Neogen Corporation — Form 10-Q Summary
Reporting period: Third quarter and nine months ended February 28, 2017; comparisons are to the corresponding periods of 2016. Figures below are in U.S. dollars.
Business context and results
Neogen operates in Food Safety, providing testing products and related services, and Animal Safety, providing animal health products, biosecurity products and genomic testing services.
| Metric | Three months | Nine months |
|---|---|---|
| Revenue | $88.4 million, up 15% | $262.7 million, up 14% |
| Gross margin | $40.9 million; 46.3% versus 45.9% | $125.0 million; 47.6% versus 48.1% |
| Operating income | $14.4 million, versus $11.3 million | $45.9 million, versus $40.8 million |
| Net income attributable to Neogen | $10.3 million; diluted EPS $0.27 | $31.3 million; diluted EPS $0.82 |
| Operating cash flow | Not separately reported for the quarter | $45.2 million, versus $28.0 million |
Quarterly revenue comprised $74.0 million of product revenue and $14.4 million of service revenue. For the nine-month period, product revenue was $223.2 million and service revenue was $39.6 million. Organic sales growth was 5% for both periods, with acquisitions contributing substantially to reported growth.
Financial position, liquidity and cash flow
- At February 28, 2017, cash and cash equivalents were $59.9 million and marketable securities were $64.7 million, totaling $124.6 million. The comparable total at May 31, 2016 was $107.8 million.
- Total assets were $507.3 million and total equity was $451.7 million. Current assets were $276.8 million versus current liabilities of $34.7 million.
- Cash from operations of $45.2 million was offset by $59.2 million of net investing cash outflow, including $34.0 million for acquisitions and $13.0 million for property, equipment and other non-current intangible assets. Financing activities provided $19.5 million, principally from stock-option exercises and related tax benefits.
- Inventory increased $11.0 million, or 17%, from May 31, 2016, reflecting receipt timing, planned stocking increases and acquired inventory. Average days’ sales outstanding rose to 63 days from 61.
- No debt was outstanding under the amended $15 million unsecured revolving credit facility, which matures September 30, 2019. The company reported compliance with its financial covenants.
Material changes and management commentary
- Food Safety revenue increased 24% for the quarter and 15% year to date; Animal Safety revenue increased 8% and 12%, respectively. Acquisitions contributed $7.8 million of quarterly revenue and $19.9 million year to date.
- Recent acquisitions included Quat-Chem and Rogama, both acquired in December 2016. Management attributed growth to acquisitions, organic demand and market expansion; food safety testing and genomics were notable contributors.
- Quarterly gross margin improved, supported by genomics margins and product mix, but year-to-date gross margin declined because acquired businesses had lower margins and currency movements were adverse. Quarterly operating margin rose to 16.2% from 14.7%; year-to-date operating margin was 17.5% versus 17.6%.
- The stronger U.S. dollar reduced revenue by an estimated $1.7 million for the quarter and $5.7 million year to date, compared with constant currency. International sales represented 36.3% of quarterly revenue and 35.1% year to date.
- Animal Safety lost U.S. sales rights to a canine thyroid replacement product after a competitor received FDA approval and exclusive marketing rights. The product generated $6.6 million in fiscal 2016 sales; Neogen stated that it would not regain the ability to sell it in the current fiscal year.
- Other income included a $660,000 gain from settling a licensing agreement. Year-to-date other income was $1.8 million, compared with a $492,000 other expense in the prior-year period. The quarterly effective tax rate was 34.0%, compared with 28.8% a year earlier; the prior-year quarter benefited from tax-credit and deduction adjustments.
Outlook, risks and contingencies
Management does not provide forecasts of future financial performance, though it expressed optimism about long-term prospects. It believes existing cash, marketable securities, available credit and expected operating cash flow should fund activities for the foreseeable future, but noted that these resources may not cover commercialization plans or future acquisitions; additional equity or other financing may be considered.
- Risks identified include competition, reliance on key employees, weather effects on agriculture and food production, acquisition identification and integration, research and development, intellectual-property protection, regulation and foreign-exchange movements. The company uses forward contracts to mitigate some currency exposure.
- The company reported a $916,000 estimated environmental-remediation liability for its Randolph, Wisconsin facility, including $60,000 classified as current. Management stated that ordinary-course legal matters were not expected to have a material effect.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
- The filing notes that interim results are not necessarily indicative of full-year results. Management also stated that inflation and changing prices were not expected to have a material operational effect, based on its expectation of offsetting costs through pricing or efficiencies.
Important facts for investors to verify
- How much reported growth and future performance depend on acquisitions versus organic growth, and whether acquired businesses achieve expected integration and margins.
- The ongoing impact of losing the canine thyroid replacement product and the timing and prospects for any regulatory approval to resume sales.
- Whether inventory growth, currency movements and lower acquired-business margins affect cash conversion and profitability in subsequent periods.
- The potential funding needs for product commercialization and acquisitions, given management’s stated possibility of additional financing.
- Progress on the $916,000 environmental obligation and the final purchase-price allocations and contingent consideration for recent acquisitions.