UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM
10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended February 28, 2019.

29, 2020.

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from
to

Commission file number
0-17988

Neogen Corporation

(Exact name of registrant as specified in its charter)

Michigan 38-2367843

Michigan
38-2367843
(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer

Identification Number)

620 Lesher Place

Lansing, Michigan 48912

(Address of principal executive offices, including zip code)

(517)
372-9200

(Registrant’s telephone number, including area code)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of each Class
Trading
Symbol(s)
Name of each exchange
on which registered
N/A

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  ☒    NO  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T
232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    YES
    NO  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a
non-accelerated
filer (see definition of “accelerated filer and large accelerated filer” in Rule
12b-2
of the Exchange Act):

Large accelerated filer
 
 
Accelerated filer
Non-accelerated
 filer
Smaller Reporting Company
 
Non-accelerated filer  Smaller Reporting Company 
Emerging growth company
   

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2
of the Exchange Act):    YES  
    NO  

As of February 28, 2019,29, 2020 there were 52,120,42252,910,832 shares of Common Stock outstanding.


Table of Contents

NEOGEN CORPORATION AND SUBSIDIARIES

TABLE OF CONTENTS

Page No.
  Page No. 

PART I. FINANCIAL INFORMATION

Item 1.
 

Item 1.

  
2
 
  
2
 
  
3
 
  
4
 
5
 Consolidated Statement of Equity – Nine months ended February 28, 20195
  
6
 
  
7
 

Item 2.

 
Item 2.
  18
19
 

Item 3.

 
Item 3.
  25
27
Item 4.
27
Item 1.
28
Item 1A.
28
Item 6.
28
29
 

Item 4.

  25
 

PART II. OTHER INFORMATION

Item 1.

  26
 

Item 2.

  26 

Item 6.

Exhibits26

SIGNATURES

27
CEO Certification
CFO Certification
Section 906 Certification

1

PART I – FINANCIAL INFORMATION

Item 1. Interim Consolidated Financial Statements

Neogen Corporation and Subsidiaries

Consolidated Balance Sheet

Sheets

(in thousands, except share and

per share amounts)

   February 28,
2019
  May 31,
2018
 
   (Unaudited)  (Unaudited) 

Assets

   

Current Assets

   

Cash and cash equivalents

  $93,576  $83,074 

Marketable securities (at fair value, which approximates cost)

   153,104   127,736 

Accounts receivable, less allowance of $1,700 and $1,550

   80,011   79,086 

Inventories

   84,870   76,005 

Prepaid expenses and other current assets

   11,041   9,888 
  

 

 

  

 

 

 

Total Current Assets

   422,602   375,789 

Net Property and Equipment

   76,453   73,069 

Other Assets

   

Goodwill

   104,077   99,558 

Othernon-amortizable intangible assets

   15,658   14,783 

Amortizable customer-based intangibles, net of accumulated amortization of $27,184 and $24,579 at February 28, 2019 and May 31, 2018, respectively

   30,007   31,841 

Othernon-current assets, net of accumulated amortization of $12,304 and $12,470 at February 28, 2019 and May 31, 2018, respectively

   23,788   22,969 
  

 

 

  

 

 

 

Total Assets

  $672,585  $618,009 
  

 

 

  

 

 

 

Liabilities and Equity

   

Current Liabilities

   

Accounts payable

  $18,952  $20,750 

Accrued compensation

   5,391   6,065 

Income taxes

   —     165 

Other accruals

   9,925   11,708 
  

 

 

  

 

 

 

Total Current Liabilities

   34,268   38,688 

Deferred Income Taxes

   14,211   14,103 

OtherNon-Current Liabilities

   4,190   5,043 
  

 

 

  

 

 

 

Total Liabilities

   52,669   57,834 

Commitments and Contingencies (Note 8)

   

Equity

   

Preferred stock, $1.00 par value, 100,000 shares authorized, none issued and outstanding

   —     —   

Common stock, $0.16 par value, 120,000,000 shares authorized, 52,120,422 and 51,735,732 shares issued and outstanding at February 28, 2019 and May 31, 2018, respectively

   8,339   8,278 

Additionalpaid-in capital

   217,274   202,572 

Accumulated other comprehensive loss

   (9,129  (9,746

Retained earnings

   403,432   359,071 
  

 

 

  

 

 

 

Total Stockholders’ Equity

   619,916   560,175 
  

 

 

  

 

 

 

Total Liabilities and Equity

  $672,585  $618,009 
  

 

 

  

 

 

 

         
 
February 29,
2020
  
 
 
 
 
May 31,
 
 
 
 

2019
 
 
Unaudited
  
Un
a
udited
 
Assets
      
Current Assets
      
Cash and cash equivalents
 $
  50,774
  $
41,688
 
Marketable securities
  
277,149
   
225,836
 
Accounts receivable, less allowance of $1,400 and $1,700 at February 29, 2020 and May 31, 2019, respectively
  
80,692
   
82,582
 
Inventories
  
89,244
   
85,992
 
Prepaid expenses and other current assets
  
17,016
   
13,431
 
         
Total Current Assets
  
514,875
   
449,529
 
Net Property and Equipment
  
78,394
   
74,847
 
Other Assets
      
Goodwill
  
109,761
   
103,619
 
Other
non-amortizable
intangible assets
  
15,425
   
15,649
 
Amortizable intangible and other assets, net of accumulated amortization of $43,397 and $40,835 at February 29,
2020
and May 31, 2019, respectively
  
55,046
   
52,096
 
         
Total Assets
 $
773,501
  $
695,740
 
         
Liabilities and Stockholders’ Equity
      
Current Liabilities
      
Accounts payable
 $
18,994
  $
19,063
 
Accrued compensation
  
5,596
   
7,085
 
Income taxes
  
1,479
   
601
 
Other accruals
  
13,066
   
11,502
 
         
Total Current Liabilities
  
39,135
   
38,251
 
Deferred Income Taxes
  
16,343
   
15,618
 
Other
Non-Current
Liabilities
  
6,152
   
3,972
 
         
Total Liabilities
  
61,630
   
57,841
 
Commitments and Contingencies (note 8)
      
Equity
      
Preferred stock, $1.00 par value, 100,000 shares authorized, 0ne issued and outstanding
  
—  
   
—  
 
Common stock, $0.16 par value, 120,000,000 shares authorized, 52,910,832 and 52,216,589 shares issued and outstanding at February 29, 2020 and May 31, 2019, respectively
  
8,466
   
8,355
 
Additional
paid-in
capital
  
254,537
   
221,937
 
Accumulated other comprehensive loss
  
(13,507
  
(11,640
)
Retained earnings
  
462,375
   
419,247
 
         
Total Stockholders’ Equity
  
711,871
   
637,899
 
         
Total Liabilities and Stockholders’ Equity
 $
773,501
  $
695,740
 
         
See notes to interim consolidated financial statements.

