, which was subsequent to the performance obligation being satisfied. Royalty revenues are based on net sales of the Company’s licensed products by a third party. We recognize royalty revenues in the period the sales occur using third party evidence. The Company has also elected the "right to invoice" practical expedient based on the Company's right to invoice a customer at an amount that approximates the value to the customer and the performance completed to date.
The Company has elected the exemption to not disclose the unfulfilled performance obligations for contracts with an original length of one year or less and the exemption to exclude future performance obligations that are accounted under the sales-based or usage-based royalty guidance. The Company's unfulfilled performance obligations were not material as of June 30, 2019.
Contracts with customers that contain instruments may include multiple performance obligations. For these contracts, the Company allocates the contract’s transaction price to each performance obligation on a relative standalone selling price basis. Allocation of the transaction price is determined at the contracts’ inception.
Payment terms for shipments to end-users are generally net 30 days. Payment terms for distributor shipments may range from 30 to 90 days. Service arrangements commonly call for payments in advance of performing the work (e.g. extended warranty and service contracts), upon completion of the service (e.g. custom development manufacturing) or a mix of both.
Contract assets include revenues recognized in advance of billings. Contract assets are included within other current assets in the accompanying balance sheet as the amount of time expected to lapse until the company's right to consideration becomes unconditional is less than one year. We elected the practical expedient allowing us to expense costs of obtaining contracts less than one year that would otherwise be capitalized and amortized over the contract period. Contract assets as of June 30, 2019 are not material.
Contract liabilities include billings in excess of revenues recognized, such as those resulting from customer advances and deposits and unearned revenue on warranty contracts. Contract liabilities as of June 30, 2019 and June 30, 2018 were approximately $10.4 million and $9.3 million, respectively. Contract liabilities as of June 30, 2018 subsequently recognized as revenue during the year ended June 30, 2019 were approximately $7.0 million. Contract liabilities in excess of one year are included in Other long-term liabilities on the balance sheet.
Any claims for credit or return of goods must be made within 10 days of receipt. Revenues are reduced to reflect estimated credits and returns. Although the amounts recorded for these revenue deductions are dependent on estimates and assumptions, historically our adjustments to actual results have not been material.
Taxes collected from customers relating to product sales and remitted to governmental authorities are excluded from revenue. Amounts billed to customers for shipping and handling are included in revenue, while the related shipping and handling costs are reflected in cost of products. We have elected the practical expedient that allows us to account for shipping and handling activities that occur after the customer has obtained control of a good as a fulfillment cost, and we accrue costs of shipping and handling when the related revenue is recognized.
The following tables present our disaggregated revenue for the periods presented.
Revenue by type is as follows:
Year ended June 30, |
||||||||||||
2019 |
2018 |
2017 | ||||||||||
Consumables |
$ | 588,979 | $ | 534,738 | $ | 476,541 | ||||||
Instruments |
67,538 | 61,784 | 47,751 | |||||||||
Services |
38,050 | 34,137 | 23,652 | |||||||||
Total product and services revenue, net |
694,567 | $ | 630,659 | 547,944 | ||||||||
Royalty revenues |
19,439 | 12,334 | 15,059 | |||||||||
Total revenues, net |
$ | 714,006 | $ | 642,993 | $ | 563,003 |
Revenue by geography is as follows:
Year Ended June 30, |
||||||||||||
2019 |
2018 |
2017 |
||||||||||
Net sales: |
||||||||||||
United States |
$ | 391,191 | $ | 346,293 | $ | 313,195 | ||||||
EMEA, excluding U.K. |
155,821 | 148,599 | 125,126 | |||||||||
U.K. |
34,975 | 33,704 | 28,401 | |||||||||
APAC, excluding Greater China |
52,913 | 48,392 | 41,463 | |||||||||
Greater China |
57,799 | 47,950 | 39,078 | |||||||||
Rest of world |
21,307 | 18,055 | 15,740 | |||||||||
Total external sales |
$ | 714,006 | $ | 642,993 | $ | 563,003 |
Note 3. Supplemental Balance Sheet and Cash Flow Information:
Available-For-Sale Investments:
The fair value of the Company's available-for-sale investments as of June 30, 2019 and June 30, 2018 were $38.2 million and $54.3 million, respectively. The decrease was due to year-over-year decreases in the stock price of CCXI, from $13.17 per share at June 30, 2018 to $9.30 per share at June 30, 2019 resulting in a $16.1 million decrease in the fair value of the Company's investment in CCXI. The amortized cost basis of the Company's investment in CCXI was $18.8 million as of June 30, 2019 and 2018.
Inventories:
Inventories consist of (in thousands):
June 30, |
||||||||
2019 |
2018 |
|||||||
Raw materials |
$ | 40,913 | $ | 30,956 | ||||
Finished goods(1) |
53,376 | 54,692 | ||||||
Inventories, net |
$ | 94,289 | $ | 85,648 |
(1) Finished goods inventory of $3,239 is included within other long-term assets in the June 30, 2019 Balance Sheet as it forecasted to be sold after the 12 months subsequent to the consolidated balance sheet date.
Property and Equipment:
Property and equipment consist of (in thousands):
June 30, |
||||||||
2019 |
2018 |
|||||||
Cost: |
||||||||
Land |
$ | 7,065 | $ | 7,065 | ||||
Buildings and improvements |
175,019 | 170,110 | ||||||
Machinery, equipment and other |
124,233 | 107,625 | ||||||
Property and equipment |
306,317 | 284,800 | ||||||
Accumulated depreciation and amortization |
(152,278 |
) |
(139,452 |
) |
||||
Property and equipment, net |
$ | 154,039 | $ | 145,348 |
Intangibles assets were comprised of the following (in thousands):
June 30, |
|||||||||||||
Useful Life (years) |
2019 |
2018 |
|||||||||||
Developed technology |
9 | - | 15 | $ | 435,679 | $ | 305,303 | ||||||
Trade names |
2 | - | 20 | 147,296 | 89,608 | ||||||||
Customer relationships |
7 | - | 16 | 214,320 | 212,228 | ||||||||
Patents |
10 | 2,133 | 1,401 | ||||||||||
Intangible assets |
799,428 | 608,540 | |||||||||||
Accumulated amortization |
(219,999 |
) |
(162,208 |
) |
|||||||||
Intangibles assets, net |
$ | 579,429 | $ | 446,332 |
Changes to the carrying amount of net intangible assets consist of (in thousands):
June 30, |
||||||||
2019 |
2018 |
|||||||
Beginning balance |
$ | 446,332 | $ | 452,042 | ||||
Acquisitions (Note 4) |
191,956 | 40,673 | ||||||
Other additions |
633 | 908 | ||||||
Amortization expense |
(58,715 |
) |
(47,076 |
) |
||||
Currency translation |
(777 |
) |
(215 |
) |
||||
Ending balance |
$ | 579,429 | $ | 446,332 |
Amortization expense related to technologies included in cost of sales was $33.3 million, $25.3 million, and $23.1 million in fiscal 2019, 2018, and 2017, respectively. Amortization expense related to trade names, customer relationships, non-compete agreements, and patents included in selling, general and administrative expense was $25.4 million, $21.6 million, and $21.3 million, in fiscal 2019, 2018, and 2017 respectively.
