Business context and reporting period
Neogen Corporation’s unaudited Form 10-Q covers the first quarter of fiscal 2016, the three months ended August 31, 2015, with comparisons to the three months ended August 31, 2014. Neogen operates Food Safety and Animal Safety segments. Amounts below are in U.S. dollars; financial statement figures are in millions unless stated otherwise.
Financial results and position
| Metric | Q1 FY2016 | Q1 FY2015 / comparator |
|---|---|---|
| Revenue | $74.860 million | $67.599 million; up 10.7% |
| Gross margin | $37.792 million; 50.5% of revenue | $34.076 million; 50.4% |
| Operating income | $14.895 million; 19.9% of revenue | $13.439 million; 19.9% |
| Net income attributable to Neogen | $9.323 million; $0.25 per diluted share | $8.883 million; $0.24 per diluted share |
| Operating cash flow | $6.600 million | $10.425 million |
| Cash and marketable securities | $110.955 million at August 31, 2015 | $114.164 million at May 31, 2015 |
| Total assets / total liabilities | $409.386 million / $43.480 million | $392.181 million / $41.218 million at May 31, 2015 |
- Product revenue was $65.036 million, up from $58.224 million; service revenue was $9.824 million, up from $9.375 million.
- Food Safety revenue rose 11.3% to $34.459 million; Animal Safety revenue rose 10.3% to $40.401 million.
- Cash and cash equivalents declined to $42.326 million from $66.061 million at May 31; marketable securities increased to $68.629 million from $48.103 million.
- Investing cash outflow was $36.473 million, including $13.126 million net cash used for acquisitions and $2.821 million for property, equipment and other noncurrent assets. Financing cash inflow was $6.173 million.
- No revolving credit borrowings were outstanding. The company had an unsecured $12 million line maturing September 1, 2017 and reported compliance with its financial covenants. No other debt balance is reported in the filing.
Material changes versus the prior comparable period
- Revenue increased 10.7% and net income attributable to Neogen increased 5.0%; diluted EPS rose from $0.24 to $0.25.
- Food Safety organic growth was 7.0%. Segment revenue also included $1.3 million from BioLumix, acquired in October 2014. Animal Safety included $152,000 from Sterling Test House, acquired in June 2015.
- Consolidated gross margin edged up 0.1 percentage point. Food Safety margin improved 0.3 percentage point, while Animal Safety margin declined 0.2 point.
- Operating expenses rose 11.0%, including higher sales and marketing, administration, and research and development costs. Operating margin remained 19.9%.
- Other expense was $456,000 versus other income of $270,000 a year earlier. Current-quarter other expense included $605,000 of currency translation expense; the prior period included $241,000 of income from settlement of acquisition contingent consideration.
- Operating cash flow fell to $6.6 million from $10.4 million. The filing cites working-capital movements, including increases in inventories and prepaid expenses, among cash flow items.
Outlook, commentary, risks and contingencies
- Management does not provide forecasts of future performance. It said existing cash, marketable securities, available credit and expected operating cash flows should fund activities for the foreseeable future, but may not cover commercialization of products under development or future acquisitions; additional equity or other financing could be considered.
- Management cited a stronger U.S. dollar as a headwind to reported international revenue. International sales were 32.7% of total sales, compared with 36.8% a year earlier. European sales were also affected by prior-year large genomics orders and equipment placements that did not recur.
- Growth drivers included food safety testing, animal care products, rodent-control contracts and agrigenomics services. Some comparisons reflected nonrecurring or timing factors: prior-year forensic-kit orders did not repeat, insecticide distributor bookings shifted sales into the prior fiscal year, and a media research-product sale’s duration was uncertain.
- Other stated risks include competition, dependence on key employees, weather effects on agriculture and food production, acquisition integration, research and development, intellectual property protection, regulation, foreign exchange and foreign-market conditions.
- The company accrued $916,000 for environmental remediation and monitoring at its Randolph, Wisconsin facility, measured undiscounted over an estimated 15 years. Management said normal-course legal proceedings were not expected to materially affect results or financial position.
- The company was evaluating a new revenue-recognition standard; adoption was required for fiscal years beginning after December 15, 2017, and early adoption was not permitted. Management reported effective disclosure controls and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether revenue growth persists after separating organic performance from acquisition contributions, currency effects and unusual customer orders.
- Whether margins and earnings can withstand continued expense growth, foreign-exchange pressure and changing product mix.
- How operating cash flow, inventory levels and the substantial cash deployment for acquisitions develop in subsequent quarters.
- Whether acquisition purchase-price allocations, integration and expected returns—particularly for Lab M and Sterling Test House—evolve as anticipated.
- Whether foreign currency movements, product demand, contingencies and future financing needs materially change from management’s stated expectations.