Bio-Techne Corp (TECH) 2015 Q3 法說會逐字稿

Good morning, and thank you for joining us as we discuss the third quarter results of fiscal year 2015. Also on the call this morning is Chuck Kummeth, Chief Executive Officer of Bio-Techne.

Before we begin, let me briefly cover our Safe Harbor statement. Some of the remarks made during this conference call may be considered forward-looking statements. The Company's 10-K for fiscal year 2014 identifies certain factors that can cause the Company's actual results to differ materially from those projected in the forward-looking statements made during this call.

The Company does not undertake to update any forward-looking statements as a result of any new information, or future events or developments. The 10-K, as well as the Company's other SEC filings are available on the Company's website within its Investor Relations section.

During the call, non-GAAP financial measures may be used to provide information pertinent to ongoing business performance. Tables reconciling these measures to the most comparable GAAP measures are available in the Company's press release, issued earlier this morning, or on the Bio-Techne Corporation website at www.bio-techne.com.

One other item before we get started. As I've mentioned in previous quarter calls, please note that the commentary today regarding the total Company's Q3 organic growth by end market and geography does not include the performance of our Protein Platform segment.

Now I'll turn the call over to Chuck.

Thanks, Jim, and good morning, everyone. Thank you for joining us today for our third quarter earnings call.

This morning we reported a 19% increase in revenue for the third quarter, driven by our recent deployment of capital in the form of acquisitions. Organic growth, however, was essentially flat compared to the same period last year.

When we break down our revenue results by business, by platform, and by geography, a different picture of the business emerges, which gives us confidence that the current circumstances are temporary, and mask the fundamental solid execution of our continuing strategies to drive long-term growth for the Company and create value for our stakeholders.

Our strongest product line, proteins, and what we are most well-known for, experienced the best growth in Q3 compared to the previous eight quarters. Antibodies, on the other hand, continue to experience the negative effects of an extremely competitive landscape. We are working hard on our integrated strategies involving Novus Biologicals, branded products, and improving our customer website experience, especially to price-sensitive customers like academics that drive the largest market demand for antibodies.

In North America, we continue to experience stable organic growth. In this region, our Biopharma end markets were especially strong, experiencing double-digit growth. Both our US sales team and the Fisher partnership remain focused on engaging customers and understanding their specific needs via our new trade show investments and strategies.

In Europe, too, we experienced solid organic growth in most countries, the one exception being Germany, where the pharma market there is still in between major research product cycles for us. You may recall that we experienced 20% growth in Germany last year, largely driven by pharma, and making for a difficult comp this year.

When we look at our results in Asia, China continues to perform very well, despite the continued apprehension in the overall market brought on by the Chinese government anti-corruption auditing activities. We expect to see continued strength in China as the increase in government-funded research, as approved in their most recent 5-year plan, starts to get released and audit activities wind down.

For the full year, we still expect China to perform similar to last year, with well over 20% organic growth. This is supported by a strong fourth quarter currently being experienced.

Japan, on the other hand, and to a lesser extent other Pac-Rim markets, were negatively impacted by the strength of the US dollar. Here, distributors reduced inventories in the wake of volatile exchange rates. When currency markets stabilize and inventories run low, we expect the Pac-Rim region to return back to growth.

In our Clinical Controls segment, our hematology controls business continued to execute well, growing at 7%. However, our blood glucose and blood gas business experienced delays on several key new projects at large OEM customers. We are very excited about the funnel of projects that we have in this business and have focused on the (inaudible) acquisition.

Contracts are in place, but timing is beyond our control, and we expect results in the next couple quarters. These projects involve the transfers of specific customers' in-house controls and packaging operations to our facility in Devens, Massachusetts. As these transfers begin to occur in Q4, we believe we will see growth rates in this part of the segment near those in the hematology controls business.

Finally, our Protein Platform segment continued to post strong growth, with organic growth at 23% on a stand-alone basis. Our teams from both R&D systems and ProteinSimple continue to work very closely together to expand the portfolio of qualified antibodies in the Simple Western platform, as well as developing assays for the SimplePlex platform and rationalizing operational strengths in the manufacture of instruments versus reagents for consumables.

Speaking of operational strengths, the teams across all businesses have done an exceptional job finding savings and achieving productivity in their work flows, which have allowed for both gross and operating margins to expand in Q3 versus last year in our organic business, despite the heavy negative impact that currency translation has had as a result of the strengthened dollar, and especially the weaker euro.

