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Neogen (NEOG) Q2 Earnings Up Y/Y on Revenue Improvement

Neogen Corp. NEOG reported second-quarter fiscal 2016 earnings of 24 cents per share, which increased 14.3% year over year driven by a 16.3% increase in revenues that totalled $79.6 million. The strengthening of the U.S. dollar against the euro, British pound, Brazilian real and Mexican peso hurt earnings by 2 cents and revenues by $2.2 million.

Neogen Corporation (NEOG) EPS BNRI & Surprise Percent - Last 5 Quarters | FindTheCompany

Segment Details

Food Safety revenues increased 13% to $37.2 million, primarily driven by robust performance by the allergen product line, which soared 24% on a year-over-year basis. Sales of every single food allergen test increased at least 13%. Overall organic growth at the food safety segment stood at 6% (13% at constant currency). Acquisitions of BioLumix and Lab M within the past year drove considerable top-line growth in the quarter.

Sales of general sanitation products that include the new AccuPoint advanced sanitation monitoring system (launched in June) increased 25% in the quarter under review. Sales of AccuPoint samplers, the disposable component of the system, also increased 25% on a year-over-year basis.

Sales from test for mycotoxins and other natural toxins dipped year over year, while foodborne pathogen line of products increased 11%, led by a 27% increase in sales of Listeria detecting test kits.

Animal Safety business revenues surged 19.3% on a year-over-year basis (mostly organic) to $42.4 million. Rodenticides sales surged 69% driven by higher contract manufacturing revenues and retail market share gains. A new distribution agreement with a large milk equipment manufacturer (GEA) in the commercial dairy industry also drove results.

Uniprim veterinary antibiotic sales, which Neogen acquired in 2012, increased on a year-over-year basis. Uniprim is a prescription-only combination of trimethoprim and sulfadiazine that is effective in treating a wide range of infections in animals.

GeneSeek animal genomic operations revenues increased about 35% driven by higher revenues from genomic testing for meat type chickens, and increased penetration in the swine industry.

International sales were approximately $28.7 million which equated to about 36% of total revenues. Neogen Europe revenues declined by 6% in local currency (euro) primarily due to difficult year-over-year comparisons and lower mycotoxin revenues. Brazil revenues increased 38% in local currency (real). Mexico reported revenue growth 58% in local currency (peso).

However, after conversion to U.S. dollar, Europe revenues declined 10%, Brazil revenues fell 12%, while Mexico revenues increased 28% in the quarter.

Operational Details

Gross profit increased 11.7% year over year to $38.2 million. Gross margin contracted 200 basis points (bps) to 48% due to unfavorable product mix, impact of acquisitions and the strong U.S. dollar.

Total operating expenses increased 10.8% on a year-over-year basis to $23.6 million. As a percentage of revenues, total operating expenses declined 150 bps to 29.7%.

The decline in total operating expenses, as a percentage of revenues, was primarily attributed to decline across all the expense lines. Sales and marketing declined 80 bps, administrative fell 40 bps and research & development decreased 30 bps in the quarter.

Operating income increased 13.3% to $14.6 million. Operating margin, however, contracted 40 bps on a year-over-year basis to 18.4%, due to lower gross margin.

Balance Sheet

Neogen had cash and investments of nearly $123 million as of Nov 30, as compared with $111 million at the end of Aug 31, 2015.

Outlook

Neogen believes increasing consumer demand for products that are verified to be free of gluten and other food allergens will continue to drive market for rapid food allergen testing. Management believes that North American test volumes will increase due to the Food Safety Modernization Act (FSMA), which focuses on food safety management at processing facilities.

Our Take

We believe that increasing global footprint (China, Mexico, India) and new regulations of Food Safety Modernization Act (FSMA) are key long-term catalysts for Neogen.

However, an unfavorable foreign exchange rate will continue to raise concern in the near term. Operating margin is expected to remain under pressure owing to adverse product mix as well as impact from acquisitions, apart from the foreign exchange woes.

Zacks Rank & Key Picks

Currently, Neogen carries a Zacks Rank #3 (Hold).

Better-ranked stocks in the same sector are Abaxis Inc ABAX , ICU Medical Inc ICUI and Nxstage Medical Inc NXTM . All the stocks sport a Zacks Rank #1 (Strong Buy).

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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