Neogen’s animal safety markets are primarily comprised of:
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INTERNATIONAL SALES AND MARKETING
Neogen maintains 16 Company-owned locations outside of the United States in 23 countries to provide a direct presence in regions of particular importance to us; wesales presence. We also maintain an extensivea network of distributors to reach countries where we do not have a direct presence.
UK, Europe, Middle East, Africa and subsidiaries.
Neogen Europe management also is also responsible for Neogen’svarious other Europeanmanufacturing operations which include:
Neogen Latinoam
Mexico, Central and South America. Neogen maintains offices and distribution facilities in Kochi, inMexico, Guatemala, Brazil, Argentina, Chile, Uruguay and Colombia. Combined, the state of Kerala, which is India’s leading region for the export of spices, tea,businesses distribute Neogen’s products and fresh fruitsoffer genomics services throughout Mexico, Central and vegetables. South America to distributors and end customers.
Neogen Indiado Brasil, headquartered near São Paulo, is also responsible for manufacturing, marketing and sales of our food safetyfor Rogama, located in Pindamonhangaba, Brazil. This company operates a genomics testing laboratory (formerly named Deoxi) and animal safetydevelops, manufactures and markets rodent control and insect control products. Rogama offers registered pest control products to customersBrazil’s agronomic, professional and retail markets.
Asia Pacific. Neogen maintains offices in Japan, Korea, Thailand, China, Australia and New Zealand. Combined, the businesses distribute Neogen’s products throughout the Asia Pacific region to distributors and end customers.
Our Chinese subsidiary, located in India and nearby countries.
Neogen Canada.
Other distributor partners.
Sales to customers outside the United States accounted for 39.1%48.4%, 39.4%39.7%, and 40.1%39.1% of our total revenues for fiscal years ended May 31, 2021, 20202023, 2022 and 2019,2021, respectively. No individual foreign country contributed 10% or more of our revenues for those same periods.
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RESEARCH AND DEVELOPMENT
Neogen has a strong commitment to Neogen’sits research and development activities. Our product development efforts are focused on the enhancement of existing products and on the development of new products that fitadvance our business strategy. As of May 31, 2021,2023, we employed 112136 scientists and support staff in our worldwide research and development group, including immunologists, chemists and microbiologists. Research and development costs were approximately $16.3 million, $14.8 million,$26,039, $17,049, and $12.8 million$16,247 representing 3.5%3.2%, 3.5%3.2%, and 3.1%3.5% of total revenues in fiscal years 2021, 20202023, 2022 and 2019,2021, respectively. Management currently expects our future research and development expenditures to approximate 3% to 4% of total revenues annually.
Neogen has ongoing development projects for several new and improved diagnostic tests and other complementary products for both the Food Safety and Animal Safety markets. Management expects that a number of these products will be commercially available at various times during fiscal years 20222024 and 2023.
Certain technologies used in some products manufactured and marketed by Neogen were acquired from or developed in collaboration with affiliated partners, independent scientists, governmental agencies, universities and other third parties. We have entered into agreements with these parties that provide for the payment of royalties based uponon sales of products that use the pertinent licensed technology. Royalties, expensed to sales and marketing, under these agreements amounted to $2,129,000, $2,524,000,$3,392, $1,999, and $2,795,000$2,129 in fiscal years 2023, 2022, and 2021, 2020 and 2019, respectively.
PROPRIETARY PROTECTION AND APPROVALS
Neogen uses a variety of intellectual property approaches to protect the competitive position of its offerings, including the use of patents, trademarks, trade secrets, proprietary and confidential know-how, as proprietary protection in many of its foodwell as branding and animal safety products. In many cases, we have developed unique antibodies capable of detecting microorganisms and residues at minute levels. The supply of these antibodies, and the proprietary techniques utilized for their development, may offer better protection than filing patents. Such proprietary reagents are maintained in secure facilities and stored in more than one location to reduce exposure to complete destruction by natural disaster or other means.
USA | International | Expiration | ||||||||||
Natural Toxins, Allergens, & Drug Residues | 19 | 36 | 2021-2042 | |||||||||
Bacterial & General Sanitation | 1 | 0 | 2022 | |||||||||
Life Sciences | 0 | 3 | 2024 | |||||||||
Vaccine | 1 | 0 | 2028 | |||||||||
Veterinary Instruments & Other | 11 | 33 | 2021-2042 | |||||||||
Genomics Services | 18 | 4 | 2021-2029 | |||||||||
We do not expect the near-term expiration of any single patent to have a significant effect on future results of operations.
Management believes that Neogen has adequate rights to commercialize our products. However, we are aware that substantial research is conducted at universities, governmental agencies and other companies throughout the world, and that it always is always possible that patents have been applied for and could be granted that are relevant to technologies that may be used in our products. To the extent some of our products may now, or in the future, embody technologies protected by patents or trade secrets of others, we may need to obtain licenses to use such technologies to continue to sell the products. These licenses may not be available on commercially reasonable terms. Failure to obtain any such licenses could delay or prevent the sale of certain new or existing products. In addition, patent litigation is not uncommon. Accordingly, there can be no assurance that we will continue to have adequate rights to commercialize our new products or that we will avoid litigation.
One of the major areas affecting the success of biotechnology and pharmaceutical development involves the time, cost and uncertainty surrounding regulatory approvals. Neogen products requiring regulatory approval, which we currently have in place, include BotVax B, EqStim, ImmunoRegulin Uniprim and BetaStar. Our general strategy is to focus on technical and proprietary products that do not require mandatory approval by regulatory bodies to be marketed.Uniprim. Neogen’s rodenticide, disinfectant, parasiticide and insecticide products are subject to registration in the United States and internationally.
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Neogen utilizes third-party validations and certifications on many of our disposable test kitsproducts and associated methods to provide our customers with assurancesconfidence that our products perform to specified levels. These include validation by, among others, the AOAC International, independently administered third-party, multi-laboratory collaborative studies, and approvals by the USDA Food Safety Inspection Service for the use of ourService.
PRODUCTION AND SUPPLY
Neogen manufactures products in their operations.
Food safety diagnostics.
Animal health products.
Veterinary biologics.
Agricultural genomics services.
Cleaners, disinfectants and rodenticides.
Insect control products.Neogen manufactures insecticides and other pesticidesinsect control products at its facilities in Pleasantville, Iowa and Pindamonhangaba, Brazil.
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Neogen purchases component parts and raw materials from more than 1,000 suppliers. Though many of these items are purchased from a single source to achieve the greatest volume discounts, we believe we have identified acceptable alternative suppliers for most of our key components and raw materials where it is economically feasible to do so. There can be no assurance that we would avoid a disruption of supply in the event a supplier discontinues shipment of product. Shipments of higher volume products are generally accomplished within a
COMPETITION
Although competitors vary in individual markets, management knows of no single competitor that is pursuing Neogen’s fundamental strategy of developing and marketing a broad line of products, ranging from disposable tests and culture media to veterinary pharmaceuticals and instruments for a large number of food safety and animal safety concerns. For each of our individual products or product lines, we face intense competition from companies ranging from small businesses to divisions of large multinational companies. Some of these organizations have substantially greater financial resources than Neogen. We compete primarily on the basis of ease of use, speed, accuracy and other similar performance characteristics of our products. The breadth of our product line, the effectiveness of our sales and customer service organizations, and pricing also are also components in management’s competitive strategy.
Future competition may become even more intense and could result from the development of new technologies, which could affect the marketability and profitability of Neogen’s products. Our competitive position will also dependdepends on our ability to continue to develop proprietary products, attract and retain qualified scientific and other personnel, develop and implement production and marketing plans and obtain patent protectionprotect the intellectual property for new products. Additionally, we must continue to generate or have access to adequate capital resources to execute our strategy.
FOOD SAFETY:
With a large professional sales organization offering a comprehensive catalog of food safety solutions, management believes we maintain a general advantage over competitors offering only limited product lines. In most cases, Neogen sales and technical service personnel can offer unique insight into a customer’s numerous safety and quality challenges, and offer testing and other solutions to help the customer overcome those challenges.
Competition for pathogen detection products includes traditional methods and antibody and genetic-based platforms; competition for natural toxins and allergen detection products includeincludes instrumentation and antibody-based tests. While our offerings will not always compete on all platforms in all markets, the products we offer provide tests that can be utilized by most customers to meet their testing needs.
In addition to our extensive product offerings and robust distribution network, we focus our competitive advantage in the areas of customer service, product performance, speed, and ease of use of our products. Additionally, by aggressively maintaining Neogen’s ability to produce at low cost, we believe that we can be competitive with new market entrants that may choose a low pricing strategy in an attempt to gain market share.
ANIMAL SAFETY:
Neogen’s Animal Safety segment faces no single competitor across the products and markets we serve. In the racing industry market, we believe we hold a leading market share position. In the life sciences and forensicstoxicology markets, we compete against several other diagnostic and reagent companies with similar product offerings.
In the veterinary market, Neogen markets BotVax B, the only USDA-approved vaccine for the prevention of botulism Type B in horses. We compete on other key products through differentiated product performance and superior customer and technical support. With some of our products, we provide solutions as a lower cost alternative and also offer a private label option for our distributors.
Competition in the rodenticiderodent control market includes several companies of comparable size that offer products into similar market segments. The retail rodenticiderodent control market is not dominated by a single brand. While the technical
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materials used by competing companies are similar, Neogen uses manufacturing and bait formula techniques, which we believe may better attract rodents to the product and thereby improves overall product performance.
Within the insecticideinsect control market, Chem-Tech products specifically focus on the area of insect control for food and animal safety applications. There are several competitors offering similar products, however, we have a proprietary formulation chemistry that optimizes the delivery and safe application of insecticidesinsect control products at the customer’s location. These products currently are currently only sold in the U.S. through a combination of direct sales and distributors.
Numerous companies, including a number of large multinationals, compete for sales in the cleaner and disinfectant product segment. Neogen’s broad line of products areis sold through our distributor network around the world, primarily to assist in the cleaning and disinfecting of animal production facilities.
In addition to our extensive portfolio of Animal Safetyanimal safety products, Neogen also competes in the retail market by providing solutions to common retail problems, such as stock outs, wasted floor space, and inconsistent brand identity. We differentiate ourselves by offering planograms and convenient reordering systems to maximize turns and profitability for our retail customers.
Neogen Genomics, thea leading worldwide commercial agriculturalanimal genomics laboratory, in the U.S., employs cutting-edge technology in the area of genomics. The result of this technology allows the acceleration of natural selection through parentage testing and selective breeding of traits such as disease resistance, yield improvement and meat quality. Competition comes mainly from a number of service providers, some significantly larger than us as well as several smaller companies offering genomics services. Neogen Genomics is not involved in cloning or the development of transgenic animals.
GOVERNMENT REGULATION
A significant portion of Neogen’s products and revenues are affected by the regulations of various domestic and foreign government agencies, including the U.S. Department of Agriculture (USDA), the Environmental Protection Agency (EPA), and the U.S. Food and Drug Administration (FDA). Changes in these regulations could affect revenues and/or costs of production and distribution.
Neogen’s development and manufacturing processes involve the use of certain hazardous materials, chemicals, and compounds. Management believes that our safety procedures for handling and disposing of such commodities comply with the standards prescribed by federal, state and local regulations; however,regulations. However, changes in such regulations or rules could involve significant costs to us and could be materially adverse to our business.
The rodenticides, insecticides,rodent control products, insect control products, cleaners, disinfectants and sanitizers manufactured and distributed by Neogen are subject to EPA and various U.S. state regulations.regulations as well as other analogous agencies in the markets where we sell such products. In general, any international sale of our products also must also comply with similar regulatory requirements in the country of destination. Each country has its own individual regulatory construct with specific requirements (e.g., label in the language of the importing country).requirements. To the best of our knowledge, Neogen products are compliant with applicable regulations in the countries where such products are sold.
Many of the food safety diagnostic products do not require direct government approval. However, we have pursued AOAC approvalvoluntary approvals and certifications for a number of these products to enhance their marketability.
Neogen’s veterinary vaccine products and some pharmaceutical products require government approval to allow for lawful sales. The vaccine products are approved by the U.S. Department of Agriculture, Center for Veterinary Biologicstheanalogous agencies in jurisdictions where sold. The pharmaceutical products are approved by the FDA.FDA and analogous agencies in jurisdictions where sold. The products, and the facilities in which they are manufactured, are in a position of good standing with bothall agencies. We have no warning letters based on any review of these products or facility inspection, no recalls on any of these products,inspections and are not aware of any reason why we could not manufacture and market such products in the future.
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Other animal safety and food safety products generally do not require additional registrations or approvals. However, Neogen’s regulatory staff routinely monitors amendments to current regulatory requirements to ensure compliance.
HUMAN CAPITAL MANAGEMENT
Our people are a critical component in our continued success. As a team, they put Neogen’s core values into action, while executing on key growth initiatives to maintain long-term sustainable growth. We strive to create a workplace of choice to attract, retain, and develop top talent to achieve our vision and deliver shareholder results. As of May 31, 2021,2023, we employed 1,841 full-time persons worldwide. None2,640 people worldwide, with 1,444 located in the U.S. and 1,196 international. We maintain good relations with both our union and non-union employees and have not experienced any work stoppages.
The Company is committed to fostering a diverse and inclusive workplace that attracts and retains exceptional talent. Through ongoing employee development, comprehensive compensation and benefits, and a focus on health, safety and employee wellbeing, the Company strives to help its employees in all aspects of these employees are covered by collective bargaining agreements.their lives so they can do their best work.
Workplace Culture and Employee Engagement. We adhere to a philosophy that includes, among other things, commitments to create ongoing job opportunities, pay fair wages, and protect worker health and safety. Fundamental to these commitments are Neogen’shave established our One Neogen Pillars of Trust consistingwhich are the principles that guide our decision-making every day: • Openness • Honesty • Credibility • Respect • Service. We value responsibility, consistency and integrity. Our Code of openness, honesty, credibility, respectConduct codifies our commitment to conducting business ethically.
Equity, Diversity, Inclusion, and service. Management considers its relations with employeesBelonging (EDIB). We strive to generallycreate an environment where colleagues feel valued and understand the important role we play in embracing diversity to improve the quality of our innovation, collaboration and relationships. We are dedicated to executing on our equity, diversity, inclusion and belonging initiatives.
Talent Attraction, Development and Retention. We employ a variety of career development, employee benefits, policies and compensation programs designed to attract, develop and retain our colleagues. Employee benefits and policies are designed for diverse needs. We have internal programs designed to develop and retain talent, including career planning, leadership development programs, performance management and training programs.
Compensation and Benefits. We strive to support our colleagues’ well-being and enable them to achieve their best at work and at home. Our compensation and benefits programs are designed to be positive.
ITEM 1A. RISK FACTORS
Investing in our securities involves a variety of risks and uncertainties, known and unknown, including, among others, those discussed below. Each of the following risks should be considered carefully, considered, together with all the other information included in this Annual Report on Formmay also could adversely affect our business. Our business, results of operations, financial condition and cash flow could be materially and adversely affected by any of these risks or uncertainties.
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RISKS RELATING TOCOVID-19
We may not realize the anticipated financial and other benefits, including growth opportunities, expected from the 3M Food Safety merger transaction.
On September 1, 2022, Neogen, 3M, and Neogen Food Safety Corporation, a wholly-owned subsidiary of 3M created to carve out 3M’s FSD, closed on theCOVID-19pandemic could adversely affect our business, results Transaction combining 3M’s FSD with Neogen in a Reverse Morris Trust transaction and Neogen Food Safety Corporation became a wholly owned subsidiary of operations and financial condition.
We have realized and expect that we will continue to dependrealize synergies, growth opportunities and other financial and operating benefits as a result of the Transaction. Our success in realizing these benefits, and the timing of their realization, depends, among other things, on manythe continued successful integration of the business operations of the 3M Food Safety business with Neogen. Even if we are able to integrate the 3M Food Safety business successfully, we cannot predict with certainty if or when the balance of these synergies, growth opportunities and other benefits will be realized, or the extent to which they will actually be achieved. For example, the benefits from the Transaction could be offset by costs incurred in integrating the 3M Food Safety business. Realization of any synergies, growth opportunities or other benefits could be affected by the factors outsidedescribed in other risk factors and a number of factors beyond our control, including, without limitation, the timing, extent, trajectorygeneral economic conditions, increased operating costs and durationregulatory developments.
The integration of the pandemic,3M Food Safety business with Neogen presents challenges, and the failure to successfully integrate the 3M Food Safety business could have a material adverse effect on our business, financial condition or results of operations.
Although significant progress has been made to date in the integration of the 3M Food Safety business with Neogen, there is much that remains to be accomplished, particularly in the integration of the manufacturing operations of the 3M Food Safety business with Neogen. There is a significant degree of difficulty inherent in the process of integrating the 3M Food Safety business with Neogen. The difficulties include:
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The continued successful integration of the 3M Food Safety business cannot be assured. The failure to do so could have a material adverse effect on our business, financial condition or results of operations.
Pursuant to the terms of the Transaction, Neogen and formerly Neogen Food Safety Corporation will be restricted from taking certain actions that could adversely affect the intended tax treatment of the Transaction, and such restrictions could significantly impair Neogen’s and Neogen Food Safety Corporation’s ability to implement strategic initiatives that otherwise would be beneficial.
The Tax Matters Agreement executed in connection with the Transaction generally restricts Neogen and its affiliates from taking certain actions after the distribution of Neogen shares that could adversely affect the intended tax treatment of the Transaction. In particular:
For a two-year period following the distribution date, except as described below:
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unless, in each case, prior to taking any such action, Neogen and Neogen Food Safety Corporation shall have requested that 3M obtain, or request and receive 3M’s prior written consent to obtain, an IRS ruling satisfactory to 3M in its reasonable discretion or provide 3M with an unqualified tax opinion satisfactory to 3M in its sole and absolute discretion to the effect that such action would not jeopardize the intended tax treatment of the Transaction, unless 3M waives such requirement. Failure to adhere to these requirements could result in tax being imposed on 3M for which Neogen and Neogen Food Safety Corporation could bear responsibility and for which Neogen and Neogen Food Safety Corporation could be obligated to indemnify 3M. Any such indemnification obligation would likely be substantial and would likely have a material adverse effect on Neogen. These restrictions could have a material adverse effect on Neogen’s liquidity and financial condition, and otherwise could impair Neogen’s and Neogen Food Safety Corporation’s ability to implement strategic initiatives and Neogen Food Safety Corporation’s and Neogen’s indemnity obligation to 3M might discourage, delay or prevent a change of control that shareholders of Neogen may consider favorable.
RISKS RELATING TO OUR BUSINESS AND INDUSTRY
We are subject to risks relating to existing international operations and expansion into new geographical markets.
Expanding sales globally is part of our overall growth strategy, and we expect sales from outside the United States to continue to represent a significant portion of our revenue. In fiscal 2023, sales to customers outside of the U.S. accounted for 48.4% of our total revenue. Our international operations are subject to general risks related restrictions on travelto such operations, including:
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If we are not limitedunable to successfully manage the risks associated with expanding our global business or adequately manage operational risks of our existing international operations, these risks could have a material adverse effectseffect on the demand for our products and services,growth strategy into new geographical markets, our supply chain and sales and distribution channels, our cost structure and profitability. An extended period of global supply chain and economic disruption could materially affect our business, results of operations, and financial condition.
Our business strategy is dependent on successfully promoting internal growth and identifying and integrating acquisitions.
Our business has grown significantly over the past several years as a result of both internal growth and acquisitions of existing businesses and their products. Management initiatives may be attempted to augment internal growth, such as strengthening our presence in select markets, reallocating research and development funds to products with higher growth potential, development of new applications for our technologies, enhancing our service offerings, continuing key customer efforts, and finding new markets for our products. Failure of these management initiatives may have a material adverse effect on our operating results and financial condition.
Identifying and pursuing acquisition opportunities, integrating these acquisitions into our business and managing their growth requires a significant amount of management’s time and skill. We cannot assure that we will be effective in identifying, integrating or managing future acquisition targets. Our failure to successfully integrate and manage a future acquisition maycould have a material adverse effect on our operating results and financial condition.
We may not be able to effectively manage our future growth, and if we fail to do so, our business, financial condition and results of operations could be adversely affected.
We rely significantly on our information systems’ infrastructure to support our operations and a failure of these systems and infrastructure and/or a security breach of our information systems could damage our reputation and have an adverse effect on operations and results.
We rely on our information systems’ infrastructure to integrate departments and functions, to enhance our ability to service customers, to improve our control environment, and to manage our cost reduction initiatives. If a security breach or cyberattack of our ITinformation technology ("IT") networks and systems occurs, our operations could be interrupted. Any issues involving our critical business applications and infrastructure maycould adversely impact our ability to manage our operations and the customers we serve. Although we have controls and security measures in place to prevent such attacks, experienced computer hackers are increasingly organized and sophisticated. Malicious attack efforts operate on a large-scalelarge scale and sometimes offer targeted attacks as a
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We rely on several information systems throughout our company, as well as those of our third-party business partners, to provide access to ourNeogen employswe employ system backup measures and engagesengage in information system redundancy planning and processes, such measures, as well as our current disaster recovery plan, may be ineffective or inadequate to address all vulnerabilities. Further, our information systems and our business partners’ and suppliers’ information systems may be vulnerable to attacks by hackers and other security breaches, including computer viruses and malware, through the Internetinternet (including via devices and applications connected to the Internet)internet), email attachments and persons with access to these information systems, such as our employees or third parties with whom we do business. As information systems and the use of software and related applications by us, our business partners, suppliers and customers become more cloud-based, there has been an increase in global cybersecurity vulnerabilities and threats, including more sophisticated and targeted cyber-related attacks that pose a risk to the security of our information systems and networks and the confidentiality, availability and integrity of data and information.
While we have implemented network security and internal control measures, especiallyincluding for the purpose of protecting our connected products and services from cyberattacks, and invested in our data and information technology infrastructure, there can be no assurance that these efforts will prevent a system disruption, attack, or security breach and, as such, the risk of system disruptions and security breaches from a cyberattack remains.
If our security and information systems are compromised, interrupted or destroyed, or employees fail to comply with the applicable laws and regulations, or thisthe information we maintain is obtained by unauthorized persons or used inappropriately, it could adversely affect our business and reputation, as well as our results of operations, and could result in litigation, the imposition of regulatory sanctions or penalties, or significant expenditures to remediate any damage to persons whose personal information has been compromised.
In Pandemics or disease outbreaks, such as the COVID-19addition,may pandemic, have affected and could adversely affect our business, operation, results of operations and financial condition.
The COVID-19 pandemic negatively impacted the global economy, disrupted global supply chains, and created significant volatility and disruption of financial markets.
During the course of the pandemic, we modified our business practices to comply with safety measures required by federal, state and local governments, as well as those we determined to be in the best interests of our employees and customers, including implementing social distancing, remote work, reducing employee travel, restricting building access and more. In the event of the renewed outbreak of COVID-19 or an adverse impact on our information technology systems, including telecommuting issues associated with the rapid and broad-based shiftoutbreak of a different virus or disease, we could experience disruptions in our employee population working remotely,supply chain, operations, facilities and workforce which creates inherentcould cause delays in developing new products or negatively affect efficiency and productivity connectivityor our ability to market products and oversight challenges.
Additional future impacts to us may include, but are not limited to, material adverse effects on the demand for our products and services, our supply chain and sales and distribution channels, our cost structure and profitability. An extended period of global supply chain and economic disruption could materially affect our business, results of operations and financial condition.
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Disruption of our manufacturing and service operations could have an adverse effect on our financial condition and results of operations.
Our facilities and our distribution systems are subject to catastrophic loss due to fire, flood, terrorism or other natural ortheseour facilities were to experience a catastrophic loss, it could disrupt our operations, delay production, shipments and revenue and result in significant expenses to repair or replace the facility and/or distribution system. If such a disruption were to occur, we could breach agreements, our reputation could be harmed, and our business and operating results could be adversely affected. Although we carry insurance for property damage and business interruption, we do not carry insurance or financial reserves for interruptions or potential losses arising from terrorism. Economic conditions and uncertainties in global markets maycould adversely affect the cost and other terms upon which we are able to obtain third party insurance. If we are unable to obtain sufficient and cost-effective third-party insurance coverage, or to the extent we have elected to self-insure, we maycould be at greater risk that our operations will be harmed by a catastrophic loss.
We rely heavily on third-party package delivery services, and a significant disruption in these services or significant increases in prices maycould disrupt our ability to ship products, increase our costs and lower our profitability.
We ship a significant portion of our products to customers through independent package delivery companies, such as UPS, Federal Express and DHL. We also ship our products through other carriers, including national and regional trucking firms, overnight carrier services and the U.S. Postal Service. If one or more of these third-party package delivery providers were to experience a major work stoppage, preventing our products from being delivered in a timely fashion or causing us to incur additional shipping costs we could not pass on to our customers, our costs could increase and our relationships with some of our customers could be adversely affected. In addition, if one or more of our third-party package delivery providers were to increase prices, and we were not able to find comparable alternatives or make adjustments within our delivery network, our profitability could be adversely affected.
Our dependence on suppliers could limit our ability to sell certain products or negatively affect our operating results.
We rely on third-party suppliers to provide raw materials and other components in our products, manufacture products that we do not manufacture ourselves and perform services that we do not provide ourselves. Because these suppliers are independent third parties with their own financial objectives, actions taken by them could have a negative effect on our results of operations. The risks of relying on suppliers include our inability to enter into contracts with third party suppliers on reasonable terms, inconsistent or inadequate quality control, relocation of supplier facilities, supplier work stoppages and suppliers’ failure to comply with their contractual obligations. In addition, we currently purchase some raw materials and products from sole or single sources. Some of the products that we purchase from these sources are proprietary and, therefore, cannot be readily or easily replaced by alternative sources. Problems with suppliers and the supply chain could negatively impact our ability to supply the market, substantially decrease sales, lead to higher costs or damage our reputation with our customers.
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Our business sells many products through distributors, which present risks that could negatively affect our operating results.
We sell many of our products, both within and outside of the U.S., through distribution.independent distributors. As a result, we are dependent on distributors to sell our products and assist us in promoting and creating a demand for our products. Our distributors sometimes offer products from several different companies, and those distributors may carry our competitors’ products and promote our competitors’ products over our own. We have limited ability, if any, to cause our distributors to devote adequate resources to promoting, marketing, selling and supporting our products. We cannot assure that we will be successful in maintaining and strengthening our relationships with our distributors or establishing relationships with new distributors who have the ability to market, sell, and support our products effectively. We may rely on one or more key distributors for a product or region, and the loss of one or more of these distributors could reduce our revenue. Distributors could face financial difficulties, including bankruptcy, which could impact our ability to collect our accounts receivable and negatively impact our financial results. In addition, violations of anti-bribery and anti-corruption or similar laws by our distributors could have a material impact on our business. Further, termination of a distributor relationship could result in increased competition in the applicable jurisdiction. Failing to manage the risks associated with our use of distributors could reduce sales, increase expenses and weaken our competitive position, which could have a negative impact on our operating results.
If we are unable to develop new products and technologies, our competitive position could be impaired, which could materially and adversely affect our sales and market share.
The markets in which we operate are characterized by changing technologies and the introduction of new products. As a result, our success is dependent upon our ability to develop or acquire new products and services on a cost-effective basis, to introduce them into the marketplace in a timely manner and to protect and maintain critical intellectual property assets related to these developments. Difficulties or delays in research, development or production of new products and technologies, or failure to gain market acceptance of new products and technologies, could significantly reduce future revenue and materially and adversely affect our competitive position. While we intend to continue to commit financial resources and effort to the development of new products entails substantial riskand services, we may not be able to successfully differentiate our products and services from those of failure dueour competitors. Our customers may not consider our proposed products and services to the productionbe ofnon-viablelack of properly identifying market potential, and services. In addition, our competitors better serving the marketplace.
If we fail to maintain a positive reputation or are unable to conduct effective sales and marketing, our production of anon-viableproduct, a misidentified market, or a competitor’s superior ability to meet our customers’ requirements, operating resultsprospects and financial condition could be adversely affected.
Our sales and marketing efforts are anchored by promoting our products to potential customers. Therefore, our sales and marketing force, whether in-house sales representatives or third-party commercial partners, must possess an up-to-date understanding of industry trends and products, as well as promotion and communication skills. In addition, we have a network of third-party commercial partners that we use to sell or distribute our products.
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While we will continue to promote our brands to remain competitive, we may not be successful in doing so. If we are unable to increase or maintain the effectiveness and efficiency of our sales and marketing activities, or if we incur excessive sales expenses to do so, our business, financial condition and results of operations may be materially and adversely affected.
We could lose customers or generate lower revenue, operating profits and cash flows if there are significant increases in the cost of raw materials or if we are unable to obtain such raw materials or other components of our products.
We purchase raw materials and components for use in our products, which exposes us to volatility in prices for certain raw materials and products. Prices and availability of these raw materials are subject to substantial fluctuations that are beyond our control due to factors such as changing economic conditions, inflation, currency and commodity price fluctuations, tariffs, resource availability, transportation costs, weather conditions and natural disasters, political unrest and instability, and other factors impacting supply and demand pressures. Significant price increases for these supplies could adversely affect our operating profits. Current and future inflationary effects may be driven by, among other things, supply chain disruptions and governmental stimulus or fiscal policies. The COVID-19 pandemic, for example, resulted in raw material price inflation as well as supply chain constraints and disruptions. While we will generally attempt to mitigate the impact of increased raw materials prices by endeavoring to make strategic purchasing decisions, broadening our supplier base and passing along increased costs to customers, there may be a time delay between the increased raw material prices, the ability to increase the prices of products, and dependence on a sole or single source for certain materials and products. Additionally, we may be unable to increase the prices of products due to a competitor’s pricing pressure or other factors, or may be unable to raise the price of our products in a manner that is proportional to the level of inflation, which would materially adversely affect our results of operations.
Certain of our food safety product lines depend on a sole or single source suppliers and vendors. The ability of these third parties to deliver raw materials and products may also be affected by events beyond our control. In addition, public health threats, such as COVID-19, severe influenza and other highly communicable viruses or diseases could affect our supply of raw materials, by limiting our ability to transport raw materials from our vendors or increasing demand and competition for supplies, which could adversely affect our ability to obtain necessary raw materials for certain of our products. Any sustained interruption in our receipt of adequate raw materials, supply chain disruptions impacting the receipt or distribution of products, or disruption to key manufacturing sites’ operations due to natural and other disasters or events or other legal or regulatory requirements, could result in a significant price increase in raw materials, or their unavailability, which could result in a loss of customers or otherwise adversely impact our business, results of operations, financial condition and cash flows.
Our reputation, ability to do business and results of operations could be impaired by improper conduct by or disputes with any of our employees, agents or business partners and we have a compliance burden with respect to, and risk of violations of, anti-bribery, trade control, trade sanctions, anti-corruption and similar laws.
