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:
Cease the development, manufacture, importation, use and sale of products that infringe the patent rights of others, through a court-imposed injunction;
Expend significant resources to redesign our technology so that it does not infringe others’ patent rights, or develop or acquirenon-infringing intellectual property, which may not be possible;
Discontinue manufacturing or other processes incorporating infringing technology; and/or
Obtain licenses to the infringed intellectual property, which may not be available to us on acceptable terms, or at all.
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, but not limited to, 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, our growth may be adversely affected by the implementation of new regulations. We are not aware of any failures to comply with applicable laws and regulations; theThe costs of compliance or failure to comply with any obligations related to these laws or regulations could adversely impact our 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 us. We maintain certain incentive plans for key employees, and many of these employees have been with us 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 our 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 we currently maintain 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.
OperatingOur international operations are subject to different product standards as well as other operational risks.
In fiscal 2019, sales to customers outside of the U.S. accounted for 40.1% of our total revenue. We expect that our international business will continue to account for a significant portion of our total sales. Foreign regulatory bodies may establish product standards different from those in the U.S. and with which our 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 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 negatively impact our competitiveness in these markets or otherwise adversely impact our business results or financial condition. Moreover, discriminatory or conflicting fiscal or trade policies in different countries, including potential changes to tariffs and existing trade policies and agreements, could be negatively impacted by economic,adversely affect our results.
Changing political or other developmentsconditions could adversely impact our business and financial results.
Changes in countriesthe political conditions in markets in which we do business.
Future operatingmanufacture, sell or distribute our products may be difficult to predict and may adversely affect our business and financial results. For example, the U.K.’s decision to leave the European Union has created uncertainty regarding, among other things, the U.K.’s future legal and economic framework and how the U.K. will interact with other countries, including with respect to the free movement of goods, services, capital and people. In addition, results of elections, referendums or other political processes in certain markets in which our products are manufactured, sold or distributed 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 ofcreate uncertainty regarding how existing governmental policies, laws and regulations or administrative actions in eachmay change, including with respect to sanctions, taxes, the movement of goods, services, capital and people between countries and other matters. The potential implications of such uncertainty, which include, among others, exchange rate fluctuations, trade barriers and market contraction, could adversely affect the countries where we conductCompany’s business including the U.S.
These potential negative impacts include, but are not limited 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 prices for our products and services, and longer sales cycles and greater difficulty in collecting accounts receivable.financial results.
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, legislationLegislation may be proposedenacted 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,
Our tax expense and liabilities may also be affected by other factors, such as changes in our business operations, acquisitions, investments, entry into new businesses and geographies, intercompany transactions, the President signed into law the Tax Cutrelative amount of our foreign earnings, losses incurred in jurisdictions for which we are not able to realize related tax benefits, changes in our stock price, and Jobs Act, which contains a broad range ofchanges in our deferred tax reform provisions that impact corporate tax rates, international tax provisions, income taxadd-back provisionsassets and deductions. We are still evaluating this complex new law to determine its long-term impact.
liabilities and their valuation. In addition, tax laws and regulations are extremely complex and subject to varying interpretations. For example, the legislation known as the U.S. Tax Cuts and Jobs Act of 2017 (the “U.S. Tax Act”) requires complex computations to be performed that were not previously required by U.S. tax law, significant judgments to be made in interpretation of the provision of the U.S. Tax Act, significant estimates in calculations, and the preparation and analysis of information not previously relevant or regularly produced. The U.S. Treasury Department, the IRS, and other standard-setting bodies will continue to interpret or issue guidance on how provisions of the U.S. Tax Act will be applied or otherwise administered. As future guidance is issued, we may make adjustments to amounts that we have previously recorded that may materially impact our financial statements in the period in which the adjustments are made.
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, we 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 our 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 | 33,500 | Animal Safety | Leased, expires 3/ | |||||
St Joseph, Michigan | 7,000 | Animal Safety | Leased, expires 5/ | |||||
Randolph, Wisconsin | 137,000 | Animal Safety | Owned | |||||
Pleasantville, Iowa | 59,000 | Animal Safety | Leased, expires 12/ | |||||
Lincoln, Nebraska | 41,000 | Animal Safety | Owned | |||||
Memphis, Tennessee | 66,100 | Animal Safety | Owned | |||||
Turlock, California | 29,500 | Animal Safety | Leased, expires 9/2022 | |||||
| Animal Safety | Leased, | ||||||
Ayr, Scotland, United Kingdom | 74,000 | Food Safety | Owned | |||||
Heywood, England, United Kingdom | Food Safety | Owned | ||||||
Rochdale, England, United Kingdom | 60,000 | Food Safety | Owned | |||||
Indaiatuba, Brazil | 6,800 | Food Safety | Leased, expires 5/2021 | |||||
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Pindamonhangaba, Brazil | Food Safety | Owned | ||||||
Naucalpan, Mexico | 27,000 | Food Safety | Leased, expires 10/ | |||||
Shanghai, China | Food Safety | Leased, expires | ||||||
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Kochi, India | 5,500 | Food Safety | Leased, expires 4/ | |||||
Gatton, Australia | 4,600 | Animal Safety | Leased, expires 1/2023 | |||||
Our 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 support 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 our future results of operations or financial position.
| ITEM 4. | MINE SAFETY DISCLOSURES — NOT APPLICABLE |
| ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
MARKET INFORMATION: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.NEOG.
| 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 | $ | 44.76 | $ | 38.00 | ||||
Second Quarter | $ | 47.47 | $ | 38.40 | ||||
Third Quarter | $ | 50.92 | $ | 46.20 | ||||
Fourth Quarter | $ | 51.43 | $ | 44.76 | ||||
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:Holders
As of June 30, 2018,2019, there were approximately 266249 stockholders of record of Common Stock and management believes there are a total of approximately 12,00010,000 beneficial holders.
DIVIDENDS: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-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 5/31/20132014 to 5/31/2018.2019.
| 5/13 | 5/14 | 5/15 | 5/16 | 5/17 | 5/18 | 5/14 | 5/15 | 5/16 | 5/17 | 5/18 | 5/19 | |||||||||||||||||||||||||||||||||||||
Neogen Corporation | 100.00 | 104.07 | 128.71 | 135.96 | 174.29 | 277.99 | 100.00 | 123.68 | 130.64 | 167.48 | 267.13 | 198.82 | ||||||||||||||||||||||||||||||||||||
NASDAQ Composite | 100.00 | 125.98 | 151.80 | 150.04 | 189.31 | 228.19 | 100.00 | 120.89 | 119.47 | 151.43 | 183.75 | 186.02 | ||||||||||||||||||||||||||||||||||||
NASDAQ Medical Equipment | 100.00 | 105.43 | 134.12 | 140.40 | 184.56 | 258.15 | 100.00 | 127.63 | 134.41 | 176.32 | 249.17 | 244.73 | ||||||||||||||||||||||||||||||||||||
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, our Board of Directors authorized a program to purchase, 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 approximately $923,000. There were no purchases in fiscal years 2018, 2017 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, 2018,2019, and each of the four preceding fiscal years. The selected consolidated financial data presented below have been derived from our 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 | 2019 | 2018 | 2017 | 2016 | 2015 | |||||||||||||||||||||||||||||||||||
| (in thousands, except per share data) | 2018 | 2017 | 2016 | 2015 | 2014 | |||||||||||||||||||||||||||||||||||
Income Statement Data: | ||||||||||||||||||||||||||||||||||||||||
Food Safety Revenues | $ | 196,047 | $ | 171,325 | $ | 146,421 | $ | 131,479 | $ | 116,290 | $ | 213,474 | $ | 194,477 | $ | 170,034 | $ | 145,057 | $ | 129,876 | ||||||||||||||||||||
Animal Safety Revenues | 206,205 | 190,269 | 174,854 | 151,595 | 131,115 | 200,712 | 203,453 | 188,243 | 172,172 | 150,025 | ||||||||||||||||||||||||||||||
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Total Revenues | 402,252 | 361,594 | 321,275 | 283,074 | 247,405 | 414,186 | 397,930 | 358,277 | 317,229 | 279,901 | ||||||||||||||||||||||||||||||
Total Cost of Revenues | 212,000 | 189,626 | 168,211 | 143,389 | 124,807 | 222,266 | 211,658 | 189,353 | 167,898 | 143,113 | ||||||||||||||||||||||||||||||
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Gross Margin | 191,920 | 186,272 | 168,924 | 149,331 | 136,788 | |||||||||||||||||||||||||||||||||||
Sales and Marketing | 70,909 | 62,424 | 57,599 | 51,757 | 46,432 | 70,230 | 66,929 | 59,380 | 53,866 | 48,860 | ||||||||||||||||||||||||||||||
General and Administrative | 38,294 | 34,214 | 29,189 | 25,233 | 24,449 | 40,791 | 38,294 | 34,214 | 29,189 | 25,233 | ||||||||||||||||||||||||||||||
Research and Development | 10,855 | 10,385 | 9,890 | 9,577 | 8,326 | 12,805 | 10,855 | 10,385 | 9,890 | 9,577 | ||||||||||||||||||||||||||||||
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Operating Income | 70,194 | 64,945 | 56,386 | 53,118 | 43,391 | 68,094 | 70,194 | 64,945 | 56,386 | 53,118 | ||||||||||||||||||||||||||||||
Other Income (Expense) | 3,271 | 1,728 | (873 | ) | (1,042 | ) | (360 | ) | 4,865 | 3,271 | 1,728 | (873 | ) | (1,042 | ) | |||||||||||||||||||||||||
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Income Before Income Taxes | 73,465 | 66,673 | 55,513 | 52,076 | 43,031 | 72,959 | 73,465 | 66,673 | 55,513 | 52,076 | ||||||||||||||||||||||||||||||
Provision for Income Taxes | 10,250 | 22,700 | 18,975 | 18,500 | 15,000 | 12,783 | 10,250 | 22,700 | 18,975 | 18,500 | ||||||||||||||||||||||||||||||
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Net Income | 63,215 | 43,973 | 36,538 | 33,576 | 28,031 | 60,176 | 63,215 | 43,973 | 36,538 | 33,576 | ||||||||||||||||||||||||||||||
Net (Income) Loss Attributable toNon-Controlling Interest | (70 | ) | (180 | ) | 26 | (50 | ) | 127 | ||||||||||||||||||||||||||||||||
Net (Income) Loss Attributable toNon-controlling Interest | — | (70 | ) | (180 | ) | 26 | (50 | ) | ||||||||||||||||||||||||||||||||
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Net Income Attributable to Neogen | $ | 63,145 | $ | 43,793 | $ | 36,564 | $ | 33,526 | $ | 28,158 | $ | 60,176 | $ | 63,145 | $ | 43,793 | $ | 36,564 | $ | 33,526 | ||||||||||||||||||||
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Net Income per Share (basic) (1) | $ | 1.23 | $ | 0.87 | $ | 0.73 | $ | 0.68 | $ | 0.58 | $ | 1.16 | $ | 1.23 | $ | 0.87 | $ | 0.73 | $ | 0.68 | ||||||||||||||||||||
Net Income per Share (diluted) (1) | $ | 1.21 | $ | 0.86 | $ | 0.72 | $ | 0.67 | $ | 0.57 | $ | 1.15 | $ | 1.21 | $ | 0.86 | $ | 0.72 | $ | 0.67 | ||||||||||||||||||||
Weighted Average Shares Outstanding (diluted) (1) | 52,149 | 51,165 | 50,500 | 49,926 | 49,689 | 52,425 | 52,149 | 51,165 | 50,500 | 49,926 | ||||||||||||||||||||||||||||||
| 2018 | 2017 | 2016 | 2015 | 2014 | Years Ended May 31 | |||||||||||||||||||||||||||||||||||
| 2019 | 2018 | 2017 | 2016 | 2015 | ||||||||||||||||||||||||||||||||||||
Balance Sheet Data: | ||||||||||||||||||||||||||||||||||||||||
Cash and Cash Equivalents and Marketable Securities | $ | 210,810 | $ | 143,635 | $ | 107,796 | $ | 114,164 | $ | 76,496 | $ | 267,524 | $ | 210,810 | $ | 143,635 | $ | 107,796 | $ | 114,164 | ||||||||||||||||||||
Working Capital (2) | 337,101 | 256,959 | 219,628 | 205,739 | 163,779 | 411,278 | 337,101 | 256,959 | 219,628 | 205,739 | ||||||||||||||||||||||||||||||
Total Assets | 618,009 | 528,409 | 449,940 | 392,181 | 345,301 | �� | 695,740 | 618,009 | 528,409 | 449,940 | 392,181 | |||||||||||||||||||||||||||||
Long-Term Debt | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||
Total Equity | 560,175 | 471,757 | 404,161 | 350,963 | 306,300 | 637,899 | 560,175 | 471,757 | 404,161 | 350,963 | ||||||||||||||||||||||||||||||
| (1) | On December 29, 2017, the Company effected a4-for-3 stock split whereby |
| (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’s management does not provide forecasts of future financial performance. While we are optimistic about our 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 Itemitem 1A. RISK FACTORS in this Form10-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 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 we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if our views change.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The discussion and analysis of our 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
In May 2014, the FASB issued ASU No.2014-09—Revenue from Contracts with 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 productsContracts with Customers (Topic 606), which amends and services is recognized whenadds clarity to certain aspects of the productguidance set forth in ASU2014-09 related to identifying performance obligations and licensing. The guidance became effective for the Company on June 1, 2018. We adopted this standard using the full retrospective approach. This approach was chosen to provide appropriate comparisons against our prior year financial statements; accordingly, historical information for the years ended May 31, 2018 and 2017 has been shipped oradjusted to conform to the service performed,new standard. See Revenue Recognition section of Note 1 to 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 creditsconsolidated financial statements 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.further discussion.
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-moving inventory has been established and is reviewed at least quarterly based on an analysis of the inventory, considering 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 net 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. Customer-basedCustomer relationship 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; intangibles are generally amortized over 5 to 25 years. We 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 our stock option plans was estimated on the date of grant using the Black-Scholes option-pricingoption pricing model with 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 wouldmay produce different option values, which in turn wouldmay 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 us 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 our 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
We 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 carryforwards 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.
Our 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, and Neogen Australasia Pty Limited. Based on historical experience, as well as our future plans, earnings from these subsidiaries are expected to bere-invested indefinitely for future expansion and working capital needs. Furthermore, our domestic operations have historically produced sufficient operating cash flow to mitigate the need to remit foreign earnings. On an annual basis, we 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, 2018,2019, unremitted earnings of our foreign subsidiaries were $43,784,000.$55,553,000.
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the(U.S. Tax Act) was signed into law making significant changes to the Internal Revenue Code. Changes include a federal corporate tax rate reduced 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 issuedThe U. S. Tax Act also includes a provision 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 certaintax global intangiblelow-taxed 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(GILTI) of foreign earnings wassubsidiaries and a provisional amount at May 31,deduction for foreign derived intangible income (FDII), both of which became effective for us beginning June 1, 2018. Any subsequent adjustmentSee Note 6 to these amounts will be recorded to current tax expense in the quarter of 2019 when anyconsolidated financial statements for 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.information.
RESULTS OF OPERATIONS
Executive Overview
Consolidated revenues were $402.3$414.2 million in fiscal 2018,2019, an increase of 11%4% compared to $361.6$397.9 million in fiscal 2017.2018. Organic sales increased 8%3%.
Food Safety segment sales were $196.0$213.5 million in fiscal 2018,2019, an increase of 14%10% compared to $171.3$194.5 million in fiscal 2017.2018. Organic sales increased 9%, with the acquisitionsacquisition of Quat-Chem and Rogama, bothClarus Labs, in December 2016,August 2018, contributing the remainder of the growth.
