Neogen Corporation — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended February 28, 2014, compared with the corresponding 2013 periods. The filing’s period is fiscal Q3 2014, notwithstanding the request metadata’s “2013 Q3.” Financial statement amounts below are in millions of dollars unless otherwise noted.
Financial performance
| Metric | Three months ended Feb. 28 | Nine months ended Feb. 28 |
|---|---|---|
| Revenue, 2014 (2013) | $62.0 ($51.1), +21.4% | $180.1 ($151.5), +18.9% |
| Gross margin | $30.7; 49.5% (53.5%) | $90.6; 50.3% (53.5%) |
| Operating income | $10.3 ($9.7); operating margin 16.6% (18.9%) | $32.4 ($30.5); operating margin 18.0% (20.1%) |
| Net income attributable to Neogen | $6.6 ($6.7); diluted EPS $0.18 ($0.18) | $20.6 ($20.2); diluted EPS $0.56 ($0.55) |
| Operating cash flow | Not separately reported | $17.2 ($19.9) |
- Quarterly revenue growth was led by Animal Safety (+32.0%); Food Safety grew 10.7%. Nine-month growth was 26.7% and 11.5%, respectively.
- Management reported organic growth of 5.9% for the quarter and 9.8% year to date. Acquisition contributions accounted for the remainder of overall growth.
- Quarterly service revenue was $7.4 million (+6.4%); nine-month service revenue was $20.9 million (+30.1%).
- Quarterly net income attributable to Neogen declined slightly year over year despite higher revenue and operating income. Nine-month net income increased 2.3%.
Financial position and liquidity
- At February 28, 2014, cash and cash equivalents were $43.3 million and marketable securities were $25.5 million, totaling $68.8 million, versus $85.4 million at May 31, 2013.
- Total assets were $330.4 million; current assets $176.0 million and current liabilities $24.5 million. Total liabilities were $39.2 million and equity $291.1 million.
- No borrowings were outstanding under the $12.0 million unsecured revolving credit facility. The facility matured September 1, 2014; the company reported compliance with its financial covenants.
- Nine-month investing cash use was $36.8 million, including $39.3 million for acquisitions and $7.3 million for property, equipment and other assets. Financing cash inflow was $12.2 million, including $8.1 million of net share-issuance proceeds.
- Accounts receivable rose 24.1% and inventory rose 35.4% from May 31, 2013. Acquired businesses accounted for $9.1 million of February inventory.
Material changes, outlook and risks
- Gross margin fell as revenue mix shifted toward Animal Safety, including lower-margin acquired products, and due to product mix. Management expected the revenue mix to remain near current levels in the near term; it said weaker mycotoxin-kit demand from relatively clean crops could affect comparisons through the rest of the fiscal year.
- Animal Safety growth reflected acquisitions of SyrVet, Prima Tech and Chem-Tech during fiscal 2014, as well as earlier acquisitions. The company reported $39.3 million of acquisition payments in the nine-month period. Certain purchase-price allocations and sales-based contingent payments remained estimated or preliminary.
- Management said it expected to rightsize inventory over the following months as product lines were rationalized and acquisitions integrated. It did not provide forecasts of future performance.
- Nine-month other expense included $0.6 million, largely from foreign-currency losses. Management cited competition, acquisition identification and integration, agricultural and food-production weather, R&D, key-personnel dependence, intellectual-property protection, regulation and foreign-exchange exposure as risks.
- The company reported a $0.9 million estimated environmental-remediation liability for its Randolph, Wisconsin facility, measured over an estimated 15-year period. Management said ordinary-course legal matters were not expected to materially affect results or financial position.
- Management believed cash, securities, available credit and expected operating cash flow would fund foreseeable activities, but said these resources might not cover product commercialization or planned acquisitions; additional equity or other financing could be considered.
Important facts for investors to verify
- How much reported growth reflects sustainable organic demand versus acquisitions, and how acquired businesses perform after integration.
- Whether gross margin stabilizes as acquisition and product mix evolve, and whether inventory is reduced as management expected.
- Cash conversion, working-capital needs and acquisition spending, given lower operating cash flow and higher receivables and inventory.
- Final acquisition valuations and contingent-payment amounts, particularly the preliminary Chem-Tech, Prima Tech and SyrVet allocations.
- Renewal or replacement of the revolving credit facility, which was scheduled to mature September 1, 2014.
- Developments in crop-related test-kit demand, currency exposure and the environmental-remediation estimate.