The estimated future amortization expense for intangible assets as of June 30, 2019 is as follows (in thousands):
2020 |
$ | 59,905 | ||
2021 |
59,557 | |||
2022 |
57,905 | |||
2023 |
56,031 | |||
2024 |
53,464 | |||
Thereafter |
292,567 | |||
Total |
$ | 579,429 |
Changes in goodwill by reportable segment and in total consist of (in thousands):
Protein Sciences |
Diagnostics & Genomics |
Total |
||||||||||
June 30, 2017 |
$ | 331,789 | $ | 247,237 | $ | 579,026 | ||||||
Acquisitions (Note 4) |
16,186 | 2,910 | 19,096 | |||||||||
Currency translation |
(56 |
) |
(176 | ) | (232 | ) | ||||||
June 30, 2018 |
$ | 347,918 | $ | 249,972 | $ | 597,890 | ||||||
Acquisitions (Note 4) |
30,939 | 105,362 | 136,301 | |||||||||
Currency translation |
(1,450 | ) | (74 | ) | (1,524 |
) |
||||||
June 30, 2019 |
$ | 377,407 | $ | 355,260 | $ | 732,667 |
Other Assets:
Other assets consist of (in thousands):
June 30, |
||||||||
2019 |
2018 |
|||||||
Investments |
$ | - | $ | 2,606 | ||||
Other |
5,668 | 2,660 | ||||||
Other long-term assets |
$ | 5,668 | $ | 5,266 |
As of June 30, 2019, the Company had $5.7 million of other assets compared to $5.3 million as of June 30, 2018. The increase was attributable to finished goods inventory of $3.2 million included within other long-term assets in the June 30, 2019 Balance Sheet as it forecasted to be sold after the 12 months subsequent to the consolidated balance sheet date. This increase was partially offset by the reduction in investments related to our purchase of the outstanding shares of B-MoGen discussed in note 4 and the reclassification of the amounts held in escrow from our Astute investment classified as a long-term asset as of June 30, 2018 to a short-term asset as of June 30, 2019 as we are expected to receive the final proceeds within the next 12 months.
Supplemental Cash Flow Information:
Supplemental cash flow information was as follows (in thousands):
Year Ended June 30, |
||||||||||||
2019 |
2018 |
2017 |
||||||||||
Income taxes paid |
$ | 36,814 | $ | 35,076 | $ | 42,900 | ||||||
Interest paid |
21,497 | 9,844 | 7,452 | |||||||||
Non-cash activities: |
||||||||||||
Acquisition-related liabilities (1) |
12,600 |
1,396 | 32,856 |
|
(1) Consists of holdback payments due at future dates and liabilities for contingent consideration. Further information regarding liabilities for contingent consideration can be found in Notes 4 and 5. |
Note 4. Acquisitions:
We periodically complete business combinations that align with our business strategy. Acquisitions are accounted for using the acquisition method of accounting, which requires, among other things, that assets acquired and liabilities assumed be recognized at fair value as of the acquisition date and that the results of operations of each acquired business be included in our consolidated statements of comprehensive income from their respective dates of acquisitions. Acquisition costs are recorded in selling, general and administrative expenses as incurred.
2019 Acquisitions
Quad Technologies
On July 2, 2018, the Company acquired QT Holdings Corporation (Quad) for approximately $20.5 million, net of cash acquired, plus contingent consideration of up to $51.0 million, subject to certain product development milestones and revenue thresholds. The goodwill recorded as a result of the acquisition represents the strategic benefits of growing the Company’s product portfolio and the expected revenue growth from increased market penetration. The goodwill is not deductible for income tax purposes. The business became part of the Protein Sciences reportable segment in the first quarter of fiscal year 2019. Purchase accounting was finalized during the fourth quarter of fiscal 2019. The preliminary and final fair values of the assets acquired and liabilities assumed are as follows (in thousands):
Preliminary Allocation at Acquisition Date |
Adjustments to Fair Value |
Final Opening Balance Sheet Allocation |
||||||||||
Current assets, net of cash |
$ | 36 | $ | 36 | ||||||||
Equipment and other long-term assets |
284 | (56 |
) |
228 | ||||||||
Intangible assets: |
||||||||||||
Developed technology |
20,000 | (7,744 |
) |
12,256 | ||||||||
Goodwill |
9,790 | 4,691 | 14,481 | |||||||||
Total assets acquired |
30,110 | (3,109 |
) |
27,001 | ||||||||
Liabilities |
765 | (469 |
) |
296 | ||||||||
Deferred income taxes, net |
3,741 | (2,798 |
) |
943 | ||||||||
Net assets acquired |
$ | 25,604 | $ | 158 | $ | 25,762 | ||||||
Cash paid, net of cash acquired |
$ | 20,404 | $ | 58 | $ | 20,462 | ||||||
Fair value of contingent consideration |
5,200 | 100 | 5,300 | |||||||||
Net assets acquired |
$ | 25,604 | $ | 158 | $ | 25,762 |
As summarized in the table, there were adjustments totaling $4.7 million to goodwill during the measurement period. These adjustments primarily relate to refinements made to acquired intangible asset cash flow models, an update in the discount rate used in the contingent consideration calculation based on refinements made in the acquired intangible asset cash flow models, and adjustments to preliminary deferred tax amounts based on updated assessments of the applicability of certain NOLs. Tangible assets and liabilities acquired were recorded at fair value on the date of close based on management's assessment. The purchase price allocated to developed technology was estimated based on management's forecasted cash inflows and outflows using a multi-period excess earnings method to calculate the fair value of assets purchased. The developed technology asset is being amortized with the expense reflected in cost of goods sold in the Consolidated Statement of Earnings and Comprehensive Income. The amortization period for intangible assets acquired in fiscal 2019 are 14 years for developed technology. The net deferred income tax liability represents the net amount of the estimated future impact of adjustments for costs to be recognized as intangible asset amortization, which is not deductible for income tax purposes offset by the deferred tax asset for our calculation of acquired net operating losses (NOLs).
