Neogen Corporation — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended February 28, 2021; comparisons are to the corresponding periods ended February 29, 2020. Financial amounts below are in U.S. dollars and rounded to millions unless otherwise stated.
Business context and reporting period
Neogen develops and sells food-safety and animal-safety products and services, including diagnostic tests, culture media, veterinary supplies, biosecurity products and genomics services. It reports Food Safety and Animal Safety segments. The interim statements are unaudited.
Financial performance and position
| Metric | Q3 FY2021 | Q3 FY2020 | Nine months FY2021 | Nine months FY2020 |
|---|---|---|---|---|
| Revenue | $116.7M | $99.9M | $341.0M | $309.1M |
| Gross margin | $53.8M; 46.1% | $45.3M; 45.4% | $157.4M; 46.1% | $144.6M; 46.8% |
| Operating income | $15.8M; 13.5% of revenue | $13.0M; 13.1% | $53.9M; 15.8% | $47.6M; 15.4% |
| Net income | $13.4M | $12.2M | $45.1M | $43.1M |
| Diluted EPS | $0.25 | $0.23 | $0.85 | $0.82 |
- Quarterly revenue increased 17% (13% organic); nine-month revenue rose 10% (8% organic). Food Safety revenue grew 16% in the quarter and 7% year to date; Animal Safety grew 18% and 13%, respectively.
- Quarterly gross margin improved 0.7 percentage points, attributed primarily to stronger sales of higher-margin rodenticides. Year-to-date margin declined 0.7 points, reflecting sales mix, including a greater contribution from Animal Safety and lower-margin product lines.
- Quarterly operating expenses rose 18% to $38.1M; year-to-date expenses increased 7% to $103.5M. General and administrative expense included $2.1M in the quarter for strategic, legal and professional work on acquisition opportunities that were not completed.
- Effective tax rate was 16.3% for the quarter and 18.1% year to date, up from 14.4% and 15.6%. The filing attributes the increase to international and state taxes and a lower projected U.S. foreign-derived income deduction; stock-option exercises reduced the effective rate.
Cash flow, liquidity and debt
- At February 28, 2021, cash and cash equivalents were $73.5M and marketable securities were $279.9M, totaling $353.3M, versus $343.7M at May 31, 2020. Current assets were $555.3M and current liabilities $45.9M.
- The cash-flow statement reports nine-month operating cash flow of $59.1M, investing cash outflow of $73.9M and financing cash inflow of $22.8M. Investing included $19.4M for property, equipment and other non-current assets and $52.0M for acquisitions. Cash increased $7.2M.
- Cash-flow discrepancy: MD&A states operating cash flow was $57.9M, while the cash-flow statement reports $59.1M; the filing text does not explain the difference.
- Total liabilities were $72.5M; the company reported no outstanding borrowings. Its unsecured revolving credit facility provides up to $15M and expires November 30, 2023. The company said it was in compliance with its financial covenants.
- Management said cash, securities, available credit and expected operating cash generation should fund foreseeable activities, but may not cover significant commercialization or acquisition plans.
Material changes, outlook and risks
- Acquisitions contributed to growth. The December 2020 Megazyme acquisition expanded food and feed diagnostic offerings; consideration included $39.8M net cash at closing, $8.6M payable in installments, $4.9M in stock and up to $2.5M contingent consideration. The company also acquired the StandGuard product line in July 2020.
- COVID-19 had mixed effects: biosecurity products and companion-animal markets benefited, while some food-safety demand—especially customers serving restaurants, bars and institutional food service—was weaker. Vendor disruption, border closures, shipping constraints and restricted travel also affected operations. Management expected impacts to continue through at least the fiscal year-end.
- Some elevated sales were described as potentially nonrecurring, including pandemic-driven demand for personal protective equipment and sanitizing products, and sales of acquired inventory of non-Neogen products. Lower travel and event spending partly offset higher shipping and protective-equipment costs.
- Management does not provide financial forecasts. It cited competition, key-employee dependence, weather, acquisition integration, R&D, intellectual-property protection, regulation, disease outbreaks including COVID-19, and foreign-exchange movements among factors that could affect results.
- The company recorded a $0.9M estimated liability for environmental remediation at its Wisconsin facility. Future costs remain uncertain while it discusses possible remediation approaches with regulators; a change in strategy could increase the liability. Management said ordinary-course legal matters were not expected to have a material effect.
- International revenue was affected by currency translation, which reduced nine-month comparative revenue by approximately $3.4M. The filing also notes lower drug-residue test-kit sales through a major European distributor.
Important facts for investors to verify
- Reconcile the $59.1M operating cash flow in the cash-flow statement with the $57.9M cited in MD&A.
- Assess how much reported growth reflects organic demand versus acquisitions, and whether pandemic-related product demand is sustainable.
- Monitor Food Safety product trends, particularly drug-residue tests, and the margin effects of segment and product mix.
- Review Megazyme integration, purchase accounting, contingent payments and acquisition-related costs, including unsuccessful acquisition efforts.
- Track the Wisconsin remediation review and any resulting change in estimated environmental liability.