2

Neogen Corporation and Subsidiaries

Consolidated Statements of Income (unaudited)

(in thousands, except per share amounts)

   

Three Months Ended

February 28,

   

Nine Months Ended

February 28,

 
   2019   2018   2019   2018 

Revenues

        

Product revenues

  $77,375   $77,184   $249,897   $241,200 

Service revenues

   20,325    17,719    54,527    48,611 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Revenues

   97,700    94,903    304,424    289,811 

Cost of Revenues

        

Cost of product revenues

   41,902    40,283    132,157    124,520 

Cost of service revenues

   11,170    10,019    30,877    27,517 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Cost of Revenues

   53,072    50,302    163,034    152,037 
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross Margin

   44,628    44,601    141,390    137,774 

Operating Expenses

        

Sales and marketing

   16,722    16,572    52,454    49,442 

General and administrative

   10,018    9,280    30,337    29,096 

Research and development

   3,249    2,836    9,235    8,901 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Operating Expenses

   29,989    28,688    92,026    87,439 
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating Income

   14,639    15,913    49,364    50,335 

Other Income

        

Interest income

   1,335    524    3,290    1,322 

Other income

   649    844    807    1,913 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Other Income

   1,984    1,368    4,097    3,235 
  

 

 

   

 

 

   

 

 

   

 

 

 

Income Before Taxes

   16,623    17,281    53,461    53,570 

Provision for Income Taxes

   3,550    700    9,100    7,900 
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Income

   13,073    16,581    44,361    45,670 

Net (Income) Loss Attributable toNon-Controlling Interest

   —      5    —      (70
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Income Attributable to Neogen

  $13,073   $16,586   $44,361   $45,600 
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Income Attributable to Neogen Per Share

        

Basic

  $0.25   $0.32   $0.86   $0.89 
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

  $0.25   $0.32   $0.85   $0.88 
  

 

 

   

 

 

   

 

 

   

 

 

 

                 
 
Three 
Months
Ended
  
Nine Months Ended
 
 
February 29/28,
  
February 29/28,
 
 
2020
  
2019
  
2020
  
2019
 
Revenues
            
Product revenues
 $
77,736
  $
77,375
  $
247,071
  $
249,897
 
Service revenues
  
22,133
   
20,325
   
62,025
   
54,527
 
                 
Total Revenues
  
99,869
   
97,700
   
309,096
   
304,424
 
Cost of Revenues
            
Cost of product revenues
  
41,068
   
41,902
   
128,658
   
132,157
 
Cost of service revenues
  
13,471
   
11,170
   
35,888
   
30,877
 
                 
Total Cost of Revenues
  
54,539
   
53,072
   
164,546
   
163,034
 
                 
Gross Margin
  
45,330
   
44,628
   
144,550
   
141,390
 
                 
Operating Expenses
            
Sales and marketing
  
17,675
   
16,722
   
53,206
   
52,454
 
General and administrative
  
10,789
   
10,018
   
32,473
   
30,337
 
Research and development
  
3,823
   
3,249
   
11,292
   
9,235
 
                 
Total Operating Expenses
  
32,287
   
29,989
   
96,971
   
92,026
 
                 
Operating Income
  
13,043
   
14,639
   
47,579
   
49,364
 
                 
Other Income (Expense)
            
Interest income
  
1,600
   
1,335
   
4,381
   
3,290
 
Other income (expense)
  
(393
)  
649
   
(832
)  
807
 
                 
Total Other Income
  
1,207
   
1,984
   
3,549
   
4,097
 
                 
Income Before Taxes
  
14,250
   
16,623
   
51,128
   
53,461
 
Provision for Income Taxes
  
2,050
   
3,550
   
8,000
   
9,100
 
                 
Net Income
 $
12,200
  $
13,073
  $
43,128
  $
44,361
 
                 
Net Income Per Share
            
Basic
 $
0.23
  $
0.25
  $
0.82
  $
0.86
 
                 
Diluted
 $
0.23
  $
0.25
  $
0.82
  $
0.85
 
                 
See notes to interim consolidated financial statements.

3

Neogen Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income (unaudited)

(in thousands)

   

Three Months Ended

February 28,

   Nine Months Ended
February 28,
 
   2019   2018   2019   2018 

Net income

  $13,073   $16,581   $44,361   $45,670 

Other comprehensive income, net of tax:
currency translation adjustments

   3,105    1,163    617    1,900 
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   16,178    17,744    44,978    47,570 

Comprehensive (income) loss attributable tonon-controlling interest

   —      5    —      (70
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to Neogen Corporation

  $16,178   $17,749   $44,978   $47,500 
  

 

 

   

 

 

   

 

 

   

 

 

 

                 
 
Three Months Ended
  
Nine Months Ended
 
 
February 29/28,
  
February 29/28,
 
 
2020
  
2019
  
2020
  
2019
 
Net income
 $
12,200
  $
13,073
  $
43,128
  $
44,361
 
Other comprehensive income (loss), net of tax:
            
currency translation adjustments
  
(1,761
)  
3,105
   
(2,452
)  
617
 
Other comprehensive income, net of tax:
            
unrealized gain on marketable securities
  
172
   
—  
   
585
   
—  
 
                 
Total comprehensive income
 $
10,611
  $
16,178
  $
41,261
  $
44,978
 
                 
See notes to interim consolidated financial statements.

4

Neogen Corporation and Subsidiaries

Consolidated StatementStatements of
Equity (unaudited)

(in thousands)

   Common Stock  Additional
Paid-in
  Accumulated
Other
Comprehensive
  Retained     
   Shares  Amount  Capital  (Loss)  Earnings   Total 

Balance at May 31, 2018

   51,736  $8,278  $202,572  $(9,746 $359,071   $560,175 

Issuance of shares under share-based compensation plan

   251   40   8,433   —     —      8,473 

Issuance of shares under employee stock purchase plan

   8   2   517   —     —      519 

Net income for the three months ended August 31, 2018

   —     —     —     —     15,237    15,237 

Other comprehensive (loss)

   —     —     —     (2,778  —      (2,778
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

 

Balance at August 31, 2018

   51,995  $8,320  $211,522  $(12,524 $374,308   $581,626 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

 

Issuance of shares under share-based compensation plan

   87   14   4,093   —     —      4,107 

Net income for the three months ended November 30, 2018

   —     —     —     —     16,051    16,051 

Other comprehensive income

   —     —     —     290   —      290 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

 

Balance at November 30, 2018

   52,082  $8,334  $215,615  $(12,234 $390,359   $602,074 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

 

Issuance of shares under share-based compensation plan

   78   12   4,146   —     —      4,158 

Issuance of shares under employee stock purchase plan

   10   1   640   —     —      641 

Shares repurchased

   (50  (8  (3,127  —     —      (3,135

Net income for the three months ended February 28, 2019

   —     —     —     —     13,073    13,073 

Other comprehensive income

   —     —     —     3,105   —      3,105 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