Our operations require us to comply with a number of U.S. and international laws and regulations, including those governing payments to government officials, bribery, fraud, anti-kickback and false claims, competition, export and import compliance, money laundering and data privacy, as well as the improper use of proprietary information or social media. In particular, our international operations are subject to the regulations imposed by the Foreign Corrupt Practices Act and the United Kingdom Bribery Act 2010 as well as anti-bribery and anti-corruption laws of various jurisdictions in which we operate. While we strive to maintain high standards, we cannot provide assurance that our internal controls and compliance systems always will protect us from acts committed by our employees, agents or business partners that would violate such U.S. or international laws or regulations or fail to protect our confidential information. Any such violations of law or improper actions could subject us to civil or criminal investigations in the U.S. or other jurisdictions, could lead to substantial civil or criminal, monetary and non-monetary penalties and related shareholder lawsuits, could lead to increased costs of compliance and could damage the our reputation, business, results of operations, financial condition and cash flows.
23
Tariffs and other trade measures could adversely affect our results of operations, financial position and cash flows.
Our international operations subject us to discriminatory or conflicting tariffs and trade policies. Tariffs have and may continue to increase our material input costs, and any further trade restrictions, retaliatory trade measures and additional tariffs could result in higher input costs to our products. We may not be able to fully mitigate the impact of these increased costs or pass price increases on to our customers. While tariffs and other trade measures imposed by other countries on U.S. goods have not yet had a significant impact on our business or results of operations, we cannot predict further developments, and such existing or future tariffs could have a material adverse effect on our results of operations, financial position and cash flows.
Changes in domestic and foreign governmental laws, regulations and policies, changes in statutory tax rates and laws, and unanticipated outcomes with respect to tax audits could adversely affect our business, profitability and reputation.
Our domestic and international sales and operations are subject to risks associated with changes in laws, regulations and policies (including environmental and employment regulations, export/import laws, tax policies and other similar programs). Failure to comply with any of the foregoing laws, regulations and policies could result in civil and criminal, monetary and non-monetary penalties, as well as damage to our reputation. In addition, we cannot provide assurance that our costs of complying with new and evolving regulatory reporting requirements and current or future laws, including environmental protection, employment, data security, data privacy and health and safety laws, will not exceed our estimates. While these risks or the impact of these risks are difficult to predict, any one or more of them could adversely affect our business, results of operations and reputation.
We are subject to taxation in a number of jurisdictions. Accordingly, our effective tax rate is impacted by changes in the mix among earnings in countries with differing statutory tax rates. A material change in the statutory tax rate or interpretation of local law in a jurisdiction in which we have significant operations could adversely impact our effective tax rate and impact our financial results.
Our tax returns are subject to audit and taxing authorities could challenge our operating structure, taxable presence, application of treaty benefits or transfer pricing policies. If changes in statutory tax rates or laws or audits result in assessments different from amounts estimated, our business, results of operations, financial condition and cash flows could be adversely affected. In addition, changes in tax laws could have an adverse effect on our customers, resulting in lower demand for our products and services.
A deterioration in our future expected profitability or cash flows could result in an impairment of our recorded goodwill and intangible assets.
We have significant goodwill and intangible assets recorded on our consolidated balance sheet. The valuation and classification of these assets and the assignment of useful lives to intangible assets involve significant judgments and the use of estimates. Impairment testing of goodwill and intangible assets requires significant use of judgment and assumptions, particularly as it relates to the determination of fair market value. A decrease in the long-term economic outlook and future cash flows of our business could significantly impact asset values and potentially result in the impairment of intangible assets, including goodwill.
The markets for our products are extremely competitive, and our competitors could use existing resource advantages to our detriment.
The markets in which we competefood and animal safety industries are subject to rapid and substantial changes in technology and are characterized by extensive research and development and intense competition. Our competitors and potential competitors may have greater financial, technical, manufacturing, marketing, research and development and management resources than we do.us. These competitors could use their resources, reputations and ability to leverage existing customer relationships to give themprovide a competitive advantage over us.us that could impact our results of operations. They might also succeed in developing products that are more reliable and effective than our products, are less costly than our products or provide alternatives to our products.
24
We are dependent on the agricultural marketplace, which is affected by factors beyond our control.
Our primary customers are in the agricultural and food production industries. Economic conditions affecting agricultural industries are cyclical and are dependent upon many factors outside of our control, including weather conditions, changes in consumption patterns or commodity prices. Any of these factors in the agricultural marketplace could affect our sales and overall financial performance.
RISKS RELATED TO AN INVESTMENT IN OUR SECURITIES
We have incurred substantial indebtedness and our financial condition and operations may be adversely affected by a violation of financial and other covenants.
We have incurred substantial indebtedness and related debt service obligations, which could have important consequences, including:
Our Term Loan, comprised of our Revolving Facility and Term Loan Facility, contain customary affirmative and negative covenants. Some or, with respect to certain covenants, all of these agreements include financial covenants based on leverage and cash interest expense coverage ratios and limitations to make certain investments, declare or pay dividends or distributions on capital stock, redeem or repurchase capital stock and certain debt obligations, incur liens, incur indebtedness, or merge, make certain acquisitions or sales of assets.
The Senior Notes governing our senior unsecured indebtedness also include customary events of default. A violation of any of these covenants or agreements could result in a default under these contracts, which could permit the lenders or note holders, as applicable, to accelerate repayment of any borrowings or notes outstanding at that time and levy on the collateral granted in connection with the Senior Notes. A default or acceleration under the Senior Notes governing the senior unsecured indebtedness could result in defaults under our other debt agreements and could adversely affect our ability to operate our business, our subsidiaries' ability to operate their respective businesses and our results of operations and financial condition.
The available capacity under our Revolving Facility could be limited by our covenant ratios under certain conditions. An increase in the applicable leverage ratio, as a result of decreased earnings or otherwise, could result in reduced access to capital under our Revolving Facility, which is a significant component of our total available liquidity.
25
Our quarterly or annual operating results are subject to significant fluctuations.
We have experienced, and may experience in the future, significant fluctuations in our quarterly or annual operating results. The mix of products sold and the acceptance of new products, in addition to other factors such as cost increases, could contribute to this variability. We operate with relatively little backlog and have few long-term customer contracts.contracts and operate primarily with purchase orders. Substantially all our product revenue in each period results from orders received in that period. In addition, our expense levels are based, in part, on our expectation of future revenue levels. Therefore, a shortfall in expected revenue could result in a disproportionate decrease in our net income.
The market price of our common stock maycould be highly volatile.
The trading price of our common stock maycould be volatile. Securities markets worldwide experience significant price and volume fluctuations. This market volatility, as well as other general economic, market or political conditions, could reduce the market price of our common stock rapidly and unexpectedly, despite our operating performance. Factors that maycould impact the market price of our common stock include the factors described in this “Risk Factors” section and elsewhere in this Annual Report on Form
• Investor perception of us and the industry and markets in which we operate, including changes in earnings estimates or buy/sell recommendations by securities analysts; and whether or not we meet earnings estimates of securities analysts who follow us; and |
Our business could be adversely affected by fluctuations in the global capital markets.
Our business and financial results are affected by fluctuations in the global financial markets, including interest rates and currency exchange rates. The exposure to fluctuations in currency exchange rates takes on different forms. International revenues and costs are subject to the risk that fluctuations in exchange rates could adversely affect our reported revenues and profitability when translated into U.S. dollars for financial reporting purposes. These fluctuations could also adversely affect the demand for products and services provided by us. Failure to respond timely to these fluctuations, or failure to effectively hedge these risks when possible, could lead to a material adverse impact on our results of operations and financial condition.
We cannot assure investors that we will make dividend payments in the future.
Dividend payments to our shareholders depend upon a number of factors, including our results of operations, cash flows and financial position, contractual restrictions and other factors considered relevant by our Board of Directors. We have not historically paid dividends to our shareholders, and there is no assurance that we will declare and pay, or have the ability to declare and pay, any dividends on our common stock in the future.
26
Certain shareholders could attempt to influence changes within Neogen, which could adversely affect our operations, financial condition and the value of our common stock.
Our shareholders may from time-to-time seek to acquire a controlling stake in Neogen, engage in proxy solicitations, advance shareholder proposals or otherwise attempt to effect changes. Campaigns by shareholders to effect changes at publicly-traded companies are sometimes led by investors seeking to increase short-term shareholder value through actions such as financial restructuring, increased debt, special dividends, stock repurchases or sales of assets or the entire company. Responding to proxy contests and other actions by activist shareholders can be costly and time-consuming, and could disrupt our operations and divert the attention of our Board of Directors and senior management from the pursuit of our business strategies. These actions could adversely affect our operations, financial condition and the value of our common stock.
GENERAL RISKS
We have identified a material weakness in our internal control over financial reporting, and if we are unable to improve our internal controls, our financial results may not be accurately reported.
As disclosed in Item 9A, “Controls and Procedures,” we identified material weaknesses in our internal control over financial reporting related to ineffective information technology general controls, our period-end invoice accrual procedures, and ineffective operation of management review controls related to the accounting, valuation and purchase price allocation of the Company’s acquisition and associated goodwill. The material weaknesses did not result in any material identified misstatements to the consolidated financial statements, and there were no changes to previously issued financial results. We are actively developing a remediation plan designed to address these material weaknesses, however, we cannot guarantee that these steps will be sufficient or that we will not have material weaknesses in the future. These material weaknesses, or difficulties encountered in implementing new or improved controls or remediation, could prevent us from accurately reporting our financial results, result in material misstatements in our financial statements or cause us to fail to meet our reporting obligations. Failure to comply with Section 404 of the Sarbanes-Oxley Act of 2002 could negatively affect our business, financial condition and results of operations.
Our success is highly dependent on our ability to obtain protection for the intellectual property utilizedused in our products; these products could be the subject of patent infringement challenges.
Our success and ability to compete depends, in part, on our ability to obtain protectionprotect, in the U.S. and other countries, for our products by establishing and maintaining intellectual property rights capable of protecting our technology and products. Patent applications filed by us may not result in the issuance of patents or, if granted, may not be granted in a form that will be commercially advantageous to us. Even if granted, patents can be challenged, narrowed, invalidated, or circumvented, which could limit our ability to stop competitors from marketing similar products or limit the length of time we have patent protection for our products. We also cannot assure that our nondisclosure agreements, together with trade secrets and other common law rights, will provide meaningful protection for our trade secrets and other proprietary information. Moreover, the laws of some foreign jurisdictions may not protect intellectual property rights to the same extent as in the U.S., and many companies have encountered significant difficulties in protecting and defending such rights in foreign jurisdictions. If we encounter such difficulties or we are otherwise precluded from effectively protecting our intellectual property rights domestically or in foreign jurisdictions, we could incur substantial costs and our business, including our business prospects, could be substantially harmed.
From time to time, we have received notices alleging that our products infringe third-party proprietary rights. Whether the manufacture, sale, or use of current products, or whether any products under development would, upon commercialization, infringe any patent claim cannot be known with certainty unless and until a court interprets thea patent claim and its validity in the context of litigation. When an infringement allegation is made against us, we may seek to invalidate the asserted patent claim and/or to allegenon-infringementof the asserted patent claim. For us to invalidate a U.S. patent claim, we would need to rebut the presumption of validity afforded to issued patents in the U.S. with clear and convincing evidence of invalidity, which is a high burden of proof. The outcome of infringement litigation is subject to substantial uncertainties, and also the testimony of experts as to technical facts upon which experts may reasonably disagree. Our defense of an infringement litigation lawsuit could result in significant expense. Regardless of the outcome, infringement litigation could significantly disrupt our marketing, development and commercialization efforts, divert management’s attention and consume our financial resources. In the event that we are found to infringe any valid claim in a patent held by a third party, we could, among other things, be required to:
27
Any development or acquisition of
We are subject to substantial governmental regulation.
A portion of our products and facilities are regulated by various domestic and foreign government agencies including but not limited to, the U.S. Department of Agriculture, the U.S. Food and Drug Administration and the Environmental Protection Agency. A significant portion of our revenue is derived from products used to monitor and detect the presence of residuessubstances that are regulated by various government agencies. Furthermore, our growth maycould result in substantial liability to us and be adversely affected by the implementation of new regulations. The costs of compliance or failure to comply with any obligations related to these laws or regulations could adversely impact our business.
Failure to attract, retain and develop personnel, including for key employees.
Our success depends,growth, profitability and effectiveness in largeconducting our operations and executing our strategic plans depend in part on members of our ability to attract, retain and develop qualified personnel and align them with appropriate opportunities for key management team.positions and support for strategic initiatives. Our loss of any of these, or otherour key employees could have a material adverse effect on us. We have not executed long-term employment agreements with any of these employees and do not expect to do so in the foreseeable future. Our success depends, significantly, onWe compete with employers in various industries for sales, manufacturing, technical services or other personnel, and this competition to hire may increase and the availability of qualified personnel may be reduced. If we are unsuccessful in our ability to continueefforts to attract and retain such personnel.qualified personnel, our business, results of operations, financial condition, cash flows and competitive position could be adversely affected. Additionally, we could miss opportunities for growth and efficiencies. We cannot assure that we will be able to retain our existing personnel or attract additional qualified persons when required and on acceptable terms.
Our business may be subject to product or servicesservice liability claims.
The manufacturing and distribution of our products or performance of our services involves an inherent risk of liability claims being asserted against us. Regardless of whether we are ultimately determined to be liable or our products are determined to be defective, we mightcould incur significant legal expenses not covered by insurance. In addition, product or service liability litigation could damage our reputation and impair our ability to market our products and services, regardless of the outcome. Litigation also could also impair our ability to retain product liability insurance or make our insurance more expensive. Although we currently maintain liability insurance, we cannot assure that we will be able to continue to obtain such insurance on acceptable terms, or that such insurance will provide adequate coverage against all potential claims. If we are subject to an uninsured or inadequately insured product or services liability claim, our business, financial condition and results of operations could be adversely affected.
Changing political conditions could adversely impact our business and financial results.
Changes in the political conditions in markets in which we manufacture, sell or distribute our products maycould be difficult to predict and may adverselycould affect our business and financial results. For example, the U.K.’s decision to leave the European Union has created uncertainty regarding, among other things, the U.K.’s future legal and economic framework and how the U.K. will interact with other countries, including with respect to the free movement of goods, services, capital and people.results adversely. In addition, results of elections, referendums or other political processes in certain markets in which our products are manufactured, sold, or
28
distributed could create uncertainty regarding how existing governmental policies, laws and regulations may change, including with respect to sanctions, taxes, the movement of goods, services, capital and people between countries and other matters. The potential implications of such uncertainty, which include, among others, exchange rate fluctuations, trade barriers and market contraction, could adversely affect the Company’sour business and financial results.
Climate change, or legal, regulatory or market measures to address climate change maycould materially adversely affect our financial condition and business operations.
Climate change resulting from increased concentrations of carbon dioxide and other greenhouse gases in the atmosphere could present risks to our future operations from natural disasters and extreme weather conditions, such as hurricanes, tropical storms, blizzards, tornadoes, earthquakes, wildfires or flooding. Such extreme weather conditions could pose physical risks to our facilities and disrupt operation of our supply chainoperations and impair our critical systems, and may impact raw material sourcing, manufacturing operations, the distribution of our products and our operational costs. Damage or destruction of our facilities may result in losses that exceed our insurance coverage. The impacts of climate change on global water resources may result in water scarcity, which could in the future impact our ability to access sufficient quantities of water in certain locations and result in increased costs. Concern over climate change could result in new legal or regulatory requirements designed to mitigate the effects of climate change on the environment. If such laws or regulations are more stringent than current legal or regulatory requirements, we may experience increased compliance burdens and costs to meet the regulatory obligations and mayobligations.
Our business could be adversely affect raw material sourcing, manufacturing operations andimpacted by an inability to meet the distributionexpectations of our products.
Various stakeholders, including customers, suppliers, providers of debt and equity capital, regulators, and those in the workforce, are increasing their expectations of companies to do their part to combat global climate change and its impact and to conduct their operations in an environmentally sustainable and socially responsible manner with appropriate oversight by senior leadership. We have made certain public commitments to reduce emissions, conserve resources at our various facilities and further develop a diverse, equitable and inclusive culture. A failure to respond to the expectations and initiatives of our stakeholders or to achieve the commitments we have made, could result in damage to our reputation and relationships with various stakeholders, as well as adversely impact our financial condition due to volatility in the cost or availability of capital, difficultly obtaining new business, or entering into new supplier relationships, a possible loss of market share on our current product portfolio, or difficulty attracting and retaining a skilled workforce.
Tax legislation could materially adversely affect our financial results and tax liabilities.
Our business is subject to thetax-related external conditions, such as tax rates, tax laws, and regulations, changing political environments in the U.S. and foreign jurisdictions that impact tax examination, assessment and enforcement approaches. In addition, changes in tax laws including further regulatory developments arising from U.S. tax reform legislation and/or regulations around the world could result in a tax expense or benefit recorded to our consolidated statement of earnings. In connection with guidance such as the Base Erosion and Profit Shifting (BEPS) Integrated Framework provided by Organization for Economic Cooperation and Development (OECD), determination of multi-jurisdictional taxation rights and the rate of tax applicable to certain types of income may be subject to potential change. Due to uncertainty of the U.S., including stateregulation changes and local governments, as well as foreign jurisdictions. Legislation may be enacted that could materially adversely affectother tax-related factors stated above, it is currently not possible to assess the ultimate impact of these actions on our financial results There can be no assurance that our effective tax rate will not be adversely affected by legislation.
Although we believe that our historical tax positions are sound and consistent with applicable laws, regulations and existing precedent, there can be no assurance that our tax positions will not be challenged by relevant tax authorities or that we would be successful in any such challenge. Additionally, we operate in multiple income tax jurisdictions and must determine the appropriate allocation of income to each of these jurisdictions based on current interpretations of complex income tax regulations. Income tax audits associated with the allocation of income and other complex issues maycould result in significant income tax adjustments that could negatively impact our future operating results.
29
ITEM 1B.UNRESOLVED STAFF COMMENTS – NONE
ITEM 2.PROPERTIES
Principal Manufacturing, Distribution and Administrative locations
Feet | ||||||||
Location |
| Owned |
|
| Leased |
|
| Segment | ||
U.S. |
|
| 7 |
|
|
| 7 |
|
| Corporate, Food Safety, Animal Safety |
Canada |
|
| 1 |
|
|
| 0 |
|
| Animal Safety |
U.K. |
|
| 4 |
|
|
| 3 |
|
| Food Safety |
Ireland |
|
| 1 |
|
|
| 0 |
|
| Food Safety |
Italy |
|
| 0 |
|
|
| 1 |
|
| Food Safety |
UAE |
|
| 0 |
|
|
| 1 |
|
| Food Safety |
Brazil |
|
| 2 |
|
|
| 0 |
|
| Food Safety |
Mexico |
|
| 0 |
|
|
| 2 |
|
| Food Safety |
Guatemala |
|
| 0 |
|
|
| 1 |
|
| Food Safety |
Argentina |
|
| 0 |
|
|
| 1 |
|
| Food Safety |
Uruguay |
|
| 0 |
|
|
| 1 |
|
| Food Safety |
Chile |
|
| 0 |
|
|
| 1 |
|
| Food Safety |
Colombia |
|
| 0 |
|
|
| 1 |
|
| Food Safety |
China |
|
| 0 |
|
|
| 1 |
|
| Food Safety |
India |
|
| 1 |
|
|
| 1 |
|
| Food Safety |
Korea |
|
| 0 |
|
|
| 1 |
|
| Food Safety |
Thailand |
|
| 0 |
|
|
| 1 |
|
| Food Safety |
Australia |
|
| 2 |
|
|
| 0 |
|
| Animal Safety |
Total |
|
| 18 |
|
|
| 23 |
|
|
|
Our corporate headquarters are located in Lansing, Michigan, with administrative, sales, manufacturing, and warehousing in other locations domestically and globally. These properties are in good condition, well-maintained, and generally suitable and adequate to support our business. For thoseleased properties, we do not anticipate difficulty in renewing existing leases expiring within the next 12 months, we believe that we will be able to negotiate agreements to extend such leases on similar terms.
ITEM 3.LEGAL PROCEEDINGS
The litigation process is subject to certain legal proceedings inmany uncertainties, and the normal courseoutcome of business that, in the opinion of management, shouldindividual matters is not have a material effect on our future results of operations or financial position. On March 6, 2020, the Company received an administrative subpoena from the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) regarding activities or transactions involving parties located in Iran. The Company subsequently conducted an internal investigation under the direction of outside legal counselpredictable with assurance. See Note 7. “Commitments and disclosed information concerning certain genomic testing services provided to an unrelated U.S.-based party engaged in veterinary activities involving an Iranian party. The Company continues to cooperate with OFAC’s investigation and is currently examining whether certain of these activities may be eligible for OFAC General Licenses authorizing agricultural and veterinary activities. In addition to respondingContingencies” to the administrative subpoena, the Company is implementing additional compliance measures to prevent inadvertent dealings with restricted countries or parties. These measures will further enhance the Company’s international trade compliance program, which is designed to assure that the Company does not conduct business directly or indirectly with any countries or parties subject to U.S. economic sanctionsconsolidated financial statements included in Item 15. “Exhibits and export control laws. Although it is too early to predict what action, if any, that OFAC will take, the Company does not currently have any reason to believe that OFAC’s pending investigation will have a meaningful impact on its operations, the resultsFinancial Statement Schedules” of operationsthis Report for any future period, or its overall financial condition. In fiscal 2020, the Company took a charge to expense and recorded a reservediscussion of $600,000 to provide for potential fines or penalties on this matter. At this time, the Company believes that it is adequately reserved for this issue.
ITEM 4.MINE SAFETY DISCLOSURES — NOT APPLICABLE
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PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Neogen Common Stock is traded on the NASDAQ Global Select Market under the symbol NEOG.
Holders
As of June 30, 2021,2023, there were approximately 221580 stockholders of record of Common Stockour common stock. The actual number of holders is significantly greater than this number of holders and management believes thereincludes stockholders who are a total of approximately 10,000 beneficial holders.
Dividends
Neogen has never paid cash dividends on its Common Stock.
Securities Authorized for Issuance under Equity Compensation Plans
The graph below matches Neogen Corporation’s cumulative5-Yeartotal shareholder return on common stock with the cumulative total returns of the NASDAQ Composite index and the NASDAQ Medical Equipment index. The graph tracks the performance of a $100 investment ininformation regarding our common stock and in each index (with the reinvestment of all dividends) from 5/31/2016 to 5/31/2021.
5/16 | 5/17 | 5/18 | 5/19 | 5/20 | 5/21 | |||||||||||||||||||
Neogen Corporation | 100.00 | 128.20 | 204.47 | 152.18 | 192.34 | 249.30 | ||||||||||||||||||
NASDAQ Composite | 100.00 | 126.75 | 153.80 | 155.70 | 200.33 | 292.39 | ||||||||||||||||||
NASDAQ Medical Equipment | 100.00 | 133.48 | 188.69 | 184.23 | 224.92 | 312.79 | ||||||||||||||||||
Year Ended May 31 | ||||||||||||||||||||
2021 | 2020 | 2019 | 2018 | 2017 | ||||||||||||||||
(in thousands, except per share data) | ||||||||||||||||||||
Income Statement Data: | ||||||||||||||||||||
Food Safety Revenues | $ | 234,244 | $ | 212,691 | $ | 213,474 | $ | 194,477 | $ | 170,034 | ||||||||||
Animal Safety Revenues | 234,215 | 205,479 | 200,712 | 203,453 | 188,243 | |||||||||||||||
Total Revenues | 468,459 | 418,170 | 414,186 | 397,930 | 358,277 | |||||||||||||||
Total Cost of Revenues | 253,403 | 221,891 | 222,266 | 211,658 | 189,353 | |||||||||||||||
Gross Margin | 215,056 | 196,279 | 191,920 | 186,272 | 168,924 | |||||||||||||||
Sales and Marketing | 73,443 | 69,675 | 70,230 | 66,929 | 59,380 | |||||||||||||||
General and Administrative | 51,197 | 44,331 | 40,791 | 38,294 | 34,214 | |||||||||||||||
Research and Development | 16,247 | 14,750 | 12,805 | 10,855 | 10,385 | |||||||||||||||
Operating Income | 74,169 | 67,523 | 68,094 | 70,194 | 64,945 | |||||||||||||||
Other Income | 1,099 | 4,782 | 4,865 | 3,271 | 1,728 | |||||||||||||||
Income Before Income Taxes | 75,268 | 72,305 | 72,959 | 73,465 | 66,673 | |||||||||||||||
Provision for Income Taxes | 14,386 | 12,830 | 12,783 | 10,250 | 22,700 | |||||||||||||||
Net Income | 60,882 | 59,475 | 60,176 | 63,215 | 43,973 | |||||||||||||||
Net (Income) Loss Attributable to Non-controlling Interest | — | — | — | (70 | ) | (180 | ) | |||||||||||||
Net Income Attributable to Neogen | $ | 60,882 | $ | 59,475 | $ | 60,176 | $ | 63,145 | $ | 43,793 | ||||||||||
Net Income per Share (basic) (1) | $ | 0.57 | $ | 0.57 | $ | 0.58 | $ | 0.62 | $ | 0.43 | ||||||||||
Net Income per Share (diluted) (1) | $ | 0.57 | $ | 0.56 | $ | 0.57 | $ | 0.61 | $ | 0.43 | ||||||||||
Weighted Average Shares Outstanding (diluted) (1) | 107,120 | 105,720 | 104,850 | 104,298 | 102,330 | |||||||||||||||
Year Ended May 31 | ||||||||||||||||||||
2021 | 2020 | 2019 | 2018 | 2017 | ||||||||||||||||
Balance Sheet Data: | ||||||||||||||||||||
Cash and Cash Equivalents and Marketable Securities | $ | 381,087 | $ | 343,673 | $ | 267,524 | $ | 210,810 | $ | 143,635 | ||||||||||
Working Capital (2) | 537,852 | 488,917 | 411,278 | 337,101 | 256,959 | |||||||||||||||
Total Assets | 920,192 | 797,182 | 695,740 | 618,009 | 528,409 | |||||||||||||||
Long-Term Debt | — | — | — | — | — | |||||||||||||||
Total Equity | 840,377 | 725,177 | 637,899 | 560,175 | 471,757 | |||||||||||||||
ITEM 6. RESERVED
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form
In addition, any forward-looking statements represent management’s views only as of the day this Form
TRENDS AND UNCERTAINTIES
During fiscal 2023, we closely monitorexperienced higher than normal input cost inflation, including increases in certain raw materials, labor costs and supply chain pressure that negatively impacted operating results. Pricing actions taken during fiscal 2022 and 2023 mitigated some, but not all, of theCOVID-19pandemic, inflationary pressures on the business. Ongoing inflation also could have an impact on our top priority remains protecting the healthcustomer’s purchasing decisions and safety of our employees, their families, and those in our communities. While essential operations continue in our locations around the world, many of ournon-manufacturingemployeesorder patterns. We estimate inflation will continue to work remotelyaffect us in fiscal year 2024, although at a decreasing rate compared to the prior two fiscal years.
Although we have no operations in or direct exposure to Russia, Belarus and travel remains limited. Safety guidelinesUkraine, we have experienced intermittent shortages in materials and procedures, including social distancingincreased costs for transportation, energy and enhanced cleaning,raw materials due, in part, to the negative impact of the Russia-Ukraine military conflict, which began in February 2022, on the global economy. Our European operations and customer base have been developed foron-siteemployees and these policies are regularly monitored and updatedadversely impacted by the conflict. As the conflict continues or worsens, it may further impact our internal Emergency Response Team.
While theresults. There has been a positive impactresults, particularly in salesthe first half of our biosecurity product lines, as the pandemic has created increased demand for these products, and sales into companion animal markets have benefitted, as remote work and stay at home orders have driven increased pet ownership.fiscal year in Asia. A number of our food safety diagnostic product lines have beenwere negatively impacted due to decreased demand in many of our customers’ businesses, particularly those serving restaurants, bars and other institutional food service markets; supply chain difficulties including vendor disruptions, border closures, shipping issues and labor shortages. Broadly speaking, many of our markets have recovered or are recovering from the pandemic, as supply chain difficulties and shipping issues;costs have decreased. A renewed outbreak of COVID-19 could result in further uncertainty and restricted travel, which hinders our ability to connect with customers. Duringbusiness disruptions. However, the current fiscal year, we have incurred less expense for travel, meals, trade showstrend is positive and some other customer-facing marketing activities; higher spend on shipping, cleaning activitiesnegative impacts appear to be moderating.
Overall, the impact of inflation, the Russia-Ukraine military conflict and personal protective equipment has somewhat offsetCOVID-19 remains uncertain. We continue to evaluate the nature and extent to which these savings.issues impact our business, including supply chain, labor availability and attrition, consolidated results of operations, financial condition and liquidity. We expect theCOVID-19pandemic willthese issues to continue to impact our business operations and financial results through the majority of our 2022us throughout fiscal year.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The discussion and analysis of our financial condition and results of operations are based on the consolidated financial statements that have been prepared in accordance with accounting principles generally accepted in the United States. 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 disclosure of contingent assets and liabilities. On an ongoing basis, management evaluates the estimates, including but not limited to, those related to receivable allowances, inventories and 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. Though the impact of theCOVID-19pandemic to our business and operating results presents additional uncertainty, we continue to use the best information available to inform our critical accounting estimates. Actual results may differ from these estimates under different assumptions or conditions.
The following critical accounting policy reflectsestimates reflect management’s more significant judgments and estimates used in the preparation of the consolidated financial statements.
32
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. The determination of income subject to income tax in each tax paying jurisdiction requires us to apply transfer pricing guidelines for certain intercompany transactions.
Our tax rate is subject to adjustment over the balance of the year due to, among other things, income tax rate changes by governments; the jurisdictions in which our profits are determined to be earned and taxed; changes in the valuation of our deferred tax assets and liabilities; adjustments to our interpretation of transfer pricing standards; changes in available tax credits or other incentives; changes in stock-based compensation expense; changes in tax laws or the interpretation of such tax laws; and changes in U.S. generally accepted accounting principles.
Although we believe our tax estimates are reasonable and we prepare our tax filings in accordance with all applicable tax laws, the final determination with respect to any audit, and any related litigation, could be materially different from our estimates or from our historical income tax provisions and accruals. The results of an audit or litigation could have a material effect on operating results and/or cash flows in the periods for which that determination is made. In addition, future period earnings may be adversely impacted by litigation costs, settlements, penalties, and/or interest assessments.
