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, 2021.
☐ | 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)
| | |
| | |
(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:
| | | | |
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Common Stock, $0.16 par value per share | | | | NASDAQ Global Select Market |
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
Indicate by a check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES Yes ☒
NONo ☐
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). YESYes ☒ NONo ☐Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
anon-accelerated
filer, a smaller reporting company, or
anon-accelerated filer (see definitionan emerging growth company. See the definitions of
“accelerated filer and large“large accelerated filer”
, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule
12b-2
of the Exchange Act):Act. | | | | | | | | | | |
Large accelerated filer | | ☒ | | Accelerated filer | | ☐ |
| | | |
Non-accelerated filer | | ☐ | | Smaller Reporting Company | | ☐ |
| | | | | |
Non-accelerated filer | | ☐ (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. Yes ☐ NONo ☒As of
February 28, 2018,August 31, 2021, there were
51,583,085107,493,015 shares of Common Stock outstanding.
NEOGEN CORPORATION AND SUBSIDIARIES
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| | Interim Consolidated Financial Statements (unaudited) | | | 2 | |
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| | Consolidated Balance Sheets – February 28, 2018August 31, 2021 and May 31, 20172021 | | | 2 | |
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| | Consolidated Statements of Income – Three and nine months ended February 28, 2018August 31, 2021 and 20172020 | | | 3 | |
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| | Consolidated Statements of Comprehensive Income – Three and nine months ended February 28, 2018August 31, 2021 and 20172020 | | | 4 | |
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| | Consolidated StatementStatements of Equity – NineThree months ended February 28, 2018August 31, 2021 and 2020 | | | 5 | |
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| | Consolidated Statements of Cash Flows – NineThree months ended February 28, 2018August 31, 2021 and 20172020 | | | 6 | |
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| | Notes to Interim Consolidated Financial Statements – February 28, 2018August 31, 2021 | | | 7 | |
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| | Management’s Discussion and Analysis of Financial Condition and Results of Operations | | | 1317 | |
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| | Quantitative and Qualitative Disclosures About Market Risk | | | 2023 | |
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| | Controls and Procedures | | | 2023 | |
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| | Legal Proceedings | | | 2124 | |
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| | Exhibits | | | 2124 | |
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| | | 2225 | |
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| | CEO Certification of Principal Executive Officer | | | | |
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| | CFO Certification of Principal Financial Officer | | | | |
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| | Section 906 Certification | | | | |
PART I – FINANCIAL INFORMATION
Item 1. | Interim Consolidated Financial Statements |
Item 1. Interim Consolidated Financial Statements
Neogen Corporation and Subsidiaries
Consolidated Balance
SheetSheets (unaudited)
(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 | |
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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 | | $ | 71,283 | | | $ | 75,602 | |
| | | 329,597 | | | | 305,485 | |
Accounts receivable, less allowance of $1,500 and $1,400 at August 31, 2021 and May 31, 2021, respectively | | | 87,291 | | | | 91,823 | |
| | | 102,109 | | | | 100,701 | |
Prepaid expenses and other current assets | | | 18,844 | | | | 17,840 | |
| | | | | | | | |
| | | 609,124 | | | | 591,451 | |
Net Property and Equipment | | | 99,515 | | | | 100,453 | |
| | | | | | | | |
| | | 2,407 | | | | 2,477 | |
| | | 130,012 | | | | 131,476 | |
Other non-amortizable intangible assets | | | 15,496 | | | | 15,545 | |
Amortizable intangible and other assets, net of accumulated amortization of $49,086 and $53,462 at August 31, 2021 and May 31, 2021, respectively | | | 73,534 | | | | 76,771 | |
| | | 2,018 | | | | 2,019 | |
| | | | | | | | |
| | $ | 932,106 | | | $ | 920,192 | |
| | | | | | | | |
Liabilities and Stockholders’ Equity | | | | | | | | |
| | | | | | | | |
| | $ | 22,414 | | | $ | 23,900 | |
| | | 6,989 | | | | 11,251 | |
| | | 4,523 | | | | 1,848 | |
| | | 16,836 | | | | 16,600 | |
| | | | | | | | |
Total Current Liabilities | | | 50,762 | | | | 53,599 | |
| | | 21,827 | | | | 21,917 | |
Other Non-Current Liabilities | | | 4,154 | | | | 4,299 | |
| | | | | | | | |
| | | 76,743 | | | | 79,815 | |
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Commitments and Contingencies (note 10) | | | 0 | | | | 0 | |
| | | | | | | | |
Preferred stock, $1.00 par value, 100,000 shares authorized, 0ne issued and outstanding | | | 0 | | | | 0 | |
Common stock, $0.16 par value, 120,000,000 shares authorized, 107,493,015 and 107,468,304 shares issued and outstanding at August 31, 2021 and May 31, 2021, respectively | | | 17,199 | | | | 17,195 | |
| | | 297,687 | | | | 294,953 | |
Accumulated other comprehensive loss | | | (16,204 | ) | | | (11,375 | ) |
| | | 556,681 | | | | 539,604 | |
| | | | | | | | |
Total Stockholders’ Equity | | | 855,363 | | | | 840,377 | |
| | | | | | | | |
Total Liabilities and Stockholders’ Equity | | $ | 932,106 | | | $ | 920,192 | |
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See notes to interim consolidated financial statements.
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 | |
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Total Cost of Revenues | | | 50,371 | | | | 47,505 | | | | 152,302 | | | | 137,797 | |
| | | | | | | | | | | | | | | | |
Gross Margin | | | 45,521 | | | | 40,880 | | | | 140,663 | | | | 124,950 | |
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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 | |
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| | $ | 104,013 | | | $ | 87,935 | |
| | | 24,292 | | | | 21,390 | |
| | | | | | | | |
| | | 128,305 | | | | 109,325 | |
| | | | | | | | |
| | | | | | | | |
| | | 54,726 | | | | 46,595 | |
| | | 13,571 | | | | 12,428 | |
| | | | | | | | |
| | | 68,297 | | | | 59,023 | |
| | | | | | | | |
| | | 60,008 | | | | 50,302 | |
| | | | | | | | |
| | | 20,555 | | | | 16,516 | |
General and administrative | | | 13,383 | | | | 11,013 | |
| | | 4,325 | | | | 3,878 | |
| | | | | | | | |
| | | 38,263 | | | | 31,407 | |
| | | | | | | | |
| | | 21,745 | | | | 18,895 | |
| | | | | | | | |
| | | 203 | | | | 722 | |
| | | (221 | ) | | | 193 | |
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Total Other Income (Expense) | | | (18 | ) | | | 915 | |
| | | | | | | | |
| | | 21,727 | | | | 19,810 | |
Provision for Income Taxes | | | 4,650 | | | | 3,950 | |
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| | $ | 17,077 | | | $ | 15,860 | |
| | | | | | | | |
| | | | | | | | |
| | $ | 0.16 | | | $ | 0.15 | |
| | $ | 0.16 | | | $ | 0.15 | |
Weighted Average Shares Outstanding | | | | | | | | |
| | | 107,490 | | | | 105,984 | |
| | | 108,109 | | | | 106,570 | |
See notes to interim consolidated financial statements.
