UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM10-Q
(Mark One)
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended February 28, 2018.2019.
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 February 28, 2018,2019, there were 51,583,08552,120,422 shares of Common Stock outstanding.
NEOGEN CORPORATION AND SUBSIDIARIES
1
PART I – FINANCIAL INFORMATION
Item 1. Interim Consolidated Financial Statements
Neogen Corporation and Subsidiaries
(in thousands, except share and
per share amounts)
February 28, 2018 | May 31, 2017 | February 28, 2019 | May 31, 2018 | |||||||||||||
(Unaudited) | (Audited) | (Unaudited) | (Unaudited) | |||||||||||||
Assets | ||||||||||||||||
Current Assets | ||||||||||||||||
Cash and cash equivalents | $ | 82,066 | $ | 77,567 | $ | 93,576 | $ | 83,074 | ||||||||
Marketable securities (at fair value, which approximates cost) | 110,089 | 66,068 | 153,104 | 127,736 | ||||||||||||
Accounts receivable, less allowance of $1,750 and $2,000 | 73,209 | 68,576 | ||||||||||||||
Inventories, net | 77,506 | 73,144 | ||||||||||||||
Accounts receivable, less allowance of $1,700 and $1,550 | 80,011 | 79,086 | ||||||||||||||
Inventories | 84,870 | 76,005 | ||||||||||||||
Prepaid expenses and other current assets | 9,334 | 7,606 | 11,041 | 9,888 | ||||||||||||
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Total Current Assets | 352,204 | 292,961 | 422,602 | 375,789 | ||||||||||||
Property and Equipment, net | 72,514 | 61,748 | ||||||||||||||
Net Property and Equipment | 76,453 | 73,069 | ||||||||||||||
Other Assets | ||||||||||||||||
Goodwill | 99,478 | 104,759 | 104,077 | 99,558 | ||||||||||||
Othernon-amortizable intangible assets | 15,011 | 14,323 | 15,658 | 14,783 | ||||||||||||
Customer-based intangibles, net of accumulated amortization of $23,846 and $20,846 at February 28, 2018 and May 31, 2017 | 33,518 | 35,983 | ||||||||||||||
Othernon-current assets, net of accumulated amortization of $11,893 and $9,931 at February 28, 2018 and May 31, 2017 | 22,876 | 18,635 | ||||||||||||||
Amortizable customer-based intangibles, net of accumulated amortization of $27,184 and $24,579 at February 28, 2019 and May 31, 2018, respectively | 30,007 | 31,841 | ||||||||||||||
Othernon-current assets, net of accumulated amortization of $12,304 and $12,470 at February 28, 2019 and May 31, 2018, respectively | 23,788 | 22,969 | ||||||||||||||
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Total Assets | $ | 595,601 | $ | 528,409 | $ | 672,585 | $ | 618,009 | ||||||||
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Liabilities and Equity | ||||||||||||||||
Current Liabilities | ||||||||||||||||
Accounts payable | $ | 19,654 | $ | 16,244 | $ | 18,952 | $ | 20,750 | ||||||||
Accrued compensation | 5,469 | 5,002 | 5,391 | 6,065 | ||||||||||||
Income taxes | 960 | 936 | — | 165 | ||||||||||||
Other accruals | 11,210 | 13,820 | 9,925 | 11,708 | ||||||||||||
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Total Current Liabilities | 37,293 | 36,002 | 34,268 | 38,688 | ||||||||||||
Deferred Income Taxes | 11,400 | 17,048 | 14,211 | 14,103 | ||||||||||||
Non-Current Liabilities | 4,973 | 3,602 | ||||||||||||||
OtherNon-Current Liabilities | 4,190 | 5,043 | ||||||||||||||
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Total Liabilities | 53,666 | 56,652 | 52,669 | 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, 51,583,085 and 50,932,489 shares issued and outstanding at February 28, 2018 and May 31, 2017, respectively | 8,253 | 8,149 | ||||||||||||||
Common stock, $0.16 par value, 120,000,000 shares authorized, 52,120,422 and 51,735,732 shares issued and outstanding at February 28, 2019 and May 31, 2018, respectively | 8,339 | 8,278 | ||||||||||||||
Additionalpaid-in capital | 197,246 | 174,742 | 217,274 | 202,572 | ||||||||||||
Accumulated other comprehensive loss | (5,303 | ) | (7,203 | ) | (9,129 | ) | (9,746 | ) | ||||||||
Retained earnings | 341,459 | 295,926 | 403,432 | 359,071 | ||||||||||||
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Total Neogen Corporation Stockholders’ Equity | 541,655 | 471,614 | ||||||||||||||
Non-controlling interest | 280 | 143 | ||||||||||||||
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Total Equity | 541,935 | 471,757 | ||||||||||||||
Total Stockholders’ Equity | 619,916 | 560,175 | ||||||||||||||
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Total Liabilities and Equity | $ | 595,601 | $ | 528,409 | $ | 672,585 | $ | 618,009 | ||||||||
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See notes to interim consolidated financial statements.
2
Neogen Corporation and Subsidiaries
Consolidated Statements of Income (unaudited)
(in thousands, except per share amounts)
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||
February 28, | February 28, | Three Months Ended February 28, | Nine Months Ended February 28, | |||||||||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2019 | 2018 | 2019 | 2018 | |||||||||||||||||||||||||
Revenues | ||||||||||||||||||||||||||||||||
Product revenues | $ | 78,142 | $ | 73,964 | $ | 244,298 | $ | 223,170 | $ | 77,375 | $ | 77,184 | $ | 249,897 | $ | 241,200 | ||||||||||||||||
Service revenues | 17,750 | 14,421 | 48,667 | 39,577 | 20,325 | 17,719 | 54,527 | 48,611 | ||||||||||||||||||||||||
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Total Revenues | 95,892 | 88,385 | 292,965 | 262,747 | 97,700 | 94,903 | 304,424 | 289,811 | ||||||||||||||||||||||||
Cost of Revenues | ||||||||||||||||||||||||||||||||
Cost of product revenues | 40,352 | 38,816 | 124,785 | 113,241 | 41,902 | 40,283 | 132,157 | 124,520 | ||||||||||||||||||||||||
Cost of service revenues | 10,019 | 8,689 | 27,517 | 24,556 | 11,170 | 10,019 | 30,877 | 27,517 | ||||||||||||||||||||||||
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Total Cost of Revenues | 50,371 | 47,505 | 152,302 | 137,797 | 53,072 | 50,302 | 163,034 | 152,037 | ||||||||||||||||||||||||
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Gross Margin | 45,521 | 40,880 | 140,663 | 124,950 | 44,628 | 44,601 | 141,390 | 137,774 | ||||||||||||||||||||||||
Operating Expenses | ||||||||||||||||||||||||||||||||
Sales and marketing | 17,492 | 15,340 | 52,331 | 45,824 | 16,722 | 16,572 | 52,454 | 49,442 | ||||||||||||||||||||||||
General and administrative | 9,280 | 8,548 | 29,096 | 25,094 | 10,018 | 9,280 | 30,337 | 29,096 | ||||||||||||||||||||||||
Research and development | 2,836 | 2,641 | 8,901 | 8,087 | 3,249 | 2,836 | 9,235 | 8,901 | ||||||||||||||||||||||||
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Total Operating Expenses | 29,608 | 26,529 | 90,328 | 79,005 | 29,989 | 28,688 | 92,026 | 87,439 | ||||||||||||||||||||||||
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Operating Income | 15,913 | 14,351 | 50,335 | 45,945 | 14,639 | 15,913 | 49,364 | 50,335 | ||||||||||||||||||||||||
Other Income | ||||||||||||||||||||||||||||||||
Interest income | 524 | 271 | 1,322 | 690 | 1,335 | 524 | 3,290 | 1,322 | ||||||||||||||||||||||||
Other income | 844 | 1,105 | 1,913 | 1,098 | 649 | 844 | 807 | 1,913 | ||||||||||||||||||||||||
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Total Other Income | 1,368 | 1,376 | 3,235 | 1,788 | 1,984 | 1,368 | 4,097 | 3,235 | ||||||||||||||||||||||||
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Income Before Taxes | 17,281 | 15,727 | 53,570 | 47,733 | 16,623 | 17,281 | 53,461 | 53,570 | ||||||||||||||||||||||||
Provision for Income Taxes | 700 | 5,350 | 7,900 | 16,250 | 3,550 | 700 | 9,100 | 7,900 | ||||||||||||||||||||||||
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Net Income | 16,581 | 10,377 | 45,670 | 31,483 | 13,073 | 16,581 | 44,361 | 45,670 | ||||||||||||||||||||||||
Net (Income)/Loss Attributable toNon-Controlling Interest | 5 | (90 | ) | (70 | ) | (163 | ) | |||||||||||||||||||||||||
Net (Income) Loss Attributable toNon-Controlling Interest | — | 5 | — | (70 | ) | |||||||||||||||||||||||||||
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Net Income Attributable to Neogen | $ | 16,586 | $ | 10,287 | $ | 45,600 | $ | 31,320 | $ | 13,073 | $ | 16,586 | $ | 44,361 | $ | 45,600 | ||||||||||||||||
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Net Income Attributable to Neogen Per Share | ||||||||||||||||||||||||||||||||
Basic | $ | 0.32 | $ | 0.20 | $ | 0.89 | $ | 0.62 | $ | 0.25 | $ | 0.32 | $ | 0.86 | $ | 0.89 | ||||||||||||||||
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Diluted | $ | 0.32 | $ | 0.20 | $ | 0.88 | $ | 0.61 | $ | 0.25 | $ | 0.32 | $ | 0.85 | $ | 0.88 | ||||||||||||||||
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See notes to interim consolidated financial statements.
3
Neogen Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income (unaudited)
(in thousands)
Three Months Ended | Nine Months Ended | |||||||||||||||
February 28, | February 28, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Net Income | $ | 16,581 | $ | 10,377 | $ | 45,670 | $ | 31,483 | ||||||||
Other comprehensive income (loss), net of tax: currency translation adjustments | 1,163 | 441 | 1,900 | (3,743 | ) | |||||||||||
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Comprehensive income | 17,744 | 10,818 | 47,570 | 27,740 | ||||||||||||
Comprehensive loss (income) attributable tonon-controlling interest | 5 | (90 | ) | (70 | ) | (163 | ) | |||||||||
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Comprehensive income attributable to Neogen | $ | 17,749 | $ | 10,728 | $ | 47,500 | $ | 27,577 | ||||||||
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Three Months Ended February 28, | Nine Months Ended February 28, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Net income | $ | 13,073 | $ | 16,581 | $ | 44,361 | $ | 45,670 | ||||||||
Other comprehensive income, net of tax: | 3,105 | 1,163 | 617 | 1,900 | ||||||||||||
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Comprehensive income | 16,178 | 17,744 | 44,978 | 47,570 | ||||||||||||
Comprehensive (income) loss attributable tonon-controlling interest | — | 5 | — | (70 | ) | |||||||||||
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Comprehensive income attributable to Neogen Corporation | $ | 16,178 | $ | 17,749 | $ | 44,978 | $ | 47,500 | ||||||||
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See notes to interim consolidated financial statements.
