Neogen Corp 10-Q for FY2021 Q1
Neogen Corp (NEOG)
10-Q
2020-09-30
For: 2020-08-31
View Original
Added on
April 11, 2026
About this 10-Q
Neogen Corp filed this 10-Q on September 30, 2020, covering the quarter ended August 31, 2020 (FY2021 Q1).
Headline figures
Quarter ended August 31, 2020, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $109.33M
- up 7.8% from $101.42M a year earlier
- Net income
- $15.86M
- up 8.2% from net income of $14.65M a year earlier
- Diluted EPS
- $0.30
- up 7.1% from $0.28 a year earlier
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 August 31, 2020 .
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
oration
(Exact name of registrant as specified in its charter)
(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 | ||
N/A
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
Indicate by a check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ 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 Yes ☒ No ☐
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). Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2
of the Exchange Act.| ☒ | Accelerated filer | ☐ | ||||
| Non-accelerated filer | ☐ | Smaller reporting company | ||||
| Emerging growth company | ||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended 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 Act). Yes ☐ No As of August 31, 2020, there were
shares of Common Stock outstanding.
NEOGEN CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
1
PART I – FINANCIAL INFORMATION
Item 1. Interim Consolidated Financial Statements
Neogen Corporation and Subsidiaries
Consolidated Balance Sheets (unaudited)
(in thousands, except share and
per share amounts)
August 31, |
|
May 31, |
||||||
2020 |
|
2020 |
||||||
| Assets |
|
|||||||
| Current Assets |
|
|||||||
| Cash and cash equivalents |
$ |
|
$ | |||||
| Marketable securities |
|
|||||||
| Accounts receivable, less allowance of $ |
|
|||||||
| May 31, 2020, respectively |
|
|
|
|
|
|
|
|
| Inventories |
|
|||||||
| Prepaid expenses and other current assets |
|
|||||||
| |
|
|
|
|
||||
| Total Current Assets |
|
|||||||
| Net Property and Equipment |
|
|||||||
| Other Assets |
|
|||||||
| Right of use assets |
|
|||||||
| Goodwill |
|
|||||||
| Other non-amortizable intangible assets |
|
|||||||
| Amortizable intangible and other assets, net of accumulated amortization of $ |
|
|||||||
| |
|
|
|
|
||||
| Total Assets |
$ |
|
$ | |||||
| |
|
|
|
|
||||
| Liabilities and Stockholders’ Equity |
|
|||||||
| Current Liabilities |
|
|||||||
| Accounts payable |
$ |
|
$ | |||||
| Accrued compensation |
|
|||||||
| Income taxes |
|
|||||||
| Other accruals |
|
|||||||
| |
|
|
|
|
||||
| Total Current Liabilities |
|
|||||||
| Deferred Income Taxes |
|
|||||||
| Other Non-Current Liabilities |
|
|||||||
| |
|
|
|
|
||||
| Total Liabilities |
|
|||||||
| Commitments and Contingencies (note 8) |
|
|||||||
| Equity |
|
|||||||
| Preferred stock, $ |
|
|||||||
| Common stock, $ |
|
|||||||
| Additional paid-in capital |
|
|||||||
| Accumulated other comprehensive loss |
( |
) | |
( |
) | |||
| Retained earnings |
|
|||||||
| |
|
|
|
|
||||
| Total Stockholders’ Equity |
|
|||||||
| |
|
|
|
|
||||
| Total Liabilities and Stockholders’ Equity |
$ |
|
$ | |||||
| |
|
|
|
|
||||
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 August 31, |
||||||||
2020 |
2019 |
|||||||
Revenues |
||||||||
Product revenues |
$ |
$ | ||||||
Service revenues |
||||||||
Total Revenues |
||||||||
Cost of Revenues |
||||||||
Cost of product revenues |
||||||||
Cost of service revenues |
||||||||
Total Cost of Revenues |
||||||||
Gross Margin |
||||||||
Operating Expenses |
||||||||
Sales and marketing |
||||||||
General and administrative |
||||||||
Research and development |
||||||||
Total Operating Expenses |
||||||||
Operating Income |
||||||||
Other Income (Expense) |
||||||||
Interest income |
||||||||
Other expense |
( |
) | ||||||
Total Other Income |
||||||||
Income Before Taxes |
||||||||
Provision for Income Taxes |
||||||||
Net Income |
$ |
$ | ||||||
Net Income Per Share |
||||||||
Basic |
$ | $ | ||||||
Diluted |
$ | $ | ||||||
Weighted Average Shares Outstanding |
||||||||
Basic |
||||||||
Diluted |
||||||||
See notes to interim consolidated financial statements.
3
Neogen Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income (unaudited)
(in thousands)
Three Months Ended August 31, |
||||||||
2020 |
2019 |
|||||||
Net income |
$ |
$ | ||||||
Other comprehensive income (loss), net of tax: foreign currency translations |
( |
) | ||||||
Other comprehensive income (loss), net of tax: unrealized gain (loss) on marketable securities |
( |
) | ||||||
Total comprehensive income |
$ |
$ |
||||||
See notes to interim consolidated financial statements.
