Business context and reporting period
Neogen Corporation’s Form 10-K covers the fiscal year ended May 31, 2014—not fiscal 2013 Q4. Neogen develops, manufactures and markets food-safety testing products and animal-safety products and services. Its two segments are Food Safety and Animal Safety.
Financial highlights
| Metric | FY2014 | FY2013 |
|---|---|---|
| Revenue | $247.4 million | $207.5 million |
| Gross margin | $122.6 million; 49.6% | $109.5 million; 52.8% |
| Operating income | $43.4 million; 17.5% of revenue | $40.7 million; 19.6% |
| Net income attributable to Neogen | $28.2 million; diluted EPS $0.76 | $27.2 million; diluted EPS $0.75 |
| Cash from operations | $21.7 million | $26.6 million |
| Cash and marketable securities at year-end | $76.5 million | $85.4 million |
| Working capital | $163.8 million | $150.7 million |
| Long-term debt | None | None |
Revenue grew 19%; product revenue was $219.7 million and service revenue $27.7 million. Food Safety revenue rose 10% to $116.3 million; Animal Safety revenue increased 29% to $131.1 million. Reported Animal Safety growth included $23.7 million from acquisitions; organic segment growth was 6%.
Gross-margin compression reflected acquisitions and product-mix shifts, including lower mycotoxin-test sales after unusually strong prior-year demand. Operating expenses rose in dollars but declined as a share of revenue, to 32.0% from 33.1%. Operating income rose 7%, slower than revenue, and net income attributable to Neogen rose 4%.
Material changes and cash, debt and liquidity
- Fiscal 2014 acquisitions included SyrVet, Prima Tech and Chem-Tech, expanding veterinary instruments, animal-care delivery products and biosecurity offerings. Acquisition spending, net of cash acquired, was $39.3 million.
- Cash from operations fell about 18% year over year, with receivables growth contributing to cash use. Receivables rose 34% to $51.9 million, and days sales outstanding increased from 57 to 64 days, mainly because of slower international collections and year-end revenue timing.
- Inventory increased 34% to $51.2 million; $8.7 million of the increase was attributed to acquisitions. Management said it was working to rationalize overlapping products and improve inventory turnover.
- Capital expenditures and other noncurrent-asset purchases were $11.5 million. Cash and cash equivalents ended at $40.7 million; marketable securities were $35.8 million.
- The company had an unsecured $12 million revolving credit facility, extended to September 2017, with no borrowings outstanding. Management cautioned that cash and available borrowing might not suffice for future commercialization or acquisitions; additional equity or financing could be considered.
Outlook, risks and unusual items
Management does not provide forecasts of future financial performance. It expects R&D spending to remain approximately 3%–5% of revenue and anticipated several products in development could become commercially available during fiscal 2015–2017. Its stated priorities include developing products, expanding product use and international sales, sustaining margins, and pursuing acquisitions. Management reported 77 R&D employees and fiscal 2014 R&D expense of $8.3 million.
- Key risks include acquisition identification and integration, competition and technology shifts, product-development failure, dependence on suppliers (including some single-source items), agricultural-market cyclicality and weather, regulatory requirements, intellectual-property disputes, product liability, key-personnel retention, and foreign-exchange and political/economic exposure.
- International sales were $96.1 million, or 38.8% of revenue, versus 40.1% a year earlier. The company generally does not hedge its foreign net investment and reported fiscal 2014 foreign-currency transaction losses of $717,000, largely in the first quarter.
- Environmental remediation at the Randolph, Wisconsin facility carried an estimated liability of $916,000, measured over an estimated 15-year period. Management said ordinary-course legal proceedings were not expected to materially affect results or financial position.
- Quarterly results can fluctuate: the company has little backlog and few long-term customer contracts. Fiscal 2014 fourth-quarter revenue was $67.3 million and net income attributable to Neogen was $7.5 million; the comparable fiscal 2013 quarter was $56.0 million and $7.0 million, respectively.
- President and COO Stephen Snyder resigned effective July 31, 2014, after the fiscal year-end. The company reported effective disclosure controls and internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- How much of future growth is expected to be organic versus acquisition-driven, and whether recent acquisitions meet their sales and integration expectations.
- Whether gross margins recover from 49.6%, given lower-margin acquisitions and shifts in product mix.
- Whether receivables collection times and inventory turnover improve, and how working-capital needs affect operating cash flow.
- Whether the $76.5 million in cash and marketable securities, together with the $12 million credit line, can support planned investment and acquisitions without new financing.
- Developments in environmental-remediation costs, foreign-currency exposure, product and regulatory risks, and leadership succession following the COO’s departure.