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Table of Contents
 
 
 
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, 2019.
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the transition period from
    
    
    
    
to
    
    
    
    
Commission file number
0-17988
 
Neogen Corporation
(Exact name of registrant as specified in its charter)
 
     
Michigan
 
38-2367843
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer
Identification Number)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
620 Lesher Place
Lansing, Michigan 48912
(Address of principal executive offices, including zip code)
(517)
372-9200
(Registrant’s telephone number, including area code)
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 whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  
    NO  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    YES  
    NO  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a
non-accelerated
filer (see definition of “accelerated filer and large accelerated filer” in Rule
12b-2
of the Exchange Act):
 
Large accelerated filer
 
 
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 Exchange Act):    YES  
    NO  
As of August 31, 2019 there were 52,422,942 shares of Common Stock outstanding.
 
 
 
 
Table of Contents
 
NEOGEN CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
             
PART I. FINANCIAL INFORMATION
   
Page No.
 
             
Item 1.
     
2
 
     
2
 
     
3
 
     
4
 
     
5
 
     
6
 
     
7
 
Item 2.
     
18
 
Item 3.
     
25
 
Item 4.
     
25
 
         
 
 
 
 
             
Item 1.
     
26
 
             
Item 6.
     
26
 
         
   
27
 
             
 
CEO Certification
   
 
 
CFO Certification
   
 
 
Section 906 Certification
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1
 
 
Table of Contents
 
PART I – FINANCIAL INFORMATION
Item 1. Interim Consolidated Financial Statements
 
Neogen Corporation and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share and
per share amounts) 
 
August 31,
2019
   
May 31,
2019
 
Assets
 
Unaudited 
   
Audited
 
Current Assets
   
     
 
Cash and cash equivalents
  $
56,289
    $
41,688
 
Marketable securities
   
234,727
     
225,836
 
Accounts receivable, less allowance of $1,700 and $1,700 
at August 31, 2019 and May 31, 2019, respectively
   
79,112
     
82,582
 
Inventories
   
87,682
     
85,992
 
Prepaid expenses and other current assets
   
15,738
     
13,431
 
                 
Total Current Assets
   
473,548
     
449,529
 
Net Property and Equipment
   
75,154
     
74,847
 
Other Assets
   
     
 
Goodwill
   
102,883
     
103,619
 
Other
non-amortizable
intangible assets
   
15,397
     
15,649
 
Amortizable
 intangible and other assets,
 net of accumulated amortization of $40,127 and $40,835 at August 31, 2019 and May 31, 2019, respectively
   
54,162
     
52,096
 
                 
Total Assets
  $   
721,144
    $
695,740
 
                 
Liabilities and Stockholders’ Equity
   
     
 
Current Liabilities
   
     
 
Accounts payable
  $
18,345
    $
19,063
 
Accrued compensation
   
4,796
     
7,085
 
Income taxes
   
4,142
     
601
 
Other accruals
   
13,144
     
11,502
 
                 
Total Current Liabilities
   
40,427
     
38,251
 
Deferred Income Taxes
   
15,501
     
15,618
 
Other
Non-Current
Liabilities
   
4,910
     
3,972
 
                 
Total Liabilities
   
60,838
     
57,841
 
Commitments and Contingencies (note 8)
   
     
 
Equity
   
     
 
Preferred stock, $1.00 par value, 100,000 shares authorized, none issued and outstanding
   
     
  
 
Common stock, $0.16 par value, 120,000,000 shares authorized, 52,422,942 and 52,216,589 shares issued and outstanding at August 31, 2019 and May 31, 2019, respectively
   
8,387
     
8,355
 
Additional
paid-in
capital
   
232,156
     
221,937
 
Accumulated other comprehensive loss
   
(14,136
)    
(11,640
)
Retained earnings
   
433,899
     
419,247
 
                 
Total Stockholders’ Equity
   
660,306
     
637,899
 
                 
Total Liabilities and Stockholders’ Equity
  $
721,144
    $     
695,740
 
                 
See notes to interim consolidated financial statements.
 
2
 
 
Table of Contents
 
Neogen Corporation and Subsidiaries
Consolidated Statements of Income (unaudited)
(in thousands, except per share amounts)
                 
 
Three Months Ended
August 31,
 
 
2019
   
2018
 
Revenues
   
     
 
Product revenues
  $
81,948
    $   
82,960
 
Service revenues
   
19,476
     
16,666
 
                 
Total Revenues
   
101,424
     
99,626
 
Cost of Revenues
   
     
 
Cost of product revenues
   
42,031
     
42,950
 
Cost of service revenues
   
11,199
     
9,947
 
                 
Total Cost of Revenues
   
53,230
     
52,897
 
                 
Gross Margin
   
48,194
     
46,729
 
Operating Expenses
   
     
 
Sales and marketing
   
17,543
     
17,233
 
General and administrative
   
10,699
     
10,198
 
Research and development
   
3,688
     
2,819
 
                 
Total Operating Expenses
   
31,930
     
30,250
 
                 
Operating Income
   
16,264
     
16,479
 
Other Income (Expense)
   
     
 
Interest income
   
1,510
     
927
 
Other expense
   
(122
)    
(269
)
                 
Total Other Income
   
1,388
     
658
 
                 
Income Before Taxes
   
17,652
     
17,137
 
Provision for Income Taxes
   
3,000
     
1,900
 
                 
Net Income
  $
14,652
    $
15,237
 
                 
Net Income Per Share
   
     
 
Basic
  $
0.28
    $
0.29
 
                 
Diluted
  $
0.28
    $
0.29
 
                 
 
 
 
 
 
 
See notes to interim consolidated financial statements.
 