Animal Safety segment sales were $206.2$200.7 million in fiscal 2018, an increase2019, a decrease of 8%1% compared to $190.3$203.5 million in fiscal 2017.2018. Organic sales increased 7%decreased 2%, with the September 2017 acquisitionacquisitions of Neogen Australasia contributing(September 2017), Livestock Genetic Services (September 2018) and Delta Genomics (January 2019) partially offsetting the remainder of the growth.decrease.
International sales were 40.1% of total sales in fiscal 2019 compared to 37.6% of total sales in fiscal 20182018.
Our effective tax rate was 17.5% in fiscal 2019 compared to 35.8%an effective tax rate of total sales14.0% in fiscal 2017.2018.
Cash generated from operating activities in fiscal 20182019 was $69.1$63.8 million, compared to $60.3$69.1 million in fiscal 2017.2018.
Neogen’s results reflect a 17%an 11% increase in international sales in fiscal 20182019 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 20182019 compared to the prior year are as follows for each of our international locations:
| Revenue | Revenue | |||||||||||||||
| % Increase | % Increase | |||||||||||||||
| Revenue % Increase USD | Revenue % Increase Local Currency | USD | Local Currency | |||||||||||||
Neogen Europe (including Lab M & Quat-Chem) | 23 | % | 16 | % | 8 | % | 12 | % | ||||||||
Neogen do Brasil (including Deoxi & Rogama) | 54 | % | 56 | % | 16 | % | 36 | % | ||||||||
Neogen Latinoamerica | 13 | % | 9 | % | 13 | % | 17 | % | ||||||||
Neogen China | 18 | % | 14 | % | 13 | % | 17 | % | ||||||||
Neogen India | 18 | % | 14 | % | 71 | % | 86 | % | ||||||||
Neogen Australasia | 122 | % | 150 | % | ||||||||||||
Neogen Canada | (11 | )% | (7 | )% | ||||||||||||
Currency translation had a positivenegative impact of approximately $3.7$8.0 million on revenues recorded in foreign currencies during fiscal 2018. At Neogen Europe, a 31%2019, as the U.S. dollar strengthened against all the currencies in the countries in which we conduct business. The revenue increase in genomics revenues andEurope was led by a 29%14% increase in sales of culture media manufactured at Lab M offset an 8% decreasegenomics services, primarily in natural toxinthe porcine and bovine markets. Deoxynivalenol (DON) test kit sales as last year’s deoxynivalenol (DON)also increased 19% due to increased testing after a DON outbreak in cornFrance’s wheat crops in western Europe did not repeatthe fall of calendar 2018. Sales at Quat-Chem increased 17%, due to increased sales coverage and the introduction of new products into their markets.
After adjusting for a 15% devaluation of the real against the dollar, sales in the current year. The organic revenueBrazil increased 16%, led by a 90% increase in Brazil was primarily due to a large Rogama sale to a government health organization that will not recur in fiscal 2019. Salessales of natural toxins test kits, to detect aflatoxin also increased over 200% in Brazil as we gained significant new business from customers testing for the presence of aflatoxin in corn. Sales of forensic test kits, used for required drug testing of commercial drivers in Brazil, increased significantly due to business that shifted from U.S. labs to labs in Brazil and increased demand from commercial laboratories located in Brazil. Neogen Latinoamerica grew revenues by 13%, with gains across most product lines, in particular mycotoxins and culture media, and increased sales in both Mexico and Central America.
Service revenue, which consists primarily of genomics services to animal protein and companion animal markets, was $74.7 million in fiscal 2019, an increase of 12% over prior fiscal year sales of $66.6 million, aided by the acquisitions of Neogen Australasia (September 2017), Livestock Genetics (September 2018) and Delta Genomics (January 2019); organic sales of service revenue increased 9%. The growth was led by increases in sample volumes from the global beef and companion animal markets and porcine and bovine markets in Europe.
REVENUES
| Year Ended | ||||||||||||||||||||
| Increase/ | Increase/ | |||||||||||||||||||
| (dollars in thousands) | May 31, 2019 | (Decrease) | May 31, 2018 | (Decrease) | May 31, 2017 | |||||||||||||||
Food Safety: | ||||||||||||||||||||
Natural Toxins, Allergens & Drug Residues | $ | 78,373 | 7 | % | $ | 72,962 | 3 | % | $ | 70,926 | ||||||||||
Bacterial & General Sanitation | 41,966 | 10 | % | 38,156 | 10 | % | 34,706 | |||||||||||||
Culture Media & Other | 49,857 | 13 | % | 44,271 | 12 | % | 39,367 | |||||||||||||
Rodenticides, Insecticides & Disinfectants | 25,584 | 7 | % | 23,821 | 75 | % | 13,620 | |||||||||||||
Genomics Services | 17,694 | 16 | % | 15,267 | 34 | % | 11,415 | |||||||||||||
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| 213,474 | 10 | % | 194,477 | 14 | % | 170,034 | ||||||||||||||
Animal Safety: | ||||||||||||||||||||
Life Sciences | 7,858 | (25 | )% | 10,411 | 7 | % | 9,704 | |||||||||||||
Veterinary Instruments & Disposables | 44,582 | (7 | )% | 47,749 | 15 | % | 41,693 | |||||||||||||
Animal Care & Other | 29,941 | (3 | )% | 30,930 | 11 | % | 27,891 | |||||||||||||
Rodenticides, Insecticides & Disinfectants | 66,389 | (2 | )% | 67,646 | (3 | )% | 69,429 | |||||||||||||
Genomics Services | 51,942 | 11 | % | 46,717 | 18 | % | 39,526 | |||||||||||||
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| 200,712 | (1 | )% | 203,453 | 8 | % | 188,243 | ||||||||||||||
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Total Revenue | $ | 414,186 | 4 | % | $ | 397,930 | 11 | % | $ | 358,277 | ||||||||||
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Year Ended May 31, 2019 Compared to Year Ended May 31, 2018
Food Safety:
Natural Toxins, Allergens & Drug Residues –Sales in this category increased 7% in fiscal 2019 compared to the prior year. For the natural toxins and allergens product lines, test kit sales increased 15% and 7%, respectively, for the year. The natural toxin increase was due to new business earned in Brazil for aflatoxin test kits, and higher sales of deoxynivalenol (DON) test kits in the U.S. and France, the result of mild outbreaks. These increases were partially offset by a 39%5% decrease in sales of drug residues test kits, due to lower demand in Europe.
Bacterial & General Sanitation –Sales in this category increased 10% in fiscal 2019 compared to the prior year. Sales of test kits to detect pathogens increased 24%, as we continued to gain new business with ourListeria Right Now test kit that launched in fiscal 2018. Sales of our AccuPoint sanitation monitoring product line increased 11%, with samplers up 13%, as we increased our market share. Sales of products to detect spoilage organisms in foods increased 3%.
Culture Media & Other –Sales in this category increased 13% in fiscal 2019 compared to fiscal 2018. Sales of Neogen Culture Media, formerly marketed as the Acumedia and Lab M brands, increased 7%, aided in part by the August 2018 acquisition of Clarus Labs, which consists of the Colitag product and reports in the culture media product line. Excluding new business from the acquisition, sales in the Neogen Culture Media product line increased 4%. This category also includes forensic test kits resultingsold within Brazil, which increased significantly as business shifted from labs in the U.S. in the prior year (reported in the Animal Safety segment) to labs in Brazil and increased competition and customer losses caused by conversion to different testing methods.demand from commercial laboratories in that country.
Service revenue was $66.7 millionRodenticides, Insecticides & Disinfectants –Revenues of products in this category sold through our Food Safety operations increased 7% in fiscal 2018, an increase of 21% over prior fiscal year sales of $55.1 million, aided by the September 2017 acquisition of Neogen Australasia. The growth2019. This category was led by increases in sales of cleaners and disinfectants to customers in Europe, China and India, partially offset by lower sales of insecticides in Brazil due to a large government tender in fiscal 2018 which did not recur in fiscal 2019.
Genomics Services –Sales of genomics services sold through our Food Safety operations increased 16% in fiscal 2019 compared to the globalsame period in the prior year, primarily due to higher sales in the European porcine and bovine markets. We also benefitted from a large,non-recurring research project with the Brazilian government, and the commercialization of a new service offering for a type of cattle specific to the Brazilian market.
Animal Safety:
A high proportion of the Animal Safety products are marketed and sold through our veterinary distributor network; this channel was soft in 2019, with sluggish end market demand, caused in part by increased tariffs and political uncertainties in our markets. We were also negatively impacted by inventory destocking at our largest distributor partners.
Life Sciences –Sales in this category decreased 25% in fiscal 2019 compared to the same period in the prior year, as approximately $2.4 million of forensic test kit revenues shifted to our operations in Brazil, which are reported in the Food Safety segment. This testing was performed by commercial labs in the U.S. in the prior fiscal year, but has since moved to commercial labs located in Brazil.
Veterinary Instruments & Disposables –Revenues in this category decreased 7% in fiscal 2019 compared to fiscal 2018. Protective wear and consumables decreased 17%, resulting from poor economic conditions in the commercial dairy production market. Veterinary instruments sales were down 4% for the year, however, this product line had a very strong increase in fiscal 2018, with sales up 23% in that period compared to the prior year. A 19% decline in detectable needles was partially offset by strong increases in disposable syringes and aluminum and poly hub needles.
Animal Care & Other –Sales of these products decreased 3% in fiscal 2019. Wound care and injectable vitamin products were down 13% and 6%, respectively, due to inventory destocking at distributors; dairy supplies that we distribute were down 5%, due to poor economic conditions in the commercial dairy production market. Additionally, we spent more on promotional programs and rebates with distributors, which are recorded as contra revenues within this category, in fiscal 2019 than in the prior year. Partially offsetting these losses were a 12% increase in sales of our biologics product line, and a 7% increase in supplements and other care products, both due to increased demand from end customers in the companion animal and equine markets.
Rodenticides, Insecticides & Disinfectants –Sales in this category decreased 2% in fiscal 2019, compared to the same period in the prior year. The decrease was due primarily to the full year impact of toll manufacturing business lost in the third quarter of fiscal year 2018. Additionally, rodenticide sales declined due to poor weather conditions causing lower demand and a weak U.S. animal protein market partially caused by tariff issues.
Genomics Services –Sales in this category increased 11% in fiscal 2019, aided by the acquisitions of Neogen Australasia (September 2017), Livestock Genetics (September 2018) and Delta Genomics (January 2019); organic growth in this category was 7%. Strong growth in the beef and dairy cattle and companion animal markets was partially offset by revenue decreases in U.S. poultry and increased testingporcine markets, despite increases in sample volumes, withresulting from a large poultry customer. shift to lower priced chips and services. Additionally, poor economic conditions in the U. S. commercial dairy production market resulted in lower revenues from that market.
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 the prior year. For the allergens and dairy drug residues product lines, test kit sales increased 12% and 13%, respectively, for the year. These increases were partially offset by a 26% decrease in sales of deoxynivalenol (DON) test kits, as prior year outbreaks of DON in corn crops in the 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 consumable supplies. Sales of test kits to detect pathogens increased 16%, led by growth inListeria 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%12% 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 a U.S. customer. This category also includes sales of forensic test kits sold through our Brazilian subsidiary, which decreased by 39% in fiscal 2018. Demand in the prior yearfiscal 2017 was extremely high, due to a new requirement for drug testing of commercial truck drivers, however, sales of these kits in Brazil have decreased in the current yearfiscal 2018 due to increased competition and customer losses caused by conversion to different testing methods.
Rodenticides, Insecticides & Disinfectants –Sales of products in this category sold through our Food Safety operations increased 75% in fiscal 2018; excluding the December 2016 acquisitions of Quat-Chem and Rogama, organic growth was 2%. The increase was primarily due to a nonrecurring large sale atof insecticides by Rogama to a government health organization that will not recur in fiscal 2019.organization. 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 services sold through our Food Safety operations increased 34% in fiscal 2018 compared to the same period in the prior year, primarily due to market share increases, particularly in the beef and dairy cattle markets, and incremental business with a large poultry 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 U.S.
Veterinary Instruments & Disposables –Revenues 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 new drug application for a competitive product.
Rodenticides, Insecticides & Disinfectants –Sales in this category decreased 2%3% in fiscal 2018, compared to the same period in the prior year. The 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 increased 18% in fiscal 2018; excluding the September 2017 acquisition of Neogen Australasia, organic growth was 11%. The growth was led by increases in sales to the global beef and dairy cattle and companion animal markets and higher volumes from a large poultry customer.
Year Ended May 31, 2017 Compared to Year Ended May 31, 2016
Food 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 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 in this category increased 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 deoxynivalenol (DON), due to outbreaks of DON in corn crops in the Midwest 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 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.
Bacterial & General Sanitation –Revenues of these products rose 2%, compared to the prior fiscal year, led by a 4% increase in sales of our 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 we gained market share with our ANSR product line. These increases were partially offset by lower sales of a distributed product that was discontinued in fiscal 2017. Our 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.
Culture Media & Other –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 our Brazilian subsidiary. Demand for these kits from commercial labs located in Brazil 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 our 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 ofrodenticides, insecticides and disinfectants into our 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 our Mexican subsidiary.
Genomics Services –Genomics revenues sold through the Food Safety segment increased 47%, primarily due to strong demand of genomics testing in Europe and expanded capabilities at our 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, we lost the ability to sell our 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. We 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. Additionally, in January 2017, our 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 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 in this category decreased 1%, the 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 our proprietary detectable needles and durable speed syringes, with both gains due to strong demand from customers.
Animal Care & Other –Sales in this category decreased 19% due to the loss of our ability to sell our 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 –Sales in this category increased 31% in fiscal 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.
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 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.
COST OF REVENUES
(dollars in thousands) | 2018 | Increase | 2017 | Increase | 2016 | 2019 | Increase | 2018 | Increase | 2017 | ||||||||||||||||||||||||||||||
Cost of Revenues | $ | 212,000 | 12 | % | $ | 189,626 | 13 | % | $ | 168,211 | $ | 222,266 | 5 | % | $ | 211,658 | 12 | % | $ | 189,353 | ||||||||||||||||||||
Cost of revenues increased 5% in fiscal 2019 and 12% in fiscal 2018 and 13% in fiscal 2017 in comparison with the prior years. This compares with revenue
increases of 4% in fiscal 2019 and 11% in fiscal 2018 and 13% in fiscal 2017.2018. Expressed as a percentage of sales, cost of revenues was 52.7%53.7%, 52.4%53.2% and 52.4%52.9% in fiscal years 2019, 2018 and 2017, respectively.
Fiscal 2019 – Both Food Safety and 2016, respectively.Animal Safety margins decreased in fiscal 2019, primarily due to a product mix shift towards lower margin products within each segment, and to a lesser extent, the strength of the U.S. dollar, which rose against all of the currencies in the countries in which we operate, and resulted in higher cost of sales in our international operations, which pay for their inventory in U. S. dollars. A higher overall proportion of Food Safety revenues, which have higher than average gross margins, partially offset the lower margins within each segment.
Fiscal 2018 – Improvements in Animal Safety gross margins, resulting from raw material cost reductions and favorable 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 in Animal Safety gross margins, resulting from lower raw material costs in the genomics business and increased higher margin forensics 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.
Food Safety Gross Margins:
Food Safety gross margins were 52.8%51.8%, 55.3%52.4% and 56.7%55.0% in fiscal years 2019, 2018 and 2017, respectively.
Fiscal 2019 –Food Safety gross margins decreased 60 basis points in fiscal 2019,primarily the result of a shift in product mix at our international operations; in fiscal 2019, these operations sold a higher proportion of lower margin traditional Animal Safety products such as cleaners and 2016,disinfectants. In addition, gross margins were also negatively impacted by the strength of the U.S. dollar relative to the international currencies in which we operate, particularly in Brazil, Europe, and Mexico, where the real, pound and peso declined in value against the U.S. dollar by 15%, 3%, and 4%, respectively. These international operations report through the Food Safety segment. Increases in higher margin product lines such as our diagnostic and forensic test kits partially offset these decreases.
