Neogen Corporation — FY2019 Form 10-K Summary
Reporting period: Fiscal year ended May 31, 2019. The filing is an annual report, not a standalone 2018 Q4 filing. For context, the unaudited quarter ended May 2019 (FY2019 Q4) is summarized below.
Business context
Neogen develops, manufactures and markets food-safety testing products and animal-safety products and services, including veterinary products, biosecurity products and animal genomics. It reports Food Safety and Animal Safety segments. International customers generated 40.1% of FY2019 revenue.
Financial performance and liquidity
| Metric | FY2019 | FY2018 |
|---|---|---|
| Revenue | $414.2 million | $397.9 million |
| Gross margin | $191.9 million; 46.3% | $186.3 million; 46.8% |
| Operating income | $68.1 million; 16.4% margin | $70.2 million; 17.6% margin |
| Net income attributable to Neogen | $60.2 million | $63.1 million |
| Diluted EPS | $1.15 | $1.21 |
| Cash from operating activities | $63.8 million | $69.1 million |
- Revenue grew 4% overall, with 3% organic growth. Food Safety revenue rose 10% to $213.5 million (9% organic); Animal Safety revenue declined 1% to $200.7 million (2% organic decline).
- Service revenue increased 12% to $74.7 million, including 9% organic growth. International sales increased 11%; currency translation reduced reported revenue by approximately $8.0 million.
- Gross margin decreased from 46.8% to 46.3%, while operating income fell 3%. Management cited product mix, foreign exchange and operating expenses growing faster than revenue.
- At May 31, 2019, cash and cash equivalents were $41.7 million, marketable securities were $225.8 million and working capital was $411.3 million. Inventory rose 13% to $86.0 million, partly from precautionary European inventory ahead of Brexit.
- No long-term debt was outstanding. The company had an undrawn $15 million revolving credit facility, extended to September 2021. Capital expenditures were $14.7 million; acquisitions used $6.4 million; option exercises provided $17.0 million.
- FY2019 Q4: Revenue was $109.8 million, gross margin $50.5 million, net income $15.8 million and diluted EPS $0.30. Compared with the May 2018 quarter, revenue increased about 1.5% and net income decreased about 9.9%.
Changes, outlook and management commentary
- Food Safety growth reflected pathogen testing, culture media and natural-toxin products; Animal Safety faced weaker distributor demand, inventory destocking and softness in commercial dairy and animal-protein markets.
- Acquisitions during FY2019 included Clarus Labs, Livestock Genetic Services and Delta Genomics. Management described acquisitions, new products, international expansion and organic growth as key elements of its strategy.
- Management expected R&D spending to remain approximately 3% of revenue and anticipated several products in development could become commercially available during fiscal 2020 and 2021. It did not provide a financial forecast.
- The effective tax rate increased to 17.5% from 14.0%; FY2018 benefited from U.S. tax reform accounting effects. FY2019 tax expense included GILTI expense and an FDII benefit.
- The company adopted ASC 606 using retrospective application; adoption had no material financial-statement impact. Prior-year revenue and expense classifications were revised for variable consideration; the revisions did not affect operating income, net income, EPS or equity.
- Management reported effective disclosure controls and internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and internal controls.
Risks and contingencies
- Key exposures include competitive and product-development risk, acquisition integration, dependence on suppliers and distributors, agricultural and weather cycles, regulation, cybersecurity and international political, trade and currency uncertainty.
- Foreign-currency movements affected reported revenue and margins; management noted the U.S. dollar strengthened against currencies in the company’s markets.
- Environmental remediation at the Randolph, Wisconsin facility had a recorded liability of $916,000. The company was discussing possible alternative remediation approaches with regulators; future costs could increase if the strategy changes.
- Management considered ordinary-course legal proceedings not material. The company noted that cash and borrowing capacity might not be sufficient for future acquisitions or commercialization plans, and additional financing could be considered.
Important facts for investors to verify
- Whether Food Safety growth can continue to offset Animal Safety weakness and the reported pressure on margins.
- How much future growth and profitability depends on acquisitions versus organic growth, and the integration and contribution of recent acquisitions.
- Whether elevated inventory, including Brexit-related stock, converts to sales without obsolescence or working-capital strain.
- The effect of currency movements, distributor destocking and agricultural-market conditions on revenue and margins.
- Potential changes to environmental remediation costs and any future funding needs for acquisitions or product commercialization.
- Quarterly figures are unaudited and FY2019 Q4 refers to the quarter ended May 31, 2019; the filing does not provide a separate 2018 Q4 report.