SECURITIES AND EXCHANGE COMMISSION
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
February 28, 2018.August 31, 2019.
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from
to
(Exact name of registrant as specified in its charter)
| | |
Michigan | | 38-2367843 |
| | |
(State or other jurisdiction of incorporation or organization) | | |
(Address of principal executive offices, including zip code)
(Registrant’s telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file reports), and (2) has been subject to such filing requirements for the past 90 days.
YES☒
NO
Indicate by check mark whether the registrant has submitted electronically
and posted on its corporate Web site, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation
S-T (§
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES☒
NO Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a
non-accelerated
filer (see definition of “accelerated filer and large accelerated filer” in Rule12b-2
of the Exchange Act): | | | | | | | | | | |
Large accelerated filer | | | | | | |
| | | | |
| | | | | |
Non-accelerated filerSmaller Reporting Company | | ☐ (Do not check if a smaller reporting company) |
| | Smaller reporting company | | | | | | |
| | | | | |
Emerging growth company | | ☐ | | | | | | | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended
transactiontransition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2
of the Exchange Act): YES ☐
NO As of
February 28, 2018,August 31, 2019 there were
51,583,08552,422,942 shares of Common Stock outstanding.
NEOGEN CORPORATION AND SUBSIDIARIES
PART I – FINANCIAL INFORMATION
Item 1. | Interim Consolidated Financial Statements |
Item 1. Interim Consolidated Financial Statements
Neogen Corporation and Subsidiaries
Consolidated Balance
SheetSheets
(in thousands, except share and
per share amounts)
| | | | | | | | |
| | February 28, 2018 | | | May 31, 2017 | |
| | (Unaudited) | | | (Audited) | |
Assets | | | | | | | | |
Current Assets | | | | | | | | |
Cash and cash equivalents | | $ | 82,066 | | | $ | 77,567 | |
Marketable securities (at fair value, which approximates cost) | | | 110,089 | | | | 66,068 | |
Accounts receivable, less allowance of $1,750 and $2,000 | | | 73,209 | | | | 68,576 | |
Inventories, net | | | 77,506 | | | | 73,144 | |
Prepaid expenses and other current assets | | | 9,334 | | | | 7,606 | |
| | | | | | | | |
Total Current Assets | | | 352,204 | | | | 292,961 | |
Property and Equipment, net | | | 72,514 | | | | 61,748 | |
Other Assets | | | | | | | | |
Goodwill | | | 99,478 | | | | 104,759 | |
Othernon-amortizable intangible assets | | | 15,011 | | | | 14,323 | |
Customer-based intangibles, net of accumulated amortization of $23,846 and $20,846 at February 28, 2018 and May 31, 2017 | | | 33,518 | | | | 35,983 | |
Othernon-current assets, net of accumulated amortization of $11,893 and $9,931 at February 28, 2018 and May 31, 2017 | | | 22,876 | | | | 18,635 | |
| | | | | | | | |
Total Assets | | $ | 595,601 | | | $ | 528,409 | |
| | | | | | | | |
Liabilities and Equity | | | | | | | | |
Current Liabilities | | | | | | | | |
Accounts payable | | $ | 19,654 | | | $ | 16,244 | |
Accrued compensation | | | 5,469 | | | | 5,002 | |
Income taxes | | | 960 | | | | 936 | |
Other accruals | | | 11,210 | | | | 13,820 | |
| | | | | | | | |
Total Current Liabilities | | | 37,293 | | | | 36,002 | |
Deferred Income Taxes | | | 11,400 | | | | 17,048 | |
Non-Current Liabilities | | | 4,973 | | | | 3,602 | |
| | | | | | | | |
Total Liabilities | | | 53,666 | | | | 56,652 | |
Commitments and Contingencies (note 9) | | | | | | | | |
Equity | | | | | | | | |
Preferred stock, $1.00 par value, 100,000 shares authorized, none issued and outstanding | | | — | | | | — | |
Common stock, $0.16 par value, 60,000,000 shares authorized, 51,583,085 and 50,932,489 shares issued and outstanding at February 28, 2018 and May 31, 2017, respectively | | | 8,253 | | | | 8,149 | |
Additionalpaid-in capital | | | 197,246 | | | | 174,742 | |
Accumulated other comprehensive loss | | | (5,303 | ) | | | (7,203 | ) |
Retained earnings | | | 341,459 | | | | 295,926 | |
| | | | | | | | |
Total Neogen Corporation Stockholders’ Equity | | | 541,655 | | | | 471,614 | |
Non-controlling interest | | | 280 | | | | 143 | |
| | | | | | | | |
Total Equity | | | 541,935 | | | | 471,757 | |
| | | | | | | | |
Total Liabilities and Equity | | $ | 595,601 | | | $ | 528,409 | |
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Cash and cash equivalents | | $ | | | | $ | | |
| | | | | | | | |
Accounts receivable, less allowance of $1,700 and $1,700 at August 31, 2019 and May 31, 2019, respectively | | | | | | | | |
| | | | | | | | |
Prepaid expenses and other current assets | | | | | | | | |
| | | | | | | | |
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Net Property and Equipment | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Other non-amortizable intangible assets | | | | | | | | |
Amortizable intangible and other assets, net of accumulated amortization of $40,127 and $40,835 at August 31, 2019 and May 31, 2019, respectively | | | | | | | | |
| | | | | | | | |
| | $ | | | | $ | | |
| | | | | | | | |
Liabilities and Stockholders’ Equity | | | | | | | | |
| | | | | | | | |
| | $ | | | | $ | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
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Total Current Liabilities | | | | | | | | |
| | | | | | | | |
Other Non-Current Liabilities | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Commitments and Contingencies (note 8) | | | | | | | | |
| | | | | | | | |
Preferred stock, $1.00 par value, 100,000 shares authorized, NaN issued and outstanding | | | | | | | | |
Common stock, $0.16 par value, 120,000,000 shares authorized, 52,422,942 and 52,216,589 shares issued and outstanding at August 31, 2019 and May 31, 2019, respectively | | | | | | | | |
| | | | | | | | |
Accumulated other comprehensive loss | | | | ) | | | | ) |
| | | | | | | | |
| | | | | | | | |
Total Stockholders’ Equity | | | | | | | | |
| | | | | | | | |
Total Liabilities and Stockholders’ Equity | | $ | | | | $ | | |
| | | | | | | | |
See notes to interim consolidated financial statements.
2
Neogen Corporation and Subsidiaries
Consolidated Statements of Income (unaudited)
(in thousands, except per share amounts)
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | | Nine Months Ended | |
| | February 28, | | | February 28, | |
| | 2018 | | | 2017 | | | 2018 | | | 2017 | |
Revenues | | | | | | | | | | | | | | | | |
Product revenues | | $ | 78,142 | | | $ | 73,964 | | | $ | 244,298 | | | $ | 223,170 | |
Service revenues | | | 17,750 | | | | 14,421 | | | | 48,667 | | | | 39,577 | |
| | | | | | | | | | | | | | | | |
Total Revenues | | | 95,892 | | | | 88,385 | | | | 292,965 | | | | 262,747 | |
Cost of Revenues | | | | | | | | | | | | | | | | |
Cost of product revenues | | | 40,352 | | | | 38,816 | | | | 124,785 | | | | 113,241 | |
Cost of service revenues | | | 10,019 | | | | 8,689 | | | | 27,517 | | | | 24,556 | |
| | | | | | | | | | | | | | | | |
Total Cost of Revenues | | | 50,371 | | | | 47,505 | | | | 152,302 | | | | 137,797 | |
| | | | | | | | | | | | | | | | |
Gross Margin | | | 45,521 | | | | 40,880 | | | | 140,663 | | | | 124,950 | |
| | | | |
Operating Expenses | | | | | | | | | | | | | | | | |
Sales and marketing | | | 17,492 | | | | 15,340 | | | | 52,331 | | | | 45,824 | |
General and administrative | | | 9,280 | | | | 8,548 | | | | 29,096 | | | | 25,094 | |
Research and development | | | 2,836 | | | | 2,641 | | | | 8,901 | | | | 8,087 | |
| | | | | | | | | | | | | | | | |
Total Operating Expenses | | | 29,608 | | | | 26,529 | | | | 90,328 | | | | 79,005 | |
| | | | | | | | | | | | | | | | |
Operating Income | | | 15,913 | | | | 14,351 | | | | 50,335 | | | | 45,945 | |
| | | | |
Other Income | | | | | | | | | | | | | | | | |
Interest income | | | 524 | | | | 271 | | | | 1,322 | | | | 690 | |
Other income | | | 844 | | | | 1,105 | | | | 1,913 | | | | 1,098 | |
| | | | | | | | | | | | | | | | |
Total Other Income | | | 1,368 | | | | 1,376 | | | | 3,235 | | | | 1,788 | |
| | | | | | | | | | | | | | | | |
Income Before Taxes | | | 17,281 | | | | 15,727 | | | | 53,570 | | | | 47,733 | |
Provision for Income Taxes | | | 700 | | | | 5,350 | | | | 7,900 | | | | 16,250 | |
| | | | | | | | | | | | | | | | |
Net Income | | | 16,581 | | | | 10,377 | | | | 45,670 | | | | 31,483 | |
Net (Income)/Loss Attributable toNon-Controlling Interest | | | 5 | | | | (90 | ) | | | (70 | ) | | | (163 | ) |
| | | | | | | | | | | | | | | | |
Net Income Attributable to Neogen | | $ | 16,586 | | | $ | 10,287 | | | $ | 45,600 | | | $ | 31,320 | |
| | | | | | | | | | | | | | | | |
Net Income Attributable to Neogen Per Share | | | | | | | | | | | | | | | | |
Basic | | $ | 0.32 | | | $ | 0.20 | | | $ | 0.89 | | | $ | 0.62 | |
| | | | | | | | | | | | | | | | |
Diluted | | $ | 0.32 | | | $ | 0.20 | | | $ | 0.88 | | | $ | 0.61 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | |
| | Three Months Ended August 31, | |
| | | | | | |
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| | $ | | | | $ | | |
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General and administrative | | | | | | | | |
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| | | | ) | | | | ) |
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Provision for Income Taxes | | | | | | | | |
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| | $ | | | | $ | | |
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| | $ | | | | $ | | |
| | | | | | | | |
| | $ | | | | $ | | |
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See notes to interim consolidated financial statements.
