Neogen(NEOG) - 2020 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Interim Consolidated Financial Statements (unaudited) Neogen's Q1 FY2020 net income decreased to $14.7 million due to higher taxes, despite a 2% revenue increase | Metric | Three Months Ended Aug 31, 2019 (in thousands) | Three Months Ended Aug 31, 2018 (in thousands) | Change (%) | | :------------------------------------ | :--------------------------------------------- | :--------------------------------------------- | :--------- | | Total Revenues | $101,424 | $99,626 | 1.8% | | Net Income | $14,652 | $15,237 | (3.8%) | | Basic Net Income Per Share | $0.28 | $0.29 | (3.4%) | | Diluted Net Income Per Share | $0.28 | $0.29 | (3.4%) | | Balance Sheet Item | August 31, 2019 (in thousands) | May 31, 2019 (in thousands) | Change (vs. May 31, 2019) | | :------------------------ | :----------------------------- | :-------------------------- | :------------------------ | | Total Assets | $721,144 | $695,740 | +3.65% | | Total Liabilities | $60,838 | $57,841 | +5.18% | | Total Stockholders' Equity| $660,306 | $637,899 | +3.51% | | Cash and cash equivalents | $56,289 | $41,688 | +35.06% | | Marketable securities | $234,727 | $225,836 | +3.94% | Consolidated Balance Sheets | Item | August 31, 2019 (in thousands) | May 31, 2019 (in thousands) | | :------------------------ | :----------------------------- | :-------------------------- | | Cash and cash equivalents | $56,289 | $41,688 | | Marketable securities | $234,727 | $225,836 | | Accounts receivable, net | $79,112 | $82,582 | | Inventories | $87,682 | $85,992 | | Total Current Assets | $473,548 | $449,529 | | Total Assets | $721,144 | $695,740 | | Total Current Liabilities | $40,427 | $38,251 | | Total Liabilities | $60,838 | $57,841 | | Total Stockholders' Equity| $660,306 | $637,899 | Consolidated Statements of Income | Metric | Three Months Ended Aug 31, 2019 (in thousands) | Three Months Ended Aug 31, 2018 (in thousands) | Change (%) | | :---------------------- | :--------------------------------------------- | :--------------------------------------------- | :--------- | | Product revenues | $81,948 | $82,960 | (1.2%) | | Service revenues | $19,476 | $16,666 | 16.9% | | Total Revenues | $101,424 | $99,626 | 1.8% | | Gross Margin | $48,194 | $46,729 | 3.1% | | Operating Income | $16,264 | $16,479 | (1.3%) | | Income Before Taxes | $17,652 | $17,137 | 3.0% | | Provision for Income Taxes| $3,000 | $1,900 | 57.9% | | Net Income | $14,652 | $15,237 | (3.8%) | | Basic Net Income Per Share| $0.28 | $0.29 | (3.4%) | | Diluted Net Income Per Share| $0.28 | $0.29 | (3.4%) | Consolidated Statements of Comprehensive Income | Metric | Three Months Ended Aug 31, 2019 (in thousands) | Three Months Ended Aug 31, 2018 (in thousands) | | :-------------------------------------------- | :--------------------------------------------- | :--------------------------------------------- | | Net income | $14,652 | $15,237 | | Other comprehensive loss: currency translation adjustments | $(3,058) | $(2,778) | | Other comprehensive income: unrealized gain on marketable securities | $562 | — | | Total comprehensive income | $12,156 | $12,459 | Consolidated Statements of Equity | Item | Balance at May 31, 2019 (in thousands) | Balance at August 31, 2019 (in thousands) | | :------------------------------------------ | :------------------------------------- | :---------------------------------------- | | Common Stock Shares | 52,217 | 52,423 | | Common Stock Amount | $8,355 | $8,387 | | Additional Paid-in Capital | $221,937 | $232,156 | | Accumulated Other Comprehensive (Loss) | $(11,640) | $(14,136) | | Retained Earnings | $419,247 | $433,899 | | Total Stockholders' Equity | $637,899 | $660,306 | - Issuance of shares under share-based compensation plan contributed $9,713 thousand to equity, and under employee stock purchase plan contributed $538 thousand[23] Consolidated Statements of Cash Flows | Cash Flow Activity | Three Months Ended Aug 31, 2019 (in thousands) | Three Months Ended Aug 31, 2018 (in thousands) | | :---------------------------------- | :--------------------------------------------- | :--------------------------------------------- | | Net Cash From Operating Activities | $23,719 | $16,082 | | Net Cash For Investing Activities | $(15,361) | $(7,574) | | Net Cash From Financing Activities | $8,708 | $8,992 | | Effect of Exchange Rates on Cash | $(2,465) | $(3,349) | | Net