3
 
 
Table of Contents
 
Neogen Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income (unaudited)
(in thousands)
                 
 
Three Months Ended
 
 
August 31,
 
 
2019
   
2018
 
Net income
  $
14,652
    $
15,237
 
Other comprehensive loss, net of tax: currency translation adjustments
   
(3,058
)    
(2,778
)
                 
Other comprehensive income, net of tax: unrealized gain on marketable securities
 
 
562
 
 
 
 
Total comprehensive income
  $
12,156
    $
12,459
 
                 
 
 
 
 
 
See notes to interim consolidated financial statements.
 
4
 
 
Table of Contents
 
Neogen Corporation and Subsidiaries
Consolidated Statements of Equity
(unaudited)
(in thousands)
 
   
   
   
Accumulated
   
   
 
 
   
   
Additional
   
Other
   
   
 
 
Common Stock
   
Paid-in
   
Comprehensive
   
Retained
   
 
 
Shares
   
Amount
   
Capital
   
(Loss)
   
Earnings
   
Total
 
Balance at May 31, 2019
   
52,217
    $
8,355
    $
221,937
    $
(11,640
)   $
419,247
    $
637,899
 
Issuance of shares under share-based compensation plan
   
196
     
30
     
9,683
     
 
     
 
     
9,713
 
Issuance of shares under employee stock purchase plan
   
10
     
2
     
536
     
 
     
 
     
538
 
Net income for the three months ended August 31, 2019
   
 
     
 
     
 
     
 
     
14,652
     
14,652
 
Other comprehensive loss for the three months ended August 31, 2019
   
 
     
 
     
 
     
(2,496
)    
 
     
(2,496
)
                                                 
Balance at August 31, 2019
   
52,423
    $
8,387
    $
232,156
    $
(14,136
)   $
433,899
    $
660,306
 
                                                 
 
   
   
   
Accumulated
   
   
 
 
   
   
Additional
   
Other
   
   
 
 
Common Stock
   
Paid-in
   
Comprehensive
   
Retained
   
 
 
Shares
   
Amount
   
Capital
   
(Loss)
   
Earnings
   
Total
 
Balance at May 31, 2018
   
51,736
    $
8,278
    $
202,572
    $
(9,746
)   $
359,071
    $
560,175
 
Issuance of shares under share-based compensation plan
   
251
     
40
     
8,433
     
     
     
8,473
 
Issuance of shares under employee stock purchase plan
   
8
     
2
     
517
     
     
     
519
 
Net income for the three months ended August 31, 2018
   
     
     
     
     
15,237
     
15,237
 
Other comprehensive loss for the three months ended August 31, 2018
   
     
     
     
(2,778
)    
     
(2,778
)
                                                 
Balance at August 31, 2018
   
51,995
    $
8,320
    $
211,522
    $
(12,524
)   $
374,308
    $
581,626
 
                                                 
See notes to interim consolidated financial statements.
 
5
 
 
Table of Contents
 
Neogen Corporation and Subsidiaries
Consolidated Statements of Cash Flows (unaudited)
(in thousands)
                 
 
Three Months Ended
 
 
August 31,
 
 
2019
   
2018
 
Cash Flows From Operating Activities
   
     
 
Net Income
  $
14,652
    $
15,237
 
Adjustments to reconcile net income to net cash from operating activities:
   
     
 
Depreciation and amortization
   
4,435
     
4,271
 
Share-based compensation
   
1,543
     
1,431
 
Change in operating assets and liabilities, net of business acquisitions:
   
     
 
Accounts receivable
   
3,390
     
755
 
Inventories
   
(2,132
)    
(2,940
)
Prepaid expenses and other current assets
   
(1,929
)    
(3,236
)
Accounts payable, accruals and other changes
   
3,760
     
564
 
                 
Net Cash From Operating Activities
   
23,719
     
16,082
 
Cash Flows For Investing Activities
   
     
 
Purchases of property, equipment and other assets
   
(6,469
)    
(1,918
)
Proceeds from the sale of marketable securities
   
94,540
     
73,096
 
Purchases of marketable securities
   
(103,432
)    
(74,549
)
Business acquisitions, net of cash acquired
   
     
(4,203
)
                 
Net Cash For Investing Activities
   
(15,361
)    
(7,574
)
Cash Flows From Financing Activities
   
     
 
Exercise of stock options and issuance of employee stock purchase plan shares
   
8,708
     
8,992
 
                 
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, Beginning of Period
   
41,688
     
83,074
 
                 
Cash and Cash Equivalents, End of Period
  $
56,289
    $
97,225
 
                 
 
 
 
 
 
See notes to interim consolidated financial statements.
 