4
Neogen Corporation and Subsidiaries
Consolidated Statements of
Equity (unaudited)
(in thousands)
Additional Paid-in Capital |
Accumulated Other Comprehensive (Loss) |
Retained Earnings |
||||||||||||||||||||||
Common Stock |
||||||||||||||||||||||||
Shares |
Amount |
Total |
||||||||||||||||||||||
| Balance, June 1, 2020 |
$ |
$ |
$ |
( |
) |
$ |
$ |
|||||||||||||||||
| Exercise of options and share-based compensation expense |
— |
— |
||||||||||||||||||||||
| Issuance of shares under employee stock purchase plan |
— |
— |
||||||||||||||||||||||
| Net income for the three months ended August 31, 2020 |
— |
|
|
|
— |
|
|
|
— |
— |
||||||||||||||
| Other comprehensive income for the three months ended August 31, 2020 |
— |
|
|
|
— |
|
|
|
— |
— |
|
|||||||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Balance, August 31, 2020 |
$ |
$ |
$ |
( |
) |
$ |
$ |
|||||||||||||||||
Additional Paid-in Capital |
Accumulated Other Comprehensive (Loss) |
|||||||||||||||||||||||
Common Stock |
Retained Earnings |
|||||||||||||||||||||||
Shares |
Amount |
Total |
||||||||||||||||||||||
| Balance, June 1, 2019 |
$ |
$ |
$ |
( |
) |
$ |
$ |
|||||||||||||||||
| Exercise of options and share-based compensation expense |
— |
|
|
|
— |
|||||||||||||||||||
| Issuance of shares under employee stock purchase plan |
— |
|
|
|
— |
|||||||||||||||||||
| Net income for the three months ended August 31, 2019 |
— |
|
|
|
— |
|
|
|
— |
— |
|
|||||||||||||
| Other comprehensive loss for the three months ended August 31, 2019 |
— |
|
|
|
— |
|
|
|
— |
( |
) |
— |
|
( |
) | |||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Balance, August 31, 2019 |
$ |
$ |
$ |
( |
) |
$ |
$ |
|||||||||||||||||
See notes to interim consolidated financial statements.
5
Neogen Corporation and Subsidiaries
Consolidated Statements of Cash Flows (unaudited)
(in thousands)
Three Months Ended August 31, |
||||||||
2020 |
2019 |
|||||||
| Cash Flows From Operating Activities |
||||||||
| Net Income |
$ |
$ | ||||||
| Adjustments to reconcile net income to net cash from operating activities: |
||||||||
| Depreciation and amortization |
||||||||
| Share-based compensation |
||||||||
| Change in operating assets and liabilities, net of business acquisitions: |
||||||||
| Accounts receivable |
||||||||
| Inventories |
( |
) | ( |
) | ||||
| Prepaid expenses and other current assets |
( |
) | ( |
) | ||||
| Accounts payable, accruals and other changes |
( |
) | ||||||
| |
|
|
|
|||||
| Net Cash From Operating Activities |
||||||||
| Cash Flows For Investing Activities |
||||||||
| Purchases of property, equipment and other non-current intangible assets |
( |
) | ( |
) | ||||
| Proceeds from the sale of marketable securities |
||||||||
| Purchases of marketable securities |
( |
) | ( |
) | ||||
| Business acquisitions, net of cash acquired |
( |
) | — | |||||
| |
|
|
|
|||||
| Net Cash For Investing Activities |
( |
) | ( |
) | ||||
| Cash Flows From Financing Activities |
||||||||
| Exercise of stock options and issuance of employee stock purchase plan shares |
||||||||
| |
|
|
|
|||||
| Net Cash From Financing Activities |
||||||||
| Effect of Foreign Exchange Rates on Cash |
( |
) | ||||||
| |
|
|
|
|||||
| Net Increase (Decrease) In Cash and Cash Equivalents |
( |
) | ||||||
| Cash and Cash Equivalents, Beginning of Period |
||||||||
| |
|
|
|
|||||
| 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-month period ended August 31, 2020 are not necessarily indicative of the results to be expected for the fiscal year ending May 31, 2021. 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, 2020.Our functional currency is the U.S. dollar. We translate our
non-U.S.
operations’ assets and liabilities denominated in foreign currencies into U.S. dollars at current rates of exchange as of the balance sheet date and income and expense items at the average exchange rate for the reporting period. Translation adjustments resulting from exchange rate fluctuations are recorded in other comprehensive income (loss). Gains or losses from foreign currency transactions are included in other income (expense) on our consolidated statement of income.Recently Adopted Accounting Standards
Financial Instruments—Credit Losses
On June 1, 2020, the Company adopted ASU No. debt securities. Rather than generally recognizing credit losses when it is probable that the loss has been incurred, the revised guidance requires the Company 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. The adoption of this guidance did not have a material impact on our consolidated financial statements due to the Company’s short-term contractual life of receivables and minimal expected losses.
2016-13—Measurement
of Credit Losses on Financial Instruments, which changes how the Company measures credit losses on most financial instruments measured at amortized cost and certain other instruments, such as loans, receivables and held-to-maturity
Fair Value Measurements
On June 1, 2020, the Company adopted 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. The adoption of this guidance did not have an impact on our consolidated financial statements. Cloud Computing Implementation Cost
On June 1, 2020, the Company adopted 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. The adoption of this guidance did not have an impact on our 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 and losses on our marketable securities.
Fair Value of Financial Instruments
The carrying amounts of the Company’s financial instruments other than cash equivalents and marketable securities, which include accounts receivable and accounts payable, approximate fair value based on either their short maturity or current terms for similar instruments.
Fair value measurements are determined based upon the exit price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants exclusive of any transaction costs. The Company utilizes a fair value hierarchy based upon the observability of inputs used in valuation techniques as follows:
Level 1: Observable inputs such as quoted prices in active markets;
Level 2: Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and
Level 3: Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own
assumptions.
ESTIMATES AND ASSUMPTIONS
The preparation of these financial statements requires that management make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an ongoing basis, management evaluates the estimates, including, but not limited to, variable consideration related to revenue recognition, allowances for doubtful accounts, the market value of, and demand for, inventories, stock-based compensation, provision for income taxes and related balance sheet accounts, accruals, goodwill and other intangible assets. These estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Accounts Receivable Allowance
Management attempts to minimize credit risk by reviewing customers’ credit history before extending credit and by monitoring credit exposure on a regular basis. An allowance for doubtful accounts is established based upon factors surrounding the credit risk of specific customers, historical trends, current economic conditions and other information. Collateral or other security is generally not required for accounts receivable. Once a receivable balance has been determined to be uncollectible, generally after all collection efforts have been exhausted, that amount is charged against the allowance for doubtful accounts.
