Neogen Corporation — Form 10-Q Summary
Reporting period: Quarter and six months ended November 30, 2015, the second quarter and first half of fiscal 2016. Neogen operates in Food Safety and Animal Safety, providing diagnostic testing, animal health products, and related services. Unless stated otherwise, dollar amounts below are in millions.
Financial performance
| Metric | Q2 FY2016 | Q2 FY2015 | Six months FY2016 | Six months FY2015 |
|---|---|---|---|---|
| Revenue | $79.6 | $68.5 | $154.5 | $136.1 |
| Gross margin | $38.2; 48.0% | $34.2; 50.0% | $76.0; 49.2% | $68.3; 50.2% |
| Operating income | $14.6; 18.4% of revenue | $12.9; 18.8% | $29.5; 19.1% | $26.3; 19.4% |
| Net income attributable to Neogen | $9.1 | $7.8 | $18.4 | $16.7 |
| Diluted EPS | $0.24 | $0.21 | $0.49 | $0.45 |
- Quarterly revenue rose 16.3% and attributable net income rose 16.2%; first-half revenue rose 13.5% and attributable net income rose 10.2% year over year.
- Q2 segment revenue increased 13.0% in Food Safety and 19.3% in Animal Safety; first-half growth was 12.2% and 14.7%, respectively. Management reported organic growth of 12.8% for Q2 and 10.5% for the first half.
- Gross margin declined year over year, particularly in Food Safety, reflecting product mix and lower-margin Lab M products. Animal Safety margins improved modestly, aided by product mix.
- Operating expenses rose 10.8% in Q2 and 10.9% for the first half, primarily from personnel, sales and marketing, stock compensation, IT-related depreciation and licenses, and increased development activity.
Cash flow, liquidity and balance sheet
- First-half operating cash flow was $20.9, down from $23.4 a year earlier. Investing cash outflow was $24.9, including $13.6 for acquisitions and $7.8 for property, equipment, and other noncurrent assets. Financing cash inflow was $9.1.
- Cash and cash equivalents were $71.4 at November 30, 2015; marketable securities were $51.6, for combined cash and securities of approximately $123.0, versus $114.2 at May 31, 2015.
- Current assets were $250.5 and current liabilities $31.2 (approximately 8.0x current-asset coverage). Total liabilities were $47.9 and equity $377.9.
- No revolving credit was drawn; the company had an unsecured $12.0 credit line maturing September 2017 and reported compliance with its financial covenants. The filing reports no outstanding long-term debt.
- Inventory increased $9.9, or 19.2%, from fiscal year-end, attributed to international order timing, planned stocking increases, and acquired inventory. Receivables decreased 2.7%, and average days sales outstanding improved from 63 to 62.
Changes, outlook and risks
- Growth included contributions from BioLumix, Lab M, and Sterling Test House acquisitions; management also cited organic sales growth. Lab M was acquired in August 2015 and reported in Food Safety. Sterling Test House was acquired in June 2015 and reported in Animal Safety.
- Foreign currency translation reduced revenue by $2.3 in Q2 and $4.5 in the first half. A stronger U.S. dollar and difficult prior-year comparisons weighed on international results; Europe was particularly affected by nonrecurring prior-year genomics projects and lower mycotoxin sales.
- Other expense was $0.4 in Q2 and $0.9 year to date. Q2 FY2016 included $0.6 of currency-translation expense, partly offset by royalty and interest income. Prior-year comparisons included acquisition-related contingent-consideration charges and a reversal of an overaccrual.
- Management provided no earnings or revenue forecast. It said cash, securities, available credit, and expected operating cash flow should fund foreseeable activities, while noting these resources might not cover commercialization plans or future acquisitions; additional equity or financing could be considered.
- Disclosed risks include competition, reliance on key employees, weather effects on agriculture and food production, acquisition integration, R&D, intellectual property protection, regulation, foreign exchange, and foreign-market conditions. The company uses currency derivatives to manage some exchange-rate exposure.
- Environmental remediation at the Randolph, Wisconsin facility had an estimated undiscounted liability of $0.916 over approximately 15 years; annual remediation costs had ranged from $47,000 to $56,000 over the prior five years. Management did not expect normal-course legal proceedings to materially affect results or financial position.
- On December 22, 2015, after the reporting date, Neogen acquired Virbac rodenticide assets for $3.525 in cash plus up to $0.300 contingent consideration; the purchase-price allocation was incomplete at filing.
Important facts for investors to verify
- Whether revenue growth and organic growth persist, particularly in Animal Safety and acquired businesses.
- Whether Food Safety gross-margin pressure and the overall margin decline continue as product and acquisition mix changes.
- How inventory growth converts to sales and cash, and whether operating cash flow recovers.
- The ongoing effect of currency movements on reported international revenue, expenses, and other income or expense.
- Integration and performance of Lab M, Sterling Test House, and the subsequent Virbac asset acquisition, including final purchase accounting.
- Future funding needs for product commercialization or acquisitions, despite current liquidity and unused credit capacity.