As of May 31, 2023, the Company has approximately $153 million of undistributed earnings in its foreign subsidiaries. Approximately $41 million of these earnings are no longer considered permanently reinvested. The incremental tax cost to repatriate these earnings to the U.S. is immaterial. The Company has not provided deferred taxes on approximately $112 million of undistributed earnings from non-U.S. subsidiaries as of May 31, 2023 which are comprised of Neogen Europe, Quat-Chem Ltd, Megazyme Ltd, Megazyme IP, Neogen Italia S.r.l., Neogen do Brasil, Rogama Industria e Comercio Ltda, Neogen Latinoamérica, Neogen Argentina, Neogen Uruguay, Neogen Chile SpA, NeogenBio-ScientificTechnology Co (Shanghai), Neogen Food and Animal Security (India), Neogen Canada and Neogen Australasia Pty Limited.indefinitely reinvested in operations. Based on historical experience, as well as management’s future plans, earnings from these subsidiaries are expectedwill continue to be Furthermore, our domestic operations have historically produced sufficient operating cash flow to mitigate the need to remit foreign earnings. On an annual basis, we evaluate the current business environment and whether any new events or other external changes might require are-evaluationpracticablepractical to determine the income tax liability that would be payable if such earnings were not reinvested indefinitely.
As described in Note 3 "Business Combinations" to the consolidated financial statements, on September 1, 2022, we completed a transaction combining 3M’s food safety division with Neogen in a Reverse Morris Trust transaction for consideration of approximately $3.2 billion, which resulted in recording of a customer relationships intangible assets valued at $1.17 billion. We determined the fair value of the acquired customer relationships intangible assets by applying the multi-period excess earnings method, which involved the use of significant estimates and assumptions related to forecasted revenue growth rate and customer attrition rate. Valuation specialists were used to develop and evaluate the appropriateness of the multi-period excess earnings method, our discount rates, our attrition rate and our fair value estimates using our cash flow projections.
The fair value of assets acquired and liabilities assumed in certain cases may be subject to revision based on the final determination of fair value during a period of time not to exceed 12 months from the acquisition date. Legal costs, due diligence costs, business valuation costs and all other business acquisition costs are expensed when incurred.
33
Our estimates of fair value are based on assumptions believed to be reasonable at that time. If we made different estimates or judgments, it could result in material differences in the fair values of the net assets acquired.
Goodwill
We record goodwill when the purchase price of acquired businesses exceeds the value of their identifiable net tangible and intangible assets acquired. We periodically evaluate goodwill for impairment in accordance with the accounting guidance for goodwill and other indefinite-lived intangibles that are not amortized. We review our goodwill for impairment annually during the fourth quarter. In addition, we review goodwill for impairment whenever adverse events or changes in circumstances indicate a possible impairment.
This review is performed at the reporting unit level, and involves a comparison of the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered impaired. If the carrying amount of the reporting unit exceeds its fair value, an impairment loss is recognized in an amount equal to the excess carrying value over fair value.
In performing goodwill impairment testing, we utilize a third-party valuation specialist to assist management in determining the fair value of our reporting units. Fair value of each reporting unit is estimated based on a combination of discounted cash flows and the use of pricing multiples derived from an analysis of comparable public companies multiplied against historical and/or anticipated financial metrics of each reporting unit. These calculations contain uncertainties as they require management to make assumptions including, but not limited to, market comparables, future cash flows of the reporting units, and appropriate discount and long-term growth rates.
During fiscal year 2023, our business was organized into two reporting units: Food Safety and Animal Safety. The determination of our reporting units and impairment indicators also require us to make significant judgments.
As a result of our test in the fourth quarter of fiscal year 2023, we determined that the fair value of our reporting units exceeded their respective carrying values. As such, the annual impairment analysis resulted in no impairment in fiscal year 2023.
34
RESULTS OF OPERATIONS
Historical Periods
Refer to Part II - Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Form 10-K for the fiscal 2021, an increaseyear ended May 31, 2022 for discussion of 12% compared to $418.2 million in fiscal 2020. Organic sales overall increased 9%the Results of Operations, Segment Results of Operations, and Financial Condition and Liquidity for the year ended May 31, 2022 compared to the prior year.
Executive Overview
|
| Year Ended |
| |||||||||
(in thousands, except earnings per share) |
| May 31, 2023 |
|
| May 31, 2022 |
|
| % Change |
| |||
Consolidated |
|
|
|
|
|
|
|
|
| |||
Revenues, net |
| $ | 822,447 |
|
| $ | 527,159 |
|
|
| 56 | % |
Core Sales Growth |
|
|
|
|
|
|
|
| 4 | % | ||
Food Safety |
|
|
|
|
|
|
|
|
| |||
Revenues, net |
| $ | 546,797 |
|
| $ | 259,979 |
|
|
| 110 | % |
Core Sales Growth |
|
|
|
|
|
|
|
| 6 | % | ||
Animal Safety |
|
|
|
|
|
|
|
|
| |||
Revenues, net |
| $ | 275,650 |
|
| $ | 267,180 |
|
|
| 3 | % |
Core Sales Growth |
|
|
|
|
|
|
|
| 2 | % | ||
% of International Sales |
|
| 48 | % |
|
| 40 | % |
|
|
| |
Effective Tax Rate |
|
| (3.8 | )% |
|
| 19.8 | % |
|
|
| |
Net Income |
| $ | (22,870 | ) |
| $ | 48,307 |
|
|
| -147 | % |
Earnings per Diluted Share |
| $ | (0.12 | ) |
| $ | 0.45 |
|
|
|
| |
Cash from Operations |
| $ | 41,028 |
|
| $ | 68,038 |
|
|
|
| |
International sales were 39.1% of total sales in fiscal 2021 compared to 39.4% of total sales in fiscal 2020.
Neogen’s international revenues were $183.2$398.4 million in fiscal 2021,year 2023, compared to $164.7$209.3 million in fiscal 2020. Currency translation had a negligible impact on2022, an increase of 90%. Revenues from 3M FSD drove the international sales increase. Since September 1, 2022, 67% of 3M FSD revenues for the full year, with gains in the U.K., Italy, China, Australia and Canada almost entirely offset by negative impact in Brazil, Mexico and Argentina. In a neutral currency environment,were international sales, would have been $3.4 million higher than reported in the first nine months of fiscal 2021. However, the Brazilian real and Mexican peso strengthened significantly in the fourth quarter, resulting in an overall positive effectcompared to Neogen’s historical average of approximately $3.3 million from currency translations; the full year impact from currency translations was minimal.
35
Revenue changes, expressed in percentages, for fiscal 20212023 compared to the prior year are as follows for the legacy business at each of our international locations:
Revenue | Revenue | |||||||
Change | Change | |||||||
USD | Local Currency | |||||||
UK Operations | 10 | % | 4 | % | ||||
Brazil Operations | (8 | %) | 15 | % | ||||
Neogen Latinoamerica | 9 | % | 13 | % | ||||
Neogen China | 101 | % | 89 | % | ||||
Neogen India | 4 | % | 7 | % | ||||
Neogen Australasia | 78 | % | 61 | % | ||||
Neogen Canada | 14 | % | 9 | % | ||||
| Revenue |
|
| Revenue |
| |||
U.K. Operations (including Neogen Italia) |
|
| (3 | )% |
|
| 9 | % |
Megazyme |
|
| (3 | )% |
|
| 6 | % |
Brazil Operations |
|
| 11 | % |
|
| 10 | % |
Neogen Latinoamerica |
|
| 10 | % |
|
| 4 | % |
Neogen Argentina |
|
| (5 | )% |
|
| 48 | % |
Neogen Uruguay |
|
| (1 | )% |
|
| (9 | )% |
Neogen Chile |
|
| 16 | % |
|
| 24 | % |
Neogen China |
|
| (11 | )% |
|
| (4 | )% |
Neogen India |
|
| 2 | % |
|
| 11 | % |
Neogen Canada |
|
| (6 | )% |
|
| 0 | % |
Neogen Australasia |
|
| 3 | % |
|
| 11 | % |
Excluding the December 2021 acquisition of Delf, sales at our U.K. operations increased 5% in U.S. dollars at Neogen Europelocal currency, which was led by a 22% increaseincreased sample volume in the pig and poultry markets. In local currency, revenue in Brazil increased 10% in fiscal 2023, driven by strong sales of disinfectantthe company’s natural toxin test kits, including tests to detect aflatoxin in corn, as well as increases in insect and veterinaryrodent control products, and genomics testing. In local currency, Neogen Latinoamerica revenues rose by 4% in fiscal 2023, led by our diagnostic testing portfolio and culture media.
China’s revenue decreased 4% in local currency, which was primarily due toCOVID-19related salesthe result of hand sanitizer and disinfectant in the U.K.COVID-19 lockdowns in the first quarter and strong cleaner and disinfectant sales throughouthalf of the entire year to Asia to mitigate the impact of African Swine Fever. Partially offsetting this growth were lower sales of diagnostic test kits due toCOVID-19shutdowns; additionally, a large portion of sales into European Union countries from January through May were sold through our Neogen Italia subsidiary as Brexit created export issues from the U.K.
Service Revenue
Service revenue, which consists primarily of genomics services sales to animal protein and companion animal markets, was $92.2$107.4 million in fiscal 2021,2023, an increase of 12%5% over prior fiscal year sales of $82.6$102.5 million. The increase was primarily driven by growth was led by increases in sample volumes from the globalU.S. beef and companion animal markets for genomics testing and commercial beefhigher sales of our Neogen Analytics software as a service (SaaS) product. These increases were partially offset by COVID-related shutdowns in China in the first half of fiscal 2023 and lower genomics sales to the U.S. porcine and poultry markets, and the Chinese porcine market, as that country has begun recovery from its African swine fever outbreak.
REVENUES
Year Ended | ||||||||||||||||||||
(dollars in thousands) | May 31, 2021 | Change | May 31, 2020 | Change | May 31, 2019 | |||||||||||||||
Food Safety: | ||||||||||||||||||||
Natural Toxins, Allergens & Drug Residues | $ | 76,614 | 1 | % | $ | 76,207 | (3 | %) | $ | 78,373 | ||||||||||
Bacterial & General Sanitation | 44,009 | 5 | % | 41,780 | (0 | %) | 41,966 | |||||||||||||
Culture Media & Other | 56,922 | 19 | % | 47,847 | (4 | %) | 49,857 | |||||||||||||
Rodenticides, Insecticides & Disinfectants | 36,542 | 26 | % | 28,890 | 13 | % | 25,584 | |||||||||||||
Genomics Services | 20,157 | 12 | % | 17,967 | 2 | % | 17,694 | |||||||||||||
| $ | 234,244 | 10 | % | $ | 212,691 | (0 | %) | $ | 213,474 | |||||||||||
Animal Safety: | ||||||||||||||||||||
Life Sciences | 5,715 | (10 | %) | 6,322 | (20 | %) | 7,858 | |||||||||||||
Veterinary Instruments & Disposables | 48,128 | 12 | % | 42,941 | (4 | %) | 44,582 | |||||||||||||
Animal Care & Other | 35,897 | 26 | % | 28,389 | (5 | %) | 29,941 | |||||||||||||
Rodenticides, Insecticides & Disinfectants | 77,458 | 13 | % | 68,815 | 4 | % | 66,389 | |||||||||||||
Genomics Services | 67,017 | 14 | % | 59,012 | 14 | % | 51,942 | |||||||||||||
| $ | 234,215 | 14 | % | $ | 205,479 | 2 | % | $ | 200,712 | |||||||||||
Total Revenue | $ | 468,459 | 12 | % | $ | 418,170 | 1 | % | $ | 414,186 | ||||||||||
| Year Ended |
| ||||||||||
(dollars in thousands) |
| May 31, 2023 |
|
| May 31, 2022 |
|
| % Change |
| |||
Food Safety: |
|
|
|
|
|
|
|
|
| |||
Natural Toxins, Allergens & Drug Residues |
| $ | 82,567 |
|
| $ | 79,395 |
|
|
| 4 | % |
Bacterial & General Sanitation |
|
| 134,934 |
|
|
| 47,282 |
|
|
| 185 | % |
Culture Media & Other |
|
| 267,178 |
|
|
| 75,278 |
|
|
| 255 | % |
Rodent Control, Insect Control & Disinfectants |
|
| 39,655 |
|
|
| 35,691 |
|
|
| 11 | % |
Genomics Services |
|
| 22,463 |
|
|
| 22,333 |
|
|
| 1 | % |
| $ | 546,797 |
|
| $ | 259,979 |
|
|
| 110 | % | |
Animal Safety: |
|
|
|
|
|
|
|
|
| |||
Life Sciences |
|
| 6,254 |
|
|
| 5,685 |
|
|
| 10 | % |
Veterinary Instruments & Disposables |
|
| 63,843 |
|
|
| 63,938 |
|
|
| 0 | % |
Animal Care & Other |
|
| 39,068 |
|
|
| 39,805 |
|
|
| (2 | )% |
Rodent Control, Insect Control & Disinfectants |
|
| 87,423 |
|
|
| 83,610 |
|
|
| 5 | % |
Genomics Services |
|
| 79,062 |
|
|
| 74,142 |
|
|
| 7 | % |
| $ | 275,650 |
|
| $ | 267,180 |
|
|
| 3 | % | |
Total Revenue, net |
| $ | 822,447 |
|
| $ | 527,159 |
|
|
| 56 | % |
36
Year Ended May 31, 20212023 Compared to Year Ended May 31, 2020
Food Safety:
Natural Toxins, Allergens
Bacterial
Culture Media
Rodent Control, Insect Control & Disinfectants –
Genomics Services –
Animal Safety:
Life Sciences – Sales in this category increased 10% in fiscal 2023 compared to the prior fiscal year, primarily due to higher salesdemand from customers purchasing substrates and reagents used in the Chinese porcine and bovine markets.
Veterinary Instruments & Disposables –
Animal Care
Rodent Control, Insect Control & Disinfectants –
Genomics Services –
37
GROSS MARGIN
Gross margin, expressed as a percentage of sales, of DON test kits in the U.S. and France, the result of mild outbreaks inwas 49.4% during fiscal year 2023 compared to 46.1% during the prior fiscal year. The increase was primarily due to the incremental revenues from the 3M FSD merger, which generated gross margin higher than the legacy company average margin. Within each reporting segment, increased raw material costs pressured gross margins in certain product lines. However, freight costs declined significantly during the comparative period particularly benefitting the Animal Safety segment, although they remained higher than pre-pandemic levels in some areas. Pricing actions taken during the year which did not recur inalso mitigated the impact of cost increases.
OPERATING EXPENSES
(dollars in thousands) |
| 2023 |
|
| 2022 |
|
| % Change |
| |||
Sales and Marketing |
| $ | 141,222 |
|
| $ | 84,604 |
|
|
| 67 | % |
General and Administrative |
|
| 201,179 |
|
|
| 82,742 |
|
|
| 143 | % |
Research and Development |
|
| 26,039 |
|
|
| 17,049 |
|
|
| 53 | % |
Total Operating Expense |
| $ | 368,440 |
|
| $ | 184,395 |
|
|
| 100 | % |
Operating expenses were $368.4 million during fiscal 2020.year 2023, compared to $184.4 million during the prior fiscal year. The allergen test kit increase was primarily the result of strong gliadin, milk$58.2 million of legal, consulting and coconut allergen test kit salesother expenses related to the 3M FSD transaction and incremental ongoing expenses resulting from the employees who conveyed over to Neogen from 3M FSD and the amortization of intangible assets acquired in the U.S. market, although fourth quarter sales declined 7% due to lower business with customers supplying restaurantsTransaction.
Sales and other food service organizations, whichMarketing:
Sales and marketing expenses were adversely impacted byCOVID-19.
General and Administrative:
General and administrative expenses were $201.2 million during fiscal year 2023, compared to $82.7 million during the prior fiscal year. The current fiscal year included $58.2 million in transaction fees and integration expenses resulting from lower market demandthe 3M FSD transaction and customer losses.
Research and Development:
Research and development expense was $26.0 million in fiscal 2020year 2023, compared to fiscal 2019. Antibiotics and injectable vitamin products were down 20% and 15%, respectively, due primarily to inventory destocking at distributors. Sales of our biologics product line, marketed primarily into$17.0 million during the equine market, declined 17%, and our equine supplements were also down 20%, due to lower demand from end customers in this market. Sales of wound care products rose 9% to partially offset these losses.
OPERATING INCOME
Operating income was $37.5 million during fiscal year 2023, compared to a $2.6operating income of $58.6 million increase in sales of cleaners and disinfectants for the year, driven in large part by growth in hand sanitizers, disinfectants, and disinfecting wipes in the fourth quarter resulting from theCOVID-19pandemic. Revenues for water disinfection in animal protein production environments rose 8% overprior fiscal 2019. Rodenticide sales increased 1% over the prior year, as strong growth in the retail market was almost entirely offset by lower sales to agricultural markets in the northwest U.S., due to lower rodent pressure. Insecticide revenues declined 2% for the year.
(in thousands) | 2021 | Change | 2020 | Change | 2019 | |||||||||||||||
Cost of Revenues | $ | 253,403 | 14 | % | $ | 221,891 | 0 | % | $ | 222,266 | ||||||||||
(dollars in thousands) | 2021 | Change | 2020 | Change | 2019 | |||||||||||
Sales and Marketing | $ | 73,443 | 5% | $ | 69,675 | (1%) | $ | 70,230 | ||||||||
General and Administrative | 51,197 | 15% | 44,331 | 9% | 40,791 | |||||||||||
Research and Development | 16,247 | 10% | 14,750 | 15% | 12,805 | |||||||||||
Total Operating Expense | $ | 140,887 | 9% | $ | 128,756 | 4% | $ | 123,826 | ||||||||
38
OTHER (EXPENSE) INCOME
(dollars in thousands) | 2021 | Change | 2020 | Change | 2019 | |||||||||||
Operating Income | $ | 74,169 | 10% | $ | 67,523 | (1%) | $ | 68,094 | ||||||||
Other (Expense) Income (Expense) for the previous threetwo fiscal years consisted of the following:
(dollars in thousands) | 2021 | 2020 | 2019 | |||||||||
Interest income (net of expense) | $ | 1,614 | $ | 5,992 | $ | 4,683 | ||||||
Foreign currency transactions | (541 | ) | (1,178 | ) | (1,279 | ) | ||||||
Royalty income | — | 1 | 150 | |||||||||
Licenses and settlements | 9 | (38 | ) | 672 | ||||||||
Quat-Chem contingent consideration | — | — | 422 | |||||||||
Deoxi contingent consideration | — | — | (10 | ) | ||||||||
Magiar contingent consideration | 111 | — | — | |||||||||
Livestock Genomics contingent consideration | 37 | — | — | |||||||||
Other | (131 | ) | 5 | 227 | ||||||||
Total Other Income | $ | 1,099 | $ | 4,782 | $ | 4,865 | ||||||
(dollars in thousands) |
| 2023 |
|
| 2022 |
| ||
Interest income |
| $ | 3,166 |
|
| $ | 1,339 |
|
Interest expense |
|
| (55,961 | ) |
|
| (72 | ) |
Foreign currency transactions |
|
| (5,322 | ) |
|
| (40 | ) |
Loss on sale of minority interest |
|
| (1,516 | ) |
|
| - |
|
Loss on investment |
|
| (500 | ) |
|
| - |
|
Contingent consideration adjustments |
|
| 300 |
|
|
| 220 |
|
Other |
|
| 276 |
|
|
| 142 |
|
Total Other Income |
| $ | (59,557 | ) |
| $ | 1,589 |
|
The net interest expense recorded during fiscal year 2023 was the result of debt incurred to fund the 3M FSD transaction. In fiscal 2022, the Company had no debt outstanding. Interest income declined by $4.4 million in fiscal 2021 comparedrelates to fiscal 2020, despite higher cash andearnings on our marketable securities balances, asportfolio. Higher yields on fixed income securities declined significantly during the year; the U.S. Federal Reserve intervened in markets toportfolio were partially offset by lower rates to stimulate the economy during theCOVID-19pandemic. Interest income rosebalances in fiscal year 2020 compared to fiscal 2019, due to higher cash balances and rising interest rates during most of fiscal 2020. The loss2023. Other expense resulting from foreign currency translations in fiscal years 2021, 2020 and 2019 is primarilytransactions was the result of the changes in the value of foreign currencies relative to the U.S. dollar in countries in which we operate;operate. The increase in expense during fiscal year 2023 was due to U.S. dollar denominated intercompany loans incurred in our international subsidiaries as the dollar strengthened against mostresult of these currenciesthe 3M FSD transaction on September 1, 2022. Due to our acquisition of Corvium, Inc. in all three years.
PROVISION FOR INCOME TAXES
(dollars in thousands) | 2021 | Change | 2020 | Change | 2019 | |||||||||||
Provision for Income Taxes | $ | 14,386 | 12% | $ | 12,830 | 0% | $ | 12,783 | ||||||||
Income tax expense forduring fiscal 2021year 2023 was $14,386$0.8 million, compared to $11.9 million in the prior fiscal year, primarily resulting from the additional pre-tax loss due to the 3M FSD acquisition, share-based compensation, and foreign rate differential. This was offset primarily by an increase in GILTI income and nondeductible transaction costs.
The total amounts of unrecognized tax benefits that, if recognized, would affect the effective tax rate as of 19.1%, compared to incomeMay 31, 2023 and May 31, 2022 are $1.1 million and $0.8 million, respectively. The increase in unrecognized tax expense of $12.8 million in 2020, an effective tax rate of 17.7%. For fiscal 2019, income tax expense of $12.8 million represented an effective tax rate of 17.5%.
NET INCOME AND INCOME PER SHARE
Net loss was $22.9 million during fiscal year 2023, compared to net income of $48.3 million in the prior fiscal year. The decrease in earnings was primarily the result of $56.0 million of interest expense from the $1 billion in debt incurred in the Transaction, $59.8 million of transaction fees and integration expenses, and $60.9 million in incremental amortization expenses related to 3M FSD intangibles.
39
NON-GAAP FINANCIAL MEASURES
This report includes certain financial information of Neogen that differs from what is reported in accordance with GAAP. These non-GAAP financial measures consist of EBITDA, Adjusted EBITDA, Adjusted EBITDA margin, adjusted net income and adjusted earnings per share. These non-GAAP financial measures are included in this report because management believes that they provide investors with additional useful information to measure the performance of Neogen, and because these non-GAAP financial measures are frequently used by securities analysts, investors and other interested parties as common performance measures to compare results or estimate valuations across companies in Neogen’s industries.
EBITDA
We define EBITDA as net income before interest, income taxes, and depreciation and amortization. We present EBITDA as a performance measure because it may allow for a comparison of results across periods and results across companies in the industries in which Neogen operates on a consistent basis, by removing the effects on operating performance of (a) capital structure (such as the varying levels of interest expense and interest income), (b) asset base and capital investment cycle (such as depreciation and amortization) and (c) items largely outside the control of management (such as income taxes). EBITDA also forms the basis for the measurement of Adjusted EBITDA (discussed below).
Adjusted EBITDA
We define Adjusted EBITDA as EBITDA, adjusted for share-based compensation and certain transaction fees and expenses. We present Adjusted EBITDA because it provides an understanding of underlying business performance by excluding the following:
(dollars in thousands, except per share data) | 2021 | Change | 2020 | Change | 2019 | |||||||||||||||
Net Income Attributable to Neogen | $ | 60,882 | 2% | $ | 59,475 | (1%) | $ | 60,176 | ||||||||||||
Net Income Per Share-Basic | $ | 0.57 | $ | 0.57 | $ | 0.58 | ||||||||||||||
Net Income Per Share-Diluted | $ | 0.57 | $ | 0.56 | $ | 0.57 | ||||||||||||||
Adjusted EBITDA margin
We define Adjusted EBITDA margin as Adjusted EBITDA as a percentage of total revenues. We present Adjusted EBITDA margin as a performance measure to analyze the level of Adjusted EBITDA generated from total revenue.
Adjusted Net Income
We define Adjusted Net Income as Net Income, adjusted for share-based compensation, FX translation gain/(loss) on loan revaluation, certain transaction fees and expenses, impairment and scrap of discontinued product lines and other one-time adjustments, all of which are tax effected.
Adjusted Earnings per Share
We define Adjusted Earnings per Share as Adjusted Net Income divided by diluted average shares outstanding.
40
These non-GAAP financial measures are presented for informational purposes only. EBITDA, Adjusted EBITDA, Adjusted EBITDA margin, Adjusted Net Income and Adjusted Earnings per Share are not recognized terms under GAAP and should not be considered in isolation or as a substitute for, or superior to, net income (loss), operating income, cash flow from operating activities or other measures of financial performance. This information does not purport to represent the results Neogen would have achieved had any of the transactions for which an adjustment is made occurred at the beginning of the periods presented or as of the dates indicated. This information is inherently subject to risks and uncertainties. It may not give an accurate or complete picture of Neogen’s financial condition or results of operations for the periods presented and should not be relied upon when making an investment decision.
The use of the terms EBITDA, Adjusted EBITDA, Adjusted EBITDA margin, Adjusted Net Income and Adjusted Earnings per Share may not be comparable to similarly titled measures used by other companies or persons due to potential differences in the method of calculation.
These non-GAAP financial measures have limitations as analytical tools. For example, for EBITDA-based metrics:
A reader should compensate for these limitations by relying primarily on the financial statements of Neogen and using these non-GAAP financial measures only as a supplement to evaluate Neogen’s performance.
For each of these non-GAAP financial measures below, we are providing a reconciliation of the differences between the non-GAAP measure and the most directly comparable GAAP measure.
Reconciliation between net income and EBITDA and Adjusted EBITDA is as follows:
| Year ended May 31 |
| ||||||||||
(in thousands) |
| 2023 |
|
| 2022 |
|
| 2021 |
| |||
Net (Loss) Income |
| $ | (22,870 | ) |
| $ | 48,307 |
|
| $ | 60,882 |
|
Net income margin % |
|
| (2.8 | )% |
|
| 9.2 | % |
|
| 13.0 | % |
Provision for income taxes |
|
| 828 |
|
|
| 11,900 |
|
|
| 14,386 |
|
Depreciation and amortization |
|
| 88,377 |
|
|
| 23,694 |
|
|
| 21,041 |
|
Interest expense (income), net |
|
| 52,795 |
|
|
| (1,267 | ) |
|
| (1,614 | ) |
EBITDA |
| $ | 119,130 |
|
| $ | 82,634 |
|
| $ | 94,695 |
|
Share-based compensation |
|
| 10,177 |
|
|
| 7,154 |
|
|
| 6,437 |
|
FX transaction loss (gain) on loan revaluation(1) |
|
| 5,226 |
|
|
| — |
|
|
| — |
|
Certain transaction fees and integration costs |
|
| 59,812 |
|
|
| 25,581 |
|
|
| 3,085 |
|
Contingent consideration adjustments |
|
| (300 | ) |
|
| — |
|
|
| — |
|
Restructuring |
|
| 475 |
|
|
| — |
|
|
| — |
|
Loss on sale of minority interest |
|
| 1,516 |
|
|
| — |
|
|
| — |
|
Loss on investment |
|
| 500 |
|
|
| — |
|
|
| — |
|
Impairment and scrap of discontinued product lines(2) |
|
| 5,639 |
|
|
| — |
|
|
| — |
|
Inventory step-up charge |
|
| 3,245 |
|
|
| — |
|
|
| — |
|
Adjusted EBITDA |
| $ | 205,420 |
|
| $ | 115,369 |
|
| $ | 104,217 |
|
Adjusted EBITDA margin % |
|
| 25.0 | % |
|
| 21.9 | % |
|
| 22.2 | % |
(1) Net foreign currency transaction loss (gain) associated with the revaluation of non-functional currency intercompany loans established in connection with FSD transaction.
41
(2)Expenses associated with intangible asset impairments and inventory scrap amounts related to certain discontinued product lines.
Adjusted EBITDA increased 2%$90.1 million in fiscal 2021year 2023 compared to fiscal 2020,year 2022, primarily due to earnings generated from the $6.7 million increase3M FSD business, which combined with Neogen on September 1, 2022. Expressed as a percentage of revenue, adjusted EBITDA was 25.0% in operating income. The increasefiscal year 2023 compared to 21.9% in operating incomefiscal year 2022. Increases in the margin reflect the higher margin products sold by the 3M FSD business, which was partially offset by lower othernot a part of the Company in the prior fiscal year.
Reconciliation between net income and higherAdjusted Net Income and earnings per share and Adjusted Earnings per Share are as follows:
| Year ended May 31 |
| ||||||||||
(in thousands, except earnings per share) |
| 2023 |
|
| 2022 |
|
| 2021 |
| |||
Net Income (Loss) |
| $ | (22,870 | ) |
| $ | 48,307 |
|
| $ | 60,882 |
|
Earnings per diluted share |
| $ | (0.12 | ) |
| $ | 0.45 |
|
| $ | 0.57 |
|
Amortization of acquisition-related intangibles |
|
| 68,690 |
|
|
| 7,235 |
|
|
| 6,271 |
|
Share-based compensation |
|
| 10,177 |
|
|
| 7,154 |
|
|
| 6,437 |
|
FX transaction loss (gain) on loan revaluation(1) |
|
| 5,226 |
|
|
| — |
|
|
| — |
|
Certain transaction fees and integration costs |
|
| 59,812 |
|
|
| 25,581 |
|
|
| 3,085 |
|
Contingent consideration adjustments |
|
| (300 | ) |
|
| — |
|
|
| — |
|
Restructuring |
|
| 475 |
|
|
| — |
|
|
| — |
|
Loss on sale of minority interest |
|
| 1,516 |
|
|
| — |
|
|
| — |
|
Loss on investment |
|
| 500 |
|
|
| — |
|
|
| — |
|
Impairment and scrap of discontinued product lines(2) |
|
| 5,639 |
|
|
| — |
|
|
| — |
|
Inventory step-up charge |
|
| 3,245 |
|
|
| — |
|
|
| — |
|
Other adjustments(3) |
|
| 5,864 |
|
|
| — |
|
|
| — |
|
Estimated tax effect of above adjustments(4) |
|
| (32,323 | ) |
|
| (9,017 | ) |
|
| (1,904 | ) |
Adjusted Net Income |
| $ | 105,651 |
|
| $ | 79,260 |
|
| $ | 74,771 |
|
Adjusted Earnings per Share |
| $ | 0.56 |
|
| $ | 0.73 |
|
| $ | 0.70 |
|
(1) Net foreign currency transaction loss (gain) associated with the revaluation of non-functional currency intercompany loans established in connection with the 3M FSD transaction.
(2) Expenses associated with intangible asset impairments and inventory scrap amounts related to certain discontinued product lines.
(3) Income tax benefit associated with non-deductible transaction costs that were recognized as expense in prior periods.
(4) Tax effect of adjustments is calculated using projected effective tax rates for each applicable item.
Adjusted Net Income increased $26.4 million during the year.
