Neogen Corporation — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended February 29, 2016, compared with the periods ended February 28, 2015. The request metadata says “2015 Q3,” but the filing itself reports fiscal 2016 Q3.
Financial performance
| Metric | Three months | Nine months |
|---|---|---|
| Revenue | $76.7 million, up 12.2% | $231.2 million, up 13.1% |
| Gross margin | $35.2 million; 45.9% vs. 49.3% | $111.2 million; 48.1% vs. 49.9% |
| Operating income | $11.3 million; 14.7% of revenue, vs. $12.2 million; 17.8% | $40.8 million; 17.6% of revenue, vs. $38.5 million; 18.8% |
| Net income | $8.3 million vs. $7.4 million; diluted EPS $0.22 vs. $0.20 | $26.7 million vs. $24.1 million; diluted EPS $0.71 vs. $0.65 |
| Operating cash flow | Not separately reported for the quarter | $28.0 million vs. $33.5 million |
Quarterly revenue growth included product revenue of $64.4 million and service revenue of $12.3 million. Organic sales grew 10.0% in the quarter and 10.4% year to date; acquisitions contributed $1.5 million and $5.5 million, respectively. Food Safety revenue rose 8.2% for the quarter and 10.9% year to date; Animal Safety rose 15.6% and 15.0%.
Liquidity, balance sheet and cash flows
- Cash and cash equivalents were $66.9 million and marketable securities $58.3 million at February 29, 2016, totaling $125.2 million, compared with $114.2 million at May 31, 2015.
- Current assets were $254.9 million and current liabilities $27.8 million. Total liabilities were $44.4 million; the company reported no debt outstanding and had an undrawn $12.0 million revolving credit facility, maturing September 2017. It was in compliance with its financial covenants.
- Nine-month investing cash outflow was $38.0 million, including $11.1 million for property, equipment and other noncurrent assets and $16.6 million for acquisitions. Financing cash inflow was $11.0 million, primarily from stock option exercises and related tax benefits. Cash increased $0.8 million to $66.9 million.
- Inventory increased $13.8 million, or 26.8%, from May 31, 2015, reflecting efforts to improve service levels and reduce backorders, order timing, new-business stocking and acquired inventory. Receivables declined 5.2%; days sales outstanding improved from 63 to 61.
Changes, management commentary and outlook
- Revenue growth was broad, with notable gains in Animal Care and Other, rodenticides, and DNA testing services. Management attributed growth to organic demand, distribution and customer relationships, and acquisitions including Lab M, Sterling Test House and Virbac rodenticide assets.
- Gross margin and operating margin declined despite higher sales. Management cited unfavorable product and service mix, a larger contribution from lower-margin Animal Safety, currency effects, and Mexican standard-cost adjustments. Operating expenses rose, though they declined as a percentage of sales.
- Foreign exchange remained a headwind: management estimated revenue would have been $1.8 million higher for the quarter and $6.3 million higher year to date at constant currency. The company uses currency derivatives; quarterly other income included net currency gains, while year-to-date results included currency losses.
- The quarterly effective tax rate fell to 28.8% from 36.3%, reflecting tax-credit and domestic-production-deduction reviews, an amended fiscal 2012 return, and a fiscal 2015 return-to-provision adjustment. The company planned to amend fiscal 2013 and 2014 returns in Q4 and expected the rate to return to approximately 36% in fiscal 2017.
- Management does not provide forecasts. It said existing cash, securities, available credit and expected operating cash flow should fund foreseeable activities, but could be insufficient for product commercialization or acquisitions; equity or other financing could be considered. The filing states results for the interim periods are not necessarily indicative of full-year results.
Risks, contingencies and unusual items
- Key disclosed risks include competition, recruiting and retaining key employees, weather impacts on agriculture and food production, acquisition identification and integration, R&D execution, intellectual-property protection, regulation, and foreign-exchange and foreign-market exposure.
- The company reported a $916,000 estimated environmental remediation liability for its Randolph, Wisconsin facility, measured undiscounted over an estimated 15 years. Management said ordinary-course legal matters were not expected to materially affect results or financial position.
- Acquisition accounting includes preliminary purchase-price allocations for recent purchases, including Lab M and Virbac assets. Goodwill and intangible-asset valuations and integration outcomes merit attention.
Important facts for investors to verify
- Whether organic growth and segment momentum continue, particularly in Animal Safety, DNA testing and food-safety products, and how much growth reflects acquisitions.
- Whether gross-margin pressure from mix, currency and operating costs persists or reverses.
- Whether inventory growth converts to sales and cash without increasing obsolescence or working-capital strain.
- The results and cash/tax effects of planned amended tax returns, and whether the effective tax rate moves toward the stated fiscal 2017 expectation.
- Acquisition integration, preliminary purchase-price accounting, and the environmental liability and other contingencies.