 

Balance at February 28, 2019

   52,120  $8,339  $217,274  $(9,129 $403,432   $619,916 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

 

                         
       
Accumulated
     
     
Additional
  
Other
     
 
Common Stock
  
Paid-in
  
Comprehensive
  
Retained
   
 
Shares
  
Amount
  
Capital
  
Income (Loss)
  
Earnings
  
Total
 
Balance at May 31, 2019
  
52,217
  $
8,355
  $
221,937
  $
(11,640
) $
419,247
  $
637,899
 
Issuance of shares under share-based compensation plan
  
196
   
30
   
9,683
   
 
 
   
 
 
   
9,713
 
Issuance of shares under employee stock purchase plan
  
10
   
2
   
536
   
 
 
   
 
 
   
538
 
Net income for the three months ended August 31, 2019
  
   
 
 
   
 
 
   
 
 
   
14,652
   
14,652
 
Other comprehensive loss for the three months ended August 31
, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(2,496
)
 
 
 
 
 
 
 
(2,496
)
                         
Balance at August 31, 2019
  
52,423
  $
 8,387
  $
 232,156
  $
 (14,136
) $
 433,899
  $
 660,306
 
Issuance of shares under share-based compensation plan
  
288
   
47
   
12,070
   
 
 
   
 
 
   
12,117
 
Net income for the three months ended November 30, 2019
  
   
 
 
   
 
 
   
 
 
   
16,276
   
16,276
 
Other comprehensive income for the three months ended November 30, 2019
  
   
 
 
   
 
 
   
2,218
   
 
 
   
2,218
 
                         
Balance at November 30, 2019
  
 52,711
  $
 8,434
  $
 244,226
  $
 (11,918
) $
 450,175
  $
 690,917
 
Issuance of shares under share-based compensation plan
  
188
   
31
   
9,705
   
   
   
9,736
 
Issuance of shares under employee stock purchase plan
  
12
   
1
   
606
   
   
   
607
 
Net income for the three months ended February 29, 2020
     
   
   
   
12,200
   
12,200
 
Other comprehensive loss for the three months ended February 29
, 2020
 
 
 
 
 
 
 
 
 
 
 
(1,589
)
 
 
 
 
 
(1,589
)
                         
Balance at February 29, 2020
  
52,911
  
$
8,466
  $
254,537
  $
(13,507
) $
462,375
  $
711,871
 
                         
                         
       
Accumulated
     
     
Additional
  
Other
     
 
Common Stock
  
Paid-in
  
Comprehensive
  
Retained
   
 
Shares
  
Amount
  
Capital
  
Income (Loss)
  
Earnings
  
Total
 
Balance at May 31, 2018
  
51,736
  $
8,278
  $
202,572
  $
(9,746
) $
359,071
  $
560,175
 
Issuance of shares under share-based compensation plan
  
251
   
40
   
8,433
   
 
 
   
 
 
   
8,473
 
Issuance of shares under employee stock purchase plan
  
8
   
2
   
517
   
 
 
   
 
 
   
519
 
Net income for the three months ended August 31, 2018
  
 
 
   
 
 
   
 
 
   
 
 
   
15,237
   
15,237
 
Other comprehensive loss for the three months ended August 31, 2018
  
 
 
   
 
 
   
 
 
   
(2,778
)  
 
 
   
(2,778
)
                         
Balance at August 31, 2018
  
51,995
  $
 8,320
  $
 211,522
  $
 (12,524
) $
 374,308
  $
 581,626
 
Issuance of shares under share-based compensation plan
  
87
   
14
   
4,093
   
 
 
   
 
 
   
4,107
 
Net income for the three months ended November 30, 2018
  
 
 
   
 
 
   
 
 
   
 
 
   
16,051
   
16,051
 
Other comprehensive income for the three months ended November 30, 2018
  
 
 
   
 
 
   
 
 
   
290
   
 
 
   
290
 
                         
Balance at November 30, 2018
  
52,082
  $
 8,334
  $
 215,615
  $
 (12,234
) $
 390,359
  $
 602,074
 
Issuance of shares under share-based compensation plan
  
78
   
12
   
4,146
   
—  
   
—  
   
4,158
 
Issuance of shares under employee stock purchase plan
  
10
   
1
   
640
   
—  
   
—  
   
641
 
Shares repurchased
  
(50
)  
(8
)  
(3,127
)  
—  
   
—  
   
(3,135
)
Net income for the three months ended February 28, 2019
  
—  
   
—  
   
—  
   
—  
   
13,073
   
13,073
 
Other comprehensive loss for the three months ended February 28, 2019
  
—  
   
—  
   
—  
   
3,105
   
—  
   
3,105
 
                         
Balance at February 28, 2019
  
52,120
  
$
8,339
  $
217,274
  $
(9,129
) $
403,432
  
$
619,916
 
                         
See notes to interim consolidated financial statements.

5

Neogen Corporation and Subsidiaries

Consolidated Statements of Cash Flows (unaudited)

(in thousands)

   

Nine Months Ended

February 28,

 
   2019  2018 

Cash Flows From Operating Activities

   

Net Income

  $44,361  $45,670 

Adjustments to reconcile net income to net cash from operating activities:

   

Depreciation and amortization

   13,028   12,682 

Share-based compensation

   4,137   3,692 

Change in operating assets and liabilities, net of business acquisitions:

   

Accounts receivable

   (898  (4,013

Inventories

   (8,745  (3,859

Prepaid expenses and other current assets

   (1,463  (7,316

Accounts payable, accruals and other changes

   (7,455  (280
  

 

 

  

 

 

 

Net Cash From Operating Activities

   42,965   46,576 

Cash Flows From Investing Activities

   

Purchases of property, equipment and othernon-current intangible assets

   (11,877  (16,297

Proceeds from the sale of marketable securities

   290,827   211,327 

Purchases of marketable securities

   (316,195  (255,348

Business acquisitions, net of cash acquired

   (6,388  (468
  

 

 

  

 

 

 

Net Cash Used In Investing Activities

   (43,633  (60,786

Cash Flows From Financing Activities

   

Exercise of stock options and issuance of employee stock purchase plan shares

   13,752   18,916 

Repurchase of common stock

   (3,135  —   
  

 

 

  

 

 

 

Net Cash From Financing Activities

   10,617   18,916 

Effect of Exchange Rate on Cash

   553   (207
  

 

 

  

 

 

 

Net Increase In Cash and Cash Equivalents

   10,502   4,499 

Cash and Cash Equivalents, Beginning of Period

   83,074   77,567 
  

 

 

  

 

 

 

Cash and Cash Equivalents, End of Period

  $93,576  $82,066 
  

 

 

  

 

 

 

         
 