Increase In Cash and Cash Equivalents | $14,601 | $14,151 | | Cash and Cash Equivalents, End of Period | $56,289 | $97,225 | Notes to Interim Consolidated Financial Statements 1. Accounting Policies This section details accounting principles, including ASU No. 2016-02—Leases adoption and revenue recognition policies - The company adopted ASU No. 2016-02—Leases on June 1, 2019, recognizing right-of-use assets and lease liabilities of approximately $2.0 million, with an immaterial impact on consolidated financial statements[33][54][56] - New accounting pronouncements not yet adopted, including those for Financial Instruments Credit Losses, Fair Value Measurements, and Cloud Computing Implementation Cost, are not expected to have a material impact on the consolidated financial statements[34][35][36] - Revenue is primarily generated from product sales (diagnostic test kits, culture media, rodenticides, etc.) and service revenues (genomic identification, laboratory services), recognized when performance obligations are satisfied[64][65][66] 2. Inventories Inventories are valued at the lower of cost (FIFO) or net realizable value, comprising raw materials, WIP, and finished goods | Inventory Component | August 31, 2019 (in thousands) | May 31, 2019 (in thousands) | | :---------------------- | :----------------------------- | :-------------------------- | | Raw materials | $42,964 | $41,594 | | Work-in-process | $5,901 | $5,581 | | Finished and purchased goods | $38,817 | $38,817 | | Total Inventories | $87,682 | $85,992 | 3. Net Income Per Share Basic and diluted net income per share for Q1 FY2020 decreased slightly, reflecting changes in net income and shares | Metric | Three Months Ended Aug 31, 2019 | Three Months Ended Aug 31, 2018 | | :-------------------------- | :------------------------------ | :------------------------------ | | Net income (in thousands) | $14,652 | $15,237 | | Weighted average shares (basic) | 52,292 | 51,806 | | Effect of dilutive stock options | 392 | 974 | | Weighted average shares (diluted) | 52,684 | 52,780 | | Basic Net Income Per Share | $0.28 | $0.29 | | Diluted Net Income Per Share| $0.28 | $0.29 | 4. Segment Information and Geographic Data Neogen's Food Safety segment saw a slight revenue decrease, while Animal Safety grew; international revenues declined due to currency | Segment/Geographic Location | Three Months Ended Aug 31, 2019 (in thousands) | Three Months Ended Aug 31, 2018 (in thousands) | Change (%) | | :-------------------------- | :--------------------------------------------- | :--------------------------------------------- | :--------- | | Total Revenues | | | | | Food Safety | $51,021 | $52,183 | (2.2%) | | Animal Safety | $50,403 | $47,443 | 6.2% | | Domestic | $63,340 | $59,846 | 5.8% | | International | $38,084 | $39,780 | (4.3%) | | Operating Income | | | | | Food Safety | $9,134 | $10,873 | (16.0%) | | Animal Safety | $8,300 | $6,706 | 23.8% | - International operations, including the UK, Mexico, Brazil, China, and India, initially focused on food safety but have expanded to offer a full range of products and services, including those typically associated with Animal Safety[74] 5. Equity Compensation Plans The company grants stock options to directors, officers, and employees, with share-based compensation expense increasing in Q1 FY2020 | Stock Option Activity (in thousands) | Shares | Weighted Average Exercise Price | | :----------------------------------- | :----- | :------------------------------ | | Options outstanding June 1, 2019 | 2,385 | $49.37 | | Exercised | (196) | $41.51 | | Forfeited | (6) | $62.70 | | Options outstanding August 31, 2019 | 2,183 | $50.04 | | Compensation Expense (in thousands) | Three Months Ended Aug 31, 2019 | Three Months Ended Aug 31, 2018 | | :---------------------------------- | :------------------------------ | :------------------------------ | | Share-based awards | $1,543 | $1,431 | 6. Business and Product Line Acquisitions Neogen completed three acquisitions in FY2019, including Clarus Labs, Livestock Genetic Services, and Delta Genomics, to expand offerings - Acquired Clarus Labs, Inc. on August 1, 2018, for $4.2 million cash plus contingent consideration, gaining access to new markets for Colitag water test products[83] - Acquired Livestock Genetic Services, LLC on September 4, 2018, for $1.1 million cash plus contingent consideration, enhancing in-house genetic evaluation capabilities[85] - Acquired