Neogen Corporation — Form 10-Q Summary
Business context and period: Neogen Corporation, which operates Food Safety and Animal Safety businesses, reported its unaudited first quarter of fiscal 2015, the three months ended August 31, 2014. Comparisons are with the three months ended August 31, 2013 unless otherwise noted. Dollar amounts are in millions except per-share data.
Financial performance
| Metric | Quarter ended Aug. 31, 2014 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $67.599 | $58.548 | +15.5% |
| Gross profit / margin | $34.076 / 50.4% | $30.364 / 51.9% | Margin down 1.5 percentage points |
| Operating income | $13.439 | $12.418 | +8.2% |
| Net income attributable to Neogen | $8.883 | $7.839 | +13.3% |
| Diluted earnings per share | $0.24 | $0.21 | Up $0.03 |
| Cash from operating activities | $10.425 | $5.508 | +$4.917 |
Operating expenses rose 15.0% to $20.637 million, broadly in line with revenue growth. The income tax provision was $4.800 million versus $4.200 million. Other income included a $241,000 reversal of excess accrued SyrVet contingent consideration; the prior-year quarter included $552,000 of other expense, primarily currency-translation expense.
Business and segment results
- Food Safety: Revenue was $30.963 million, up 3.2%; segment operating income was $7.515 million versus $8.701 million. Natural toxins, allergens and drug residues declined 2.7%, partly reflecting clean crops, distributor order timing, and delays in a product launch in Eastern Europe. Dehydrated culture media and other grew 15.1%.
- Animal Safety: Revenue was $36.636 million, up 28.3%; segment operating income was $6.705 million versus $4.420 million. Growth included $8.5 million of sales from recent acquisitions across the company, including SyrVet, Prima Tech and Chem-Tech. Rodenticides, disinfectants and insecticides rose 64.9%, including $5.1 million from Chem-Tech; veterinary instruments and disposables rose 55.6%.
- DNA testing service revenue increased 12.4% to $6.474 million, supported by a chicken-genotyping research project and porcine-market growth. International sales were 37.0% of total sales versus 42.3%; management attributed the lower share partly to Chem-Tech’s domestic sales and timing of international orders.
Financial position and liquidity
At August 31, 2014, cash and cash equivalents were $53.457 million, marketable securities were $34.640 million, and their combined balance was $88.097 million, up from $76.496 million at May 31, 2014. Total assets were $357.662 million and total liabilities were $38.797 million. The company had no outstanding borrowings under its $12 million unsecured revolving credit facility, which matures September 1, 2017; it reported compliance with its financial covenants. The facility’s stated interest rate was 1.16% at quarter-end.
Operating cash flow was $10.425 million. Investing activities used $1.330 million, including $2.511 million for property, equipment and other noncurrent assets; financing activities provided $3.798 million, mainly from stock-option exercises and related tax benefits. Inventories increased $3.909 million, or 7.6%, from May 31, primarily in the Animal Safety distribution business. Management 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.
Changes, outlook and risks
- Revenue growth was driven substantially by Animal Safety and acquisitions, while Food Safety grew more modestly. Animal Safety increased from 48.8% to 54.2% of sales; management cited this mix shift as the primary reason gross margin fell year over year. Gross margin improved 2.8 percentage points from the prior fiscal fourth quarter.
- Management provided no forecast of future performance. It expressed optimism about long-term prospects but cautioned that quarterly results are not necessarily indicative of full-year results.
- Risks identified include competition; recruiting and retaining key employees; weather effects on agriculture and food production; acquisition identification and integration; research and development; intellectual-property protection; regulation; foreign-exchange fluctuations; and foreign-market economic weakness. The company uses derivatives to help manage some currency exposure.
- The company reported an estimated $916,000 liability for environmental remediation and monitoring at its Randolph, Wisconsin facility, measured over an estimated 15-year period. Management did not expect ordinary-course legal proceedings to materially affect results or financial position; it reported no significant changes to previously disclosed contractual obligations or contingencies.
- Other notable items: no options were granted in the quarter; share-based compensation expense was $907,000. A $12 million revolving credit line was undrawn. The quarter included a $689,000 payment of SyrVet contingent consideration, with the remaining $241,000 accrual reversed to income.
Investor verification priorities
- Assess how much reported growth is organic versus acquisition-related, and whether acquired businesses sustain their contribution.
- Track gross margin and segment profitability as the revenue mix shifts toward Animal Safety.
- Monitor Food Safety product and regional trends, including drug-residue order timing and the delayed Eastern European product launch.
- Verify inventory growth, inventory-turn improvement, and subsequent operating cash flow.
- Review contingent consideration estimates, environmental remediation costs, foreign-exchange exposure, and any future financing needs.