4
Neogen Corporation and Subsidiaries
Consolidated Statement of Equity (unaudited)
(in thousands)
Accumulated | ||||||||||||||||||||||||||||
Additional | Other | Non- | ||||||||||||||||||||||||||
Common Stock | Paid-in | Comprehensive | Retained | controlling | ||||||||||||||||||||||||
Shares | Amount | Capital | Income (Loss) | Earnings | Interest | Total | ||||||||||||||||||||||
Balance, May 31, 2017 | 50,932 | $ | 8,149 | $ | 174,742 | $ | (7,203 | ) | $ | 295,926 | $ | 143 | $ | 471,757 | ||||||||||||||
Issuance of shares under share-based compensation plan | 631 | 101 | 21,456 | 21,557 | ||||||||||||||||||||||||
Issuance of shares under employee stock purchase plan | 20 | 3 | 1,048 | 1,051 | ||||||||||||||||||||||||
Conversion of minority interest to retained earnings | (67 | ) | 67 | — | ||||||||||||||||||||||||
Net income for the nine months ended February 28, 2018 | 45,600 | 70 | 45,670 | |||||||||||||||||||||||||
Other comprehensive income | 1,900 | 1,900 | ||||||||||||||||||||||||||
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Balance February 28, 2018 | 51,583 | $ | 8,253 | $ | 197,246 | $ | (5,303 | ) | $ | 341,459 | $ | 280 | $ | 541,935 | ||||||||||||||
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Common Stock | Additional Paid-in | Accumulated Other Comprehensive | Retained | |||||||||||||||||||||
Shares | Amount | Capital | (Loss) | 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 | 251 | 40 | 8,433 | — | — | 8,473 | ||||||||||||||||||
Issuance of shares under employee stock purchase plan | 8 | 2 | 517 | — | — | 519 | ||||||||||||||||||
Net income for the three months ended August 31, 2018 | — | — | — | — | 15,237 | 15,237 | ||||||||||||||||||
Other comprehensive (loss) | — | — | — | (2,778 | ) | — | (2,778 | ) | ||||||||||||||||
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Balance at August 31, 2018 | 51,995 | $ | 8,320 | $ | 211,522 | $ | (12,524 | ) | $ | 374,308 | $ | 581,626 | ||||||||||||
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Issuance of shares under share-based compensation plan | 87 | 14 | 4,093 | — | — | 4,107 | ||||||||||||||||||
Net income for the three months ended November 30, 2018 | — | — | — | — | 16,051 | 16,051 | ||||||||||||||||||
Other comprehensive income | — | — | — | 290 | — | 290 | ||||||||||||||||||
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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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Issuance of shares under share-based compensation plan | 78 | 12 | 4,146 | — | — | 4,158 | ||||||||||||||||||
Issuance of shares under employee stock purchase plan | 10 | 1 | 640 | — | — | 641 | ||||||||||||||||||
Shares repurchased | (50 | ) | (8 | ) | (3,127 | ) | — | — | (3,135 | ) | ||||||||||||||
Net income for the three months ended February 28, 2019 | — | — | — | — | 13,073 | 13,073 | ||||||||||||||||||
Other comprehensive income | — | — | — | 3,105 | — | 3,105 | ||||||||||||||||||
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Balance at February 28, 2019 | 52,120 | $ | 8,339 | $ | 217,274 | $ | (9,129 | ) | $ | 403,432 | $ | 619,916 | ||||||||||||
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See notes to interim consolidated financial statements.
5
Neogen Corporation and Subsidiaries
Consolidated Statements of Cash Flows (unaudited)
(in thousands)
Nine Months Ended | ||||||||||||||||
February 28, | Nine Months Ended February 28, | |||||||||||||||
2018 | 2017 | 2019 | 2018 | |||||||||||||
Cash Flows From Operating Activities | ||||||||||||||||
Net Income | $ | 45,670 | $ | 31,483 | $ | 44,361 | $ | 45,670 | ||||||||
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 | 12,682 | 10,691 | 13,028 | 12,682 | ||||||||||||
Share-based compensation | 3,692 | 3,932 | 4,137 | 3,692 | ||||||||||||
Excess income tax benefit from the exercise of stock options (see note 5) | — | (3,671 | ) | |||||||||||||
Change in operating assets and liabilities, net of business acquisitions: | ||||||||||||||||
Accounts receivable | (4,013 | ) | 5,916 | (898 | ) | (4,013 | ) | |||||||||
Inventories | (3,859 | ) | (9,460 | ) | (8,745 | ) | (3,859 | ) | ||||||||
Prepaid expenses and other current assets | (7,316 | ) | 717 | (1,463 | ) | (7,316 | ) | |||||||||
Accounts payable, accruals and other changes | (280 | ) | 5,580 | (7,455 | ) | (280 | ) | |||||||||
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Net Cash Provided By Operating Activities | 46,576 | 45,188 | ||||||||||||||
Cash Flows Used In Investing Activities | ||||||||||||||||
Net Cash From Operating Activities | 42,965 | 46,576 | ||||||||||||||
Cash Flows From Investing Activities | ||||||||||||||||
Purchases of property, equipment and othernon-current intangible assets | (16,297 | ) | (13,002 | ) | (11,877 | ) | (16,297 | ) | ||||||||
Proceeds from the sale of marketable securities | 211,327 | 102,957 | 290,827 | 211,327 | ||||||||||||
Purchases of marketable securities | (255,348 | ) | (115,117 | ) | (316,195 | ) | (255,348 | ) | ||||||||
Business acquisitions, net of cash acquired | (468 | ) | (34,027 | ) | (6,388 | ) | (468 | ) | ||||||||
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Net Cash Used In Investing Activities | (60,786 | ) | (59,189 | ) | (43,633 | ) | (60,786 | ) | ||||||||
Cash Flows From Financing Activities | ||||||||||||||||
Exercise of stock options and issuance of employee stock purchase plan shares | 13,752 | 18,916 | ||||||||||||||
Repurchase of common stock | (3,135 | ) | — | |||||||||||||
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Cash Flows From Financing Activities | ||||||||||||||||
Exercise of stock options | 18,916 | 15,844 | ||||||||||||||
Excess income tax benefit from the exercise of stock options | — | 3,671 | ||||||||||||||
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Net Cash Provided By Financing Activities | 18,916 | 19,515 | ||||||||||||||
Effect of Exchange Rates on Cash | (207 | ) | (888 | ) | ||||||||||||
Net Cash From Financing Activities | 10,617 | 18,916 | ||||||||||||||
Effect of Exchange Rate on Cash | 553 | (207 | ) | |||||||||||||
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Net Increase In Cash and Cash Equivalents | 4,499 | 4,626 | 10,502 | 4,499 | ||||||||||||
Cash And Cash Equivalents At Beginning Of Period | 77,567 | 55,257 | ||||||||||||||
Cash and Cash Equivalents, Beginning of Period | 83,074 | 77,567 | ||||||||||||||
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Cash And Cash Equivalents At End Of Period | $ | 82,066 | $ | 59,883 | ||||||||||||
Cash and Cash Equivalents, End of Period | $ | 93,576 | $ | 82,066 | ||||||||||||
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See notes to interim consolidated financial statements.
6
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 the three and nine month periods ended February 28, 20182019 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’sour 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:
February 28, 2018 | May 31, 2017 | |||||||
(in thousands) | ||||||||
Raw materials | $ | 35,774 | $ | 33,190 | ||||
Work-in-process | 6,231 | 4,831 | ||||||
Finished and purchased goods | 35,501 | 35,123 | ||||||
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$ | 77,506 | $ | 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 February 28, | Nine Months Ended February 28, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
(in thousands, except per share amounts) | ||||||||||||||||
Numerator for basic and diluted net income per share: | ||||||||||||||||
Net income attributable to Neogen | $ | 16,586 | $ | 10,287 | $ | 45,600 | $ | 31,320 | ||||||||
Denominator for basic net income per share: | ||||||||||||||||
Weighted average shares | 51,537 | 50,746 | 51,253 | 50,438 | ||||||||||||
Effect of dilutive stock options | 700 | 633 | 761 | 723 | ||||||||||||
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Denominator for diluted net income per share | 52,237 | 51,379 | 52,014 | 51,161 | ||||||||||||
Net income attributable to Neogen per share: | ||||||||||||||||
Basic | $ | 0.32 | $ | 0.20 | $ | 0.89 | $ | 0.62 | ||||||||
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Diluted | $ | 0.32 | $ | 0.20 | $ | 0.88 | $ | 0.61 | ||||||||
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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 in this Formreflect the December 29, 201710-Q4-for-3 reflect amountsstock split as if the splitit took place at the beginning of the periods period
presented.
Recently Adopted Accounting Standards
Revenue Recognition
7
4. SEGMENT INFORMATION
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, culture media and related products used by food producers and processors to detect harmful natural toxins, foodborne bacteria, allergens and levels of general sanitation. The Animal Safety segment is primarily engaged in the development, production and marketing of products dedicated to animal safety, including a complete line of consumable products marketed to veterinarians and animal health product distributors; this segment also provides genomic identification and related interpretive bioinformatic services. Additionally, the Animal Safety segment produces and markets rodenticides, cleaners, disinfectants and insecticides to assist in the control of rodents, insects and disease in and around agricultural, food production and other facilities.
