☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Michigan 38-2367843
(517)
Title of each Class | Trading Symbol(s) | Name of each exchange on which registered | ||
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Non-accelerated filer | ☐ | Smaller Reporting Company | ☐ | |||||||
Emerging growth company | ☐ |
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Section 906 Certification |
Sheets Assets Current Assets Cash and cash equivalents Marketable securities (at fair value, which approximates cost) Accounts receivable, less allowance of $1,750 and $2,000 Inventories, net Prepaid expenses and other current assets Total Current Assets Property and Equipment, net Other Assets Goodwill Othernon-amortizable intangible assets Customer-based intangibles, net of accumulated amortization of $23,846 and $20,846 at February 28, 2018 and May 31, 2017 Othernon-current assets, net of accumulated amortization of $11,893 and $9,931 at February 28, 2018 and May 31, 2017 Total Assets Liabilities and Equity Current Liabilities Accounts payable Accrued compensation Income taxes Other accruals Total Current Liabilities Deferred Income Taxes Non-Current Liabilities Total Liabilities 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 Additionalpaid-in capital Accumulated other comprehensive loss Retained earnings Total Neogen Corporation Stockholders’ Equity Non-controlling interest Total Equity Total Liabilities and Equity Revenues Product revenues Service revenues Total Revenues Cost of Revenues Cost of product revenues Cost of service revenues Total Cost of Revenues Gross Margin Operating Expenses Sales and marketing General and administrative Research and development Total Operating Expenses Operating Income Other Income Interest income Other income Total Other Income Income Before Taxes Provision for Income Taxes Net Income Net (Income)/Loss Attributable toNon-Controlling Interest Net Income Attributable to Neogen Net Income Attributable to Neogen Per Share Basic Diluted Net Income Other comprehensive income (loss), net of tax: currency translation adjustments Comprehensive income Comprehensive loss (income) attributable tonon-controlling interest Comprehensive income attributable to Neogen Balance, May 31, 2017 Issuance of shares under share-based compensation plan Issuance of shares under employee stock purchase plan Conversion of minority interest to retained earnings Net income for the nine months ended February 28, 2018 Other comprehensive income Balance February 28, 2018 Cash Flows From Operating Activities Net Income Adjustments to reconcile net income to net cash provided from operating activities: Depreciation and amortization Share-based compensation Excess income tax benefit from the exercise of stock options (see note 5) Change in operating assets and liabilities, net of business acquisitions: Accounts receivable Inventories Prepaid expenses and other current assets Accounts payable, accruals and other changes Net Cash Provided By Operating Activities Cash Flows Used In Investing Activities Purchases of property, equipment and othernon-current intangible assets Proceeds from the sale of marketable securities Purchases of marketable securities Business acquisitions, net of cash acquired Net Cash Used In Investing Activities Cash Flows From Financing Activities Exercise of stock options Excess income tax benefit from the exercise of stock options Net Cash Provided By Financing Activities Effect of Exchange Rates on Cash Net Increase In Cash and Cash Equivalents Cash And Cash Equivalents At Beginning Of Period Cash And Cash Equivalents At End Of Period AND CONSOLIDATION 2019. Raw materials Work-in-process Finished and purchased goods Numerator for basic and diluted net income per share: Net income attributable to Neogen Denominator for basic net income per share: Weighted average shares Effect of dilutive stock options Denominator for diluted net income per share Net income attributable to Neogen per share: Basic Diluted As of and for the three months ended February 28, 2018 Product revenues to external customers Service revenues to external customers Total revenues to external customers Operating income (loss) Total assets As of and for the three months ended February 28, 2017 Product revenues to external customers Service revenues to external customers Total revenues to external customers Operating income (loss) Total assets For the nine months ended February 28, 2018 Product revenues to external customers Service revenues to external customers Total revenues to external customers Operating income (loss) For the nine months ended February 28, 2017 Product revenues to external customers Service revenues to external customers Total revenues to external customers Operating income (loss)Sheet February 28,
