NEOGEN CORP
10-Ks and 10-Qs
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended November 30, 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 number 0-17988
(Exact name of registrant as specified in its charter)
| |
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| (State or other jurisdiction of incorporation or organization) |
(IRS Employer Identification Number) |
(Address of principal executive offices, including zip code)
(517 ) 372-9200
(Registrant’s telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
| Title of each Class |
Trading Symbol(s) |
Name of each exchange on which registered | ||
| |
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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.
☒
NO ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒
NO ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a
non-accelerated
filer (see definition of “accelerated filer and large accelerated filer” in Rule 12b-2
of the Exchange Act):| |
☒ |
Accelerated filer |
☐ | |||
| Non-accelerated filer |
☐ |
Smaller Reporting Company |
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| Emerging growth company |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule ☒
12b-2
of the Exchange Act): YES ☐
NO As of November 30, 2019 there were 52,710,633 shares of Common Stock outstanding.
NEOGEN CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
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CEO Certification |
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CFO Certification |
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Section 906 Certification |
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1
PART I – FINANCIAL INFORMATION
Item 1. Interim Consolidated Financial Statements
Neogen Corporation and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share and
per share amounts)
| November 30, |
May 31, |
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| 2019 |
2019 |
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| Unaudited |
Audited |
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| Assets |
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| Current Assets |
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| Cash and cash equivalents |
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$ | |
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| Marketable securities |
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| Accounts receivable, less allowance of $ |
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| Inventories |
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| Prepaid expenses and other current assets |
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| Total Current Assets |
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| Net Property and Equipment |
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| Other Assets |
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| Goodwill |
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| Other non-amortizable intangible assets |
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| Amortizable intangible and other assets, net of accumulated amortization of $ |
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| Total Assets |
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| Liabilities and Stockholders’ Equity |
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| Current Liabilities |
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| Accounts payable |
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| Accrued compensation |
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| Income taxes |
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| Other accruals |
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| Total Current Liabilities |
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| Deferred Income Taxes |
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| Other Non-Current Liabilities |
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| Total Liabilities |
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| Commitments and Contingencies (note 8) |
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| Equity |
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| Preferred stock, $ |
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| Common stock, $ |
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| Additional paid-in capital |
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| Accumulated other comprehensive loss |
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| Retained earnings |
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| Total Stockholders’ Equity |
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| Total Liabilities and Stockholders’ Equity |
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$ | |
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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 |
Six Months Ended |
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| November 30, |
November 30, |
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| 2019 |
2018 |
2019 |
2018 |
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| Revenues |
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| Product revenues |
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$ | |
$ | |
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| Service revenues |
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| Total Revenues |
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| Cost of Revenues |
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| Cost of product revenues |
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| Cost of service revenues |
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| Total Cost of Revenues |
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| Gross Margin |
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| Operating Expenses |
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| Sales and marketing |
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| General and administrative |
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| Research and development |
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| Total Operating Expenses |
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| Operating Income |
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| Other Income (Expense) |
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| Interest income |
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| Other income (expense) |
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| Total Other Income |
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| Income Before Taxes |
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| Provision for Income Taxes |
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| Net Income |
$ | |
$ | |
$ | |
$ | |
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| Net Income Per Share |
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| Basic |
$ | |
$ | |
$ | |
$ | |
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| Diluted |
$ | |
$ | |
$ | |
$ | |
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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 |
Six Months Ended |
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| November 30, |
November 30, |
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| 2019 |
2018 |
2019 |
2018 |
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| Net income |
$ | |
$ | |
$ | |
$ | |
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| Other comprehensive income (loss), net of tax: |
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| currency translation adjustments |
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| Other comprehensive income (loss), net of tax: |
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| unrealized gain (loss) on marketable securities |
( |
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— |
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| Total comprehensive income |
$ | |
$ | |
$ | |
$ | |
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See notes to interim consolidated financial statements.
4
Neogen Corporation and Subsidiaries
Consolidated Statements of
Equity (unaudited)
(in thousands)
| Accumulated |
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| Additional |
Other |
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| Common Stock |
Paid-in |
Comprehensive |
Retained |
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| Shares |
Amount |
Capital |
Income (Loss) |
Earnings |
Total |
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| Balance at May 31, 2019 |
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$ |
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$ |
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| Issuance of shares under share-based compensation plan |
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| Issuance of shares under employee stock purchase plan |
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| Net income for the three months ended August 31, 2019 |
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| Other comprehensive loss for the three months ended August 31, 2019 |
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| Balance at August 31, 2019 |
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| Issuance of shares under share-based compensation plan |
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| Net income for the three months ended November 30, 2019 |
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| Other comprehensive income for the three months ended November 30, 2019 |
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| Balance at November 30, 2019 |
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| Balance at May 31, 2018 |
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| Issuance of shares under share-based compensation plan |
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| Issuance of shares under employee stock purchase plan |
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| Net income for the three months ended August 31, 2018 |
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| Other comprehensive loss for the three months ended August 31, 2018 |
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| Balance at August 31, 2018 |
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| Issuance of shares under share-based compensation plan |
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| Net income for the three months ended November 30, 2018 |
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| Other comprehensive income for the three months ended November 30, 2018 |
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| Balance at November 30, 2018 |
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$ |
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$ |
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See notes to interim consolidated financial statements.
5
Neogen Corporation and Subsidiaries
Consolidated Statements of Cash Flows (unaudited)
(in thousands)
Six Months Ended |
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November 30, |
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2019 |
2018 |
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Cash Flows From Operating Activities |
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Net Income |
$ | $ | ||||||
Adjustments to reconcile net income to net cash from operating activities: |
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Depreciation and amortization |
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Share-based compensation |
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Change in operating assets and liabilities, net of business acquisitions: |
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Accounts receivable |
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Inventories |
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Prepaid expenses and other current assets |
( |
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Accounts payable, accruals and other changes |
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Net Cash From Operating Activities |
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Cash Flows For Investing Activities |
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Purchases of property, equipment and other assets |
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Proceeds from the sale of marketable securities |
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Purchases of marketable securities |
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Business acquisitions, net of cash acquired |
— |
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Net Cash For Investing Activities |
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Cash Flows From Financing Activities |
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Exercise of stock options and issuance of employee stock purchase plan shares |
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Net Cash From Financing Activities |
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Effect of Exchange Rates on Cash |
( |
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Net Increase In Cash and Cash Equivalents |
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Cash and Cash Equivalents, Beginning of Period |
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Cash and Cash Equivalents, End of Period |
$ | $ | ||||||
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 Form
10-Q
and Article 10 of Regulation S-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 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 six month
periods
ended November 30, 2019 are not necessarily indicative of the results to be expected for the fiscal year ending May 31, 2020. For more complete financial information, these consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K
for the fiscal year ended May 31, 2019.Recently Adopted Accounting Standards
Leases
On June 1, 2019, the Company adopted ASU No.