Nine Months Ended
February 29/28,
 
 
2020
  
2019
 
Cash Flows From Operating Activities
      
Net Income
 $
  43,128
  $
44,361
 
Adjustments to reconcile net income to net cash from operating activities:
      
Depreciation and amortization
  
13,542
   
13,028
 
Share-based compensation
  
4,795
   
4,137
 
Change in operating assets and liabilities, net of business acquisitions:
      
Accounts receivable
  
3,841
   
(898
)
Inventories
  
(2,238
)  
(8,745
)
Prepaid expenses and other current assets
  
(3,119
)  
(1,463
)
Accounts payable, accruals and other changes
  
301
   
(7,455
)
         
Net Cash From Operating Activities
  
60,250
   
42,965
 
         
Cash Flows For Investing Activities
      
Purchases of property, equipment and other assets
  
(16,322
)  
(11,877
)
Proceeds from the sale of marketable securities
  
300,448
   
290,827
 
Purchases of marketable securities
  
(351,002
)  
(316,195
)
Business acquisitions, net of cash acquired
  
(9,701
)  
(6,388
)
         
Net Cash For Investing Activities
  
(76,577
)  
(43,633
)
         
Cash Flows From Financing Activities
      
Exercise of stock options and issuance of employee stock purchase plan shares
  
27,915
   
13,752
 
Repurchase of common stock
  
   
(3,135
)
         
Net Cash From Financing Activities
  
27,915
   
10,617
 
         
Effect of Exchange Rates on Cash
  
(2,502
)  
553
 
         
Net Increase In Cash and Cash Equivalents
  
9,086
   
10,502
 
Cash and Cash Equivalents, Beginning of Period
  
41,688
   
83,074
 
         
Cash and Cash Equivalents, End of Period
 $
50,774
  $
93,576
 
         
See notes to interim consolidated financial statements.

6

NEOGEN CORPORATION AND SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. ACCOUNTING POLICIES

BASIS OF PRESENTATION AND CONSOLIDATION

The accompanying unaudited consolidated financial statements include the accounts of Neogen Corporation (“Neogen” or the “Company”) and its wholly owned subsidiaries and have been prepared in accordance with accounting principles generally accepted in the United States of America (generally accepted accounting principles) for interim financial information and with the instructions to Form
10-Q
and Article 10 of Regulation
S-X.
Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included in the accompanying unaudited consolidated financial statements. All intercompany balances and transactions have been eliminated in consolidation. The results of operations for the three and nine month periods ended February 28, 201929, 2020 are not necessarily indicative of the results to be expected for the fiscal year ending May 31, 2019.2020. For more complete financial information, these consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in our Annual Report on Form
10-K
for the fiscal year ended May 31, 2018.

Share and per share amounts reflect the December 29, 20174-for-3 stock split as if it took place at the beginning of the period

presented.

2019.

Recently Adopted Accounting Standards

Revenue Recognition

Leases
On June 1, 2018, we2019, the Company adopted ASU No.2014-09—Revenue from Contracts with Customers (Topic 606).
 2016-02—
Leases. Refer to the Revenue RecognitionLeases section of Note 1 for further information.

Classification of Cash Receipts and Payments

In August 2016, the FASB issued ASU No.2016-15—Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force). The amendments in ASU2016-15 address eight specific cash flow issues and apply to all entities that are required to present a statement of cash flows under FASB Accounting Standards Codification (FASB ASC) 230, Statement of Cash Flows. The amendments in ASU2016-15 are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. We adopted this ASU on June 1, 2018; the impact on our consolidated financial statements was immaterial.

Recent Accounting Pronouncements Not Yet Adopted

Leases

In February 2016, the FASB issued ASU No.2016-02—Leases to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and aright-of-use asset representing its right to use the underlying asset for the lease term. The recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessor have not significantly changed from previous U.S. GAAP. This ASU is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2018. Modified retrospective application is required with certain practical expedients. We will adopt this ASU on June 1, 2019 and are currently in the process of evaluating our lessee and lessor arrangements to determine the impact of this pronouncement on our consolidated financial condition and results of operations. This evaluation includes a review of revenue through leasing arrangements as well as lease expenses, which primarily result from operating lease arrangements at most of our facilities.

Financial Instruments-Instruments - Credit Losses

In June 2016, the FASB issued ASU No.
2016-13—Measurement
of Credit Losses on Financial Instruments, which changes how companies measure credit losses on most financial instruments measured at amortized cost and certain other instruments, such as loans, receivables and
held-to-maturity
debt securities. Rather than generally recognizing credit losses when it is probable that the loss has been incurred, the revised guidance requires companies to recognize an allowance for credit losses for the difference between the

amortized cost basis of a financial instrument and the amount of amortized cost that the company expects to collect over the instrument’s contractual life. ASU

2016-13
is effective for fiscal periods beginning after December 15, 2019 and must be adopted as a cumulative effect adjustment to retained earnings. EarlyThe Company does not believe adoption of this guidance will have a
 material
 impact on its consolidated financial statements.
Fair Value Measurements
In August 2018, the FASB issued ASU
2018-13—Fair
Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement, which modifies the disclosure requirements of fair value measurements. ASU
2018-13
is permitted. We doeffective for fiscal years beginning after December 15, 2019. The Company does not believe adoption of this guidance will have an impact on ourits consolidated financial statements.

Cloud Computing Implementation Cost
In August 2018, the FASB issued ASU
2018-15—Intangible-Goodwill
and Other
Internal-Use
Software (Subtopic
350-40):
Customer’s Accounting for Implementation Cost Incurred in a Cloud Computing Arrangement That Is a Service Contract, which clarifies the accounting for implementation costs in cloud computing arrangements. ASU
2018-15
is effective for fiscal years beginning after December 15, 2019. The Company does not believe adoption of this guidance will have an impact on its consolidated financial statements.
7

Comprehensive Income

Comprehensive income represents net income and any revenues, expenses, gains and losses that, under U.S. generally accepted accounting principles, are excluded from net income and recognized directly as a component of equity. Accumulated other comprehensive income (loss) consists solely of foreign currency translation adjustments.

adjustments and unrealized gains or losses on marketable securities.

Fair Value of Financial Instruments

The carrying amounts of ourthe Company’s financial instruments other than cash equivalents and marketable securities, which include accounts receivable and accounts payable, approximate fair value based on either their short maturity or current terms for similar instruments.
Fair value measurements are determined based upon the exit price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants exclusive of any transaction costs. We utilizeThe Company utilizes a fair value hierarchy based upon the observability of inputs used in valuation techniques as follows:

Level 1: Observable inputs such as quoted prices in active markets;

Level 2: Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and

Level 3: Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

Cash and Cash Equivalents

Cash and cash equivalents consist of bank demand accounts, savings deposits, certificates of deposit and commercial paper with original maturities of 90 days or less. Cash and cash equivalents are maintained at financial institutions and, at times, balances may exceed federally insured limits. The carrying value ofCompany has never experienced any losses related to these assets approximates fair value duebalances and believes it is not exposed to the short maturity of these instrumentssignificant credit risk regarding its cash and meets the Level 1 criteria.

cash equivalents.

