Neogen Corporation — FY2015 Form 10-K
Business context and reporting period. Neogen develops, manufactures and markets products and services for food and animal safety through its Food Safety and Animal Safety segments. This annual report covers the fiscal year ended May 31, 2015; it is not a standalone 2014 Q4 filing. Fourth-quarter figures below refer to the quarter ended May 31, 2015. The company filed the report on July 30, 2015.
Financial performance and position
| Metric | FY2015 | FY2014 | Change |
|---|---|---|---|
| Total revenue | $283.1 million | $247.4 million | +14% |
| Food Safety revenue | $131.5 million | $116.3 million | +13% |
| Animal Safety revenue | $151.6 million | $131.1 million | +16% |
| Gross margin | 49.4% | 49.6% | Down 0.2 percentage points |
| Operating income | $53.1 million | $43.4 million | +22% |
| Net income attributable to Neogen | $33.5 million | $28.2 million | +19% |
| Diluted earnings per share | $0.90 | $0.76 | Up $0.14 |
| Cash from operating activities | $43.8 million | $21.7 million | Up $22.1 million |
- Revenue comprised $247.9 million of product sales and $35.1 million of service revenue. Service revenue grew 27%, supported by genomic offerings and customer work.
- Operating margin was approximately 18.8%, compared with 17.5% in FY2014. Net margin was approximately 11.8%, versus 11.4%.
- FY2015 segment operating income was $30.3 million for Food Safety and $26.0 million for Animal Safety; corporate and eliminations were a $3.2 million expense.
- At May 31, cash and cash equivalents were $66.1 million and marketable securities were $48.1 million. Working capital was $205.7 million, versus $163.8 million a year earlier.
- Total assets were $392.2 million and total equity was $351.0 million. Long-term debt was zero; the company had no borrowings on its $12 million revolving credit facility, which expires September 1, 2017.
- Cash used for property and equipment and other noncurrent assets was $9.6 million; net cash used for acquisitions was $6.6 million. Stock option exercises provided $8.6 million.
- For the quarter ended May 31, 2015, revenue was $78.6 million, gross margin was $37.7 million, net income attributable to Neogen was $9.4 million and diluted EPS was $0.25.
Material changes versus the prior year
- Reported growth included $17.1 million of FY2015 revenue from recent acquisitions. Management reported organic growth of 10% in Food Safety and 6% in Animal Safety before adjustments for customer transfers; after those transfers, it cited 4% and 10%, respectively.
- Acquisitions included BioLumix in October 2014 and Chinese distributor Anapure’s food safety and veterinary genomics assets in December 2014. Sterling Test House in India was acquired June 1, 2015, after year-end, for $1.1 million.
- Operating expenses rose 9%, more slowly than revenue, and fell from 32.0% to 30.6% of revenue. Operating income increased 22% as scale and acquisition integration helped offset the slight gross-margin decline.
- International revenue grew 8% to $103.9 million but fell to 36.7% of total sales from 38.8%. Currency translation reduced FY2015 revenue by $3.6 million; foreign-currency translation losses also contributed to other expense.
- Food Safety growth was led by bacterial/general sanitation and culture media/other. Animal Safety benefited from instruments, biosecurity products and DNA testing; some acquired businesses contributed materially to reported growth.
Outlook, management commentary, risks and unusual items
- Management does not provide forecasts of future financial performance. It expects R&D spending to remain approximately 3%–5% of revenue and anticipates that products in development may become commercially available during FY2016–FY2018.
- Management cited long-term growth priorities including new products, broader customer use, international expansion, margins and acquisitions. It also cautioned that historical performance may not indicate future results.
- Risks include acquisition identification and integration, intense competition, product-development failure, agricultural-market cycles and weather, regulation, intellectual-property disputes, key-personnel retention, supplier and delivery dependence, distributor execution, cybersecurity, and business interruption at facilities.
- Foreign exchange is a material exposure. A stronger U.S. dollar reduced translated international revenue and Food Safety margins; the company uses derivatives to help manage certain currency exposures.
- FY2015 other expense included $1.124 million of foreign-currency translation losses and a net $297,000 expense from contingent acquisition consideration adjustments. The effective tax rate was 36%, compared with 35% in FY2014.
- Environmental remediation at the Randolph, Wisconsin facility was accrued at $916,000, including $50,000 classified as current. Management said normal-course legal proceedings were not expected to materially affect results or financial position.
- Contractual obligations totaled $50.3 million, including $49.4 million of unconditional purchase obligations due within one year; operating lease obligations totaled $894,000. The filing also reports $24.4 million of foreign subsidiary earnings intended to be indefinitely reinvested.
- The company reported effective disclosure controls and internal control over financial reporting; the independent auditor issued unqualified opinions on the financial statements and internal control.
Most important facts for investors to verify
- How much of reported growth and future earnings depends on acquired businesses, and whether organic growth persists after separating acquisition effects and customer transfers.
- Whether margins can withstand currency movements, product-mix changes and integration costs, particularly in Food Safety.
- The sustainability and composition of operating cash flow, cash and marketable securities, and the $49.4 million of near-term unconditional purchase obligations.
- Progress on planned product launches and international expansion, including the integration and performance of the China and India operations.
- Whether supplier, regulatory, intellectual-property, agricultural-market and foreign-exchange risks lead to material costs or disruption.
- The filing presents a small inconsistency in FY2015 net income attributable to Neogen: the consolidated income statement reports $33.526 million, while other summary text rounds or states $33.527 million.