Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

The following management discussion and analysis (“MD&A”) provides information that we believe is useful in understanding our operating results, cash flows and financial condition. We provide quantitative information about the material sales drivers including the effect of acquisitions and changes in foreign currency at the corporate and segment level. We also provide quantitative information about discrete tax items and other significant factors we believe are useful for understanding our results. The MD&A should be read in conjunction with both the unaudited condensed consolidated financial information and related notes included in this Form 10-Q, and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended June 30, 2021. This discussion contains various “Non-GAAP Financial Measures” and also contains various “Forward-Looking Statements” within the meaning of the Private Securities Litigation Reform Act of 1995. We refer readers to the statements entitled “Non-GAAP Financial Measures” and “Forward-Looking Information and Cautionary Statements” located at the end of Item 2 of this report.

OVERVIEW

Bio-Techne and its subsidiaries, collectively doing business as Bio-Techne Corporation (Bio-Techne, we, our, us or the Company) develop, manufacture and sell biotechnology reagents, instruments and services for the research and clinical diagnostic markets worldwide. 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. 

Consistent with prior year, we have operated with two segments – our Protein Sciences segment and our Diagnostics and Genomics segment during the first quarter of fiscal year 2022. Our Protein Sciences segment is a leading developer and manufacturer of high-quality purified proteins and reagent solutions, most notably cytokines and growth factors, antibodies, immunoassays, biologically active small molecule compounds, tissue culture reagents and T-Cell activation technologies. This segment also includes protein analysis solutions that offer researchers efficient and streamlined options for automated western blot and multiplexed ELISA workflow. Our Genomics and Diagnostics segment develops and manufactures diagnostic products, including FDA-regulated controls, calibrators, blood gas and clinical chemistry controls and other reagents for OEM and clinical customers, as well as a portfolio of clinical molecular diagnostic oncology assays, including the ExoDx® Prostate (IntelliScore) test (EPI) for prostate cancer diagnosis. This segment also manufactures and sells advanced tissue-based in-situ hybridization assays (ISH) for research and clinical use.

RECENT ACQUISITIONS

A key component of the Company's strategy is to augment internal growth at existing businesses with complementary acquisitions. The Company did not make any acquisitions in the three months ended September 30, 2021. Refer to the prior year Annual Report on form 10-K for additional disclosure regarding the Company's recent acquisitions.   

RESULTS OF OPERATIONS

Operational Update

Consolidated net sales increased 26% for the quarter ended September 30, 2021 compared to the same prior year period. Organic growth was 21% for the quarter ended September 30, 2021 compared to the same prior year period, with foreign currency exchange having a favorable impact of 1% on revenue growth and acquisitions contributing a favorable impact of 4% to revenue growth.

Consolidated net earnings attributable to Bio-Techne increased to $69.6 million for the quarter ended September 30, 2021 compared to the $33.4 million in same prior year period. The increase in net earnings attributable to Bio-Techne for the quarter ended September 30, 2021 is primarily due to an increase in net sales and changes in the fair value of our ChemoCentryx investment. 

Business Strategy Update

The Company’s key business strategies for long-term growth and profitability continue to be geographic expansion, core product innovation, acquisitions and talent retention and development. In fiscal year 2022, the Company is also focused on evaluating how climate change impacts from our business operations might be measured and mitigated, with the plan of integrating consideration of greenhouse gas emissions and other climate variables into those key business strategies. The financial impact of this initiative is not expected to materially alter the Company’s financial results in the fiscal year, but we expect it to provide positive long-term financial benefit.  

Net Sales

Consolidated net sales for the quarter ended September 30, 2021 were $257.7 million, an increase of 26% from the same prior year period. Organic growth was 21% for the quarter ended September 30, 2021 compared to the same prior year period, with foreign currency exchange having a favorable impact of 1% on sales growth and acquisitions contributing a favorable impact of 4% to revenue growth. Organic revenue growth was mainly driven by strong biopharma demand, especially for products, services and solutions from the Protein Sciences segment and by overall execution of the Company's long-term growth strategy. 

Gross Margins

Consolidated gross margins for the quarter ended September 30, 2021 and September 30, 2020 were 66.4% and 67.4%, respectively. Under purchase accounting, inventory is valued at fair value less expected selling and marketing costs, resulting in reduced margins in future periods as the inventory is sold. Excluding the impact of costs recognized upon the sale of acquired inventory, stock compensation expense, amortization of intangibles, and impact of partially owned consolidated subsidiaries, adjusted gross margins were 71.2% and 71.9% for the quarter ended September 30, 2021 and 2020, respectively. Both consolidated gross margins and non-GAAP adjusted gross margins were negatively impacted by product mix and additional investments made in the business to support future growth for the quarter ended September 30, 2021 as compared to the prior year.