Neogen’s 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 February 28, 2018 |
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Product revenues to external customers | $ | 42,618 | $ | 35,524 | $ | — | $ | 78,142 | ||||||||
Service revenues to external customers | 5,027 | 12,723 | — | 17,750 | ||||||||||||
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Total revenues to external customers | 47,645 | 48,247 | — | 95,892 | ||||||||||||
Operating income (loss) | 8,258 | 8,493 | (838 | ) | 15,913 | |||||||||||
Total assets | 188,075 | 215,371 | 192,155 | 595,601 | ||||||||||||
As of and for the three months ended February 28, 2017 |
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Product revenues to external customers | $ | 39,318 | $ | 34,646 | $ | — | $ | 73,964 | ||||||||
Service revenues to external customers | 3,631 | 10,790 | — | 14,421 | ||||||||||||
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Total revenues to external customers | 42,949 | 45,436 | — | 88,385 | ||||||||||||
Operating income (loss) | 7,403 | 7,743 | (795 | ) | 14,351 | |||||||||||
Total assets | 183,419 | 215,243 | 108,636 | 507,298 |
8
Food Safety | Animal Safety | Corporate and Eliminations (1) | Total | |||||||||||||
(in thousands) | ||||||||||||||||
For the nine months ended February 28, 2018 | ||||||||||||||||
Product revenues to external customers | $ | 129,621 | $ | 114,677 | $ | — | $ | 244,298 | ||||||||
Service revenues to external customers | 14,319 | 34,348 | — | 48,667 | ||||||||||||
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Total revenues to external customers | 143,940 | 149,025 | — | 292,965 | ||||||||||||
Operating income (loss) | 25,704 | 27,691 | (3,060 | ) | 50,335 | |||||||||||
For the nine months ended February 28, 2017 | ||||||||||||||||
Product revenues to external customers | $ | 112,592 | $ | 110,578 | $ | — | $ | 223,170 | ||||||||
Service revenues to external customers | 10,475 | 29,102 | — | 39,577 | ||||||||||||
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Total revenues to external customers | 123,067 | 139,680 | — | 262,747 | ||||||||||||
Operating income (loss) | 24,286 | 24,616 | (2,957 | ) | 45,945 |
9
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 nine months ended February 28, 2018 follows:
Weighted- | ||||||||
Average | ||||||||
Shares | Exercise Price | |||||||
(in thousands) | ||||||||
Options outstanding June 1, 2017 | 2,708 | $ | 32.88 | |||||
Granted | 819 | 59.26 | ||||||
Exercised | (668 | ) | 28.23 | |||||
Forfeited | (144 | ) | 37.31 | |||||
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Options outstanding February 28, 2018 | 2,715 | 41.75 |
During the three and nine month periods ended February 28, 2018 and 2017, the Company recorded $1,026,000 and $1,198,000 and $3,692,000 and $3,932,000, 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 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. 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. 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 primarily result from 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 been incurred, the revised guidance requires companies to recognize an allowance for credit losses for the difference between the
amortized cost basis of a financial instrument and the amount of amortized cost that the company expects to collect over the instrument’s contractual life. 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. We do not believe adoption of this ASU increasedguidance 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 $331,000banks or broker-dealers at February 28, 2019, consisting of short-term domestic certificates of deposit and commercial paper rated at least A1/P1 (short-term) and A/A2 (long-term) with maturities between 91 days and two years. These securities are classified as available for sale. The primary objective of our short-term investment activity is to preserve capital for the three monthspurpose of funding operations, capital expenditures and business acquisitions; short-term investments are not entered into for trading or speculative purposes. These securities are recorded at fair value (that approximates cost) based on recent trades 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 preparation of these financial statements requires that management make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an ongoing basis, management evaluates the estimates, including, but not limited to, variable consideration related to revenue recognition, allowances for doubtful accounts, the market value of, and demand for, inventories, stock-based compensation, provision for income taxes and related balance sheet accounts, accruals, goodwill and other intangible assets. These estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
There have been no significant changes to the critical accounting policies and estimates disclosed in our Annual Report on Form10-K for the fiscal year ended February 28,May 31, 2018, except for the new revenue recognition standard the Company adopted effective June 1, 2018. See the 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 the reductionwell 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 corporate tax rate frommarketplace or other competitive situations.
Goodwill and Other Intangible Assets
Goodwill represents the tax reform enactedexcess of purchase price over fair value of tangible net assets of acquired businesses after amounts are allocated to other identifiable intangible assets. Other intangible assets include customer relationships, trademarks, licenses, trade names, covenantsnot-to-compete and patents. Customer-based intangibles are amortized on either an accelerated or straight-line basis, reflecting the pattern in December 2017 resultedwhich 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 partial reversalreview. The carrying value of tax benefit previously recorded ata long-lived asset is considered impaired when the higher corporate rate inanticipated separately identifiable undiscounted cash flows over the first and second quartersremaining useful life of the current fiscal year; year to date, income tax expense decreased by $3,463,000 as a result of adoptionasset indicate that the carrying amount of the ASU.
The weighted-averageasset may not be recoverable. In such an event, fair value per shareis 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 $14.44 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 were subject to revisions as we completed our analysis of the Tax Act, collected and prepared necessary data, and interpreted any additional guidance issued by the Internal Revenue Service. Prior to December 22, 2018, immaterial adjustments to these provisions were recorded to income 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 (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 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, andthe Company on June 1, 2018. We adopted this standard using the full retrospective approach. This approach was chosen to provide appropriate comparisons against our prior year financial statements; accordingly, historical information for the year ended May 31, 2018, including interim periods within those years, beginning after December 15, 2017. The guidance permits two methods of adoption: a full retrospective methodtherein, has been adjusted to each prior reporting period presented or a modified retrospective approach with the cumulative effect of initially applying the guidance recognized at the date of initial application. The Company has formed an internal teamconform to implement the new standard. This team has
Prior to the adoption, we identified all revenue streams at each significant subsidiary and is currently reviewingreviewed contracts to evaluate the potential impact of adopting the new standard on the Company’sour revenue recognition policies, procedures and control framework and ultimately on the Company’sour consolidated financial statements and related disclosures. TheIn 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.
Under Topic 606, the Company will adopt this ASU on June 1, 2018 usingdetermines the modified retrospective approach.
10
In February 2016,Identification of the FASB issued ASU No.2016-02—Leasescontract with a customer;
Identification of the performance obligations in the contract;
Determination of the transaction price;
Allocation of the transaction price to increase transparencythe performance obligations in the contract; and comparability among organizations by recognizing lease assets
Recognition of revenue when or as the Company satisfies the performance obligations.
Essentially all of 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 of 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 lease liabilitiesservices in an amount that reflects the consideration the Company expects to receive in exchange for those products or services. The collectability of consideration on the contract is reasonably assured before revenue is recognized. To the extent that customer payment has been received before all recognition criteria are met, these revenues are initially deferred in other accruals on the balance sheet and 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 select 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 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,governmental authorities. The Company’s terms and conditions of sale generally do not provide for returns of product or reperformance of service except in the case of quality or warranty issues. These situations are infrequent; due to immateriality of the amount, warranty claims are recorded in the period incurred.
We derive revenue from two primary sources — product revenue and service revenue.
Product revenue consists primarily of shipments of:
Diagnostic test kits, culture media and related products used by food producers and processors to detect harmful natural toxins, foodborne bacteria, allergens and levels of general sanitation;
Consumable products marketed to veterinarians retailers, livestock producers and animal health product distributors; and
Rodenticides, disinfectants and insecticides to assist in the control of rodents, insects and disease in and around agricultural, food production and other facilities.
Revenues for our products are recognized and invoiced when the product is shipped to the customer.
Service revenue consists primarily of:
Genomic identification and related interpretive bioinformatic services; and
Other commercial laboratory services.
Revenues for our genomics and commercial laboratory services are recognized and invoiced when the applicable laboratory service is performed and the results are conveyed to the customer.
Payment terms for products and services are generally 30 to 60 days.
The following table presents disaggregated revenue by major product and service categories for the three and nine months ended February 28, 2019 and is currently2018:
Three Months Ended February 28, | Nine Months Ended February 28, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
(in thousands) | (in thousands) | |||||||||||||||
Food Safety | ||||||||||||||||
Natural Toxins, Allergens & Drug Residues | $ | 18,612 | $ | 16,807 | $ | 58,021 | $ | 54,960 | ||||||||
Bacterial & General Sanitation | 9,519 | 8,992 | 30,807 | 27,435 | ||||||||||||
Culture Media & Other | 11,893 | 10,179 | 36,302 | 31,353 | ||||||||||||
Rodenticides, Insecticides & Disinfectants | 5,953 | 7,359 | 18,521 | 18,175 | ||||||||||||
Genomics Services | 5,136 | 3,976 | 13,395 | 10,887 | ||||||||||||
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$ | 51,113 | $ | 47,313 | $ | 157,046 | $ | 142,810 | |||||||||
Animal Safety | ||||||||||||||||
Life Sciences | $ | 1,823 | $ | 2,769 | $ | 5,794 | $ | 7,589 | ||||||||
Veterinary Instruments & Disposables | 10,682 | 10,630 | 32,769 | 32,804 | ||||||||||||
Animal Care & Other | 6,823 | 7,245 | 22,439 | 22,894 | ||||||||||||
Rodenticides, Insecticides & Disinfectants | 13,256 | 14,255 | 48,921 | 49,422 | ||||||||||||
Genomics Services | 14,003 | 12,691 | 37,455 | 34,292 | ||||||||||||
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$ | 46,587 | $ | 47,590 | $ | 147,378 | $ | 147,001 | |||||||||
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Total Revenues | $ | 97,700 | $ | 94,903 | $ | 304,424 | $ | 289,811 | ||||||||
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Restatement of Previously Issued Financial Statements
The Company has historically classified certain variable consideration components resulting from volume rebates, distributor support, and other marketing discounts as cost of revenues or sales and marketing expense in our consolidated financial statements of income. These amounts should have been classified as contra revenue in product or service revenues. The Company had determined in prior periods that the misstatements were clearly immaterial, individually and in the processaggregate, to each of evaluating its lessee and lessor arrangements to determine the impact of this amendment on its consolidated financial condition and results of operations. This evaluation includes a review of revenue through leasing arrangementsreporting 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 and year 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 income tax effectsrevisions on the line items within our unaudited consolidated statements of awards in the income statement when the awards vest or are settled, thus eliminating additionalpaid-in capital pools. The guidance also allows for the employer to repurchase more of an employee’s shares for tax withholding purposes without triggering liability accounting. In addition, the guidance allows for a policy election to account for forfeitures as they occur rather than on an estimated basis. The Company adopted this standard effective June 1, 2017. Adoption of this ASU increased income tax expense by $331,000 for the three and nine months ended February 28, 2018 are as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
February 28, 2018 | 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 |
Presented below are the reductioneffects of the revisions on the line items within our previously issued consolidated statements of income for the years ended May 31, 2018 and 2017. Revised consolidated statements of income related to these periods are presented in this Form10-Q and the Form10-K to be filed in the corporate tax rate from the tax reform enacted in December 2017 resulted in a partial reversal of tax benefit previously recorded at the higher corporate rate in the first and second quarters of the current fiscal year; year to date, income tax expense decreased by $3,463,000 as a result of adoption of the ASU.