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 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, we 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 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 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.
Animal Safety Gross Margins:
Animal Safety gross margins were 42.0%40.6%, 40.6%41.4% and 40.1% in fiscal years 2019, 2018 and 2017, respectively.
Fiscal 2019 –Animal Safety gross margins decreased 80 basis points in fiscal 2019,primarily the result of lower volumes in higher margin products such as diagnostics, animal care products, instruments and 2016, respectively.rodenticides. Forensic test kit revenues in Animal Safety declined as a large U.S. commercial laboratory transferred sample testing to its locations in Brazil, which we service through our Brazilian operation, reporting in the Food Safety segment. We also had strong growth in sales of genomics services in our Australian operations; gross margins in this operation are lower than historical Animal Safety margins due to higher chip costs and lack of scale. Partially offsetting these lower margins were increased margins in the U.S. genomics operations, based primarily on improved input costs and increased sales of higher margin services to the bovine and companion animal markets.
Fiscal 2018 – The improvement in gross margin percentage from fiscal 2017 to 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, 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 we were required to stop selling at the end of fiscal 2016.
OPERATING EXPENSES
(dollars in thousands) | 2018 | Increase | 2017 | Increase | 2016 | 2019 | Increase | 2018 | Increase | 2017 | ||||||||||||||||||||||||||||||
Sales and Marketing | $ | 70,909 | 14 | % | $ | 62,424 | 8 | % | $ | 57,599 | $ | 70,230 | 5 | % | $ | 66,929 | 13 | % | $ | 59,380 | ||||||||||||||||||||
General and Administrative | 38,294 | 12 | % | 34,214 | 17 | % | 29,189 | 40,791 | 7 | % | 38,294 | 12 | % | 34,214 | ||||||||||||||||||||||||||
Research and Development | 10,855 | 5 | % | 10,385 | 5 | % | 9,890 | 12,805 | 18 | % | 10,855 | 5 | % | 10,385 | ||||||||||||||||||||||||||
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Total Operating Expense | $ | 120,058 | 12 | % | $ | 107,023 | 11 | % | $ | 96,678 | $ | 123,826 | 7 | % | $ | 116,078 | 12 | % | $ | 103,979 | ||||||||||||||||||||
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Overall operating expenses increased by 7% in fiscal 2019 and 12% in fiscal 2018, and 11% in fiscal 2017, each compared to the prior year. These increases
compare to revenue increases of 11%4% and 13%11%, respectively, in each comparative period.
Sales and Marketing:
Sales and marketing expenses increased by 14%5% in fiscal 20182019 and 8%13% in fiscal 2017,2018, each compared to the prior year. As a
percentage of sales, sales and marketing expense was 17.6%17.0%, 17.3%16.8% and 17.9%16.6% in fiscal years 2019, 2018 and 2017, respectively.
Fiscal 2019– Salaries and 2016, respectively.commissions increased by 4% in 2019, and drove the 5% increase in overall sales and marketing expenses; shipping expenses increased 11%, the result of higher rates and an increase in air shipments. Other increases were the result of higher trade show, exhibit and sponsorship costs, and provision for bad debts. Partially offsetting these increases were lower promotion and consulting expenses.
Fiscal 2018– Salaries and commissions 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 and commissions within the sales and marketing function, which is also comprised of technical service, customer service, and product management personnel, rose 10%, 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 our recent acquisitions.
General and Administrative:
General and administrative expenses rose 7% in fiscal 2019 compared to fiscal 2018 and by 12% in fiscal 2018 compared to fiscal 2017 and by 17% in fiscal 2017 compared to fiscal
2016.2017. As a percentage of sales, general and administrative expense was 9.5%9.8%, 9.5%9.6% and 9.1%9.5% in fiscal years 2019, 2018 2017 and 2016,2017, respectively.
Fiscal 2019 – Higher salary and stock-based compensation costs were the primary drivers of the overall 7% expense increase. In both fiscal years,addition, higher depreciation and license fees onIT-related hardware and software investments, increased training, recruiting and legal fees contributed to the increased expense. These increases were somewhat offset by a $427,000 reduction in amortization expense, as certain intangible assets from past acquisitions were fully amortized during the year.
Fiscal 2018 – The 12% increase iswas 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 our recent acquisitions, also contributed to the increase in each comparative period.compared to fiscal 2017.
Research and Development:
Research and development expenses increased 5%18% in fiscal 20182019 and 5% in fiscal 2017,2018, 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 3.1% in fiscal year 2019, 2.7% in fiscal year 2018 and 2.9% in fiscal year 2017 and 3.1% in fiscal year 2016;2017; we expect to spend approximately 3% of total revenue on research and development annually.
Fiscal 2019 – The 18% increase in research and development expenses in fiscal 2019 was primarily the result of development spending for next generation products, and increases in expenditures to obtain regulatory approvals for a number of new products. Higher salaries expense, resulting from increased headcount and compensation increases, and increased depreciation expense, resulting from investments in analytical and testing equipment, accounted for the remainder of the increase.
Fiscal 2018 – In fiscal 2018, higher compensation costs were partially offset by lower levels of consulting and other outside services.
OPERATING INCOME
(dollars in thousands) | 2018 | Increase | 2017 | Increase | 2016 | 2019 | Increase | 2018 | Increase | 2017 | ||||||||||||||||||||||||||||||
Operating Income | $ | 70,194 | 8 | % | $ | 64,945 | 15 | % | $ | 56,386 | $ | 68,094 | -3 | % | $ | 70,194 | 8 | % | $ | 64,945 | ||||||||||||||||||||
Our operating income decreased by 3% in fiscal 2019 compared to fiscal 2018, and increased by 8% in fiscal 2018 compared to fiscal 2017, and by 15% in fiscal 2017 compared to fiscal 2016.2017. Expressed as a percentage of revenues, operating income was 17.5%16.4%, 18.0%17.6% and 17.6%18.1% in fiscal years 2018, 2017 and 2016, respectively.
The 3% decrease in operating income for fiscal 2019 was due primarily to overall operating expense increases of $7.7 million, up 7%, which compared to a gross margin increase of $5.6 million.
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 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.
OTHER INCOME (EXPENSE)
Other Income (Expense) for the previous three fiscal years consisted of the following:
| (dollars in thousands) | 2018 | 2017 | 2016 | 2019 | 2018 | 2017 | ||||||||||||||||||
Interest income (net of expense) | $ | 2,043 | $ | 838 | $ | 322 | $ | 4,683 | $ | 2,043 | $ | 838 | ||||||||||||
Foreign currency transactions | 274 | (40 | ) | (1,338 | ) | (1,279 | ) | 274 | (40 | ) | ||||||||||||||
Royalty income | 147 | 171 | 217 | 150 | 147 | 171 | ||||||||||||||||||
Settlement of licensing agreement | — | 660 | — | |||||||||||||||||||||
Licenses and insurance settlements | 672 | 360 | 660 | |||||||||||||||||||||
Quat-Chem contingent consideration | 255 | — | — | 422 | 255 | — | ||||||||||||||||||
Deoxi contingent consideration | (42 | ) | (14 | ) | — | (10 | ) | (42 | ) | (14 | ) | |||||||||||||
Neogen India contingent consideration | — | 32 | — | — | — | 32 | ||||||||||||||||||
Other | 594 | 81 | (74 | ) | 227 | 234 | 81 | |||||||||||||||||
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Total Other Income (Expense) | $ | 3,271 | $ | 1,728 | $ | (873 | ) | |||||||||||||||||
Total Other Income ( Expense) | $ | 4,865 | $ | 3,271 | $ | 1,728 | ||||||||||||||||||
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The increasesincrease in interest income in both fiscal years 2019 and 2018, and 2017each compared to the prior yearsyear, is the result of higher cash balances and rising interest rates during thetwo-year period. Other income resultingThe loss from foreign currency translations in fiscal 2019 is primarily the result of the changes in the value of foreign currencies relative to the U.S. dollar in countries in which we operate.operate; the dollar strengthened against all of these currencies in 2019. In fiscal 2019 and 2018, gains were recognized on insurance proceeds received for property loss settlements; in fiscal 2017, we terminated a licensing agreement and recognized a gain of $660,000. Other Income in fiscal 2019 and 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. Inbusinesses in each of those fiscal 2017, we terminated a licensing agreement and recognized a gain of $660,000.years.
PROVISION FOR INCOME TAXES
(dollars in thousands) | 2018 | Increase | 2017 | Increase | 2016 | 2019 | Increase | 2018 | Increase | 2017 | ||||||||||||||||||||||||||||||
Provision for Income Taxes | $ | 10,250 | (55 | )% | $ | 22,700 | 20 | % | $ | 18,975 | $ | 12,783 | 25 | % | $ | 10,250 | -55 | % | $ | 22,700 | ||||||||||||||||||||
Income tax expense for fiscal 20182019 was $10.3$12.8 million, an effective tax rate of 14%17.5%, compared to prior yearincome tax expense of $10.3 million in 2018, an effective tax rate of 14.0%. For fiscal 2017, income tax expense of $22.7 million represented an effective tax rate of 34%34.0%. We recorded favorable tax adjustments totaling $4.8 million during the year as the result of
The U.S. tax reform passed in December 2017. The tax reformTax Act reduced the U.S. statutory income tax rate from 35% to 21%, and also resulted in other adjustmentsDecember 2017. During fiscal 2019, we utilized the 21% statutory rate for the entire year to income tax expense. We computedcompute our income tax forexpense, whereas the statutory rate in fiscal year ending May 31, 2018 usingwas a blended Federalrate of 29.2% and fiscal 2017 was calculated using the previous statutory rate of 35%.
Differences from the U. S. statutory rate to our effective rate are primarily due to provisions in the U.S. 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 earningsAct and profits 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;options. Please refer to Note 6 of our Consolidated Financial Statementsto the consolidated financial statements for furthermore information. In the second quarter of fiscal 2018, an IRS examination of our federal income tax returns for fiscal years 2014, 2015 and 2016 was concluded. As a result of the favorable outcome of the audit, we reversed a total of $1.0 million from our reserve for uncertain tax positions, which had been accrued in prior fiscal years, with a corresponding credit to federal income tax expense.
NET INCOME AND INCOME PER SHARE
| (dollars in thousands-except per share data) | 2018 | Increase | 2017 | Increase | 2016 | 2019 | Increase | 2018 | Increase | 2017 | ||||||||||||||||||||||||||||||
Net Income Attributable to Neogen | $ | 63,145 | 44 | % | $ | 43,793 | 20 | % | $ | 36,564 | $ | 60,176 | -5 | % | $ | 63,145 | 44 | % | $ | 43,793 | ||||||||||||||||||||
Net Income Per Share-Basic | $ | 1.23 | $ | 0.87 | $ | 0.73 | $ | 1.16 | $ | 1.23 | $ | 0.87 | ||||||||||||||||||||||||||||
Net Income Per Share-Diluted | $ | 1.21 | $ | 0.86 | $ | 0.72 | $ | 1.15 | $ | 1.21 | $ | 0.86 | ||||||||||||||||||||||||||||
Net income decreased by 5% in fiscal 2019 as compared to fiscal 2018. This is due to the increase in our effective tax rate in fiscal 2019 and, to a lesser extent, a 1% decrease inpre-tax income.
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, 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.compensation.
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 our ability to successfully implement various strategies, including:
developing, manufacturing and marketing new products with new features and capabilities, and having those new products successfully accepted in the marketplace;
expanding our markets by fostering increased use of our products by customers;
maintaining or increasing gross and net operating margins in changing cost environments;
strengthening operations and sales and marketing activities in geographies outside of the U.S.;
developing and implementing new technology development strategies; and
identifying and completing acquisitions that enhance existing product categories or create new products or services.
FINANCIAL CONDITION AND LIQUIDITY
On May 31, 2018,2019, we had $83.1$41.7 million in cash and cash equivalents, $127.7$225.8 million in marketable securities and working capital of $337.1$411.3 million. For the year ended May 31, 2018,2019, cash generated from operating activities was $69.1$63.8 million, compared to $60.3$69.1 million generated in fiscal 2017;2018; proceeds from stock option exercises provided an additional $22.8$17.0 million of cash. For the same period, additions to property and equipment were $14.7 million and business acquisitions used cash of $20.9 million and $468,000, respectively.$6.4 million. We have a financing agreement with a bank providing for an unsecured revolving line of credit of $15.0 million, which expires onwas amended in November 2018 to extend the expiration to September 30, 2019.2021. There were no advances against this line of credit during fiscal years 2019, 2018 2017 and 2016,2017, and no balance outstanding at May 31, 20182019 and 2017.2018.
Accounts receivable at May 31, 20182019 were $79.1$82.6 million, compared to $68.6$79.1 million at May 31, 2017,2018; the increase is primarily due to the increase in revenues. Days sales outstanding, a measurement of the time it takes to collect receivables, was 61 days at May 31, 2019 compared to 60 days at both May 31, 2018 and May 31, 2017.2018. All customer accounts are actively managed and no losses in excess of amounts reserved are currently expected.
Inventory balances were $86.0 million at May 31, 2019, an increase of $10.0 million, or 13%, compared to $76.0 million at May 31, 2018, an2018. During fiscal 2019, we increased inventory levels of products that are sold into our European markets, to enhance our ability to serve these markets in the event of a disorderly Brexit. While Brexit has been postponed to October 2019, we will continue to monitor and adjust our inventory levels as necessary. Excluding the impacts of the increase of $2.9 million, or 4.0%, comparedrelated to $73.1 million at May 31, 2017. This past year, we were successfulBrexit, inventory levels rose 8%. All operations are participating in controllingprograms to improve inventory turns in fiscal 2020, while ensuring adequate safety stocks to minimize backorders. We 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. However, our cash on hand and current borrowing capacity may not be sufficient to meet our cash requirements to commercialize products currently under development or our potentialfuture plans to acquire additional businesses, technology and products that fit within our strategic plan. Accordingly, we may be required, or may choose, to issue equity securities or enter into other financing arrangements for a portion of our future capital needs.
We 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 our results of operations or financial position.
CONTRACTUAL OBLIGATIONS
As of May 31, 2018,2019, we have the following contractual obligations due by period:
| Less than | More than | |||||||||||||||||||||||||||||||||||||||
(dollars in thousands) | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | Total | 1 year | 1-3 years | 3-5 years | 5 years | ||||||||||||||||||||||||||||||
Long-Term Debt | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||||
Operating Leases | 906 | 498 | 194 | 214 | — | 2,320 | 1,112 | 1,106 | 102 | — | ||||||||||||||||||||||||||||||
Unconditional Purchase Obligations (1) | 54,339 | 54,061 | 278 | — | — | 54,583 | 50,410 | 3,231 | 934 | 8 | ||||||||||||||||||||||||||||||
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| $ | 55,245 | $ | 54,559 | $ | 472 | $ | 214 | $ | — | $ | 56,903 | $ | 51,522 | $ | 4,337 | $ | 1,036 | $ | 8 | |||||||||||||||||||||
| (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.consolidated financial statements.
| ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS |
We have interest rate and foreign exchange rate risk exposure but no long-term fixed rate investments or borrowings. Our 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 we market and sell 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. Our 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, the Australian dollar 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 revenuesinvoiced amounts can be positively or negatively affected by changes in exchange rates in the course of collection. We 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 U.S., located in the United Kingdom, Brazil, Mexico, China, India, Canada and Australia where the functional currency is the British pound sterling, Brazilian real, Mexican peso, Chinese yuan, Indian rupee, Canadian dollar and Australian dollar, respectively, and also transacts business throughout Europe in the euro. Our investments in foreign subsidiaries are considered to be long-term. As discussed in ITEM 1A. RISK FACTORS, our financial condition and results of operations could be adversely affected by currency fluctuations.
| 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 our management, including the Chief Executive Chairman of the BoardOfficer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule13a-15 (e) under the Securities Exchange Act of 1934) as of May 31, 2018.2019. Based on and as of the time of such evaluation, our management, including the Chief Executive Chairman of the BoardOfficer and Chief Financial Officer, concluded that our 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 Chief Executive Chairman of the BoardOfficer 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 our management, including the Chief Executive Chairman of the BoardOfficer and Chief Financial Officer, an evaluation was conducted as to the effectiveness of internal control over financial reporting as of May 31, 2018,2019, 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, 2018.2019. The effectiveness of internal control over financial reporting as of May 31, 2018,2019 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, 20182019 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
Lansing, Michigan
Opinion on Internal Control over Financial Reporting
We have audited Neogen Corporation’s (the “Company’s”) internal control over financial reporting as of May 31, 2018,2019, 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, 2018,2019, based on the COSO criteria.