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

		Quarter Ended
		September 30,
		2021				2020
Consolidated gross margin percentage			66.4	%			67.4	%
Identified adjustments:
Costs recognized upon sale of acquired inventory			0.6	%			-	%
Amortization of intangibles			4.0	%			4.2	%
Stock compensation expense - COGS			0.1	%			0.3	%
Impact of partially owned consolidated subsidiaries			0.1	%			-	%
Non-GAAP adjusted gross margin percentage			71.2	%			71.9	%

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $13.6 million (19%) for the quarter ended September 30, 2021 from the same prior year period. The increase in expense was due to strategic growth investments and the Asuragen acquisition in the fourth quarter of fiscal year 2021.

Research and Development Expenses

Research and development expenses were $21.6 million for the quarter ended September 30, 2021 compared to $16.0 million from the same prior year period. The increase in expense was due to strategic growth investments and the Asuragen acquisition in the fourth quarter of fiscal year 2021.  

Segment Results

Protein Sciences

		Quarter Ended
		September 30,
		2021				2020
Net sales (in thousands)		$	197,186			$	154,446
Operating margin percentage			45.7	%			45.6	%

Protein Science’s net sales for the quarter ended September 30, 2021 were $197.2 million with reported growth of 28% compared to the same prior year period. Organic growth for the quarter ended September 30, 2021 was 26% with foreign currency having a favorable impact of 2%. Segment growth was driven by strong BioPharma demand resulting in broad-based growth across our proteomic research reagents and analytical tools. 

The operating margin for the quarter ended September 30, 2021 was 45.7% compared to 45.6% for the same prior year period. Operating income margin was positively impacted by volume leverage largely offset by strategic investments to support future growth.  

Diagnostics and Genomics

		Quarter Ended
		September 30,
		2021				2020
Net sales (in thousands)		$	60,985			$	50,125
Operating margin percentage			12.2	%			17.3	%

Diagnostics and Genomics’ net sales for the quarter ended September 30, 2021 were $61.0 million with reported growth of 22% compared to the same prior year period. Organic growth for the quarter ended September 30, 2021 was 6% with acquisitions contributing 15% to revenue growth and foreign currency exchange having a favorable impact of 1%. Total segment revenue increased primarily due to the Asuragen acquisition in the fourth quarter of fiscal year 2021. Organic growth was driven by continued strength in our diagnostic reagent product lines.

The operating margin for the segment was 12.2% for the quarter ended September 30, 2021 compared to 17.3% for the same prior year period. The segment’s operating margin was negatively impacted by acquisitions and additional investments made in the business to support future growth.

Income Taxes

Income taxes for the quarter ended September 30, 2021 were at an effective rate of (2.4)% of consolidated earnings before income taxes compared to 15.1% for the quarter ended September 30, 2020. The change in the Company’s tax rate for the quarter ended September 30, 2021 was driven by discrete tax items of $17.7 million compared to prior year discrete tax items of $4.2 million as further discussed in Note 12. 

The forecasted tax rate as of the first fiscal quarter of 2022 before discrete items is 23.9% compared to the prior year forecasted tax rate before discrete items of 25.7%. Excluding the impact of discrete items, the Company expects the consolidated income tax rate for the remainder of fiscal 2022 to range from 23% to 28%.

Net Earnings

Non-GAAP adjusted consolidated net earnings are as follows:

		Quarter Ended
		September 30,
		2021				2020
Net earnings before taxes - GAAP		$	67,383			$	39,339
Identified adjustments attributable to Bio-Techne:
Costs recognized upon sale of acquired inventory			1,512				-
Amortization of intangibles			18,389				15,501
Acquisition related expenses			(2,262	)			230
Stock-based compensation, inclusive of employer taxes			13,860				13,333
Restructuring costs			1,185				-
Realized (gain) loss on investments and other			(6,235	)			4,351
Impact of non-controlling interest (pre-tax)			1,562
Non-GAAP adjusted net earnings attributable to Bio-Techne		$	95,394			$	72,754
Non-GAAP tax rate			21.0	%			21.5	%
Non-GAAP tax expense			20,033				15,609
Non-GAAP adjusted net earnings attributable to Bio-Techne			75,361				57,145
Earnings per share - diluted - Adjusted		$	1.83			$	1.43

Depending on the nature of discrete tax items, our reported tax rate may not be consistent on a period to period basis. The Company independently calculates a non-GAAP adjusted tax rate considering the impact of discrete items and jurisdictional mix of the identified non-GAAP adjustments. The following table summarizes the reported GAAP tax rate and the effective Non-GAAP adjusted tax rate for the quarter ended September 30, 2021 and September 30, 2020.