In June 2016, the FASB issued ASU No.2016-13—Measurement of Credit Losses on Financial Instruments, which changes how companies measure credit losses on most financial instruments measured at amortized cost and certain other instruments, such as loans, receivables and held-to-maturity debt securities. Rather than generally recognizing credit losses when it is probable that the loss has been incurred, the revised guidance requires companies to recognize an allowance for credit losses for the difference between the amortized cost basis of a financial instrument and the amount of amortized cost the Company expects to collect over the instrument’s contractual life. ASU2016-13 is effective for fiscal periods beginning after December 15, 2019 and must be adopted as a cumulative effect adjustment to retained earnings. Early adoption is permitted. The Company does not believe the adoptionsucceeding period of this guidance will have anfiscal year.
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 itsour audited consolidated financial statements.
In August 2016, the FASB issued ASUNo. 2016-15— Classificationbalance sheets as of Certain Cash ReceiptsMay 31, 2018 and Cash Payments (a consensus2017 and no impact on our unaudited consolidated statements of the Emerging Issues Task Force). The amendments in ASU2016-15 address eight specific cash flow issues and apply to all entities that are required to present a statementequity or unaudited consolidated statements of cash flows for the three and nine month periods 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:
February 28, 2019 | May 31, 2018 | |||||||
(in thousands) | ||||||||
Raw materials | $ | 38,944 | $ | 36,702 | ||||
Work-in-process | 6,758 | 5,993 | ||||||
Finished and purchased goods | 39,168 | 33,310 | ||||||
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$ | 84,870 | $ | 76,005 | |||||
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3. NET INCOME PER SHARE
The calculation of net income per share attributable to Neogen Corporation follows:
Three Months Ended February 28, | Nine Months Ended February 28, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
(in thousands, except per share amounts) | ||||||||||||||||
Numerator for basic and diluted net income per share: | ||||||||||||||||
Net income attributable to Neogen | $ | 13,073 | $ | 16,586 | $ | 44,361 | $ | 45,600 | ||||||||
Denominator for basic net income per share: | ||||||||||||||||
Weighted average shares | 52,071 | 51,537 | 51,849 | 51,253 | ||||||||||||
Effect of dilutive stock options | 401 | 700 | 599 | 761 | ||||||||||||
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Denominator for diluted net income per share | 52,472 | 52,237 | 52,448 | 52,014 | ||||||||||||
Net income attributable to Neogen per share: | ||||||||||||||||
Basic | $ | 0.25 | $ | 0.32 | $ | 0.86 | $ | 0.89 | ||||||||
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Diluted | $ | 0.25 | $ | 0.32 | $ | 0.85 | $ | 0.88 | ||||||||
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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 retailer, livestock producers 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 selling 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 February 28, 2019 |
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Product revenues to external customers | $ | 44,790 | $ | 32,585 | $ | — | $ | 77,375 | ||||||||
Service revenues to external customers | 6,323 | 14,002 | — | 20,325 | ||||||||||||
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Total revenues to external customers | 51,113 | 46,587 | — | 97,700 | ||||||||||||
Operating income (loss) | 8,339 | 7,338 | (1,038 | ) | 14,639 | |||||||||||
Total assets | 204,570 | 221,335 | 246,680 | 672,585 | ||||||||||||
As of and for the three months ended February 28, 2018 - Revised (2) |
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Product revenues to external customers | $ | 42,286 | $ | 34,898 | $ | — | $ | 77,184 | ||||||||
Service revenues to external customers | 5,027 | 12,692 | — | 17,719 | ||||||||||||
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Total revenues to external customers | 47,313 | 47,590 | — | 94,903 | ||||||||||||
Operating income (loss) | 8,258 | 8,493 | (838 | ) | 15,913 | |||||||||||
Total assets | 188,075 | 215,371 | 192,155 | 595,601 |
(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) | Revenues for the three months ended February 28, 2018 have been revised as discussed in Note 1. For the three months ended February 28, 2018, product revenues were reduced by $332,000 in the Food Safety segment and $626,000 in the Animal Safety segment; service revenues were unchanged in the Food Safety segment and were reduced by $31,000 in the Animal Safety segment. |
Food Safety | Animal Safety | Corporate and Eliminations (1) | Total | |||||||||||||
(in thousands) | ||||||||||||||||
For the nine months ended February 28, 2019 | ||||||||||||||||
Product revenues to external customers | $ | 139,979 | $ | 109,918 | $ | — | $ | 249,897 | ||||||||
Service revenues to external customers | 17,067 | 37,460 | — | 54,527 | ||||||||||||
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Total revenues to external customers | 157,046 | 147,378 | — | 304,424 | ||||||||||||
Operating income (loss) | 29,554 | 23,101 | (3,291 | ) | 49,364 | |||||||||||
For the nine months ended February 28, 2018 - Revised (2) |
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Product revenues to external customers | $ | 128,491 | $ | 112,709 | $ | — | $ | 241,200 | ||||||||
Service revenues to external customers | 14,319 | 34,292 | — | 48,611 | ||||||||||||
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Total revenues to external customers | 142,810 | 147,001 | — | 289,811 | ||||||||||||
Operating income (loss) | 25,704 | 27,691 | (3,060 | ) | 50,335 |
(1) | Includes the elimination of intersegment transactions. |
(2) | Revenues for the nine months ended February 28, 2018 have been revised as discussed in Note 1. For the nine months ended February 28, 2018, product revenues were reduced by $1,130,000 in the Food Safety segment and $1,968,000 in the Animal Safety segment; service revenues were unchanged in the Food Safety segment and reduced by $56,000 in the Animal Safety segment. |
The following table presents the Company’s revenue disaggregated by geographic location:
Three Months ended February 28, | Nine Months Ended February 28, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
(in thousands) | (in thousands) | |||||||||||||||
Revenues by Geographic Location | ||||||||||||||||
Domestic | $ | 57,422 | $ | 57,825 | $ | 182,298 | $ | 180,414 | ||||||||
International | 40,278 | 37,078 | 122,126 | 109,397 | ||||||||||||
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Total revenue | 97,700 | 94,903 | 304,424 | 289,811 | ||||||||||||
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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 FASB Accounting Standards Codification (FASB ASC) 230, Statementthe terms of Cash Flows. our 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 nine months ended February 28, 2019 follows:
Shares | Weighted- Average Exercise Price | |||||||
Options outstanding June 1, 2018 | 2,497,124 | $ | 42.63 | |||||
Granted | 526,750 | 62.92 | ||||||
Exercised | (418,598 | ) | 30.76 | |||||
Forfeited | (105,835 | ) | 46.50 | |||||
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Options outstanding February 28, 2019 | 2,499,441 | 48.78 |
During the three and nine month periods ended February 28, 2019 and 2018, the Company recorded $1,306,000 and $1,026,000 and $4,137,000 and $3,692,000, respectively, of compensation expense related to its share-based awards.
The amendments in ASU2016-15 are effective for public business entities forweighted-average fair value per share of stock options granted during fiscal years beginning after December 15, 2017,2019 and interim periods within those fiscal years. Early adoption is permitted, including adoption during an interim period. 2018, estimated on the date of grant using the Black-Scholes option pricing model, was $14.91 and $14.44, respectively. The fair value of stock options granted was estimated using the following weighted-average assumptions.
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 |
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. In January 2018, the Company paid the former owners $249,000 in contingent consideration based on the achievement of sales targets in the first year, and recorded a credit of $255,000 to other income, reducing the contingent consideration accrual by a corresponding amount; $554,000 remains accrued for contingent consideration payable at the end of the second year. This business continues to operate in its current location and is managed by Neogen Europe, reporting within the Food Safety segment.
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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 $12,428,000 in cash and up to $2,069,000 of contingent consideration, due at the end of each of the first two years, based on an excess net sales formula. The final purchase price allocation, based upon the fair value of these assets and liabilities determined using the income approach, included accounts receivable of $1,866,000, othernon-current assets of $26,000, inventory of $960,000, land, property and equipment of $4,734,000, current liabilities of $2,562,000, contingent consideration accrual of $213,000,non-current deferred tax liability of $1,307,000,non-amortizable intangible assets of $870,000, intangible assets of $5,112,000 (with an estimated life of5-15 years) and the remainder to goodwill(non-deductible for tax purposes). These values are Level 3 fair value measurements. This business continues to operate in its current location and is managed by Neogen do Brasil, reporting within the Food Safety segment.
On September 1, 2017, the Company acquired the assets of The University of Queensland Animal Genetics Laboratory, an animal genomics laboratory located near Brisbane, Australia. This acquisition is intended to accelerate the growth of the Company’s animal genomics business in Australia and New Zealand. Consideration for the purchase was $2,063,000; $468,000 has 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,non-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 Neogen 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 semiannually for the first five years, based on an excess net sales formula. The final purchase price allocation, based upon the fair value of these assets and liabilities determined using the income approach, included inventory of $32,000, machinery and equipment of $120,000, accounts payable of $53,000, contingent consideration accrual of $1,256,000,non-current deferred tax liability of $426,000,non-amortizable intangible assets of $878,000, intangible assets of $1,487,000 (with an estimated life of5-15 years) and the remainder to goodwill(non-deductible for tax purposes). These values are Level 3 fair value measurements. In February 2019, $90,000 was paid to the former owners as contingent consideration from the accrual. Manufacturing of these products was moved to the Company’s Lansing, Michigan location in October 2018, reporting within the Food Safety segment.
On September 4, 2018, the Company acquired the assets of Livestock Genetic Services, LLC, a Virginia-based company that specializes in genetic evaluations and data management for cattle breeding organizations. Livestock Genetic Services has been a long-time strategic partner of Neogen and the acquisition 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 operation are now performed at the Company’s Lincoln, Nebraska location, reporting within the Animal Safety segment.
On January 1, 2019, the Company acquired the assets of Edmonton, Alberta-based Delta Genomics Centre, an animal genomics laboratory in Canada. Delta’s laboratory operations were renamed Neogen Canada and the acquisition is intended to accelerate growth of the Company’s animal genomics business in Canada. Consideration for the purchase was $1,485,000 in cash. The preliminary purchase price allocation, based upon the fair value of these assets and liabilities determined using the income approach, included inventory of $38,000, machinery and equipment of $371,000, unearned revenue liability of $125,000, intangible assets of $186,000 (with an estimated life of 5 to 10 years) and the remainder to goodwill (deductible for tax purposes). These values are Level 3 fair value measurements. Services provided by this operation continue to be performed in its current 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 year 20172018 and there have been none thus far in fiscal year 2018;2019; there was no balance outstanding at February 28, 2018.2019. Interest on any borrowings remained atis LIBOR plus 100 basis points (rate under the terms of the agreement was 2.82%3.58% at February 28, 2018)2019). Financial covenants include maintaining specified levels of tangible net worth, debt service coverage, and funded debt to EBITDA, each of which the Company was in compliance with at February 28, 2018.2019.
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 February 28, 20182019 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 February 28,In December 2018, 1,350,632the 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 year 2018.retired.
