Neogen Corporation — Form 10-Q Summary
Reporting period: Three months ended August 31, 2018 (first quarter of fiscal 2019). The unaudited statements are consolidated and prepared under U.S. GAAP. Unless noted otherwise, amounts below are in millions of dollars.
Financial results
| Metric | Q1 FY2019 | Q1 FY2018 | Change |
|---|---|---|---|
| Revenue | $99.6 | $94.2 | +6% |
| Gross margin | $46.7; 46.9% | $44.9; 47.7% | Margin down 0.8 percentage points |
| Operating expenses | $30.3 | $28.5 | +6% |
| Operating income | $16.5; 16.5% of revenue | $16.4; 17.4% of revenue | Nearly flat; margin down |
| Net income attributable to Neogen | $15.2 | $11.9 | +28% |
| Diluted EPS | $0.29 | $0.23 | Up $0.06 |
| Cash from operating activities | $16.1 | $18.7 | Down $2.6 |
Product revenue was $83.0 million and service revenue was $16.7 million. Food Safety revenue increased 13% to $52.2 million; Animal Safety revenue decreased 1% to $47.4 million. International sales were 39.9% of revenue, versus 36.2% a year earlier. Management reported 4% organic growth overall; Food Safety organic growth was 12%, while Animal Safety organic sales declined 4% after excluding acquisitions.
Liquidity, debt, and cash flow
- At August 31, cash and cash equivalents were $97.2 million and marketable securities were $129.2 million, totaling $226.4 million, versus $210.8 million at May 31, 2018.
- Current assets were $396.1 million and current liabilities $39.2 million; the current ratio was approximately 10.1x. Total assets were $640.9 million and total liabilities $59.3 million.
- No borrowings were outstanding under the unsecured $15 million revolving credit facility, which matures September 30, 2019. The company reported compliance with its financial covenants.
- Investing activities used $7.6 million, including $4.2 million for the Clarus Labs acquisition; financing provided $9.0 million, mainly from option exercises and employee stock purchases. The company spent $1.9 million on property, equipment, and other non-current assets.
Changes, management commentary, and notable items
- Revenue growth was led by Food Safety, culture media, bacterial and sanitation products, and service revenue. Animal Safety was slightly lower overall; management cited softness in animal care and other products, partly offset by genomics growth.
- Gross margin declined partly because certain acquired and faster-growing product lines carry lower margins. Operating expenses rose 6%, including higher personnel, shipping, bad-debt, health-insurance, and IT costs.
- Net income benefited substantially from a lower effective tax rate: 11.1%, compared with 30.7%. Management attributed this mainly to the U.S. corporate tax-rate reduction and a $2.3 million tax credit from stock-option exercises. The new GILTI provision increased quarterly tax expense by $0.7 million.
- Foreign currency translation reduced revenue by approximately $1.3 million year over year; foreign-currency transaction effects were also unfavorable. Management cited U.S. dollar strength against the Brazilian real and Mexican peso.
- Clarus Labs was acquired August 1 for $4.2 million cash plus approximately $1.3 million of contingent consideration. A livestock genetics business was acquired after quarter-end for $1.1 million cash plus contingent consideration. Neogen reported $4.2 million of acquisition cash outflow during the quarter.
- The company adopted Topic 606 revenue recognition on June 1, 2018 using full retrospective application and reported no material implementation impact. Prior-period revenue and expense classifications were revised to present rebates and certain customer incentives as reductions of revenue; the revisions had no effect on operating income, net income, or EPS.
- Management does not provide forecasts of future financial performance. It said cash, securities, available credit, and expected operating cash flow should fund foreseeable activities, but may not suffice for commercialization or planned acquisitions; additional equity or financing could be considered.
Risks and contingencies
- 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 movements.
- The company had a $0.9 million estimated environmental remediation liability for its Randolph, Wisconsin facility, including $0.1 million classified as current. Management said ordinary-course legal proceedings were not expected to materially affect results or financial position.
- Accounts receivable days sales outstanding increased to 64 days from 60 days at May 31, 2018, which management attributed to higher international sales and longer collection cycles. Inventory rose 4% to $78.8 million.
Important facts for investors to verify
- Whether growth in Food Safety and international markets persists, and whether Animal Safety organic sales recover.
- How much of earnings growth reflects sustainable operating performance versus tax reform and stock-option tax benefits.
- Whether the lower gross and operating margins stabilize as acquired and lower-margin product lines expand.
- Collection trends, inventory turnover, foreign-exchange effects, and the performance and contingent payments associated with acquisitions.
- The eventual effects of lease-accounting adoption and any updates to the Tax Act measurement-period estimates.