Neogen(NEOG) - 2021 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Interim Consolidated Financial Statements (unaudited) This section presents Neogen Corporation's unaudited consolidated financial statements and comprehensive notes for the period ended August 31, 2020 Consolidated Balance Sheets This section provides a snapshot of Neogen's financial position, detailing assets, liabilities, and equity as of August 31, 2020, and May 31, 2020 Consolidated Balance Sheet Highlights (in thousands) | Item | August 31, 2020 | May 31, 2020 | | :-------------------------------- | :-------------- | :----------- | | Total Assets | $821,592 | $797,182 | | Total Liabilities | $70,046 | $72,005 | | Total Stockholders' Equity | $751,546 | $725,177 | | Cash and cash equivalents | $60,947 | $66,269 | | Marketable securities | $306,539 | $277,404 | | Accounts receivable, net | $77,685 | $84,681 | | Inventories | $97,573 | $95,053 | Consolidated Statements of Income This section outlines Neogen's financial performance, presenting revenues, expenses, and net income for the three months ended August 31, 2020, and 2019 Consolidated Statements of Income Highlights (Three Months Ended August 31, in thousands, except per share amounts) | Item | 2020 | 2019 | Change (YoY) | | :-------------------------- | :----- | :----- | :----------- | | Total Revenues | $109,325 | $101,424 | +7.8% | | Cost of Revenues | $59,023 | $53,230 | +10.9% | | Gross Margin | $50,302 | $48,194 | +4.4% | | Total Operating Expenses | $31,407 | $31,930 | -1.6% | | Operating Income | $18,895 | $16,264 | +16.2% | | Income Before Taxes | $19,810 | $17,652 | +12.2% | | Provision for Income Taxes | $3,950 | $3,000 | +31.7% | | Net Income | $15,860 | $14,652 | +8.2% | | Basic Net Income Per Share | $0.30 | $0.28 | +7.1% | | Diluted Net Income Per Share | $0.30 | $0.28 | +7.1% | Consolidated Statements of Comprehensive Income This section details Neogen's total comprehensive income, including net income and other comprehensive income items, for the three months ended August 31, 2020, and 2019 Consolidated Statements of Comprehensive Income (Three Months Ended August 31, in thousands) | Item | 2020 | 2019 | | :-------------------------------------------------- | :----- | :----- | | Net income | $15,860 | $14,652 | | Other comprehensive income (loss), net of tax: foreign currency translations | $4,121 | ($3,058) | | Other comprehensive income (loss), net of tax: unrealized gain (loss) on marketable securities | ($119) | $562 | | Total comprehensive income | $19,862 | $12,156 | Consolidated Statements of Equity This section presents changes in Neogen's total stockholders' equity, including net income and other comprehensive income, for the three months ended August 31, 2020, and 2019 Consolidated Statements of Equity Highlights (Three Months Ended August 31, in thousands) | Item | August 31, 2020 | June 1, 2020 | | :------------------------------------------ | :-------------- | :----------- | | Total Stockholders' Equity | $751,546 | $725,177 | | Net income for the three months ended August 31, 2020 | $15,860 | N/A | | Other comprehensive income for the three months ended August 31, 2020 | $4,002 | N/A | | Exercise of options and share-based compensation expense | $5,839 | N/A | | Issuance of shares under employee stock purchase plan | $668 | N/A | Consolidated Statements of Cash Flows This section details Neogen's cash inflows and outflows from operating, investing, and financing activities for the three months ended August 31, 2020, and 2019 Consolidated Statements of Cash Flows Highlights (Three Months Ended August 31, in thousands) | Item | 2020 | 2019 | | :------------------------------------------ | :----- | :----- | | Net Cash From Operating Activities | $25,134 | $23,719 | | Net Cash For Investing Activities | ($35,732) | ($15,361) | | Net Cash From Financing Activities | $5,095 | $8,708 | | Effect of Foreign Exchange Rates on Cash | $181 | ($2,465) | | Net Increase (Decrease) In Cash and Cash Equivalents | ($5,322) | $14,601 | | Cash and Cash Equivalents, End of Period | $60,947 | $56,289 | Notes to Interim Consolidated Financial Statements This section provides detailed information on Neogen's accounting policies, financial