42
FUTURE OPERATING RESULTS
Neogen Corporation’s future operating results involve a number of risks and uncertainties. Actual events or results may differ materially from those discussed in this report. Factors that could cause or contribute to such differences include, but are not limited to, the factors discussed below as well as those discussed elsewhere in this report. Management’s ability to grow the business in the future depends upon our ability to successfully implement various strategies, including:
FINANCIAL CONDITION AND LIQUIDITY
As of May 31, 2021, we had $75.6 million in2023, the overall cash, and cash equivalents $305.5 million inand marketable securities and net working capitalposition of $537.9Neogen was $245.6 million. ForDuring the fiscal year ended May 31, 2021,2023, cash generated from operating activities was $81.2$41.0 million, compared to $85.9$68.0 million generated in fiscal 2020;2022. The decrease was primarily the result of 3M FSD transaction costs and the addition of FSD accounts receivable. Cash flow from investing activities was $201.0 million during the fiscal year ended 2023, which was primarily the result of proceeds from stock option exercises provided an additional $34.6 millionthe sale of cash. For the same period, additions tomarketable securities of $266.8 million. This was partially offset by purchases of property, equipment and otherwere $26.7of $65.8 million. Cash flow for financing activities was $118.1 million and business acquisitions used cashduring the fiscal year ended 2023, which was primarily the result of $52.0 million. We have a financing agreement with a bank providing for an unsecured revolving linethe Company paying down $100 million of credit of $15.0 million, which expiresthe $1 billion in debt taken on November 30, 2023. There were no advances against this line of credit during fiscal years 2021, 2020 and 2019, and no balance outstanding at May 31, 2021 and 2020.
Net accounts receivable atbalances were $153.3 million as of May 31, 2021 were $91.8 million,2023 compared to $84.7$99.7 million atas of May 31, 2020; the increase is primarily due to the increased sales in the fourth quarter of fiscal 2021 compared to the corresponding period a year ago. Our days2022. Days’ sales outstanding, a measurement of the time it takes to collect receivables, improved to 66for the legacy business was 57 days atas of May 31, 20212023, compared to 6862 days atas of May 31, 2020. We have been carefully monitoring2022. The increase in receivables is primarily attributable to the recording of FSD customer balances, currently managed by 3M as a transition service.
As part of transition services agreements between the Company and 3M, related to the merger of the Food Safety business, 3M is invoicing our customers for products that 3M is manufacturing and shipping on our behalf. As of May 31, 2023, there were $57.3 million in customer receivables billed by 3M on our behalf. The Company is working collaboratively with 3M on managing the credit risk associated with the former FSD customers during the period while 3M is providing transition invoicing and distribution services to the Company.
Net inventory was $133.8 million as theCOVID-19pandemic has spread across our global markets; to date, although there has been some slowdown in collections, we have not experienced an appreciable increase in bad debt write offs.
Debt and Liquidity
On September 1, 2022, Neogen, 3M, and Neogen Food Safety Corporation, a subsidiary of inventory during3M created to carve out 3M’s Food Safety business, closed on theCOVID-19pandemic, we have also continued Transaction that previously was announced in December 2021, combining 3M’s Food Safety business with Neogen in a Reverse Morris Trust transaction.
43
On June 30, 2022, Neogen Food Safety Corporation entered into a credit agreement consisting of a five-year senior secured term loan facility in the amount of $650 million and a five-year senior secured revolving facility in the amount of $150 million (collectively, the “Credit Facilities”), which became available in connection with the merger and related transactions. The loan facility was funded to focusNeogen Food Safety Corporation on improving inventory turns acrossAugust 31, 2022, and upon the business.
On July 20, 2022, Neogen Food Safety Corporation closed on an offering of $350 million aggregate principal amount of 8.625% senior notes due 2030 (the “Notes”) in a private placement at par. The Notes were initially issued by Neogen Food Safety Corporation to 3M and were transferred and delivered by 3M to the selling securityholder in the offering, in satisfaction of certain of 3M’s existing debt. Neogen Food Safety Corporation did not receive any proceeds from the sale of the Notes by the selling securityholder. Prior to the distribution of the shares of Neogen Food Safety Corporation’s common stock to 3M stockholders, the Notes were guaranteed on a senior unsecured basis by 3M. Upon consummation of such distribution, 3M was released from all obligations under its guarantee. Upon the effectiveness of the merger on September 1, 2022, the Notes became guaranteed on a senior unsecured basis by Neogen and certain wholly-owned domestic subsidiaries of Neogen.
In addition to the 3M transaction described above, our future cash on handgeneration and current borrowing capacity may not be sufficient to meet our cash requirements to fund the operating business, repay debt obligations, construct new manufacturing facilities, commercialize products currently under development or execute our future plans to acquire additional businesses, technology and products that fit within our strategic plan. Accordingly, we may be required, or may choose, to issue additional equity securities or enter into other financing arrangements for a portion of our future capital needs.
We are subject to certain legal and other proceedings in the normal course of business that have not had, and, in the opinion of management, are not expected to have, a material effect on our results of operations or financial position.
Contractual Obligations As of May 31, 2021,2023, we have the following contractual obligations due by period:
|
|
|
| Less than |
|
|
|
|
|
|
|
| More than |
| ||||||
(dollars in thousands) |
| Total |
|
| 1 year |
|
| 1-3 years |
|
| 4-5 years |
|
| 5 years |
| |||||
Long-Term Debt |
| $ | 900,000 |
|
| $ | — |
|
| $ | — |
|
| $ | 550,000 |
|
| $ | 350,000 |
|
Interest obligations |
|
| 351,649 |
|
|
| 69,162 |
|
|
| 125,956 |
|
|
| 92,047 |
|
|
| 64,484 |
|
Operating Leases |
|
| 13,895 |
|
|
| 3,542 |
|
|
| 5,739 |
|
|
| 2,729 |
|
|
| 1,885 |
|
Purchase Obligations (1) |
|
| 100,148 |
|
|
| 95,620 |
|
|
| 4,411 |
|
|
| 117 |
|
|
| — |
|
| $ | 1,365,692 |
|
| $ | 168,324 |
|
| $ | 136,106 |
|
| $ | 644,893 |
|
| $ | 416,369 |
| |
Less than | More than | |||||||||||||||||||
(dollars in thousands) | Total | 1 year | 1-3 years | 3-5 years | 5 years | |||||||||||||||
Long-Term Debt | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||
Operating Leases | 2,574 | 1,313 | 1,219 | 42 | — | |||||||||||||||
Unconditional Purchase Obligations (1) | 84,265 | 83,773 | 488 | 4 | — | |||||||||||||||
| $ | 86,839 | $ | 85,086 | $ | 1,707 | $ | 46 | $ | — | |||||||||||
We continue to make investments in our business and operating facilities. Our preliminary estimate for capital expenditures related to our legacy operations in fiscal 2024 is $30 to $40 million. We also expect to spend approximately $120 million over the next two fiscal years to construct a manufacturing facility in Lansing, Michigan to produce a significant portion of the acquired FSD products and to add additional production capacity for projected growth of existing product lines. Additionally, we expect to spend approximately $30 million over the next two fiscal years to implement a new enterprise resource planning solution.
NEW ACCOUNTING PRONOUNCEMENTS
See discussion of any New Accounting Pronouncements in Note 1 to consolidated financial statements.
44
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
We have interest rate and foreign exchange rate risk exposure but no long-term fixed rate investments or borrowings.investments. Our primary interest rate risk is due to potential fluctuations of interest rates for short-term investments.
Foreign exchange risk exposure arises because we market and sell our products throughout the world. Revenues in certain foreign countries as well as certain expenses related to those revenues are transacted in currencies other than the U.S. dollar. OurAs such, our operating results are exposed to changes in exchange rates between the U.S. dollar and the British pound sterling, the euro, the Mexican peso, the Brazilian real, the Chinese yuan, the Australian dollar and to a lesser extent, the Indian rupee, the Canadian dollar, the Argentine peso, the Uruguayan peso and the Chilean peso; there is also exposure to a change in exchange rate between the British pound sterling and the euro.rates. When the U.S. dollar weakens against foreign currencies, the dollar value of revenues denominated in foreign currencies increases. When the U.S. dollar strengthens, the opposite situation occurs. Additionally, previously invoiced amounts can be positively or negatively affected by changes in exchange rates in the course of collection. We use derivative financial instruments to help manage the economic impact of fluctuations in certain currency exchange rates. These contracts are adjusted to fair value through earnings.
Neogen has assets, liabilities, and operations outside of the U.S., located in Scotland, England, Ireland, Italy, Brazil, Mexico, Argentina, Uruguay, Chile, China, India, Canada and Australia where the functional currency is the British pound sterling, Brazilian real, Mexican peso, Argentine peso, Uruguayan peso, Chilean peso, Chinese yuan, Indian rupee, Canadian dollar and Australian dollar, respectively, and also transacts business throughout Europe in the euro. Our investments in foreign subsidiaries are considered to be long-term. As discussed in ITEM 1A. RISK FACTORS, our financial condition and results of operations could be adversely affected by currency fluctuations.
The following table sets forth the potential loss in future earnings or fair values, resulting from hypothetical changes in relevant market rates or prices:
Risk Category | Hypothetical Change | May 31, 2021 | Impact | |||||
(in thousands) | ||||||||
Foreign Currency—Revenue | 10% Decrease in exchange rates | $ | (18,317 | ) | Earnings | |||
Foreign Currency—Hedges | 10% Decrease in exchange rates | (1,998 | ) | Earnings | ||||
Risk Category |
| Hypothetical Change |
| May 31, 2023 |
|
| Impact | |
(dollars in thousands) |
|
|
|
|
|
|
| |
Foreign Currency — Revenue |
| 10% Decrease in exchange rates |
| $ | 39,844 |
|
| Earnings |
Foreign Currency — Hedges |
| 10% Decrease in exchange rates |
|
| 1,550 |
|
| Fair Value |
Interest Income |
| 10% Decrease in interest rates |
|
| 434 |
|
| Earnings |
Interest Expense |
| 10% Increase in interest rates |
|
| 2,125 |
|
| Earnings |
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is submitted in a separate section of this report starting on page
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE—NONE
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
An evaluation was performed under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule2021. Based on and as of the time of such evaluation, our management, including the Chief Executive Officer and Chief Financial Officer, concluded that our disclosure2023. Disclosure controls and procedures were effective as of the end of the period covered by this reportrefer to controls and other procedures designed to ensure that information required to be disclosed in the reports that are filedwe file or submittedsubmit under the Securities and Exchange Act of 1934 (the “Exchange Act”) is appropriately recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the Securities and Exchange Commission’s rules and forms.Commission. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure the information required to be disclosed in the reports that are filed or submitted under the Securities Exchange Act of 1934 is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
45
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness for future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
On September 1, 2022, we completed our merger with Neogen Food Safety Corporation, a wholly owned subsidiary of 3M that was created to carve out 3M’s Food Safety Division. We are in the process of evaluating the existing controls and procedures of 3M's Food Safety Division and integrating it into our internal control over financial reporting. In accordance with SEC Staff guidance permitting a company to exclude an acquired business from management’s assessment of the effectiveness of internal control over financial reporting for the year in which the acquisition is completed, management has excluded the business that we acquired from our assessment of the effectiveness of internal control over financial reporting as of May 31, 2023. The business that we acquired in 3M's Food Safety Division represented approximately 82% of the Company’s total assets as of May 31, 2023, 34% of the Company’s revenues and 29% of the Company’s operating income for the year ended May 31, 2023.
Under the supervision of and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, an evaluation was conducted as towe assessed the effectiveness of our internal control over financial reporting as of May 31, 2021, based on2023, using the framework in Internal Control – Integrated Framework (2013) issuedcriteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework (2013). BasedA material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.
Management’s assessment of the Company’s internal control over financial reporting identified the following material weaknesses that evaluation,existed as of May 31, 2023:
46
These control deficiencies create a reasonable possibility that a material misstatement to the consolidated financial statements will not be prevented or detected on a timely basis, and therefore, we concluded that the deficiencies represent material weaknesses. As a result of these material weaknesses, management has concluded that our internal control over financial reporting was not effective as of May 31, 2021. 2023.
Following identification of these material weaknesses and prior to filing this Annual Report on Form 10-K, we completed additional procedures and concluded that our consolidated financial statements included in this Form 10-K have been prepared in accordance with U.S. GAAP and fairly present, in all material respects, the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this Form 10-K.
The Company’s independent registered public accounting firm, BDO USA, P.A., which has audited and reported on our consolidated financial statements, issued an attestation report on the effectiveness of the Company’s internal control over financial reporting as of May 31, 2021 has been audited by BDO USA, LLP, an independent registered public accounting firm, as stated in its attestation report,2023, which is included onin this annual report below.
Plan of Remediation
Management has been implementing and continues to implement measures designed to ensure that control deficiencies contributing to the following pagematerial weaknesses are remediated, such that these controls are designed, implemented, and is incorporated into this Item 9A by reference.
When fully implemented and operational, we believe that these actions will remediate the underlying causes of the material weaknesses and strengthen our internal control over financial reporting. The material weaknesses will not be considered remediated, however, until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.
As we implement these remediation efforts, we may determine that additional steps may be necessary to remediate the material weaknesses. We cannot provide assurance that these remediation efforts will be successful or that our internal control over financial reporting will be effective in accomplishing all control objectives all of the time. We will continue to assess the effectiveness of our remediation efforts in connection with our evaluations of internal control over financial reporting.
Changes in Internal Control over Financial Reporting
Other than the material weaknesses and related remediation efforts described above, and any changes resulting from the business combination described above, no changes in our internal control over financial reporting were identified as having occurred during the quarter ended May 31, 20212023 that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting.
47
Report of Independent Registered Public Accounting Firm
Shareholders and Board of Directors
Neogen Corporation
Lansing, Michigan
Opinion on Internal Control over Financial Reporting
We have audited Neogen Corporation’s (the “Company’s”) internal control over financial reporting as of May 31, 2021,2023, based on criteria established in—– Integrated Framework (2013)maintained,did not maintain, in all material respects, effective internal control over financial reporting as of May 31, 2021,2023, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheets of the Company as of May 31, 20212023 and 2020,2022, the related consolidated statements of income (loss), comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended May 31, 2021,2023, and the related notes and our report dated July 30, 2021August 15, 2023 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Item 9A, Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit of internal control over financial reporting in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. Material weaknesses have been identified and described in management’s assessment. These material weaknesses related to management’s failure to design and maintain effective controls over financial reporting, specifically related to the following: (1) information technology general controls in the areas of user access and change management over certain information technology systems that support the Company’s financial reporting processes, (2) period-end invoice accrual controls and (3) management review controls related to the accounting, valuation and purchase price allocation of the Company’s acquisitions and associated goodwill. These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2023 consolidated financial statements, and this report does not affect our report dated August 15, 2023 on those consolidated financial statements.
As indicated in the accompanying “Item 9A, Changes in Internal Control over Financial Reporting”, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of 3M’s Food Safety Division, which was acquired on September 1, 2022, and which is included in the consolidated balance sheet of the Company as of May 31, 2023, and the related consolidated statements of income (loss), comprehensive income, stockholders’ equity, and cash flows for the year then ended. 3M’s Food Safety Division constituted 82% of total assets as of May 31, 2023, and 34% and 29% of revenues and operating
48
income, respectively, for the year then ended. Management did not assess the effectiveness of internal control over financial reporting of 3M’s Food Safety Division because of the timing of the acquisition which was completed on September 1, 2022. Our audit of internal control over financial reporting of the Company also did not include an evaluation of the internal control over financial reporting of 3M’s Food Safety Division.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ BDO USA, LLP
Grand Rapids, Michigan
August 15, 2023
49
ITEM 9B. OTHER INFORMATION—NONE
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS—NOT APPLICABLE
50
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information regarding the Company and certain corporate governance matters appearing under the captions “Proposal 1—1 — Election of Directors,” “Information About the Board and Corporate Governance Matters,” and “Miscellaneous-Delinquent“Additional Information-Delinquent Section 16(a) Reports” is incorporated by reference to Neogen’s 20212023 proxy statement to be filed within 120 days of May 31, 2021.
We have adopted a Code of Conduct that applies to our directors, officers, and employees. This Code of Conduct is available on our website at
Information About Our Officers and Executive Officers
The officers of Neogen serve at the discretion of the Board of Directors. The names and titles of our officers as of May 31, 20212023 are set forth below.
Name | Position with the Company | Year Joined | ||||
John E. Adent | President & Chief Executive Officer | 2017 | ||||
Robert S. Donofrio, Ph.D. | Chief Scientific Officer | 2016 | ||||
Douglas E. Jones | Chief | 2020 | ||||
Jason W. Lilly, Ph.D. | Vice President, | 2005 | ||||
Julie L. Mann | Chief Human Resources Officer | 2017 | ||||
David H. Naemura | Chief Financial Officer | 2022 | ||||
Steven J. Quinlan | Vice President, | 2011 | ||||
Amy M. Rocklin, Ph.D. | Chief Legal & | 2021 |
Information concerning the officers of Neogen follows:
John E. Adent, age 53,55, joined Neogen as Chief Executive Officer on July 17, 2017 and was then named President on September 22, 2017. Prior to joining Neogen, Mr. Adent served as the Chief Executive Officer of Animal Health International, Inc., formerly known as Lextron, Inc., from 2004 to 2015, also serving as its President during that time. Animal Health International was sold to Patterson Companies, Inc. in 2015, and Mr. Adent served as the Chief Executive Officer of the $3.3 billion Animal Health Division of Patterson Animal Health from that period until his resignation on July 1, 2017. Mr. Adent began his career with management responsibilities for Ralston Purina Company, developing animal feed manufacturing and sales operations in China and the Philippines. When Ralston Purina spun off that business to Agribrands, he continued his management role in the European division in Spain and Hungary, serving as managing director of the Hungarian operations. He left Ralston Purina in 2004.
Dr. Robert S. Donofrio, age 48,50, joined Neogen in February 2016 as Director of Microbiology Research and Development, and was promoted to Director of Food Safety Research and Development in December 2016. In April 2018, Dr. Donofrio was named Vice President, Food Safety Research and Development.Development and then named Vice President, Research and Development in September 2018. In 2022, Dr. Donofrio was named Chief Scientific Officer. Prior to joining Neogen, he worked for 15 years at NSF International in various positions of increasing responsibility, including Director of Microbiology and Molecular Biology and Director of Applied Research, where he led efforts in grant research and method development with partners in academia, industry and government. At Neogen, Dr. Donofrio is responsible for our worldwide food safety and animal safety research activities.
51
Douglas E. Jones, age 51,53, joined Neogen as Chief Commercial Officer on August 17, 2020.2020; in 2022, he was named Chief Operating Officer. Prior to joining Neogen, Mr. Jones served as the President of the Companion Animal Division at Patterson Companies from 2016 to August 2020. Prior to joining Patterson, Mr. Jones served as the Head of Business Operations for the North American Merial Animal Health Division of Sanofi. Mr. Jones began his career as a management consultant with the North Highland Company and PriceWaterhouseCoopers, focusing on commercial transformation and strategy projects in the pharmaceutical, healthcare distribution and high-tech industries.
Dr. Jason W. Lilly, age 47,49, joined Neogen in June 2005 as Market Development Manager for Food Safety. In June 2009, he moved to the Corporate Development group. He was named Vice President of Corporate Development in December 2011, responsible for the identification and acquisition of new business opportunities for the Company. In January 2019, Dr. Lilly was named Vice President, International Business, responsible for Neogen’s operations outside of the U.S. and Canada. In May 2023, Dr. Lilly was named Vice President, Americas & Australia/New Zealand, with responsibility for all commercial business in those regions. He also has strategic and operational oversight of our global genomics business. Prior to joining Neogen, he served in various technical sales and marketing roles at Invitrogen Corporation.
Julie L. Mann, age 56,58, joined Neogen in 2017 as Director of Human Resources and was promoted to Senior Director of Human Resources in June 2019. On June 1,In 2020, Ms. Mann was named Vice President & Chief Human Resources Officer, with responsibilities for people-focused programs and initiatives for Neogen’s more than 1,800 globalworldwide employees. Ms. Mann has more than 30 years of experience focused on all aspects of strategic human resources including talent acquisition, compensation and benefits, employee development and employee relations. Prior to joining Neogen, Ms. Mann held the positions of Director, Talent Acquisition at Holland, a logistics company, and Director, People Services Consulting at Herman Miller.
David H. Naemura, age 57,54, joined Neogen in MayNovember 2022 as Chief Financial Officer. Previously, Mr. Naemura served as the Senior Vice President and Chief Financial Officer of Vontier Corporation from February 2020 until November 2022. Mr. Naemura served as Chief Financial Officer of Gates Industrial Corporation from March 2015 to January 2020. Prior to his time at Gates Industrial Corporation, Mr. Naemura served as Vice President Agrigenomics. Ms. Munson has held positions with increasing responsibilityof Finance and Group Chief Financial Officer at Danaher Corporation from April 2012 to March 2015, and previously served as Danaher Corporation’s Test & Measurement Communications Platform Chief Financial Officer from January 2009 to April 2012. Prior to 2009, Mr. Naemura was employed by Tektronix Corporation from August 2000 to January 2009, including during its acquisition by Danaher Corporation in sales and operations in the life science, biotechnology and agriculture industries for more than 20 years, with an additional seven years of experience in clinical and research labs. In the five years prior to joining Neogen, Ms. Munson was Board Chair at NorthShore Bio, Sr Partner at TNK Associates, LLC (dba Devil Doc Distributors) and provided consulting services at MPower Network. Her previous positions included VP of Global NGS Informatics at Qiagen, VP of Global Business Development and Sales at Biomatrica, Director of Global Sales Operations and America Sales at Illumina, and Global Market/Business Development Manager at Agilent Technologies.
Steven J. Quinlan, age 58,60, joined Neogen in January 2011 as Vice President & Chief Financial Officer and was also Corporate Secretary until March 2021. HeMr. Quinlan announced his retirement in September 2022 and Mr. Naemura was subsequently appointed as Chief Financial Officer, beginning in November 2022. For the remainder of fiscal year 2023, Mr. Quinlan continued to serve the Company as Vice President of Finance and is continuing to work on special projects through the end of the 2023 calendar year. Prior to his retirement announcement, Mr. Quinlan was responsible for all internal and external financial reporting for Neogen, and managesmanaged the accounting, information technology, corporate purchasing, treasury and investor relations functions. Mr. Quinlan came to Neogen following 19 years at Detrex Corporation (1992-2010), the last eight years serving as Vice President-Finance, CFO and Treasurer. He was on the audit staff at the public accounting firm Price Waterhouse (now PWC)PricewaterhouseCoopers) from 1985-1989.
Amy M. Rocklin, Ph.D., age 49,51, joined Neogen in March 2021 as Vice President, General Counsel & Corporate Secretary. In 2022, Dr. Rocklin was named Chief Legal & Compliance Officer. In this role, she is responsible for all legal and compliance matters and also leads the regulatory, quality and ESG functions. Dr. Rocklin also serves as the Corporate Secretary. Prior to joining Neogen, Dr. Rocklin was the Division Vice President, Corporate Law at Corning Incorporated, one of the world’s leading innovators in materials science.Incorporated. In her nearly ten years at
52
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item, and pursuant to Regulation 14A of the Exchange Act, is incorporated by reference from the sections entitled “Compensation Discussion and Analysis”, “Compensation Committee Report”, “Executive Compensation”, “Information About the Board and Corporate Governance Matters-Compensation Committee Interlocks and Insider Participation”, “CEO Pay Ratio”, and “Compensation of Directors” in the Company’s definitive Proxy Statement to be filed within 120 days of May 31, 2021.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT, AND RELATED STOCKHOLDER MATTERS
The information required by this Item, and pursuant to Regulation 14A of the Exchange Act, is incorporated by reference from the section entitled “Security Ownership of Certain Beneficial Owners, Directors and Management” in the Company’s definitive Proxy Statement to be filed within 120 days of May 31, 2021.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this Item, and pursuant to Regulation 14A of the Exchange Act, is incorporated by reference from the section entitled “Information about the Board and Corporate Governance Matters-Independent Directors”Directors,” “Board Committees” and “-Certain“Certain Relationships and Related Party Transactions” in the Company’s definitive Proxy Statement to be filed within 120 days of May 31, 2021.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item, and pursuant to Regulation 14A of the Exchange Act, is incorporated by reference from the section entitled “Proposal 32021.
53
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) (1) and (2) and (c). The response to this portion of ITEM 15 is submitted as a separate section of this report starting on page
(a) (3) and (b). The Exhibits, listed on the accompanying Exhibit Index on page 40, are incorporated herein by reference.
ITEM 16. FORM 10-K SUMMARY — NONE
Neogen Corporation
Annual Report on Form
Year Ended May 31, 2021
EXHIBIT INDEX
EXHIBIT NO. | DESCRIPTION | |
2.1 | ||
2.2 | ||
2.3 | ||
2.4 | ||
3.1 | ||
3.2 | ||
3.3 | ||
3.4 | ||
3.5 | ||
3.6 | ||
3.7 | ||
4.1 |
54
EXHIBIT NO. | DESCRIPTION | |
4.2 | ||
10.1 | ||
10.2 | ||
10.3 | ||
10.4 | ||
10.5 | ||
10.6 | ||
10.7 | ||
10.8 | ||
10.9 | ||
21 | ||
| Listing of Subsidiaries | ||
23 | Consent of Independent Registered Public Accounting Firm BDO USA, | |
24 | ||
31.1 | ||
31.2 | ||
32 | ||
101.INS | Inline XBRL Instance Document | |
101.SCH | Inline XBRL Taxonomy Extension Schema Document | |
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF | Inline XBRL Taxonomy Extension Definition Document | |
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | |
55
EXHIBIT NO. | DESCRIPTION | |
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
104 | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) |
56
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
NEOGEN CORPORATION | ||||||||||
By: | /s/ John E. Adent | By: | /s/ | |||||||
John E. Adent, President & Chief | David H. Naemura, | |||||||||
Executive Officer | Chief Financial Officer | |||||||||
(Principal Executive Officer) | (Principal Financial & Accounting Officer) | |||||||||
Dated: July 30, 2021
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature | Title | Date | ||||
President & Chief Executive Officer | ||||||
/s/ John E. Adent | (Principal Executive Officer) | August 15, 2023 | ||||
John E. Adent | ||||||
Chief Financial Officer | ||||||
/s/ David H. Naemura | (Principal Financial & Accounting Officer) | August 15, 2023 | ||||
David H. Naemura | ||||||
* | Chairman of the Board of Directors | August 15, 2023 | ||||
James C. Borel | ||||||
* | Director | August 15, 2023 | ||||
William T. Boehm, Ph.D. | ||||||
* | Director | August 15, 2023 | ||||
Jeffrey D. Capello | ||||||
* | Director | August 15, 2023 | ||||
Ronald D. Green, Ph.D. | ||||||
* | Director | August 15, 2023 | ||||
Aashima Gupta | ||||||
* | Director | August 15, 2023 | ||||
Raphael A. Rodriguez | ||||||
* | Director | August 15, 2023 | ||||
James P. Tobin | ||||||
* | Director | August 15, 2023 | ||||
Darci L. Vetter | ||||||
57
Signature | Title | Date | |||||
* | Director | August 15, 2023 | |||||
Catherine E. Woteki, Ph.D. | |||||||
*By: | /s/ John E. Adent | ||||||
John E. Adent, | |||||||
| Attorney-in-fact | |||||||
(Principal Financial & Accounting Officer) | |||||||
August 15, 2023 | |||||||
58
ANNUAL REPORT ON FORM
ITEM 15 (a)(1)(a)(2) and (c)
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
YEAR ENDED MAY 31, 2021
NEOGEN CORPORATION
LANSING, MICHIGAN
FORM
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
The following consolidated financial statements of Neogen Corporation and subsidiaries are included below and incorporated in ITEM 8:
| BDO USA, P.A., Grand Rapids, MI PCAOB ID# 243 | F-2 | |
| Sheets | F-4 | |
| Income (Loss) | F-6 | |
| Income | F-7 | |
| Equity | F-8 | |
| Flows | F-9 | |
Notes to Consolidated Financial Statements | F-10 |
Schedules for which provision is made in the applicable accounting regulation of the United States Securities and Exchange Commission are not required under the related instructions or are inapplicable and, therefore, have been omitted.
F-1
Report of Independent Registered Public Accounting Firm
Shareholders and Board of Directors
Neogen Corporation
Lansing, Michigan
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Neogen Corporation (the “Company”) as of May 31, 20212023 and 2020,2022, the related consolidated statements of income (loss), comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended May 31, 2021,2023, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at May 31, 20212023 and 2020,2022, and the results of its operations and its cash flows for each of the three years in the period ended May 31, 2021,
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of May 31, 2021,2023, based on criteria established inJuly 30, 2021August 15, 2023 expressed an unqualifiedadverse opinion thereon.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates it relates.
Valuation of the Accounting for Income Taxes
As described in Notes 1 and 6Note 3 to the consolidated financial statements, on September 1, 2022, the Company recorded income tax expensecompleted a transaction combining 3M’s Food Safety Division with Neogen in a Reverse Morris Trust transaction for consideration of approximately $3.2 billion, which resulted in recording of a customer relationships intangible asset valued at $1.17 billion. Management determined the fair value of the acquired customer relationships intangible asset by applying the multi-period excess earnings method, which involved the use of significant estimates and assumptions related to U.S.forecasted revenue growth rate and Foreign tax paying jurisdictions totaling $14.39 million for the year ended May 31, 2021. International components of U.S. income taxes have a significant impact on total income tax expense including global intangiblelow-taxedincome and Subpart F income representing $2.69 million of expense and foreign derived intangible income deduction and foreign tax credits which provide income tax benefit of $3.96 million. The Company’s accounting for income taxes involves the application of tax regulations in each of the tax paying jurisdictions in which it operates. The determination of income subject to income tax in each tax paying jurisdiction requires management to apply transfer pricing guidelines for certain intercompany transactions. Additionally, the Company is entitled to claim foreign tax credits for taxes paid in international tax paying jurisdictions. Management’s assumptions and allocations used in the determination of the foreign tax credits are based on current interpretations of complex income tax regulations and can have a material effect on the calculation of U.S. income taxes.
F-2
We identified the assumptions and allocations used to calculate international componentsvaluation of U.S. income taxes to bethe customer relationship intangible asset from the 3M Food Safety Division transaction as a critical audit matter. TheseThe principal considerations for this determination are the significant judgments and assumptions made by management when determining the fair value of the customer relationships intangible asset, specifically the forecasted revenue growth rate and allocations include: (i) technical merit of tax positions including considerations related to transfer pricing guidelines for certain intercompany transactions, and (ii) allocation methodologies that are subjective in nature.customer attrition rate. Auditing these assumptions and allocationselements involved especially subjective auditor judgment due to the complexitynature and extent of audit effort required to address these matters, including the extent of specialized skills or knowledge needed.
The primary procedures we performed to address this critical audit matter included:
/s/ BDO USA, LLP
We have served as the Company’s auditor since 2014.
