Neogen Corporation — Form 10-Q Summary
Reporting period: Third quarter and nine months ended February 28, 2015 (fiscal 2015); filed April 1, 2015. The filing’s fiscal-year results are not necessarily indicative of the full year. Amounts below are in U.S. dollars.
Financial performance
| Metric | Three months ended Feb. 28, 2015 | Year-over-year | Nine months ended Feb. 28, 2015 | Year-over-year |
|---|---|---|---|---|
| Revenue | $68.4 million | +10.3% | $204.5 million | +13.5% |
| Gross margin | $33.7 million; 49.3% | 49.5% prior year | $102.0 million; 49.9% | 50.3% prior year |
| Operating income | $12.2 million; 17.8% margin | $10.3 million; 16.6% margin | $38.5 million; 18.8% margin | $32.4 million; 18.0% margin |
| Net income attributable to Neogen | $7.5 million | $6.6 million | $24.1 million | $20.6 million |
| Diluted EPS | $0.20 | $0.18 | $0.65 | $0.56 |
| Operating cash flow | Not separately provided | — | $33.5 million | $17.2 million |
Quarterly revenue included $59.2 million of product sales and $9.2 million of service revenue. Service revenue increased 25.3% for the quarter and 20.6% year to date, supported by genomic offerings and new poultry-customer business. Organic sales growth was 6.7% for the quarter and 5.0% year to date; acquisitions contributed $2.3 million and $15.3 million, respectively.
Segments and material changes
- Food Safety: Revenue rose 14.1% in the quarter to $32.0 million and 11.0% year to date to $95.9 million. Quarterly growth was strong in bacteria and general sanitation (+25.3%) and dehydrated culture media and other (+22.5%). BioLumix contributed significantly to bacteria and sanitation growth; excluding it, that product group grew 3.6% for the quarter.
- Animal Safety: Revenue increased 7.3% in the quarter to $36.4 million and 15.8% year to date to $108.6 million. Rodenticides, disinfectants and insecticides rose 29.8% in the quarter, benefiting from Chem-Tech and demand associated with western U.S. vole infestations. DNA testing services increased 29.2%.
- Quarterly organic growth, adjusted for a transfer of customers in Mexico and Central America between segments, was 4.0% in Food Safety and 8.9% in Animal Safety. Revenue transfers boosted reported growth in Neogen Latinoamerica.
- Gross margin eased year over year, which management attributed to currency effects and, year to date, a shift in sales mix toward Animal Safety products. Operating margins improved as revenue growth and relatively moderate operating-expense growth more than offset lower gross-margin percentages.
Cash, liquidity and debt
- Cash and cash equivalents were $57.5 million at February 28, 2015; marketable securities were $44.7 million. Combined, these totaled $102.1 million, versus $76.5 million at May 31, 2014.
- Nine-month operating cash flow was $33.5 million. Investing activities used $22.3 million, including $6.6 million for acquisitions and $6.9 million for property, equipment and other assets. Financing activities provided $6.5 million, principally from stock issuance and option exercises.
- There were no borrowings under the $12 million unsecured revolving credit facility, which matures September 1, 2017. The company reported compliance with its financial covenants. Total liabilities were $41.7 million, including $26.6 million of current liabilities.
- Management stated that available cash, marketable securities, borrowing capacity and expected operating cash flow should fund foreseeable activities. It cautioned that these resources might not cover commercialization or future acquisition plans and that equity or other financing could be considered.
Outlook, risks and unusual items
- Neogen said it does not provide forecasts of future performance. Management expressed optimism about long-term prospects but cautioned that historical results may not predict future performance.
- Currency movements were a material headwind: management estimated that, at constant currency, quarterly revenue would have been $1.5 million (2.4%) higher and year-to-date revenue $1.1 million (0.6%) higher. Currency losses contributed to quarterly other expense of $526,000. Year-to-date other expense of $728,000 also included contingent-consideration charges and a reversal of an earlier accrual.
- The stronger U.S. dollar reduced translated foreign revenue; international sales were 36.4% of quarterly sales and 37.9% of year-to-date sales. Other stated risks include competition, acquisition integration, key-person dependence, weather effects on agriculture and food production, research and development, intellectual-property protection, regulation and foreign-market conditions.
- Recent acquisitions included BioLumix and food-safety and veterinary genomic assets from a Chinese distributor. Acquisition-related contingent consideration included a $454,000 Prima Tech charge and an $84,000 Chem-Tech charge; a $241,000 SyrVet accrual reversal was recorded as income.
- The company reported a $916,000 estimated liability for environmental remediation and monitoring at its Randolph, Wisconsin facility, measured undiscounted over an estimated 15-year period. Management said ordinary-course legal matters were not expected to have a material effect and reported no significant changes to previously disclosed contractual obligations or contingencies.
- Currency translation adjustments were a $2.5 million loss for the nine months, compared with a $1.7 million gain in the prior-year period. The filing also noted adoption of the new revenue-recognition standard was being evaluated; early adoption was not permitted.
Important facts for investors to verify
- Whether organic growth and service-revenue momentum persist, particularly after separating acquisition contributions and customer transfers.
- Whether foreign-exchange movements continue to pressure reported sales, margins and earnings.
- Whether recent acquisitions deliver expected growth and integration benefits, and whether additional contingent consideration becomes payable.
- Inventory growth, acquisition spending and cash generation relative to management’s stated liquidity needs and potential financing plans.
- Developments in the Randolph environmental remediation estimate, ordinary-course legal matters and implementation of the new revenue-recognition standard.