Marketable Securities

The Company has marketable securities held by banks or broker-dealers at February 28, 2019,29, 2020, consisting of short-term domestic certificates of deposit, and commercial paper and U.S. treasuries rated at least A1/P1
A-1/P-1
(short-term) and A/A2 (long-term) with maturities between 91 days and two years. These securities are classified as available for sale. The primary objective of our short-termthe Company’s investment activity is to preserve capital for the purpose of funding operations, capital expenditures and business acquisitions; short-term investments are not entered into for trading or speculative purposes. These securities are recorded at fair value (that approximates cost) based on recent trades of similar securities or pricing models and therefore meet the Level 2 criteria. Interest income on these investments is recorded within Other Incomeother income on the consolidated statements of income.

ESTIMATES AND ASSUMPTIONS

The preparation of these financial statements requires that management make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an ongoing basis, management evaluates the estimates, including, but not limited to, variable consideration related to revenue recognition, allowances for doubtful accounts, the market value of, and demand for, inventories, stock-based compensation, provision for income taxes and related balance sheet accounts, accruals, goodwill and other intangible assets. These estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

There have been no significant changes to the critical accounting policies and estimates disclosed in ourthe Company’s Annual Report on Form
10-K
for the fiscal year ended May 31, 2018, except for the new revenue recognition standard the Company adopted effective June 1, 2018. See the below sections Revenue Recognition and Recently Adopted Accounting Standards for further information on revenue recognition.

2019.

There were no significant changes to the contractual obligations or contingent liabilities and commitments disclosed in ourthe Company’s Annual Report on Form
10-K
for the fiscal year ended May 31, 2018.

2019.

8

Table of Contents
Accounts Receivable Allowance

Management attempts to minimize credit risk by reviewing customers’ credit history before extending credit and by monitoring credit exposure on a regular basis. An allowance for doubtful accounts receivable is established based upon factors surrounding the credit risk of specific customers, historical trends and other information. Collateral or other security is generally not required for accounts receivable. Once a receivable balance has been determined to be uncollectible, that amount is charged against the allowance for doubtful accounts.

Inventory

The reserve for obsolete and slow-moving inventory is reviewed at least quarterly based on an analysis of the inventory, considering the current condition of the asset as well as other known facts and future plans. The reserve required to record inventory at lower of cost or net realizable value is adjusted as conditions change. Product obsolescence may be caused by shelf-life expiration, discontinuance of a product line, replacement products in the marketplace or other competitive situations.

Goodwill and Other Intangible Assets

Goodwill represents the excess of purchase price over fair value of tangible net assets of acquired businesses after amounts are allocated to other identifiable intangible assets. Other intangible assets include customer relationships, trademarks, licenses, trade names, covenants
not-to-compete
and patents. Customer-based intangibles are amortized on either an accelerated or straight-line basis, reflecting the pattern in which the economic benefits are consumed, while all other amortizable intangibles are amortized on a straight-line basis; intangibles are generally amortized over 5 to 25 years. We review the carrying amounts of goodwill and other
non-amortizable
intangible assets annually, or when indications of impairment exist, to determine if such assets may be impaired by performing a quantitative assessment. If the carrying amounts of these assets are deemed to be less than fair value based upon a discounted cash flow analysis and comparison to comparable EBITDA multiples of peer companies, such assets are reduced to their estimated fair value and a charge is recorded to operations.

Long Lived

Long-Lived Assets

Management reviews the carrying values of its long-lived assets to be held and used, including definite-lived intangible assets, for possible impairment whenever events or changes in business conditions warrant such a review. The carrying value of a long-lived asset is considered impaired when the anticipated separately identifiable undiscounted cash flows over the remaining useful life of the asset indicate that the carrying amount of the asset may not be recoverable. In such an event, fair value is determined using discounted cash flows and, if lower than the carrying value, impairment is recognized through a charge to operations.

Equity Compensation Plans

Share options awarded to employees and shares of stock awarded to employees under certain stock purchase plans are recognized as compensation expense based on their fair value at grant date. The fair market value of options granted under the Company stock option plans was estimated on the date of grant using the Black-Scholes option-pricing model with assumptions for inputs such as interest rates, expected dividends, volatility measures and specific employee exercise behavior patterns based on statistical data. Some of the inputs used are not market-observable and have to be estimated or derived from available data. Use of different estimates would produce different option values, which in turn would result in higher or lower compensation expense recognized. To value options, several recognized valuation models exist. None of these models can be singled out as being the best or most correct one.correct. The model applied by us can handle most of the specific features included in the options granted, which is the reason for its use. If a different model were used, the option values could differ despite using the same inputs. Accordingly, using different assumptions coupled with using a different valuation model could have a significant impact on the fair value of employee stock options. Fair value could be either higher or lower than the number provided by the model applied and the inputs used. Further information on our equity compensation plans, including inputs used to determine the fair value of options, is disclosed in Note 5 to the unaudited consolidated financial statements.

5.

9

Table of Contents
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 period.

year.

On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the Tax Act) was signed into law making significant changes to the Internal Revenue Code. Changes include a federal corporate tax rate reduction from 35% to 21% for tax years beginning after December 31, 2017, the transition of U.S. international taxation from a worldwide tax system to a territorial system, and aone-time transition tax on the mandatory deemed repatriation of foreign earnings. The Tax Act also includes a provision to tax global intangible low taxed income (“GILTI”) of foreign subsidiaries, which became effective for us beginning June 1, 2018.

Leases
In the fourth quarter of fiscal 2018, we recorded an estimated net charge of $4.8 million related to the Tax Act, due to the impact of the reduction in the tax rate on deferred tax assets and liabilities of $6.0 million, partially offset by $1.2 million ofone-time transition tax on the deemed repatriation of foreign earnings. Due to the timing of the enactment and the complexity in applying the provisions of the Tax Act, these charges and benefits were recorded based on reasonable estimates and were subject to revisions as we completed our analysis of the Tax Act, collected and prepared necessary data, and interpreted any additional guidance issued by the Internal Revenue Service. Prior to December 22, 2018, immaterial adjustments to these provisions were recorded to income tax expense, within the measurement period under SAB 118.