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 not-to-compete
8
and patents. Customer-based intangibles are amortized on either an accelerated or straight-line basis, reflecting the pattern in which the economic benefits are consumed, while all other amortizable intangibles are amortized on a straight-line basis; intangibles are generally amortized over 5 to 25 years. We review the carrying amounts of goodwill and other
non-amortizable
intangible assets annually, or when indications of impairment exist, to determine if such assets may be impaired. If the carrying amounts of these assets are deemed to be less than fair value based upon a discounted cash flow analysis and comparison to comparable EBITDA multiples of peer companies, such assets are reduced to their estimated fair value and a charge is recorded to operations.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.
Income Taxes
We account for income taxes using the asset and liability method. Under this method, deferred income tax
ssets
and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and for tax credit carryforwards and are measured using the enacted tax rates in effect for the years in which the differences are expected to reverse. Deferred income tax expense represents the change in net deferred income tax assets and liabilities during the year.
2. CASH AND MARKETABLE SECURITIES
Cash and Cash Equivalents
Cash and cash equivalents consist of bank demand accounts, savings deposits, certificates of deposit and commercial paper with original maturities of 90 days or less. Cash and cash equivalents are maintained at financial institutions and, at times, balances may exceed federally insured limits. The Company has not experienced losses related to these balances and believes it is not exposed to significant credit risk regarding its cash and cash equivalents. Cash and cash equivalents were $60,947 ,000 and $66,269 ,000 at August 31, 2020 and May 31, 2020, respectively. The carrying value of these assets approximates fair value due to the short maturity of these instruments and is classified as Level 1 in the fair value hierarchy.
Marketable Securities
The Company has marketable securities held by banks or broker-dealers at August 31, 2020. Changes in market value are monitored and recorded on a monthly basis; in the event of a downgrade in credit quality subsequent to purchase, the marketable security investment is evaluated to determine the appropriate action to take to minimize the overall risk to our marketable security portfolio.
9
These securities are classified as available for sale. The primary objective of management’s short-term investment activity is to preserve capital for the purpose of funding current operations, capital expenditures and business acquisitions; short-term investments are not entered into for trading or speculative purposes. These securities are recorded at fair value based on recent trades or pricing models and therefore meet the Level 2 criteria. Interest income on these investments is recorded within other income on the income statement. Adjustments in the fair value of these assets are recorded in other comprehensive income.
Marketable Securities as of August 31, 2020 and May 31, 2020 are listed below by classification and remaining maturities.
(in thousands) |
Maturity |
August 31, 2020 |
May 31, 2020 |
|||||||
| US Treasuries |
0—90 days |
$ |
$ |
|||||||
91—180 days |
||||||||||
181 days—1 year |
||||||||||
1—2 years |
||||||||||
| Commercial Paper & Corporate Bonds |
0—90 days |
|||||||||
91—180 days |
||||||||||
181 days—1 year |
||||||||||
1—2 years |
||||||||||
| Certificates of Deposit |
0—90 days |
|||||||||
91—180 days |
||||||||||
181 days—1 year |
||||||||||
1—2 years |
||||||||||
| |
|
|
|
|||||||
| Total Marketable Securities |
$ |
$ |
||||||||
| |
|
|
|
|||||||
The components of marketable securities at August 31, 2020 are as follows:
(in thousands) |
Amortized Cost |
Unrealized Gains |
Unrealized Losses |
Fair Value |
||||||||||||
| US Treasuries |
$ |
$ |
$ |
— |
$ |
|||||||||||
| Commercial Paper & Corporate Bonds |
( |
) |
||||||||||||||
| Certificates of Deposit |
— |
|||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Total Marketable Securities |
$ |
$ |
$ |
( |
) |
$ |
||||||||||
| |
|
|
|
|
|
|
|
|||||||||
The components of marketable securities at May 31, 2020 are as follows:
(in thousands) |
Amortized Cost |
Unrealized Gains |
Unrealized Losses |
Fair Value |
||||||||||||
| US Treasuries |
$ |
$ |
$ |
— |
$ |
|||||||||||
| Commercial Paper & Corporate Bonds |
( |
) |
||||||||||||||
| Certificates of Deposit |
— |
|||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Total Marketable Securities |
$ |
$ |
$ |
( |
) |
$ |
||||||||||
| |
|
|
|
|
|
|
|
|||||||||
10
3. 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: (in thousands) |
August 31, 2020 |
May 31, 2020 |
||||||
| Raw materials |
$ |
$ |
||||||
| Work-in-process |
||||||||
| Finished and purchased goods |
||||||||
| |
|
|
|
|||||
$ |
$ |
|||||||
| |
|
|
|
|||||
4. LEASES
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.
Topic 842 requires the Company to recognize in the statement of financial position a liability to make lease payments (the lease liability) and a asset representing its right to use the underlying asset for the lease term. assets are recorded in other assets on our consolidated balance sheets. Current and
right-of-use
Right-of-use
non-current
lease liabilities are recorded in other accruals within current liabilities and other non-current
liabilities, respectively, on our consolidated balance sheets. Costs associated with operating leases are recognized on a straight-line basis within operating expenses over the term of the lease. 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 |
• |
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:
(in thousands) |
August 31, 2020 |
May 31, 2020 |
||||||
| Right of use—assets |
$ |
|
|
$ |
|
|||
| Lease liabilities—current |
|
|
|
|
||||
| Lease liabilities—non-current |
|
|
|
|
||||
The weighted average remaining lease term and weighted average discount rate were as follows:
(in thousands) |
August 31, 2020 |
May 31, 2020 |
||||||
| Weighted average remaining lease term |
||||||||
| Weighted average discount rate |
% |
% | ||||||
11
Operating lease expenses are classified as cost of revenues or operating expenses on the consolidated statements of income.
The components of lease expense were as follows:
August 31, |
||||||||
(in thousands) |
2020 |
2019 |
||||||
| 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 statement of cash flows were approximately
$304,000 and $247,000 for the three months ended August 31, 2020 and 2019, respectively. There were
no non-cash additions to right-of-use assets obtained from new operating lease liabilities for either period.
