Neogen Corporation — Form 10-Q Summary
Reporting period: First quarter of fiscal 2017, the three months ended August 31, 2016. Comparisons are with the three months ended August 31, 2015, except balance-sheet comparisons, which are with May 31, 2016. Amounts are in U.S. dollars; financial statement figures below are in millions unless noted.
Business context and results
Neogen develops and sells products and services for food safety and animal safety. Its reportable segments are Food Safety and Animal Safety. Revenue rose 11.7% to $83.6 million; management reported 3% organic growth overall, with acquisition contributions of $6.2 million.
| Metric | Q1 FY2017 | Q1 FY2016 |
|---|---|---|
| Product revenue | $72.2 million | $65.0 million |
| Service revenue | $11.4 million | $9.8 million |
| Gross profit / margin | $40.5 million / 48.4% | $37.8 million / 50.5% |
| Operating income | $14.7 million | $14.9 million |
| Net income attributable to Neogen | $9.9 million | $9.3 million |
| Diluted earnings per share | $0.26 | $0.25 |
| Cash from operating activities | $20.3 million | $6.6 million |
Revenue, margins, and material changes
- Food Safety revenue increased 13% to $39.0 million; organic growth was 9%. Dehydrated culture media and other revenue grew 28%, including acquisition contributions and higher genomics revenue.
- Animal Safety revenue increased 10% to $44.6 million, primarily due to acquisitions; organic sales declined 1%. Rodenticides, insecticides and disinfectants rose 35%, while veterinary instruments and disposables fell 5% and animal care and other fell 13%.
- Management attributed the Animal Safety organic decline in part to the loss of U.S. selling rights for a canine thyroid replacement product after a competitor received FDA approval. Neogen had no product sales in the quarter and issued $1.1 million in channel-removal credits. Management said approval to resume sales was not expected in the current fiscal year; the product had generated $6.6 million in fiscal 2016.
- Gross margin declined 210 basis points. Management cited lower-margin acquisitions, the loss of higher-margin thyroid-product sales (about 70 basis points of impact), and currency effects. It estimated margin would have been about 130 basis points higher excluding the two largest recent acquisitions.
- Operating expenses increased 12% to $25.7 million, including higher general and administrative costs, partly related to acquisitions and compensation. Operating income decreased slightly; higher other income and a lower effective tax rate helped net income attributable to Neogen rise 6%.
- International revenue was $29.0 million, 34.7% of total revenue, versus $24.5 million, 32.7%, a year earlier. Currency translation reduced consolidated revenue by approximately $1.9 million, primarily following sterling’s decline after the Brexit vote.
Cash, liquidity, debt, and balance sheet
- Cash and cash equivalents were $76.2 million and marketable securities were $53.0 million at August 31, 2016, totaling $129.2 million, versus $107.8 million at May 31, 2016.
- Operating cash flow was $20.3 million. Investing activities used $3.9 million, including $3.4 million for property, equipment and other non-current intangible assets; financing activities provided $4.8 million, primarily from stock-option exercises and related tax benefits.
- Total assets were $468.6 million and total liabilities were $51.4 million. The company reported no outstanding borrowings. Its unsecured revolving credit line provides up to $12 million and expires September 1, 2017; Neogen said it was in compliance with its financial covenants.
- Accounts receivable declined 12% from May 31, while inventory increased 8%. Average days’ sales outstanding were 63, compared with 61 at May 31.
Outlook, risks, contingencies, and notable items
- Neogen does not provide forecasts of future financial performance. Management expressed optimism about long-term prospects and said cash, securities, credit availability and expected operating cash flow should fund activities for the foreseeable future. It cautioned that commercialization plans or acquisitions could exceed available resources and might require equity or other financing.
- Management identified competition, key-personnel dependence, weather impacts on agriculture and food production, acquisition integration, research and development, intellectual-property protection and regulation among factors that could cause results to differ materially.
- Foreign-exchange movements are a notable exposure; the company uses derivatives to help manage certain currency risks. Foreign-currency translation reduced other comprehensive income by $2.6 million in the quarter.
- The estimated environmental remediation liability for the Randolph, Wisconsin facility was $916,000, unchanged from May 31; $60,000 was current. Management said ordinary-course legal proceedings were not expected to have a material effect.
- Recent acquisitions include Lab M, Virbac assets, Deoxi, and Preserve/Tetradyne. The company paid $70,000 of contingent consideration relating to Sterling Test House during the quarter. No business acquisition cash outlay was reported in the quarter.
- Management stated that disclosure controls were effective and that no material change in internal control over financial reporting occurred during the quarter.
Important facts for investors to verify
- Whether the thyroid-product sales restriction persists, its ongoing revenue and margin effects, and the timing and likelihood of Neogen obtaining the necessary regulatory approval.
- How much reported growth reflects organic performance versus acquisitions, and whether acquired businesses’ margins improve or continue to dilute consolidated gross margin.
- The durability of segment trends, including Food Safety growth, Animal Safety organic weakness, and the contribution of international markets.
- Foreign-exchange sensitivity and the effects of currency movements on revenue, earnings, and accumulated other comprehensive loss.
- Future cash needs for product commercialization and acquisitions, including whether external financing becomes necessary; also monitor inventory growth and receivable collection metrics.