2018 May 31,
2017 (Unaudited) (Audited) $ 82,066 $ 77,567 110,089 66,068 73,209 68,576 77,506 73,144 9,334 7,606 352,204 292,961 72,514 61,748 99,478 104,759 15,011 14,323 33,518 35,983 22,876 18,635 $ 595,601 $ 528,409 $ 19,654 $ 16,244 5,469 5,002 960 936 11,210 13,820 37,293 36,002 11,400 17,048 4,973 3,602 53,666 56,652 — — 8,253 8,149 197,246 174,742 (5,303 ) (7,203 ) 341,459 295,926 541,655 471,614 280 143 541,935 471,757 $ 595,601 $ 528,409 $ $ $ $ $ $ ) ) $ $ 2 Three Months Ended Nine Months Ended February 28, February 28, 2018 2017 2018 2017 $ 78,142 $ 73,964 $ 244,298 $ 223,170 17,750 14,421 48,667 39,577 95,892 88,385 292,965 262,747 40,352 38,816 124,785 113,241 10,019 8,689 27,517 24,556 50,371 47,505 152,302 137,797 45,521 40,880 140,663 124,950 17,492 15,340 52,331 45,824 9,280 8,548 29,096 25,094 2,836 2,641 8,901 8,087 29,608 26,529 90,328 79,005 15,913 14,351 50,335 45,945 524 271 1,322 690 844 1,105 1,913 1,098 1,368 1,376 3,235 1,788 17,281 15,727 53,570 47,733 700 5,350 7,900 16,250 16,581 10,377 45,670 31,483 5 (90 ) (70 ) (163 ) $ 16,586 $ 10,287 $ 45,600 $ 31,320 $ 0.32 $ 0.20 $ 0.89 $ 0.62 $ 0.32 $ 0.20 $ 0.88 $ 0.61 $ $ $ $ ) ) $ $ $ $ $ $ $ $ $ $ $ $ 3 Three Months Ended Nine Months Ended February 28, February 28, 2018 2017 2018 2017 $ 16,581 $ 10,377 $ 45,670 $ 31,483 1,163 441 1,900 (3,743 ) 17,744 10,818 47,570 27,740 5 (90 ) (70 ) (163 ) $ 17,749 $ 10,728 $ 47,500 $ 27,577 $ $ $ $ ) ) ) $ $ $ $ 4StatementStatements of Accumulated Additional Other Non- Common Stock Paid-in Comprehensive Retained controlling Shares Amount Capital Income (Loss) Earnings Interest Total 50,932 $ 8,149 $ 174,742 $ (7,203 ) $ 295,926 $ 143 $ 471,757 631 101 21,456 21,557 20 3 1,048 1,051 (67 ) 67 — 45,600 70 45,670 1,900 1,900 51,583 $ 8,253 $ 197,246 $ (5,303 ) $ 341,459 $ 280 $ 541,935 $ $ $ ) $ $ ) ) $ $ $ ) $ $ $ $ $ ) $ $ $ $ $ ) $ $ ) ) $ $ $ ) $ $ ) Nine Months Ended February 28, 2018 2017 $ 45,670 $ 31,483 12,682 10,691 3,692 3,932 — (3,671 ) (4,013 ) 5,916 (3,859 ) (9,460 ) (7,316 ) 717 (280 ) 5,580 46,576 45,188 (16,297 ) (13,002 ) 211,327 102,957 (255,348 ) (115,117 ) (468 ) (34,027 ) (60,786 ) (59,189 ) 18,916 15,844 — 3,671 18,916 19,515 (207 ) (888 ) 4,499 4,626 77,567 55,257 $ 82,066 $ 59,883 $ $ ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) $ $ 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 ninesix monthFebruary 28, 2018November 30, 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 Form2017.
2019$
2019%
Months Ended
November 30,
2019
November 30,
2019 $ $ $ $ $ (1) Excluding the six months ended November 30, 2019 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ onby the February 28,
2018 May 31,
2017 (in thousands) $ 35,774 $ 33,190 6,231 4,831 35,501 35,123 $ 77,506 $ 73,144 $ $ $ $ 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) $ 16,586 $ 10,287 $ 45,600 $ 31,320 51,537 50,746 51,253 50,438 700 633 761 723 52,237 51,379 52,014 51,161 $ 0.32 $ 0.20 $ 0.89 $ 0.62 $ 0.32 $ 0.20 $ 0.88 $ 0.61 The Board of Directors declared a 4 for $ $ $ $ $ $ $ $ $ $ $ $ stock split effective December 29, 2017. All share and per share amounts in this Form10-Q reflect amounts as if the split took place at the beginning of the periods presented.7The Company has two AND GEOGRAPHIC DATAcleaners, disinfectants and insecticides to assist in the control of rodents, insects and disease in and around agricultural, food production and other facilities.Neogen’sFood 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. Food
Safety Animal
Safety Corporate and
Eliminations