Grand Rapids, Michigan
August 15, 2023
F-3
Neogen Corporation and Subsidiaries
Consolidated Balance Sheets – Assets
(in thousands)
May 31 | ||||||||
2021 | 2020 | |||||||
Assets | ||||||||
Current Assets | ||||||||
Cash and cash equivalents | $ | 75,602 | $ | 66,269 | ||||
Marketable securities | 305,485 | 277,404 | ||||||
Accounts receivable, net of allowance of $1,400 and $1,350 at May 31, 2021 and 2020, respectively | 91,823 | 84,681 | ||||||
Inventories | 100,701 | 95,053 | ||||||
Prepaid expenses and other current assets | 17,840 | 13,999 | ||||||
Total Current Assets | 591,451 | 537,406 | ||||||
Property and Equipment | ||||||||
Land and improvements | 7,783 | 5,456 | ||||||
Building and improvements | 72,754 | 48,881 | ||||||
Machinery and equipment | 108,194 | 90,351 | ||||||
Furniture and fixtures | 6,270 | 4,324 | ||||||
Construction in progress | 3,261 | 4,968 | ||||||
| 198,262 | 153,980 | |||||||
Less accumulated depreciation | (97,809 | ) | (75,309 | ) | ||||
Net Property and Equipment | 100,453 | 78,671 | ||||||
Other Assets | ||||||||
Right of use assets | 2,477 | 1,952 | ||||||
Goodwill | 131,476 | 110,340 | ||||||
Other non-amortizable intangible assets | 15,545 | 15,217 | ||||||
Amortizable intangible assets, net of accumulated amortization of $53,462 and $44,690 at May 31, 2021 and 2020, respectivel y | 76,771 | 51,364 | ||||||
Other non-current assets | 2,019 | 2,232 | ||||||
Total Other Assets | 228,288 | 181,105 | ||||||
Total Assets | $ | 920,192 | $ | 797,182 | ||||
| May 31 |
| ||||||
| 2023 |
|
| 2022 |
| |||
Assets |
|
|
|
|
|
| ||
Current Assets |
|
|
|
|
|
| ||
Cash and cash equivalents |
| $ | 163,240 |
|
| $ | 44,473 |
|
Marketable securities |
|
| 82,329 |
|
|
| 336,578 |
|
Accounts receivable, net |
|
| 153,253 |
|
|
| 99,674 |
|
Inventories |
|
| 133,812 |
|
|
| 122,313 |
|
Prepaid expenses and other current assets |
|
| 53,297 |
|
|
| 23,760 |
|
Total Current Assets |
|
| 585,931 |
|
|
| 626,798 |
|
Property and Equipment |
|
|
|
|
|
| ||
Land and improvements |
|
| 10,209 |
|
|
| 9,485 |
|
Building and improvements |
|
| 96,794 |
|
|
| 79,513 |
|
Machinery and equipment |
|
| 152,547 |
|
|
| 114,180 |
|
Furniture and fixtures |
|
| 7,080 |
|
|
| 6,307 |
|
Construction in progress |
|
| 52,237 |
|
|
| 5,974 |
|
|
| 318,867 |
|
|
| 215,459 |
| |
Less accumulated depreciation |
|
| (120,118 | ) |
|
| (104,875 | ) |
Net Property and Equipment |
|
| 198,749 |
|
|
| 110,584 |
|
Other Assets |
|
|
|
|
|
| ||
Right of use assets |
|
| 11,933 |
|
|
| 3,184 |
|
Goodwill |
|
| 2,137,496 |
|
|
| 142,704 |
|
Other non-amortizable intangible assets |
|
| 14,316 |
|
|
| 15,397 |
|
Amortizable intangible assets, net |
|
| 1,590,787 |
|
|
| 92,106 |
|
Other non-current assets |
|
| 15,220 |
|
|
| 2,156 |
|
Total Other Assets |
|
| 3,769,752 |
|
|
| 255,547 |
|
Total Assets |
| $ | 4,554,432 |
|
| $ | 992,929 |
|
See accompanying notes to consolidated financial statements.
F-4
Neogen Corporation and Subsidiaries
Consolidated Balance Sheets – Liabilities and Stockholders’ Equity
(in thousands, except shareshares and per share)
May 31 | ||||||||
2021 | 2020 | |||||||
Liabilities and Stockholders’ Equity | ||||||||
Current Liabilities | ||||||||
Accounts payable | $ | 23,900 | $ | 25,650 | ||||
Accruals | ||||||||
Accrued compensation | 11,251 | 7,735 | ||||||
Income taxes | 1,848 | 1,456 | ||||||
Other accruals | 16,600 | 13,648 | ||||||
Total Current Liabilities | 53,599 | 48,489 | ||||||
Deferred Income Taxes | 21,917 | 18,125 | ||||||
Other Non-Current Liabilities | 4,299 | 5,391 | ||||||
Total Liabilities | 79,815 | 72,005 | ||||||
Commitments and Contingencies (note 7) | 0 | 0 | ||||||
Stockholders’ Equity | ||||||||
Preferred stock, $1.00 par value — shares authorized 100,000; NaN issued and outstanding | 0 | 0 | ||||||
Common stock, $0.16 par value — shares authorized 120,000,000; 107,468,304 and 105,891,682 shares issued and outstanding at May 31, 2021 and 2020, respectively | 17,195 | 16,943 | ||||||
Additional paid-in capital | 294,953 | 249,221 | ||||||
Accumulated other comprehensive loss | (11,375 | ) | (19,709 | ) | ||||
Retained earnings | 539,604 | 478,722 | ||||||
Total Neogen Corporation and Subsidiaries Stockholders’ Equity | 840,377 | 725,177 | ||||||
Total Liabilities and Stockholders’ Equity | $ | 920,192 | $ | 797,182 | ||||
| May 31 |
| ||||||
| 2023 |
|
| 2022 |
| |||
Liabilities and Stockholders’ Equity |
|
|
|
|
|
| ||
Current Liabilities |
|
|
|
|
|
| ||
Accounts payable |
| $ | 76,669 |
|
| $ | 34,614 |
|
Accrued compensation |
|
| 25,153 |
|
|
| 11,123 |
|
Income tax payable |
|
| 6,951 |
|
|
| 2,126 |
|
Accrued interest |
|
| 11,149 |
|
|
| — |
|
Deferred revenue |
|
| 4,616 |
|
|
| 5,460 |
|
Other accruals |
|
| 20,934 |
|
|
| 24,521 |
|
Total Current Liabilities |
|
| 145,472 |
|
|
| 77,844 |
|
Deferred Income Tax Liability |
|
| 353,427 |
|
|
| 17,011 |
|
Non-Current Debt |
|
| 885,439 |
|
|
| — |
|
Other Non-Current Liabilities |
|
| 35,877 |
|
|
| 10,700 |
|
Total Liabilities |
|
| 1,420,215 |
|
|
| 105,555 |
|
Commitments and Contingencies (note 7) |
|
|
|
|
|
| ||
Stockholders’ Equity |
|
|
|
|
|
| ||
Preferred stock, $1.00 par value — shares authorized 100,000; none issued |
|
| — |
|
|
| — |
|
Common stock, $0.16 par value — shares authorized 315,000,000; 216,245,501 and 107,801,094 shares issued and outstanding at May 31, 2023 and 2022, respectively |
|
| 34,599 |
|
|
| 17,248 |
|
Additional paid-in capital |
|
| 2,567,828 |
|
|
| 309,984 |
|
Accumulated other comprehensive loss |
|
| (33,251 | ) |
|
| (27,769 | ) |
Retained earnings |
|
| 565,041 |
|
|
| 587,911 |
|
Total Stockholders’ Equity |
|
| 3,134,217 |
|
|
| 887,374 |
|
Total Liabilities and Stockholders’ Equity |
| $ | 4,554,432 |
|
| $ | 992,929 |
|
See accompanying notes to consolidated financial statements.
F-5
Neogen Corporation and Subsidiaries
Consolidated Statements of Income
(in thousands, except per share)
Year Ended May 31 | ||||||||||||
2021 | 2020 | 2019 | ||||||||||
Revenues | ||||||||||||
Product revenues | $ | 376,302 | $ | 335,539 | $ | 339,439 | ||||||
Service revenues | 92,157 | 82,631 | 74,747 | |||||||||
Total Revenues | 468,459 | 418,170 | 414,186 | |||||||||
Cost of Revenues | ||||||||||||
Cost of product revenues | 201,348 | 173,566 | 179,660 | |||||||||
Cost of service revenues | 52,055 | 48,325 | 42,606 | |||||||||
Total Cost of Revenues | 253,403 | 221,891 | 222,266 | |||||||||
Gross Margin | 215,056 | 196,279 | 191,920 | |||||||||
Operating Expenses | ||||||||||||
Sales and marketing | 73,443 | 69,675 | 70,230 | |||||||||
General and administrative | 51,197 | 44,331 | 40,791 | |||||||||
Research and development | 16,247 | 14,750 | 12,805 | |||||||||
Total Operating Expenses | 140,887 | 128,756 | 123,826 | |||||||||
Operating Income | 74,169 | 67,523 | 68,094 | |||||||||
Other Income | ||||||||||||
Interest income, net | 1,614 | 5,992 | 4,683 | |||||||||
Royalty income | — | — | 150 | |||||||||
Other, net | (515 | ) | (1,210 | ) | 32 | |||||||
Total Other Income | 1,099 | 4,782 | 4,865 | |||||||||
Income Before Income Taxes | 75,268 | 72,305 | 72,959 | |||||||||
Provision for Income Taxes | 14,386 | 12,830 | 12,783 | |||||||||
Net Income | $ | 60,882 | $ | 59,475 | $ | 60,176 | ||||||
| Net Income per Share | ||||||||||||
Basic | $ | 0.57 | $ | 0.57 | $ | 0.58 | ||||||
Diluted | $ | 0.57 | $ | 0.56 | $ | 0.57 | ||||||
Weighted Average Shares Outstanding | ||||||||||||
Basic | 106,499 | 105,100 | 103,776 | |||||||||
Diluted | 107,120 | 105,720 | 104,850 | |||||||||
| Year Ended May 31 |
| ||||||||||
| 2023 |
|
| 2022 |
|
| 2021 |
| ||||
Revenues |
|
|
|
|
|
|
|
|
| |||
Product revenues, net |
| $ | 715,076 |
|
| $ | 424,664 |
|
| $ | 376,302 |
|
Service revenues, net |
|
| 107,371 |
|
|
| 102,495 |
|
|
| 92,157 |
|
Total Revenues, net |
|
| 822,447 |
|
|
| 527,159 |
|
|
| 468,459 |
|
Cost of Revenues |
|
|
|
|
|
|
|
|
| |||
Cost of product revenues |
|
| 354,707 |
|
|
| 228,017 |
|
|
| 201,348 |
|
Cost of service revenues |
|
| 61,785 |
|
|
| 56,129 |
|
|
| 52,055 |
|
Total Cost of Revenues |
|
| 416,492 |
|
|
| 284,146 |
|
|
| 253,403 |
|
Gross Margin |
|
| 405,955 |
|
|
| 243,013 |
|
|
| 215,056 |
|
Operating Expenses |
|
|
|
|
|
|
|
|
| |||
Sales and marketing |
|
| 141,222 |
|
|
| 84,604 |
|
|
| 73,443 |
|
General and administrative |
|
| 201,179 |
|
|
| 82,742 |
|
|
| 51,197 |
|
Research and development |
|
| 26,039 |
|
|
| 17,049 |
|
|
| 16,247 |
|
Total Operating Expenses |
|
| 368,440 |
|
|
| 184,395 |
|
|
| 140,887 |
|
Operating Income |
|
| 37,515 |
|
|
| 58,618 |
|
|
| 74,169 |
|
Other (Expense) Income |
|
|
|
|
|
|
|
|
| |||
Interest income |
|
| 3,166 |
|
|
| 1,339 |
|
|
| 1,692 |
|
Interest expense |
|
| (55,961 | ) |
|
| (72 | ) |
|
| (78 | ) |
Other, net |
|
| (6,762 | ) |
|
| 322 |
|
|
| (515 | ) |
Total Other (Expense) Income |
|
| (59,557 | ) |
|
| 1,589 |
|
|
| 1,099 |
|
(Loss) Income Before Taxes |
|
| (22,042 | ) |
|
| 60,207 |
|
|
| 75,268 |
|
Provision for Income Taxes |
|
| 828 |
|
|
| 11,900 |
|
|
| 14,386 |
|
Net (Loss) Income |
| $ | (22,870 | ) |
| $ | 48,307 |
|
| $ | 60,882 |
|
Net (Loss) Income Per Share |
|
|
|
|
|
|
|
|
| |||
Basic |
| $ | (0.12 | ) |
| $ | 0.45 |
|
| $ | 0.57 |
|
Diluted |
| $ | (0.12 | ) |
| $ | 0.45 |
|
| $ | 0.57 |
|
Weighted Average Shares Outstanding |
|
|
|
|
|
|
|
|
| |||
Basic |
|
| 188,881 |
|
|
| 107,684 |
|
|
| 106,499 |
|
Diluted |
|
| 188,881 |
|
|
| 108,020 |
|
|
| 107,120 |
|
See accompanying notes to consolidated financial statements.
F-6
Neogen Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income
(in thousands)
Year Ended May 31 | ||||||||||||
2021 | 2020 | 2019 | ||||||||||
Net Income | $ | 60,882 | $ | 59,475 | $ | 60,176 | ||||||
| Other comprehensive income (loss), net of tax: foreign currency translations | 8,602 | (8,495 | ) | (1,894 | ) | |||||||
| Other comprehensive income (loss), net of tax: unrealized gain on marketable securities | (268 | ) | 426 | — | ||||||||
Comprehensive income | $ | 69,216 | $ | 51,406 | $ | 58,282 | ||||||
| Year Ended May 31 |
| ||||||||||
| 2023 |
|
| 2022 |
|
| 2021 |
| ||||
Net (Loss) Income |
| $ | (22,870 | ) |
| $ | 48,307 |
|
| $ | 60,882 |
|
Other comprehensive (loss) income: |
|
|
|
|
|
|
|
|
| |||
Foreign currency translations |
|
| (4,796 | ) |
|
| (13,955 | ) |
|
| 8,602 |
|
Unrealized gain (loss) on marketable securities, net of tax of $389, $(728), and $(80) |
|
| 1,353 |
|
|
| (2,439 | ) |
|
| (268 | ) |
Unrealized loss on derivative instruments, net of tax of $(644) |
|
| (2,039 | ) |
|
| - |
|
|
| - |
|
Other comprehensive (loss) income, net of tax: |
|
| (5,482 | ) |
|
| (16,394 | ) |
|
| 8,334 |
|
Comprehensive (loss) income |
| $ | (28,352 | ) |
| $ | 31,913 |
|
| $ | 69,216 |
|
See accompanying notes to consolidated financial statements.
F-7
Neogen Corporation and Subsidiaries
Consolidated Statements of Stockholders’ Equity
(in thousands, except shares)
Accumulated | ||||||||||||||||||||||||||||
Common Stock | Additional Paid-in | Other Comprehensive | Retained | Non- Controlling | Total | |||||||||||||||||||||||
Shares | Amount | Capital | Income (Loss) | Earnings | Interest | Equity | ||||||||||||||||||||||
Balance, June 1, 2018 | 103,471,464 | $ | 16,555 | $ | 194,295 | $ (9,746) | $ | 359,071 | $ | 0 | $ | 560,175 | ||||||||||||||||
Exercise of options and share-based compensation expense | 1,025,054 | 164 | 21,253 | — | — | — | 21,417 | |||||||||||||||||||||
Issuance of shares under employee stock purchase plan | 36,660 | 6 | 1,154 | — | — | — | 1,160 | |||||||||||||||||||||
Shares repurchased | (100,000 | ) | (16 | ) | (3,119 | ) | — | — | — | (3,135 | ) | |||||||||||||||||
Net income for 2019 | — | — | — | — | 60,176 | 0 | 60,176 | |||||||||||||||||||||
Other comprehensive loss | — | — | — | (1,894 | ) | — | — | (1,894 | ) | |||||||||||||||||||
Balance, May 31, 2019 | 104,433,178 | $ | 16,709 | $ | 213,583 | $ (11,640) | $ | 419,247 | $ | 0 | $ | 637,899 | ||||||||||||||||
Exercise of options and share-based compensation expense | 1,415,348 | 227 | 34,452 | — | — | — | 34,679 | |||||||||||||||||||||
Issuance of shares under employee stock purchase plan | 43,156 | 7 | 1,186 | — | — | — | 1,193 | |||||||||||||||||||||
Net income for 2020 | — | — | — | — | 59,475 | — | 59,475 | |||||||||||||||||||||
Other comprehensive loss | — | — | — | (8,069 | ) | — | — | (8,069 | ) | |||||||||||||||||||
Balance, May 31, 2020 | 105,891,682 | $ | 16,943 | $ | 249,221 | $ (19,709) | $ | 478,722 | $ | — | $ | 725,177 | ||||||||||||||||
Exercise of options and share-based compensation expense | 1,410,948 | 226 | 39,454 | — | — | — | 39,680 | |||||||||||||||||||||
Issuance of shares under employee stock purchase plan | 38,406 | 6 | 1,382 | — | — | — | 1,388 | |||||||||||||||||||||
Issuance of shares for Megazyme acquisition | 127,268 | 20 | 4,896 | — | — | — | 4,916 | |||||||||||||||||||||
Net income for 2021 | — | — | — | 0 | 60,882 | — | 60,882 | |||||||||||||||||||||
| Other comprehensive gain | — | — | — | 8,334 | — | — | 8,334 | |||||||||||||||||||||
Balance, May 31, 2021 | 107,468,304 | $ | 17,195 | $ | 294,953 | $ (11,375) | $ | 539,604 | $ | — | $ | 840,377 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
| Accumulated |
|
|
|
|
|
|
| |||||||
|
|
|
|
|
|
|
| Additional |
|
| Other |
|
|
|
|
|
|
| ||||||
|
| Common Stock |
|
| Paid-in |
|
| Comprehensive |
|
| Retained |
|
| Total |
| |||||||||
| Shares |
|
| Amount |
|
| Capital |
|
| Income (Loss) |
|
| Earnings |
|
| Equity |
| |||||||
Balance, June 1, 2020 |
|
| 105,891,682 |
|
| $ | 16,943 |
|
| $ | 249,221 |
|
| $ | (19,709 | ) |
| $ | 478,722 |
|
| $ | 725,177 |
|
Exercise of options, RSUs and share-based compensation expense |
|
| 1,410,948 |
|
|
| 226 |
|
|
| 39,454 |
|
|
| — |
|
|
| — |
|
|
| 39,680 |
|
Issuance of shares under employee stock purchase plan |
|
| 38,406 |
|
|
| 6 |
|
|
| 1,382 |
|
|
| — |
|
|
| — |
|
|
| 1,388 |
|
Issuance of shares for Megazyme acquisition |
|
| 127,268 |
|
|
| 20 |
|
|
| 4,896 |
|
|
| — |
|
|
| — |
|
|
| 4,916 |
|
Net income for 2021 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 60,882 |
|
|
| 60,882 |
|
Other comprehensive income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 8,334 |
|
|
| — |
|
|
| 8,334 |
|
Balance, May 31, 2021 |
|
| 107,468,304 |
|
| $ | 17,195 |
|
| $ | 294,953 |
|
| $ | (11,375 | ) |
| $ | 539,604 |
|
| $ | 840,377 |
|
Exercise of options, RSUs and share-based compensation expense |
|
| 289,334 |
|
|
| 46 |
|
|
| 13,162 |
|
|
| — |
|
|
| — |
|
|
| 13,208 |
|
Issuance of shares under employee stock purchase plan |
|
| 43,456 |
|
|
| 7 |
|
|
| 1,869 |
|
|
| — |
|
|
| — |
|
|
| 1,876 |
|
Net income for 2022 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 48,307 |
|
|
| 48,307 |
|
Other comprehensive loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (16,394 | ) |
|
| — |
|
|
| (16,394 | ) |
Balance, May 31, 2022 |
|
| 107,801,094 |
|
| $ | 17,248 |
|
| $ | 309,984 |
|
| $ | (27,769 | ) |
|
| 587,911 |
|
| $ | 887,374 |
|
Exercise of options, RSUs and share-based compensation expense |
|
| 79,857 |
|
|
| 13 |
|
|
| 10,483 |
|
|
| — |
|
|
| — |
|
|
| 10,496 |
|
Issuance of shares under employee stock purchase plan |
|
| 94,604 |
|
|
| 15 |
|
|
| 1,843 |
|
|
| — |
|
|
| — |
|
|
| 1,858 |
|
Issuance of shares for 3M transaction |
|
| 108,269,946 |
|
|
| 17,323 |
|
|
| 2,245,518 |
|
|
|
|
|
|
|
|
| 2,262,841 |
| ||
Net loss for 2023 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (22,870 | ) |
|
| (22,870 | ) |
Other comprehensive loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (5,482 | ) |
|
| — |
|
|
| (5,482 | ) |
Balance, May 31, 2023 |
|
| 216,245,501 |
|
| $ | 34,599 |
|
| $ | 2,567,828 |
|
| $ | (33,251 | ) |
| $ | 565,041 |
|
| $ | 3,134,217 |
|
See accompanying notes to consolidated financial statements.
F-8
Neogen Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
Year Ended May 31 | ||||||||||||
2021 | 2020 | 2019 | ||||||||||
Cash Flows From Operating Activities | ||||||||||||
Net income | $ | 60,882 | $ | 59,475 | $ | 60,176 | ||||||
Adjustments to reconcile net income to net cash provided from operating activities: | ||||||||||||
Depreciation and amortization | 21,041 | 18,396 | 17,624 | |||||||||
Deferred income taxes | (640 | ) | 1,601 | 1,197 | ||||||||
Share-based compensation | 6,437 | 6,468 | 5,543 | |||||||||
Changes in operating assets and liabilities, net of business acquisitions: | ||||||||||||
Accounts receivable | (2,595 | ) | (2,881 | ) | (4,025 | ) | ||||||
Inventories | 2,450 | (10,011 | ) | (10,437 | ) | |||||||
Prepaid expenses and other assets | (3,386 | ) | (1,017 | ) | (3,569 | ) | ||||||
Accounts payable | (3,206 | ) | 6,745 | (1,461 | ) | |||||||
Accruals and other changes | 106 | 7,102 | (1,206 | ) | ||||||||
Net Cash From Operating Activities | 81,089 | 85,878 | 63,842 | |||||||||
| Cash Flows Used for Investing Activities | ||||||||||||
Purchase of property, equipment and other non-current intangible assets | (26,712 | ) | (24,052 | ) | (14,661 | ) | ||||||
| Proceeds from the maturities of marketable securities | 764,597 | 406,731 | 339,225 | |||||||||
Purchase of marketable securities | (792,678 | ) | (458,300 | ) | (437,324 | ) | ||||||
Business acquisitions, net of cash acquired | (50,771 | ) | (13,164 | ) | (6,388 | ) | ||||||
Net Cash Used for Investing Activitie s | (105,564 | ) | (88,785 | ) | (119,148 | ) | ||||||
Cash Flows From Financing Activities | ||||||||||||
Exercise of stock options and other | 34,631 | 29,405 | 17,034 | |||||||||
| Payment of contingent consideration | (1,087 | ) | — | — | ||||||||
| Repurchase of common stock | — | — | (3,135 | ) | ||||||||
Net Cash From Financing Activities | 33,544 | 29,405 | 13,899 | |||||||||
| Effects of Foreign Exchange Rate on Cash | 264 | (1,917 | ) | 21 | ||||||||
| Net Increase (Decrease) in Cash and Cash Equivalents | 9,333 | 24,581 | (41,386 | ) | ||||||||
Cash and Cash Equivalents, Beginning of Year | 66,269 | 41,688 | 83,074 | |||||||||
Cash and Cash Equivalents, End of Year | $ | 75,602 | $ | 66,269 | $ | 41,688 | ||||||
Supplementary Cash Flow Information | ||||||||||||
Income taxes paid, net of refunds | $ | 14,966 | $ | 7,364 | $ | 13,027 | ||||||
| Year Ended May 31 |
| ||||||||||
| 2023 |
|
| 2022 |
|
| 2021 |
| ||||
Cash Flows From Operating Activities |
|
|
|
|
|
|
|
|
| |||
Net (loss) income |
| $ | (22,870 | ) |
| $ | 48,307 |
|
| $ | 60,882 |
|
Adjustments to reconcile net (loss) income to net cash from operating activities: |
|
|
|
|
|
|
|
|
| |||
Depreciation and amortization |
|
| 88,377 |
|
|
| 23,694 |
|
|
| 21,041 |
|
Impairment of discontinued product lines |
|
| 3,109 |
|
|
| — |
|
|
| — |
|
Loss on sale of minority interest and investment |
|
| 2,016 |
|
|
| — |
|
|
| — |
|
Deferred income taxes |
|
| (19,230 | ) |
|
| (4,695 | ) |
|
| (640 | ) |
Share-based compensation |
|
| 10,177 |
|
|
| 7,154 |
|
|
| 6,437 |
|
Gain on disposal of property and equipment |
|
| (486 | ) |
|
| — |
|
|
| — |
|
Amortization of debt issuance costs |
|
| 2,720 |
|
|
| — |
|
|
| — |
|
Changes in operating assets and liabilities, net of business acquisitions: |
|
|
|
|
|
|
|
|
| |||
Accounts receivable |
|
| (53,879 | ) |
|
| (7,798 | ) |
|
| (2,595 | ) |
Inventories |
|
| 9,955 |
|
|
| (21,072 | ) |
|
| 2,450 |
|
Prepaid expenses and other assets |
|
| (3,121 | ) |
|
| (4,054 | ) |
|
| (3,386 | ) |
Accounts payable, accruals and changes |
|
| 18,642 |
|
|
| 20,238 |
|
|
| (2,221 | ) |
Interest expense accrual |
|
| 4,052 |
|
|
| — |
|
|
| — |
|
Changes in other non-current assets and non-current liabilities |
|
| 1,566 |
|
|
| 6,264 |
|
|
| (879 | ) |
Net Cash From Operating Activities |
|
| 41,028 |
|
|
| 68,038 |
|
|
| 81,089 |
|
Cash Flows From (For) Investing Activities |
|
|
|
|
|
|
|
|
| |||
Purchase of property, equipment and other non-current intangible assets |
|
| (65,757 | ) |
|
| (24,429 | ) |
|
| (26,712 | ) |
Proceeds from the maturities of marketable securities |
|
| 266,772 |
|
|
| 381,839 |
|
|
| 764,597 |
|
Purchase of marketable securities |
|
| (12,523 | ) |
|
| (415,894 | ) |
|
| (792,678 | ) |
Proceeds from the sale of property and equipment |
|
| 826 |
|
|
| — |
|
|
| — |
|
Business acquisitions, net of working capital adjustments and cash acquired |
|
| 11,721 |
|
|
| (38,745 | ) |
|
| (50,771 | ) |
Net Cash From (For) Investing Activities |
|
| 201,039 |
|
|
| (97,229 | ) |
|
| (105,564 | ) |
Cash Flows (For) From Financing Activities |
|
|
|
|
|
|
|
|
| |||
Exercise of stock options and issuance of employee stock purchase plan shares |
|
| 1,195 |
|
|
| 7,933 |
|
|
| 34,631 |
|
Debt issuance costs paid |
|
| (19,276 | ) |
|
| — |
|
|
| — |
|
Repayment of debt |
|
| (100,000 | ) |
|
| — |
|
|
| — |
|
Payment of contingent consideration |
|
| — |
|
|
| (1,120 | ) |
|
| (1,087 | ) |
Net Cash (For) From Financing Activities |
|
| (118,081 | ) |
|
| 6,813 |
|
|
| 33,544 |
|
Effects of Foreign Exchange Rate on Cash |
|
| (5,219 | ) |
|
| (8,751 | ) |
|
| 264 |
|
Net Increase (Decrease) in Cash and Cash Equivalents |
|
| 118,767 |
|
|
| (31,129 | ) |
|
| 9,333 |
|
Cash and Cash Equivalents, Beginning of Year |
|
| 44,473 |
|
|
| 75,602 |
|
|
| 66,269 |
|
Cash and Cash Equivalents, End of Year |
| $ | 163,240 |
|
| $ | 44,473 |
|
| $ | 75,602 |
|
Supplementary Cash Flow Information |
|
|
|
|
|
|
|
|
| |||
Cash paid for interest |
| $ | 42,616 |
|
| $ | 72 |
|
| $ | 78 |
|
Income taxes paid, net of refunds |
| $ | 15,473 |
|
| $ | 17,242 |
|
| $ | 14,966 |
|
See accompanying notes to consolidated financial statements.
F-9
NEOGEN CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands except per share and share amounts)
Neogen Corporation and Subsidiaries
Neogen’s Animal Safety segment is engaged in the development, manufacture, marketing and distribution of veterinary instruments, pharmaceuticals, vaccines, topicals, parasiticides, diagnostic products, rodent control products, cleaners, disinfectants, insect control products and genomics testing services for the worldwide animal safety market. The majority of these consumable products are marketed through veterinarians, retailers, livestock producers and animal health product distributors. Our line of drug detection products is sold worldwide for the detection of abused and therapeutic drugs in animals and animal products, and has expanded into the workplace and human forensic markets.
Basis of Consolidation
The consolidated financial statements include the accounts of Neogen Corporation and its subsidiaries, all of which are wholly-owned as of May 31, 2021.
All intercompany accounts and transactions have been eliminated in consolidation.
Share and per share amounts reflect the June
Functional Currency
Our functional currency is the U.S. dollar. We translate our
F-10
Recently Adopted Accounting Standards
Acquired contract assets and liabilities in a business combination
On June 1, 2020,2023, the Company adopted ASU No.2016-13—MeasurementCredit Losses on Financial Instruments, which changes howacquisition, recognize and measure contract assets and contract liabilities acquired in accordance with ASU 2014-09, Revenue from Contracts with Customers (Topic 606) as if the Company measures credit losses on most financial instruments measured at amortized cost and certain other instruments, such as loans, receivables andheld-to-maturitydebt securities. Rather than generally recognizing credit losses when it is probable thatentity had originated the loss has been incurred, the revised guidance requires the Company to recognize an allowance for credit losses for the difference between the amortized cost basis of a financial instrument and the amount of amortized cost that the Company expects to collect over the instrument’s contractual life. The adoptioncontracts. Adoption of this guidancestandard did not have a material impact on ourits consolidated financial statements due to the Company’s short-term contractual life of receivables and minimal expected losses.
Reference Rate Reform
On JuneSeptember 1, 2020,2022, the Company adopted ASU2018-13,Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement, which modifies the disclosure requirements of fair value measurements. The adoption of this guidance did not have an impact on our consolidated financial statements.
Accounting Standards Board (“FASB”) issued UpdatePolicies
(in thousands) | Foreign Currency Translation Adjustments | Unrealized Gain on Marketable Securities | Total AOCI | |||||||||
Balance, May 31, 2019 | $ | (11,640 | ) | $ | — | $ | (11,640 | ) | ||||
Other comprehensive income (loss) | (8,495 | ) | 426 | (8,069 | ) | |||||||
Balance, May 31, 2020 | $ | (20,135 | ) | $ | 426 | $ | (19,709 | ) | ||||
Other comprehensive income (loss) | 8,602 | (268 | ) | 8,334 | ||||||||
Balance, May 31, 2021 | $ | (11,533 | ) | $ | 158 | $ | (11,375 | ) | ||||
Cash and Cash Equivalents
Cash and cash equivalents consist of bank demand accounts, savings deposits, certificates of deposit and commercial paper with original maturities of 90 days or less. Cash and cash equivalents are maintained at financial institutions and, at times, balances may exceed federally insured limits. The Company has not experienced losses related to these balances and believes it is not exposed to significant credit risk regarding its cash and cash equivalents. Cash and cash equivalents were $75,602,000 and $66,269,000 at May 31, 2021 and 2020, respectively. The carrying value of these assets approximates fair value due to the short maturity of these instruments and is classified as Level 1 in the fair value hierarchy. Cash held by foreign subsidiaries was $15,246,000$36,288 and $13,060,000$17,057 at May 31, 20212023 and 2020,2022, respectively.