6
 
 
Table of Contents
 
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, 2019 are not necessarily indicative of the results to be expected for the fiscal year ending May 31, 2020. For more complete financial information, these consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in our Annual Report on Form
10-K
for the fiscal year ended May 31, 2019.
Recently Adopted Accounting Standards
Leases
On June 1, 2019, the Company adopted ASU No. 2016-02— Leases. Refer to Leases section of Note 1 for further information.
Recent Accounting Pronouncements Not Yet Adopted
Financial Instruments Credit Losses
In June 2016, the FASB issued ASU No. 2016-13—Measurement of Credit Losses on Financial Instruments, which changes how companies measure credit losses on most financial instruments measured at amortized cost and certain other instruments, such as loans, receivables and held-to-maturity debt securities. Rather than generally recognizing credit losses when it is probable that the loss has been incurred, the revised guidance requires companies to recognize an allowance for credit losses for the difference between the amortized cost basis of a financial instrument and the amount of amortized cost that the company expects to collect over the instrument’s contractual life. ASU 2016-13 is effective for fiscal periods beginning after December 15, 2019 and must be adopted as a cumulative effect adjustment to retained earnings; early adoption is permitted. The Company does not believe adoption of this guidance will have an impact on its consolidated financial statements.
Fair Value Measurements
In August 2018, the FASB issued ASU 2018-3, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement, which modifies the disclosure requirements of fair value measurements. ASU 2018-13 is effective for fiscal years beginning after December 15, 2019 and early adoption is permitted. The Company does not believe adoption of this guidance will have an impact on its consolidated financial statements.
Cloud Computing Implementation Cost
In August 2018, the FASB issued ASU 2018-15, Intangible-Goodwill and Other Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Cost Incurred in a Cloud Computing Arrangement That Is a Service Contract, which clarifies the accounting for implementation costs in cloud computing arrangements. ASU 2018-15 is effective for fiscal years beginning after December 15, 2019 and early adoption is permitted. The Company does not believe adoption of this guidance will have an impact on its consolidated financial statements.
 
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Comprehensive Income
Comprehensive income represents net income and any revenues, expenses, gains and losses that, under U.S. generally accepted accounting principles, are excluded from net income and recognized directly as a component of equity. Accumulated other comprehensive income (loss) consists of foreign currency translation adjustments and unrealized gains or losses on marketable securities.
Fair Value of Financial Instruments
The carrying amounts of the Company’s financial instruments other than cash equivalents and marketable securities, which include accounts receivable and accounts payable, approximate fair value based on either their short maturity or current terms for similar instruments.
Fair value measurements are determined based upon the exit price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants exclusive of any transaction costs. The Company utilizes a fair value hierarchy based upon the observability of inputs used in valuation techniques as follows:
Level 1: Observable inputs such as quoted prices in active markets;
Level 2: Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and
Level 3: Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
Cash and Cash Equivalents
Cash and cash equivalents consist of bank demand accounts, savings deposits, certificates of deposit and commercial paper with original maturities of 90 days or less. The carrying value of these assets approximates fair value due to the short maturity of these instruments and meets the Level 1 criteria.
Marketable Securities
The Company has marketable securities held by banks or broker-dealers at August 31, 2019, consisting of short-term domestic certificates of deposit, and commercial paper and U.S. treasuries rated at least A-1/P-1 (short-term) and A/A2 (long-term) with maturities between 91 days and two years. These securities are classified as available for sale. The primary objective of the Company’s investment activity is to preserve capital for the purpose of funding operations, capital expenditures and business acquisitions; investments are not entered into for trading or speculative purposes. These securities are recorded at fair value based on recent trades or pricing models and therefore meet the Level 2 criteria. Interest income on these investments is recorded within other income on the consolidated statements of income
.
ESTIMATES AND ASSUMPTIONS
The preparation of these financial statements requires that management make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an ongoing basis, management evaluates the estimates, including, but not limited to, variable consideration related to revenue recognition, allowances for doubtful accounts, the market value of, and demand for, inventories, stock-based compensation, provision for income taxes and related balance sheet accounts, accruals, goodwill and other intangible assets. These estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
There have been no significant changes to the critical accounting policies and estimates disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended May 31, 2019.
There were no significant changes to the contractual obligations or contingent liabilities and commitments disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended May 31, 2019.
 
