Business context and reporting period
Neogen Corporation develops, manufactures and markets food- and animal-safety products and services through its Food Safety and Animal Safety segments. This is the Form 10-K for the fiscal year ended May 31, 2017—not a standalone fiscal 2016 Q4 filing. The filing also reports unaudited results for the quarter ended May 31, 2017.
Financial performance and liquidity
| Metric | FY2017 | FY2016 |
|---|---|---|
| Revenue | $361.6 million | $321.3 million |
| Operating income / margin | $64.9 million / 18.0% | $56.4 million / 17.6% |
| Net income attributable to Neogen | $43.8 million | $36.6 million |
| Diluted EPS | $1.14 | $0.97 |
| Gross margin | 47.6% | 47.6% |
| Cash from operating activities | $60.3 million | $35.3 million |
- Food Safety revenue was $171.3 million, up 17%; Animal Safety revenue was $190.3 million, up 9%. Acquisitions contributed $27.7 million of FY2017 revenue; management reported 4% overall organic sales growth.
- Cash and cash equivalents were $77.6 million and marketable securities $66.1 million at year-end. Working capital was $257.0 million; current assets were $293.0 million and current liabilities $36.0 million.
- Capital expenditures were $14.6 million and acquisition spending was $34.0 million. The company had no balance on its $15 million revolving credit facility. It also disclosed a $1.2 million borrowing at its Brazilian pesticide business, repayable upon shipment of related inventory.
- Quarter ended May 31, 2017: revenue $98.8 million, net income $12.5 million, net income attributable to Neogen $12.5 million and diluted EPS $0.32. The comparable May 2016 quarter reported revenue of $90.1 million, attributable net income of $9.9 million and diluted EPS of $0.26.
Changes versus the prior year
- FY2017 revenue increased 13% and attributable net income increased 20%. Operating margin improved from 17.6% to 18.0%, while gross margin was unchanged.
- Growth reflected acquisitions and organic gains, notably in food-safety toxin and allergen tests, genomics, and biosecurity products. Service revenue rose 15%, primarily from genomics demand and expanded capacity.
- Acquisition-related businesses included Lab M, Virbac, Deoxi, Preserve, Quat-Chem and Rogama. Acquisitions and currency effects weighed on Food Safety margins, offset by favorable product mix and higher genomics margins.
- FY2017 operating cash flow rose from $35.3 million to $60.3 million. Cash and marketable securities together increased to $143.6 million from $107.8 million.
Outlook, commentary, risks and unusual items
- Management did not provide forecasts of future financial performance. It expected R&D spending to remain approximately 3%–4% of revenue and anticipated some new products becoming commercially available during fiscal 2018–2020.
- The company lost U.S. sales of a canine thyroid-replacement product, which generated $6.2 million in FY2016; similar regulatory approval was expected in FY2019. Termination of a cleaner-and-disinfectant distribution agreement also reduced sales; management expected some substitution by Preserve products in FY2018.
- Other income included an $660,000 gain from settlement of a licensing agreement. FY2017 included $40,000 of foreign-currency translation losses in other income/expense, while currency translation reduced other comprehensive income by $3.3 million.
- Key risks include acquisition integration and execution, competition and product-development uncertainty, regulation and intellectual-property matters, reliance on suppliers and distributors, agricultural-market cyclicality, foreign exchange exposure, and operational or information-system disruptions. International sales were 35.8% of revenue.
- The company disclosed an IRS audit for fiscal years 2014–2016. Environmental remediation liabilities at its Randolph, Wisconsin facility were $916,000. Management said ordinary-course legal proceedings were not expected to have a material effect; no material contingency amount for those proceedings was specified.
- Contractual obligations totaled $51.2 million, including $48.8 million of unconditional purchase obligations, primarily for inventory and capital equipment. Management noted that cash and current borrowing capacity might not cover future commercialization or acquisition needs, and that additional equity or other financing could be considered.
Important facts for investors to verify
- Separate acquisition-driven growth from organic growth and assess whether acquired businesses sustain their contribution and margins.
- Track recovery of the canine thyroid product following the expected FY2019 approval process, and the effect of lost distribution sales and product substitution.
- Review cash conversion, inventory growth, purchase commitments, and funding plans for future acquisitions and product development.
- Monitor foreign-exchange effects, international market performance, and the outcome of the IRS audit.
- Confirm that the reported quarterly figures are for the quarter ended May 31, 2017, while the filing’s principal annual results cover the year ended that date.