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 | |
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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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| | | |
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| | $ | 17,077 | | | $ | 15,860 | |
Other comprehensive income (loss), net of tax: foreign currency translations | | | (4,623 | ) | | | 4,121 | |
Other comprehensive loss, net of tax: unrealized loss on marketable securities | | | (206 | ) | | | (119 | ) |
| | | | | | | | |
Total comprehensive income | | $ | 12,248 | | | $ | 19,862 | |
| | | | | | | | |
See notes to interim consolidated financial statements.
Neogen Corporation and Subsidiaries
Consolidated StatementStatements of
(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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| | | 107,468 | | | $ | 17,195 | | | $ | 294,953 | | | $ | (11,375 | ) | | $ | 539,604 | | | $ | 840,377 | |
Exercise of options and share-based compensation expense | | | 6 | | | | 1 | | | | 1,838 | | | | — | | | | — | | | | 1,839 | |
Issuance of shares under employee stock purchase plan | | | 19 | | | | 3 | | | | 896 | | | | — | | | | — | | | | 899 | |
Net income for the three months ended August 31, 2021 | | | — | | | | — | | | | — | | | | — | | | | 17,077 | | | | 17,077 | |
Other comprehensive loss for the three months ended August 31, 2021 | | | — | | | | — | | | | — | | | | (4,829 | ) | | | — | | | | (4,829 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | 107,493 | | | $ | 17,199 | | | $ | 297,687 | | | $ | (16,204 | ) | | $ | 556,681 | | | $ | 855,363 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
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| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | 105,892 | | | $ | 16,943 | | | $ | 249,221 | | | $ | (19,709 | ) | | $ | 478,722 | | | $ | 725,177 | |
Exercise of options and share-based compensation expense | | | 172 | | | | 28 | | | | 5,811 | | | | — | | | | — | | | | 5,839 | |
Issuance of shares under employee stock purchase plan | | | 18 | | | | 3 | | | | 665 | | | | — | | | | — | | | | 668 | |
Net income for the three months ended August 31, 2020 | | | — | | | | — | | | | — | | | | — | | | | 15,860 | | | | 15,860 | |
Other comprehensive income for the three months ended August 31, 2020 | | | — | | | | — | | | | — | | | | 4,002 | | | | — | | | | 4,002 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | 106,082 | | | $ | 16,974 | | | $ | 255,697 | | | $ | (15,707 | ) | | $ | 494,582 | | | $ | 751,546 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
See notes to interim consolidated financial statements.
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 | |
| | | | | | | | |
Cash And Cash Equivalents At End Of Period | | $ | 82,066 | | | $ | 59,883 | |
| | | | | | | | |
| | | | | | | | |
| | | |
| | | |
| | | | | | |
Cash Flows From Operating Activities | | | | | | | | |
| | $ | 17,077 | | | $ | 15,860 | |
Adjustments to reconcile net income to net cash from operating activities: | | | | | | | | |
Depreciation and amortization | | | 5,682 | | | | 4,720 | |
| | | 1,690 | | | | 1,681 | |
Change in operating assets and liabilities, net of business acquisitions: | | | | | | | | |
| | | 4,036 | | | | 8,350 | |
| | | (1,863 | ) | | | (1,319 | ) |
Prepaid expenses and other current assets | | | (1,029 | ) | | | (1,045 | ) |
Accounts payable, accruals and other changes | | | (2,383 | ) | | | (3,113 | ) |
| | | | | | | | |
Net Cash From Operating Activities | | | 23,210 | | | | 25,134 | |
Cash Flows Used for Investing Activities | | | | | | | | |
Purchases of property, equipment and other non-current intangible assets | | | (1,295 | ) | | | (4,248 | ) |
Proceeds from the maturities of marketable securities | | | 112,636 | | | | 139,184 | |
Purchases of marketable securities | | | (136,748 | ) | | | (168,318 | ) |
Business acquisitions, net of cash acquired | | | — | | | | (2,350 | ) |
| | | | | | | | |
Net Cash Used for Investing Activities | | | (25,407 | ) | | | (35,732 | ) |
Cash Flows From Financing Activities | | | | | | | | |
Exercise of stock options and other | | | 1,048 | | | | 5,095 | |
| | | | | | | | |
Net Cash From Financing Activities | | | 1,048 | | | | 5,095 | |
Effects of Foreign Exchange Rates on Cash | | | (3,170 | ) | | | 181 | |
| | | | | | | | |
Net Increase (Decrease) in Cash and Cash Equivalents | | | (4,319 | ) | | | (5,322 | ) |
Cash and Cash Equivalents, Beginning of Period | | | 75,602 | | | | 66,269 | |
| | | | | | | | |
Cash and Cash Equivalents, End of Period | | $ | 71,283 | | | $ | 60,947 | |
| | | | | | | | |
See notes to interim consolidated financial statements.
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, 2021 are not necessarily indicative of the results to be expected for the fiscal year ending May 31,
2018.2022. 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
the Company’sour Annual Report on Form
10-K
for the fiscal year ended May 31, 2017.2021.
Our functional currency is the U.S. dollar. We translate ournon-U.S.
operations’ assets and liabilities denominated in foreign currencies into U.S. dollars at current rates of exchange as of the balance sheet date and income and expense items at the average exchange rate for the reporting period. Translation adjustments resulting from exchange rate fluctuations are recorded in other comprehensive income (loss). Gains or losses from foreign currency transactions are included in other income (expense) on our consolidated statement of income. Share and per share amounts reflect the June 4, 2021stock split as if it took place at the beginning of the periods presented. Recently Adopted Accounting Standards
Income Tax Simplification
On June 1, 2021, the Company adopted ASU 740 Update2019-12,
Income Taxes (Topic 740). This guidance provides amendments to simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. The adoption of this guidance did not have a material impact on our consolidated financial statements. Recent Accounting Pronouncements Not Yet Adopted
In March 2020, the FASB issued Update2020-04,
Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This update provides temporary optional expedients to applying the reference rate reform guidance to contracts that reference LIBOR or another reference rate expected to be discontinued. Under this update, contract modifications resulting in a new reference rate may be accounted for as a continuation of the existing contract. This guidance is effective upon issuance of the update and applies to contract modifications made through December 31, 2022. We will adopt this standard when LIBOR is discontinued and our lender begins using the new reference rate. We are evaluating the impact the new standard will have on our consolidated financial statements and related disclosures, but do not anticipate a material impact. 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 and losses on our 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 ownassumptions.
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. Topic 842 requires the Company to recognize in the statement of financial position a liability to make lease payments (the lease liability) and aasset representing its right to use the underlying asset for the lease term.assets are recorded in other assets on our consolidated balance sheets. Current andnon-current
lease liabilities are recorded in other accruals within current liabilities and othernon-current
liabilities, respectively, on our consolidated balance sheets. Costs associated with operating leases are recognized on a straight-line basis within operating expenses over the term of the lease. Theassets were $2,407,000 and $2,477,000 at August 31, 2021 and May 31, 2021, respectively. The total current andnon-current
lease liabilities were $2,408,000 and $2,492,000 at August 31, 2021 and May 31, 2021, respectively. 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.