		Quarter Ended
		September 30,
		2021				2020
GAAP effective tax rate			(2.4	)%			15.1	%
Discrete items			26.3				10.6
Annual tax forecast update			-				-
Long-term GAAP tax rate			23.9	%			25.7	%
Rate impact items
Stock based compensation			(2.1	)			(3.7	)%
Other			(0.8	)			(0.5	)
Total rate impact items			(2.9	)%			(4.2	)%
Non-GAAP adjusted tax rate			21.0	%			21.5	%

The difference between the reported GAAP tax rate and non-GAAP tax rate applied to the identified non-GAAP adjustments for the quarter ended September 30, 2021 is primarily a result of discrete tax items, including the tax benefit of stock option exercises.

LIQUIDITY AND CAPITAL RESOURCES

As of September 30, 2021, cash and cash equivalents and available-for-sale investments were $235.1 million compared to $231.6 million as of June 30, 2021. Included in available-for-sale-investments as of September 30, 2021 was the fair value of the Company's investment in CCXI of $25.2 million. The fair value of the Company's CCXI investment at June 30, 2021 was $20.0 million.

The Company has a line-of-credit and term loan governed by the Credit Agreement. See Note 5 to the Condensed Consolidated Financial Statements for a description of the Credit Agreement.

The Company has contingent consideration payments of up to $105 million and $38 million relating to the Asuragen and B-MoGen acquisitions, respectively. The fair value of the remaining payments is $22.6 million as of September 30, 2021.

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

Cash Flows From Operating Activities

The Company generated cash of $48.4 million from operating activities in the first quarter of fiscal 2022 compared to $66.0 million in the first quarter of fiscal 2021. The decrease from the prior year was primarily due to the timing of cash payments on certain operating assets and liabilities, partially offset by an increase in year over year net earnings.

Cash Flows From Investing Activities

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

Capital expenditures for fixed assets for the first quarter of fiscal 2022 and 2021 were $6.1 million and $10.9 million, respectively. Capital expenditures for the remainder of fiscal 2022 are expected to be approximately $60 million. Capital expenditures are expected to be financed through currently available funds and cash generated from operating activities. Expected additions in fiscal 2022 is related to increasing capacity to meet expected sales growth across the Company.

Cash Flows From Financing Activities

During the first quarter of fiscal 2022 and 2021, the Company paid cash dividends of $12.5 million and $12.3 million, respectively, to all common shareholders. On November 2, 2021, the Company announced the payment of a $0.32 per share cash dividend, or approximately $12.6 million, will be payable November 26, 2021 to all common shareholders of record on November 12, 2021.

Cash of $37.9 million and $15.4 million was received during the first quarter of fiscal 2022 and 2021, respectively, from the exercise of stock options.

During the first quarter of fiscal 2022 and 2021, the Company made repayments of $51.1 million and $33.1 million, respectively, on its long-term debt balance. The Company drew $10.0 million under its revolving line-of-credit facility during the first quarter of fiscal 2022. There were no withdrawals on the line-of-credit facility during the first quarter of fiscal 2021. 

During the first quarter of fiscal 2022, the Company made payments of $0.7 million of contingent consideration payments classified as financing activities. The Company made $3.3 million in contingent consideration payments, which were classified within operating activities. No contingent consideration payments classified as either financing or operating activities were made in the first quarter of fiscal 2021.  

During the first quarter of fiscal 2022 and 2021, the Company made $23.2 million and $4.9 million in other financing payments, respectively, related to taxes paid on restricted stock units and stock options exercised through a net share settlement.   

CRITICAL ACCOUNTING POLICIES

The Company's significant accounting policies are discussed in the Company's Annual Report on Form 10-K for fiscal 2021 and are incorporated herein by reference. The application of certain of these policies requires judgments and estimates that can affect the results of operations and financial position of the Company. Judgments and estimates are used for, but not limited to, valuation of available-for-sale investments, inventory valuation and allowances, valuation of intangible assets and goodwill and valuation of investments in unconsolidated entities. There have been no significant changes in estimates in the first quarter of fiscal 2022 that would require disclosure nor have there been any changes to the Company's policies.

