Neogen Corporation — Form 10-Q Summary
Reporting period: First quarter of fiscal 2014, the three months ended August 31, 2013, compared with the three months ended August 31, 2012, unless otherwise noted. Financial statement amounts below are in millions of dollars, except per-share data.
Business context and performance
Neogen operates through Food Safety, which sells diagnostic tests and related products, and Animal Safety, which sells animal health products and provides genetic identification services. Total revenue rose 17.7% to $58.5 million. Management reported 12.5% organic sales growth, with the balance of growth attributed to acquisitions. International sales were 42.3% of revenue, versus 41.7% a year earlier.
| Metric | Q1 FY2014 | Q1 FY2013 | Change |
|---|---|---|---|
| Product revenue | $51.3 million | $44.8 million | +14.6% |
| Service revenue | $7.2 million | $4.9 million | +46.5% |
| Total revenue | $58.5 million | $49.7 million | +17.7% |
| Gross margin | $30.4 million; 51.9% | $26.5 million; 53.3% | Margin down 1.4 percentage points |
| Operating income | $12.4 million; 21.2% of revenue | $10.3 million; 20.8% of revenue | +20.2% |
| Net income | $7.7 million | $6.7 million | +14.9% |
| Net income attributable to Neogen | $7.8 million | $6.7 million | +16.8% |
| Diluted EPS | $0.32 | $0.28 | +$0.04 |
| Operating cash flow | $5.5 million | $4.4 million | +$1.1 million |
Segments and material changes
- Food Safety: Revenue increased 14.5% to $30.0 million. Growth included dehydrated culture media and other (+27.2%), natural toxins, allergens and drug residues (+10.7%), and bacteria and general sanitation (+9.9%).
- Animal Safety: Revenue increased 21.3% to $28.6 million. Veterinary instruments and disposables grew 35.1%, animal care and other grew 32.9%, and DNA testing grew 27.9%. Acquisitions contributed to growth in this segment.
- Gross margin declined as Animal Safety represented a larger share of sales and product mix modestly reduced material margins within both segments. Operating margin nevertheless increased because operating expenses grew more slowly than revenue.
- General and administrative expense rose $1.1 million, primarily from acquisition-related intangible amortization and higher compensation. Other expense was $0.6 million, largely from foreign-currency losses as the Brazilian real and Mexican peso weakened against the U.S. dollar.
Cash, liquidity, debt, and acquisitions
Cash and cash equivalents were $43.6 million at August 31, 2013, down from $50.0 million at May 31, 2013. Cash plus marketable securities totaled $84.4 million, compared with $85.4 million at fiscal year-end. Net cash used in investing was $17.5 million, including $10.0 million for the July 2013 SyrVet asset acquisition and $2.0 million for property, equipment, and other assets. The quarter-end cash decrease was $6.4 million.
Total assets were $308.1 million and total liabilities were $37.4 million. The balance sheet reported no outstanding borrowings. Neogen had an unsecured $12.0 million revolving credit facility maturing September 1, 2014, with no advances during the quarter; the company reported compliance with its financial covenants. Management said existing cash, securities, available credit, and expected operating cash flow should fund foreseeable activities, but might not cover product commercialization or future acquisitions, and additional equity or other financing could be considered.
During the quarter, Neogen acquired SyrVet for $10.0 million cash, with an estimated additional contingent payment liability of $0.7 million (subject to a contractual maximum of $1.5 million). The filing also describes the earlier acquisitions of Macleod Pharmaceuticals and Scidera Genomics. SyrVet was being integrated with an existing operation; management said recent acquisitions had been integrated with minimal incremental costs.
Outlook, risks, and contingencies
- Neogen does not provide forecasts of future performance. Management expressed optimism about long-term prospects, while cautioning that quarterly results are not necessarily indicative of full-year results.
- Risks identified include competition, dependence on key employees, weather effects on agriculture and food production, acquisition identification and integration, research and development, intellectual-property protection, regulation, foreign-exchange movements, and weak foreign-market conditions.
- Management did not expect inflation or changing prices to materially affect operations, citing expected price increases and/or cost efficiencies.
- The company accrued $0.916 million for environmental remediation and monitoring at its Randolph, Wisconsin facility, measured over an estimated 15-year period. Annual remediation costs had ranged from $50,000 to $105,000 over the prior five years.
- Management said routine legal proceedings were not expected to materially affect future results or financial position, and reported no significant changes to previously disclosed contractual obligations or contingencies.
- Disclosure controls were reported effective; no material change in internal control over financial reporting was reported for the quarter.
Important facts for investors to verify
- Whether organic growth and service-revenue momentum continue, and how much future growth depends on acquisitions.
- Whether gross-margin pressure from segment and product mix persists despite improving operating margin.
- The integration, sales performance, and contingent consideration for SyrVet, and the performance of prior acquisitions.
- Foreign-currency exposure and the drivers of the reported quarterly currency loss.
- Cash conversion, working-capital needs, and funding capacity if product commercialization or acquisition plans expand.
- Progress and remaining obligations for the Randolph environmental remediation.