(1) Total (in thousands) $ 42,618 $ 35,524 $ — $ 78,142 5,027 12,723 — 17,750 47,645 48,247 — 95,892 8,258 8,493 (838 ) 15,913 188,075 215,371 192,155 595,601 $ 39,318 $ 34,646 $ — $ 73,964 3,631 10,790 — 14,421 42,949 45,436 — 88,385 7,403 7,743 (795 ) 14,351 183,419 215,243 108,636 507,298 8 Food
Safety Animal
Safety Corporate and
Eliminations
(1) Total (in thousands) $ 129,621 $ 114,677 $ — $ 244,298 14,319 34,348 — 48,667 143,940 149,025 — 292,965 25,704 27,691 (3,060 ) 50,335 $ 112,592 $ 110,578 $ — $ 223,170 10,475 29,102 — 39,577 123,067 139,680 — 262,747 24,286 24,616 (2,957 ) 45,945 $ $ $ $ ) $ $ $ $ ) 9
Corporate and | ||||||||||||||||
Food | Animal | Eliminations | ||||||||||||||
Safety | Safety | (1) | Total | |||||||||||||
(in thousands) | ||||||||||||||||
As of and for the six months ended November 30, 2019 | ||||||||||||||||
Product revenues to external customers | $ | 97,065 | $ | 72,270 | $ | — | $ | 169,335 | ||||||||
Service revenues to external customers | 10,810 | 29,082 | — | 39,892 | ||||||||||||
Total revenues to external customers | 107,875 | 101,352 | — | 209,227 | ||||||||||||
Operating income (loss) | 18,690 | 18,029 | (2,183 | ) | 34,536 | |||||||||||
As of and for the six months ended November 30, 2018 | ||||||||||||||||
Product revenues to external customers | $ | 95,189 | $ | 77,333 | $ | — | $ | 172,522 | ||||||||
Service revenues to external customers | 10,744 | 23,458 | — | 34,202 | ||||||||||||
Total revenues to external customers | 105,933 | 100,791 | — | 206,724 | ||||||||||||
Operating income (loss) | 21,215 | 15,763 | (2,253 | ) | 34,725 |
(1) | Includes elimination of intersegment transactions . |
Three months ended | Six months ended | |||||||||||||||
November 30, | November 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
(in thousands) | (in thousands) | |||||||||||||||
Revenues by Geographic Location | ||||||||||||||||
Domestic | $ | 63,317 | $ | 65,033 | $ | 126,657 | $ | 124,879 | ||||||||
International | 44,486 | 42,065 | 82,570 | 81,845 | ||||||||||||
Total revenue | 107,803 | 107,098 | 209,227 | 206,724 | ||||||||||||
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 in thousands) | Shares | Weighted- Average Exercise Price | ||||||
Options outstanding June 1, 2019 | 2,385 | $ | 49.37 | |||||
Granted | 561 | 63.91 | ||||||
Exercised | (493 | ) | 39.01 | |||||
Forfeited | (51 | ) | 56.26 | |||||
Options outstanding November 30, 2019 | 2,402 | $ | 54.76 |
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.
FY 20 20 | ||||
Risk-free interest rate | 1.9% | |||
Expected dividend yield | 0.0% | |||
Expected stock price volatility | 29.4% | |||
Expected option life | 3.5 years |
In May 2014, the FASB issued ASU No.2014-09—Revenue from Contracts with Customers (Topic 606). The new standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard is designed to create greater comparability for financial statement users across industries and jurisdictions and also requires enhanced disclosures. In April 2016, the FASB issued Accounting Standards UpdateNo. 2016-10— Revenue from 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
11
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.
The Company has
9.November 30, 2019.
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.
10.
The Company has a stock repurchase program, authorized by
12
retired.
Critical Accounting Policies and Estimates
The discussion and analysis of the Company’s financial condition and results of operations are based on the consolidated financial statements that have been prepared in accordance with accounting principles generally accepted
There were no significant changes to the contractual obligations or contingent liabilities and commitments disclosed$107.1 million in the Company’s Annual Report on Form10-K for thesecond quarter of 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 changes2019. Organic sales growth in the Tax Act. The measurementsecond quarter of fiscal 2020 was flat. For the six month 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, 2018consolidated revenues were $95.9$209.2 million, an increase of 8%, or $7.5 million,1% compared to $206.7 million in the same period in the prior fiscal year. On a year to date basis, organic sales also rose 1%.
