Neogen Corporation — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended November 30, 2019. Neogen develops and sells food-safety and animal-safety products and testing services. Amounts below are in U.S. dollars; financial statement amounts are rounded to millions.
Financial performance and liquidity
| Metric | Three months ended Nov. 30, 2019 | Six months ended Nov. 30, 2019 | Comparable 2018 period |
|---|---|---|---|
| Revenue | $107.8 million, up 1% | $209.2 million, up 1% | $107.1 million and $206.7 million |
| Gross margin | 47.3%, up from 46.7% | 47.4%, up from 46.8% | Prior-year margins shown for comparison |
| Operating income | $18.3 million, approximately flat | $34.5 million, down from $34.7 million | $18.2 million and $34.7 million |
| Net income | $16.3 million; diluted EPS $0.31 | $30.9 million; diluted EPS $0.59 | $16.1 million / $0.31 and $31.3 million / $0.60 |
| Cash from operations | Not separately reported | $40.5 million, versus $32.6 million | Six-month comparison |
Quarterly operating margin was 16.9%, versus 17.0%; six-month operating margin was 16.5%, versus 16.8%. Gross-margin improvement reflected a higher Food Safety revenue mix and better margins in domestic genomics services, but operating expenses grew faster than gross profit. Six-month capital expenditures and other non-current asset purchases were $12.8 million, versus $6.7 million.
At November 30, 2019, cash and cash equivalents were $66.4 million and marketable securities were $247.2 million, totaling $313.6 million. Total liabilities were $59.7 million; no borrowings were outstanding under the $15 million revolving credit facility, which matures September 30, 2021. Management said available cash, the credit facility and expected operating cash flow should fund foreseeable activities, while noting that commercialization plans or acquisitions could require additional financing. The filing reports no long-term borrowings.
Material changes and business drivers
- Food Safety: Second-quarter revenue rose 6% to $56.9 million; six-month revenue rose 2% to $107.9 million. Quarterly growth included higher sales of rodenticides, insecticides and disinfectants, bacterial-testing products, and culture media.
- Animal Safety: Second-quarter revenue declined 4% to $50.9 million, with organic sales down 5%; six-month revenue increased 1% to $101.4 million, with organic sales flat. Quarterly genomics growth was offset by weaker sales of veterinary products, animal-care products and pest-control/disinfectant products.
- Service revenue increased 16% in the quarter and 17% year to date, driven mainly by genomics testing, particularly in the companion-animal market. Acquisitions contributed to year-to-date comparisons, including Delta Genomics and Livestock Genetic Services.
- Quarterly organic sales were flat overall; six-month organic sales increased 1%. International sales were 41% of quarterly revenue and 39% year to date. Currency translation reduced revenue by about $1.0 million in the quarter and $2.1 million year to date.
- Quarterly net income was slightly higher mainly because the effective tax rate fell to 15.3% from 18.5%, including a greater tax benefit from stock-option exercises. The six-month effective rate rose to 16.1% from 15.1%, contributing to lower year-to-date net income.
Outlook, risks, contingencies and unusual items
- Neogen does not provide forecasts of future financial performance. Management expressed optimism about long-term prospects but cautioned that historical results may not indicate future results.
- Management cited competition, recruitment and retention of key employees, weather effects on agriculture and food production, acquisition integration, research and development, intellectual-property protection, regulation, and foreign-exchange exposure as risks.
- Sales were affected by currency devaluations and the loss of Brazilian forensic-test-kit business after a customer changed testing methods. Brazilian quarterly growth also benefited from a large non-recurring insecticide sale; Food Safety pest-control growth included non-recurring government sales. These items may not recur.
- Research and development expense rose 19% in the quarter, primarily for products expected to launch in late fiscal 2020 or early fiscal 2021. The filing gives no revenue or earnings guidance for those launches.
- The company recorded a $916,000 liability for environmental remediation at its Randolph, Wisconsin facility. The regulator and company were discussing potential alternative remediation strategies; future costs and the outcome were uncertain, and a strategy change could require a higher liability and expense.
- Legal proceedings in the normal course of business were not expected by management to materially affect results or financial position. The company reported compliance with its credit covenants. Lease-accounting adoption resulted in approximately $2.0 million of right-of-use assets and lease liabilities and was described as immaterial to the financial statements overall.
Important facts for investors to verify
- Whether Animal Safety’s quarterly organic-sales decline persists and whether Food Safety growth offsets it.
- The durability of genomics growth, its margins, and the extent to which recent acquisitions contributed to reported growth.
- Whether one-time sales, distributor inventory reductions, supplier backorders, and the Brazilian forensic-business loss continue to affect revenue.
- Future currency effects and the outcome and potential cost of the Wisconsin remediation review.
- Cash deployment for product development, capital spending and acquisitions, and whether additional financing or equity issuance becomes necessary.