Neogen Corporation — Q1 FY2012 Form 10-Q
Reporting period: Three months ended August 31, 2011; comparative period ended August 31, 2010. Neogen operates Food Safety and Animal Safety businesses. The interim financial statements are unaudited, and management cautions that quarterly results are not necessarily indicative of full-year results.
Financial performance
| Metric | Q1 FY2012 | Q1 FY2011 | Change |
|---|---|---|---|
| Net sales | $45.697 million | $42.923 million | +6.5% |
| Gross profit | $22.977 million | $22.767 million | +0.9% |
| Operating income | $9.350 million | $9.596 million | -2.6% |
| Net income | $6.004 million | $5.824 million | +3.1% |
| Basic / diluted EPS | $0.26 / $0.25 | $0.26 / $0.25 | Unchanged |
| Operating cash flow | $1.347 million | $11.546 million | Down $10.199 million |
Gross margin declined to 50.3% from 53.0%; operating margin declined to 20.5% from 22.4%. Management attributed the margin pressure primarily to product mix, with greater sales of lower-margin Animal Safety products, and higher operating expenses. Sales and marketing spending rose to $8.103 million from $7.512 million; research and development expense fell to $1.512 million from $1.797 million, partly due to timing of outside services.
Segments and material changes
- Food Safety: Revenue increased 4.6% to $23.282 million. Bacteria and general sanitation products grew 20.3%, while dehydrated culture media and other revenue fell 9.9%, primarily on lower sales to certain international distributors. VeroMara contributed approximately 0.5% to Food Safety revenue.
- Animal Safety: Revenue increased 8.4% to $22.415 million. Veterinary instruments and other products rose 24.6%, and rodenticides and disinfectants rose 16.3%. DNA testing revenue fell 20.5%, as prior-year product demand and opportunistic contracts did not repeat; management said the timing and amount of such contracts are unpredictable. Vaccine revenue fell 16.3%, attributed to distributor-order timing.
- International markets accounted for 41.4% of revenue. Management described revenue growth as almost entirely organic, apart from VeroMara’s contribution.
- Net income increased despite lower operating income; the prior-year quarter included a $300,000 charge to increase the GeneSeek contingent-payment liability, versus $26,000 in Q1 FY2012.
Cash, liquidity, debt, and acquisitions
At August 31, 2011, cash and cash equivalents were $22.032 million and marketable securities were $29.325 million, totaling $51.357 million, compared with $56.083 million at May 31, 2011. Cash and securities shifted during the quarter; cash declined $13.812 million. Operating cash flow was $1.347 million, with working-capital use including a $4.039 million increase in receivables and a $2.208 million increase in inventory. Investing cash outflow was $16.724 million, including $6.827 million for property, equipment and other assets, and $810,000 for acquisitions.
Total current assets were $124.219 million and current liabilities were $18.253 million; the resulting current ratio was approximately 6.8. Total liabilities were $31.056 million and total equity was $196.566 million. The company reported no amounts drawn on its bank credit facility. The filing describes a $10 million unsecured revolving line, extended through August 31, 2013, with an additional $2 million available for foreign-currency risk-mitigation obligations. The stated borrowing rate was LIBOR plus 100 basis points; Neogen reported compliance with its financial covenants.
Neogen acquired VeroMara, a Scotland-based seafood testing laboratory, in June 2011 for approximately $800,000 cash, with a potential secondary payment of approximately $200,000. Purchase accounting was not yet complete. The company also purchased a 128,000-square-foot facility in Lexington, Kentucky, in August for $4.950 million. A $1.856 million payment related to the earlier GeneSeek acquisition was made in June; the remaining GeneSeek secondary-payment liability was approximately $2.546 million at quarter-end.
Outlook, risks, and contingencies
Neogen does not provide forecasts of future performance. Management said existing cash and marketable securities, available borrowing capacity, and expected operating cash flows should fund activities for the foreseeable future, but may not cover commercialization of products under development or potential acquisitions; equity or other financing may be considered. Management did not expect inflation and changing prices to have a material effect, citing its ability to offset input-cost increases with price increases.
Disclosed risks include competition; recruitment, retention, and reliance on key employees; weather impacts on agriculture and food production; acquisition integration; research and development; intellectual-property protection; regulation; and foreign-exchange exposure, particularly involving the U.S. dollar, British pound, and euro. The company uses derivatives to manage certain currency risks. Environmental remediation at its Randolph, Wisconsin facility carries an estimated undiscounted liability of $916,000 over an estimated 15-year period; annual remediation costs had ranged from $50,000 to $105,000 over the prior five years. Management said ordinary-course legal matters were not expected to materially affect results or financial position. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported for the quarter.
Important facts for investors to verify
- Reconcile the MD&A statement that approximately $1.525 million was generated from operations with the cash-flow statement’s $1.347 million of operating cash flow.
- Assess whether lower gross and operating margins persist as product mix and operating expenses evolve.
- Track receivables, inventory, and operating cash conversion, given their contribution to the quarter’s cash use.
- Review the final VeroMara purchase-price allocation and any contingent payment, and monitor GeneSeek contingent-payment estimates.
- Confirm the facility’s total availability and permitted uses: the filing describes a $10 million revolving line plus an additional $2 million for foreign-currency obligations.