Neogen Corporation — FY2018 Form 10-K
Period clarification: The filing is for the fiscal year ended May 31, 2018, not calendar 2017 Q4. It reports the quarter ended May 2018 as fiscal Q4.
Business context
Neogen develops, manufactures and markets food-safety testing products and animal-safety products and services, including veterinary products, biosecurity products and genomics testing. It reports Food Safety and Animal Safety segments. International customers generated 37.6% of FY2018 revenue; no customer represented 10% or more of revenue.
Financial performance
| Metric | FY2018 | FY2017 | Change |
|---|---|---|---|
| Revenue | $402.3 million | $361.6 million | +11%; organic growth 8% |
| Food Safety revenue | $196.0 million | $171.3 million | +14%; organic growth 9% |
| Animal Safety revenue | $206.2 million | $190.3 million | +8%; organic growth 7% |
| Gross margin | $190.3 million; 47.3% | $172.0 million; 47.6% | Margin down 0.3 percentage points |
| Operating income | $70.2 million; 17.5% margin | $64.9 million; 18.0% margin | +8% |
| Net income attributable to Neogen | $63.1 million | $43.8 million | +44% |
| Diluted earnings per share | $1.21 | $0.86 | Up from prior year |
| Cash from operating activities | $69.1 million | $60.3 million | Increased |
| Cash and marketable securities at year-end | $210.8 million | $143.6 million | Increased |
| Working capital at year-end | $337.1 million | $257.0 million | Increased |
| Long-term debt | None | None | No debt outstanding |
FY2018 capital spending on property, equipment and other non-current intangible assets was $20.9 million; acquisitions, net of cash acquired, used $0.5 million. The company had an undrawn $15 million revolving credit facility, expiring September 2019. A simple operating-cash-flow less capital-spending measure was approximately $48.2 million; this is a derived figure, not a company-reported measure.
Fiscal Q4, ended May 2018, revenue was $109.3 million, gross margin $49.6 million, net income attributable to Neogen $17.5 million and diluted EPS $0.33.
Changes versus FY2017
- Revenue growth reflected 8% organic growth, acquisitions and favorable currency translation; international revenue increased 17% in U.S. dollars, including a reported $3.7 million favorable currency impact.
- Food Safety growth included stronger bacterial testing, culture media, genomics and acquired biosecurity products. Lower mycotoxin test-kit sales followed the prior-year DON outbreak, which did not recur.
- Animal Safety growth included veterinary instruments and genomics. Rodenticides, insecticides and disinfectant revenue declined 2%, in part after termination of a distribution agreement.
- Gross margin declined as product mix and acquired businesses with lower margins weighed on results. Food Safety gross margin fell to 52.8% from 55.3%; Animal Safety gross margin improved to 42.0% from 40.6%.
- Operating expenses rose 12%, slightly faster than revenue, and operating margin declined to 17.5% from 18.0%.
Outlook, unusual items and risks
- Management does not provide forecasts of future financial performance. It expects R&D spending to approximate 3% of revenue annually and expects several products in development to become commercially available during FY2019 and FY2020.
- FY2018 net income benefited from tax-related items: a net $4.8 million benefit from U.S. tax reform and a $4.8 million benefit from adoption of share-based compensation accounting guidance. The company also reversed approximately $1.0 million of uncertain-tax-position reserves after a favorable IRS examination. The filing says parts of the Tax Act accounting were provisional and further analysis was expected in FY2019.
- A large Rogama sale to a Brazilian government health organization boosted FY2018 revenue but was not expected to recur in FY2019. A large U.S. culture-media order also contributed to category growth.
- Key disclosed risks include acquisition integration and growth execution, product development and competition, reliance on suppliers and distributors, regulatory and intellectual-property matters, agricultural-market cycles, foreign-exchange exposure, cybersecurity and operational disruption. International sales accounted for 37.6% of revenue.
- The company reported a $916,000 estimated liability for environmental remediation and monitoring at its Randolph, Wisconsin facility. Management said ordinary-course legal proceedings were not expected to materially affect results or financial position.
Important facts for investors to verify
- How much future growth is organic and recurring versus acquisition-related, currency-driven or attributable to one-time orders.
- Whether gross-margin pressure—particularly from acquired product mix and weaker mycotoxin and Brazilian forensic-kit sales—persists.
- The final effects of tax reform and the share-based compensation tax benefit on the sustainable effective tax rate and earnings.
- Progress integrating acquisitions, including Neogen Australasia, and the expected cash requirements for acquisitions, capital investment and product development.
- Updates on the Randolph environmental liability, foreign-exchange exposure, and the undrawn credit facility’s availability and maturity.