UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM10-K
| ☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Fiscal Year Ended May 31, 20172018
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For The Transition Period From To .
COMMISSION FILE NUMBER0-17988
NEOGEN CORPORATION
(Exact name of registrant as specified in its charter)
| MICHIGAN | 38-2367843 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
620 Lesher Place
Lansing, Michigan 48912
(Address of principal executive offices, including zip code)
517-372-9200
(Registrant’s telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $0.16 par value per share
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes ☒ No ☐
Indicate by a check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of RegulationS-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of RegulationS-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of RegulationS-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form10-K or any amendment to this Form10-K. ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule12b-2 of the Exchange Act.
(Check one):
Large accelerated filer ☒ | Accelerated filer ☐ | Non-accelerated filer ☐ | Smaller reporting company ☐ | |||
Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Act). Yes ☐ No ☒
Based on the closing sale price on November 30, 20162017 the aggregate market value of the voting stock held bynon-affiliates of the registrant was $2,403,000,000.$3,242,762,000. For these purposes, the registrant considers its Directors and executive officers to be its only affiliates.
The number of outstanding shares of the registrant’s Common Stock was 38,211,87351,756,964 on June 30, 2017.2018.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant’sCertain portions of the registrant’s definitive proxy statement to be prepared pursuant to Regulation 14a and filed in connection with solicitation of proxies for its October 5, 20174, 2018 annual meeting of shareholders is incorporated by reference into part III of this Form10-K.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
Forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, are made throughout this Annual Report on Form10-K, including statements relating to management’s expectations regarding new product introductions; the adequacy of the Company’sour sources for certain components, raw materials and finished products; and the Company’sour ability to utilize certain inventory. For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words “believes,” “anticipates,” “plans,” “expects,” “seeks,” “estimates,” and similar expressions are intended to identify forward-looking statements. There are a number of important factors that could cause Neogen Corporation’s results to differ materially from those indicated by such forward-looking statements, including those detailed in ITEM 1A. RISK FACTORS and under the captions “Management’s Discussion and Analysis of Financial Condition and Results of Operations,”Operations”, “Critical Accounting Policies and Estimates,”Estimates”, and “Future Operating Results.”Results”.
In addition, any forward-looking statements represent management’s views only as of the day this Annual Report on Form10-K was first filed with the Securities and Exchange Commission and should not be relied upon as representing management’s views as of any subsequent date. While management may elect to update forward-looking statements at some point in the future, it specifically disclaims any obligation to do so, even if its views change.
| ITEM 1. | BUSINESS |
Neogen Corporation and subsidiaries (Neogen(collectively referred to as we, Neogen or the Company) develop, manufacture and market a diverse line of products dedicated to food and animal safety. The Company’sOur Food Safety segment consists primarily of diagnostic test kits and complementary products (e.g., dehydrated culture media) sold to food producers and processors to detect dangerous and/or unintended substances in human food and animal feed, such as foodborne pathogens, spoilage organisms, natural toxins, food allergens, genetic modifications, ruminantby-products, meat speciation, drug residues, pesticide residues and general sanitation concerns. TheOur diagnostic test kits are generally less expensive, easier to use and provide greater accuracy and speed than conventional diagnostic methods. The majority of the teststest kits are disposable,single-use, immunoassay and DNA detection products that rely on the Company’sour proprietary antibodies and RNA and DNA testing methodologies to produce rapid and accurate test results. The Company’sOur expanding line of food safety products also includes bioluminescence-based diagnostic technology.
Neogen’s Animal Safety segment is engaged in the development, manufacture, marketing and distribution of veterinary instruments, pharmaceuticals, vaccines, topicals, diagnostic products, rodenticides, cleaners, disinfectants, insecticides and genomics testing services for the worldwide animal safety market. The majority of these consumable products are marketed through a network of national and international distributors, as well as a number of large farm supply retail chains in the United States and Canada. The Company’sOur USDA-licensed facility in Lansing, Michigan, produces immunostimulant products for horses and dogs, and a unique equine botulism vaccine. The Company’sOur line of drug detection products is sold worldwide for the detection of abused and therapeutic drugs in animals and animal products, and has expanded into the human forensic market.
Neogen’s products are marketed by Companyour sales personnel in the U.S., Canada, Mexico, Central America, the United Kingdom and other parts of Europe, Brazil, China, India and Australia, and by distributors throughout the rest of the world.
Neogen’sOur mission is to be the leading company in the development and marketing of solutions for food and animal safety. To meet this vision, a growth strategy consisting of the following elements has been developed: (i) increasing sales of existing products; (ii) introducing new products and product lines; (iii) expanding international sales; and (iv) acquiring businesses and forming strategic alliances. The Company hasWe have historically been successful at increasing product sales organically and maintainsmaintain an active acquisition program to identify and capitalize on opportunities to acquire new products and/or businesses.
Neogen Corporation was formed as a Michigan corporation in June 1981 and actual operations began in 1982. The Company’sOur principal executive offices are located at 620 Lesher Place, Lansing, Michigan 48912-1595 and itsour telephone number is(517) 372-9200.
Neogen’s Annual Report on Form10-K, Quarterly Reports on Form10-Q, Current Reports on Form8-K, and amendments to those reports are available free of charge via our website (www.neogen.com) as soon as reasonably practicable after such information is filed with, or furnished to, the United States Securities and Exchange Commission. The content of our website or the websites of any third parties that may be noted herein are not incorporated by reference in this Form 10-K.
PRODUCTS
Product trademarks and registered trademarks owned by Neogen include: CORPORATE:Neogen®, Neogen flask logo®;FOOD SAFETY:SAFETY: AccuClean®, AccuPoint®, AccuScan®, Acumedia®, Agri-Screen®, Alert®, ANSR®, BetaStar®, BioLumix®, F.A.S.T.®, GeneQuence®, GENE-TRAK®, HarlequinTM®,ISO-GRID®, Lab M®,ListeriaRight Now™, NeoCare™, NeoColumn™, NeoFilm®, NeoNet™NeoNet®, NeoSeek™,NEO-GRID®, Penzyme®, Raptor™Raptor®, Reveal®, Soleris®, µPREP®, Veratox®, Simple. Accurate. Supported. Food Safety SolutionsSM;LIFE SCIENCES:SCIENCES: Alert®,K-Blue®,K-Blue Substrate®,K-Gold®, NeoSal®;ANIMAL SAFETY:SAFETY:Acid-A-Foam™, Aero-ssault™,Ag-Tek®, AluShield™, AquaPrime®, Assault®, Barnstorm™Barnstorm®, BioCres™ 50, BioPhene™, BioQuat™, BotVax®, Breeder-Sleeve®, Bromethalin One Meal Is All It Takes(design)®, Calf Eze™, Chem-Tech, Ltd.™, Chem-Tech’s CT logo (with circle)™,Chlor-A-Foam™, COMPANION™, Cowboy Syringe®,CT-511®, Cykill™, D3™ Needles, DC&R®, DeciMax®,Di-Kill®, Dr. Frank’s®,Dy-Fly®,Dyne-O-Might®, Earth City Resources (design)®, ElectroJac®, ELISA Technologies (design)®, EqStim®, EquiSleeve®,E-Z Bond™,E-Z Catch®, Farmphene®,Final-Fly-T®,Fly-Die Defense™,Fly-Die Ultra™, Fura-Zone®, GenQuat™, Horse Sense®, Ideal®, ImmunoRegulin®, Insectrin®, Insight™, Iodis®, Jolt®,LD-44®,LD-44T™, Maxi Sleeve®, MaxKlor®, MegaShot™, MycAseptic™, NeedleGard™, NFZ™, Nu Dyne®, PanaKare™, Pantek™, ParlorMint™, Parvosol®, Place Pack®, PolyPetite™, PolyShield™, PolySleeve®, Preserve™Preserve®, Preserve International™International®, Preserve International(design)™®, Prima®, Prima Marc™, Prima®Prima-Shot™, Prima Tech®, Prima Tech logo®,Pro-Fix®,Pro-Flex®, Promar™,Pro-Shot™,PRO-TECT 6 MIL®,PRO-TECT 6 MIL logo®, Prozap®, Prozap (stylized mark w/fancy Z)™,PY-75™, Quat-Chem™Quat-Chem®, Ramik®, Rat &Mouse-A-Rest II®, RenaKare™, Rodent Elimination Station™, Rodex™,Rot-Not™,Safe-T-Flex™, Siloxycide®, Spectrasol™, Spec-Tuss™, Squire®, Starlicide®,Stress-Dex®, SureBond®, SureKill®,Swine-O-Dyne™Swine-O-Dyne®, Synergize®, SyrVet®, Tetrabase™Tetrabase®, Tetracid®,Tetradyne™ Tetradyne®, ThyroKare™, TopHoof™,Tri-Hist®,Tri-Seal™, Tryad®, Turbocide®, Turbocide Gold®, Uniprim®, UriKare™,VAP-5™,VAP-20™,Vet-Tie™, Viroxide Super®,Vita-15™, War Paint®, We keep ‘em movin’®,X-185™, Zipcide®;GENOMICS:GENOMICS: Deoxi™, GeneSeek®, Genomic Profiler™, Genomic Solutions for Food Security®, Igenity®, SeekGain™, SeekSire™, SeekTrace™,Tru-Polled®;LOGOTYPESLOGOTYPES:: BioSentry barn logo®, BioSentry chicken logo®, BioSentry pig logo®, Circular design®, TurboCide® (stylized).
Neogen operates in two business areas: the Food Safety and the Animal Safety segments. See Notes to Consolidated Financial Statements elsewhere in this Form10-K for financial information about the Company’sour business segments and international operations.
FOOD SAFETY SEGMENT
Neogen’s Food Safety segment is primarily engaged in the production and marketing of diagnostic test kits and complementary products marketed to food and feed producers and processors to detect dangerous and/or unintended substances in food and animal feed, such as foodborne pathogens, spoilage organisms, natural toxins, food allergens, genetic modifications, ruminant by-products, meat speciation, drug residues, pesticide residues and general sanitation concerns.
Our test kits are used to detect potential hazards in food and animal feed by testers ranging from small local grain elevators to the largest, best-known food and feed processors in the world, and numerous regulatory agencies. Neogen’s products include tests for:
Mycotoxins. Grain producers and processors of all types and sizes use the Company’sour Veratox, Agri-Screen, Reveal, Reveal Q+ and Reveal Q+ MAX tests to detect the presence of mycotoxins, including aflatoxin, deoxynivalenol, fumonisin, ochratoxin, zearalenone andT-2/HT-2 toxin, to help ensure product safety and quality in food and animal feed.
Food allergens. The world’s largest producers of cookies, crackers, candy, ice cream and many other processed foods use the Company’sour Veratox, Alert, Reveal, Reveal3-D and BioKits testing products for food allergens to help protect their food-allergic customers from the inadvertent contamination of products with food allergens, such as peanut, milk, egg, almond, gliadin (gluten), soy and hazelnut residues.
Dairy antibiotics. DairiesDairy processors are the primary users of Neogen’s BetaStar S, BetaStar Combo,Advanced and BetaStar 4D and Penzyme diagnostic tests to detect the presence of beta-lactam and tetracyclineveterinary antibiotics in milk. The presence of these drugs in milk is a public health hazard and an economic risk to processors as it limits the milk’s further processing.
Foodborne pathogens. Meat and poultry processors, seafood processors, fruit and vegetable producers and many other market segments are the primary users of Neogen’s ANSR and Reveal tests for foodborne bacteria, includingE. coli O157:H7,Salmonella,Listeriaand Campylobacter. Neogen’s ANSR pathogen detection system is an isothermal amplification reaction test method which exponentially amplifies the DNA of any bacteria present in food and environmental samples to detectable levels in 10 minutes. Combined with ANSR’s single enrichment step, Neogen’s pathogen detection method providesDNA-definitive results in a fraction of the time of other molecular detection methods. Our newListeria Right Now test detects the pathogen in less than 60 minutes without sample enrichment. Reveal’s lateral flow device combines an immunoassay with chromatography for a rapid and accurateone-step result.
Spoilage microorganisms. Neogen’s Soleris and BioLumix products are used by food processors to identify the presence of spoilage organisms (e.g., yeast and mold) and other microbiological contamination in food. The systems measure microbial growth by monitoring biochemical reactions that generate a color change in the media as microorganisms grow. The sensitivity of the system allows detection in a fraction of the time needed for traditional methods, with less labor and handling time. Our NeoSeek genomics services utilize a novel application of 16s metagenomics to determine all bacteria in a sample, without introducing biases from culture media, and without the need to generate a bacterial isolate for each possible microbe in a sample.
Sanitation monitoring. Neogen manufactures and markets itsour AccuPoint Advanced rapid sanitation test forto detect the presence of adenosine triphosphate (ATP), a chemical found in all living cells. Thiseasy-to-use and inexpensive test uses bioluminescence to quickly determine if a contact surface has been completely sanitized. When ATP comes into contact with the reagents contained in the test device, a reaction takes place that produces light. More light is indicative of higher levels of ATP and a need for more thorough sanitation. The Company’sOur worldwide customer base for its ATP sanitation testing products includes food and beverage processors, the food service and healthcare industries, as well as many other users.
Dehydrated cultureCulture media.Neogen Culture Media, formerly Neogen’s Acumedia and Lab M products, offer dehydratedoffers culture media for varied purposes, including traditional bacterial testing and the growth of beneficial bacteria, such as cultures for sausages and beer. The Company’sOur customers for dehydrated culture media also include commercial and research laboratories and producers of pharmaceuticals, cosmetics and veterinary vaccines.
Seafood contaminants. Neogen’s specialty products for the seafood market include tests for histamine, a highly allergenic substance that occurs when certain species of fish begin to decay; chloramphenicol, a banned antibiotic in most of the world, but still used by some shrimp farmers to improve the yield of their products; sulfite, an effective but potentially allergenic shrimp preservative; and shellfish toxins.
The majority of Neogen’s food safety test kits use immunoassay technology to rapidly detect target substances. The Company’sOur ability to produce high quality antibodies sets itsour products apart from immunoassay test kits produced and sold by other companies. The Company’sOur kits are available in microwell formats, which allow for automated and rapid processing of a large number of samples, and lateral flow and other similar devices that provide distinct visual results. Typically, test kits use antibody-coated test devices and chemical reagents to indicate a positive or negative result for the presence of a target substance in a test sample; the simplicity of the tests makes them accessible to all levels of food producers, processors and handlers. Neogen also offers other test methods and products to complement its immunoassay tests.
The Company’sOur test kits are generally based on internally developed technology, licensed technology, or technology that is acquired in connection with acquisitions. In fiscal 2017,2018, the Food Safety segment incurred royalty expense totaling $1,710,000$2,038,000 for licenses and royalties for technology used in the Company’sour products, including expense of $863,000$829,000 for allergen products, $199,000$241,000 for the pathogen product line and $375,000$409,000 for licenses related to the dairy antibiotics product line. Generally, the Company’s royalty rates are in the range of 2% to 10% of revenues on products containing the licensed technology. Some licenses involve technology that is exclusive to Neogen’s use while others arenon-exclusive and involve technology licensed to multiple licensees.
Neogen’s international operations in the United Kingdom, Mexico, Brazil, China and India originally focused on the Company’s Food Safetyfood safety products, and each of these units reports through the Food Safety segment. In recent years, these operations have expanded to offer the Company’sour complete line of products and services, including those usually associated with the Animal Safety segment such as cleaners, disinfectants, rodenticides, insecticides, veterinary instruments and genomics services. These additional products and services are managed and directed by existing management at our international operations, and are reportedreport through the Food Safety segment.
Revenues from Neogen’s Food Safety segment accounted for 47.4%48.7%, 47.4% and 45.6% and 46.5% of the Company’sour total revenues for fiscal years ended May 31, 2018, 2017 2016 and 2015,2016, respectively.
ANIMAL SAFETY SEGMENT
Neogen’s Animal Safety segment is primarily engaged in the development, manufacture, marketing and marketingdistribution of veterinary instruments, pharmaceuticals, vaccines, topicals, diagnostic products, a full suite of agricultural biosecurity products such as rodenticides, cleaners, disinfectants and insecticides, and genomics services.
Veterinary instruments. Neogen markets a broad line of veterinary instruments and animal health delivery systems under the Ideal brand name. Approximately 250 different products are offered, many of which are used to deliver animal health products, such as antibiotics and vaccines. Ideal’s D3 Needles are stronger than conventional veterinary needles and are uniquely detectable by metal detectors at meat processing facilities — a potential market advantage in the safety-conscious beef and swine industries. Neogen’s Prima Tech product line consists of highly accurate devices used by farmers, ranchers and veterinarians to inject animals, provide topical applications and to use for oral administration. Prima Tech is also a supplier of products used in artificial insemination in the swine industry. Other products include animal identification and handling equipment.
Veterinary pharmaceuticals. Animal Safety’s NeogenVet product line provides innovative, value-added, high quality products to the veterinary market. Top NeogenVet products include PanaKare, a digestive aid that serves as a replacement therapy where digestion of protein, carbohydrate and fat is inadequate due to exocrine pancreatic insufficiency; Natural VitaminE-AD, which aids in the prevention and treatment of vitamin deficiencies in swine, cattle and sheep; and RenaKare, a supplement for potassium deficiency in cats and dogs. Other products sold under the NeogenVet brand includeVita-15 and Liver 7, which are used in the treatment and prevention of nutritional deficiencies. The CompanyWe also manufacturesmanufacture and marketsmarket Uniprim, a leading veterinary antibiotic.
Veterinary biologics. Neogen’s BotVax B vaccine has successfully protected thousands of high-value horses and foals against Type B botulism, commonly known as Shaker Foal Syndrome. The Company’sOur product is the only USDA-approved vaccine for the prevention of Type B botulism in horses. Years of research and many thousands of doses have proven Neogen’s EqStim immunostimulant to be safe and effective as a veterinarian-administered adjunct to conventional treatment of equine bacterial and viral respiratory infections. The Company’sOur ImmunoRegulin product uses similar immunostimulant technology to aid in the treatment of pyoderma (a bacterial skin inflammation) in dogs.
Veterinary OTC products. Animal Safety products offered by Neogen to the retailover-the-counter (OTC) market include Ideal brand veterinary instruments packaged for the retail market. OTC products also includeStress-Dex, an oral electrolyte replacer for performance horses, and Fura-Zone, for the prevention and treatment of surface bacterial infections in wounds, burns and cutaneous ulcers.Ag-Tek and other hoof care, disposables and artificial insemination supplies are marketed to the dairy and veterinary industries.
Rodenticides. Neogen’s comprehensive line of proven rodenticides, sold under brand names such as Ramik and Havoc, effectively address rodent problems of any size and serve as a critical component of an overall biosecurity plan for animal protein production operations. Neogen offers several rodenticide active ingredients including diphacinone, bromethalin, brodifacoum, and zinc phosphide formulated with food grade ingredients to generate the highest acceptance and most palatable bait possible.
Cleaners and disinfectants. Used in animal and food production facilities, Neogen’s cleaners and disinfectants, including DC&R, 904 Disinfectant,Acid-A-Foam, Preserve, TetradyneSynergize, BioPhene and FarmFluid S, can stop a disease outbreak before it starts. The products are also are used in the veterinary clinic market to maintain sanitary conditions and limit the potential hazards of bacteria, fungi and viruses.
Insecticides. Neogen’s highly effective insecticides utilize environmentally friendly technical formulas, and several are approved for use in food establishments. The company’sCompany’s Prozap insecticide brand is well known in the large animal production industry, particularly with dairy and equine producers.
Animal genomics services. Neogen’s animal genomics businesses,Neogen Genomics, formerly known as GeneSeek and Igenity, provideprovides value-added services to leading agricultural genetics providers, large national cattle associations, companion animal breed registries, university researchers, and numerous commercial beef and dairy cattle, swine and poultry producers. Withstate-of-the-art geneticsgenomics laboratories and the comprehensive bioinformatics to interpret geneticgenomics test results, Neogen offers identity and trait determination and analysis. GeneSeek’sOur technology employs high-resolution DNA genotyping for identity and trait analysis in a variety of important animal and agricultural plant species. Igenity’sOur extensive bioinformatics database identifies and predicts an animal’s positive or negative traits based on DNA test results. This information has helped livestock producers make significant improvements in the genomic makeup and overall quality of their animals.
Life sciences. Neogen’s line of approximately 100 drug detection immunoassay test kits is sold worldwide for the detection of approximately 300 abused and therapeutic drugs in farm animals and racing animals, and for detection of drug residues in meat and meat products. The test kits are also used for human forensic toxicology drug screening applications. This line includes tests for narcotics, analgesics, stimulants, depressants, tranquilizers, anesthetics, steroids and diuretics. Neogen also has several products used by researchers for the detection of biologically active substances.
Many of the products and services in the Animal Safety segment use licensed technology. In fiscal year 2018, Animal Safety incurred royalty expense totaling $949,000$838,000 for licenses and royalties in fiscal 2017 for technology used in the segment’sour products and services, including expense of $410,000 for licenses related to the genomics services line.
Revenues from Neogen’s Animal Safety segment accounted for 52.6%51.3%, 52.6% and 54.4% and 53.5% of the Company’sour total revenues for fiscal years ended May 31, 2018, 2017 2016 and 2015,2016, respectively.
GENERAL SALES AND MARKETING
Neogen is organized under two segments — Food Safety and Animal Safety. Within these segments, the Company’sour sales efforts are generally organized by specific markets, rather than by products or geography. During the fiscal year that ended May 31, 2017, the Company2018, we had approximately 23,00027,000 customers for itsour products. Since many customers for animal safety products are distributors, and certain animal safety products are offered to the general retail market, the total number of end users of the Company’sour products is considerably greater than 23,000.27,000. As of May 31, 2017,2018, a total of 375401 employees were assigned to sales and marketing functions, within the Company, compared to 348375 at the end of May 2016.2017. During the fiscal years ended May 31, 2018, 2017 2016 and 2015,2016, no single customer or distributor accounted for 10% or more of the Company’sour revenues.
DOMESTIC SALES AND MARKETING
FOOD SAFETY
To reach each customer and prospect with expertise and experience, Neogen has a staff of specialized food safety sales and technical service representatives assigned to specific markets. This staff sells Companyour products directly to end users, and also handles technical support issues that arise with customers in the United States and Canada.
Neogen’s food safety markets are primarily comprised of: milling
ANIMAL SAFETY
Neogen markets a broad range of pharmaceuticals, vitamin injectables, wound care products, topicals, instruments, genomics services and biologicals to the veterinary market. The product range is focused on the food (e.g., cattle, swine and poultry) and companion (e.g., horses, dogs and cats) animal markets. Neogen’s sales group works directly with veterinarians, clinics and universities, and markets through established ethical distributors by supporting the efforts of over 1,000 domestic distributor sales representatives calling on 35,000 plus veterinarians. Neogen further supports its veterinary distribution channel through product training, field support, promotions and technical service.
The Company believesWe believe the animal health market offers growth opportunities for Neogen and its products. Neogen offers a broad range of products including well-recognized brands of rodenticides, cleaners and disinfectants, insecticides, instruments and horse care products. To reach the OTC market, Neogen’s sales team works with a large network of animal health distributors including marketing groups, traditionaltwo-step distributors, catalogers and large retail chains. Support includes product training, field support, planogram solutions, promotions and advertising.
As a commercial laboratory, GeneSeekNeogen provides genomics services direct to large-herd beef and dairy cattle, swine, poultry and sheep producers, universities and other research organizations, and various livestock and canine breed associations.
INTERNATIONAL SALES AND MARKETING
Neogen maintains 1012 Company-owned locations outside of the United States to provide a direct presence in regions of particular importance to the Company,us, and maintains an extensive network of distributors to reach countries where the Company doeswe do not have a direct presence.
Neogen Europe. Neogen Europe, Ltd., located in Ayr, Scotland, provides the Company access to the European Union (E.U.), and sells products and services to itsour network of customers and distributors throughout the E.U.European Union (E.U.). Customers in the United Kingdom (U.K.), France, Germany and the Netherlands are served by Companyour employees. In other European regions, customers are generally serviced by distributors managed by Neogen Europe personnel. Neogen Europe’s research and development team continues to be a strong asset in the development of products tailored to meet the unique requirements of the European market. Neogen Europe management is also responsible for sales and marketing for the Company’sour England-based Lab M and Quat-Chem businesses. In August 2015, Neogen acquired the stock of Lab M Holdings (Lab M), a developer, manufacturer and supplier of microbiological culture media and diagnostic systems located in Heywood, England. Lab M’s extensive range of microbiological culture media, supplements, immunomagnetic separation techniques and proficiency testing systems are used in laboratories around the world. In December 2016, Neogen acquired Quat-Chem Ltd., a Rochdale, England-based chemical company specializing in the development, manufacture and sale of agricultural, industrial, and food processing biocidal hygiene products, including cleaners and disinfectants. Quat-Chem sells its products on a global basis, with a focus on the United Kingdom, European Union,U.K., E.U., Middle East and Asia.
Neogen LatinoaméLatinoamérica. The Company’sOur subsidiary in Mexico, Neogen Latinoamérica, is headquartered near Mexico City and distributes Neogen’s products throughout Mexico and Central America. Neogen Latinoamérica manages the Company’sour business activities throughout the region by marketing to animal and crop producers and food processors, utilizing itsour direct sales representatives to sell Food Safety products and genomics services, while marketing cleaners, disinfectants and other Animal Safety products primarily through distributors.
Neogen do Brasil.Neogen do Brasil, (translated as Neogen of Brazil), headquartered near São Paulo, distributes Neogen’s products throughout Brazil. Brazil is one of the world leaders in the export of numerous food commodities, including beef, poultry, soybeans, coffee, sugar and orange juice, and this operation gives the Companyus direct sales representation to these important markets. Neogen do Brasil management is also responsible for sales and marketing for the Company’sourBrazil-based Deoxi and Rogama businesses. Neogen owns Deoxi Biotecnologia Ltda, a genomics testing laboratory located in Aracatuba, Brazil, which itwe purchased in April 2016. In December 2016, Neogenwe acquiredBrazil-based Rogama Indústria e Comércio Ltda., a company which develops, manufactures and markets rodenticides and insecticides. Rogama was founded in 1979 and offers more than 70 registered pest control products to Brazil’s agronomic, professional, and retail markets.
Neogen China. Neogen’sOur Chinese subsidiary, with offices in Shanghai and Beijing, employs sales representatives who sell directly to Chinese customers. China’s burgeoning middle class, with its rapidly growing demand for higher quality meat and dairy products, makes the country a substantial growth opportunity for Neogen products — both for animal production on the country’s farms, and in processing plants throughout China’s food production and distribution channels. The Company utilizesWe utilize both direct sales representatives and distributors to market itssell our complete portfolio.portfolio in this growing market.
Neogen India. In June 2015, Neogen acquired the assets of Sterling Test House, a leading commercial food testing laboratory based in southwest India, to serve as a base for the Company’sour operations in India. Sterling Test HouseThis business, which was incorporated in 1990, and its businessrenamed Neogen India, includes food safety and water quality testing for major hotels and restaurants in its home region, as well as safety and quality analysis for the country’s expanding nutraceutical market, and growing food export businesses. The laboratory is located in Kochi, in the state of Kerala, which is India’s leading region for the export of spices, tea, and fresh fruits and vegetables. In late fiscal 2016, Neogen transferred sales responsibility for itsour Food Safety products directly to sales representatives at Neogen India.
Neogen Canada. In September 2015, Neogen opened a Canadian location in Guelph, Ontario. Currently, this office is used for genomics sales and sample reception, and reports through the Animal Safety segment.
Neogen Australasia. In September 2017, Neogen acquired the assets of The University of Queensland Animal Genetics Laboratory (AGL) — the leading animal genomics laboratory in Australia, a country with large cattle and sheep markets. The acquisition of AGL was intended to help accelerate the growth of our animal genomics business in Australia and New Zealand. With the acquisition, AGL was renamed Neogen Australasia, and became Neogen’s fourth animal genomics laboratory — joining existing locations in the U.S., Scotland and Brazil.
Dairy antibiotics distributor. Neogen’s dairy antibiotics diagnostic products are marketed directly to customers in North America, Brazil and China, and distributed elsewhere internationally by Denmark based Chr. Hansen, an international supplier of natural ingredient solutions for the food, health and nutritional industries.
Other distributor partners. Outside of the Companyour physical locations and dairy antibiotics distributor mentioned above, Neogen uses itsour own sales managers in both the Food Safety and Animal Safety segments to work closely with and coordinate the efforts of a network of approximately 150 distributors in more than 100 countries. The distributors provide local training and technical support, perform market research and promote Company products within designated countries around the world.
Sales to customers outside the United States accounted for 35.8%37.6%, 35.8% and 33.5% and 36.7% of the Company’sour total revenues for fiscal years ended May 31, 2018, 2017 and 2016, and 2015, respectively. No individual foreign country contributed 10% or more of our revenues for those same periods.
RESEARCH AND DEVELOPMENT
Management maintains a strong commitment to Neogen’s research and development activities. The Company’sOur product development efforts are focused on the enhancement of existing products and in the development of new products that fit itsour business strategy. As of May 31, 2017, the Company2018, we employed 92100 individuals in itsour worldwide research and development group, including immunologists, chemists and microbiologists. Research and development costs were approximately $10.9 million, $10.4 million and $9.9 million representing 2.7%, 2.9% and $9.6 million representing 2.9%, 3.1% and 3.4% of total revenues in fiscal years 2018, 2017 2016 and 2015,2016, respectively. Management currently expects the Company’sour future research and development expenditures to approximate 3% to 4% of total revenues.revenues annually.