3
Neogen Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income (unaudited)
(in thousands)
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | | Nine Months Ended | |
| | February 28, | | | February 28, | |
| | 2018 | | | 2017 | | | 2018 | | | 2017 | |
Net Income | | $ | 16,581 | | | $ | 10,377 | | | $ | 45,670 | | | $ | 31,483 | |
| | | | |
Other comprehensive income (loss), net of tax: currency translation adjustments | | | 1,163 | | | | 441 | | | | 1,900 | | | | (3,743 | ) |
| | | | | | | | | | | | | | | | |
Comprehensive income | | | 17,744 | | | | 10,818 | | | | 47,570 | | | | 27,740 | |
Comprehensive loss (income) attributable tonon-controlling interest | | | 5 | | | | (90 | ) | | | (70 | ) | | | (163 | ) |
| | | | | | | | | | | | | | | | |
Comprehensive income attributable to Neogen | | $ | 17,749 | | | $ | 10,728 | | | $ | 47,500 | | | $ | 27,577 | |
| | | | | | | | | | | | | | | | |
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Net income | | $ | | | | $ | | |
Other comprehensive loss, net of tax: currency translation adjustments | | | | ) | | | | ) |
| | | | | | | | |
Other comprehensive income, net of tax: unrealized gain on marketable securities | | | 562 | | | | — | |
Total comprehensive income | | $ | | | | $ | | |
| | | | | | | | |
See notes to interim consolidated financial statements.
4
Neogen Corporation and Subsidiaries
Consolidated StatementStatements of Equity
(in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Accumulated | | | | | | | | | | |
| | | | | | | | Additional | | | Other | | | | | | Non- | | | | |
| | Common Stock | | | Paid-in | | | Comprehensive | | | Retained | | | controlling | | | | |
| | Shares | | | Amount | | | Capital | | | Income (Loss) | | | Earnings | | | Interest | | | Total | |
Balance, May 31, 2017 | | | 50,932 | | | $ | 8,149 | | | $ | 174,742 | | | $ | (7,203 | ) | | $ | 295,926 | | | $ | 143 | | | $ | 471,757 | |
Issuance of shares under share-based compensation plan | | | 631 | | | | 101 | | | | 21,456 | | | | | | | | | | | | | | | | 21,557 | |
Issuance of shares under employee stock purchase plan | | | 20 | | | | 3 | | | | 1,048 | | | | | | | | | | | | | | | | 1,051 | |
Conversion of minority interest to retained earnings | | | | | | | | | | | | | | | | | | | (67 | ) | | | 67 | | | | — | |
Net income for the nine months ended February 28, 2018 | | | | | | | | | | | | | | | | | | | 45,600 | | | | 70 | | | | 45,670 | |
Other comprehensive income | | | | | | | | | | | | | | | 1,900 | | | | | | | | | | | | 1,900 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance February 28, 2018 | | | 51,583 | | | $ | 8,253 | | | $ | 197,246 | | | $ | (5,303 | ) | | $ | 341,459 | | | $ | 280 | | | $ | 541,935 | |
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Balance at May 31, 2019 | | | | | | $ | | | | $ | | | | $ | | ) | | $ | | | | $ | | |
Issuance of shares under share-based compensation plan | | | | | | | | | | | | | | | | | | | | | | | | |
Issuance of shares under employee stock purchase plan | | | | | | | | | | | | | | | | | | | | | | | | |
Net income for the three months ended August 31, 2019 | | | | | | | | | | | | | | | | | | | | | | | | |
Other comprehensive loss for the three months ended August 31, 2019 | | | | | | | | | | | | | | | | ) | | | | | | | | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Balance at August 31, 2019 | | | | | | $ | | | | $ | | | | $ | | ) | | $ | | | | $ | | |
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Balance at May 31, 2018 | | | 51,736 | | | $ | 8,278 | | | $ | 202,572 | | | $ | (9,746 | ) | | $ | 359,071 | | | $ | 560,175 | |
Issuance of shares under share-based compensation plan | | | 251 | | | | 40 | | | | 8,433 | | | | | | | | | | | | 8,473 | |
Issuance of shares under employee stock purchase plan | | | 8 | | | | 2 | | | | 517 | | | | | | | | | | | | 519 | |
Net income for the three months ended August 31, 2018 | | | | | | | | | | | | | | | | | | | 15,237 | | | | 15,237 | |
Other comprehensive loss for the three months ended August 31, 2018 | | | | | | | | | | | | | | | (2,778 | ) | | | | | | | (2,778 | ) |
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Balance at August 31, 2018 | | | 51,995 | | | $ | 8,320 | | | $ | 211,522 | | | $ | (12,524 | ) | | $ | 374,308 | | | $ | 581,626 | |
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See notes to interim consolidated financial statements.
5
Neogen Corporation and Subsidiaries
Consolidated Statements of Cash Flows (unaudited)
(in thousands)
| | | | | | | | |
| | Nine Months Ended | |
| | February 28, | |
| | 2018 | | | 2017 | |
Cash Flows From Operating Activities | | | | | | | | |
Net Income | | $ | 45,670 | | | $ | 31,483 | |
Adjustments to reconcile net income to net cash provided from operating activities: | | | | | | | | |
Depreciation and amortization | | | 12,682 | | | | 10,691 | |
Share-based compensation | | | 3,692 | | | | 3,932 | |
Excess income tax benefit from the exercise of stock options (see note 5) | | | — | | | | (3,671 | ) |
Change in operating assets and liabilities, net of business acquisitions: | | | | | | | | |
Accounts receivable | | | (4,013 | ) | | | 5,916 | |
Inventories | | | (3,859 | ) | | | (9,460 | ) |
Prepaid expenses and other current assets | | | (7,316 | ) | | | 717 | |
Accounts payable, accruals and other changes | | | (280 | ) | | | 5,580 | |
| | | | | | | | |
Net Cash Provided By Operating Activities | | | 46,576 | | | | 45,188 | |
| | |
Cash Flows Used In Investing Activities | | | | | | | | |
Purchases of property, equipment and othernon-current intangible assets | | | (16,297 | ) | | | (13,002 | ) |
Proceeds from the sale of marketable securities | | | 211,327 | | | | 102,957 | |
Purchases of marketable securities | | | (255,348 | ) | | | (115,117 | ) |
Business acquisitions, net of cash acquired | | | (468 | ) | | | (34,027 | ) |
| | | | | | | | |
Net Cash Used In Investing Activities | | | (60,786 | ) | | | (59,189 | ) |
| | |
Cash Flows From Financing Activities | | | | | | | | |
Exercise of stock options | | | 18,916 | | | | 15,844 | |
Excess income tax benefit from the exercise of stock options | | | — | | | | 3,671 | |
| | | | | | | | |
Net Cash Provided By Financing Activities | | | 18,916 | | | | 19,515 | |
| | |
Effect of Exchange Rates on Cash | | | (207 | ) | | | (888 | ) |
| | | | | | | | |
Net Increase In Cash and Cash Equivalents | | | 4,499 | | | | 4,626 | |
Cash And Cash Equivalents At Beginning Of Period | | | 77,567 | | | | 55,257 | |
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Cash And Cash Equivalents At End Of Period | | $ | 82,066 | | | $ | 59,883 | |
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Cash Flows From Operating Activities | | | | | | | | |
| | $ | | | | $ | | |
Adjustments to reconcile net income to net cash from operating activities: | | | | | | | | |
Depreciation and amortization | | | | | | | | |
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Change in operating assets and liabilities, net of business acquisitions: | | | | | | | | |
| | | | | | | | |
| | | | ) | | | | ) |
Prepaid expenses and other current assets | | | | ) | | | | ) |
Accounts payable, accruals and other changes | | | | | | | | |
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Net Cash From Operating Activities | | | | | | | | |
Cash Flows For Investing Activities | | | | | | | | |
Purchases of property, equipment and other assets | | | | ) | | | | ) |
Proceeds from the sale of marketable securities | | | | | | | | |
Purchases of marketable securities | | | | ) | | | | ) |
Business acquisitions, net of cash acquired | | | | | | | | ) |
| | | | | | | | |
Net Cash For Investing Activities | | | | ) | | | | ) |
Cash Flows From Financing Activities | | | | | | | | |
Exercise of stock options and issuance of employee stock purchase plan shares | | | | | | | | |
| | | | | | | | |
Net Cash From Financing Activities | | | | | | | | |
Effect of Exchange Rates on Cash | | | | ) | | | | ) |
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Net Increase In Cash and Cash Equivalents | | | | | | | | |
Cash and Cash Equivalents, Beginning of Period | | | | | | | | |
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Cash and Cash Equivalents, End of Period | | $ | | | | $ | | |
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See notes to interim consolidated financial statements.
6
NEOGEN CORPORATION AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
BASIS OF PRESENTATION
AND CONSOLIDATION
The accompanying unaudited consolidated financial statements
include the accounts of Neogen Corporation (“Neogen” or the “Company”) and its wholly owned subsidiaries and have been prepared in accordance with accounting principles generally accepted in the United States of America (generally accepted accounting principles) for interim financial information and with the instructions to Form
10-Q
and Article 10 of RegulationS-X.
Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been
included.included in the accompanying unaudited consolidated financial statements. All intercompany balances and transactions have been eliminated in consolidation. The results of operations for the
three and nine month periodsthree-month period ended
February 28, 2018August 31, 2019 are not necessarily indicative of the results to be expected for the fiscal year ending May 31,
2018.2020. For more complete financial information, these consolidated financial statements should be read in conjunction with the
May 31, 2017 audited consolidated financial statements and the notes thereto included in
our Annual Report on Form10-K
for the fiscal year ended May 31, 2019.Recently Adopted Accounting Standards
On June 1, 2019, the Company adopted ASU No. 2016-02— Leases. Refer to Leases section of Note 1 for further information.
Recent Accounting Pronouncements Not Yet Adopted
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 and held-to-maturity debt securities. Rather than generally recognizing credit losses when it is probable that the loss has been incurred, the revised guidance requires companies to recognize an allowance for credit losses for the difference between the amortized cost basis of a financial instrument and the amount of amortized cost that the company expects to collect over the instrument’s contractual life. ASU 2016-13 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.
In August 2018, the FASB issued ASU 2018-3, 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. ASU 2018-13 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 ASU 2018-15, Intangible-Goodwill and Other Internal-Use Software (Subtopic 350-40): 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. ASU 2018-15 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 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 of foreign currency translation adjustments and unrealized gains or losses on marketable securities.
Fair Value of Financial Instruments
The carrying amounts of the 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. The 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. The carrying value of these assets approximates fair value due to the short maturity of these instruments and meets the Level 1 criteria.
The Company has marketable securities held by banks or broker-dealers at August 31, 2019, consisting of short-term domestic certificates of deposit, and commercial paper and U.S. treasuries rated at least A-1/P-1 (short-term) and A/A2 (long-term) with maturities between 91 days and two years. These securities are classified as available for sale. The primary objective of the Company’s investment activity is to preserve capital for the purpose of funding operations, capital expenditures and business acquisitions; investments are not entered into for trading or speculative purposes. These securities are recorded at fair value 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 consolidated statements of income.
ESTIMATES AND ASSUMPTIONS
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.
There have been no significant changes to the critical accounting policies and estimates disclosed in the Company’s Annual Report on Form
10-K for the
fiscal year ended May 31,
2017.2019.
