Business context and reporting period
Neogen Corporation’s Form 10-Q covers the third quarter and first nine months of fiscal 2018, ended February 28, 2018; comparisons are with the periods ended February 28, 2017. Neogen develops and sells food-safety and animal-safety products and services through its Food Safety and Animal Safety segments. Financial amounts below are in millions of dollars unless otherwise stated.
Financial performance
| Metric | Q3 FY2018 | Q3 FY2017 | Nine months FY2018 | Nine months FY2017 |
|---|---|---|---|---|
| Revenue | $95.9 | $88.4 | $293.0 | $262.7 |
| Gross margin | $45.5; 47.5% | $40.9; 46.3% | $140.7; 48.0% | $125.0; 47.6% |
| Operating income | $15.9; 16.6% of revenue | $14.4; 16.2% | $50.3; 17.2% | $45.9; 17.5% |
| Net income attributable to Neogen | $16.6 | $10.3 | $45.6 | $31.3 |
| Diluted EPS | $0.32 | $0.20 | $0.88 | $0.61 |
- Q3 revenue rose 8% and nine-month revenue rose 12%. Product revenue was $78.1 million and service revenue $17.8 million in Q3; service revenue grew 24% year over year.
- Q3 segment revenue: Food Safety $47.6 million, up 11%; Animal Safety $48.2 million, up 6%. Management reported 7% overall organic growth for both Q3 and the nine-month period. Acquisitions contributed to reported growth.
- Q3 gross margin improved, reflecting lower genomics input costs and favorable product mix, partly offset by lower mycotoxin test-kit sales. Nine-month operating margin declined from 17.5% to 17.2% as operating expenses grew faster than revenue.
- For the first nine months, operating cash flow was $46.6 million; investing cash flow was negative $60.8 million and financing cash flow was positive $18.9 million. Purchases of property, equipment, and other non-current intangibles were $16.3 million.
- Cash and cash equivalents were $82.1 million and marketable securities $110.1 million at February 28, 2018, totaling $192.2 million, versus $143.6 million at May 31, 2017. Total assets were $595.6 million; total liabilities were $53.7 million.
- No revolving-credit borrowings were outstanding. The company had an unsecured $15 million credit facility, expiring September 2019, and reported compliance with its financial covenants. The filing reports no other debt balance.
Material changes and management commentary
- International sales increased 17% in Q3 to $37.4 million and represented 39.0% of revenue, versus 36.3% a year earlier. Currency translation added approximately $1.9 million to Q3 international revenue.
- Growth drivers included genomics, culture media, sanitation and pathogen-testing products, and dairy drug-residue tests. Management cited stronger sales in several regions, while noting weaker Brazil forensic-test-kit sales amid competition and customer losses, and lower India sales because a prior-year large order did not recur.
- Food Safety rodenticides, insecticides, and disinfectants had a large Q3 increase, including a Rogama government-contract order that management said was unlikely to recur within the next 12 months. Animal Safety rodenticides, insecticides, and disinfectants declined, partly due to a terminated distribution agreement.
- Management does not provide forecasts of future financial performance. It said cash, securities, available borrowing capacity, and expected operating cash generation should fund foreseeable activities, but may not cover commercialization and acquisition plans; additional equity or other financing may be considered.
Taxes, contingencies, and risks
- Q3 income-tax expense was $0.7 million, a 4% effective rate, versus $5.4 million and 34% a year earlier. The filing attributes the lower rate and increased earnings to U.S. tax reform, stock-option tax benefits, and a favorable IRS audit conclusion. Nine-month tax expense was $7.9 million versus $16.3 million.
- Tax reform included a provisional $5.6 million deferred-tax remeasurement benefit and a provisional $2.7 million tax estimate on unrepatriated foreign earnings, payable over eight years. Management said these estimates could change as information develops. A blended 29.2% federal rate applies to fiscal 2018.
- The company reported a $916,000 estimated environmental remediation liability for its Wisconsin facility. Management said ordinary-course legal proceedings are not expected to materially affect results or financial position.
- Disclosed risks include competition, dependence on key employees, weather effects on agriculture and food production, acquisition integration, R&D, intellectual-property protection, regulation, and foreign-exchange exposure. The company uses forward contracts to help mitigate some currency risk.
- Revenue recognition guidance was scheduled for adoption June 1, 2018 using the modified retrospective approach; the potential impact was still under review. Lease-accounting guidance was expected to be adopted June 1, 2019, with impact under evaluation.
Most important facts for investors to verify
- How much of reported growth reflects organic demand versus acquisitions, currency effects, and unusual orders—especially the nonrecurring Rogama government-contract sale.
- Whether Q3 and year-to-date earnings growth is sustainable apart from tax reform, stock-option tax benefits, and the favorable IRS audit outcome.
- Whether improved gross margin can persist as acquisition-related product mix and lower mycotoxin test-kit sales continue to affect results.
- Developments in Brazil competition and customer losses, the terminated distribution agreements, and the company’s inventory and receivables trends; DSO rose to 63 days from 60 days at fiscal year-end.
- Finalization of provisional tax-reform accounting and the financial-statement effects of the upcoming revenue-recognition and lease-accounting standards.