UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM10-Q
(Mark One)
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR |
For the quarterly period ended November 30, 2017.2018.
or
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number0-17988
Neogen Corporation
(Exact name of registrant as specified in its charter)
Michigan | 38-2367843 | |
(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification Number) |
620 Lesher Place
Lansing, Michigan 48912
(Address of principal executive offices, including zip code)
(517)372-9200
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file reports), and (2) has been subject to such filing requirements for the past 90 days. YES ☒ NO ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of RegulationS-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES ☒ NO ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer (see definition of “accelerated filer and large accelerated filer” in Rule12b-2 of the Exchange Act):
Large accelerated filer | ☒ | Accelerated filer | ☐ | |||||||
Non-accelerated filer | ☐ | Smaller | ☐ | |||||||
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 Rule12b-2 of the Exchange Act): YES ☐ NO ☒
As of December 31, 2017,November 30, 2018, there were 51,522,58752,081,876 shares of Common Stock outstanding.
NEOGEN CORPORATION AND SUBSIDIARIES
PART I – FINANCIAL INFORMATION
Neogen Corporation and Subsidiaries
(in thousands, except share and
per share amounts)
November 30, 2017 | May 31, 2017 | November 30, 2018 | May 31, 2018 | |||||||||||||
(Unaudited) | (Audited) | (Unaudited) | (Unaudited) | |||||||||||||
Assets | ||||||||||||||||
Current Assets | ||||||||||||||||
Cash and cash equivalents | $ | 64,425 | $ | 77,567 | $ | 101,585 | $ | 83,074 | ||||||||
Marketable securities (at fair value, which approximates cost) | 111,410 | 66,068 | 139,385 | 127,736 | ||||||||||||
Accounts receivable, less allowance of $1,800 and $2,000 | 74,859 | 68,576 | ||||||||||||||
Inventories, net | 73,713 | 73,144 | ||||||||||||||
Accounts receivable, less allowance of $1,700 and $1,550 | 82,282 | 79,086 | ||||||||||||||
Inventories | 79,473 | 76,005 | ||||||||||||||
Prepaid expenses and other current assets | 15,533 | 7,606 | 11,569 | 9,888 | ||||||||||||
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Total Current Assets | 339,940 | 292,961 | 414,294 | 375,789 | ||||||||||||
Net Property and Equipment | 66,874 | 61,748 | 73,910 | 73,069 | ||||||||||||
Other Assets | ||||||||||||||||
Goodwill | 104,290 | 104,759 | 103,309 | 99,558 | ||||||||||||
Othernon-amortizable intangible assets | 14,667 | 14,323 | 15,423 | 14,783 | ||||||||||||
Amortizable customer-based intangibles, net of accumulated amortization of $22,808 and $20,846 at November 30, 2017 and May 31, 2017 | 33,512 | 35,983 | ||||||||||||||
Othernon-current assets, net of accumulated amortization of $11,089 and $9,931 at November 30, 2017 and May 31, 2017 | 21,745 | 18,635 | ||||||||||||||
Amortizable customer-based intangibles, net of accumulated amortization of $26,292 and $24,579 at November 30, 2018 and May 31, 2018, respectively | 30,022 | 31,841 | ||||||||||||||
Othernon-current assets, net of accumulated amortization of $11,440 and $12,470 at November 30, 2018 and May 31, 2018, respectively | 23,534 | 22,969 | ||||||||||||||
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Total Assets | $ | 581,028 | $ | 528,409 | $ | 660,492 | $ | 618,009 | ||||||||
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Liabilities and Equity | ||||||||||||||||
Current Liabilities | ||||||||||||||||
Accounts payable | $ | 17,427 | $ | 16,244 | $ | 20,555 | $ | 20,750 | ||||||||
Accrued compensation | 5,619 | 5,002 | 5,216 | 6,065 | ||||||||||||
Income taxes | 1,959 | 936 | 1,533 | 165 | ||||||||||||
Other accruals | 12,940 | 13,820 | 11,456 | 11,708 | ||||||||||||
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Total Current Liabilities | 37,945 | 36,002 | 38,760 | 38,688 | ||||||||||||
Deferred Income Taxes | 16,943 | 17,048 | 14,144 | 14,103 | ||||||||||||
Non-Current Liabilities | 5,496 | 3,602 | ||||||||||||||
OtherNon-Current Liabilities | 5,514 | 5,043 | ||||||||||||||
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Total Liabilities | 60,384 | 56,652 | 58,418 | 57,834 | ||||||||||||
Commitments and Contingencies (note 9) | ||||||||||||||||
Commitments and Contingencies (Note 8) | ||||||||||||||||
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, 51,508,548 and 50,932,489 shares issued and outstanding at November 30, 2017 and May 31, 2017, respectively | 8,241 | 8,149 | ||||||||||||||
Common stock, $0.16 par value, 60,000,000 shares authorized, 52,081,876 and 51,735,732 shares issued and outstanding at November 30, 2018 and May 31, 2018, respectively | 8,334 | 8,278 | ||||||||||||||
Additionalpaid-in capital | 193,711 | 174,742 | 215,615 | 202,572 | ||||||||||||
Accumulated other comprehensive loss | (6,466 | ) | (7,203 | ) | (12,234 | ) | (9,746 | ) | ||||||||
Retained earnings | 324,873 | 295,926 | 390,359 | 359,071 | ||||||||||||
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Total Neogen Corporation Stockholders’ Equity | 520,359 | 471,614 | ||||||||||||||
Non-controlling interest | 285 | 143 | ||||||||||||||
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Total Equity | 520,644 | 471,757 | ||||||||||||||
Total Stockholders’ Equity | 602,074 | 560,175 | ||||||||||||||
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Total Liabilities and Equity | $ | 581,028 | $ | 528,409 | $ | 660,492 | $ | 618,009 | ||||||||
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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 | Six Months Ended | |||||||||||||||||||||||||||||||
November 30, | November 30, | Three Months Ended November 30, | Six Months Ended November 30, | |||||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2018 | 2017 | 2018 | 2017 | |||||||||||||||||||||||||
Revenues | ||||||||||||||||||||||||||||||||
Product revenues | $ | 85,590 | $ | 76,961 | $ | 166,157 | $ | 149,206 | $ | 89,562 | $ | 84,471 | $ | 172,522 | $ | 164,016 | ||||||||||||||||
Service revenues | 16,227 | 13,756 | 30,916 | 25,156 | 17,536 | 16,227 | 34,202 | 30,891 | ||||||||||||||||||||||||
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Total Revenues | 101,817 | 90,717 | 197,073 | 174,362 | 107,098 | 100,698 | 206,724 | 194,907 | ||||||||||||||||||||||||
Cost of Revenues | ||||||||||||||||||||||||||||||||
Cost of product revenues | 43,349 | 38,890 | 84,433 | 74,425 | 47,305 | 43,252 | 90,255 | 84,236 | ||||||||||||||||||||||||
Cost of service revenues | 9,197 | 8,236 | 17,498 | 15,867 | 9,760 | 9,197 | 19,707 | 17,498 | ||||||||||||||||||||||||
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Total Cost of Revenues | 52,546 | 47,126 | 101,931 | 90,292 | 57,065 | 52,449 | 109,962 | 101,734 | ||||||||||||||||||||||||
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Gross Margin | 49,271 | 43,591 | 95,142 | 84,070 | 50,033 | 48,249 | 96,762 | 93,173 | ||||||||||||||||||||||||
Operating Expenses | ||||||||||||||||||||||||||||||||
Sales and marketing | 17,815 | 15,687 | 34,838 | 30,484 | 18,499 | 16,793 | 35,732 | 32,869 | ||||||||||||||||||||||||
General and administrative | 10,491 | 8,284 | 19,817 | 16,546 | 10,121 | 10,491 | 20,319 | 19,817 | ||||||||||||||||||||||||
Research and development | 2,967 | 2,768 | 6,065 | 5,446 | 3,167 | 2,967 | 5,986 | 6,065 | ||||||||||||||||||||||||
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Total Operating Expenses | 31,273 | 26,739 | 60,720 | 52,476 | 31,787 | 30,251 | 62,037 | 58,751 | ||||||||||||||||||||||||
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Operating Income | 17,998 | 16,852 | 34,422 | 31,594 | 18,246 | 17,998 | 34,725 | 34,422 | ||||||||||||||||||||||||
Other Income | ||||||||||||||||||||||||||||||||
Interest income | 1,028 | 429 | 1,955 | 798 | ||||||||||||||||||||||||||||
Other income | 427 | 626 | 158 | 1,069 | ||||||||||||||||||||||||||||
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Other Income (Expense) | ||||||||||||||||||||||||||||||||
Interest income | 429 | 296 | 798 | 419 | ||||||||||||||||||||||||||||
Other income (expense) | 626 | (377 | ) | 1,069 | (8 | ) | ||||||||||||||||||||||||||
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Total Other Income (Expense) | 1,055 | (81 | ) | 1,867 | 411 | |||||||||||||||||||||||||||
Total Other Income | 1,455 | 1,055 | 2,113 | 1,867 | ||||||||||||||||||||||||||||
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Income Before Taxes | 19,053 | 16,771 | 36,289 | 32,005 | 19,701 | 19,053 | 36,838 | 36,289 | ||||||||||||||||||||||||
Provision for Income Taxes | 1,900 | 5,600 | 7,200 | 10,900 | 3,650 | 1,900 | 5,550 | 7,200 | ||||||||||||||||||||||||
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Net Income | 17,153 | 11,171 | 29,089 | 21,105 | 16,051 | 17,153 | 31,288 | 29,089 | ||||||||||||||||||||||||
Net (Income) Attributable toNon-Controlling Interest | (53 | ) | (20 | ) | (75 | ) | (73 | ) | — | (53 | ) | — | (75 | ) | ||||||||||||||||||
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Net Income Attributable to Neogen | $ | 17,100 | $ | 11,151 | $ | 29,014 | $ | 21,032 | $ | 16,051 | $ | 17,100 | $ | 31,288 | $ | 29,014 | ||||||||||||||||
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Net Income Attributable to Neogen Per Share | ||||||||||||||||||||||||||||||||
Basic | $ | 0.33 | $ | 0.22 | $ | 0.57 | $ | 0.42 | $ | 0.31 | $ | 0.33 | $ | 0.60 | $ | 0.57 | ||||||||||||||||
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Diluted | $ | 0.33 | $ | 0.22 | $ | 0.56 | $ | 0.41 | $ | 0.31 | $ | 0.33 | $ | 0.60 | $ | 0.56 | ||||||||||||||||
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See notes to interim consolidated financial statements.
Neogen Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income (unaudited)
(in thousands)
Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||||
November 30, | November 30, | Three Months Ended November 30, | Six Months Ended November 30, | |||||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2018 | 2017 | 2018 | 2017 | |||||||||||||||||||||||||
Net income | $ | 17,153 | $ | 11,171 | $ | 29,089 | $ | 21,105 | $ | 16,051 | $ | 17,153 | $ | 31,288 | $ | 29,089 | ||||||||||||||||
Other comprehensive income (loss), net of tax: currency translation adjustments | 534 | (1,606 | ) | 737 | (4,184 | ) | ||||||||||||||||||||||||||
Other comprehensive income (loss), net of tax: | ||||||||||||||||||||||||||||||||
currency translation adjustments | 290 | 534 | (2,488 | ) | 737 | |||||||||||||||||||||||||||
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Comprehensive income | 17,687 | 9,565 | 29,826 | 16,921 | 16,341 | 17,687 | 28,800 | 29,826 | ||||||||||||||||||||||||
Comprehensive (income) attributable tonon-controlling interest | (53 | ) | (20 | ) | (75 | ) | (73 | ) | — | (53 | ) | — | (75 | ) | ||||||||||||||||||
Comprehensive income attributable to | ||||||||||||||||||||||||||||||||
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Comprehensive income attributable to Neogen Corporation | $ | 17,634 | $ | 9,545 | $ | 29,751 | $ | 16,848 | ||||||||||||||||||||||||
Neogen Corporation | $ | 16,341 | $ | 17,634 | $ | 28,800 | $ | 29,751 | ||||||||||||||||||||||||
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See notes to interim consolidated financial statements.
