Neogen Corporation — Form 10-Q Summary
Reporting period: Quarter ended February 29, 2012, the third quarter of fiscal 2012, with nine-month comparisons to the period ended February 28, 2011. The request metadata labels the period “2011 Q3,” but the filing covers fiscal 2012 Q3.
Business context and financial performance
Neogen operates Food Safety and Animal Safety businesses. Financial statement amounts below are in millions of dollars except per-share data.
| Metric | Q3 FY2012 | Q3 FY2011 | Nine months FY2012 | Nine months FY2011 |
|---|---|---|---|---|
| Revenue | $44.9 | $42.2 | $135.5 | $129.1 |
| Gross margin | $22.9 | $20.6 | $68.5 | $65.8 |
| Operating income | $7.5 | $8.1 | $25.0 | $27.3 |
| Net income | $5.2 | $4.9 | $16.5 | $16.9 |
| Diluted earnings per share | $0.22 | $0.21 | $0.69 | $0.71 |
| Operating cash flow | Not separately reported | Not separately reported | $13.2 | $24.0 |
- Quarterly revenue grew 6.3%; nine-month revenue grew 5.0%. Food Safety revenue rose 6.2% for the quarter and 4.7% year to date; Animal Safety rose 6.4% and 5.2%, respectively.
- Gross margin was 51.0% for the quarter versus 48.7% a year earlier; year-to-date gross margin was 50.6% versus 51.0%. Management attributed the quarterly improvement to product mix and manufacturing efficiencies, and the year-to-date decline primarily to mix.
- Operating margin declined to 16.8% for the quarter from 19.1%, and to 18.5% year to date from 21.1%. Higher selling, marketing, customer-support and administrative costs more than offset revenue growth. Management described these spending increases as investments intended to support future growth and efficiencies.
- Quarterly net income increased 6.1%, while nine-month net income fell 2.3%. Nine-month operating income declined 8.2%; diluted EPS decreased from $0.71 to $0.69.
Cash, liquidity, debt and balance sheet
- At February 29, 2012, cash and cash equivalents were $42.7 million and marketable securities were $18.6 million, totaling $61.3 million, up from $56.1 million at May 31, 2011.
- Nine-month operating cash flow was $13.2 million, down from $24.0 million. Receivables used $5.7 million of cash and inventory used $4.4 million, reflecting revenue/payment timing and inventory purchases and build-up.
- Investing activities used $10.0 million, including $10.8 million for property, equipment and other assets and $0.8 million for the VeroMara acquisition. Capital spending included $4.95 million for a Lexington, Kentucky office and warehouse facility.
- Total assets were $240.3 million, current assets $136.2 million, and current liabilities $17.4 million. Total liabilities were $30.4 million; the balance sheet reported no drawn long-term debt.
- The company had an undrawn $12 million revolving credit facility, extended through November 30, 2013, at LIBOR plus 100 basis points. Neogen reported compliance with its financial covenants.
Material changes, outlook and risks
- Quarterly segment growth was broad, but product-line results varied. Veterinary Instruments and Other revenue rose 29.0% for the quarter and 24.4% year to date. DNA Testing revenue fell 4.3% and 13.0%, respectively, largely due to lower pricing; management noted that contract timing and amounts can be unpredictable.
- Food Safety growth included VeroMara, acquired in June 2011; excluding VeroMara, Food Safety revenue increased 5.7% for the quarter and 4.2% year to date. Its potential $0.2 million contingent payment was not triggered because the specified contract was not awarded.
- Other income included a $0.18 million reversal in the estimated GeneSeek contingent purchase consideration in both the quarter and year-to-date period. Royalty income was $0.165 million for the quarter and $0.283 million year to date. These items contributed to the improvement in other income versus the prior-year periods.
- Management provided no earnings or revenue forecast. It said cash, securities, available credit and expected operating cash flows should fund activities for the foreseeable future, but could be insufficient for commercialization of products under development or potential acquisitions; additional equity or other financing may be considered. Neogen said it does not plan to pay cash dividends.
- Identified risks include competition, key-personnel dependence, weather impacts on agriculture and food production, acquisition integration, R&D, intellectual-property protection, regulation, foreign-exchange exposure and economic weakness in foreign markets. International revenue was 40.7% of total revenue in both the quarter and nine-month period.
- Environmental remediation at the Randolph, Wisconsin facility carried an estimated $0.916 million liability, measured undiscounted over an estimated 15 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 quarterly change in internal controls reported.
Important facts for investors to verify
- Whether revenue growth and the improved quarterly gross margin persist, particularly as year-to-date operating and net income declined.
- Whether increased sales and support spending translates into the future revenue gains and efficiencies management expects.
- The sustainability and predictability of DNA Testing, veterinary product, and other segment/product-line trends, including customer concentration and contract timing.
- Working-capital needs and capital spending, including the effect of higher receivables and inventories on operating cash flow.
- Potential funding needs for product commercialization or acquisitions, and the status of the undrawn credit facility and covenant compliance.
- Developments in the GeneSeek contingent consideration, VeroMara integration, environmental remediation estimate, and foreign-currency exposure.