Neogen has ongoing development projects for a number ofseveral new and improved diagnostic tests and other complementary products for both the food safetyFood Safety and animal safetyAnimal Safety markets. Management expects that a number of these products will be commercially available at various times during fiscal years 2018 to2019 and 2020.
Portions of certain technologies utilized in some products manufactured and marketed by Neogen were acquired from or developed in collaboration with affiliated partnerships, independent scientists, governmental units, universities and other third parties. The Company hasWe have entered into agreements with these parties that provide for the payment of license fees and royalties based upon sales of products that utilize the pertinent technology. License fees and royalties, expensed to sales and marketing, under these agreements amounted to $2,876,000, $2,659,000 $1,969,000 and $2,189,000$1,969,000 in fiscal years 2018, 2017 2016 and 2015,2016, respectively.
PROPRIETARY PROTECTION AND APPROVALS
Neogen uses trade secrets as proprietary protection in many of its food and animal safety products. In many cases, the Company haswe have developed unique antibodies capable of detecting microorganisms and residues at minute levels. The supply of these antibodies, and the proprietary techniques utilized for their development, may offer better protection than the filing of patents. Such proprietary reagents are maintained in secure facilities and stored in more than one location to reduce exposure to complete destruction by natural disaster or other means.
Patent and trademark applications are submitted whenever appropriate. Since its inception, Neogen has acquired and received numerous patents and trademarks, and has several pending patents and trademarks. The patents expire at various times over the next 2224 years.
A summary of patents by product categories follows:
| USA | International | Expiration | USA | International | Expiration | |||||||||||||||||||
Natural Toxins, Allergens, & Drug Residues | 6 | 31 | 2018-2038 | 24 | 48 | 2018-2042 | ||||||||||||||||||
Bacterial & General Sanitation | 17 | 18 | 2017-2030 | 1 | 9 | 2018-2021 | ||||||||||||||||||
Life Sciences | 0 | 7 | 2024 | 0 | 4 | 2024 | ||||||||||||||||||
Vaccine | 2 | 0 | 2018-2028 | |||||||||||||||||||||
Veterinary Instruments & Other | 14 | 32 | 2017-2039 | 13 | 33 | 2019-2039 | ||||||||||||||||||
Genomics Services | 7 | 1 | 2021-2029 | 18 | 4 | 2021-2029 | ||||||||||||||||||
The Company does
We do not expect the near-term expiration of any single patent to have a significant effect on future results of operations.
Management believes that Neogen has adequate protection regarding proprietary rights for itsour products. However, it iswe are aware that substantial research has taken place at universities, governmental agencies and other companies throughout the world and that numerous patents have been applied for and issued for technologies which may be used in the Company’sour products. To the extent some of the Company’sour products may now, or in the future, embody technologies protected by patents, copyrights or trade secrets of others, licenses to use such technologies may need to be obtained in order to continue to sell the products. These licenses may not be available on commercially reasonable terms. Failure to obtain any such licenses may delay or prevent the sale of certain new or existing products. In addition, patent litigation is not uncommon. Accordingly, there can be no assurance that the Company’sour existing patents will be sufficient to completely protect itsour proprietary rights.
One of the major areas affecting the success of biotechnology development involves the time, cost and uncertainty surrounding regulatory approvals. Neogen products requiring regulatory approval, which the Companywe currently hashave in place, include BotVax B, EqStim, ImmunoRegulin, Uniprim and BetaStar. The Company’sOur general strategy is to select technical and proprietary products that do not require mandatory approval by regulatory bodies to be marketed. Neogen’s rodenticide, disinfectant and insecticide products are subject to registration in the United States and internationally.
Neogen utilizes third-party validations on many of itsour disposable test kits as a marketing tool to provide itsour customers with assurances that the Company’sour products perform to specified levels. These include validation by the AOAC International, independently administered third-party, multi-laboratory collaborative studies and approvals by the U.S. Federal Grain Inspection Service and the USDA Food Safety Inspection Service for the use of Companyour products in their operations.
PRODUCTION AND SUPPLY
Neogen manufactures itsour products in Michigan, Kentucky, Wisconsin, North Carolina, Iowa, Tennessee, California, the United Kingdom and Brazil and provides genomics services in Nebraska, Scotland, Brazil and Brazil.Australia. As of May 31, 2017,2018, there were approximately 680764 full-time employees assigned to manufacturing and providing of services in these locations, operating on one or two shifts; with occasional 24/7 production during high demand periods. Future demand increases could be accommodated by adding shifts. Management believes itwe could increase the current output of itsour primary product lines by more than 50% using the current space available; however, to do so would require investment in additional capital equipment.
Food safety diagnostics. Manufacturing of diagnostic tests for the detection of natural toxins, pathogens, food allergens, dairy antibiotics, spoilage organisms and pesticides, final kit assembly, quality assurance and shipping takes place in the Company’sat our facilities in Lansing, Michigan. Proprietary monoclonal and polyclonal antibodies for Neogen’s diagnostic kits are produced on a regular schedule in the Company’sour immunology laboratories in Lansing. Generally, final assembly and shipment of diagnostic test kits to customers in Europe is performed in the Company’sour Ayr, Scotland facility. Assembly and shipment of electronic readers and disposablesingle-use samplers takes place in the Company’sour facilities in Lansing. Soleris and BioLumix instrument readers are produced by third partythird-party vendors to the Company’sour specifications, quality tested in Lansing, and then shipped to customers. Dehydrated cultureCulture media products are manufactured in aFDA-registered facility in Lansing and also in Heywood, England. Products are blended following strict formulations or custom blended to customer specification and shipped directly to customers from Lansing and Heywood.
Animal health products. Manufacturing of animal health products, pharmacological diagnostic test kits and test kits for drug residues takes place in the Company’sourFDA-registered facilities in Lexington, Kentucky. In general, manufacturing operations including reagent manufacturing, quality assurance, final kit assembly and packaging are performed by Neogen personnel. Certain animal health products and veterinary instruments that are purchased finished or that are toll manufactured by third party vendors are warehoused and shipped from the Company’sour Lexington facilities. Other veterinary instruments are produced in the Company’sour facilities in Lansing, and are generally then shipped to Lexington, for distribution to customers. Manufacturing and shipment of devices used for animal injections, topical applications and oral administration takes place in a Company-owned facilityoccurs in Kenansville, North Carolina.
Veterinary biologics. Neogen maintains a Lansing-based USDA-approved manufacturing facility devoted to the production of the biologic products EqStim and ImmunoRegulin.P. acnesP.acnes seed cultures are added to media and then subjected to several stages of further processing resulting in a finished product that is filled and packaged within the facility. The Company’sOur BotVax B vaccine is also produced in the Lansing facility utilizing Type B botulism seed cultures and a traditional fermentation process. All completed biologic products are then shipped to Neogen’s Lexington facilities for inventory andwhere they are inventoried prior to distribution to customers.
Agricultural genomics services. Neogen offers agricultural genomics laboratory services and bioinformatics at itsour locations in Lincoln, Nebraska; Ayr, Scotland;Nebraska, Scotland, Brazil and Aracatuba, Brazil.Australia. Through itsour laboratory services and bioinformatics (primarily in beef and dairy cattle, pigs, sheep, poultry, horses and dogs), GeneSeek empowers itsNeogen Genomics allows our customers to speed genetic improvement efforts, as well as identify economically important diseases. In fiscal 2016, the Company added to its processing capabilities in Scotland, while also purchasing a genomics business in Brazil to enhance its presence there.
Cleaners, disinfectants and rodenticides. Manufacturing of rodenticides and/or cleaners and disinfectants takes place in the following locations: Randolph, Wisconsin; Memphis, Tennessee; Turlock, California; Rochdale, England; and Pindamonhangaba, Brazil. Manufacturing of rodenticides consists of blending technical material (active ingredient) with bait consisting principally of various grains. Certain cleaners and disinfectants are manufactured in Neogen facilities, while others are purchased from other manufacturers for resale, or toll manufactured by third parties.
Pesticides. Neogen manufactures insecticides and other pesticides at its facilities in Pleasantville, Iowa and Pindamonhangaba, Brazil.
Neogen purchases component parts and raw materials from more than 9001,000 suppliers. Though many of these items are purchased from a single source in order to achieve the greatest volume discounts, the Company believes it haswe believe we have identified acceptable alternative suppliers for most of itsour key components and raw materials where it is economically feasible to do so. There can be no assurance that the Companywe would avoid a disruption of supply in the event a supplier discontinues shipment of product. Shipments of products are generally accomplished within a48-hour turnaround time. As a resultBecause of this quick response time, Neogen’sour backlog of unshipped orders at any given time has historically not been significant.
COMPETITION
Although competitors vary in individual markets, management knows of no competitor that is pursuing Neogen’s fundamental strategy of developing and marketing a broad line of products, ranging from disposable tests and dehydrated culture media to veterinary pharmaceuticals and instruments for a large number of food safety and animal safety concerns. For each of itsour individual products the Company facesor product lines, we face intense competition from companies ranging from small businesses to divisions of large multinational companies. Some of these organizations have substantially greater financial resources than the Company. Neogen competesNeogen. We compete primarily on the basis of ease of use, speed, accuracy and other similar performance characteristics of itsour products. The breadth of the Company’sour product line, the effectiveness of itsour sales and customer service organizations, and pricing are also components in management’s competitive plan.strategy.
Future competition may become even more intense, and could result from the development of new technologies, which could affect the marketability and profitability of Neogen’s products. The Company’sOur competitive position will also depend on management’s ability to continue to develop proprietary products, attract and retain qualified scientific and other personnel, develop and implement production and marketing plans and obtain patent protection.protection for new products. Additionally, the Companywe must have adequate capital resources to execute itsour strategy.
FOOD SAFETY:
With a large professional sales organization offering a comprehensive catalog of food safety solutions, management believes the Company maintainswe maintain a general advantage over competitors offering only limited product lines. In most cases, Neogen sales and technical service personnel can offer unique insight into a customer’s numerous safety and quality challenges, and offer testing and other solutions to help the customer overcome those challenges.
Competition for pathogen detection products includes traditional methods and antibody and genetic-based platforms; competition for natural toxins and allergen detection products include instrumentation and antibody-based tests. While the Company’sour offerings will not always compete on all platforms in all markets, the products that are offeredwe offer provide tests that can be utilized by most customers to meet their testing needs.
Besides itsIn addition to our extensive product offerings and robust distribution network, the Company focuses itswe focus our competitive advantage in the areas of customer service, product performance, speed and ease of use of itsour products. Additionally, by aggressively maintaining itselfNeogen as alow-cost producer, Neogen believeswe believe that itwe can be competitive with new market entrants that may choose a low pricing strategy in an attempt to gain market share.
ANIMAL SAFETY:
Neogen’s Animal Safety segment faces no one competitor across the products and markets it serves.we serve. In the racing industry market, the Company believes it holdswe believe we hold a leading market share position. In the life sciences and forensicforensics markets, the Company competeswe compete against several other diagnostic and reagent companies with similar product offerings.
In the veterinary market, Neogen markets BotVax B, the only USDA-approved vaccine for the prevention of botulism Type B in horses. The Company competesWe compete on other key products through differentiated product performance and superior customer and technical support. With some of itsour products, the Company provideswe provide solutions as a lower cost alternative and offersoffer a private label option for itsour distributors.
Competition in the rodenticide market includes several companies of comparable size that offer products into similar market segments. The retail rodenticide market is not dominated by a single brand. While the technical materials used by competing companies are similar, Neogen uses manufacturing and bait formula techniques which the Company believeswe believe may better attract rodents to the product and thereby improves overall product performance.
Within the insecticide market, the Company’sChem-Tech products specifically focus on the area of insect control for food and animal safety applications. There are several competitors offering similar products, however, the Company haswe have a proprietary formulation chemistry that optimizes the delivery and safe application of insecticides at the customer’s location. These products are currently only sold in the U.S. through a combination of direct sales and distributors.
Numerous companies, including a number of large multinationals, compete for sales in the cleaner and disinfectant product segment. Neogen’s broad line of products are sold through itsour distributor network around the world, primarily to assist in the cleaning and disinfecting of animal production facilities.
In addition to the Company’sour extensive portfolio of Animal Safety products, Neogen also competes in the retail market by providing solutions to common retail problems, such as stock outs, wasted floor space and inconsistent brand identity. The Company differentiates itselfWe differentiate ourselves by offering planograms and convenient reordering systems to maximize turns and profitability for itsour retail customers.
GeneSeek,Neogen Genomics, which includes the leading commercial agricultural genomics laboratory in the U.S., employs cutting-edge technology in the area of genomics. The result of this technology allows the acceleration of natural selection through selective breeding of traits such as disease resistance, yield improvement and meat quality. Competition comes mainly from a number of service providers, some significantly larger than us, whose primary focus are the human and pharmaceutical industries, as well as several smaller companies offering genomics services. GeneSeekNeogen Genomics is not involved in cloning or the development of transgenic animals.
GOVERNMENT REGULATION
A significant portion of Neogen’s products and revenues are affected by the regulations of various domestic and foreign government agencies, including the U.S. Department of Agriculture (USDA), the Environmental Protection Agency (EPA), and the U.S. Food and Drug Administration (FDA). Changes in these regulations could affect revenues and/or costs of production and distribution.
Neogen’s development and manufacturing processes involve the use of certain hazardous materials, chemicals and compounds. Management believes that the Company’sour safety procedures for handling and disposing of such commodities comply with the standards prescribed by federal, state and local regulations; however, changes in such regulations or rules could involve significant costs to the Companyus and could be materially adverse to itsour business.
The rodenticides, insecticides, cleaners, disinfectants and sanitizers manufactured and distributed by Neogen are subject to EPA and various state regulations. In general, any international sale of the productour products must also comply with similar regulatory requirements in the country of destination. Each country has its own individual regulatory construct with specific requirements (e.g., label in the language of the importing country). To the best of the Company’sour knowledge, Neogen products are in compliance with applicable regulations in the countries where such products are sold.
Dairy diagnostic products used in National Conference on Interstate Milk Shipments (NCIMS), a cooperative program involving FDA, state governments, and other milk monitoring programs are regulated by the FDA.industry must first be approved. Before products requiring FDANCIMS approval can be sold in the U.S., extensive product performance data must be submitted in accordance with theFDA-approved protocol administered by the AOAC Research Institute (AOAC RI). Following approval of a product by the FDA,NCIMS, the product must also be approvedreviewed by NCIMS, an oversight body that includes federal, state and industry representatives. The Company’sthe FDA. Our BetaStar Advanced U.S. dairy antibiotic residue testing product has been reviewed and/or approved by the FDA, NCIMS, and AOAC RI. While some foreign countries accept AOAC RI approval as part of theirappropriate regulatory approval processes, many countries have their own regulatory requirements.bodies.
Many of the food safety diagnostic products to detect allergens and spoilage organisms do not require direct government approval. However, the Company haswe have pursued AOAC approval for manya number of these products to enhance their marketability. Products for mycotoxin detection, which are used by federal inspectors, must be approved by the USDA. Neogen has obtained and retained the necessary approvals to conduct its current operations.
Neogen’s veterinary vaccine products and some pharmaceutical products require government approval to allow for lawful sales. The vaccine products are approved by the U.S. Department of Agriculture, Center for Veterinary Biologics(USDA-CVB) and the pharmaceutical products are approved by the FDA. The products, and the facilities in which they are manufactured, are in a position of good standing with both agencies. The Company has hadWe have no warning letters based on any review of these products or facility inspection, no recalls on any of these products, and knowsare not aware of noany reason why itwe could not manufacture and market such products in the future.
Other animal safety and food safety products generally do not require additional registrations or approvals. However, Neogen’s regulatory staff routinely monitors amendments to current regulatory requirements to ensure compliance.
EMPLOYEES
As of May 31, 2017, the Company2018, we employed 1,4131,546 full-time persons worldwide. None of the employees are covered by collective bargaining agreements. There have been no work stoppages or slowdowns due to labor-related problems, and management believes that itsour relationship with itsour employees is generally good. Employees havingwith access to proprietary information have executed confidentiality agreements with the Company.Neogen.
| ITEM 1A. | RISK FACTORS |
An investment in Neogen Corporation’s common shares involves a high degree of risk. The risks described below are not the only ones that an investor faces. Additional risks that are not yet known to us or that we currently think are immaterial could also impair our business, financial condition or results of operations. If any of the following risks actually occurs, our business, financial condition or results of operations could be adversely affected.
Risks Relating to Our Business
Our business strategy is dependent on successfully promoting internal growth and identifying and integrating acquisitions.
Our business has grown significantly over the past several years as a result of both internal growth and acquisitions of existing businesses and their products. Management initiatives may be attempted to augment internal growth, such as strengthening our presence in select markets, reallocating research and development funds to higher growth potential products, development of new applications for our technologies, enhancing our service offerings, continuing key customer efforts, and finding new markets for our products. Failure of these management initiatives may have a material adverse effect on our operating results and financial condition.
Identifying and pursuing acquisition opportunities, integrating these acquisitions into our business and managing their growth requires a significant amount of management’s time and skill. We cannot assure that we will be effective in identifying, integrating or managing future acquisition targets. Our failure to successfully integrate and manage a future acquisition may have a material adverse effect on our operating results and financial condition.
In addition, if we continue to experience growth in our business, such growth could place a significant strain on our management, customer service, operations, sales and administrative personnel, and other resources. To serve the needs of our existing and future customers we will be required to recruit, train, motivate and manage qualified employees. We have incurred and will continue to incur significant costs to retain qualified management, sales and marketing, engineering, production, manufacturing and administrative personnel, as well as expenses for marketing and promotional activities. Our ability to manage our planned growth depends upon our success in expanding our operating, management, information and financial systems, which might significantly increase our operating expenses.
We may not be able to effectively manage our future growth, and if we fail to do so, our business, financial condition and results of operations could be adversely affected.
We rely significantly on our information systems infrastructure to support our operations and a failure of these systems and infrastructure and/or a security breach of the Company’sour information systems could damage the Company’sour reputation and have an adverse effect on operations and results.
We rely on our information systems infrastructure to integrate departments and functions, to enhance our ability to service customers, to improve our control environment and to manage our cost reduction initiatives. If a security breach or cyberattack of our IT networks and systems occurs, our operations could be interrupted. Any issues involving our critical business applications and infrastructure may adversely impact our ability to manage our operations and the customers we serve. Although we have controls and security measures in place to prevent such attacks, experienced computer hackers are increasingly organized and sophisticated. Malicious attack efforts operate on a large-scale and sometimes offer targeted attacks as apaid-for service. In addition, the techniques used to access or sabotage networks change frequently and generally are not recognized until launched against a target.
We rely on several information systems throughout our company, as well as our third-party business partners’, to provide access to ourweb-based products and services, keep financial records, analyze results of operations, process customer orders, manage inventory, process shipments to customers, store confidential or proprietary information and operate other critical functions. Although Neogen employs system backup measures and engages in information system redundancy planning and processes, such measures, planning and processes, as well as our current disaster recovery plan, may be ineffective or inadequate to address all vulnerabilities. Further, our information systems and our business partners’ and suppliers’ information systems may be vulnerable to attacks by hackers and other security breaches, including computer viruses and malware, through the Internet (including via devices and applications connected to the Internet), email attachments and persons with access to these information systems, such as our employees or third parties with whom we do business. As information systems and the use of software and related applications by us, our business partners, suppliers, and customers become more cloud-based, there has been an increase in global cybersecurity vulnerabilities and threats, including more sophisticated and targeted cyber-related attacks that pose a risk to the security of our information systems and networks and the confidentiality, availability and integrity of data and information.
While we have implemented network security and internal control measures, especially for the purpose of protecting our connected products and services from cyberattacks, and invested in our data and information technology infrastructure, there can be no assurance that these efforts will prevent a system disruption, attack, or security breach and, as such, the risk of system disruptions and security breaches from a cyberattack remains.
In addition, if the Company’sour security and information systems are compromised, or employees fail to comply with the applicable laws and regulations, andor this information is obtained by unauthorized persons or used inappropriately, it could adversely affect the Company’sour reputation, as well as results of operations, and could result in litigation, the imposition of penalties, or significant expenditures to remediate any damage to persons whose personal information has been compromised.
Disruption of our manufacturing and service operations could have an adverse effect on our financial condition and results of operations.
We manufacture our products at several manufacturing facilities located in the following locations: Lansing, Michigan; Lexington, Kentucky; Randolph, Wisconsin; Kenansville, North Carolina; Pleasantville, Iowa; Memphis, Tennessee; Turlock, California; Heywood, England; Ayr, Scotland; Rochdale, England; and Pindamonhangaba, Brazil. We offer genomics services from facilities located in: Lincoln, Nebraska; Ayr, Scotland; Aracatuba, Brazil and Aracatuba, Brazil.Gatton, Australia. These facilities and our distribution systems are subject to catastrophic loss due to fire, flood, terrorism or other natural orman-made disasters. If any of these facilities were to experience a catastrophic loss, it could disrupt our operations, delay production, shipments and revenue and result in significant expenses to repair or replace the facility and/or distribution system. If such a disruption were to occur, we could breach agreements, our reputation could be harmed, and our business and operating results could be adversely affected. Although we carry insurance for property damage and business interruption, we do not carry insurance or financial reserves for interruptions or potential losses arising from terrorism. Economic conditions and uncertainties in global markets may adversely affect the cost and other terms upon which we are able to obtain third party insurance. If our third partywe are unable to obtain sufficient and cost-effective third-party insurance coverage, is adversely affected, or to the extent we have elected to self-insure, we may be at greater risk that our operations will be harmed by a catastrophic loss.
Our dependence on suppliers could limit our ability to sell certain products or negatively affect our operating results.
We rely on third partythird-party suppliers to provide components in our products, manufacture products that we do not manufacture ourselves and perform services that we do not provide ourselves, including package delivery services. Because these suppliers are independent third parties with their own financial objectives, actions taken by them could have a negative effect on our results of operations. The risks of relying on suppliers include our inability to enter into contracts with third party suppliers on reasonable terms, inconsistent or inadequate quality control, relocation of supplier facilities, supplier work stoppages and suppliers’ failure to comply with their contractual obligations. In addition, we currently purchase some raw materials and products from sole or single sources. Some of the products that we purchase from these sources are proprietary and, therefore, cannot be readily or easily replaced by alternative sources. Problems with suppliers could negatively impact our ability to supply the market, substantially decrease sales, lead to higher costs or damage our reputation with our customers.
We rely heavily on third partythird-party package delivery services, and a significant disruption in these services or significant increases in prices may disrupt our ability to ship products, increase our costs and lower our profitability.
We ship a significant portion of our products to our customers through independent package delivery companies, such as UPS, Federal Express and DHL. We also ship our products through other carriers, including national and regional trucking firms, overnight carrier services and the U.S. Postal Service. If one or more of these third partythird-party package delivery providers were to experience a major work stoppage, preventing our products from being delivered in a timely fashion or causing us to incur additional shipping costs we could not pass on to our customers, our costs could increase and our relationships with some of our customers could be adversely affected. In addition, if one or more of our third partythird-party package delivery providers were to increase prices, and we were not able to find comparable alternatives or make adjustments inwithin our delivery network, our profitability could be adversely affected.
Our business sells many products through distributors, which present risks that could negatively affect our operating results.
We sell many of our products, both within and outside of the U.S., through distributors. As a result, we are dependent on these distributors to sell our products and assist us in promoting and creating a demand for our products. Our distributors sometimes offer products from several different companies, and those distributors may carry our competitors’ products and promote our competitors’ products over our own. We have limited ability, if any, to cause our distributors to devote adequate resources to promoting, marketing, selling and supporting our products. We cannot assure that we will be successful in maintaining and strengthening our relationships with our distributors or establishing relationships with new distributors who have the ability to market, sell and support our products effectively. We may rely on one or more key distributors for a product or region, and the loss of one or more of these distributors could reduce our revenue. Distributors may face financial difficulties, including bankruptcy, which could harmimpact our collection ofability to collect our accounts receivable and negatively impact our financial results. In addition, violations of anti-corruption laws or similar laws by our distributors could have a material impact on our business, and any termination of a distributor relationship may result in increased competition in the applicable jurisdiction. Failing to manage the risks associated with our use of distributors may reduce sales, increase expenses and weaken our competitive position, which could have a negative impact on our operating results.
The development of new products entails substantial risk of failure due to the production ofnon-viable products, lack of properly identifying market potential, and competitors better serving the marketplace.
Our growth strategy includes significant investment in and expenditures for product development. To execute this strategy, we are continually developing new products for which we believe there should be significant market demand. We cannot assure that we will successfully develop commercially viable products, that the products will be developed on a timely basis to meet market demand or that the relevant market will be properly identified. Our competitors may also adapt more quickly, and deliver superior technologies, price and/or service to better fit our customers’ requirements. If we expend substantial resources in developing an unsuccessful product, whether that lack of success is the result of our production of anon-viable product, a misidentified market, or a competitor’s superior ability to meet our customers’ requirements, operating results could be adversely affected.
Our international operations are subject to different product standards as well as other operational risks.
In fiscal 2017,2018, sales to customers outside of the U.S. accounted for 35.8%37.6% of the Company’sour total revenue. We expect that our international business will continue to account for a significant portion of our total revenue.sales. Foreign regulatory bodies may establish product standards different from those in the U.S. and with which the Company’sour current products do not comply. Our potential inability to design products that comply with foreign standards could have a material adverse effect on our future growth. Other risks related to our sales to customers outside of the U.S. include possible disruptions in transportation, difficulties in building and managing foreign distribution, fluctuation in the value of foreign currencies, changes in import duties and quotas and unexpected economic and political changes in foreign markets. These factors could adversely affect international sales and our overall financial performance.
The markets for our products are extremely competitive, and our competitors may be able to utilize existing resource advantages to our detriment.
The markets in which the Company competeswe compete are subject to rapid and substantial changes in technology and are characterized by extensive research and development and intense competition. Many of our competitors and potential competitors have greater financial, technical, manufacturing, marketing, research and development and management resources than we do. These competitors might be able to use their resources, reputations and ability to leverage existing customer relationships to give them a competitive advantage over us. They might also succeed in developing products that are more reliable and effective than our products, make additional measurements, are less costly than our products or provide alternatives to our products.
We are dependent on the agricultural marketplace, which is affected by factors beyond our control.
Our primary customers are in the agricultural and food production industries. Economic conditions affecting agricultural industries are cyclical and are dependent upon many factors outside of our control, including weather conditions, changes in consumption patterns or commodity prices. Any of these factors in the agricultural marketplace could affect our sales and overall financial performance.
Our quarterly operating results are subject to significant fluctuations.
We have experienced, and may experience in the future, significant fluctuations in our quarterly operating results. The mix of products sold and the acceptance of new products, in addition to other factors, could contribute to this quarterly variability. We operate with relatively little backlog and have few long-term customer contracts. Substantially all of our product revenue in each quarter results from orders received in that quarter. In addition, our expense levels are based, in part, on our expectation of future revenue levels. A shortfall in expected revenue could, therefore, result in a disproportionate decrease in our net income.
Our success is highly dependent on our ability to obtain protection for the intellectual property utilized in our products.
Our success and ability to compete depends in part upon our ability to obtain protection in the United StatesU.S. and other countries for our products by establishing and maintaining intellectual property rights relating to or incorporated into our technology and products. Patent applications filed by the Companyus may not result in the issuance of patents or, if issued, may not be issued in a form that will be commercially advantageous to us. Even if issued, patents may be challenged, narrowed, invalidated or circumvented, which could limit our ability to stop competitors from marketing similar products or limit the length of time we may have patent protection for our products. We also cannot assure that our nondisclosure agreements, together with trade secrets and other common law rights, will provide meaningful protection for the Company’sour trade secrets and other proprietary information. Moreover, the laws of some foreign jurisdictions may not protect intellectual property rights to the same extent as in the United States,U.S., and many companies have encountered significant difficulties in protecting and defending such rights in foreign jurisdictions. If we encounter such difficulties or we are otherwise precluded from effectively protecting our intellectual property rights domestically or in foreign jurisdictions, we may incur substantial costs and our business, including our business prospects, could be substantially harmed.
From time to time, the Company haswe have received notices alleging that the Company’sour products infringe third partythird-party proprietary rights. Whether the manufacture, sale or use of current products, or whether any products under development would, upon commercialization, infringe any patent claim will not be known with certainty unless and until a court interprets the patent claim in the context of litigation. When an infringement allegation is made against us, we may seek to invalidate the asserted patent claim and/or to allegenon-infringement of the asserted patent claim. In order forFor us to invalidate a U.S. patent claim, we would need to rebut the presumption of validity afforded to issued patents in the United StatesU.S. with clear and convincing evidence of invalidity, which is a high burden of proof. The outcome of infringement litigation is subject to substantial uncertainties, and also the testimony of experts as to technical facts upon which experts may reasonably disagree. Our defense of an infringement litigation lawsuit could result in significant expense. Regardless of the outcome, infringement litigation could significantly disrupt our marketing, development and commercialization efforts, divert management’s attention and consume our financial resources. In the event that we are found to infringe any valid claim in a patent held by a third party, we may, among other things, be required to:
Any development or acquisition ofnon-infringing products, technology or licenses could require the expenditure of substantial time and other resources and could have a material adverse effect on our business and financial results. If we are required to, but cannot, obtain a license to valid patent rights held by a third party, we would likely be prevented from commercializing the relevant product, or from further manufacture, sale or use of the relevant product.