Neogen Corporation and Subsidiaries
Consolidated Statement of Equity (unaudited)
(in thousands)
Common Stock | Additional Paid-in | Accumulated Other Comprehensive | Retained | Non- 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 | 566 | 90 | 18,486 | 18,576 | ||||||||||||||||||||||||
Issuance of shares under employee stock purchase plan | 11 | 2 | 483 | 485 | ||||||||||||||||||||||||
Conversion of minority interest to retained earnings | (67 | ) | 67 | — | ||||||||||||||||||||||||
Net income for the six months ended November 30, 2017 | 29,014 | 75 | 29,089 | |||||||||||||||||||||||||
Other comprehensive loss | 737 | 737 | ||||||||||||||||||||||||||
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Balance November 30, 2017 | 51,509 | $ | 8,241 | $ | 193,711 | $ | (6,466 | ) | $ | 324,873 | $ | 285 | $ | 520,644 | ||||||||||||||
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Accumulated | ||||||||||||||||||||||||
Additional Paid-in Capital | Other Comprehensive (Loss) | |||||||||||||||||||||||
Common Stock | Retained | |||||||||||||||||||||||
Shares | Amount | Earnings | Total | |||||||||||||||||||||
Balance at May 31, 2018 | 51,736 | $ | 8,278 | $ | 202,572 | $ | (9,746 | ) | $ | 359,071 | 560,175 | |||||||||||||
Issuance of shares under share-based compensation plan | 338 | 54 | 12,526 | 12,580 | ||||||||||||||||||||
Issuance of shares under employee stock purchase plan | 8 | 2 | 517 | 519 | ||||||||||||||||||||
Net income for the six months ended November 30, 2018 | 31,288 | 31,288 | ||||||||||||||||||||||
Other comprehensive (loss) | (2,488 | ) | (2,488 | ) | ||||||||||||||||||||
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Balance at November 30, 2018 | 52,082 | $ | 8,334 | $ | 215,615 | $ | (12,234 | ) | $ | 390,359 | $ | 602,074 | ||||||||||||
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See notes to interim consolidated financial statements.
Neogen Corporation and Subsidiaries
Consolidated Statements of Cash Flows (unaudited)
(in thousands)
Six Months Ended November 30, | Six Months Ended November 30, | |||||||||||||||
2017 | 2016 | 2018 | 2017 | |||||||||||||
Cash Flows From Operating Activities | ||||||||||||||||
Net Income | $ | 29,089 | $ | 21,105 | $ | 31,288 | $ | 29,089 | ||||||||
Adjustments to reconcile net income to net cash provided from operating activities: | ||||||||||||||||
Adjustments to reconcile net income to net cash from operating activities: | ||||||||||||||||
Depreciation and amortization | 8,268 | 7,038 | 8,597 | 8,268 | ||||||||||||
Share-based compensation | 2,666 | 2,734 | 2,831 | 2,666 | ||||||||||||
Excess income tax benefit from the exercise of stock options (see note 5) | — | (2,476 | ) | |||||||||||||
Change in operating assets and liabilities, net of business acquisitions: | ||||||||||||||||
Accounts receivable | (5,859 | ) | 1,847 | (3,615 | ) | (5,859 | ) | |||||||||
Inventories | (218 | ) | (7,963 | ) | (3,787 | ) | (218 | ) | ||||||||
Prepaid expenses and other current assets | (7,916 | ) | 428 | (2,025 | ) | (7,916 | ) | |||||||||
Accounts payable, accruals and other changes | 1,377 | 6,836 | (706 | ) | 1,377 | |||||||||||
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Net Cash Provided By Operating Activities | 27,407 | 29,549 | ||||||||||||||
Cash Flows Used In Investing Activities | ||||||||||||||||
Net Cash From Operating Activities | 32,583 | 27,407 | ||||||||||||||
Cash Flows From Investing Activities | ||||||||||||||||
Purchases of property, equipment and othernon-current intangible assets | (10,409 | ) | (6,238 | ) | (6,720 | ) | (10,409 | ) | ||||||||
Proceeds from the sale of marketable securities | 123,601 | 64,522 | 179,839 | 123,601 | ||||||||||||
Purchases of marketable securities | (168,943 | ) | (67,792 | ) | (191,488 | ) | (168,943 | ) | ||||||||
Business acquisitions, net of cash acquired | (468 | ) | (437 | ) | (4,903 | ) | (468 | ) | ||||||||
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Net Cash Used In Investing Activities | (56,219 | ) | (9,945 | ) | ||||||||||||
Net From Investing Activities | (23,272 | ) | (56,219 | ) | ||||||||||||
Cash Flows From Financing Activities | ||||||||||||||||
Exercise of stock options and issuance of employee stock purchase plan shares | 10,268 | 16,395 | ||||||||||||||
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Cash Flows From Financing Activities | ||||||||||||||||
Exercise of stock options | 16,395 | 10,345 | ||||||||||||||
Excess income tax benefit from the exercise of stock options | — | 2,476 | ||||||||||||||
Net Cash From Financing Activities | 10,268 | 16,395 | ||||||||||||||
Effect of Exchange Rate on Cash | (1,068 | ) | (725 | ) | ||||||||||||
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Net Cash Provided By Financing Activities | 16,395 | 12,821 | ||||||||||||||
Net Increase (decrease) In Cash and Cash Equivalents | 18,511 | (13,142 | ) | |||||||||||||
Cash and Cash Equivalents, Beginning of Period | 83,074 | 77,567 | ||||||||||||||
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Effect of Exchange Rates on Cash | (725 | ) | (1,385 | ) | ||||||||||||
Cash and Cash Equivalents, End of Period | $ | 101,585 | $ | 64,425 | ||||||||||||
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Net Increase (Decrease) In Cash and Cash Equivalents | (13,142 | ) | 31,040 | |||||||||||||
Cash And Cash Equivalents At Beginning Of Period | 77,567 | 55,257 | ||||||||||||||
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Cash And Cash Equivalents At End Of Period | $ | 64,425 | $ | 86,297 | ||||||||||||
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See notes to interim consolidated financial statements.
NEOGEN CORPORATION AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. ACCOUNTING POLICIES
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 Form10-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 thesix-month period ended November 30, 20172018 are not necessarily indicative of the results to be expected for the fiscal year ending May 31, 2018.2019. 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’s annual reportour Annual Report on Form10-K for the fiscal year ended May 31, 2017.2018.
2. INVENTORIES
Inventories are stated at the lower of cost, determined on thefirst-in,first-out method, or net realizable value. The components of inventories follow:
November 30, 2017 | May 31, 2017 | |||||||
(in thousands) | ||||||||
Raw materials | $ | 35,909 | $ | 33,190 | ||||
Work-in-process | 4,955 | 4,831 | ||||||
Finished and purchased goods | 32,849 | 35,123 | ||||||
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$ | 73,713 | $ | 73,144 | |||||
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3. NET INCOME PER SHARE
The calculation of net income per share attributable to Neogen Corporation follows:
Three Months Ended November 30, | Six Months Ended November 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
(in thousands, except per share amounts) | ||||||||||||||||
Numerator for basic and diluted net income per share: | ||||||||||||||||
Net income attributable to Neogen | $ | 17,100 | $ | 11,151 | $ | 29,014 | $ | 21,032 | ||||||||
Denominator for basic net income per share: | ||||||||||||||||
Weighted average shares | 51,264 | 50,421 | 51,109 | 50,287 | ||||||||||||
Effect of dilutive stock options | 697 | 595 | 669 | 624 | ||||||||||||
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Denominator for diluted net income per share | 51,961 | 51,016 | 51,778 | 50,911 | ||||||||||||
Net income attributable to Neogen per share: | ||||||||||||||||
Basic | $ | 0.33 | $ | 0.22 | $ | 0.57 | $ | 0.42 | ||||||||
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Diluted | $ | 0.33 | $ | 0.22 | $ | 0.56 | $ | 0.41 | ||||||||
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The Board of Directors declared a 4 for 3 stock split effective December 29, 2017. All shareShare and per share amounts inreflect the formDecember 29, 201710-Q4-for-3 reflect amountsstock split as if the splitit took place at the beginning of the periodsperiod presented.
Recently Adopted Accounting Standards
4. SEGMENT INFORMATIONRevenue Recognition
The Company has two reportable segments: Food Safety and Animal Safety. The Food Safety segment is primarily engaged in the development, production and marketing of diagnostic test kits, dehydrated culture media and related products used by food producers and processors to detect harmful natural toxins, foodborne bacteria, allergens and levels of general sanitation. The Animal Safety segment is primarily engaged in the development, production and marketing of products dedicated to animal safety, including a complete line of consumable products marketed to veterinarians and animal health product distributors; this segment also provides genomic identification and related interpretive bioinformatic services. Additionally, the Animal Safety segment produces and markets rodenticides, disinfectants and insecticides to assist in the control of rodents, insects and disease in and around agricultural, food production and other facilities.
Neogen’s international operations in the United Kingdom, Mexico, Brazil, China, and India originally focused on the Company’s Food Safety products, and each of these units reports through the Food Safety segment. In recent years, these operations have expanded to offer the Company’s complete line of products and services, including those usually associated with the Animal Safety segment such as cleaners, disinfectants, rodenticides, insecticides, veterinary instruments and genomic services. These additional products and services are managed and directed by existing management, and are reported through the Food Safety segment.
The accounting policies of each of the segments are the same as those described in Note 1.
Segment information follows:
Food Safety | Animal Safety | Corporate and Eliminations (1) | Total | |||||||||||||
(in thousands) | ||||||||||||||||
As of and for the three months ended November 30, 2017 |
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Product revenues to external customers | $ | 44,721 | $ | 40,869 | $ | — | $ | 85,590 | ||||||||
Service revenues to external customers | 4,839 | 11,388 | — | 16,227 | ||||||||||||
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Total revenues to external customers | 49,560 | 52,257 | — | 101,817 | ||||||||||||
Operating income (loss) | 8,668 | 10,529 | (1,199 | ) | 17,998 | |||||||||||
Total assets | 175,836 | 215,099 | 190,093 | 581,028 | ||||||||||||
As of and for the three months ended November 30, 2016 |
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Product revenues to external customers | $ | 37,366 | $ | 39,595 | $ | — | $ | 76,961 | ||||||||
Service revenues to external customers | 3,595 | 10,161 | — | 13,756 | ||||||||||||
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Total revenues to external customers | 40,961 | 49,756 | — | 90,717 | ||||||||||||
Operating income (loss) | 8,883 | 9,094 | (1,125 | ) | 16,852 | |||||||||||
Total assets | 143,901 | 215,974 | 127,436 | 487,311 |
For the six months ended November 30, 2017 Product revenues to external customers Service revenues to external customers Total revenues to external customers Operating income (loss) For the six months ended November 30, 2016 Product revenues to external customers Service revenues to external customers Total revenues to external customers Operating income (loss) Food
Safety Animal
Safety Corporate and
Eliminations
(1) Total (in thousands) $ 87,004 $ 79,153 $ — $ 166,157 9,291 21,625 — 30,916 96,295 100,778 — 197,073 17,446 19,198 (2,222 ) 34,422 $ 73,059 $ 76,147 $ — $ 149,206 7,059 18,097 — 25,156 80,118 94,244 — 174,362 16,882 16,874 (2,162 ) 31,594
5. EQUITY COMPENSATION PLANS
Qualified andnon-qualified options to purchase shares of common stock may be granted to directors, officers and employees of the
Company 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 six months ended November 30, 2017 follows:
Shares | Weighted- Average Exercise Price | |||||||
(in thousands) | ||||||||
Options outstanding June 1, 2017 | 2,708 | $ | 32.88 | |||||
Granted | 819 | 59.26 | ||||||
Exercised | (603 | ) | 27.50 | |||||
Forfeited | (59 | ) | 39.87 | |||||
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Options outstanding November 30, 2017 | 2,865 | 41.41 |
During the three and six month periods ended November 30, 2017 and 2016, the Company recorded $1,264,000 and $1,218,000 and $2,666,000 and $2,734,000, respectively, of compensation expense related to its share-based awards. On June 1, 2017,2018, we adopted ASU No.2014-09—Revenue from Contracts with Customers (Topic 606). Refer to the Company adoptedRevenue Recognition section of Note 1 for further information.