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Accounts Receivable Allowance
Management attempts to minimize credit risk by reviewing customers’ credit history before extending credit and by monitoring credit exposure on a regular basis. An allowance for doubtful accounts is established based upon factors surrounding the credit risk of specific customers, historical trends and other information. Collateral or other security is generally not required for accounts receivable. Once a receivable balance has been determined to be uncollectible, that amount is charged against the allowance for doubtful accounts.
Inventory
The reserve for obsolete and slow-moving inventory is reviewed at least quarterly based on an analysis of the inventory, considering the current condition of the asset as well as other known facts and future plans. The reserve required to record inventory at lower of cost or net realizable value is adjusted as conditions change. Product obsolescence may be caused by shelf-life expiration, discontinuance of a product line, replacement products in the marketplace or other competitive situations.
Goodwill and Other Intangible Assets
Goodwill represents the excess of purchase price over fair value of tangible net assets of acquired businesses after amounts are allocated to other identifiable intangible assets. Other intangible assets include customer relationships, trademarks, licenses, trade names, covenants
not-to-compete
and patents. Customer-based intangibles are amortized on either an accelerated or straight-line basis, reflecting the pattern in which the economic benefits are consumed, while all other amortizable intangibles are amortized on a straight-line basis; intangibles are generally amortized over 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 by performing a quantitative assessment. If the carrying amounts of these assets are deemed to be less than fair value based upon a discounted cash flow analysis and comparison to comparable EBITDA multiples of peer companies, such assets are reduced to their estimated fair value and a charge is recorded to operations.
Long-Lived Assets
Management reviews the carrying values of its long-lived assets to be held and used, including definite-lived intangible assets, for possible impairment whenever events or changes in business conditions warrant such a review. The carrying value of a long-lived asset is considered impaired when the anticipated separately identifiable undiscounted cash flows over the remaining useful life of the asset indicate that the carrying amount of the asset may not be recoverable. In such an event, fair value is determined using discounted cash flows and, if lower than the carrying value, impairment is recognized through a charge to operations.
Equity Compensation Plans
Share options awarded to employees and shares of stock awarded to employees under certain stock purchase plans are recognized as compensation expense based on their fair value at grant date. The fair market value of options granted under the Company stock option plans was estimated on the date of grant using the Black-Scholes option-pricing model with assumptions for inputs such as interest rates, expected dividends, volatility measures and specific employee exercise behavior patterns based on statistical data. Some of the inputs used are not market-observable and have to be estimated or derived from available data. Use of different estimates would produce different option values, which in turn would result in higher or lower compensation expense recognized. To value options, several recognized valuation models exist. None of these models can be singled out as being the best or most correct. The model applied by us can handle most of the specific features included in the options granted, which is the reason for its use. If a different model were used, the option values could differ despite using the same inputs. Accordingly, using different assumptions coupled with using a different valuation model could have a significant impact on the fair value of employee stock options. Fair value could be either higher or lower than the number provided by the model applied and the inputs used. Further information on our equity compensation plans, including inputs used to determine the fair value of options, is disclosed in Note 5.
Income Taxes
We account for income taxes using the asset and liability method. Under this method, deferred income tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and for tax credit carryforwards and are measured using the enacted tax rates in effect for the years in which the differences are expected to reverse. Deferred income tax expense represents the change in net deferred income tax assets and liabilities during the year.
 
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Leases
In February 2016, the FASB issued ASU No. 2016-02—Leases, to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. The recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessor have not significantly changed from previous U.S. GAAP. This ASU is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2018; early adoption is permitted. We adopted this ASU on June 1, 2019; the impact on our consolidated financial statements was immaterial.
We lease various manufacturing, laboratory, warehousing and distribution facilities, administrative and sales offices, equipment and vehicles under operating leases. We evaluate our contracts to determine if an arrangement is a lease at inception and classify it as a finance or operating lease. Currently, all our leases are classified as operating leases. Leased assets and corresponding liabilities are recognized based on the present value of the lease payments over the lease term. Our lease terms may include options to extend when it is reasonably certain that we will exercise that option.
Costs associated with operating leases are recognized on a straight-line basis within operating expenses over the term of the lease. With the adoption of ASC 842, on June 1, 2019 we recognized all leases with terms greater than 12 months in duration on our consolidated balance sheets as right-of-use assets and lease liabilities of approximately $2.0  million as of June 1, 2019. We adopted the standard using the prospective approach and did not retrospectively apply to prior periods. Right-of-use assets are recorded in other assets on our consolidated balance sheets. Current and non-current lease liabilities are recorded in other accruals within current liabilities and other non-current liabilities, respectively, on our consolidated balance sheets.
We have made certain assumptions and judgments when applying ASC 842, the most significant of which are:
  We elected the package of practical expedients available for transition that allow us to not reassess whether expired or existing contracts contain leases under the new definition of a lease, lease classification for expired or existing leases and whether previously capitalized initial direct costs would qualify for capitalization under ASC 842.
 
 
 
 
 
 
  We did not elect to use hindsight when considering judgments and estimates such as assessments of lessee options to extend or terminate a lease or purchase the underlying asset.
 
 
 
 
 
 
  For all asset classes, we elected to not recognize a right-of-use asset and lease liability for short-term leases.
 
 
 
 
 
 
  For all asset classes, we elected to not separate non-lease components from lease components to which they relate and have accounted for the combined lease and non-lease components as a single lease component.
 
 
 
 
 
 
  The determination of the discount rate used in a lease is our incremental borrowing rate that is based on what we would normally pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments.
Supplemental balance sheet information related to operating leases was as follows:
         
 
August 31,
 
 
2019
 
 
(in thousands)
 
Right of use - assets
  $
  1,726
 
Lease liabilities - current
   
755
 
Lease liabilities - non-current
   
982
 
 
 
 
 
 
 
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The weighted average remaining lease term and weighted average discount rate were as follows:
 
August 31,
 
 
2019
 
Weighted average remaining lease term
   
2.1 years
 
Weighted average discount rate
   
3.5
%
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:
 
Three Months Ended
 
 
August 31,
 
 
2019
 
 
(in thousands)
 
Operating leases
  $
  240
 
Short term leases
   
48
 
         
Total lease expense
  $
288
 
         
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 $247,000 for the three months ended August 31, 2019. There were no non-cash additions to right-of-use assets obtained from new operating lease liabilities for the three months ended August 31, 2019.
In accordance with the new leases standard, discounted and undiscounted lease payments as of August 31, 2019 were as follows (in thousands):
Years ending May 31,
   
