Neogen Corporation — FY2016 Form 10-K
Period: Fiscal year ended May 31, 2016, compared with fiscal 2015 and 2014. The request metadata says “2015 Q4,” but this filing covers FY2016; it reports the quarter ended May 31, 2016 separately.
Business context and reporting period
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 two segments: Food Safety and Animal Safety. The filing reports 2016 revenue of $321.3 million, with Food Safety contributing 45.4% and Animal Safety 54.6%. International sales were $107.7 million, or 33.5% of revenue.
Financial results and liquidity
| Metric | FY2016 | FY2015 |
|---|---|---|
| Total revenue | $321.3 million | $283.1 million |
| Operating income | $56.4 million | $53.1 million |
| Net income attributable to Neogen | $36.6 million | $33.5 million |
| Diluted EPS | $0.97 | $0.90 |
| Gross margin | 47.6% | 49.3% |
| Operating margin | 17.6% | 18.8% |
| Cash from operations | $35.3 million | $43.8 million |
Revenue increased 13%; operating income increased 6% and net income attributable to Neogen increased 9%. Cash and cash equivalents were $55.3 million, marketable securities $52.5 million, and working capital $221.4 million at year-end. Total assets were $451.7 million and total equity $404.2 million. The company reported no long-term debt and no draws on its $12.0 million revolving credit facility. Capital expenditures and other long-lived asset purchases used $14.2 million; acquisitions used $42.5 million. Inventory rose 25% to $64.4 million.
Fourth-quarter FY2016 revenue was $90.1 million and net income attributable to Neogen was $9.9 million; diluted EPS was $0.26.
Material changes versus the prior comparable period
- Food Safety revenue rose 11% to $145.8 million; organic growth was 6%. Animal Safety revenue rose 16% to $175.4 million; organic growth was 14%.
- Acquisitions added $9.0 million of FY2016 revenue. Purchases included Sterling Test House, Lab M, Virbac rodenticide assets, Deoxi and Preserve/Tetradyne.
- Service revenue rose 22% to $47.7 million, supported by genomics growth and increased poultry-industry business.
- Gross margin declined 170 basis points. Management cited currency effects, less favorable product mix, a higher share of lower-margin Animal Safety revenue and acquired products.
- International revenue increased 4% in U.S. dollars, but the stronger dollar reduced comparative revenue by $7.7 million. International sales fell as a share of total revenue from 36.7% to 33.5%.
- Cash from operations fell by $8.5 million, with increased inventory and receivables among the working-capital uses of cash.
Outlook, risks, contingencies and unusual items
- Management does not provide forecasts of future financial performance. It expects R&D spending to remain about 3%–4% of revenue and anticipates certain products in development may become commercially available during FY2017–FY2019.
- A competitor received approval for a competing thyroid-replacement drug. Neogen expected to be unable to sell its product in the U.S. after July 2016 until it obtained similar approval, which it expected in FY2018. The product generated $6.6 million of FY2016 sales.
- Key risks include foreign-exchange movements, agricultural-market conditions, regulation, competition, product-development outcomes, supplier and distributor reliance, acquisitions and integration, intellectual-property disputes, and operational or information-system disruptions.
- Management said cash and available borrowing capacity might not be sufficient for potential acquisitions and product commercialization; additional equity or other financing may be considered.
- Environmental remediation liability at the Randolph, Wisconsin facility was $916,000. Management said routine legal proceedings were not expected to materially affect results or financial position.
- Unconditional purchase obligations totaled $50.1 million, all due within one year; these are contractual commitments, not reported debt. The company also had $1.1 million of operating-lease obligations.
- The financial statements received an unqualified audit opinion, and the auditor reported effective internal control over financial reporting as of May 31, 2016.
Important facts for investors to verify
- Whether Neogen obtained U.S. approval for its thyroid-replacement product and the resulting sales and earnings impact.
- Organic growth, acquired growth and integration performance for the FY2016 acquisitions, particularly Lab M and Preserve/Tetradyne.
- Whether gross margins recover as currency, product mix and acquisition effects change.
- Cash conversion and inventory levels, including whether working capital supports growth without additional financing.
- Exposure to foreign currencies and the concentration of sales in international markets, agricultural customers and distributors.