I am proud of our team's perseverance to stay focused on our strategy that should enable long-term growth and not get distracted nor deterred by short-term aberrations, and I'm especially pleased with their effort on productivity, which has enabled us to continue to make the investments needed to support our strategy, while increasing our core margins along the way.

With that, I will turn the call over to Jim for more detail on the financials before we open the line up for Q&A. Jim?

Thanks, Chuck. As on prior earnings calls, I will provide an overview of our Q3 financial performance for the total Company, then provide some color on each of our three segments.

And, as a reminder, at the total Company level, reported organic growth excludes the results of acquired companies up to the one-year anniversary date of acquisition. It also excludes the impact of foreign currency translation impact.

However, for the Protein Platform segment, we are providing organic growth on a pro forma basis as if we'd owned ProteinSimple and CyVek for all of 2014 and 2015 to give you more relevant insight into the growth performance of that segment.

So, starting with the overall financial performance of the third quarter, adjusted earnings decreased 8% to $32 million, while adjusted EPS was $0.86 versus $0.94 in the prior year. The impact of currency translation caused $0.07 of the year-over-year decline.

Under GAAP, EPS was $0.65 in Q3 compared to $0.85 in the prior year, with the decrease, including the amortization of intangibles and other costs related to acquisitions, in addition to the impact of currency translation.

On the top line, Q3 reported sales were $114.2 million, an increase of 19% year over year, and organic growth was essentially flat. Q3 sales included 23% growth from acquisitions and a negative 4% impact from foreign exchange.

Moving on to the details of the P&L, total Company adjusted gross margin came in at 72.5% in Q3, down 110 basis points from the prior year, due to the product mix change associated with the acquisitions that occurred since last year. Excluding acquisitions, gross margins were up 80 basis points compared to the prior year.

Adjusted SG&A in Q3 was 21.5% of revenue, and R&D was 9.5% of revenue. That's 800 basis points and 150 basis points higher than last year, respectively. The increases in these operating expenses were driven by the acquisitions made since Q3 of last year. The resulting adjusted operating margin for the quarter was 41.5%. Operating margin excluding the impact of acquisitions increased 60 basis points compared to Q3 of last year.

Looking at our numbers below operating income, net interest expense in Q3 was $256,000 compared to $529,000 of net interest income last year, as a result of a line of credit that was opened in July to partially fund the acquisitions of ProteinSimple and CyVek.

Our adjusted effective tax rate in Q3 was 31.4%, up 50 basis points from third quarter of last year due to acquisition and geographic mix.

The GAAP reported effective tax rate for the quarter was 37.3%, as it includes a change in the estimated state taxes owed for fiscal year 2014 and the first half of fiscal year 2015. This change in tax estimate resulted from final state income apportionment factors being determined following the recent acquisitions.

In terms of returning capital, we paid out $11.9 million in the form of dividends to our shareholders in the quarter.

Average diluted shares were 37,269,000 in Q3, and that's up 216,000 shares, or less than 1%, from last year as a result of option dilution.

Turning to cash flow in the balance sheet, $30.8 million of cash was generated from operations in the third quarter, and our investment in capital expenditures was $4.9 million. We ended the quarter with $160 million of cash and short-term available for self investment, up $20 million sequentially from the end of Q2.

Our long-term debt obligations at the end of Q3 were little changed from the end of Q2 at $187 million.

That wraps my comments on the total Company performance for the third quarter. Now I'll discuss the performance of our three business segments, starting with the Biotechnology segment.

Q3 net sales were $83.2 million, with reported growth of 4% compared to last year, and organic growth that was essentially flat. Growth from acquisitions was 7% while the impact from foreign exchange was negative 4%.

By geography, North America increased in the low single digits organically. Biopharma sales were strong in North America, with growth in the teens, while academic and government declined by low single digits during the quarter.

Europe also declined in the low single digits, but with many of the countries experiencing high-single-digit and even double-digit growth. However, this growth was more than offset by double-digit declines in Germany.

As Chuck previously mentioned, our business in Germany is being impacted by the timing of research projects in the regional biopharma market, which was experiencing a highly active cycle last year, making for a difficult year-over-year comp.

China experienced solid organic growth in the mid-teens, even with the ongoing Chinese government anti-corruption auditing activities that slow the release of research funds there.