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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
Executive Overview
Consolidated revenues were $97.7 million in the third quarter of fiscal 2019, an increase of 3% compared to $94.9 million in the third quarter of fiscal 2018. Organic sales in the third quarter also increased 3%. For the nine month period, consolidated revenues were $304.4 million, an increase of 5% compared to $289.8 million in the same period in the prior fiscal year. On a year to date basis, organic sales increased 4%.
Food Safety segment sales were $51.1 million in the third quarter of the Company’s financial condition and resultscurrent fiscal year, an increase of operations are based on the consolidated financial statements that have been prepared in accordance with accounting principles generally accepted8% compared to $47.3 million in the United States. The preparationsame period of these financial statements requires that management make estimatesthe prior year. Organic sales in this segment also increased 8%, with a minor contribution from the August 1, 2018 acquisition of Clarus Labs. For the year to date, Food Safety segment sales were $157.0 million, an increase of 10% compared to $142.8 million in the same period of the prior fiscal year; the organic sales increase was also 10%.
Animal Safety segment sales were $46.6 million in the third quarter of fiscal 2019, a decrease of 2% compared to $47.6 million in the third quarter of fiscal 2018. Organic sales in this segment decreased 3% in the third quarter, with minor contributions from the September 1, 2018 acquisition of Livestock Genetic Services and judgments that affect the reported amountsJanuary 1, 2019 acquisition of assets, liabilities, revenuesDelta Genomics. For the nine month period, Animal Safety segment sales were $147.4 million, flat compared to $147.0 million in the same period a year ago. Year to date organic sales decreased 1%, after excluding three months of the September 1, 2017 acquisition of Neogen Australasia, six months of the Livestock Genetic Services acquisition and expenses, and related disclosuretwo months of contingent assets and liabilities. Onthe Delta Genomics acquisition.
International sales in the third quarter of fiscal 2019 were 41% of total sales compared to 39% of total sales in the third quarter of fiscal 2018. For the year to date, fiscal 2019 international sales were 40% of total sales compared to 38% of total sales in the same period of the prior year.
Our effective tax rate in the third quarter was 21.4% compared to an ongoing basis, management evaluateseffective tax rate of 4.1% in the estimates, including, but not limitedprior year third quarter; the fiscal 2019 year 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 changesdate effective tax rate was 17.0% compared to the contractual obligations or contingent liabilities and commitments disclosedyear to date effective tax rate of 14.7% in the Company’s Annual Report on Form10-K forprior fiscal year. The U.S. statutory rate is 21% in the current fiscal year ended May 31, 2017.
The Company adopted ASUNo. 2016-09 related to share-based compensation onand was 35% from June 1, 2017. (See Note 5 Equity Compensation Plans for further discussion).
On2017 until December 22, 2017, with the Tax Cuts and Jobs Act, (“reminder of the Tax Act”) was enacted. Among the significant changes to the U.S. Internal Revenue Code, the Tax Act lowers the U.S. federal corporate income tax rate (“Federal Tax Rate”) from 35% to 21% effective January 1, 2018. The Company will compute its income tax for theprior fiscal year ending May 31, 2018 using a blended Federal Tax Rate of 29.2%third quarter taxed at 21%.
In December 2017, Differences from the Securities and Exchange Commission staff issued Staff Accounting Bulletin No. 118, which addresses how a company recognizes provisional amounts when a company does not have the necessary information available, prepared or analyzed (including computations) in reasonable detailstatutory rate are primarily due to complete its accounting for the effect of the changestax deductions resulting from stock option exercises, provisions included in the Tax Act. The measurement period ends when a company has obtained, prepared and analyzed the information necessary to finalize its accounting, but cannot extend beyond one year.
As of February 28, 2018, the Company was able to determine a reasonable estimate for certain effects ofcorporate tax reform, and recorded that estimate as a provisional amount. The provisional remeasurementstate and local taxes. Additionally, the third quarter of the prior year included a favorable adjustment to income tax expense to adjust deferred tax assets and liabilities resulted in a $5.6 million discrete tax benefit. In addition, the Company was required to estimate its cumulative unrepatriated foreign earnings and profits and
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calculate estimated tax owed on those earnings and profits; this tax was provisionally estimated at $2.7 million. The provisional remeasurement and repatriation amounts are anticipated to change as more data becomes available allowing more accurate computations of the amounts.
There have been no other material changesbalances due to the critical accounting policies and estimates discloseddecrease in the Company’s Annual Report on Form10-KU.S. statutory tax rate.
Net income for the fiscal year ended May 31, 2017.
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Executive Overview
Revenues for the Company for the third quarter ended February 28, 2018 were $95.92019 was $13.1 million, an increaseor $0.25 per diluted share, a decrease of 8%, or $7.5 million,21% compared to revenues of $88.4$16.6 million, foror $0.32 per share in the same period in the prior year. For the year to date, period, revenues were $293.0net income was $44.4 million, an increaseor $0.85 per diluted share, a decrease of 12%, or $30.3 million,6% compared to revenuesprior year to date net income of $262.7$45.6 million, or $0.88 per share.
Cash provided from operating activities in the first nine months of fiscal year 2017. Net income attributable2019 was $43.0 million, compared to Neogen for$46.6 million in the first three quarters of fiscal 2018.
Neogen’s results reflect an increase in international sales of 9% in the third quarter of fiscal 2018 increased 61%2019 and 12% for the year to $16.6 million,date, each compared to $10.3the same respective period 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 nine 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 February 28, 2019 | Nine Months Ended February 28, 2019 | |||||||||||||||
Revenue % Increase/(Decrease) USD | Revenue % Increase/(Decrease) Local Currency | Revenue % Increase USD | Revenue % Increase Local Currency | |||||||||||||
Neogen Europe (including Lab M & Quat-Chem) | 11 | % | 18 | % | 12 | % | 15 | % | ||||||||
Neogen do Brasil (including Deoxi & Rogama) | (9 | )% | 5 | % | 10 | % | 31 | % | ||||||||
Neogen Latinoamerica | 19 | % | 22 | % | 12 | % | 17 | % | ||||||||
Neogen China | 9 | % | 15 | % | 6 | % | 9 | % | ||||||||
Neogen India | 94 | % | 115 | % | 86 | % | 104 | % |
Currency translations reduced revenues by approximately $2.5 million in the third quarter of fiscal 2019 compared to the same quarter a year 2017. Earnings per shareago, primarily due to increased strength of the U.S. dollar relative to the Brazilian real, the British pound, the Australian dollar and the Mexican peso. For the year to date, currency translations reduced revenues by approximately $5.8 million compared to the prior year.
The increase in revenues at Neogen Europe for the third quarter of fiscal 2018 were $0.32 compared to $0.20 per share2019 was led by an 18% increase in sales of genomics services, primarily in the same period a year ago. Net earningsporcine and bovine markets; genomics sales increased 24% for the third quarter were favorably impacted by adjustments resulting from tax reform legislation enacted in December 2017. For the first nine months of the current fiscal year, net income attributable to Neogen increased 46% to $45.6 million, or $0.88 per fully diluted share, compared to $31.3 million, or $0.61, for the same period in the prior fiscal year. For the year to date period, net earnings were favorably impacted by tax reform, excess tax benefits from stock option exercises,date. Neogen Europe continues to have strong sales of test kits to detect deoxynivalenol (DON) in grain, due to increased testing after a DON outbreak in France’s wheat crops in the fall of 2018. At Neogen do Brasil, sales of natural toxins test kits increased 36% and the favorable conclusion of an IRS audit.
Food Safety segment revenues increased 11% and Animal Safety segment revenues increased 6%64% for the three month period ended February 28, 2018, eachand nine months, respectively, both compared to the same periodperiods a year ago, as we gained significant new business testing for the presence of aflatoxin in the prior year. For the quarter, the overall organic sales increase was 7%; organic growth in the Food Safety and Animal Safety segments was 9% and 5%, respectively. The acquisitionscorn. Sales of Rogama, purchased inmid-December 2016, and Neogen Australasia, in September 2017, contributed $1.6 million to the overall revenue growthforensic test kits increased significantly in the third quarter. Food Safety segment revenues increased 17%quarter and Animal Safety segment revenues increased 7% for the year to date period. Overall organic salesover the prior year periods due to business that shifted from U.S. labs to labs in Brazil and increased 7% for the year to date period; the organic increases were 9% for the Food Safety segment and 6% for the Animal Safety segment. The previously discussed acquisitions, and Quat-Chem, purchased on December 1, 2016, contributed $11.1 million to the overalldemand from commercial laboratories located in Brazil. Neogen Latinoamerica’s third quarter sales increase for the nine month period.of 19% was led by a 64% increase in sales of AccuPoint sanitation monitoring products, due to increased market share.
International sales were $37.4Service revenue was $20.3 million in the third quarter of fiscal 2018,2019, an increase of 17%15% over prior year third quarter revenues of $17.7 million, including minor contributions from the acquisitions of Livestock Genetics Services and Delta Genomics. For the nine month period, service revenue was $54.5 million, an increase of 12% over prior year revenues of $48.6 million. Year to date revenues were aided by the Livestock Genetics Services and Delta Genomics acquisitions and the September 2017 acquisition of Neogen Australasia. The growth was led by increases in sales of genomic services to the global beef markets, and porcine and bovine markets in Europe.