There were no significant changes to the contractual obligations or contingent liabilities and commitments disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended May 31, 2019.
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 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.
The reserve for obsolete and slow-moving inventory 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 is 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-based intangibles are amortized on either an accelerated or straight-line basis, reflecting the pattern in which the economic benefits are consumed, while all other amortizable intangibles are amortized on a straight-line basis; 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 recorded to operations. Management reviews the carrying values of its long-lived assets to be held and used, including definite-lived intangible assets, for possible impairment whenever events or changes in business conditions warrant such a review. The carrying value of a long-lived asset is considered impaired when the anticipated separately identifiable undiscounted cash flows over the remaining useful life of the asset indicate that the carrying amount of the asset may not be recoverable. In such an event, fair value is determined using discounted cash flows and, if lower than the carrying value, impairment is recognized through a charge to operations.
Equity Compensation Plans
Share options awarded to employees and shares of stock awarded to employees under certain stock purchase plans are recognized as compensation expense based on their fair value at grant date. The fair market value of options granted under the Company stock option plans was estimated on the date of grant using the Black-Scholes option-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 would produce different option values, which in turn would result in higher or lower compensation expense recognized. To value options, several recognized valuation models exist. None of these models can be singled out as being the best or most correct. 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 Note 5.
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.
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 a right-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. We adopted this ASU on June 1, 2019; the impact on our consolidated financial statements was immaterial.
We lease various manufacturing, laboratory, warehousing and distribution facilities, administrative and sales offices, equipment and vehicles under operating leases. We evaluate our contracts to determine if an arrangement is a lease at inception and classify it as a finance or operating lease. Currently, all our leases are classified as operating leases. Leased assets and corresponding liabilities are recognized based on the present value of the lease payments over the lease term. Our lease terms may include options to extend when it is reasonably certain that we will exercise that option.
Costs associated with operating leases are recognized on a straight-line basis within operating expenses over the term of the lease. With the adoption of ASC 842, on June 1, 2019 we recognized all leases with terms greater than 12 months in duration on our consolidated balance sheets as right-of-use assets and lease liabilities of approximately $2.0 million as of June 1, 2019. We adopted the standard using the prospective approach and did not retrospectively apply to prior periods. Right-of-use assets are recorded in other assets on our consolidated balance sheets. Current and non-current lease liabilities are recorded in other accruals within current liabilities and other non-current liabilities, respectively, on our consolidated balance sheets.
We have made certain assumptions and judgments when applying ASC 842, the most significant of which are:
We elected the package of practical expedients available for transition that allow us to not reassess whether expired or existing contracts contain leases under the new definition of a lease, lease classification for expired or existing leases and whether previously capitalized initial direct costs would qualify for capitalization under ASC 842.
We did not elect to use hindsight when considering judgments and estimates such as assessments of lessee options to extend or terminate a lease or purchase the underlying asset.
For all asset classes, we elected to not recognize a right-of-use asset and lease liability for short-term leases.
For all asset classes, we elected to not separate non-lease components from lease components to which they relate and have accounted for the combined lease and non-lease components as a single lease component.
The determination of the discount rate used in a lease is our incremental borrowing rate that is based on what we would normally pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments.
Supplemental balance sheet information related to operating leases was as follows:
| | | | |
| | | |
| | | |
| | | |
Right of use - assets | | $ | 1,726 | |
Lease liabilities - current | | | 755 | |
Lease liabilities - non-current | | | 982 | |
The weighted average remaining lease term and weighted average discount rate were as follows:
| | | | |
| | | |
| | | |
Weighted average remaining lease term | | | 2.1 years | |
Weighted average discount rate | | | 3.5 | % |
Operating lease expenses are classified as cost of revenues or operating expenses on the Consolidated Statements of Income. The components of lease expense were as follows:
| | | | |
| | | |
| | | |
| | | |
| | | |
Operating leases | | $ | 240 | |
Short term leases | | | 48 | |
| | | | |
Total lease expense | | $ | 288 | |
| | | | |
Cash paid for amounts included in the measurement of lease liabilities for operating leases included in cash flows from operations on the Statement of Cash Flows were approximately $247,000 for the three months ended August 31, 2019. There were 0 non-cash additions to right-of-use assets obtained from new operating lease liabilities for the three months ended August 31, 2019.
In accordance with the new leases standard, discounted and undiscounted lease payments as of August 31, 2019 were as follows (in thousands):
| | | | |
Years ending May 31, | | | | |
2020 (1) | | $ | 757 | |
2021 | | | 730 | |
2022 | | | 230 | |
2023 | | | 61 | |
2024 | | | 3 | |
| | | — | |
| | | | |
Total lease payments | | | 1,781 | |
Less: imputed interest | | | 44 | |
| | | | |
Total lease liabilities | | $ | 1,737 | |
| | | | |
(1) | Excluding the three months ended August 31, 2019 |
Prior to our adoption of the new leases standard, future minimum lease payments as of May 31, 2019, which were undiscounted, were
as follows (in thousands):
| | | | |
Years ending May 31, | | | | |
2020 | | $ | 1,169 | |
2021 | | | 818 | |
2022 | | | 260 | |
2023 | | | 73 | |
2024 | | | — | |
2025 and thereafter | | | — | |
| | | | |
Total lease payments | | $ | 2,320 | |
The Company determines the amount of revenue to be recognized through application of the following steps:
Identification of the contract with a customer;
Identification of the performance obligations in the contract;
Determination of 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 our revenue is generated through contracts with our customers. A performance obligation is a promise in a contract to transfer a product or service to a customer. We generally recognize revenue at a point in time when all our performance obligations under the terms of a contract are satisfied. 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 on the contract 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 the revenue is recognized in the period that all recognition criteria have been met. In certain situations, we provide rebates, marketing support, credits or incentives to selected customers, which are accounted for as variable consideration when estimating 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 our contracts are generally satisfied well within one year of the contract inception. In such cases, we have elected the practical expedient to not adjust the promised amount of consideration for the effects of a significant financing component. We have 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.
We derive revenue from two primary sources—product revenue and service revenue.
Product revenue consists of shipments of:
Diagnostic test kits, dehydrated 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 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.
Revenues for our 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 our 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 three month periods ended August 31, 2019 and 2018:
| | | | | | | | |
| | Three Months ended August 31, | |
| | | | | | |
| | | |
| | | | | | | | |
Natural Toxins, Allergens & Drug Residues | | $ | | | | $ | | |
Bacterial & General Sanitation | | | | | | | | |
Dehydrated Culture Media & Other | | | | | | | | |
Rodenticides, Insecticides & Disinfectants | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | $ | | | | $ | | |
| | | | | | | | |
| | $ | | | | $ | | |
Veterinary Instruments & Disposables | | | | | | | | |
| | | | | | | | |
Rodenticides, Insecticides & Disinfectants | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | $ | | | | $ | | |
| | | | | | | | |
| | $ | | | | $ | | |
| | | | | | | | |
Inventories are stated at the lower of cost, determined
onby the
first-in,
first-out
method, or net realizable value. The components of inventories follow: | | | | | | | | |
| | February 28, 2018 | | | May 31, 2017 | |
| | (in thousands) | |
Raw materials | | $ | 35,774 | | | $ | 33,190 | |
Work-in-process | | | 6,231 | | | | 4,831 | |
Finished and purchased goods | | | 35,501 | | | | 35,123 | |
| | | | | | | | |
| | $ | 77,506 | | | $ | 73,144 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | |
| | | | | | |
| | | |
| | $ | | | | $ | | |
| | | | | | | | |
Finished and purchased goods | | | | | | | | |
| | | | | | | | |
| | $ | | | | $ | | |
| | | | | | | | |
The calculation of net income per share
attributable to Neogen Corporation follows:
| | | | | | | | | | | | | | | | |
| | Three Months Ended February 28, | | | Nine Months Ended February 28, | |
| | 2018 | | | 2017 | | | 2018 | | | 2017 | |
| | (in thousands, except per share amounts) | |
Numerator for basic and diluted net income per share: | | | | | | | | | | | | | | | | |
Net income attributable to Neogen | | $ | 16,586 | | | $ | 10,287 | | | $ | 45,600 | | | $ | 31,320 | |
Denominator for basic net income per share: | | | | | | | | | | | | | | | | |
Weighted average shares | | | 51,537 | | | | 50,746 | | | | 51,253 | | | | 50,438 | |
Effect of dilutive stock options | | | 700 | | | | 633 | | | | 761 | | | | 723 | |
| | | | | | | | | | | | | | | | |
Denominator for diluted net income per share | | | 52,237 | | | | 51,379 | | | | 52,014 | | | | 51,161 | |
| | | | |
Net income attributable to Neogen per share: | | | | | | | | | | | | | | | | |
Basic | | $ | 0.32 | | | $ | 0.20 | | | $ | 0.89 | | | $ | 0.62 | |
| | | | | | | | | | | | | | | | |
Diluted | | $ | 0.32 | | | $ | 0.20 | | | $ | 0.88 | | | $ | 0.61 | |
| | | | | | | | | | | | | | | | |
The Board
| | | | | | | | |
| | | |
| | | |
| | | | | | |
| | (in thousands, except per share | |
Numerator for basic and diluted net income per share: | | | | | | | | |
| | $ | | | | $ | | |
Denominator for basic net income per share: | | | | | | | | |
| | | | | | | | |
Effect of dilutive stock options | | | | | | | | |
| | | | | | | | |
Denominator for diluted net income per share | | | | | | | | |
| | | | | | | | |
| | $ | | | | $ | | |
| | | | | | | | |
| | $ | | | | $ | | |
| | | | | | | | |
4. SEGMENT INFORMATION
The Company has two AND GEOGRAPHIC DATA
We have 2 reportable segments: Food Safety and Animal Safety. The Food Safety segment is primarily engaged in the development, production and marketing of diagnostic test kits,
dehydrated culture media 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,
cleaners, disinfectants and insecticides to assist in the control of rodents, insects and disease in and around agricultural, food production and other facilities.
