Neogen Corporation — Q1 FY2020 Form 10-Q
Business context and period: Neogen develops and sells food-safety and animal-safety products and services. This unaudited quarter ended August 31, 2019, compared with the three months ended August 31, 2018. Amounts below are in U.S. dollars; financial statement figures are in millions unless stated otherwise.
Key financial results
| Metric | Q1 FY2020 | Q1 FY2019 | Change |
|---|---|---|---|
| Revenue | $101.4 | $99.6 | +2%; organic growth 1% |
| Gross profit / margin | $48.2 / 47.5% | $46.7 / 46.9% | Margin +0.6 percentage points |
| Operating income / margin | $16.3 / 16.0% | $16.5 / 16.5% | Income down $0.2 |
| Net income | $14.7 | $15.2 | Down 4% |
| Diluted EPS | $0.28 | $0.29 | Down $0.01 |
| Operating cash flow | $23.7 | $16.1 | Up $7.6 |
Revenue growth was led by Animal Safety, while Food Safety revenue declined. Service revenue rose 17% to $19.5 million; product revenue was $81.9 million. Domestic revenue was $63.3 million and international revenue was $38.1 million, down 4% year over year in reported dollars.
- Food Safety: Revenue of $51.0 million, down 2% (organic down 2%). Natural toxins, allergens and drug-residue revenue increased 7%; culture media and other declined 8%, and rodenticides, insecticides and disinfectants declined 18%.
- Animal Safety: Revenue of $50.4 million, up 6% (organic up 5%). Genomics services increased 25%, including 21% organic growth; veterinary instruments and disposables rose 9%.
Gross margin improved as Animal Safety genomics margins strengthened and Food Safety benefited from product mix. Operating expenses increased 6% to $31.9 million, including higher R&D spending ($3.7 million, up $0.9 million) for products expected to launch in late FY2020 and early FY2021. Operating margin declined primarily due to that R&D investment.
Cash, liquidity and debt
- Cash and cash equivalents were $56.3 million; marketable securities were $234.7 million. Combined, these totaled $291.0 million at quarter-end, versus $267.5 million at May 31, 2019.
- Operating activities generated $23.7 million. Investing activities used $15.4 million, including $6.5 million for property, equipment and other assets; financing activities provided $8.7 million, principally from stock-option exercises and employee stock purchases.
- Current assets were $473.5 million and current liabilities $40.4 million. Total liabilities were $60.8 million; the company reported no outstanding balance on its $15 million revolving credit line. The facility matures September 30, 2021, and the company reported compliance with its financial covenants.
- Management said available cash, marketable securities, credit availability and expected operating cash flow should fund foreseeable needs, but noted these resources may not suffice for commercialization plans or potential acquisitions; additional equity or other financing could be considered.
Material changes, outlook and risks
- Net income fell despite revenue and gross-margin growth, primarily because the effective tax rate rose to 17.0% from 11.1%. Tax benefits from stock-option exercises were $0.8 million versus $2.3 million a year earlier.
- International sales were affected by approximately $1.2 million of unfavorable currency translation, a nonrecurring Brazilian government insecticide order in the prior-year quarter, and lost Brazilian forensic-laboratory business. Brazil aflatoxin-kit sales increased 57%; China sales were also affected by African swine fever-related animal losses.
- Livestock Genetics and Delta Genomics acquisitions contributed to Animal Safety growth. Management did not provide a financial forecast and cautioned that quarterly results are not necessarily indicative of full-year results.
- Risks cited include competition, key-employee dependence, weather effects on agriculture and food production, acquisition integration, R&D, intellectual-property protection, regulation, foreign-exchange exposure and other risks in SEC filings. The company uses forward contracts to mitigate certain currency fluctuations.
- Environmental remediation at the Randolph, Wisconsin facility had a recorded liability of $0.916 million. The company is discussing possible alternative approaches with the Wisconsin regulator; future costs and the outcome are unknown, and a strategy change could increase the liability. Management said ordinary-course legal matters were not expected to have a material effect.
- The company adopted the new lease standard on June 1, 2019; the reported transition impact was immaterial. Operating-lease liabilities were $1.737 million at August 31, 2019.
Important facts for investors to verify
- Whether Animal Safety growth, particularly genomics, continues to offset Food Safety weakness and how much growth is organic versus acquisition-related.
- Whether R&D spending produces the products expected in late FY2020 and early FY2021, and how it affects operating margins.
- How currency movements, Brazil’s lost forensic business and prior-year nonrecurring sales affect international comparisons in subsequent quarters.
- Whether the Randolph remediation strategy changes and requires an increased accrual, and whether planned commercialization or acquisitions create additional financing needs.
- How collections and working-capital trends develop; days sales outstanding were 64 days at quarter-end, compared with 61 days at May 31, 2019.