Undiscounted future minimum lease payments as of August 31, 2020 were as follows (in thousands):
| Years ending May 31, | Amount |
|||
| 2021 (1) |
$ | |||
| 2022 |
||||
| 2023 |
||||
| 2024 |
||||
| 2025 |
||||
| 2026 and thereafter |
||||
| |
|
|||
| Total lease payments |
||||
| Less: imputed interest |
( |
) | ||
| |
|
|||
| Total lease liabilities |
$ | |||
| |
|
|||
| (1) | Excluding the three months ended August 31, 2020 . |
12
5. REVENUE RECOGNITION
We determine the amount of revenue to be recognized through application of the following steps:
| • | Identification of the contract with a customer; |
| • | Identification of the performance obligations in the contract; |
| • | Determination of the transaction price; |
| • | Allocation of the transaction price to the performance obligations in the contract; and |
| • | Recognition of revenue when, or as, the Company satisfies the performance obligations. |
Essentially all of Neogen’s revenue is generated through contracts with its customers. A performance obligation is a promise in a contract to transfer a product or service to a customer. We generally recognized revenue at a point in time when all of our performance obligations under the terms of a contract are satisfied. Revenue is recognized upon transfer of control of promised products and services in an amount that reflects the consideration we expect to receive in exchange for those products or services. The collectability of consideration on the contract is reasonably assured before revenue is recognized. To the extent that customer payment has been received before all recognition criteria are met, these revenues are initially deferred in other accruals on the balance sheet and the revenue is recognized in the period that all recognition criteria have been met.
Certain agreements with customers include discounts or rebates on the sale of products and services applied retrospectively, such as volume rebates achieved by purchasing a specified purchase threshold of goods and services. We account for these discounts as variable consideration and estimate the likelihood of a customer meeting the threshold in order to determine the transaction price using the most predictive approach. We typically use the most-likely-amount method, for incentives that are offered to individual customers, and the expected-value method, for programs that are offered to a broad group of customers. Variable consideration reduces the amount of revenue that is recognized. Rebate obligations related to customer incentive programs are recorded in accrued liabilities; the rebate estimates are adjusted at the end of each applicable measurement period based on information currently available.
The performance obligations in Neogen’s contracts are generally satisfied well within one year of contract inception. In such cases, management has elected the practical expedient to not adjust the promised amount of consideration for the effects of a significant financing component. Management has elected to utilize the practical expedient to recognize the incremental costs of obtaining a contract as an expense when incurred because the amortization period for the prepaid costs that would otherwise have been deferred and amortized is one year or less. We account for shipping and handling for products as a fulfillment activity when goods are shipped. Shipping and handling costs that are charged to and reimbursed by the customer are recognized as revenues, while the related expenses incurred by Neogen are recorded in sales and marketing expense. Revenue is recognized net of any tax collected from customers; the taxes are subsequently remitted to governmental authorities. Our terms and conditions of sale generally do not provide for returns of product or reperformance of service except in the case of quality or warranty issues. These situations are infrequent; due to immateriality of the amount, warranty claims are recorded in the period incurred.
The Company derives revenue from two primary sources—product revenue and service revenue.
Product revenue consists of shipments of:
• |
Diagnostic test kits, culture media and related products used by food producers and processors to detect harmful natural toxins, foodborne bacteria, allergens and levels of general sanitation; |
• |
Consumable products marketed to veterinarians, retailers, livestock producers and animal health product distributors; and |
• |
Rodenticides, disinfectants and insecticides to assist in the control of rodents, insects and disease in and around agricultural, food production and other facilities. |
Revenues for our products are recognized and invoiced when the product is shipped to the customer.
Service revenue consists primarily of:
• |
Genomic identification and related interpretive bioinformatic services; and |
• |
Other commercial laboratory services. |
Revenues for Neogen’s genomics and commercial laboratory services are recognized and invoiced when the applicable laboratory service is performed and the results are conveyed to the customer.
Payment terms for products and services are generally 30 to 60 days .
13
The following table presents disaggregated revenue by major product and service categories for the three month periods ended August 31, 2020 and 2019:
| Three Months ended August 31, |
||||||||
(in thousands) |
2020 |
2019 |
||||||
| 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 |
$ | $ | ||||||
| |
|
|
|
|||||
6. NET INCOME PER SHARE
The calculation of net income per share follows:
Three Months Ended |
||||||||
August 31, |
||||||||
(in thousands, except |
2020 |
2019 |
||||||
| 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 |
$ | $ | ||||||
| |
|
|
|
|||||
14
7. SEGMENT INFORMATION AND GEOGRAPHIC DATA
We have two reportable segments: Food Safety and Animal Safety. The Food Safety segment is primarily engaged in the development, production and marketing of diagnostic test kits, culture media and related products used by food producers and processors to detect harmful natural toxins, foodborne bacteria, allergens and levels of general sanitation. The Animal Safety segment is primarily engaged in the development, production and marketing of products dedicated to animal safety, including a complete line of consumable products marketed to veterinarians and animal health product distributors; this segment also provides genomic identification and related interpretive bioinformatic services. Additionally, the Animal Safety segment produces and markets rodenticides, disinfectants and insecticides to assist in the control of rodents, insects and disease in and around agricultural, food production and other facilities.
Our international operations in the United Kingdom, Mexico, Brazil, China and India originally focused on the Company’s food safety products, and each of these units reports through the Food Safety segment. In recent years, these operations have expanded to offer our complete line of products and services, including those usually associated with the Animal Safety segment such as cleaners, disinfectants, rodenticides, insecticides, veterinary instruments and genomics services. These additional products and services are managed and directed by existing management and are reported through the Food Safety segment.
Neogen’s operation in Australia originally focused on providing genomics services and sales of animal safety products and reports through the Animal Safety segment. With the acquisition of Cell BioSciences in February 2020, this operation has expanded to offer our complete line of products and services, including those usually associated with the Food Safety segment. These additional products are managed and directed by existing management at Neogen Australasia and report through the Animal Safety segment.