In the Pacific Rim, sales declined in the mid-single digits, led by Japan, which decreased by the low teens. As sales in this region are handled through distributors and transacted in US dollars, the strengthening US dollar has encouraged our distribution partners to lower stocking levels until we believe exchange rates stabilize.

Adjusted operating income from the Biotechnology segment was essentially flat in Q3 compared to prior year, and adjusted operating margin was 55.6%, a decline of 200 basis points from the prior year. The lower adjusted margin percentage is attributable to a change in product mix associated with the acquisition of Novus Biologicals.

Turning now to our Clinical Controls segment, where Q3 net sales were $15.4 million, with both reported and organic growth essentially flat compared to last year. Revenue growth was strong in the hematology part of the business, however the delay of a few key OEM projects in the blood glucose and blood gas part of the business negated its overall growth. We expect these projects to begin their transfer to us in Q4, with full ramp-up in fiscal year '16.

Adjusted operating margin for the segment decreased 6% in Q3, and adjusted operating margin was 30%, a decrease of 180 basis points from the prior year. The decrease is attributable to pricing pressures in the blood glucose controls market. We expect higher margins from the new projects, beginning in Q4, that will help mitigate the pricing pressure going forward.

Moving on to our Protein Platform segment where net sales in Q3 were $15.7 million, on a pro forma basis, assuming ProteinSimple and CyVek were owned for the entire quarter in both current and prior years, organic revenue for the segment was 23%. We saw growth across all product lines, with over 200 instruments placed during the quarter.

Q3 adjusted operating margin was negative 10.9%. As independent companies, ProteinSimple and CyVek together reported negative 19.1% adjusted operating margin in the quarter ended March 31st, 2014.

That concludes my prepared comments, and with that I'll turn the call back over to the moderator to open the line for some questions.

(Operator Instructions). All right, looks like our first question comes from Paul Knight with Janney Capital. Please go ahead.

Hi, Chuck. How did the second -- excuse me, how has the current quarter resumed in terms of orders, et cetera? Is Germany back to what you think is more normal in overall orders?

Overall, we've had a much better start this quarter. Things are looking much better in a lot of areas, but not specifically Germany. Germany is a little more of the same. It's going to take another quarter or two to get back in the right cycle. These are all really large, large company deals, a lot of bulk sales, and we've reached out. We've actually been working there. It's just cycle timing.

But probably not much this quarter yet. Maybe a little bit better, but not like last year.

Did you lose additional days sales to weather this quarter versus last year?

We lost three, like everybody else, so it was comparable to the same three or four we lost last year. So, it was really no change there, no additional.

And what -- just lastly, what are you doing specifically to kind of recover from currency? Are you adjusting pricing? And how quickly does that get changed?

I'll let Jim handle that. We're looking at a couple things.

Well, I mean, first of all, on the cost side, we're definitely driving productivity for a number of reasons, but everyone, internally, obviously, is aware of the pressure that FX is putting on the business. And the fact that our core gross and operating margins actually increased year over year with that FX headwind, I think, goes to the effort that we're doing internally to try to mitigate as much of that pressure as we can.

With regards to any kind of hedging activity, we're not interested in doing that.

With regards to pricing, the only area where that could come into play, potentially, would be in Japan, the Pac-Rim, but the reality is that most of the competition there is in the same boat we are, and there's not a lot of internally sourced competition. So, we're not seeing price decreases coming competitively yet. So, we believe that this kind of reduction in inventories will play itself out, and we hope the business can come back at our historical pricing levels.

And then, lastly, the reagent products, I think, were introduced for ProteinSimple in Q -- in the March period. Are you seeing traction with that antibody catalog edition?

Yes, we are, actually. We're seeing a lot of good strong traction. We have well over 600 in the catalog. We'll (inaudible) this calendar year. And traction is beginning.

Thanks.

Our next question comes from Jeff Elliott with Robert W. Baird. Please go ahead.

Hi, guys. This is [Catherine] filling in for Jeff. We were wondering if you could give us any color on the Protein Platforms margins. Any reason that they've gone negative?

Well, I think year on year we've actually made a big improvement, over 10 points. It's probably -- it's more aligned with CyVek being part of it, and --.

I'd also suggested the revenue profile of the business, as well. So --.

Yes, the instrument business has a cycle that's a little bit different than our consumable business in that the calendar -- the December calendar year, given that it's a year end for many customers' CapEx budgets, as well as our own fiscal year end tend to be the stronger quarters for the instruments.

