Business context and reporting period
Neogen Corporation’s Form 10-K covers the fiscal year ended May 31, 2021, with comparisons to fiscal 2020 and 2019. The company develops, manufactures and markets products and services for food safety and animal safety, including diagnostic tests, laboratory and genomics services, veterinary products and agricultural biosecurity products. Fiscal 2021’s fourth quarter ended May 31, 2021; this is an annual filing, not a standalone quarterly report.
Financial performance and position
| Metric | FY2021 | FY2020 | Change |
|---|---|---|---|
| Revenue | $468.5 million | $418.2 million | +12% |
| Gross profit / margin | $215.1 million / 45.9% | $196.3 million / 46.9% | Profit +10%; margin down 1.0 percentage point |
| Operating income / margin | $74.2 million / 15.8% | $67.5 million / 16.1% | Income +10%; margin down 0.3 percentage point |
| Net income | $60.9 million | $59.5 million | +2% |
| Diluted EPS | $0.57 | $0.56 | Up $0.01 |
| Cash from operations | $81.1 million | $85.9 million | Down $4.8 million |
- Food Safety revenue rose 10% to $234.2 million; Animal Safety revenue rose 14% to $234.2 million. Organic sales increased 6% and 13%, respectively. Acquisitions also contributed to growth.
- Product revenue was $376.3 million and service revenue was $92.2 million. International revenue was $183.2 million, or 39.1% of total revenue, versus 39.4% in FY2020.
- At May 31, 2021, cash and cash equivalents were $75.6 million and marketable securities were $305.5 million. Working capital was $537.9 million; total assets were $920.2 million and equity was $840.4 million.
- No long-term debt was outstanding. The company had an undrawn $15 million revolving credit facility expiring November 2023.
- Operating cash flow was $81.1 million; purchases of property, equipment and other non-current assets were $26.7 million, and cash used for acquisitions was $50.8 million. Stock-option exercises and other financing provided $34.6 million.
- FY2021 fourth-quarter revenue was $127.4 million and net income was $15.8 million, compared with $109.1 million and $16.3 million in the prior-year quarter. Diluted EPS was $0.15 in both quarters.
Material changes versus the prior comparable period
- Sales accelerated from 1% growth in FY2020 to 12% in FY2021. Management reported 9% overall organic sales growth.
- Gross margin contracted to 45.9% from 46.9%. Management cited supply-chain pressures, including a 53% increase in freight costs on inventory purchases, higher labor and overhead costs, and product mix. Operating expenses rose 9%, slower than revenue growth.
- Net income increased only 2% despite higher operating income, mainly because other income fell (interest income declined as yields dropped) and the effective tax rate rose to 19.1% from 17.7%.
- Cash from operations declined from $85.9 million to $81.1 million. Cash and marketable securities nevertheless increased, and the company remained debt-free.
- Acquisitions included Megazyme, acquired in December 2020, and the StandGuard product line, acquired in July 2020, alongside prior-year acquisitions. Megazyme consideration included $39.8 million cash at closing, $8.6 million escrow cash, $4.9 million in shares and potential contingent consideration.
Outlook, management commentary, risks and unusual items
- Management expected COVID-19 to affect operations and financial results through the majority of FY2022. The pandemic supported biosecurity and companion-animal sales, while some food-safety testing demand, customer access and supply chains were adversely affected. The company also cautioned that demand for pandemic-related products could decline as cases decrease.
- Management expects annual R&D spending of approximately 3%–4% of revenue and said several new or improved products were expected to become commercially available during FY2022 and FY2023. No specific revenue or earnings guidance was provided.
- Key risks include supply and shipping disruptions, reliance on distributors and some single-source suppliers, acquisition integration, competition, product-development and regulatory risks, cybersecurity, agricultural-market conditions, foreign-exchange exposure and international operations.
- An OFAC investigation concerns genomic testing services connected to veterinary activities involving an Iranian party. Neogen continues to cooperate; the potential outcome is uncertain. The company recorded a $600,000 reserve in FY2020 and said it believed the reserve was adequate.
- Environmental remediation at the Randolph, Wisconsin facility carried a recorded liability of $916,000. The company is evaluating a pilot study; changes to the remediation approach could increase future costs.
- FY2021 included $3.1 million in strategic consulting, legal and other professional fees related to unsuccessful acquisition activity. The company also recorded a $300,000 vendor legal-settlement expense and received $309,000 from a property-loss settlement.
- The annual impairment review found no goodwill or long-lived asset impairment. The auditor gave unqualified opinions on the financial statements and internal control over financial reporting; income-tax accounting was identified as a critical audit matter.
Important facts for investors to verify
- How much of continued revenue growth is organic, and how sustainable are acquisition contributions and pandemic-related demand?
- Whether freight, labor and other cost pressures ease, and whether gross margins recover from FY2021 levels.
- Whether operating cash flow converts consistently into cash after capital spending and acquisitions, and how management deploys its substantial cash and securities balance.
- The status and potential financial consequences of the OFAC investigation and environmental remediation, including whether recorded reserves remain sufficient.
- Acquisition integration, purchase accounting and the performance of Megazyme and other recently acquired businesses.
- The filing reports no cash dividends; verify any subsequent change in capital-return policy or material developments after May 31, 2021.