2016-02—
Leases. Refer to Leases section of Note 1 for further information.Recent Accounting Pronouncements Not Yet Adopted
Financial Instruments - Credit Losses
In June 2016, the FASB issued ASU No.
2016-13—Measurement
of Credit Losses on Financial Instruments, which changes how companies measure credit losses on most financial instruments measured at amortized cost and certain other instruments, such as loans, receivables and held-to-maturity
debt securities. Rather than generally recognizing credit losses when it is probable that the loss has been incurred, the revised guidance requires companies to recognize an allowance for credit losses for the difference between the amortized cost basis of a financial instrument and the amount of amortized cost that the company expects to collect over the instrument’s contractual life. ASU 2016-13
is effective for fiscal periods beginning after December 15, 2019 and must be adopted as a cumulative effect adjustment to retained earnings; early adoption is permitted. The Company does not believe adoption of this guidance will have an impact on its consolidated financial statements.Fair Value Measurements
In August 2018, the FASB issued ASU 2018-13—Fair Value
Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement, which modifies the disclosure requirements of fair value measurements. ASU 2018-13
is effective for fiscal years beginning after December 15, 2019 and early adoption is permitted. The Company does not believe adoption of this guidance will have an impact on its consolidated financial statements.Cloud Computing Implementation Cost
In August 2018, the FASB issued ASU 2018-15—Intangible
-Goodwill and Other Internal-Use
Software (Subtopic 350-40):
Customer’s Accounting for Implementation Cost Incurred in a Cloud Computing Arrangement That Is a Service Contract, which clarifies the accounting for implementation costs in cloud computing arrangements. ASU 2018-15
is effective for fiscal years beginning after December 15, 2019 and early adoption is permitted. The Company does not believe adoption of this guidance will have an impact on its consolidated financial statements.7
Comprehensive Income
Comprehensive income represents net income and any revenues, expenses, gains and losses that, under U.S. generally accepted accounting principles, are excluded from net income and recognized directly as a component of equity. Accumulated other comprehensive income (loss) consists of foreign currency translation adjustments and unrealized gains or losses on marketable securities.
Fair Value of Financial Instruments
The carrying amounts of the Company’s financial instruments other than cash equivalents and marketable securities, which include accounts receivable and accounts payable, approximate fair value based on either their short maturity or current terms for similar instruments.
Fair value measurements are determined based upon the exit price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants exclusive of any transaction costs. The Company utilizes a fair value hierarchy based upon the observability of inputs used in valuation techniques as follows:
Level 1: Observable inputs such as quoted prices in active markets;
Level 2: Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and
Level 3: Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
Cash and Cash Equivalents
Cash and cash equivalents consist of bank demand accounts, savings deposits, certificates of deposit and commercial paper with original maturities of 90 days or less. The carrying value of these assets approximates fair value due to the short maturity of these instruments and meets the Level 1 criteria.
Marketable Securities
The Company has marketable securities held by banks or broker-dealers at November 30, 2019, consisting of short-term domestic certificates of deposit, and commercial paper and U.S. treasuries rated at least 91 days and two years . These securities are classified as available for sale. The primary objective of the Company’s investment activity is to preserve capital for the purpose of funding operations, capital expenditures and business acquisitions; investments are not entered into for trading or speculative purposes. These securities are recorded at fair value based on recent trades or pricing models and therefore meet the Level 2 criteria. Interest income on these investments is recorded within other income on the consolidated statements of income.
A-1/P-1
(short-term) and A/A2 (long-term) with maturities between ESTIMATES AND ASSUMPTIONS
The preparation of these financial statements requires that management make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an ongoing basis, management evaluates the estimates, including, but not limited to, variable consideration related to revenue recognition, allowances for doubtful accounts, the market value of, and demand for, inventories, stock-based compensation, provision for income taxes and related balance sheet accounts, accruals, goodwill and other intangible assets. These estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
There have been no significant changes to the critical accounting policies and estimates disclosed in the Company’s Annual Report on Form
10-K
for the fiscal year ended May 31, 2019.There were no significant changes to the contractual obligations or contingent liabilities and commitments disclosed in the Company’s Annual Report on Form
10-K
for the fiscal year ended May 31, 2019.8
Accounts Receivable Allowance
Management attempts to minimize credit risk by reviewing customers’ credit history before extending credit and by monitoring credit exposure on a regular basis. An allowance for doubtful accounts is established based upon factors surrounding the credit risk of specific customers, historical trends and other information. Collateral or other security is generally not required for accounts receivable. Once a receivable balance has been determined to be uncollectible, that amount is charged against the allowance for doubtful accounts
.
Inventory
The reserve for obsolete and slow-moving inventory is reviewed at least quarterly based on an analysis of the inventory, considering the current condition of the asset as well as other known facts and future plans. The reserve required to record inventory at lower of cost or net realizable value is adjusted as conditions change. Product obsolescence may be caused by shelf-life expiration, discontinuance of a product line, replacement products in the marketplace or other competitive situations.
Goodwill and Other Intangible Assets
Goodwill represents the excess of purchase price over fair value 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, covenants 5 to 25 years. We review the carrying amounts of goodwill and other
not-to-compete
and patents. Customer-based intangibles are amortized on either an accelerated or straight-line basis, reflecting the pattern in which the economic benefits are consumed, while all other amortizable intangibles are amortized on a straight-line basis; intangibles are generally amortized over non-amortizable
intangible assets annually, or when indications of impairment exist, to determine if such assets may be impaired by performing a quantitative assessment. If the carrying amounts of these assets are deemed to be less than fair value based upon a discounted cash flow analysis and comparison to comparable EBITDA multiples of peer companies, such assets are reduced to their estimated fair value and a charge is recorded to operations.Long-Lived Assets
Management reviews the carrying values of its long-lived assets to be held and used, including definite-lived intangible assets, for
possible impairment whenever events or changes in business conditions warrant such a review. The carrying value of a long-lived asset is considered impaired when the anticipated separately identifiable undiscounted cash flows over the remaining useful life of the asset indicate that the carrying amount of the asset may not be recoverable. In such an event, fair value is determined using discounted cash flows and, if lower than the carrying value, impairment is recognized through a charge to operations.