instruments, segment performance, and other significant financial commitments and contingencies 1. Accounting Policies This section outlines Neogen's significant accounting policies, including the basis of presentation, recently adopted standards, and key estimates used in financial reporting - The financial statements are prepared in accordance with GAAP for interim financial information and Form 10-Q instructions, with all necessary recurring adjustments included[22][23] - The Company's functional currency is the U.S. dollar; foreign currency translation adjustments are recorded in other comprehensive income (loss)[24] - Recently adopted accounting standards (ASU No. 2016-13 on Credit Losses, ASU 2018-13 on Fair Value Measurement, and ASU 2018-15 on Cloud Computing Implementation Cost) did not have a material impact on the consolidated financial statements[25][26][27] - Comprehensive income includes net income and other items excluded from net income, such as foreign currency translation adjustments and unrealized gains/losses on marketable securities[28] - Fair value measurements are categorized into a hierarchy: Level 1 (quoted prices in active markets), Level 2 (observable inputs other than quoted prices), and Level 3 (unobservable inputs)[30] - Management makes estimates and judgments for financial reporting, including variable consideration, doubtful accounts, inventory valuation, stock-based compensation, income taxes, goodwill, and other intangible assets[31] 2. Cash and Marketable Securities This section details Neogen's cash, cash equivalents, and marketable securities, including their fair value classification and maturity profiles - Cash and cash equivalents were $60,947,000 at August 31, 2020, and $66,269,000 at May 31, 2020, classified as Level 1 fair value[39] - Marketable securities are classified as available for sale, recorded at fair value (Level 2), with the primary objective to preserve capital for operations, capital expenditures, and acquisitions[42] Marketable Securities by Classification and Maturity (August 31, 2020, in thousands) | Maturity | US Treasuries | Commercial Paper & Corporate Bonds | Certificates of Deposit | Total Marketable Securities | | :--------- | :------------ | :--------------------------------- | :---------------------- | :-------------------------- | | 0—90 days | $— | $120,055 | $4,908 | $124,963 | | 91—180 days | $2,516 | $93,239 | $1,257 | $97,012 | | 181 days—1 year | $— | $63,668 | $8,338 | $72,006 | | 1—2 years | $— | $10,012 | $2,546 | $12,558 | | Total | $2,516 | $286,974 | $17,049 | $306,539 | Marketable Securities Components (August 31, 2020, in thousands) | Item | Amortized Cost | Unrealized Gains | Unrealized Losses | Fair Value | | :-------------------------- | :------------- | :--------------- | :---------------- | :--------- | | US Treasuries | $2,502 | $14 | $— | $2,516 | | Commercial Paper & Corporate Bonds | $286,211 | $820 | ($57) | $286,974 | | Certificates of Deposit | $16,911 | $138 | $— | $17,049 | | Total Marketable Securities | $305,624 | $972 | ($57) | $306,539 | 3. Inventories This section provides a breakdown of Neogen's inventory components, including raw materials, work-in-process, and finished goods Inventory Components (in thousands) | Item | August 31, 2020 | May 31, 2020 | | :---------------------- | :-------------- | :----------- | | Raw materials | $47,589 | $45,058 | | Work-in-process | $6,323 | $6,887 | | Finished and purchased goods | $43,661 | $43,108 | | Total Inventories | $97,573 | $95,053 | 4. Leases This section details Neogen's operating lease arrangements, including right-of-use assets, lease liabilities, and future minimum lease payments - All leases are classified as operating leases, with right-of-use assets and corresponding liabilities recognized on the balance sheet[48][49] Operating Lease Information (in thousands) | Item | August 31, 2020 | May 31, 2020 | | :-------------------------- | :-------------- | :----------- | | Right of use—assets | $1,756 | $1,952 | | Lease liabilities—current | $803 | $1,054 | | Lease liabilities—non-current | $966 | $913 | | Weighted average remaining lease term | 2.4 years | 2.5 years | | Weighted average discount rate | 3.2% | 3.2% | Total