NON-GAAP FINANCIAL MEASURES

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

	•	Organic Growth
	•	Adjusted gross margin
	•	Adjusted net earnings
	•	Adjusted effective tax rate

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

Our non-GAAP financial measure of organic growth represents revenue growth excluding revenue from acquisitions within the preceding 12 months, the impact of foreign currency, as well as the impact of partially owned consolidated subsidiaries. Excluding these measures provides more useful period-to-period comparison of revenue results as it excludes the impact of foreign currency exchange rates, which can vary significantly from period to period, and revenue from acquisitions that would not be included in the comparable prior period. Revenues from partially owned subsidiaries consolidated in our financial statements are also excluded from our organic revenue calculation, as those revenues are not fully attributable to the Company. Revenue from partially owned subsidiaries was $413 thousand for the quarter ended September 30, 2021.

Our non-GAAP financial measures for adjusted gross margin, adjusted operating margin, and adjusted net earnings, in total and on a per share basis, exclude stock-based compensation, the costs recognized upon the sale of acquired inventory, amortization of acquisition intangibles, acquisition related expenses inclusive of the changes in fair value of contingent consideration, and other non-recurring items including non-recurring costs and gains. Stock-based compensation is excluded from non-GAAP adjusted net earnings because of the nature of this charge, specifically the varying available valuation methodologies, subjection assumptions, variety of award types, and unpredictability of amount and timing of employer related tax obligations. The Company excludes amortization of purchased intangible assets, purchase accounting adjustments, including costs recognized upon the sale of acquired inventory and acquisition-related expenses inclusive of the changes in fair value contingent consideration, and other non-recurring items including gains or losses on legal settlements and one-time assessments from this measure because they occur as a result of specific events, and are not reflective of our internal investments, the costs of developing, producing, supporting and selling our products, and the other ongoing costs to support our operating structure. Additionally, these amounts can vary significantly from period to period based on current activity. The Company also excludes revenue and expense attributable to partially owned consolidated subsidiaries in the calculation of our non-GAAP financial measures as the revenues and expenses are not fully attributable to the Company. 

The Company’s non-GAAP adjusted operating margin and adjusted net earnings, in total and on a per share basis, also excludes stock-based compensation expense, which is inclusive of the employer portion of payroll taxes on those stock awards, restructuring, impairments of equity method investments, gain and losses from investments, and certain adjustments to income tax expense. Impairments of equity investments are excluded as they are not part of our day-to-day operating decisions. Additionally, gains and losses from other investments that are either isolated or cannot be expected to occur again with any predictability are excluded. Costs related to restructuring activities, including reducing overhead and consolidating facilities, are excluded because we believe they are not indicative of our normal operating costs. The Company independently calculates a non-GAAP adjusted tax rate to be applied to the identified non-GAAP adjustments considering the impact of discrete items on these adjustments and the jurisdictional mix of the adjustments. In addition, the tax impact of other discrete and non-recurring charges which impact our reported GAAP tax rate are adjusted from net earnings. We believe these tax items can significantly affect the period-over-period assessment of operating results and not necessarily reflect costs and/or income associated with historical trends and future results.

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

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

FORWARD LOOKING INFORMATION AND CAUTIONARY STATEMENTS

This quarterly report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include those regarding the Company's expectations as to the effect of changes to accounting policies, the amount of capital expenditures for the remainder of the fiscal year, the source of funding for capital expenditure requirements, the sufficiency of currently available funds for meeting the Company's needs, the impact of fluctuations in foreign currency exchange rates, and expectations regarding gross margin fluctuations, increasing research and development expenses, increasing selling, general and administrative expenses and income tax rates. These statements involve risks and uncertainties that may affect the actual results of operations. The following important factors, among others, have affected and, in the future, could affect the Company's actual results: integration of newly acquired businesses, the introduction and acceptance of new products, general national and international economic, political, regulatory, and other conditions, increased competition, the reliance on internal manufacturing and related operations, the impact of currency exchange rate fluctuations, the recruitment and retention of qualified personnel, the impact of governmental regulation, maintenance of intellectual property rights, credit risk and fluctuation in the market value of the Company's investment portfolio, and unseen delays and expenses related to facility construction and improvements. For additional information concerning such factors, see the Company's Annual Report on Form 10-K for fiscal 2021 as filed with the Securities and Exchange Commission and Part II. Item 1A below.