The accounting policies of each of the segments are the same as those described in Note 1.
Segment information follows:
Corporate and |
||||||||||||||||
Food |
Animal |
Eliminations |
||||||||||||||
(in thousands) |
Safety |
Safety |
(1) |
Total |
||||||||||||
| As of and for the three months ended August 31, 2020 |
||||||||||||||||
| 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 August 31, 2019 |
||||||||||||||||
| 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. |
The following table presents the Company’s revenue disaggregated by geographic location:
| Three months ended August 31, |
||||||||
(in thousands) |
2020 |
2019 |
||||||
| Domestic |
$ | $ | ||||||
| International |
||||||||
| |
|
|
|
|||||
| Total revenue |
||||||||
| |
|
|
|
|||||
15
8. EQUITY COMPENSATION PLANS
Incentive and non-qualified options to purchase shares of common stock have been granted to directors, officers and employees of Neogen 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
and five year periods and the contractual terms are generally or ten years . A summary of stock option activity during the three months ended August 31, 2020 follows:
Weighted- |
||||||||
Average |
||||||||
(Options in thousands) |
Shares |
Exercise Price |
||||||
| Options outstanding June 1, 2020 |
$ | |||||||
| Granted |
||||||||
| Exercised |
( |
) | ||||||
| Forfeited |
( |
) | ||||||
| |
|
|||||||
| Options outstanding August 31, 2020 |
$ | |||||||
During the three month periods ended August 31, 2020 and 2019, the Company recorded $1,681,000 and $1,543,000 , respectively, of compensation expense related to its share-based awards.
The weighted-average fair value per share of stock options granted during fiscal year 2020, estimated on the date of grant using the Black-Scholes option pricing model, was $15.56 . The fair value of stock options granted was estimated using the following weighted-average assumptions. No options were granted in the first quarter of fiscal year 2021.
FY 2020 |
||||
| Risk-free interest rate |
% | |||
| Expected dividend yield |
% | |||
| Expected stock price volatility |
% | |||
| Expected option life |
|
|
|
|
The Company offers eligible employees the option to purchase common stock at a
discount to the lower of the market value of the stock at the beginning or end of each participation period under the terms of the 2011 Employee Stock Purchase Plan; the discount is recorded in general and administrative expense. Total individual purchases in any year are limited to 10 % of compensation.
9. 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 January 1, 2020, the Company acquired all of the stock of Productos Quimicos Magiar, a distributor of Neogen’s Food Safety products for the past 20 years, located in Argentina. This acquisition gives Neogen a direct sales presence in Argentina. Consideration for the purchase was $3,776,000 in net cash, with $3,237,000 paid at closing and $540,000 payable to the former owner on January 1, 2022 , and up to $979,000 of contingent consideration, payable in one year, based upon an excess net sales formula. The preliminary purchase price allocation, based upon the fair value of these assets and liabilities determined using the income approach, included accounts receivable of $603,000 , inventory of $446,000 , machinery and equipment of $36,000 , other current assets of $221,000 , accounts payable of $383,000 , other current liabilities of $312,000 , contingent consideration accrual of $640,000 , 441,000 , intangible assets of $1,471,000 (with an estimated life of 5 -10 years) and the remainder to goodwill
non-current
deferred tax liabilities of $(non-deductible
for tax purposes). These values are Level 3 fair value measurements. This operation continues to operate from its current location in Buenos Aires, Argentina, reporting within the Food Safety segment. It is managed through Neogen’s Latin America operation.16
On January 1, 2020, the Company acquired all of the stock of Productos Quimicos Magiar, a distributor of Neogen’s Food Safety products for the past 20 years, located in Uruguay. This acquisition gives Neogen a direct sales presence in Uruguay. Consideration for the purchase was $1,488,000 in net cash, with $1,278,000 paid at closing and $210,000 payable to the former owner on January 1, 2022 , and up to $241,000 in contingent consideration, payable in one year, based upon an excess net sales formula. The preliminary purchase price allocation,
non-current
deferred tax liabilities of $(non-deductible
for tax purposes). These values are Level 3 fair value measurements. This operation continues to operate from its current location in Montevideo, Uruguay, reporting within the Food Safety segment. It is managed through Neogen’s Latin America operation.On January 9, 2020, the Company acquired 3,455,000 in net cash. The preliminary purchase price allocation, based upon the fair value of these assets and liabilities determined using the income approach, included accounts receivable of $780,000 , inventory of $5,000 , other current assets of $160,000 , accounts payable of $140,000 , other current liabilities of $305,000 , 294,000 , intangible assets of $1,225,000 (with an estimated life of 5 -10 years) and the remainder to goodwill
all of
the stock of Diessechem Srl, a distributor of food and feed diagnostics for the past 27 years, located in Italy. This acquisition gives Neogen a direct sales presence in Italy. Consideration for the purchase was $non-current
deferred tax liabilities of $(non-deductible
for tax purposes). These values are Level 3 fair value measurements. This operation continues to operate from its current location in Milan, Italy, reporting within the Food Safety segment. It is managed through Neogen’s Scotland operation.On January 31, 2020, the Company acquired
all of
the stock of Abtek Biologicals Limited, a manufacturer and supplier of culture media supplements and microbiology technologies. This acquisition enhances the Company’s culture media product line offering for the worldwide industrial microbiology markets. Consideration for the purchase was $1,401,000 in net cash, with $1,282,000 paid at closing and $119,000 payable to the former owner on
non-current
deferred tax liabilities of $(non-deductible
for tax purposes). These values are Level 3 fair value measurements. This manufacturing operation continues to operate from its current location in Liverpool, England, reporting within the Food Safety segment. It is managed through Neogen’s Scotland operation.On February 28, 2020, the Company acquired the assets of Cell BioSciences, an Australian distributor of food safety and industrial microbiology products. This acquisition gave Neogen a direct sales presence across Australasia for its entire product portfolio. Consideration for the purchase was $3,768,000 in cash, with $3,596,000 paid at closing and $172,000 payable in one year. The preliminary purchase price allocation, based upon the fair value of these assets and liabilities determined using the income approach, included inventory of $420,000 , unearned revenue liability of $13,000 , intangible assets of $1,338,000 (with an estimated life of 3 to 10 years) and the remainder to goodwill
(non-deductible
for tax purposes). The business operates in Gatton, Australia, reporting within the Australian operations in the Animal Safety segment.On March 26, 2020, the Company acquired the assets of Chile-based Magiar Chilena, a distributor of food, animal and plant diagnostics, including Neogen products. This acquisition gives Neogen a direct sales presence in Chile. Consideration for the purchase was $400,000 in cash, with $350,000 paid at closing and $50,000 payable to the former owner on March 26, 2021 . The preliminary purchase price allocation, based upon the fair value of these assets and liabilities determined using the income approach, included inventory of $164,000 , machinery and equipment of $53,000 , and intangible assets of $183,000 (with an estimated life of 5 -10 years). The business is operated from its current location in Santiago, Chile, reporting within the Food Safety segment. It is managed through Neogen’s Latin America operation.