Revenues
Three Months Ended February 28, | ||||||||||||||||
2019 | 2018 | Increase/ (Decrease) | % | |||||||||||||
(in thousands) | ||||||||||||||||
Food Safety | ||||||||||||||||
Natural Toxins, Allergens & Drug Residues | $ | 18,612 | $ | 16,807 | $ | 1,805 | 11 | % | ||||||||
Bacterial & General Sanitation | 9,519 | 8,992 | 527 | 6 | % | |||||||||||
Culture Media & Other | 11,893 | 10,179 | 1,714 | 17 | % | |||||||||||
Rodenticides, Insecticides & Disinfectants | 5,953 | 7,359 | (1,406 | ) | (19 | )% | ||||||||||
Genomics Services | 5,136 | 3,976 | 1,160 | 29 | % | |||||||||||
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| |||||||||||
$ | 51,113 | $ | 47,313 | $ | 3,800 | 8 | % | |||||||||
Animal Safety | ||||||||||||||||
Life Sciences | $ | 1,823 | $ | 2,769 | $ | (946 | ) | (34 | )% | |||||||
Veterinary Instruments & Disposables | 10,682 | 10,630 | 52 | 0 | % | |||||||||||
Animal Care & Other | 6,823 | 7,245 | (422 | ) | (6 | )% | ||||||||||
Rodenticides, Insecticides & Disinfectants | 13,256 | 14,255 | (999 | ) | (7 | )% | ||||||||||
Genomics Services | 14,003 | 12,691 | 1,312 | 10 | % | |||||||||||
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|
|
|
|
| |||||||||||
$ | 46,587 | $ | 47,590 | $ | (1,003 | ) | (2 | )% | ||||||||
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|
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|
| |||||||||||
Total Revenues | $ | 97,700 | $ | 94,903 | $ | 2,797 | 3 | % | ||||||||
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|
|
|
| |||||||||||
Nine Months Ended February 28, | ||||||||||||||||
2019 | 2018 | Increase/ (Decrease) | % | |||||||||||||
(in thousands) | ||||||||||||||||
Food Safety | ||||||||||||||||
Natural Toxins, Allergens & Drug Residues | $ | 58,021 | $ | 54,960 | $ | 3,061 | 6 | % | ||||||||
Bacterial & General Sanitation | 30,807 | 27,435 | 3,372 | 12 | % | |||||||||||
Culture Media & Other | 36,302 | 31,353 | 4,949 | 16 | % | |||||||||||
Rodenticides, Insecticides & Disinfectants | 18,521 | 18,175 | 346 | 2 | % | |||||||||||
Genomics Services | 13,395 | 10,887 | 2,508 | 23 | % | |||||||||||
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|
|
|
|
| |||||||||||
$ | 157,046 | $ | 142,810 | $ | 14,236 | 10 | % | |||||||||
Animal Safety | ||||||||||||||||
Life Sciences | $ | 5,794 | $ | 7,589 | $ | (1,795 | ) | (24 | )% | |||||||
Veterinary Instruments & Disposables | 32,769 | 32,804 | (35 | ) | 0 | % | ||||||||||
Animal Care & Other | 22,439 | 22,894 | (455 | ) | (2 | )% | ||||||||||
Rodenticides, Insecticides & Disinfectants | 48,921 | 49,422 | (501 | ) | (1 | )% | ||||||||||
Genomics Services | 37,455 | 34,292 | 3,163 | 9 | % | |||||||||||
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|
| |||||||||||
$ | 147,378 | $ | 147,001 | $ | 377 | 0 | % | |||||||||
|
|
|
|
|
| |||||||||||
Total Revenues | $ | 304,424 | $ | 289,811 | $ | 14,613 | 5 | % | ||||||||
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|
|
|
|
Food Safety
Natural Toxins, Allergens & Drug Residues –Sales in this category increased 11% and 6% for the three and nine month periods ended February 28, 2019, respectively, compared to the same periodperiods in the prior year. Expressed as a percentage of sales, international sales were 39.0% in the quarter, compared to 36.3% inFor the third quarter, a year ago.natural toxin test kit revenues increased 17%, due to new business for aflatoxin test kits in Brazil and DON test kits in the U.S. and France, the result of mild outbreaks. Sales of drug residue test kits, including dairy antibiotics, increased 8% and sales of our allergens product line increased 7%. For the year to date internationalperiod, natural toxin test kit sales were $110.5 million, an increaseincreased 12%, sales of 20%; internationalour allergens product line increased 6% and sales were 37.7% of total sales in the current year to date period and 35.1% in the prior year. For each comparative period, international revenue increases weredrug residue test kits decreased 7%, the result of the acquisitions of Quat-Chem (England), Rogama (Brazil) and Neogen Australasia (Australia), and to a lesser extent, revenue increases at existing Company locations. Currency translation had a positive effect on international revenues of approximately $1.9 millionlower demand in Europe.
Bacterial & General Sanitation –Revenues in this category increased 6% in the third quarter of fiscal 2018 as the pound, euro, and peso were stronger on average against the dollar than the same period a year ago;12% for the year to date, period,both compared to the positive revenue impact was $2.5 million.
Revenues at Neogen Europesame periods in the prior year. In the third quarter, sales of test kits to detect pathogens increased 16%, and rose 27% for the year to date, as we continued to gain new business with ourListeriaRight Now test kit that launched in U.S. dollarsfiscal 2018, and sales of our AccuPoint sanitation monitoring product line increased 11% for both the quarter and year to date periods. Sales of products to detect spoilage organisms in processed foods decreased 6% in the third quarter, compareddue to the same periodhigher equipment placements in the prior year; for the nine month period, sales rose 10%of this product line increased 7%. For the quarter, a 39% increase
Culture Media & Other – Sales in genomics revenues offset lower mycotoxin test kit sales, as last year’s deoxynivalenol (DON) outbreak in corn crops in western Europe did not repeat in the current year. For the year to date period, genomics salesthis category increased 34% and helped to offset lower DON test kit sales. Sales at Lab M, the Company’s subsidiary in England, increased 20% in the third quarter and 25% for the nine month period, as its culture media products continued to be integrated into Neogen’s global sales and marketing channels. Neogen Latinoamerica recorded a sales increase of 19% in the third quarter; Food Safety products increased 21% and Animal Safety products increased 17%, with broad-based gains recorded in both categories. For the year to date, revenues rose 18%, with Food Safety products and increases in genomics services providing the majority of the increase. Revenues at Neogen do Brasil declined 2% in the year’s third quarter, as a decrease in forensic test kit sales resulting from increased competition and customer losses caused by conversion to different testing methods more than offset increased sales of mycotoxin and dairy drug residue test kits. For the year to date, revenues increased 18%. Neogen China sales increased 28% in the third quarter and 21% for the year to date period, each compared to the same periods in the prior year; for each period, increases were driven by strength in genomics services and animal safety products. Revenues for Neogen India declined 37% for the quarter, as a large cleaner and disinfectant order in the prior year’s third quarter did not repeat; for the year to date, revenues were flat, as higher sales of Food Safety products and testing services were almost entirely offset by the cleaner and disinfectant revenue from last year’s third quarter which did not repeat this year.
Service revenue was $17.8 million in the quarter ended February 28, 2018, an increase of $3.4 million, or 24%,2019 compared to $14.4 millionthe third quarter in the prior year; the year to date increase is 16%. In the third quarter, sales of Neogen Culture Media, formerly marketed as the Acumedia and Lab M brands, increased 5%, aided in part by the August 2018 acquisition of Clarus Labs, which consists of the Colitag product and reports in the culture media product line. This category also includes forensic test kits sold within Brazil, which increased significantly in both the third quarter and for the year to date periods due to a shift in business from labs in the U.S. to labs in Brazil and increased demand from commercial laboratories in that country.
Rodenticides, Insecticides & Disinfectants –Revenues in this category decreased 19% in the third quarter of the prior year. For the year to date period, service revenue was $48.7 million, an increase of $9.1 million, or 23%, compared to $39.6 million in the prior year. The growth, for both the quarter and year to date periods, was led by increases in sales to the global cattle and companion animal markets, increased testing volumes with a large poultry customer and, to a lesser extent, revenues from the acquisition of Neogen Australasia, in September 2017.
15
Revenues
Three Months ended February 28, | ||||||||||||||||
Increase/ | ||||||||||||||||
2018 | 2017 | (Decrease) | % | |||||||||||||
(in thousands) | ||||||||||||||||
Food Safety | ||||||||||||||||
Natural Toxins, Allergens & Drug Residues | $ | 16,807 | $ | 16,453 | $ | 354 | 2 | % | ||||||||
Bacterial & General Sanitation | 8,992 | 8,348 | 644 | 8 | % | |||||||||||
Dehydrated Culture Media & Other | 10,511 | 10,383 | 128 | 1 | % | |||||||||||
Rodenticides, Insecticides & Disinfectants | 7,359 | 5,040 | 2,319 | 46 | % | |||||||||||
Genomics Services | 3,976 | 2,725 | 1,251 | 46 | % | |||||||||||
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| |||||||||||
$ | 47,645 | $ | 42,949 | $ | 4,696 | 11 | % | |||||||||
Animal Safety | ||||||||||||||||
Life Sciences | $ | 2,769 | $ | 2,332 | $ | 437 | 19 | % | ||||||||
Veterinary Instruments & Disposables | 10,630 | 10,000 | 630 | 6 | % | |||||||||||
Animal Care & Other | 7,535 | 6,311 | 1,224 | 19 | % | |||||||||||
Rodenticides, Insecticides & Disinfectants | 14,590 | 16,111 | (1,521 | ) | (9 | )% | ||||||||||
Genomics Services | 12,723 | 10,682 | 2,041 | 19 | % | |||||||||||
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|
|
| |||||||||||
$ | 48,247 | $ | 45,436 | $ | 2,811 | 6 | % | |||||||||
|
|
|
|
|
| |||||||||||
Total Revenues | $ | 95,892 | $ | 88,385 | $ | 7,507 | 8 | % | ||||||||
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|
| |||||||||||
Nine Months ended February 28, | ||||||||||||||||
Increase/ | ||||||||||||||||
2018 | 2017 | (Decrease) | % | |||||||||||||
(in thousands) | ||||||||||||||||
Food Safety | ||||||||||||||||
Natural Toxins, Allergens & Drug Residues | $ | 54,960 | $ | 53,090 | $ | 1,870 | 4 | % | ||||||||
Bacterial & General Sanitation | 27,435 | 25,340 | 2,095 | 8 | % | |||||||||||
Dehydrated Culture Media & Other | 32,483 | 29,792 | 2,691 | 9 | % | |||||||||||
Rodenticides, Insecticides & Disinfectants | 18,175 | 7,088 | 11,087 | 156 | % | |||||||||||
Genomics Services | 10,887 | 7,757 | 3,130 | 40 | % | |||||||||||
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|
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|
| |||||||||||
$ | 143,940 | $ | 123,067 | $ | 20,873 | 17 | % | |||||||||
Animal Safety | ||||||||||||||||
Life Sciences | $ | 7,589 | $ | 7,261 | $ | 328 | 5 | % | ||||||||
Veterinary Instruments & Disposables | 32,804 | 29,281 | 3,523 | 12 | % | |||||||||||
Animal Care & Other | 24,056 | 21,563 | 2,493 | 12 | % | |||||||||||
Rodenticides, Insecticides & Disinfectants | 50,228 | 52,796 | (2,568 | ) | (5 | )% | ||||||||||
Genomics Services | 34,348 | 28,779 | 5,569 | 19 | % | |||||||||||
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|
| |||||||||||
$ | 149,025 | $ | 139,680 | $ | 9,345 | 7 | % | |||||||||
|
|
|
|
|
| |||||||||||
Total Revenues | $ | 292,965 | $ | 262,747 | $ | 30,218 | 12 | % | ||||||||
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|
The Company’s Food Safety segment revenues were $47.6 million in the quarter ended February 28, 2018, an increase of 11%fiscal 2019 compared to the same period a year ago, due to a largeone-time sale in the prior year. For the nine month period, Food Safetyyear at Rogama in Brazil resulting from a government contract. Partially offsetting this were increases of disinfectant sales to customers in Europe, China and India. Year to date revenues increased 17% to $143.9 million. Organic growth for the segment was 9% for both the quarter and year to date periods, with the acquisition of Rogama, occurring on December 21, 2016, contributing the remainder of the growth.2%.