Neogen’s
Our international operations in the United Kingdom, Mexico, Brazil, China and India originally focused on the Company’s
Food Safetyfood safety products, and each of these units reports through the Food Safety segment. In recent years, these operations have expanded to offer
the Company’sour complete line of products and services, including those usually associated with the Animal Safety segment such as cleaners, disinfectants, rodenticides, insecticides, veterinary instruments and
genomicgenomics 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 follows:
| | | | | | | | | | | | | | | | |
| | Food Safety | | | Animal Safety | | | Corporate and Eliminations (1) | | | Total | |
| | (in thousands) | |
As of and for the three months ended February 28, 2018 | | | | | | | | | | | | | |
Product revenues to external customers | | $ | 42,618 | | | $ | 35,524 | | | $ | — | | | $ | 78,142 | |
Service revenues to external customers | | | 5,027 | | | | 12,723 | | | | — | | | | 17,750 | |
| | | | | | | | | | | | | | | | |
Total revenues to external customers | | | 47,645 | | | | 48,247 | | | | — | | | | 95,892 | |
Operating income (loss) | | | 8,258 | | | | 8,493 | | | | (838 | ) | | | 15,913 | |
Total assets | | | 188,075 | | | | 215,371 | | | | 192,155 | | | | 595,601 | |
| | | |
As of and for the three months ended February 28, 2017 | | | | | | | | | | | | | |
Product revenues to external customers | | $ | 39,318 | | | $ | 34,646 | | | $ | — | | | $ | 73,964 | |
Service revenues to external customers | | | 3,631 | | | | 10,790 | | | | — | | | | 14,421 | |
| | | | | | | | | | | | | | | | |
Total revenues to external customers | | | 42,949 | | | | 45,436 | | | | — | | | | 88,385 | |
Operating income (loss) | | | 7,403 | | | | 7,743 | | | | (795 | ) | | | 14,351 | |
Total assets | | | 183,419 | | | | 215,243 | | | | 108,636 | | | | 507,298 | |
8
| | | | | | | | | | | | | | | | |
| | Food Safety | | | Animal Safety | | | Corporate and Eliminations (1) | | | Total | |
| | (in thousands) | |
For the nine months ended February 28, 2018 | | | | | | | | | | | | | | | | |
Product revenues to external customers | | $ | 129,621 | | | $ | 114,677 | | | $ | — | | | $ | 244,298 | |
Service revenues to external customers | | | 14,319 | | | | 34,348 | | | | — | | | | 48,667 | |
| | | | | | | | | | | | | | | | |
Total revenues to external customers | | | 143,940 | | | | 149,025 | | | | — | | | | 292,965 | |
Operating income (loss) | | | 25,704 | | | | 27,691 | | | | (3,060 | ) | | | 50,335 | |
| | | | |
For the nine months ended February 28, 2017 | | | | | | | | | | | | | | | | |
Product revenues to external customers | | $ | 112,592 | | | $ | 110,578 | | | $ | — | | | $ | 223,170 | |
Service revenues to external customers | | | 10,475 | | | | 29,102 | | | | — | | | | 39,577 | |
| | | | | | | | | | | | | | | | |
Total revenues to external customers | | | 123,067 | | | | 139,680 | | | | — | | | | 262,747 | |
Operating income (loss) | | | 24,286 | | | | 24,616 | | | | (2,957 | ) | | | 45,945 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | |
As of and for the three months ended August 31, 2019 | | | | | | | | | | | | | | | | |
Product revenues to external customers | | $ | | | | $ | | | | $ | | | | $ | | |
Service revenues to external customers | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Total revenues to external customers | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | ) | | | | |
| | | | | | | | | | | | | | | | |
As of and for the three months ended August 31, 2018 | | | | | | | | | | | | | | | | |
Product revenues to external customers | | $ | | | | $ | | | | $ | | | | $ | | |
Service revenues to external customers | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Total revenues to external customers | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | ) | | | | |
| | | | | | | | | | | | | | | | |
(1) | Includes corporate assets, consisting principally of 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. |
9
The following table presents the Company’s revenue disaggregated by geographic location:
| | | | | | | | |
| | Three months ended August 31, | |
| | | | | | |
| | | |
Revenues by Geographic Location | | | | | | | | |
| | $ | | | | $ | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
5. EQUITY COMPENSATION PLANS
Qualified and
non-qualified
options to purchase shares of common stock may be granted to directors, officers and employees of theCompany under the terms of
the Company’sour stock option plans. These options are granted at an exercise price of not less than the fair market value of the stock on the date of grant. Options vest ratably over
three and five year periods and the contractual terms are generally
five or ten years. A summary of stock option activity during the
ninethree months ended
February 28, 2018August 31, 2019 follows:
| | | | | | | | |
| | | | | Weighted- | |
| | | | | Average | |
| | Shares | | | Exercise Price | |
| | (in thousands) | | | | |
Options outstanding June 1, 2017 | | | 2,708 | | | $ | 32.88 | |
Granted | | | 819 | | | | 59.26 | |
Exercised | | | (668 | ) | | | 28.23 | |
Forfeited | | | (144 | ) | | | 37.31 | |
| | | | | | | | |
Options outstanding February 28, 2018 | | | 2,715 | | | | 41.75 | |
| | | | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
Options outstanding June 1, 2019 | | | | | | $ | | |
| | | | | | | | |
| | | | ) | | | | |
| | | | ) | | | | |
| | | | | | | | |
Options outstanding August 31, 2019 | | | | | | $ | | |
During the three
and nine month periods ended
February 28,August 31, 2019 and 2018,
and 2017, the Company recorded
$1,026,000$1,543,000 and
$1,198,000 and $3,692,000 and $3,932,000,$1,431,000, respectively, of compensation expense related to its share-based awards.
On June 1, 2017, the Company adopted ASUNo. 2016-09, which simplifies the accounting for share-based payments to employees. The guidance requires the recognition of the income effects of awards in the income statement when the awards vest or are settled, thus eliminating additionalpaid-in capital pools. The guidance also allows for a policy election to account for forfeitures as they occur, rather than on an estimated basis, and requires that excess tax benefits be classified as an operating activity on the Statement of Cash Flows. The adoption of this ASU increased income tax expense by $331,000 for the three months ended February 28, 2018 as the reduction in the corporate tax rate from the tax reform enacted in December 2017 resulted in a partial reversal of tax benefit previously recorded at the higher corporate rate in the first and second quarters of the current fiscal year; year to date, income tax expense decreased by $3,463,000 as a result of adoption of the ASU.The weighted-average fair value per share of stock options granted during fiscal
2018 and fiscal 2017,year 2019, estimated on the date of grant using the Black-Scholes option pricing model, was
$14.44 and $11.84, respectively.$14.91. The fair value of stock options granted was estimated using the following weighted-average
assumptions: | | | | |
| | FY 2018 | | FY 2017 |
Risk-free interest rate | | 1.6% | | 1.2% |
Expected dividend yield | | 0.0% | | 0.0% |
Expected stock price volatility | | 27.7% | | 35.2% |
Expected option life | | 4.0 years | | 4.0 years |
assumptions. NaN options were granted in the first quarter of fiscal year 2020.
| | | | |
| | | |
| | | | % |
| | | | % |
Expected stock price volatility | | | | % |
| | | | |
The Company has an employee stock purchase plan that provides for employee stock purchases at a 5% discount to market price. The discount is recorded in administrative expense as of the date of purchase.
6.
NEW ACCOUNTING PRONOUNCEMENTSIn 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 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. The Company has formed an internal team to implement the new standard. This team has identified all revenue streams at each significant subsidiary and is currently reviewing contracts to evaluate the potential impact of adopting the new standard on the Company’s revenue recognition policies, procedures and control framework and ultimately on the Company’s consolidated financial statements and related disclosures. The Company will adopt this ASU on June 1, 2018 using the modified retrospective approach.
10
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; early adoption is permitted. Modified retrospective application is permitted with certain practical expedients. The Company expects to adopt this ASU on June 1, 2019 and is currently in the process of evaluating its lessee and lessor arrangements to determine the impact of this amendment on its consolidated financial condition and results of operations. This evaluation includes a review of revenue through leasing arrangements as well as lease expenses, which are primarily through operating lease arrangements at most of the Company’s facilities.
In March 2016, the FASB issued ASUNo. 2016-09 — Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting to provide guidance that changes the accounting for certain aspects of share-based payments to employees. The guidance requires the recognition of the income tax effects of awards in the income statement when the awards vest or are settled, thus eliminating additionalpaid-in capital pools. The guidance also allows for the employer to repurchase more of an employee’s shares for tax withholding purposes without triggering liability accounting. In addition, the guidance allows for a policy election to account for forfeitures as they occur rather than on an estimated basis. The Company adopted this standard effective June 1, 2017. Adoption of this ASU increased income tax expense by $331,000 for the three months ended February 28, 2018 as the reduction in the corporate tax rate from the tax reform enacted in December 2017 resulted in a partial reversal of tax benefit previously recorded at the higher corporate rate in the first and second quarters of the current fiscal year; year to date, income tax expense decreased by $3,463,000 as a result of adoption of the ASU.
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 and held-to-maturity debt securities. Rather than generally recognizing credit losses when it is probable that the loss has been incurred, the revised guidance requires companies to recognize an allowance for credit losses for the difference between the amortized cost basis of a financial instrument and the amount of amortized cost 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 the adoption of this guidance will have an impact on its consolidated financial statements.
In August 2016, the FASB issued ASUNo. 2016-15— Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force). The amendments in ASU2016-15 address eight specific cash flow issues and apply to all entities that are required to present a statement of cash flows under FASB Accounting Standards Codification (FASB ASC) 230, Statement of Cash Flows. The amendments in ASU2016-15 are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption during an interim period. The Company has not yet adopted this update and is currently evaluating the impact of ASUNo. 2016-15 on its consolidated financial statements.
7. BUSINESS AND PRODUCT LINE ACQUISITIONS
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 discussed below relates primarily to enhancing the Company’s strategic platform for the expansion of available product offerings.
On
DecemberAugust 1,
2016,2018, the Company acquired the stock of
Quat-Chem Ltd.Clarus Labs, Inc., a
chemical company that manufactures biosecurity products, based in Rochdale, England.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
$21,606,000$4,204,000 in cash and
up to $3,778,000$1,256,000 of contingent consideration, due
at the end of each ofsemiannually for the first
twofive 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$32,000, machinery and equipment of
$2,526,000,$120,000, accounts payable of
$2,197,000, $53,000, contingent consideration accrual of $1,256,000,non-current
deferred tax liability of
$1,133,000, contingent consideration accrual of $1,058,000, other current liabilities of $604,000,$544,000,non-amortizable
intangible assets of $1,889,000,$878,000, intangible assets of $6,900,000$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 January 2018, the CompanySince February 2019, $180,000 has been paid to the former owners $249,000 inas contingent consideration based onfrom the achievementaccrual. Manufacturing of sales targetsthese products was moved to the Company’s Lansing, Michigan location in the first year, and recorded a credit of $255,000 to other income, reducing the contingent consideration accrual by a corresponding amount; $554,000 remains accrued for contingent consideration payable at the end of the second year. This business continues to operate in its current location and is managed by Neogen Europe,October 2018, reporting within the Food Safety segment.11
On
December 27, 2016,September 4, 2018, the Company acquired the
stockassets of
Rogama Industria e Comercio, Ltda.,Livestock Genetic Services, LLC, a
Virginia-based company that
developsspecialized in genetic evaluations and
manufactures rodenticidesdata management for cattle breeding organizations. Livestock Genetic Services had been a long-time strategic partner of Neogen and
insecticides, based near Sao Paulo, Brazil.the acquisition enhanced the Company’sin-house
genetic evaluation capabilities. Consideration for the purchase was
$12,428,000$1,100,000 in cash,
with $700,000 paid at closing and $400,000 payable to the former owner on September 1, 2019, and up to
$2,069,000$585,000 of contingent consideration,
due atpayable over the
end of each of the first two years, based on an excess net sales formula.next three years. 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 office equipment of $4,734,000, current liabilities of $2,562,000,$
15,000, contingent consideration accrual of $213,000,non-current deferred tax liability of $1,307,000,non-amortizable$
385,000, intangible assets of $870,000, intangible assets of $5,112,000 (with$
942,000(with an estimated life of
5-15
years) and the remainder to goodwill(non-deductible (deductible to tax purposes). These values are Level 3 fair value measurements.
