Neogen Corporation — Form 10-Q Summary
Business context and reporting period
Neogen develops and sells food-safety testing products and animal-health products and services. This unaudited filing covers the second quarter and first six months of fiscal 2012, ended November 30, 2011; comparisons are with the corresponding fiscal 2011 periods. Unless otherwise noted, amounts below are in millions of dollars.
Financial performance and condition
| Metric | Three months ended Nov. 30, 2011 | Six months ended Nov. 30, 2011 | Prior-year comparable |
|---|---|---|---|
| Net sales | $44.891 | $90.588 | $43.931; $86.853 |
| Gross margin | $22.657; 50.5% | $45.634; 50.4% | $22.488; 51.2%; $45.255; 52.1% |
| Operating income | $8.143 | $17.494 | $9.629; $19.225 |
| Net income | $5.237 | $11.241 | $6.110; $11.935 |
| Diluted EPS | $0.22 | $0.47 | $0.26; $0.51 |
| Operating margin | 18.1% | 19.3% | 21.9%; 22.1% |
Six-month operating cash flow was $6.174, versus $19.559 in the prior-year period. Investing activities used $8.105, including $8.897 for property, equipment and other assets and $0.813 for the VeroMara acquisition. Cash and cash equivalents were $36.972 at November 30; marketable securities were $18.634, for combined cash and securities of $55.606, compared with $56.083 at May 31, 2011.
Current assets were $130.418 and current liabilities $18.409 at November 30. Total liabilities were $31.192, with no amounts drawn on the bank credit facility. The facility was extended through November 30, 2013 and increased to $12.0; the company reported compliance with its financial covenants.
Material changes and management commentary
- Sales increased 2.2% in the quarter and 4.3% for the six months. Food Safety sales grew 3.3% and 4.0%; Animal Safety sales grew 1.1% and 4.6%, respectively.
- Profitability weakened despite sales growth: management attributed lower gross margins mainly to product mix and higher manufacturing costs. Lower operating margins reflected increased sales, marketing and customer-support staffing and infrastructure investments intended to support future opportunities.
- Food Safety growth included stronger bacteria and sanitation products, partly offset by lower dehydrated culture media sales. Animal Safety growth in veterinary instruments and related products was offset in part by declines in GeneSeek DNA testing; GeneSeek revenue fell 14.7% for the quarter and 17.7% year to date, with contract business described as unpredictable.
- Management reported receivables up $3.235 and inventories up $4.411 since May 31, citing sales and payment timing, anticipated international orders, and bulk purchases. Neogen also bought a 128,000-square-foot Lexington, Kentucky facility for $4.950 to accommodate Animal Safety expansion.
Outlook, risks and contingencies
Neogen does not provide financial forecasts. Management expressed optimism about long-term prospects and expects research and development spending to range from 4% to 5% of revenue. Management said available cash, securities, credit capacity and expected operating cash flow should fund foreseeable activities, but may not cover product commercialization or future acquisitions; equity or other financing may be considered. The filing says inflation and changing prices are not expected to have a material effect, based on management’s expectation that input-cost increases can be offset with price increases.
Risks identified include competition, key-employee dependence, weather effects on agriculture and food production, acquisition integration, research and development, intellectual-property protection, regulation, foreign-market conditions and currency movements. The company uses derivatives to help manage some foreign-exchange exposure. Environmental remediation at its Randolph, Wisconsin facility carries an estimated $0.916 liability, measured over an estimated 15-year period; annual remediation costs in recent years ranged from $0.050 to $0.105. Management said ordinary-course legal matters were not expected to have a material effect. No material changes to critical accounting estimates or internal financial controls were reported; disclosure controls were deemed effective.
Important facts for investors to verify
- Whether sales growth can improve while gross and operating margins remain below prior-year levels, and whether the added commercial and support costs generate the expected returns.
- Whether inventory and receivables convert to cash as anticipated, given the substantial year-over-year decline in six-month operating cash flow.
- Whether GeneSeek revenue stabilizes and whether growth in veterinary products and Food Safety testing offsets weaker product lines and customer losses.
- Integration and financial effects of the VeroMara acquisition, including the potential secondary payment of approximately $0.200 and completion of purchase accounting.
- Future funding needs for commercialization or acquisitions, foreign-exchange exposure, and developments in environmental remediation or legal matters.