Classification of Cash Receipts and Payments
In August 2016, the FASB issued ASU No.No. 2016-09,2016-15—Classification which simplifies the accounting for share-based payments to employees. The guidance requires the recognitionof Certain Cash Receipts and Cash Payments (a consensus of the income effectsEmerging 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 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 thecash flows under FASB Accounting Standards Codification (FASB ASC) 230, Statement of Cash Flows. The Companyamendments in ASU2016-15 are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. We adopted this ASU on June 1, 2018; the impact on our consolidated financial statements was immaterial.
Recent Accounting Pronouncements Not Yet Adopted
Leases
In February 2016, the FASB issued ASU No.2016-02—Leases to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and aright-of-use asset representing its right to use the underlying asset for the lease term. The recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessor have not significantly changed from previous U.S. GAAP. This ASU is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2018; early adoption is permitted. Modified retrospective application is required with certain practical expedients. We will adopt this ASU on June 1, 2019 and are currently in the process of evaluating our lessee and lessor arrangements to determine the impact of this pronouncement on our 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 our facilities.
Financial Instruments- Credit Losses
In June 2016, the FASB issued ASU No.2016-13—Measurement of Credit Losses on Financial Instruments, which changes how companies measure credit losses on most financial instruments measured at amortized cost and certain other instruments, such as loans, receivables andheld-to-maturity debt securities. Rather than generally recognizing credit losses when it is probable that the loss has electedbeen incurred, the revised guidance requires companies to accountrecognize an allowance for forfeiturescredit losses for the difference between the amortized cost basis of a financial instrument and the amount of
amortized cost that the company expects to collect over the instrument’s contractual life. ASU2016-13 is effective for fiscal periods beginning after December 15, 2019 and must be adopted as they occur. Thea cumulative effect adjustment to retained earnings. Early adoption is permitted. We do not believe adoption of this ASU reducedguidance will have an impact on our consolidated financial statements.
Comprehensive Income
Comprehensive income tax expenserepresents net income and any revenues, expenses, gains and losses that, under U.S. generally accepted accounting principles, are excluded from net income and recognized directly as a component of equity. Accumulated other comprehensive income (loss) consists solely of foreign currency translation adjustments.
Fair Value of Financial Instruments
The carrying amounts of our financial instruments other than cash equivalents and marketable securities, which include accounts receivable and accounts payable, approximate fair value based on either their short maturity or current terms for similar instruments. Fair value measurements are determined based upon the exit price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants exclusive of any transaction costs. We utilize a fair value hierarchy based upon the observability of inputs used in valuation techniques as follows:
Level 1: Observable inputs such as quoted prices in active markets;
Level 2: Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and
Level 3: Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
Cash and Cash Equivalents
Cash and cash equivalents consist of bank demand accounts, savings deposits, certificates of deposit and commercial paper with original maturities of 90 days or less. The carrying value of these assets approximates fair value due to the short maturity of these instruments and meets the Level 1 criteria.
Marketable Securities
The Company has marketable securities held by $3,418,000banks or broker-dealers at November 30, 2018, consisting of short-term domestic certificates of deposit and $3,794,000commercial paper rated at leastA-2/P-2 with maturities between 91 days and one year. These securities are classified as available for sale. The primary objective of our short-term investment activity is to preserve capital for the threepurpose of funding operations, capital expenditures and six month periods ended November 30, 2017.business acquisitions; short-term investments are not entered into for trading or speculative purposes. These securities are recorded at fair value (that approximates cost) based on recent trades of similar securities or pricing models and therefore meet the Level 2 criteria. Interest income on these investments is recorded within Other Income on the consolidated statements of income.
ESTIMATES AND ASSUMPTIONS
The weighted-averagepreparation of these financial statements requires that management make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an ongoing basis, management evaluates the estimates, including, but not limited to, variable consideration related to revenue recognition, allowances for doubtful accounts, the market value of, and demand for, inventories, stock-based compensation, provision for income taxes and related balance sheet accounts, accruals, goodwill and other intangible assets. These estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
There have been no significant changes to the critical accounting policies and estimates disclosed in our Annual Report on Form10-K for the fiscal year ended May 31, 2018, except for the new revenue recognition standard the Company adopted effective June 1, 2018. See below sections Revenue Recognition and Recently Adopted Accounting Standards for further information on revenue recognition.
There were no significant changes to the contractual obligations or contingent liabilities and commitments disclosed in our Annual Report on Form10-K for the fiscal year ended May 31, 2018.
Accounts Receivable Allowance
Management attempts to minimize credit risk by reviewing customers’ credit history before extending credit and by monitoring credit exposure on a regular basis. An allowance for doubtful accounts receivable is established based upon factors surrounding the credit risk of specific customers, historical trends and other information. Collateral or other security is generally not required for accounts receivable. Once a receivable balance has been determined to be uncollectible, that amount is charged against the allowance for doubtful accounts.
Inventory
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 per shareof tangible net assets of acquired businesses after amounts are allocated to other identifiable intangible assets. Other intangible assets include customer relationships, trademarks, licenses, trade names, covenantsnot-to-compete and patents. Customer-based intangibles are amortized on either an accelerated or straight-line basis, reflecting the pattern in which the economic benefits are consumed, while all other amortizable intangibles are amortized on a straight-line basis; intangibles are generally amortized over 5 to 25 years. We review the carrying amounts of goodwill and othernon-amortizable intangible assets annually, or when indications of impairment exist, to determine if such assets may be impaired by performing a quantitative assessment. If the carrying amounts of these assets are deemed to be less than fair value based upon a discounted cash flow analysis and comparison to comparable EBITDA multiples of peer companies, such assets are reduced to their estimated fair value and a charge is recorded to operations.
Long Lived Assets
Management reviews the carrying values of its long-lived assets to be held and used, including definite-lived intangible assets, for possible impairment whenever events or changes in business conditions warrant such a review. The carrying value of a long-lived asset is considered impaired when the anticipated separately identifiable undiscounted cash flows over the remaining useful life of the asset indicate that the carrying amount of the asset may not be recoverable. In such an event, fair value is determined using discounted cash flows and, if lower than the carrying value, impairment is recognized through a charge to operations.
Equity Compensation Plans
Share options awarded to employees and shares of stock awarded to employees under certain stock purchase plans are recognized as compensation expense based on their fair value at grant date. The fair market value of options granted during fiscal 2018 and fiscal 2017,under the Company stock option plans was estimated on the date of grant using the Black-Scholes option-pricing model with assumptions for inputs such as interest rates, expected dividends, volatility measures and specific employee exercise behavior patterns based on statistical data. Some of the inputs used are not market-observable and have to be estimated or derived from available data. Use of different estimates would produce different option pricingvalues, which in turn would result in higher or lower compensation expense recognized. To value options, several recognized valuation models exist. None of these models can be singled out as being the best or most correct one. The model was $14.69 and $11.84, respectively. Theapplied by us can handle most of the specific features included in the options granted, which is the reason for its use. If a different model were used, the option values could differ despite using the same inputs. Accordingly, using different assumptions coupled with using a different valuation model could have a significant impact on the fair value of employee stock options. Fair value could be either higher or lower than the number provided by the model applied and the inputs used. Further information on our equity compensation plans, including inputs used to determine the fair value of options, granted was estimatedis disclosed in Note 5 to the unaudited consolidated financial statements.
Income Taxes
We account for income taxes using the following weighted-average assumptions.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 period.
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 |
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the Tax Act) was signed into law making significant changes to the Internal Revenue Code. Changes include a federal corporate tax rate reduction from 35% to 21% for tax years beginning after December 31, 2017, the transition of U.S. international taxation from a worldwide tax system to a territorial system, and aone-time transition tax on the mandatory deemed repatriation of foreign earnings. The Company hasTax Act also includes a provision to tax global intangible low taxed income (“GILTI”) of foreign subsidiaries, which became effective for us beginning June 1, 2018. In the fourth quarter of fiscal 2018, we recorded an employee stock purchase plan that provides for employee stock purchases at a 5% discountestimated net charge of $4.8 million related to market price. The discount is recorded in administrative expense asthe Tax Act, due to the impact of the datereduction in the tax rate on deferred tax assets and liabilities of purchase.$6.0 million, partially offset by $1.2 million ofone-time transition tax on the deemed repatriation of foreign earnings. Due to the timing of the enactment and the complexity in applying the provisions of the Tax Act, these charges and benefits were recorded based on reasonable estimates and are subject to revisions as we complete our analysis of the Tax Act, collect and prepare necessary data, and interpret any additional guidance issued by the Internal Revenue Service. During the month of December 2018, immaterial adjustments to these provisions were recorded to tax expense, within the measurement period under SAB 118.
6. NEW ACCOUNTING PRONOUNCEMENTSRevenue Recognition
In May 2014, the FASB issued ASU No.2014-09—Revenue from Contracts with Customers.Customers (Topic 606). The new standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard is designed to create greater comparability for financial statement users across industries and jurisdictions and also requires enhanced disclosures. In April 2016, the FASB issued Accounting Standards UpdateNo. 2016-10— Revenue from Contracts with Customers (Topic 606), which amends and adds clarity to certain aspects of the guidance set forth in ASU2014-09 related to identifying performance obligations and licensing. The guidance isbecame effective for fiscal years, and interim periods within those years, beginning after December 15, 2017.the Company on June 1, 2018. The guidance permits two methods of adoption;adoption: a full retrospective method to each prior reporting period presented or a modified retrospective approach with the cumulative effect of initially applying the guidance recognized at the date of initial application. The CompanyWe adopted this standard using the full retrospective approach. This approach was chosen to provide appropriate comparisons against our prior year financial statements; accordingly, historical information for the year ended May 31, 2018, including interim periods therein, has formed an internal teambeen adjusted to implement this ASU and is currently identifyingconform to the new standard.
Prior to the adoption, we identified all revenue streams and reviewing contracts at each significant subsidiary and evaluatingreviewed contracts to evaluate the potential impact of adopting the new standard on itsour revenue recognition policies, procedures and control framework and ultimately on our consolidated financial statements and related disclosures. In our review of contracts in each revenue stream, we noted no material impact in the implementation of the standard. We determined the impact of adopting the standard on our control framework and noted minimal, insignificant changes to our system and other controls processes.
We derive revenue from two primary sources — product revenue and service revenue.
Product revenue consists primarily of shipments of:
Diagnostic test kits, culture media and related products used by food producers and processors to detect harmful natural toxins, foodborne bacteria, allergens and levels of general sanitation;
Consumable products marketed to veterinarians 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.
Service revenue consists primarily of:
Genomic identification and related interpretive bioinformatic services; and
Other commercial laboratory services.
Revenues for our genomics and commercial laboratory services are recognized and invoiced when the applicable laboratory service is performed and the results are conveyed to the customer.
Under Topic 606, the Company determines the amount of revenue to be recognized through application of the following steps:
Identification of the contract with a customer;
Identification of the performance obligations in the contract;
Determination of the transaction price;
Allocation of the transaction price to the performance obligations in the contract; and
Recognition of revenue when or as the Company satisfies the performance obligations.
Essentially all our revenue is generated through contracts with our customers. A performance obligation is a promise in a contract to transfer a product or service to a customer. We generally recognize revenue at a point in time when all our performance obligations under the terms of a contract are satisfied. With the adoption of Topic 606, revenue is recognized upon transfer of control of promised products and services in an amount that reflects the consideration the Company expects to receive in exchange for those products or services. The Company will adopt this ASUcollectability of consideration on June 1, 2018 using the modified retrospective approach.
In February 2016,contract is reasonably assured before revenue is recognized. To the FASB issued ASU No.2016-02—Leases to increase transparency and comparability among organizations by recognizing lease assets and lease liabilitiesextent that customer payment has been received before all recognition criteria are met, these revenues are initially deferred in other accruals on the balance sheet and disclosing key information about leasing arrangements. A lessee should recognizethe revenue is recognized in the statementperiod that all recognition criteria have been met. In certain situations, we provide rebates, marketing support, credits or incentives to selected customers, which are accounted for as variable consideration when estimating the amount of financial positionrevenue to recognize on a liabilitycontract. Variable consideration reduces the amount of revenue that is recognized. These variable consideration estimates are updated at the end of each reporting period based on information currently available.