 
2020 (1)
  $
757
 
2021
   
730
 
2022
   
230
 
2023
   
61
 
2024
   
3
 
2025 and thereafter
   
—  
 
         
Total lease payments
   
1,781
 
Less: imputed interest
   
44
 
         
Total lease liabilities
  $
  1,737
 
         
(1) Excluding the three months ended August 31, 2019
 
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Prior to our adoption of the new leases standard, future minimum lease payments as of May 31, 2019, which were undiscounted, were
as follows (in thousands):
Years ending May 31,
   
 
2020
  $
  1,169
 
2021
   
818
 
2022
   
260
 
2023
   
73
 
2024
   
—  
 
2025 and thereafter
   
—  
 
         
Total lease payments
  $
  2,320
 
Revenue Recognition
The Company determines the amount of revenue to be recognized through application of the following steps:
  Identification of the contract with a customer;
  Identification of the performance obligations in the contract;
  Determination of the transaction price;
  Allocation of the transaction price to the performance obligations in the contract; and
  Recognition of revenue when, or as, the Company satisfies the performance obligations.
Essentially all our revenue is generated through contracts with our customers. A performance obligation is a promise in a contract to transfer a product or service to a customer. We generally recognize revenue at a point in time when all our performance obligations under the terms of a contract are satisfied. Revenue is recognized upon transfer of control of promised products and services in an amount that reflects the consideration the Company expects to receive in exchange for those products or services. The collectability of consideration on the contract is reasonably assured before revenue is recognized. To the extent that customer payment has been received before all recognition criteria are met, these revenues are initially deferred in other accruals on the balance sheet and the revenue is recognized in the period that all recognition criteria have been met. In certain situations, we provide rebates, marketing support, credits or incentives to selected customers, which are accounted for as variable consideration when estimating the amount of revenue to recognize on a contract. Variable consideration reduces the amount of revenue that is recognized. These variable consideration estimates are updated at the end of each reporting period based on information currently available.
The performance obligations in our contracts are generally satisfied well within one year of the contract inception. In such cases, we have elected the practical expedient to not adjust the promised amount of consideration for the effects of a significant financing component. We have elected to utilize the practical expedient to recognize the incremental costs of obtaining a contract as an expense when incurred because the amortization period for the prepaid costs that would otherwise have been deferred and amortized is one year or less. The Company accounts for shipping and handling for products as a fulfillment activity when goods are shipped. Revenue is recognized net of any tax collected from customers; the taxes are subsequently remitted to governmental authorities. The Company’s terms and conditions of sale generally do not provide for returns of product or reperformance of service except in the case of quality or warranty issues. These situations are infrequent; due to immateriality of the amount, warranty claims are recorded in the period incurred.
We derive revenue from two primary sources—product revenue and service revenue.
Product revenue consists of shipments of:
  Diagnostic test kits, dehydrated culture media and related products used by food producers and processors to detect harmful natural toxins, foodborne bacteria, allergens and levels of general sanitation;
  Consumable products marketed to veterinarians and animal health product distributors; and
  Rodenticides, disinfectants and insecticides to assist in the control of rodents, insects and disease in and around agricultural, food production and other facilities.
Revenues for our products are recognized and invoiced when the product is shipped to the customer.
Service revenue consists primarily of:
  Genomic identification and related interpretive bioinformatic services; and
  Other commercial laboratory services.
 
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Revenues for our genomics and commercial laboratory services are recognized and invoiced when the applicable laboratory service is performed and the results are conveyed to the customer.
Payment terms for products and services are generally 30 to 60 days.
The following table presents disaggregated revenue by major product and service categories for the three month periods ended August 31, 2019 and 2018:
 
Three Months ended August 31,
 
 
2019
   
2018
 
 
(in thousands)
 
Food Safety
   
     
 
Natural Toxins, Allergens & Drug Residues
  $
20,115
    $
18,838
 
Bacterial & General Sanitation
   
10,316
     
10,467
 
Dehydrated Culture Media & Other
   
11,279
     
12,217
 
Rodenticides, Insecticides & Disinfectants
   
5,449
     
6,625
 
Genomics Services
   
3,862
     
4,036
 
                 
  $
51,021
    $
52,183
 
Animal Safety
   
     
 
Life Sciences
  $
1,723
    $
2,080
 
Veterinary Instruments & Disposables
   
11,336
     
10,404
 
Animal Care & Other
   
6,405
     
6,398
 
Rodenticides, Insecticides & Disinfectants
   
16,718
     
17,146
 
Genomics Services
   
14,221
     
11,415
 
                 
  $
50,403
    $
47,443
 
                 
Total Revenues
  $
101,424
    $
99,626
 
                 
 
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2. INVENTORIES
Inventories are stated at the lower of cost, determined by the
first-in, 
first-out
method, or net realizable value. The components of inventories follow:
 
August 31,
   
May 31,
 
 
2019
   
2019
 
 
(in thousands)
 
Raw materials
  $  
42,964
    $  
41,594
 
Work-in-process
   
5,901
     
5,581
 
Finished and purchased goods
   
38,817
     
38,817
 
                 
  $
87,682
    $
85,992
 
                 
3. NET INCOME PER SHARE
The calculation of net income per share follows:
 
Three Months Ended
 
 
August 31,
 
 
2019
   
2018
 
 
(in thousands, except per share
amounts)
 