Exosome Diagnostics
On August 1, 2018, the Company acquired Exosome Diagnostics, Inc. (ExosomeDx) for approximately $251.6 million, net of cash acquired, plus contingent consideration of up to $325.0 million as follows:
● Up to $250 million if calendar year 2020 EBITA is between $45 million and $58 million or greater.
● Up to $45 million if calendar year 2022 EBITA for a new instrument product is between $54 million and $70 million or greater.
● Up to $30 million if calendar year 2022 EBITA for the remaining business is between $150 million and $190 million or greater.
The goodwill recorded as a result of the acquisition represents the strategic benefits of growing the Company’ product portfolio and the expected revenue growth from increased market penetration. The goodwill is not deductible for income tax purposes. The business became part of the Diagnostics and Genomics reportable segment in the first quarter of fiscal year 2019. Purchase accounting was finalized during the fourth quarter of fiscal 2019. The preliminary and final fair values of the assets acquired and liabilities assumed are as follows (in thousands):
Preliminary Allocation at Acquisition Date |
Adjustments to Fair Value |
Final Opening Balance Sheet Allocation |
||||||||||
Current assets, net of cash |
$ |
5,118 |
(2,507 |
) |
$ |
2,611 |
||||||
Equipment and other long-term assets |
2,212 |
- |
2,212 |
|||||||||
Intangible assets: |
||||||||||||
Developed technology |
180,000 |
(75,000 |
) |
105,000 |
||||||||
Trade name |
- |
58,000 |
58,000 |
|||||||||
Customer relationships |
- |
2,300 |
2,300 |
|||||||||
Goodwill |
96,592 |
8,770 |
105,362 |
|||||||||
Total assets acquired |
283,922 |
(8,437 |
) |
275,485 |
||||||||
Liabilities |
2,624 |
1,092 |
3,716 |
|||||||||
Deferred income taxes, net |
27,673 |
(11,327 |
) |
16,346 |
||||||||
Net assets acquired |
$ |
253,625 |
$ |
1,798 |
$ |
255,423 |
||||||
Cash paid, net of cash acquired |
$ |
251,825 |
$ |
(202 |
) |
$ |
251,623 |
|||||
Fair value of contingent consideration |
1,800 |
2,000 |
3,800 |
|||||||||
Net assets acquired |
$ |
253,625 |
$ |
1,798 |
$ |
255,423 |
As summarized in the table, there were adjustments totaling $8.8 million to goodwill during the measurement period. As previously disclosed, the intangible value associated with the ExosomeDx trade name and determination of the related estimated useful life was under assessment as part of purchase accounting review. During the period, the Company updated our intangible assessment to include a $58.0 million value for the ExosomeDx trade name. Due to our updated assessments and further refinements in our intangible asset cash flow models, the fair value of the developed technology intangible asset decreased by $75.0 million. When applying our final assumptions in our intangible asset cash flow models to the Company's contingent consideration recorded in the Opening Balance Sheet, the estimated contingent consideration increased by $2.0 million. Additionally, we recorded a Customer Relationships intangible asset of $2.3 million for the established physician network ordering ExosomeDx laboratory services that existed at the acquisition date. Adjustments to the opening balance sheet fair value also included updates to preliminary deferred tax amounts and working capital adjustments, primarily attributable to updates for the net realizable value of certain acquired receivables based on factors existing on the acquisition date.
Tangible assets and liabilities acquired were recorded at fair value on the date of close based on management's assessment. The purchase price allocated to developed technology, trade names, and customer relationships was based on management's forecasted cash inflows and outflows and using either a relief-from-royalty or a multiperiod excess earnings method to calculate the fair value of assets purchased. The preliminary amount recorded for developed technology is being amortized with the expense reflected in cost of goods sold in the Condensed Consolidated Statement of Earnings and Comprehensive Income. Preliminary amortization expense related to trade names, and customer relationships is reflected in selling, general and administrative expenses in the Consolidated Statement of Earnings and Comprehensive Income. The preliminary amortization periods for intangible assets acquired in fiscal 2019 are 15 years for developed technology and trade names, and 14 years for customer relationships. The net deferred income tax liability represents the net amount of the estimated future impact of adjustments for costs to be recognized as intangible asset amortization, which is not deductible for income tax purposes offset by the deferred tax asset for the preliminary calculation of acquired NOLs.
B-MoGen Biotechnologies
On June 4, 2019, the Company acquired the remaining interest in B-MoGen Biotechnologies Inc. (B-MoGen) for approximately $17.5 million, net of cash acquired, plus contingent consideration of up to $38.0 million, subject to certain product development milestones and revenue thresholds. The Company previously held an investment of $1.4 million in B-MoGen and recognized a gain of approximately $3.7 million on the transaction within other non-operating income in the consolidated statements of earnings and comprehensive income representing the adjustment of our historical investment to its fair value. The goodwill recorded as a result of the acquisition represents the strategic benefits of growing the Company’s product portfolio and the expected revenue growth from increased market penetration. The goodwill is not deductible for income tax purposes. The business became part of the Protein Sciences reportable segment in the fourth quarter of fiscal year 2019.