The performance obligations in our contracts are generally satisfied well within one year of the contract inception. In such cases, we have elected the practical expedient to make lease payments (the lease liability) and aright-of-use asset representing its right to usenot adjust the underlying assetpromised amount of consideration for the lease term. The recognition, measurementeffects of a significant financing component. We have elected to utilize the practical expedient to recognize the incremental costs of obtaining a contract as an expense when incurred because the amortization period for the prepaid costs that would otherwise have been deferred and presentation of expenses and cash flows arising from a lease by a lessor have not significantly changed from previous U.S. GAAP. This ASUamortized 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.one year or less. The Company expectsaccounts for shipping and handling for products as a fulfillment activity when goods are shipped. Revenue is recognized net of any tax collected from customers; the taxes are subsequently remitted to adopt this ASU on June 1, 2019governmental authorities. The Company’s terms and is currentlyconditions of sale generally do not provide for returns of product or reperformance of service except in the processcase of evaluating its lesseequality or warranty issues. These situations are infrequent; due to immateriality of the amount, warranty claims are recorded in the period incurred.
The following table presents disaggregated revenue by major product and lessor arrangements to determineservice categories for the impactthree and six months ended November 30, 2018 and 2017:
Three Months Ended November 30, | Six Months Ended November 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
(in thousands) | (in thousands) | |||||||||||||||
Food Safety | ||||||||||||||||
Natural Toxins, Allergens & Drug Residues | $ | 20,571 | $ | 18,989 | $ | 39,409 | $ | 38,153 | ||||||||
Bacterial & General Sanitation | 10,822 | 9,324 | 21,288 | 18,443 | ||||||||||||
Culture Media & Other | 12,191 | 11,041 | 24,408 | 21,173 | ||||||||||||
Rodenticides, Insecticides & Disinfectants | 5,943 | 6,126 | 12,569 | 10,817 | ||||||||||||
Genomics Services | 4,223 | 3,726 | 8,259 | 6,911 | ||||||||||||
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Animal Safety | $ | 53,750 | $ | 49,206 | $ | 105,933 | $ | 95,497 | ||||||||
Life Sciences | $ | 1,891 | $ | 2,394 | $ | 3,971 | $ | 4,820 | ||||||||
Veterinary Instruments & Disposables | 11,683 | 11,687 | 22,087 | 22,174 | ||||||||||||
Animal Care & Other | 9,064 | 8,237 | 15,617 | 15,649 | ||||||||||||
Rodenticides, Insecticides & Disinfectants | 18,673 | 17,786 | 35,664 | 35,167 | ||||||||||||
Genomics Services | 12,037 | 11,388 | 23,452 | 21,600 | ||||||||||||
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$ | 53,348 | $ | 51,492 | $ | 100,791 | $ | 99,410 | |||||||||
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Total Revenues | $ | 107,098 | $ | 100,698 | $ | 206,724 | $ | 194,907 | ||||||||
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Restatement of this amendment on itsPreviously Issued Financial Statements
The Company has historically classified certain variable consideration components resulting from volume rebates, distributor support, and other marketing discounts as cost of product revenues or sales and marketing expense in our consolidated financial conditionstatements of income. These amounts should have been classified as contra revenue in product or service revenues. The Company had determined in prior periods that the misstatements were clearly immaterial, individually and resultsin the aggregate, to each of operations. This evaluation includes a review of revenue through leasing arrangementsthe reporting periods affected. The Company began properly classifying these items as well as lease expenses, which are primarily through operating lease arrangements at mostcontra revenues beginning in the three-month period ended August 31, 2018, the first quarter of the Company’s facilities.current fiscal year, and has revised the prior year’s quarter andyear-to-date periods to conform to the current period presentation. These immaterial adjustments had no impact on our operating income, income before taxes, net income or reported earnings per share, and no change to stockholders’ equity.
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 recognitioneffects of the revisions on the line items within our unaudited consolidated statements of income taxfor the three and six months ended November 30, 2017 are as follows:
Three Months Ended November 30, 2017 | Six Months Ended November 30, 2017 | |||||||||||||||||||||||
As Previously Reported | Adjustments | As Revised | As Previously Reported | Adjustments | As Revised | |||||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||
Revenues | ||||||||||||||||||||||||
Product revenues | $ | 85,590 | $ | (1,119 | ) | $ | 84,471 | $ | 166,157 | $ | (2,141 | ) | $ | 164,016 | ||||||||||
Service revenues | 16,227 | — | 16,227 | 30,916 | (25 | ) | 30,891 | |||||||||||||||||
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Total revenues | 101,817 | (1,119 | ) | 100,698 | 197,073 | (2,166 | ) | 194,907 | ||||||||||||||||
Cost of revenues | ||||||||||||||||||||||||
Cost of product revenues | 43,349 | (97 | ) | 43,252 | 84,433 | (197 | ) | 84,236 | ||||||||||||||||
Cost of service revenues | 9,197 | — | 9,197 | 17,498 | — | 17,498 | ||||||||||||||||||
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Total cost of revenues | 52,546 | (97 | ) | 52,449 | 101,931 | (197 | ) | 101,734 | ||||||||||||||||
Gross margin | 49,271 | (1,022 | ) | 48,249 | 95,142 | (1,969 | ) | 93,173 | ||||||||||||||||
Operating expenses | ||||||||||||||||||||||||
Sales and marketing | 17,815 | (1,022 | ) | 16,793 | 34,838 | (1,969 | ) | 32,869 | ||||||||||||||||
Total operating expenses | 31,273 | (1,022 | ) | 30,251 | 60,720 | (1,969 | ) | 58,751 | ||||||||||||||||
Operating income | 17,998 | — | 17,998 | 34,422 | — | 34,422 |
Presented below are the effects of awardsthe revisions on the line items within the previously issued unaudited consolidated statements of income for the three and nine months ended February 28, 2018 and the consolidated statements of income for the years ended May 31, 2018 and 2017. Revised consolidated statements of income related to these periods will be presented in the income statement whenForms10-Q and Form10-K to be filed in the awards vestsucceeding periods of this fiscal year.
Three Months Ended February 28, 2018 | Nine Months Ended February 28, 2018 | |||||||||||||||||||||||
As Previously Reported | Adjustments | As Revised | As Previously Reported | Adjustments | As Revised | |||||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||
Revenues | ||||||||||||||||||||||||
Product revenues | $ | 78,142 | $ | (958 | ) | $ | 77,184 | $ | 244,298 | $ | (3,098 | ) | $ | 241,200 | ||||||||||
Service revenues | 17,750 | (31 | ) | 17,719 | 48,667 | (56 | ) | 48,611 | ||||||||||||||||
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Total revenues | 95,892 | (989 | ) | 94,903 | 292,965 | (3,154 | ) | 289,811 | ||||||||||||||||
Cost of revenues | ||||||||||||||||||||||||
Cost of product revenues | 40,352 | (69 | ) | 40,283 | 124,785 | (265 | ) | 124,520 | ||||||||||||||||
Cost of service revenues | 10,019 | — | 10,019 | 27,517 | — | 27,517 | ||||||||||||||||||
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Total cost of revenues | 50,371 | (69 | ) | 50,302 | 152,302 | (265 | ) | 152,037 | ||||||||||||||||
Gross margin | 45,521 | (920 | ) | 44,601 | 140,663 | (2,889 | ) | 137,774 | ||||||||||||||||
Operating expenses | ||||||||||||||||||||||||
Sales and marketing | 17,492 | (920 | ) | 16,572 | 52,331 | (2,889 | ) | 49,442 | ||||||||||||||||
Total operating expenses | 29,608 | (920 | ) | 28,688 | 90,328 | (2,889 | ) | 87,439 | ||||||||||||||||
Operating income | 15,913 | — | 15,913 | 50,335 | — | 50,335 |
Year Ended | Year Ended | |||||||||||||||||||||||
May 31, 2018 | May 31, 2017 | |||||||||||||||||||||||
As Previously Reported | Adjustments | As Revised | As Previously Reported | Adjustments | As Revised | |||||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||
Revenues | ||||||||||||||||||||||||
Product revenues | $ | 335,554 | $ | (4,266 | ) | $ | 331,288 | $ | 306,512 | $ | (3,390 | ) | $ | 303,122 | ||||||||||
Service revenues | 66,698 | (56 | ) | 66,642 | 55,082 | 73 | 55,155 | |||||||||||||||||
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Total revenues | 402,252 | (4,322 | ) | 397,930 | 361,594 | (3,317 | ) | 358,277 | ||||||||||||||||
Cost of revenues | ||||||||||||||||||||||||
Cost of product revenues | 174,067 | (342 | ) | 173,725 | 156,568 | (273 | ) | 156,295 | ||||||||||||||||
Cost of service revenues | 37,933 | — | 37,933 | 33,058 | — | 33,058 | ||||||||||||||||||
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Total cost of revenues | 212,000 | (342 | ) | 211,658 | 189,626 | (273 | ) | 189,353 | ||||||||||||||||
Gross margin | 190,252 | (3,980 | ) | 186,272 | 171,968 | (3,044 | ) | 168,924 | ||||||||||||||||
Operating expenses | ||||||||||||||||||||||||
Sales and marketing | 70,909 | (3,980 | ) | 66,929 | 62,424 | (3,044 | ) | 59,380 | ||||||||||||||||
Total operating expenses | 120,058 | (3,980 | ) | 116,078 | 107,023 | (3,044 | ) | 103,979 | ||||||||||||||||
Operating income | 70,194 | — | 70,194 | 64,945 | — | 64,945 |
The revisions had no impact on our audited consolidated balance sheets as of May 31, 2018 and 2017 and no impact on our unaudited consolidated statements of equity or are settled, thus eliminating additionalpaid-in capital pools. The guidance also allowsunaudited consolidated statements of cash flows for the employerthree and six months ended November 30, 2017 and the three and nine months ended February 28, 2018.
2. INVENTORIES
Inventories are stated at the lower of cost, determined by thefirst-in,first-out method, or net realizable value. The components of inventories follow:
November 30, 2018 | May 31, 2018 | |||||||
(in thousands) | ||||||||
Raw materials | $ | 36,563 | $ | 36,702 | ||||
Work-in-process | 7,601 | 5,993 | ||||||
Finished and purchased goods | 35,309 | 33,310 | ||||||
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$ | 79,473 | $ | 76,005 | |||||
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3. NET INCOME PER SHARE
The calculation of net income per share attributable to repurchase moreNeogen Corporation follows:
Three Months Ended | Six Months Ended | |||||||||||||||
November 30, | November 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
(in thousands, except per share amounts) | ||||||||||||||||
Numerator for basic and diluted net income per share: | ||||||||||||||||
Net income attributable to Neogen | $ | 16,051 | $ | 17,100 | $ | 31,288 | $ | 29,014 | ||||||||
Denominator for basic net income per share: | ||||||||||||||||
Weighted average shares | 52,019 | 51,264 | 51,820 | 51,109 | ||||||||||||
Effect of dilutive stock options | 572 | 697 | 721 | 669 | ||||||||||||
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Denominator for diluted net income per share | 52,591 | 51,961 | 52,541 | 51,778 | ||||||||||||
Net income attributable to Neogen per share: | ||||||||||||||||
Basic | $ | 0.31 | $ | 0.33 | $ | 0.60 | $ | 0.57 | ||||||||
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Diluted | $ | 0.31 | $ | 0.33 | $ | 0.60 | $ | 0.56 | ||||||||
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4. SEGMENT INFORMATION AND GEOGRAPHIC DATA
We have two reportable segments: Food Safety and Animal Safety. The Food Safety segment is primarily engaged in the development, production and marketing of diagnostic test kits, 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, disinfectants and insecticides to assist in the control of rodents, insects and disease in and around agricultural, food production and other facilities.
Our international operations in the United Kingdom, Mexico, Brazil, China and India originally focused on the Company’s Food Safety products, and each of these units reports through the Food Safety segment. In recent years, these operations have expanded to offer our complete line of products and services, including those usually associated with the Animal Safety segment such as cleaners, disinfectants, rodenticides, insecticides, veterinary instruments and genomics services. These additional products and services are managed and directed by existing management and are reported through the Food Safety segment.
The accounting policies of each of the segments are the same as those described in Note 1.
