Neogen Corporation — Form 10-Q Summary
Reporting period: Fiscal third quarter ended February 28, 2013, with year-to-date results for the nine months ended that date. Comparisons are with the corresponding 2012 periods. Amounts below are in U.S. dollars; financial statement figures are in millions unless stated otherwise.
Business context
Neogen operates through Food Safety, which sells diagnostic testing products, and Animal Safety, which sells animal health products and genetic identification services. The company reported 8.8% organic sales growth for both the quarter and nine-month period; additional growth came from acquisitions.
Financial performance
| Metric | Quarter 2013 | Quarter 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | $51.1 | $44.9 | $151.5 | $135.5 |
| Gross margin | $27.3 | $22.9 | $81.1 | $68.5 |
| Gross margin percentage | 53.5% | 51.0% | 53.5% | 50.6% |
| Operating income | $9.7 | $7.5 | $30.5 | $25.0 |
| Net income attributable to Neogen | $6.7 | $5.2 | $20.2 | $16.5 |
| Diluted earnings per share | $0.27 | $0.22 | $0.83 | $0.69 |
- Sales increased 13.7% for the quarter and 11.8% year to date. Food Safety sales rose 15.5% and 15.3%, respectively; Animal Safety sales rose 12.0% and 8.4%.
- Operating margin improved to 18.9% from 16.8% for the quarter and to 20.1% from 18.5% year to date. Operating expenses increased 15.0% for the quarter and 16.5% year to date, led by sales and marketing investment, with higher R&D and other costs also noted.
- Net cash provided by operating activities was $19.7 million for nine months, up from $13.2 million. Investing activities used $26.2 million, including $13.3 million for businesses and $6.8 million for property, equipment and other assets. Financing activities provided $6.4 million. Cash and cash equivalents ended at $48.9 million, versus $49.0 million at May 31, 2012.
- Cash, cash equivalents and marketable securities totaled $74.6 million, versus $68.6 million at May 31, 2012. Current assets were $160.1 million and current liabilities $22.6 million at February 28, 2013.
- No revolver borrowings were outstanding. Neogen had a $12 million unsecured revolving credit line, extended to September 1, 2014, and reported compliance with its financial covenants. Total liabilities were $35.3 million; the filing reports no long-term debt balance.
Material changes and notable items
- Neogen acquired Macleod Pharmaceuticals in October 2012 for $9.9 million net cash and Scidera Genomics in January 2013 for $3.4 million cash. These acquisitions contributed to Animal Safety growth. The company also purchased a building in Ayr, Scotland, for approximately $1.5 million.
- Management attributed gross-margin improvement to product mix, including higher-margin Food Safety diagnostics and Animal Safety products, and manufacturing efficiencies. European Food Safety sales benefited from increased demand for meat-speciation tests amid a labeling scandal, among other drivers; U.S. aflatoxin testing demand also supported sales.
- Inventory rose to $41.1 million from $35.0 million at May 31, 2012, partly to support higher sales and partly due to the Macleod acquisition. Goodwill increased to $61.7 million from $53.1 million, with acquisitions contributing to the balance-sheet change.
- The company recorded a $1.5 million liability for the final GeneSeek contingent payment, expected to be paid in the fourth quarter of fiscal 2013. The quarter included a $40,000 expense from a change in purchase consideration; the filing does not provide further detail on that quarter’s change.
Outlook, risks and contingencies
Neogen stated that it does not provide forecasts. Management was optimistic about long-term prospects and believed available cash, securities, credit capacity and expected operating cash flows would fund foreseeable activities. It cautioned that these resources might not cover product commercialization or future acquisitions, and that equity issuance or other financing could be considered.
Risks identified include competition, reliance on key employees, weather effects on agriculture and food production, acquisition integration, R&D, intellectual-property protection, regulation, foreign exchange and demand in foreign markets. The company cited interest-rate and currency exposure, particularly involving the U.S. dollar, British pound and euro, and uses currency derivatives to manage certain exchange-rate effects.
Environmental remediation at the Randolph, Wisconsin facility carried an estimated $916,000 liability at February 28, 2013, measured undiscounted over an estimated 15 years; annual costs in recent years ranged from $50,000 to $105,000. Management said ordinary-course legal proceedings were not expected to materially affect results or financial position. Disclosure controls were judged effective, with no material change in internal control over financial reporting reported for the quarter.
Important facts for investors to verify
- How much of reported growth and margin improvement is sustainable organic performance versus acquisitions, favorable product mix, outbreaks, order timing and other temporary factors.
- Whether the elevated inventory and receivables convert to cash as expected, and how working-capital needs affect operating cash flow.
- Acquisition integration and performance, including the final GeneSeek contingent payment and the contribution of Macleod and Scidera.
- Whether operating-expense growth and planned product commercialization or acquisitions create a need for additional financing.
- Exposure to foreign exchange, competitive pressure in disinfectants, and the timing or variability of testing demand and agricultural conditions.