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, current economic conditions and other information. Collateral or other security is generally not required for accounts receivable. Once a receivable balance has been determined to be uncollectible, generally after all collection efforts have been exhausted, 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, covenantsand 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. 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, restricted stock units (RSUs) 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, an estimate of award forfeitures, 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. For RSUs, we use the intrinsic value method to value the units.
To value other equity awards, 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 are the reason for their use. If different models 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 8.
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.
2. CASH AND MARKETABLE SECURITIES
Cash and Cash Equivalents
Cash and cash equivalents consist of bank demand accounts, savings deposits, certificates of deposit and commercial paper with original maturities of 90 days or less. Cash and cash equivalents are maintained at financial institutions and, at times, balances may exceed federally insured limits. The Company has not experienced losses related to these balances and believes it is not exposed to significant credit risk regarding its cash and cash equivalents. Cash and cash equivalents were $71,283,000 and $75,602,000 at August 31, 2021 and May 31, 2021, respectively. The carrying value of these assets approximates fair value due to the short maturity of these instruments and is classified as Level 1 in the fair value hierarchy.
The Company has marketable securities held by banks or broker-dealers at August 31, 2021. Changes in market value are monitored and recorded on a monthly basis; in the event of a downgrade in credit quality subsequent to purchase, the marketable security investment is evaluated to determine the appropriate action to take to minimize the overall risk to our marketable security portfolio.
These securities are classified as available for sale. The primary objective of management’s short-term investment activity is to preserve capital for the purpose of funding current operations, capital expenditures and business acquisitions; short-term investments are not entered into for trading or speculative purposes. These securities are recorded at fair value based on recent trades or pricing models and therefore meet the Level 2 criteria. Interest income on these investments is recorded within other income on the income statement. Adjustments in the fair value of these assets are recorded in other comprehensive income.
Marketable Securities as of August 31, 2021 and May 31, 2021 are listed below by classification and remaining maturities.
| | | | | | | | | | |
| | | | | | | | |
Commercial Paper & Corporate Bonds | | 0 - 90 days | | | 82,115 | | | | 106,631 | |
| | 91 - 180 days | | | 78,299 | | | | 78,727 | |
| | 181 days - 1 year | | | 90,026 | | | | 87,590 | |
| | 1 - 2 years | | | 76,647 | | | | 26,752 | |
| | 0 - 90 days | | | 1,253 | | | | 3,262 | |
| | 91 - 180 days | | | 1,006 | | | | 1,260 | |
| | 181 days - 1 year | | | 251 | | | | 1,263 | |
| | 1 - 2 years | | | 0— | | | | 0— | |
| | | | | | | | | | |
Total Marketable Securities | | | | $ | 329,597 | | | $ | 305,485 | |
| | | | | | | | | | |
The components of marketable securities at August 31, 2021 are as follows:
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | |
Commercial Paper & Corporate Bonds | | $ | 327,157 | | | $ | 53 | | | $ | (123 | ) | | $ | 327,087 | |
| | | 2,503 | | | | 7 | | | | 0— | | | | 2,510 | |
| | | | | | | | | | | | | | | | |
Total Marketable Securities | | $ | 329,660 | | | $ | 60 | | | $ | (123 | ) | | $ | 329,597 | |
| | | | | | | | | | | | | | | | |
The components of marketable securities at May 31, 2021 are as follows:
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | |
Commercial Paper & Corporate Bonds | | $ | 299,524 | | | $ | 209 | | | $ | (33 | ) | | $ | 299,700 | |
| | | 5,755 | | | | 30 | | | | 0— | | | | 5,785 | |
| | | | | | | | | | | | | | | | |
Total Marketable Securities | | $ | 305,279 | | | $ | 239 | | | $ | (33 | ) | | $ | 305,485 | |
| | | | | | | | | | | | | | | | |
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 | |
| | | | | | | | |
3.
| | | | | | | | |
| | | | | | |
| | $ | 50,244 | | | $ | 47,588 | |
| | | 6,704 | | | | 6,412 | |
Finished and purchased goods | | | 45,161 | | | | 46,701 | |
| | | | | | | | |
| | $ | 102,109 | | | $ | 100,701 | |
| | | | | | | | |
We determine 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 of Neogen’s revenue is generated through contracts with its customers. A performance obligation is a promise in a contract to transfer a product or service to a customer. We generally recognize revenue at a point in time when all of 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 we expect 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.
Certain agreements with customers include discounts or rebates on the sale of products and services applied retrospectively, such as volume rebates achieved by purchasing a specified purchase threshold of goods and services. We account for these discounts as variable consideration and estimate the likelihood of a customer meeting the threshold in order to determine the transaction price using the most predictive approach. We typically use the most-likely-amount method, for incentives that are offered to individual customers, and the expected-value method, for programs that are offered to a broad group of customers. Variable consideration reduces the amount of revenue that is recognized. Rebate obligations related to customer incentive programs are recorded in accrued liabilities; the rebate estimates are adjusted at the end of each applicable measurement period based on information currently available.
The performance obligations in Neogen’s contracts are generally satisfied well within one year of contract inception. In such cases, management has elected the practical expedient to not adjust the promised amount of consideration for the effects of a significant financing component. Management has elected to utilize the practical expedient to recognize the incremental costs of obtaining a contract as an expense when incurred because the amortization period for the prepaid costs that would otherwise have been deferred and amortized is one year or less. We account for shipping and handling for products as a fulfillment activity when goods are shipped. Shipping and handling costs that are charged to and reimbursed by the customer are recognized as revenues, while the related expenses incurred by Neogen are recorded in sales and marketing expense. Revenue is recognized net of any tax collected from customers; the taxes are subsequently remitted to governmental authorities. Our terms and conditions of sale generally do not provide for returns of product or reperformance of service except in the case of quality or warranty issues. These situations are infrequent; due to immateriality of the amount, warranty claims are recorded in the period incurred.
The Company derives revenue from two primary sources—product revenue and service revenue.
Product revenue consists of shipments of:
Diagnostic test kits, culture media and related products used by food producers and processors to detect harmful natural toxins, foodborne bacteria, allergens and levels of general sanitation;
Consumable products marketed to veterinarians, retailers, livestock producers and animal health product distributors; and
Rodenticides, disinfectants and insecticides to assist in the control of rodents, insects and disease in and around agricultural, food production and other facilities.
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 Neogen’s genomics and commercial laboratory services are recognized and invoiced when the applicable laboratory service is performed and the results are conveyed to the customer.
Payment terms for products and services are generally 30 to 60 days.
