Neogen Corporation — Form 10-Q Summary
Business context and reporting period: Neogen develops and sells food-safety testing products and animal-safety products and services, including genomics. This filing covers the second quarter and first six months of fiscal 2018, ended November 30, 2017; comparisons are with the corresponding fiscal 2017 periods. Amounts below are in U.S. dollars unless noted. Per-share figures reflect the 4-for-3 stock split effective December 29, 2017.
Financial performance
| Metric | Three months ended Nov. 30, 2017 | Three months ended Nov. 30, 2016 | Six months ended Nov. 30, 2017 | Six months ended Nov. 30, 2016 |
|---|---|---|---|---|
| Revenue | $101.8 million | $90.7 million | $197.1 million | $174.4 million |
| Gross profit / margin | $49.3 million / 48.4% | $43.6 million / 48.1% | $95.1 million / 48.3% | $84.1 million / 48.2% |
| Operating income / margin | $18.0 million / 17.7% | $16.9 million / 18.6% | $34.4 million / 17.5% | $31.6 million / 18.1% |
| Net income attributable to Neogen | $17.1 million | $11.2 million | $29.0 million | $21.0 million |
| Diluted EPS | $0.33 | $0.22 | $0.56 | $0.41 |
| Operating cash flow | Not separately provided | Not separately provided | $27.4 million | $29.5 million |
- Quarterly revenue rose 12%; first-half revenue rose 13%. Quarterly net income attributable to Neogen increased 53%, and first-half net income increased 38%.
- Quarterly Food Safety revenue grew 21% to $49.6 million; Animal Safety revenue grew 5% to $52.3 million. First-half segment revenue grew 20% to $96.3 million and 7% to $100.8 million, respectively.
- Management reported organic revenue growth of 6% for the quarter and 8% year to date. Acquisitions contributed $5.3 million and $9.5 million to revenue growth for those periods, respectively.
- Gross margin improved slightly, but operating margin declined as operating expenses grew faster than revenue. Quarterly operating expenses rose 17% to $31.3 million; first-half expenses rose 16% to $60.7 million.
- Quarterly income tax expense was $1.9 million (10% effective rate), versus $5.6 million (33%) a year earlier. First-half tax expense was $7.2 million (20%), versus $10.9 million (34%). Lower tax expense included share-based compensation tax benefits of $3.4 million for the quarter and $3.8 million year to date; the quarter also benefited from an $816,000 release of uncertain-tax-position reserves following a favorable IRS audit outcome.
Financial position and liquidity
- At November 30, 2017, cash and cash equivalents were $64.4 million and marketable securities were $111.4 million, totaling $175.8 million, compared with $143.6 million at May 31, 2017.
- Total assets were $581.0 million and total liabilities were $60.4 million. Current assets were $339.9 million and current liabilities $37.9 million. The company reported no outstanding borrowings.
- Six-month investing cash outflow was $56.2 million, including $45.3 million net purchases of marketable securities and $10.4 million for property, equipment, and other non-current intangible assets. Financing cash inflow was $16.4 million, primarily from stock-option exercises and employee share purchases.
- Accounts receivable were $74.9 million, up 9% from May 31; days sales outstanding increased to 62 from 60. Inventory was $73.7 million, broadly unchanged. Management said it had initiated programs to improve inventory turnover.
- The company had a $15 million unsecured revolving credit facility, expiring September 30, 2019, with no balance drawn. It reported compliance with its financial covenants. Management believed cash, securities, available credit, and expected operating cash flow were sufficient for foreseeable needs, but noted that additional financing could be needed for commercialization or acquisitions.
Material changes, outlook, and risks
- Growth included contributions from Quat-Chem and Rogama, acquired in December 2016, and GeneSeek Australasia, acquired in September 2017. Management attributed some margin pressure to these acquisitions’ lower-than-historical gross margins.
- International sales grew 24% in the quarter to $38.6 million and represented 37.9% of revenue, compared with 34.4% a year earlier. Currency translation added approximately $0.9 million to quarterly international revenue.
- Product trends were mixed: culture media, genomics, veterinary instruments, and several testing categories grew; lower DON toxin sales reflected the non-recurrence of prior-year crop outbreaks. A terminated distribution agreement reduced cleaner and disinfectant sales.
- Management does not provide forecasts of future financial performance. It expressed optimism about long-term prospects but cautioned that historical results may not predict future performance. Risks cited include competition, key-employee recruitment and retention, weather effects on agriculture and food production, acquisition integration, R&D, intellectual-property protection, and regulation.
- Foreign-exchange exposure spans several currencies; the company uses forward contracts to mitigate some currency effects. Interest-rate exposure relates to variable-rate investments and potential borrowings.
- Environmental remediation at the Randolph, Wisconsin facility had an estimated liability of $916,000, unchanged from May 31, 2017, with an estimated 15-year period. Management said ordinary-course legal proceedings were not expected to materially affect results or financial position.
- The company adopted the share-based compensation accounting update on June 1, 2017, affecting tax expense. It planned to adopt the new revenue standard on June 1, 2018 using the modified retrospective method and was assessing its impact. It expected to adopt the lease standard on June 1, 2019 and was evaluating the effects.
Important facts for investors to verify
- How much of revenue and earnings growth is sustainable organic growth versus acquisitions, currency effects, and episodic testing demand.
- The ongoing effect of share-based compensation tax benefits and the IRS reserve release on reported tax rates and net income.
- Whether operating-margin pressure continues as expenses rise and acquired businesses contribute at lower gross margins.
- Receivables collection and inventory-turnover progress, including the effect of the company’s improvement programs on cash generation.
- The impact of revenue-standard adoption, acquisition-related contingent payments, foreign-exchange movements, and potential future financing needs.