Equity Compensation Plans
Share options awarded to employees and shares of stock awarded to employees under certain stock purchase plans are recognized as compensation expense based on their fair value at grant date. The fair market value of options granted under the Company stock option plans was estimated on the date of grant using the Black-Scholes option-pricing model with assumptions for inputs such as interest rates, expected dividends, volatility measures and specific employee exercise behavior patterns based on statistical data. Some of the inputs used are not market-observable and have to be estimated or derived from available data. Use of different estimates would produce different option values, which in turn would result in higher or lower compensation expense recognized. To value options, several recognized valuation models exist. None of these models can be singled out as being the best or most correct. The model applied by us can handle most of the specific features included in the options granted, which is the reason for its use. If a different model were used, the option values could differ despite using the same inputs. Accordingly, using different assumptions coupled with using a different valuation model could have a significant impact on the fair value of employee stock options. Fair value could be either higher or lower than the number provided by the model applied and the inputs used. Further information on our equity compensation plans, including inputs used to determine the fair value of options, is disclosed in Note 5.
9
Income Taxes
We account for income taxes using the asset and liability method. Under this method, deferred income tax assets and liabilities are
determined based on differences between the financial reporting and tax bases of assets and liabilities and for tax credit carryforwards and are measured using the enacted tax rates in effect for the years in which the differences are expected to reverse. Deferred income tax expense represents the change in net deferred income tax assets and liabilities during the year.
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 a right-of-use asset representing its right to use the underlying asset for the lease term. The recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessor have not significantly changed from previous U.S. GAAP. This ASU was effective for annualperiods, including interim periods within those annual periods, beginning after December 15, 2018. We adopted this ASU on June 1, 2019; the impact on our consolidated financial statements was immaterial.
We lease various manufacturing, laboratory, warehousing and distribution facilities, administrative and sales offices, equipment and vehicles under operating leases. We evaluate our contracts to determine if an arrangement is a lease at inception and classify it as a finance or operating lease. Currently, all our leases are classified as operating leases. Leased assets and corresponding liabilities are recognized based on the present value of the lease payments over the lease term. Our lease terms may include options to extend when it is reasonably certain that we will exercise that option.
Costs associated with operating leases are recognized on a straight-line basis within operating expenses over the term of the lease. With the adoption of ASC 842 on June 1, 20192.0
,
we recognized all leases with terms greater than 12 months in duration on our consolidated balance sheets as right-of-use
assets and lease liabilities of approximately $each
as of June 1, 2019. We adopted the standard using the prospective approach and did not retrospectively apply to prior periods. Right-of-use
assets are recorded in other assets on our consolidated balance sheets. Current and non-current
lease liabilities are recorded in other accruals within current liabilities and other non-current
liabilities, respectively, on our consolidated balance sheets.We have made certain assumptions and judgments when applying ASC 842, the most significant of which are:
| • | We elected the package of practical expedients available for transition that allow us to not reassess whether expired or existing contracts contain leases under the new definition of a lease, lease classification for expired or existing leases and whether previously capitalized initial direct costs would qualify for capitalization under ASC 842. |
| • | We did not elect to use hindsight when considering judgments and estimates such as assessments of lessee options to extend or terminate a lease or purchase the underlying asset. |
| • | For all asset classes, we elected to not recognize a right-of-use asset and lease liability for short-term leases. |
| • | For all asset classes, we elected to not separate non-lease components from lease components to which they relate and have accounted for the combined lease and non-lease components as a single lease component. |
| • | The determination of the discount rate used in a lease is our incremental borrowing rate that is based on what we would normally pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments. |
Supplemental balance sheet information related to operating leases was as follows:
| November 30, 2019 |
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| (in thousands) |
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| Right of use - assets |
$ | |
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| Lease liabilities - current |
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| Lease liabilities - non-current |
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1
0
The weighted average remaining lease term and weighted average discount rate were as follows:
| November 30, 2019 |
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| Weighted average remaining lease term |
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| Weighted average discount rate |
|
% | ||
Operating lease expenses are classified as cost of revenues or operating expenses on the The components of lease expense were as follows:
c
onsolidated s
tatements of i
ncome. | Three Months Ended November 30, 2019 |
Six Months Ended November 30, 2019 |
|||||||
| (in thousands) |
(in thousands) |
|||||||
| Operating leases |
$ |
|
$ |
|
||||
| Short term leases |
|
|
||||||
| Total lease expense |
$ |
|
$ |
|
||||
Cash paid for amounts included in the measurement of lease liabilities for operating leases included in cash flows from operations on the 558,000 for the six months ended November 30, 2019. There were no
s
tatement of c
ash f
lows were approximately $non-cash
additions to right-of-use
assets obtained from new operating lease liabilities for the six months ended November 30, 2019.Undiscounted minimum
lease payments as of November 30, 2019 were as follows:
| |
Amount |
|||
| |
(in thousands) |
|||
| Years ending May 31, |
||||
| 2020 (1) |
$ |
|
||
| 2021 |
|
|||
| 2022 |
|
|||
| 2023 |
|
|||
| 2024 |
|
|||
| 2025 and thereafter |
|
|||
| Total lease payments |
|
|||
| Less: imputed interest |
|
|||
| Total lease liabilities |
$ | |
||
| (1) | Excluding the six months ended November 30, 2019 . |
1
1
Revenue Recognition
The Company determines the amount of revenue to be recognized through application of the following steps:
• |
Identification of the contract with a customer; |
• |
Identification of the performance obligations in the contract; |
• |
Determination of the transaction price; |
• |
Allocation of the transaction price to the performance obligations in the contract; and |
• |
Recognition of revenue when, or as, the Company satisfies the performance obligations. |
Essentially all our revenue is generated through contracts with our customers. A performance obligation is a promise in a contract to transfer a product or service to a customer. We generally recognize revenue at a point in time when all our performance obligations under the terms of a contract are satisfied. Revenue is recognized upon transfer of control of promised products and services in an amount that reflects the consideration the Company expects to receive in exchange for those products or services. The collectability of consideration on the contract is reasonably assured before revenue is recognized. To the extent that customer payment has been received before all recognition criteria are met, these revenues are initially deferred in other accruals on the balance sheet and the revenue is recognized in the period that all recognition criteria have been met. In certain situations, we provide rebates, marketing support, credits or incentives to selected customers, which are accounted for as variable consideration when estimating the amount of revenue to recognize on a contract. Variable consideration reduces the amount of revenue that is recognized. These variable consideration estimates are updated at the end of each reporting period based on information currently available.
The performance obligations in our contracts are generally satisfied well within one year of the contract inception. In such cases, we have elected the practical expedient to not adjust the promised amount of consideration for the effects of a significant financing component. We have elected to utilize the practical expedient to recognize the incremental costs of obtaining a contract as an expense when incurred because the amortization period for the prepaid costs that would otherwise have been deferred and amortized is one year or less. The Company accounts for shipping and handling for products as a fulfillment activity when goods are shipped. Revenue is recognized net of any tax collected from customers; the taxes are subsequently remitted to governmental authorities. The Company’s terms and conditions of sale generally do not provide for returns of product or reperformance of service except in the case of quality or warranty issues. These situations are infrequent; due to immateriality of the amount, warranty claims are recorded in the period incurred.