Marketable Securities
The Company has marketable securities held by banks or broker-dealers at May 31, 2021, consisting of short-term domestic certificates of deposit of $5,785,000and commercial paper and corporate bonds rated at least A-1/P-1 (short-term) and A/A2 (long-term) with original maturities between of $299,700,000. Total outstanding marketable. These securities at May 31, 2021 were $305,485,000; there were $277,404,000in marketable securities outstanding at May 31, 2020.are classified as available for sale. Changes in marketfair value are monitored and recorded on a monthly basis;basis and are recorded in other comprehensive income (loss). In the event of a downgrade in credit quality subsequent to purchase, the marketable securitysecurities investment is evaluated to determine the appropriate action to take to minimize the overall risk to our marketable securitysecurities portfolio. As these securities are highly rated and short-term in nature, they have very little credit risk; therefore,If fair value is less than its amortized cost basis, then the Company does not believeevaluates whether the decline is the result of a reservecredit loss, in which case an impairment is recorded through an allowance for expected credit losses on marketable securitieslosses. Where there is material. These securities are classified as available for sale.an intention or a requirement to sell an impaired available-for-sale debt security, the entire impairment is recognized in earnings with a corresponding adjustment to the amortized cost basis of the security. The primary objective of management’s short-term investment activity is to preserve capital for the purpose of funding current operations, capital expenditures and business acquisitions; short-termacquisitions. Short-term investments are not entered into for trading or speculative purposes. These securities are recorded at fair value based on recent trades or pricing models and therefore meet the Level 2 criteria. Interest income on these investments is recorded within other (expense) income on ourthe consolidated statements of income. Adjustments in the fair value of these assets are recorded in other comprehensive income.
F-11
Marketable Securities as of May 31, 20212023 and 20202022 are listed below by classification and remaining maturitiesmaturities.
|
|
| Year ended May 31 |
| ||||||
|
| Maturity |
| 2023 |
|
| 2022 |
| ||
Commercial Paper & Corporate Bonds |
| 0 - 90 days |
| $ | 22,552 |
|
| $ | 106,497 |
|
| 91 -180 days |
|
| 35,692 |
|
|
| 61,373 |
| |
| 181 days -1 year |
|
| 23,768 |
|
|
| 91,706 |
| |
| 1 - 2 years |
|
| 317 |
|
|
| 77,002 |
| |
Total Marketable Securities |
|
|
| $ | 82,329 |
|
| $ | 336,578 |
|
Year ended May 31 | ||||||||||
(in thousands) | Maturity | 2021 | 2020 | |||||||
US Treasuries | 0 - 90 days | $ | 0 | $ | — | |||||
91 -180 days | 0 | — | ||||||||
| 181 days - 1 year | 0 | 2,532 | ||||||||
| 1 - 2 years | 0 | — | ||||||||
Commercial Paper & Corporate Bonds | 0 - 90 days | 106,631 | 133,130 | |||||||
91 - 180 days | 78,727 | 73,824 | ||||||||
181 days - 1 year | 87,590 | 43,231 | ||||||||
| 1 - 2 years | 26,752 | 7,839 | ||||||||
Certificates of Deposit | 0 - 90 days | 3,262 | 1,003 | |||||||
91 - 180 days | 1,260 | 5,184 | ||||||||
181 days - 1 year | 1,263 | 6,069 | ||||||||
| 1 - 2 years | 0 | 4,592 | ||||||||
Total Marketable Securities | $ | 305,485 | $ | 277,404 | ||||||
(in thousands) | Amortized Cost | Unrealized Gains | Unrealized Losses | Fair Value | ||||||||||||
US Treasuries | $ | 0 | $ | 0 | $ | 0 | $ | 0 | ||||||||
Commercial Paper & Corporate Bonds | 299,524 | 209 | (33 | ) | 299,700 | |||||||||||
Certificates of Deposit | 5,755 | 30 | 0 | 5,785 | ||||||||||||
Total Marketable Securities | $ | 305,279 | $ | 239 | $ | (33 | ) | $ | 305,485 | |||||||
The components of marketable securities as of May 31, 20202023 are as follows:
|
|
|
|
|
|
|
|
|
|
|
| |||||
|
| Amortized |
|
| Unrealized |
|
| Unrealized |
|
| Fair Value |
| ||||
Commercial Paper & Corporate Bonds |
| $ | 83,549 |
|
| $ | 0 |
|
| $ | (1,220 | ) |
| $ | 82,329 |
|
The components of marketable securities as of May 31, 2022 are as follows:
|
| Amortized |
|
| Unrealized |
|
| Unrealized |
|
| Fair Value |
| ||||
Commercial Paper & Corporate Bonds |
| $ | 339,540 |
|
| $ | 7 |
|
| $ | (2,969 | ) |
| $ | 336,578 |
|
Derivative Financial Instruments
The Company operates on a global basis and is exposed to the risk that its financial condition, results of operations and cash flows could be adversely affected by changes in foreign currency exchange rates and changes in interest rates. To reduce the potential effects of foreign currency exchange rate movements on net earnings, the Company enters into derivative financial instruments in the form of foreign currency exchange forward contracts with major financial institutions and have also entered into interest rate swap contracts as a hedge against changes in interest rates. The Company has established policies and procedures for risk assessment and the approval, reporting and monitoring of derivative financial instrument activities. On the date the derivative is established, the Company designates the derivative as either a fair value hedge, a cash flow hedge or a net investment hedge in accordance with its established policy. Each reporting period, derivatives are recorded at fair value in other current assets, other assets, accrued liabilities and other long-term liabilities. The change in fair value is recorded in accumulated other comprehensive income (loss), and amounts are reclassified into earnings on the consolidated statement of income (loss) when transactions are realized. Derivatives that are not determined to be effective hedges are adjusted to fair value with a corresponding adjustment to earnings. The Company does not enter into derivative financial instruments for trading or speculative purposes.
(in thousands) | Amortized Cost | Unrealized Gains | Unrealized Losses | Fair Value | ||||||||||||
US Treasuries | $ | 2,502 | $ | 30 | $ | 0 | $ | 2,532 | ||||||||
Commercial Paper & Corporate Bonds | 257,700 | 347 | (23 | ) | 258,024 | |||||||||||
Certificates of Deposit | 16,648 | 200 | 0 | 16,848 | ||||||||||||
Total Marketable Securities | $ | 276,850 | $ | 577 | $ | (23 | ) | $ | 277,404 | |||||||
Use of Estimates
The preparation of these consolidated financial statements in conformity with U.S. GAAP requires that management to make estimates and judgments that affect amounts reflected in the reported amountsconsolidated financial statements. Considerable judgment is often involved in making such estimates, and the use of assets, liabilities, revenuesdifferent assumptions could result in different conclusions. Management believes its assumptions 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
Accounts Receivable and Concentrations of Credit Risk
Financial instruments which potentially subject Neogen to concentrations of credit risk consist principally of accounts receivable. Management attempts to minimize credit risk by reviewing customers’ credit histories before extending credit and by monitoring credit exposure on a regular basis. Collateral or other security is generally not required for accounts receivable. We maintain an allowance for customer accounts that reduces receivables to amounts that are expected to be collected. In estimating the allowance for doubtful accounts,credit losses, management considers relevant information about past events, current conditions and reasonable and supportable forecasts that affect the collectability of financial assets. Once a receivable balance has been determined to be uncollectible, generally after all collection efforts have been exhausted, that
F-12
amount is charged against the allowance for doubtful accounts.credit losses. No customer accounted for more than
| Year ended May 31 |
| ||||||||||
|
| 2023 |
|
| 2022 |
|
| 2021 |
| |||
Beginning Balance |
| $ | 1,650 |
|
| $ | 1,400 |
|
| $ | 1,350 |
|
Provision |
|
| 1,460 |
|
|
| 332 |
|
|
| 239 |
|
Recoveries |
|
| 46 |
|
|
| 98 |
|
|
| 139 |
|
Write-offs |
|
| (329 | ) |
|
| (180 | ) |
|
| (328 | ) |
Ending Balance |
| $ | 2,827 |
|
| $ | 1,650 |
|
| $ | 1,400 |
|
Inventories
Year ended May 31 | ||||||||||||
(in thousands) | 2021 | 2020 | 2019 | |||||||||
Beginning Balance | $ | 1,350 | $ | 1,700 | $ | 1,550 | ||||||
Provision | 239 | 393 | 263 | |||||||||
Recoveries | 139 | 49 | 38 | |||||||||
Write-offs | (328 | ) | (792 | ) | (151 | ) | ||||||
Ending Balance | $ | 1,400 | $ | 1,350 | $ | 1,700 | ||||||
Inventories are stated at the lower of cost or net realizable value, determined on the
| Year ended May 31 |
| ||||||
|
| 2023 |
|
| 2022 |
| ||
Raw Materials |
| $ | 64,971 |
|
| $ | 58,667 |
|
Work-in-process |
|
| 5,369 |
|
|
| 6,388 |
|
Finished goods |
|
| 63,472 |
|
|
| 57,258 |
|
| $ | 133,812 |
|
| $ | 122,313 |
| |
Year ended May 31 | ||||||||
(in thousands) | 2021 | 2020 | ||||||
Raw Materials | $ | 47,588 | $ | 45,058 | ||||
Work-in-process | 6,412 | 6,887 | ||||||
Finished goods | 46,701 | 43,108 | ||||||
| $ | 100,701 | $ | 95,053 | |||||
The Company’s inventories are analyzed for slow moving, expired and obsolete items on a quarterly basis and the valuation allowance is adjusted as required within cost of salesrevenues expense. The valuation allowance for inventory was $3,100,000$6,270 and $2,850,000$4,050 at May 31, 20212023 and 2020,2022, respectively.
Property and Equipment
Property and equipment is stated at cost. Expenditures for major improvements are capitalized while repairs and maintenance are charged to expense as incurred. Depreciation is provided on the straight-line method over the estimated useful lives of the respective assets, which are generally sevento 39 years for buildings and improvements, and three to ten10 years for furniture, fixtures, computers, leasehold improvements, and machinery and equipment. Depreciation expense was $13,288,000, $11,907,000$17,292, $14,094, and $11,315,000$13,288 in fiscal years 2023, 2022, and 2021, 2020 and 2019, respectively.
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. The Company's business is organized into two operating segments: Food Safety and Animal Safety. Under the goodwill guidance, management determined that each of its segments represents a reporting unit. Other intangible assets include customer relationships, trademarks, licenses, trade names, covenantsAmortizable intangible assetsCustomer relationships 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, generallybasis. Intangibles are amortized over 52 to 25 years.
Management reviews the carrying amounts of goodwill and otherIn evaluating goodwillThese are tested for impairment we have the option to first assess the qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the goodwill impairment test. In contrast, we can opt to bypass the qualitative assessment for any reporting unitannually in any period and proceed directly to assessing the fair value of all of our reporting units and compare the fair value of the reporting unit to carrying value to determine if any impairment is necessary. Doing so does not preclude us from performing the qualitative assessment in any subsequent period. In the fourth quarterquarter. During management's annual test or when there are indicators of fiscal2021, we elected to bypass the qualitative approach that allows the assessment of qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount and instead proceeded directly to assessing the fair value of all of our reporting units and comparing the fair values of the reporting units to the carrying values to determineimpairment, if any impairment is necessary.
F-13
EBITDA multiples of peer companies, such assets are reduced to their estimated fair value and a charge is maderecorded to operations. NaN goodwill impairments were identified during
Amortizable intangible assets are tested for impairment when indications of impairment exist. If the years ended May 31, 2021, 2020carrying amounts of these assets are deemed to be less than fair value based upon a discounted cash flow analysis, such assets are reduced to their estimated fair value and 2019, respectively. The remaining weighted-average amortization period for intangibles was 10 years and 9 years at May 31, 2021 and May 31, 2020, respectively.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 are less than the carrying value of the asset. 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. NaNNo impairments of long-lived assets were identified during the years ended May 31, 2023, 2022 and 2021, 2020 and 2019, respectively.
Equity Compensation Plans
At May 31, 2021,2023, the Company had stock option plans which are described more fully in Note 5 to the consolidated financial statements.
We measure stock-based compensation at the grant date, based on the estimated fair value of the award, and recognize the cost (net of estimated forfeitures) as compensation expense on a straight-line basis over the requisite service period. Our stock-based compensation expense is reflected in general and administrative expense in our consolidated statements of income.
Year ended May 31 | ||||||||||||
2021 | 2020 | 2019 | ||||||||||
Risk-free interest rate | 0.2 | % | 1.9 | % | 2.6 | % | ||||||
Expected dividend yield | 0.0 | % | 0.0 | % | 0.0 | % | ||||||
Expected stock volatility | 31.3 | % | 29.4 | % | 27.0 | % | ||||||
Expected option life | 3.25 years | 3.5 years | 3.5 years | |||||||||
three to five years and have a weighted average value of $34.21 in fiscal 2021, which was the first year this type of award was issued.
Research and development costs, which consist primarily of compensation costs, administrative expenses and new product development, among other items, are expensed as incurred.
Advertising Costs
Advertising costs are expensed within sales and marketing as incurred and totaled $1,687,000, $1,454,000$2,548, $2,018, and $1,471,000$1,687 in fiscal years 2023, 2022, and 2021, 2020 and 2019, respectively.
Net (Loss) Income per Share
Basic net (loss) income per share is based on the weighted average number of common shares outstanding during each year. Diluted (loss) earnings per share is based on the weighted average number of common shares and dilutive potential common shares outstanding. Our dilutive potential common shares outstanding during the years result entirely from dilutive stock options. options and restricted stock units. The following table presents the net (loss) income per share calculations:
| Year ended May 31 |
| ||||||||||
|
| 2023 |
|
| 2022 |
|
| 2021 |
| |||
Numerator for basic and diluted net (loss) income per share — Net (Loss) Income |
| $ | (22,870 | ) |
| $ | 48,307 |
|
| $ | 60,882 |
|
Denominator for basic net (loss) income per share — Weighted average shares |
|
| 188,881 |
|
|
| 107,684 |
|
|
| 106,499 |
|
Effect of dilutive stock options and restricted stock units |
|
| - |
|
|
| 336 |
|
|
| 621 |
|
Denominator for diluted net (loss) income per share |
|
| 188,881 |
|
|
| 108,020 |
|
|
| 107,120 |
|
Net (loss) income attributable per share |
|
|
|
|
|
|
|
|
| |||
Basic |
| $ | (0.12 | ) |
| $ | 0.45 |
|
| $ | 0.57 |
|
Diluted |
| $ | (0.12 | ) |
| $ | 0.45 |
|
| $ | 0.57 |
|
Year ended May 31 | ||||||||||||
(in thousands, except per share) | 2021 | 2020 | 2019 | |||||||||
Numerator for basic and diluted net income per share — Net Income | $ | 60,882 | $ | 59,475 | $ | 60,176 | ||||||
Denominator for basic net income per share — Weighted average shares | 106,499 | 105,100 | 103,776 | |||||||||
Effect of dilutive stock options | 621 | 620 | 1,074 | |||||||||
Denominator for diluted net income per share | 107,120 | 105,720 | 104,850 | |||||||||
Net income attributable to Neogen per share | ||||||||||||
Basic | $ | 0.57 | $ | 0.57 | $ | 0.58 | ||||||
Diluted | $ | 0.57 | $ | 0.56 | $ | 0.57 | ||||||
F-14
Due to the net loss in fiscal 2023, the dilutive stock options and RSUs are anti-dilutive. At May 31, 2023 and May 31, 2022, 148,000 and 383,000 shares, respectively, were excluded from the calculation of diluted net (loss) income per share, because the inclusion of such securities in the calculation would have been anti-dilutive. At May 31, 2021, 0 potential shares from option exercises were excluded from the computation of diluted net income per share, as the option exerciseprices did not exceed the average market price of the common shares. At May 31, 2020, 56,000no potential shares were excluded from the computation. At May 31, 2019, 10,000 potential shares were excluded from the computation.
Leases
The Company to recognizerecognizes in the statement of financial position a liability to make lease payments (the lease liability) and aUpon adoption of Topic 842, weWe recognized all leases with terms greater than 12 months in duration on our consolidated balance sheets as of approximately $2.0 million. 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.
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 of 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.
We have made certain assumptions and judgments when applying ASC 842,accounting for leases, the most significant of which are:
Supplemental balance sheet information related to operating leases was as follows:
| Year ended May 31 |
| ||||||
|
| 2023 |
|
| 2022 |
| ||
Rights of use - assets |
| $ | 11,933 |
|
| $ | 3,184 |
|
Lease liabilities - current |
|
| 3,277 |
|
|
| 1,440 |
|
Lease liabilities - non-current |
|
| 8,812 |
|
|
| 1,788 |
|
Year ended May 31 | ||||||||
(in thousands) | 2021 | 2020 | ||||||
Rights of use—assets | $ | 2,477 | $ | 1,952 | ||||
Lease liabilities—current | 1,285 | 1,054 | ||||||
Lease liabilities—non-current | 1,207 | 913 | ||||||
The weighted average remaining lease term and weighted average discount rate were as follows:
| Year ended May 31 |
| ||||||
| 2023 |
|
| 2022 |
| |||
Weighted average remaining lease term |
| 4.7 years |
|
| 3 years |
| ||
Weighted average discount rate |
|
| 4.7 | % |
|
| 1.7 | % |
Year ended May 31 | ||||||||
2021 | 2020 | |||||||
Weighted average remaining lease term | 2 years | 2.5 years | ||||||
Weighted average discount rate | 2.0% | 3.2% | ||||||
Operating lease expenses are classified as cost of revenues or operating expenses on the consolidated statements of income. income (loss). The components of lease expense were as follows:
| Year ended May 31 |
| ||||||
|
| 2023 |
|
| 2022 |
| ||
Operating leases |
| $ | 2,097 |
|
| $ | 438 |
|
Short term leases |
|
| 460 |
|
|
| 277 |
|
Total lease expense |
| $ | 2,557 |
|
| $ | 715 |
|
F-15
Year ended May 31 | ||||||||
(in thousands) | 2021 | 2020 | ||||||
Operating leases | $ | 1,352 | $ | 1,207 | ||||
Short term leases | 134 | 166 | ||||||
Total lease expense | $ | 1,486 | $ | 1,373 | ||||
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 was approximately $1,397,000,
Maturities of operating lease liabilities as of May 31, 20212023 are as follows:
Years ending May 31, |
| Amount |
| |
2024 |
| $ | 3,542 |
|
2025 |
|
| 3,014 |
|
2026 |
|
| 2,725 |
|
2027 |
|
| 1,624 |
|
2028 |
|
| 1,105 |
|
2029 and thereafter |
|
| 1,885 |
|
Total lease payments |
| $ | 13,895 |
|
Less: imputed interest |
|
| (1,806 | ) |
Total lease liabilities |
| $ | 12,089 |
|
(in thousands) | Amount | |||
Years ending May 31, 202 2 | $ | 1,313 | ||
2023 | 874 | |||
2024 | 345 | |||
2025 | 42 | |||
2026 and thereafter | 0 | |||
Total lease payments | $ | 2,574 | ||
Less: imputed interest | (82 | ) | ||
Total lease liabilities | $ | 2,492 | ||
Revenue Recognition
We determine the amount of revenue to be recognized through application of the following steps:
Essentially all of Neogen’s revenue is generated through contracts with its customers. A performance obligation is a promise in a contract to transfer a product or service to a customer. We generally recognized revenue at a point in time when all of our performance obligations under the terms of a contract are satisfied. Revenue is recognized upon transfer of control of promised products or services in an amount that reflects the consideration we expect to receive in exchange for those products or services. The collectability of consideration on the contract is reasonably assured before revenue is recognized. To the extent that customer payment has been received before all recognition criteria are met, these revenues are initially deferred in other accruals on the balance sheet and the revenue is recognized in the period that all recognition criteria have been met.
Certain agreements with customers include discounts or rebates on the sale of products and services applied retrospectively, such as volume rebates achieved by purchasing a specified purchase threshold of goods and services. We account for these discounts as variable consideration and estimate the likelihood of a customer meeting the threshold in order to determine the transaction price using the most predictive approach. We typically use the most-likely-amount method, for incentives that are offered to individual customers, and the expected-value method, for programs that are offered to a broad group of customers. Variable consideration reduces the amount of revenue that is recognized. Rebate obligations related to customer incentive programs are recorded in accrued liabilities; theliabilities. The rebate estimates are adjusted at the end of each applicable measurement period based on information currently available.
The performance obligations in Neogen’s contracts are generally satisfied well within one year of contract inception. In such cases, management has elected the practical expedient to not adjust the promised amount of consideration for the effects of a significant financing component. Management has elected to utilize the practical expedient to recognize the incremental costs of obtaining a contract as an expense when incurred because the amortization period for the prepaid costs that would otherwise have been deferred and amortized is one year or less. We account for shipping and handling for products as a fulfillment activity when goods are shipped. Shipping and handling costs that are charged to and reimbursed
F-16
by the customer are recognized as revenues, while the related expenses incurred by Neogen are recorded in sales and marketing expense; theseexpense. These expenses totaled $15,180,000, $13,514,000$18,513, $17,482, and $13,503,000$15,180 in fiscal years 2021, 20202023, 2022, and 2019,2021, respectively. Revenue is recognized net of any tax collected from customers; thecustomers. The taxes are subsequently remitted to governmental authorities. Our terms and conditions of sale generally do not provide for returns of product or reperformance of service except in the case of quality or warranty issues. TheseWhile these situations are infrequent;infrequent, due to immateriality of the amount, warranty claims are recorded in the period incurred.
The Company derives revenue from two primary sources — product revenue and service revenue.
Product revenue consists primarily of shipments of:
Revenue for Neogen’s products are recognized and invoiced when the product is shipped to the customer.
Service revenue consists primarily of:
Revenues for Neogen’s genomics and commercial laboratory services are recognized and invoiced when the applicable laboratory service is performed and the results are conveyed to the customer.
Payment terms for products and services are generally 30 to 60 days.
On September 1, 2022, Neogen closed on a Reverse Morris Trust transaction to combine with 3M’s Food Safety business. Similar to Neogen, 3M’s former Food Safety business sells diagnostic test kits, dehydrated culture media, and related products used by food producers and processors to detect foodborne bacteria, allergens and levels of general sanitation. Revenue for these products are recognized and invoiced when the product is shipped to the customer. These products are currently manufactured, invoiced and distributed by 3M on behalf of, and as directed by Neogen to its customers under a number of transition service contracts.
F-17
The following table presents disaggregated revenue by major product and service categories for the years ended May 31, 2021, 20202023, 2022 and 2019:2021:
Year Ended |
| ||||||||
| May 31, 2023 |
| May 31, 2022 |
| May 31, 2021 |
| |||
Food Safety: |
|
|
|
|
|
| |||
Natural Toxins, Allergens & Drug Residues | $ | 82,567 |
| $ | 79,395 |
| $ | 76,614 |
|
Bacterial & General Sanitation |
| 134,934 |
|
| 47,282 |
|
| 44,009 |
|
Culture Media & Other |
| 267,178 |
|
| 75,278 |
|
| 61,245 |
|
Rodent Control, Insect Control & Disinfectants |
| 39,655 |
|
| 35,691 |
|
| 32,219 |
|
Genomics Services |
| 22,463 |
|
| 22,333 |
|
| 20,157 |
|
$ | 546,797 |
| $ | 259,979 |
| $ | 234,244 |
| |
Animal Safety: |
|
|
|
|
|
| |||
Life Sciences |
| 6,254 |
|
| 5,685 |
|
| 5,715 |
|
Veterinary Instruments & Disposables |
| 63,843 |
|
| 63,938 |
|
| 48,128 |
|
Animal Care & Other |
| 39,068 |
|
| 39,805 |
|
| 35,897 |
|
Rodent Control, Insect Control & Disinfectants |
| 87,423 |
|
| 83,610 |
|
| 77,458 |
|
Genomics Services |
| 79,062 |
|
| 74,142 |
|
| 67,017 |
|
$ | 275,650 |
| $ | 267,180 |
| $ | 234,215 |
| |
Total Revenue | $ | 822,447 |
| $ | 527,159 |
| $ | 468,459 |
|
Year Ended | ||||||||||||||||||||
(dollars in thousands) | May 31, 2021 | Change | May 31, 2020 | Change | May 31, 2019 | |||||||||||||||
Food Safety: | ||||||||||||||||||||
Natural Toxins, Allergens & Drug Residues | $ | 76,614 | 1 | % | $ | 76,207 | (3 | %) | $ | 78,373 | ||||||||||
Bacterial & General Sanitation | 44,009 | 5 | % | 41,780 | (0 | %) | 41,966 | |||||||||||||
Culture Media & Other | 56,922 | 19 | % | 47,847 | (4 | %) | 49,857 | |||||||||||||
Rodenticides, Insecticides & Disinfectants | 36,542 | 26 | % | 28,890 | 13 | % | 25,584 | |||||||||||||
Genomics Services | 20,157 | 12 | % | 17,967 | 2 | % | 17,694 | |||||||||||||
| $ | 234,244 | 10 | % | $ | 212,691 | (0 | %) | $ | 213,474 | |||||||||||
Animal Safety: | ||||||||||||||||||||
Life Sciences | 5,715 | (10 | % ) | 6,322 | (20 | %) | 7,858 | |||||||||||||
Veterinary Instruments & Disposables | 48,128 | 12 | % | 42,941 | (4 | %) | 44,582 | |||||||||||||
Animal Care & Other | 35,897 | 26 | % | 28,389 | (5 | %) | 29,941 | |||||||||||||
Rodenticides, Insecticides & Disinfectants | 77,458 | 13 | % | 68,815 | 4 | % | 66,389 | |||||||||||||
Genomics Services | 67,017 | 14 | % | 59,012 | 14 | % | 51,942 | |||||||||||||
| $ | 234,215 | 14 | % | $ | 205,479 | 2 | % | $ | 200,712 | |||||||||||
Total Revenue | $ | 468,459 | 12 | % | $ | 418,170 | 1 | % | $ | 414,186 | ||||||||||
Goodwill
Management completed the annual impairment analysis of goodwill and intangible assets with indefinite lives using a third-party quantitative assessment as of the first day of the fourth quarter of fiscal years 2021, 2020year 2023. The fair value of each reporting unit was determined and 2019, respectively,compared to the carrying value. The inputs to the fair value are defined in the fair value hierarchy as Level 3 inputs. If the carrying value had exceeded the fair value, an impairment charge would have been recorded based on that difference. The annual impairment analysis resulted in no impairment for 2023. Management completed the annual impairment analysis of goodwill using a qualitative approach during fiscal year 2022, which resulted in no impairment charges.
The following table summarizes goodwill by reportable segment:
|
| Food |
|
| Animal |
|
| Total |
| |||
Balance, May 31, 2021 |
| $ | 67,822 |
|
| $ | 63,654 |
|
| $ | 131,476 |
|
Acquisitions |
|
| 4,152 |
|
|
| 11,752 |
|
|
| 15,904 |
|
Foreign currency translation and other |
|
| (4,416 | ) |
|
| (260 | ) |
|
| (4,676 | ) |
Balance, May 31, 2022 |
| $ | 67,558 |
|
| $ | 75,146 |
|
| $ | 142,704 |
|
Acquisitions (1) |
|
| 1,985,476 |
|
|
| 6,783 |
|
|
| 1,992,259 |
|
Foreign currency translation and other |
|
| 3,127 |
|
|
| (594 | ) |
|
| 2,533 |
|
Balance, May 31, 2023 |
| $ | 2,056,161 |
|
| $ | 81,335 |
|
| $ | 2,137,496 |
|
(1) Animal Safety acquisitions represents portion of FSD transaction recorded at Neogen Australasia.
F-18
Other Intangible Assets
As of May 31, 2023, non-amortizable intangible assets included licenses of $569, trademarks of $12,522 and other intangibles of $1,224. During fiscal year 2023, the Company recorded an impairment of $1,000 to its non-amortizable trademarks related to discontinued product lines.
As of May 31, 2022, non-amortizable intangible assets included licenses of $569, trademarks of $13,604 and other intangibles of $1,224.
Management completed the annual impairment analysis of intangible assets with indefinite lives using a qualitative assessment for fiscal year 2023 and a quantitative assessment for fiscal year 2022. Other than the impairment in fiscal year 2023 related to the discrete trademarks discussed above, management determined that recorded amounts were not impaired and that no write-down wasimpairment charges were necessary.
