Neogen Corporation — FY2020 Form 10-K Summary
Reporting period: Fiscal year ended May 31, 2020. Although the request metadata says “2019 Q4,” this filing is an annual report for FY2020; it includes quarterly results through May 2020.
Business context
Neogen develops, manufactures and sells food-safety testing products and animal-safety products and services, including veterinary and biosecurity products and genomics testing. It reports Food Safety and Animal Safety segments. International sales represented 39.4% of revenue; no customer represented 10% or more of revenue.
Financial results and liquidity
| Metric | FY2020 | FY2019 | Change |
|---|---|---|---|
| Revenue | $418.2 million | $414.2 million | +1.0%; organic sales +0.2% |
| Gross margin | $196.3 million; 46.9% | $191.9 million; 46.3% | +60 basis points |
| Operating income | $67.5 million; 16.1% margin | $68.1 million; 16.4% margin | -1% |
| Net income attributable to Neogen | $59.5 million | $60.2 million | -1% |
| Diluted EPS | $1.13 | $1.15 | Down $0.02 |
| Operating cash flow | $85.9 million | $63.8 million | Up $22.0 million |
- Segment revenue: Food Safety was $212.7 million, down 0.4% (organic down 1.3%); Animal Safety was $205.5 million, up 2.4% (organic up 1.9%). Animal Safety growth included genomics strength; Food Safety’s disinfectants and related products grew, while several testing and culture-media categories declined.
- Cash and liquidity: At year-end, cash and equivalents were $66.3 million and marketable securities were $277.4 million; working capital was $488.9 million. Cash and marketable securities combined totaled $343.7 million.
- Debt: No long-term debt or revolver borrowings were outstanding. The company had a $15 million unsecured revolving credit facility, expiring September 2021.
- Cash uses and collections: Capital and other non-current asset additions were $24.1 million; acquisitions used $13.2 million; stock-option exercises provided $29.4 million. Receivables were $84.7 million and days sales outstanding rose to 68 from 61. Inventory increased 11% to $95.1 million.
Changes, outlook and notable items
- Revenue growth was modest and net income declined despite improved consolidated gross margin. Operating expenses rose 4%, including a 15% increase in R&D and a 9% increase in general and administrative costs.
- COVID-19 disrupted customer demand, supply chains and selling activity. It weighed on some markets and genomics sample flow, while increasing demand for hand sanitizers, disinfectants, wipes and other biosecurity products. Currency movements reduced comparative revenue; management estimated FY2020 revenue would have been about $6 million higher in a neutral-currency environment.
- Neogen completed several acquisitions during FY2020, primarily adding direct sales operations and product or microbiology capabilities in Argentina, Uruguay, Italy, the U.K., Australia and Chile. Management said acquired businesses’ revenue and net income were not material individually.
- No specific consolidated revenue or earnings guidance is provided. Management expected R&D spending to approximate 3% of revenue annually and anticipated several new or improved products to become commercially available during FY2021 and FY2022; two new readers were anticipated for launch in the first half of FY2021.
- Unusual items included $600,000 of expense for an expected U.S. government sanctions-program penalty, partly offset by a $483,000 gain on a Brazilian sales-tax settlement and property-loss proceeds. A $916,000 environmental remediation liability remained recorded for the Randolph, Wisconsin site; future costs could rise if the remediation strategy changes.
- Management identified COVID-19, acquisitions and integration, competition, agricultural-market conditions, supplier and distribution dependence, foreign exchange, regulation, cybersecurity, intellectual property and tax matters among key risks. Management and the auditor reported effective internal control over financial reporting; the auditor issued an unqualified opinion on the financial statements.
Important facts for investors to verify
- Whether organic demand and segment trends improve, particularly in Food Safety and distributor-dependent Animal Safety products, and how much growth depends on acquisitions or pandemic-related disinfectant sales.
- Whether receivables collection (DSO 68 days), inventory growth and any COVID-related credit losses affect working capital and cash generation.
- The durability of gross-margin improvement and whether operating-expense growth continues to outpace revenue.
- Progress and commercial uptake for the planned FY2021–FY2022 product launches, and the returns and integration costs from recent acquisitions.
- Developments in the sanctions matter and Wisconsin environmental remediation, as well as the effects of currency movements and the evolving pandemic.