Neogen Corporation — Form 10-Q Summary
Business and period: Neogen develops and sells food-safety and animal-safety products and services through its Food Safety and Animal Safety segments. This unaudited report covers the fiscal second quarter and first six months ended November 30, 2016; the comparable periods ended November 30, 2015. Amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Three months 2016 | Three months 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $90.7 | $79.6 | $174.4 | $154.5 |
| Gross margin | $43.6 | $38.2 | $84.1 | $76.0 |
| Operating income | $16.9 | $14.6 | $31.6 | $29.5 |
| Net income attributable to Neogen | $11.2 | $9.1 | $21.0 | $18.4 |
| Diluted earnings per share | $0.29 | $0.24 | $0.55 | $0.49 |
| Gross margin percentage | 48.1% | 48.0% | 48.2% | 49.2% |
| Operating margin | 18.6% | 18.4% | 18.1% | 19.1% |
- Quarterly revenue grew 14%, with Food Safety up 9% and Animal Safety up 18%. Six-month revenue grew 13%, with Food Safety up 11% and Animal Safety up 14%.
- Quarterly organic sales growth was 7% overall (Food Safety 8%, Animal Safety 5%); six-month organic growth was 5% overall (Food Safety 9%, Animal Safety 2%). Management said growth excluding the lost thyroid-product sales and adverse currency effects would have been 11% in both periods.
- Quarterly gross margin was nearly flat year over year; the six-month margin declined 1.0 percentage point. The quarter’s favorable product mix offset pressure from recent acquisitions, the lost high-margin thyroid product, and currency. The six-month decline also reflected product mix.
- Operating expenses rose 13% in both periods. General and administrative expense increased 22% in each period, reflecting acquisitions, personnel-related costs, and higher IT depreciation. Sales and marketing rose 10%; research and development rose 6% for the quarter and 5% year to date.
- Quarterly net income attributable to Neogen rose 23%; six-month net income rose 14%. The effective tax rate was 33.4% for the quarter and 34.1% year to date, versus 35.6% in both prior-year periods. The current-year quarter included an R&D tax credit.
Cash, liquidity, and debt
- Cash and cash equivalents were $86.3 million at November 30, 2016; marketable securities were $55.8 million. Together, these totaled $142.1 million, versus $107.8 million at May 31, 2016.
- Six-month operating cash flow was $29.5 million, compared with $20.9 million a year earlier. Capital spending on property, equipment, and other non-current assets was $6.2 million. Cash increased by $31.0 million during the period.
- Inventory increased $7.3 million, or 11%, from fiscal year-end, which management attributed primarily to order timing and planned stocking. Accounts receivable declined $2.8 million; days sales outstanding increased to 63 from 61.
- No borrowings were outstanding under the unsecured revolving credit facility. On November 30, the facility was increased from $12 million to $15 million and maturity extended to September 30, 2019. The company reported compliance with its financial covenants. Management said existing liquidity, facility availability, and expected operating cash flow should fund foreseeable activities, but may not cover all commercialization or acquisition plans.
Material changes, outlook, and risks
- Thyroid product: Neogen lost the ability to sell its canine thyroid replacement product in the U.S. after a competitor received FDA approval and exclusive marketing rights. The product generated $6.6 million in fiscal 2016 sales; management did not expect to regain approval during fiscal 2017. The loss reduced Animal Care and Other sales by $1.4 million in the quarter and $4.4 million year to date.
- Acquisitions: Recent acquisitions contributed $5.9 million to quarterly revenue growth and $12.1 million to six-month growth. Subsequent to quarter-end, Neogen acquired Quat-Chem Ltd. for $20.5 million cash on December 1, 2016, and Rogama Industria e Comercio Ltda. for $13 million cash on December 27, 2016. Purchase-price allocations were not complete at filing.
- Currency and international business: Currency translation reduced international revenue by approximately $2.1 million in the quarter and $4.0 million year to date. Management cited exposure to exchange-rate changes across its international operations. Results also benefited from Brazilian real appreciation in the quarter.
- Management did not provide forecasts of future financial performance. It expressed optimism about long-term prospects but cautioned that historical results may not indicate future performance.
- Risks identified include competition; dependence on key employees; weather effects on agriculture and food production; acquisition identification and integration; R&D risks; intellectual-property protection; regulation; and foreign exchange exposure.
- Environmental remediation at the Randolph, Wisconsin facility had an estimated liability of $916,000, unchanged from May 31, 2016, measured over an estimated 15-year period. Management said ordinary-course legal matters were not expected to materially affect results or financial position.
- Other notable items: six-month foreign-currency translation loss was $4.2 million; the company recorded $2.476 million of excess tax benefits from stock-option exercises. No stock repurchases were made in fiscal 2017 through November 30.
Important facts for investors to verify
- Whether organic growth can be sustained, particularly in Animal Safety, and how much growth depends on acquisitions versus existing operations.
- The financial and regulatory implications of losing the thyroid replacement product, including any path or timing for renewed U.S. sales approval.
- The completed purchase-price allocations, integration costs, and performance of the Quat-Chem and Rogama acquisitions.
- Whether margins recover from the year-to-date decline and the effects of acquisition mix, currency, and product mix on future profitability.
- Foreign-exchange sensitivity, inventory growth and stocking needs, and the sufficiency of liquidity for planned acquisitions and product commercialization.
- The filing states that interim results are not necessarily indicative of the fiscal year ending May 31, 2017.