We are subject to substantial governmental regulation.
A portion of our products and facilities are regulated by various domestic and foreign government agencies, including the U.S. Department of Agriculture, the U.S. Food and Drug Administration and the Environmental Protection Agency. A significant portion of our revenue is derived from products used to monitor and detect the presence of residues that are regulated by various government agencies. Furthermore, the Company’sour growth may be adversely affected by the implementation of new regulations. The Company isWe are not aware of any failures to comply with applicable laws and regulations; the costs of compliance or failure to comply with any obligations could adversely impact theour business.
We are dependent on key employees.
Our success depends, in large part, on members of our management team. Our loss of any of these, or other, key employees could have a material adverse effect on the Company.us. We maintain certain incentive plans for key employees, and mostmany of these employees have been with the Companyus in excess of five years. However, we have not executed long-term employment agreements with any of these employees and do not expect to do so in the foreseeable future. Our success depends, significantly, on our ability to continue to attract such personnel. We cannot assure that we will be able to retain our existing personnel or attract additional qualified persons when required and on acceptable terms.
Our business may be subject to product liability claims.
The manufacturing and distribution of the Company’sour products involve an inherent risk of product liability claims being asserted against us. Regardless of whether we are ultimately determined to be liable or our products are determined to be defective, we might incur significant legal expenses not covered by insurance. In addition, product liability litigation could damage our reputation and impair our ability to market our products, regardless of the outcome. Litigation could also impair our ability to retain product liability insurance or make our insurance more expensive. Although the Companywe currently maintainsmaintain liability insurance, we cannot assure that we will be able to continue to obtain such insurance on acceptable terms, or that such insurance will provide adequate coverage against all potential claims. If we are subject to an uninsured or inadequately insured product liability claim, our business, financial condition and results of operations could be adversely affected.
Market prices for securities of technology companies are highly volatile.
The market prices for securities of technology companies have been volatile in the past and could continue to be volatile in the future. Fluctuations in our financial performance from period to period could have a significant impact on the market price of our common shares.
Operating results could be negatively impacted by economic, political or other developments in countries in which we do business.
Future operating results could be negatively impacted by unstable economic, political and social conditions, including but not limited to fluctuations in foreign currency exchange rates, political instability, or changes in the creation or interpretation of laws and regulations or administrative actions in each of the countries where the Company conductswe conduct business, including the United States.U.S.
These potential negative impacts include, but are not limited to:to, the following: reduction of demand for some of our products, increase in the rate of order cancellations or delays, increased risk of excess and obsolete inventories, increased pressure on the prices for our products and services, and longer sales cycles and greater difficulty in collecting accounts receivable.
Tax legislation could materially adversely affect our financial results and tax liabilities.
We are subject to the tax laws and regulations of the U.S., including state and local governments, as well as foreign jurisdictions. From time to time, legislation may be proposed that could materially adversely affect our financial results. There can be no assurance that our effective tax rate will not be adversely affected by legislation. On December 22, 2017, the President signed into law the Tax Cut and Jobs Act, which contains a broad range of tax reform provisions that impact corporate tax rates, international tax provisions, income taxadd-back provisions and deductions. We are still evaluating this complex new law to determine its long-term impact.
In addition, tax laws and regulations are extremely complex and subject to varying interpretations. Although we believe that our historical tax positions are sound and consistent with applicable laws, regulations and existing precedent, there can be no assurance that our tax positions will not be challenged by relevant tax authorities or that we would be successful in any such challenge. Additionally, the Company operateswe operate in multiple income tax jurisdictions and must determine the appropriate allocation of income to each of these jurisdictions based on current interpretations of complex income tax regulations. Income tax audits associated with the allocation of income and other complex issues may result in significant income tax adjustments that could negatively impact the Company’sour future operating results.
| ITEM 1B. | UNRESOLVED STAFF COMMENTS – NONE |
| ITEM 2. | PROPERTIES |
Principal Manufacturing, Distribution and Administrative locations
Location | Approximate Square Feet | Operations | Ownership | |||||
Lansing, Michigan | 300,000 | Corporate, Food Safety, Animal Safety | Owned | |||||
Lexington, Kentucky | 210,000 | Animal Safety | Owned | |||||
Kenansville, North Carolina | Animal Safety | Leased, expires | ||||||
St Joseph, Michigan | 7,000 | Animal Safety | Leased, | |||||
Randolph, Wisconsin | Animal Safety | Owned | ||||||
Pleasantville, Iowa | 59,000 | Animal Safety | Leased, expires 12/2018 | |||||
Lincoln, Nebraska | Animal Safety | Owned | ||||||
Memphis, Tennessee | 66,100 | Animal Safety | Owned | |||||
Turlock, California | 29,500 | Animal Safety | Leased, expires 9/2022 | |||||
Guelph, Ontario, Canada | 700 | Animal Safety | Leased, expires 7/2019 | |||||
Ayr, Scotland, United Kingdom | 74,000 | Food Safety | Owned | |||||
Heywood, England, United Kingdom | 24,800 | Food Safety | Owned | |||||
Rochdale, England, United Kingdom | 60,000 | Food Safety | Owned | |||||
Indaiatuba, Brazil | 6,800 | Food Safety | Leased, expires 5/2021 | |||||
Aracatuba, Brazil | 2,000 | Food Safety | Leased, | |||||
Pindamonhangaba, Brazil | 55,300 | Food Safety | Owned | |||||
Naucalpan, Mexico | 27,000 | Food Safety | Leased, expires 10/2018 | |||||
Shanghai, China | 4,900 | Food Safety | Leased, expires | |||||
Beijing, China | 1,100 | Food Safety | Leased, expires 12/ | |||||
Kochi, India | 5,500 | Food Safety | Leased, expires 4/ | |||||
Gatton, Australia | 4,600 | Animal Safety | Leased, expires 1/2023 | |||||
The Company’sOur corporate headquarters are located in Lansing, Michigan, with administrative, sales, manufacturing and warehousing in other locations domestically and globally. These properties are in good condition, well-maintained, and generally suitable and adequate to carry on the Company’ssupport our business.
| ITEM 3. | LEGAL PROCEEDINGS |
Neogen is subject to certain legal proceedings in the normal course of business that, in the opinion of management, should not have a material effect on itsour future results of operations or financial position.
| ITEM 4. | MINE SAFETY DISCLOSURES |
| ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
MARKET INFORMATION:
Neogen Common Stock is traded on the NASDAQ Global Select Market under the symbol “NEOG”. The following table sets forth, for the fiscal periods indicated, the high and low sales prices for the Common Stock as reported on the NASDAQ Stock Market.
| High | Low | High | Low | |||||||||||||
Year ended May 31, 2018 | ||||||||||||||||
First Quarter | $ | 52.28 | $ | 48.30 | ||||||||||||
Second Quarter | $ | 63.25 | $ | 51.85 | ||||||||||||
Third Quarter | $ | 62.86 | $ | 54.64 | ||||||||||||
Fourth Quarter | $ | 76.13 | $ | 58.78 | ||||||||||||
Year ended May 31, 2017 | ||||||||||||||||
First Quarter | $ | 60.56 | $ | 49.30 | $ | 44.76 | $ | 38.00 | ||||||||
Second Quarter | $ | 63.57 | $ | 50.53 | $ | 47.47 | $ | 38.40 | ||||||||
Third Quarter | $ | 69.09 | $ | 61.25 | $ | 50.92 | $ | 46.20 | ||||||||
Fourth Quarter | $ | 68.98 | $ | 59.51 | $ | 51.43 | $ | 44.76 | ||||||||
Year ended May 31, 2016 | ||||||||||||||||
First Quarter | $ | 62.70 | $ | 44.90 | ||||||||||||
Second Quarter | $ | 59.76 | $ | 43.00 | ||||||||||||
Third Quarter | $ | 60.38 | $ | 45.00 | ||||||||||||
Fourth Quarter | $ | 53.02 | $ | 43.79 | ||||||||||||
Neogen declared a4-for-3 stock split effective on December 29, 2017. All share prices above have been adjusted as if the split had been in effect at the beginning of the periods presented.
HOLDERS:
As of June 30, 2017,2018, there were approximately 281266 stockholders of record of Common Stock and management believes there are a total of approximately 12,000 beneficial holders.
DIVIDENDS:
Neogen has never paid cash dividends on its Common Stock and does not anticipate paying cash dividends in the foreseeable future.
The graph below matches Neogen Corporation’s cumulative5-year5-Year total shareholder return on common stock with the cumulative total returns of the NASDAQ Composite index and the NASDAQ Medical Equipment index. The graph tracks the performance of a $100 investment in our common stock and in each index (with the reinvestment of all dividends) from May 31, 20125/31/2013 to May 31, 2017.5/31/2018.
| 5/12 | 5/13 | 5/14 | 5/15 | 5/16 | 5/17 | 5/13 | 5/14 | 5/15 | 5/16 | 5/17 | 5/18 | |||||||||||||||||||||||||||||||||||||
Neogen Corporation | 100.00 | 139.88 | 145.57 | 180.05 | 190.18 | 243.80 | 100.00 | 104.07 | 128.71 | 135.96 | 174.29 | 277.99 | ||||||||||||||||||||||||||||||||||||
NASDAQ Composite | 100.00 | 123.46 | 155.08 | 186.71 | 183.49 | 231.19 | 100.00 | 125.98 | 151.80 | 150.04 | 189.31 | 228.19 | ||||||||||||||||||||||||||||||||||||
NASDAQ Medical Equipment | 100.00 | 110.10 | 114.40 | 146.23 | 155.20 | 204.07 | 100.00 | 105.43 | 134.12 | 140.40 | 184.56 | 258.15 | ||||||||||||||||||||||||||||||||||||
The stock price performance included in this graph is not necessarily indicative of future stock price performance.
Issuer Purchases of Equity Securities
In December 2008, theour Board of Directors authorized managementa program to repurchasepurchase, subject to market conditions, up to 1,500,000 shares of our common stock. As of May 31, 2018, 149,368 cumulative shares have been purchased in negotiated and open market transactions for a total price, including commissions, of 1,125,000 shares of its common stock in open market transactions. This authorization remains in effect; however, the Company madeapproximately $923,000. There were no purchases of common stock in fiscal years 2018, 2017 2016 and 2015.or 2016. Shares purchased under the program were retired.
| ITEM 6. | SELECTED FINANCIAL DATA |
The following tables set forth selected consolidated financial data of Neogen for the year ended May 31, 2017,2018, and each of the four preceding fiscal years. The selected consolidated financial data presented below have been derived from the Company’sour consolidated financial statements. This financial data should be read in conjunction with the consolidated financial statements, related notes and other financial information appearing elsewhere in this Form10-K.
| Years Ended May 31 | Years Ended May 31 | |||||||||||||||||||||||||||||||||||||||
| (in thousands, except per share data) | 2017 | 2016 | 2015 | 2014 | 2013 | 2018 | 2017 | 2016 | 2015 | 2014 | ||||||||||||||||||||||||||||||
Income Statement Data: | ||||||||||||||||||||||||||||||||||||||||
Food Safety Revenues | $ | 171,325 | $ | 146,421 | $ | 131,479 | $ | 116,290 | $ | 106,158 | $ | 196,047 | $ | 171,325 | $ | 146,421 | $ | 131,479 | $ | 116,290 | ||||||||||||||||||||
Animal Safety Revenues | 190,269 | 174,854 | 151,595 | 131,115 | 101,370 | 206,205 | 190,269 | 174,854 | 151,595 | 131,115 | ||||||||||||||||||||||||||||||
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Total Revenues | 361,594 | 321,275 | 283,074 | 247,405 | 207,528 | 402,252 | 361,594 | 321,275 | 283,074 | 247,405 | ||||||||||||||||||||||||||||||
Cost of Revenues | 189,626 | 168,211 | 143,389 | 124,807 | 98,034 | |||||||||||||||||||||||||||||||||||
Total Cost of Revenues | 212,000 | 189,626 | 168,211 | 143,389 | 124,807 | |||||||||||||||||||||||||||||||||||
Sales and Marketing | 62,424 | 57,599 | 51,757 | 46,432 | 40,791 | 70,909 | 62,424 | 57,599 | 51,757 | 46,432 | ||||||||||||||||||||||||||||||
General and Administrative | 34,214 | 29,189 | 25,233 | 24,449 | 20,216 | 38,294 | 34,214 | 29,189 | 25,233 | 24,449 | ||||||||||||||||||||||||||||||
Research and Development | 10,385 | 9,890 | 9,577 | 8,326 | 7,781 | 10,855 | 10,385 | 9,890 | 9,577 | 8,326 | ||||||||||||||||||||||||||||||
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Operating Income | 64,945 | 56,386 | 53,118 | 43,391 | 40,706 | 70,194 | 64,945 | 56,386 | 53,118 | 43,391 | ||||||||||||||||||||||||||||||
Other Income (Expense) | 1,728 | (873 | ) | (1,042 | ) | (360 | ) | 435 | 3,271 | 1,728 | (873 | ) | (1,042 | ) | (360 | ) | ||||||||||||||||||||||||
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Income Before Income Taxes | 66,673 | 55,513 | 52,076 | 43,031 | 41,141 | 73,465 | 66,673 | 55,513 | 52,076 | 43,031 | ||||||||||||||||||||||||||||||
Provision for Income Taxes | 22,700 | 18,975 | 18,500 | 15,000 | 14,100 | 10,250 | 22,700 | 18,975 | 18,500 | 15,000 | ||||||||||||||||||||||||||||||
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Net Income | 43,973 | 36,538 | 33,576 | 28,031 | 27,041 | 63,215 | 43,973 | 36,538 | 33,576 | 28,031 | ||||||||||||||||||||||||||||||
Net (Income) Loss Attibutable toNon-Controlling Interest | (180 | ) | 26 | (50 | ) | 127 | 149 | |||||||||||||||||||||||||||||||||
Net (Income) Loss Attributable toNon-Controlling Interest | (70 | ) | (180 | ) | 26 | (50 | ) | 127 | ||||||||||||||||||||||||||||||||
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Net Income Attributable to Neogen | $ | 43,793 | $ | 36,564 | $ | 33,526 | $ | 28,158 | $ | 27,190 | $ | 63,145 | $ | 43,793 | $ | 36,564 | $ | 33,526 | $ | 28,158 | ||||||||||||||||||||
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Net Income per Share (basic) (1) | $ | 1.16 | $ | 0.98 | $ | 0.91 | $ | 0.77 | $ | 0.76 | $ | 1.23 | $ | 0.87 | $ | 0.73 | $ | 0.68 | $ | 0.58 | ||||||||||||||||||||
Net Income per Share (diluted) (1) | $ | 1.14 | $ | 0.97 | $ | 0.90 | $ | 0.76 | $ | 0.75 | $ | 1.21 | $ | 0.86 | $ | 0.72 | $ | 0.67 | $ | 0.57 | ||||||||||||||||||||
Weighted Average Shares Outstanding (diluted) (1) | 38,374 | 37,875 | 37,444 | 37,267 | 36,491 | 52,149 | 51,165 | 50,500 | 49,926 | 49,689 | ||||||||||||||||||||||||||||||
| 2017 | 2016 | 2015 | 2014 | 2013 | 2018 | 2017 | 2016 | 2015 | 2014 | |||||||||||||||||||||||||||||||
Balance Sheet Data: | ||||||||||||||||||||||||||||||||||||||||
Cash and Cash Equivalents and Marketable Securities | $ | 143,635 | $ | 107,796 | $ | 114,164 | $ | 76,496 | $ | 85,369 | $ | 210,810 | $ | 143,635 | $ | 107,796 | $ | 114,164 | $ | 76,496 | ||||||||||||||||||||
Working Capital (2) | 256,959 | 219,628 | 205,739 | 163,779 | 150,728 | 337,101 | 256,959 | 219,628 | 205,739 | 163,779 | ||||||||||||||||||||||||||||||
Total Assets | 528,409 | 449,940 | 392,181 | 345,301 | 290,558 | 618,009 | 528,409 | 449,940 | 392,181 | 345,301 | ||||||||||||||||||||||||||||||
Long-Term Debt | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||
Total Equity | 471,757 | 404,161 | 350,963 | 306,300 | 258,287 | 560,175 | 471,757 | 404,161 | 350,963 | 306,300 | ||||||||||||||||||||||||||||||
| (1) | On |
| (2) | Defined as current assets less current liabilities. |
| ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The information in this Management’s Discussion and Analysis of Financial Condition and Results of Operations contains both historical financial information and forward-looking statements. Neogen CorporationNeogen’s management does not provide forecasts of future financial performance. While management iswe are optimistic about the Company’sour long-term prospects, historical financial information may not be indicative of our future financial results.
Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words “believes,” “anticipates,” “plans,” “expects,” “seeks,” “estimates,” and similar expressions are intended to identify forward-looking statements. There are a number of important factors, including competition, recruitment and dependence on key employees, impact of weather on agriculture and food production, identification and integration of acquisitions, research and development risks, patent and trade secret protection, government regulation and other risks detailed in Item 1A. RISK FACTORS in this Form 10-K and from time to time in the Company’s reports on file at the Securities and Exchange Commission, that could cause Neogen Corporation’s results to differ materially from those indicated by such forward-looking statements, including those detailed in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
In addition, any forward-looking statements represent management’s views only as of the day this Report on Form10-K was first filed with the Securities and Exchange Commission and should not be relied upon as representing management’s views as of any subsequent date. While managementwe may elect to update forward-looking statements at some point in the future, itwe specifically disclaimsdisclaim any obligation to do so, even if itsour views change.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The discussion and analysis of the Company’sour financial condition and results of operations are based on the consolidated financial statements that have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires that management make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, management evaluates the estimates, including but not limited to, those related to receivable allowances, inventories and intangible assets. These estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
The following critical accounting policies reflect management’s more significant judgments and estimates used in the preparation of the consolidated financial statements.
Revenue Recognition
Revenue from products and services is recognized when the product has been shipped or the service performed, the sales price is fixed and determinable, and collection of any receivable is probable. To the extent that customer payment has been received before all recognition criteria are met, these revenues are initially deferred and later recognized in the period that all recognition criteria have been met. Customer credits for sales returns, pricing and other disputes, and other related matters (including volume rebates offered to certain distributors as marketing support) represent approximately 3% of reported net revenue for each period presented.
Accounts Receivable Allowance
Management attempts to minimize credit risk by reviewing customers’ credit history before extending credit and by monitoring credit exposure on a regular basis. An allowance for doubtful accounts receivable is established based upon factors surrounding the credit risk of specific customers, historical trends and other information. Collateral or other security is generally not required for accounts receivable. Once a receivable balance has been determined to be uncollectible, that amount is charged against the allowance for doubtful accounts.
Inventory
A reserve for obsolete and slow movingslow-moving inventory has been established and is reviewed at least quarterly based on an analysis of the inventory, taking into accountconsidering the current condition of the asset as well as other known facts and future plans. The reserve required to record inventory at lower of cost or marketnet realizable value may be adjusted as conditions change. Product obsolescence may be caused by shelf-life expiration, discontinuance of a product line, replacement products in the marketplace or other competitive situations.
Goodwill and Other Intangible Assets
Goodwill represents the excess of purchase price over fair value of tangible net assets of acquired businesses after amounts are allocated to other identifiable intangible assets. Other intangible assets include customer relationships, trademarks, licenses, trade names, covenantsnot-to-compete and patents. Amortizable intangible assetsCustomer-based intangibles are amortized on either an accelerated or straight-line basis, reflecting the pattern in which the economic benefits are consumed, while all other amortizable intangibles are amortized on a straight-line basis,basis; intangibles are generally amortized over 5 to 25 years. The Company reviewsWe review the carrying amounts of goodwill and othernon-amortizable intangible assets annually, or when indications of impairment exist, to determine if such assets may be impaired by performing a quantitative assessment. If the carrying amounts of these assets are deemed to be less than fair value based upon a discounted cash flow analysis and comparison to comparable EBITDA multiples of peer companies, such assets are reduced to their estimated fair value and a charge is made to operations.
Long-lived Assets
Management reviews the carrying values of its long-lived assets to be held and used, including definite-lived intangible assets, for possible impairment whenever events or changes in business conditions warrant such a review. The carrying value of a long-lived asset is considered impaired when the anticipated separately identifiable undiscounted cash flows over the remaining useful life of the asset indicate that the carrying amount of the asset may not be recoverable. In such an event, fair value is determined using discounted cash flows and, if lower than the carrying value, impairment is recognized through a charge to operations.
Equity Compensation Plans
Share options awarded to employees and shares of stock awarded to employees under certain stock purchase plans are recognized as compensation expense based on their fair value at grant date. The fair market value of options granted under the Company’sour stock option plans was estimated on the date of grant using the Black-Scholes option-pricing model usingwith assumptions for inputs such as interest rates, expected dividends, volatility measures and specific employee exercise behavior patterns based on statistical data. Some of the inputs used are not market-observable and have to be estimated or derived from available data. Use of different estimates would produce different option values, which in turn would result in higher or lower compensation expense recognized.
To value options, several recognized valuation models exist. None of these models can be singled out as being the best or most correct one. The model applied by the Company is able tous can handle most of the specific features included in the options granted, which is the reason for its use. If a different model were used, the option values could differ despite using the same inputs. Accordingly, using different assumptions coupled with using a different valuation model could have a significant impact on the fair value of employee stock options. Fair value could be either higher or lower than the number provided by the model applied and the inputs used. Further information on the Company’sour equity compensation plans, including inputs used to determine the fair value of options, is disclosed in Notes 1 and 5 to the consolidated financial statements.
Income Taxes
The Company accountsWe account for income taxes using the asset and liability method. Under this method, deferred income tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and for tax credit carry forwardscarryforwards and are measured using the enacted tax rates in effect for the years in which the differences are expected to reverse. Deferred income tax expense represents the change in net deferred income tax assets and liabilities during the year.
The Company’sOur wholly-owned foreign subsidiaries are comprised of Neogen Europe, Lab M Holdings, Quat-Chem, Neogen do Brasil, Deoxi Biotecnologia Ltda, Rogama Industria e Comercio Ltda, Acumedia do Brasil, Neogen Latinoamérica, NeogenBio-Scientific Technology Co (Shanghai), Neogen Food and Animal Security (India), Neogen Canada, Acumedia do Brasil, Deoxi Biotecnologia Ltda, and Rogama Industria e Comercio, Ltda; Neogen owns 90% of Neogen Latinoamerica.Australasia Pty Limited. Based on historical experience, as well as the Company’sour future plans, earnings from these subsidiaries are expected to bere-invested indefinitely for future expansion and working capital needs. Furthermore, the Company’sour domestic operations have historically produced sufficient operating cash flow to mitigate the need to remit foreign earnings. On an annual basis, the Company evaluateswe evaluate the current business environment and whether any new events or other external changes might require are-evaluation of the decision to indefinitelyre-invest foreign earnings. At May 31, 2017,2018, unremitted earnings of theour foreign subsidiaries were $35,281,000.$43,784,000.
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the Tax Act) was signed into law making significant changes to the Internal Revenue Code. Changes include a federal corporate tax rate from 35% to 21% for tax years beginning after December 31, 2017, the transition of U.S. international taxation from a worldwide tax system to a territorial system, and aone-time transition tax on the mandatory deemed repatriation of foreign earnings. On December 22, 2017, Staff Accounting Bulletin No. 118 (SAB 118) was issued to address the application of U.S. GAAP to situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. In accordance with SAB 118, we have determined that the $6.0 million of deferred tax benefit recorded in connection with the remeasurement of certain deferred tax assets and liabilities and the $1.2 million of current tax expense recorded in connection with the transition tax on the mandatory deemed repatriation of foreign earnings was a provisional amount at May 31, 2018. Any subsequent adjustment to these amounts will be recorded to current tax expense in the quarter of 2019 when any further analysis of our deferred tax assets and liabilities and our historical foreign earnings is completed. We expect to complete our detailed analysis during fiscal 2019.
RESULTS OF OPERATIONS
Executive Overview
Total consolidated revenue for Neogen Corporation
The Company’s Food Safety segment revenues were $171.3 millionNeogen’s results reflect a 17% increase in international sales in fiscal 2017, an increase of 17%, and Animal Safety segment revenues were $190.3 million, an increase of 9%, each2018 compared to the prior year. We continue to focus on increasing our presence and market share throughout the world, while also integrating our recent international acquisitions into our product portfolio. Sales increases for fiscal year. Recent acquisitions2018 compared to the prior year are as follows for each of our international locations:
| Revenue % Increase USD | Revenue % Increase Local Currency | |||||||
Neogen Europe (including Lab M & Quat-Chem) | 23 | % | 16 | % | ||||
Neogen do Brasil (including Deoxi & Rogama) | 54 | % | 56 | % | ||||
Neogen Latinoamerica | 13 | % | 9 | % | ||||
Neogen China | 18 | % | 14 | % | ||||
Neogen India | 18 | % | 14 | % | ||||
Currency translation had a positive impact of approximately $3.7 million on revenues recorded in foreign currencies during fiscal 2018. At Neogen Europe, a 31% increase in genomics revenues and a 29% increase in sales of culture media manufactured at Lab M (August 2015), Virbac (December 2015), Deoxi (April 2016), Preserve (May 2016), Quat-Chem (December 2016) andoffset an 8% decrease in natural toxin test kit sales, as last year’s deoxynivalenol (DON) outbreak in corn crops in western Europe did not repeat in the current year. The organic revenue increase in Brazil was primarily due to a large Rogama (December 2016) contributed $27.7 million of revenuesale to a government health organization that will not recur in fiscal 2017; overall organic2019. Sales of test kits to detect aflatoxin also increased over 200% in Brazil as we gained new business testing for aflatoxin in corn. These increases were partially offset by a 39% decrease in sales growthof forensic test kits resulting from increased competition and customer losses caused by conversion to different testing methods.
Service revenue was 4%.
International sales were $129.3$66.7 million in fiscal 2018, an increase of 21% over prior fiscal year sales of $55.1 million, aided by the September 2017 or 35.8%acquisition of total revenues,Neogen Australasia. The growth was led by increases in sales to the global beef and dairy cattle and companion animal markets, and increased testing volumes with a large poultry customer.
REVENUES
| Year Ended | ||||||||||||||||||||
(dollars in thousands) | May 31, 2018 | Increase/ (Decrease) | May 31, 2017 | Increase/ (Decrease) | May 31, 2016 | |||||||||||||||
Food Safety: | ||||||||||||||||||||
Natural Toxins, Allergens & Drug Residues | $ | 72,962 | 3 | % | $ | 70,926 | 12 | % | $ | 63,269 | ||||||||||
Bacterial & General Sanitation | 38,155 | 10 | % | 34,706 | 2 | % | 33,899 | |||||||||||||
Culture Media & Other | 45,842 | 13 | % | 40,658 | 9 | % | 37,285 | |||||||||||||
Rodenticides, Insecticides & Disinfectants | 23,821 | 75 | % | 13,620 | 223 | % | 4,213 | |||||||||||||
Genomics Services | 15,267 | 34 | % | 11,415 | 47 | % | 7,755 | |||||||||||||
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| 196,047 | 14 | % | 171,325 | 17 | % | 146,421 | ||||||||||||||
Animal Safety: | ||||||||||||||||||||
Life Sciences | 10,411 | 7 | % | 9,704 | 24 | % | 7,815 | |||||||||||||
Veterinary Instruments & Disposables | 47,748 | 15 | % | 41,693 | (1 | )% | 42,028 | |||||||||||||
Animal Care & Other | 32,719 | 11 | % | 29,495 | (19 | )% | 36,494 | |||||||||||||
Rodenticides, Insecticides & Disinfectants | 68,553 | (2 | )% | 69,825 | 31 | % | 53,490 | |||||||||||||
Genomics Services | 46,774 | 18 | % | 39,552 | 13 | % | 35,027 | |||||||||||||
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| 206,205 | 8 | % | 190,269 | 9 | % | 174,854 | ||||||||||||||
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Total Revenue | $ | 402,252 | 11 | % | $ | 361,594 | 13 | % | $ | 321,275 | ||||||||||
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Year Ended May 31, 2018 Compared to Year Ended May 31, 2017
Food Safety:
Natural Toxins, Allergens & Drug Residues –Sales in this category increased 3% in fiscal 2018 compared to $107.7 million, or 33.5% of total revenues, in the prior year. The increase in international sales as a percentage of total sales was due to recent international acquisitions and strength in thepre-existing international operations. For the year, revenues at Neogen Europeallergens and dairy drug residues product lines, test kit sales increased 12% and 13% (32% increase, respectively, for the year. These increases were partially offset by a 26% decrease in local currency) due primarily to strong sales of deoxynivalenol (DON) test kits, resulting fromas prior year outbreaks of contaminatedDON in corn crops in westernthe U.S., Canada and Europe did not recur in fiscal 2018.
Bacterial & General Sanitation –Sales in this category increased 10% in fiscal 2018, led by strong sales of our AccuPoint sanitation monitoring product line which increased 18% on strength in both reader equipment and increasesconsumable supplies. Sales of test kits to detect pathogens increased 16%, led by growth in genomics revenues resultingListeria products, including our newListeria Right Now test kit that launched earlier in the fiscal year. Additionally, sales of our product line to detect spoilage organisms in processed foods increased 2%.