Certain estimated fair values are not yet finalized and are subject to change, which could be significant. The Company expects to finalize our purchasing accounting by the end of the second quarter of fiscal year 2020 when we have completed our assessment of the working capital adjustment and we have finalized our income tax assessment of acquired net operating losses (NOLs) with the completion of the stub period tax returns. Amounts for acquired current assets and liabilities, deferred tax liabilities, acquired NOLs, and goodwill also remain subject to change. The preliminary estimated fair values of the assets acquired and liabilities assumed are as follows (in thousands):
Preliminary Allocation at Acquisition Date |
||||
Current assets, net of cash |
$ | 504 | ||
Equipment and other long-term assets |
269 | |||
Intangible assets: |
||||
Developed technology |
14,000 | |||
Customer relationships | 400 | |||
Goodwill |
16,457 | |||
Total assets acquired |
31,630 | |||
Liabilities |
211 | |||
Deferred income taxes, net |
3,377 | |||
Net assets acquired |
$ | 28,042 | ||
Cash paid, net of cash acquired |
$ | 17,448 | ||
Fair value of contingent consideration |
5,500 | |||
Fair value of historical investment in B-MoGen | 5,094 | |||
Net assets acquired |
$ | 28,042 |
Tangible assets and liabilities acquired were recorded at fair value on the date of close based on management's assessment. The purchase price allocated to developed technology was estimated based on management's forecasted cash inflows and outflows and using a multi-period excess earnings method to calculate the fair value of assets purchased. The preliminary amount recorded for developed technology is being amortized with the expense reflected in cost of goods sold in the Consolidated Statement of Earnings and Comprehensive Income. The amortization periods for intangible assets acquired in fiscal 2019 are estimated to be 14 years for developed technology. The net deferred income tax liability represents the net amount of the estimated future impact of adjustments for costs to be recognized as intangible asset amortization, which is not deductible for income tax purposes offset by the deferred tax asset for the preliminary calculation of acquired NOLs.
2018 Acquisitions
Trevigen
On September 5, 2017 the Company acquired the stock of Trevigen Inc. for approximately $10.6 million, net of cash received. The Company has had a long-standing business relationship with Trevigen as a distributor of its product line. The goodwill recorded as a result of the acquisition represents the strategic benefits of growing the Company’s product portfolio and the expected revenue growth from increased market penetration. The goodwill is not deductible for income tax purposes. The business became part of the Protein Sciences reportable segment in the first quarter of fiscal 2018.
Atlanta Biologicals
On January 2, 2018 the Company acquired the stock of Atlanta Biologicals, Inc. and its affiliated company, Scientific Ventures, Inc., for approximately $51.3 million, net of cash acquired. The transaction was financed through available cash on hand and an additional draw from the Company’s line-of-credit. Atlanta Biologicals fetal bovine serum (FBS) product line strengthens and complements our current tissue culture reagents offering and furthers our efforts to provide more complete solutions to our research customers. The goodwill recorded as a result of the acquisition represents the strategic benefits of growing the Company’s product portfolio and the expected revenue growth from increased market penetration. The goodwill is not deductible for income tax purposes. The business became part of the Protein Sciences reportable segment in the third quarter of fiscal 2018. Purchase accounting was finalized during fiscal 2018.
Tangible assets acquired in the acquisition, net of liabilities assumed, were recorded at fair value on the date of close based on management's assessment. The purchase price allocated to developed technology, trade names, and customer relationships was based on management's forecasted cash inflows and outflows and using a relief-from-royalty and a multi-period excess earnings method to calculate the fair value of assets purchased. The developed technology is being amortized with the expense reflected in cost of goods sold in the Consolidated Statement of Earnings and Comprehensive Income. Amortization expense related to trade names, and customer relationships is reflected in selling, general and administrative expenses in the Consolidated Statement of Earnings and Comprehensive Income. The amortization periods for intangible assets acquired in fiscal 2018 are 13 years for developed technology, 12 years for customer relationships, and 15 years for trade names. The deferred income tax liability represents the net amount of the estimated future impact of adjustments for costs to be recognized upon the sale of acquired inventory that was written up to fair value and intangible asset amortization, both of which are not deductible for income tax purposes.
Eurocell Diagnostics
On February 1, 2018, the Company acquired Eurocell Diagnostics SAS, a company based in Rennes, France, for approximately $7.3 million, net of cash acquired. The Company paid $6.0 million on the acquisition date and the remaining $1.3 million was paid on February 1, 2019. The Company has had a long-standing business relationship with Eurocell as a distributor of its product line. Eurocell sells directly to the laboratory markets in the French region as well as servicing the EMEA markets via a network of distributors. The transaction was financed through cash on hand. The primary asset in this acquisition is the customer relationships; however, the acquisition resulted in some goodwill as we expect strategic benefits of revenue growth from increased market penetration. The goodwill is not deductible for income tax purposes. The business became part of the Company’s Diagnostics and Genomics reportable segment in the third quarter of fiscal 2018. Purchase accounting was finalized during fiscal 2018.
Tangible assets acquired, net of liabilities assumed, were recorded at fair value on the date of close based on management's assessment. The purchase price allocated to customer relationships was based on management's forecasted cash inflows and outflows using a multi-period excess earnings method to calculate the fair value of assets purchased. Amortization expense related customer relationships is reflected in selling, general and administrative expenses in the Consolidated Statement of Earnings and Comprehensive Income. The amortization period for customer relationships acquired in fiscal 2018 is 7 years. The deferred income tax liability represents the net amount of the estimated future impact of intangible asset amortization, which is not deductible for income tax purposes.
2017 Acquisitions
Advanced Cell Diagnostics (ACD)
On August 1, 2016, the Company acquired ACD for approximately $258.0 million, net of cash acquired, plus contingent consideration of up to $75.0 million as follows:
● |
$25.0 million if calendar year 2016 revenues equal or exceed $30.0 million. |
● |
an additional $50.0 million if calendar year 2017 revenues equal or exceed $45.0 million. |
The Company paid approximately $247.0 million, net of cash acquired and the working capital adjustments, as of the acquisition date. The remaining $11.0 million was paid to current employees who held ACD unvested stock as of the acquisition date. In order to receive payment for unvested shares, the individuals had to remain employees of ACD over an 18-month vesting period which extended from the acquisition date through March 31, 2018. Any amounts that would have been owed to individuals who left the company during the vesting period was pooled together and distributed amongst the other former ACD shareholders at the end of the vesting period. Management determined that $3.6 million of the $11.0 million represented purchase price consideration paid for pre-acquisition services. However, the remaining $7.4 million represented compensation expense as the amount the individual employees received was tied to future service. This liability recorded on the Consolidated Balance Sheets under the caption “Salaries, wages and related accruals” for the fiscal year ended June 30, 2017.
