Neogen Corporation — Form 10-Q Summary
Business and period: Neogen develops and markets food-safety testing products and animal-safety products and services. This unaudited filing covers the fiscal second quarter and six months ended November 30, 2014; amounts below are in U.S. dollars. The company reports Food Safety and Animal Safety segments.
Financial performance
| Metric | Three months ended Nov. 30, 2014 | Six months ended Nov. 30, 2014 |
|---|---|---|
| Revenue | $68.5 million, up 14.9% | $136.1 million, up 15.2% |
| Gross margin | $34.2 million; 50.0% of revenue, versus 49.5% | $68.3 million; 50.2%, versus 50.7% |
| Operating income | $12.9 million; 18.8% operating margin, versus 16.3% | $26.3 million; 19.4% operating margin, versus 18.7% |
| Net income attributable to Neogen | $7.8 million; $0.21 per diluted share, versus $6.2 million and $0.17 | $16.7 million; $0.45 per diluted share, versus $14.0 million and $0.38 |
Second-quarter revenue growth reflected Food Safety growth of 16.0% and Animal Safety growth of 13.8%. Company organic growth was 7.4% for the quarter and 4.2% year to date; acquisitions contributed materially, particularly to Animal Safety’s year-to-date growth. Service revenue rose 20.5% in the quarter and 18.0% year to date, driven by genomic services.
For the six months, operating cash flow was $23.4 million, compared with $10.7 million a year earlier. Investing cash outflow was $18.6 million, including $4.5 million for Biolumix and $4.7 million for property, equipment and other assets; financing cash inflow was $4.4 million. Cash and cash equivalents were $49.1 million at November 30, while cash plus marketable securities totaled $94.3 million, up from $76.5 million at May 31.
Current assets were $205.8 million and current liabilities $24.1 million at November 30. Total liabilities were $39.1 million; no revolver borrowings were outstanding. The company had an unsecured $12 million revolving credit facility, due September 2017, and reported compliance with its financial covenants. No long-term debt balance was reported.
Material changes and operating developments
- Quarterly revenue increased $8.9 million year over year; six-month revenue increased $17.9 million. Quarterly margin improvement reflected product mix and Animal Safety operating efficiencies, while the six-month gross margin percentage declined from the prior year.
- Food Safety organic revenue growth was 13.0% for the quarter and 8.0% year to date. Biolumix, acquired October 1, contributed $852,000 to reported growth in both periods.
- Animal Safety organic growth was 2.2% in the quarter and flat year to date; acquisitions—SyrVet, Prima Tech and Chem-Tech—accounted for much of reported growth. Veterinary instruments and disposables benefited from SyrVet and Prima Tech.
- Neogen do Brasil sales declined 4.1% for the quarter and 6.5% year to date, primarily due to drought-reduced milk production. Management also cited weaker meat-speciation kit sales and lower drug-residue kit sales. European genomic services and mycotoxin kits supported growth.
- At November 30, inventory was $53.5 million, up $2.3 million, or 4.5%, from May 31, mainly from Animal Safety distribution. Management said inventory had declined from August as it worked to improve inventory turns.
Outlook, risks and unusual items
- Management does not provide forecasts. It said existing cash, marketable securities, credit availability and expected operating cash flow should fund foreseeable activities, but may not cover product commercialization or future acquisitions; additional equity or other financing may be considered.
- Quarterly other expense included $454,000 of additional contingent consideration for Prima Tech. Year-to-date change in purchase consideration was a net expense of $213,000, after a $241,000 reversal related to SyrVet. Currency losses also affected results as the U.S. dollar strengthened.
- The company accrued $916,000 for environmental remediation and monitoring at its Randolph, Wisconsin facility, estimated over 15 years. Management said ordinary-course legal proceedings are not expected to materially affect results or financial position.
- Disclosed risks include competition, reliance on key employees, weather impacts on agriculture and food production, acquisition integration, R&D, intellectual property protection, regulation, foreign exchange and foreign-market demand. The company reported foreign-currency exposure, particularly to the British pound and euro, and uses derivatives to manage some currency risk.
- After quarter end, on December 8, 2014, Neogen acquired food-safety and veterinary genomic assets from Beijing Anapure for $2.04 million. The purchase allocation was incomplete at filing. The company was evaluating the impact of a new revenue-recognition standard effective for its fiscal years beginning after December 15, 2016.
Important facts for investors to verify
- How much future revenue growth is organic versus acquisition-related, particularly in Animal Safety, and whether quarterly organic growth is sustained.
- Whether gross-margin trends, inventory growth and working-capital conversion improve or weaken in subsequent periods.
- The financial contribution and final purchase accounting for Biolumix and Beijing Anapure, and the cash needs of planned acquisitions or commercialization.
- Exposure to currency movements, Brazilian drought conditions, customer credit issues, and the disclosed environmental remediation estimate.
- Whether the $454,000 Prima Tech contingent consideration and other acquisition-related estimates change as sales outcomes become clearer.