Lease Expense (Three Months Ended August 31, in thousands) | Item | 2020 | 2019 | | :---------------- | :--- | :--- | | Operating leases | $205 | $240 | | Short term leases | $44 | $48 | | Total lease expense | $249 | $288 | Undiscounted Future Minimum Lease Payments (as of August 31, 2020, in thousands) | Years ending May 31, | Amount | | :------------------- | :----- | | 2021 (1) | $789 | | 2022 | $553 | | 2023 | $292 | | 2024 | $145 | | 2025 | $43 | | 2026 and thereafter | $— | | Total lease payments | $1,822 | | Less: imputed interest | ($97) | | Total lease liabilities | $1,725 | 5. Revenue Recognition This section describes Neogen's policies for recognizing revenue from product sales and services, including disaggregated revenue by major categories - Revenue is recognized when performance obligations are satisfied, transferring control of products or services to the customer, with collectability reasonably assured[55] - Variable consideration, such as volume rebates, is estimated using the most-likely-amount or expected-value methods and reduces recognized revenue[56] - The Company derives revenue from two primary sources: product revenue (diagnostic test kits, culture media, consumables, rodenticides, disinfectants, insecticides) and service revenue (genomic identification, commercial laboratory services)[58][59][60][62] Disaggregated Revenue by Major Product and Service Categories (Three Months Ended August 31, in thousands) | Category | 2020 | 2019 | Change (YoY) | | :---------------------------------- | :----- | :----- | :----------- | | Food Safety | | | | | Natural Toxins, Allergens & Drug Residues | $19,015 | $20,115 | -5.5% | | Bacterial & General Sanitation | $9,931 | $10,316 | -3.7% | | Culture Media & Other | $11,393 | $11,279 | +1.0% | | Rodenticides, Insecticides & Disinfectants | $9,608 | $5,449 | +76.3% | | Genomics Services | $4,238 | $3,862 | +9.7% | | Total Food Safety | $54,185 | $51,021 | +6.2% | | Animal Safety | | | | | Life Sciences | $1,325 | $1,723 | -23.1% | | Veterinary Instruments & Disposables | $10,375 | $11,336 | -8.4% | | Animal Care & Other | $7,658 | $6,405 | +19.6% | | Rodenticides, Insecticides & Disinfectants | $19,914 | $16,718 | +19.1% | | Genomics Services | $15,868 | $14,221 | +11.6% | | Total Animal Safety | $55,140 | $50,403 | +9.4% | | Total Revenues | $109,325 | $101,424 | +7.8% | 6. Net Income Per Share This section outlines the calculation of Neogen's basic and diluted net income per share for the periods presented Net Income Per Share Calculation (Three Months Ended August 31, in thousands, except per share amounts) | Item | 2020 | 2019 | | :------------------------------------------ | :----- | :----- | | Net income attributable to Neogen | $15,860 | $14,652 | | Weighted average shares (Basic) | 52,992 | 52,292 | | Effect of dilutive stock options | 293 | 392 | | Weighted average shares (Diluted) | 53,285 | 52,684 | | Basic Net income per share | $0.30 | $0.28 | | Diluted Net income per share | $0.30 | $0.28 | 7. Segment Information and Geographic Data This section provides financial data for Neogen's Food Safety and Animal Safety segments, along with revenue breakdown by geographic location - Neogen operates in two reportable segments: Food Safety (diagnostic test kits, culture media for toxins, bacteria, allergens) and Animal Safety (consumable products for veterinarians, genomic identification, rodenticides, disinfectants, insecticides)[65] - International operations in the U.K., Mexico, Brazil, China, and India primarily report through the Food Safety segment, while Australia (including Cell BioSciences acquisition) reports through the Animal Safety segment[66][67] Segment Information (Three Months Ended August 31, 2020, in thousands) | Item | Food Safety | Animal Safety | Corporate and Eliminations | Total | | :-------------------------- | :---------- | :------------ | :------------------------- | :------ | | Product revenues | $48,663 | $39,272 | $— | $87,935 | | Service revenues | $5,522 | $15,868 | $— | $21,390 | | Total revenues | $54,185 | $55,140 | $— | $109,325 | | Operating income (loss) | $7,963 | $12,165 | ($1,233) | $18,895 | | Total assets | $225,716 | $228,390 | $367,486 | $821,592 | Revenue by Geographic