(in thousands) | Food Safety | Animal Safety | Total | |||||||||
Balance, May 31, 2019 | $ | 42,553 | $ | 61,066 | $ | 103,619 | ||||||
Goodwill acquired | 6,254 | 2,095 | 8,349 | |||||||||
Goodwill and/or currency adjustments (1) | (1,592 | ) | (36 | ) | (1,628 | ) | ||||||
Balance, May 31, 2020 | $ | 47,215 | $ | 63,125 | $ | 110,340 | ||||||
Goodwill acquired | 18,775 | 0 | 18,775 | |||||||||
Goodwill and/or currency adjustments (1) | 1,832 | 529 | 2,361 | |||||||||
Balance, May 31, 2021 | $ | 67,822 | $ | 63,654 | $ | 131,476 | ||||||
Amortizable intangible assets consisted of the following and are included in customer-based intangibles and othernon-current
|
| Gross |
|
| Less |
|
| Net |
| |||
Licenses |
| $ | 16,010 |
|
| $ | 6,763 |
|
| $ | 9,247 |
|
Covenants not to compete |
|
| 488 |
|
|
| 384 |
|
|
| 104 |
|
Patents |
|
| 8,499 |
|
|
| 4,865 |
|
|
| 3,634 |
|
Customer relationships intangibles |
|
| 1,244,635 |
|
|
| 81,577 |
|
|
| 1,163,058 |
|
Trade names and trademarks |
|
| 111,172 |
|
|
| 3,583 |
|
|
| 107,589 |
|
Developed technology |
|
| 309,609 |
|
|
| 20,175 |
|
|
| 289,434 |
|
Other product and service-related intangibles |
|
| 23,628 |
|
|
| 5,907 |
|
|
| 17,721 |
|
Balance, May 31, 2023 |
| $ | 1,714,041 |
|
| $ | 123,254 |
|
| $ | 1,590,787 |
|
|
|
|
|
|
|
|
|
|
| |||
Licenses |
| $ | 17,109 |
|
| $ | 5,682 |
|
| $ | 11,427 |
|
Covenants not to compete |
|
| 846 |
|
|
| 671 |
|
|
| 175 |
|
Patents |
|
| 8,347 |
|
|
| 4,583 |
|
|
| 3,764 |
|
Customer relationships intangibles |
|
| 75,000 |
|
|
| 33,662 |
|
|
| 41,338 |
|
Trade names and trademarks |
|
| 1,180 |
|
|
| 167 |
|
|
| 1,013 |
|
Developed technology |
|
| 17,741 |
|
|
| 6,124 |
|
|
| 11,617 |
|
Other product and service-related intangibles |
|
| 27,299 |
|
|
| 4,527 |
|
|
| 22,772 |
|
Balance, May 31, 2022 |
| $ | 147,522 |
|
| $ | 55,416 |
|
| $ | 92,106 |
|
(in thousands) | Gross Carrying Amount | Less Accumulated Amortization | Net Carrying Amount | |||||||||
Licenses | $ | 16,913 | $ | 4,580 | $ | 12,333 | ||||||
Covenants not to compete | 1,006 | 571 | 435 | |||||||||
Patents | 8,363 | 4,243 | 4,120 | |||||||||
Customer-based intangibles | 76,384 | 35,209 | 41,175 | |||||||||
Other products and service-related intangibles | 27,567 | 8,859 | 18,708 | |||||||||
Balance, May 31, 2021 | $ | 130,233 | $ | 53,462 | $ | 76,771 | ||||||
Licenses | $ | 10,346 | $ | 3,330 | $ | 7,016 | ||||||
Covenants not to compete | 706 | 407 | 299 | |||||||||
Patents | 8,509 | 4,118 | 4,391 | |||||||||
Customer-based intangibles | 59,847 | 29,898 | 29,949 | |||||||||
Other products and service-related intangibles | 16,646 | 6,937 | 9,709 | |||||||||
Balance, May 31, 2020 | $ | 96,054 | $ | 44,690 | $ | 51,364 | ||||||
During fiscal year 2023, the Company recorded an impairment of $2,109 to its amortizable licenses related to discontinued product lines.
Amortization expense for intangibles totaled $7,753,000, $6,489,000$71,085, $9,600, and $6,309,000$7,753 in fiscal years 2021, 2020,2023, 2022, and 2019,2021, respectively. The estimated amortization expense for each of the five succeeding fiscal years is as follows: $8,331,000 in 2022, $7,639,000 in 2023, $7,335,000$93,200 in 2024, $7,007,000$92,900 in 2025, $92,300 in 2026, $91,700 in 2027, $90,900 in 2028 and $6,943,000 in 2026. $1,129,987 thereafter.
The amortizable intangible assetsassets' useful lives are 2 to 20 years for licenses, 23 to 1310 years for covenants not to compete, 5 to 25 years for patents, 59 to 20 years for customer-based intangiblescustomer relationships, 10 to 25 years for trade names and 5trademarks, 10 to 20 years for developed technology and 5 to 15 years for other product and service-related intangibles, which primarily consist of product formulations.intangibles. All definite-lived intangibles are amortized on a straight-line basis with the exception of definite-lived customer-basedcustomer relationships intangibles and product and service-related intangibles, which are amortized on either a straight-line or an accelerated basis.
The weighted average remaining amortization period for intangibles was 18 years as of May 31, 2023 and eight years as of May 31, 2022.
F-19
The Consolidated Statements of Income (Loss) 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 described below relates primarily to enhancing the Company’s strategic platform for the expansion of available product offerings.
Fiscal 2021
In July 31, 2020, the Company acquired the U.S. (including territories) rights to Elanco’s StandGuardThis product line fits in well with Neogen’s existing agricultural insecticide portfolio and organizational capabilities. Consideration for the purchase was $2,351,000$2,351 in cash, all paid at closing.$51,000$51 and intangible assets of $2,300,000 (with an estimated life of 15 years)$2,300. This product line is currently being toll manufactured for the Company but is eventually expected to be manufactured at Neogen’s operation in Iowa; the salesSales are reported within the Animal Safety segment.
In December 30, 2020, the Company acquired all of the stock of Megazyme, Ltd, an Ireland-based company, and its wholly-owned subsidiaries, U.S.-based Megazyme, Inc. and Ireland-based Megazyme IP. Megazyme is a manufacturer and supplier of diagnostic assay kits and enzymes to measure dietary fiber, complex carbohydrates and enzymes in food and beverages as well as animal feeds. This acquisition will allow Neogen to expand its commercial relationships across food, feed and beverage companies, and provide additional food quality diagnostic products to commercial labs and food science research institutions. Consideration for the purchase was net cash of
Fiscal 2022
In September 2021, the Company acquired all of the stock of CAPInnoVet, Inc., a companion animal health business that provides pet medications to the veterinary market. This acquisition provided entry into the retail parasiticide market and enhanced the Company’s presence in companion animal markets. Consideration for the purchase was net cash of $17,900 paid at closing. There also is the potential for performance milestone payments to the former owners of up to $6,500 and the Company could incur up to $14,500 in future royalty payments. The final purchase allocation, based upon the fair value of these assets and liabilities determined using the income approach, included accounts receivable of $308, inventory of $531, prepayments of $296, accounts payable of $120, other current liabilities of $84, non-current liabilities of $6,500, intangible assets of $19,200 and the remainder to goodwill (deductible for tax purposes). Upon revaluation of the contingent liability during the third quarter of fiscal year 2023, the Company recognized a gain of $300 on the performance milestone liability, recorded within other income. The business is operated from our location in Lexington, KY, reporting within the Animal Safety segment.
In November 2021, the Company acquired all of the stock of Delf (U.K.) Ltd., a United Kingdom-based manufacturer and supplier of animal hygiene and industrial cleaning products, and Abbott Analytical Ltd., a related service provider. This acquisition expanded the Company’s line of dairy hygiene products and enhances our cleaner and disinfectant product portfolio. Consideration for the purchase was net cash of $9,500 paid at closing. The final purchase price allocation, based upon the fair value of these assets and liabilities determined using the income approach, included accounts receivable of $1,059, inventory of $972, net property, plant and equipment of $152, prepayments of $31, accounts payable of $497, other current liabilities of $378, non-current deferred tax liabilities of $780, intangible assets of $3,100 and the remainder to goodwill (non-deductible for tax purposes). The companies continue to operate from their current location in Liverpool, England, reporting within the Food Safety segment and are managed through Neogen’s Scotland operation.
In December 2021, the Company acquired all of the stock of Genetic Veterinary Sciences, Inc., a companion animal genetic testing business providing genetic information for dogs, cats and birds to animal owners, breeders and veterinarians. This acquisition further will expand the Company’s presence in the companion animal market. Consideration for the purchase was $11,300 in net cash. The final purchase price allocation, based upon the fair value of these assets and liabilities
F-20
determined using the income approach, included accounts receivable of $38, net inventory of $292, net property, plant and equipment of $399, prepayments of $54, accounts payable of $325, unearned revenue of $1,900, other current liabilities of $321, intangible assets of $5,500 and the remainder to goodwill (deductible for tax purposes). The business is operated from its current location in Spokane, Washington, reporting within the Animal Safety segment. Since completion of initial estimates in the second quarter of fiscal year 2022, the Company has recorded insignificant measurement period adjustments, which resulted in a decrease to the base purchase price.
Fiscal 2023
Thai-Neo Biotech Co., Ltd. Acquisition
On July 1, 2022, the Company acquired all of the stock of Thai-Neo Biotech Co., Ltd., a longstanding distributor of Neogen’s food safety products to Thailand and Southeast Asia. This acquisition gives Neogen a direct sales presence in Thailand. Consideration for the purchase was $1,581 in net cash, with $1,310 paid at closing, $37 paid on November 29, 2022 as a working capital adjustment and $234 payable on October 1, 2023. The final purchase price allocation, based upon the fair value of these assets and liabilities determined using the income approach, included intangible assets of $620 (with an estimated life of 10 years). The business continues to operate in Bangkok, Thailand, reporting within the Food Safety segment.
Corvium Acquisition
On February 10, 2023, the Company acquired certain assets as part of an asset purchase agreement with Corvium, Inc., a partner and supplier within the Company's software analytics platform. This acquisition, which primarily includes the software technology, advances the Company's food safety data analytics strategy. The purchase price consideration was $24,067, which included $9,004 held in escrow. Subsequent to May 31, 2023, $8,000 of the escrow balance was released to Corvium, Inc. in July 2023. This transaction is a business combination and was accounted for using the acquisition method.
There also is the potential for performance milestone payments of up to $8,500 based on successful implementation of the software service at customer sites and sale of licenses. As a result, the Company has recorded contingent liabilities of $930 as part of the opening balance sheet within Other non-current liabilities, as shown below.
In the fourth quarter of fiscal 2023, the Company recorded adjustments to intangible assets of $3,820 and contingent liability of $1,070, which decreased the balances, based on a third-party advisor's valuation work and fair value estimates. Goodwill, which is fully deductible for tax purposes, includes value associated with profits earned from data management solutions that can be offered to existing customers and the expertise and reputation of the assembled workforce. These values are Level 3 fair value measurements.
Our estimates and assumptions are subject to change within the measurement period (up to one year from the acquisition date). While we believe that these preliminary estimates provide a reasonable basis for estimating the fair value of the assets acquired and liabilities assumed, we will continue to evaluate available information prior to finalization of the amounts. The primary areas of the preliminary purchase price allocation that are not yet finalized relate to the fair value of intangible assets.
Due to the Company's acquisition of Corvium, Inc., it recorded a loss of $1,500 during fiscal year 2023 on dissolution of its minority interest in that company.
The following table summarizes the preliminary fair value of assets acquired and liabilities assumed as of the date of acquisition:
F-21
Prepaids and other current assets |
| $ | 66 |
|
Property, plant and equipment |
|
| 13 |
|
Intangible assets |
|
| 10,180 |
|
Deferred revenue |
|
| (1,827 | ) |
Adjustment of annual license prepaid |
|
| (419 | ) |
Other non-current liabilities |
|
| (930 | ) |
Total identifiable assets and liabilities acquired |
|
| 7,083 |
|
Goodwill |
|
| 16,984 |
|
Total purchase consideration |
| $ | 24,067 |
|
For each completed acquisition listed above, the revenues and net income were not considered material and were therefore not disclosed.
3M Food Safety transaction
On September 1, 2022, Neogen, 3M Company (“3M”), and Neogen Food Safety Corporation (“Neogen Food Safety Corporation”), a subsidiary created to carve out 3M’s Food Safety Division (“3M FSD”, “FSD”), closed on the transaction combining 3M’s FSD with Neogen in a Reverse Morris Trust transaction and Neogen Food Safety Corporation became a wholly owned subsidiary of Contents
The acquired business is a leading provider of food safety testing solutions. It offers a broad range of food safety testing products that support multiple industries within food and beverage, helping producers to prevent and protect consumers from foodborne illnesses. The business has a broad global presence with products used in more than 60 countries and a diversified revenue base of more than 100,000 end-user customers. The combination of Neogen and the 3M FSD creates a leading innovator with an enhanced geographic footprint, innovative product offerings, digitization capabilities, and financial flexibility to capitalize on robust growth trends in sustainability, food safety, and supply chain integrity. The acquired Food Safety business continues to primarily operate in facilities in Minnesota and the United Kingdom ("U.K."), and is being managed overall in Michigan, reporting within the Food Safety segment.
The purchase price consideration for the 3M FSD was $3.2 billion, net of customary purchase price adjustments and transaction costs, which consisted of 108,269,946 shares of Neogen common stock issued on closing with a fair value of $2.2 billion and cash consideration of $1 billion, funded by the additional financing secured by the Company. See Note 4 "Long-Term Debt" for further detail on the debt incurred.
During the fiscal year ended May 31, 2023, the Company recorded adjustments to its preliminary allocation of the purchase consideration to assets acquired and liabilities assumed based on initial fair value estimates and is subject to continuing management analysis, with assistance from third-party valuation advisors. In the fourth quarter of fiscal 2023, Inventory and Property, plant and equipment amounts were finalized. The excess of the purchase price over the fair value of the net tangible assets and identifiable intangible assets of $1.97 billion was recorded as goodwill, of which $1.92 billion is non-deductible for tax purposes. Goodwill includes value associated with profits earned from market and expansion capabilities, expected synergies from integration and streamlining operational activities, the expertise and reputation of the assembled workforce and other intangible assets that do not qualify for separate recognition. These values are Level 3 fair value measurements.
The preliminary fair values of net tangible assets and intangible assets acquired were based on preliminary valuations, and our estimates and assumptions are subject to change within the measurement period (up to one year from the acquisition date). The primary areas of the preliminary purchase price allocation that are not yet finalized relate to deferred income tax liabilities. The fair values of the assets acquired and liabilities assumed are based on our preliminary estimates and assumptions, as well as other information compiled by management, including valuations that utilize customary valuation procedures and techniques. While we believe that these preliminary estimates provide a reasonable basis for estimating the
F-22
fair value of the assets acquired and liabilities assumed, we will continue to evaluate available information prior to finalization of the amounts.
The following table summarizes the preliminary fair value of assets acquired and liabilities assumed as of the date of acquisition:
|
|
|
| |
Cash and cash equivalents |
| $ | 319 |
|
Inventories |
|
| 18,403 |
|
Other current assets |
|
| 14,855 |
|
Property, plant and equipment |
|
| 25,832 |
|
Intangible assets |
|
| 1,560,000 |
|
Right of use asset |
|
| 882 |
|
Lease liability |
|
| (885 | ) |
Deferred tax liabilities |
|
| (352,481 | ) |
Other liabilities |
|
| (2,832 | ) |
Total identifiable assets and liabilities acquired |
|
| 1,264,093 |
|
Goodwill |
|
| 1,974,520 |
|
Total purchase consideration |
| $ | 3,238,613 |
|
The following table summarizes the intangible assets acquired and the useful life of these assets.
|
| Fair Value |
|
| Useful Life in Years |
| ||
Trade Names and Trademarks |
| $ | 110,000 |
|
|
| 25 |
|
Developed Technology |
|
| 280,000 |
|
|
| 15 |
|
Customer Relationships |
|
| 1,170,000 |
|
|
| 20 |
|
Total intangible assets acquired |
| $ | 1,560,000 |
|
|
|
| |
The Company hasdetermined the fair value of the acquired customer relationships intangible assets by applying the multi-period excess earnings method, which involved the use of significant estimates and assumptions related to forecasted revenue growth rate and customer attrition rate. Valuation specialists were used to develop and evaluate the appropriateness of the multi-period excess earnings method, the Company's discount rates, attrition rate and fair value estimates using its cash flow projections.
During the twelve months ended May 31, 2023, transaction fees and integration costs of $58,175 were expensed. In the twelve months ended May 31, 2022, acquisition related costs of $25,581 were expensed. These costs are included in general and administrative expenses in the Company’s consolidated statements of income (loss).
The operating results of the FSD have been included in the Company’s consolidated statements of income (loss) since the acquisition date. In fiscal year 2023, the FSD’s total revenue was $279,541 and operating loss was approximately $28,200. The operating loss includes $58,175 of transaction fees and integration expenses, $60,872 of amortization expense for acquired intangible assets and a $3,245 charge to cost of goods sold related to the step up to fair value on acquired inventory.
The following table presents unaudited pro forma information as if the merger with the 3M FSD business had occurred on June 1, 2021 and had been combined with the results reported in our consolidated statements of income (loss) for all periods presented:
| Year Ended May 31 |
| ||||||
|
| 2023 |
|
| 2022 |
| ||
Net sales |
| $ | 919,959 |
|
| $ | 910,978 |
|
Operating income |
| $ | 44,373 |
|
| $ | 42,258 |
|
The unaudited pro forma information is presented for informational purposes only and is not indicative of the results that would have been achieved if the merger had taken place at such time. The unaudited pro forma information presented
F-23
above includes adjustments primarily for amortization charges for acquired intangible assets and certain acquisition-related expenses for legal and professional fees.
In connection with the acquisition of the 3M FSD, the Company and 3M entered into several transition service agreements, including manufacturing, distribution and certain back-office support, that have been accounted for separately from the acquisition of assets and assumption of liabilities in the business combination. 3M periodically remits amounts charged to customers on our behalf and charges us for the associated cost of goods sold and transition service fees. Additionally, 3M is reimbursing the Company for a portion of its SAP implementation costs. As of May 31, 2023, a receivable from 3M of $12,365 was included in prepaid expenses and other current assets in the Company’s consolidated balance sheets.
The Company’s long-term debt consists of the following:
|
| May 31, 2023 |
| |
Term Loan |
| $ | 550,000 |
|
Senior Notes |
|
| 350,000 |
|
Total long-term debt |
|
| 900,000 |
|
Less: Unamortized debt issuance costs |
|
| (14,561 | ) |
Total non-current debt, net |
| $ | 885,439 |
|
The Company had a financing agreement with a bank providing for a
As of May 31, 2021. 2022, the Company had no outstanding debt. In connection with the acquisition of 3M’s Food Safety business as described more fully in Note 8, Neogen incurred financing through Neogen Food Safety Corporation as follows:
Credit Facilities
On June 30, 2022, Neogen Food Safety Corporation entered into a credit agreement consisting of a five-year senior secured term loan facility (“term loan facility”) in the amount of $650,000 and a five-year senior secured revolving facility (“revolving facility”) in the amount of $150,000 (collectively, the “Credit Facilities”) to fund the FSD transaction. The term loan facility was drawn on August 31, 2022, to fund the closing of the FSD transaction on September 1, 2022 while the revolving facility was undrawn and continues to be undrawn as of May 31, 2023.
The Credit Facilities bear interest based on term SOFR plus an applicable margin which ranges between 150 to 225 basis points, determined for each interest period and paid monthly. During the twelve months ended May 31, 2023, the interest rates ranged from 4.81% to 7.33% per annum. The term loan facility matures on June 30, 2027 and the revolving facility matures at the earlier of June 30, 2027 and the termination of the revolving commitments. The Company paid $60,000 of the term loan facility’s principal in September 2022 and an additional $40,000 of the term loan facility's principal in December 2022, in order to decrease the outstanding debt balance.
The term loan facility contains an optional prepayment feature at the discretion of the Company. The Company determined that the prepayment feature did not meet the definition of an embedded derivative and does not require bifurcation from the host liability and, accordingly, has accounted for the entire instrument at amortized cost.
F-24
In November 2022, the Company entered into an interest rate swap agreement, whereby interest on $250,000 of the total $550,000 principal balance is paid at a fixed rate. See Note 9. "Fair Value and Derivatives" for further detail on the interest rate swap agreement.
The Company can draw any amount under the revolving facility up to the $150,000 limit, with the amount to be repaid on the termination date of the revolving commitments. Debt issuance costs of $2,361 were incurred related to the revolving facility. These costs are being amortized as interest expense in the consolidated statements of (loss) income over the contractual life of the revolving facility using the straight line method. Amortization of the deferred debt issuance costs for the revolving facility was $366 during the twelve months ended May 31, 2023. Debt issuance costs of $489 were recorded in Prepaid expenses and other current assets and $1,506 were recorded in Other non-current assets on the consolidated balance sheet as of May 31, 2023. The Company must pay an annual commitment fee ranging from 0.20% and 0.35% on the unused portion of the Revolving Credit Facility, paid quarterly. As of May 31, 2023, the commitment fee was 0.35% and $473 was recorded as interest expense in the consolidated statements of income (loss) during the twelve months ended May 31, 2023.
Accrued interest payable on the term loan as of May 31, 2023 was $164. The Company incurred $10,232 in total debt issuance costs on the term loan which is recorded as an offset to the term loan facility and amortized over the contractual life of the loan to interest expense using the straight line method. The amortization of deferred debt issuance costs of $1,588 and interest expense of $27,254 (excluding swap credit of $577) for the term loan was included in the consolidated statements of income (loss) during the twelve months ended May 31, 2023.
Financial covenants include maintaining specified levels of funded debt to EBITDA, and debt service coverage. As of May 31, 2023, the Company was in compliance with its debt covenants.
Senior Notes
On July 20, 2022, Neogen Food Safety Corporation closed on an offering of $350,000 aggregate principal amount of 8.625% senior notes due 2030 (the “Notes”) in a private placement at par. The Notes were initially issued by Neogen Food Safety Corporation to 3M and were transferred and delivered by 3M to the selling securityholder in the offering, in satisfaction of certain of 3M’s existing debt. Upon closing of the FSD transaction on September 1, 2022, the Notes became guaranteed on a senior unsecured basis by the Company and certain wholly-owned domestic subsidiaries of the Company.
The Company determined that the redemption features of the Notes did not meet the definition of a derivative and thus does not require bifurcation from the host liability and accordingly has accounted for the entire instrument at amortized cost.
Total accrued interest on the Notes was $10,985 as of May 31, 2023 based on the stated interest rate of 8.625%. This amount was included in current liabilities on the consolidated balance sheets. The Company incurred total debt issuance costs of $6,683, which is recorded as an offset to the Notes and amortized over the contractual life of the Notes to interest expense using the straight line method. The amortization of deferred debt issuance costs of $766 and interest expense of $26,079 for the Notes was included in the consolidated statements of income (loss) during the twelve months ended May 31, 2023.
There are no required principal payments on the Term Loan or the Senior Notes through fiscal year 2026, due to $100,000 in prepayments made on the Term Loan in fiscal 2023. The expected maturities associated with the Company’s outstanding debt as of May 31, 2023, were as follows:
|
| Amount |
| |
Fiscal Year |
|
|
| |
2024 |
| $ | — |
|
2025 |
|
| — |
|
2026 |
|
| — |
|
2027 |
|
| 34,063 |
|
2028 |
|
| 515,937 |
|
Thereafter |
|
| 350,000 |
|
Total |
| $ | 900,000 |
|
F-25
The Company’s long-term incentive plans allow for the grant of various types of share-based awards to officers, directors and other key employees of the Company. Incentive andto directors, officers and employees of Neogen under the terms of the Company’s stock option plans.2018 Omnibus Incentive Plan. These options wereare granted at an exercise price of not less than the fair market valueclosing price of the common stock on the date of grant. Remaining shares available for grant under stock option plans were 6,355,000, 7,002,000and 7,994,000 at May 31, 2021, 2020 and 2019, respectively. Options vest ratably overthree threeand andfive year-year periods and the contractual terms are generally five, seven or ten years.years. The Company grants restricted stock units (RSUs) under the terms of the 2018 Omnibus Incentive Plan, which vest ratably over three and five year periods. The fair value of the options was estimated at the date of the grant using the Black-Scholes option pricing model. The fair value of the RSUs is determined based on the closing price of the common stock on the date of grant.
Remaining shares available for grant under share-based compensation plans were 2,871,000, 5,386,000, and 6,355,000 at May 31, 2023, 2022, and 2021, respectively. Compensation expense related to share-based awards was $10,177, $7,154, and $6,437 in fiscal years 2023, 2022, and 2021, respectively.
Options
|
|
|
|
|
|
|
|
| ||||
(options in thousands) |
| Options |
|
| Weighted-Average Exercise Price |
|
| Weighted-Average Grant Date Fair Value |
| |||
Outstanding at May 31, 2020 (972 exercisable) |
|
| 4,324 |
|
| $ | 27.98 |
|
| $ | 6.98 |
|
Granted |
|
| 403 |
|
|
| 34.23 |
|
|
| 7.71 |
|
Exercised |
|
| (1,389 | ) |
|
| 24.38 |
|
|
| 6.31 |
|
Forfeited |
|
| (381 | ) |
|
| 28.99 |
|
|
| 7.20 |
|
Outstanding at May 31, 2021 (643 exercisable) |
|
| 2,957 |
|
|
| 27.98 |
|
|
| 6.98 |
|
Granted |
|
| 615 |
|
|
| 36.42 |
|
|
| 8.49 |
|
Exercised |
|
| (281 | ) |
|
| 22.79 |
|
|
| 6.29 |
|
Forfeited |
|
| (47 | ) |
|
| 33.93 |
|
|
| 8.02 |
|
Outstanding at May 31, 2022 (1,191 exercisable) |
|
| 3,244 |
|
|
| 32.13 |
|
|
| 7.66 |
|
Granted |
|
| 1,704 |
|
|
| 14.68 |
|
|
| 4.61 |
|
Exercised |
|
| (22 | ) |
|
| 14.78 |
|
|
| 4.23 |
|
Forfeited |
|
| (704 | ) |
|
| 29.81 |
|
|
| 7.26 |
|
Outstanding at May 31, 2023 (1,401 exercisable) |
|
| 4,222 |
|
|
| 25.56 |
|
|
| 6.51 |
|
(options in thousands) | Options | Weighted-Average Exercise Price | Weighted-Average Grant Date Fair Value | |||||||||
Outstanding at May 31, 2018 (1,016 exercisable) | 4,998 | $ | 21.32 | $ | 5.72 | |||||||
Granted | 1,054 | 31.46 | 7.46 | |||||||||
Exercised | (1,026 | ) | 15.64 | 4.46 | ||||||||
Forfeited | (256 | ) | 23.54 | 6.21 | ||||||||
Outstanding at May 31, 2019 (1,234 | 4,770 | 24.69 | 6.35 | |||||||||
Granted | 1,124 | 31.96 | 7.78 | |||||||||
Exercised | (1,438 | ) | 20.12 | 5.53 | ||||||||
Forfeited | (132 | ) | 28.72 | 7.10 | ||||||||
Outstanding at May 31, 2020 (972 | 4,324 | 27.98 | 6.98 | |||||||||
Granted | 403 | 34.23 | 7.71 | |||||||||
Exercised | (1,389 | ) | 24.38 | 6.31 | ||||||||
Forfeited | (381 | ) | 28.99 | 7.20 | ||||||||
Outstanding at May 31, 2021 (643 | 2,957 | 30.38 | 7.36 | |||||||||
The following is a summary of stock options outstanding at May 31, 2021:2023:
| Options Outstanding |
|
| Options Exercisable |
| |||||||||||||||
|
|
|
|
| Average |
|
|
|
|
|
|
|
|
|
| |||||
(options in thousands) |
|
|
|
| Contractual Life |
|
| Weighted-Average |
|
|
|
|
| Weighted-Average |
| |||||
Range of Exercise Price |
| Number |
|
| (in years) |
|
| Exercise Price |
|
| Number |
|
| Exercise Price |
| |||||
$12.20 - $20.00 |
|
| 1,585 |
|
|
| 6.3 |
|
| $ | 13.63 |
|
|
| 27 |
|
| $ | 15.95 |
|
$20.01 - $28.00 |
|
| 138 |
|
|
| 6.7 |
|
|
| 25.11 |
|
|
| 90 |
|
|
| 23.93 |
|
$28.01 - $36.00 |
|
| 2,124 |
|
|
| 1.8 |
|
|
| 31.77 |
|
|
| 1,205 |
|
|
| 31.84 |
|
$36.01 - $42.15 |
|
| 375 |
|
|
| 3.4 |
|
|
| 40.94 |
|
|
| 79 |
|
|
| 40.99 |
|
|
|
| 4,222 |
|
|
| 3.8 |
|
| $ | 25.56 |
|
|
| 1,401 |
|
| $ | 31.54 |
|
Options Outstanding | Options Exercisable | |||||||||||||||||||
Average | ||||||||||||||||||||
(options in thousands) | Contractual Life | Weighted-Average | Weighted-Average | |||||||||||||||||
Range of Exercise Price | Number | (in years) | Exercise Price | Number | Exercise Price | |||||||||||||||
$10.75 - $20.00 | 54 | 3.1 | $ | 15.65 | 51 | $ | 15.45 | |||||||||||||
$20.01 - $30.00 | 376 | 1.8 | 22.55 | 150 | 23.07 | |||||||||||||||
$30.01 - $31.50 | 1,150 | 2.1 | 30.87 | 299 | 30.76 | |||||||||||||||
$31.51 - $32.00 | 898 | 3.4 | 31.95 | 101 | 31.95 | |||||||||||||||
$32.01 - $35.28 | 479 | 4.1 | 34.07 | 42 | 33.53 | |||||||||||||||
| 2,957 | 2.8 | 30.38 | 643 | 28.10 | ||||||||||||||||
The weighted average exercise price of shares subject to options that were exercisable at May 31, 20202022 and 20192021 was
Remaining compensation cost to be expensed in future periods for$15,131,000$11,729 at May 31, 2021,2023, with a weighted average expense recognition period of 3.12.4 years.
F-26
| Year ended May 31 |
| ||||||||||
|
| 2023 |
|
| 2022 |
|
| 2021 |
| |||
Aggregate intrinsic value of options outstanding |
| $ | 6,154 |
|
| $ | 850 |
|
| $ | 46,667 |
|
Aggregate intrinsic value of options exercisable |
| $ | 42 |
|
| $ | 817 |
|
| $ | 11,617 |
|
Aggregate intrinsic value of options exercised |
| $ | 73 |
|
| $ | 5,507 |
|
| $ | 22,349 |
|
The fair value of Contents
| Year ended May 31 |
| ||||||||||
| 2023 |
|
| 2022 |
|
| 2021 |
| ||||
Risk-free interest rate |
|
| 3.3 | % |
|
| 0.4 | % |
|
| 0.2 | % |
Expected dividend yield |
|
| 0.0 | % |
|
| 0.0 | % |
|
| 0.0 | % |
Expected stock volatility |
|
| 34.0 | % |
|
| 32.8 | % |
|
| 31.3 | % |
Expected option life |
| 4.5 years |
|
| 3.12 years |
|
| 3.25 years |
| |||
Year Ended | ||||||||||||
(in thousands) | May 31, 2021 | May 31, 2020 | May 31, 2019 | |||||||||
Aggregate intrinsic value of options outstanding | $ | 46,667 | $ | 32,988 | $ | 22,798 | ||||||
Aggregate intrinsic value of options exercisable | $ | 11,617 | $ | 10,814 | $ | 10,222 | ||||||
Aggregate intrinsic value of options exerised | $ | 22,349 | $ | 19,597 | $ | 21,382 | ||||||
The Companyrisk-free interest rate for periods within the expected life of options granted 118,250 restrictedis based on the United States Treasury yield curve in effect at the time of grant. Expected stock units (RSUs) to directors, officers and employees under the termsprice volatility is based on historical volatility of the 2018 Omnibus Incentive PlanCompany’s stock. The expected option life, representing the period of time that options granted are expected to be outstanding, is based on historical option exercise and employee termination data. We include recent historical experience in October 2020, which vest ratably over threeestimating our forfeitures. As employees terminate, grant tranches expire or as forfeitures are known, estimated expense is adjusted to actual. For options granted in fiscal years 2023, 2022, and five year periods. RSUs have a weighted average2021, the Company recorded charges in general and administrative expense based on the fair value of $34.21 per share and will bestock options using the straight-line method over the vesting period of three to five years.
Restricted Stock Units
The RSUs are expensed straight-line over the remaining weighted-average period of 4.242.7 years. On May 31, 20212023, there was $3,064,000$10,839 in unamortized compensation cost related to non-vested RSUs. The fair value of restricted stock units vested during fiscal years 2023 and 2022 was $820 and $1,032, respectively. There were no RSUs that vested during fiscal year 2021.