And so, with a lower revenue dip that naturally occurs in Q1, it's not so much the cost structure increase, it was more of a cycle in the lower revenue dip.

You've got to remember, this is an instrument business. Our -- it's very different than our normal consumable business that we are much run-ready. So, end of calendar year, end of our fiscal year will be the better quarters. So, you'll see better results this quarter, just because of the cycle time. But this last quarter is a natural. That was -- they were really right in line, actually, where they need to be.

We've had the normal things to work with, with products coming up to speed and stuff. We had -- we actually had a couple weeks where we had a slowdown due to some issues, which was published. We had the same kind of thing last quarter, which wasn't published. It's this all normal sort of stuff.

We've had -- our backlog's been totally done with and taken care of by end of the quarter. So, this is actually the normal kind of cycle quarter for that business.

23% organic growth is above our model for this acquisition. So, we're hoping for 25% or better this quarter. We'll see.

So, going forward, I guess, how shall we think about those margins? Just think about them on the instrument cycle?

Well, it was all kind of put out in the S-1, and kind of -- we've talked about it, that they were in the high 60s, overall. I think that will come down as we meld in the CyVek numbers, but ProteinSimple on its own would be, we always think, hopefully, north of 55% gross margins.

With a little extra volume, and the strong IP holding out, 70 is still a goal for us, but we haven't achieved that yet.

All right, thank you.

The next question comes from Dan Leonard with Leerink. Please go ahead.

Thank you. Thank you. A couple on the Protein Platforms business.

First off, could you put the 200 instrument placements in the quarter in context? How does that compare, year over year, and is that mix mostly West? And any other color you could offer?

Well, I don't have the numbers in front of me. Jim does. I'll let him comment in a second. From a high level, we're actually right on target, on forecast in the imaging section of the business. And the other two, the Simple Western, is roughly comparable to the biological side. And both are kind of where they need to be.

I'd say biologicals were a little hair above where we expected and Simple Western maybe just a hair below, but nothing out of the ordinary for the -- kind of -- it's hard to divide up and get too much into 200 instruments, total, across the board, right? It's just not granular enough.

I guess all I would add to that is that -- give some color to the numbers. We've gotten some questions about instruments, so I thought I'd put it out there, but I think the number of instruments is -- year over year is comparable to the revenue growth that you see.

With regards to what the breakdown of that looks like, as a reminder, we have three product lines -- imagers, biologics, as well as Simple Western. And the price points of those instruments vary quite a bit.

So, for example, we have -- the biologic instruments are over $100,000. We have large Simple Western instruments that could be as much as $300,000, and then we have the desktop Simple Westerns, which can be $50,000 to $60,000, and then the imagers that are much lower.

So, the number of instruments can mix -- can vary quite a bit, depending on the profile.

Right. Just timing on one or two of what we call the big [Sues] at $300,000 an instrument, can dramatically change the outlook of a quarter for us. So --.

Okay. That's helpful. And then, secondly, my follow-up, I was curious if you can quantify the various timing issues you spiked out in the press release as impacting the quarter?

And regarding Germany, did you just have more customer concentration in Germany than you do elsewhere, and that's why that's worth calling out?

Thank you.

We do. We have strong relations with the largest biopharma in Germany. And you know the characters. I don't want to comment on their businesses, but they're all strong with us, and last year was an exceptionally good year.

We sell a lot of what we call bulks to them, all right? So, these are large orders.

I'd say in Germany, roughly 20% of our revenue in Europe is concentrated in Germany.

Yes, actually, it's 23 --.

It's over 20, yes.

And just in terms of the variance versus plan, if you think about the issues, divided between Germany, the OEM in Clinical Controls, and the third, is there a relative contribution you could offer?

I'm sorry. Could you repeat that question one more time? It didn't come across clear.

Yes. So, the three issues you spiked out in the press release as timing related, one was Germany. The other was Japan currency, and then the final was Clinical Controls. Is there like a contribution you could offer in terms of how much each of those issues contributed to variance versus your plan? Was it a third, a third, a third? Or was one of them more impactful than another?

Honestly, I'd say they were all fairly comparable in their impact, which is why we called them out.

Yes, they're all --.

Got it.

None of them are hugely materially or large, but all together, there's a couple points.

Okay, thank you.