Revenue Recognition

In May 2014,February 2016, the FASB issued ASU No.2014-09—Revenue from Contracts with Customers (Topic 606). The new standard outlines

2016-02—Leases,
to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. A lessee should recognize in the statement of financial position a single comprehensive model for entitiesliability to make lease payments (the lease liability) and a
right-of-use
asset representing its right to use in accountingthe underlying asset for revenuethe lease term. The recognition, measurement and presentation of expenses and cash flows arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard is designed to create greater comparability for financial statement users across industries and jurisdictions and also requires enhanced disclosures. In April 2016, the FASB issued Accounting Standards UpdateNo. 2016-10—Revenuea lease by a lessor have not significantly changed from Contracts with Customers (Topic 606), which amends and adds clarity to certain aspects of the guidance set forth inprevious U.S. GAAP. This ASU2014-09 related to identifying performance obligations and licensing. The guidance became was effective for the Company on June 1,annual periods, including interim periods within those annual periods, beginning after December 15, 2018. We adopted this standard usingASU on June 1, 2019; the full retrospective approach. This approach was chosen to provide appropriate comparisons against our prior year financial statements; accordingly, historical information for the year ended May 31, 2018, including interim periods therein, has been adjusted to conform to the new standard.

Prior to the adoption, we identified all revenue streams at each significant subsidiary and reviewed contracts to evaluate the impact of adopting the new standard on our revenue recognition policies, procedures and control framework and ultimately on our consolidated financial statements was immaterial.

We lease various manufacturing, laboratory, warehousing and distribution facilities, administrative and sales offices, equipment and vehicles under operating leases. We evaluate our contracts to determine if an arrangement is a lease at inception and classify it as a finance or operating lease. Currently, all our leases are classified as operating leases. Leased assets and corresponding liabilities are recognized based on the present value of the lease payments over the lease term. Our lease terms may include options to extend when it is reasonably certain that we will exercise that option.
Costs associated with operating leases are recognized on a straight-line basis within operating expenses over the term of the lease. With the adoption of ASC 842 on June 1, 2019, we recognized all leases with terms greater than 12 months in duration on our consolidated balance sheets as
right-of-use
assets and lease liabilities of approximately $2.0 million each as of June 1, 2019. We adopted the standard using the prospective approach and did not retrospectively apply to prior periods.
Right-of-use
assets are recorded in other assets on our consolidated balance sheets. Current and
non-current
lease liabilities are recorded in other accruals within current liabilities and other
non-current
liabilities, respectively, on our consolidated balance sheets.
We have made certain assumptions and judgments when applying ASC 842, the most significant of which are:
We elected the package of practical expedients available for transition that allow us to not reassess whether expired or existing contracts contain leases under the new definition of a lease, lease classification for expired or existing leases and whether previously capitalized initial direct costs would qualify for capitalization under ASC 842.
We did not elect to use hindsight when considering judgments and estimates such as assessments of lessee options to extend or terminate a lease or purchase the underlying asset.
For all asset classes, we elected to not recognize a
right-of-use
asset and lease liability for short-term leases.
For all asset classes, we elected to not separate
non-lease
components from lease components to which they relate and have accounted for the combined lease and
non-lease
components as a single lease component.
The determination of the discount rate used in a lease is our incremental borrowing rate that is based on what we would normally pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments.
Supplemental balance sheet information related disclosures. In our reviewto operating leases was as follows:
     
 
February 29,
2020
 
 
(in thousands)
 
Right of use - assets
 $
1,755
 
Lease liabilities - current
  
325
 
Lease liabilities -
non-current
  
1,467
 
10

Table of contracts in each revenue stream, we noted no material impactContents
The weighted average remaining lease term and weighted average discount rate were as follows:
February 29,

2020
Weighted average remaining lease term
2.4 years
Weighted average discount rate
3.5%
Operating lease expenses are classified as cost of revenues or operating expenses on the consolidated statements of income. The components of lease expense were as follows:
         
 
Three 
Months Ended 
February 29,
2020
  
Nine
Months Ended
February 29,
2020
 
 
(in thousands)
  
(in thousands)
 
Operating leases
 $
316
  $
889
 
Short term leases
  
25
   
106
 
         
Total lease expense
 $
341
  $
995
 
         
Cash paid for amounts included in the implementationmeasurement of lease liabilities for operating leases included in cash flows from operations on the standard. We determinedstatement of cash flows were approximately $868,000 for the impactnine months ended February 29, 2020. There were 0
non-cash
additions to
right-of-use
assets obtained from new operating lease liabilities for the nine months ended February 29, 2020.
Undiscounted minimum lease payments as of adopting the standard on our control framework and noted minimal, insignificant changesFebruary 29, 2020 were as follows:
     
 
Amount
 
 
(in thousands)
 
Years ending May 31,
   
2020 (1)
 $
289
 
2021
  
915
 
2022
  
358
 
2023
  
168
 
2024
  
94
 
2025 and thereafter
  
26
 
     
Total lease payments
  
1,850
 
Less: imputed interest
  
58
 
     
Total lease liabilities
 $
  1,792
 
     
(1)Excluding the nine months ended February 29, 2020.
The aggregate amount of future minimum annual rental payments applicable to our system and other controls processes.

Under Topic 606, thenoncancelable leases as of May 31, 2019 were as follows:

     
 
Future Minimum
Lease Payments
 
 
(in thousands)
 
Years ending May 31,
   
2020
 $
1,112
 
2021
  
810
 
2022
  
297
 
2023
  
101
 
Thereafter
  
0
 
     
 $
2,320
 
     
11

Revenue Recognition
The Company determines the amount of revenue to be recognized through
application
of the following steps:

Identification of the contract with a customer;

Identification of the performance obligations in the contract;

Determination of the transaction price;

Allocation of the transaction price to the performance obligations in the contract; and

Recognition of revenue when, or as, the Company satisfies the performance obligations.

Essentially all of our revenue is generated through contracts with our customers. A performance obligation is a promise in a contract to transfer a product or service to a customer. We generally recognize revenue at a point in time when all of our performance obligations under the terms of a contract are satisfied. With the adoption of Topic 606, revenueRevenue is recognized upon transfer of control of promised products and services in an amount that reflects the consideration the Company expects to receive in exchange for those products or services. The collectability of consideration on the contract is reasonably assured before revenue is recognized. To the extent that customer payment has been received before all recognition criteria are met, these revenues are initially deferred in other accruals on the balance sheet and the revenue is recognized in the period that all recognition criteria have been met. In certain situations, we provide rebates, marketing support, credits or incentives to selectselected customers, which are accounted for as variable consideration when estimating the amount of revenue to recognize on a contract. Variable consideration reduces the amount of revenue that is recognized. These variable consideration estimates are updated at the end of each reporting period based on information currently available.

The performance obligations in our contracts are generally satisfied well within one year of the contract inception. In such cases, we have elected the practical expedient to not adjust the promised amount of consideration for the effects of a significant financing component. We have elected to utilize the practical expedient to recognize the incremental costs of obtaining a contract as an expense when incurred because the amortization period for the prepaid costs that would otherwise have been deferred and amortized is one year or less. The Company accounts for shipping and handling for products as a fulfillment activity when goods are shipped. Revenue is recognized net of any tax collected from customers; the taxes are subsequently remitted to governmental authorities. The Company’s terms and conditions of sale generally do not provide for returns of product or reperformance of service except in the case of quality or warranty issues. These situations are infrequent; due to immateriality of the amount, warranty claims are recorded in the period incurred.