The following table presents disaggregated revenue by major product and service categories for the three month periods ended August 31, 2021 and 2020:
| | | | | | | | |
| | Three Months ended August 31, | |
| | | | | | |
| | | | | | | | |
Natural Toxins, Allergens & Drug Residues | | $ | 20,408 | | | $ | 19,015 | |
Bacterial & General Sanitation | | | 11,165 | | | | 9,931 | |
| | | 18,046 | | | | 12,171 | |
Rodenticides, Insecticides & Disinfectants | | | 7,649 | | | | 8,830 | |
| | | 5,454 | | | | 4,238 | |
| | | | | | | | |
| | $ | 62,722 | | | $ | 54,185 | |
| | | | | | | | |
| | $ | 1,363 | | | $ | 1,325 | |
Veterinary Instruments & Disposables | | | 15,337 | | | | 10,375 | |
| | | 9,219 | | | | 7,658 | |
Rodenticides, Insecticides & Disinfectants | | | 22,149 | | | | 19,914 | |
| | | 17,515 | | | | 15,868 | |
| | | | | | | | |
| | $ | 65,583 | | | $ | 55,140 | |
| | | | | | | | |
| | $ | 128,305 | | | $ | 109,325 | |
| | | | | | | | |
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 amounts) | | | | | | |
Numerator for basic and diluted net income per share: | | | | | | | | |
| | $ | 17,077 | | | $ | 15,860 | |
Denominator for basic net income per share: | | | | | | | | |
| | | 107,490 | | | | 105,984 | |
Effect of dilutive stock options | | | 619 | | | | 586 | |
| | | | | | | | |
Denominator for diluted net income per share | | | 108,109 | | | | 106,570 | |
| | | | | | | | |
| | $ | 0.16 | | | $ | 0.15 | |
| | | | | | | | |
| | $ | 0.16 | | | $ | 0.15 | |
| | | | | | | | |
6. 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, 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.
Neogen’s operation in Australia originally focused on providing genomics services and sales of animal safety products and reports through the Animal Safety segment. With the acquisition of Cell BioSciences in February 2020, this operation has expanded to offer our complete line of products and services, including those usually associated with the Food Safety segment. These additional products are managed and directed by existing management at Neogen Australasia and report through the Animal 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, 2021 | | | | | | | | | | | | | | | | |
Product revenues to external customers | | $ | 55,945 | | | $ | 48,068 | | | $ | — | | | $ | 104,013 | |
Service revenues to external customers | | | 6,777 | | | | 17,515 | | | | — | | | | 24,292 | |
| | | | | | | | | | | | | | | | |
Total revenues to external customers | | | 62,722 | | | | 65,583 | | | | — | | | | 128,305 | |
| | | 10,131 | | | | 12,762 | | | | (1,148 | ) | | | 21,745 | |
| | | 291,018 | | | | 240,208 | | | | 400,880 | | | | 932,106 | |
As of and for the three months ended August 31, 2020 | | | | | | | | | | | | | | | | |
Product revenues to external customers | | $ | 48,663 | | | $ | 39,272 | | | $ | — | | | $ | 87,935 | |
Service revenues to external customers | | | 5,522 | | | | 15,868 | | | | — | | | | 21,390 | |
| | | | | | | | | | | | | | | | |
Total revenues to external customers | | | 54,185 | | | | 55,140 | | | | — | | | | 109,325 | |
| | | 7,963 | | | | 12,165 | | | | (1,233 | ) | | | 18,895 | |
| | | 225,716 | | | | 228,390 | | | | 367,486 | | | | 821,592 | |
(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, | |
| | | | | | |
| | $ | 77,779 | | | $ | 67,324 | |
| | | 50,526 | | | | 42,001 | |
| | | | | | | | |
| | | 128,305 | | | | 109,325 | |
| | | | | | | | |
5.
7. EQUITY COMPENSATION PLANS
Qualified
Incentive and
non-qualified
options to purchase shares of common stock may behave been granted to directors, officers and employees of theCompanyNeogen under the terms of the Company’s stock option plans. These options are granted at an exercise price of not less than the fair market value of the stock on the date of grant. 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, 2021 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, 2021 | | | 2,957 | | | $ | 30.38 | |
| | | 0 | | | | 0 | |
| | | (5 | ) | | | 27.71 | |
| | | (11 | ) | | | 30.79 | |
| | | | | | | | |
Options outstanding August 31, 2021 | | | 2,941 | | | $ | 30.38 | |
During the
three and nine monththree-month periods ended
February 28, 2018August 31, 2021 and
2017,2020, the Company recorded
$1,026,000$1,690,000 and
$1,198,000 and $3,692,000 and $3,932,000,$1,681,000, 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 2021, estimated on the date of grant using the Black-Scholes option pricing model, was
$14.44 and $11.84, respectively.$7.71. 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 2022.
| | | | |
| | | |
| | | 0.2 | % |
| | | 0.0 | % |
Expected stock price volatility | | | 31.3 | % |
| | | 3.25 years | |
The Company
has an employeegranted 118,250 restricted stock
units (RSUs) to directors, officers and employees under the terms of the 2018 Omnibus Incentive Plan in fiscal year 2021, which vest ratably over three and five year periods. NaN RSUs were gran
ted in the first quarter of fiscal year 2022. RSUs have a weighted average value of $34.21 per share and will be expensedon a
straight-lineover the remaining weighted-average period of 4.0 years. On August 31, 2021 there was $2,908,000 in unamortized compensation cost related tonon-vested
RSUs.The Company offers eligible employees the option to purchase
plan that provides for employeecommon stock
purchases at a 5% discount to
the lower of the market
price. Thevalue of the stock at the beginning or end of each participation period under the terms of the 2011 Employee Stock Purchase Plan; the discount is recorded in
general and administrative
expense asexpense. Total individual purchases in any year are limited to 10% of
the date of purchase.6. NEW ACCOUNTING PRONOUNCEMENTS
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.compensation.
8. BUSINESS
AND PRODUCT LINE ACQUISITIONSCOMBINATIONS
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
December 1, 2016,July 31, 2020, the Company acquired the
stock of Quat-Chem Ltd., a chemical company that manufactures biosecurity products, basedU.S. (including territories) rights to Elanco’s StandGuardPour-on
for horn fly and lice control in
Rochdale, England.beef cattle, and related assets. This product line fits in well with Neogen’s existing agricultural insecticide portfolio and organizational capabilities. Consideration for the purchase was
$21,606,000$2,351,000 in cash,
all paid at closing. The final purchase price allocation, based upon the fair value of these assets determined using the income approach, included inventory of $51,000 and intangible assets of $2,300,000 (with an estimated life of 15 years). This product line is currently being toll manufactured for the Company but is eventually expected to be manufactured at Neogen’s operation in Iowa; the sales are reported within the Animal Safety segment.