Culture Media & Other –Sales in this category increased 13% in fiscal 2018 compared to fiscal 2017. Sales of Neogen Culture Media, formerly marketed as the Acumedia and Lab M brands, increased 19%, due to continued strength in products manufactured at Lab M in the U.K. and a largenon-recurring order from strong demand for these services in Europe and the addition of anin-house genomics lab in Ayr. Neogen do Brasil revenues increased 65% for the year (46% increase in local currency), witha U.S. customer. This category also includes sales of forensic and diagnostic test kits leadingsold through our Brazilian subsidiary, which decreased by 39% in fiscal 2018. Demand in the growth. Revenues at Neogen Latinoamerica declined by 7% (6% increase in local currency)prior year was extremely high, due to adverse currency translations and the terminationa new requirement for drug testing of a distribution agreement for certaincommercial truck drivers, however, sales of its cleaners and disinfectantsthese kits in Brazil have decreased in the 4th quartercurrent year due to increased competition and customer losses caused by conversion to different testing methods.
Rodenticides, Insecticides & Disinfectants –Sales of fiscal 2017. Neogen China revenues rose 24% (32% increaseproducts in local currency) and Neogen India salesthis category sold through our Food Safety operations increased 67% (70% increase in local currency), each off of small bases.
Service revenue was $55.1 million75% in fiscal 2017, an increase2018; excluding the December 2016 acquisitions of $7.4 million, or 15%, compared to fiscal 2016.Quat-Chem and Rogama, organic growth was 2%. The increase was primarily due to highera large sale at Rogama to a government health organization that will not recur in fiscal 2019. Cleaner and disinfectants sold through Food Safety operations were negatively impacted by termination of a distribution agreement in January 2017, which resulted in a decline in sales for those distributed products of $859,000 in fiscal 2018.
Genomics Services –Sales of genomics revenuesservices sold through our Food Safety operations increased 34% in fiscal 2018 compared to the same period in the prior year, primarily due to continued market penetrationshare increases, particularly in U.S.the beef and dairy cattle markets, strong demand in Europe and additional genomics capacity resulting from laboratory facilities constructed at our Scotland-based operation, and incremental ongoing business with a large customerpoultry producer, in Europe.
Animal Safety:
Life Sciences –Sales in this category increased 7% in fiscal 2018 compared to fiscal 2017, due to increased volumes of forensic test kits sold to commercial labs in the poultry industry. U.S.
Veterinary Instruments & Disposables –Revenues were also enhanced,in this category increased 15% in fiscal 2018, led by a 20% increase in sales of syringes, as we gained new customers in the retail and custom solutions markets. Sales of our patented detectable needles increased 23%, aided by strong sales to customers in Europe, including Russia.
Animal Care & Other –Sales of these products increased 11% in fiscal 2018, due to higher sales of PanaKare, our pancreatic replacement therapy, which benefitted from competitor backorders in fiscal 2018. Additionally, results from fiscal 2017 included sales credits totaling $1.1 million in the first quarter as we removed our canine thyroid product from the market, after the FDA approved a lesser extent, by the April 2016 acquisition of Deoxi Laboratories, an agricultural genomics labnew drug application for a competitive product.
Rodenticides, Insecticides & Disinfectants –Sales in Brazil.
Gross margin was 47.6%this category decreased 2% in both fiscal years 2017 and 2016. In the current year, acquisitions of businesses with gross margins which are lower than the Company’s historical average, and the adverse margin impact resulting from currency translation, were entirely offset by favorable product mix shifts on existing products and higher genomics margins, resulting in gross margins that were flat2018, compared to the prior year.
Sales and marketing expenses were $62.4 million, an increase of $4.8 million, or 8%, compared tosame period in the prior fiscal year. IncreasesThe January 2017 termination of a distribution agreement with a manufacturer of cleaners and disinfectants resulted in lost sales of those distributed products totaling $4.7 million within this category. Partially offsetting this loss, sales of rodenticides increased 11% due to market share gains in the U.S.
Genomics Services –Sales in this category were primarilyincreased 18% in fiscal 2018; excluding the resultSeptember 2017 acquisition of increased personnel related costs such as salaries, commissions and travel; shipping and royalty expenses also rose dueNeogen Australasia, organic growth was 11%. The growth was led by increases in sales to the increased volume. Generalglobal beef and administrative expenses were $34.2 million, an increase of $5.0 million, or 17%. Incremental ongoing operating expensesdairy cattle and companion animal markets and higher volumes from the most recent four acquisitions, which continued to operate from their existing locations, and related amortization expense accounted for $2.6 million of the increase. Other increases in this category resulted from investments in information technology personnel and infrastructure and increased salary and benefit expenses across the organization. Research and development expenses increased 5% to $10.4 million, primarily due to increased personnel related expenses and new product development activities, partially offset by lower contracted outside services.
Operating margin in fiscal 2017 was 18.0% compared to 17.6% in the prior fiscal year. The improvement in operating margin resulted from the revenue increases, flat gross margins, and growth in operating expenses which was less than the rate of the revenue increase.
Other income of $1.7 million in fiscal 2017 included $838,000 of net interest income, a $660,000 gain recorded as the result of the settlement of a licensing agreement, $171,000 of royalty income, and a loss of $40,000 from currency translations. Fiscal 2016 other expense of $873,000 included a $1,338,000 loss from currency translations, partially offset by interest income of $322,000 and royalty income of $217,000.large poultry customer.
The effective income tax rate for fiscal 2017 was 34.0%, compared to 34.2% in the prior fiscal year.
REVENUES
| Year Ended | ||||||||||||||||||||
(dollars in thousands) | May 31, 2017 | Increase/ (Decrease) | May 31, 2016 | Increase/ (Decrease) | May 31, 2015 | |||||||||||||||
Food Safety: | ||||||||||||||||||||
Natural Toxins, Allergens & Drug Residues | $ | 70,926 | 12 | % | $ | 63,269 | 4 | % | $ | 60,561 | ||||||||||
Bacterial & General Sanitation | 34,706 | 2 | % | 33,899 | 15 | % | 29,492 | |||||||||||||
Dehydrated Culture Media & Other | 40,658 | 9 | % | 37,285 | 27 | % | 29,423 | |||||||||||||
Rodenticides, Insecticides & Disinfectants | 13,620 | 223 | % | 4,213 | (8 | %) | 4,568 | |||||||||||||
Genomics Services | 11,415 | 47 | % | 7,755 | 4 | % | 7,435 | |||||||||||||
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| 171,325 | 17 | % | 146,421 | 11 | % | 131,479 | ||||||||||||||
Animal Safety: | ||||||||||||||||||||
Life Sciences | 9,704 | 24 | % | 7,815 | (10 | %) | 8,715 | |||||||||||||
Veterinary Instruments & Disposables | 41,693 | (1 | %) | 42,028 | 1 | % | 41,740 | |||||||||||||
Animal Care & Other | 29,495 | (19 | %) | 36,494 | 32 | % | 27,606 | |||||||||||||
Rodenticides, Insecticides & Disinfectants | 69,825 | 31 | % | 53,490 | 17 | % | 45,857 | |||||||||||||
Genomics Services | 39,552 | 13 | % | 35,027 | 27 | % | 27,677 | |||||||||||||
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| 190,269 | 9 | % | 174,854 | 15 | % | 151,595 | ||||||||||||||
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Total Revenue | $ | 361,594 | 13 | % | $ | 321,275 | 13 | % | $ | 283,074 | ||||||||||
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Year Ended May 31, 2017 Compared to Year Ended May 31, 2016
The Company’sFood Safety:
Overall Food Safety segment revenues in fiscal 2017 were $171.3 million compared to $146.4 million in fiscal 2016, an increase of 17%. Organic growth for the segment was 9%, with the acquisitions of Lab M (August 2015), Deoxi (April 2016), Quat-Chem (December 2016) and Rogama (December 2016) contributing the remainder of the growth. Adverse currency conditions, resulting from the strength of the U.S. dollar, reduced overall growth and organic growth within the segment for the comparative period. In a neutral currency environment, overall Food Safety growth for the year was 22% and organic growth was 14%.
Natural Toxins, Allergens & Drug Residues sales–Sales in this category increased by 12% to $70.9 million in fiscal 2017. Within this category, sales of natural toxin test kits increased 19%, led by sales of test kits and related equipment to detect the mycotoxin deoxynivalenol (DON), due to outbreaks of DON in corn crops in the midwestMidwest U.S., Canada and western Europe. Allergen test kit revenues rose 16% for the year, as increases in product recalls relating to allergenic contamination of food continued to expand the market. The largest increases in this product line were test kits to detect milk, gliadin, tree nut,nuts, hazelnut and peanut contamination. Partially offsetting these increases, sales of test kits to detect drug residues were down 4%, due primarily to market losses in Europe caused by delays in the launch of new products, and, to a lesser extent, currency translations, as this product is sold in euros, which declined 2% against the dollar in fiscal 2017. A number of new and improved drug residue detection products are expected to be available for sale in the first half of fiscal 2018.
Bacterial & General Sanitation revenues–Revenues of these products rose 2%, compared to the prior fiscal year, led by a 4% increase in sales of the Company’sour line of automated equipment and consumable vials to detect spoilage microorganisms (e.g. yeast and mold), and an 11% increase in sales ofSalmonella test kits for the year as the Companywe gained market share with itsour ANSR product line. These increases were partially offset by lower sales of a distributed product that the Companywas discontinued in fiscal 2017. The Company’sOur line of AccuPoint readers and samplers to monitor environmental sanitation rose 4% for the year, with samplers increasing 7%, while equipment was flat compared to fiscal 2016. Dehydrated
Culture Media & Other sales–Sales in this category increased 9% in fiscal 2017, aided in part by the acquisition of Lab M; organic sales in this category increased 6%. Within this category, there was a significant increase in sales of forensic test kits through the Company’sour Brazilian subsidiary. Demand for these kits from commercial labs located in Brazil has increased dramatically due to a new requirement for drug testing of commercial truck drivers. Partially offsetting this increase was an 11% decrease in sales of the Company’sour Acumedia line of dehydrated culture media sold into traditional domestic markets; the first half of fiscal 2016 had strong sales resulting from a research project, which did not recur.
Rodenticides, Insecticides & Disinfectants sales–Sales ofrodenticides, insecticides and disinfectants into the Company’sour Food Safety segment increased 223%, almost entirely due to the acquisitions of Rogama (Brazil), which reports through Neogen do Brasil, and Quat-Chem (U.K.), which reports through Neogen Europe; each was purchased in December 2016. Excluding these acquisitions, growth in this category was 3%, primarily from rodenticide and disinfectant sales into Mexico and Central America by the Company’sour Mexican subsidiary.
Genomics Services –Genomics revenues intosold through the Food Safety segment increased 47%, primarily due to strong demand of genomics testing in Europe and expanded capabilities at the Company’sour operation in Ayr, Scotland to better serve the growing European market; the Deoxi acquisition in April 2016 also contributed to the growth.
Animal Safety:
Revenues for the Company’s Animal Safety segment were $190.3 million in fiscal 2017, an increase of 9% compared to prior year revenues of $174.9 million. The revenue growth resulted from the acquisitions of Virbac (December 2015) and Preserve (May 2016). In the first quarter of fiscal 2017, the Companywe lost the ability to sell itsour popular canine thyroid replacement product after the FDA approved a new drug application for a competitor, which gave the competitor exclusive marketing rights to the product. The CompanyWe will be unable to sell this product, which had sales of $6.2 million in fiscal 2016, in the U.S. until similar regulatory approval is granted; this approval is currently expected to occur in fiscal 2019.granted. Additionally, in January 2017, the Company’sour agreement with a manufacturer to distribute certain cleaners and disinfectants was canceled, resulting in the loss of $1.3 million of sales in the 4th quarter of fiscal 2017. Excluding these products, this segment had overall organic growth of 5% for the year. Currency translations had minimal effect on revenues in this segment.
Life Sciences sales–Sales in this category increased 24% in fiscal 2017, compared to the prior year. This growth was primarily due to increased volume to U.S. commercial labs to meet new requirements for drug testing of commercial truck drivers in Brazil.
Veterinary Instruments & Disposables revenues–Revenues in this category decreased 1%, due tothe result of lower sales of disposable syringes, which had increased sales in the prior year due to a competitor’s backorder situation, and marking products. Partially offsetting this were gains in the sales of the Company’sour proprietary detectable needles and durable speed needles,syringes, with both gains due to strong demand from customers.
Animal Care & Other sales–Sales in this category decreased 19% due to the loss of theour ability to sell the Company’sour popular thyroid replacement product, mentioned above. Partially offsetting this was an increase in revenues for vitamin injectable products due to increased market share and price increases.
Rodenticides, Insecticides & Disinfectants revenues–Sales in this category increased 31% for the currentin fiscal year,2017, due to the acquisitions of Virbac (December 2015) and Preserve (May 2016); organic sales in this category were flat. The Preserve acquisition added $15.5 million of revenue in fiscal 2017, primarily to the domestic swine, poultry, dairy and food processing markets. Rodenticide sales increased 1% with strong sales in the custom solutions, retail and distribution markets offset by lower sales in the northwest U.S. after the prior year rodent outbreak subsided. Cleaners and disinfectant sales were 8% lower on an organic basis, due to the early termination of a distribution agreement for certain cleaners and disinfectants in the second half of the fiscal year; it is expected that there will be some offset of these lost revenues in fiscal 2018 by substitution of similar products from the planned transition to the Preserve product line.year.
Genomics Services –Genomics Services revenues reported within the Animal Safety segment increased 13% in fiscal 2017, compared to fiscal 2016. The increase was primarily due primarily to increased market share in the beef and dairy markets from new product offerings and focused sales efforts in these markets; also contributing to the increase was expanded business with a large customer in the poultry market.
Year Ended May 31, 2016 Compared to Year Ended May 31, 2015
The Company’s Food Safety segment revenues were $146.4 million in fiscal 2016, an 11% increase compared to the prior year. The increase, predominantly volume related, from organic sales was 6%, with revenues from the BioLumix (October 2014), Lab M (August 2015) and Deoxi (April 2016) acquisitions contributing the remainder of the growth. Sales of Natural Toxins, Allergens & Drug Residues increased 4% in fiscal 2016 compared to fiscal 2015. Natural toxin sales were flat with a 10% increase in aflatoxin sales offset by a 3% decrease in DON sales, due to outbreaks in the prior year which were not repeated in fiscal 2016. Allergen sales increased 20%, as increased consumer awareness continued to grow demand for these products, while sales of drug residue test kits decreased 5%, caused by currency conversions, as the majority of these sales are invoiced in euros.
Bacterial & General Sanitation revenues increased 15% in fiscal 2016, aided by $1.9 million in sales from the October 2014 BioLumix acquisition. Excluding BioLumix sales, the organic increase in these products was 9% over the prior year. The AccuPoint sanitation monitoring product line recorded an increase of 18% due to the continued successful introduction of an improved, next generation product line. Sales of the Soleris and BioLumix product lines, which detect spoilage organisms, increased 23% for the year (5% organic growth), with revenue increases in both equipment and disposable vials. Pathogen sales increased 4% in fiscal 2016 as compared to the prior year, primarily due to an increase in sales ofListeria test kits to the commercial lab market.
Dehydrated Culture Media & Other sales increased 27% in fiscal 2016. This category includes $4.8 million of Lab M revenues, a business which was acquired in August 2015; excluding the impact of these revenues, the organic increase was 10%. Sales of Acumedia products into the food safety market increased 10% while sales into traditional domestic media markets increased 16%. Rodenticides, Insecticides & Disinfectants revenues decreased 8% in U.S. dollars, due to the strength of the dollar, poor economic conditions in a number of international markets and order timing from large distributors. Genomics service revenues in the Company’s international operations increased 4%.
The Company’s Animal Safety segment revenues were $174.9 million in fiscal 2016, a 15% increase, predominantly volume related, over fiscal 2015. Life Sciences sales decreased 10% in fiscal 2016 after a strong 16% increase in 2015. Sales of forensic kits to commercial labs declined as new testing requirements in Brazil for commercial drivers, originally anticipated to go into effect in late fiscal 2015, were delayed until the 4th quarter of fiscal 2016. Veterinary Instruments & Disposables increased 1%, as market share gains in disposable syringes, up 25%, and animal marking products, up 14%, were almost entirely offset by an 8% decrease in detectable needles, due to large orders in the prior year which did not recur, and an 11% decline in hoof and leg products, due to lower sales of these products to customers in the retail market.
Animal Care & Other product sales rose 32% in fiscal 2016, with the increase primarily the result of a new distribution agreement with a large manufacturer and supplier of dairy equipment, and strong sales of the Company’s line of thyroid replacement therapy for companion animals. Also contributing to growth in the Animal Care product category were increased sales of wound care products, as a key active ingredient which had been on backorder for much of fiscal 2015, became available in fiscal 2016, and veterinary antibiotics, due to a competitor exiting the business. During the fourth quarter of fiscal 2016, the Company was notified that a competitor had been granted approval on a new drug application for a competitive thyroid replacement product, effectively giving them exclusive rights to sell the product. As a result, the Company is unable to sell its product into the domestic market effective July 2016, until it is granted similar regulatory approval; this approval is expected in fiscal 2019. Sales of this product in fiscal 2016 were $6.2 million.
The Company’s line of Rodenticides, Insecticides & Disinfectants rose 17% in fiscal 2016, compared to the prior year, led by a 58% increase in sales of rodenticides. This increase was in large part the result of an expansion of the Company’s contract manufacturing business with a large marketer of rodenticides to the commercial and residential markets. Additionally, the Company successfully introduced a number of new products into the retail agricultural market, and also benefitted from the continued vole outbreak in the northwestern U.S. Cleaners and disinfectant revenues declined 9% compared to fiscal 2015, primarily due to lower sales to international customers as the strength of the U.S. dollar made the Company’s products less competitive internationally; poor economic conditions in a number of the Company’s key international markets also adversely impacted sales. The Company’s line of insecticides rose 3% in fiscal 2016, as incremental revenues from new product launches were almost entirely offset by lower sales of existing products due to timing of orders and backorders caused by a vendor issue.
Genomics Services revenues increased 27% in fiscal 2016 compared to the same period in the prior year. Incremental business with a large poultry producer, earned in fiscal 2015, was the primary driver of the growth. The Company also continued to gain market share in fiscal 2016 with its proprietary chip technology, primarily to cattle and pig producers, and grew sample volume particularly with its largest customers. In addition, the canine testing service business grew 17% as the Company successfully commercialized new service offerings, developed in the prior fiscal year.
COST OF REVENUES
(dollars in thousands) | 2017 | Increase | 2016 | Increase | 2015 | 2018 | Increase | 2017 | Increase | 2016 | ||||||||||||||||||||||||||||||
Cost of Revenues | $ | 189,626 | 13 | % | $ | 168,211 | 17 | % | $ | 143,389 | $ | 212,000 | 12 | % | $ | 189,626 | 13 | % | $ | 168,211 | ||||||||||||||||||||
Cost of revenues increased 12% in fiscal 2018 and 13% in fiscal 2017 and 17% in fiscal 2016 in comparison with the prior years. This compares with revenue
increases of 11% in fiscal 2018 and 13% in both fiscal years.2017. Expressed as a percentage of revenues,sales, cost of revenues was 52.4%52.7%, 52.4% and 50.7%52.4% in fiscal years 2018, 2017 and 2016, respectively.
Fiscal 2018 – Improvements in Animal Safety gross margins, resulting from raw material cost reductions and 2015, respectively. Infavorable mix were offset by higher product costs in the Food Safety segment resulting from lower sales of our mycotoxin test kits, which have higher gross margins, and a change in mix caused by the Quat-Chem and Rogama acquisitions. These businesses have product lines with gross margins lower than the average gross margins in this segment. Depreciation expense, resulting from the investment of machinery and equipment at several manufacturing locations, increased $872,000 in fiscal 2018.
Fiscal 2017 improvements – Improvements in Animal Safety gross margins, resulting from lower raw material costs in the genomics business and increased higher margin forensicforensics test kit sales into the commercial laboratory market, and strong growth in sales of higher margin mycotoxin and allergen test kits in the Food Safety segment, overcame the lower gross margins resulting from the Quat-Chem and Rogama acquisitions. For fiscal 2016, the strength of the U.S. dollar, which adversely impacted revenue with no corresponding decline in product cost, had the largest impact on the decline in gross margins compared to fiscal 2015. In addition, shifts in product mix within the
Food Safety segment, in part the result of acquisitions completed in fiscal years 2015 and 2016, towards products which have lower gross margins than the segment average, and a shift in the proportion of Animal Safety revenues to the overall revenue of the Company, resulted in the decline in gross margins.Gross Margins:
Food Safety gross margins were 55.3%52.8%, 56.7%55.3% and 59.7%56.7% in fiscal years 2018, 2017 and 2016, respectively.
Fiscal 2018 – Our fiscal 2018 results reflect the full year impact of lower gross margins from revenues contributed by the recent acquisitions of Quat-Chem and 2015, respectively.Rogama. Excluding these businesses, Food Safety gross margins would have been 330 basis points higher in fiscal 2018. Additionally, the decrease in sales of higher margin forensic test kits through our Brazilian subsidiary, due to increased competition, and lower sales of mycotoxin test kits, due to a DON outbreak in the prior year which did not recur in fiscal 2018, adversely impacted gross margins in this segment.
Fiscal 2017 – During fiscal 2017, the Companywe purchased the Quat-Chem and Rogama businesses, which generated gross margins lower than historical averages for this segment. These acquisitions, and the full year impact of the prior year acquisitions of Lab M and Deoxi resulted in a 140 basis point decline in Food Safety gross margins. In addition, gross margins were also negatively impacted by the strength of the U.S. dollar relative to the international currencies in which the Company operates,we operate, primarily in Europe and Mexico, where the pound and peso declined in value against the U.S. dollar by 14% and 12%, respectively. These international operations report in through the Food Safety segment. Partially offsetting these negative impacts to gross margins were favorable shifts in product mix towards higher margin diagnostic test kits for mycotoxins and allergens. In fiscal 2016, lower gross margins resulted primarily from the strength in the U.S. dollar, which resulted in lower revenues and gross margins when international sales were converted from local currencies to the dollar. All currencies the Company operates in weakened against the dollar in fiscal 2016, pressuring margins in this segment. Additionally, revenues from the acquisition of Lab M, which were at lower average gross margins than the rest of the segment, standard cost adjustments at Neogen Latinoamerica, and other product mix shifts within the segment, negatively impacted gross margins in Food Safety.
Animal Safety Gross Margins:
Animal Safety gross margins were 40.6%42.0%, 40.1%40.6% and 40.4%40.1% in fiscal years 2018, 2017 and 2016, and 2015, respectively. For
Fiscal 2018 – The improvement in gross margin percentage from fiscal 2017 improvementsto fiscal 2018 was primarily due to raw material cost reductions in our genomics business. We also benefitted from increased sales of forensic test kits and other higher margin products and decreased sales of lower margin distributed cleaners and disinfectants resulting from the termination of a distribution agreement in January 2017.
Fiscal 2017 –Improvements in raw material costs, and favorable product mix in the genomics business and strong sales of forensic kits to commercial labs in the U.S. more than offset the loss of high margin revenues from the thyroid replacement product for companion animals, which the Company waswe were required to stop selling at the end of fiscal 2016. For fiscal 2016, improved gross margins from the 58% increase in sales of rodenticides, which have higher than average gross margins within the segment, were somewhat offset by lower gross margins on revenues from the dairy distribution business initiated in August 2015, lower gross margins at GeneSeek due to the significant increase in poultry business, which has lower than average gross margins within the genomics product line, and other product mix shifts within the segment.
OPERATING EXPENSES
(dollars in thousands) | 2017 | Increase | 2016 | Increase | 2015 | 2018 | Increase | 2017 | Increase | 2016 | ||||||||||||||||||||||||||||||
Sales and Marketing | $ | 62,424 | 8 | % | $ | 57,599 | 11 | % | $ | 51,757 | $ | 70,909 | 14 | % | $ | 62,424 | 8 | % | $ | 57,599 | ||||||||||||||||||||
General and Administrative | 34,214 | 17 | % | 29,189 | 16 | % | 25,233 | 38,294 | 12 | % | 34,214 | 17 | % | 29,189 | ||||||||||||||||||||||||||
Research and Development | 10,385 | 5 | % | 9,890 | 3 | % | 9,577 | 10,855 | 5 | % | 10,385 | 5 | % | 9,890 | ||||||||||||||||||||||||||
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Total Operating Expense | 107,023 | 11 | % | 96,678 | 12 | % | 86,567 | $ | 120,058 | 12 | % | $ | 107,023 | 11 | % | $ | 96,678 | |||||||||||||||||||||||
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Overall operating expenses increased by 12% in fiscal 2018 and 11% in fiscal 2017, and 12% in fiscal 2016, each compared to the prior year. These increases
compare to revenue increases of 11% and 13%, respectively, in each comparative period.
Sales and Marketing:
Sales and marketing expenses increased by 14% in fiscal 2018 and 8% in fiscal 2017, and 11% in fiscal 2016, each compared withto the prior year. As a
percentage of sales, sales and marketing expense was 17.3%17.6%, 17.9%17.3% and 18.3%17.9% in fiscal years 2018, 2017 and 2016, respectively.
Fiscal 2018 – Salaries and 2015, respectively. Forcommissions expense rose 9% in fiscal 2018, while travel expense increased 12%. Other significant increases include shipping expense, distributor support and promotion programs, federal and state product registrations and royalty expense.
Approximately $1.2 million of the increase in sales and marketing expense resulted from the Quat-Chem, Rogama and Neogen Australasia acquisitions.
Fiscal 2017 salaries– Salaries and commissions within the sales and marketing function, which is also comprised of technical service, customer service, and product management personnel, rose 10%, primarily due to increased staffing and the increase in revenue, while travel
expenses rose 7%. Other significant expense increases were domestic shipping expense, up 11% and in line with the revenue increase,
and royalty expense, which rose 35% due to increased sales in fiscal 2017 and aone-time credit in the prior year resulting from a
retroactive rate reduction on a royalty agreement. Of the $4.8 million increase in expenses, approximately $2.2 million resulted from the Company’sour recent acquisitions. For fiscal 2016, salaries, commissions
General and travel expenses rose 13%, primarily on increases in staffing and higher revenue. Other significant expense increases were sales promotions and allowances, based on higher levels of sales to the Company’s largest distributors, shipping expense, up 13% and in line with the revenue increase, and shows and exhibits, which rose 22% on increased Company participation in trade shows.Administrative:
General and administrative expenses rose 12% in fiscal 2018 compared to fiscal 2017 and by 17% in fiscal 2017 compared to fiscal 2016
2016. As a percentage of sales, general and by 16% in fiscal 2016 compared to fiscal 2015. The increasesadministrative expense was 9.5%, 9.5% and 9.1% in fiscal years 2018, 2017 and 2016, respectively, arerespectively.
In both fiscal years, the increase is primarily the result of higher salaries, due to additional headcount as well as compensation increases. Higher legal and professional fees and additional amortization of intangible assets, due to the Company’sour recent acquisitions, also contributed to the increase in each comparative period.
Research and Development:
Research and development expenses increased 5% in fiscal 20172018 and 3%5% in fiscal 2016,2017, each compared to the prior year.
Higher salaries expense in each fiscal year, resulting from increased headcount and compensation increases, was partially offset by lower levels of consulting and other outside services. As a percentage of revenue, these expenses were 2.7% in fiscal year 2018, 2.9% in fiscal year 2017 and 3.1% in fiscal year 2016 and 3.4% in fiscal year 2015; the Company expects2016; we expect to spend approximately 3% to 4% of total revenue on research and development annually.
OPERATING INCOME
(dollars in thousands) | 2017 | Increase | 2016 | Increase | 2015 | 2018 | Increase | 2017 | Increase | 2016 | ||||||||||||||||||||||||||||||
Operating Income | $ | 64,945 | 15 | % | $ | 56,386 | 6 | % | $ | 53,118 | $ | 70,194 | 8 | % | $ | 64,945 | 15 | % | $ | 56,386 | ||||||||||||||||||||
The Company’sOur operating income increased by 8% in fiscal 2018 compared to fiscal 2017, and by 15% in fiscal 2017 compared to fiscal 2016, and by 6% in fiscal 2016 compared to fiscal 2015.2016. Expressed as a percentage of revenues, itoperating income was 18.0%17.5%, 17.6%18.0% and 18.8%17.6% in fiscal years 2018, 2017 and 2016, respectively.
The 8% increase in operating income for fiscal 2018 was due to the 11% increase in sales, offset by slightly lower gross margins due to product mix shifts, and 2015, respectively.operating expenses which rose by 12% over fiscal 2017.
The 15% increase in operating income for fiscal 2017 was due to the 13% increase in revenues and operating expense increases which were less than the revenue growth rate, combined with gross margins which, at 47.6% of sales, were the same as the prior year.
The 6% increase in operating income in fiscal 2016 was due primarily to the 13% increase in revenues and lower rates of increases in operating expenses, partially offset by the 170 basis point reduction in gross margin expressed as a percentage of revenues. The Company controlled its expense growth while incurring additional amortization and other expenses relating to its recent acquisitions.