We derive revenue from two primary sources - product revenue and service revenue.
Product revenue consists of shipments of:
• |
Diagnostic test kits, dehydrated culture media and related products used by food producers and processors to detect harmful natural toxins, foodborne bacteria, allergens and levels of general sanitation; |
• |
Consumable products marketed to veterinarians and animal health product distributors; and |
• |
Rodenticides, disinfectants and insecticides to assist in the control of rodents, insects and disease in and around agricultural, food production and other facilities. |
Revenues for our products are recognized and invoiced when the product is shipped to the customer.
Service revenue consists primarily of:
• |
Genomic identification and related interpretive bioinformatic services; and |
• |
Other commercial laboratory services. |
Revenues for our genomics and commercial laboratory services are recognized and invoiced when the applicable laboratory service is performed and the results are conveyed to the customer.
Payment terms for products and services are generally 30 to 60 days ; international terms may be longer.
12
The following table presents disaggregated revenue by major product and service categories for the three and six month periods ended November 30, 2019 and 2018:
| Three Months ended November 30, |
Six Months ended November 30, |
|||||||||||||||
| 2019 |
2018 |
2019 |
2018 |
|||||||||||||
| (in thousands) |
||||||||||||||||
| Food Safety |
||||||||||||||||
| Natural Toxins, Allergens & Drug Residues |
$ |
|
$ | |
$ |
|
$ | |
||||||||
| Bacterial & General Sanitation |
|
|
|
|
||||||||||||
| Culture Media & Other |
|
|
|
|
||||||||||||
| Rodenticides, Insecticides & Disinfectants |
|
|
|
|
||||||||||||
| Genomics Services |
|
|
|
|
||||||||||||
| $ | |
$ | |
$ | |
$ | |
|||||||||
| Animal Safety |
||||||||||||||||
| Life Sciences |
$ |
|
$ | |
$ |
|
$ | |
||||||||
| Veterinary Instruments & Disposables |
|
|
|
|
||||||||||||
| Animal Care & Other |
|
|
|
|
||||||||||||
| Rodenticides, Insecticides & Disinfectants |
|
|
|
|
||||||||||||
| Genomics Services |
|
|
|
|
||||||||||||
| $ | |
$ | |
$ | |
$ | |
|||||||||
| Total Revenues |
$ | |
$ | |
$ | |
$ | |
||||||||
2. INVENTORIES
Inventories are stated at the lower of cost, determined by the
first-in,
first-out
method, or net realizable value. The components of inventories follow:| November 30, |
May 31, |
|||||||
| 2019 |
2019 |
|||||||
| (in thousands) |
||||||||
| Raw materials |
$ | |
$ | |
||||
| Work-in-process |
|
|
||||||
| Finished and purchased goods |
|
|
||||||
| $ | |
$ | |
|||||
3. NET INCOME PER SHARE
The calculation of net income per share follows:
| Three Months Ended |
Six Months Ended |
|||||||||||||||
| November 30, |
November 30, |
|||||||||||||||
| 2019 |
2018 |
2019 |
2018 |
|||||||||||||
| (in thousands, except per share amounts) |
||||||||||||||||
| Numerator for basic and diluted net income per share: |
||||||||||||||||
| Net income attributable to Neogen |
$ |
|
$ | |
$ |
|
$ | |
||||||||
| Denominator for basic net income per share: |
||||||||||||||||
| Weighted average shares |
|
|
|
|
||||||||||||
| Effect of dilutive stock options |
|
|
|
|
||||||||||||
| Denominator for diluted net income per share |
|
|
|
|
||||||||||||
| Net income attributable to Neogen per share: |
||||||||||||||||
| Basic |
$ | |
$ | |
$ | |
$ | |
||||||||
| Diluted |
$ | |
$ | |
$ | |
$ | |
||||||||
1
3
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, dehydrated culture media and related products used by food producers and processors to detect harmful natural toxins, foodborne bacteria, allergens and levels of general sanitation. The Animal Safety segment is primarily engaged in the development, production and marketing of products dedicated to animal safety, including a complete line of consumable products marketed to veterinarians and animal health product distributors; this segment also provides genomic identification and related interpretive bioinformatic services. Additionally, the Animal Safety segment produces and markets rodenticides, disinfectants and insecticides to assist in the control of rodents, insects and disease in and around agricultural, food production and other facilities.
Our international operations in the United Kingdom, Mexico, Brazil, China and India originally focused on the Company’s food safety products, and each of these units reports through the Food Safety segment. In recent years, these operations have expanded to offer our complete line of products and services, including those usually associated with the Animal Safety segment such as cleaners, disinfectants, rodenticides, insecticides, veterinary instruments and genomics services. These additional products and services are managed and directed by existing management and are reported through the Food Safety segment.
The accounting policies of each of the segments are the same as those described in Note 1.
Segment information follows:
| Corporate and |
||||||||||||||||
| Food |
Animal |
Eliminations |
||||||||||||||
| Safety |
Safety |
(1) |
Total |
|||||||||||||
| (in thousands) |
||||||||||||||||
| As of and for the three months ended November 30, 2019 |
||||||||||||||||
| Product revenues to external customers |
$ | |
$ | |
$ | — |
$ | |
||||||||
| Service revenues to external customers |
|
|
— |
|
||||||||||||
| Total revenues to external customers |
|
|
— |
|
||||||||||||
| Operating income (loss) |
|
|
( |
) | |
|||||||||||
| Total assets |
|
|
|
|
||||||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| As of and for the three months ended November 30, 2018 |
||||||||||||||||
| Product revenues to external customers |
$ | |
$ | |
$ | — |
$ | |
||||||||
| Service revenues to external customers |
|
|
— |
|
||||||||||||
| Total revenues to external customers |
|
|
— |
|
||||||||||||
| Operating income (loss) |
|
|
( |
) | |
|||||||||||
| Total assets |
|
|
|
|
||||||||||||
| (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. |
1
4
| Corporate and |
||||||||||||||||
| Food |
Animal |
Eliminations |
||||||||||||||
| Safety |
Safety |
(1) |
Total |
|||||||||||||
| (in thousands) |
||||||||||||||||
| As of and for the six months ended November 30, 2019 |
||||||||||||||||
| Product revenues to external customers |
$ | |
$ | |
$ | — |
$ | |
||||||||
| Service revenues to external customers |
|
|
— |
|
||||||||||||
| Total revenues to external customers |
|
|
— |
|
||||||||||||
| Operating income (loss) |
|
|
( |
) | |
|||||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| As of and for the six months ended November 30, 2018 |
||||||||||||||||
| Product revenues to external customers |
$ | |
$ | |
$ | — |
$ | |
||||||||
| Service revenues to external customers |
|
|
— |
|
||||||||||||
| Total revenues to external customers |
|
|
— |
|
||||||||||||
| Operating income (loss) |
|
|
( |
) | |
|||||||||||
| (1) |
Includes elimination of intersegment transactions . |
The following table presents the Company’s revenue disaggregated by geographic location:
| Three months ended |
Six months ended |
|||||||||||||||
| November 30, |
November 30, |
|||||||||||||||
| 2019 |
2018 |
2019 |
2018 |
|||||||||||||
| (in thousands) |
(in thousands) |
|||||||||||||||
| Revenues by Geographic Location |
||||||||||||||||
| Domestic |
$ | |
$ | |
$ | |
$ | |
||||||||
| International |
|
|
|
|
||||||||||||
| Total revenue |
|
|
|
|
||||||||||||
1
5
5. EQUITY COMPENSATION PLANS
Qualified and Company under the terms of 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 and five year periods and the contractual terms are generally or ten years . A summary of stock option activity during the six months ended November 30, 2019 follows:
non-qualified
options to purchase shares of common stock may be granted to directors, officers and employees of the(Options in thousands) |
Shares |
Weighted- Average Exercise Price |
||||||
Options outstanding June 1, 2019 |
$ | |||||||
Granted |
||||||||
Exercised |
( |
) | ||||||
Forfeited |
( |
) | ||||||
Options outstanding November 30, 2019 |
$ | |||||||
During the three and six month periods ended November 30, 2019 and 2018, the Company recorded $1,612,000 and $1,400,000 and $3,155,000 and $2,831,000 , respectively, of compensation expense related to its share-based awards.