Segment information follows:
Food Safety | Animal Safety | Corporate and Eliminations (1) | Total | |||||||||||||
(in thousands) | ||||||||||||||||
As of and for the three months ended November 30, 2018 |
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Product revenues to external customers | $ | 48,256 | $ | 41,306 | $ | — | $ | 89,562 | ||||||||
Service revenues to external customers | 5,494 | 12,042 | — | 17,536 | ||||||||||||
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Total revenues to external customers | 53,750 | 53,348 | — | 107,098 | ||||||||||||
Operating income (loss) | 10,342 | 9,057 | (1,153 | ) | 18,246 | |||||||||||
Total assets | 201,291 | 218,231 | 240,970 | 660,492 | ||||||||||||
As of and for the three months ended November 30, 2017—Revised (2) |
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Product revenues to external customers | $ | 44,367 | $ | 40,104 | $ | — | $ | 84,471 | ||||||||
Service revenues to external customers | 4,839 | 11,388 | — | 16,227 | ||||||||||||
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Total revenues to external customers | 49,206 | 51,492 | — | 100,698 | ||||||||||||
Operating income (loss) | 8,668 | 10,529 | (1,199 | ) | 17,998 | |||||||||||
Total assets | 175,836 | 215,099 | 190,093 | 581,028 |
(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. |
(2) | Segment revenues for the three months ended November 30, 2017 have been revised as discussed in Note 1. For the three months ended November 30, 2017, product revenues were reduced by $354,000 in the Food Safety segment and $765,000 in the Animal Safety segment; service revenues were unchanged in the Food Safety segment and in the Animal Safety segment. |
Food Safety | Animal Safety | Corporate and Eliminations (1) | Total | |||||||||||||
(in thousands) | ||||||||||||||||
For the six months ended November 30, 2018 | ||||||||||||||||
Product revenues to external customers | $ | 95,189 | $ | 77,333 | $ | — | $ | 172,522 | ||||||||
Service revenues to external customers | 10,744 | 23,458 | — | 34,202 | ||||||||||||
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Total revenues to external customers | 105,933 | 100,791 | — | 206,724 | ||||||||||||
Operating income (loss) | 21,215 | 15,763 | (2,253 | ) | 34,725 | |||||||||||
For the six months ended November 30, 2017—Revised (2) |
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Product revenues to external customers | $ | 86,206 | $ | 77,810 | $ | — | $ | 164,016 | ||||||||
Service revenues to external customers | 9,291 | 21,600 | — | 30,891 | ||||||||||||
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Total revenues to external customers | 95,497 | 99,410 | — | 194,907 | ||||||||||||
Operating income (loss) | 17,446 | 19,198 | (2,222 | ) | 34,422 |
(1) | Includes the elimination of intersegment transactions. |
(2) | Segment revenues for the six months ended November 30, 2017 have been revised as discussed in Note 1. For the six months ended November 30, 2017, product revenues were reduced by $798,000 in the Food Safety segment and $1,343,000 in the Animal Safety segment; service revenues were unchanged in the Food Safety segment and reduced by $25,000 in the Animal Safety segment. |
The following table presents the Company’s revenue disaggregated by geographic location:
Three Months ended | Six Months Ended | |||||||||||||||
November 30, | November 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
(in thousands) | (in thousands) | |||||||||||||||
Revenues by Geographic Location | ||||||||||||||||
Domestic | $ | 65,033 | $ | 62,452 | $ | 124,879 | $ | 122,588 | ||||||||
International | 42,065 | 38,246 | 81,845 | 72,319 | ||||||||||||
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Total revenue | 107,098 | 100,698 | 206,724 | 194,907 | ||||||||||||
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5. EQUITY COMPENSATION PLANS
Qualified andnon-qualified options to purchase shares of common stock may be granted to directors, officers and employees of the
Company under the terms of our stock option plans. These options are granted at an employee’s shares for tax withholding purposes without triggering liability accounting. In addition,exercise price of not less than the guidance allows for a policy election to account for forfeitures as they occur rather thanfair market value of the stock on an estimated basis. This ASU is effective for annualthe date of grant. Options vest ratably over three and five year periods including interim periods within those annual periods, beginning after December 15, 2016 with early adoption permitted. The Company adopted this standard effective June 1, 2017; this resulted in a reductionand the contractual terms are generally five or 10 years. A summary of federal income tax expense of $3,418,000 and $3,794,000 forstock option activity during the six months ended November 30, 2018 follows:
Shares | Weighted- Average Exercise Price | |||||||
Options outstanding June 1, 2018 | 2,497,124 | $ | 42.63 | |||||
Granted | 525,750 | 62.93 | ||||||
Exercised | (340,023 | ) | 29.49 | |||||
Forfeited | (91,620 | ) | 45.87 | |||||
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Options outstanding November 30, 2018 | 2,591,231 | 48.40 |
During the three and six month periods ended November 30, 2017. The2018 and 2017, the Company believes that tax benefitsrecorded $1,400,000 and $1,264,000 and $2,831,000 and $2,666,000, respectively, of compensation expense related to its share-based payments will result in a lower effective tax rate inawards.
The weighted-average fair value per share of stock options granted during fiscal 2018.year 2018 and fiscal 2019, estimated on the date of grant using the Black-Scholes option pricing model, was $14.47 and $14.91, respectively. The fair value of stock options granted was estimated using the following weighted-average assumptions.
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.
FY 2019 | FY 2018 | |||||||
Risk-free interest rate | 2.6 | % | 1.6 | % | ||||
Expected dividend yield | 0.0 | % | 0.0 | % | ||||
Expected stock price volatility | 27.0 | % | 27.2 | % | ||||
Expected option life | 3.5 years | 4.0 years |
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 andan employee stock purchase plan that provides for employee stock purchases at a 5% discount to market price. The discount is currently evaluatingrecorded in administrative expense as of the impactdate of ASUNo. 2016-15 on its consolidated financial statements.purchase.
7.6. BUSINESS AND PRODUCT LINE ACQUISITIONS
The Consolidated Statements of Income reflect the results of operations for business acquisitions since the respective dates of purchase. All are accounted for using the acquisition method. Goodwill recognized in the acquisitions discussed below relates primarily to enhancing the Company’s strategic platform for the expansion of available product offerings.
On December 1, 2016, the Company acquired the stock of Quat-Chem Ltd., a chemical Company that manufactures biosecurity products, based in Rochdale, England. Consideration for the purchase was $21,606,000 in cash and up to $3,778,000 of contingent consideration, due at the end of each of the first two years, based on an excess net sales formula. The final purchase price allocation, based upon the fair value of these assets and liabilities determined using the income approach, included accounts receivable of $4,684,000, inventory of $1,243,000, land, property and equipment of $2,526,000, accounts payable of $2,197,000, deferred tax liability of $1,133,000, contingent consideration accrual of $1,058,000, other current liabilities of $604,000,non-amortizable intangible assets of $1,889,000, intangible assets of $6,900,000 (with an estimated life of5-15 years) and the remainder to goodwill(non-deductible for tax purposes). These values are Level 3 fair value measurements. This business continues to operate in its current location and is managed by Neogen Europe, reporting within the Food Safety segment.
On December 27, 2016, the Company acquired the stock of Rogama Industria e Comercio, Ltda., a Company that develops and manufactures rodenticides and insecticides, based near Sao Paulo, Brazil. Consideration for the purchase was $12,423,000 in cash and
up to $2,069,000 of contingent consideration, due at the end of each of the first two years, based on an excess net sales formula. The preliminary purchase price allocation included accounts receivable of $1,863,000, inventory of $1,026,000, property and equipment of $1,840,000, current liabilities of $2,177,000, contingent consideration accrual of $430,000,non-current deferred tax liability of $1,307,000,non-amortizable intangible assets of $591,000, intangible assets of $3,252,000 (with an estimated life of5-15 years) and the remainder to goodwill (deductible for tax purposes). These values are Level 3 fair value measurements. This business continues to operate in its current location and 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 beenwas paid in cash on the acquisition date with the remainder due in annual installments over the next five years. The preliminaryfinal purchase price allocation, based upon the fair value of these assets and liabilities determined using the income approach, included inventory of $19,000, equipment of $419,000, long-termnon-current liabilities of $1,629,000, intangible assets of $850,000$902,000 (with an estimated life of5-15 years) and the remainder to goodwill(non-deductible for tax purposes). These values are Level 3 fair value measurements. The new business, renamed GeneSeekNeogen Australasia, continues to operate in its current location, reporting within the Animal Safety segment.
8.On August 1, 2018, the Company acquired the stock of Clarus Labs, Inc., a manufacturer of water testing products. Neogen has distributed Clarus’ Colitag water test to the food and beverage industries since 2004 and this acquisition gives the Company access to sell this product to new markets. Consideration for the purchase was $4,204,000 in cash and approximately $1.3 million of contingent consideration, due at the end of each of the first five years, based on an excess net sales formula. The preliminary purchase price allocation, based upon the fair value of these assets and liabilities determined using the income approach, included inventory of $32,000, machinery and equipment of $120,000, accounts payable of $53,000, contingent consideration accrual of $1,256,000,non-current deferred tax liability of $426,000,non-amortizable intangible assets of $750,000, intangible assets of $1,100,000 (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. Manufacturing of these products was moved to the Company’s Lansing, Michigan location in October, reporting within the Food Safety segment.
On September 4, 2018, the Company acquired the assets of Livestock Genetic Services, LLC, a Virginia-based company that specializes in genetic evaluations and data management for cattle breeding organizations. Livestock Genetic Services has been a long-time strategic partner of Neogen and the acquisition will enhance the Company’sin-house genetic evaluation capabilities. Consideration for the purchase was $1,100,000 in cash, with $700,000 paid at closing and $400,000 payable to the former owner on September 1, 2019, and approximately $385,000 of contingent consideration, payable over the next three years. The preliminary purchase price allocation, based upon the fair value of these assets and liabilities determined using the income approach, included office equipment of $15,000, contingent consideration accrual of $385,000, intangible assets of $860,000 (with an estimated life of5-15 years) and the remainder to goodwill (deductible for tax purposes). These values are Level 3 fair value measurements. Services provided by this company are now performed at the Company’s Lincoln, Nebraska location, reporting within the Animal Safety segment.
7. LONG TERM DEBT
The Company hasWe have a financing agreement with a bank providing for ana $15,000,000 unsecured revolving line of credit, of $15,000,000, which expireswas amended on November 30, 2018 to extend the maturity from September 30, 2019.2019 to September 30, 2021. There were no advances against the line of credit during fiscal 20172018 and there have been none thus far in fiscal 2018;2019; there was no balance outstanding at November 30, 2017.2018. Interest on any borrowings remained at LIBOR plus 100 basis points (rate under the terms of the agreement was 2.35%3.51% at November 30, 2017)2018). Financial covenants include maintaining specified levels of tangible net worth, debt service coverage, and funded debt to EBITDA, each of which the Company was in compliance with at November 30, 2017.2018.
9.8. COMMITMENTS AND CONTINGENCIES
The Company is involved in environmental remediation and monitoring activities at its Randolph, Wisconsin manufacturing facility and accrues for related costs when such costs are determined to be probable and estimable. The Company expenses annual costs of remediation, which have ranged from $38,000 to $57,000$74,000 per year over the past five years. The Company’s estimated liability for these costs was $916,000 at November 30, 20172018 and May 31, 2017,2018, measured on an undiscounted basis over an estimated period of 15 years; $54,000$100,000 of the liability is recorded within current liabilities, and the remainder is recorded within othernon-current liabilities inon the consolidated balance sheet.sheets. During the second quarter of fiscal 2019, the Company’s environmental consultant performed an updated Corrective Measures Study on the Randolph site, per a request from the Wisconsin Department of Natural Resources. Based on the results of the study, the Company plans to continue the current remediation and monitoring program, with no changes proposed.
The Company is subject to certain legal and other proceedings in the normal course of business that, in the opinion of management, should not have a material effect on its future results of operations or financial position.
10.9. STOCK PURCHASE
The Company has a stock repurchase program, authorized byIn October 2018, the Company’s Board of Directors passed a resolution canceling the Company’s prior stock buyback program, which had been approved in calendar yearDecember 2008, and authorized a new program to purchase, subject to market conditions, up to 1,500,0003,000,000 shares of the Company’s common stock. As of November 30, 2017, 1,350,6322018, there had been no purchases of common stock in the current fiscal year under either program. In December 2018, the Company purchased 50,000 shares were available to be repurchased under the program. There were no purchasesnew program in fiscal year 2017negotiated and thereopen market transactions for a total price, including commissions, of $3,134,727. Shares purchased under the program have been none thus far in fiscal 2018.retired.