On December 30, 2020, the Company acquired all of the stock of Megazyme, Ltd, an Ireland-based company, and its wholly-owned subsidiaries, U.S.-based Megazyme, Inc. and Ireland-based Megazyme IP. Megazyme is a manufacturer and supplier of diagnostic assay kits and enzymes to measure dietary fiber, complex carbohydrates and enzymes in food and beverages as well as animal feeds. This acquisition will allow Neogen to expand its commercial relationships across food, feed and beverage companies, and provide additional food quality diagnostic products to commercial labs and food science research institutions. Consideration for the purchase was net cash of $39.8 million paid at closing, $8.6 million of cash placed in escrow payable to the former owner in two installments in two and four years, $4.9 million of stock issued at closing, and up to
$3,778,000$2.5 million of contingent consideration,
due atpayable in two installments over the
end of each of the first two years,next year, based
onupon an excess net sales formula. The
finalpreliminary 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,$1,376,000, inventory of
$1,243,000, land,$5,595,000, net property,
plant and equipment of
$2,526,000,$12,599,000, prepayments of $69,000, accounts payable of
$2,197,000, deferred tax liability$4,000, other current liabilities of
$1,133,000,$1,815,000, contingent consideration accrual of
$1,058,000, other current $2,458,000,non-current
liabilities of
$604,000,non-amortizable$319,000,non-current
deferred tax liabilities of $3,306,000, intangible assets of
$1,889,000, intangible assets of $6,900,000$22,945,000 (with an estimated life of
5-1515-20
years) and the remainder to goodwill
(non-deductible
for tax purposes). These values are Level 3 fair value measurements. In January 2018, the Company paidFebruary 2021, the former owners $249,000 inowner was paid $1,229,000 for the first installment of contingent consideration, based onupon the achievement of sales targets in the first year, and recorded a credit of $255,000 to other income, reducing the contingent consideration accrual by a corresponding amount; $554,000 remains accrued for contingent consideration payable at the end of the second year. This business continuestargets. The Irish companies continue to operate from their current locations in its current location and is managed by Neogen Europe,Bray, Ireland, reporting within the Food Safety segment.11
On December 27, 2016,segment and are managed through Neogen’s Scotland operation. The U.S. company’s business is managed by our Lansing-based Food Safety team.
Subsequent to the end of the quarter, on September 17, 2021, the Company acquired the stock of
Rogama Industria e Comercio, Ltda.CAPInnoVet, Inc., a
companycompanion animal health business that
develops and manufactures rodenticides and insecticides, based near Sao Paulo, Brazil. Consideration forprovides pet medications to the
purchase was $12,428,000 in cash and upveterinary market. Due to
$2,069,000 of contingent consideration, due at the
end of eachtiming of the
first two years, based on an excess net sales formula. The final purchase price allocation, based upontransaction, the
fair value of these assets and liabilities determined using the income approach, included accounts receivable of $1,866,000, othernon-current assets of $26,000, inventory of $960,000, land, property and equipment of $4,734,000, current liabilities of $2,562,000, contingent consideration accrual of $213,000,non-current deferred tax liability of $1,307,000,non-amortizable intangible assets of $870,000, intangible assets of $5,112,000 (with an estimated life of5-15 years) and the remainder to goodwill(non-deductible for tax purposes). These values are Level 3 fair value measurements. This business continues to operate in its current location and is managed by Neogen do Brasil, reporting within the Food Safety segment.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 inventorywas not complete at the time 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.filing. The new business renamed Neogen Australasia, continues to operatewill be operated from our location in its current location,Lexington, KY, reporting within the Animal Safety segment.
8.
For each acquisition listed above, the revenues and net income were not considered material and were therefore not disclosed.
9. 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 expires on
SeptemberNovember 30,
2019.2023. There were
no0 advances against the line of credit during fiscal
year 20172021 and there have been none thus far in fiscal
year 2018;2022; there was
no balance0balance outstanding at
February 28, 2018.August 31, 2021. Interest on any borrowings
remained is
at LIBOR plus 100 basis points (rate under the terms of the agreement was
2.82%1.08% at
February 28, 2018)August 31, 2021). 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, 2021.
10. 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
expensescurrently utilizes a pump and treat remediation strategy, which includes semi-annual monitoring and reporting, consulting, and maintenance of monitoring wells. We expense 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
remaining liability for these costs was $916,000 at
February 28, 2018both August 31, 2021 and May 31,
2017,2021, measured on an undiscounted basis over an estimated period of 15
years; $54,000years. In fiscal 2019, the Company performed an updated Corrective Measures Study 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. However, the Company has agreed to a pilot study in which chemical reagents are injected into the ground in an attempt to reduceon-site
contamination and is currently working with its consultant to design the system. At this time, the outcome of the
pilot study is unknown, but a change in the current remediation strategy, depending on the alternative selected, could result in an increase in future costs and ultimately, an increase in the currently recorded liability,
with an offsetting charge to operations in the period recorded. The Company has recorded $300,000 as a current liability, and the remaining $616,000 is recorded
within current liabilities and the remainder is recorded withinin other
non-current
liabilities in the consolidated balance sheet.On March 6, 2020, the Company received an administrative subpoena from the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) regarding activities or transactions involving parties located in Iran. The Company subsequently conducted an internal investigation under the direction of outside legal counsel and disclosed information concerning certain genomic testing services provided to an unrelated U.S.-based party engaged in veterinary activities involving an Iranian party. The Company continues to cooperate with OFAC’s investigation and is currently examining whether certain of these activities may be eligible for OFAC General Licenses authorizing agricultural and veterinary activities.
In addition to responding to the administrative subpoena, the Company is implementing additional compliance measures to prevent inadvertent dealings with restricted countries or parties. These measures will further enhance the Company’s international trade compliance program, which is designed to assure that the Company does not conduct business directly or indirectly with any countries or parties subject to U.S. economic sanctions and export control laws. Although it is too early to predict what action, if any, that OFAC will take, the Company does not currently have any reason to believe that OFAC’s pending investigation will have a material impact on its operations, the results of operations for any future period, or its overall financial condition. In fiscal 2020, the Company took a charge to expense and recorded a reserve of $600,000 to provide for potential fines or penalties on this matter. At this time, the Company believes that it is adequately reserved for this issue.
The Company is subject to certain
other
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. STOCK PURCHASE
The Company has a stock repurchase program, authorized by the Board
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, effects of the ongoingCOVID-19
pandemic on our business, 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
As we continue to closely monitor theCOVID-19
pandemic, our top priority remains protecting the health and
EstimatesThe discussionsafety of our employees. While operations continue in our locations around the world, many of our
non-manufacturing
employees continue to work remotely and,
analysisalthough it is starting to increase, business travel remains limited. Safety guidelines and procedures, including social distancing and enhanced cleaning, have been developed foron-site
employees and these policies are regularly monitored and updated by our internal Emergency Response Team. In the first quarter of fiscal 2022, theCOVID-19
pandemic continued to impact our business operations and financial results. There has been a positive impact in sales of our biosecurity product lines, as the pandemic has created increased demand for these products, and sales into companion animal markets have benefitted, as remote work and stay at home orders have driven increased pet ownership. A number of our food safety diagnostic product lines have been negatively impacted due to decreased demand in many of our customers’ businesses around the world, particularly those serving restaurants, bars and other institutional food service markets. A number of our markets across the world are recovering, but the pandemic has continued to adversely impact our customers and, ultimately, our revenues. We have also experienced supply chain difficulties including vendor disruptions, border closures, shipping issues and significantly increased shipping costs; labor shortages and higher labor costs, as we have had to use staffing agencies and increase our base pay in many areas of the
Company’scompany to fill open positions; and restricted travel, which hinders our ability to connect with customers. During the current fiscal year, we have incurred less expense for travel, meals, trade shows and some other customer-facing marketing activities; some of these activities have resumed but have not yet returned topre-pandemic
levels. Higher spend on shipping and labor are offsetting these savings. We expect theCOVID-19
pandemic will continue to impact our business operations and financial
condition and results
through at least the end of
operations are based on the consolidated financial statements that have been prepared in accordance with accounting principles generally acceptedour current fiscal year.