The weighted-average fair value per share of stock options granted during
the first six months of
fiscal year 2015.56 . The fair value of stock options granted was estimated using the following weighted-average assumptions.
20
, estimated on the date of grant using the Black-Scholes option pricing model, was $FY 20 20 |
||||
Risk-free interest rate |
||||
Expected dividend yield |
||||
Expected stock price volatility |
||||
Expected option life |
||||
The Company has an employee stock purchase plan that provides for employee stock purchases at a 5 % discount to market price. The discount is recorded in administrative expense as of the date of purchase.
6. 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 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 this acquisition 4,204,000 in cash and approximately $1,256,000 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 , 544,000 , 878,000 , intangible assets of $1,487,000 (with an estimated life of 5 -15 years) and the remainder to goodwill 180,000 has been 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.
;
has given
the Company the ability
to sell this product to new markets. Consideration for the purchase was $non-current
deferred tax liability of $non-amortizable
intangible assets of $(non-deductible
for tax purposes). These values are Level 3 fair value measurements. Since February 2019, $1
6
On September 4, 2018, the Company acquired the assets of Livestock Genetic Services, LLC, a Virginia-based company that specialized in genetic evaluations and data management for cattle breeding organizations. Livestock Genetic Services had been a long-time strategic partner of Neogen and the acquisition enhanced the Company’s 1,100,000 in cash, with $700,000 paid at closing and $400,000 payable to the former owner on September 1, 2019 , and up to $585,000 of contingent consideration, payable over the next three years. The final 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 $942,000 (with an estimated life of 5 -15 years) and the remainder to goodwill (deductible to tax purposes). These values are Level 3 fair value measurements. In September 2019, the former owner was paid the second installment of $400,000 and was also paid $107,000 in contingent consideration based on the achievement of sales targets in the first year. Services provided by this operation are now performed at the Company’s Lincoln, Nebraska location, reporting within the Animal Safety segment.
in-house
genetic evaluation capabilities. Consideration for the purchase was $On January 1, 2019, the Company acquired the assets of Edmonton, Alberta based Delta Genomics Centre, an animal genomics laboratory in Canada. Delta’s laboratory operations were renamed Neogen Canada and the acquisition was intended to accelerate growth of the Company’s animal genomics business in Canada. Consideration for the purchase was $1,485,000 in cash. The final purchase price allocation, based upon the fair value of these assets and liabilities determined using the income approach, included inventory of $38,000 , machinery and equipment of $371,000 , unearned revenue liability of $125,000 , intangible assets of $532,000 (with an estimated life of 5 to 10 years) and the remainder to goodwill (deductible for tax purposes). These values are Level 3 fair value measurements. Services provided by this operation continue to be performed in Edmonton, reporting within the Animal Safety segment.
7. LONG TERM DEBT
We have a financing agreement with a bank providing for a $15,000,000 unsecured revolving line of credit, which was amended on November 30, 2018 to extend the maturity from September 1, 2019 to September 30, 2021 . There were no no balance outstanding at November 30, 2019. Interest on any borrowings remained at LIBOR plus basis points (rate under the terms of the agreement was 2.70 % at November 30, 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 November 30, 2019.
8. COMMITMENTS AND CONTINGENCIES
The Company is involved in environmental remediation and monitoring activities at its Randolph, Wisconsin manufacturing facility and accrues for related costs when such costs are determined to be probable and estimable. The Company currently utilizes a pump and treat remediation strategy, which includes semi-annual monitoring and reporting, consulting, and maintenance of monitoring wells. Neogen expenses these annual costs of remediation, which have ranged from $38,000 to $131,000 per year over the past five years . The Company’s estimated liability for these costs was $916,000 15 years; $100,000 of the liability is recorded within current liabilities and the remainder is recorded within other
non-current
liabilities on the consolidated balance sheets. In fiscal 2019, the Company performed an updated Corrective Measures Study (CMS) on the site, per a request from the Wisconsin Department of Natural Resources (WDNR), and is currently in discussion with the WDNR regarding potential alternative remediation strategies going forward. The Company believes that the current pump and treat strategy is appropriate for the site. At this time, the outcome of the review in terms of approach and future costs is unknown, but a change in the current remediation strategy, depending on the alternative selected, could require an increase in the currently recorded liability, with an offsetting charge to operations in the period recorded.The Company is subject to certain legal and other proceedings in the normal course of business that, in the opinion of management, should not have a material effect on its future results of operations or financial position.
9. STOCK PURCHASE
In October 2018, the Company’s Board of Directors passed a resolution canceling the Company’s prior stock buyback program, which had been approved in December 2008, and authorized a new program to purchase, subject to market conditions, up to 3,000,000 shares of the Company’s common stock. In December 2018, the Company purchased 50,000 shares under the program in negotiated and open market transactions for a total price, including commissions, of $3,134,727 . Shares acquired under the program have been retired.
1
7
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’s long-term prospects, historical financial information may not be indicative of future financial results.
Safe Harbor and Forward-Looking Statements
Forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, are made throughout this Quarterly Report on Form
10-Q.