Numerator for basic and diluted net income per share:
   
     
 
Net income
  $
 14,652
           $  
15,237
 
Denominator for basic net income per share:
   
     
 
Weighted average shares
   
52,292
     
51,806
 
Effect of dilutive stock options
   
392
     
974
 
                 
Denominator for diluted net income per share
   
52,684
     
52,780
 
Net income per share:
   
     
 
Basic
  $
0.28
    $
0.29
 
                 
Diluted
  $
0.28
    $
0.29
 
                 
 
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4. SEGMENT INFORMATION AND GEOGRAPHIC DATA
We have two reportable segments: Food Safety and Animal Safety. The Food Safety segment is primarily engaged in the development, production and marketing of diagnostic test kits, dehydrated culture media and related products used by food producers and processors to detect harmful natural toxins, foodborne bacteria, allergens and levels of general sanitation. The Animal Safety segment is primarily engaged in the development, production and marketing of products dedicated to animal safety, including a complete line of consumable products marketed to veterinarians and animal health product distributors; this segment also provides genomic identification and related interpretive bioinformatic services. Additionally, the Animal Safety segment produces and markets rodenticides, disinfectants and insecticides to assist in the control of rodents, insects and disease in and around agricultural, food production and other facilities.
Our international operations in the United Kingdom, Mexico, Brazil, China and India originally focused on the Company’s food safety products, and each of these units reports through the Food Safety segment. In recent years, these operations have expanded to offer our complete line of products and services, including those usually associated with the Animal Safety segment such as cleaners, disinfectants, rodenticides, insecticides, veterinary instruments and genomics services. These additional products and services are managed and directed by existing management and are reported through the Food Safety segment.
The accounting policies of each of the segments are the same as those described in Note 1.
Segment information follows:
                                 
 
   
   
Corporate and
   
 
 
Food
   
Animal
   
Eliminations
   
 
 
Safety
   
Safety
   
(1)
   
Total
 
 
(in thousands)
 
As of and for the three months ended August 31, 2019
   
     
     
     
 
Product revenues to external customers
  $
45,877
    $
36,071
    $
    $
81,948
 
Service revenues to external customers
   
5,144
     
14,332
     
     
19,476
 
                                 
Total revenues to external customers
   
51,021
     
50,403
     
     
101,424
 
Operating income (loss)
   
9,134
     
8,300
     
(1,170
)    
16,264
 
Total assets
   
207,725
     
222,403
     
291,016
     
721,144
 
As of and for the three months ended August 31, 2018
   
     
     
     
 
Product revenues to external customers
  $
46,933
    $
36,027
    $
—  
    $
82,960
 
Service revenues to external customers
   
5,250
     
11,416
     
—  
     
16,666
 
                                 
Total revenues to external customers
   
52,183
     
47,443
     
—  
     
99,626
 
Operating income (loss)
   
10,873
     
6,706
     
(1,100
)    
16,479
 
Total assets
   
201,727
     
212,786
     
226,413
     
640,926
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(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,
 
 
2019
   
2018
 
 
(in thousands)
 
Revenues by Geographic Location
   
     
 
Domestic
  $
63,340
    $  
59,846
 
International
   
38,084
     
39,780
 
                 
Total revenue
   
101,424
     
99,626
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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5. EQUITY COMPENSATION PLANS
Qualified and
non-qualified
options to purchase shares of common stock may be granted to directors, officers and employees of the 
Company under the terms of our stock option plans. These options are granted at an exercise price of not less than the fair market value of the stock on the date of grant. Options vest ratably over three and five year periods and the contractual terms are generally five or ten years. A summary of stock option activity during the three months ended August 31, 2019 follows:
                 
 
   
Weighted-
 
 
   
Average
 
(Options in thousands)
 
Shares
      
Exercise Price
 
Options outstanding June 1, 2019
   
2,385
    $
49.37
 
Granted
   
     
 
Exercised
   
(196
)    
41.51
 
Forfeited
   
(6
)    
62.70
 
                 
Options outstanding August 31, 2019
   
2,183
    $
50.04
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
During the three month periods ended August 31, 2019 and 2018, the Company recorded $1,543,000 and $1,431,000, respectively, of compensation expense related to its share-based awards.
The weighted-average fair value per share of stock options granted during fiscal year 2019, estimated on the date of grant using the Black-Scholes option pricing model, was $14.91. 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 2020.
         