PART I – FINANCIAL INFORMATION
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’sour 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 Form10-Q. For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward looking statements. Without limiting the foregoing, the words “believes,” “anticipates,” “plans,” “expects,” “seeks,” “estimates,” and similar expressions are intended to identify forward-looking statements. There are a number of important factors, including competition, recruitment and dependence on key employees, impact of weather on agriculture and food production, identification and integration of acquisitions, research and development risks, patent and trade secret protection, government regulation and other risks detailed from time to time in the Company’s reports on file at the Securities and Exchange Commission, that could cause Neogen Corporation’s results to differ materially from those indicated by such forward-looking statements, including those detailed in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
In addition, any forward-looking statements represent management’s views only as of the day this Quarterly Report on Form10-Q was first filed with the Securities and Exchange Commission and should not be relied upon as representing management’s views as of any subsequent date. While management may elect to update forward-looking statements at some point in the future, it specifically disclaims any obligation to do so, even if its views change.
Critical Accounting Policies and Estimates
The discussion and analysis of the Company’s financial condition and results of operations are based on the consolidated financial statements that have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires that management make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, management evaluates the estimates, including, but not limited to, those related to receivable allowances, inventories, 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. 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.
Executive Overview
Revenues
Consolidated revenues were $107.1 million in the second quarter of fiscal 2019, an increase of 6% compared to $100.7 million in the second quarter of fiscal 2018. Organic sales in the second quarter also increased 6%. For the six month period, consolidated revenues were $206.7 million, an increase of 6% compared to $194.9 million in the same period in the prior fiscal year. On a year to date basis, organic sales increased 5%.
Food Safety segment sales were $53.8 million in the second quarter of the current fiscal year, an increase of 9% compared to $49.2 million in the same period of the prior year. Organic sales in this segment also increased 9%, with a minor contribution from the August 1, 2018 acquisition of Clarus Labs. For the year to date, Food Safety segment sales were $105.9 million, an increase of 11% compared to $95.5 million in the same period of the prior fiscal year; the organic sales increase was also 11%.
Animal Safety segment sales were $53.3 million in the second quarter of fiscal 2019, an increase of 4% compared to $51.5 million in the second quarter of fiscal 2018. Organic sales in this segment also increased 4% in the second quarter, with a minor contribution from the September 1, 2018 acquisition of Livestock Genetic Services. For the six month period, Animal Safety segment sales were $100.8 million, an increase of 1% compared to $99.4 million in the same period a year ago. Year to date organic sales were flat, after excluding three months of the September 1, 2017 acquisition of Neogen Australasia and one month of the Livestock Genetic Services acquisition.
International sales in the second quarter of fiscal 2019 were 39% of total sales compared to 38% of total sales in the second quarter of fiscal 2018. For the year to date, fiscal 2019 international sales were 40% of total sales compared to 37% of total sales in the same period of the prior year.
Our effective tax rate in the second quarter was 18.5% compared to an effective tax rate of 10.0% in the prior year second quarter; the fiscal 2019 year to date effective tax rate was 15.1% compared to the year to date effective tax rate of 19.8% in the prior fiscal year. The U.S. statutory rate is 21% in the current fiscal year and was 35% in the first six months of fiscal 2018. Differences from the statutory rate are primarily due to tax deductions resulting from stock option exercises, provisions included in the corporate tax reform, and state and local taxes.
Net income for the Company for the second quarter ended November 30, 2017 were $101.82018 was $16.1 million, an increaseor $0.31 per diluted share, a decrease of 12%, or $11.1 million,6% compared to revenues of $90.7$17.1 million, foror $0.33 per share in the same period in the prior year. For the year to date, period, revenues were $197.1net income was $31.3 million, or $0.60 per share, an increase of 13%, or $22.7 million,8% compared to revenuesprior year to date net income of $174.4$29.0 million, or $0.56 per diluted share.
Cash provided from operating activities in the first six months of fiscal 2017. Net income attributable2019 was $32.6 million, compared to Neogen for$27.4 million in the first half of fiscal 2018.
Neogen’s results reflect an increase in international sales of 10% in the second quarter of fiscal 2018 increased 53%2019 and 13% for the year to $17.1 million,date, each compared to $11.2the same respective periods in the prior year. We continue to focus on increasing our presence and market share throughout the world, while also integrating recent international acquisitions into our product portfolio. Sales fluctuations in the three and six month periods of fiscal 2019 compared to the same respective periods in the prior year are as follows for each of our international locations:
Three Months Ended | Six Months Ended | |||||||||||||||
November 30, 2018 | November 30, 2018 | |||||||||||||||
Revenue % Increase/(Decrease) USD | Revenue % Increase/(Decrease) Local Currency | Revenue % Increase USD | Revenue % Increase Local Currency | |||||||||||||
Neogen Europe (including Lab M & Quat-Chem) | 8 | % | 10 | % | 13 | % | 13 | % | ||||||||
Neogen do Brasil (including Deoxi & Rogama) | 6 | % | 29 | % | 23 | % | 48 | % | ||||||||
Neogen Latinoamerica | (7 | )% | (2 | )% | 9 | % | 15 | % | ||||||||
Neogen China | 1 | % | 6 | % | 4 | % | 6 | % | ||||||||
Neogen India | 83 | % | 105 | % | 81 | % | 99 | % |
Currency translations reduced revenues by approximately $2.0 million in the second quarter of the prior fiscal year. Adjusted for a4-for-3 stock split effective December 29, 2017, earnings per share in the current year second quarter were $0.332019 compared to $0.22 per share inthe same quarter a year ago, primarily due to increased strength of the U.S. dollar relative to the Brazilian real, the British pound, and the Mexican peso. For the year to date, currency translations reduced revenues by approximately $3.3 million compared to the prior year. Net earnings were favorably impacted
The increase in revenues at Neogen Europe was led by excess tax benefits related to stock option exercises totaling $3.4 million for the quarter. For the first six monthsa 30% increase in sales of the current fiscal year, net income attributable to Neogen increased 38% to $29.0 million, or $0.56 per fully diluted share, compared to $21.0 million, or $0.41,genomics services, primarily in the same period in fiscal 2017. Net earnings were favorably impacted by excess tax benefits related to stock option exercises totaling $3.8 millionporcine and bovine markets; genomics sales increased 28% for the year to date period.
Fordate. Neogen Europe also had strong sales of our products to detect spoilage organisms in processed foods, due to equipment placements, andListeria Right Now. At Neogen do Brasil, sales of natural toxins test kits increased 62% and 73% for the three month period ended November 30, 2017, Food Safety segment revenues increased 21% and Animal Safety segment revenues increased 5%, eachsix months, respectively, both compared to the same period in the prior year. For the quarter, the overall organic sales increase was 6%; organic growth in the Food Safety and Animal Safety segments was 9% and 4%, respectively. The acquisitions of Quat-Chem and Rogama, both in December 2016, and GeneSeek Australasia, in September 2017, contributed $5.3 millionperiods a year ago, as we continued to the overall revenue growth in the second quarter. Overall organic sales increased 8%gain significant new business testing for the year to date period; the organic increases were 9% for the Food Safety segment and 7% for the Animal Safety segment. The previously discussed acquisitions contributed $9.5 million to the overall sales increase for the six month period.
International sales were $38.6 millionpresence of aflatoxin in the second quarter, an increasecorn. Sales of 24% compared to the prior year. Expressed as a percentage of sales, international sales were 37.9% compared to 34.4% in the second quarter of the prior year. For the six month period, international sales were $73.1 million, an increase of 21%; international sales were 37.1% of total sales in the current year to date period and 34.6% in the prior year. For each comparative period, international revenue increases were the result of the acquisitions of Quat-Chem (England), Rogama (Brazil) and GeneSeek Australasia (Australia), and to a lesser extent, revenue increases at previously existing Company locations. Currency translation had a positive effect on international revenues of approximately $900,000 in the second quarter as the pound, euro, real and peso strengthened against the dollar; for the year to date period, the positive impact was $800,000.
Neogen Europe salesforensic test kits increased 15% in U.S. dollars in the second quarter compared to the prior year; for the six month period, sales increased 8%. For the quarter, a 44% increase in genomics revenues offset lower mycotoxin sales, as last year’s deoxynivalenol (DON) outbreak in corn crops in western Europe, primarily France and Germany, did not repeat in the current year; for the year to date period, genomics sales increased 31% and helped to offset lower DON sales. Sales at Lab M, the Company’s subsidiary in England, increased 22%166% in the second quarter and rose 27% for the six month period, as its culture media products were integrated into Neogen’s global sales and marketing efforts.
Neogen Latinoamerica recorded a sales increase of 36% in the second quarter, despite termination of a distribution agreement for cleaner and disinfectant products which occurred earlier in the calendar year. Food Safety products increased 25% and Animal Safety products increased 20%, with broad-based gains recorded in both categories. Additionally, genomics had a significant increase in the current quarter, as a large research project conducted for the beef industry was completed during this period. For the year to date period, sales increased 18% with increases in genomics and Food Safety products offsetting a $700,000 decrease in sales of agricultural cleaners and disinfectants, resulting from the terminated distribution agreement. Neogen do Brasil revenues increased 22% in the quarter and 30% for the year; for both periods, increased sales of mycotoxin and dairy drug residue test kits offset a decrease in forensic test kit sales resulting from increased competition and customer losses caused by conversion to different testing methods. Neogen China sales increased 23% in the second quarter and 17% for the year to date period, each compared to the same periods inmore than tripled over the prior year led bydue to increased sales of the Company’s Acumediademand from commercial laboratories located in Brazil and Lab M brands of culture media, allergen test kits and genomics services. Revenues for Neogen India rose 48% for the quarter and 38% for the yearbusiness that shifted from U.S. labs to date, each off a small base, on higher sales of Animal Safety products for each period and stronger Food Safety kit sales for the year to date period.labs in Brazil.
Service revenue was $16.2 million in the quarter ended November 30, 2017, an increase of $2.5 million, or 18%, compared to $13.8$17.5 million in the second quarter of fiscal 2019, an increase of 8% over prior year second quarter revenues of $16.2 million, including a minor contribution from the prior year.September 2018 acquisition of Livestock Genetics Services. For the year to datesix month period, service revenue increased $5.8was $34.2 million, or 23%, toan increase of 11% over prior year revenues of $30.9 million, compared to the prior year. The growth, for both the quarter and yearmillion. Year to date periods,revenues were aided by the Livestock Genetics Services acquisition and the September 2017 acquisition of Neogen Australasia. The growth was led by increases in sales of genomic services to the global cattlebeef markets, and companion animalporcine markets increased testing volumes with a large poultry customer, and to a lesser extent, revenues from the acquisition of GeneSeek Australasia, in September 2017.Europe.