Natural Toxins, Allergens & Drug Residues sales increased 2%Genomics Services –Sales in the third quarter; revenues for the year to date period increased 4%. Sales of dairy drug residue kits, used to detect the presence of antibiotics in raw milk,this category increased 29% in the third quarter as new products continued to gain share, particularly in international markets;and 23% for the year to date period, dairy drug residue test kit revenues rose 15%. Allergen test kit sales increased 14% and 13% in the three and nine month periods, ended February 28, 2018, respectively, as product recalls relating2019, respectively. The increase for both the third quarter and year to allergenic contamination of food continued to expanddate periods was primarily from higher sales in the market. European porcine and bovine markets; additionally, the third quarter benefited from a large research project with the Brazilian government.
Animal Safety
Life Sciences –Sales of test kits to detect the presence of natural toxins in grain cropsthis category decreased 17%34% in the third quarter. An 11% increasequarter, as compared to the same period in aflatoxinthe prior year, as approximately $740,000 of forensic test kit sales shifted to our operations in Brazil, which are reported in the Food Safety Segment. The products were formerly served by our Animal Safety operation in Lexington, KY. Additionally, revenues for two large customers in the forensics market were down in the third quarter due to moderate
16
outbreaks in U.S. and Brazilian corn crops, was offset by a 41% decrease in sales of deoxynivalenol (DON) test kits, as prior year outbreaks of DON in corn crops in the U.S., Canada and Europe did not recur in the current year.order timing. For the year to date, period, sales of natural toxin test kits decreased 7%the decrease in this product line was 24%.
BacterialVeterinary Instruments & General Sanitation sales increased 8%Disposables –Revenues in this category were flat compared to the prior year, for both the three and nine month periods ended February 28, 2018. Within2019. Protective wear and consumables sales decreased 36% in the third quarter, resulting from continued poor economic conditions in the commercial dairy production market; this category, the Company’s AccuPoint sanitation monitoring product line increased 18%decline was offset by a 12% increase in veterinary instruments sales, led by strength in needles and syringes.
Animal Care & Other –Sales of these products decreased 6% in the third quarter and 19%2% for the year to date period, on sales strength in both reader equipment and consumable supplies. Sales of test kits to detect pathogens increased 22% in the third quarter, led by strength inListeria products, including the Company’s newListeria Right Now test kit that launched earlier in the fiscal year. The Company also benefitted from strong sales of equipment useddate. Promotional programs with the Company’s ANSR line of test kits to detect various pathogens, as the Company gained new customers; overall pathogen revenues increased 14% for the year to date period. Revenues for the Company’s consumable product lines to detect spoilage organisms in processed foods decreased 2% in the current quarter but increased 3% for the nine month period.
Dehydrated Culture Media & Other sales increased 1% in the third quarter. This category includes forensic test kits sold through the Company’s Brazilian subsidiary. Demand for these kits from customers located in Brazil had increased dramatically in the prior year due to a new requirement for drug testing of commercial truck drivers, however, sales of these kits in Brazil have decreased in the current yeardistributors are recorded as a result of increased competition and customer losses caused by conversion to different testing methods.contra revenue within this category. In the third quarter, the Company’s worldwide Lab M sales increased 21% and Acumedia sales increased 6%.
Sales of Rodenticides, Insecticides & Disinfectants products sold through the Company’s Food Safety operations increased 46% in the third quarter; the organic sales increase in this category was 29%. For the nine month period, sales increased $11.1 million; excluding first year sales of the Quat-Chem and Rogama acquisitions, the year to date sales increase was 16%. In the third quarter, the increase was primarily due to Rogama shipping a large order resulting from a government contract; this sale is unlikely to recur in the next 12 months. The increase in sales was partially offset by termination of a distribution agreement in January 2017, which resulted in a decline in sales for those distributed products of $143,000 in the third quarter and $859,000 for the year to date.
Genomics Services revenue recorded in the Food Safety segment increased 46% and 40% for the three and nine month periods, respectively, due primarily to growth of these services in Europe.
Sales for the Company’s Animal Safety segment were $48.2 million in the third quarter, an increase of 6% over the same period a year ago. Revenues for the nine month period increased 7% to $149 million compared to $139.7 million in the prior year. Organic growth in this segment was 5% and 6% in the three and nine month periods, respectively; the Neogen Australasia acquisition in September 2017 contributed the remainder of the growth. Sales of Life Sciences products increased 19% in the third quarter, partially due to order timing, and have risen 5% for the year to date period. The Company has increased volumes of forensic test kits sold to commercial labs in the U.S.
Veterinary Instruments & Disposables revenues increased 6% and 12% for the three and nine month periods, respectively. For both periods, the increase is primarily the result of strength in detectable needles, syringes and animal marking products. Sales of Animal Care & Other products increased 19% in the quarter ended February 28, 2018, compared to the same period in the prior year; the year to date increase was 12%. The increase in the current year is due to market share gains of supplements for companion animals and vitamin injectables, and increased sales of vaccines to a large distributor; additionally, last year’s results included sales credits totaling $1.1 million in the first quarter as the Company removed its canine thyroid product from its distribution channels, after the FDA approved a new drug application for a competitive product.
Rodenticides, Insecticides & Disinfectants sales decreased 9% in the quarter and 5% for the year to date period, as the termination of a distribution agreement with a manufacturer of cleaners and disinfectants in January 2017 resulted in lost sales for those distributed products of $1.4 million in the third quarter of the current fiscal year, several annual promotional programs ended and $3.9 millionthe final adjustments to estimates previously recorded resulted in a higher reduction of revenues than in the prior year. Partially offsetting these adjustments was a 13% increase in sales of vaccines.
Rodenticides, Insecticides & Disinfectants –Revenues in this category decreased 7% and 1% for the three and nine month periods ended February 28, 2019, respectively. In the third quarter, rodenticide sales decreased 28%, the result of poor weather conditions causing lower demand and a weak U.S. animal protein market partially caused by tariff issues; the year to date decrease was 6% due to the loss of toll manufacturing business from the first half of the prior year. Also in the third quarter, cleaner and disinfectant sales grew 18% due to increased demand from international customers. For the year to date, cleaner and disinfectant sales increased 4%.
Genomics Services –Sales in this category increased 10% in the third quarter and 9% for the year to date period. These losses were offset by an 11% increase in rodenticide sales in the third quarter as the Company gained incremental business with several large customers; year to date sales rose by 9%.
Genomics Services increased 19% inperiod, both the third quarter and year to date periods, respectively, each compared to the same period in the prior year. The third quarter increase included minor contributions from the Livestock Genetics and Delta Genomics acquisitions while the year to date increase included those acquisitions and three months of sales from the September 2017 acquisition of Neogen Australasia. For both the three and nine month periods, growth for both periods was led by increases in sales to the globalbeef cattle and companion animal markets higherwas offset by revenue
decreases in U.S. poultry and porcine markets, despite increases in sample volumes, resulting from a large poultry customershift to lower priced chips and to a lesser extent, revenues from the acquisition of Neogen Australasia, in September 2017.services.
Gross Margin
Gross margin was 47.5%45.7% in the third quarter of fiscal 20182019 compared to 46.3%47.0% in the same quarter a year ago. Gross marginsThe decline in gross margin for the quarterthree month period is due to stronger growth in our international markets, which were positivelyadversely impacted by lower costs inputs at the Company’s genomics operationscurrency fluctuations, and favorablea shift in product mix towardswithin both the Food Safety and the Animal Safety segments, with higher margin diagnostic and animal care products; this improvement was somewhat offset byrevenue increases on product lines with lower sales of mycotoxin test kits due to a prior year outbreak of DON in corn crops ingross margins than the U.S. and western Europe, which did not recur in the current fiscal year.historical averages within these segments. Gross margin for the nine month period ended February 28, 20182019 was 48.0%46.4% compared to 47.6%47.5% in the same period of the prior year. Gross marginsyear, for the year to date were positively impacted by improved raw material costs at the Company’s genomics operations and favorable product mix towards higher margin diagnostic and animal care products; this improvement was somewhat offset by mix
17
changes resulting from the three most recent acquisitions (Rogama, Quat-Chem and Neogen Australasia), all of which have gross margins that are lower than the historical average for the Company, and lower sales of mycotoxin test kits due to a prior year outbreak of DON in corn crops in the U.S. and western Europe, which did not recur in the current fiscal year.same reasons.
Operating Expenses
Operating expenses were $29.6$30.0 million in the third quarter of fiscal 2019, compared to $26.5$28.7 million in the same quarter of last fiscalthe prior year, an
increase of $3.1$1.3 million, or 12%5%. Sales and marketing expenses were $17.5 million, compared to $15.3 million in last year’s third quarter, an increase of 14%increased 1%, primarily due toas increases in salariesshipping and related personnel costs, shipping expense,contracted services were almost entirely offset by lower promotional and higher advertising expenses. For the year to date, sales and marketing expenses in support of new product launches.have increased 6%. General and administrative expense increased $700,000,$738,000, or 9%8%, infor the third quarter;quarter, resulting from increases in amortization of acquired intangible assets, IT consulting, and higher salary expenses were partially offset by lower stock basedshare-based compensation expense, resulting from forfeitures due to employee retirementslegal and reduced legal expenses. In last year’s third quarter, the Company closed on two acquisitions, while there were none in this year’s third quarter.professional fees, and training costs. For the year to date, period, researchgeneral and administrative expenses have risen by 4%. Research and development expense increased 7% in$413,000, or 15%, primarily the third quarter to a totalresult of $2.8 million. Increases were due to increases in compensation, higher depreciation resulting from investments in laboratory equipment, and projects relating to product improvements andcontracted services supporting new product development. For the year to date, research and development expensesexpense has increased 10%. Operating4%, and overall operating expenses for the nine month period were $90.3 million, an increase of $11.3Company increased $4.6 million, or 14% over the same period last fiscal year. The recent acquisitions accounted for $2.8 million of the increase.5%.
Operating Income
Operating income was $15.9$14.6 million in the third quarter an increase of $1.5 million, or 11%,fiscal 2019, compared to $15.9 million in the same period of the prior year; year to date operating income of
$14.4was $49.4 million compared to $50.3 million in the prior year. Expressed as a percentage of revenue,sales, operating income was 16.6%15.0% for the third quarter of fiscal 2019 compared to 16.2%16.8% in last year’s
third quarter. The improvement in operating margin percentagequarter; for the comparative quarter was primarily the result of higher gross margins offset somewhat by operating expenses which rose more than the rate of the overall revenue increase. For the nine months ended February 28, 2018, operating income was $50.3 million, an increase of $4.4 million, or 10%, compared to operating income of $45.9 million for the same period last year. Expressed as a percentage of revenue, year to date, operating income was 17.2%16.2%, compared to 17.5%17.4%, respectively, in the prior fiscal year. The decline in operating margin percentage for each period in the current fiscal year was primarily the result of the lower gross margin percentage, and to a lesser extent, operating expenses which rose at a rate greater than or equal to the rate of revenue growth.