During the third quarter of fiscal 2017, management determined that the calendar year 2016 revenue milestone was met. During the third quarter of fiscal 2018, management determined that the calendar year 2017 revenue milestone was met. Refer to Note 4 for discussion of this item as well as discussion of the changes to the fair value estimate for the calendar year revenue milestones as of June 30, 2018 and 2017.
The goodwill recorded as a result of the ACD acquisition represents the strategic benefits of growing the Company's product portfolio and the expected revenue growth from increased market penetration from future products and customers. The goodwill is not deductible for income tax purposes. The business became part of the Company’s Biotechnology reportable segment in the first quarter of 2017.
As previously disclosed, ACD was acquired on August 1, 2016. The unaudited pro forma financial information below summarizes the combined results of operations for Bio-Techne and ACD as though the companies were combined as of the beginning fiscal 2016. The pro forma financial information for all periods presented includes the purchase accounting effects resulting from these acquisitions except for the increase in inventory to fair value and the fair value adjustments to contingent consideration as these are not expected to have a continuing impact on cost of goods sold or selling, general and administrative expense, respectively. The pro forma financial information as presented below is for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisitions had taken place at the beginning of fiscal 2016.
Year Ended |
||||||||
June 30, |
||||||||
2017 |
2016 |
|||||||
Net sales |
$ |
564,220 |
$ |
523,840 |
||||
Net income |
99,380 |
110,536 |
Space Import-Export, Srl
On July 1, 2016, the Company acquired Space Import-Export, Srl (Space) of Milan, Italy for approximately $9.0 million. $6.7 million was paid on the acquisition date and the remaining $2.3 million was paid during the first quarter of fiscal year 2018. Space was a long-time distribution partner of the Company in the Italian market. The acquisition resulted in goodwill as we expect strategic benefits of revenue growth from increased market penetration. The goodwill is not deductible for income tax purposes. The business became part of the Company’s Biotechnology reportable segment in the first quarter of 2017.
Tangible assets acquired, net of liabilities assumed, were stated at fair value at the date of acquisition based on management's assessment. The purchase price allocated to developed technology, trade names, non-compete agreements and customer relationships was based on management's forecasted cash inflows and outflows and using a relief-from-royalty and a multi-period excess earnings method to calculate the fair value of assets purchased. The developed technology is being amortized with the expense reflected in cost of goods sold in the Consolidated Statements of Earnings and Comprehensive Income. Amortization expense related to trade names, the non-compete agreement and customer relationships is reflected in selling, general and administrative expenses in the Consolidated Statements of Earnings and Comprehensive Income. The deferred income tax liability represents the estimated future impact of adjustments for the cost to be recognized upon the sale of acquired inventory that was written up to fair value and intangible asset amortization, both of which are not deductible for income tax purposes, and the future tax benefit of net operating loss and tax credit carryforwards which will be deductible by the Company in future periods.
The aggregate purchase price of the acquisitions was allocated to the assets acquired and liabilities assumed based on their estimated fair values as of the acquisition date. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed as a result of the fiscal year 2018 and 2017 acquisitions (in thousands):
Trevigen | Atlanta Biologicals |
Eurocell Diagnostics |
ACD |
Space |
||||||||||||||
Current assets, net of cash |
$ | 1,662 | $ | 15,722 | $ | 512 | $ | 15,824 | $ | 2,128 | ||||||||
Equipment and other long-term assets |
53 | 4,901 | 188 | 6,569 | 159 | |||||||||||||
Intangible assets: |
||||||||||||||||||
Developed technology | 5,100 | 23,000 | - | 150,000 | - | |||||||||||||
Trade name | 160 | 2,300 | - | 21,900 | - | |||||||||||||
Customer relationships |
260 | 3,600 | 6,272 | 6,300 | 6,769 | |||||||||||||
Goodwill |
5,991 | 10,195 | 2,910 | 143,967 | 3,517 | |||||||||||||
Total assets acquired |
13,226 | 59,718 | 9,882 | 344,560 | 12,573 | |||||||||||||
Liabilities |
387 | 90 | 483 | 4,179 | 1,445 | |||||||||||||
Deferred income taxes, net |
2,195 | 8,354 | 2,070 | 52,743 | 2,125 | |||||||||||||
Net assets acquired |
$ | 10,644 | $ | 51,274 | $ | 7,329 | $ | 287,638 | $ | 9,003 | ||||||||
Cash paid, net of cash acquired |
10,644 | 51,274 | $ | 5,933 | $ | 247,038 | $ | 6,747 | ||||||||||
Consideration payable |
- | - | 1,396 | 3,600 | 2,256 | |||||||||||||
Contingent consideration payable | - | - | - | 37,000 | - | |||||||||||||
Net assets acquired | $ | 10,644 | $ | 51,274 | $ | 7,329 | $ | 287,638 | $ | 9,003 |
Tangible assets acquired, net of liabilities assumed, were stated at fair value at the date of acquisition based on management's assessment. The purchase price allocated to developed technology, trade names, non-compete agreements and customer relationships was based on management's forecasted cash inflows and outflows and using a relief-from-royalty and multi-period excess earnings method to calculate the fair value of assets purchased. The developed technology is being amortized with the expense reflected in cost of good sold in the Consolidated Statements of Earnings and Comprehensive Income. Amortization expense related to trade names, the non-compete agreement and customer relationships is reflected in selling, general and administrative expenses in the Consolidated Statements of Earnings and Comprehensive Income. The deferred income tax liability represents the estimated future impact of adjustments for the cost to be recognized upon the sale of acquired inventory that was written up to fair value and intangible asset amortization, both of which are not deductible for income tax purposes, and the future tax benefit of net operating loss and tax credit carryforwards which will be deductible by the Company in future periods.
Note 5. Fair Value Measurements:
The Company’s financial instruments include cash and cash equivalents, available for sale investments, accounts receivable, accounts payable, contingent consideration obligations, derivative instruments, and long-term debt.
Fair value is defined as the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. This standard also establishes a hierarchy for inputs used in measuring fair value. This standard maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs market participants would use in valuing the asset or liability based on market data obtained from independent sources. Unobservable inputs are inputs that reflect our assumptions about the factors market participants would use in valuing the asset or liability based upon the best information available in the circumstances.