OTHER INCOME (EXPENSE)
(dollars in thousands) | 2017 | Increase | 2016 | Increase | 2015 | |||||||||||||||
Other Income (Expense) | $ | 1,728 | n/a | $ | (873 | ) | n/a | $ | (1,042 | ) | ||||||||||
Other Income (Expense) consists principallyfor the previous three fiscal years consisted of royalty income,the following:
| (dollars in thousands) | 2018 | 2017 | 2016 | |||||||||
Interest income (net of expense) | $ | 2,043 | $ | 838 | $ | 322 | ||||||
Foreign currency transactions | 274 | (40 | ) | (1,338 | ) | |||||||
Royalty income | 147 | 171 | 217 | |||||||||
Settlement of licensing agreement | — | 660 | — | |||||||||
Quat-Chem contingent consideration | 255 | — | — | |||||||||
Deoxi contingent consideration | (42 | ) | (14 | ) | — | |||||||
Neogen India contingent consideration | — | 32 | — | |||||||||
Other | 594 | 81 | (74 | ) | ||||||||
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Total Other Income (Expense) | $ | 3,271 | $ | 1,728 | $ | (873 | ) | |||||
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The increases in interest income from investingin both fiscal years 2018 and 2017 compared to the Company’s excess cash balances, the impact of foreign currency transactions, adjustments to contingent consideration liabilities relating to acquisitions, and other
miscellaneous items.
Other Income of $1,728,000 in fiscal 2017 primarily consisted of net interest income of $838,000, a $660,000 gain recorded asprior years is the result of higher cash balances and rising interest rates during thetwo-year period. Other income resulting from foreign currency translations is primarily the settlementresult of changes in the value of foreign currencies relative to the dollar in countries in which we operate. Other Income in fiscal 2018 also included the adjustment of Quat-Chem and Deoxi contingent consideration based on the level of achievement of revenue targets for the acquired businesses. In fiscal 2017, we terminated a licensing agreement $171,000 of royalty income,and recognized a net gain of $18,000 resulting from contingent consideration payments made during the year for prior year acquisitions, and a loss of $40,000 on foreign currency translations.
In fiscal 2016, Other Expense primarily consisted of losses on foreign currency translations of $1,338,000, the result of all foreign currencies in which we operate devaluing against the U.S. dollar. In addition, the Company recognized interest income of $322,000,
and royalty income of $217,000.
In fiscal 2015, Other Income (Expense) primarily consisted of losses on foreign currency translations of $1,124,000, the result of the stronger U.S. dollar during the year. In addition, the Company recognized interest income of $228,000, royalty income of $150,000 and net expense of $297,000 resulting from contingent consideration payments made during the year for prior year acquisitions. The contingent consideration adjustments consisted of $241,000 of income for SyrVet, $454,000 of expense for Prima Tech, and $84,000 of expense for Chem-Tech; these adjustments were the difference between the liability recorded at the initial purchase of each business and the actual payment made to the former owners, and were based on the achievement of sales goals for the first 12
months of the Company’s ownership.$660,000.
PROVISION FOR INCOME TAXES
(dollars in thousands) | 2017 | Increase | 2016 | Increase | 2015 | 2018 | Increase | 2017 | Increase | 2016 | ||||||||||||||||||||||||||||||
Provision for Income Taxes | $ | 22,700 | 20 | % | $ | 18,975 | 3 | % | $ | 18,500 | $ | 10,250 | (55 | )% | $ | 22,700 | 20 | % | $ | 18,975 | ||||||||||||||||||||
The effectiveIncome tax rateexpense for fiscal 2018 was 34.0% of pretax income in fiscal 2017, 34.2% in fiscal 2016 and 35.5% in fiscal 2015. Differences in the tax rate from the 35% U.S. statutory corporate rate were primarily due to increases from international taxes and the provision for state taxes, offset by tax deductions related to domestic manufacturing and credits related to research and development activities. The fiscal 2017$10.3 million, an effective tax rate of 34.0% includes benefit from research and development credits, the Company’s domestic manufacturing deduction and reversal14%, compared to prior year income tax expense of a valuation allowance against net operating losses in Brazil, which the Company is utilizing. The Company is currently under audit by the Internal Revenue Service for fiscal years 2014-2016.
The$22.7 million, an effective tax rate declinedof 34%. We recorded favorable tax adjustments totaling $4.8 million during the year as the result of U.S. tax reform passed in fiscal 2016 due primarilyDecember 2017. The tax reform reduced the U.S. statutory income tax rate from 35% to amendments filed21%, and also resulted in other adjustments to income tax expense. We computed our income tax for the fiscal 2012, 2013year ending May 31, 2018 using a blended Federal Tax Rate of 29.2%. As required by generally accepted accounting principles, we revalued our net deferred tax liabilities during the year to reflect the lower rate, resulting in a credit to income tax expense of $6.0 million. In addition, we have calculated our cumulative unrepatriated foreign earnings and 2014profits and calculated tax owed on those earnings and profits. This tax was estimated at $1.2 million and was recorded as federal income tax expense; payment of this tax is permitted over an eight-year period.
Additionally, during the year we recorded incremental credits of $4.8 million to federal income tax expense for excess tax benefits from the exercise of stock options, due to the adoption of ASU2016-09; refer to Note 6 of our Consolidated Financial Statements for further information. In the second quarter of fiscal 2018, an IRS examination of our federal income tax returns and an adjustment for fiscal years 2014, 2015 relating to credits claimed for research and development activities. The Company engaged2016 was concluded. As a third party in fiscal 2016 to perform a study of its research and development activities, and credits originally claimed thereon, for these prior annual periods. Based on the resultsresult of the study,favorable outcome of the Company revised its calculationsaudit, we reversed a total of $1.0 million from our reserve for its research and development activities for those periods,
resultinguncertain tax positions, which had been accrued in higherprior fiscal years, with a corresponding credit to federal income tax credits.expense.
NET INCOME AND INCOME PER SHARE
(dollars in thousands-except per share data) | 2017 | Increase | 2016 | Increase | 2015 | 2018 | Increase | 2017 | Increase | 2016 | ||||||||||||||||||||||||||||||
Net Income Attributable to Neogen | $ | 43,793 | 20 | % | $ | 36,564 | 9 | % | $ | 33,526 | $ | 63,145 | 44 | % | $ | 43,793 | 20 | % | $ | 36,564 | ||||||||||||||||||||
Net Income Per Share-Basic | $ | 1.16 | $ | 0.98 | $ | 0.91 | $ | 1.23 | $ | 0.87 | $ | 0.73 | ||||||||||||||||||||||||||||
Net Income Per Share-Diluted | $ | 1.14 | $ | 0.97 | $ | 0.90 | $ | 1.21 | $ | 0.86 | $ | 0.72 | ||||||||||||||||||||||||||||
Net income increased by 44% in fiscal 2018, significantly aided by U.S. tax reform enacted in December 2017 and a change in accounting for stock-based compensation, and increased by 20% in fiscal 2017, and increased by 9% in fiscal 2016, each compared to the prior year. As a percentage of revenue, net income was 15.7% in fiscal 2018, 12.1% in fiscal 2017 and 11.4% in fiscal 2016 and 11.8% in fiscal 2015.2016.
FUTURE OPERATING RESULTS
Neogen Corporation’s future operating results involve a number of risks and uncertainties. Actual events or results may differ materially from those discussed in this report. Factors that could cause or contribute to such differences include, but are not limited to, the factors discussed below as well as those discussed elsewhere in this report. Management’s ability to grow the business in the future depends upon itsour ability to successfully implement various strategies, including:
FINANCIAL CONDITION AND LIQUIDITY
On May 31, 2017, the Company2018, we had $77.6$83.1 million in cash and cash equivalents, $66.1$127.7 million in marketable securities and working capital of $257.0$337.1 million. For the year ended May 31, 2017,2018, cash generated from operating activities was $60.3$69.1 million, compared to $35.3$60.3 million generated in fiscal 2016;2017; proceeds from stock option exercises provided an additional $21.1$22.8 million of cash. For the same period, additions to property and equipment and business acquisitions used cash of $14.6$20.9 million and $34.0 million,$468,000, respectively. The Company hasWe have a financing agreement with a bank providing for an unsecured revolving line of credit of $15.0 million, which expires on September 30, 2019. There were no advances against this line of credit during fiscal years 2018, 2017 2016 and 2015,2016, and no balance outstanding at May 31, 20172018 and 2016. The Company does have an outstanding borrowing of $1.2 million at its pesticide business in Brazil, which originated prior to the Company’s purchase of the business. The terms of the borrowing allow for repayment of the principal only upon export shipment of the associated inventory, which the Company believes will occur in the 2018 fiscal year.2017.
Accounts receivable at May 31, 20172018 were $68.6$79.1 million, compared to $67.6$68.6 million at May 31, 2016,2017, primarily due to the increase in revenues. Days sales outstanding, a measurement of the time it takes to collect receivables, decreased from 61was 60 days at both May 31, 2016 to 60 days at2018 and May 31, 2017. All customer accounts are actively managed and no losses in excess of amounts reserved are currently expected.
Inventory balances were $76.0 million at May 31, 2018, an increase of $2.9 million, or 4.0%, compared to $73.1 million at May 31, 2017, an increase of $8.7 million, or 14%, compared to $64.4 million at May 31, 2016. Approximately $2.2 million of the increase was from the acquisitions of Quat-Chem and Rogama, completed during fiscal 2017. The Company also increasedThis past year, we were successful in controlling inventory levels at a number of its other operations to support the revenue growth and to ensurewhile ensuring adequate safety stocks to minimize backorders. The Company continuesWe continue to identify and rationalize redundant product offerings resulting from recent acquisitions.
Neogen has been consistently profitable and has generated strong cash flow from operations during each of the past three fiscal years 2015, 2016 and 2017.years. However, the Company’sour cash on hand and current borrowing capacity may not be sufficient to meet the Company’sour cash requirements to commercialize products currently under development or itsour potential plans to acquire additional businesses, technology and products that fit within the Company’sour strategic plan. Accordingly, the Companywe may be required, or may choose, to issue equity securities or enter into other financing arrangements for a portion of itsour future capital needs.
The Company isWe are subject to certain legal and other proceedings in the normal course of business that have not had, and, in the opinion of management, are not expected to have, a material effect on itsour results of operations or financial position.
CONTRACTUAL OBLIGATIONS
The Company hasAs of May 31, 2018, we have the following contractual obligations due by period:
(dollars in thousands) | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | ||||||||||||||||||||||||||||||
Long-Term Debt | $ | 1,195 | $ | 1,195 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||||
Operating Leases | 1,150 | 591 | 381 | 155 | 23 | 906 | 498 | 194 | 214 | — | ||||||||||||||||||||||||||||||
Unconditional Purchase Obligations (1) | 48,831 | 43,402 | 5,429 | — | — | 54,339 | 54,061 | 278 | — | — | ||||||||||||||||||||||||||||||
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| $ | 51,176 | $ | 45,188 | $ | 5,810 | $ | 155 | $ | 23 | $ | 55,245 | $ | 54,559 | $ | 472 | $ | 214 | $ | — | |||||||||||||||||||||
| (1) | Unconditional purchase obligations are primarily purchase orders for future inventory and capital equipment purchases. |
NEW ACCOUNTING PRONOUNCEMENTS
See discussion of any New Accounting Pronouncements in Note 1 to Consolidated Financial Statements.
| ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS |
The Company hasWe have interest rate and foreign exchange rate risk exposure but no long-term fixed rate investments or borrowings. The Company’sOur primary interest rate risk is due to potential fluctuations of interest rates for variable rate borrowings and short-term investments.
Foreign exchange risk exposure arises because the Company marketswe market and sells itssell our products throughout the world. Revenues in certain foreign countries as well as certain expenses related to those revenues are transacted in currencies other than the U.S. dollar. The Company’sOur operating results are exposed to changes in exchange rates between the U.S. dollar and the British pound sterling, the euro, the Mexican peso, the Brazilian real, the Chinese yuan, and to a lesser extent, the Indian rupee, and the Canadian dollar and Australian dollar; there is also exposure to a change in exchange rate between the British pound sterling and the euro. When the U.S. dollar weakens against foreign currencies, the dollar value of revenues denominated in foreign currencies increases. When the U.S. dollar strengthens, the opposite situation occurs. Additionally, previously recognized revenues can be positively or negatively affected by changes in exchange rates in the course of collection. The Company usesWe use derivative financial instruments to help manage the economic impact of fluctuations in certain currency exchange rates. These contracts are adjusted to fair value through earnings.
Neogen has assets, liabilities and operations outside of the United States,U.S., located in the United Kingdom, Brazil, Mexico, China, India, Canada and CanadaAustralia where the functional currency is the British pound sterling, Brazilian real, Mexican peso, Chinese yuan, Indian rupee, Canadian dollar and CanadianAustralian dollar, respectively, and also transacts business throughout Europe in the euro. The Company’sOur investments in foreign subsidiaries are considered to be long-term.
| ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA |
The response to this item is submitted in a separate section of this report starting on pageF-1.
| ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE—NONE |
| ITEM 9A. | CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
An evaluation was performed under the supervision and with the participation of the Company’sour management, including the Executive Chairman of the Board of Directors and Chief Financial Officer, of the effectiveness of the design and operation of the Company’sour disclosure controls and procedures (as defined in Rule13a-15 (e) under the Securities Exchange Act of 1934) as of May 31, 2017.2018. Based on and as of the time of such evaluation, the Company’sour management, including the Executive Chairman of the Board of Directors and Chief Financial Officer, concluded that the Company’sour disclosure controls and procedures were effective as of the end of the period covered by this report to ensure that information required to be disclosed in the reports that are filed or submitted under the Securities and Exchange Act of 1934 is appropriately recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure the information required to be disclosed in the reports that are filed or submitted under the Securities Exchange Act of 1934 is accumulated and communicated to management, including the Executive Chairman of the Board of Directors and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules13-a-15(f) and15d-15(f). Under the supervision and with the participation of the Company’sour management, including the Executive Chairman of the Board of Directors and Chief Financial Officer, an evaluation was conducted as to the effectiveness of internal control over financial reporting as of May 31, 2017,2018, based on the framework in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on that evaluation, management concluded that internal control over financial reporting was effective as of May 31, 2017.2018. The effectiveness of internal control over financial reporting as of May 31, 2017,2018, has been audited by BDO USA, LLP, an independent registered public accounting firm, as stated in its attestation report, which is included on the following page and is incorporated into this Item 9A by reference.
Changes in Internal Control over Financial Reporting
No changes in our internal control over financial reporting were identified as having occurred during the year ended May 31, 20172018 that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting.
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
Neogen Corporation and Subsidiaries
Lansing, Michigan
Opinion on Internal Control over Financial Reporting
We have audited Neogen Corporation and Subsidiaries’Corporation’s (the “Company’s”) internal control over financial reporting as of May 31, 2017,2018, based on criteria established inInternal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO criteria”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of May 31, 2018, based on the COSO criteria)criteria. Neogen Corporation
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheets of the Company and Subsidiaries’subsidiaries as of May 31, 2018 and 2017, the related consolidated statements of income, comprehensive income, equity, and cash flows for each of the three years in the period ended May 31, 2018, and the related notes and our report dated July 27, 2018 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying “Item 9A, Management’s Report on Internal Control Over Financial Reporting.” Our responsibility is to express an opinion on the company’sCompany’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Neogen Corporation and Subsidiaries maintained, in all material respects, effective internal control over financial reporting as of May 31, 2017, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Neogen Corporation and Subsidiaries as of May 31, 2017 and 2016, and the related consolidated statements of income, comprehensive income, equity, and cash flows for each of the three years in the period ended May 31, 2017, and our report dated July 28, 2017 expressed an unqualified opinion thereon.
/s/ BDO USA, LLP
Grand Rapids, Michigan
July 28, 201727, 2018
| ITEM 9B. | OTHER INFORMATION – NONE |
| ITEM 10. | DIRECTORS, |
Information regarding the Company and certain corporate governance matters appearing under the captions “Election of Directors”, “Audit Committee”, and “Miscellaneous-Section 16(a) Beneficial Ownership Reporting Compliance” is incorporated by reference to Neogen’s 20172018 proxy statement to be filed within 120 days of May 31, 2017.2018.
The Company hasWe have adopted a Code of Conduct that applies to all of itsour directors, officers and employees. The Company has made a copy of thisThis Code of Conduct is available on itsour website at http://www.neogen.com/pdf/CodeOfConduct.pdf.
OFFICERS AND OTHER KEY INDIVIDUALS OF THE REGISTRANT
The officers of Neogen are elected by and serve at the discretion of the Board of Directors. The names and titles of the Company’sour officers as of May 31, 2018 are set forth below.
| Name | Position with the Company | Year Joined the Company | ||||
John E. Adent | President & Chief Executive Officer | 2017 | ||||
Stewart W. Bauck, D.V.M., Ph.D. | Vice President, Agrigenomics | 2012 | ||||
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Joseph A. Corbett | Vice President, Animal Safety Sales & Operations | 1993 | ||||
Robert S. Donofrio, Ph.D. | Vice President, Food Safety Research & Development | 2016 | ||||
Shane M. Fitzwater | Vice President, Animal Safety Operations | 2018 | ||||
Jerome L. Hagedorn | Vice President, Food Safety Operations | 2018 | ||||
James L. Herbert | Executive Chairman of the Board | 1982 | ||||
Melissa K. Herbert | Vice President, Support Services | 2005 | ||||
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Jason W. Lilly, Ph.D., MBA | Vice President, Corporate Development | 2005 | ||||
Terri A. Morrical | Vice President, Animal Safety | 1992 | ||||
Steven J. Quinlan | Vice President & Chief Financial Officer | 2011 | ||||
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Dwight E. Schroedter | Vice President, Animal Safety Manufacturing | 1995 | ||||
Melissa K. Herbert, Vice President, Support Services, is the daughter of James L. Herbert, Executive Chairman of the Board.
Information concerning the officers of Neogen follows:
John E. Adent, age 49,50, joined Neogen as Chief Executive Officer on July 17, 2017. Prior to joining Neogen, Mr. Adent served as the Chief Executive Officer of Animal Health International, Inc., formerly known as Lextron, Inc., from 2004 to 2015, also serving as its President during that time. Animal Health International was sold to Patterson Companies, Inc. in 2015, and Mr. Adent served as the Chief Executive Officer of the $3.3 billion Animal Health Division of Patterson Animal Health from that period until his resignation on July 1, 2017. Mr. Adent began his career with management responsibilities for Ralston Purina Company, developing animal feed manufacturing and sales operations in China and the Philippines. When Ralston Purina spun off that business to Agribrands, he continued his management role in the European division in Spain and Hungary, serving as managing director of the Hungarian operations. He left Ralston Purina in 2004.
Dr. Stewart W. Bauck, age 59,60, joined Neogen in 2012 as the Company’sour Director of Beef Cattle Genomics, and became General Manager of Neogen’s GeneSeek subsidiary in 2013. In December 2016, Dr. Bauck was named Neogen’s Vice President of Agrigenomics, responsible for GeneSeek’s operation and execution of the company’sour genomics strategy. Prior to joining Neogen, Bauck spent 15 years with Merial Inc., where he created and launched the Igenity livestock production business. Igenity was acquired by Neogen from Merial in May 2012. Dr. Bauck’s experience also includes various responsibilities in technical services and management for Merck AgVet, and earlier in his career, he owned and operated his own private veterinary practice with a major emphasis on food-producing animals.
Edward L. Bradley, age 57, joined the Company in February 1995 as part of its acquisition of AMPCOR Diagnostics, Inc, where he served as Vice President of Sales and Marketing. In June 1996, he was named a Vice President of Neogen. In June 2006, Mr. Bradley was named Vice President, Food Safety. He has responsibility for all of Food Safety, with the exception of Neogen Europe and research and development. From 1988 to 1995, Mr. Bradley served in several sales and marketing capacities for Mallinckrodt Animal Health, including the position of National Sales Manager in its Food Animal Products Division. Prior to joining Mallinckrodt, he held several sales and marketing positions for Stauffer Chemical Company.
Richard E. Calk Jr., age 54, joined the Company as President and Chief Operating Officer in December 2014. He is responsible for all of the operations of the Company. He joined the Company after gaining extensive experience in a variety of senior leadership positions at food ingredient companies CP Kelco, Roquette America, and DSM Food Specialties. Mr. Calk has specialized in leading the resurgence of various companies’ brands by helping to modify simple food commodities to become value-added specialty ingredients to be used in foods and other products, and then expanding the global reach of those value-added ingredients. His experience includes establishing new operations throughout Asia, Europe, North and South America.
Joseph A. Corbett, age 48,49, joined Neogen in December 1993 as a sales representative in the Animal Safety operation based in Lexington, Kentucky. Prior to Neogen, he worked for the Marriott Corporation in sales and operations. He has served in various sales, marketing and operational roles in the Neogen Animal Safety group. Most recently, Mr. Corbett was Senior Director of Sales & Operations, Animal Safety.segment. He was named Vice President, Animal Safety Sales and Operations in October 2014, responsible for all Animal Safety revenues, excluding GeneSeekGenomics and Life Sciences, and operations at the Lexington distribution centers.
Dr. Robert S. Donofrio, age 45, joined Neogen in February 2016 as Director of Microbiology Research and Development, and was promoted to Director of Food Safety Research and Development in December 2016. In April 2018, Dr. Donofrio was named Vice President of Food Safety Research and Development. Prior to joining Neogen, he worked for 15 years at NSF International in various positions including Director of Microbiology and Molecular Biology and Director of Applied Research. At Neogen, Dr. Donofrio is responsible for our food safety research activities in the U.S., Scotland and England.
Shane M. Fitzwater, age 44, joined Neogen in April 2018 as Vice President of Animal Safety Operations. In his role, Mr. Fitzwater is responsible for the manufacturing, quality systems, supply chain, shipping and warehousing for our domestic biosecurity operations. Prior to joining Neogen, he spent 18 years in positions of increasing responsibility at Ecolab, Inc., including five years as Ecolab’s vice president of supply chain, global specialty sector. Mr. Fitzwater managed Ecolab’s global supply chain for a $750 million business unit with worldwide manufacturing and logistics operations. Before being named a vice president, he spent four years as a director of operations at Ecolab, managing a group of 450 employees and an annual operating budget of $40 million.
Jerome L. Hagedorn, age 52, joined Neogen in April 2018 as Vice President of Food Safety Operations. In the role, Mr. Hagedorn is responsible for the manufacturing, supply chain, shipping and warehousing, production engineering and quality systems for Neogen’s food safety operations. Prior to joining Neogen, Mr. Hagedorn spent the past eight years as Vice President of Operations at Siemens Healthcare Diagnostics. At Siemens, he was responsible for multiple plant operations, including diagnostic instrument manufacturing and new product introduction. Prior to joining Siemens, Mr. Hagedorn held a variety of senior-level positions over a20-year career, including director of manufacturing at Bayer Healthcare in Indiana, director of lean manufacturing at Invensys in Ohio, and manager of automated manufacturing at Siemens Electronic Components in Mexico.
James L. Herbert, age 77,78, is Executive Chairman of the Board of Directors of the Company.Directors. He had been the Chief Executive Officer and Chairman of the Board since 2006; he resigned as Chief Executive Officer on July 17, 2017, when John Adent was named to that role. Prior to 2006, he had been President and a Director since he founded the Company in June 1982. Mr. Herbert previously held the position of Corporate Vice President of DeKalb Ag Research, a major agricultural genetics and energy company. He has management experience in animal biologics, specialized chemical research, medical instruments, aquaculture, animal nutrition, and poultry and livestock breeding and production.
Melissa K. Herbert, age 53,54, joined the CompanyNeogen in August 2005 as a sales representative in the Company’sour Food Safety Division in Lansing, Michigan. In 2011, Ms. Herbert was named Manager of Industry Affairs, with oversight of regulatory issues for both the Food and Animal Safety divisions,segments, and in June 2013, Director of Industry Affairs. She was named Vice President, Support Services in October 2015. Support Services is comprised of Technical Service, Regulatory Affairs and Industry Affairs departments.
Dr. Daniel D. Kephart, age 53, joined Neogen in January 2017 as Chief Science Officer — a new position for the Company. Dr. Kephart’s experience and expertise in technology scouting, product design, and instrument integration will help broaden Neogen’s continued rapid growth in the development of solutions for both food and animal safety. Prior to joining Neogen, Kephart served as Research and Development Director for the Agribusiness unit of Thermo Fisher Scientific, as well as Animal Health and Food Safety Development at Life Technologies. His extensive industry experience also includes the management of a team focused on technical applications and customer-facing solutions for Promega Corporation.
Kenneth V. Kodilla, age 60, joined Neogen in November 2003 as Vice President of Manufacturing. He has responsibility for all manufacturing, inventory management, shipping and quality system operations for the Company’s Food Safety Division in Lansing, Michigan. Prior to joining Neogen, Mr. Kodilla served as plant manager for Facet Technologies in Atlanta, Georgia from 2001, as Manufacturing Manager for Becton Dickinson and Difco Laboratories from 1988, and as Quality Manager for Lee Laboratories from 1984. Mr. Kodilla’s manufacturing and regulatory experience includes FDA/ISO regulated Class and diagnostic reagents and devices, high volume automated assembly and packaging, materials management and plant operations.
Dr. Jason W. Lilly, age 43,44, joined the CompanyNeogen in June 2005 as Market Development Manager for Food Safety. In June 2009, he moved to the Corporate Development group. He was named Vice President of Corporate Development in December 2011, responsible for the identification and acquisition of new business opportunities for the Company. Prior to joining Neogen, he served in various technical sales and marketing roles at Invitrogen Corporation. Dr. Lilly’s technical knowledge and business acumen provides the Company with a strong combination of merger and acquisition skills.
Terri A. Morrical, age 52,53, joined Neogen in September 1992 as part of the Company’sour acquisition of WTT, Incorporated. She has directed most aspects of the Company’sour Animal Safety operations since she joined Neogen and currently serves as Vice President in charge of all ofresponsible for the Company’s Animal Safety operationssegment, excluding GeneSeek.Genomics. From 1986 to 1991, Ms. Morrical was Controller for Freeze Point Cold Storage Systems and concurrently served in the same capacity for Powercore, Inc. In 1990, she joined WTT, Incorporated as VP/CFO and then became President, the position she held at the time Neogen acquired the business.
Steven J. Quinlan, age 54,55, joined Neogen in January 2011 as Vice President and Chief Financial Officer. He was named Secretary in October 2011. He is responsible for all internal and external financial reporting for the Company,Neogen, and also manages the accounting, human resources, information technology, communications and facilities departments. Mr. Quinlan came to the CompanyNeogen following 19 years at Detrex Corporation (1992-2010), the last eight years serving as Vice President-Finance, CFO and Treasurer. He was on the audit staff at the public accounting firm Price Waterhouse (now PWC) from 1985-1989.
Dr. Jennifer A. Rice, age 56, joined the Company in February 2009 as Senior Scientific Officer. In October 2010, she was named Vice President and Senior Research Director and had responsibility to manage and lead Neogen’s research and development team. Prior to joining Neogen, Dr. Rice served as Animal Health Global Product Development Leader at Dow AgroSciences. From 1996 to 2004, she held Research Director Positions at Biocor Animal Health (2001-2004) and Merial Animal Health (1996-2001). Dr. Rice’s strong background in leading large global research and development teams brought a key management skill to Neogen. Dr. Rice retired from the Company effective November 11, 2016.
Dwight E. Schroedter, age 60,61, joined Neogen in January 1995 as the Research and Development Manager of the Animal Safety Division based in Lexington, Kentucky. He has served in a variety of technical, operational and sales roles as part of the Animal Safety Division and was named Vice President, Animal Safety Manufacturing in October 2014, overseeing manufacturing operations at the Company’sour domestic Animal Safety manufacturing locations, excluding Lansing. Prior to joining Neogen, Mr. Schroedter managed the antibody development laboratory for the Ames Division of Miles, Incorporated.
| ITEM 11. | EXECUTIVE COMPENSATION |
The information required by this Item is incorporated by reference to Neogen’s Proxy Statement to be filed within 120 days of May 31, 2017.2018.
| ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS, MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
The information required by this Item is incorporated by reference to Neogen’s Proxy Statement to be filed within 120 days of May 31, 2017.2018.
| ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
The information required by this Item is incorporated by reference to Neogen’s Proxy Statement to be filed within 120 days of May 31, 2017.2018.
| ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES |
The information required by this itemItem is incorporated by reference to Neogen’s Proxy Statement to be filed within 120 days of May 31, 2017.2018.
| ITEM 15. | EXHIBITS, FINANCIAL STATEMENT SCHEDULES |
(a) (1) and (2) and (c). The response to this portion of ITEM 15 is submitted as a separate section of this report.report starting on page F-1.