On July 31, 2020, the Company acquired the U.S. (including territories) rights to Elanco’s StandGuard 2,351,000 in cash, all paid at closing. The preliminary purchase price allocation, based upon the fair value of these assets determined using the income approach, included inventory of $51,000 and intangible assets of $2,300,000 (with an estimated life of 15 years). This product line is currently being toll manufactured for the Company but is
Pour-on
for horn fly and lice control in beef cattle, and related assets. This product line fits in well with Neogen’s existing agricultural insecticide portfolio and organizational capabilities. Consideration for the purchase was $eventually
expected to be manufactured at Neogen’s operation in Iowa,
the sales are reported within the Animal Safety segment. For each acquisition listed above, the revenues and net income were not considered material and were therefore not disclosed.
17
10. LONG TERM DEBT
We have a financing agreement with a bank providing for a $15,000,000 unsecured revolving line of credit, which September 30, 2021 . There were no no balance outstanding at August 31, 2020. Interest on any borrowings remained at LIBOR plus basis points (rate under the terms of the agreement was 1.20 % at August 31, 2020). 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 August 31, 2020.
expires
on 11. 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 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 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.
18
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, effects of the ongoing COVID-19
pandemic on our business, identification and integration of acquisitions, research and development risks, patent and trade secret protection, government regulation and other risks detailed from time to time in the Company’s reports on file at the Securities and Exchange Commission, that could cause Neogen Corporation’s results to differ materially from those indicated by such forward-looking statements, including those detailed in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”In addition, any forward-looking statements represent management’s views only as of the day this Quarterly Report on Form
10-Q
was first filed with the Securities and Exchange Commission and should not be relied upon as representing management’s views as of any subsequent date. While management may elect to update forward-looking statements at some point in the future, it specifically disclaims any obligation to do so, even if its views change.19
Executive Overview
| • | Consolidated revenues were $109.3 million in the first quarter of fiscal 2021, an increase of 8% compared to $101.4 million in the first quarter of fiscal 2020. Organic sales increased 6%. |
| • | Food Safety segment sales were $54.2 million in the first quarter of the current fiscal year, an increase of 6% compared to $51.0 million in the same period of the prior year. Organic sales in this segment rose 4% for the comparative period, with revenues from the acquisitions of Neogen Italia (January 2020), Neogen Argentina (January 2020), Neogen Uruguay (January 2020), Abtek (January 2020) and Neogen Chile (March 2020) providing the remainder of the increase. |
| • | Animal Safety segment sales were $55.1 million in the first quarter, an increase of 9% compared to prior year first quarter sales of $50.4 million. Organic sales in this segment increased 8%, with the acquisitions of Cell BioSciences (February 2020) and the StandGuard product line from Elanco (August 2020) providing the remainder of the increase. |
| • | International sales in the first quarter of fiscal 2021 were 38.4% of total sales compared to 37.5% of total sales in the first quarter of fiscal 2020. |
| • | The effective tax rate in the first quarter of fiscal 2021 was 19.9% compared to 17.0% in the prior year first quarter. The increase in the effective tax rate for this quarter was due primarily to lower tax benefits from the exercise of stock options and reduced benefit from foreign derived income, each compared to the same period a year ago. |
| • | Net income for the quarter ended August 31, 2020 was $15.9 million, or $0.30 per diluted share, an increase of 8% compared to $14.7 million, or $0.28 per share, for the same period in the prior year. |
| • | Cash generated from operating activities in the first quarter of fiscal 2021 was $25.1 million, compared to $23.7 million in the first quarter of fiscal 2020. |
Neogen’s results reflect a 10% increase in international sales in the first quarter of fiscal 2021 compared to the same period in the prior year. Revenue changes, expressed in percentages, in the first quarter of fiscal 2021 compared to the same quarter in the prior year are as follows for each of our international locations:
Revenue % Inc (Dec) USD |
Revenue % Inc (Dec) Local Currency |
|||||||
| U.K. Operations |
21 | % | 17 | % | ||||
| Brazil Operations |
1 | % | 38 | % | ||||
| Neogen Latinoamerica |
(2 | )% | 13 | % | ||||
| Neogen China |
105 | % | 106 | % | ||||
| Neogen India |
10 | % | 18 | % | ||||
| Neogen Canada |
(11 | )% | (10 | )% | ||||
| Neogen Australasia |
67 | % | 63 | % | ||||
Currency translations reduced comparative revenues by approximately $2.1 million in the first quarter of fiscal 2021 compared to the same quarter a year ago, primarily due to increased strength of the U.S. dollar relative to the Brazilian real and Mexican peso. Combined revenues at our U.K. operations increased 21% resulting from a large shipment of hand sanitizers to the U.K. government’s health organization and strong cleaner & disinfectant sales to China, Africa and the Middle East. Histamine test kits sales also contributed to the growth, due to increased business from tuna producers.