Location (Three Months Ended August 31, in thousands) | Item | 2020 | 2019 | | :----------- | :----- | :----- | | Domestic | $67,324 | $63,340 | | International | $42,001 | $38,084 | | Total revenue | $109,325 | $101,424 | 8. Equity Compensation Plans This section details Neogen's equity compensation plans, including stock option activity and share-based compensation expense Stock Option Activity (Three Months Ended August 31, 2020, in thousands) | Item | Shares | Weighted Average Exercise Price | | :-------------------------- | :----- | :---------------------------- | | Options outstanding June 1, 2020 | 2,162 | $55.96 | | Exercised | (86) | $48.39 | | Forfeited | (7) | $57.81 | | Options outstanding August 31, 2020 | 2,069 | $56.27 | - Share-based compensation expense was $1,681,000 for the three months ended August 31, 2020, compared to $1,543,000 in the prior year[71] Black-Scholes Option Pricing Model Assumptions (FY 2020) | Assumption | Value | | :------------------------ | :---- | | Risk-free interest rate | 1.9% | | Expected dividend yield | 0.0% | | Expected stock price volatility | 29.4% | | Expected option life | 3.5 years | - The Company offers an Employee Stock Purchase Plan allowing eligible employees to purchase common stock at a 5% discount[73] 9. Business and Product Line Acquisitions This section describes Neogen's recent business and product line acquisitions, highlighting their strategic purpose and impact - Neogen completed seven acquisitions between January 2020 and July 2020, primarily to expand direct sales presence in Argentina, Uruguay, Italy, Chile, and Australasia, and to enhance product lines (culture media, agricultural insecticides)[75][76][77][78][79][80][81] - Acquisitions include Productos Quimicos Magiar (Argentina and Uruguay), Diessechem Srl (Italy), Abtek Biologicals Limited (UK), Cell BioSciences (Australia), Magiar Chilena (Chile), and Elanco's StandGuard Pour-on product line (US)[75][76][77][78][79][80][81] - Goodwill recognized in these acquisitions primarily relates to enhancing the Company's strategic platform and expanding product offerings[74] 10. Long Term Debt This section outlines Neogen's long-term debt arrangements, including its revolving line of credit and compliance with financial covenants - The Company has a $15,000,000 unsecured revolving line of credit expiring September 30, 2021, with no outstanding balance at August 31, 2020[84] - Interest on borrowings is LIBOR plus 100 basis points (1.20% at August 31, 2020), and the Company was in compliance with all financial covenants[84] 11. Commitments and Contingencies This section details Neogen's commitments and contingencies, including environmental remediation liabilities and other legal proceedings - Neogen is involved in environmental remediation at its Randolph, Wisconsin facility, with an estimated liability of $916,000 at August 31, 2020, measured over 15 years[85] - Discussions are ongoing with the Wisconsin Department of Natural Resources regarding potential alternative remediation strategies, which could increase the recorded liability[85] - The Company is subject to other legal proceedings in the normal course of business, which management believes will not have a material effect on future results or financial position[86] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's analysis of Neogen's financial performance, condition, and liquidity for the first quarter of fiscal 2021, including key drivers and trends Executive Overview This section provides a high-level summary of Neogen's consolidated financial performance for the first quarter of fiscal 2021, including revenue growth and net income - Consolidated revenues increased 8% to $109.3 million in Q1 FY2021 (6% organic growth) compared to $101.4 million in Q1 FY2020[94] - Food Safety segment sales rose 6% (4% organic), while Animal Safety segment sales increased 9% (8% organic)[94] - International sales grew 10% and represented 38.4% of total sales in Q1 FY2021, with significant local currency growth in Brazil (+38%), China (+106%), and Australasia (+63%)[91][94] - Net income for the quarter increased 8% to $15.9 million, or $0.30 per diluted share[94] - Cash generated from operating activities was $25.1 