We derive revenue from two primary sources - product revenue and service revenue.

Product revenue consists primarily of shipments of:

Diagnostic test kits, dehydrated culture media and related products used by food producers and processors to detect harmful natural toxins, foodborne bacteria, allergens and levels of general sanitation;

Consumable products marketed to veterinarians retailers, livestock producers and animal health product distributors; and

Rodenticides, disinfectants and insecticides to assist in the control of rodents, insects and disease in and around agricultural, food production and other facilities.

Revenues for our products are recognized and invoiced when the product is shipped to the customer.

Service revenue consists primarily of:

Genomic identification and related interpretive bioinformatic services; and

Other commercial laboratory services.

Revenues for our genomics and commercial laboratory services are recognized and invoiced when the applicable laboratory service is performed and the results are conveyed to the customer.

Payment terms for products and services are generally 30 to 60 days.

days; international terms may be longer.

12

Table of Contents
The following table presents disaggregated revenue by major product and service categories for the three and nine months ended February 28, 2019 and 2018:

   

Three Months Ended

February 28,

   

Nine Months Ended

February 28,

 
   2019   2018   2019   2018 
   (in thousands)   (in thousands) 

Food Safety

        

Natural Toxins, Allergens & Drug Residues

  $18,612   $16,807   $58,021   $54,960 

Bacterial & General Sanitation

   9,519    8,992    30,807    27,435 

Culture Media & Other

   11,893    10,179    36,302    31,353 

Rodenticides, Insecticides & Disinfectants

   5,953    7,359    18,521    18,175 

Genomics Services

   5,136    3,976    13,395    10,887 
  

 

 

   

 

 

   

 

 

   

 

 

 
  $51,113   $47,313   $157,046   $142,810 

Animal Safety

        

Life Sciences

  $1,823   $2,769   $5,794   $7,589 

Veterinary Instruments & Disposables

   10,682    10,630    32,769    32,804 

Animal Care & Other

   6,823    7,245    22,439    22,894 

Rodenticides, Insecticides & Disinfectants

   13,256    14,255    48,921    49,422 

Genomics Services

   14,003    12,691    37,455    34,292 
  

 

 

   

 

 

   

 

 

   

 

 

 
  $46,587   $47,590   $147,378   $147,001 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Revenues

  $97,700   $94,903   $304,424   $289,811 
  

 

 

   

 

 

   

 

 

   

 

 

 

Restatement of Previously Issued Financial Statements

The Company has historically classified certain variable consideration components resulting from volume rebates, distributor support, and other marketing discounts as cost of revenues or sales and marketing expense in our consolidated financial statements of income. These amounts should have been classified as contra revenue in product or service revenues. The Company had determined in prior periods that the misstatements were clearly immaterial, individually and in the aggregate, to each of the reporting periods affected. The Company began properly classifying these items as contra revenues beginning in the three month period ended August 31, 2018, the first quarter of the Company’s current fiscal year, and has revised the prior year’s quarter and year to date periods to conform to the current period presentation. These immaterial adjustments had no impact on our operating income, income before taxes, net income or reported earnings per share, and no change to stockholders’ equity.

The effects of the revisions on the line items within our unaudited consolidated statements of income for the three and nine months ended February 28, 2018 are as follows:

   Three Months Ended   Nine Months Ended 
   February 28, 2018   February 28, 2018 
   As
Previously
Reported
   Adjustments  As
Revised
   As
Previously
Reported
   Adjustments  As
Revised
 
   (in thousands)   (in thousands) 

Revenues

          

Product revenues

  $78,142   $(958 $77,184   $244,298   $(3,098 $241,200 

Service revenues

   17,750    (31  17,719    48,667    (56  48,611 
  

 

 

   

 

 

  

 

 

   

 

 

   

 

 

  

 

 

 

Total revenues

   95,892    (989  94,903    292,965    (3,154  289,811 

Cost of revenues

          

Cost of product revenues

   40,352    (69  40,283    124,785    (265  124,520 

Cost of service revenues

   10,019    —     10,019    27,517    —     27,517 
  

 

 

   

 

 

  

 

 

   

 

 

   

 

 

  

 

 

 

Total cost of revenues

   50,371    (69  50,302    152,302    (265  152,037 

Gross margin

   45,521    (920  44,601    140,663    (2,889  137,774 

Operating expenses

          

Sales and marketing

   17,492    (920  16,572    52,331    (2,889  49,442 

Total operating expenses

   29,608    (920  28,688    90,328    (2,889  87,439 

Operating income

   15,913    —     15,913    50,335    —     50,335 

Presented below are the effects of the revisions on the line items within our previously issued consolidated statements of income for the years ended May 31, 2018 and 2017. Revised consolidated statements of income related to these periods are presented in this Form10-Q and the Form10-K to be filed in the succeeding period of this fiscal year.

   Year Ended   Year Ended 
   May 31, 2018   May 31, 2017 
   As
Previously
Reported
   Adjustments  As
Revised
   As
Previously
Reported
   Adjustments  As
Revised
 
   (in thousands)   (in thousands) 

Revenues

          

Product revenues

  $335,554   $(4,266 $331,288   $306,512   $(3,390 $303,122 

Service revenues

   66,698    (56  66,642    55,082    73   55,155 
  

 

 

   

 

 

  

 

 

   

 

 

   

 

 

  

 

 

 

Total revenues

   402,252    (4,322  397,930    361,594    (3,317  358,277 

Cost of revenues

          

Cost of product revenues

   174,067    (342  173,725    156,568    (273  156,295 

Cost of service revenues

   37,933    —     37,933    33,058    —     33,058 
  

 

 

   

 

 

  

 

 

   

 

 

   

 

 

  

 

 

 

Total cost of revenues

   212,000    (342  211,658    189,626    (273  189,353 

Gross margin

   190,252    (3,980  186,272    171,968    (3,044  168,924 

Operating expenses

          

Sales and marketing

   70,909    (3,980  66,929    62,424    (3,044  59,380 

Total operating expenses

   120,058    (3,980  116,078    107,023    (3,044  103,979 

Operating income

   70,194    —     70,194    64,945    —     64,945 

The revisions had no impact on our audited consolidated balance sheets as of May 31, 2018 and 2017 and no impact on our unaudited consolidated statements of equity or unaudited consolidated statements of cash flows for the three and nine month periods ended February 29, 2020 and February 28, 2018.