 
FY 2019
 
Risk-free interest rate
   
2.6
%
Expected dividend yield
   
0.0
%
Expected stock price volatility
   
27.0
%
Expected option life
   
3.5 years
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The Company has an employee stock purchase plan that provides for employee stock purchases at a 5% discount to market price. The discount is recorded in administrative expense as of the date of purchase.
6. BUSINESS AND PRODUCT LINE ACQUISITIONS
The Consolidated Statements of Income reflect the results of operations for business acquisitions since the respective dates of purchase. All are accounted for using the acquisition method. Goodwill recognized in the acquisitions discussed below relates primarily to enhancing the Company’s strategic platform for the expansion of available product offerings.
On August 1, 2018, the Company acquired the stock of Clarus Labs, Inc., a manufacturer of water testing products. Neogen has distributed Clarus’ Colitag water test to the food and beverage industries since 2004 and this acquisition gives the Company access to sell this product to new markets. Consideration for the purchase was $4,204,000 in cash and $1,256,000 of contingent consideration, due semiannually for the first five years, based on an excess net sales formula. The final purchase price allocation, based upon the fair value of these assets and liabilities determined using the income approach, included inventory of $32,000, machinery and equipment of $120,000, accounts payable of $53,000, contingent consideration accrual of $1,256,000,
non-current
deferred tax liability of $544,000,
non-amortizable
intangible assets of $878,000, intangible assets of $1,487,000 (with an estimated life of
5-15
years) and the remainder to goodwill
(non-deductible
for tax purposes). These values are Level 3 fair value measurements. Since February 2019, $180,000 has been paid to the former owners as contingent consideration from the accrual. Manufacturing of these products was moved to the Company’s Lansing, Michigan location in October 2018, reporting within the Food Safety segment.
 
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On September 4, 2018, the Company acquired the assets of Livestock Genetic Services, LLC, a Virginia-based company that specialized in genetic evaluations and data management for cattle breeding organizations. Livestock Genetic Services had been a long-time strategic partner of Neogen and the acquisition enhanced the Company’s
in-house
genetic evaluation capabilities. Consideration for the purchase was $1,100,000 in cash, with $700,000 paid at closing and $400,000 payable to the former owner on September 1, 2019, and up to $585,000 of contingent consideration, payable over the next three years. The final purchase price allocation, based upon the fair value of these assets and liabilities determined using the income approach, included office 
equipment of $
15,000
, contingent consideration accrual of $
385,000
, intangible assets of $
942,000
(with an estimated life of
5-15
years) and the remainder to goodwill (deductible to tax purposes). These values are Level 3 fair value measurements.
In September 2019, the former owner was paid the second installment of $400,000 and was also paid $88,000 in contingent consideration based on the achievement of sales targets in the first year.
Services provided by this operation are now performed at the Company’s Lincoln, Nebraska location, reporting within the Animal Safety segment.
On January 1, 2019, the Company acquired the assets of Edmonton, Alberta based Delta Genomics Centre, an animal genomics laboratory in Canada. Delta’s laboratory operations were renamed Neogen Canada and the acquisition was intended to accelerate growth of the Company’s animal genomics business in Canada. Consideration for the purchase was $1,485,000 in cash. The final purchase price allocation, based upon the fair value of these assets and liabilities determined using the income approach, included inventory of $38,000, machinery and equipment of $371,000, unearned revenue liability of $125,000, intangible assets of $532,000 (with an estimated life of 5 to 10 years) and the remainder to goodwill (deductible for tax purposes). These values are Level 3 fair value measurements. Services provided by this operation continue to be performed in Edmonton, reporting within the Animal Safety segment.
7. LONG TERM DEBT
We have a financing agreement with a bank providing for a $15,000,000 unsecured revolving line of credit, which was amended on November 30, 2018 to extend the maturity from September 1, 2019 to September 30, 2021. There were no advances against the line of credit during fiscal 2019 and there have been none thus far in fiscal 2020; there was no balance outstanding at August 31, 2019. Interest on any borrowings remained at LIBOR plus 100 basis points (rate under the terms of the agreement was 3.08% at August 31, 2019). Financial covenants include maintaining specified levels of tangible net worth, debt service coverage, and funded debt to EBITDA, each of which the Company was in compliance with at August 31, 2019.
8. COMMITMENTS AND CONTINGENCIES
The Company is involved in environmental remediation and monitoring activities at its Randolph, Wisconsin manufacturing facility and accrues for related costs when such costs are determined to be probable and estimable. The Company currently utilizes a pump and treat remediation strategy, which includes semi-annual monitoring and reporting, consulting, and maintenance of monitoring wells. Neogen expenses these annual costs of remediation, which have ranged from $38,000 to $131,000 per year over the past five years. The Company’s estimated liability for these costs was $916,000 at both August 31, 2019 and May 31, 2019, measured on an undiscounted basis over an estimated period of 15 years; $100,000 of the liability is recorded within current liabilities and the remainder is recorded within other
non-current
liabilities on the consolidated balance sheets. In fiscal 2019, the Company performed an updated Corrective Measures Study (CMS) on the site, per a request from the Wisconsin Department of Natural Resources (WDNR), and is currently in discussion with the WDNR regarding potential alternative remediation strategies going forward. The Company believes that the current pump and treat strategy is appropriate for the site. At this time, the outcome of the review in terms of approach and future costs is unknown, but a change in the current remediation strategy, depending on the alternative selected, could require an increase in the currently recorded liability, with an offsetting charge to operations in the period recorded.
The Company is subject to certain legal and other proceedings in the normal course of business that, in the opinion of management, should not have a material effect on its future results of operations or financial position.
9. STOCK PURCHASE
In October 2018, the Company’s Board of Directors passed a resolution canceling the Company’s prior stock buyback program, which had been approved in December 2008, and authorized a new program to purchase, subject to market conditions, up to 3,000,000 shares of the Company’s common stock. In December 2018, the Company purchased 50,000 shares under the program in negotiated and open market transactions for a total price, including commissions, of $3,134,727. Shares acquired under the program have been retired.
 