Revenues
Three Months ended November 30, | Three Months Ended November 30, | |||||||||||||||||||||||||||||||
2017 | 2016 | Increase/ (Decrease) | % | 2018 | 2017 | Increase/ (Decrease) | % | |||||||||||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||||||||||
Food Safety | ||||||||||||||||||||||||||||||||
Natural Toxins, Allergens & Drug Residues | $ | 18,989 | $ | 19,030 | $ | (41 | ) | (0 | )% | $ | 20,571 | $ | 18,989 | $ | 1,582 | 8 | % | |||||||||||||||
Bacterial & General Sanitation | 9,324 | 8,429 | 895 | 11 | % | 10,822 | 9,324 | 1,498 | 16 | % | ||||||||||||||||||||||
Dehydrated Culture Media & Other | 11,395 | 9,864 | 1,531 | 16 | % | |||||||||||||||||||||||||||
Culture Media & Other | 12,191 | 11,041 | 1,150 | 10 | % | |||||||||||||||||||||||||||
Rodenticides, Insecticides & Disinfectants | 6,126 | 1,052 | 5,074 | 482 | % | 5,943 | 6,126 | (183 | ) | (3 | )% | |||||||||||||||||||||
Genomics Services | 3,726 | 2,586 | 1,140 | 44 | % | 4,223 | 3,726 | 497 | 13 | % | ||||||||||||||||||||||
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$ | 49,560 | $ | 40,961 | $ | 8,599 | 21 | % | $ | 53,750 | $ | 49,206 | $ | 4,544 | 9 | % | |||||||||||||||||
Animal Safety | ||||||||||||||||||||||||||||||||
Life Sciences | $ | 2,394 | $ | 2,674 | $ | (280 | ) | (10 | )% | $ | 1,891 | $ | 2,394 | $ | (503 | ) | (21 | )% | ||||||||||||||
Veterinary Instruments & Disposables | 11,687 | 9,649 | 2,038 | 21 | % | 11,683 | 11,687 | (4 | ) | 0 | % | |||||||||||||||||||||
Animal Care & Other | 8,742 | 8,268 | 474 | 6 | % | 9,064 | 8,237 | 827 | 10 | % | ||||||||||||||||||||||
Rodenticides, Insecticides & Disinfectants | 18,046 | 19,004 | (958 | ) | (5 | )% | 18,673 | 17,786 | 887 | 5 | % | |||||||||||||||||||||
Genomics Services | 11,388 | 10,161 | 1,227 | 12 | % | 12,037 | 11,388 | 649 | 6 | % | ||||||||||||||||||||||
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$ | 52,257 | $ | 49,756 | $ | 2,501 | 5 | % | $ | 53,348 | $ | 51,492 | $ | 1,856 | 4 | % | |||||||||||||||||
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Total Revenues | $ | 101,817 | $ | 90,717 | $ | 11,100 | 12 | % | $ | 107,098 | $ | 100,698 | $ | 6,400 | 6 | % | ||||||||||||||||
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Six Months ended November 30, | ||||||||||||||||||||||||||||||||
2017 | 2016 | Increase/ (Decrease) | % | |||||||||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||||||
Food Safety | ||||||||||||||||||||||||||||||||
Natural Toxins, Allergens & Drug Residues | $ | 38,153 | $ | 36,637 | $ | 1,516 | 4 | % | ||||||||||||||||||||||||
Bacterial & General Sanitation | 18,443 | 16,992 | 1,451 | 9 | % | |||||||||||||||||||||||||||
Dehydrated Culture Media & Other | 21,971 | 19,408 | 2,563 | 13 | % | |||||||||||||||||||||||||||
Rodenticides, Insecticides & Disinfectants | 10,817 | 2,049 | 8,768 | 428 | % | |||||||||||||||||||||||||||
Genomics Services | 6,911 | 5,032 | 1,879 | 37 | % | |||||||||||||||||||||||||||
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$ | 96,295 | $ | 80,118 | $ | 16,177 | 20 | % | |||||||||||||||||||||||||
Animal Safety | ||||||||||||||||||||||||||||||||
Life Sciences | $ | 4,820 | $ | 4,929 | $ | (109 | ) | (2 | )% | |||||||||||||||||||||||
Veterinary Instruments & Disposables | 22,174 | 19,281 | 2,893 | 15 | % | |||||||||||||||||||||||||||
Animal Care & Other | 16,521 | 15,252 | 1,269 | 8 | % | |||||||||||||||||||||||||||
Rodenticides, Insecticides & Disinfectants | 35,638 | 36,685 | (1,047 | ) | (3 | )% | ||||||||||||||||||||||||||
Genomics Services | 21,625 | 18,097 | 3,528 | 19 | % | |||||||||||||||||||||||||||
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$ | 100,778 | $ | 94,244 | $ | 6,534 | 7 | % | |||||||||||||||||||||||||
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Total Revenues | $ | 197,073 | $ | 174,362 | $ | 22,711 | 13 | % | ||||||||||||||||||||||||
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The Company’s
Six Months Ended November 30, | ||||||||||||||||
2018 | 2017 | Increase/ (Decrease) | % | |||||||||||||
(in thousands) | ||||||||||||||||
Food Safety | ||||||||||||||||
Natural Toxins, Allergens & Drug Residues | $ | 39,409 | $ | 38,153 | $ | 1,256 | 3 | % | ||||||||
Bacterial & General Sanitation | 21,288 | 18,443 | 2,845 | 15 | % | |||||||||||
Culture Media & Other | 24,408 | 21,173 | 3,235 | 15 | % | |||||||||||
Rodenticides, Insecticides & Disinfectants | 12,569 | 10,817 | 1,752 | 16 | % | |||||||||||
Genomics Services | 8,259 | 6,911 | 1,348 | 20 | % | |||||||||||
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$ | 105,933 | $ | 95,497 | $ | 10,436 | 11 | % | |||||||||
Animal Safety | ||||||||||||||||
Life Sciences | $ | 3,971 | $ | 4,820 | $ | (849 | ) | (18 | )% | |||||||
Veterinary Instruments & Disposables | 22,087 | 22,174 | (87 | ) | 0 | % | ||||||||||
Animal Care & Other | 15,617 | 15,649 | (32 | ) | 0 | % | ||||||||||
Rodenticides, Insecticides & Disinfectants | 35,664 | 35,167 | 497 | 1 | % | |||||||||||
Genomics Services | 23,452 | 21,600 | 1,852 | 9 | % | |||||||||||
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$ | 100,791 | $ | 99,410 | $ | 1,381 | 1 | % | |||||||||
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Total Revenues | $ | 206,724 | $ | 194,907 | $ | 11,817 | 6 | % | ||||||||
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Food Safety segment revenues were $49.6 million in the quarter ended November 30, 2017, an increase of 21% compared to the same period in the prior year. For the six month period, Food Safety revenues increased 20% to $96.3 million. Organic growth for the segment was 9% for both the quarter and year to date periods, with the acquisitions of Quat-Chem and Rogama, each occurring in December 2016, contributing the remainder of the growth.
Natural Toxins, Allergens & Drug Residues sales were flat–Sales in the second quarter; revenues for the year to date periodthis category increased 4%. Sales of drug residue test kits, primarily used to detect the presence of antibiotics in raw milk, increased 18% in the second quarter as new products gained traction, particularly in international markets; for the year to date, dairy drug residue test kit revenues rose 9%. Allergen test kit sales rose 9% in the quarter8% and 13% for the six month period, as continued 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 11%; aflatoxin test kit sales increased 13% due to moderate outbreaks in U.S. and Brazilian corn crops while sales of deoxynivalenol (DON) decreased 34% 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, sales of natural toxin test kits decreased 2%.
Bacterial & General Sanitation sales rose 11% and 9%,3% for the three and six month periods ended November 30, 2017, respectively. Within this category,2018, respectively, compared to the Company’s AccuPoint sanitation monitoringsame periods in the prior year. For the second quarter, natural toxin test kit revenues increased 17%, due to strong sales of aflatoxin test kits in Brazil and DON test kits and readers in Canada, and sales of our allergens product line increased 23% for6%. This was partially offset by a 6% decrease in dairy drug residue test kits caused by lower demand in Europe and timing of distributor orders.
Bacterial & General Sanitation –Revenues in this category increased 16% in the second quarter and 19%15% for the year to date, onboth compared to the same periods in the prior year. In the second quarter, sales strength in both reader equipment and consumable samplers. Sales of test kits to detect pathogens increased 14% in the second quarter, led by strength in24%, as we continued to gain new business with ourListeriaproducts, including the Company’s newListeriaRight Now test kit that launched earlier in the fiscal year; pathogen sales increased 10% on a year to date basis. Revenues for the Company’s consumable product lines2018. Sales of products to detect spoilage organisms in processed foods increased 8%24%, due to equipment placements and 5% for the quarterrelated consumables, and year to date periods, respectively. Dehydrated sales of our AccuPoint sanitation monitoring product line increased 6%.
Culture Media & Other sales– Sales in this category increased 16%10% in the quarter ended November 30, 2017, led by a 26%2018 compared to the second quarter in the prior year; the year to date increase is 15%. In the second quarter, sales of worldwideNeogen Culture Media, formerly marketed as the Acumedia and Lab M salesbrands, increased 8%, aided in part by the August 2018 acquisition of Clarus Labs, which consists of the Colitag product and an 18% increasereports in the Company’s lineculture media product line. This category also includes forensic test kits sold within Brazil, which increased significantly in both the second quarter and for the year to date due to increased demand from commercial laboratories in that country and a shift in business from labs in the U.S. to labs in Brazil.
Rodenticides, Insecticides & Disinfectants –Revenues in this category decreased 3% in the second quarter of Acumedia dehydrated culture media.fiscal 2019 compared to the same period a year ago, due to order timing of rodenticides from customers in Mexico, as those sales were strong in the first quarter. Partially offsetting this were increases of disinfectant sales to customers in Europe, China and India. Year to date revenues increased 16% due to the strength of rodenticide sales in Mexico. The year to date increase also included the final shipment of a large insecticide order in the first quarter to a government health organization in Brazil; we do not believe this business, which was part of a bid won in fiscal 2018, will recur in fiscal 2019.
Genomics Services –Sales in this category increased 13%.
Rodenticides, Insecticides & Disinfectants products sold through the Company’s Food Safety operations recorded revenues of $6.1 million for the quarter compared to $1.1 million in last year’s second quarter; for the six month period, sales were $10.8 million compared to $2.0 million in the prior year. The increase was the result of revenues generated by Rogama and Quat-Chem, acquisitions completed in the second half of the 2017 fiscal year. The increase was partially offset by termination of a distribution agreement in January 2017, which resulted in a decline in sales for those distributed products of $283,000 in the second quarter and $716,000 for the year to date. Genomics Services revenue recorded in the Food Safety segment increased 44% and 37%20% for the three and six month periods respectively,ended November 30, 2018, respectively. The increase came primarily from higher sales in the European porcine and bovine markets; lower sales in Mexico partially offset this increase due primarily to growth of these services in Europe and Mexico.
Sales for the Company’s Animal Safety segment were $52.3 milliona large research project completed in the second quarter an increase of 5% over the same quarter a year ago. Revenues for the six month period increased 7% to $100.8 million compared to $94.2 millionfiscal 2018 that did not recur in the priorcurrent year. Organic growth
Animal Safety
Life Sciences –Sales in this segment was 4% and 7% in the three and six month periods, respectively; the GeneSeek Australasia acquisition in September 2017 contributed the remainder of the growth. Sales of Life Sciences productscategory decreased 10%21% in the second quarter, and 2% for the year to date period; the decrease in the second quarter is due to order timing of forensic test kits from a domestic commercial lab and increased competition.
Veterinary Instruments & Disposables revenues increased 21% in the three months ended November 30, 2017,as compared to the same period in the prior year;year, as a portion of forensic test kit sales shifted to our operations in Brazil. The products were formerly served by our Animal Safety operation in Lexington, KY. For the year to date, salesthe decrease in this product line is 18%.
Veterinary Instruments & Disposables –Revenues in this category rosewere flat compared to the prior year, for both the three and six month periods ended November 30, 2018. Protective wear sales decreased 25% in the second quarter, resulting from poor economic conditions in the dairy market; this decline was offset by 15%. For both periods, thea 7% increase is primarily the result ofin veterinary instruments sales, led by strength in detectable needles syringes and animal marking products. syringes.
Animal Care & Other –Sales of these products increased 10% in the second quarter but were flat for the year to date. For the second quarter, the growth was led by small animal supplements, which rose 49%, and antibiotics, up 24% due to order timing from a large distributor. The increase in the second quarter was offset by an overall decrease in the first quarter, primarily due to order timing from large distributors.
Rodenticides, Insecticides & Disinfectants –Revenues in this category increased 5% and 1% for the three and six month periods ended November 30, 2018, respectively. In the second quarter, insecticides sales increased 22% due to new private label business and increased demand in the U.S. Cleaners and disinfectants increased 7%, due to market share gains in the U.S., while rodenticide sales were flat, with new business earned offset by the loss of toll manufacturing business from the prior year.
Genomics Services –Sales in this category increased 6% in the second quarter and rose 8% in the six month period due to market share gains of vitamin injectables and increased sales of vaccines to a large distributor; additionally, last year’s results included sales credits totaling $1.1 million in the first quarter as the Company removed its popular canine thyroid replacement product from its distribution channels, after the FDA approved a new drug application for a competitive product.
