Business context and reporting period
Neogen Corporation’s unaudited Form 10-Q covers the first quarter of fiscal 2021, the three months ended August 31, 2020; comparisons are with the three months ended August 31, 2019 unless stated otherwise. The company reports in Food Safety and Animal Safety, including diagnostic products, animal health products, genomics and laboratory services.
Financial performance and liquidity
| Metric | Q1 FY2021 | Q1 FY2020 |
|---|---|---|
| Revenue | $109.3 million | $101.4 million |
| Gross margin | $50.3 million; 46.0% | $48.2 million; 47.5% |
| Operating income | $18.9 million; 17.3% of revenue | $16.3 million; 16.0% |
| Net income | $15.9 million | $14.7 million |
| Diluted EPS | $0.30 | $0.28 |
| Operating cash flow | $25.1 million | $23.7 million |
- Revenue increased 8% year over year, with organic sales up 6%. Food Safety revenue rose 6% to $54.2 million; Animal Safety rose 9% to $55.1 million. International sales were 38.4% of revenue versus 37.5%.
- Gross margin declined 1.5 percentage points, chiefly from a sales mix shift toward lower-margin cleaners, disinfectants and insecticides, plus currency, freight and duty impacts. Animal Safety margin improved, supported by rodenticide sales and operating efficiencies.
- Operating expenses fell 2% to $31.4 million, primarily as pandemic-related travel and trade-show restrictions reduced costs. Net income grew about 8%; the effective tax rate increased to 19.9% from 17.0%.
- Cash and cash equivalents were $60.9 million and marketable securities $306.5 million at August 31, for combined liquidity of $367.5 million. The company reported total liabilities of $70.0 million and no outstanding borrowings on its $15 million revolving credit facility.
- Cash from operations was $25.1 million; purchases of property, equipment and other non-current intangible assets were $4.2 million. Cash and equivalents decreased $5.3 million during the quarter, while marketable securities increased.
Material changes, outlook and risks
- Growth included acquisitions completed in 2020 and the July 2020 purchase of U.S. rights to Elanco’s StandGuard product line. Organic sales rose in both segments. Management said acquisition revenues and net income were not material individually.
- Some sales were unusually strong: U.K. operations benefited from a large hand-sanitizer shipment to a government health organization; Brazil recorded a large, non-recurring insecticide sale. Increased demand for cleaners and disinfectants in China was attributed partly to African swine fever and COVID-19.
- COVID-19 affected customer demand, laboratory sample receipts and commercial activity; management also cited supply-chain precautions and reduced travel and trade-show spending. The company had not seen an appreciable increase in bad-debt write-offs as of the filing, but said it would continue monitoring receivables.
- Management provided no financial forecast and cautioned that quarterly results are not necessarily indicative of full-year results. It said existing cash, available credit and expected operating cash flow should fund foreseeable activities, but may not cover all product commercialization or acquisition plans; additional equity or other financing could be considered.
- Risks cited include COVID-19, competition, acquisition identification and integration, foreign exchange, agricultural and food-production conditions, research and development, regulation, and reliance on key employees. Currency translation reduced year-over-year comparative revenue by approximately $2.1 million.
- The company recorded a $916,000 liability for environmental remediation at its Wisconsin facility. The remediation approach and future costs remain under discussion with state regulators; a change in strategy could increase the liability and require an expense. Management did not expect other ordinary-course legal matters to materially affect results or financial position.
- The company reported compliance with credit-facility covenants and effective disclosure controls. Adoption of the new credit-loss accounting guidance had no material financial-statement impact.
Important facts for investors to verify
- How much of future growth is organic and recurring, versus acquisitions or one-time sales such as the Brazil insecticide order and U.K. sanitizer shipment.
- Whether gross margin stabilizes after the unfavorable product and geographic mix, currency, freight and duty effects.
- Ongoing COVID-19 effects on customer demand, laboratory sample volumes, supply chains and receivable collectability.
- The outcome and potential cost of the Wisconsin remediation review, and any changes to the recorded $916,000 liability.
- Whether acquisition-related payments, contingent consideration, commercialization plans or other financing needs materially change liquidity.