At our Brazilian operations, fiscal 2021 first quarter sales increased 38% in local currency and included a large
non-recurring
insecticide sale to a government health organization. Additionally, sales were strong across our entire portfolio of products, including rodenticides, genomics services, dairy drug residue test kits and aflatoxin test kits, however negative currency translations lowered the overall growth to 1%. At Neogen Latinoamerica, the growth in local currency in the first quarter was led by sales of cleaners, disinfectants and sanitizers.Service revenue, which consists primarily of genomics services to animal protein and companion animal markets, was $21.4 million in the first quarter of fiscal 2021, an increase of 10% over prior year first quarter revenues of $19.5 million. The growth was led by increases of genomics revenues to the companion animal and Australian sheep markets, somewhat offset by lower sales of services to domestic commercial beef and dairy producers, due to delays in sample receipts caused by the
Covid-19
pandemic and poor economic conditions in the commercial dairy markets.20
Revenues
Three Months ended August 31, |
||||||||||||||||
(in thousands) |
2020 |
2019 |
Increase/ (Decrease) |
% |
||||||||||||
| Food Safety |
||||||||||||||||
| Natural Toxins, Allergens & Drug Residues |
$ | 19,015 | $ | 20,115 | $ | (1,100 | ) | (5 | )% | |||||||
| Bacterial & General Sanitation |
9,931 | 10,316 | (385 | ) | (4 | )% | ||||||||||
| Culture Media & Other |
11,393 | 11,279 | 114 | 1 | % | |||||||||||
| Rodenticides, Insecticides & Disinfectants |
9,608 | 5,449 | 4,159 | 76 | % | |||||||||||
| Genomics Services |
4,238 | 3,862 | 376 | 10 | % | |||||||||||
| |
|
|
|
|
|
|||||||||||
| $ | 54,185 | $ | 51,021 | $ | 3,164 | 6 | % | |||||||||
| Animal Safety |
||||||||||||||||
| Life Sciences |
$ | 1,325 | $ | 1,723 | $ | (398 | ) | (23 | )% | |||||||
| Veterinary Instruments & Disposables |
10,375 | 11,336 | (961 | ) | (8 | )% | ||||||||||
| Animal Care & Other |
7,658 | 6,405 | 1,253 | 20 | % | |||||||||||
| Rodenticides, Insecticides & Disinfectants |
19,914 | 16,718 | 3,196 | 19 | % | |||||||||||
| Genomics Services |
15,868 | 14,221 | 1,647 | 12 | % | |||||||||||
| |
|
|
|
|
|
|||||||||||
| $ | 55,140 | $ | 50,403 | $ | 4,737 | 9 | % | |||||||||
| |
|
|
|
|
|
|||||||||||
| Total Revenues |
$ | 109,325 | $ | 101,424 | $ | 7,901 | 8 | % | ||||||||
| |
|
|
|
|
|
|||||||||||
Food Safety
Natural Toxins, Allergens
& Drug Residues –
COVID-19
pandemic, and from competitive pressure.Bacterial
& General Sanitation –
Listeria Right Now
Culture Media
& Other –
COVID-19
pandemic. Sales of Neogen Culture Media were down 10%, due primarily to continued weakness in end demand at a number of our large U.S. customers.Rodenticides, Insecticides
& Disinfectants –
non-recurring
insecticide order recorded at our Brazil operation, to a government health organization. Additionally, sales of cleaners and disinfectants into China more than doubled, primarily due to increased demand resulting from the African swine fever outbreak in that country and the COVID-19
pandemic.Genomics Services –
21
Animal Safety
Life Sciences –
Veterinary Instruments
& Disposables –
Animal Care
& Other –
Rodenticides, Insecticides
& Disinfectants –
Genomics Services –
Covid-19
pandemic and poor economic conditions in the commercial dairy markets, and reduced sales to a large poultry customer due to their move to one of our lower density, lower cost, chips.Gross Margin
Gross margin was 46.0% in the first quarter of fiscal 2021 compared to 47.5% in the same quarter a year ago, due in large part to a shift in product mix within the Food Safety segment resulting from significantly increased sales of products with lower than average gross margins, such as cleaners and disinfectants from our European and Chinese operations and insecticides from our Brazilian operation. Additionally, the impact of the stronger dollar relative to the Brazilian real and Mexican peso during the period, and increased duties and freight charges adversely impacted Food Safety gross margins. Animal Safety gross margins improved by 290 basis points, primarily the result of a 47% increase in rodenticide sales, a higher gross margin product, a 31% increase in sales of disinfectant products such as hand sanitizers and improved efficiencies in our Australian operations from higher throughput resulting from the acquisition of Cell Biosciences in February of 2020.
Operating Expenses
Operating expenses were $31.4 million in the first quarter of fiscal 2021, compared to $31.9 million in the first quarter of fiscal 2020, a decrease of $500,000, or 2%. Sales and marketing expenses were $16.5 million, a decline of $1.0 million, or 6%, compared to $17.5 million in last year’s first quarter, as the
COVID-19
pandemic restricted travel worldwide, lowering expenses by $900,000. Additionally, trade show expenses were $353,000 lower than the first quarter of fiscal 2020, as all of the tradeshows we participate in were cancelled or moved to virtual formats due to the pandemic. Partially offsetting these lower expenses was a $1.0 million increase in compensation costs, the result of increased headcount and higher commissions and quarterly bonuses, reflective of the revenue increases.General and administrative expenses were $11.0 million, an increase of $314,000, or 2.9%, compared to $10.7 million in last year’s first quarter, primarily due to a $372,000 increase in compensation expense, the result of higher headcount and salaries, increased legal and professional fees, depreciation related to investments in information technology, and higher stock-based compensation expense. Research and development expense was $3.9 million in the first quarter of fiscal 2021, an increase of $191,000 compared to the same period in the prior year, with the increase due primarily to third party services and approval costs related to new product development. The Company launched a next generation system to detect spoilage organisms in processed foods, the Soleris NG, in the first quarter of fiscal 2021.