Other Income and
Three Months Ended | Nine Months Ended | |||||||||||||||
February 28, | February 28, | |||||||||||||||
(dollars in thousands) | 2019 | 2018 | 2019 | 2018 | ||||||||||||
Interest income (net of expense) | $ | 1,335 | $ | 524 | $ | 3,290 | $ | 1,322 | ||||||||
Foreign currency transactions | 104 | 179 | (354 | ) | 1,140 | |||||||||||
Royalty income | — | — | 60 | 78 | ||||||||||||
Deoxi contingent consideration | — | (49 | ) | (9 | ) | (148 | ) | |||||||||
Quat-Chem contingent consideration | — | 255 | 422 | 255 | ||||||||||||
Other | 545 | 459 | 688 | 588 | ||||||||||||
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Total Other Income | $ | 1,984 | $ | 1,368 | $ | 4,097 | $ | 3,235 | ||||||||
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Income Tax
Other income was $1.4 million for both the third quarter of fiscal 2018 and the same period in 2017. Components of other income in this year’s third quarter included $525,000 of interest income, $360,000 from an insurance settlement, $179,000 in currency gains and a $255,000 gain recorded on the settlement of contingent consideration related to the Quat-Chem acquisition. Last year’s fiscal third quarter included a gain on the settlement of a licensing agreement of $660,000, currency gains of $442,000, and interest income of $271,000. For the year to date period in fiscal 2018, other income was $3.2 million, primarily comprised of $1.3 million of interest income, currency gains of $1.1 million, $360,000 from an insurance settlement, $255,000 gain recorded on the settlement of contingent consideration related to the Quat-Chem acquisition, and $78,000 of royalty income. For the same period in fiscal 2017, other income was $1.8 million, which included interest income of $691,000, gain on the settlement of a licensing agreement of $660,000, currency gains of $263,000, and royalty income of $79,000. Expense
Income tax expense in the third quarter of fiscal 2019 was $700,000,$3.6 million, an effective tax rate of 21.4% compared to $0.7 million, an effective tax rate of 4%, compared toin the same period of the prior year. In the third quarter of the prior year, third quarter expense of $5.4 million, an effective tax rate of 34%. Thethe Company recorded favorable tax adjustments totaling $2.9 million during the quarter as the result of corporate tax reform passedenacted in December 2017, which reduced the U.S. in December 2017. The tax reform reduced the statutory federal income tax rate from 35% to 21%, and also resulted in other adjustments to income tax expense. The Company will compute its income tax for the fiscal year ending May 31, 2018 using a blended Federal Tax Rate of 29.2%. Accordingly, first and second quarter income previously subject to tax at the 35% Federal Tax Rate benefitted from the 29.2% Federal Tax Rate. As required by generally accepted accounting principles, the Company revalued its net deferred tax liabilities during the quarter to reflect the lower rate, resulting in a credit to income tax expense of $5.6 million. In addition, the Company was required to estimate its cumulative unrepatriated foreign earnings and profits and calculate tax owed on those earnings and profits during the third quarter. This tax was estimated at $2.7 million, and the amount was recorded as federal income tax expense; payment of the tax is permitted over an eight year period.
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For the first nine months of fiscal 2018,2019, income tax expense was $7.9$9.1 million compared to $16.3$7.9 million in the prior year; the current year to date effective tax rate was 15%17.0%, compared to an effective tax rate of 34%14.7% in the prior fiscal year. For the year to date period, the lower effective rate is primarily the resultCompany recorded a total credit of the tax reform passed in the U.S. in December 2017 as discussed in the preceding paragraph. Additionally, during the year the Company has recorded credits of $3.4$3.0 million to federal income tax expense for excess tax benefits resulting from the exercise of stock options, duecompared to $3.4 million in the adoption of ASU2016-09; refer to Note 5 of the Company’s Consolidated Financial Statements for further information.prior year. In the second quarterfirst half of fiscal 2018, an IRS examination of the Company’s federal income tax returns for fiscal years 2014, 2015 and 2016 was concluded. As a result of the favorable outcome of the audit, the Company also reversed a total of $816,000 from its reserve for uncertain tax positions, which had been accrued in prior fiscal years, with a corresponding credit to federal income tax expense.expense, due to the conclusion of an IRS audit for fiscal years 2014, 2015, and 2016.
Net Income
Net income attributable to Neogen increased 61% from $10.3was $13.1 million in the third quarter of fiscal 2019, compared to $16.6 million forin the three monthsame period ended February 28,
2018.in the prior year. Earnings in the prior year quarter were favorably impacted by the lower tax expense resulting from the corporate tax reform and revaluation of deferred tax balances in that quarter. For the year to date, period, net income was $44.4 million, compared to $45.6 million a 46% increase overin the same period last year; the $1.2 million decline was due to the lower tax expense in the prior year net income of $31.3 million. Pre tax income increases of 10% for the quarter and 12% for the year to date were favorably impacted by the effects of tax reform, excess tax benefits from the exercise of stock options, and positive results from the IRS examination that concluded during the year’s second quarter.year.
Financial Condition and Liquidity
The overall cash, cash equivalents and marketable securities position of the CompanyNeogen was $192.2$246.7 million at February 28, 20182019, compared to $143.6$210.8 million at May 31, 2017.2018. Approximately $46.5$43.0 million was generated from operations during the first nine months of fiscal 2018.2019. Net cash proceeds of $18.9$13.8 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 nine months of fiscal 2019. We spent $16.3$11.9 million for property, equipment and othernon-current assets duringin the first nine months of fiscal 2018.2019.
AccountsNet accounts receivable balances were $73.2$80.0 million at February 28, 2018,2019, an increase of $4.6$0.9 million, or 7%, compared to $68.6$79.1 million at May 31, 2017, less than the increase in revenue.2018. Days sales outstanding, a measurement of the time it takes to collect receivables, were 6368 days at February 28, 20182019, compared to 63 days at November 30, 2018, 64 days at August 31, 2018 and 60 days at May 31, 2017.2018; the increase in the current year is primarily 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 $77.5$84.9 million at February 28, 2018,2019, an increase of $4.4$8.9 million, or 6%12%, compared to $73.1 million ata May 31, 2017. The Company2018 balance of $76.0 million; the increase is due to lower than forecasted sales at the end of the quarter, and to higher levels necessary to support the business. 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.efficiency improvements.
Management believes that the Company’sour existing cash and marketable securities balances at February 28, 20182019, 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.
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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 February 28, 2018)2019) and short-term investments.
Foreign exchange risk exposure arises because the Company marketswe market and sells itssell our products throughout the world. Revenues in certain foreign countries as well as certain expenses related to those revenues are transacted in currencies other than the U.S. dollar. The Company’sOur operating results are exposed to changes in exchange rates between the U.S. dollar and the British pound sterling, the euro, the Brazilian real, the Mexican peso, the Chinese yuan, the Australian dollar, and to a lesser extent, the Indian rupee the Canadian dollar, and the AustralianCanadian dollar. When the U.S. dollar weakens against foreign currencies, the dollar value of revenues denominated in foreign currencies increases. When the U.S. dollar strengthens, the opposite situation occurs. Additionally, previously recognized revenues in the course of collection can be affected positively or negatively by changes in exchange rates. The Company enters into forward contracts to help mitigate the economic impact of fluctuations in certain currency exchange rates. These contracts are adjusted to fair value through earnings.
Neogen has assets, liabilities and operations outside of the United States, located in Scotland, England, Brazil, Mexico, China, India, Canada, and Australia where the functional currency is the British pound sterling, Brazilian real, Mexican peso, Chinese yuan, Indian rupee, Canadian dollar and the Australian dollar, respectively, and also transacts business throughout Europe in the euro. The Company’s investments in foreign subsidiaries are considered to be primarily long-term.
PART I – FINANCIAL INFORMATION
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
An evaluation of the effectiveness of the design and operation of the Company’sour disclosure controls and procedures as of February 28, 20182019 was carried out under the supervision and with the participation of the Company’s management, including the President & Chief Executive ChairmanOfficer and the Vice President & Chief Financial Officer (“the Certifying Officers”). Based on the evaluation, the Certifying Officers concluded that the Company’s disclosure controls and procedures are effective.
Changes in Internal ControlsControl over Financial Reporting
No changes in our controlcontrols over financial reporting were identified as having occurred during the quarter ended February 28, 20182019 that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting.
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Subsequent to the end of the third quarter, the Company settled a dispute with PerkinElmer, Bioo Scientific and Richard E. Calk, Jr., the former President and Chief Operating Officer of Neogen, regarding non-compliance with the terms of Mr. Calk’s non-competition agreement following his departure from Neogen in September, 2017. Per the terms of a court order, entered into on March 15, 2019, Mr. Calk was ordered to strictly comply with the non-competition clause of his separation agreement with the Company through September 1, 2019, and PerkinElmer and Bioo Scientific are prohibited from either directly or indirectly rehiring or engaging Mr. Calk for a period of 18 months.
The Company is subject to certainother 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.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Purchases of Equity Securities by the Issuer
The following table summarizes shares repurchased pursuant to our share repurchase program during the three months ended February 28, 2019 (in thousands except for price per share):
Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Programs | Approximate Number of Shares that May Yet Be Purchased Under the Programs | ||||||||||||
December 1, 2018 - December 31, 2018 | 50 | $ | 62.69 | 50 | 2,950 | |||||||||||
January 1, 2019 - January 31, 2019 | — | — | — | — | ||||||||||||
February 1, 2019 - February 28, 2019 | — | — | — | — | ||||||||||||
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Total | 50 | $ | 62.69 | 50 | 2,950 | |||||||||||
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(a) Exhibit Index
3 | Articles of Incorporation, as restated (incorporated by reference to Exhibit 3 to the registrant’s Form10-Q filed on December 28, 2018) | |
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.
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Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
NEOGEN CORPORATION | ||
(Registrant) |
Dated: March 29, 2019
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/s/ | ||
President & Chief Executive | ||
(Principal Executive Officer) |
Dated: March 29, 2019
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/s/ Steven J. Quinlan | ||
Steven J. Quinlan | ||
Vice President & Chief Financial Officer | ||
(Principal Financial Officer and Principal Accounting Officer) |
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