million, up from $23.7 million in the prior year[94] Revenues This section analyzes Neogen's revenue performance, detailing growth drivers and changes across major product and service categories Revenue Growth by Category (Three Months Ended August 31, YoY % Change) | Category | % Change | | :---------------------------------- | :------- | | Food Safety | | | Natural Toxins, Allergens & Drug Residues | -5% | | Bacterial & General Sanitation | -4% | | Culture Media & Other | +1% | | Rodenticides, Insecticides & Disinfectants | +76% | | Genomics Services | +10% | | Animal Safety | | | Life Sciences | -23% | | Veterinary Instruments & Disposables | -8% | | Animal Care & Other | +20% | | Rodenticides, Insecticides & Disinfectants | +19% | | Genomics Services | +12% | - Food Safety's Rodenticides, Insecticides & Disinfectants saw a 76% increase, driven by hand/skin sanitizing products (UK) and a large non-recurring insecticide order (Brazil), and increased cleaner/disinfectant sales to China due to African swine fever and COVID-19[99] - Animal Safety's Rodenticides, Insecticides & Disinfectants increased 19%, primarily due to a 47% rise in rodenticide sales and the acquisition of the StandGuard product line[104] - Genomics Services for Food Safety more than doubled in China due to increased pork industry testing and aquaculture projects, while Animal Safety genomics grew 12% from companion animal and Australian sheep markets, partially offset by declines in domestic commercial beef/dairy due to COVID-19[100][105] - Drug residue test kits decreased 34% in Food Safety due to lower demand in European dairy markets and a shift to direct marketing[96] Gross Margin This section discusses the factors influencing Neogen's gross margin, including product mix shifts and operational efficiencies - Gross margin decreased to 46.0% in Q1 FY2021 from 47.5% in Q1 FY2020[106] - The decline was largely due to a shift in product mix within the Food Safety segment towards lower-margin products (cleaners, disinfectants, insecticides), the stronger U.S. dollar, and increased duties and freight charges[106] - Animal Safety gross margins improved by 290 basis points, driven by increased sales of higher-margin rodenticides and disinfectants, and improved efficiencies from the Cell BioSciences acquisition[106] Operating Expenses This section details changes in Neogen's operating expenses, including sales and marketing, general and administrative, and research and development costs - Total operating expenses decreased by $500,000, or 2%, to $31.4 million in Q1 FY2021[107] - Sales and marketing expenses declined 6% due to reduced travel ($900,000) and trade show cancellations ($353,000) caused by the COVID-19 pandemic, partially offset by a $1.0 million increase in compensation costs[107] - General and administrative expenses increased 2.9% due to higher compensation, legal/professional fees, depreciation from IT investments, and stock-based compensation[108] - Research and development expense increased by $191,000, primarily for third-party services and approval costs related to new product development, including the launch of the Soleris NG system[108] Operating Income This section analyzes Neogen's operating income and its percentage of revenue, highlighting the impact of revenue growth and expense management - Operating income increased to $18.9 million in Q1 FY2021, up 16.2% from $16.3 million in the prior year[110] - As a percentage of revenue, operating income improved to 17.3% from 16.0%, driven by increased revenues and lower operating expenses[110] Other Income This section presents Neogen's other income components, including interest income and foreign currency transaction gains or losses Other Income (Three Months Ended August 31, in thousands) | Item | 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 | - Interest income decreased due to lower yields on cash and marketable securities balances[111] - Foreign currency transactions resulted in a gain in Q1 FY2021 ($175,000) as the pound and euro strengthened against the U.S. dollar, contrasting with a loss in the prior year[111] Income Tax Expense This section discusses Neogen's income tax expense and effective tax rate, explaining the factors