In September 2019, the former owner was paid the second installment of $400,000 and was also paid $88,000 in contingent consideration based on the achievement of sales targets in the first year.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 was 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.
This business continuesServices provided by this operation continue to
operatebe performed in
its current location and is managed by Neogen do Brasil, reporting within the Food Safety segment.On September 1, 2017, the 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 the Company’s animal genomics business in Australia and New Zealand. Consideration for the purchase was $2,063,000; $468,000 has been paid in cash with the remainder due in annual installments over the next five years. The preliminary purchase price allocation included inventory of $19,000, equipment of $419,000,non-current liabilities of $1,629,000, intangible assets of $850,000 (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,Edmonton, reporting within the Animal Safety segment.
8.
7. LONG TERM DEBT
The Company has
We have a financing agreement with a bank providing for
ana $15,000,000 unsecured revolving line of credit,
of $15,000,000, which
expireswas amended on
November 30, 2018 to extend the maturity from September 1, 2019 to September 30,
2019.2021. There were
no0 advances against the line of credit during fiscal
year 20172019 and there have been none thus far in fiscal
year 2018;2020; there was
no0 balance outstanding at
February 28, 2018.August 31, 2019. Interest on any borrowings remained at LIBOR plus
100 basis points (rate under the terms of the agreement was
2.82%3.08% at
February 28, 2018)August 31, 2019). Financial covenants include maintaining specified levels of tangible net worth, debt service coverage, and funded debt to EBITDA, each of which the Company was in compliance with at
February 28, 2018.9.August 31, 2019.
8. COMMITMENTS AND CONTINGENCIES
The Company is involved in environmental remediation and monitoring activities at its Randolph, Wisconsin manufacturing facility and accrues for related costs when such costs are determined to be probable and estimable. The 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
$57,000$131,000 per year over the past five years. The Company’s estimated liability for these costs was $916,000 at
February 28, 2018both August 31, 2019 and May 31,
2017,2019, measured on an undiscounted basis over an estimated period of 15 years;
$54,000$100,000 of the liability is recorded within current liabilities and the remainder is recorded within other
non-current
liabilities inon the consolidated balance sheet.sheets. 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.
The 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 its future results of operations or financial position.
10.
9. STOCK PURCHASE
The Company has a stock repurchase program, authorized by
In October 2018, the
Company’s Board of Directors
passed a resolution canceling the Company’s prior stock buyback program, which had been approved in
calendar yearDecember 2008,
and authorized a new program to purchase, subject to market conditions, up to
1,500,0003,000,000 shares of the Company’s common stock.
As of February 28,In December 2018,
1,350,632the Company purchased 50,000 shares
were available to be repurchased under the
program. There were no purchasesprogram in
fiscal year 2017negotiated and
thereopen market transactions for a total price, including commissions, of $3,134,727. Shares acquired under the program have been
none thus far in fiscal year 2018.12
retired.
PART I – FINANCIAL INFORMATION
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Item 2. 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 does not provide forecasts of future financial performance. While management is optimistic about the Company’s long-term prospects, historical financial information may not be indicative of future financial results.
Safe Harbor and Forward-Looking Statements
Forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, are made throughout this Quarterly Report on Form
10-Q.
For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward looking statements. Without limiting the foregoing, the words “believes,” “anticipates,” “plans,” “expects,” “seeks,” “estimates,” and similar expressions are intended to identify forward-looking statements. There are a number of important factors, 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 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 Quarterly Report on Form
10-Q
was first filed with the Securities and Exchange Commission and should not be relied upon as representing management’s views as of any subsequent date. While management may elect to update forward-looking statements at some point in the future, it specifically disclaims any obligation to do so, even if its views change.Critical Accounting Policies and Estimates
The discussion and analysis
Consolidated revenues were $101.4 million in the
United States. The preparationfirst quarter 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, 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.There were no significant changes to the contractual obligations or contingent liabilities and commitments disclosed in the Company’s Annual Report on Form10-K for the fiscal year ended May 31, 2017.
The Company adopted ASUNo. 2016-09 related to share-based compensation on June 1, 2017. (See Note 5 Equity Compensation Plans for further discussion).
On December 22, 2017, the Tax Cuts and Jobs Act, (“the Tax Act”) was enacted. Among the significant changes to the U.S. Internal Revenue Code, the Tax Act lowers the U.S. federal corporate income tax rate (“Federal Tax Rate”) from 35% to 21% effective January 1, 2018. The Company will compute its income tax for the fiscal year ending May 31, 2018 using a blended Federal Tax Rate of 29.2%.
In December 2017, the Securities and Exchange Commission staff issued Staff Accounting Bulletin No. 118, which addresses how a company recognizes provisional amounts when a company does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete its accounting for the effect of the changes in the Tax Act. The measurement period ends when a company has obtained, prepared and analyzed the information necessary to finalize its accounting, but cannot extend beyond one year.
As of February 28, 2018, the Company was able to determine a reasonable estimate for certain effects of tax reform and recorded that estimate as a provisional amount. The provisional remeasurement of the deferred tax assets and liabilities resulted in a $5.6 million discrete tax benefit. In addition, the Company was required to estimate its cumulative unrepatriated foreign earnings and profits and
13
calculate estimated tax owed on those earnings and profits; this tax was provisionally estimated at $2.7 million. The provisional remeasurement and repatriation amounts are anticipated to change as more data becomes available allowing more accurate computations of the amounts.
There have been no other material changes to the critical accounting policies and estimates disclosed in the Company’s Annual Report on Form10-K for the fiscal year ended May 31, 2017.
14
Executive Overview
Revenues for the Company for the third quarter ended February 28, 2018 were $95.9 million,2020, an increase of 8%, or $7.5 million,2% compared to revenues$99.6 million in the first quarter of $88.4fiscal 2019. Organic sales increased 1%.
Food Safety segment sales were $51.0 million in the first quarter of the current fiscal year, a decrease of 2% compared to $52.2 million in the same period of the prior year. Organic sales in this segment also decreased 2%, after excluding a minor contribution from the August 1, 2018 acquisition of Clarus Labs.
Animal Safety segment sales were $50.4 million in the first quarter, an increase of 6% compared to prior year first quarter sales of $47.4 million. Organic sales in this segment increased 5%, with the acquisitions of Livestock Genetics (September 2018) and Delta Genomics (January 2019) providing the remainder of the increase.
International sales in the first quarter of fiscal 2020 were 37.5% of total sales compared to 39.9% of total sales in the first quarter of fiscal 2019.
Our effective tax rate in the first quarter of fiscal 2020 was 17.0% compared to an effective tax rate of 11.1% in the prior year first quarter. The prior year’s first quarter effective tax rate was lower primarily due to tax benefits from stock options.
Net income for the quarter ended August 31, 2019 was $14.7 million, or $0.28 per diluted share, a decrease of 4% compared to $15.2 million, or $0.29 per share, for the same period in the prior year. For
Cash generated from operating activities in the year to date period, revenues were $293.0 million, an increasefirst quarter of 12%, or $30.3fiscal 2020 was $23.7 million, compared to revenues of $262.7$16.1 million in the first nine months of fiscal year 2017. Net income attributable to Neogen for the third quarter of fiscal 2018 increased 61% to $16.6 million, compared to $10.3 million2019.
Neogen’s results reflect a 4% decrease in international sales in the
thirdfirst quarter of fiscal
year 2017. Earnings per share for the third quarter of fiscal 2018 were $0.322020 compared to
$0.20 per share in the same period a year ago. Net earnings for the third quarter were favorably impacted by adjustments resulting from tax reform legislation enacted in December 2017. For the first nine months of the current fiscal year, net income attributable to Neogen increased 46% to $45.6 million, or $0.88 per fully diluted share, compared to $31.3 million, or $0.61, for the same period in the prior fiscal year.
For the year to date period, net earnings were favorablyInternational growth in this quarter was adversely impacted by
tax reform, excess tax benefits from stock option exercises,currency rates, the loss of forensics business in Brazil and a large prior yearnon-recurring
government sale, also in Brazil. Revenue changes, expressed in percentages, in the first quarter of fiscal 2020 compared to the same quarter in the prior year are as follows for each of our international locations: | | | | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
Neogen Europe (including Lab M & Quat-Chem) | | | | )% | | | | % |
Neogen do Brasil (including Deoxi & Rogama) | | | | )% | | | | )% |
| | | | % | | | | % |
| | | | )% | | | | )% |
| | | | % | | | | % |
| | | | % | | | | % |
| | | | % | | | | % |
Currency translations reduced comparative revenues by approximately $1.2 million in the first quarter of fiscal 2020 compared to the same quarter a year ago, primarily due to increased strength of the U.S. dollar relative to the British pound and the favorable conclusionAustralian dollar. Neogen Europe’s 4% decline in revenue in the first quarter was primarily due to a 2% decrease in sales of natural toxins test kits; prior year sales in this category were enhanced due to a mild deoxynivalenol (DON) outbreak in France that contributed to increased testing in that period. Additionally, the first quarter of fiscal 2019 included a large equipment sale that did not recur in the current year. Partially offsetting these declines were strong sales of cleaners and disinfectants.