The categorization of financial assets and liabilities within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The hierarchy is broken down into three levels. Level 1 inputs are quoted prices in active markets for identical assets or liabilities. Level 2 inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs (other than quoted prices) that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable for the asset or liability and their fair values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable. Level 3 may also include certain investment securities for which there is limited market activity or a decrease in the observability of market pricing for the investments, such that the determination of fair value requires significant judgment or estimation.
The following tables provide information by level for financial assets and liabilities that are measured at fair value on a recurring basis (in thousands):
Total carrying value as of |
Fair Value Measurements Using Inputs Considered as |
|||||||||||||||
June 30, 2019 |
Level 1 |
Level 2 |
Level 3 |
|||||||||||||
Assets |
||||||||||||||||
Equity securities (1) |
$ | 38,219 | $ | 38,219 | $ | - | $ | - | ||||||||
Certificates of deposit (2) |
26,928 | 26,928 | - | - | ||||||||||||
Total Assets |
$ | 65,147 | $ | 65,147 | $ | - | $ | - | ||||||||
Liabilities |
||||||||||||||||
Contingent consideration |
$ | 12,600 | $ | - | $ | - | $ | 12,600 | ||||||||
Derivative instruments - cash flow hedges | 12,458 | - | 12,458 | - | ||||||||||||
Total Liabilities | $ | 25,058 | $ | - | $ | 12,458 | $ | 12,600 |
Total carrying value as of |
Fair Value Measurements Using Inputs Considered as |
|||||||||||||||
June 30, 2018 |
Level 1 |
Level 2 |
Level 3 |
|||||||||||||
Assets |
||||||||||||||||
Equity securities (1) |
$ | 54,286 | $ | 54,286 | $ | - | $ | - | ||||||||
Certificates of deposit (2) |
5,478 | 5,478 | - | - | ||||||||||||
Total Assets |
$ | 59,764 | $ | 59,764 | $ | - | $ | - | ||||||||
Liabilities |
||||||||||||||||
Contingent consideration |
$ | - | $ | - | $ | - | $ | - |
(1) Included in available-for-sale investments on the balance sheet. The cost basis in the Company's investment in CCXI at June 30, 2019 and June 30, 2018 was $18.8 million. |
|
(2) Included in available-for-sale investments on the balance sheet. The certificate of deposits have contractual maturity dates within one year. |
Fair value measurements of available for sale securities
Our available for sale securities are measured at fair value using quoted market prices in active markets for identical assets and are therefore classified as Level 1 assets.
Fair value measurements of derivative instruments
In October 2018, the Company entered into forward starting swaps designated as cash flow hedges on outstanding debt. The forward starting swaps reduce the variability of cash flow payments for the Company by converting the variable interest rate on the Company’s long-term debt described in Note 6 to that of a fixed interest rate. Accordingly, as part of the forward starting swaps, the Company will exchange, at specified intervals, the difference between floating and fixed interest amounts based on $380 million of notional principal amount. The change in the fair value of the instrument is reported as a component of other comprehensive income and reclassified into interest expense over the corresponding term of the cash flow hedge. The Company did not reclassify any amounts out of other comprehensive income into interest expense during the fiscal year ended June 30, 2019. The liability related to the derivative instrument was recorded within Other long-term liabilities on the Consolidated Balance Sheet. The instrument was valued using observable market inputs in active markets and therefore classified as a Level 2 liability.
Fair value measurements of contingent consideration
In connection with the ExosomeDx, Quad, and B-Mogen acquisitions the Company is required to make contingent consideration payments of up to $325.0 million, $51.0 million, and $38.0 million respectively. The contingent consideration payments are subject to ExosomeDx achieving certain EBITA thresholds, Quad meeting certain product development milestones and revenue thresholds, and B-Mogen meeting certain product development milestones and revenue thresholds. The preliminary fair value of the liabilities for the contingent payments recognized upon the acquisition as part of the purchase accounting opening balance sheet totaled $14.6 million ($3.8 million for ExosomeDx, $5.3 million for Quad, and $5.5 million for B-Mogen) as discussed in Note 4. The preliminary fair value of the development milestone payments was estimated by discounting the probability-weighted contingent payments expected to be made to present value. Assumptions used in these calculations were probability of success, duration of the earn-out, and discount rate. The preliminary fair value for the EBITA and revenue milestone payments was determined using a Monte Carlo simulation-based model discounted to present value. Assumptions used in these calculations are units sold, expected revenue, expected expenses, discount rate and various probability factors. The ultimate settlement of contingent consideration could deviate from current estimates based on the actual results of these financial measures. This liability is considered to be a Level 3 financial liability that is re-measured each reporting period. The change in fair value of contingent consideration for these acquisitions is included in general and administrative expense.
In fiscal 2018, the Company made $88.5 million in cash payments towards the ACD, CyVek and Zephyrus contingent consideration liabilities after it determined certain sales and revenue thresholds were met. Of the $88.5 million in total payments, $61.9 million is classified as financing on the statement of cash flows. The remaining $26.6 million is recorded as operating on the statement of cash flows as it represents the consideration liability that exceeds the amount of the contingent consideration liability recognized at the acquisition date.
The following table presents a reconciliation of the liability measured at fair value on a recurring basis using significant unobservable inputs (Level 3) (in thousands):
June 30, |
||||||||
2019 |
2018 |
|||||||
Fair value at the beginning of period |
$ | - | $ | 68,400 | ||||
Purchase price contingent consideration (Note 4) |
14,600 | - | ||||||
Payments |
- |
|
(88,500 |
) |
||||
Change in fair value of contingent consideration |
(2,000 | ) | 20,100 | |||||
Contingent consideration payable |
$ | 12,600 | $ | - |
Fair value measurements of other financial instruments – The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practicable to estimate fair value.
Cash and cash equivalents, certificates of deposit, accounts receivable, and accounts payable – The carrying amounts reported in the consolidated balance sheets approximate fair value because of the short-term nature of these items.
Long-term debt – The carrying amounts reported in the consolidated balance sheets for the amount drawn on our line-of-credit facility approximates fair value because our interest rate is variable and reflects current market rates.