contributing to changes - Income tax expense for Q1 FY2021 was $3.95 million, with an effective tax rate of 19.9%, up from 17.0% in the prior year[112] - The increase in the effective tax rate was primarily due to lower tax benefits from stock option exercises and reduced benefits from foreign derived income compared to the prior year[112] Net Income This section summarizes the drivers behind Neogen's net income performance, including sales, gross margins, and operating expenses - Net income increased 8.2% to $15.9 million in Q1 FY2021, driven by higher sales and gross margins, and decreased operating expenses, partially offset by increased income taxes[113] Financial Condition and Liquidity This section assesses Neogen's financial condition and liquidity, focusing on cash, marketable securities, receivables, and inventory management - Overall cash, cash equivalents, and marketable securities increased to $367.5 million at August 31, 2020, from $343.7 million at May 31, 2020[114] - Net cash from operations was $25.1 million in Q1 FY2021[114] - Accounts receivable declined by $7.0 million to $77.7 million, with Days Sales Outstanding (DSOs) improving to 61 days[115] - Inventory balances increased by $2.5 million to $97.6 million to ensure adequate supplies amidst COVID-19 and Brexit concerns[117] - Management believes existing cash and credit facilities are sufficient for the foreseeable future, but may seek additional financing for product commercialization or acquisitions[119] Item 3. Quantitative and Qualitative Disclosures About Market Risk Neogen is exposed to market risks primarily from fluctuations in interest rates on short-term investments and foreign exchange rates due to its global operations, which involve transactions in various foreign currencies - The Company's primary interest rate risk stems from potential fluctuations in interest rates for short-term investments[121] - Foreign exchange risk arises from marketing and selling products globally, with revenues and expenses transacted in currencies such as the British pound sterling, euro, Mexican peso, Brazilian real, Chinese yuan, Australian dollar, and others[122][123] - Changes in exchange rates can positively or negatively affect the dollar value of foreign-denominated revenues and previously invoiced amounts[122] Item 4. Controls and Procedures Management, including the Principal Executive Officer and Principal Financial Officer, evaluated the effectiveness of the Company's disclosure controls and procedures as of August 31, 2020, concluding they are effective, and reported no material changes in internal controls over financial reporting during the quarter - The Company's disclosure controls and procedures were evaluated and deemed effective as of August 31, 2020[124] - No changes in internal controls over financial reporting occurred during the quarter ended August 31, 2020, that materially affected or are reasonably likely to materially affect internal control over financial reporting[125] PART II. OTHER INFORMATION Item 1. Legal Proceedings This section states that the Company is involved in legal and other proceedings in the normal course of business, which management does not expect to have a material effect on its future results of operations or financial position - The Company is subject to legal and other proceedings in the normal course of business[126] - 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[126] Item 6. Exhibits This section lists the exhibits filed as part of the Form 10-Q, including the Amended and Restated Credit Agreement, certifications from the Principal Executive Officer and Principal Financial Officer, and various Inline XBRL documents - Exhibits include the Amended and Restated Credit Agreement, Certifications of Principal Executive Officer and Principal Financial Officer, Certification Pursuant to 18 U.S.C. Section 1350, and various Inline XBRL documents[127] SIGNATURES This section contains the official signatures of Neogen's principal executive and financial officers, certifying the accuracy of the report - The report is signed by John E. Adent, President & Chief Executive Officer, and Steven J. Quinlan, Vice President & Chief Financial Officer, on September 30, 2020[130]