At our Brazilian operations, the prior year first quarter included the final shipment of a largenon-recurring
insecticide order to a government health organization. Additionally, forensic sales in Brazil decreased significantly due to lost business from a large commercial laboratory that converted their testing protocol toa higher throughput method
. Partially offsetting these lower revenues, sales of our aflatoxin test kits rose 57% as we continued to gain market share of corn testing in Brazil. At Neogen Latinoamerica, the growth in the first quarter was led by sales of natural toxins test kits due to market share gains, partially offset by lower sales of biosecurity products
. Service revenue, which consists primarily of genomics services to animal protein and companion animal markets, was $19.5 million in the first quarter of fiscal 2020, an
IRS audit.increase of 17% over prior year first quarter revenues of $16.7 million, with minor contributions from the acquisitions of Livestock Genetics (September 2018) and Delta Genomics (January 2019). The growth was led by increases of genomic testing service revenues to the companion animal and global beef and dairy cattle markets.
| | | | | | | | | | | | | | | | |
| | Three Months ended August 31, | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | |
| | | | | | | | | | | | | | | | |
Natural Toxins, Allergens & Drug Residues | | $ | | | | $ | | | | $ | | | | | | % |
Bacterial & General Sanitation | | | | | | | | | | | | ) | | | | )% |
| | | | | | | | | | | | ) | | | | )% |
Rodenticides, Insecticides & Disinfectants | | | | | | | | | | | | ) | | | | )% |
| | | | | | | | | | | | ) | | | | )% |
| | | | | | | | | | | | | | | | |
| | $ | | | | $ | | | | $ | | ) | | | | )% |
| | | | | | | | | | | | | | | | |
| | $ | | | | $ | | | | $ | | ) | | | | )% |
Veterinary Instruments & Disposables | | | | | | | | | | | | | | | | % |
| | | | | | | | | | | | | | | | % |
Rodenticides, Insecticides & Disinfectants | | | | | | | | | | | | ) | | | | )% |
| | | | | | | | | | | | | | | | % |
| | | | | | | | | | | | | | | | |
| | $ | | | | $ | | | | $ | | | | | | % |
| | | | | | | | | | | | | | | | |
| | $ | | | | $ | | | | $ | | | | | | % |
| | | | | | | | | | | | | | | | |
Food Safety segment revenues
Natural Toxins, Allergens & Drug Residues –
Sales in this category increased
11%7% in the first quarter of fiscal 2020, led by a 9% increase in sales of natural toxins test kits primarily due to market share gains of aflatoxin kits in Brazil. Sales of allergen test kits increased 8% while sales of dairy drug residue test kits decreased 3%.Bacterial & General Sanitation –
Revenues in this category decreased 1% in the first quarter, due to lower equipment sales compared to the first quarter of the prior year, resulting from backorders of equipment from our primary supplier. Partially offsetting the decrease was a 12% increase in sales of our environmental sanitation product line and
Animal Safety segment revenues increased 6% fora 20% increase in sales oftest kits, as we continue to increase market share with ourRight Now test kit.Sales in this category decreased 8% in the
three month period ended February 28, 2018, eachfirst quarter of fiscal 2020 compared to the same period in the prior year.
For the quarter, the overall organicThis category includes sales
increase was 7%; organic growthof forensic test kits sold within Brazil, which decreased significantly, as a large customer moved toa higher throughput method
. Sales of Neogen Culture Media were down 4%, due primarily to order timing from a number of international distributors and large U.S. customers. Rodenticides, Insecticides & Disinfectants –
Sales of products in this category sold through our Food Safety operations decreased 18% in the
Food Safety and Animal Safety segments was 9% and 5%, respectively. The acquisitions of Rogama, purchased inmid-December 2016, and Neogen Australasia, in September 2017, contributed $1.6 million to the overall revenue growth in the third quarter. Food Safety segment revenues increased 17% and Animal Safety segment revenues increased 7% for the year to date period. Overall organic sales increased 7% for the year to date period; the organic increases were 9% for the Food Safety segment and 6% for the Animal Safety segment. The previously discussed acquisitions, and Quat-Chem, purchased on December 1, 2016, contributed $11.1 million to the overall sales increase for the nine month period.International sales were $37.4 million in the thirdfirst quarter of fiscal 2018,2020. The decrease was due primarily to the final shipment of a large
non-recurring
insecticide order to a government health organization in Brazil in the first quarter of the prior year. A decline in disinfectant sales in Central America and rodenticide sales in Mexico, both due to order timing from distributors, also contributed to the decrease in this category in the first quarter. Partially offsetting this was a 6% increase in sales at U.K.-based Quat-Chem and an increase
in sales of
disinfectant products in China, the result of increased demand in the pork market caused by the African swine fever virus outbreak in that country.Sales of genomics services sold through our Food Safety operations decreased 4% in the quarter ended August 31, 2019. The decrease is due to lower sales in China, as testing in the pork industry declined due to animal losses suffered as the result of the African swine fever virus. The strengthening of the U.S. dollar against the British pound also contributed to the decline; in local currency, genomics sales through our Neogen Europe operation increased 4%. Sales in this category decreased 17%
in the first quarter. The prior year first quarter included sales to a commercial laboratory customer that were transferred to our Brazilian operation in the second quarter of fiscal 2019. Veterinary Instruments & Disposables –
Revenues in this category increased 9% in the first quarter of fiscal 2020, led by growth in disposable syringes and marking products due to market share gains, offsetting a 17% decrease in detectable needles.Sales of these products were flat in the first quarter as compared to the same period a year ago. Promotional programs with distributors are recorded as a contra revenue within this category. Adjustments to these amounts, which can vary from quarter to quarter, resulted in a higher reduction of revenue in the current year first quarter than in the prior year. Offsetting this, sales of our animal care product lines increased 10%. Rodenticides, Insecticides & Disinfectants –
Sales in this category decreased 2% in the first quarter of fiscal 2020 compared to the same period in the prior year.
ExpressedRodenticide sales were down 8%, as
a percentagedemand declined due to weak rodent pressure in certain areas of the U.S. Insecticide sales increased 6%, and cleaners and disinfectants sales were flat as growth in the U.S. was offset by lower sales to international distributors.Sales in this category increased 25% in the first quarter, aided by minor contributions from the Livestock Genetics (September 2018) and Delta Genomics (January 2019) acquisitions; organic growth in this category was 21%. The growth was led by increases of sales
international sales were 39.0% into the
quarter, compared to 36.3% in the third quarter a year ago. For the year to date, international sales were $110.5 million, an increase of 20%; international sales were 37.7% of total sales in the current year to date periodcompanion animal and
35.1% in the prior year. For each comparative period, international revenue increases were the result of the acquisitions of Quat-Chem (England), Rogama (Brazil)beef and
Neogen Australasia (Australia),dairy cattle markets, and to a lesser extent,
revenue increases at existing Company locations. Currency translation had a positive effect on international revenues of approximately $1.9 millionsheep testing business in Australia. Gross margin was 47.5% in the
thirdfirst quarter of fiscal
2018 as the pound, euro, and peso were stronger on average against the dollar than2020 compared to 46.9% in the same
periodquarter a year
ago; forago. Animal Safety gross margins improved by 130 basis points, primarily the
year to date period, the positive revenue impact was $2.5 million.Revenues at Neogen Europeresult of increased 16% in U.S. dollarsgross margins in the third quarter compared to the same perioddomestic genomics testing service business, while gross margins in the prior year; for the nine month period, sales rose 10%. For the quarter, a 39% increase in genomics revenues offset lower mycotoxin test kit sales, as last year’s deoxynivalenol (DON) outbreak in corn crops in western Europe did not repeat in the current year. For the year to date period, genomics sales increased 34% and helped to offset lower DON test kit sales. Sales at Lab M, the Company’s subsidiary in England, increased 20% in the third quarter and 25% for the nine month period, as its culture media products continued to be integrated into Neogen’s global sales and marketing channels. Neogen Latinoamerica recorded a sales increase of 19% in the third quarter; Food Safety products increased 21% and Animal Safety products increased 17%, with broad-based gains recorded in both categories. For the year to date, revenues rose 18%, with Food Safety products and increases in genomics services providing the majority of the increase. Revenues at Neogen do Brasil declined 2% in the year’s third quarter, as a decrease in forensic test kit sales resulting from increased competition and customer losses caused by conversion to different testing methods more than offset increased sales of mycotoxin and dairy drug residue test kits. For the year to date, revenues increased 18%. Neogen China sales increased 28% in the third quarter and 21% for the year to date period, each compared to the same periods in the prior year; for each period, increases were driven by strength in genomics services and animal safety products. Revenues for Neogen India declined 37% for the quarter, as a large cleaner and disinfectant order in the prior year’s third quarter did not repeat; for the year to date, revenues were flat, as higher sales of Food Safety products and testing services were almost entirely offset by the cleaner and disinfectant revenue from last year’s third quarter which did not repeat this year.
Service revenue was $17.8 million in the quarter ended February 28, 2018, an increase of $3.4 million, or 24%, compared to $14.4 million in the third quarter of the prior year. For the year to date period, service revenue was $48.7 million, an increase of $9.1 million, or 23%, compared to $39.6 million in the prior year. The growth, for both the quarter and year to date periods, was led by increases in sales to the global cattle and companion animal markets, increased testing volumes with a large poultry customer and, to a lesser extent, revenues from the acquisition of Neogen Australasia, in September 2017.