Note 6. Debt and Other Financing Arrangements:
On August 1, 2018, the Company entered into a new uncollateralized revolving line-of-credit and term loan governed by a Credit Agreement (the Credit Agreement). The Credit Agreement provides for a revolving credit facility of $600.0 million, which can be increased by an additional $200.0 million subject to certain conditions, and a term loan of $250.0 million. Borrowings under the Credit Agreement may be used for working capital and expenditures of the Company and its subsidiaries, including financing permitted acquisitions. Borrowings under the Credit Agreement bear interest at a variable rate. The current outstanding debt is based on the Eurodollar Loans term for which the interest rate is calculated as the sum of LIBOR plus an applicable margin. The applicable margin is determined for the total leverage ratio of the Company and updated on a quarterly basis. The annualized fee for any unused portion of the credit facility is currently 20 basis points. The Company has recorded $12.5 million of our outstanding borrowings under the Credit Agreement as a current liability in our Consolidated Balance sheet, which represents our required quarterly debt payments to be made in fiscal year 2020.
The Credit Agreement matures on August 1, 2023 and contains customary restrictive and financial covenants and customary events of default. At the closing on August 1, 2018 the company borrowed $250.0 million under the term loan and $330.0 million under the revolving credit facility. As of June 30, 2019, the outstanding balance under the Credit Agreement was $505.2 million.
Note 7. Commitments and Contingencies:
The Company leases office and warehouse space, vehicles and various office equipment under operating leases. At June 30, 2019, aggregate net minimum rental commitments under non-cancelable leases having an initial or remaining term of more than one year are payable as follows (in thousands):
2020 |
$ | 13,707 | ||
2021 |
13,469 | |||
2022 |
13,154 | |||
2023 |
12,716 | |||
2024 |
11,392 | |||
Thereafter |
51,895 | |||
Total |
$ | 116,333 |
Total rent expense was approximately $12.9 million, $10.8 million, and $9.8 million for the years ended June 30, 2019, 2018, and 2017, respectively.
The Company is routinely subject to claims and involved in legal actions which are incidental to the business of the Company. Although it is difficult to predict the ultimate outcome of these matters, management believes that any ultimate liability will not materially affect the consolidated financial position or results of operations of the Company.
Note 8. Supplemental Equity and Accumulated Other Comprehensive Income (loss):
Supplemental Equity
The Company has declared cash dividends per share of $1.28 in each of the full fiscal years ended June 30, 2019, June 30, 2018, and June 30, 2017. During the year ended June 30, 2019, the Company repurchased 95,000 shares at an average share price of $162.15. During fiscal 2019, the Company made the accounting policy election to record the portion of share repurchases in excess of the par value entirely in retained earnings.
Accumulated Other Comprehensive Income (loss)
Changes in accumulated other comprehensive income (loss), net of tax, at June 30 consists of (in thousands):
Unrealized Gains (Losses) on Available- for-Sale Investments |
Foreign Currency Translation Adjustments |
Unrealized Gains (Losses) on Derivatives Instruments |
Total |
|||||||||||||
Balance June 30, 2016 |
$ | (5,542 |
) |
(64,863 |
) |
- | $ | (70,405 |
) |
|||||||
Other comprehensive income (loss) before reclassifications |
24,531 | (3,061 |
) |
- | 21,470 | |||||||||||
Balance June 30, 2017 |
$ | 18,989 | (67,924 |
) |
- | $ | (48,935 |
) |
||||||||
Other comprehensive income (loss) before reclassifications |
18,108 | (1,572 |
) |
- | 16,536 | |||||||||||
Amounts reclassified from accumulated other comprehensive loss to income |
(12,415 |
) |
- | - | (12,415 |
) |
||||||||||
Balance June 30, 2018 |
$ | 24,682 | (69,496 |
) |
- | $ | (44,814 |
) |
||||||||
Cumulative effect adjustment for adoption for ASU 2018-02(1) | 2,371 | - | - | 2,371 | ||||||||||||
Cumulative effect adjustment for adoption for ASU 2016-01(1) | (27,053 | ) | - | - | (27,053 | ) | ||||||||||
Other comprehensive income (loss) before reclassifications (2) |
- | (4,487 | ) | (9,537 | ) | (14,024 | ) | |||||||||
Balance June 30, 2019 |
$ | - | (73,983 |
) |
(9,537 | ) | $ | (83,521 |
) |
(1)See Note 1 for further information related to the adoption of ASU 2016-01 and 2018-02.
(2) The gain (loss) on the forward starting interest rate swap will be reclassified into earnings beginning October 31, 2019. Approximately ($1,748) of the ($9,537) will be reclassified into earnings in the 12 months subsequent to June 30, 2019.
Note 9. Earnings Per Share:
The following table reflects the calculation of basic and diluted earnings per share (in thousands, except per share amounts):
Year Ended June 30, |
||||||||||||
2019 |
2018 |
2017 |
||||||||||
Earnings per share – basic: |
||||||||||||
Net income |
$ | 96,072 | $ | 126,150 | $ | 76,086 | ||||||
Income allocated to participating securities |
(105 |
) |
(108 |
) |
(65 |
) |
||||||
Income available to common shareholders |
$ | 95,967 | $ | 126,042 | $ | 76,021 | ||||||
Weighted-average shares outstanding – basic |
37,781 | 37,476 | 37,313 | |||||||||
Earnings per share – basic |
$ | 2.54 | $ | 3.36 | $ | 2.04 | ||||||
Earnings per share – diluted: |
||||||||||||
Net income |
$ | 96,072 | $ | 126,150 | $ | 76,086 | ||||||
Income allocated to participating securities |
(105 |
) |
(108 |
) |
(65 |
) |
||||||
Income available to common shareholders |
$ | 95,967 | $ | 126,042 | $ | 76,021 | ||||||
Weighted-average shares outstanding – basic |
37,781 | 37,476 | 37,313 | |||||||||
Dilutive effect of stock options and restricted stock units |
1,111 | 579 | 187 | |||||||||
Weighted-average common shares outstanding – diluted |
38,892 | 38,055 | 37,500 | |||||||||
Earnings per share – diluted |
$ | 2.47 | $ | 3.31 | $ | 2.03 |
Basic net income per common share is calculated based on the weighted average number of common shares outstanding during the period. Diluted net income per common share is computed by dividing net income by the weighted average number of common and potentially dilutive common shares outstanding during the period. Potentially dilutive common shares of our stock result from dilutive common stock options and restricted stock units. We use the treasury stock method to calculate the weighted-average shares used in the diluted earnings per share computation. Under the treasury stock method, the proceeds from exercise of an option, the amount of compensation cost, if any, for future service that we have not yet recognized, and the amount of estimated tax benefits that would be recorded in paid-in capital, if any, when the option is exercised are assumed to be used to repurchase shares in the current period.
