Neogen Corporation — Form 10-Q summary
Business context and period. Neogen develops and sells food-safety and animal-safety products and services, including diagnostic tests, laboratory and genomics services, and pest-control products. This filing covers the third quarter and first nine months of fiscal 2020, ended February 29, 2020; it compares the quarter with the three months ended February 28, 2019. The filing is dated April 3, 2020. Unless stated otherwise, figures below are in U.S. dollars.
Financial performance
| Metric | Third quarter FY2020 | Third quarter FY2019 | Nine months FY2020 | Nine months FY2019 |
|---|---|---|---|---|
| Revenue | $99.9 million | $97.7 million | $309.1 million | $304.4 million |
| Gross margin | $45.3 million; 45.4% | $44.6 million; 45.7% | $144.6 million; 46.8% | $141.4 million; 46.4% |
| Operating income | $13.0 million; 13.1% of revenue | $14.6 million; 15.0% | $47.6 million; 15.4% | $49.4 million; 16.2% |
| Net income | $12.2 million | $13.1 million | $43.1 million | $44.4 million |
| Diluted earnings per share | $0.23 | $0.25 | $0.82 | $0.85 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $60.3 million | $43.0 million |
- Quarter revenue rose 2%; management reported 1% organic growth. Nine-month revenue rose 2%, with 1% organic growth.
- Quarter operating income declined 11% and net income declined 7%. For the nine months, operating income declined 4% and net income declined 3%.
- Operating expenses increased 8% in the quarter and 5% year to date, outpacing revenue growth. Research and development spending rose 18% in the quarter and 22% year to date, largely for new-product development.
- Cash and cash equivalents were $50.8 million and marketable securities were $277.1 million at February 29, 2020, totaling $327.9 million, versus $267.5 million at May 31, 2019. Current assets were $514.9 million and current liabilities $39.1 million.
- Cash from operations was $60.3 million for the first nine months. Investing cash outflow was $76.6 million, including $16.3 million for property, equipment and other assets and $9.7 million for acquisitions. Financing cash inflow was $27.9 million, principally from stock-option exercises and employee share purchases.
- No borrowings were outstanding under the $15 million revolving credit line. The company reported no long-term debt and said it was in compliance with its credit covenants.
Business trends and changes versus prior periods
- Food Safety: Third-quarter revenue declined 1% to $50.5 million; organic sales fell 3%. Nine-month revenue increased 1% to $158.4 million, but was flat excluding acquisitions. Quarterly declines in drug-residue tests, culture media and genomics were partly offset by higher pest-control and disinfectant sales.
- Animal Safety: Third-quarter revenue increased 6% to $49.4 million, with 6% organic growth. Nine-month revenue increased 2% to $150.7 million. Genomics services were a key contributor, up 14% for the quarter and 20% year to date, supported by companion-animal testing demand.
- Service revenue increased 9% in the quarter and 14% year to date. Product revenue was nearly flat in the quarter and declined modestly year to date.
- International revenue was approximately 40% of total in both periods. Currency translation reduced reported revenue by about $0.4 million in the quarter and $2.5 million year to date. Management also cited weaker drug-residue kit demand in Europe and lost Brazilian forensics business.
- Quarter gross margin fell 0.3 percentage points, primarily from a higher share of lower-margin Animal Safety sales. Year-to-date gross margin improved 0.4 percentage points, helped by improved domestic genomics-service margins.
- The effective tax rate declined to 14.4% from 21.4% for the quarter and to 15.6% from 17.0% year to date. Management attributed the rates mainly to stock-option tax benefits, research and development credits, and other deductions.
Outlook, risks and unusual items
- Neogen provided no financial forecast. Management said it was optimistic about long-term prospects, while cautioning that historical results may not indicate future performance.
- COVID-19 had mixed effects by the reporting date: disinfectant demand in China contributed to growth, while the company warned that prolonged economic and supply-chain disruption could materially affect operations, financial results, liquidity and financial condition. It increased some raw-material inventory levels as a precaution and was monitoring customer payment risk.
- Management said existing cash, marketable securities, available credit and anticipated operating cash flow should fund activities for the foreseeable future, but might not suffice for commercialization plans or desired acquisitions; additional equity or other financing could be considered.
- During the quarter, the company acquired distributors in Argentina, Uruguay and Italy, a culture-media business in England, and an Australian distributor. Nine-month acquisition cash spending was $9.7 million. A further Chilean acquisition closed after quarter-end for $0.4 million.
- The company recorded a $0.916 million liability for environmental remediation at its Wisconsin facility. Future costs are uncertain; a change in remediation strategy could require a higher accrual and an expense. Management said ordinary-course legal matters were not expected to have a material effect.
- Other identified risks include competition, acquisition integration, research and development, regulation, key-personnel dependence, agricultural and food-production conditions, foreign exchange movements, and disease outbreaks. The filing reported effective disclosure controls and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether organic growth and recent momentum in Animal Safety genomics can offset softness in parts of Food Safety, especially drug-residue testing and culture media.
- Whether expense growth, particularly R&D and acquisition-related costs, moderates enough to support operating-margin recovery.
- The duration and financial effects of COVID-19, including customer collections, supply-chain availability, and the sustainability of pandemic-related disinfectant demand.
- Integration, purchase-price allocations and performance of recent acquisitions, along with the company’s capacity and willingness to fund further acquisitions or development.
- Potential changes in the Wisconsin remediation approach and whether the recorded $0.916 million liability remains adequate.