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 as of May 31, 20182019 and 2017,2018, the related consolidated statements of income, comprehensive income, equity, and cash flows for each of the three years in the period ended May 31, 2018,2019, and the related notes and our report dated July 27, 201830, 2019 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 Overover Financial Reporting.”Reporting”. Our responsibility is to express an opinion on the Company’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 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.
/s/ BDO USA, LLP
Grand Rapids, Michigan
July 27, 2018
| ITEM 9B. | OTHER INFORMATION – NONE |
| ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
Information regarding the Company and certain corporate governance matters appearing under the captions “Election of Directors”,Directors,” “Audit Committee”,Committee,” and “Miscellaneous-Section 16(a) Beneficial Ownership Reporting Compliance” is incorporated by reference to Neogen’s 20182019 proxy statement to be filed within 120 days of May 31, 2018.2019.
We have adopted a Code of Conduct that applies to our directors, officers and employees. This Code of Conduct is available on our website at http://www.neogen.com/pdf/CodeOfConduct.pdf.
OFFICERS OF THE REGISTRANTInformation About Our Executive Officers
The officers of Neogen are elected by and serve at the discretion of the Board of Directors. The names and titles of our officers as of May 31, 20182019 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 | ||||
Joseph A. Corbett | Vice President, Animal Safety Sales | 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 | Chairman of the Board | 1982 | ||||
Melissa K. Herbert | Vice President, Support Services | 2005 | ||||
Jason W. Lilly, Ph.D. | Vice President, | 2005 | ||||
Terri A. Morrical | Vice President, Animal Safety | 1992 | ||||
Steven J. Quinlan | Vice President & Chief Financial Officer | 2011 | ||||
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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 50,51, 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 60,61, joined Neogen in 2012 as our Director of Beef Cattle Genomics, and became General Manager of Neogen’s GeneSeek subsidiarygenomics operation in Lincoln, NE in 2013. In December 2016, Dr. Bauck was named Neogen’s Vice President of Agrigenomics, responsible for GeneSeek’sthe operation and execution of our 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.
Joseph A. Corbett, age 49,50, 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 segment. He was named Vice President, Animal Safety Sales and Operations in October 2014, responsible for all Animal Safety revenues, excluding Genomics and Life Sciences, and operations at the Lexington distribution centers.Sciences.
Dr. Robert S. Donofrio, age 45,46, 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 44,45, 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.Animal Safety operations, excluding Genomics. Prior to joining Neogen, he spent 18 years in positions of increasing responsibility at Ecolab, Inc., including five years as Ecolab’s vice presidentVice President of supply chain, global specialty sector.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 52,53, 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 safetyFood 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-levelsenior level positions over a20-year 20 year career, including directorDirector of manufacturingManufacturing at Bayer Healthcare in Indiana, directorDirector of lean manufacturingLean Manufacturing at Invensys in Ohio, and managerManager of automated manufacturingAutomated Manufacturing at Siemens Electronic Components in Mexico.
James L. Herbert, age 78,79, is Executive Chairman of the Board of Directors.Directors and Director of Strategic Growth. He had been Chief Executive Officer and Executive Chairman of the Board since 2006; he resigned as Chief Executive Officer on July 17, 2017, when John Adent was named to that role.role, and from his role as Executive Chairman on January 29, 2019, when his executive responsibilities were transitioned to Mr. Adent. 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 54,55, joined Neogen in August 2005 as a sales representative in our 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 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. Jason W. Lilly, age 44,45, joined Neogen 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. In January 2019, Dr. Lilly was named Vice President of International Business, responsible for Neogen’s operations outside of the U.S. and Canada. Prior to joining Neogen, he served in various technical sales and marketing roles at Invitrogen Corporation.
Terri A. Morrical, age 53,54, joined Neogen in September 1992 as part of our acquisition of WTT, Incorporated. She has directed most aspects of our Animal Safety operations since she joined Neogen and currently serves as Vice President responsible for the Animal Safety segment, excluding 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 55,56, 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 Neogen, and manages the accounting, human resources and information technology communications and facilities departments. Mr. Quinlan came to Neogen 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.
Dwight E. Schroedter, age 61, joined Neogen in January 1995 as 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 our 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, 2018.2019.
| 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, 2018.2019.
| 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, 2018.2019.
| ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES |
The information required by this Item is incorporated by reference to Neogen’s Proxy Statement to be filed within 120 days of May 31, 2018.2019.
| 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 starting on pageF-1.
(a) (3). The Exhibits, listed on the accompanying Exhibit Index on page 42,40, are incorporated herein by reference.
| ITEM 16. | FORM10-K SUMMARY — NONE |
Neogen Corporation
Annual Report on Form10-K
Year Ended May 31, 20182019
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/ | By: | /s/Steven J. Quinlan | |||||
| Steven J. Quinlan, Vice President & | ||||||||
| Chief Financial Officer | ||||||||
| (Principal Executive Officer) | (Principal Financial Officer) | |||||||
Dated: July 27, 201830, 2019
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/
| ||||||||
| President & Chief Executive Officer (Principal Executive Officer) | July | ||||||
| 30, 2019 | ||||||||
/s/ Steven J. Quinlan Steven J. Quinlan | Vice President & Chief Financial Officer
| July | ||||||
/s/ James L. Herbert | Chairman of the Board | July 30, 2019 | ||||||
| James L. Herbert | ||||||||
* | 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/ | |||||||
| 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, 20182019
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, 2019, 2018 | ||||
Consolidated Statements of Comprehensive Income—Years ended May 31, 2019, 2018 | ||||
Consolidated Statements of Equity— Years ended May 31, 2019, 2018 | ||||
Consolidated Statements of Cash Flows— Years ended May 31, 2019, 2018 | ||||
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 precedes the signature page, and is incorporated herein by reference.
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
Neogen Corporation
Lansing, Michigan
Opinion on theConsolidatedFinancial Statements
We have audited the accompanying consolidated balance sheets of Neogen Corporation (the “Company”) and subsidiaries as of May 31, 20182019 and 2017, and2018, the related consolidated statements of income, comprehensive income, equity, and cash flows for each of the three years in the period ended May 31, 2018,2019, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company and subsidiaries at May 31, 20182019 and 2017,2018, and the results of theirits operations and theirits cash flows for each of the three years in the period ended May 31, 20182019, 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”), the Company’s internal control over financial reporting as of May 31, 2018,2019, based on criteria established inInternal Control – Integrated Framework(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report dated July 27, 201830, 2019 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.
/s/ BDO USA, LLP
We have served as the Company’s auditor since 2014.
/s/ BDO USA, LLP
Grand Rapids, Michigan
July 27, 201830, 2019
Neogen Corporation and Subsidiaries
Consolidated Balance Sheets – Assets
(in thousands)
| May 31 | May 31 | |||||||||||||||
| 2018 | 2017 | 2019 | 2018 | |||||||||||||
Assets | ||||||||||||||||
Current Assets | ||||||||||||||||
Cash and cash equivalents | $ | 83,074 | $ | 77,567 | $ | 41,688 | $ | 83,074 | ||||||||
Marketable securities | 127,736 | 66,068 | 225,836 | 127,736 | ||||||||||||
Accounts receivable, less allowance of $1,550 and $2,000 at May 31, 2018 and 2017, respectively | 79,086 | 68,576 | ||||||||||||||
Accounts receivable, less allowance of $1,700 and $1,550 at May 31, 2019 and 2018, respectively | 82,582 | 79,086 | ||||||||||||||
Inventories | 76,005 | 73,144 | 85,992 | 76,005 | ||||||||||||
Prepaid expenses and other current assets | 9,888 | 7,606 | 13,431 | 9,888 | ||||||||||||
|
|
|
| |||||||||||||
Total Current Assets | 375,789 | 292,961 | 449,529 | 375,789 | ||||||||||||
Property and Equipment | ||||||||||||||||
Land and improvements | 4,730 | 3,094 | 5,324 | 4,730 | ||||||||||||
Building and improvements | 44,008 | 37,917 | 46,205 | 44,008 | ||||||||||||
Machinery and equipment | 74,911 | 64,867 | 82,752 | 74,911 | ||||||||||||
Furniture and fixtures | 3,568 | 3,333 | 3,895 | 3,568 | ||||||||||||
Construction in progress | 2,654 | 2,290 | 2,294 | 2,654 | ||||||||||||
|
|
|
| |||||||||||||
| 129,871 | 111,501 | 140,470 | 129,871 | |||||||||||||
Less accumulated depreciation | 56,802 | 49,753 | 65,623 | 56,802 | ||||||||||||
|
|
|
| |||||||||||||
Net Property and Equipment | 73,069 | 61,748 | 74,847 | 73,069 | ||||||||||||
Other Assets | ||||||||||||||||
Goodwill | 99,558 | 104,759 | 103,619 | 99,558 | ||||||||||||
Othernon-amortizable intangible assets | 14,938 | 14,323 | 15,649 | 14,938 | ||||||||||||
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 | ||||||||||||||
Amortizable intangible assets, net of accumulated amortization of $40,835 and $37,049 at May 31, 2019 and 2018, respectively | 52,096 | 54,655 | ||||||||||||||
|
|
|
| |||||||||||||
Total Other Assets | 169,151 | 173,700 | 171,364 | 169,151 | ||||||||||||
|
|
|
| |||||||||||||
Total Assets | $ | 618,009 | $ | 528,409 | $ | 695,740 | $ | 618,009 | ||||||||
|
|
|
| |||||||||||||
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 | |||||||||||||||
| 2018 | 2017 | 2019 | 2018 | |||||||||||||
Liabilities and Equity | ||||||||||||||||
Current Liabilities | ||||||||||||||||
Accounts payable | $ | 20,750 | $ | 16,244 | $ | 19,063 | $ | 20,750 | ||||||||
Accruals | ||||||||||||||||
Accrued compensation | 6,065 | 5,002 | 7,085 | 6,065 | ||||||||||||
Income taxes | 165 | 936 | 601 | 165 | ||||||||||||
Other accruals | 11,708 | 13,820 | 11,502 | 11,708 | ||||||||||||
|
|
|
| |||||||||||||
Total Current Liabilities | 38,688 | 36,002 | 38,251 | 38,688 | ||||||||||||
Deferred Income Taxes | 14,103 | 17,048 | 15,618 | 14,103 | ||||||||||||
OtherNon-Current Liabilities | 5,043 | 3,602 | 3,972 | 5,043 | ||||||||||||
|
|
|
| |||||||||||||
Total Liabilities | 57,834 | 56,652 | 57,841 | 57,834 | ||||||||||||
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; 51,735,732 and 50,932,489 shares issued and outstanding at May 31, 2018 and 2017, respectively | 8,278 | 8,149 | ||||||||||||||
Common stock, $0.16 par value — shares authorized 120,000,000; 52,216,589 and 51,735,732 shares issued and outstanding at May 31, 2019 and 2018, respectively | 8,355 | 8,278 | ||||||||||||||
Additionalpaid-in capital | 202,572 | 174,742 | 221,937 | 202,572 | ||||||||||||
Accumulated other comprehensive loss | (9,746 | ) | (7,203 | ) | (11,640 | ) | (9,746 | ) | ||||||||
Retained earnings | 359,071 | 295,926 | 419,247 | 359,071 | ||||||||||||
|
|
|
| |||||||||||||
Total Neogen Corporation and Subsidiaries Stockholders’ Equity | 560,175 | 471,614 | 637,899 | 560,175 | ||||||||||||
Non-controlling interest | — | 143 | ||||||||||||||
|
|
|
| |||||||||||||
Total Equity | 560,175 | 471,757 | ||||||||||||||
Total Liabilities and Stockholders’ Equity | $ | 695,740 | $ | 618,009 | ||||||||||||
|
|
|
| |||||||||||||
| $ | 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 | |||||||||||||||||||||||
| 2018 | 2017 | 2016 | 2019 | 2018 | 2017 | |||||||||||||||||||
Revenues | ||||||||||||||||||||||||
Product revenues | $ | 335,554 | $ | 306,512 | $ | 273,570 | $ | 339,439 | $ | 331,288 | $ | 303,148 | ||||||||||||
Service revenues | 66,698 | 55,082 | 47,705 | 74,747 | 66,642 | 55,129 | ||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Total Revenues | 402,252 | 361,594 | 321,275 | 414,186 | 397,930 | 358,277 | ||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Cost of Revenues | ||||||||||||||||||||||||
Cost of product revenues | 174,067 | 156,568 | 137,766 | 179,660 | 173,725 | 156,295 | ||||||||||||||||||
Cost of service revenues | 37,933 | 33,058 | 30,445 | 42,606 | 37,933 | 33,058 | ||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Total Cost of Revenues | 212,000 | 189,626 | 168,211 | 222,266 | 211,658 | 189,353 | ||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Gross Margin | 190,252 | 171,968 | 153,064 | 191,920 | 186,272 | 168,924 | ||||||||||||||||||
Operating Expenses | ||||||||||||||||||||||||
Sales and marketing | 70,909 | 62,424 | 57,599 | 70,230 | 66,929 | 59,380 | ||||||||||||||||||
General and administrative | 38,294 | 34,214 | 29,189 | 40,791 | 38,294 | 34,214 | ||||||||||||||||||
Research and development | 10,855 | 10,385 | 9,890 | 12,805 | 10,855 | 10,385 | ||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
| 120,058 | 107,023 | 96,678 | ||||||||||||||||||||||
Total Operating Expenses | 123,826 | 116,078 | 103,979 | |||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Operating Income | 70,194 | 64,945 | 56,386 | 68,094 | 70,194 | 64,945 | ||||||||||||||||||
Other Income (Expense) | ||||||||||||||||||||||||
Other Income | ||||||||||||||||||||||||
Interest income, net | 2,043 | 838 | 322 | 4,683 | 2,043 | 838 | ||||||||||||||||||
Royalty income | 147 | 171 | 217 | 150 | 147 | 171 | ||||||||||||||||||
Other, net | 1,081 | 719 | (1,412 | ) | 32 | 1,081 | 719 | |||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
| 3,271 | 1,728 | (873 | ) | |||||||||||||||||||||
Total Other Income | 4,865 | 3,271 | 1,728 | |||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Income Before Income Taxes | 73,465 | 66,673 | 55,513 | 72,959 | 73,465 | 66,673 | ||||||||||||||||||
Provision for Income Taxes | 10,250 | 22,700 | 18,975 | 12,783 | 10,250 | 22,700 | ||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Net Income | 63,215 | 43,973 | 36,538 | 60,176 | 63,215 | 43,973 | ||||||||||||||||||
Net (Income) Loss Attributable toNon-controlling Interest | (70 | ) | (180 | ) | 26 | |||||||||||||||||||
Net Income Attributable toNon-controlling Interest | — | (70 | ) | (180 | ) | |||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Net Income Attributable to Neogen | $ | 63,145 | $ | 43,793 | $ | 36,564 | $ | 60,176 | $ | 63,145 | $ | 43,793 | ||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Net Income Attributable to Neogen per Share | ||||||||||||||||||||||||
Basic | $ | 1.23 | $ | 0.87 | $ | 0.73 | $ | 1.16 | $ | 1.23 | $ | 0.87 | ||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Diluted | $ | 1.21 | $ | 0.86 | $ | 0.72 | $ | 1.15 | $ | 1.21 | $ | 0.86 | ||||||||||||
|
|
|
|
|
| |||||||||||||||||||
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 | |||||||||||||||||||||||
| 2018 | 2017 | 2016 | 2019 | 2018 | 2017 | |||||||||||||||||||
Net Income | $ | 63,215 | $ | 43,973 | $ | 36,538 | $ | 60,176 | $ | 63,215 | $ | 43,973 | ||||||||||||
Other comprehensive (loss), net of tax: currency translations | (2,543 | ) | (3,257 | ) | (1,504 | ) | ||||||||||||||||||
Other comprehensive loss, net of tax: foreign currency translations | (1,894 | ) | (2,543 | ) | (3,257 | ) | ||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Comprehensive income | 60,672 | 40,716 | 35,034 | 58,282 | 60,672 | 40,716 | ||||||||||||||||||
Comprehensive (income) loss attributable tonon-controlling interest | (70 | ) | (180 | ) | 26 | |||||||||||||||||||
Comprehensive income loss attributable tonon-controlling interest | — | (70 | ) | (180 | ) | |||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Comprehensive income attributable to Neogen | $ | 60,602 | $ | 40,536 | $ | 35,060 | $ | 58,282 | $ | 60,602 | $ | 40,536 | ||||||||||||
|
|
|
|
|
| |||||||||||||||||||
See accompanying notes to consolidated financial statements.