The dilutive effect of stock options in the above table excludes all options for which the aggregate exercise proceeds exceeded the average market price for the period. The number of potentially dilutive option shares excluded from the calculation was 1.3 million, 0.9 million, and 2.0 million for the fiscal years ended June 30, 2019, 2018 and 2017, respectively.
Note 10. Share-based Compensation and Other Benefit Plans:
The cost of employee services received in exchange for the award of equity instruments is based on the fair value of the award at the date of grant. Compensation cost is recognized using a straight-line method over the vesting period and is net of estimated forfeitures. Stock option exercises and stock awards are satisfied through the issuance of new shares.
Equity incentive plan: The Company's Second Amended and Restated 2010 Equity Incentive Plan (the Second A&R 2010 Plan) provides for the granting of incentive and nonqualified stock options, restricted stock, restricted stock units, performance shares, performance units and stock appreciation rights. There are 7.5 million shares of common stock authorized for grant under the Second A&R 2010 Plan. At June 30, 2019, there were 2.6 million shares of common stock available for grant under the Second A&R 2010 Plan. The maximum term of incentive options granted under the Second A&R 2010 Plan is ten years. The Second A&R 2010 Plan amended and restated the Company's Amended and Restate 2010 Equity Incentive Plan (the A&R 2010 Plan). The A&R 2010 Plan replaced the Company's 1998 Nonqualified Stock Option Plan (the 1998 Plan). The Second A&R 2010 Plan and the 1998 Plan (collectively, the Plans) are administered by the Board of Directors and its Executive Compensation Committee, which determine the persons who are to receive awards under the Plans, the number of shares subject to each award and the term and exercise price of each award. The number of shares of common stock subject to outstanding awards as of June 30, 2019 under the Second A&R 2010 Plan and the 1998 Plan were 3.6 million and 20,000, respectively. On April 26, 2018 the Compensation Committee of the Board of Directors approved a modification to the Equity Incentive Plan. The modification implements a new retirement policy that permits retirees to continue vesting in certain time-based stock options granted during employment, resulting in accelerated stock compensation expense for those employees meeting the definition of retirement eligible. This modification resulted in an additional $8.3 million of expense during fiscal year 2018 and affected all employees who participate in the plan.
The fair values of options granted under the Plans were estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions used:
Year Ended June 30, |
|||||||||||||||
2019 |
2018 |
2017 |
|||||||||||||
Dividend yield |
0.74% | 1.1% | 1.2% | ||||||||||||
Expected volatility |
20% | - | 23% | 20% | - | 21% | 21% | - | 24% | ||||||
Risk-free interest rates |
2.5% | - | 3.0% | 1.7% | - | 2.8% | 1.0% | - | 1.9% | ||||||
Expected lives (years) |
4.1 | 4.7 | 4.7 |
The dividend yield is based on the Company's historical annual cash dividend divided by the market value of the Company's common stock. The expected annualized volatility is based on the Company's historical stock price over a period equivalent to the expected life of the option granted. The risk-free interest rate is based on U.S. Treasury constant maturity interest rates with a term consistent with the expected life of the options granted.
Stock option activity under the Plans for the three years ended June 30, 2019, consists of the following (shares in thousands):
Number of Shares (in thousands) |
Weighted |
Aggregate (millions) |
Weighted Average Contractual Life (years) |
|||||||||||||
Outstanding at June 30, 2016 |
1,819 | $ | 91.91 | |||||||||||||
Granted |
1,135 | 107.42 | ||||||||||||||
Forfeited |
(70 |
) |
99.11 | |||||||||||||
Exercised |
(63 |
) |
71.81 | |||||||||||||
Outstanding at June 30, 2017 |
2,821 | $ | 98.42 | |||||||||||||
Granted |
1,087 | 120.67 | ||||||||||||||
Forfeited |
(252 |
) |
86.62 | |||||||||||||
Exercised |
(204 |
) |
111.51 | |||||||||||||
Outstanding at June 30, 2018 |
3,452 | $ | 105.17 | |||||||||||||
Granted |
917 | 173.89 | ||||||||||||||
Forfeited |
(330 |
) |
129.93 | |||||||||||||
Exercised |
(383 |
) |
95.29 | |||||||||||||
Outstanding at June 30, 2019 |
3,656 | $ | 121.16 | $ | 319.3 | 4.45 | ||||||||||
Exercisable at June 30, 2017: |
843 | 82.93 | ||||||||||||||
Exercisable at June 30, 2018: |
1,151 | 90.75 | ||||||||||||||
Exercisable at June 30, 2019: |
1,467 | 98.70 | $ | 161 | 3.33 |
The weighted average fair value of options granted during fiscal 2019, 2018 and 2017 was $34.66, $22.07 and $18.21 respectively. The total intrinsic value of options exercised during fiscal 2019, 2018 and 2017 were $159.0 million, $10.6 million, and $2.3 million respectively. The total fair value of options vested during fiscal 2019, 2018 and 2017 were $31.7 million, $8.8 million, and $5.0 million respectively.
Restricted common stock activity under the Plans for the three years ended June 30, 2019, consists of the following (units in thousands):
Number of Shares (in thousands) |
Weighted Average Grant Date Fair Value |
Weighted Average Remaining Contractual Term (years) |
||||||||||
Unvested at June 30, 2016 |
23 | $ | 98.03 | |||||||||
Granted |
24 | 104.94 | ||||||||||
Vested |
(15 |
) |
92.62 | |||||||||
Forfeited |
- | - | ||||||||||
Unvested at June 30, 2017 |
32 | $ | 105.80 | |||||||||
Granted |
20 | 125.05 | ||||||||||
Vested |
(17 |
) |
104.66 | |||||||||
Forfeited |
- | - | ||||||||||
Unvested at June 30, 2018 |
35 | $ |
117.39 |
|||||||||
Granted |
15 | 177.93 | ||||||||||
Vested |
(20 |
) |
116.76 | |||||||||
Forfeited |
- | - |