Delta Genomics Centre on January 1, 2019, for $1.485 million cash, accelerating growth of the animal genomics business in Canada[86] 7. Long Term Debt Neogen maintains a $15 million unsecured revolving line of credit, with no outstanding balance and compliance with covenants - The company has a $15 million unsecured revolving line of credit, extended to September 30, 2021[87] - There was no balance outstanding on the line of credit at August 31, 2019, and the company was in compliance with all financial covenants[87] 8. Commitments and Contingencies Neogen has an estimated $916,000 environmental remediation liability and faces routine legal proceedings not expected to be material - Estimated liability for environmental remediation at the Randolph, Wisconsin facility was $916,000 at August 31, 2019, measured on an undiscounted basis over 15 years[88] - The company is in discussions with the WDNR regarding potential alternative remediation strategies, which could impact the recorded liability[88] - Legal and other proceedings in the normal course of business are not expected to have a material effect on future results of operations or financial position[89] 9. Stock Purchase Neogen's Board authorized a program to purchase up to 3 million shares, with 50,000 shares purchased for $3.1 million in December 2018 - Board of Directors authorized a new program to purchase up to 3,000,000 shares of common stock in October 2018[90] - In December 2018, 50,000 shares were purchased for $3.1 million and subsequently retired[90] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Q1 FY2020 revenues grew 2% to $101.4 million (Animal Safety up, Food Safety down), but net income fell 4% to $14.7 million due to taxes | Metric | Q1 FY2020 (in millions) | Q1 FY2019 (in millions) | Change (%) | | :------------------------------------ | :---------------------- | :---------------------- | :--------- | | Consolidated Revenues | $101.4 | $99.6 | 1.8% | | Food Safety Segment Sales | $51.0 | $52.2 | (2.3%) | | Animal Safety Segment Sales | $50.4 | $47.4 | 6.3% | | International Sales (% of total sales)| 37.5% | 39.9% | (2.4 pp) | | Net Income | $14.7 | $15.2 | (3.3%) | | Diluted EPS | $0.28 | $0.29 | (3.4%) | | Cash from Operating Activities | $23.7 | $16.1 | 47.8% | - International sales were adversely impacted by currency rates (approx. $1.2 million reduction), loss of forensics business in Brazil, and a large prior year non-recurring government sale in Brazil[97] Safe Harbor and Forward-Looking Statements This section outlines forward-looking statements and important factors that could cause actual results to differ materially - The report contains forward-looking statements, identified by words like 'believes,' 'anticipates,' 'plans,' 'expects,' 'seeks,' 'estimates,' and similar expressions[94] - Important factors that could cause actual results to differ materially include competition, dependence on key employees, weather impact on agriculture, acquisition integration, R&D risks, patent protection, and government regulation[94] Executive Overview The executive overview summarizes Q1 FY2020 financial performance, highlighting revenue growth, segment performance, and international sales impacts | Metric | Q1 FY2020 (in millions) | Q1 FY2019 (in millions) | Change (%) | | :------------------------------------ | :---------------------- | :---------------------- | :--------- | | Consolidated Revenues | $101.4 | $99.6 | 1.8% | | Food Safety Segment Sales | $51.0 | $52.2 | (2.3%) | | Animal Safety Segment Sales | $50.4 | $47.4 | 6.3% | | International Sales (% of total sales)| 37.5% | 39.9% | (2.4 pp) | | Net Income | $14.7 | $15.2 | (3.3%) | | Diluted EPS | $0.28 | $0.29 | (3.4%) | | Cash from Operating Activities | $23.7 | $16.1 | 47.8% | | International Location | Revenue % Inc (Dec) USD | Revenue % Inc (Dec) Local Currency | | :-------------------------------- | :---------------------- | :--------------------------------- | | Neogen Europe (including Lab M & Quat-Chem) | (4)% | 1% | | Neogen do Brasil (including Deoxi & Rogama) | (16)% | (15)% | | Neogen Latinoamerica | 5% | 5% | | Neogen China | (18)% | (14)% | | Neogen India | 22% | 24% | | Neogen Canada | 98% | 99% | | Neogen Australasia | 21% | 30% | - Currency translations reduced comparative revenues by approximately $1.2 million in Q1 FY2020, primarily due to the stronger U.S. dollar against the British pound and Australian dollar[97] Revenues