Consolidated revenues were $128.3 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,2022, an increase of 8%, or $7.5 million,17% compared to $109.3 million in the first quarter of fiscal 2020. Organic sales increased 14%.
Food Safety segment sales were $62.7 million in the first quarter of the current fiscal year, an increase of 16% compared to $54.2 million in the same period of the prior year. Organic sales in this segment rose 10% for the comparative period, with revenues from the acquisition of $88.4Megazyme (December 2020) providing the remainder of the increase.
Animal Safety segment sales were $65.6 million in the first quarter of fiscal 2022, an increase of 19% compared to prior year first quarter sales of $55.1 million. Organic sales in this segment also rose 19%.
International sales in the first quarter of fiscal 2022 were 39.4% of total sales compared to 38.4% of total sales in the first quarter of fiscal 2021.
The effective tax rate in the first quarter of fiscal 2022 was 21.4% compared to 19.9% in the prior year first quarter.
Net income for the quarter ended August 31, 2021 was $17.1 million, or $0.16 per diluted share, an increase of 8% compared to $15.9 million, or $0.15 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 2022 was $23.2 million, compared to revenues of $262.7$25.1 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 million2021.
Neogen’s results reflect a 20% increase in international sales in the
thirdfirst quarter of fiscal
year 2017. Earnings per share for the third quarter of fiscal 2018 were $0.32 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 favorably impacted by tax reform, excess tax benefits from stock option exercises, and the favorable conclusion of an IRS audit.Food Safety segment revenues increased 11% and Animal Safety segment revenues increased 6% for the three month period ended February 28, 2018, each2022 compared to the same period in the prior year. For the quarter, the overall organic sales increase was 7%; organic growthRevenue changes, expressed in percentages, in the Food Safety and Animal Safety segments was 9% and 5%, respectively. The acquisitionsfirst quarter of Rogama, purchased inmid-December 2016, and Neogen Australasia, in September 2017, contributed $1.6 millionfiscal 2022 compared to the overall revenue growthsame quarter in the third quarter. Food Safety segmentprior year are as follows for each of our international locations:
| | | | | | | | |
| | | | | Revenue Change Local Currency | |
U.K. Operations (including Neogen Italia) | | | 9 | % | | | (2 | )% |
| | | 228 | % | | | 217 | % |
| | | (15 | )% | | | (17 | )% |
| | | 16 | % | | | 4 | % |
| | | 15 | % | | | 54 | % |
| | | 15 | % | | | 17 | % |
| | | 71 | % | | | 63 | % |
| | | 59 | % | | | 47 | % |
| | | 15 | % | | | 14 | % |
| | | 89 | % | | | 75 | % |
| | | 49 | % | | | 41 | % |
Currency translations increased comparative 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 $37.4by approximately $2.3 million in the thirdfirst quarter of fiscal 2018,2022 compared to the same quarter a year ago, primarily due to increased strength of the British pound and Mexican peso relative to the U.S. dollar. Combined revenues at our U.K. operations increased approximately 9%, with our Neogen Europe and Neogen Italia operations experiencing combined 17% growth in diagnostic test kits and genomics services. This growth was partially offset by a 10% decrease in the first quarter at Quat-Chem, as the prior year quarter included a large shipment of hand sanitizers to the U.K. government’s health organization and strong cleaner and disinfectant sales to China, Africa and the Middle East. Due to shipping and tax issues caused by Brexit, Neogen Italia is fulfilling orders to many European Union customers that were previously managed through Neogen Europe in the U.K.
At our Brazilian operations, fiscal 2022 first quarter sales decreased 15% as the prior year first quarter included a largenon-recurring
insecticide sale to a government health organization. Additionally, an extended drought led to a significantly reduced corn crop and the associated testing, resulting in a 36% decrease in sales of aflatoxin test kits. At Neogen Latinoamerica, the growth in local currency in the first quarter was led by strength in environmental sanitation and culture media. Sales at Neogen China increased 59% from new sales of Megazyme products and strong growth in genomics, as the commercial dairy, swine and sheep markets have increased sampling volumes. Service revenue, which consists primarily of genomics services to animal protein and companion animal markets, was $24.3 million in the first quarter of fiscal 2022, an increase of 14% over prior year first quarter revenues of $21.4 million. The growth was led by strong increases in genomics revenues in our Australia, China and Canada genomics operations; growth in our domestic operations was reduced by lower sales in companion animal markets, the result of difficult comparisons from a 61% increase in the prior year first quarter.
| | | | | | | | | | | | | | | | |
| | Three Months ended August 31, | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Natural Toxins, Allergens & Drug Residues | | $ | 20,408 | | | $ | 19,015 | | | $ | 1,393 | | | | 7 | % |
Bacterial & General Sanitation | | | 11,165 | | | | 9,931 | | | | 1,234 | | | | 12 | % |
| | | 18,046 | | | | 12,171 | | | | 5,875 | | | | 48 | % |
Rodenticides, Insecticides & Disinfectants | | | 7,649 | | | | 8,830 | | | | (1,181 | ) | | | (13 | )% |
| | | 5,454 | | | | 4,238 | | | | 1,216 | | | | 29 | % |
| | | | | | | | | | | | | | | | |
| | $ | 62,722 | | | $ | 54,185 | | | $ | 8,537 | | | | 16 | % |
| | | | | | | | | | | | | | | | |
| | $ | 1,363 | | | $ | 1,325 | | | $ | 38 | | | | 3 | % |
Veterinary Instruments & Disposables | | | 15,337 | | | | 10,375 | | | | 4,962 | | | | 48 | % |
| | | 9,219 | | | | 7,658 | | | | 1,561 | | | | 20 | % |
Rodenticides, Insecticides & Disinfectants | | | 22,149 | | | | 19,914 | | | | 2,235 | | | | 11 | % |
| | | 17,515 | | | | 15,868 | | | | 1,647 | | | | 10 | % |
| | | | | | | | | | | | | | | | |
| | $ | 65,583 | | | $ | 55,140 | | | $ | 10,443 | | | | 19 | % |
| | | | | | | | | | | | | | | | |
| | $ | 128,305 | | | $ | 109,325 | | | $ | 18,980 | | | | 17 | % |
| | | | | | | | | | | | | | | | |
Natural Toxins, Allergens
Sales in this category increased 7% in the first quarter of fiscal 2022 due primarily to a 17%
increase in sales of our allergen test kits, as customers have increased their testing compared to the prior year when many were shut down or operating at lower capacity due toCOVID-19
restrictions. Sales of our natural toxin test kits rose 6%, as higher sales of deoxynivalenol (DON), zearalenone and fumonisin test kits were partially offset by lower aflatoxin test kit sales in Brazil, as a drought significantly reduced crop size and associated testing. Drug residue test kit sales declined 22% due to the termination of a European distribution agreement and competitive pressure within the marketplace.Revenues in this category increased 12% in the first quarter, led by a 14% increase in sales of our environmental sanitation product line, in which we launched a new reader in the previous quarter. Pathogen test kit revenues increased 15%, led by a 32% increase in sales ofproducts, including our innovativeRight Now™
system. Sales of our Soleris product line to detect spoilage organisms increased 6% as 9% growth in our consumable vials was partially offset by flat sales of equipment. Our Soleris®
NG instrument was launched in the first quarter of the prior year; equipment sales, although flat to prior year, are approximately double compared to the first quarter two years ago. Sales in this category rose 48% in the first quarter of fiscal 2022 compared to the same period in the prior year; excluding sales from the December 2020 acquisition of Megazyme, sales increased 21%. Sales of Neogen Culture Media products increased 36%, due to high demand with diagnostics customers globally and a large domestic sale to a vaccine manufacturer. Rodenticides, Insecticides
Sales of products in this category decreased 13% in the first quarter of fiscal 2022, compared to last year’s first quarter. The prior year first quarter included a 73% increase in sales of hand sanitizing products at our U.K. based Quat-Chem operation and a largenon-recurring
insecticide order, recorded at our Brazilian operation, to a government health organization. Additionally, sales of cleaners and disinfectants into China in the prior year more than doubled, primarily due to increased demand resulting from the African swine fever outbreak in that country and theCOVID-19
pandemic. Sales of cleaners and disinfectants into Asia in the first quarter of fiscal 2022 continued to be strong, increasing approximately 18%.Sales of genomics services sold through our Food Safety operations rose 29% in the first quarter of fiscal 2022, compared to the same period last year, as genomics services in China more than doubled, due to increased commercial dairy and swine business. Genomics revenue in Europe also increased 15% on strength in poultry testing.