(a) (3). The Exhibits, listed on the accompanying Exhibit Index on page 36,42, are incorporated herein by reference.
| ITEM 16. | FORM10-K SUMMARY — NONE |
Neogen Corporation
Annual Report on Form10-K
Year Ended May 31, 20172018
EXHIBIT INDEX
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
| NEOGEN CORPORATION | ||||||||
By: | /s/ James L. Herbert | By: | /s/ Steven J. Quinlan | |||||
| James L. Herbert, Executive
| Steven J. Quinlan, Vice President & | |||||||
| Chairman of the Board of Directors | Chief Financial Officer | |||||||
| (Principal Executive Officer) | (Principal | |||||||
Dated: July 28, 201727, 2018
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature | Title | Date | ||||
/s/ James L. Herbert James L. Herbert | Executive Chairman of the Board of Directors (Principal Executive Officer) | July | ||||
/s/
| President & Chief | July | ||||
| John E. Adent | ||||||
/s/ Steven J. Quinlan
| Vice President & Chief Financial Officer (Principal Financial Officer) | July | ||||
| ||||||
| ||||||
| ||||||
| ||||||
| ||||||
| ||||||
* | Director | |||||
| William T. Boehm, Ph.D. | ||||||
* | Director | |||||
| James C. Borel | ||||||
* | Director | |||||
| Ronald D. Green, Ph.D. | ||||||
* | Director | |||||
| G. Bruce Papesh | ||||||
* | Director | |||||
| Jack C. Parnell | ||||||
* | Director | |||||
| Thomas H. Reed | ||||||
* | Director | |||||
| James P. Tobin | ||||||
* | Director | |||||
| Darci L. Vetter | ||||||
| *By: | /s/ James L. Herbert | |||||||
| James L. Herbert, Attorney-in-fact | July | |||||||
ANNUAL REPORT ON FORM10-K
ITEM 15 (a)(1)(2) (3), (b) and (c)
LIST OF FINANCIAL STATEMENTS, EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
YEAR ENDED MAY 31, 20172018
NEOGEN CORPORATION
LANSING, MICHIGAN
FORM10-K—ITEM 15(a)(1) AND (2) AND 15(c)
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
The following consolidated financial statements of Neogen Corporation and subsidiaries are included below and incorporated in ITEM 8:
Report of Independent Registered Public Accounting Firm | ||||
Consolidated Balance Sheets—May 31, | ||||
Consolidated Statements of Income—Years ended May 31, 2018, 2017 | ||||
Consolidated Statements of Comprehensive Income—Years ended May 31, 2018, 2017 | ||||
Consolidated Statements of Equity— Years ended May 31, 2018, 2017 | ||||
Consolidated Statements of Cash Flows— Years ended May 31, 2018, 2017 | ||||
Notes to Consolidated Financial Statements | ||||
Schedules for which provision is made in the applicable accounting regulation of the United States Securities and Exchange Commission are not required under the related instructions or are inapplicable and, therefore, have been omitted.
FORM10-K – ITEM 15 (a) (3) AND (b)
A list of Exhibits required to be filed as a part of this report is set forth in the Exhibit Index, which immediately followsprecedes the signature page, and is incorporated herein by reference.
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
Neogen Corporation and Subsidiaries
Lansing, Michigan
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Neogen Corporation (the “Company”) and Subsidiaries (the Company)subsidiaries as of May 31, 20172018 and 2016,2017, and the related consolidated statements of income, comprehensive income, equity, and cash flows for each of the three years in the period ended May 31, 2017. These2018, and the related notes (collectively referred to as the “consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States)statements”). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Neogen Corporationthe Company and Subsidiariessubsidiaries at May 31, 20172018 and 2016,2017, and the results of itstheir operations and itstheir cash flows for each of the three years in the period ended May 31, 20172018, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), Neogen Corporation and Subsidiaries’the Company’s internal control over financial reporting as of May 31, 2017,2018, based on criteria established inInternal Control – Integrated Framework(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)(“COSO”) and our report dated July 28, 201727, 2018 expressed an unqualified opinion thereon.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
We have served as the Company’s auditor since 2014.
/s/ BDO USA, LLP
Grand Rapids, Michigan
July 28, 201727, 2018
Neogen Corporation and Subsidiaries
Consolidated Balance Sheets – Assets
(in thousands)
| May 31 | May 31 | |||||||||||||||
| 2017 | 2016 | 2018 | 2017 | |||||||||||||
Assets | ||||||||||||||||
Current Assets | ||||||||||||||||
Cash and cash equivalents | $ | 77,567 | $ | 55,257 | $ | 83,074 | $ | 77,567 | ||||||||
Marketable securities | 66,068 | 52,539 | 127,736 | 66,068 | ||||||||||||
Accounts receivable, less allowance of $2,000 and $1,500 at May 31, 2017 and 2016, respectively | 68,576 | 67,652 | ||||||||||||||
Accounts receivable, less allowance of $1,550 and $2,000 at May 31, 2018 and 2017, respectively | 79,086 | 68,576 | ||||||||||||||
Inventories | 73,144 | 64,371 | 76,005 | 73,144 | ||||||||||||
Prepaid expenses and other current assets | 7,606 | 8,407 | 9,888 | 7,606 | ||||||||||||
|
|
|
| |||||||||||||
Total Current Assets | 292,961 | 248,226 | 375,789 | 292,961 | ||||||||||||
Property and Equipment | ||||||||||||||||
Land and improvements | 3,094 | 2,659 | 4,730 | 3,094 | ||||||||||||
Building and improvements | 37,917 | 33,417 | 44,008 | 37,917 | ||||||||||||
Machinery and equipment | 64,867 | 56,470 | 74,911 | 64,867 | ||||||||||||
Furniture and fixtures | 3,333 | 3,068 | 3,568 | 3,333 | ||||||||||||
Construction in progress | 2,290 | 1,057 | 2,654 | 2,290 | ||||||||||||
|
|
|
| |||||||||||||
| 111,501 | 96,671 | 129,871 | 111,501 | |||||||||||||
Less accumulated depreciation | 49,753 | 41,988 | 56,802 | 49,753 | ||||||||||||
|
|
|
| |||||||||||||
Net Property and Equipment | 61,748 | 54,683 | 73,069 | 61,748 | ||||||||||||
Other Assets | ||||||||||||||||
Goodwill | 104,759 | 88,506 | 99,558 | 104,759 | ||||||||||||
Othernon-amortizable intangible assets | 14,323 | 9,170 | 14,938 | 14,323 | ||||||||||||
Amortizable customer-based intangible assets, net of accumulated amortization of $20,846 and $17,277 at May 31, 2017 and 2016, respectively | 35,983 | 30,909 | ||||||||||||||
Othernon-current assets, net of accumulated amortization of $9,931 and $7,530 at May 31, 2017 and 2016, respectively | 18,635 | 18,446 | ||||||||||||||
Amortizable customer-based intangible assets, net of accumulated amortization of $24,579 and $20,846 at May 31, 2018 and 2017, respectively | 31,841 | 35,983 | ||||||||||||||
Othernon-current assets, net of accumulated amortization of $12,470 and $9,931 at May 31, 2018 and 2017, respectively | 22,814 | 18,635 | ||||||||||||||
|
|
|
| |||||||||||||
Total Other Assets | 173,700 | 147,031 | 169,151 | 173,700 | ||||||||||||
|
|
|
| |||||||||||||
Total Assets | $ | 528,409 | $ | 449,940 | $ | 618,009 | $ | 528,409 | ||||||||
|
|
|
| |||||||||||||
See accompanying notes to consolidated financial statements.
Neogen Corporation and Subsidiaries
Consolidated Balance Sheets – Liabilities and Equity
(in thousands, except share and per share)
| May 31 | May 31 | |||||||||||||||
| 2017 | 2016 | 2018 | 2017 | |||||||||||||
Liabilities and Equity | ||||||||||||||||
Current Liabilities | ||||||||||||||||
Accounts payable | $ | 16,244 | $ | 15,800 | $ | 20,750 | $ | 16,244 | ||||||||
Accruals | ||||||||||||||||
Accrued compensation | 5,002 | 4,986 | 6,065 | 5,002 | ||||||||||||
Income taxes | 936 | — | 165 | 936 | ||||||||||||
Other accruals | 13,820 | 7,812 | 11,708 | 13,820 | ||||||||||||
|
|
|
| |||||||||||||
Total Current Liabilities | 36,002 | 28,598 | 38,688 | 36,002 | ||||||||||||
Deferred Income Taxes | 17,048 | 14,758 | 14,103 | 17,048 | ||||||||||||
OtherNon-Current Liabilities | 3,602 | 2,423 | 5,043 | 3,602 | ||||||||||||
|
|
|
| |||||||||||||
Total Liabilities | 56,652 | 45,779 | 57,834 | 56,652 | ||||||||||||
Commitments and Contingencies (note 7) | ||||||||||||||||
Equity | ||||||||||||||||
Preferred stock, $1.00 par value - shares authorized 100,000; none issued and outstanding | — | — | ||||||||||||||
Common stock, $0.16 par value - shares authorized 60,000,000; 38,199,367 and 37,567,689 shares issued and outstanding at May 31, 2017 and 2016, respectively | 6,112 | 6,011 | ||||||||||||||
Preferred stock, $1.00 par value — shares authorized 100,000; none issued and outstanding | — | — | ||||||||||||||
Common stock, $0.16 par value — shares authorized 60,000,000; 51,735,732 and 50,932,489 shares issued and outstanding at May 31, 2018 and 2017, respectively | 8,278 | 8,149 | ||||||||||||||
Additionalpaid-in capital | 176,779 | 150,000 | 202,572 | 174,742 | ||||||||||||
Accumulated other comprehensive loss | (7,203 | ) | (3,946 | ) | (9,746 | ) | (7,203 | ) | ||||||||
Retained earnings | 295,926 | 252,133 | 359,071 | 295,926 | ||||||||||||
|
|
|
| |||||||||||||
Total Neogen Corporation and Subsidiaries Stockholders’ Equity | 471,614 | 404,198 | 560,175 | 471,614 | ||||||||||||
Non-controlling interest | 143 | (37 | ) | — | 143 | |||||||||||
|
|
|
| |||||||||||||
Total Equity | 471,757 | 404,161 | 560,175 | 471,757 | ||||||||||||
|
|
|
| |||||||||||||
| $ | 528,409 | 449,940 | $ | 618,009 | 528,409 | |||||||||||
|
|
|
| |||||||||||||
See accompanying notes to consolidated financial statements.
Neogen Corporation and Subsidiaries
Consolidated Statements of Income
(in thousands, except per share)
| Year Ended May 31 | Year Ended May 31 | |||||||||||||||||||||||
| 2017 | 2016 | 2015 | 2018 | 2017 | 2016 | |||||||||||||||||||
Revenues | ||||||||||||||||||||||||
Product revenues | $ | 306,512 | $ | 273,570 | $ | 243,909 | $ | 335,554 | $ | 306,512 | $ | 273,570 | ||||||||||||
Service revenues | 55,082 | 47,705 | 39,165 | 66,698 | 55,082 | 47,705 | ||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Total Revenues | 361,594 | 321,275 | 283,074 | 402,252 | 361,594 | 321,275 | ||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Cost of Revenues | ||||||||||||||||||||||||
Cost of product revenues | 156,568 | 137,766 | 120,377 | 174,067 | 156,568 | 137,766 | ||||||||||||||||||
Cost of service revenues | 33,058 | 30,445 | 23,012 | 37,933 | 33,058 | 30,445 | ||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Total Cost of Revenues | 189,626 | 168,211 | 143,389 | 212,000 | 189,626 | 168,211 | ||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Gross Margin | 171,968 | 153,064 | 139,685 | 190,252 | 171,968 | 153,064 | ||||||||||||||||||
Operating Expenses | ||||||||||||||||||||||||
Sales and marketing | 62,424 | 57,599 | 51,757 | 70,909 | 62,424 | 57,599 | ||||||||||||||||||
General and administrative | 34,214 | 29,189 | 25,233 | 38,294 | 34,214 | 29,189 | ||||||||||||||||||
Research and development | 10,385 | 9,890 | 9,577 | 10,855 | 10,385 | 9,890 | ||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
| 107,023 | 96,678 | 86,567 | 120,058 | 107,023 | 96,678 | |||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Operating Income | 64,945 | 56,386 | 53,118 | 70,194 | 64,945 | 56,386 | ||||||||||||||||||
Other Income (Expense) | ||||||||||||||||||||||||
Interest income | 838 | 322 | 228 | |||||||||||||||||||||
Interest income, net | 2,043 | 838 | 322 | |||||||||||||||||||||
Royalty income | 171 | 217 | 150 | 147 | 171 | 217 | ||||||||||||||||||
Change in purchase consideration | 18 | — | (297 | ) | ||||||||||||||||||||
Other, net | 701 | (1,412 | ) | (1,123 | ) | 1,081 | 719 | (1,412 | ) | |||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
| 1,728 | (873 | ) | (1,042 | ) | 3,271 | 1,728 | (873 | ) | ||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Income Before Income Taxes | 66,673 | 55,513 | 52,076 | 73,465 | 66,673 | 55,513 | ||||||||||||||||||
Provision for Income Taxes | 22,700 | 18,975 | 18,500 | 10,250 | 22,700 | 18,975 | ||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Net Income | 43,973 | 36,538 | 33,576 | 63,215 | 43,973 | 36,538 | ||||||||||||||||||
Net (Income) Loss Attributable toNon-controlling Interest | (180 | ) | 26 | (50 | ) | (70 | ) | (180 | ) | 26 | ||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Net Income Attributable to Neogen | $ | 43,793 | $ | 36,564 | $ | 33,526 | $ | 63,145 | $ | 43,793 | $ | 36,564 | ||||||||||||
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|
|
| |||||||||||||||||||
Net Income Attributable to Neogen per Share | ||||||||||||||||||||||||
Basic | $ | 1.16 | $ | 0.98 | $ | 0.91 | $ | 1.23 | $ | 0.87 | $ | 0.73 | ||||||||||||
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Diluted | $ | 1.14 | $ | 0.97 | $ | 0.90 | $ | 1.21 | $ | 0.86 | $ | 0.72 | ||||||||||||
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|
|
| |||||||||||||||||||
See accompanying notes to consolidated financial statements.
Neogen Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income
(in thousands, except per share)
| Year Ended May 31 | Year Ended May 31 | |||||||||||||||||||||||
| 2017 | 2016 | 2015 | 2018 | 2017 | 2016 | |||||||||||||||||||
Net Income Other comprehensive income (loss), net of tax: | $ | 43,973 | $ | 36,538 | $ | 33,576 | ||||||||||||||||||
currency translations | (3,257 | ) | (1,504 | ) | (2,813 | ) | ||||||||||||||||||
Net Income | $ | 63,215 | $ | 43,973 | $ | 36,538 | ||||||||||||||||||
Other comprehensive (loss), net of tax: currency translations | (2,543 | ) | (3,257 | ) | (1,504 | ) | ||||||||||||||||||
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|
| |||||||||||||||||||
Comprehensive income | 40,716 | 35,034 | 30,763 | 60,672 | 40,716 | 35,034 | ||||||||||||||||||
Comprehensive (income) loss attributable tonon-controlling interest | (180 | ) | 26 | (50 | ) | (70 | ) | (180 | ) | 26 | ||||||||||||||
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|
|
|
|
| |||||||||||||||||||
Comprehensive income attributable to Neogen | $ | 40,536 | $ | 35,060 | $ | 30,713 | $ | 60,602 | $ | 40,536 | $ | 35,060 | ||||||||||||
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|
|
|
|
| |||||||||||||||||||
See accompanying notes to consolidated financial statements.
Neogen Corporation and Subsidiaries
Consolidated Statements of Equity
(in thousands, except shares)
| Accumulated | Accumulated | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Additional | Other | Non- | Common Stock | Additional Paid-in | Other Comprehensive | Retained | Non- Controlling | Total | ||||||||||||||||||||||||||||||||||||||||||||||||
| Paid-in | Comprehensive | Retained | Controlling | Total | Shares | Amount | Capital | Income (Loss) | Earnings | Interest | Equity | |||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Capital | Income (Loss) | Earnings | Interest | Equity | ||||||||||||||||||||||||||||||||||||||||||||||||||
Balance, May 31, 2014 | 36,732,313 | $ | 5,877 | $ | 118,070 | $ | 371 | $ | 182,043 | $ | (61 | ) | $ | 306,300 | ||||||||||||||||||||||||||||||||||||||||||
Exercise of options, share-based compensation and $2,475 income tax benefit | 376,364 | 61 | 13,115 | 13,176 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of shares under employee stock purchase plan | 19,592 | 3 | 721 | 724 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Net income (loss) for 2015 | 33,526 | 50 | 33,576 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Other comprehensive income (loss) | (2,813 | ) | (2,813 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||||||||||||||||||
Balance, May 31, 2015 | 37,128,269 | 5,941 | 131,906 | (2,442 | ) | 215,569 | (11 | ) | 350,963 | 49,504,359 | $ | 7,921 | $ | 129,926 | $ | (2,442 | ) | $ | 215,569 | $ | (11 | ) | $ | 350,963 | ||||||||||||||||||||||||||||||||
Exercise of options, share-based compensation and $2,945 income tax benefit | 421,143 | 67 | 17,311 | 17,378 | 561,524 | 89 | 17,288 | 17,377 | ||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of shares under employee stock purchase plan | 18,277 | 3 | 783 | 786 | 24,369 | 4 | 782 | 786 | ||||||||||||||||||||||||||||||||||||||||||||||||
Net income (loss) for 2016 | 36,564 | (26 | ) | 36,538 | 36,564 | (26 | ) | 36,538 | ||||||||||||||||||||||||||||||||||||||||||||||||
Other comprehensive income (loss) | (1,504 | ) | (1,504 | ) | (1,504 | ) | (1,504 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
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|
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|
| |||||||||||||||||||||||||||||||||||||||||||
Balance, May 31, 2016 | 37,567,689 | 6,011 | 150,000 | (3,946 | ) | 252,133 | (37 | ) | 404,161 | 50,090,252 | 8,014 | 147,996 | (3,946 | ) | 252,133 | (37 | ) | 404,160 | ||||||||||||||||||||||||||||||||||||||
Exercise of options, share-based compensation and $3,922 income tax benefit | 612,963 | 98 | 26,621 | 26,719 | 817,284 | 131 | 26,589 | 26,720 | ||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of shares under employee stock purchase plan | 18,715 | 3 | 922 | 925 | 24,953 | 4 | 921 | 925 | ||||||||||||||||||||||||||||||||||||||||||||||||
Purchase of minority interest | (764 | ) | (764 | ) | (764 | ) | (764 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
Net income (loss) for 2017 | 43,793 | 180 | 43,973 | 43,793 | 180 | 43,973 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Other comprehensive income (loss) | (3,257 | ) | (3,257 | ) | (3,257 | ) | (3,257 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
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Balance, May 31, 2017 | 38,199,367 | $ | 6,112 | $ | 176,779 | $ | (7,203 | ) | $ | 295,926 | $ | 143 | $ | 471,757 | 50,932,489 | 8,149 | 174,742 | (7,203 | ) | 295,926 | 143 | 471,757 | ||||||||||||||||||||||||||||||||||
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Exercise of options, share-based compensation | 781,116 | 125 | 26,992 | 27,117 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of shares under employee stock purchase plan | 22,127 | 4 | 1,048 | 1,052 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Purchase of minority interest | (210 | ) | (213 | ) | (423 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||
Net income (loss) for 2018 | 63,145 | 70 | 63,215 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Other comprehensive income (loss) | (2,543 | ) | (2,543 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
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Balance, May 31, 2018 | 51,735,732 | $ | 8,278 | $ | 202,572 | $ | (9,746 | ) | $ | 359,071 | $ | — | $ | 560,175 | ||||||||||||||||||||||||||||||||||||||||||
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See accompanying notes to consolidated financial statements.
Neogen Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
| Year Ended May 31 | Year Ended May 31 | |||||||||||||||||||||||
| 2017 | 2016 | 2015 | 2018 | 2017 | 2016 | |||||||||||||||||||
Cash Flows From Operating Activities | ||||||||||||||||||||||||
Net income | $ | 43,973 | $ | 36,538 | $ | 33,576 | $ | 63,215 | $ | 43,973 | $ | 36,538 | ||||||||||||
Adjustments to reconcile net income to net cash provided from operating activities: | ||||||||||||||||||||||||
Depreciation and amortization | 14,691 | 12,181 | 10,649 | 17,058 | 14,691 | 12,181 | ||||||||||||||||||
Deferred income taxes | (292 | ) | 1,906 | 496 | (2,996 | ) | (292 | ) | 1,906 | |||||||||||||||
Share-based compensation | 5,261 | 5,468 | 4,450 | 4,909 | 5,261 | 5,468 | ||||||||||||||||||
Excess income tax benefit from exercise of stock options | (3,922 | ) | (2,945 | ) | (2,475 | ) | — | (3,922 | ) | (2,945 | ) | |||||||||||||
Changes in operating assets and liabilities, net of business acquisitions: | ||||||||||||||||||||||||
Accounts receivable | 5,035 | (6,002 | ) | (7,252 | ) | (10,233 | ) | 5,035 | (6,002 | ) | ||||||||||||||
Inventories | (6,970 | ) | (9,427 | ) | 319 | (2,647 | ) | (6,970 | ) | (9,427 | ) | |||||||||||||
Prepaid expenses and other assets | 812 | (3,836 | ) | 3,264 | (2,275 | ) | 812 | (3,836 | ) | |||||||||||||||
Accounts payable | (1,691 | ) | 704 | 412 | 4,381 | (1,691 | ) | 704 | ||||||||||||||||
Accruals and other changes | 3,377 | 744 | 353 | (2,281 | ) | 3,377 | 744 | |||||||||||||||||
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Net Cash From Operating Activities | 60,274 | 35,331 | 43,792 | 69,131 | 60,274 | 35,331 | ||||||||||||||||||
Cash Flows Used in Investing Activities | ||||||||||||||||||||||||
Purchase of property, equipment and othernon-current intangible assets | (14,578 | ) | (14,222 | ) | (9,619 | ) | (20,946 | ) | (14,578 | ) | (14,222 | ) | ||||||||||||
Proceeds from the sales of marketable securities | 149,226 | 147,189 | 93,662 | 299,751 | 149,226 | 147,189 | ||||||||||||||||||
Purchase of marketable securities | (162,755 | ) | (151,625 | ) | (105,944 | ) | (361,419 | ) | (162,755 | ) | (151,625 | ) | ||||||||||||
Business acquisitions, net of cash acquired | (34,029 | ) | (42,491 | ) | (6,554 | ) | (468 | ) | (34,029 | ) | (42,491 | ) | ||||||||||||
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Net Cash Used in Investing Activities | (62,136 | ) | (61,149 | ) | (28,455 | ) | (83,082 | ) | (62,136 | ) | (61,149 | ) | ||||||||||||
Cash Flows From Financing Activities | ||||||||||||||||||||||||
Exercise of stock options | 21,148 | 12,363 | 8,558 | |||||||||||||||||||||
Exercise of stock options and other | 23,261 | 21,148 | 12,363 | |||||||||||||||||||||
Excess income tax benefit from the exercise of stock options | 3,922 | 2,945 | 2,475 | — | 3,922 | 2,945 | ||||||||||||||||||
Purchase of minority interest | (423 | ) | — | — | ||||||||||||||||||||
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Net Cash From Financing Activities | 25,070 | 15,308 | 11,033 | 22,838 | 25,070 | 15,308 | ||||||||||||||||||
Effect of Exchange Rate on Cash | (898 | ) | (294 | ) | (984 | ) | (3,380 | ) | (898 | ) | (294 | ) | ||||||||||||
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Net Increase (Decrease) in Cash and Cash Equivalents | 22,310 | (10,804 | ) | 25,386 | 5,507 | 22,310 | (10,804 | ) | ||||||||||||||||
Cash and Cash Equivalents, Beginning of Year | 55,257 | 66,061 | 40,675 | 77,567 | 55,257 | 66,061 | ||||||||||||||||||
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Cash and Cash Equivalents, End of Year | $ | 77,567 | $ | 55,257 | $ | 66,061 | $ | 83,074 | $ | 77,567 | $ | 55,257 | ||||||||||||
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Supplementary Cash Flow Information | ||||||||||||||||||||||||
Income taxes paid, net of refunds | $ | 13,865 | $ | 13,413 | $ | 10,454 | $ | 11,800 | $ | 13,865 | $ | 13,413 | ||||||||||||
See accompanying notes to consolidated financial statements.
Neogen Corporation and Subsidiaries
Notes to Consolidated Financial Statements
| 1. | Summary of Significant Accounting Policies |
Nature of Operations
Neogen Corporation develops, manufactures and markets a diverse line of products and services dedicated to food and animal safety.
Basis of Consolidation
The consolidated financial statements include the accounts of Neogen Corporation and its subsidiaries, (collectively, the Company), all of which are wholly ownedwholly-owned as of May 31, 2017, with the exception of2018. Neogen Latinoamerica. Neogen Latinoamerica was 90% owned as of May 31, 2017 and 2016. The Company made an additional capital contribution on December 31, 2013 which increased its ownership interest in Neogen Latinoamerica from 60% to 90%. Neogen do BrasilLatinoamérica was 100% and 90% owned as of May 31, 20172018 and 2016, respectively. The Company2017. We purchased all shares owned by the minority interest owner on December 31, 2017, which increased our ownership in Neogen Latinoamérica to 100%. For Neogen do Brasil, we purchased the 10% owned by the two minority interest owners on February 28, 2017, which increased itsour ownership interest in Neogen do Brasil to 100%.Non-controlling interest represents thenon-controlling owner’sowners’ proportionate share in the equity of these subsidiaries; thenon-controlling owner’sowners’ proportionate share in the income or losses of the subsidiaries is subtracted from, or added to, Companyour net income to calculate the net income attributable to Neogen Corporation.
All intercompany accounts and transactions have been eliminated in consolidation.
Share and per share amounts reflect the December 29, 20174-for-3 stock split as if it took place at the beginning of the period presented.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from these estimates. Significant estimates impacting the accompanying consolidated financial statements include the allowance for uncollectible accounts receivable, inventory valuation and intangible assets.
Comprehensive Income
Comprehensive income represents net income and any revenues, expenses, gains and losses that, under U.S. generally accepted accounting principles, are excluded from net income and recognized directly as a component of equity. Accumulated other comprehensive income (loss) consists solely of foreign currency translation adjustments.
Accounts Receivable and Concentrations of Credit Risk
Financial instruments which potentially subject the Companyus to concentrations of credit risk consist principally of accounts receivable. Management attempts to minimize credit risk by reviewing customers’ credit history before extending credit and by monitoring credit exposure on a regular basis. An allowance for doubtful accounts on accounts receivable is established based upon factors surrounding the credit risk of specific customers, historical trends and other information. Collateral or other security is generally not required for accounts receivable. Once a receivable balance has been determined to be uncollectible, that amount is charged against the allowance for doubtful accounts. No customer accounted for more than 10% of accounts receivable at May 31, 20172018 or 2016,2017, respectively. The activity in the allowance for doubtful accounts was as follows:
| Year ended May 31 | Year ended May 31 | |||||||||||||||||||||||
| (in thousands) | 2017 | 2016 | 2015 | 2018 | 2017 | 2016 | ||||||||||||||||||
Beginning Balance | $ | 1,500 | $ | 1,300 | $ | 1,200 | $ | 2,000 | $ | 1,500 | $ | 1,300 | ||||||||||||
Provision | 645 | 305 | 337 | 152 | 645 | 305 | ||||||||||||||||||
Recoveries | 25 | 90 | 92 | 40 | 25 | 90 | ||||||||||||||||||
Write-offs | (170 | ) | (195 | ) | (329 | ) | (642 | ) | (170 | ) | (195 | ) | ||||||||||||
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Ending Balance | $ | 2,000 | $ | 1,500 | $ | 1,300 | $ | 1,550 | $ | 2,000 | $ | 1,500 | ||||||||||||
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Fair Value of Financial Instruments
The carrying amounts of the Company’sour financial instruments other than cash equivalents and marketable securities, which include accounts receivable and accounts payable, approximate fair value based on either their short maturity or current terms for similar instruments.
Fair Value Measurements
Fair value measurements are determined based upon the exit price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants exclusive of any transaction costs. The Company utilizesWe utilize a fair value hierarchy based upon the observability of inputs used in valuation techniques as follows:
Level 1: | Observable inputs such as quoted prices in active markets; | |
Level 2: | Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and | |
Level 3: | Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions. |
Cash and Cash Equivalents
Cash and cash equivalents consist of bank demand accounts, savings deposits, certificates of deposit and commercial paper with original maturities of 90 days or less. Cash and cash equivalents were $77,567,000$83,074,000 and $55,257,000$77,567,000 at May 31, 20172018 and 2016,2017, respectively. The carrying value of these assets approximates fair value due to the short maturity of these instruments and meetmeets the Level 1 criteria. Cash held by foreign subsidiaries was $8,132,000$7,101,000 and $5,320,000$8,132,000 at May 31, 20172018 and 2016,2017, respectively.
Marketable Securities
The Company hasWe have marketable securities held by banks or broker-dealers at May 31, 2017,2018, consisting of short-term domestic certificates of deposit of $25,355,000$27,400,000 and commercial paper rated at leastA-2/P-2 with maturities between 91 days and one year of $40,713,000.$100,336,000. Total outstanding marketable securities at May 31, 2017 were $66,068,000;2018 was $127,736,000; there were $52,539,000$66,068,000 in marketable securities outstanding at May 31, 2016.2017. These securities are classified as available for sale. The primary objective of the Company’sour short-term investment activity is to preserve capital for the purpose of funding operations, capital expenditures and business acquisitions; short-term investments are not entered into for trading or speculative purposes. These securities are recorded at fair value (that approximates cost) based on recent trades or pricing models and therefore meet the Level 2 criteria. Interest income on these investments is recorded within Other Income on the income statement.