Neogen Corporation and Subsidiaries
Consolidated Statements of Equity
(in thousands, except shares)
| Accumulated | Accumulated | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-in | Other Comprehensive | Retained | Non- Controlling | Total | Common Stock | Additional Paid-in | Other Comprehensive | Retained | Non- Controlling | Total | |||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Capital | Income (Loss) | Earnings | Interest | Equity | Shares | Amount | Capital | Income (Loss) | Earnings | Interest | Equity | |||||||||||||||||||||||||||||||||||||||||||
Balance, May 31, 2015 | 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 | 561,524 | 89 | 17,288 | 17,377 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of shares under employee stock purchase plan | 24,369 | 4 | 782 | 786 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Net income (loss) for 2016 | 36,564 | (26 | ) | 36,538 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Other comprehensive income (loss) | (1,504 | ) | (1,504 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||||||||||||||||||
Balance, May 31, 2016 | 50,090,252 | 8,014 | 147,996 | (3,946 | ) | 252,133 | (37 | ) | 404,160 | 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 | 817,284 | 131 | 26,589 | 26,720 | 817,284 | 131 | 26,589 | — | — | — | 26,720 | |||||||||||||||||||||||||||||||||||||||||||||
Issuance of shares under employee stock purchase plan | 24,953 | 4 | 921 | 925 | 24,953 | 4 | 921 | — | — | — | 925 | |||||||||||||||||||||||||||||||||||||||||||||
Purchase of minority interest | (764 | ) | (764 | ) | — | — | (764 | ) | — | — | — | (764 | ) | |||||||||||||||||||||||||||||||||||||||||||
Net income (loss) for 2017 | 43,793 | 180 | 43,973 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Other comprehensive income (loss) | (3,257 | ) | (3,257 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Net income for 2017 | — | — | — | — | 43,793 | 180 | 43,973 | |||||||||||||||||||||||||||||||||||||||||||||||||
Other comprehensive loss | — | — | — | (3,257 | ) | — | — | (3,257 | ) | |||||||||||||||||||||||||||||||||||||||||||||||
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Balance, May 31, 2017 | 50,932,489 | 8,149 | 174,742 | (7,203 | ) | 295,926 | 143 | 471,757 | 50,932,489 | 8,149 | 174,742 | (7,203 | ) | 295,926 | 143 | 471,757 | ||||||||||||||||||||||||||||||||||||||||
Exercise of options, share-based compensation | 781,116 | 125 | 26,992 | 27,117 | 781,116 | 125 | 26,992 | — | — | — | 27,117 | |||||||||||||||||||||||||||||||||||||||||||||
Issuance of shares under employee stock purchase plan | 22,127 | 4 | 1,048 | 1,052 | 22,127 | 4 | 1,048 | — | — | — | 1,052 | |||||||||||||||||||||||||||||||||||||||||||||
Purchase of minority interest | (210 | ) | (213 | ) | (423 | ) | — | — | (210 | ) | — | — | (213 | ) | (423 | ) | ||||||||||||||||||||||||||||||||||||||||
Net income (loss) for 2018 | 63,145 | 70 | 63,215 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Other comprehensive income (loss) | (2,543 | ) | (2,543 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Net income for 2018 | — | — | — | — | 63,145 | 70 | 63,215 | |||||||||||||||||||||||||||||||||||||||||||||||||
Other comprehensive 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 | 51,735,732 | 8,278 | 202,572 | (9,746 | ) | 359,071 | — | 560,175 | ||||||||||||||||||||||||||||||||||
Exercise of options, share-based compensation | 512,527 | 82 | 21,335 | — | — | — | 21,417 | |||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of shares under employee stock purchase plan | 18,330 | 3 | 1,157 | — | — | — | 1,160 | |||||||||||||||||||||||||||||||||||||||||||||||||
Shares repurchased | (50,000 | ) | (8 | ) | (3,127 | ) | — | — | — | (3,135 | ) | |||||||||||||||||||||||||||||||||||||||||||||
Net income for 2019 | — | — | — | — | 60,176 | — | 60,176 | |||||||||||||||||||||||||||||||||||||||||||||||||
Other comprehensive loss | — | — | — | (1,894 | ) | — | — | (1,894 | ) | |||||||||||||||||||||||||||||||||||||||||||||||
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Balance, May 31, 2019 | 52,216,589 | $ | 8,355 | $ | 221,937 | $ | (11,640 | ) | $ | 419,247 | $ | — | $ | 637,899 | ||||||||||||||||||||||||||||||||||||||||||
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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 | |||||||||||||||||||||||
| 2018 | 2017 | 2016 | 2019 | 2018 | 2017 | |||||||||||||||||||
Cash Flows From Operating Activities | ||||||||||||||||||||||||
Net income | $ | 63,215 | $ | 43,973 | $ | 36,538 | $ | 60,176 | $ | 63,215 | $ | 43,973 | ||||||||||||
Adjustments to reconcile net income to net cash provided from operating activities: | Adjustments to reconcile net income to net cash provided from operating activities: |
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Depreciation and amortization | 17,058 | 14,691 | 12,181 | 17,624 | 17,058 | 14,691 | ||||||||||||||||||
Deferred income taxes | (2,996 | ) | (292 | ) | 1,906 | 1,197 | (2,996 | ) | (292 | ) | ||||||||||||||
Share-based compensation | 4,909 | 5,261 | 5,468 | 5,543 | 4,909 | 5,261 | ||||||||||||||||||
Excess income tax benefit from exercise of stock options | — | (3,922 | ) | (2,945 | ) | — | — | (3,922 | ) | |||||||||||||||
Changes in operating assets and liabilities, net of business acquisitions: | ||||||||||||||||||||||||
Accounts receivable | (10,233 | ) | 5,035 | (6,002 | ) | (4,025 | ) | (10,233 | ) | 5,035 | ||||||||||||||
Inventories | (2,647 | ) | (6,970 | ) | (9,427 | ) | (10,437 | ) | (2,647 | ) | (6,970 | ) | ||||||||||||
Prepaid expenses and other assets | (2,275 | ) | 812 | (3,836 | ) | (3,569 | ) | (2,275 | ) | 812 | ||||||||||||||
Accounts payable | 4,381 | (1,691 | ) | 704 | (1,461 | ) | 4,381 | (1,691 | ) | |||||||||||||||
Accruals and other changes | (2,281 | ) | 3,377 | 744 | (1,206 | ) | (2,281 | ) | 3,377 | |||||||||||||||
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Net Cash From Operating Activities | 69,131 | 60,274 | 35,331 | 63,842 | 69,131 | 60,274 | ||||||||||||||||||
Cash Flows Used in Investing Activities | ||||||||||||||||||||||||
Purchase of property, equipment and othernon-current intangible assets | (20,946 | ) | (14,578 | ) | (14,222 | ) | (14,661 | ) | (20,946 | ) | (14,578 | ) | ||||||||||||
Proceeds from the sales of marketable securities | 299,751 | 149,226 | 147,189 | 339,225 | 299,751 | 149,226 | ||||||||||||||||||
Purchase of marketable securities | (361,419 | ) | (162,755 | ) | (151,625 | ) | (437,324 | ) | (361,419 | ) | (162,755 | ) | ||||||||||||
Business acquisitions, net of cash acquired | (468 | ) | (34,029 | ) | (42,491 | ) | (6,388 | ) | (468 | ) | (34,029 | ) | ||||||||||||
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Net Cash Used in Investing Activities | (83,082 | ) | (62,136 | ) | (61,149 | ) | (119,148 | ) | (83,082 | ) | (62,136 | ) | ||||||||||||
Cash Flows From Financing Activities | ||||||||||||||||||||||||
Exercise of stock options and other | 23,261 | 21,148 | 12,363 | 17,034 | 23,261 | 21,148 | ||||||||||||||||||
Repurchase of common stock | (3,135 | ) | — | — | ||||||||||||||||||||
Excess income tax benefit from the exercise of stock options | — | 3,922 | 2,945 | — | — | 3,922 | ||||||||||||||||||
Purchase of minority interest | (423 | ) | — | — | ||||||||||||||||||||
Purchase ofnon-controlling minority interest | — | (423 | ) | — | ||||||||||||||||||||
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Net Cash From Financing Activities | 22,838 | 25,070 | 15,308 | 13,899 | 22,838 | 25,070 | ||||||||||||||||||
Effect of Exchange Rate on Cash | (3,380 | ) | (898 | ) | (294 | ) | 21 | (3,380 | ) | (898 | ) | |||||||||||||
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Net Increase (Decrease) in Cash and Cash Equivalents | 5,507 | 22,310 | (10,804 | ) | ||||||||||||||||||||
Net (Decrease) Increase in Cash and Cash Equivalents | (41,386 | ) | 5,507 | 22,310 | ||||||||||||||||||||
Cash and Cash Equivalents, Beginning of Year | 77,567 | 55,257 | 66,061 | 83,074 | 77,567 | 55,257 | ||||||||||||||||||
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Cash and Cash Equivalents, End of Year | $ | 83,074 | $ | 77,567 | $ | 55,257 | $ | 41,688 | $ | 83,074 | $ | 77,567 | ||||||||||||
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Supplementary Cash Flow Information | ||||||||||||||||||||||||
Income taxes paid, net of refunds | $ | 11,800 | $ | 13,865 | $ | 13,413 | $ | 13,027 | $ | 14,966 | $ | 17,704 | ||||||||||||
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, all of which are wholly-owned as of May 31, 2018.2019. Neogen Latinoamérica was 100% and 90% owned as of May 31, 20182019 and 2017. WeMay 31, 2018; Neogen purchased all shares owned by the minority interest owner on December 31, 2017, which increased ourits ownership in Neogen Latinoamérica from 90% to 100%. For Neogen do Brasil, wethe Company purchased the 10% owned by the two minority interest owners on February 28, 2017, which increased ourits ownership interest to 100%.Non-controlling interest represents thenon-controlling owners’ proportionate share in the equity of these subsidiaries; thenon-controlling owners’ proportionate share in the income or losses of the subsidiaries is subtracted from, or added to, ourNeogen’s 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.
UseRecently Adopted Accounting Standards
Revenue Recognition
On June 1, 2018, the Company adopted ASU No.2014-09—Revenue from Contracts with Customers (Topic 606). Refer to the Revenue Recognition section of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires managementNote 1 to make estimates and assumptions that affect the amounts reported in the consolidated financial statements for further information.
Classification of Cash Receipts and accompanying notes. Actual results could differ from these estimates. Significant estimates impactingPayments
In August 2016, the accompanyingFASB issued ASU No.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. The Company adopted this ASU on June 1, 2018; the impact on its consolidated financial statements includewas immaterial.
Recent Accounting Pronouncements Not Yet Adopted
Leases
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. Modified retrospective application is required with certain practical expedients. The Company will adopt this ASU on June 1, 2019. The Company has performed a review of its lessee and lessor arrangements, including revenue through leasing programs as well as lease expenses, which primarily result from operating lease arrangements at most of the Company’s facilities. The Company will record aright-of-use (ROU) asset and corresponding lease liability on the balance sheet in the first quarter of fiscal 2020 and has determined the impact of this pronouncement on its consolidated financial condition and results of operations is immaterial.
Financial Instruments- Credit Losses
In June 2016, the FASB issued ASU No.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 uncollectible accounts receivable, inventory valuationcredit losses for the difference between the amortized cost basis of a financial instrument and intangible assets.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 does not believe adoption of this guidance will have an impact on its consolidated financial statements.
Fair Value Measurements
In August 2018, the FASB issued ASU2018-3, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement, which modifies the disclosure requirements of fair value measurements. ASU2018-13 is effective for fiscal years beginning after December 15, 2019 and early adoption is permitted. The Company does not believe adoption of this guidance will have an impact on its consolidated financial statements.
Cloud Computing Implementation Cost
In August 2018, the FASB issued ASU2018-15, Intangible-Goodwill and OtherInternal-Use Software (Subtopic350-40): Customer’s Accounting for Implementation Cost Incurred in a Cloud Computing Arrangement That Is a Service Contract, which clarifies the accounting for implementation costs in cloud computing arrangements. ASU2018-15 is effective for fiscal years beginning after December 15, 2019 and early adoption is permitted. The Company does not believe adoption of this guidance will have an impact on its consolidated financial statements.
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 us 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, 2018 or 2017, respectively. The activity in the allowance for doubtful accounts was as follows:
| Year ended May 31 | ||||||||||||
| (in thousands) | 2018 | 2017 | 2016 | |||||||||
Beginning Balance | $ | 2,000 | $ | 1,500 | $ | 1,300 | ||||||
Provision | 152 | 645 | 305 | |||||||||
Recoveries | 40 | 25 | 90 | |||||||||
Write-offs | (642 | ) | (170 | ) | (195 | ) | ||||||
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Ending Balance | $ | 1,550 | $ | 2,000 | $ | 1,500 | ||||||
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Fair Value of Financial Instruments
The carrying amounts of ourthe Company’s 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 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. We utilizeThe Company utilizes 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 are maintained at financial institutions and, at times, balances may exceed federally insured limits. The Company has never experienced any losses related to these balances and believes it is not exposed to significant credit risk regarding its cash and cash equivalents. Cash and cash equivalents were $83,074,000$41,688,000 and $77,567,000$83,074,000 at May 31, 20182019 and 2017,2018, respectively. The carrying value of these assets approximates fair value due to the short maturity of these instruments and meets the Level 1 criteria. Cash held by foreign subsidiaries was $7,101,000$8,711,000 and $8,132,000$7,101,000 at May 31, 2019 and 2018, and 2017, respectively.
Marketable Securities
We haveThe Company has marketable securities held by banks or broker-dealers at May 31, 2018,2019, consisting of short-term domestic certificates of deposit of $27,400,000$17,681,000 and commercial paper and US treasuries rated at leastA-2/P-2A-1/P-1 (short-term) and A/A2 (long-term) with original maturities between 91 days and one yeartwo years of $100,336,000.$208,155,000. Total outstanding marketable securities at May 31, 20182019 was $127,736,000;$225,836,000; there were $66,068,000$127,736,000 in marketable securities outstanding at May 31, 2017.2018. These securities are classified as available for sale. The primary objective of ourmanagement’s 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.