Sales in this category increased 3% in the first quarter, due to drug testing at doctor’s offices and workplaces increasing to more normal levels followingCOVID-19
restrictions that impacted testing in the prior year. The growth was partially offset by the loss of hair testing business with a large U.S. commercial laboratory that moved to a different testing platform. Revenues in this category increased 48% in the first quarter of fiscal 2022 compared to the prior year. Veterinary instruments, including disposable syringes and needles, increased 52% as we gained new private label business. Sales of these products increased 20% in the first quarter compared to the same period a year ago. Small animal supplements, including our recentlyre-launched
ThyroKare™
product, increased 78% and antibiotics increased 56%, both due to strength in the veterinary market. Partially offsetting these increases, sales of our dairy supply products decreased 81% due to termination of an agreement in which we distributed these products for a large manufacturer of dairy equipment, in the first quarter of fiscal 2021. Rodenticides, Insecticides
Sales in this category rose 11% in the first quarter of fiscal 2022 compared to the same period in the prior year.
Expressed as a percentage of sales, international sales were 39.0%Insect control products increased 23%, led by growth in the
StandGuard®
product line which was acquired in July 2020. We also had higher sales to customers in the restaurant industry, due to many being affected in the prior year by COVID shutdowns. Sales of rodenticides increased 5% on a difficult comparison to the prior year, when sales had increased 47%, and cleaners and disinfectant sales rose 6%.Sales in this category increased 10% in the first three months, led by increased business in the beef cattle and swine markets; a largenon-recurring
plant research project also contributed to the growth in this category. Partially offsetting these gains was a decrease in companion animal testing services in the U.S. due to lower sampling volumes. Gross margin was 46.8% in the first quarter of fiscal 2022 compared to 36.3%46.0% in the thirdsame quarter a year ago. ForThe improvement was due primarily to a shift in product mix within the yearFood Safety segment resulting from the incremental sales generated by Megazyme, which has products with higher gross margins. Reduced sales of lower margin cleaners and disinfectants from our European and Chinese operations and insecticides from our Brazilian operations also contributed to date,the Food Safety gross margin improvement of 360 basis points. Animal Safety gross margins declined by 190 basis points, primarily due to lower sales of companion animal services (a higher gross margin product), a mix shift towards lower margin products in our rodenticide line, and significantly increased international salesfreight costs, the result of ongoing global supply chain issues. Increased health insurance costs and the resumption of the 401k match, which had been suspended in last year’s first fiscal quarter, resulted in an incremental $530,000 expense within overhead on a consolidated basis.
Operating expenses were
$110.5$38.3 million
in the first quarter of fiscal 2022, compared to $31.4 million in the first quarter of fiscal 2021, an increase of
20%; international sales were 37.7%$6.9 million, or 22%. It is important to note that in last year’s first quarter, with the economic impact of
total salestheCOVID-19
pandemic uncertain, the Company took aggressive steps to control operating expenses and made cost reductions where possible. These steps included a reduction in workforce, temporary furloughs and reduced hours for a number of employees. In addition, the Company temporarily eliminated the match on the 401k plan during that period. These steps, in addition to the elimination of travel across most of the organization, and lower utilization of medical services by our employees resulting fromorders and a reduction innon-emergency
procedures, resulted in an approximately $2.5 million reduction in operating expense in the
current yearfirst quarter of fiscal 2021 compared to
date period 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) and Neogen Australasia (Australia), and to a lesser extent, revenue increases at existing Company locations. Currency translation had a positive effect on international revenues of approximately $1.9 millionThe 401k match was restored in the
thirdsecond quarter of fiscal
2018 as2021, and medical service utilization has recovered, with procedures delayed in calendar 2020 now driving a significant increase in the
pound, euro, and peso were strongerlast two consecutive quarters. These two expense items had an adverse impact on
average againstoperating expenses of $546,000 in the
dollar thanfirst quarter of fiscal 2022 compared to the same period a year
ago; forago. Sales and marketing expenses in this fiscal year’s first quarter were $20.6 million, an increase of $4.0 million, or 25%, compared to $16.5 million in last year’s first quarter. Personnel related expenses rose by $1.2 million due to an increase in headcount and performance-based incentives, reflective of the
yearrevenue increases across the Company. Shipping costs increased by $900,000, due to
date period, the
positive revenue impactincrease in volume and an increase in rates. Travel and trade shows, which had declined by $1.3 million in last year’s first quarter due to restrictions resulting from theCOVID-19
pandemic, increased $780,000 in this year’s first quarter, as restrictions eased in a number of our markets and our sales force was
$2.5 million.Revenues at Neogen Europe increased 16%able to resume face to face meetings.
General and administrative expenses were $13.4 million, an increase of $2.4 million, or 22%, compared to $11.0 million in
U.S. dollarslast year’s first quarter, primarily due to a $791,000 increase in compensation related expense, the result of a number of senior management hires and higher performance-based incentives, a $608,000 increase in amortization expense resulting primarily from our acquisition of Megazyme in December 2020, higher depreciation and licensing costs related to continued investments in information technology infrastructure, and increases in legal and professional fees. Research and development expense was $4.3 million in the
thirdfirst quarter
of fiscal 2021, an increase of $447,000 compared to the same period 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, 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 millionpersonnel absorbed in the third quarter, an increase of 6% over the same period a year ago. RevenuesMegazyme acquisition and compensation increases for the nine month period increased 7% to $149 million compared to $139.7 million in the prior year. Organic growth in this segmentdomestic employees.