(RSU Grants in thousands) |
| RSUs |
|
| Weighted Average Grant Date Fair Value |
| ||
Outstanding at May 31, 2021 |
|
| 121 |
|
| $ | 34.21 |
|
Granted |
|
| 169 |
|
|
| 37.28 |
|
Released |
|
| (25 | ) |
|
| 34.24 |
|
Forfeited |
|
| (8 | ) |
|
| 36.80 |
|
Outstanding at May 31, 2022 |
|
| 257 |
|
|
| 36.14 |
|
Granted |
|
| 596 |
|
|
| 13.83 |
|
Released |
|
| (60 | ) |
|
| 35.14 |
|
Forfeited |
|
| (27 | ) |
|
| 22.81 |
|
Outstanding at May 31, 2023 |
|
| 766 |
|
|
| 19.30 |
|
The weighted average grant date fair value of the fiscal year 2021 awards was $34.21.
Employee Stock Purchase Plan
The Company offers eligible employees the option to purchase common stock at a 5%5% discount to the lower of the market value of the stock at the beginning or end of each participation period under the terms of the 20112021 Employee Stock Purchase Plan; thePlan. The discount is recorded in general and administrative expense. Total individual purchases in any year are limited to 10%10% of compensation. Shares purchased by employees through this program were 38,4062021, 43,156202036,6602019.2021. As of May 31, 2021,2023, common stock totaling 649,228881,323 of the 1,425,000
F-27
Income before income taxes by source consists of the following amounts:
| Year ended May 31 |
| ||||||||||
|
| 2023 |
|
| 2022 |
|
| 2021 |
| |||
U.S. |
| $ | (85,681 | ) |
| $ | 38,554 |
|
| $ | 55,753 |
|
Foreign |
|
| 63,639 |
|
|
| 21,653 |
|
|
| 19,515 |
|
| $ | (22,042 | ) |
| $ | 60,207 |
|
| $ | 75,268 |
| |
Year ended May 31 | ||||||||||||
(in thousands) | 2021 | 2020 | 2019 | |||||||||
U.S. | $ | 55,753 | $ | 62,329 | $ | 58,479 | ||||||
Foreign | 19,515 | 9,976 | 14,480 | |||||||||
| $ | 75,268 | $ | 72,305 | $ | 72,959 | |||||||
The provision for income taxes consists of the following:
| Year ended May 31 |
| ||||||||||
|
| 2023 |
|
| 2022 |
|
| 2021 |
| |||
Current |
|
|
|
|
|
|
|
|
| |||
Domestic |
|
|
|
|
|
|
|
|
| |||
Federal |
| $ | 8,674 |
|
| $ | 8,579 |
|
| $ | 6,981 |
|
Change in tax-related uncertainties |
|
| 278 |
|
|
| 3 |
|
|
| (75 | ) |
State |
|
| 1,616 |
|
|
| 2,406 |
|
|
| 2,147 |
|
Foreign |
|
| 9,490 |
|
|
| 5,140 |
|
|
| 4,875 |
|
Total Current |
|
| 20,058 |
|
|
| 16,128 |
|
|
| 13,928 |
|
Deferred |
|
|
|
|
|
|
|
|
| |||
Domestic |
|
|
|
|
|
|
|
|
| |||
Federal |
|
| (17,406 | ) |
|
| (3,721 | ) |
|
| 479 |
|
State |
|
| (1,865 | ) |
|
| (356 | ) |
|
| 44 |
|
Foreign |
|
| 41 |
|
|
| (151 | ) |
|
| (65 | ) |
Total Deferred |
|
| (19,230 | ) |
|
| (4,228 | ) |
|
| 458 |
|
Provision for Income Taxes |
| $ | 828 |
|
| $ | 11,900 |
|
| $ | 14,386 |
|
Year ended May 31 | ||||||||||||
(in thousands) | 2021 | 2020 | 2019 | |||||||||
Current | ||||||||||||
Domestic | ||||||||||||
Federal | $ | 6,981 | $ | 6,886 | $ | 7,173 | ||||||
Change in tax-related uncertainties | (75 | ) | 269 | 13 | ||||||||
State | 2,147 | 1,262 | 1,265 | |||||||||
Foreign | 4,875 | 2,475 | 3,758 | |||||||||
Deferred | ||||||||||||
Domestic | ||||||||||||
Federal | 479 | 1,964 | 1,031 | |||||||||
State | 44 | 195 | 98 | |||||||||
Foreign | (65 | ) | (221 | ) | (555 | ) | ||||||
Provision for Income Taxes | $ | 14,386 | $ | 12,830 | $ | 12,783 | ||||||
The reconciliation of income taxes computed at the U.S. federal statutory tax rate to income tax expense is as follows:
|
| Year ended May 31 |
| |||||||||
|
| 2023 |
|
| 2022 |
|
| 2021 |
| |||
Tax at U.S. statutory rate |
| $ | (4,629 | ) |
| $ | 12,643 |
|
| $ | 15,806 |
|
Permanent differences |
|
| 325 |
|
|
| 179 |
|
|
| 292 |
|
Global intangible low-taxed income (GILTI) |
|
| 6,482 |
|
|
| 1,501 |
|
|
| 2,064 |
|
Foreign derived intangible income deduction (FDII) |
|
| (643 | ) |
|
| (1,308 | ) |
|
| (1,210 | ) |
Foreign rate differential |
|
| (3,742 | ) |
|
| 215 |
|
|
| 669 |
|
Subpart F income |
|
| 152 |
|
|
| 397 |
|
|
| 628 |
|
Tax-effect from stock-based compensation |
|
| 1,946 |
|
|
| (462 | ) |
|
| (2,651 | ) |
Provision for state income taxes, net of federal benefit |
|
| 18 |
|
|
| 1,517 |
|
|
| 1,601 |
|
Non-deductible acquisition expenses |
|
| 7,187 |
|
|
| — |
|
|
| — |
|
Tax credits |
|
| (6,709 | ) |
|
| (2,527 | ) |
|
| (3,298 | ) |
Impact of tax rate changes |
|
| — |
|
|
| 583 |
|
|
| (75 | ) |
Change in tax-related uncertainties |
|
| 278 |
|
|
| 3 |
|
|
| 55 |
|
Changes in valuation allowances |
|
| 355 |
|
|
| 85 |
|
|
| — |
|
Research expenditures deduction |
|
| (365 | ) |
|
| (112 | ) |
|
| — |
|
Other |
|
| 173 |
|
|
| (814 | ) |
|
| 505 |
|
Income Tax Expense |
| $ | 828 |
|
| $ | 11,900 |
|
| $ | 14,386 |
|
Year ended May 31 | ||||||||||||
(in thousands) | 2021 | 2020 | 2019 | |||||||||
Tax at U.S. statutory rate | $ | 15,806 | $ | 15,184 | $ | 15,321 | ||||||
Permanent differences | 292 | 360 | (56 | ) | ||||||||
Global intangible low-taxed income (GILTI) | 2,064 | 438 | 840 | |||||||||
Foreign derived intangible income deduction (FDII) | (1,210 | ) | (1,120 | ) | (1,531 | ) | ||||||
Foreign rate differential | 669 | (182 | ) | 495 | ||||||||
Subpart F income | 628 | 634 | 842 | |||||||||
Tax benefits on stock-based compensation | (2,651 | ) | (1,998 | ) | (2,586 | ) | ||||||
Changes in tax contingencies—Increase/(Release) | (76 | ) | 269 | 13 | ||||||||
Provision for state income taxes, net of federal benefit | 1,601 | 1,412 | 1,251 | |||||||||
Tax Credits | (3,298 | ) | (1,417 | ) | (1,726 | ) | ||||||
Other | 561 | (750 | ) | (80 | ) | |||||||
Tax Expense | $ | 14,386 | $ | 12,830 | $ | 12,783 | ||||||
Foreign tax credits, primarily offsetting taxes associated with Subpart F and GILTI income, were $2,753,000, $945,000$5,324, $1,747, and $1,296,000$2,753 in fiscal years 2021, 20202023, 2022, and 2019,2021, respectively. The Company’s research and development credits were $545,000, $472,000$1,385, $780, and $430,000$545 in fiscal years 2023, 2022, and 2021, 2020 and 2019, respectively.
F-28
Deferred income taxes reflect the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of our deferred income tax liabilities and assets are as follows:
| Year ended May 31 |
| ||||||
|
| 2023 |
|
| 2022 |
| ||
Deferred income tax liabilities |
|
|
|
|
|
| ||
Indefinite and long-lived assets |
| $ | (369,500 | ) |
| $ | (22,709 | ) |
Right of use asset |
|
| (1,834 | ) |
|
| (344 | ) |
Prepaid expenses |
|
| (1,480 | ) |
|
| (884 | ) |
|
| (372,814 | ) |
|
| (23,937 | ) | |
Deferred income tax assets |
|
|
|
|
|
| ||
Interest expense not currently deductible |
|
| 5,782 |
|
|
| — |
|
Research and experimentation capitalization |
|
| 5,868 |
|
|
| — |
|
Stock options |
|
| 2,192 |
|
|
| 2,085 |
|
Inventories and accounts receivable |
|
| 3,219 |
|
|
| 2,044 |
|
Tax loss carryforwards |
|
| 3,909 |
|
|
| 561 |
|
Lease liability |
|
| 1,899 |
|
|
| 382 |
|
Accrued expenses and other |
|
| 1,981 |
|
|
| 2,422 |
|
|
| 24,850 |
|
|
| 7,494 |
| |
Valuation allowance |
|
| (2,110 | ) |
|
| (568 | ) |
Net deferred income tax liabilities |
| $ | (350,074 | ) |
| $ | (17,011 | ) |
|
|
|
|
|
| |||
Net deferred income tax assets (jurisdictional) |
| $ | 3,353 |
|
| $ | 575 |
|
Net deferred income tax liabilities (jurisdictional) |
|
| (353,427 | ) |
|
| (17,586 | ) |
Net deferred income tax liabilities |
| $ | (350,074 | ) |
| $ | (17,011 | ) |
Year ended May 31 | ||||||||
(in thousands) | 2021 | 2020 | ||||||
Deferred income tax liabilities | ||||||||
Indefinite and long-lived assets | $ | (25,072 | ) | $ | (20,867 | ) | ||
Prepaid expense s | (721 | ) | (795 | ) | ||||
| (25,793 | ) | (21,662 | ) | |||||
Deferred income tax assets | ||||||||
Stock options | 1,106 | 1,479 | ||||||
Inventories and accounts receivable | 2,081 | 1,336 | ||||||
Tax loss carryforwards | 662 | 484 | ||||||
Accrued expenses and other | 568 | 657 | ||||||
Less: valuation allowances | (541 | ) | (419 | ) | ||||
| 3,876 | 3,537 | |||||||
Net deferred income tax liabilities | $ | (21,917 | ) | $ | (18,125 | ) | ||
The Company has the following net operating loss carryforwards:
|
| As of May 31, 2023 |
|
| Expiry | |
U.S. |
| $ | 218 |
|
| 2037 |
Foreign |
|
| 13,362 |
|
| 2024 to Indefinite |
| $ | 13,580 |
|
|
| |
(in thousands) | As of | |||||||
Jurisdiction | 5/31/2021 | Expiry | ||||||
U.S. | $ | 345 | 2037 to indefinite | |||||
Foreign | 1,938 | 2024 to 2039 | ||||||
| $ | 2,283 | |||||||
Valuation allowances against certain deferred tax assets are established based on management’s determination of a more likely than not standard that the tax benefits will not be realized.
We are subject to income taxes in the U.S. (federal and state) and in numerous foreign jurisdictions. Significant judgment is required in evaluating our tax positions and determining our provision for income taxes. During the ordinary course of business, there are transactions and calculations for which the ultimate tax determination is uncertain. We establish reserves fortax-relatedcircumstances,circumstances, such as the outcome of tax audits. The provision for income taxes includes the impact of reserve provisions and changes to reserves that are considered appropriate.
F-29
The reconciliation of our tax-related uncertaintiesunrecognized tax benefits is as follows:
| Year ended May 31 |
| ||||||||||
|
| 2023 |
|
| 2022 |
|
| 2021 |
| |||
Beginning balance |
| $ | 741 |
|
| $ | 764 |
|
| $ | 762 |
|
Increase/(decrease) related to prior periods |
|
| 2 |
|
|
| (75 | ) |
|
| (182 | ) |
Increase related to current period |
|
| 479 |
|
|
| 147 |
|
|
| 184 |
|
Lapses of applicable statute of limitations |
|
| (276 | ) |
|
| (95 | ) |
|
| — |
|
Ending balance |
| $ | 946 |
|
| $ | 741 |
|
| $ | 764 |
|
Year ended May 31 | ||||||||||||
(in thousands) | 2021 | 2020 | 2019 | |||||||||
Beginning balance | $ | 880 | $ | 611 | $ | 598 | ||||||
Increase/(decrease) related to prior periods | (272 | ) | 56 | (106 | ) | |||||||
Increase related to current period | 197 | 213 | 119 | |||||||||
Ending balance | $ | 805 | $ | 880 | $ | 611 | ||||||
The Company is no longer subject to examination by the Internal Revenue Service for fiscal year 2017
As of May 31, 2023, the Company has approximately $153 million of undistributed earnings in its foreign subsidiaries. Approximately $41 million of these earnings are no longer considered permanently reinvested. The incremental tax cost to repatriate these earnings to the US is immaterial. The Company has not provided deferred taxes on approximately $112 million of undistributed earnings from non-U.S. subsidiaries as of May 31, 2023 which are indefinitely reinvested in operations. Based on historical experience, as well as management’s future plans, earnings from these subsidiaries will continue to be re-invested indefinitely for future expansion and working capital needs. On an annual basis, we evaluate the current business environment and whether any new events or other external changes might require future evaluation of the decision to indefinitely re-invest these foreign earnings. It is not practical to determine the income tax liability that would be payable if such earnings were not reinvested indefinitely.
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. We expense these annual costs of remediation, which have ranged from $38,000$63 to $131,000 $131per year over the past five years. The Company’s estimated$916,000$916 at both May 31, 20212023 and 2020,2022, measured on an undiscounted basis over an estimated period of 15 years.in discussionworking 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. However, the Company has agreed toinitiated a pilot study in fiscal 2022 which chemical reagents arewere injected into the ground in an attempt to reduce on-site contamination,contamination. The study will run over a two year period, with a majority of expenses incurred in fiscal 2022. Testing and is currently working with its consultant to design the system.treatment costs of $85 were incurred in fiscal 2023. At this time, the outcome of the pilot study is unknown, but a change in the current remediation strategy, depending on the alternative selected, could result in an increase in future costs and ultimately, an increase in the currently recorded liability, with an offsetting charge to operations in the period recorded. The Company has recorded $300,000$100 as a current liability, and the remaining $616,000$816 is recorded in other non-current liabilities in the consolidated balance sheet.
The Company receivedpreviously disclosed an administrative subpoena fromongoing investigation by the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) regarding activities or transactions involving parties located in Iran. The Company subsequently conducted an internal investigation under the direction of outside legal counsel and disclosed information concerning certain genomic testing services provided to an unrelated U.S.-based party engaged in veterinary activities involving an Iranian party. The Company continues to cooperate with OFAC’s investigation and is currently examining whether certain of these activities may be eligible for OFAC General Licenses authorizing agricultural and veterinary activities.
F-30
The Company has agreements with unrelated third parties that provide for the payment of royalties on the sale of certain products. Royalty expense, recorded in sales and marketing, under the terms of these agreements was $2,129,0002,524,0001,999, and $2,795,000$2,129 for fiscal years 2021, 20202023, 2022, and 2019,2021, respectively. Some of these agreements provide for guaranteed minimum royalty payments to be paid each fiscal year by the Company for certain technologies. Future minimum royalty payments are as follows: 2022—2024—$115,000, 2023—112, 2025—$110,000, 2024—109, 2026—$110,000, 2025—84, 2027—$110,0002026— 2028—$85,000
The Company is subject to certain legal and other proceedings in the normal course of business that, in the opinion of management, are not expected to have a material effect on its future results of operations or financial position.
8. Defined Contribution Benefit Plan
The Company maintains a defined contribution 401(k) benefit plan covering substantially all domestic employees. Employees are permitted to defer compensation up to IRS limits, with Neogen matching 100%100% of the first 3% of deferred compensation and 50%50% of the next 2% of deferred compensation.In the first quarter of fiscal 2021, the Company suspended the 401(k) match, while we assessed the potential financial impact of COVID-19 on the Company. The match was restored in September 2020. $1,204,000, $1,535,000,$2,439, $1,834, and $1,361,000$1,204 in fiscal years 2023, 2022, and 2021, 2020respectively.
9. Fair Value and 2019, respectively.
Fair Value of Financial 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. |
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.
Items Measured at Fair Value on a Recurring Basis
We forecast our net exposure in various receivables and payables to fluctuations in the value of various currencies, and have entered into a number of foreign currency forward contracts each month to mitigate that exposure. These contracts are recorded net at fair value on our consolidated balance sheets, classified as Level 2 in the fair value hierarchy.
Gains and losses from these foreign currency forward contracts are recognized in other income in our consolidated statements of income (loss). The notional amount of forward contracts in place was $15,500 and $4,424 as of May 31, 2023 and 2022, respectively, and consisted of hedges of transactions up to June 2023.
Fair Value of Derivatives Not Designated as Hedging Instruments |
| Balance Sheet Location |
| May 31, 2023 |
|
| May 31, 2022 |
| ||
Foreign currency forward contracts, net |
| Other receivable (Other accruals) |
| $ | 140 |
|
| $ | (78 | ) |
We record the fair value of our interest rate swaps on a recurring basis using Level 2 observable market inputs for similar assets or liabilities in active markets.
Fair Value of Derivatives Designated as Hedging Instruments |
| Balance Sheet Location |
| May 31, 2023 |
|
| May 31, 2022 |
| ||
Interest rate swaps – current |
| Other current assets |
| $ | 2,087 |
|
| $ | - |
|
Interest rate swaps – non-current |
| Other non-current liabilities |
|
| (4,770 | ) |
|
| - |
|
F-31
Items Measured at Fair Value on a Nonrecurring Basis
In addition to items that are measured at fair value on a recurring basis, the Company measures certain assets and liabilities at fair value on a nonrecurring basis, which are not included in the table above. As these nonrecurring fair value measurements are generally determined using unobservable inputs, these fair value measurements are classified within Level 3 of the fair value hierarchy. For further information see Note 2 "Goodwill and Other Intangible Assets" and Note 3 “Business Combinations”.
Items Not Carried at Fair Value
Fair values of the Company’s Term Loan and Senior Notes were as follows:
|
| May 31, 2023 |
| |
Aggregate fair value |
| $ | 927,720 |
|
Aggregate carrying value (1) |
|
| 900,000 |
|
(1) Excludes unamortized debt issuance costs.
Fair values were based on available market information and other observable data and are classified within Level 2 of the fair value hierarchy.
Derivatives
Derivatives Not Designated as Hedging Instruments
The location and amount of gains from derivatives not designated as hedging instruments in our consolidated statements of income (loss) were as follows:
| Location in statements |
| Year Ended May 31 |
| ||||||||||
Derivatives Not Designated as Hedging Instruments |
| of (loss) income |
| May 31, 2023 |
|
| May 31, 2022 |
|
| May 31, 2021 |
| |||
Foreign currency forward contracts |
| Other (expense) income |
| $ | (10,092 | ) |
| $ | 1,218 |
|
| $ | 2,651 |
|
Derivatives Designated as Hedging Instruments
In November 2022, we entered into a receive-variable, pay-fixed interest rate swap agreement with an initial $250,000 notional value, which is designated as a cash flow hedge. This agreement fixed a portion of the variable interest due on our term loan facility, with an effective date of December 2, 2022 and a maturity date of June 30, 2027. Under the terms of the agreement, we pay a fixed interest rate of 4.215% plus an applicable margin ranging between 150 to 225 basis points and receive a variable rate of interest based on term SOFR from the counterparty, which is reset according to the duration of the SOFR term. The fair value of the interest rate swap as of May 31, 2023 was a net liability of $2,683. The Company expects to reclassify a $2,087 gain of accumulated other comprehensive income into earnings in the next 12 months.
The following table summarizes the other comprehensive income (loss) before reclassifications of derivative gains and losses:
|
| Other Comprehensive Income (Loss) Before Reclassifications During |
| |||||||||
|
| Year Ended May 31 |
| |||||||||
Derivatives Designated as Hedging Instruments |
| 2023 |
|
| 2022 |
|
| 2021 |
| |||
Interest rate swaps |
| $ | (1,599 | ) |
| $ | — |
|
| $ | — |
|
The following table summarizes the reclassification of derivative gains and losses into net income from accumulated other comprehensive income (loss):
F-32
|
|
|
| Gain (Loss) Reclassified During |
| |||||||||
|
| Location of Gain (Loss) |
| Year Ended May 31 |
| |||||||||
Derivatives Designated as Hedging Instruments |
| Reclassified |
| 2023 |
|
| 2022 |
|
| 2021 |
| |||
Interest rate swaps |
| Interest expense |
| $ | 440 |
|
| $ | — |
|
| $ | — |
|
10. Segment Information
The Company has 2two reportable segments: Food Safety and Animal Safety. The Food Safety segment is primarily engaged in the development, production and marketing of diagnostic test kits 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; thisdistributors. This segment also provides genomic identification and related interpretive bioinformatic services. Additionally, the Animal Safety segment produces and markets rodenticides,rodent control products, disinfectants and insecticidesinsect control products to assist in the control of rodents, insects and disease in and around agricultural, food production and other facilities.
Neogen’s international operations in the United Kingdom, Mexico, Guatemala, Brazil, Argentina, Uruguay, Chile, China and India originally focused on the sales and marketing of our food safety products, and each of these units reports through the Food Safety segment. In recent years, these operations have expanded to offer the Company’s complete line of products and services, including those usually associated with the Animal Safety segment such as cleaners, disinfectants, rodenticides, insecticides,rodent control products, insect control products, veterinary instruments and genomics services. These additional products and services are managed and directed by existing management and are reported through the Food Safety segment.
Neogen’s operation in Australia originally focused on providing genomics services and sales of animal safety products and reports through the Animal Safety segment. With the acquisition of Cell BioSciences in February 2020, thisThis operation has expanded to offer our complete line of products and services, including those usually associated with the Food Safety segment. These additional products are managed and directed by existing management at Neogen Australasia and report through the Animal Safety segment.
The accounting policies of each of the segments are the same as those described in Note 1.
F-33
Segment information is as follows:
|
| Food Safety |
|
| Animal Safety |
|
| Corporate and |
|
| Total |
| ||||
Fiscal 2023 |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Product revenues, net to external customers |
| $ | 518,488 |
|
| $ | 196,588 |
|
| $ | — |
|
| $ | 715,076 |
|
Service revenues, net to external customers |
|
| 28,309 |
|
|
| 79,062 |
|
|
| — |
|
|
| 107,371 |
|
Total revenues to external customers |
|
| 546,797 |
|
|
| 275,650 |
|
|
| — |
|
|
| 822,447 |
|
Operating income (loss) |
|
| 60,414 |
|
|
| 43,332 |
|
|
| (66,231 | ) |
|
| 37,515 |
|
Depreciation and amortization |
|
| 76,841 |
|
|
| 11,536 |
|
|
| — |
|
|
| 88,377 |
|
Interest expense |
|
| — |
|
|
| — |
|
|
| 55,961 |
|
|
| 55,961 |
|
Total assets |
|
| 3,970,356 |
|
|
| 338,507 |
|
|
| 245,569 |
|
|
| 4,554,432 |
|
Expenditures for long-lived assets |
|
| 52,169 |
|
|
| 13,588 |
|
|
| — |
|
|
| 65,757 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Fiscal 2022 |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Product revenues, net to external customers |
| $ | 231,626 |
|
| $ | 193,038 |
|
| $ | — |
|
| $ | 424,664 |
|
Service revenues, net to external customers |
|
| 28,353 |
|
|
| 74,142 |
|
|
| — |
|
|
| 102,495 |
|
Total revenues to external customers |
|
| 259,979 |
|
|
| 267,180 |
|
|
| — |
|
|
| 527,159 |
|
Operating income (loss) |
|
| 38,581 |
|
|
| 52,546 |
|
|
| (32,509 | ) |
|
| 58,618 |
|
Depreciation and amortization |
|
| 13,386 |
|
|
| 10,308 |
|
|
| — |
|
|
| 23,694 |
|
Interest expense |
|
| — |
|
|
| — |
|
|
| 72 |
|
|
| 72 |
|
Total assets |
|
| 304,461 |
|
|
| 307,417 |
|
|
| 381,051 |
|
|
| 992,929 |
|
Expenditures for long-lived assets |
|
| 7,842 |
|
|
| 16,939 |
|
|
| — |
|
|
| 24,781 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Fiscal 2021 |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Product revenues, net to external customers |
| $ | 209,104 |
|
| $ | 167,198 |
|
| $ | — |
|
| $ | 376,302 |
|
Service revenues, net to external customers |
|
| 25,140 |
|
|
| 67,017 |
|
|
| — |
|
|
| 92,157 |
|
Total revenues to external customers |
|
| 234,244 |
|
|
| 234,215 |
|
|
| — |
|
|
| 468,459 |
|
Operating income (loss) |
|
| 33,725 |
|
|
| 48,685 |
|
|
| (8,241 | ) |
|
| 74,169 |
|
Depreciation and amortization |
|
| 11,575 |
|
|
| 9,466 |
|
|
| — |
|
|
| 21,041 |
|
Interest expense |
|
| — |
|
|
| — |
|
|
| 78 |
|
|
| 78 |
|
Total assets |
|
| 295,065 |
|
|
| 244,039 |
|
|
| 381,088 |
|
|
| 920,192 |
|
Expenditures for long-lived assets |
|
| 13,730 |
|
|
| 12,982 |
|
|
| — |
|
|
| 26,712 |
|
(in thousands) | Food Safety | Animal Safety | Corporate and Eliminations (1) | Total | ||||||||||||
Fiscal 2021 | ||||||||||||||||
Product revenues to external customers | $ | 209,104 | $ | 167,198 | $ | — | $ | 376,302 | ||||||||
Service revenues to external customers | 25,140 | 67,017 | — | 92,157 | ||||||||||||
Total revenues to external customers | 234,244 | 234,215 | — | 468,459 | ||||||||||||
Operating income (loss) | 33,725 | 48,685 | (8,241 | ) | 74,169 | |||||||||||
Depreciation and amortization | 11,575 | 9,466 | — | 21,041 | ||||||||||||
Total Assets | 295,065 | 244,039 | 381,088 | 920,192 | ||||||||||||
Expenditures for long-lived assets | 13,730 | 12,982 | — | 26,712 | ||||||||||||
Fiscal 2020 | ||||||||||||||||
Product revenues to external customers | $ | 189,893 | $ | 145,646 | $ | — | $ | 335,539 | ||||||||
Service revenues to external customers | 22,798 | 59,833 | — | 82,631 | ||||||||||||
Total revenues to external customers | 212,691 | 205,479 | — | 418,170 | ||||||||||||
Operating income (loss) | 33,526 | 39,051 | (5,054 | ) | 67,523 | |||||||||||
Depreciation and amortization | 10,173 | 8,223 | — | 18,396 | ||||||||||||
Total Assets | 222,331 | 231,178 | 343,673 | 797,182 | ||||||||||||
Expenditures for long-lived assets | 15,867 | 8,185 | — | 24,052 | ||||||||||||
Fiscal 2019 | ||||||||||||||||
Product revenues to external customers | $ | 190,675 | $ | 148,764 | $ | — | $ | 339,439 | ||||||||
Service revenues to external customers | 22,799 | 51,948 | — | 74,747 | ||||||||||||
Total revenues to external customers | 213,474 | 200,712 | — | 414,186 | ||||||||||||
Operating income (loss) | 39,020 | 33,875 | (4,801 | ) | 68,094 | |||||||||||
Depreciation and amortization | 9,525 | 8,099 | — | 17,624 | ||||||||||||
Total Assets | 206,267 | 221,950 | 267,523 | 695,740 | ||||||||||||
Expenditures for long-lived assets | 8,916 | 5,745 | — | 14,661 | ||||||||||||
Revenue is determined by location of the end customer. The following table presents the Company’s revenue disaggregated by geographical location:location.
| Year ended May 31 |
| ||||||||||
|
| 2023 |
|
| 2022 |
|
| 2021 |
| |||
Domestic |
| $ | 424,005 |
|
| $ | 317,820 |
|
| $ | 285,262 |
|
International |
|
| 398,442 |
|
|
| 209,339 |
|
|
| 183,197 |
|
Total revenue |
| $ | 822,447 |
|
| $ | 527,159 |
|
| $ | 468,459 |
|
The following table presents the Company's net property and equipment amounts disaggregated by country.
| Year ended May 31 |
| ||||||
|
| 2023 |
|
| 2022 |
| ||
United States |
| $ | 130,967 |
|
| $ | 63,313 |
|
United Kingdom |
|
| 20,123 |
|
|
| 14,204 |
|
Other |
|
| 47,659 |
|
|
| 33,067 |
|
Total PPE |
| $ | 198,749 |
|
| $ | 110,584 |
|
Year ended May 31 | ||||||||
(in thousands) | 2021 | 2020 | ||||||
Domestic | $ | 285,262 | $ | 253,458 | ||||
International | 183,197 | 164,712 | ||||||
Total revenue | $ | 468,459 | $ | 418,170 | ||||
F-34
Quarter Ended | ||||||||||||||||
(in thousands, except per share) | August 2020 | November 2020 | February 2021 | May 2021 | ||||||||||||
Total Revenue | $ | 109,325 | $ | 115,000 | $ | 116,709 | $ | 127,425 | ||||||||
Gross Margin | 50,302 | 53,214 | 53,849 | 57,691 | ||||||||||||
Net income | 15,860 | 15,885 | 13,377 | 15,760 | ||||||||||||
Basic net income per share | $ | 0.15 | $ | 0.15 | $ | 0.13 | $ | 0.15 | ||||||||
Diluted net income per share | $ | 0.15 | $ | 0.15 | $ | 0.12 | $ | 0.15 | ||||||||
Quarter Ended | ||||||||||||||||
(in thousands, except per share) | August 2019 | November 2019 | February 2020 | May 2020 | ||||||||||||
Total Revenue | $ | 101,424 | $ | 107,803 | $ | 99,869 | $ | 109,074 | ||||||||
Gross Margin | 48,194 | 51,026 | 45,330 | 51,729 | ||||||||||||
Net income | 14,652 | 16,276 | 12,200 | 16,347 | ||||||||||||
Basic net income per share | $ | 0.14 | $ | 0.15 | $ | 0.12 | $ | 0.15 | ||||||||
Diluted net income per share | $ | 0.14 | $ | 0.15 | $ | 0.11 | $ | 0.15 | ||||||||