Marketable Securities as of May 31, 2019 and 2018 are listed below by classification and remaining maturities.
| Year ended May 31 | ||||||||||||
Maturity | 2019 | 2018 | ||||||||||
US Treasuries | 0 – 90 days | 2,470,000 | 19,910,000 | |||||||||
91 – 180 days | — | — | ||||||||||
181 days – 1 year | 2,435,000 | — | ||||||||||
1 – 2 years | 2,505,000 | — | ||||||||||
Commercial Paper | 0 – 90 days | 84,338,000 | 47,740,000 | |||||||||
91 – 180 days | 47,960,000 | 32,673,000 | ||||||||||
181 days – 1 year | 34,369,000 | — | ||||||||||
1 – 2 years | 34,078,000 | — | ||||||||||
Certificates of Deposit | 0 – 90 days | 7,732,000 | 5,446,000 | |||||||||
91 – 180 days | 5,000,000 | 8,747,000 | ||||||||||
181 days – 1 year | 750,000 | 13,220,000 | ||||||||||
1 – 2 years | 4,199,000 | — | ||||||||||
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Total Marketable Securities | 225,836,000 | 127,736,000 | ||||||||||
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Use of Estimates
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 disclosures of contingent assets and liabilities. On an ongoing basis, management evaluates the estimates, including, but not limited to, variable consideration related to revenue recognition, allowances for doubtful accounts, the market value of, and demand for, inventories, stock-based compensation, provision for income taxes and related balance sheet accounts, accruals, goodwill and other 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.
Accounts Receivable and Concentrations of Credit Risk
Financial instruments which potentially subject Neogen 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, 2019 or 2018, respectively. The activity in the allowance for doubtful accounts was as follows:
| Year ended May 31 | ||||||||||||
| (in thousands) | 2019 | 2018 | 2017 | |||||||||
Beginning Balance | $ | 1,550 | $ | 2,000 | $ | 1,500 | ||||||
Provision | 263 | 152 | 645 | |||||||||
Recoveries | 38 | 40 | 25 | |||||||||
Write-offs | (151 | ) | (642 | ) | (170 | ) | ||||||
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Ending Balance | $ | 1,700 | $ | 1,550 | $ | 2,000 | ||||||
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Inventories
Inventories are stated at the lower of cost or net realizable value, determined on thefirst-in,first-out method. The components of inventories were as follows:
| Year ended May 31 | Year ended May 31 | |||||||||||||||
| (in thousands) | 2018 | 2017 | 2019 | 2018 | ||||||||||||
Raw Materials | $ | 36,702 | $ | 33,190 | $ | 41,594 | $ | 36,702 | ||||||||
Work-in-process | 5,993 | 4,831 | 5,581 | 5,993 | ||||||||||||
Finished goods | 33,310 | 35,123 | 38,817 | 33,310 | ||||||||||||
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| $ | 76,005 | $ | 73,144 | $ | 85,992 | $ | 76,005 | |||||||||
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OurThe Company’s inventories are analyzed for slow moving, expired and obsolete items no less frequently thanon a quarterly basis and the valuation allowance is adjusted as required. The valuation allowance for inventory was $2,200,000$2,250,000 and $2,000,000$2,200,000 at May 31, 20182019 and 2017,2018, 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 $11,315,000, $10,315,000 $8,783,000 and $7,452,000$8,783,000 in fiscal years 2019, 2018 2017 and 2016,2017, 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. We reviewManagement reviews 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 intangibles was 10 years and 11 years at bothMay 31, 2019 and May 31, 2018, and May 31, 2017, 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 20172018 and 20162017 financial statements have been reclassified to conform towith the fiscal 20182019 presentation.
Stock Options
Equity Compensation Plans
At May 31, 2018, we2019, the Company had stock option plans which are described more fully in Note 5.5 to the consolidated financial statements.
The weighted-average fair value per share of stock options granted during fiscal years 2019, 2018 2017 and 2016,2017, estimated on the date of grant using the Black-Scholes option pricing model, was $14.91, $14.47 $11.89 and $9.83,$11.89, respectively. The fair value of stock options granted was estimated using the following weighted-average assumptions:
| Year ended May 31 | Year ended May 31 | |||||||||||||||||||||||
| 2018 | 2017 | 2016 | 2019 | 2018 | 2017 | |||||||||||||||||||
Risk-free interest rate | 1.6% | 1.2% | 1.2% | 2.6 | % | 1.6 | % | 1.2 | % | |||||||||||||||
Expected dividend yield | 0.0% | 0.0% | 0.0% | 0.0 | % | 0.0 | % | 0.0 | % | |||||||||||||||
Expected stock volatility | 27.7% | 35.2% | 33.3% | 27.0 | % | 27.7 | % | 35.2 | % | |||||||||||||||
Expected option life | 4.0 years | 4.0 years | 4.0 years | 3.5 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 ourthe Company’s 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. Prior to the fiscal 2017 grants, weNeogen recognized the fair value of stock options using the accelerated method over their requisite service periods which we havemanagement has determined to be the vesting periods; for options granted in fiscal years 2019, 2018 and 2017, and 2018, wethe Company 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 and 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 Neogen are recorded in sales and marketing expense; these expenses totaled $13,503,000, $12,147,000 $10,185,000 and $9,734,000$10,185,000 in fiscal years 2019, 2018 2017 and 2016,2017, respectively.
Income Taxes
We accountThe Company accounts 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 carryforwards 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.
OurThe Company’s 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, and Neogen Australasia Pty Limited. Based on historical experience, as well as ourmanagement’s future plans, earnings from these subsidiaries are expected to bere-invested indefinitely for future expansion and working capital needs. Furthermore, ourNeogen’s domestic operations have historically produced sufficient operating cash flow to mitigate the need to remit foreign earnings. On an annual basis, we evaluatethe Company evaluates 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, 2018,2019, unremitted earnings of ourthe Company’s foreign subsidiaries were $43,784,000.$55,553,000.
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “U.S. Tax Act)Act”) was signed into law making significant changes to the Internal Revenue Code. Changes include a federal corporate tax rate decreasereduced 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 issuedThe U. S. Tax Act also includes a provision 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 certaintax global intangiblelow-taxed 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(GILTI) of foreign earnings wassubsidiaries and a provisional amount at May 31,deduction for foreign derived intangible income (FDII), both of which became effective for us beginning June 1, 2018. Any subsequent adjustmentSee Note 6 to these amounts will be recorded to current tax expense in the quarter of 2019 when anyconsolidated financial statements for further analysis of our deferred tax assets and liabilities and our historical foreign earnings is completed.information.
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$1,471,000, $1,411,000 and $1,463,000$1,426,000 in fiscal years 2019, 2018 2017 and 2016,2017, 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. Our 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) | 2018 | 2017 | 2016 | 2019 | 2018 | 2017 | ||||||||||||||||||
Numerator for basic and diluted net income per share - Net Income attributable to Neogen | $ | 63,145 | $ | 43,793 | $ | 36,564 | $ | 60,176 | $ | 63,145 | $ | 43,793 | ||||||||||||
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Denominator for basic net income per share - Weighted average shares | 51,358 | 50,544 | 49,869 | 51,888 | 51,358 | 50,544 | ||||||||||||||||||
Effect of dilutive stock options | 791 | 621 | 631 | 537 | 791 | 621 | ||||||||||||||||||
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Denominator for diluted net income per share | 52,149 | 51,165 | 50,500 | 52,425 | 52,149 | 51,165 | ||||||||||||||||||
Net income attributable to Neogen per share | ||||||||||||||||||||||||
Basic | $ | 1.23 | $ | 0.87 | $ | 0.73 | $ | 1.16 | $ | 1.23 | $ | 0.87 | ||||||||||||
Diluted | $ | 1.21 | $ | 0.86 | $ | 0.72 | $ | 1.15 | $ | 1.21 | $ | 0.86 | ||||||||||||
At May 31, 2018, 2017 and 2016,2019, 5,000 shares were excluded from the computation of diluted net income per share, as the option exercise prices exceeded the average market price of the common stock exceeded the option exercise price forshares. In 2018 and 2017, all outstanding options; therefore, no shares were excluded fromincluded in the diluted net income per share computation.
New Accounting PronouncementsRevenue Recognition
In May 2014, the FASB issued ASU No.2014-09—On June 1, 2018, Neogen adopted ASC Topic 606—Revenue from Contracts with Customers (Topic 606). The new standardThis guidance 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: 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. Our internal task force identified all revenue streams at each significant subsidiary and reviewed contracts to evaluate the impact of adopting the new standard on our revenue recognition policies, procedures and control framework and ultimately on our consolidated financial statements and related disclosures. In our review of contracts in each revenue stream, we noted no material impact in the implementation of the standard. We have determined the impact of adopting the standard on our control framework and noted minimal, insignificant changes to our system and other controls processes. WeNeogen adopted this standard on June 1, 2018 using the full retrospective approach. This approach was chosen to provide appropriate comparisons against ourthe Company’s prior year financial statements. We are finalizingstatements; accordingly, historical information for the impactyears ended May 31, 2018 and 2017 has been adjusted to conform to the new standard.
The adoption of this ASUTopic 606 did not have a material impact on the disclosures for ourconsolidated financial statement footnotes and expectstatements.
Under Topic 606, the disclosuresCompany determines the amount of revenue to be enhancedrecognized through application of the following steps:
Identification of the contract with a customer;
Identification of the performance obligations in the first quartercontract;
Determination of fiscal 2019.the transaction price;
Allocation of the transaction price to the performance obligations in the contract; and
Recognition of revenue when or as the Company satisfies the performance obligations.
Essentially all of Neogen’s revenue is generated through contracts with its customers. A performance obligation is a promise in a contract to transfer a product or service to a customer. The Company generally recognizes revenue at a point in time when all of its performance obligations under the terms of a contract are satisfied. With the adoption of Topic 606, revenue is recognized upon transfer of control of promised products and services in an amount that reflects the consideration the Company expects to receive in exchange for those products or services. The collectability of consideration
In February 2016,on the FASB issued ASU No.2016-02—Leases to increase transparency and comparability among organizations by recognizing lease assets and lease liabilitiescontract is reasonably assured before revenue is recognized. To the extent that customer payment has been received before all recognition criteria are met, these revenues are initially deferred in other accruals on the balance sheet and disclosing key information about leasing arrangements. A lessee should recognizethe revenue is recognized in the statement of financial position a liabilityperiod that all recognition criteria have been met. In certain situations, Neogen provides rebates, marketing support, credits or incentives 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; early adoption is permitted. Modified retrospective application is permitted with certain practical expedients. We will adopt this ASU on June 1, 2019 and are currently in the process of evaluating our lessee and lessor arrangements to determine the impact of this amendment on our consolidated financial condition and results of operations. This evaluation includes a review of revenue through leasing arrangements as well as lease expenses,select customers, which are primarily through operating lease arrangements at most of our 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 accountingaccounted for certain aspects of share-based payments to
employees. The guidance requires the recognition of the income tax effects of awards in the income statementas variable consideration 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. We adopted this standard effective June 1,
2017. Adoption of this ASU decreased income tax expense by $4,816,000 in fiscal 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 andestimating the amount of revenue to recognize on a contract. Variable consideration reduces the amount of revenue that is recognized. These variable consideration estimates are updated at the end of each reporting period based on information currently available.
The performance obligations in Neogen’s contracts are generally satisfied well within one year of contract inception. In such cases, management has elected the practical expedient to not adjust the promised amount of consideration for the effects of a significant financing component. Management has elected to utilize the practical expedient to recognize the incremental costs of obtaining a contract as an expense when incurred because the amortization period for the prepaid costs that would otherwise have been deferred and amortized is one year or less. The Company accounts for shipping and handling for products as a fulfillment activity when goods are shipped. Revenue is recognized net of any tax collected from customers; the taxes are subsequently remitted to governmental authorities. The Company’s terms and conditions of sale generally do not provide for returns of product or reperformance of service except in the case of quality or warranty issues. These situations are infrequent; due to immateriality of the amount, warranty claims are recorded in the period incurred.
The Company derives revenue from two primary sources — product revenue and service revenue.
Product revenue consists primarily of shipments of:
Diagnostic test kits, culture media and related products used by food producers and processors to detect harmful natural toxins, foodborne bacteria, allergens and levels of general sanitation;
Consumable products marketed to veterinarians, retailers, livestock producers and animal health product distributors; and
Rodenticides, disinfectants and insecticides to assist in the control of rodents, insects and disease in and around agricultural, food production and other facilities.
Revenue for Neogen’s products are recognized and invoiced when the product is shipped to the customer.
Service revenue consists primarily of:
Genomic identification and related interpretive bioinformatic services; and
Other commercial laboratory services.
Revenues for Neogen’s genomics and commercial laboratory services are recognized and invoiced when the applicable laboratory service is performed and the results are conveyed to the customer.
Payment terms for products and services are generally 30 to 60 days.
The following table presents disaggregated revenue by major product and service categories for the years ended May 31, 2019 and 2018:
| Year Ended | ||||||||||||||||||||
| Increase/ | Increase/ | |||||||||||||||||||
| May 31, 2019 | (Decrease) | May 31, 2018 | (Decrease) | May 31, 2017 | ||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||
Food Safety: | ||||||||||||||||||||
Natural Toxins, Allergens & Drug Residues | $ | 78,373 | 7 | % | $ | 72,962 | 3 | % | $ | 70,926 | ||||||||||
Bacterial & General Sanitation | 41,966 | 10 | % | 38,156 | 10 | % | 34,706 | |||||||||||||
Culture Media & Other | 49,857 | 13 | % | 44,271 | 12 | % | 39,367 | |||||||||||||
Rodenticides, Insecticides & Disinfectants | 25,584 | 7 | % | 23,821 | 75 | % | 13,620 | |||||||||||||
Genomics Services | 17,694 | 16 | % | 15,267 | 34 | % | 11,415 | |||||||||||||
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| 213,474 | 10 | % | 194,477 | 14 | % | 170,034 | ||||||||||||||
Animal Safety: | ||||||||||||||||||||
Life Sciences | 7,858 | (25 | )% | 10,411 | 7 | % | 9,704 | |||||||||||||
Veterinary Instruments & Disposables | 44,582 | (7 | )% | 47,749 | 15 | % | 41,693 | |||||||||||||
Animal Care & Other | 29,941 | (3 | )% | 30,930 | 11 | % | 27,891 | |||||||||||||
Rodenticides, Insecticides & Disinfectants | 66,389 | (2 | )% | 67,646 | (3 | )% | 69,429 | |||||||||||||
Genomics Services | 51,942 | 11 | % | 46,717 | 18 | % | 39,526 | |||||||||||||
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| 200,712 | (1 | )% | 203,453 | 8 | % | 188,243 | ||||||||||||||
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Total Revenue | $ | 414,186 | 4 | % | $ | 397,930 | 11 | % | $ | 358,277 | ||||||||||
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See Note 9 to the consolidated financial statements for disaggregated revenues by geographical location.
Revision of Previously Issued Financial Statements
The Company has historically classified certain variable consideration components resulting from volume rebates, distributor support, and other marketing discounts as cost of revenues or sales and marketing expense in its consolidated financial statements of income. These amounts should have been classified as contra revenue in product or service revenues. The Company had determined in prior periods that the company expectsmisstatements were clearly immaterial, individually and in the aggregate, to collect overeach of the instrument’s contractual life. ASU2016-13 is effective forreporting periods affected. The Company began properly classifying these items as contra revenues beginning in the fiscal periods beginning after December 15,year ended May 31, 2019 and must be adopted as a cumulative effect adjustmenthas revised the financials for prior fiscal years 2018 and 2017 to retained earnings. Early adoption is permitted. We do not believe adoptionconform to the current period presentation. These immaterial adjustments had no impact on the Company’s operating income, income before taxes, net income or reported earnings per share, and no change to stockholders’ equity.