15
Revenues
| | | | | | | | | | | | | | | | |
| | Three Months ended February 28, | |
| | | | | | | | Increase/ | | | | |
| | 2018 | | | 2017 | | | (Decrease) | | | % | |
| | | | | (in thousands) | | | | | | | |
Food Safety | | | | | | | | | | | | | | | | |
Natural Toxins, Allergens & Drug Residues | | $ | 16,807 | | | $ | 16,453 | | | $ | 354 | | | | 2 | % |
Bacterial & General Sanitation | | | 8,992 | | | | 8,348 | | | | 644 | | | | 8 | % |
Dehydrated Culture Media & Other | | | 10,511 | | | | 10,383 | | | | 128 | | | | 1 | % |
Rodenticides, Insecticides & Disinfectants | | | 7,359 | | | | 5,040 | | | | 2,319 | | | | 46 | % |
Genomics Services | | | 3,976 | | | | 2,725 | | | | 1,251 | | | | 46 | % |
| | | | | | | | | | | | | | | | |
| | $ | 47,645 | | | $ | 42,949 | | | $ | 4,696 | | | | 11 | % |
Animal Safety | | | | | | | | | | | | | | | | |
Life Sciences | | $ | 2,769 | | | $ | 2,332 | | | $ | 437 | | | | 19 | % |
Veterinary Instruments & Disposables | | | 10,630 | | | | 10,000 | | | | 630 | | | | 6 | % |
Animal Care & Other | | | 7,535 | | | | 6,311 | | | | 1,224 | | | | 19 | % |
Rodenticides, Insecticides & Disinfectants | | | 14,590 | | | | 16,111 | | | | (1,521 | ) | | | (9 | )% |
Genomics Services | | | 12,723 | | | | 10,682 | | | | 2,041 | | | | 19 | % |
| | | | | | | | | | | | | | | | |
| | $ | 48,247 | | | $ | 45,436 | | | $ | 2,811 | | | | 6 | % |
| | | | | | | | | | | | | | | | |
Total Revenues | | $ | 95,892 | | | $ | 88,385 | | | $ | 7,507 | | | | 8 | % |
| | | | | | | | | | | | | | | | |
| |
| | Nine Months ended February 28, | |
| | | | | | | | Increase/ | | | | |
| | 2018 | | | 2017 | | | (Decrease) | | | % | |
| | | | | (in thousands) | | | | | | | |
Food Safety | | | | | | | | | | | | | | | | |
Natural Toxins, Allergens & Drug Residues | | $ | 54,960 | | | $ | 53,090 | | | $ | 1,870 | | | | 4 | % |
Bacterial & General Sanitation | | | 27,435 | | | | 25,340 | | | | 2,095 | | | | 8 | % |
Dehydrated Culture Media & Other | | | 32,483 | | | | 29,792 | | | | 2,691 | | | | 9 | % |
Rodenticides, Insecticides & Disinfectants | | | 18,175 | | | | 7,088 | | | | 11,087 | | | | 156 | % |
Genomics Services | | | 10,887 | | | | 7,757 | | | | 3,130 | | | | 40 | % |
| | | | | | | | | | | | | | | | |
| | $ | 143,940 | | | $ | 123,067 | | | $ | 20,873 | | | | 17 | % |
Animal Safety | | | | | | | | | | | | | | | | |
Life Sciences | | $ | 7,589 | | | $ | 7,261 | | | $ | 328 | | | | 5 | % |
Veterinary Instruments & Disposables | | | 32,804 | | | | 29,281 | | | | 3,523 | | | | 12 | % |
Animal Care & Other | | | 24,056 | | | | 21,563 | | | | 2,493 | | | | 12 | % |
Rodenticides, Insecticides & Disinfectants | | | 50,228 | | | | 52,796 | | | | (2,568 | ) | | | (5 | )% |
Genomics Services | | | 34,348 | | | | 28,779 | | | | 5,569 | | | | 19 | % |
| | | | | | | | | | | | | | | | |
| | $ | 149,025 | | | $ | 139,680 | | | $ | 9,345 | | | | 7 | % |
| | | | | | | | | | | | | | | | |
Total Revenues | | $ | 292,965 | | | $ | 262,747 | | | $ | 30,218 | | | | 12 | % |
| | | | | | | | | | | | | | | | |
The Company’s Food Safety segment revenues were $47.6 million in the quarter ended February 28, 2018, an increase of 11% compared to the same period in the prior year. For the nine month period, Food Safety revenues increased 17% to $143.9 million. Organic growth for the segment was 9% for both the quarter and year to date periods, with the acquisition of Rogama, occurringrose by 50 basis points, on December 21, 2016, contributing the remainder of the growth.
Natural Toxins, Allergens & Drug Residues sales increased 2% in the third quarter; revenues for the year to date period increased 4%. Sales of dairy drug residue kits, used to detect the presence of antibiotics in raw milk, increased 29% in the third quarter as new products continued to gain share, particularly in international markets; for the year to date period, dairy drug residue test kit revenues rose 15%. Allergen test kit sales increased 14% and 13% in the three and nine month periods ended February 28, 2018, respectively, as product recalls relating to allergenic contamination of food continued to expand the market. Sales of test kits to detect the presence of natural toxins in grain crops decreased 17% in the third quarter. An 11% increase in aflatoxin test kit sales, due to moderate
16
outbreaks in U.S. and Brazilian corn crops, was offset by a 41% 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 the current year. For the year to date period,higher sales of natural toxin test kits, decreased 7%.
Bacterial & General Sanitation sales increased 8% in both the three and nine month periods ended February 28, 2018. Within this category, the Company’s AccuPoint sanitation monitoring product line increased 18% in the third quarter and 19% for the year to date period, on sales strength in both reader equipment and consumable supplies. Sales of test kits to detect pathogens increased 22% in the third quarter, led by strength inListeria products, including the Company’s newListeria Right Now test kit that launched earlier in the fiscal year. The Company also benefitted from strongdecreased sales of equipment used with the Company’s ANSR line of test kits to detect various pathogens, as the Company gained new customers; overall pathogen revenues increased 14% for the year to date period. Revenues for the Company’s consumable product lines to detect spoilage organisms in processed foods decreased 2% in the current quarter but increased 3% for the nine month period.
Dehydrated Culture Media & Other sales increased 1% in the third quarter. This category includes forensic test kits sold through the Company’s Brazilian subsidiary. Demand for these kits from customers located in Brazil had increased dramatically in the prior year due to a new requirement for drug testing of commercial truck drivers, however, sales of these kits in Brazil have decreased in the current year as a result of increased competition and customer losses caused by conversion to different testing methods. In the third quarter, the Company’s worldwide Lab M sales increased 21% and Acumedia sales increased 6%.
Sales of Rodenticides, Insecticides & Disinfectants products sold through the Company’s Food Safety operations increased 46% in the third quarter; the organic sales increase in this category was 29%. For the nine month period, sales increased $11.1 million; excluding first year sales of the Quat-Chem and Rogama acquisitions, the year to date sales increase was 16%. In the third quarter, the increase was primarily due to Rogama shipping a large order resulting from a government contract; this sale is unlikely to recur in the next 12 months. The increase in sales was partially offset by termination of a distribution agreement in January 2017, which resulted in a decline in sales for those distributed products of $143,000 in the third quarter and $859,000 for the year to date.
Genomics Services revenue recorded in the Food Safety segment increased 46% and 40% for the three and nine month periods, respectively, due primarily to growth of these services in Europe.
Sales for the Company’s Animal Safety segmentlower margin products.
Operating expenses were
$48.2 million in the third quarter, an increase of 6% over the same period a year ago. Revenues for the nine month period increased 7% to $149 million compared to $139.7 million in the prior year. Organic growth in this segment was 5% and 6% in the three and nine month periods, respectively; the Neogen Australasia acquisition in September 2017 contributed the remainder of the growth. Sales of Life Sciences products increased 19% in the third quarter, partially due to order timing, and have risen 5% for the year to date period. The Company has increased volumes of forensic test kits sold to commercial labs in the U.S.Veterinary Instruments & Disposables revenues increased 6% and 12% for the three and nine month periods, respectively. For both periods, the increase is primarily the result of strength in detectable needles, syringes and animal marking products. Sales of Animal Care & Other products increased 19% in the quarter ended February 28, 2018, compared to the same period in the prior year; the year to date increase was 12%. The increase in the current year is due to market share gains of supplements for companion animals and vitamin injectables, and increased sales of vaccines to a large distributor; additionally, last year’s results included sales credits totaling $1.1$31.9 million in the first quarter as the Company removed its canine thyroid product from its distribution channels, after the FDA approved a new drug application for a competitive product.
Rodenticides, Insecticides & Disinfectants sales decreased 9% in the quarter and 5% for the yearof fiscal 2020, compared to date period, as the termination of a distribution agreement with a manufacturer of cleaners and disinfectants in January 2017 resulted in lost sales for those distributed products of $1.4$30.3 million in the thirdfirst quarter of fiscal 2019, an increase of $1.6 million, or 6%. Sales and marketing expenses were $17.5 million, compared to $17.2 million in last year’s first quarter, an increase of 2%, in line with the current fiscal yearrevenue increase. General and $3.9 million for the year to date period. These losses were offset by an 11% increase in rodenticide salesadministrative expense increased $501,000, or 5%, in the thirdfirst quarter, asprimarily due to increased legal and professional fees, depreciation related to investments in information technology, and higher stock-based compensation expense. Research and development expense was $3.7 million in the Company gained incremental business with several large customers; year to date sales rose by 9%.
Genomics Services increased 19% in both the thirdfirst quarter, and year to date periods, respectively, eachan increase of $869,000 compared to the same period in the prior year. The growth for both periodsincrease is primarily the result of development spending on a number of new products, which are expected to be launched in late fiscal 2020 and early fiscal 2021.
Operating income was
led by increases in sales to the global cattle and companion animal markets, higher volumes from a large poultry customer and, to a lesser extent, revenues from the acquisition of Neogen Australasia, in September 2017.Gross Margin
Gross margin was 47.5%$16.3 million in the thirdfirst quarter, of fiscal 2018 compared to 46.3% in the same quarter a year ago. Gross margins for the quarter were positively impacted by lower costs inputs at the Company’s genomics operations and favorable product mix towards higher margin diagnostic and animal care products; this improvement was somewhat offset by lower sales of mycotoxin test kits due to a prior year outbreak of DON in corn crops in the U.S. and western Europe, which did not recur in the current fiscal year. Gross margin for the nine month period ended February 28, 2018 was 48.0% compared to 47.6%$16.5 million in the same period of the prior year. Gross margins for the year to date were positively impacted by improved raw material costs at the Company’s genomics operations and favorable product mix towards higher margin diagnostic and animal care products; this improvement was somewhat offset by mix
17
changes resulting from the three most recent acquisitions (Rogama, Quat-Chem and Neogen Australasia), all of which have gross margins that are lower than the historical average for the Company, and lower sales of mycotoxin test kits due to a prior year outbreak of DON in corn crops in the U.S. and western Europe, which did not recur in the current fiscal year.
Operating Expenses
Operating expenses were $29.6 million in the third quarter, compared to $26.5 million in the same quarter of last fiscal year, an
increase of $3.1 million, or 12%. Sales and marketing expenses were $17.5 million, compared to $15.3 million in last year’s third quarter, an increase of 14%, primarily due to increases in salaries and related personnel costs, shipping expense, and higher advertising expenses in support of new product launches. General and administrative expense increased $700,000, or 9%, in the third quarter; increases in amortization of acquired intangible assets, IT consulting, and higher salary expenses were partially offset by lower stock based compensation expense resulting from forfeitures due to employee retirements and reduced legal expenses. In last year’s third quarter, the Company closed on two acquisitions, while there were none in this year’s third quarter. For the year to date period, research and development expense increased 7% in the third quarter to a total of $2.8 million. Increases were due to increases in compensation, higher depreciation resulting from investments in laboratory equipment, and projects relating to product improvements and new product development. For the year to date, research and development expenses increased 10%. Operating expenses for the nine month period were $90.3 million, an increase of $11.3 million, or 14% over the same period last fiscal year. The recent acquisitions accounted for $2.8 million of the increase.
Operating Income
Operating income was $15.9 million in the third quarter, an increase of $1.5 million, or 11%, compared to operating income of
$14.4 million in the prior year. Expressed as a percentage of revenue, operating income was 16.6%16.0% compared to 16.2%16.5% in last year’s
third first quarter. The improvementdecline in operating margin percentage for the comparative quarter was primarily the result of higher gross margins offset somewhat by operating expenses which rose more than the rate of the overall revenue increase. For the nine months ended February 28, 2018, operating income was $50.3 million, an increase of $4.4 million, or 10%, compared to operating income of $45.9 million for the same period last year. Expressed as a percentage of revenue, year to date operating income was 17.2% compared to 17.5%in research and development spending in the prior year.
current quarter.