Three Months Ended | Six Months Ended | |||||||||||||||
November 30, 2019 | November 30, 2019 | |||||||||||||||
Revenue | Revenue | Revenue | Revenue | |||||||||||||
% Increase/(Decrease) | % Increase/(Decrease) | % Increase | % Increase | |||||||||||||
USD | Local Currency | USD | Local Currency | |||||||||||||
Neogen Europe (including Lab M & Quat-Chem) | 7 | % | 10 | % | 1 | % | 5 | % | ||||||||
Neogen do Brasil (including Deoxi & Rogama) | 20 | % | 27 | % | 0 | % | 4 | % | ||||||||
Neogen Latinoamerica | 5 | % | 5 | % | 5 | % | 5 | % | ||||||||
Neogen China | 40 | % | 43 | % | 10 | % | 14 | % | ||||||||
Neogen India | (1 | )% | (3 | )% | 8 | % | 7 | % | ||||||||
Neogen Canada | 329 | % | 334 | % | 181 | % | 184 | % | ||||||||
Neogen Australasia | 18 | % | 25 | % | 20 | % | 27 | % |
Three Months Ended November 30, | ||||||||||||||||
Increase/ | ||||||||||||||||
2019 | 2018 | (Decrease) | % | |||||||||||||
(in thousands) | ||||||||||||||||
Food Safety | ||||||||||||||||
Natural Toxins, Allergens & Drug Residues | $ | 20,681 | $ | 20,571 | $ | 110 | 1 | % | ||||||||
Bacterial & General Sanitation | 11,615 | 10,822 | 793 | 7 | % | |||||||||||
Culture Media & Other | 12,757 | 12,191 | 566 | 5 | % | |||||||||||
Rodenticides, Insecticides & Disinfectants | 7,447 | 5,943 | 1,504 | 25 | % | |||||||||||
Genomics Services | 4,354 | 4,223 | 131 | 3 | % | |||||||||||
$ | 56,854 | $ | 53,750 | $ | 3,104 | 6 | % | |||||||||
Animal Safety | ||||||||||||||||
Life Sciences | $ | 1,803 | $ | 1,891 | $ | (88 | ) | (5 | )% | |||||||
Veterinary Instruments & Disposables | 10,486 | 11,683 | (1,197 | ) | (10 | )% | ||||||||||
Animal Care & Other | 7,787 | 8,948 | (1,161 | ) | (13 | )% | ||||||||||
Rodenticides, Insecticides & Disinfectants | 16,186 | 18,789 | (2,603 | ) | (14 | )% | ||||||||||
Genomics Services | 14,687 | 12,037 | 2,650 | 22 | % | |||||||||||
$ | 50,949 | $ | 53,348 | $ | (2,399 | ) | (4 | )% | ||||||||
Total Revenues | $ | 107,803 | $ | 107,098 | $ | 705 | 1 | % | ||||||||
Six Months Ended November 30, | ||||||||||||||||
Increase/ | ||||||||||||||||
2019 | 2018 | (Decrease) | % | |||||||||||||
(in thousands) | ||||||||||||||||
Food Safety | ||||||||||||||||
Natural Toxins, Allergens & Drug Residues | $ | 40,796 | $ | 39,409 | $ | 1,387 | 4 | % | ||||||||
Bacterial & General Sanitation | 21,931 | 21,288 | 643 | 3 | % | |||||||||||
Culture Media & Other | 24,037 | 24,408 | (371 | ) | (2 | )% | ||||||||||
Rodenticides, Insecticides & Disinfectants | 12,896 | 12,569 | 327 | 3 | % | |||||||||||
Genomics Services | 8,216 | 8,259 | (43 | ) | (1 | )% | ||||||||||
$ | 107,876 | $ | 105,933 | $ | 1,943 | 2 | % | |||||||||
Animal Safety | ||||||||||||||||
Life Sciences | $ | 3,525 | $ | 3,971 | $ | (446 | ) | (11 | )% | |||||||
Veterinary Instruments & Disposables | 21,822 | 22,087 | (265 | ) | (1 | )% | ||||||||||
Animal Care & Other | 14,193 | 15,346 | (1,153 | ) | (8 | )% | ||||||||||
Rodenticides, Insecticides & Disinfectants | 32,904 | 35,935 | (3,031 | ) | (8 | )% | ||||||||||
Genomics Services | 28,907 | 23,452 | 5,455 | 23 | % | |||||||||||
$ | 101,351 | $ | 100,791 | $ | 560 | 1 | % | |||||||||
Total Revenues | $ | 209,227 | $ | 206,724 | $ | 2,503 | 1 | % | ||||||||
genomics services sold through our international Food Safety segment revenuesoperations increased 11% and Animal Safety segment revenues increased 6%3% for the three month period ended February 28, 2018, each compared to the same period in the prior year. For the quarter, the overall organic sales increase was 7%; organic growth 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 segmentNovember 30, 2019; revenues increased 17% and Animal Safety segment revenues increased 7%decreased 1% for the year to datesix month period. Overall organicCurrency had a negative impact on 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 third quarter of fiscal 2018, an increase of 17% compared to the same period in the prior year. Expressed as a percentage of sales, international sales were 39.0% in 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 salesboth comparative periods in the current fiscal year to date periodas the U.S. dollar has strengthened against both the British pound and 35.1%the Brazilian real; the Company has sizable genomics revenues in each of those currencies.
