Neogen Corporation — Form 10-Q Summary
Reporting period: Three months ended August 31, 2017, the first quarter of fiscal 2018. Comparisons are with the three months ended August 31, 2016, unless noted. Amounts are in U.S. dollars.
Financial performance
| Metric | Q1 FY2018 | Q1 FY2017 | Change |
|---|---|---|---|
| Revenue | $95.3 million | $83.6 million | +14% |
| Gross profit | $45.9 million | $40.5 million | +13% |
| Gross margin | 48.2% | 48.4% | Down 0.2 percentage points |
| Operating income | $16.4 million | $14.7 million | +11% |
| Operating margin | 17.2% | 17.6% | Down 0.4 percentage points |
| Net income attributable to Neogen | $11.9 million | $9.9 million | +21% |
| Diluted earnings per share | $0.31 | $0.26 | +19% |
| Cash from operating activities | $18.7 million | $20.3 million | Down $1.6 million |
- Food Safety revenue was $46.7 million, up 19%; Animal Safety revenue was $48.5 million, up 9%. Management reported 9% organic growth in each segment. Quat-Chem and Rogama, acquired in December 2016, contributed $4.2 million to revenue growth.
- Service revenue rose 29% to $14.7 million. International sales were $34.5 million, or 36.2% of revenue, versus $29.0 million, or 34.7%, a year earlier.
- Operating expenses increased 14% to $29.4 million, broadly in line with revenue growth. Management attributed the gross-margin decline mainly to the acquired businesses’ lower margins; excluding those acquisitions, it estimated current-quarter gross margin would have been about 110 basis points higher.
- The effective tax rate was 30.7%, versus 34.8%. Adoption of share-based compensation guidance reduced first-quarter federal income tax expense by $396,000.
Financial position and liquidity
- At August 31, 2017, cash and cash equivalents were $58.5 million and marketable securities were $101.5 million, totaling $160.0 million, compared with $143.6 million at May 31, 2017.
- Total assets were $547.3 million and total liabilities were $60.1 million. The company had no borrowings outstanding under its unsecured $15 million revolving credit facility, which matures September 30, 2019; it reported compliance with its financial covenants.
- Operating cash flow was $18.7 million. Investing activities used $39.9 million, principally reflecting net purchases of marketable securities; purchases of property, equipment and other non-current intangible assets were $4.4 million. Financing activities provided $2.0 million, primarily from stock option exercises.
- Accounts receivable was $66.3 million and inventory was $73.4 million at quarter-end. Days sales outstanding were 59, compared with 60 at May 31, 2017.
Changes, outlook, and risks
- Growth reflected organic gains and the Quat-Chem and Rogama acquisitions. Product and regional performance varied: management cited growth in genomics, culture media and several testing products, while some European mycotoxin sales and Latin American cleaner and disinfectant sales were weaker.
- Neogen said it does not provide financial forecasts. Management said cash, marketable securities, available credit and expected operating cash flow should fund foreseeable activities, but these resources might not cover product commercialization or future acquisitions; additional equity or other financing could be considered.
- Management expects share-based payment tax benefits to lower the fiscal 2018 effective tax rate and could increase earnings per share by one to three cents per quarter for the remainder of the year. This is an expectation, not a guaranteed outcome.
- Management identified competition, key-employee recruitment and retention, weather effects on agriculture and food production, acquisition integration, research and development, intellectual-property protection and regulation among factors that could affect results. Foreign-exchange movements also pose risk; the company uses forward contracts to mitigate some currency exposure.
- The company reported a $916,000 estimated liability for remediation and monitoring at its Randolph, Wisconsin facility, unchanged from May 31, 2017. Management said ordinary-course legal proceedings were not expected to have a material effect. No material changes to other previously disclosed commitments or contingencies were reported.
- On September 1, 2017, after quarter-end, the company acquired the assets of the University of Queensland Animal Genetics Laboratory for $2.0 million in cash; purchase-price allocation was incomplete at filing.
- The company was evaluating the impact of new revenue-recognition and lease accounting standards. It expected to adopt the revenue standard using the modified retrospective approach.
Important facts for investors to verify
- How much future growth is organic and sustainable versus attributable to acquisitions, and whether acquired businesses improve margins over time.
- Whether operating cash generation and liquidity remain adequate for planned investment, product commercialization and potential acquisitions.
- The persistence and quarterly timing of tax benefits from share-based compensation and their effect on the effective tax rate and earnings per share.
- Integration and contingent-consideration obligations associated with Quat-Chem and Rogama, and the final accounting for the post-quarter AGL acquisition.
- Potential financial-statement effects of upcoming revenue-recognition and lease standards, as well as changes in environmental remediation estimates or other contingencies.