Operating Income
22
Operating income was $18.9 million in the first quarter of fiscal 2021, compared to $16.3 million in the same period of the prior year. Expressed as a percentage of revenue, operating income was 17.3% compared to 16.0% in last year’s first quarter. The improvement is the result of the increase in revenues and lower operating expenses for the quarter.
Other Income
Three Months ended August 31, |
||||||||
(dollars in thousands) |
2020 |
2019 |
||||||
| Interest income (net of expense) |
$ | 722 | $ | 1,510 | ||||
| Foreign currency transactions |
175 | (117 | ) | |||||
| Royalty income |
— | 1 | ||||||
| Other |
18 | (7 | ) | |||||
| |
|
|
|
|||||
| Total Other Income |
$ | 915 | $ | 1,387 | ||||
| |
|
|
|
|||||
The reduction in interest income in the first quarter of fiscal 2021 compared to the prior year is the result of lower yields on our cash and marketable securities balances, as interest rates dropped significantly in the first quarter of fiscal 2021 compared to the first quarter of fiscal 2020. Other income resulting from foreign currency transactions is the result of changes in the value of foreign currencies relative to the U.S. dollar in countries in which we operate; during the first quarter of 2021, the pound and the euro rose relative to the dollar, while the peso and the real declined. In the first quarter of fiscal 2020, all of the currencies in those countries depreciated against the dollar.
Income Tax Expense
Income tax expense for the first quarter of fiscal 2021 was $3.95 million, an effective tax rate of 19.9%, compared to prior year first quarter income tax expense of $3.0 million, an effective tax rate of 17.0%. For each quarter, 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 $421,000 in the first quarter of fiscal 2021 compared to $769,000 in the first quarter of the prior year. The benefit was lower due to the decreased volume of option exercises during the comparative periods, and a reduction in benefit realized, on average, for each transaction. Additionally, we recorded a lower tax benefit in the first quarter of fiscal 2021 relating to foreign derived income, compared to the prior year first quarter.
Net Income
Net income was $15.9 million in the first quarter of fiscal 2021, an increase of 8.2% compared to $14.6 million earned in the first quarter of fiscal 2020. The increased earnings were the result of higher sales and gross margins, and decreased operating expenses, which offset the $950,0000 increase in income taxes.
Financial Condition and Liquidity
The overall cash, cash equivalents and marketable securities position of Neogen was $367.5 million at August 31, 2020, compared to $343.7 million at May 31, 2020. Approximately $25.1 million was generated from operations during the first three months of fiscal 2021. Net cash proceeds of $5.1 million were realized from the exercise of stock options and issuance of shares under our Employee Stock Purchase Plan during the first quarter. We spent $4.2 million for property, equipment and other
non-current
assets in the first three months of fiscal 2021.Net accounts receivable balances were $77.7 million at August 31, 2020, a decline of $7.0 million, compared to $84.7 million at May 31, 2020. Days sales outstanding, a measurement of the time it takes to collect receivables, were 61 days at August 31, 2020, compared to 68 days at May 31, 2020 and 64 days at August 31, 2019. We have been carefully monitoring our customer receivables as the
COVID-19
pandemic has spread across our global markets; to date, we have not experienced an appreciable increase in bad debt write offs. We did provide an additional $100,000 at May 31, 2020 in our allowance for bad debts to account for potential write offs related to COVID-19,
and will continue to actively manage our customer accounts and adjust the allowance account as circumstances change.23
Net inventory balances were $97.6 million at August 31, 2020, an increase of $2.5 million, or 3%, compared to May 31, 2020 balances of $95.1 million. We increased inventory levels in fiscal 2020 to ensure we have adequate supplies of critical raw and finished products in the event our supply chain is adversely impacted by the
COVID-19
pandemic and Brexit.Inflation and changing prices are not expected to have a material effect on operations, as management believes it will continue to be successful in offsetting increased input costs with price increases and/or cost efficiencies.
Management believes that our existing cash and marketable securities balances at August 31, 2020, 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 our 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 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, euro, Mexican peso, Brazilian real, Chinese yuan, Australian dollar and to a lesser extent, the Indian rupee, Canadian dollar, Argentine peso, Uruguayan peso and Chilean peso; there is also exposure to a change in exchange rate between the British pound sterling and the euro. When the U.S. dollar weakens against foreign currencies, the dollar value of revenues denominated in foreign currencies increases. When the U.S. dollar strengthens, the opposite situation occurs. Additionally, previously invoiced amounts can be positively or negatively affected by changes in exchange rates in the course of collection.
Neogen has assets, liabilities and operations outside of the U.S., located in Scotland, England, Italy, Brazil, Mexico, Argentina, Uruguay, Chile, China, India, Canada and Australia where the functional currency is the British pound sterling, euro, Brazilian real, Mexican peso, Argentine peso, Uruguayan peso, Chilean peso, Chinese yuan, Indian rupee, Canadian dollar and Australian dollar, respectively. Our investments in foreign subsidiaries are considered to be long-term. As discussed in ITEM 1A. RISK FACTORS of the Form
10-K
annual filing, our financial condition and results of operations could be adversely affected by currency fluctuations.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 August 31, 2020 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 August 31, 2020 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
| 10 | Amended and Restated Credit Agreement dated as of November 30, 2018 between Registrant and JP Morgan Chase N.A. (incorporated by reference to Exhibit 10.A of the registrant’s Form 8-K filed on December 6, 2018). | |
| 31.1 | Certification of Principal Executive Officer | |
| 31.2 | Certification of Principal Financial Officer | |
| 32 | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 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 | |
| 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: September 30, 2020 | ||||||
| /s/ John E. Adent | ||||||
| John E. Adent | ||||||
| President & Chief Executive Officer | ||||||
| (Principal Executive Officer) | ||||||
| Dated: September 30, 2020 | ||||||
| /s/ Steven J. Quinlan | ||||||
| Steven J. Quinlan | ||||||
| Vice President & Chief Financial Officer | ||||||
| (Principal Financial Officer and Principal Accounting Officer) | ||||||
27