Operating income 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$21.7 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, each2022, compared to the same period in the prior year. The growth 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%$18.9 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%16.9% compared to 16.2%17.3% 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 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 ratesales is primarily the result of the tax reform passed22% increase in operating expenses for the quarter.
| | | | | | | | |
| | Three Months ended August 31, | |
| | | | | | |
Interest income (net of expense) | | $ | 203 | | | $ | 722 | |
Foreign currency transactions | | | (151 | ) | | | 175 | |
| | | (70 | ) | | | 18 | |
| | | | | | | | |
| | $ | (18 | ) | | $ | 915 | |
| | | | | | | | |
The reduction in interest income in the U.S. in December 2017first quarter of fiscal 2022 compared to the prior year is primarily the result of lower yields on our cash and marketable securities balances, as discussedinterest rates have dropped significantly compared to rates in the preceding paragraph. Additionally, duringfirst quarter of fiscal 2021. Other income resulting from foreign currency transactions is the result of changes in the value of foreign currencies relative to the U.S. dollar in countries in which we operate.
Income tax expense for the first quarter of fiscal 2022 was $4,650,000, an effective tax rate of 21.4%, compared to prior year the Company has recorded credits of $3.4 million to federalfirst quarter income tax expense for excessof $3,950,000, an effective tax benefitsrate of 19.9%. For each quarter, the primary difference between the statutory rate of 21% and the effective rate recorded is the benefit resulting from the exercise of stock options,options; this benefit was $15,000 in the first quarter of fiscal 2022 compared to $421,000 in the first quarter of the prior year. The benefit was lower due to the adoptiondecreased volume of ASU2016-09; referoption exercises during the comparative periods, and a reduction in benefit realized, on average, for each transaction. Additionally, as the result of a higher tax rate enacted in the U.K., effective in 2023, we were required to Note 5revalue our deferred tax balances at our U.K. operations to the rate we expect them to reverse in the future, resulting in $548,000 of expense in this year’s first quarter.
Net income was $17.1 million in the Company’s Consolidated Financial Statements for further information. In the secondfirst quarter of fiscal 2018,2022, an IRS examinationincrease of 8% compared to $15.9 million earned in the Company’s federalfirst quarter of fiscal 2021. The increased earnings were the result of higher sales and gross margins, partially offset by increased operating expenses, the $933,000 decline in other income and higher income tax returns for fiscal years 2014, 2015 and 2016 was concluded. As a resultexpense.
Financial Condition and Liquidity
The overall cash, cash equivalents and marketable securities position of
the CompanyNeogen was
$192.2$400.9 million at
February 28, 2018August 31, 2021, compared to
$143.6$381.1 million at May 31,
2017.2021. Approximately
$46.5$23.2 million was generated from operations during the first
ninethree months of fiscal
2018.2022. Net cash proceeds of
$18.9$1.0 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$1.3 million for property, equipment and other
non-current
assets duringin the first ninethree months of fiscal 2018.Accounts2022.
Net accounts receivable balances were
$73.2$87.3 million at
February 28, 2018, an increaseAugust 31, 2021, a decline of
$4.6$4.5 million,
or 7%, compared to
$68.6$91.8 million at May 31,
2017, less than the increase in revenue.2021. Days sales outstanding, a measurement of the time it takes to collect receivables, were
6359 days at
February 28, 2018August 31, 2021, compared to
6066 days at May 31,
2017. All2021 and 61 days at August 31, 2020. We have been carefully monitoring our customer
accounts are actively managed and no lossesreceivables as theCOVID-19
pandemic has spread across our global markets; to date, we have not experienced an appreciable increase in
excess of amounts reserved are currently expected.bad debt write offs.
Net inventory balances were
$77.5$102.1 million at
February 28, 2018,August 31, 2021, an increase of
$4.4$1.4 million, or
6%1%, compared to
$73.1 million at May 31,
2017. The Company actively monitors its2021 balances of $100.7 million. We increased inventory
levels during fiscal 2021 to ensure we have adequate supplies of critical raw and
balancesfinished products in the
need for adequate product availability to minimize backorders with a desire to improve inventory turnoverevent our supply chain is adversely impacted by theCOVID-19
pandemic and
efficiency levels. Formal programs have been instituted in fiscal 2018 to improve inventory turnover.Brexit.
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, 2021, along with available borrowings under
itsour 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
itsour 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.
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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 borrowings at February 28, 2018) 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,
theMexican peso, Brazilian real,
the Mexican peso, the Chinese yuan,
Australian dollar and to a lesser extent, the Indian rupee,
the Canadian dollar,
Guatemalan quetzal, Argentine peso, Uruguayan peso and Chilean peso; there is also exposure to a change in exchange rate between the British pound sterling and the
Australian dollar.euro. When the U.S. dollar weakens against foreign currencies, the dollar value of revenues denominated in foreign currencies increases. When the U.S. dollar strengthens, the opposite situation occurs. Additionally, previously
recognized revenuesinvoiced amounts can be positively or negatively affected by changes in exchange rates in the course of
collection 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.collection.
Neogen has assets, liabilities and operations outside of the
United States,U.S., located in Scotland, England,
Ireland, Italy, Brazil, Mexico,
Guatemala, Argentina, Uruguay, Chile, China, India, Canada and Australia where the functional currency is the British pound sterling,
euro, Brazilian real, Mexican
peso, Guatemalan quetzal, Argentine peso, Uruguayan peso, Chilean peso, Chinese yuan, Indian rupee, Canadian dollar and Australian dollar,
respectively, and also transacts business throughout Europe in the euro. The Company’srespectively. Our investments in foreign subsidiaries are considered
tolong-term. As discussed in ITEM 1A. RISK FACTORS of the Form10-K
annual filing, our financial condition and results of operations could be
primarily long-term.adversely affected by currency fluctuations.
The following table sets forth the potential loss in future earnings or fair values, resulting from hypothetical changes in relevant market rates or prices:
| | | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Foreign Currency - Revenue | | 10% Decrease in exchange rates | | $ | 5,053 | | | | Earnings | |
Foreign Currency - Hedges | | 10% Decrease in exchange rates | | | 1,990 | | | | Earnings | |
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, 2021 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, 2021 that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting.
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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.
Items 1A, 2, 3, 4, and 5 are not applicable or removed or reserved and have been omitted.
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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: September 30, 2021
| |
Dated: March 29, 2018
| | |
| John E. Adent |
| | /s/ James L. Herbert President & Chief Executive Officer |
| | James L. Herbert |
| | Executive Chairman |
| | (Principal Executive Officer) |
Dated: September 30, 2021
| |
Dated: March 29, 2018
| | |
| |
| | |
| | Steven J. Quinlan |
| | Vice President & Chief Financial Officer |
| | (Principal Financial Officer and Principal Accounting Officer) |
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