I would like to point out we had a pretty good US business in academia. Where we went on this call in the past and talked about our negative double-digit contraction, we were only -- we were in low single digits. So, the Fisher work relationship is still working. Our US business is doing pretty well.

It was a lot of timing issues, and I think when you consider the impact of the Japan impact, of the Controls from the Devens unit, as well as Germany, it does fill in that gap.

The US wasn't a problem at all. If we'd have been where we're at usually with these other areas, it'd had been a normal kind of quarter for us, really.

So, we feel pretty confident. These are all pretty explainable, and we can't deal -- the FX is going to cause the issue it causes. It's been dramatic enough it's caused stocking issues for us, but, as Jim said, in areas like Japan, we don't have any -- any Japanese competitors that has one-up on us, so, these inventories are the same issue for everybody, and things are going to run low, and they're going to be buying again, and we're actually already seeing a little of that.

So --.

Our next question comes from Drew Jones with Stephens Inc. Please go ahead.

Good morning, guys.

Hi, Drew.

Looking at the operating margin improvements over the past couple of quarter and the drivers there, are the gross margin improvements, and the improvements with SG&A spending, are those sustainable?

I think they are. We've had -- as you know, we've talked about our productivity projects. We're not turning this place into a Six Sigma unit or anything, but there's been a lot of good work here on the operations side, starting with a year and a half ago when we created the operations unit. We separated the business into actual factory versus what's development here, and that's actually paid off quite well.

I could get into specifics, but there's -- we're known for our quality. We're known for having lots of quality data, and these testing work flows are all being addressed. We're doing much more statistical process control. We're improving our quality, also, with respect to reducing and taking out cost. The way testing is done is just one example.

The Fisher work has created great savings for us in terms of how we buy supplies here. We've hired in-house legal counsel, which has saved us a ton of money compared to last year, farming it all out, doing five acquisitions.

I mean, I could go on and on. But I think they're all very sustainable. We're just getting started. Jim and I and others, who all come from larger companies, we're used to driving productivity targets and Lean ideas, as well as Six Sigma, and those are all taking root here, and I'm actually quite excited about continuing. It's not going to be dramatic, but I think these kinds of numbers probably should be sustainable, per your question.

Perfect. You guys have talked a lot about the antibody certification program and just -- and you touched on it a little bit earlier. Can you give us any color about that group of, I think you said, 800 that you've certified so far, how they're doing compared to the rest of the portfolio?

Well, I said 600 or so.

All right.

We'll have 1,200, 1,250 by the end of the year. These things take a little while to catch speed, because a lot of this is done over the Web, and everything else. So, there is traction. We have hundreds of orders, already, on these, and it's starting to pick up.

I guess the way to look at it from our point of view, we look at it compared to how other new reagents that we offer start out and how they're doing, and these are kind of fitting the model. For us, it's all -- we see it as all incremental upside. So, it's all good.

So, we hope it continues the track it's on. We think this is the way to go. This is why we bought ProteinSimple is to have this value-add, solutions-based focus for customers, so they don't have to fuss with the antibodies themselves. They can get these and right away have the recipe how to make these things work. And so, we want to keep driving this.

Is 600 enough? It's really not. I mean, we're getting some traction, but we need, probably, a couple thousand here. It'll take a couple of years to get this, and one of our operational strategies is to figure out how to get more of these certified.

It's just how to grind through it. It's a lot of work, and you need to get that data, and you need to verify it, and you've got the marketing, promotional, everything around it behind it, and get it all online, and it's a lot of work.

But the team has been really good at this, and we're actually right on schedule, maybe even a little ahead of schedule in our count.

And then last one from me, but just to clarify, as far as impact from the stronger dollar, the only place where you're seeing a transactional impact is Japan?

No, let me clarify that. So, I'm terms of the impact that's hitting our translational adjustments to the P&L, it's almost entirely out of Europe. With regards to Japan and the Pac-Rim, we actually sell to distributors there in US dollars.

So, there's no currently translation impact there for us. It does make the products more expensive in local currency, i.e., in yen, but, again, we're not seeing any -- there's not much in the sense of -- there's not much in the way of local competition there, and we're not seeing price reductions from competition there yet, to -- that would require us to react to it at this point.

Thanks, guys.

The next question comes from Amanda Murphy with William Blair. Please go ahead.

Hey, good morning, guys. This is actually Anthony, in for Amanda. How are you guys doing?

Doing good.

