Neogen Corporation — Form 10-Q Summary
Business context and period. This unaudited filing covers the fiscal second quarter and six months ended November 30, 2013, compared with the corresponding 2012 periods. Neogen operates Food Safety and Animal Safety businesses. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise. Share and per-share data reflect the 3-for-2 stock split effective October 31, 2013.
Financial performance
| Metric | Three months ended Nov. 30, 2013 | Prior-year quarter | Six months ended Nov. 30, 2013 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $59.6 | $50.7 | $118.1 | $100.5 |
| Gross margin | $29.5; 49.5% | $27.3; 53.8% | $59.9; 50.7% | $53.8; 53.6% |
| Operating income | $9.7; 16.3% margin | $10.5; 20.7% margin | $22.1; 18.7% margin | $20.8; 20.7% margin |
| Net income attributable to Neogen | $6.2 | $6.8 | $14.0 | $13.5 |
| Diluted earnings per share | $0.17 | $0.19 | $0.38 | $0.37 |
- Quarterly revenue rose 17.5%; six-month revenue rose 17.6%. Management reported organic growth of 11.1% for the quarter and 11.8% for the six months, with acquisitions contributing the balance.
- Quarterly Food Safety revenue was $28.4 million, up 9.1%; Animal Safety revenue was $31.2 million, up 26.3%. Six-month growth was 11.8% and 23.9%, respectively. Animal Safety growth included acquisitions; management reported segment organic growth of 13.2% for the quarter and 11.8% for the six months.
- Quarterly service revenue increased 50.1% to $6.4 million; six-month service revenue increased 48.1% to $13.6 million, primarily from customized genomics services.
- Quarterly net income attributable to Neogen and operating income declined year over year despite higher revenue. Six-month attributable net income and operating income increased modestly.
- For the six months, operating cash flow was $10.7 million, versus $11.3 million a year earlier. Investing cash outflow was $26.7 million, including $22.1 million of business acquisition payments; financing cash inflow was $9.1 million. Cash and equivalents declined by $6.4 million to $43.6 million.
- Cash, cash equivalents, and marketable securities totaled $79.1 million at November 30, 2013, compared with $85.4 million at May 31, 2013. Total assets were $319.7 million; total liabilities were $37.9 million. No revolving credit borrowings were outstanding; the company had a $12 million unsecured facility maturing September 1, 2014 and was in compliance with its covenants.
Material changes and notable items
- Gross margin declined to 49.5% for the quarter and 50.7% for the six months. Management attributed this to product mix, a greater revenue contribution from lower-margin Animal Safety products and acquisitions, lower current-year mycotoxin test-kit sales, and increased lower-margin genomics revenue. Prior-year mycotoxin demand benefited from outbreaks; management said cleaner U.S. crops could affect comparisons in the near term.
- Sales and marketing, general and administrative, and R&D expenses increased. Higher G&A reflected acquisition-related intangible amortization, compensation and stock-option expense, and legal fees. Operating margin fell as gross margin contracted.
- Acquisitions during the reported periods included SyrVet in July 2013 and Prima Tech in November 2013, in addition to Macleod Pharmaceuticals and Scidera Genomics acquired earlier. Neogen acquired Chem Tech for $17.2 million cash, plus a contingent payment of up to $1.0 million, on January 2, 2014, after the reporting date; purchase-price allocation was incomplete at filing.
- Six-month other expense included $0.5 million, largely currency losses as the Brazilian real and Mexican peso weakened against the U.S. dollar. Quarterly currency losses were minimal.
- Accounts receivable rose 18.2% and inventory rose 23.5% from May 31, 2013, reflecting revenue growth and acquired businesses. Management cited acquired SyrVet and Prima Tech inventory of $4.6 million.
Outlook, risks, and contingencies
- Management does not provide forecasts. It said existing cash and securities, available credit, and expected operating cash flow should fund activities for the foreseeable future, but may not cover product commercialization or future acquisitions; equity or other financing could be considered.
- Management identified competition, key-employee recruitment and retention, weather effects on agriculture and food production, acquisition identification and integration, R&D, intellectual-property protection, regulation, foreign exchange, and foreign-market conditions as risks.
- The company recorded a $0.916 million estimated environmental remediation liability for its Randolph, Wisconsin facility; annual remediation costs had ranged from $50,000 to $105,000 over the prior five years. Management said ordinary-course legal matters were not expected to materially affect results or financial position.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether organic growth and acquisition contributions continue, especially in Animal Safety and genomics services.
- Whether gross-margin pressure from product mix, acquisitions, and lower mycotoxin-test demand persists.
- Acquisition integration, contingent payments, purchase accounting, and the impact of the post-quarter Chem Tech acquisition.
- Cash conversion and working-capital trends, given lower operating cash flow and higher receivables and inventory.
- Exposure to foreign-exchange movements, environmental remediation costs, and the availability of financing for future investment or acquisitions.