Other Income
and Income TaxOther
| | | | | | | | |
| | Three Months ended August 31, | |
| | | | | | |
Interest income (net of expense) | | $ | | | | $ | | |
Foreign currency transactions | | | | ) | | | | ) |
| | | | | | | | |
Deoxi contingent consideration | | | | | | | | ) |
| | | | ) | | | | |
| | | | | | | | |
| | $ | | | | $ | | |
| | | | | | | | |
The increase in interest income was $1.4 million for bothin the thirdfirst quarter of fiscal 2018 and the same period in 2017. Components of other income in this year’s third quarter included $525,000 of interest income, $360,000 from an insurance settlement, $179,000 in currency gains and a $255,000 gain recorded on the settlement of contingent consideration related2020 compared to the Quat-Chem acquisition. Last year’s fiscal thirdprior year first quarter included a gainis the result of higher cash and marketable securities balances
and higher yields on those balances.
Other expense resulting from foreign currency transactions is primarily the
settlementresult of
a licensing agreementchanges in the value of
$660,000, currency gains of $442,000, and interest income of $271,000. For the year to date period in fiscal 2018, other income was $3.2 million, primarily comprised of $1.3 million of interest income, currency gains of $1.1 million, $360,000 from an insurance settlement, $255,000 gain recorded on the settlement of contingent consideration relatedforeign currencies relative to the
Quat-Chem acquisition, and $78,000dollar in countries in which we operate; all of
royalty income. For the
same periodcurrencies in
fiscal 2017, other income was $1.8 million, which included interest income of $691,000, gain onthose countries depreciated against the
settlement of a licensing agreement of $660,000, currency gains of $263,000, and royalty income of $79,000.dollar during the comparative quarters.
Income tax expense
infor the
thirdfirst quarter
of fiscal 2020 was
$700,000, an effective tax rate of 4%, compared to prior year third quarter expense of $5.4$3.0 million, an effective tax rate of
34%. The Company recorded favorable tax adjustments totaling $2.9 million during the quarter as the result of tax reform passed in the U.S. in December 2017. The tax reform reduced the statutory federal income tax rate from 35%17.0%, compared to
21%, and also resulted in other adjustments to income tax expense. The Company will compute its income tax for the fiscalprior year
ending May 31, 2018 using a blended Federal Tax Rate of 29.2%. Accordingly, first and second quarter income previously subject to tax at the 35% Federal Tax Rate benefitted from the 29.2% Federal Tax Rate. As required by generally accepted accounting principles, the Company revalued its net deferred tax liabilities during the quarter to reflect the lower rate, resulting in a credit to income tax expense of
$5.6 million. In addition, the Company was required to estimate its cumulative unrepatriated foreign earnings and profits and calculate tax owed on those earnings and profits during the third quarter. This tax was estimated at $2.7$1.9 million,
and the amount was recorded as federal income tax expense; payment of the tax is permitted over an eight year period.18
For the first nine months of fiscal 2018, income tax expense was $7.9 million compared to $16.3 million in the prior year; the current year to date effective tax rate was 15%, compared to an effective tax rate of 34%11.1%. For each quarter, the primary difference between the statutory rate of 21% and the effective rates recorded is the benefit resulting from the exercise of stock options; this benefit was $769,000 in the first quarter of fiscal 2020 compared to $2.3 million in the first quarter of the prior year.
Net income was $14.7 million in the first quarter of fiscal
year. For2020, compared to $15.2 million in the
year to date period, the lower effective rate is primarilyfirst quarter of fiscal 2019. The decline in earnings was the result of the
tax reform passedincrease in the
U.S. in December 2017 as discussed in the preceding paragraph. Additionally, during the year the Company has recorded credits of $3.4 million to federal incomeeffective tax
expense for excessrate, which was caused by decreased tax benefits
resulting from the exercise of stock options, due to
lower option exercise activity in the
adoption of ASU2016-09; refer to Note 5 of the Company’s Consolidated Financial Statements for further information. In the secondfirst quarter of
this fiscal
2018, an IRS examination ofyear compared to the
Company’s federal income tax returns for fiscal years 2014, 2015 and 2016 was concluded. Assame period a
result of the favorable outcome of the audit, the Company reversed a total of $816,000 from its reserve for uncertain tax positions, which had been accrued in prior fiscal years, with a corresponding credit to federal income tax expense.Net Income
Net income attributable to Neogen increased 61% from $10.3 million to $16.6 million for the three month period ended February 28,
2018. For the year to date period, net income was $45.6 million, a 46% increase over prior year net income of $31.3 million. Pre tax income increases of 10% for the quarter and 12% for the year to date were favorably impacted by the effects of tax reform, excess tax benefits from the exercise of stock options, and positive results from the IRS examination that concluded during the year’s second quarter.
ago.
Financial Condition and Liquidity
The overall cash, cash equivalents and marketable securities position of
the CompanyNeogen was
$192.2$291.0 million at
February 28, 2018August 31, 2019, compared to
$143.6$267.5 million at May 31,
2017.2019. Approximately
$46.5$23.7 million was generated from operations during the first
ninethree months of fiscal
2018.2020. Net cash proceeds of
$18.9$8.7 million were realized from the exercise of stock options and issuance of shares under
the Company’s employee stock purchase planour Employee Stock Purchase Plan during the
same period. The Companyfirst quarter. We spent
$16.3$6.5 million for property, equipment and other
non-current
assets duringin the first ninethree months of fiscal 2018.Accounts2020.
Net accounts receivable balances were
$73.2$79.1 million at
February 28, 2018, an increaseAugust 31, 2019, a decline of
$4.6$3.5 million,
or 7%, compared to
$68.6$82.6 million at May 31,
2017, less than the increase in revenue.2019. Days sales outstanding, a measurement of the time it takes to collect receivables, were
6364 days at
February 28, 2018August 31, 2019, compared to
6061 days at May 31,
2017.2019 and 64 days at August 31, 2018. All customer accounts are actively managed and no losses in excess of amounts reserved are currently expected.
Net inventory balances were
$77.5$87.7 million at
February 28, 2018,August 31, 2019, an increase of
$4.4$1.7 million, or
6%2%, compared to
$73.1 million at May 31,
2017. The Company2019 balances of $86.0 million. We actively
monitors itsmonitor our inventory
levels, and
balancesbalance the need for adequate
levels of product availability to minimize backorders with a desire to improve inventory
turnover and efficiency levels. Formalturns. We have continued with our active programs
have been institutedto improve our turnover in fiscal
2018 to improve inventory turnover.2020.
Inflation and changing prices are not expected to have a material effect on operations, as management believes it will continue to be successful in offsetting increased input costs with price increases and/or cost efficiencies.
Management believes that
the Company’sour existing cash and marketable securities balances at
February 28, 2018August 31, 2019, along with available borrowings under its credit facility and cash expected to be generated from future operations, will be sufficient to fund activities for the foreseeable future. However, existing cash and borrowing capacity may not be sufficient to meet
the Company’sour cash requirements to commercialize products currently under development or its plans to acquire other organizations, technologies or products that fit within
the Company’sour mission statement. Accordingly,
the Companywe may choose to issue equity securities or enter into other financing arrangements for a portion of
itsour future financing needs.
19
PART I – FINANCIAL INFORMATION
Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
The Company has
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We have interest rate and foreign exchange rate risk exposure but no long-term fixed rate investments or borrowings.
The Company’sOur primary interest rate risk is due to potential fluctuations of interest rates for variable rate borrowings (no
long-term borrowings at
February 28, 2018)August 31, 2019) and short-term investments.
Foreign exchange risk exposure arises because
the Company marketswe market and
sells itssell our products throughout the world. Revenues in certain foreign countries as well as certain expenses related to those revenues are transacted in currencies other than the U.S. dollar.
The Company’sOur operating results are exposed to changes in exchange rates between the U.S. dollar and the British pound sterling, the euro, the Brazilian real, the Mexican peso, the Chinese yuan,
the Australian dollar, and to a lesser extent, the Indian rupee
the Canadian dollar, and the
AustralianCanadian dollar. When the U.S. dollar weakens against foreign currencies, the dollar value of revenues denominated in foreign currencies increases. When the U.S. dollar strengthens, the opposite situation occurs. Additionally, previously recognized revenues in the course of collection can be affected positively or negatively by changes in exchange rates. The Company enters into forward contracts to help mitigate the economic impact of fluctuations in certain currency exchange rates. These contracts are adjusted to fair value through earnings.
Neogen has assets, liabilities and operations outside of the United States, located in Scotland, England, 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
the Australian dollar respectively, and
also transacts business throughout Europe in the euro. The Company’s investments in foreign subsidiaries are considered to be
primarily long-term.
PART I – FINANCIAL INFORMATION
Item 4. | Controls and Procedures |
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
An evaluation of the effectiveness of the design and operation of
the Company’sour disclosure controls and procedures as of
February 28, 2018August 31, 2019 was carried out under the supervision and with the participation of the Company’s management, including the
President & Chief Executive
ChairmanOfficer and the Vice President & Chief Financial Officer (“the Certifying Officers”). Based on the evaluation, the Certifying Officers concluded that the Company’s disclosure controls and procedures are effective.
Changes in Internal Controls over Financial Reporting
No changes in our control over financial reporting were identified as having occurred during the quarter ended
February 28, 2018August 31, 2019 that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting.
20
PART II – OTHER INFORMATION
Item 1. Legal Proceedings
The Company is subject to
certain legal and other proceedings in the normal course of business. In the opinion of management, the outcomes of these matters are not expected to have a material effect on
itsthe Company’s future results of operations or financial position.
| | |
| | |
31.1 | | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| |
31.2 | | | | |
| | | | |
| |
32 | | | | |
| | | | |
| |
101.INS | | | | |
| | | | Inline XBRL Instance Document |
| |
101.SCH | | | | |
| | | | Inline XBRL Taxonomy Extension Schema Document |
| |
101.CAL | | | | |
| | | | Inline XBRL Taxonomy Extension Calculation Linkbase Document |
| |
101.DEF | | | | |
| | | | Inline XBRL Taxonomy Extension Definition Document |
| |
101.LAB | | | | |
| | | | Inline XBRL Taxonomy Extension Label Linkbase Document |
| |
101.PRE | | | | |
| | | | Inline XBRL Taxonomy Extension Presentation Linkbase Document |
| | | | |
| | | | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101 |
Items 1A, 2, 3, 4, and 5 are not applicable or removed or reserved and have been omitted.
21
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
Dated: March 29, 2018September 26, 2019 | | | | | | |
| | | | | | |
| | | | | | /s/ James L. HerbertJohn E. Adent |
| | James L. Herbert | | | | |
| | | | | | President & Chief Executive ChairmanOfficer |
| | | | | | (Principal Executive Officer) |
| | | | | | |
Dated: March 29, 2018September 26, 2019 | | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | Vice President & Chief Financial Officer |
| | | | | | (Principal Financial Officer and Principal Accounting Officer) |
22