For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words “believes,” “anticipates,” “plans,” “expects,” “seeks,” “estimates,” and similar expressions are intended to identify forward-looking statements. There are a number of important factors, including competition, recruitment and dependence on key employees, impact of weather on agriculture and food production, identification and integration of acquisitions, research and development risks, patent and trade secret protection, government regulation and other risks detailed from time to time in the Company’s reports on file at the Securities and Exchange Commission, that could cause Neogen Corporation’s results to differ materially from those indicated by such forward-looking statements, including those detailed in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”In addition, any forward-looking statements represent management’s views only as of the day this Quarterly Report on Form
10-Q
was first filed with the Securities and Exchange Commission and should not be relied upon as representing management’s views as of any subsequent date. While management may elect to update forward-looking statements at some point in the future, it specifically disclaims any obligation to do so, even if its views change.18
Executive Overview
| • | Consolidated revenues were $107.8 million in the second quarter of fiscal 2020, an increase of 1% compared to $107.1 million in the second quarter of fiscal 2019. Organic sales growth in the second quarter of fiscal 2020 was flat. For the six month period, consolidated revenues were $209.2 million, an increase of 1% compared to $206.7 million in the same period in the prior fiscal year. On a year to date basis, organic sales also rose 1%. |
| • | Food Safety segment sales were $56.9 million in the second quarter of the current fiscal year, an increase of 6% compared to $53.8 million in the same period of the prior year. There were no contributions from acquisitions in this segment in the second quarter. For the year to date, Food Safety segment sales were $107.9 million, an increase of 2% compared to $105.9 million in the same period of the prior fiscal year; the organic sales increase was also 2%, with a minor contribution in the first quarter from the August 1, 2018 acquisition of Clarus Labs. |
| • | Animal Safety segment sales were $50.9 million in the second quarter of fiscal 2020, a decrease of 4% compared to $53.3 million in the second quarter of fiscal 2019. Organic sales in this segment decreased 5% in the second quarter, with a minor contribution from the January 1, 2019 acquisition of Delta Genomics. For the six month period, Animal Safety segment sales were $101.4 million, an increase of 1% compared to $100.8 million in the same period a year ago. Year to date organic sales were flat, after excluding three months revenues from the September 1, 2018 acquisition of Livestock Genetic Services and six months revenues from the January 1, 2019 Delta Genomics acquisition. |
| • | International sales in the second quarter of fiscal 2020 were 41% of total sales compared to 39% of total sales in the second quarter of fiscal 2019. For the year to date, fiscal 2020 international sales were 39% of total sales compared to 40% of total sales in the same period of the prior year. |
| • | Our effective tax rate in the second quarter was 15.3% compared to an effective tax rate of 18.5% in the prior year second quarter; the fiscal 2020 year to date effective tax rate was 16.1% compared to 15.1% for the same period a year ago. |
| • | Net income for the quarter ended November 30, 2019 was $16.3 million, or $0.31 per diluted share, an increase of 1% compared to $16.1 million, or $0.31 per share in the same period in the prior year. For the year to date, net income was $30.9 million, or $0.59 per share, a decrease of 1% compared to prior year to date net income of $31.3 million, or $0.60 per diluted share. |
| • | Cash provided from operating activities in the first six months of fiscal 2020 was $40.5 million, compared to $32.6 million in the first half of fiscal 2019. |
Neogen’s results reflect an increase in international sales of 6% in the second quarter of fiscal 2020 and 1% for the year to date, each compared to the same respective periods in the prior year. The rate of growth in our international operations in the current fiscal year has been adversely impacted by currency devaluations in a number of the countries in which we operate and the loss of forensics business in Brazil. Revenue changes, denominated in both the U.S. dollar and as reported in the local currency, for the three and six month periods of fiscal 2020 compared to the same respective periods in the prior year are as follows for each of our international locations:
| Three Months Ended |
Six Months Ended |
|||||||||||||||
| November 30, 2019 |
November 30, 2019 |
|||||||||||||||
| Revenue |
Revenue |
Revenue |
Revenue |
|||||||||||||
| % Increase/(Decrease) |
% Increase/(Decrease) |
% Increase |
% Increase |
|||||||||||||
| USD |
Local Currency |
USD |
Local Currency |
|||||||||||||
| Neogen Europe (including Lab M & Quat-Chem) |
7 |
% | 10 |
% | 1 |
% | 5 |
% | ||||||||
| Neogen do Brasil (including Deoxi & Rogama) |
20 |
% | 27 |
% | 0 |
% | 4 |
% | ||||||||
| Neogen Latinoamerica |
5 |
% | 5 |
% | 5 |
% | 5 |
% | ||||||||
| Neogen China |
40 |
% | 43 |
% | 10 |
% | 14 |
% | ||||||||
| Neogen India |
(1 |
)% | (3 |
)% | 8 |
% | 7 |
% | ||||||||
| Neogen Canada |
329 |
% | 334 |
% | 181 |
% | 184 |
% | ||||||||
| Neogen Australasia |
18 |
% | 25 |
% | 20 |
% | 27 |
% | ||||||||
19
Currency translations reduced revenues by approximately $1.0 million in the second quarter of fiscal 2020 compared to the same quarter a year ago, and $2.1 million for the year to date compared to the same period last year, primarily due to the increased strength of the U.S. dollar relative to the British pound, the Brazilian real and the Australian dollar.
The 7% increase in second quarter revenues at our Neogen Europe operations was led by a 15% increase in sales of Neogen Culture Media products, a 9% increase in sales of cleaners and disinfectants and a 48% increase in sales of aflatoxin test kits, due to increased sale of insecticides offset the loss of forensics test kit business, due to a large commercial laboratory converting their testing protocol to a higher throughput method. For the six month period, sales at our Brazilian operations were flat compared to the prior year. At Neogen Latinoamerica, sales increased 5% for both the three and six month periods, respectively, as compared to the prior year, with broad based strength across the diagnostics business somewhat offset by lower sales of cleaners and disinfectants throughout the distribution channel.
market share and an outbreak in Africa; revenues increased 1% for the year to date period. Sales in Brazil increased 20% in the second quarter, as a large
non-recurring
Service revenue was $20.4 million in the second quarter of fiscal 2020, an increase of 16% over prior year second quarter revenues of $17.5 million, including a minor contribution from the January 1, 2019 acquisition of Delta Genomics. For the six month period, service revenue was $39.9 million, an increase of 17% over prior year revenues of $34.2 million. Year to date revenues were aided by the Delta Genomics acquisition and the September 2018 acquisition of Livestock Genetic Services. The growth in both the quarter and year to date periods was led by strong increases of genomic testing revenues to the companion animal market, and to a lesser extent, increases in our global beef and dairy cattle markets.
