Business context and reporting period
Neogen Corporation’s unaudited Form 10-Q covers the quarter and six months ended November 30, 2018, in fiscal 2019. The company sells food-safety testing and related products and animal-safety products and services, including genomics. Its reportable segments are Food Safety and Animal Safety. Dollar amounts below are in millions unless stated otherwise.
Financial performance and position
| Metric | Q2 FY2019 | Q2 FY2018 | Six months FY2019 | Six months FY2018 |
|---|---|---|---|---|
| Revenue | $107.1 | $100.7 | $206.7 | $194.9 |
| Gross margin | $50.0; 46.7% | $48.2; 47.9% | $96.8; 46.8% | $93.2; 47.8% |
| Operating income | $18.2; 17.0% of revenue | $18.0; 17.9% | $34.7; 16.8% | $34.4; 17.7% |
| Net income attributable to Neogen | $16.1 | $17.1 | $31.3 | $29.0 |
| Diluted EPS | $0.31 | $0.33 | $0.60 | $0.56 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $32.6 | $27.4 |
- Q2 revenue rose 6%, with organic sales also up 6%. Food Safety revenue increased 9% to $53.8 million; Animal Safety rose 4% to $53.3 million. Six-month revenue grew 6%; Food Safety increased 11% and Animal Safety 1%.
- Q2 revenue growth was broad in Food Safety, notably bacterial and sanitation products (+16%). Animal Safety growth included animal care (+10%) and genomics services (+6%). Management reported flat year-to-date organic sales for Animal Safety.
- For the six months, operating cash flow was $32.6 million; investing cash outflow was $23.3 million and financing cash inflow was $10.3 million. Capital and other non-current asset purchases totaled $6.7 million; acquisitions used $4.9 million.
- At November 30, cash and cash equivalents were $101.6 million and marketable securities were $139.4 million, totaling $241.0 million. Current assets were $414.3 million and current liabilities $38.8 million. Total assets were $660.5 million.
- No borrowings were outstanding under the $15 million revolving credit facility. The facility maturity was extended to September 30, 2021; the company reported compliance with its financial covenants. No long-term borrowings were reported.
Material changes, outlook, and risks
- Gross margin declined year over year, which management attributed primarily to Animal Safety product mix. Operating expenses rose 5% in Q2 and 6% year to date; higher sales and marketing costs were a key contributor. Operating income was nearly flat in Q2 and year to date.
- Q2 net income fell 6%, while six-month net income rose 8%. Management noted that the prior-year quarter benefited from $4.2 million of tax benefits from stock-option exercises, compared with $0.5 million in the current-year quarter. Effective tax rates were 18.5% versus 10.0% for Q2 and 15.1% versus 19.8% year to date.
- Foreign currency translation reduced revenue by approximately $2.0 million in Q2 and $3.3 million year to date. International sales represented 39% of Q2 revenue and 40% year-to-date revenue.
- Neogen adopted the revenue-recognition standard using full retrospective application and stated implementation had no material impact. It revised prior-period revenue and expense classifications for certain rebates, distributor support, and marketing discounts; the revisions did not affect operating income, net income, EPS, or equity.
- Recent acquisitions included Clarus Labs and Livestock Genetic Services. Purchase consideration includes contingent payments tied to sales or other terms. In December 2018, after quarter-end, the company repurchased 50,000 shares for approximately $3.1 million under a newly authorized program of up to 3 million shares.
- The company reported a $0.9 million estimated environmental remediation liability for its Randolph, Wisconsin facility and said the existing remediation program would continue. Management said ordinary-course legal matters were not expected to materially affect results or financial position.
- Management provided no forecast of future financial performance. It said cash, securities, available credit, and expected operating cash flow should fund foreseeable activities, while noting these resources might not cover commercialization or acquisition plans and additional financing could be pursued. Identified risks include competition, key-employee dependence, weather effects, acquisition integration, R&D, intellectual property, regulation, and foreign-exchange movements.
Important facts for investors to verify
- Whether Food Safety growth continues and Animal Safety’s flat year-to-date organic trend improves.
- Whether lower gross and operating margins persist, and how product mix and expense growth affect profitability.
- How tax benefits from stock-option exercises affect comparisons and future effective tax rates.
- The impact of currency movements and collection timing on international revenue and receivables.
- Acquisition performance, contingent consideration, and the cost and pace of the authorized share repurchase program.
- Future developments in environmental remediation and the adoption of the lease-accounting standard planned for June 1, 2019.