Real quickly, even as a follow-up regarding the Fisher distribution, in regard to that, I guess, could you provide a little bit more, maybe, insight or info regarding the potential upside over time?

I've been very clear about this. When we started the arrangement with them, we were looking at negative -- in the teens, double-digit of declines in our academia markets, and how to catch up. And so, one of the key things I did, starting out coming in here was to form that relationship, being I understand the Fisher model pretty well, coming from Thermo Fisher, and then Jim, as well, coming in later.

So, I've always said, getting back -- with other strategies, getting this back to even even would be great. We have bounced around between this negative 2 to positive 3 in the last couple quarters, and I expect we'll be there. I think it'll drift into low single digits and be steady there. I don't ever see Fisher getting us into double-digit gains or anything like that. It'll take other strategies.

I think the strategies like we just talked about, with certified antibodies is a better strategy for incremental growth.

But how to take on competition, how to get more of that wallet share of academia, it's all about coverage. And we have 5 reps in the key regions that help work with the bigger accounts and work with the inside sales team locally, but how do you get after those hundreds of thousands of academic researchers who largely buy online and through citations and references, et cetera?

So, the combination of Fisher with feet in the street and a better Web experience is a strategy for that. We are well on our way with Fisher. I'm very happy about the results. It's working.

It's working really well in their favor, because there is a lot of swap right now. So, their numbers look, probably, better than ours, but the net/net of it all is positive, which is what we're after, and that's how we pay them, as we've talked about in the past.

And into the coming year we're adding features and improving our website all the time. It's our single biggest adventure here in IT, and we have the folks from Novus really working on this and taking leadership roles in this. And their website and their model is very good in this, we think.

And more to come.

So, the combination should get us to low -- back to low, mid-single-digit. I think we're on track with Fisher, and it is what it is.

I also -- no one's asked, but I don't -- they're also working hard as a company to really get their Life Tech portfolio online. You've got to remember, these guys are good at dealing with millions of SKUs, and we don't see any distraction right now with Life Tech at all. We have very little overlap with them, as you know. We've talked about that last quarter. Somebody had a question.

So, no issue there, either. And the teams get along very well. It's the best non-conflict I've ever seen. So, I'm very happy.

Okay, no, and I appreciate the insight. We know it's a huge undertaking. And, as another question, in regard to the recent acquisitions, I guess, would you also be able to provide a little bit more color regarding the actual revenue contributions, or even the potential timing of synergies related from those recent acquisitions?

Well, I think you're seeing some of it here, I guess, in our margins. I mean, there are synergies coming. Again, the antibody certification programs are all sales synergies.

In terms of cost synergies, not a whole lot. Everybody knows how lean we are as a company. So, we never get in these deals for cost synergy opportunities. It's more about sales synergies.

There will be some synergies between the CyVek unit, as we integrate that into ProteinSimple, and we've seen some of that, certainly in the channel and the commercial activities.

That said, it's also got to be carefully worked, because we don't want to distract or have any dilution of the activity on the ProteinSimple channel organization. So, we've been very careful there, but there are some synergies there. And they're kind of -- the sales side, at least, things are showing up a little bit, along with the productivity numbers.

Perfect. Thank you. And then, lastly, would you be able to provide just a little bit more insight, as well, just regarding M&A going forward?

Well, as you know, things aren't real cheap out there right now. We're -- we've actually been hunting as much as we've ever been hunting. And we have been fairly quiet for nine months here, or so, but we've been very active. You just don't see it, or hear about it.

And, as I've repeatedly said, and Jim's here to make sure I'm always honest on it, we aren't going to do a bad deal. So, we've been engaged and we've walked away from some. We're looking at some.

We're still interested in our primary strategies. We're interested in doing more to create more critical mass in our clinical and control segment, especially as it relates to more on the regulated side, or more towards diagnostics, or point-of-care type of direction, which that industry is going.

We're interested in diagnostics. We're interested in diagnostics in China. We're interested in other solutions like ProteinSimple that can give us platforms that can leverage our content here.

So, those are still the strategies, and we're engaged in some, and I can't comment further. They get done when they get done, and they -- we'll do a deal when it makes sense.

There's been no change in our philosophy or our intent, or our hunger, okay? We have a strong balance sheet. We've got lots of debt capacity to take on yet, even to stay well safe beyond covenants. We're at roughly flat here, when you look at our cash we have with what we have for debt.