This section details revenue performance by segment and product category, highlighting growth in Animal Safety Genomics Services and declines in Food Safety Rodenticides | Category | Q1 FY2020 (in thousands) | Q1 FY2019 (in thousands) | Change ($) | Change (%) | | :-------------------------------------- | :----------------------- | :----------------------- | :--------- | :--------- | | Food Safety | | | | | | Natural Toxins, Allergens & Drug Residues | $20,115 | $18,838 | $1,277 | 7% | | Bacterial & General Sanitation | $10,316 | $10,467 | $(151) | (1)% | | Culture Media & Other | $11,279 | $12,217 | $(938) | (8)% | | Rodenticides, Insecticides & Disinfectants | $5,449 | $6,625 | $(1,176) | (18)% | | Genomics Services | $3,862 | $4,036 | $(174) | (4)% | | Total Food Safety | $51,021 | $52,183 | $(1,162) | (2)% | | Animal Safety | | | | | | Life Sciences | $1,723 | $2,080 | $(357) | (17)% | | Veterinary Instruments & Disposables | $11,336 | $10,404 | $932 | 9% | | Animal Care & Other | $6,405 | $6,398 | $7 | 0% | | Rodenticides, Insecticides & Disinfectants | $16,718 | $17,146 | $(428) | (2)% | | Genomics Services | $14,221 | $11,415 | $2,806 | 25% | | Total Animal Safety | $50,403 | $47,443 | $2,960 | 6% | | Total Revenues | $101,424 | $99,626 | $1,798 | 2% | - Food Safety's 'Rodenticides, Insecticides & Disinfectants' declined 18% due to a non-recurring insecticide order in Brazil in the prior year, partially offset by increased demand for disinfectants in China due to the African swine fever virus[105] - Animal Safety's 'Genomics Services' grew 25%, with 21% organic growth, driven by increases in companion animal and beef/dairy cattle markets[112] Gross Margin Gross margin improved to 47.5% in Q1 FY2020, driven by gains in Animal Safety genomics and Food Safety natural toxin test kits | Metric | Q1 FY2020 | Q1 FY2019 | | :---------- | :-------- | :-------- | | Gross Margin| 47.5% | 46.9% | - Animal Safety gross margins improved by 130 basis points due to increased gross margins in the domestic genomics testing service business[113] - Food Safety gross margins rose by 50 basis points on higher sales of natural toxin test kits and decreased sales of lower margin products[113] Operating Expenses Total operating expenses increased by 6% in Q1 FY2020, primarily due to a significant rise in research and development spending | Expense Category | Q1 FY2020 (in millions) | Q1 FY2019 (in millions) | Change ($) | Change (%) | | :------------------------ | :---------------------- | :---------------------- | :--------- | :--------- | | Sales and marketing | $17.5 | $17.2 | $0.3 | 2% | | General and administrative| $10.7 | $10.2 | $0.5 | 5% | | Research and development | $3.7 | $2.8 | $0.9 | 32% | | Total Operating Expenses | $31.9 | $30.3 | $1.6 | 6% | - Research and development expense increased significantly by $0.9 million, primarily due to development spending on new products expected to launch in late fiscal 2020 and early fiscal 2021[114] Operating Income Operating income slightly decreased by 1.2% in Q1 FY2020, with its percentage of revenue declining due to increased R&D spending | Metric | Q1 FY2020 (in millions) | Q1 FY2019 (in millions) | Change ($) | Change (%) | | :-------------- | :---------------------- | :---------------------- | :--------- | :--------- | | Operating Income| $16.3 | $16.5 | $(0.2) | (1.2%) | - Operating income as a percentage of revenue declined from 16.5% to 16.0%, primarily due to the increase in research and development spending[115] Other Income Total other income increased in Q1 FY2020, driven by higher interest income, despite foreign currency transaction expenses | Other Income (Expense) | Q1 FY2020 (in thousands) | Q1 FY2019 (in thousands) | | :-------------------------- | :----------------------- | :----------------------- | | Interest income (net of expense) | $1,510 | $927 | | Foreign currency transactions | $(117) | $(386) | | Total Other Income | $1,387 | $658 | - Interest income increased due to higher cash and marketable securities balances and improved yields[116] - Foreign currency transactions resulted in an expense, as currencies in countries of operation depreciated against the U.S. dollar[116] Income Tax Expense Income tax expense increased significantly in Q1 FY2020, leading to a higher effective tax rate, primarily due to lower stock option tax benefits | Metric | Q1 FY2020 (in millions) | Q1 FY2019 (in