20
Revenues
| Three Months Ended November 30, |
||||||||||||||||
| Increase/ |
||||||||||||||||
| 2019 |
2018 |
(Decrease) |
% |
|||||||||||||
| (in thousands) |
||||||||||||||||
| Food Safety |
||||||||||||||||
| Natural Toxins, Allergens & Drug Residues |
$ | 20,681 |
$ | 20,571 |
$ | 110 |
1 |
% | ||||||||
| Bacterial & General Sanitation |
11,615 |
10,822 |
793 |
7 |
% | |||||||||||
| Culture Media & Other |
12,757 |
12,191 |
566 |
5 |
% | |||||||||||
| Rodenticides, Insecticides & Disinfectants |
7,447 |
5,943 |
1,504 |
25 |
% | |||||||||||
| Genomics Services |
4,354 |
4,223 |
131 |
3 |
% | |||||||||||
| $ | 56,854 |
$ | 53,750 |
$ | 3,104 |
6 |
% | |||||||||
| Animal Safety |
||||||||||||||||
| Life Sciences |
$ | 1,803 |
$ | 1,891 |
$ | (88 |
) | (5 |
)% | |||||||
| Veterinary Instruments & Disposables |
10,486 |
11,683 |
(1,197 |
) | (10 |
)% | ||||||||||
| Animal Care & Other |
7,787 |
8,948 |
(1,161 |
) | (13 |
)% | ||||||||||
| Rodenticides, Insecticides & Disinfectants |
16,186 |
18,789 |
(2,603 |
) | (14 |
)% | ||||||||||
| Genomics Services |
14,687 |
12,037 |
2,650 |
22 |
% | |||||||||||
| $ | 50,949 |
$ | 53,348 |
$ | (2,399 |
) | (4 |
)% | ||||||||
| Total Revenues |
$ | 107,803 |
$ | 107,098 |
$ | 705 |
1 |
% | ||||||||
| Six Months Ended November 30, |
||||||||||||||||
| Increase/ |
||||||||||||||||
| 2019 |
2018 |
(Decrease) |
% |
|||||||||||||
| (in thousands) |
||||||||||||||||
| Food Safety |
||||||||||||||||
| Natural Toxins, Allergens & Drug Residues |
$ | 40,796 |
$ | 39,409 |
$ | 1,387 |
4 |
% | ||||||||
| Bacterial & General Sanitation |
21,931 |
21,288 |
643 |
3 |
% | |||||||||||
| Culture Media & Other |
24,037 |
24,408 |
(371 |
) | (2 |
)% | ||||||||||
| Rodenticides, Insecticides & Disinfectants |
12,896 |
12,569 |
327 |
3 |
% | |||||||||||
| Genomics Services |
8,216 |
8,259 |
(43 |
) | (1 |
)% | ||||||||||
| $ | 107,876 |
$ | 105,933 |
$ | 1,943 |
2 |
% | |||||||||
| Animal Safety |
||||||||||||||||
| Life Sciences |
$ | 3,525 |
$ | 3,971 |
$ | (446 |
) | (11 |
)% | |||||||
| Veterinary Instruments & Disposables |
21,822 |
22,087 |
(265 |
) | (1 |
)% | ||||||||||
| Animal Care & Other |
14,193 |
15,346 |
(1,153 |
) | (8 |
)% | ||||||||||
| Rodenticides, Insecticides & Disinfectants |
32,904 |
35,935 |
(3,031 |
) | (8 |
)% | ||||||||||
| Genomics Services |
28,907 |
23,452 |
5,455 |
23 |
% | |||||||||||
| $ | 101,351 |
$ | 100,791 |
$ | 560 |
1 |
% | |||||||||
| Total Revenues |
$ | 209,227 |
$ | 206,724 |
$ | 2,503 |
1 |
% | ||||||||
21
Food Safety
Natural Toxins, Allergens & Drug Residues –
non-exclusive
distributor of our dairy drug residue test kits. For the six month period, sales of our allergens product line increased 11% and natural toxins test kit revenues increased 6%, while sales of drug residue test kits declined 18%.Bacterial & General Sanitation –
Listeria
Culture Media & Other –
Rodenticides, Insecticides & Disinfectants –
non-recurring
sales of insecticide products to governmental agencies and the strength of disinfectant products in China, the result of increased demand in the pork market caused by the African swine fever virus outbreak in that country. For the year to date, sales in this category increased 3%, as the prior year first quarter included a large non-recurring
insecticide sale.Genomics Services –
Animal Safety
Life Sciences –
Veterinary Instruments & Disposables –
Animal Care & Other –
Rodenticides, Insecticides & Disinfectants –
22
Genomics Services –
Gross Margin
Gross margin was 47.3% in the second quarter of fiscal 2020 compared to 46.7% in the same quarter a year ago. The improvement in gross margin is due to a greater proportion of sales from the Food Safety segment, which have higher gross margins than the Animal Safety segment; increased gross margins on the domestic genomics service business within the Animal Safety segment also contributed to the improvement. Gross margin for the six month period ended November 30, 2019 was 47.4% compared to 46.8% in the same period of the prior year, for the same reasons.
Operating Expenses
Operating expenses were $32.8 million in the second quarter, compared to $31.8 million in the same quarter of the prior year, an increase of $967,000, or 3%. Sales and marketing expenses decreased $511,000, or 3%, primarily due to decreases in commissions, shipping and other variable expenses tied to revenues, and a reduction in bad debt expense due to the reversal of reserves for collected receivables. General and administrative expense increased $864,000, or 9%, resulting from increases in stock-based compensation expense, legal and professional fees, and depreciation related to investments in information technology. Additionally, prior year expense in the second quarter was reduced by economic incentive credits received in Lincoln for an expansion project; these incentive credits were much lower in this year’s second quarter. Research and development expense was $3.8 million in the second quarter, an increase of $615,000, or 19%, compared to the same period in the prior year. The increase is primarily the result of development spending on a number of new products, which are expected to be launched in late fiscal 2020 or early fiscal 2021.
Operating expenses for the six month period ended November 30, 2019 were $64.7 million, an increase of $2.6 million, or 4%, compared to the prior year. Driving the increase were research and development spending increases of $1.5 million, or 25%, due primarily to new product development, and a $1.4 million, or 7%, increase in general and administrative expense. The increase in general and administrative expense was led by increased stock based compensation expense, higher legal and professional fees, and an increase in depreciation expense.
Operating Income
Operating income was $18.3 million in the second quarter of fiscal 2020, compared to $18.2 million in the same period of the prior year; year to date operating income was $34.5 million compared to $34.7 million in the prior year. Expressed as a percentage of sales, operating income was 16.9% for the second quarter and 16.5% for the year to date, compared to 17.0% and 16.8%, respectively, in the prior year. The small decline in operating margin percentage for each period in the current fiscal year was the result of operating expenses that increased more than the gross margin improvement.