And so, we just need some better deals.

Thank you, again, for the insight, guys.

Yep.

The next question comes from Thomas DeBourcy with Alger. Please go ahead.

Hello?

Thomas, your line is open. Did you have a question?

Okay, the next question in queue comes from Bryan Kipp with Janney Capital. Please go ahead.

Hi, guys. Quick follow-up here. I know PrimeGene you had a deferred lumpy order in 2Q. Did that come through in 3Q? I know you continue to cite 20%-plus organic growth in China. So, just trying to think in context.

Yes, our PrimeGene unit is roughly half, I'm going to call it OEM, lumpy order side, and half on a branded commercial retail kind of business model. We're more focused on trying to expand that side of it if we can for China, and leverage them as a factory for China.

We're want to drive this OEM business, as best as we can, even globally, but that's hard, which is one reason they were coming to help. So, there's been some lumpiness. This quarter is starting out better. Some are coming through, and it's not a large business, so, it's not that material, but we're very happy.

So far, we've not lost a single employee there, and that's really something to say about in China. And they're working on a new factory. So, we bought them when they were kind of just getting started. They're very well connected with Fudan University, and we have a brand new facility (inaudible) ready by mid-summer, for an expansion with their business and give us a lot more GMP capability.

So, a lot of good stuff to come. Hopefully, more China for China, but the OEM segment is still important. We're trying to drive that, but, obviously, it's more competitive, and trying to get that work on orders that may be over in Europe is difficult, as well, right now.

So -- but a little better.

As a reminder, I'll add that we'll just passed our one-year anniversary of acquiring PrimeGene here in April. So, in Q4 those results will be included in our organic growth figures for China.

Helpful. And then, any utilization color you guys can give around ProteinSimple? I know the 600 proteins that you guys are augmenting to the platform, et cetera. Are you seeing utilization rates increase among the already-placed instruments?

Utilization?

On consumables?

Consumables? Well, certainly on these, yes. I mean, it's all brand-incremental.

In terms of what else is being bought for those machines, it's probably hard to get that actual data. In general, our biggest area has been competition with antibodies. So, I think we're still a quarter or a couple away of getting new strategies that have traction.

I can tell you that we have quite a few machines ourselves here in Minneapolis and used -- being used in development, and we're using a lot of content on them. So, hopefully, everybody else is, as well as we. As more installs happen, there'll be more purchases.

They do, even on their websites, they do support other companies' products, as well. This is not a closed system. It's an open system, which we're very okay with. We'll try to drive for more wallet share by earning it, and so far, so good.

Okay, appreciate it. And the last one for me is I know you guys have tried to right-size the portfolio for the most part, focus on core verticals and products, et cetera. What kind of run-off are you seeing from legacy products where maybe you're not investing in or maybe you're just letting fall to the wayside? Are you seeing 1% to 2% pressure there, or is it more now?

Very little. As you've all seen the chart where we have this reverse waterfall where everything gets kind of built. The life cycle is kind of forever here.

We've not end-of-lifed a whole lot of anything here on the content side. Now, we've done some good work on our inventory, and our stock and cost reductions there. I mean, we quite literally have things in our warehouse that have been here for like 20 years and are still good and still salable, but I'm not sure we need all of it. So, things like that have been dealt with.

But in terms of taking out SKUs or SKU reduction, as you have also commented in the past, the carrying cost of these products is almost nothing. So, there just isn't the kind of complexity around having these products there that are in other business models.

I think the complexity comes on the website and supporting everything online and, as you well also know, we don't have a single product over -- in the reagent side over $2 million. So, it's very well evenly dispersed, and our biggest seller is almost our oldest product.

So, it doesn't really mean much about the age of a SKU to be where it's going to be. And things can be rejuvenated. I mean, we can have something kind of go soft for a couple years, and thinking that, well, maybe that one's done, and then somebody writes the right paper and, guess what? Activity increases tenfold again. So, it's kind of a strange model that way.

Appreciate it, guys. Thanks for all the color.

(Operator Instructions). There are no other questions in queue.

All right. Again, we took more time than usual. That's good. Good questions.

We're very happy with a lot of the results. We're disappointed, of course, with some. It would have been nice to have been at 2% or 3% growth, but timing issues really were everything on this stuff.

I'd like to thank all of you. I know our teams are working hard here, never harder, and we'll be back to talk to you again next quarter. Thank you.