Inventories
Inventories are stated at the lower of cost or net realizable value, determined on thefirst-in,first-out method, or market.method. The components of inventories were as follows:
| Year ended May 31 | ||||||||
| (in thousands) | 2017 | 2016 | ||||||
Raw Materials | $ | 33,190 | $ | 29,501 | ||||
Work-in-process | 4,831 | 4,498 | ||||||
Finished goods | 35,123 | 30,372 | ||||||
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| $ | 73,144 | $ | 64,371 | |||||
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The Company’s
| Year ended May 31 | ||||||||
| (in thousands) | 2018 | 2017 | ||||||
Raw Materials | $ | 36,702 | $ | 33,190 | ||||
Work-in-process | 5,993 | 4,831 | ||||||
Finished goods | 33,310 | 35,123 | ||||||
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| $ | 76,005 | $ | 73,144 | |||||
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Our inventories are analyzed for slow moving, expired and obsolete items no less frequently than quarterly and the valuation allowance is adjusted as required. The valuation allowance for inventory was $2,000,000$2,200,000 and $1,550,000$2,000,000 at May 31, 20172018 and 2016,2017, respectively.
Property and Equipment
Property and equipment is stated at cost. Expenditures for major improvements are capitalized while repairs and maintenance are charged to expense. Depreciation is provided on the straight-line method over the estimated useful lives of the respective assets, which are generally seven to 39 years for buildings and improvements and three to ten years for furniture, fixtures, machinery and equipment. Depreciation expense was $10,315,000, $8,783,000 $7,452,000 and $6,318,000$7,452,000 in fiscal years 2018, 2017 2016 and 2015,2016, respectively.
Goodwill and Other Intangible Assets
Goodwill represents the excess of purchase price over fair value of tangible net assets of acquired businesses after amounts are allocated to other identifiable intangible assets. Other intangible assets include customer relationships, trademarks, licenses, trade names, covenantsnot-to-compete and patents. Amortizable intangible assets are amortized on either an accelerated or a straight-line basis, generally over 5 to 25 years. The Company reviewsWe review the carrying amounts of goodwill and othernon-amortizable intangible assets annually, or when indications of impairment exist, to determine if such assets may be impaired by performing a quantitative assessment. If the carrying amounts of these assets are deemed to be less than fair value based upon a discounted cash flow analysis and comparison to comparable earnings multiples of peer companies, such assets are reduced to their estimated fair value and a charge is made to operations. The remaining weighted-average amortization period for customer-based intangibles and other intangibles arewas 11 and 12 years, respectively, at both May 31, 2018 and May 31, 2017, and May 31, 2016.respectively.
Long-lived Assets
Management reviews the carrying values of its long-lived assets to be held and used, including definite-lived intangible assets, for possible impairment whenever events or changes in business conditions warrant such a review. The carrying value of a long-lived asset is considered impaired when the anticipated separately identifiable undiscounted cash flows over the remaining useful life of the asset are less than the carrying value of the asset. In such an event, fair value is determined using discounted cash flows, and if lower than the carrying value, impairment is recognized through a charge to operations.
Reclassifications
Certain amounts in the fiscal 20162017 and 20152016 financial statements have been reclassified to conform to the fiscal 20172018 presentation.
See the Company’s discussion on Accounting Standards Update2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes, below for information on reclassifications related to the adoption of this standard as of May 31, 2017.
Stock Options
At May 31, 2017, the Company2018, we had stock option plans which are described more fully in Note 5.
The weighted-average fair value per share of stock options granted during fiscal years 2018, 2017 2016 and 2015,2016, estimated on the date of grant using the Black-Scholes option pricing model, was $15.86, $13.11$14.47, $11.89 and $11.91,$9.83, respectively. The fair value of stock options granted was estimated using the following weighted-average assumptions:
| Year ended May 31 | Year ended May 31 | |||||||||||||||||||||||
| 2017 | 2016 | 2015 | 2018 | 2017 | 2016 | |||||||||||||||||||
Risk-free interest rate | 1.2% | 1.2% | 1.2% | 1.6% | 1.2% | 1.2% | ||||||||||||||||||
Expected dividend yield | 0.0% | 0.0% | 0.0% | 0.0% | 0.0% | 0.0% | ||||||||||||||||||
Expected stock volatility | 35.2% | 33.3% | 36.2% | 27.7% | 35.2% | 33.3% | ||||||||||||||||||
Expected option life | 4.0 years | 4.0 years | 4.0 years | 4.0 years | 4.0 years | 4.0 years | ||||||||||||||||||
The risk-free interest rate for periods within the expected life of options granted is based on the United States Treasury yield curve in effect at the time of grant. Expected stock price volatility is based on historical volatility of the Company’sour stock. The expected option life, representing the period of time that options granted are expected to be outstanding, is based on historical option exercise and employee termination data. The Company recognizesPrior to the fiscal 2017 grants, we recognized the fair value of stock options using the accelerated method over their requisite service periods which the Company haswe have determined to be the vesting periods.periods; for options granted in fiscal years 2017 and 2018, we recognized the fair value of stock options using the straight-line method.
Revenue Recognition
Revenue from products and services is recognized when the product has been shipped or the service performed, the sales price is fixed and determinable, and collection of any receivable is probable. To the extent that customer payment has been received before all recognition criteria are met, these revenues are initially deferred and later recognized in the period that all recognition criteria have been met. Customer credits for sales returns, pricing and other disputes, and other related matters (including volume rebates offered to certain distributors as marketing support) represent approximately 3% of reported net revenue in fiscal years 2018, 2017 2016 and 2015.2016.
Shipping and Handling Costs
Shipping and handling costs that are charged to and reimbursed by the customer are recognized as revenues, while the related expenses incurred by the CompanyNeogen are recorded in sales and marketing expense; these expenses totaled $12,147,000, $10,185,000 $9,734,000 and $8,648,000$9,734,000 in fiscal years 2018, 2017 2016 and 2015,2016, respectively.
Income Taxes
The Company accountsWe account for income taxes using the asset and liability method. Under this method, deferred income tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and for tax credit carry forwardscarryforwards, and are measured using the enacted tax rates in effect for the years in which the differences are expected to reverse. Deferred income tax expense represents the change in net deferred income tax assets and liabilities during the year.
The Company’sOur wholly-owned foreign subsidiaries are comprised of Neogen Europe, Lab M Holdings, Quat-Chem, Neogen do Brasil, Deoxi Biotecnologia Ltda, Rogama Industria e Comercio Ltda, Acumedia do Brasil, Neogen Latinoamérica, NeogenBio-Scientific Technology Co (Shanghai), Neogen Food and Animal Security (India), Neogen Canada, Acumedia do Brasil, Deoxi Biotecnologia Ltda, and Rogama Industria e Comercio, Ltda; Neogen owns 90% of Neogen Latinoamerica.Australasia Pty Limited. Based on historical experience, as well as the Company’sour future plans, earnings from these subsidiaries are expected to bere-invested indefinitely for future expansion and working capital needs. Furthermore, the Company’sour domestic operations have historically produced sufficient operating cash flow to mitigate the need to remit foreign earnings. On an annual basis, the Company evaluateswe evaluate the current business environment and whether any new events or other external changes might require are-evaluation of the decision to indefinitelyre-invest foreign earnings. At May 31, 2017,2018, unremitted earnings of theour foreign subsidiaries were $35,281,000.$43,784,000.
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the Tax Act) was signed into law, making significant changes to the Internal Revenue Code. Changes include a federal corporate tax rate decrease from 35% to 21% for tax years beginning after December 31, 2017, the transition of U.S. international taxation from a worldwide tax system to a territorial system, and aone-time transition tax on the mandatory deemed repatriation of foreign earnings. On December 22, 2017, Staff Accounting Bulletin No. 118 (SAB 118) was issued to address the application of U.S. GAAP to situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. In accordance with SAB 118, we have determined that the $6.0 million of deferred tax benefit recorded in connection with the remeasurement of certain deferred tax assets and liabilities and the $1.2 million of current tax expense recorded in connection with the transition tax on the mandatory deemed repatriation of foreign earnings was a provisional amount at May 31, 2018. Any subsequent adjustment to these amounts will be recorded to current tax expense in the quarter of 2019 when any further analysis of our deferred tax assets and liabilities and our historical foreign earnings is completed.
Research and Development Costs
Research and development costs, which consist primarily of compensation costs, administrative expenses and new product development, among other items, are expensed as incurred.
Advertising Costs
Advertising costs are expensed as incurred and totaled $1,699,000, $1,643,000 $1,463,000 and $1,371,000$1,463,000 in fiscal years 2018, 2017 2016 and 2015,2016, respectively.
Net Income Attributable to Neogen per Share
Basic net income per share is based on the weighted average number of common shares outstanding during each year. Diluted earnings per share is based on the weighted average number of common shares and dilutive potential common shares outstanding. The Company’sOur dilutive potential common shares outstanding during the years result entirely from dilutive stock options. The following table presents the net income per share calculations:
| Year ended May 31 | Year ended May 31 | |||||||||||||||||||||||
| (in thousands, except per share) | 2017 | 2016 | 2015 | 2018 | 2017 | 2016 | ||||||||||||||||||
Numerator for basic and diluted net income per share - Net Income attributable to Neogen | $ | 43,793 | $ | 36,564 | $ | 33,526 | $ | 63,145 | $ | 43,793 | $ | 36,564 | ||||||||||||
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Denominator for basic net income per share - Weighted average shares | 37,908 | 37,402 | 36,953 | 51,358 | 50,544 | 49,869 | ||||||||||||||||||
Effect of dilutive stock options | 466 | 473 | 491 | 791 | 621 | 631 | ||||||||||||||||||
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Denominator for diluted net income per share | 38,374 | 37,875 | 37,444 | 52,149 | 51,165 | 50,500 | ||||||||||||||||||
Net income attributable to Neogen per share | ||||||||||||||||||||||||
Basic | $ | 1.16 | $ | 0.98 | $ | 0.91 | $ | 1.23 | $ | 0.87 | $ | 0.73 | ||||||||||||
Diluted | $ | 1.14 | $ | 0.97 | $ | 0.90 | $ | 1.21 | $ | 0.86 | $ | 0.72 | ||||||||||||
At May 31, 2018, 2017 2016 and 2015,2016, the market price of the common stock exceeded the option exercise price for all outstanding options; therefore, no shares were excluded from the diluted net income per share computation.
New Accounting Pronouncements
In May 2014, the FASB issued ASU No.2014-09—Revenue from Contracts with Customers.Customers (Topic 606). The new standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most
current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that an entity
should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration
to which the entity expects to be entitled in exchange for those goods or services. The standard is designed to create greater comparability for financial statement users across industries and jurisdictions and also requires enhanced disclosures. In April 2016, the FASB issued Accounting Standards UpdateNo. 2016-10— Revenue from Contracts with Customers (Topic 606), which amends and adds clarity to certain aspects of the guidance set forth in ASU2014-09 related to identifying performance obligations and licensing. The guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. The guidance permits two methods of adoption;adoption: a full retrospective method to each prior reporting period presented or a modified retrospective approach with the cumulative effect of initially applying the guidance recognized at the date of initial application. The Company has formed a teamOur internal task force identified all revenue streams at each significant subsidiary and reviewed contracts to evaluate the impact of adopting the adoption of thisnew standard on itsour revenue recognition policies, procedures and control framework and ultimately on our consolidated financial statements.
statements and related disclosures. In July 2015, the FASB issued ASU No.2015-11—Inventory: Simplifying the Measurementour review of Inventory. The update requires inventory not measured using either the lastcontracts in first out (LIFO) or the retail inventory methods to be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling priceeach revenue stream, we noted no material impact in the ordinary courseimplementation of business, less reasonably predictable coststhe standard. We have determined the impact of completion, disposaladopting the standard on our control framework and transportation. The update is effective for fiscal years beginning after December 15, 2016. Early adoption is permitted for financial statements that have not been previously issued. The Company will adoptnoted minimal, insignificant changes to our system and other controls processes. We adopted this standard on June 1, 20172018 using the full retrospective approach. This approach was chosen to provide appropriate comparisons against our prior year financial statements. We are finalizing the impact of this ASU on the disclosures for our financial statement footnotes and does not expect the adoption will have a material impact on its consolidated financial condition and results of operations.
In September 2015, the FASB issued ASU2015-16—Simplifying the Accounting for Measurement—Period Adjustments. Changesdisclosures to the accounting for measurement-period adjustments relate to business combinations. Currently, an acquiring entity is required to retrospectively adjust the balance sheet amounts of the acquiree recognized at the acquisition date with a corresponding adjustment to goodwill as a result of changes made to the balance sheet amounts of the acquiree. The measurement period is the period after the acquisition date during which the acquirer may adjust the balance sheet amounts recognized for a business combination (generally up to one year from the date of acquisition). The changes eliminate the requirement to make such retrospective adjustments, and instead require the acquiring entity to record these adjustmentsbe enhanced in the reporting period they are determined. The new standard is effective for public companies forfirst quarter of fiscal years beginning after December 15, 2015. The Company has adopted this standard; the adoption has not had a material impact on its consolidated financial condition and results of operations.2019.
The FASB issued ASU No.2015-17—Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes as part of its Simplification Initiative. The amendments eliminate the guidance in Topic 740, Income Taxes, that required an entity to separate deferred tax assets and liabilities between current andnon-current amounts in a classified balance sheet. Rather, deferred taxes will be presented asnon-current under the new standard. This ASU is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2016 for public companies. Early adoption is permitted. The Company retrospectively adopted ASU2015-17 as of May 31, 2017. On the May 31, 2016 balance sheet, the Company reclassified $1,775,000 of current deferred tax assets to Deferred Income Taxes, withinNon-current Liabilities. Total assets and total liabilities decreased by $1,775,000.
In February 2016, the FASB issued ASU No.2016-02—Leases to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and aright-of-use asset representing its right to use the underlying asset for the lease term. The recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessor have not significantly changed from previous U.S. GAAP. This ASU is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2018.2018; early adoption is permitted. Modified retrospective application is permitted with certain practical expedients. Early adoption is permitted. The Company isWe will adopt this ASU on June 1, 2019 and are currently in the process of evaluating itsour lessee and lessor arrangements to determine the impact of this amendment on itsour consolidated financial condition and results of operations. This evaluation includes a review of revenue through leasing arrangements as well as lease expenses, which are primarily through operating lease arrangements at most of the Company’sour facilities.
In March 2016, the FASB issued ASUNo. 2016-09—Compensation-Stock Compensation (Topic 718): Improvements to Employee
Share-Based Payment Accounting to provide guidance that changes the accounting for certain aspects of share-based payments to
employees. The guidance requires the recognition of the income tax effects of awards in the income statement when the awards vest or are settled, thus eliminating additionalpaid-in capital pools. The guidance also allows for the employer to repurchase more of an
employee’s shares for tax withholding purposes without triggering liability accounting. In addition, the guidance allows for a policy
election to account for forfeitures as they occur rather than on an estimated basis. This ASU is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2016 with early adoption permitted. The Company will adoptWe adopted this standard effective June 1, 2017 and currently believes that
2017. Adoption of this ASU decreased income tax benefits related to share-based payments will result in a lower effective tax rateexpense by $4,816,000 in fiscal 2018.2018; refer to Note 6 of our Consolidated Financial Statements for further information.
In June 2016, the FASB issued ASUNo. 2016-13—Measurement of Credit Losses on Financial Instruments, which changes how companies measure credit losses on most financial instruments measured at amortized cost and certain other instruments, such as loans, receivables andheld-to-maturity debt securities. Rather than generally recognizing credit losses when it is probable that the loss has been incurred, the revised guidance requires companies to recognize an allowance for credit losses for the difference between the amortized cost basis of a financial instrument and the amount of amortized cost that the company expects to collect over the instrument’s contractual life. ASU2016-13 is effective for fiscal periods beginning after December 15, 2019 and must be adopted as a cumulative effect adjustment to retained earnings. Early adoption is permitted. The Company doesWe do not believe the adoption of this guidance will have an impact on itsour consolidated financial statements.
In August 2016, the FASB issued ASUNo. 2016-15—Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force). The amendments in ASU2016-15 address eight specific cash flow issues and apply to all entities that are required to present a statement of cash flows under FASB Accounting Standards Codification (FASB ASC) 230, Statement of Cash Flows. The amendments in ASU2016-15 are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption during an interim period. The Company has not yet adoptedWe will adopt this updateASU on June 1, 2019 and isare currently evaluating theits impact of ASUNo. 2016-15on itsour consolidated financial statements.
In January 2017, the FASB issued ASU2017-04—Intangibles—Goodwill and Other (Topic 350). ASU2017-04 simplifies the subsequent measurement of goodwill by removing the second step of thetwo-step impairment test. The amendment requires an entity to perform its annual, or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The amendment should be applied on a prospective basis. ASU2017-04 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company has adopted this amendment; the adoption has not had an impact on its consolidated financial statements.
2. Goodwill and Other Intangible Assets
| 2. | Goodwill and Other Intangible Assets |
Management has completed the annual impairment analysis of goodwill and intangible assets with indefinite lives using a quantitative assessment as of the first day of the fourth quarter of fiscal years 2018, 2017 2016 and 2015,2016, respectively, and determined that recorded amounts were not considered impaired and that no write-down was necessary.
The following table summarizes goodwill by reportable segment:
| (in thousands) | Food Safety | Animal Safety | Total | Food Safety | Animal Safety | Total | ||||||||||||||||||
Balance, May 31, 2015 | $ | 18,806 | $ | 51,313 | $ | 70,119 | ||||||||||||||||||
Goodwill acquired and/or adjusted | 8,083 | 10,304 | 18,387 | |||||||||||||||||||||
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Balance, May 31, 2016 | $ | 26,889 | $ | 61,617 | $ | 88,506 | $ | 26,889 | $ | 61,617 | $ | 88,506 | ||||||||||||
Goodwill acquired and/or adjusted (1) | 19,031 | (2,778 | ) | 16,253 | ||||||||||||||||||||
Goodwill acquired | 19,051 | — | 19,051 | |||||||||||||||||||||
Goodwill adjustments and/or currency (1) | (20 | ) | (2,778 | ) | (2,798 | ) | ||||||||||||||||||
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Balance, May 31, 2017 | $ | 45,920 | $ | 58,839 | $ | 104,759 | $ | 45,920 | $ | 58,839 | $ | 104,759 | ||||||||||||
Goodwill acquired | — | 757 | 757 | |||||||||||||||||||||
Goodwill adjustments and/or currency (1) | (5,919 | ) | (39 | ) | (5,958 | ) | ||||||||||||||||||
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Balance, May 31, 2018 | $ | 40,001 | $ | 59,557 | $ | 99,558 | ||||||||||||||||||
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| (1) |
At May 31, 2018,non-amortizable intangible assets included licenses of $569,000, trademarks of $12,989,000 and other intangibles of $1,224,000. At May 31, 2017,non-amortizable intangible assets included licenses of $569,000, trademarks of $12,530,000 and other intangibles of $1,224,000. At May 31, 2016,non-amortizable intangible assets included licenses of $569,000, trademarks of $7,377,000 and other intangibles of $1,224,000.
Amortizable intangible assets consisted of the following and are included in customer-based intangible and othernon-current assets within the consolidated balance sheets:
| (in thousands) | Gross Carrying Amount | Less Accumulated Amortization | Net Carrying Amount | Gross Carrying Amount | Less Accumulated Amortization | Net Carrying Amount | ||||||||||||||||||
Licenses | $ | 5,989 | $ | 2,011 | $ | 3,978 | $ | 9,491 | $ | 2,523 | $ | 6,968 | ||||||||||||
Covenants not to compete | 1,208 | 309 | 899 | 801 | 483 | 318 | ||||||||||||||||||
Patents | 9,304 | 4,601 | 4,703 | 9,693 | 5,013 | 4,680 | ||||||||||||||||||
Customer-based intangibles | 56,829 | 20,846 | 35,983 | 56,420 | 24,579 | 31,841 | ||||||||||||||||||
Other products and service-related intangibles | 12,065 | 3,010 | 9,055 | 15,299 | 4,451 | 10,848 | ||||||||||||||||||
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Balance, May 31, 2017 | $ | 85,395 | $ | 30,777 | $ | 54,618 | ||||||||||||||||||
Balance, May 31, 2018 | $ | 91,704 | $ | 37,049 | $ | 54,655 | ||||||||||||||||||
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Licenses | $ | 5,189 | $ | 1,782 | $ | 3,407 | $ | 5,989 | $ | 2,011 | $ | 3,978 | ||||||||||||
Covenants not to compete | 491 | 193 | 298 | 1,208 | 309 | 899 | ||||||||||||||||||
Patents | 8,040 | 3,631 | 4,409 | 9,304 | 4,601 | 4,703 | ||||||||||||||||||
Customer-based intangibles | 48,186 | 17,277 | 30,909 | 56,829 | 20,846 | 35,983 | ||||||||||||||||||
Other products and service-related intangibles | 12,256 | 1,924 | 10,332 | 12,065 | 3,010 | 9,055 | ||||||||||||||||||
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Balance, May 31, 2016 | $ | 74,162 | $ | 24,807 | $ | 49,355 | ||||||||||||||||||
Balance, May 31, 2017 | $ | 85,395 | $ | 30,777 | $ | 54,618 | ||||||||||||||||||
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Amortization expense for intangibles totaled $6,743,000, $5,908,000 $4,730,000 and $4,331,000$4,730,000 in fiscal years 2018, 2017, 2016, and 2015,2016, respectively. The estimated amortization expense for each of the five succeeding fiscal years is as follows: $5,951,000 in 2018, $5,558,000$6,179,000 in 2019, $5,253,000$5,865,000 in 2020, $4,977,000$5,435,000 in 2021, $5,048,000 in 2022 and $4,646,000$4,702,000 in 2022.2023. The amortizable intangible assets useful lives are 2 to 20 years for licenses, 5 to 13 years for covenants not to compete, 5 to 25 years for patents, 5 to 20 years for customer-based intangibles and 2 to 20 years for other product and service-related intangibles, which primarily consist of product formulations. All definite-lived intangibles are amortized on a straight line basis with the exception of definite-lived customer-based intangibles and product and service-related intangibles, which are amortized on either a straight-line or an accelerated basis.
| 3. | Business Combinations |
The Consolidated Statements of Income reflect the results of operations for business acquisitions since the respective dates of purchase. All are accounted for using the acquisition method. Goodwill recognized in the acquisitions described below relates primarily to enhancing the Company’sour strategic platform for the expansion of available product offerings.
Fiscal 2015
On October 1, 2014, the Company acquired all of the stock of BioLumix, Inc., a manufacturer and marketer of automated systems for the detection of microbial contaminants located in Ann Arbor, Michigan. Consideration for the purchase was $4,514,000 in cash. The final purchase price allocation, based upon the fair value of these assets and liabilities determined using the income approach, included accounts receivable of $499,000, other receivable of $178,000, inventory of $421,000 prepaid assets of $48,000, property and equipment of $159,000, current liabilities of $155,000,non-current liabilities of $780,000, intangible assets of $2,090,000 (with an estimated life of5-15 years) and the remainder to goodwill(non-deductible for tax purposes). These values are Level 3 fair value measurements. This business has been relocated to Lansing, Michigan and integrated with the Company’s operations there, reporting within the Food Safety segment.
On December 8, 2014, the Company acquired the food safety and veterinary genomic assets of its Chinese distributor Beijing Anapure BioScientific Co., Ltd. Consideration for the purchase was $2,040,000 in cash. The final purchase price allocation, based upon the fair value of these assets and liabilities determined using the income approach, included inventory of $525,000, property and equipment of $64,000, intangible assets of $422,000 (with an estimated life of5-15 years) and the remainder to goodwill (deductible for tax purposes). These values are Level 3 fair value measurements. This business has been integrated into the Company’s subsidiary in China and reports within the Food Safety segment.
Fiscal 2016
On June 1, 2015, the Companywe acquired the assets of Sterling Test House, a commercial food testing laboratory based in India.
Consideration for the purchase was $1,118,000 in cash and approximately $102,000 of a contingent consideration liability, due in installments on the first two anniversary dates, based on an excess sales formula. The final purchase price allocation, based upon the fair value of these assets and liabilities determined using the income approach, included accounts receivable of $43,000, inventory of
$14,000, $14,000, property and equipment of $141,000, contingent consideration accrual of $102,000, intangible assets of $345,000 (with an estimated life of5-15 years) and the remainder to goodwill (deductible for tax purposes). These values are Level 3 fair value measurements. This business continues to operate in its current location and reports within the Food Safety segment. In July 2016, the Companywe paid the former owner $70,000 for contingent consideration based on the achievement of sales targets, and reduced the recorded liability by a corresponding amount. In May 2016, the Company revisedwe charged the remaining contingent consideration accrual of $32,000 to Other Income because sales targets for the applicable periods were not achieved.
On August 26, 2015, the Companywe acquired all of the stock of Lab M Holdings, a developer, manufacturer and supplier of microbiological culture media and diagnostic systems located in the United Kingdom. Consideration for the purchase was $12,436,000 in cash. The final purchase price allocation, based upon the fair value of these assets and liabilities determined using the income approach, included cash of $285,000, accounts receivable of $975,000, inventory of $1,169,000, property and equipment of $3,337,000, other current assets of $309,000, current liabilities of $948,000,non-current deferred tax liability of $784,000, intangible assets of $3,611,000 (with an estimated life of5-15 years) and the remainder to goodwill(non-deductible for tax purposes). These values are Level 3 fair value measurements. This business continues to operate in its current location and reports within the Food Safety segment.
On December 22, 2015, the Companywe acquired the rodenticide assets of Virbac Corporation, the North American affiliate of the France-based Virbac group, a global animal health company. The acquired assets include a rodenticide active ingredient that complements Neogen’s existing active ingredients, and more than 40 regulatory approvals for a variety of formulations in the United States, Canada and Mexico. The acquired assets also include a large retail and OEM customer base. Consideration for the purchase was $3,525,000 in cash and up to $300,000 of contingent consideration. The final purchase price allocation, based upon the fair value of these assets and liabilities determined using the income approach, included inventory of $317,000, property and equipment of $60,000, current liabilities of $300,000, intangible assets of $1,759,000 (with an estimated life of5-15 years),non-amortizable trademarks of $200,000 and the remainder to goodwill (deductible for tax purposes). These values are Level 3 fair value measurements. The products are manufactured at the Company’sour production facility in Randolph, Wisconsin, and report within the Animal Safety segment. In fiscal 2016, the Companywe paid the former owner $300,000 of contingent consideration based on the achievement of specific objectives, and reduced the recorded liability by a corresponding amount.
On April 26, 2016, the Companywe acquired the stock of Deoxi Biotecnologia Ltda., an animal genomics laboratory located in Aracatuba, Brazil. This acquisition is intended to help accelerate the growth of Neogen’s animal genomics services in Brazil. Consideration for the purchase was $1,549,000 in cash and up to $2,552,000 of contingent consideration, due at the end of each of the first two years, based on an excess net sales formula. The final purchase price allocation, based upon the fair value of these assets and liabilities determined using the income approach, included accounts receivable of $132,000, inventory of $89,000, other current assets of $9,000, property and equipment of $232,000, current liabilities of $266,000, contingent consideration accrual of $453,000,non-current deferred tax liability of $184,000,non-amortizable trademarks of $193,000, intangible assets of $350,000 (with an estimated life of5-10 years) and the remainder to goodwill (deductible for tax purposes). These values are Level 3 fair value measurements. This business continues to operate in its current location and is managed by Neogen do Brasil, reporting within the Food Safety segment. In June 2017, the Companywe paid the former owners $393,000 in contingent consideration based on the achievement of sales targets, and charged $14,000 to Other Income; $60,000 remains accrued forExpense. In June 2018, we agreed to pay the former owners $122,000 in contingent consideration atbased on the endachievement of sales targets and charged $42,000 to Other Expense; the second year.funds are currently in escrow awaiting settlement of a legal matter.
On May 1, 2016, the Companywe acquired the stock of Preserve International and its sister company, Tetradyne LLC, manufacturers and marketers of cleaners, disinfectants and associated products to the swine, poultry, food processing and dairy markets. Preserve and Tetradyne have manufacturing locations in Memphis, Tennessee and Turlock, California. Consideration for the purchase was $24,245,000 in cash. The final purchase price allocation, based upon the fair value of these assets and liabilities determined using the income approach, included accounts receivable of $1,629,000, inventory of $1,964,000, other current assets of $269,000, land, property and equipment of $1,625,000, current liabilities of $987,000,non-current liabilities of $660,000, intangible assets of $11,950,000 (with an estimated life of5-15 years),non-amortizable trademarks of $2,600,000, and the remainder to goodwill (partially deductible for tax purposes). These values are Level 3 fair value measurements. This business continues to operate in its current locations and reports within the Animal Safety segment.