Other Income
| Three Months Ended |
Six Months Ended |
|||||||||||||||
| November 30, |
November 30, |
|||||||||||||||
| (dollars in thousands) |
2019 |
2018 |
2019 |
2018 |
||||||||||||
| Interest income (net of expense) |
$ | 1,271 |
$ | 1,028 |
$ | 2,781 |
$ | 1,955 |
||||||||
| Foreign currency transactions |
(352 |
) | (72 |
) | (469 |
) | (458 |
) | ||||||||
| Royalty income |
— |
37 |
1 |
59 |
||||||||||||
| Deoxi contingent consideration |
— |
— |
— |
(9 |
) | |||||||||||
| Quat-Chem contingent consideration |
— |
422 |
— |
422 |
||||||||||||
| Other |
35 |
40 |
29 |
144 |
||||||||||||
| Total Other Income |
$ | 954 |
$ | 1,455 |
$ | 2,342 |
$ | 2,113 |
||||||||
23
The increase in interest income in both the three and six month periods of fiscal 2020 compared to the same periods a year ago was the result of higher cash and marketable securities balances. Other expense resulting from foreign currency transactions was primarily the result of changes in the value of foreign currencies relative to the U.S. dollar in countries in which we operate.
Income Tax Expense
Income tax expense in the second quarter of fiscal 2020 was $3.0 million, an effective tax rate of 15.3%, compared to $3.7 million, an effective tax rate of 18.5%, in the same period of the prior year. For the year to date, income tax expense was $6.0 million, an effective rate of 16.1%, in fiscal 2020 and $5.6 million, an effective rate of 15.1%, in fiscal 2019. For each period, the primary difference between the statutory rate of 21% and the effective rates recorded is the benefit resulting from the exercise of stock options; this benefit was $1,204,000 in the second quarter of fiscal 2020 compared to $484,000 in the second quarter of the prior year. For the year to date, the benefit was $1,973,000 in fiscal 2020 compared to $2,774,000 in fiscal 2019; the prior year first quarter had significant stock option exercise due to a higher stock price and the timing of the expiration of the 2013 grant in August 2018.
Net Income
Net income was $16.3 million in the second quarter of fiscal 2020, compared to $16.1 million in the same period in the prior year. The improvement in earnings for this year’s second quarter was the result of the decrease in the effective tax rate, which was caused by increased tax benefits resulting from the exercise of stock options, due to higher option activity in the second quarter of this fiscal year compared to the same period a year ago. For the year to date, net income decreased 1% from $31.3 million to $30.9 million; six month net income in fiscal 2020 was negatively impacted by a higher effective tax rate.
Financial Condition and Liquidity
The overall cash, cash equivalents and marketable securities position of Neogen was $313.6 million at November 30, 2019, compared to $267.5 million at May 31, 2018. Approximately $40.5 million was generated from operations during the first six months of fiscal 2020. Net cash proceeds of $19.2 million were realized from the exercise of stock options and issuance of shares under our Employee Stock Purchase Plan during the first six months of fiscal 2020. We spent $12.8 million for property, equipment and other
non-current
assets in the first six months of fiscal 2020.Net accounts receivable balances were $85.4 million at November 30, 2019, an increase of $2.8 million, compared to $82.6 million at May 31, 2019. Days sales outstanding, a measurement of the time it takes to collect receivables, were 65 days at November 30, 2019, compared to 61 days at May 31, 2019 and 63 days at November 30, 2018. The increase in time to collection is primarily the result of the increase in international revenues, which generally take longer to collect. All customer accounts are actively managed and no losses in excess of amounts reserved are currently expected.
Net inventory balances were $86.4 million at November 30, 2019, an increase of $414,000, compared to a May 31, 2019 balance of $86.0 million. We actively monitor our inventory levels and balance the need for adequate levels of product availability to minimize backorders with a desire to improve inventory turnover and efficiency levels. We have continued active programs to improve our turnover in fiscal 2020.
Inflation and changing prices are not expected to have a material effect on operations, as management believes it will continue to be successful in offsetting increased input costs with price increases and/or cost efficiencies.
Management believes that our existing cash and marketable securities balances at November 30, 2019, along with available borrowings under our 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 our cash requirements to commercialize products currently under development or its plans to acquire other organizations, technologies or products that fit within our mission statement. Accordingly, we may choose to issue equity securities or enter into other financing arrangements for a portion of our future financing needs.
24
PART I – FINANCIAL INFORMATION
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We have interest rate and foreign exchange rate risk exposure but no long-term fixed rate investments or borrowings. Our primary interest rate risk is due to potential fluctuations of interest rates for variable rate borrowings (no long-term borrowings at November 30, 2019) and short-term investments.
Foreign exchange risk exposure arises because we market and sell 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. Our 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 and the Canadian 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 transacts business throughout Europe in the euro. The Company’s investments in foreign subsidiaries are considered to be 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 our disclosure controls and procedures as of November 30, 2019 was carried out under the supervision and with the participation of the Company’s management, including the President & Chief Executive Officer and the Vice President & Chief Financial Officer (“the Certifying Officers”). Based on the evaluation, the Certifying Officers concluded that the Company’s disclosure controls and procedures are effective.
Changes in Internal Controls over Financial Reporting
No changes in our control over financial reporting were identified as having occurred during the quarter ended November 30, 2019 that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting.
25
PART II – OTHER INFORMATION
Item 1. Legal Proceedings
The Company is subject to 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 the Company’s future results of operations or financial position.
I
tem 6. Exhibits
(a) Exhibit Index
| 3 |
||||
| 10 |
||||
| 31.1 |
||||
| 31.2 |
||||
| 32 |
||||
| 101.INS |
Inline XBRL Instance Document | |||
| 101.SCH |
Inline XBRL Taxonomy Extension Schema Document | |||
| 101.CAL |
Inline XBRL Taxonomy Extension Calculation Linkbase Document | |||
| 101.DEF |
Inline XBRL Taxonomy Extension Definition Document | |||
| 101.LAB |
Inline XBRL Taxonomy Extension Label Linkbase Document | |||
| 101.PRE |
Inline XBRL Taxonomy Extension Presentation Linkbase Document | |||
| EX-104 |
Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) |
Items 1A, 2, 3, 4, and 5 are not applicable or removed or reserved and have been omitted.
26
SIGNATURES
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: December 27, 2019 |
||||||
| /s/ John E. Adent | ||||||
| John E. Adent | ||||||
| President & Chief Executive Officer | ||||||
| (Principal Executive Officer) | ||||||
| Dated: December 27, 2019 |
||||||
| /s/ Steven J. Quinlan | ||||||
| Steven J. Quinlan | ||||||
| Vice President & Chief Financial Officer | ||||||
| (Principal Financial Officer and Principal Accounting Officer) |
27
TABLE OF CONTENTS
Part I Financial InformationItem 4. Controls and ProceduresPart II Other InformationItem 1. Legal ProceedingsItem 6. Exhibits