Rodenticides, Insecticides & Disinfectant sales decreased 5% in the quarter and 3%9% for the year to date period, asboth compared to the termination of a distribution agreement with a manufacturer of cleaners and disinfectants in January 2017 resulted in lost sales of $1.6 million in the second quarter of the current fiscal year and $2.5 million forprior year; the year to date period. These losses wereincrease was aided by three months of sales from the September 2017 acquisition of Neogen Australasia. For both the three and six month periods, growth in the beef cattle markets was offset by a 14% increaserevenue decreases in rodenticide sales in the second quarter as the Company gained incremental business with several large customers; year to date sales rose by 9%. Genomics services revenues reported through the Animal Safety segment increased 12% in the quarter ended November 30, 2017 and 19% for the year to date period. Sales to the beef and dairy cattle,U.S. poultry and companion animalporcine markets, continuedresulting from a shift to experience strong growth, the result of focused saleslower priced chips and marketing efforts in these areas.services.
Gross Margin
Gross margin was 48.4%46.7% in the second quarter of fiscal 20182019 compared to 48.1%47.9% in the same quarter a year ago. Gross margins were positively impacted by improved cost inputs atThe decline in gross margin is due to product mix within the Company’s genomics operations; this improvement was somewhat offset by mix changes resulting from the three most recent acquisitions (Quat-Chem, Rogama, and GeneSeek Australasia), all of which haveAnimal Safety segment, with higher revenue increases on product lines with lower gross margins that are lower than the historical average for the Company.within this segment. Gross margin for the six month period ended November 30, 20172018 was 48.3%46.8% compared to 48.2%47.8% in the same period of the prior year.year, for the same reasons.
Operating Expenses
Operating expenses were $31.3$31.8 million in the second quarter, compared to $26.7$30.3 million in the same quarter of the prior year, an increase of $4.6$1.5 million, or 17%5%. Sales and marketing expenseexpenses increased $2.1$1.7 million, or 14%10%, primarily due to increases in salaries and related personnel costs, and shipping expense, which was consistent with the increase in revenues. Approximately $620,000 of the increase isand bad debt expense due to the three most recent acquisitions.prior year reversal of reserves for collected receivables. General and administrative expense increased $2.2 million,decreased $370,000, or 27%4%, which includes recognition of $240,000 of state economic incentive credits in the current quarter; no credits were recognized in the second quarter; recent acquisitions contributed approximately $715,000quarter of incrementalthe prior year. The largest increases in general and administrative were salaries, stock option expense, including the amortization of acquired
intangible assets. Additional increases were for salaries and investmentrecruiting fees, offset by a decrease in information technology, primarily from depreciation of equipment and outside contracted services.services related to IT projects, and lower amortization expense due toone-time adjustments related to acquisition valuations recorded in the second quarter of the prior year. Research and development expense increased $200,000, or 7% in the second quarter, primarily from, led by increases in salaries and personnel related expenses and outside contracted services related to new product development.costs. For the year to date, research and developmentoperating expenses increased 11%. Operating expenses for the six month period were $60.7$3.3 million, an increase of 16% over the same period last fiscal year. The recent acquisitions accounted for $2.6 million of the increase.or 6%.
Operating Income
Operating income was $18.0$18.2 million in the second quarter an increase of $1.1 million, or 7%,fiscal 2019, compared to $18.0 million in the same period of the prior year; year to date operating income of $16.9was $34.7 million compared to $34.4 million in the prior year. Expressed as a percentage of revenue,sales, operating income was 17.7%17.0% for the second quarter and 16.8% for the year to date, compared to 18.6%17.9% and 17.7%, respectively, in last year’s second quarter.the prior year. The decline in operating margin percentage for each period in the current fiscal year was duethe result of the lower gross margin percentage.
Other Income
Three Months Ended | Six Months Ended | |||||||||||||||
November 30, | November 30, | |||||||||||||||
(dollars in thousands) | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Interest income (net of expense) | $ | 1,028 | $ | 429 | $ | 1,955 | $ | 798 | ||||||||
Foreign currency transactions | (72 | ) | 497 | (458 | ) | 962 | ||||||||||
Royalty income | 37 | 75 | 59 | 75 | ||||||||||||
Deoxi contingent consideration | — | (50 | ) | (9 | ) | (99 | ) | |||||||||
Quat-Chem contingent consideration | 422 | — | 422 | — | ||||||||||||
Other | 40 | 104 | 144 | 131 | ||||||||||||
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Total Other Income | $ | 1,455 | $ | 1,055 | $ | 2,113 | $ | 1,867 | ||||||||
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The increase in interest income in both the three and six month periods of fiscal 2019 compared to the overall percentage increase in operating expenses, offset somewhat bysame periods a year ago was the result of higher gross margins. Forcash and marketable securities balances and rising interest rates on those balances. Other income resulting from foreign currency transactions was primarily the six month period, operating income was $34.4 million, an increaseresult of $2.8 million, or 9%, compared to operating income of $31.6 millionchanges in the prior year. Expressed as a percentagevalue of revenue, yearforeign currencies relative to date operating income was 17.5% of sales compared to 18.1%the U.S. dollar in the prior year.countries in which we operate.
Other Income and Income Tax
Other income in the second quarter of fiscal 2018 was $1.1 million compared to a loss of $80,000 in the second quarter of the prior year. Components of other income in this year’s second quarter included $497,000 of currency gains, $429,000 of interest income and $75,000 of royalty income. Last year’s fiscal second quarter included currency losses of $424,000, partially offset by interest income of $296,000 and $22,000 of royalty income. For the year to date period, other income was $1.9 million, primarily comprised of $962,000 of currency gains, $798,000 of interest income and $75,000 of royalty income. For the same period in fiscal 2017, other income was $412,000, which included interest income of $420,000 and royalty income of $67,000, partially offset by currency losses of $178,000. Expense
Income tax expense in the second quarter of fiscal 2019 was $3.7 million, an effective tax rate of 18.5% compared to $1.9 million, an effective tax rate of 10%10.0%, comparedin the same period of the prior year. Corporate tax reform enacted in December 2017 reduced the U.S. statutory income tax rate from 35% to 21%. The second quarter of the prior year second quarter expense of $5.6 million, an effective tax rate of 33%. The current fiscal year second quarter includesincluded a credit of $3.4$3.8 million resulting from excessto federal income tax expense for tax benefits resulting from the exercise of stock optionsoptions; this credit was $484,000 in the current year second quarter. The timing of stock option exercises by quarter is due to a tranche of options that expired in the adoptionfirst quarter of ASU2016-09; refer to Note 6 of the Company’s Consolidated Financial Statements for further information. Alsofiscal 2019; a different tranche expired in the second quarter an IRS examination of the Company’s federal income tax returns forin fiscal years 2014, 2015 and 2016 was concluded. As a result of the favorable outcome of the audit, the Company reversed a total of $816,000 from its reserve for uncertain tax positions, which had originally been accrued in prior fiscal years, with a corresponding credit to federal income tax expense.2018. For the first six months of fiscal 2018,2019, income tax expense was $7.2$5.6 million compared to $10.9$7.2 million in the prior year; the year to date effective tax rate was 20%15.1%, compared to an effective tax rate of 34%19.8% in the prior fiscal year. For the year to date period, the Company recorded a total credit of $3.8$2.8 million to federal income tax expense for excess tax benefits resulting from the exercise of stock options, duecompared to $4.2 million in the adoption of ASU2016-09.prior year.
Net Income
Net income attributable to Neogen increased 53% from $11.2was $16.1 million in the second quarter of fiscal 2019, compared to $17.1 million forin the three monthsame period ended November 30, 2017.in the prior year. Earnings in the prior year quarter included $4.2 million in tax benefits resulting from the exercise of stock options; this benefit was $484,000 in the current year quarter. For the year to date, period,net income increased 8% from $29.0 million to $31.3 million; six month net income was $29.0 million, a 38% increase over prior year net incomefavorably impacted by corporate tax reform, partially offset by lower overall benefit from the exercise of $21.0 million.stock options.
Financial Condition and Liquidity
The overall cash, cash equivalents and marketable securities position of the CompanyNeogen was $175.8$241.0 million at November 30, 20172018, compared to $143.6$210.8 million at May 31, 2017.2018. Approximately $27.4$32.6 million was generated from operations during the first six months of fiscal 2018.2019. Net cash proceeds of $16.4$10.3 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 six months of fiscal 2019. We spent $10.4$6.7 million for property, equipment and othernon-current assets duringin the first six months of fiscal 2018.2019.
Accounts receivable balances were $74.9$82.3 million at November 30, 2017,2018, an increase of $6.3$3.2 million, or 9%, compared to $68.6$79.1 million at May 31, 2017.2018. Days sales outstanding, a measurement of the time it takes to collect receivables, were 6263 days at November 30, 20172018, compared to 64 days at August 31, 2018 and 60 days at May 31, 2017.2018; the increase in the current year is attributable to the higher levels of sales at our international operations, which generally take more time to collect. All customer accounts are actively managed and no losses in excess of amounts reserved are currently expected.
Net inventory balances were $73.7$79.5 million at November 30, 2017,2018, an increase of $3.5 million, or 5%, compared to $73.1 million ata May 31, 2017. The Company2018 balance of $76.0 million; the increase is attributable to our increased revenues. We actively monitors itsmonitor our inventory levels and balancesbalance the need for adequate levels of product availability to minimize backorders with a desire to improve inventory turnover and efficiency levels. FormalWe have continued with our active programs have been institutedto improve our turnover in fiscal 2018 to improve inventory turnover.2019.
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 November 30, 2017,2018, 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 its plans to acquire other organizations, technologies or products that fit within the Company’sour mission statement. Accordingly, the Companywe may choose to issue equity securities or enter into other financing arrangements for a portion of itsour future financing needs.
PART I – FINANCIAL INFORMATION
The Company hasItem 3. Quantitative and Qualitative Disclosures About Market Risk
We have interest rate and foreign exchange rate risk exposure but no long-term fixed rate investments or borrowings. The Company’sOur primary interest rate risk is due to potential fluctuations of interest rates for variable rate borrowings (no long-term borrowings at November 30, 2017)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, the Brazilian real, the Mexican peso, the Chinese yuan, the Australian dollar, and to a lesser extent, the Indian rupee the Canadian dollar, and the AustralianCanadian dollar. When the U.S. dollar weakens against foreign currencies, the dollar value of revenues denominated in foreign currencies increases. When the U.S. dollar strengthens, the opposite situation occurs. Additionally, previously recognized revenues in the course of collection can be affected positively or negatively by changes in exchange rates. The Company enters into forward contracts to help mitigate the economic impact of fluctuations in certain currency exchange rates. These contracts are adjusted to fair value through earnings.
Neogen has assets, liabilities and operations outside of the United States, located in Scotland, England, Brazil, Mexico, China, India, Canada, and Australia where the functional currency is the British pound sterling, Brazilian real, Mexican peso, Chinese yuan, Indian rupee, Canadian dollar and the Australian dollar, respectively, and also transacts business throughout Europe in the euro. The Company’s investments in foreign subsidiaries are considered to be primarily long-term.
PART I – FINANCIAL INFORMATION
Item 4. Controls and Procedures
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 November 30, 20172018 was carried out under the supervision and with the participation of the Company’s management, including the 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 ControlsControl over Financial Reporting
No changes in our controlcontrols over financial reporting were identified as having occurred during the quarter ended November 30, 20172018 that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting.
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.
(a) Exhibit Index
3 | Articles of Incorporation, as restated | |
10 | Amended and Restated Credit Agreement dated as of November 30, 2018 between Registrant and JPMorgan Chase N.A. (incorporated by reference to Exhibit 10.A to the registrant’s Form8-K filed on December 6, 2018). | |
31.1 | Certification of | |
31.2 | Certification of | |
32 | Certification pursuant to 18 U.S.C. section 1350 | |
101.INS | XBRL Instance Document | |
101.SCH | XBRL Taxonomy Extension Schema Document | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF | XBRL Taxonomy Extension Definition Document | |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
Items 1A, 2, 3, 4, and 5 are not applicable or removed or reserved and have been omitted.
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.
NEOGEN CORPORATION | ||||||
(Registrant) |
Dated: January 5, 2018
Dated: December 28, 2018 | ||||||
| ||||||
/s/ John E. Adent | ||||||
John E. Adent | ||||||
President & Chief Executive Officer | ||||||
(Principal Executive Officer) |
Dated: January 5, 2018
Dated: December 28, 2018 | ||||||
/s/ Steven J. Quinlan | ||||||
Steven J. Quinlan | ||||||
Vice President & Chief Financial Officer | ||||||
(Principal Financial Officer and Principal Accounting Officer) |
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