Revenues at Neogen Europe increased 16% in U.S. dollars in the thirdsecond quarter, compared to the same period in the prior year; for the nineyear to date, the decrease in this product line is 11%. The prior year included sales to a commercial laboratory customer that were transferred to our Brazilian operation during the second quarter of fiscal 2019.
Three Months Ended | Six Months Ended | |||||||||||||||
November 30, | November 30, | |||||||||||||||
(dollars in thousands) | 2019 | 2018 | 2019 | 2018 | ||||||||||||
Interest income (net of expense) | $ | 1,271 | $ | 1,028 | $ | 2,781 | $ | 1,955 | ||||||||
Foreign currency transactions | (352 | ) | (72 | ) | (469 | ) | (458 | ) | ||||||||
Royalty income | — | 37 | 1 | 59 | ||||||||||||
Deoxi contingent consideration | — | — | — | (9 | ) | |||||||||||
Quat-Chem contingent consideration | — | 422 | — | 422 | ||||||||||||
Other | 35 | 40 | 29 | 144 | ||||||||||||
Total Other Income | $ | 954 | $ | 1,455 | $ | 2,342 | $ | 2,113 | ||||||||
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 thirdsecond quarter of the prior year. For the year to date, period, service revenuethe benefit was $48.7 million, an increase of $9.1 million, or 23%,$1,973,000 in fiscal 2020 compared to $39.6$2,774,000 in fiscal 2019; the prior year first quarter had significant stock option exercise due to a higher stock price and the timing of the expiration of the 2013 grant in August 2018.
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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 | % | |||||||||||
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$ | 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 | % | |||||||||||
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$ | 48,247 | $ | 45,436 | $ | 2,811 | 6 | % | |||||||||
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Total Revenues | $ | 95,892 | $ | 88,385 | $ | 7,507 | 8 | % | ||||||||
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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 | % | |||||||||||
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$ | 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 | % | |||||||||||
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$ | 149,025 | $ | 139,680 | $ | 9,345 | 7 | % | |||||||||
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Total Revenues | $ | 292,965 | $ | 262,747 | $ | 30,218 | 12 | % | ||||||||
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The Company’s Food Safety segment revenues were $47.6 million in the quarter ended February 28, 2018, an increase of 11%fiscal 2020, 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, occurring 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, 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 strong 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 segment were $48.2$16.1 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 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 year 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 million in the third quarter of the current fiscal year and $3.9 million for the year to date period. These losses were offset by an 11% increase in rodenticide sales in the third quarter as the Company gained incremental business with several large customers; year to date sales rose by 9%.
Genomics Services increased 19% in both the third quarter and year to date periods, respectively, each compared to the same period in the prior year. The growthimprovement in earnings for both periods 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% in the third 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% 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% compared to 16.2% in last year’s
third quarter. The improvement 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 the prior year.
Other Income and Income Tax
Other income was $1.4 million for both the third 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 related to the Quat-Chem acquisition. Last year’s fiscal third quarter included a gain on the settlement of a licensing agreement 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 related to the Quat-Chem acquisition, and $78,000 of royalty income. For the same period in fiscal 2017, other income was $1.8 million, which included interest income of $691,000, gain on the settlement of a licensing agreement of $660,000, currency gains of $263,000, and royalty income of $79,000.
Income tax expense in the third quarter was $700,000, an effective tax rate of 4%, compared to prior year third quarter expense of $5.4 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% to 21%, and also resulted in other adjustments to income tax expense. The Company will compute its income tax for the fiscal 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 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% in the prior fiscal year. For the year to date period, the lower effective rate is primarily the result of the tax reform passeddecrease 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 increased tax benefits resulting from the exercise of stock options, due to the adoption of ASU2016-09; refer to Note 5 of the Company’s Consolidated Financial Statements for further information. Inhigher option activity in the second 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.year ago. For the year to date, period, net income was $45.6decreased 1% from $31.3 million a 46% increase over prior yearto $30.9 million; six month net income of $31.3 million. Pre tax income increases of 10% for the quarter and 12% for the year to date were favorablyin fiscal 2020 was negatively impacted by the effects ofa higher effective 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.
rate.
Accounts2020.
2020.
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3 10 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) 21
Dated: March 29, 2018 James L. HerbertJohn E. Adent James L. Herbert ChairmanOfficer Dated: March 29, 2018 22