millions) | | :---------------- | :---------------------- | :---------------------- | | Income Tax Expense| $3.0 | $1.9 | | Effective Tax Rate| 17.0% | 11.1% | - The increase in the effective tax rate was primarily due to a lower tax benefit from stock option exercises ($0.8 million in Q1 FY2020 vs. $2.3 million in Q1 FY2019)[117] Net Income Net income declined in Q1 FY2020, directly resulting from the increased effective tax rate due to decreased stock option exercise tax benefits | Metric | Q1 FY2020 (in millions) | Q1 FY2019 (in millions) | | :-------- | :---------------------- | :---------------------- | | Net Income| $14.7 | $15.2 | - The decline in net income was a direct result of the increased effective tax rate, driven by decreased tax benefits from stock option exercise activity[118] Financial Condition and Liquidity Neogen maintains a strong liquidity position with $291.0 million in cash, cash equivalents, and marketable securities as of August 31, 2019 | Metric | August 31, 2019 (in millions) | May 31, 2019 (in millions) | | :------------------------------------ | :---------------------------- | :------------------------- | | Cash, cash equivalents and marketable securities | $291.0 | $267.5 | | Net accounts receivable | $79.1 | $82.6 | | Net inventory balances | $87.7 | $86.0 | - Cash generated from operations was $23.7 million in Q1 FY2020, contributing to the overall increase in liquidity[119] - Management believes existing cash, marketable securities, and available credit will be sufficient to fund activities for the foreseeable future, but may seek additional financing for product commercialization or acquisitions[124] Item 3. Quantitative and Qualitative Disclosures About Market Risk Neogen faces market risks from interest rate fluctuations and foreign exchange rate changes, mitigated by forward contracts - Primary interest rate risk stems from potential fluctuations of interest rates for variable rate borrowings and short-term investments[125] - Foreign exchange risk arises from revenues and expenses transacted in currencies other than the U.S. dollar, including the British pound sterling, euro, Brazilian real, Mexican peso, Chinese yuan, Australian dollar, Indian rupee, and Canadian dollar[126][127] - The company enters into forward contracts to help mitigate the economic impact of fluctuations in certain currency exchange rates[126] Item 4. Controls and Procedures Management concluded the company's disclosure controls and procedures were effective as of August 31, 2019, with no material changes - The company's disclosure controls and procedures were evaluated and concluded to be effective as of August 31, 2019[128] - No changes in internal controls over financial reporting occurred during the quarter ended August 31, 2019, that materially affected or are reasonably likely to materially affect internal control over financial reporting[129] PART II. OTHER INFORMATION Item 1. Legal Proceedings Neogen is involved in routine legal proceedings, but their outcomes are not expected to materially affect future operations or financial position - The company is subject to legal and other proceedings in the normal course of business[131] - Management believes the outcomes of these matters are not expected to have a material effect on the company's future results of operations or financial position[131] Item 6. Exhibits This section lists exhibits filed with the Form 10-Q, including articles of incorporation, credit agreement, and various certifications - Exhibits include Articles of Incorporation, Amended and Restated Credit Agreement, CEO and CFO Certifications, Section 1350 Certification, and Inline XBRL documents[132] SIGNATURES CEO Certification The report includes the CEO's certification, confirming the accuracy and completeness of the financial information - The report is signed and certified by John E. Adent, President & Chief Executive Officer, as the Principal Executive Officer[135] CFO Certification The report includes the CFO's certification, confirming the accuracy and completeness of the financial information - The report is signed and certified by Steven J. Quinlan, Vice President & Chief Financial Officer, as the Principal Financial Officer and Principal Accounting Officer[135] Section 906 Certification The report includes the certification pursuant to 18 U.S.C. section 1350, as required by law - A certification pursuant to 18 U.S.C. section 1350 is included as Exhibit 32[8][132]