Fiscal 2017
On December 1, 2016, the Companywe acquired the stock of Quat-Chem Ltd., a chemical company that manufactures biosecurity products, based in Rochdale, England. Consideration for the purchase was $21,606,000 in cash and up to $3,778,000 of contingent consideration, due at the end of each of the first two years, based on an excess net sales formula. The preliminaryfinal purchase price allocation, based upon the fair value of these assets and liabilities determined using the income approach, included accounts receivable of $4,684,000, inventory of $1,243,000, land, property and equipment of $2,715,000,$2,526,000, accounts payable of $2,197,000, deferred tax liability of $1,133,000,$1,758,000, contingent consideration accrual of $1,105,000,$1,058,000, other current liabilities of $604,000,non-amortizable intangible assets of $1,637,000,$1,889,000, intangible assets of $5,682,000$6,900,000 (with an estimated life of5-15 years) and the remainder to goodwill(non-deductible for tax purposes). These values are Level 3 fair value measurements. In January 2018, we paid the former owners $249,000 in contingent consideration based on the achievement of sales targets in the first year, and recorded a credit of $255,000 to Other Income, reducing the contingent consideration accrual by a corresponding amount; $554,000 remains accrued for contingent consideration payable at the end of the second year. This business continues to operate in its current location and is managed by Neogen Europe, reporting within the Food Safety segment.
On December 27, 2016, the Companywe acquired the stock of Rogama Industria e Comercio, Ltda., a company that develops and manufactures rodenticides and insecticides, based near SaoSão Paulo, Brazil. Consideration for the purchase was $12,423,000 in cash and up to $2,069,000 of contingent consideration, due at the end of each of the first two years, based on an excess net sales formula. The preliminaryfinal purchase price allocation, based upon the fair value of these assets and liabilities determined using the income approach, included accounts receivable of $1,863,000,$1,866,000, othernon-current assets of $26,000, inventory of $1,026,000,$960,000, land, property and equipment of $1,840,000,$4,734,000, current liabilities of $2,177,000,$2,562,000, contingent consideration accrual of $430,000,non-current$213,000, deferred tax liability of $1,307,000,$2,034,000,non-amortizable intangible assets of $591,000,$870,000, intangible assets of $3,252,000$5,112,000 (with an estimated life of5-15 years) and the remainder to goodwill (deductible for tax purposes). These values are Level 3 fair value measurements. In April 2018, we paid the former owners $130,000 in contingent consideration based on the achievement of sales targets in the first year. The contingent consideration accrual was reduced by the same amount; $83,000 remains accrued for contingent consideration payable at the end of the second year. This business continues to operate in its current location and is managed by Neogen do Brasil, reporting within the Food Safety segment.
Fiscal 2018
On September 1, 2017, we acquired the assets of The University of Queensland Animal Genetics Laboratory, an animal genomics laboratory located near Brisbane, Australia. This acquisition is intended to accelerate the growth of our animal genomics business in Australia and New Zealand. Consideration for the purchase was $2,063,000; $468,000 has been paid in cash with the remainder due in annual installments over the next five years. The final purchase price allocation, based upon the fair value of these assets and liabilities determined using the income approach, included inventory of $19,000, equipment of $419,000,non-current liabilities of $1,629,000, intangible assets of $902,000 (with an estimated life of5-15 years) and the remainder to goodwill(non-deductible for tax purposes). These values are Level 3 fair value measurements. The new business, renamed Neogen Australasia, continues to operate in its current location, reporting within the Animal Safety segment.
| 4. | Long-Term Debt |
The Company hasWe have a financing agreement with a bank providing for an unsecured revolving line of credit, which was amended on November 30, 2016 to increase the line from $12,000,000 to $15,000,000, and extend the maturity from September 1, 2017 to September 30, 2019. There were no advances against the line of credit during fiscal years 20162017 and 2017;2018; there was no balance outstanding at May 31, 2017.2018. Interest on any borrowings is at LIBOR plus 100 basis points (rate under the terms of the agreement was 2.04%3.14% at May 31, 2017)2018). Financial covenants include maintaining specified levels of tangible net worth, debt service coverage, and funded debt to EBITDA, each of which the Company waswe were in compliance with at May 31, 2017.2018.
| 5. | Equity Compensation Plans |
Qualified andnon-qualified options to purchase shares of common stock may be granted to directors, officers and employees of the CompanyNeogen under the terms of the Company’sour stock option plans. These options are granted at an exercise price of not less than the fair market value of the stock on the date of grant. Remaining shares available for grant under stock option plans were 1,894,000, 2,457,0001,913,000, 2,525,000 and 306,0003,276,000 at May 31, 2018, 2017 2016 and 2015,2016, respectively. Options vest ratably over three and five yearfive-year periods and the contractual terms are generally five or ten years.
| (options in thousands) | Options | Weighted-Average Exercise Price | Weighted-Average Grant Date Fair Value | Options | Weighted-Average Exercise Price | Weighted-Average Grant Date Fair Value | ||||||||||||||||||
Outstanding at May 31, 2014 (577 exercisable) | 1,869 | 25.69 | 7.62 | |||||||||||||||||||||
Outstanding at May 31, 2015 (852 exercisable) | 2,651 | 23.29 | 6.90 | |||||||||||||||||||||
Granted | 536 | 39.79 | 11.91 | 732 | 35.23 | 9.83 | ||||||||||||||||||
Exercised | (380 | ) | 16.69 | 5.17 | (569 | ) | 17.60 | 5.36 | ||||||||||||||||
Forfeited | (37 | ) | 33.55 | 9.45 | (39 | ) | 28.93 | 8.36 | ||||||||||||||||
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Outstanding at May 31, 2015 (639 exercisable) | 1,988 | 31.04 | 9.20 | |||||||||||||||||||||
Outstanding at May 31, 2016 (875 exercisable) | 2,775 | 27.53 | 7.97 | |||||||||||||||||||||
Granted | 549 | 46.98 | 13.11 | 828 | 40.68 | 11.89 | ||||||||||||||||||
Exercised | (427 | ) | 23.47 | 7.15 | (827 | ) | 22.82 | 6.77 | ||||||||||||||||
Forfeited | (29 | ) | 38.57 | 11.14 | (77 | ) | 32.04 | 9.17 | ||||||||||||||||
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Outstanding at May 31, 2016 (656 exercisable) | 2,081 | 36.71 | 10.63 | |||||||||||||||||||||
Outstanding at May 31, 2017 (661 exercisable) | 2,699 | 32.88 | 9.51 | |||||||||||||||||||||
Granted | 621 | 54.24 | 15.86 | 829 | 59.37 | 14.47 | ||||||||||||||||||
Exercised | (620 | ) | 30.42 | 9.03 | (821 | ) | 28.18 | 8.20 | ||||||||||||||||
Forfeited | (58 | ) | 42.72 | 12.22 | (208 | ) | 39.57 | 11.12 | ||||||||||||||||
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Outstanding at May 31, 2017 (496 exercisable) | 2,024 | 43.84 | 12.68 | |||||||||||||||||||||
Outstanding at May 31, 2018 (508 exercisable) | 2,499 | 42.63 | 11.44 | |||||||||||||||||||||
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The following is a summary of stock options outstanding at May 31, 2017:2018:
| (options in thousands) | ||||||||||||||||||||
| Options Outstanding | Options Exercisable | |||||||||||||||||||
Range of Exercise Price | Number | Average Contractual Life (in years) | Weighted-Average Exercise Price | Number | Weighted-Average Exercise Price | |||||||||||||||
$ 11.02 - $36.26 | 491 | 1.8 | $ | 31.22 | 268 | $ | 29.16 | |||||||||||||
$ 36.27 - $40.87 | 382 | 2.8 | 39.57 | 113 | 39.54 | |||||||||||||||
$ 40.88 - $49.68 | 536 | 4.1 | 46.52 | 115 | 45.12 | |||||||||||||||
$ 49.69 - $54.55 | 576 | 4.7 | 53.94 | — | — | |||||||||||||||
$ 54.56 - $65.71 | 39 | 7.7 | 58.74 | — | — | |||||||||||||||
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| 2,024 | 3.5 | 43.84 | 496 | 35.23 | ||||||||||||||||
| (options in thousands) | Options Outstanding | Options Exercisable | ||||||||||||||||||
Range of Exercise Price | Number | Average Contractual Life (in years) | Weighted-Average Exercise Price | Number | Weighted-Average Exercise Price | |||||||||||||||
$8.27 - $30.03 | 515 | 1.5 | $ | 27.08 | 226 | $ | 24.78 | |||||||||||||
$30.04 - $37.26 | 522 | 3.2 | 34.84 | 179 | 34.00 | |||||||||||||||
$37.27 - $40.91 | 619 | 3.8 | 40.45 | 90 | 40.44 | |||||||||||||||
$40.92 - $59.78 | 173 | 6.0 | 50.85 | 13 | 42.19 | |||||||||||||||
$59.79 - $68.96 | 670 | 4.5 | 60.55 | — | — | |||||||||||||||
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| 2,499 | 3.5 | 42.63 | 508 | 31.23 | ||||||||||||||||
The weighted average exercise price of shares that were exercisable at May 31, 2018 and 2017 was $31.23 and 2016 was $35.23 and $29.69,$26.49, respectively.
Compensation expense related to share-based awards was $4,909,000, $5,261,000 $5,468,000 and $4,450,000$5,468,000 in fiscal years 2018, 2017 2016 and 2015,2016, respectively. Remaining compensation cost to be expensed in future periods fornon-vested options was $10,999,000$15,367,000 at May 31, 2017,2018, with a weighted average expense recognition period of 3.33.5 years.
The aggregate intrinsic value of options outstanding and options exercisable was $82,649,000 and $22,572,000, respectively, at May 31, 2018, $39,388,000 and $13,929,000 respectively, at May 31, 2017 and $26,344,000 and $12,912,000 respectively, at May 31, 2016 and $31,204,000 and $14,201,000 respectively, at May 31, 2015.2016. The aggregate intrinsic value of options exercised during the year was $25,844,000 in fiscal 2018, $18,067,000 in fiscal 2017 and $12,980,000 in fiscal 2016 and $10,690,000 in fiscal 2015.2016.
Common stock totaling 8,725332,000 of the 337,500450,000 originally authorized shares are reserved for issuance under the terms of the 2002 Employee Stock Purchase Plan. An additional 375,000 shares are also reserved for issuance under the terms of the 2011 Employee Stock Purchase Plan. The plans giveplan gives eligible employees the option to purchase common stock at a 5% discount to the lower of the market value of the stock at the beginning or end of each participation period; the discount is recorded in general and administrative expense. Total individual purchases in any year are limited to 10% of compensation. Shares purchased by employees were 18,715, 18,277 and 19,59222,127 in fiscal years2018, 24,953 in fiscal 2017 2016 and 2015, respectively.24,369 in fiscal 2016.
| 6. | Income Taxes |
Income before income taxes by source consists of the following amounts:
| Year ended May 31 | Year ended May 31 | |||||||||||||||||||||||
| (in thousands) | 2017 | 2016 | 2015 | 2018 | 2017 | 2016 | ||||||||||||||||||
U.S. | $ | 55,171 | $ | 50,662 | $ | 45,156 | $ | 62,310 | $ | 55,171 | $ | 50,662 | ||||||||||||
Foreign | 11,502 | 4,851 | 6,920 | 11,155 | 11,502 | 4,851 | ||||||||||||||||||
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| $ | 66,673 | $ | 55,513 | $ | 52,076 | $ | 73,465 | $ | 66,673 | $ | 55,513 | |||||||||||||
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The provision for income taxes consisted of the following:
| Year ended May 31 | Year ended May 31 | |||||||||||||||||||||||
| (in thousands) | 2017 | 2016 | 2015 | 2018 | 2017 | 2016 | ||||||||||||||||||
Current: | ||||||||||||||||||||||||
U.S. Taxes | $ | 20,259 | $ | 14,630 | $ | 15,269 | $ | 10,129 | $ | 20,259 | $ | 14,630 | ||||||||||||
Foreign | 2,514 | 1,756 | 1,364 | 3,066 | 2,514 | 1,756 | ||||||||||||||||||
Deferred | (73 | ) | 2,589 | 1,867 | (2,945 | ) | (73 | ) | 2,589 | |||||||||||||||
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Provision for Income Taxes | $ | 10,250 | $ | 22,700 | $ | 18,975 | ||||||||||||||||||
| $ | 22,700 | $ | 18,975 | $ | 18,500 |
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The reconciliation of income taxes computed at the U.S. federal statutory tax rate to income tax expense is as follows:
| Year ended May 31 | Year ended May 31 | |||||||||||||||||||||||
| (in thousands) | 2017 | 2016 | 2015 | 2018 | 2017 | 2016 | ||||||||||||||||||
Tax at U.S. statutory rate | $ | 23,336 | $ | 19,429 | $ | 18,227 | $ | 21,459 | $ | 23,336 | $ | 19,429 | ||||||||||||
Section 199 domestic production deduction | (1,057 | ) | (1,143 | ) | (1,067 | ) | (1,167 | ) | (1,057 | ) | (1,143 | ) | ||||||||||||
Foreign rate differential | (1,247 | ) | (699 | ) | (949 | ) | (461 | ) | (1,247 | ) | (699 | ) | ||||||||||||
Subpart F income | 996 | 1,049 | 1,396 | 816 | 996 | 1,049 | ||||||||||||||||||
Excess tax benefits on stock-based compensation | (4,816 | ) | — | — | ||||||||||||||||||||
Release of FIN 48 reserve from closed tax years | (1,035 | ) | — | — | ||||||||||||||||||||
Provision for state income taxes, net of federal benefit | 975 | 972 | 779 | |||||||||||||||||||||
Remeasurement of deferred taxes | (6,022 | ) | — | — | ||||||||||||||||||||
Transition tax on foreign earnings and profits | 1,223 | — | — | |||||||||||||||||||||
Amended U.S. Federal tax returns FY12, FY13 & FY14 | — | — | (777 | ) | ||||||||||||||||||||
Tax credits and other | (300 | ) | 337 | 39 | (722 | ) | (300 | ) | 337 | |||||||||||||||
Provision for state income taxes, net of federal benefit | 972 | 779 | 854 | |||||||||||||||||||||
Amended U.S. Federal tax returns FY12, FY13 & FY14 | — | (777 | ) | — | ||||||||||||||||||||
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| $ | 22,700 | $ | 18,975 | $ | 18,500 | $ | 10,250 | $ | 22,700 | $ | 18,975 | |||||||||||||
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On June 1, 2017, the Company adopted ASUNo. 2016-09, which simplifies the accounting for share-based payments to employees. The guidance requires the recognition of the income effects of awards in the income statement when the awards vest or are settled, thus eliminating additionalpaid-in capital pools. The guidance also allows for a policy election to account for forfeitures as they occur, rather than on an estimated basis, and requires that excess tax benefits be classified as an operating activity on the Statement of Cash Flows. The adoption of this ASU decreased income tax expense by $4.8 million in fiscal 2018.
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the Tax Act) was signed into law, making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a federal corporate tax rate decrease from 35% to 21% for tax years beginning after December 31, 2017, the transition of U.S. international taxation from a worldwide tax system to a territorial system, and aone-time transition tax on the mandatory deemed repatriation of foreign earnings. On December 22, 2017, Staff Accounting
Bulletin No. 118 (SAB 118) was issued to address the application of U.S. GAAP to situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Act. In accordance with SAB 118, we have determined that the $6.0 million of deferred tax benefit recorded in connection with the remeasurement of certain deferred tax assets and liabilities and the $1.2 million of current tax expense recorded in connection with the transition tax on the mandatory deemed repatriation of foreign earnings was a provisional amount at May 31, 2018. Any subsequent adjustment to these amounts will be recorded to current tax expense in the quarter of 2019 when any further analysis of our deferred tax assets and liabilities and our historical foreign earnings is completed.
Deferred income taxes reflect the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’sour deferred income tax liabilities and assets are as follows:
| Year ended May 31 | Year ended May 31 | |||||||||||||||
| (in thousands) | 2017 | 2016 | 2018 | 2017 | ||||||||||||
Deferred income tax liabilities | ||||||||||||||||
Indefinite and long-lived assets | $ | (23,177 | ) | $ | (19,296 | ) | $ | (17,503 | ) | $ | (23,177 | ) | ||||
Prepaid expenses | (640 | ) | (824 | ) | (573 | ) | (640 | ) | ||||||||
Brazil valuation allowance | — | (542 | ) | |||||||||||||
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| (23,817 | ) | (20,662 | ) | (18,076 | ) | (23,817 | ) | |||||||||
Deferred income tax assets | ||||||||||||||||
Stock Options | 2,604 | 2,786 | 1,489 | 2,604 | ||||||||||||
Inventories and accounts receivable | 2,603 | 2,076 | 1,593 | 2,603 | ||||||||||||
Tax loss carryforwards | 436 | 813 | 134 | 436 | ||||||||||||
Accrued expenses and other | 1,126 | 229 | 757 | 1,126 | ||||||||||||
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| 6,769 | 5,904 | 3,973 | 6,769 | |||||||||||||
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Net deferred income tax liabilities | $ | (17,048 | ) | $ | (14,758 | ) | $ | (14,103 | ) | $ | (17,048 | ) | ||||
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The CompanyWe had no accrual for unrecognized tax benefits at both May 31, 20172018 and 2016.2017. Should the accrual of any interest or penalties relative to unrecognized tax benefits be necessary, such accruals will be reflected within income tax accounts. The Company is under audit by the Internal Revenue Service for tax years 2014-2016.
| 7. | Commitments and Contingencies |
The Company isWe are involved in environmental remediation and monitoring activities at itsour Randolph, Wisconsin manufacturing facility and accruesaccrue for related costs when such costs are determined to be probable and estimable. The Company expensesWe expense annual costs of remediation which have ranged from $38,000 to $57,000$74,000 per year over the past five years. The Company’sOur estimated liability for these costs is $916,000 at both May 31, 20172018 and 2016,2017, measured on an undiscounted basis over an estimated period of 15 years; $54,000$100,000 of the liability is recorded within current liabilities and includes $45,000 to perform an updated Corrective Measures Study, per a request received in 2017 from the Wisconsin Department of Natural Resources and the remainder is recorded within othernon-current liabilities in the consolidated balance sheet.
The Company hasWe have agreements with unrelated third parties that provide for the payment of license fees and royalties on the sale of certain products. Royalty expense, recorded in sales and marketing, under the terms of these agreements was $2,876,000, $2,659,000 $1,969,000 and $2,189,000$1,969,000 for fiscal years 2018, 2017 2016 and 2015,2016, respectively. Some of these agreements provide for guaranteed minimum royalty payments to be paid each fiscal year by the Company for certain technologies. Future minimum royalty payments are as follows: 2018—$625,000, 2019—$659,000,634,000, 2020—$666,000,641,000, 2021—$674,000649,000, 2022—$572,000 and 2022—2023—$597,000.568,000.
The Company leasesWe lease office and manufacturing facilities undernon-cancelable operating leases. Rent expense for fiscal years 2018, 2017 and 2016 was $799,000, $729,000 and 2015 was $729,000, $662,000, and $736,000, respectively. Future fiscal year minimum rental payments for these leases over their remaining terms are as follows: 2018—$591,000, 2019—$292,000,498,000, 2020—$88,000, 2021 – $87,00086,000, 2021—$108,000, 2022—$141,000, and 20222023 and later—$91,000.73,000.
The Company isWe are subject to certain legal and other proceedings in the normal course of business that, in the opinion of management, should not have a material effect on itsour future results of operations or financial position.
| 8. | Defined Contribution Benefit Plan |
The Company maintainsWe maintain a defined contribution 401(k) benefit plan covering substantially all domestic employees. Employees are permitted to defer compensation up to IRS limits, with the CompanyNeogen matching 100% of the first 3% of deferred compensation and 50% of the next 2% deferred. The Company’sOur expense under this plan was $1,325,000, $1,259,000, $1,188,000, and $1,051,000$1,188,000 in fiscal years 2018, 2017 2016 and 2015,2016, respectively.
| 9. | Segment Information |
The Company hasWe have two reportable segments: Food Safety and Animal Safety. The Food Safety segment is primarily engaged in the development, production and marketing of diagnostic test kits and related products used by food producers and processors to detect harmful natural toxins, foodborne bacteria, allergens and levels of general sanitation. The Animal Safety segment is primarily engaged in the development, production and marketing of products dedicated to animal safety, including a complete line of consumable products marketed to veterinarians and animal health product distributors; this segment also provides genomic identification and related interpretive bioinformatic services. Additionally, the Animal Safety segment produces and markets rodenticides, disinfectants, and insecticides to assist in control of rodents, insects and disease in and around agricultural, food production and other facilities.
Neogen’s international operations in the United Kingdom, Mexico, Brazil, China and India originally focused on the Company’ssales and marketing of our Food Safety products, and each of these units reports through the Food Safety segment. In recent years, these operations have expanded to offer the Company’sour complete line of products and services, including those usually associated with the Animal Safety segment such as cleaners, disinfectants, rodenticides, insecticides, veterinary instruments and genomics services. These additional products and services are managed and directed by existing management, and are reported through the Food Safety segment.
The accounting policies of each of the segments are the same as those described in Note 1.
Segment information is as follows:
| (in thousands) | Food Safety | Animal Safety | Corporate and Eliminations (1) | Total | Food Safety | Animal Safety | Corporate and Eliminations (1) | Total | ||||||||||||||||||||||||
Fiscal 2018 | ||||||||||||||||||||||||||||||||
Product revenues to external customers | $ | 176,123 | $ | 159,431 | $ | — | $ | 335,554 | ||||||||||||||||||||||||
Service revenues to external customers | 19,924 | 46,774 | — | 66,698 | ||||||||||||||||||||||||||||
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Total revenues to external customers | 196,047 | 206,205 | — | 402,252 | ||||||||||||||||||||||||||||
Operating income (loss) | 34,561 | 39,529 | (3,896 | ) | 70,194 | |||||||||||||||||||||||||||
Depreciation and amortization | 9,083 | 7,975 | — | 17,058 | ||||||||||||||||||||||||||||
Total Assets | 186,570 | 220,629 | 210,810 | 618,009 | ||||||||||||||||||||||||||||
Expenditures for long-lived assets | 10,538 | 10,408 | — | 20,946 | ||||||||||||||||||||||||||||
Fiscal 2017 | ||||||||||||||||||||||||||||||||
Product revenues to external customers | $ | 155,795 | $ | 150,717 | $ | — | $ | 306,512 | $ | 155,795 | $ | 150,717 | $ | — | $ | 306,512 | ||||||||||||||||
Service revenues to external customers | 15,530 | 39,552 | — | 55,082 | 15,530 | 39,552 | — | 55,082 | ||||||||||||||||||||||||
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Total revenues to external customers | 171,325 | 190,269 | — | 361,594 | 171,325 | 190,269 | — | 361,594 | ||||||||||||||||||||||||
Operating income (loss) | 33,971 | 34,841 | (3,867 | ) | 64,945 | 33,971 | 34,841 | (3,867 | ) | 64,945 | ||||||||||||||||||||||
Depreciation and amortization | 7,088 | 7,603 | — | 14,691 | 7,088 | 7,603 | — | 14,691 | ||||||||||||||||||||||||
Total Assets | 190,895 | 210,927 | 126,587 | 528,409 | 190,895 | 210,927 | 126,587 | 528,409 | ||||||||||||||||||||||||
Expenditures for long-lived assets | 10,332 | 4,246 | — | 14,578 | 10,332 | 4,246 | — | 14,578 | ||||||||||||||||||||||||
Fiscal 2016 | ||||||||||||||||||||||||||||||||
Product revenues to external customers | $ | 133,743 | $ | 139,827 | $ | — | $ | 273,570 | $ | 133,743 | $ | 139,827 | $ | — | $ | 273,570 | ||||||||||||||||
Service revenues to external customers | 12,678 | 35,027 | — | 47,705 | 12,678 | 35,027 | — | 47,705 | ||||||||||||||||||||||||
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Total revenues to external customers | 146,421 | 174,854 | — | 321,275 | 146,421 | 174,854 | — | 321,275 | ||||||||||||||||||||||||
Operating income (loss) | 28,984 | 30,978 | (3,576 | ) | 56,386 | 28,984 | 30,978 | (3,576 | ) | 56,386 | ||||||||||||||||||||||
Depreciation and amortization | 5,609 | 6,572 | — | 12,181 | 5,609 | 6,572 | — | 12,181 | ||||||||||||||||||||||||
Total Assets | 143,303 | 215,374 | 91,263 | 449,940 | 143,303 | 215,374 | 91,263 | 449,940 | ||||||||||||||||||||||||
Expenditures for long-lived assets | 9,192 | 5,030 | — | 14,222 | 9,192 | 5,030 | — | 14,222 | ||||||||||||||||||||||||
Fiscal 2015 | ||||||||||||||||||||||||||||||||
Product revenues to external customers | $ | 119,990 | $ | 123,919 | $ | — | $ | 243,909 | ||||||||||||||||||||||||
Service revenues to external customers | 11,489 | 27,676 | — | 39,165 | ||||||||||||||||||||||||||||
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Total revenues to external customers | 131,479 | 151,595 | — | 283,074 | ||||||||||||||||||||||||||||
Operating income (loss) | 30,265 | 26,034 | (3,181 | ) | 53,118 | |||||||||||||||||||||||||||
Depreciation and amortization | 4,620 | 6,029 | — | 10,649 | ||||||||||||||||||||||||||||
Total Assets | 110,655 | 179,082 | 102,444 | 392,181 | ||||||||||||||||||||||||||||
Expenditures for long-lived assets | 4,216 | 5,403 | — | 9,619 | ||||||||||||||||||||||||||||
| (1) | Includes corporate assets, including cash and cash equivalents, marketable securities, current and deferred tax accounts, and overhead expenses not allocated to specific business segments. Also includes the elimination of intersegment transactions andnon-controlling interests. |
Revenues to customers located outside the United States amounted to $129,322,000$151,262,000 or 35.8%37.6% of consolidated revenues in fiscal 2018, $129,322,000 or 35.8% in fiscal 2017 and $107,680,000 or 33.5% in fiscal 2016 and $103,867,000 or 36.7% in fiscal 2015 and were derived primarily in various countries throughout Europe, Canada, South and Central America and Asia. No customer represented revenues in excess of 10% of consolidated net sales in any of the three years. The United StatesU.S. based operations represent 76%75% of the Company’s long-lived assets as of May 31, 20172018 and 89%76% as May 31, 2016.
| 10. | Stock Repurchase |
In December 2008, the Company’sour Board of Directors authorized a program to purchase, subject to market conditions, up to 1,125,0001,500,000 shares of the Company’sour common stock. As of May 31, 2017, 112,0262018, 149,368 cumulative shares have been purchased in negotiated and open market transactions for a total price, including commissions, of approximately $923,000. There were no purchases in fiscal years 2018, 2017 2016 or 2015.2016. Shares purchased under the program were retired.
| 11. | Summary of Quarterly Data (Unaudited) |
| Quarter Ended | Quarter Ended | |||||||||||||||||||||||||||||||
| (in thousands, except per share) | August 2016 | November 2016 | February 2017 | May 2017 | August 2017 | November 2017 | February 2018 | May 2018 | ||||||||||||||||||||||||
Total Revenue | $ | 83,645 | $ | 90,717 | $ | 88,385 | $ | 98,847 | $ | 95,256 | $ | 101,817 | $ | 95,892 | $ | 109,287 | ||||||||||||||||
Gross Margin | 40,479 | 43,591 | 40,880 | 47,018 | 45,871 | 49,271 | 45,521 | 49,589 | ||||||||||||||||||||||||
Net income | 9,934 | 11,171 | 10,377 | 12,491 | 11,936 | 17,153 | 16,581 | 17,545 | ||||||||||||||||||||||||
Net income attributable to Neogen | 9,881 | 11,151 | 10,287 | 12,474 | 11,914 | 17,100 | 16,586 | 17,545 | ||||||||||||||||||||||||
Basic net income per share | 0.26 | 0.29 | 0.27 | 0.34 | 0.23 | 0.33 | 0.32 | 0.34 | ||||||||||||||||||||||||
Diluted net income per share | 0.26 | 0.29 | 0.27 | 0.32 | 0.23 | 0.33 | 0.32 | 0.33 | ||||||||||||||||||||||||
| Quarter Ended | Quarter Ended | |||||||||||||||||||||||||||||||
| (in thousands, except per share) | August 2015 | November 2015 | February 2016 | May 2016 | August 2016 | November 2016 | February 2017 | May 2017 | ||||||||||||||||||||||||
Total Revenue | $ | 74,860 | $ | 79,610 | $ | 76,725 | $ | 90,080 | $ | 83,645 | $ | 90,717 | $ | 88,385 | $ | 98,847 | ||||||||||||||||
Gross Margin | 37,792 | 38,224 | 35,196 | 41,852 | 40,479 | 43,591 | 40,880 | 47,018 | ||||||||||||||||||||||||
Net income | 9,289 | 9,142 | 8,289 | 9,818 | 9,934 | 11,171 | 10,377 | 12,491 | ||||||||||||||||||||||||
Net income attributable to Neogen | 9,323 | 9,073 | 8,311 | 9,857 | 9,881 | 11,151 | 10,287 | 12,474 | ||||||||||||||||||||||||
Basic net income per share | 0.25 | 0.24 | 0.22 | 0.27 | 0.20 | 0.22 | 0.20 | 0.25 | ||||||||||||||||||||||||
Diluted net income per share | 0.25 | 0.24 | 0.22 | 0.26 | 0.20 | 0.22 | 0.20 | 0.24 | ||||||||||||||||||||||||
Quarterly net income per share is based on weighted-average shares outstanding and potentially dilutive stock options for the specific period, and as a result, will not necessarily aggregate to total net income per share as computed for the year as disclosed in the consolidated statements of income.
F-21