Presented below are the effects of the revisions on the line items within our previously issued consolidated statements of income for the years ended May 31, 2018 and 2017. Revised consolidated statements of income related to these periods are presented in this guidance will have anForm10-K.
| Year Ended | Year Ended | |||||||||||||||||||||||
| May 31, 2018 | May 31, 2017 | |||||||||||||||||||||||
| As Previously Reported | Adjustments | As Revised | As Previously Reported | Adjustments | As Revised | |||||||||||||||||||
| (in thousands) | (in thousands) | |||||||||||||||||||||||
Revenues | ||||||||||||||||||||||||
Product revenues | $ | 335,554 | $ | (4,266 | ) | $ | 331,288 | $ | 306,512 | $ | (3,390 | ) | $ | 303,148 | ||||||||||
Service revenues | 66,698 | (56 | ) | 66,642 | 55,082 | 73 | 55,129 | |||||||||||||||||
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Total revenues | 402,252 | (4,322 | ) | 397,930 | 361,594 | (3,317 | ) | 358,277 | ||||||||||||||||
Cost of revenues | ||||||||||||||||||||||||
Cost of product revenues | 174,067 | (342 | ) | 173,725 | 156,568 | (273 | ) | 156,295 | ||||||||||||||||
Cost of service revenues | 37,933 | — | 37,933 | 33,058 | — | 33,058 | ||||||||||||||||||
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Total cost of revenues | 212,000 | (342 | ) | 211,658 | 189,626 | (273 | ) | 189,353 | ||||||||||||||||
Gross margin | 190,252 | (3,980 | ) | 186,272 | 171,968 | (3,044 | ) | 168,924 | ||||||||||||||||
Operating expenses | ||||||||||||||||||||||||
Sales and marketing | 70,909 | (3,980 | ) | 66,929 | 62,424 | (3,044 | ) | 59,380 | ||||||||||||||||
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Total operating expenses | 120,058 | (3,980 | ) | 116,078 | 107,023 | (3,044 | ) | 103,979 | ||||||||||||||||
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Operating income | 70,194 | — | 70,194 | 64,945 | — | 64,945 | ||||||||||||||||||
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The revisions had no impact on our audited consolidated financial statements.
In August 2016, the FASB issued ASUNo. 2016-15—Classificationbalance sheets as of Certain Cash ReceiptsMay 31, 2018 and Cash Payments (a consensus2017 and no impact on our audited consolidated statements 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 statementequity or audited consolidated statements 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 forthe fiscal years beginning after December 15, 2017,ended May 31, 2018 and interim periods within those fiscal years. Early adoption is permitted, including adoption during an interim period. We will adopt this ASU on June 1, 2019 and are currently evaluating its impact on our consolidated financial statements.2017.
| 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 2019, 2018 2017 and 2016,2017, 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, 2016 | $ | 26,889 | $ | 61,617 | $ | 88,506 | ||||||||||||||||||
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 | — | 757 | 757 | ||||||||||||||||||
Goodwill adjustments and/or currency (1) | (5,919 | ) | (39 | ) | (5,958 | ) | (5,919 | ) | (39 | ) | (5,958 | ) | ||||||||||||
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Balance, May 31, 2018 | $ | 40,001 | $ | 59,557 | $ | 99,558 | $ | 40,001 | $ | 59,557 | $ | 99,558 | ||||||||||||
Goodwill acquired | 3,796 | 1,196 | 4,992 | |||||||||||||||||||||
Goodwill adjustments and/or currency (1) | (1,244 | ) | 313 | (931 | ) | |||||||||||||||||||
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Balance, May 31, 2019 | $ | 42,553 | $ | 61,066 | $ | 103,619 | ||||||||||||||||||
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| (1) | Includes final purchase price allocation adjustment. |
At May 31, 2019,non-amortizable intangible assets included licenses of $569,000, trademarks of $13,717,000 and other intangibles of $1,363,000. 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.$1,380,000.
Amortizable intangible assets consisted of the following and are included in customer-based intangibleintangibles 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 | $ | 9,491 | $ | 2,523 | $ | 6,968 | $ | 9,813 | $ | 3,182 | $ | 6,631 | ||||||||||||
Covenants not to compete | 801 | 483 | 318 | 862 | 542 | 320 | ||||||||||||||||||
Patents | 9,693 | 5,013 | 4,680 | 8,158 | 3,570 | 4,588 | ||||||||||||||||||
Customer-based intangibles | 56,420 | 24,579 | 31,841 | 57,634 | 28,017 | 29,617 | ||||||||||||||||||
Other products and service-related intangibles | 15,299 | 4,451 | 10,848 | 16,464 | 5,524 | 10,940 | ||||||||||||||||||
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Balance, May 31, 2018 | $ | 91,704 | $ | 37,049 | $ | 54,655 | ||||||||||||||||||
Balance, May 31, 2019 | $ | 92,931 | $ | 40,835 | $ | 52,096 | ||||||||||||||||||
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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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Amortization expense for intangibles totaled $6,309,000, $6,743,000 $5,908,000 and $4,730,000$5,908,000 in fiscal years 2019, 2018, 2017, and 2016,2017, respectively. The estimated amortization expense for each of the five succeeding fiscal years is as follows: $6,179,000 in 2019, $5,865,000$6,664,000 in 2020, $5,435,000$6,025,000 in 2021, $5,048,000$5,673,000 in 2022, $5,299,000 in 2023 and $4,702,000$4,989,000 in 2023.2024. 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 25 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 linestraight-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 ourthe Company’s strategic platform for the expansion of available product offerings.
Fiscal 2016
On June 1, 2015, we 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, 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, we 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, we 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, we acquired all 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, we 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 our production facility in Randolph, Wisconsin, and report within the Animal Safety segment. In fiscal 2016, we 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, we 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, we paid the former owners $393,000 in contingent consideration based on the achievement of sales targets, and charged $14,000 to Other Expense. In June 2018, we agreed to pay the former owners $122,000 in contingent consideration based on the achievement of sales targets and charged $42,000 to Other Expense; the funds are currently in escrow awaiting settlement of a legal matter.
On May 1, 2016, we 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, wethe Company 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 final 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 $2,526,000, accounts payable of $2,197,000, deferred tax liability of $1,758,000, contingent consideration accrual of $1,058,000, other current liabilities of $604,000,non-amortizable intangible assets of $1,889,000, intangible assets of $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, weNeogen 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 remainsremained accrued for contingent consideration payable at the end of the second year. In January 2019, Neogen paid the former owners $184,000 in contingent consideration based on the achievement of sales targets in the second year; the remaining accrual balance was adjusted to Other Income. 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, wethe Company acquired the stock of Rogama Industria e Comercio, Ltda., a company that develops and manufactures rodenticides and insecticides, based near São 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 final purchase price allocation, based upon the fair value of these assets and liabilities determined using the income approach, included accounts receivable of $1,866,000, othernon-current assets of $26,000, inventory of $960,000, land, property and equipment of $4,734,000, current liabilities of $2,562,000, contingent consideration accrual of $213,000, deferred tax liability of $2,034,000,non-amortizable intangible assets of $870,000, intangible assets of $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, weNeogen 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 remainsremained accrued for contingent consideration payable at the end of the second year. In April 2019, the Company paid the former owners $23,000 in contingent consideration based on the achievement of sales targets in the second year; the remaining accrual balance was adjusted to Other Income. 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, wethe Company 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 ourNeogen’s animal genomics business in Australia and New Zealand. Consideration for the purchase was $2,063,000; $468,000 has beenwas initially 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.
Fiscal 2019
On August 1, 2018, the Company acquired the stock of Clarus Labs, Inc., a manufacturer of water testing products. Neogen has distributed Clarus’ Colitag water test to the food and beverage industries since 2004 and this acquisition gives the Company access to sell this product to new markets. Consideration for the purchase was $4,204,000 in cash and approximately $1.3 million of contingent consideration, due semiannually for the first five 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 inventory of $32,000, machinery and equipment of $120,000, accounts payable of $53,000, contingent consideration accrual of $1,256,000,non-current deferred tax liability of $544,000,non-amortizable intangible assets of $878,000, intangible assets of $1,487,000 (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 February 2019, $90,000 was paid to the former owners as contingent consideration from the accrual. Manufacturing of these products was moved to the Company’s Lansing, Michigan location in October 2018, reporting within the Food Safety segment.
On September 4, 2018, the Company acquired the assets of Livestock Genetic Services, LLC, a Virginia-based company that specializes in genetic evaluations and data management for cattle breeding organizations. Livestock Genetic Services has been a long-time strategic partner of Neogen and the acquisition enhances the Company’sin-house genetic evaluation capabilities. Consideration for the purchase was $1,100,000 in cash, with $700,000 paid at closing and $400,000 payable to the former owner on September 1, 2019, and approximately $385,000 of contingent consideration, payable over the next three years. The final purchase price allocation, based upon the fair value of these assets and liabilities determined using the income approach, included office equipment of $15,000, contingent consideration accrual of $385,000, intangible assets of $942,000 (with an estimated life of5-15 years) and the remainder to goodwill (deductible for tax purposes). These values are Level 3 fair value measurements. Services provided by this operation are now performed at the Company’s Lincoln, Nebraska location, reporting within the Animal Safety segment.
On January 1, 2019, the Company acquired the assets of Edmonton, Alberta-based Delta Genomics Centre, an animal genomics laboratory in Canada. Delta’s laboratory operations were renamed Neogen Canada and the acquisition is intended to accelerate growth of the Company’s animal genomics business in Canada. Consideration for the purchase was $1,485,000 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 $38,000, machinery and equipment of $371,000, unearned revenue liability of $125,000, intangible assets of $532,000 (with an estimated life of 5 to 10 years) and the remainder to goodwill (deductible for tax purposes). These values are Level 3 fair value measurements. Services provided by this operation continue to be performed in Edmonton, reporting within the Animal Safety segment.
| 4. | Long-Term Debt |
We haveThe Company has a financing agreement with a bank providing for ana $15,000,000 unsecured revolving line of credit, which was amended on November 30, 20162018 to increase the line from $12,000,000 to $15,000,000, and extend the maturity from September 1, 201730, 2019 to September 30, 2019.2021. There were no advances against the line of credit during fiscal years 20172019 and 2018; there was no balance outstanding at May 31, 2018.2019. Interest on any borrowings is at LIBOR plus 100 basis points (rate under the terms of the agreement was 3.14%3.49% at May 31, 2018)2019). Financial covenants include maintaining specified levels of tangible net worth, debt service coverage, and funded debt to EBITDA, each of which we werethe Company was in compliance with at May 31, 2018.2019.
| 5. | Equity Compensation Plans |
QualifiedIncentive andnon-qualified options to purchase shares of common stock may be granted to directors, officers and employees of Neogen under the terms of ourthe Company’s 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 3,997,000, 1,913,000 2,525,000 and 3,276,0002,525,000 at May 31, 2019, 2018 2017 and 2016,2017, respectively. Options vest ratably over three and five-year periods and the contractual terms are generally five or ten years.
| Weighted-Average | Weighted-Average | |||||||||||||||||||||||
| (options in thousands) | Options | Weighted-Average Exercise Price | Weighted-Average Grant Date Fair Value | Options | Exercise Price | Grant Date Fair Value | ||||||||||||||||||
Outstanding at May 31, 2015 (852 exercisable) | 2,651 | 23.29 | 6.90 | |||||||||||||||||||||
Granted | 732 | 35.23 | 9.83 | |||||||||||||||||||||
Exercised | (569 | ) | 17.60 | 5.36 | ||||||||||||||||||||
Forfeited | (39 | ) | 28.93 | 8.36 | ||||||||||||||||||||
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Outstanding at May 31, 2016 (875 exercisable) | 2,775 | 27.53 | 7.97 | 2,775 | $ | 27.53 | $ | 7.97 | ||||||||||||||||
Granted | 828 | 40.68 | 11.89 | 828 | 40.68 | 11.89 | ||||||||||||||||||
Exercised | (827 | ) | 22.82 | 6.77 | (827 | ) | 22.82 | 6.77 | ||||||||||||||||
Forfeited | (77 | ) | 32.04 | 9.17 | (77 | ) | 32.04 | 9.17 | ||||||||||||||||
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Outstanding at May 31, 2017 (661 exercisable) | 2,699 | 32.88 | 9.51 | 2,699 | 32.88 | 9.51 | ||||||||||||||||||
Granted | 829 | 59.37 | 14.47 | 829 | 59.37 | 14.47 | ||||||||||||||||||
Exercised | (821 | ) | 28.18 | 8.20 | (821 | ) | 28.18 | 8.20 | ||||||||||||||||
Forfeited | (208 | ) | 39.57 | 11.12 | (208 | ) | 39.57 | 11.12 | ||||||||||||||||
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Outstanding at May 31, 2018 (508 exercisable) | 2,499 | 42.63 | 11.44 | 2,499 | 42.63 | 11.44 | ||||||||||||||||||
Granted | 527 | 62.92 | 14.91 | |||||||||||||||||||||
Exercised | (513 | ) | 31.28 | 8.92 | ||||||||||||||||||||
Forfeited | (128 | ) | 47.08 | 12.42 | ||||||||||||||||||||
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Outstanding at May 31, 2019 (617 exercisable) | 2,385 | 49.37 | 12.70 | |||||||||||||||||||||
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The following is a summary of stock options outstanding at May 31, 2018:2019:
| (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 | ||||||||||||||||
Range of Exercise Price | Number | (in years) | Exercise Price | Number | Exercise Price | |||||||||||||||
$10.17 - $37.26 | 575 | 1.7 | $ | 32.07 | 290 | $ | 30.62 | |||||||||||||
$37.27 - $40.91 | 492 | 2.8 | 40.45 | 147 | 40.44 | |||||||||||||||
$40.92 - $59.78 | 172 | 4.0 | 51.03 | 54 | 49.19 | |||||||||||||||
$59.79 - $61.56 | 614 | 3.5 | 60.43 | 124 | 60.43 | |||||||||||||||
$61.57 - $68.96 | 532 | 4.5 | 63.03 | 2 | 68.36 | |||||||||||||||
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| 2,385 | 3.2 | 49.37 | 617 | 40.68 | ||||||||||||||||
The weighted average exercise price of shares that were exercisable at May 31, 2019 and 2018 was $40.68 and 2017 was $31.23, and $26.49, respectively.
