Neogen Corporation (NEOG) — Form 10-Q Summary
Reporting period: Fiscal second quarter and first six months ended November 30, 2021; comparisons are with the corresponding 2020 periods. Amounts are in U.S. dollars. Neogen reported two segments: Food Safety and Animal Safety.
Financial performance
| Metric | Three months ended Nov. 30 | Six months ended Nov. 30 |
|---|---|---|
| Revenue | $130.5 million, up 13% from $115.0 million | $258.8 million, up 15% from $224.3 million |
| Gross margin | $60.6 million; 46.4% of revenue versus 46.3% | $120.6 million; 46.6% versus 46.1% |
| Operating income | $12.5 million versus $19.2 million; margin 9.6% versus 16.7% | $34.2 million versus $38.1 million; margin 13.2% versus 17.0% |
| Net income | $10.8 million versus $15.9 million | $27.9 million versus $31.7 million |
| Diluted earnings per share | $0.10 versus $0.15 | $0.26 versus $0.30 |
| Cash from operating activities | Not separately presented for the quarter | $41.1 million versus $47.5 million |
- Product revenue was $106.1 million and service revenue $24.4 million for the quarter. Organic sales growth was 10% in the quarter and 12% year to date, according to management.
- Quarterly Food Safety revenue grew 17% to $67.1 million; Animal Safety grew 10% to $63.4 million. Year-to-date sales were $129.9 million and $129.0 million, respectively.
- Management attributed much of the reported earnings decline to $9.3 million in legal, consulting and other professional fees for the proposed 3M Food Safety combination. Excluding these costs, management reported operating margins of 16.7% for the quarter and 16.8% year to date, and said net income rose 14% and 11%, respectively, versus prior-year comparable periods.
- Quarterly operating expenses rose 42% to $48.1 million, including the transaction-related fees. Gross margin improved modestly despite higher raw-material and freight costs; management said pricing actions were taken where appropriate.
Cash, liquidity and debt
- Cash and cash equivalents were $51.1 million at November 30, 2021, versus $75.6 million at May 31. Marketable securities were $338.1 million versus $305.5 million; together, cash and securities totaled $389.2 million versus $381.1 million.
- Six-month investing cash outflow was $64.7 million, including $26.9 million for acquisitions and $5.2 million for property, equipment and other non-current assets. Inventory increased to $107.1 million from $100.7 million; management cited supply constraints and efforts to reduce freight costs and avoid backorders.
- No borrowings were outstanding on the $15 million unsecured revolving credit facility, which expires November 30, 2023. The company reported compliance with its financial covenants. Total liabilities were $101.2 million at November 30.
- Management said cash, marketable securities, available credit and expected operating cash flow should fund the remainder of fiscal 2022. It said those resources would not be sufficient for the planned 3M transaction, expected to be funded with equity issued to 3M shareholders and approximately $1 billion of borrowing.
Developments, outlook and risks
- Neogen acquired CAPInnoVet in September 2021 and Delf (UK) and Abbott Analytical on November 30. The filing also describes a December 9 acquisition of Genetic Veterinary Services for $11.8 million. CAPInnoVet consideration included potential milestone payments of up to $6.5 million and possible future royalties of up to $14.5 million.
- After quarter-end, Neogen entered an agreement to combine with 3M’s Food Safety business in a Reverse Morris Trust transaction. The filing expected closing in the third calendar quarter of 2022. Neogen provides no forecasts of future financial performance.
- COVID-19 continued to affect customer demand in certain food-service-related markets and contributed to vendor disruption, shipping delays and higher freight and labor costs. Management expected pandemic effects to continue through at least the end of the fiscal year; duration and magnitude remained uncertain.
- Other business factors discussed include competition, acquisition integration, supply availability, labor recruitment and retention, foreign exchange, regulation, and research and development risks. Management said inflation and changing prices were not expected to have a material effect, based on its expectation of offsetting costs through pricing and efficiencies.
- The company is cooperating with an OFAC investigation concerning certain genomic testing services connected to an Iranian party. It had recorded a $600,000 reserve for potential fines or penalties and said it believed the reserve adequate; the outcome remains uncertain. Environmental remediation at its Wisconsin facility had a recorded liability of $916,000, and a pilot study could lead to higher future costs.
- Foreign currency translation contributed to a substantial other comprehensive loss: $12.3 million for the first six months, versus $5.1 million of income in the prior-year period. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether and when the 3M Food Safety combination closes, and the final transaction terms, equity issuance and borrowing requirements.
- How much of sales growth is organic versus acquisition-related, and whether gross-margin improvement can persist amid freight, labor and input-cost pressures.
- Whether transaction-related costs recur or materially affect reported earnings, and how actual results compare with management’s adjusted comparisons.
- Progress integrating recent acquisitions, including CAPInnoVet’s potential milestone and royalty obligations.
- Developments in the OFAC investigation and Wisconsin remediation plan, including any changes to recorded reserves or liabilities.