Neogen Corporation — Form 10-Q Summary
Reporting period: First quarter of fiscal 2022, the three months ended August 31, 2021; comparisons are with the three months ended August 31, 2020. Amounts are U.S. dollars. Financial statements are unaudited. Per-share amounts reflect the June 2021 2-for-1 stock split.
Financial performance
| Metric | Q1 FY2022 | Q1 FY2021 | Change |
|---|---|---|---|
| Revenue | $128.3 million | $109.3 million | +17%; organic sales +14% |
| Gross margin | $60.0 million; 46.8% | $50.3 million; 46.0% | Margin +0.8 percentage points |
| Operating expenses | $38.3 million | $31.4 million | +22% |
| Operating income | $21.7 million; 16.9% of revenue | $18.9 million; 17.3% of revenue | Income increased; margin declined |
| Net income | $17.1 million | $15.9 million | +8% |
| Diluted EPS | $0.16 | $0.15 | Up $0.01 |
| Cash from operating activities | $23.2 million | $25.1 million | Down $1.9 million |
Revenue growth reflected increases in both segments: Food Safety revenue rose 16% to $62.7 million, including Megazyme acquisition revenue, and Animal Safety rose 19% to $65.6 million. International revenue was $50.5 million, or 39.4% of total revenue, versus $42.0 million, or 38.4%, a year earlier.
Gross margin improved primarily from Food Safety product mix, including higher-margin Megazyme products, and lower sales of certain lower-margin products. Animal Safety margins weakened due to product mix, lower companion-animal service sales, and higher international freight costs. Operating expenses rose partly as pandemic-era cost controls unwound, and from higher personnel, shipping, travel, amortization, IT, and professional costs. Other income fell to a net expense of $18,000 from income of $915,000, mainly reflecting lower interest income. The effective tax rate was 21.4%, versus 19.9%, including a $548,000 charge to revalue U.K. deferred taxes.
Cash, liquidity, and debt
At August 31, 2021, cash and cash equivalents were $71.3 million and marketable securities were $329.6 million, totaling $400.9 million, versus $381.1 million at May 31, 2021. Current assets were $609.1 million and current liabilities were $50.8 million. Total liabilities were $76.7 million and stockholders’ equity was $855.4 million.
Neogen had no borrowings outstanding under its $15 million unsecured revolving credit facility, which expires November 30, 2023; the company reported compliance with its financial covenants. Management said cash, marketable securities, available credit, and expected operating cash flow should fund foreseeable needs, but could be insufficient for certain product commercialization or acquisition plans.
Investing activities used $25.4 million, primarily reflecting net purchases of marketable securities; capital spending on property, equipment, and other non-current assets was $1.3 million. Cash and cash equivalents declined $4.3 million during the quarter, including a $3.2 million adverse foreign-exchange effect.
Outlook, risks, and unusual items
- Neogen does not provide forecasts of future financial performance. Management expected COVID-19 to continue affecting operations and financial results through at least the end of the fiscal year. Pandemic impacts included uneven customer demand, supply-chain and shipping disruptions, labor shortages and higher labor costs, and restricted travel. Biosecurity and companion-animal demand benefited, while some food-safety diagnostic demand remained affected.
- On September 17, 2021, after quarter-end, Neogen acquired CAPInnoVet, a companion-animal health business. The purchase-price allocation was not complete when the filing was prepared.
- The company continues environmental remediation at its Randolph, Wisconsin facility. The recorded liability was $916,000; a pilot study or change in remediation approach could increase future costs, and the study’s outcome was unknown.
- Neogen continues cooperating with an OFAC investigation concerning certain genomic services involving an Iranian party. It had recorded a $600,000 reserve for potential fines or penalties and said it believed the reserve adequate, while noting the outcome was uncertain.
- Management cited competition, key-employee recruitment and retention, weather, COVID-19, acquisition integration, R&D, intellectual-property protection, regulation, and foreign-exchange exposure among risks. The filing disclosed hypothetical earnings impacts of $5.1 million from a 10% decrease in relevant exchange rates for foreign-currency revenue and $2.0 million for currency hedges.
Important facts for investors to verify
- Whether revenue and organic growth persist, particularly given pandemic-related demand shifts and the inclusion of Megazyme in Food Safety results.
- Whether expense growth, freight and labor costs, and Animal Safety mix pressures continue to weigh on operating margins.
- The development of operating cash flow and the company’s ability to fund acquisitions and product commercialization without additional financing.
- The integration and financial contribution of CAPInnoVet, and the status of the Randolph remediation pilot study.
- Any developments in the OFAC investigation, including whether the existing reserve remains adequate.