Compensation expense related to share-based awards was $5,543,000, $4,909,000 $5,261,000 and $5,468,000$5,261,000 in fiscal years 2019, 2018 2017 and 2016,2017, respectively. Remaining compensation cost to be expensed in future periods fornon-vested options was $15,367,000$15,880,000 at May 31, 2018,2019, with a weighted average expense recognition period of 3.53.4 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. 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.
| Year Ended | ||||||||||||
| (in thousands) | May 31, 2019 | May 31, 2018 | May 31, 2017 | |||||||||
Aggregate intrinsic value of options outstanding | $ | 22,798 | $ | 82,649 | $ | 39,388 | ||||||
Aggregate intrinsic value of options exercisable | $ | 10,222 | $ | 22,572 | $ | 13,929 | ||||||
Aggregate intrinsic value of options exercised | $ | 21,382 | $ | 25,844 | $ | 18,067 | ||||||
Common stock totaling 332,000365,395 of the 450,000 originally712,500 authorized shares are reserved for issuance under the terms of the 2011 Employee Stock Purchase Plan. The plan 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 18,330 in fiscal 2019, 22,127 in fiscal 2018 and 24,953 in fiscal 2017 and 24,369 in fiscal 2016.2017.
| 6. | Income Taxes |
Income before income taxes by source consists of the following amounts:
| Year ended May 31 | Year ended May 31 | |||||||||||||||||||||||
| (in thousands) | 2018 | 2017 | 2016 | 2019 | 2018 | 2017 | ||||||||||||||||||
U.S. | $ | 62,310 | $ | 55,171 | $ | 50,662 | $ | 58,479 | $ | 62,310 | $ | 55,171 | ||||||||||||
Foreign | 11,155 | 11,502 | 4,851 | 14,480 | 11,155 | 11,502 | ||||||||||||||||||
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| $ | 73,465 | $ | 66,673 | $ | 55,513 | $ | 72,959 | $ | 73,465 | $ | 66,673 | |||||||||||||
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The provision for income taxes consistedconsists of the following:
| Year ended May 31 | Year ended May 31 | |||||||||||||||||||||||
| (in thousands) | 2018 | 2017 | 2016 | 2019 | 2018 | 2017 | ||||||||||||||||||
Current: | ||||||||||||||||||||||||
U.S. Taxes | $ | 10,129 | $ | 20,259 | $ | 14,630 | $ | 8,451 | $ | 10,129 | $ | 20,259 | ||||||||||||
Foreign | 3,066 | 2,514 | 1,756 | 3,758 | 3,066 | 2,514 | ||||||||||||||||||
Deferred | (2,945 | ) | (73 | ) | 2,589 | 574 | (2,945 | ) | (73 | ) | ||||||||||||||
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Provision for Income Taxes | $ | 10,250 | $ | 22,700 | $ | 18,975 | $ | 12,783 | $ | 10,250 | $ | 22,700 | ||||||||||||
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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) | 2018 | 2017 | 2016 | 2019 | 2018 | 2017 | ||||||||||||||||||
Tax at U.S. statutory rate | $ | 21,459 | $ | 23,336 | $ | 19,429 | $ | 15,321 | $ | 21,459 | $ | 23,336 | ||||||||||||
Section 199 domestic production deduction | (1,167 | ) | (1,057 | ) | (1,143 | ) | — | (1,167 | ) | (1,057 | ) | |||||||||||||
Global intangiblelow-taxed income (GILTI) | 840 | — | — | |||||||||||||||||||||
Foreign derived intangible income deduction (FDII) | (1,531 | ) | — | — | ||||||||||||||||||||
Foreign rate differential | (461 | ) | (1,247 | ) | (699 | ) | 495 | (461 | ) | (1,247 | ) | |||||||||||||
Subpart F income | 816 | 996 | 1,049 | 842 | 816 | 996 | ||||||||||||||||||
Excess tax benefits on stock-based compensation | (4,816 | ) | — | — | ||||||||||||||||||||
Release of FIN 48 reserve from closed tax years | (1,035 | ) | — | — | ||||||||||||||||||||
Tax benefits on stock-based compensation | (2,586 | ) | (4,816 | ) | (535 | ) | ||||||||||||||||||
FIN 48 reserve adjustments | 13 | (1,035 | ) | 576 | ||||||||||||||||||||
Provision for state income taxes, net of federal benefit | 975 | 972 | 779 | 1,251 | 975 | 972 | ||||||||||||||||||
Remeasurement of deferred taxes | (6,022 | ) | — | — | — | (6,022 | ) | — | ||||||||||||||||
Transition tax on foreign earnings and profits | 1,223 | — | — | — | 1,223 | — | ||||||||||||||||||
Amended U.S. Federal tax returns FY12, FY13 & FY14 | — | — | (777 | ) | ||||||||||||||||||||
Tax credits and other | (722 | ) | (300 | ) | 337 | |||||||||||||||||||
Tax credits | (1,726 | ) | (1,151 | ) | (1,213 | ) | ||||||||||||||||||
Other | (136 | ) | 429 | 872 | ||||||||||||||||||||
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| $ | 10,250 | $ | 22,700 | $ | 18,975 | $ | 12,783 | $ | 10,250 | $ | 22,700 | |||||||||||||
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On June 1, 2017, the Company adopted ASU No.No. 2016-09,2016-09—Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, 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 $2.6 million in fiscal 2019 and by $4.8 million in fiscal 2018.
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the U.S. 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 AccountingThe U.S. Tax Act also includes a provision to tax global intangiblelow-taxed income (GILTI) of foreign subsidiaries and a deduction for foreign derived intangible income (FDII), both of which became effective for the Company beginning June 1, 2018.
Bulletin No. 118 (SAB 118) was issuedIn fiscal 2018, the Company recorded a net benefit of $4.8 million related to address the application of U.S. GAAPTax Act, due 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 effectsimpact of the Act. In accordance with SAB 118, we have determined thatreduction in the $6.0 million of deferred tax benefit recorded in connection with the remeasurement of certainrate on deferred tax assets and liabilities and theof $6.0 million, partially offset by $1.2 million of current tax expense recorded in connection with theone-time transition tax on the mandatory deemed repatriation of foreign earnings was a provisional amount at May 31, 2018. Any subsequent adjustment toearnings. In fiscal 2019, the Company finalized its calculation of these amounts will beand recorded immaterial adjustments to currentincome tax expense; the Company also recorded expense of $840,000 related to GILTI and a tax benefit of $1.5 million related to FDII.
Foreign tax credits, primarily offsetting taxes associated with Subpart F and GILTI income, were $1,296,000, $791,000 and $729,000 in the quarter offiscal years 2019, when any further analysis of our deferred tax assets2018 and liabilities2017, respectively. The Company’s U.S. R & D credit was $430,000 in fiscal 2019 and our historical foreign earnings is completed.$422,000 in fiscal years 2018 and 2017.
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 our deferred income tax liabilities and assets are as follows:
| Year ended May 31 | Year ended May 31 | |||||||||||||||
| (in thousands) | 2018 | 2017 | 2019 | 2018 | ||||||||||||
Deferred income tax liabilities | ||||||||||||||||
Indefinite and long-lived assets | $ | (17,503 | ) | $ | (23,177 | ) | $ | (18,963 | ) | $ | (17,503 | ) | ||||
Prepaid expenses | (573 | ) | (640 | ) | (586 | ) | (573 | ) | ||||||||
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| (18,076 | ) | (23,817 | ) | (19,549 | ) | (18,076 | ) | |||||||||
Deferred income tax assets | ||||||||||||||||
Stock Options | 1,489 | 2,604 | 1,497 | 1,489 | ||||||||||||
Inventories and accounts receivable | 1,593 | 2,603 | 1,315 | 1,593 | ||||||||||||
Tax loss carryforwards | 134 | 436 | 417 | 134 | ||||||||||||
Valuation allowance on tax loss carryforwards | (407 | ) | — | |||||||||||||
Accrued expenses and other | 757 | 1,126 | 1,109 | 757 | ||||||||||||
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| 3,973 | 6,769 | 3,931 | 3,973 | |||||||||||||
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Net deferred income tax liabilities | $ | (14,103 | ) | $ | (17,048 | ) | $ | (15,618 | ) | $ | (14,103 | ) | ||||
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We hadThe Company is no accruallonger subject to examination by the Internal Revenue Service for unrecognized2016 and earlier tax benefits at both May 31, 2018 and 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.years.
| 7. | Commitments and Contingencies |
We areThe Company is involved in environmental remediation and monitoring activities at ourits Randolph, Wisconsin manufacturing facility and accrueaccrues for related costs when such costs are determined to be probable and estimable. We expenseThe Company currently utilizes a pump and treat remediation strategy, which includes semi-annual monitoring and reporting, consulting, and maintenance of monitoring wells. Neogen expenses these annual costs of remediation, which have ranged from $38,000 to $74,000$131,000 per year over the past five years. OurThe Company’s estimated liability for these costs iswas $916,000 at both May 31, 20182019 and 2017,2018, measured on an undiscounted basis over an estimated period of 15 years; $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. In fiscal 2019, the Company performed an updated Corrective Measures Study (CMS) on the site, per a request from the Wisconsin Department of Natural Resources (WDNR), and is currently in discussion with the WDNR regarding potential alternative remediation strategies going forward. The Company believes that the current pump and treat strategy is appropriate for the site. At this time, the outcome of the review in terms of approach and future costs is unknown, but a change in the current remediation strategy, depending on the alternative selected, could require an increase in the currently recorded liability, with an offsetting charge to operations in the period recorded.
We have
The Company has 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 $2,795,000, $2,876,000 $2,659,000 and $1,969,000$2,659,000 for fiscal years 2019, 2018 2017 and 2016,2017, 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: 2019—$634,000, 2020—$641,000,183,000, 2021—$649,000,191,000, 2022—$572,000114,000, 2023—$109,000 and 2023—2024—$568,000.109,000.
We leaseNeogen leases office and manufacturing facilities undernon-cancelable operating leases. Rent expense for fiscal years 2019, 2018 and 2017 was $871,000, $799,000 and 2016 was $799,000, $729,000, and $662,000, respectively. Future fiscal year minimum rental payments for these leases over their remaining terms are as follows: 2019—$498,000, 2020—$86,000,1,112,000, 2021—$108,000,810,000, 2022—$141,000,297,000, 2023—$101,000, and 20232024 and later—$73,000.0.
We areThe Company is 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 ourits future results of operations or financial position.
| 8. | Defined Contribution Benefit Plan |
We maintainThe Company maintains a defined contribution 401(k) benefit plan covering substantially all domestic employees. Employees are permitted to defer compensation up to IRS limits, with Neogen matching 100% of the first 3% of deferred compensation and 50% of the next 2% deferred. OurNeogen’s expense under this plan was $1,361,000, $1,325,000, $1,259,000, and $1,188,000$1,259,000 in fiscal years 2019, 2018 and 2017, and 2016, respectively.
| 9. | Segment Information |
We haveThe Company has 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 the 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 sales 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 ourthe Company’s 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 2019 | ||||||||||||||||||||||||||||||||
Product revenues to external customers | $ | 190,675 | $ | 148,764 | $ | — | $ | 339,439 | ||||||||||||||||||||||||
Service revenues to external customers | 22,799 | 51,948 | — | 74,747 | ||||||||||||||||||||||||||||
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Total revenues to external customers | 213,474 | 200,712 | — | 414,186 | ||||||||||||||||||||||||||||
Operating income (loss) | 39,020 | 33,875 | (4,801 | ) | 68,094 | |||||||||||||||||||||||||||
Depreciation and amortization | 9,525 | 8,099 | — | 17,624 | ||||||||||||||||||||||||||||
Total Assets | 206,267 | 221,950 | 267,523 | 695,740 | ||||||||||||||||||||||||||||
Expenditures for long-lived assets | 8,916 | 5,745 | — | 14,661 | ||||||||||||||||||||||||||||
Fiscal 2018 | ||||||||||||||||||||||||||||||||
Product revenues to external customers | $ | 176,123 | $ | 159,431 | $ | — | $ | 335,554 | $ | 174,553 | $ | 156,735 | $ | — | $ | 331,288 | ||||||||||||||||
Service revenues to external customers | 19,924 | 46,774 | — | 66,698 | 19,924 | 46,718 | — | 66,642 | ||||||||||||||||||||||||
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Total revenues to external customers | 196,047 | 206,205 | — | 402,252 | 194,477 | 203,453 | — | 397,930 | ||||||||||||||||||||||||
Operating income (loss) | 34,561 | 39,529 | (3,896 | ) | 70,194 | 34,561 | 39,529 | (3,896 | ) | 70,194 | ||||||||||||||||||||||
Depreciation and amortization | 9,083 | 7,975 | — | 17,058 | 9,083 | 7,975 | — | 17,058 | ||||||||||||||||||||||||
Total Assets | 186,570 | 220,629 | 210,810 | 618,009 | 186,570 | 220,629 | 210,810 | 618,009 | ||||||||||||||||||||||||
Expenditures for long-lived assets | 10,538 | 10,408 | — | 20,946 | 10,538 | 10,408 | — | 20,946 | ||||||||||||||||||||||||
Fiscal 2017 | ||||||||||||||||||||||||||||||||
Product revenues to external customers | $ | 155,795 | $ | 150,717 | $ | — | $ | 306,512 | $ | 154,431 | $ | 148,717 | $ | — | $ | 303,148 | ||||||||||||||||
Service revenues to external customers | 15,530 | 39,552 | — | 55,082 | 15,603 | 39,526 | — | 55,129 | ||||||||||||||||||||||||
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Total revenues to external customers | 171,325 | 190,269 | — | 361,594 | 170,034 | 188,243 | — | 358,277 | ||||||||||||||||||||||||
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 | ||||||||||||||||||||||||
Service revenues to external customers | 12,678 | 35,027 | — | 47,705 | ||||||||||||||||||||||||||||
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Total revenues to external customers | 146,421 | 174,854 | — | 321,275 | ||||||||||||||||||||||||||||
Operating income (loss) | 28,984 | 30,978 | (3,576 | ) | 56,386 | |||||||||||||||||||||||||||
Depreciation and amortization | 5,609 | 6,572 | — | 12,181 | ||||||||||||||||||||||||||||
Total Assets | 143,303 | 215,374 | 91,263 | 449,940 | ||||||||||||||||||||||||||||
Expenditures for long-lived assets | 9,192 | 5,030 | — | 14,222 | ||||||||||||||||||||||||||||
| (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 $151,262,000 or 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 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 U.S. based operations represent 75% offollowing table presents the Company’s long-lived assets as of May 31, 2018 and 76% as May 31, 2017.revenue disaggregated by geographical location:
| Year ended May 31 | ||||||||
| 2019 | 2018 | |||||||
| (in thousands) | ||||||||
Revenues by Geographic Location | ||||||||
Domestic | $ | 248,304 | $ | 248,236 | ||||
International | 165,882 | 149,694 | ||||||
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Total revenue | 414,186 | 397,930 | ||||||
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| 10. | Stock Repurchase |
In December 2008, ourOctober 2018, the Company’s Board of Directors passed a resolution canceling the Company’s prior stock buyback program, which had been approved in December 2008, and authorized a new program to purchase, subject to market conditions, up to 1,500,0003,000,000 shares of ourthe Company’s common stock. As of May 31,In December 2018, 149,368 cumulativethe Company purchased 50,000 shares have been purchasedunder the new program 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 or 2016.$3,134,727. Shares purchasedacquired under the program werehave been retired.
| 11. | Summary of Quarterly Data (Unaudited) |
| Quarter Ended | Quarter Ended | |||||||||||||||||||||||||||||||
| (in thousands, except per share) | August 2017 | November 2017 | February 2018 | May 2018 | August 2018 | November 2018 | February 2019 | May 2019 | ||||||||||||||||||||||||
Total Revenue | $ | 95,256 | $ | 101,817 | $ | 95,892 | $ | 109,287 | $ | 99,626 | $ | 107,098 | $ | 97,700 | $ | 109,762 | ||||||||||||||||
Gross Margin | 45,871 | 49,271 | 45,521 | 49,589 | 46,729 | 50,033 | 44,628 | 50,530 | ||||||||||||||||||||||||
Net income | 11,936 | 17,153 | 16,581 | 17,545 | 15,237 | 16,051 | 13,073 | 15,815 | ||||||||||||||||||||||||
Net income attributable to Neogen | 11,914 | 17,100 | 16,586 | 17,545 | ||||||||||||||||||||||||||||
Basic net income per share | 0.23 | 0.33 | 0.32 | 0.34 | 0.29 | 0.31 | 0.25 | 0.31 | ||||||||||||||||||||||||
Diluted net income per share | 0.23 | 0.33 | 0.32 | 0.33 | 0.29 | 0.31 | 0.25 | 0.30 | ||||||||||||||||||||||||
| 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 | $ | 94,209 | $ | 100,698 | $ | 94,903 | $ | 108,120 | ||||||||||||||||
Gross Margin | 40,479 | 43,591 | 40,880 | 47,018 | 44,924 | 48,249 | 44,601 | 48,498 | ||||||||||||||||||||||||
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 | 0.20 | 0.22 | 0.20 | 0.25 | 0.23 | 0.33 | 0.32 | 0.34 | ||||||||||||||||||||||||
Diluted net income per share | 0.20 | 0.22 | 0.20 | 0.24 | 0.23 | 0.33 | 0.32 | 0.33 | ||||||||||||||||||||||||
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-21F-26