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PART I – FINANCIAL INFORMATION
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The information in this Management’s Discussion and Analysis of Financial Condition and Results of Operations contains both historical financial information and forward-looking statements. Neogen does not provide forecasts of future financial performance. While management is optimistic about the Company’s long-term prospects, historical financial information may not be indicative of future financial results.
Safe Harbor and Forward-Looking Statements
Forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, are made throughout this Quarterly Report on Form
10-Q.
For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward looking statements. Without limiting the foregoing, the words “believes,” “anticipates,” “plans,” “expects,” “seeks,” “estimates,” and similar expressions are intended to identify forward-looking statements. There are a number of important factors, including competition, recruitment and dependence on key employees, impact of weather on agriculture and food production, identification and integration of acquisitions, research and development risks, patent and trade secret protection, government regulation and other risks detailed from time to time in the Company’s reports on file at the Securities and Exchange Commission, that could cause Neogen Corporation’s results to differ materially from those indicated by such forward-looking statements, including those detailed in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
In addition, any forward-looking statements represent management’s views only as of the day this Quarterly Report on Form
10-Q
was first filed with the Securities and Exchange Commission and should not be relied upon as representing management’s views as of any subsequent date. While management may elect to update forward-looking statements at some point in the future, it specifically disclaims any obligation to do so, even if its views change.
 
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Table of Contents
 
Executive Overview
  Consolidated revenues were $101.4 million in the first quarter of fiscal 2020, an increase of 2% compared to $99.6 million in the first quarter of fiscal 2019. Organic sales increased 1%.
 
 
 
 
 
 
 
  Food Safety segment sales were $51.0 million in the first quarter of the current fiscal year, a decrease of 2% compared to $52.2 million in the same period of the prior year. Organic sales in this segment also decreased 2%, after excluding a minor contribution from the August 1, 2018 acquisition of Clarus Labs.
 
 
 
 
 
 
 
  Animal Safety segment sales were $50.4 million in the first quarter, an increase of 6% compared to prior year first quarter sales of $47.4 million. Organic sales in this segment increased 5%, with the acquisitions of Livestock Genetics (September 2018) and Delta Genomics (January 2019) providing the remainder of the increase.
 
 
 
 
 
 
 
  International sales in the first quarter of fiscal 2020 were 37.5% of total sales compared to 39.9% of total sales in the first quarter of fiscal 2019.
 
 
 
 
 
 
 
  Our effective tax rate in the first quarter of fiscal 2020 was 17.0% compared to an effective tax rate of 11.1% in the prior year first quarter. The prior year’s first quarter effective tax rate was lower primarily due to tax benefits from stock options.
 
 
 
 
 
 
 
  Net income for the quarter ended August 31, 2019 was $14.7 million, or $0.28 per diluted share, a decrease of 4% compared to $15.2 million, or $0.29 per share, for the same period in the prior year.
 
 
 
 
 
 
 
  Cash generated from operating activities in the first quarter of fiscal 2020 was $23.7 million, compared to $16.1 million in the first quarter of fiscal 2019.
 
 
 
 
 
 
 
Neogen’s results reflect a 4% decrease in international sales in the first quarter of fiscal 2020 compared to the same period in the prior fiscal year. International growth in this quarter was adversely impacted by currency rates, the loss of forensics business in Brazil and a large prior year
non-recurring
government sale, also in Brazil. Revenue changes, expressed in percentages, in the first quarter of fiscal 2020 compared to the same quarter in the prior year are as follows for each of our international locations:
                 
 
Revenue
   
Revenue
 
 
% Inc (Dec)
   
% Inc (Dec)
 
 
USD
   
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 the first quarter of fiscal 2020 compared to the same quarter a year ago, primarily due to increased strength of the U.S. dollar relative to the British pound and the Australian dollar. Neogen Europe’s 4% decline in revenue in the first quarter was primarily due to a 2% decrease in sales of natural toxins test kits; prior year sales in this category were enhanced due to a mild deoxynivalenol (DON) outbreak in France that contributed to increased testing in that period. Additionally, the first quarter of fiscal 2019 included a large equipment sale that did not recur in the current year. Partially offsetting these declines were strong sales of cleaners and disinfectants.
At our Brazilian operations, the prior year first quarter included the final shipment of a large
non-recurring
insecticide order to a government health organization. Additionally, forensic sales in Brazil decreased significantly due to lost business from a large commercial laboratory that converted their testing protocol to
a higher throughput method
. Partially offsetting these lower revenues, sales of our aflatoxin test kits rose 57% as we continued to gain market share of corn testing in Brazil. At Neogen Latinoamerica, the growth in the first quarter was led by sales of natural toxins test kits due to market share gains
, partially offset by lower sales of biosecurity products
.
 
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Service revenue, which consists primarily of genomics services to animal protein and companion animal markets, was $19.5 million in the first quarter of fiscal 2020, an increase of 17% over prior year first quarter revenues of $16.7 million, with minor contributions from the acquisitions of Livestock Genetics (September 2018) and Delta Genomics (January 2019). The growth was led by increases of genomic testing service revenues to the companion animal and global beef and dairy cattle markets.
 
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Revenues
                                 
 
Three Months ended
August 31,
   
   
 
 
   
   
Increase/
   
 
 
2019
   
2018
   
(Decrease)
   
%
 
 
(in thousands)
   
 
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
)%
                                 
  $
51,021
    $
52,183
    $
(1,162
)    
(2
)%
Animal Safety