Neogen Corporation — Q2 FY2013 Form 10-Q
Reporting period: Three and six months ended November 30, 2012. The quarter is the second quarter of Neogen’s fiscal 2013. Figures are unaudited unless otherwise noted; dollar amounts are in millions except per-share data.
Business context and results
Neogen operates in Food Safety, which sells diagnostic testing products, and Animal Safety, which includes animal health products, genetic testing, rodenticides and disinfectants.
| Metric | Q2 FY2013 | Q2 FY2012 | Six months FY2013 | Six months FY2012 |
|---|---|---|---|---|
| Net sales | $50.737 | $44.891 | $100.467 | $90.588 |
| Gross margin | $27.306 | $22.657 | $53.800 | $45.634 |
| Operating income | $10.477 | $8.143 | $20.805 | $17.494 |
| Net income attributable to Neogen | $6.793 | $5.237 | $13.507 | $11.241 |
| Diluted EPS | $0.28 | $0.22 | $0.56 | $0.47 |
Financial position and cash flow
- Margins: Gross margin was 53.8% in Q2 versus 50.5% a year earlier, and 53.6% for the six-month period versus 50.4%. Operating margin was 20.6% in Q2 versus 18.1%, and 20.7% for six months versus 19.3%.
- Cash and liquidity: Cash and cash equivalents were $41.309 million at November 30, down from $49.045 million at May 31. Marketable securities were $29.529 million, bringing cash and securities to $70.838 million, compared with $68.645 million at fiscal year-end. Current assets were $152.574 million and current liabilities $18.315 million.
- Cash flows, six months: Operating activities provided $11.334 million, compared with $6.174 million in the prior-year period. Investing activities used $23.217 million, including $9.918 million for the Macleod acquisition; financing activities provided $3.996 million.
- Debt: No borrowings were outstanding under the $12 million unsecured revolving credit facility. The facility matures September 1, 2014; the company reported compliance with its financial covenants.
- Other balance-sheet items: Total assets were $269.671 million and total liabilities $31.960 million. Goodwill was $60.037 million. Inventory increased to $38.375 million from $34.992 million at May 31.
Material changes and management commentary
- Q2 sales rose 13.0% year over year; six-month sales rose 10.9%. Management reported organic growth of 9.4% for Q2 and 8.8% for six months, with the remainder attributed to the Igenity and Macleod acquisitions.
- Food Safety sales grew 18.1% in Q2 and 15.2% for six months; Animal Safety sales grew 8.1% and 6.6%, respectively. Food Safety gains included increased aflatoxin and DON testing amid outbreaks, while Animal Safety growth included acquired products.
- Management attributed improved gross margins chiefly to a higher mix of higher-margin diagnostic products, plus product mix and manufacturing efficiencies. Operating expenses increased 16.0% in Q2 and 17.3% for six months, reflecting sales and marketing investment, legal fees, share-based compensation and research and development project costs.
- Macleod Pharmaceuticals, acquired October 1, 2012 for $9.918 million in net cash plus $0.100 million accrued secondary consideration, makes the Uniprim veterinary antibiotic and is included in Animal Safety.
- Management said existing cash, available credit and expected operating cash flows should fund foreseeable activities, but may not cover commercialization of products under development or future acquisitions; equity or other financing may be considered. Neogen does not provide performance forecasts.
Risks, contingencies and unusual items
- Risks identified include competition, reliance on key employees, weather effects on agriculture and food production, acquisition integration, research and development, intellectual property protection, regulation, foreign-market demand and currency fluctuations.
- The company has foreign-currency exposure, particularly to the British pound and euro, and uses derivatives to manage some currency risks. It also identified variable-rate borrowing exposure, although no facility borrowings were outstanding at quarter-end.
- Environmental remediation at the Randolph, Wisconsin facility is accrued at $0.916 million, measured undiscounted over an estimated 15 years; annual remediation costs in recent years ranged from $50,000 to $105,000. Management said routine legal proceedings were not expected to materially affect results or financial position.
- Management reported no material changes in contractual obligations or contingent liabilities from the latest annual report. Interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether sales and margin growth persist, particularly as crop-related aflatoxin and DON testing demand normalizes.
- Retention of business gained during a competitor’s small-animal-supplement supply disruption, and the trajectory of GeneSeek revenue and average selling prices.
- Macleod integration, acquisition-related purchase-price estimates and the remaining GeneSeek contingent payment of $1.447 million, expected in Q4 FY2013.
- Cash conversion and working-capital needs, including inventory growth, alongside spending plans for product commercialization and acquisitions.
- Any developments in environmental remediation, legal matters, foreign-exchange exposure or financing needs.