Neogen Corporation — Form 10-Q Summary
Reporting period: Third quarter and first nine months of fiscal 2019, ended February 28, 2019. Financial amounts below are in U.S. dollars; unless stated otherwise, figures are in millions. The filing’s comparative 2018 revenue and expense presentation was revised for classification purposes.
Business context and results
Neogen develops and sells food-safety and animal-safety products and services, including diagnostic tests, laboratory and genomics services, veterinary products, and pest-control products. It reports two segments: Food Safety and Animal Safety.
- Revenue: Third-quarter revenue was $97.7 million, up 3% year over year; management reported organic growth of 3%. Nine-month revenue was $304.4 million, up 5%, with 4% organic growth.
- Segment performance: Third-quarter Food Safety revenue grew 8% to $51.1 million; Animal Safety revenue declined 2% to $46.6 million. For nine months, Food Safety grew 10% to $157.0 million, while Animal Safety was essentially flat at $147.4 million.
- Profitability: Third-quarter gross margin was 45.7%, versus 47.0%; operating income was $14.6 million, down from $15.9 million, and operating margin was 15.0%, versus 16.8%. Net income was $13.1 million, or $0.25 per diluted share, versus $16.6 million, or $0.32. Nine-month net income was $44.4 million, or $0.85 per diluted share, compared with $45.6 million, or $0.88.
- Cash flow: Nine-month operating cash flow was $43.0 million, versus $46.6 million. Capital spending on property, equipment, and other non-current assets was $11.9 million.
- Liquidity and debt: Cash and cash equivalents were $93.6 million and marketable securities were $153.1 million at quarter-end, totaling $246.7 million. Current assets were $422.6 million and current liabilities $34.3 million. No borrowings were outstanding on the $15 million revolving credit facility, extended to September 2021; the company reported compliance with its financial covenants.
- Other balance-sheet items: Inventory was $84.9 million, up $8.9 million from May 31, 2018. Accounts receivable was $80.0 million; days sales outstanding increased to 68 days from 60 at fiscal year-end.
Material changes and drivers
- Food Safety growth reflected higher sales in natural-toxin testing, bacterial testing, culture media, and genomics services. Animal Safety weakness included lower life-sciences, animal-care, and pest-control sales; genomics services increased.
- International revenue represented 41% of third-quarter sales, versus 39% a year earlier. Currency translation reduced revenue by approximately $2.5 million in the quarter and $5.8 million year to date.
- Gross-margin pressure reflected international growth affected by currency and a shift toward product lines with lower-than-historical margins. Operating expenses increased 5% in both the quarter and year to date.
- Third-quarter net income comparisons were affected by the prior-year quarter’s favorable $2.9 million tax adjustment related to U.S. tax reform. The current-quarter effective tax rate was 21.4%, versus 4.1%; the nine-month rate was 17.0%, versus 14.7%.
- The company acquired Clarus Labs, Livestock Genetic Services, and Delta Genomics during fiscal 2019. Management described their revenue contributions as minor in the quarter; acquisitions contributed to year-to-date service revenue.
Outlook, risks, and unusual items
- Management does not provide forecasts of future financial performance. It stated that cash, marketable securities, available credit, and expected operating cash flow should fund activities for the foreseeable future, while noting these resources may not cover all potential commercialization or acquisition plans.
- Management cited competition, recruitment and retention of key employees, weather effects on agriculture and food production, acquisition integration, research and development, intellectual-property protection, regulation, and foreign-exchange movements as risks.
- Inventory increased due to lower-than-forecast quarter-end sales and higher operating needs. Management said it was monitoring inventory and working to improve turnover. It also noted that international receivables generally take longer to collect.
- A new share-repurchase program authorized up to 3 million shares; 50,000 shares were repurchased for approximately $3.1 million during the quarter.
- The company reported a $916,000 estimated environmental remediation liability for its Randolph, Wisconsin facility, unchanged from May 31, 2018. It planned to continue the existing remediation and monitoring program.
- After quarter-end, Neogen settled a non-compete dispute. A March 15, 2019 court order required a former executive to comply with the agreement through September 1, 2019 and restricted two other parties from engaging him for 18 months.
- Prior-period variable consideration for rebates and marketing discounts was reclassified from expenses to contra-revenue. The company said the revisions did not affect operating income, net income, EPS, equity, or cash flows.
- The company planned to adopt the new lease accounting standard on June 1, 2019 and was evaluating its effects. It did not expect the forthcoming credit-loss standard to affect its financial statements.
Important facts for investors to verify
- Whether Food Safety growth can continue and Animal Safety performance stabilizes, particularly in the weaker product categories.
- Whether gross margins and operating margins recover as product mix, international growth, currency effects, and operating costs evolve.
- Whether inventory levels and receivable collection times normalize, and how these working-capital trends affect cash generation.
- The ongoing effects of currency movements and the contribution and integration of recent acquisitions.
- Potential funding needs for product commercialization or acquisitions beyond current liquidity and credit availability.
- Any updates to the environmental remediation estimate, contingent acquisition consideration, or legal matters.