2019:

                 
 
Three Months ended February 2
9
/2
8
,
  
Nine Months ended February 2
9
/2
8
,
 
 
2020
  
2019
  
2020
  
2019
 
 
(in thousands)
 
Food Safety
            
Natural Toxins, Allergens & Drug Residues
 $
 17,154
  $
 18,612
  $
 57,950
  $
58,021
 
Bacterial & General Sanitation
  
9,413
   
9,519
   
31,345
   
30,807
 
Culture Media & Other
  
11,222
   
11,893
   
35,259
   
36,302
 
Rodenticides, Insecticides & Disinfectants
  
7,964
   
5,953
   
20,859
   
18,521
 
Genomics Services
  
4,745
   
5,136
   
12,961
   
13,395
 
                 
 $
50,498
  $
51,113
  $
158,374
  $
157,046
 
Animal Safety
            
Life Sciences
 $
 1,376
  $
1,823
  $
 4,901
  $
5,794
 
Veterinary Instruments & Disposables
  
10,799
   
10,682
   
32,621
   
32,769
 
Animal Care & Other
  
6,667
   
6,554
   
20,859
   
21,900
 
Rodenticides, Insecticides & Disinfectants
  
14,558
   
13,525
   
47,462
   
49,460
 
Genomics Services
  
15,971
   
14,003
   
44,879
   
37,455
 
                 
 $
49,371
  $
46,587
  $
150,722
  $
147,378
 
                 
Total Revenues
 $
 99,869
  $
 97,700
  $
 309,096
  $
 304,424
 
                 

2. INVENTORIES

Inventories are stated at the lower of cost, determined by the
first-in,
first-out
method, or net realizable value. The components of inventories follow:

   February 28,
2019
   May 31,
2018
 
   (in thousands) 

Raw materials

  $38,944   $36,702 

Work-in-process

   6,758    5,993 

Finished and purchased goods

   39,168    33,310 
  

 

 

   

 

 

 
  $84,870   $76,005 
  

 

 

   

 

 

 

         
 
February 29,
  
May 31,
 
 
2020
  
2019
 
 
(in thousands)
 
Raw materials
 $
42,243
  $
 41,594
 
Work-in-process
  
5,402
   
5,581
 
Finished and purchased goods
  
41,599
   
38,817
 
         
 $
89,244
  $
85,992
 
         
3. NET INCOME PER SHARE

The calculation of net income per share attributable to Neogen Corporation follows:

   Three Months Ended
February 28,
   Nine Months Ended
February 28,
 
   2019   2018   2019   2018 
   (in thousands, except per share amounts) 

Numerator for basic and diluted net income per share:

        

Net income attributable to Neogen

  $13,073   $16,586   $44,361   $45,600 

Denominator for basic net income per share:

        

Weighted average shares

   52,071    51,537    51,849    51,253 

Effect of dilutive stock options

   401    700    599    761 
  

 

 

   

 

 

   

 

 

   

 

 

 

Denominator for diluted net income per share

   52,472    52,237    52,448    52,014 

Net income attributable to Neogen per share:

        

Basic

  $0.25   $0.32   $0.86   $0.89 
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

  $0.25   $0.32   $0.85   $0.88 
  

 

 

   

 

 

   

 

 

   

 

 

 

                 
 
Three Months Ended
  
Nine Months Ended
 
 
February 29/28,
  
February 29/28,
 
 
2020
  
2019
  
2020
  
2019
 
 
(in thousands, except per share amounts)
 
Numerator for basic and diluted net income per share:
            
Net income attributable to Neogen
 $
12,200
  $
 13,073
  $
 
43,128
  $
 44,361
 
Denominator for basic net income per share:
            
Weighted average shares
  
52,795
   
52,071
   
52,463
   
51,849
 
Effect of dilutive stock options
  
253
   
401
   
320
   
599
 
                 
Denominator for diluted net income per share
  
53,048
   
52,472
   
52,783
   
52,448
 
Net income attributable to Neogen per share:
            
Basic
 $
0.23
  $
0.25
  $
0.82
  $
0.86
 
                 
Diluted
 $
0.23
  $
0.25
  $
0.82
  $
0.85
 
                 

13

Table of Contents
4. SEGMENT INFORMATION AND GEOGRAPHIC DATA

We have two2 reportable segments: Food Safety and Animal Safety. The Food Safety segment is primarily engaged in the development, production and marketing of diagnostic test kits, dehydrated culture media and related products used by food producers and processors to detect harmful natural toxins, foodborne bacteria, allergens and levels of general sanitation. The Animal Safety segment is primarily engaged in the development, production and marketing of products dedicated to animal safety, including a complete line of consumable products marketed to veterinarians retailer, livestock producers and animal health product distributors; this segment also provides genomic identification and related interpretive bioinformatic services. Additionally, the Animal Safety segment produces and markets rodenticides, disinfectants and insecticides to assist in the control of rodents, insects and disease in and around agricultural, food production and other facilities.

Our international operations in the United Kingdom, Mexico, Brazil, China and India originally focused on selling the Company’s Food Safetyfood safety products, and each of these units reports through the Food Safety segment. In recent years, these operations have expanded to offer our complete line of products and services, including those usually associated with the Animal Safety segment such as cleaners, disinfectants, rodenticides, insecticides, veterinary instruments and genomics services. These additional products and services are managed and directed by existing management and are reported through the Food Safety segment.

The accounting policies of each of the segments are the same as those described in Note 1.

Segment information follows:

   Food
Safety
   Animal
Safety
   Corporate and
Eliminations
(1)
   Total 
   (in thousands) 

As of and for the three months ended February 28, 2019

 

      

Product revenues to external customers

  $44,790   $32,585   $—     $77,375 

Service revenues to external customers

   6,323    14,002    —      20,325 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues to external customers

   51,113    46,587    —      97,700 

Operating income (loss)

   8,339    7,338    (1,038   14,639 

Total assets

   204,570    221,335    246,680    672,585 

As of and for the three months ended February 28, 2018 - Revised (2)

 

      

Product revenues to external customers

  $42,286   $34,898   $—     $77,184 

Service revenues to external customers

   5,027    12,692    —      17,719 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues to external customers

   47,313    47,590    —      94,903 

Operating income (loss)

   8,258    8,493    (838   15,913 

Total assets

   188,075    215,371    192,155    595,601 

                 
 
 
Food
Safety
  
Animal
Safety
  
Corporate and
Eliminations
(1)
  
Total
 
 
(in thousands)
 
As of and for the three months ended February 29, 2020
            
Product revenues to external customers
 $
44,450
  $
33,286
  $
  $
77,736
 
Service revenues to external customers
  
6,048
   
16,085
   
   
22,133
 
                 
Total revenues to external customers
  
50,498
   
49,371
   
   
99,869
 
Operating income (loss)
  
5,881
   
8,492
   
(1,330
  
13,043
 
Total assets
  
226,077
   
219,501
   
327,923
   
773,501
 
                 
As of and for the three months ended February 28, 2019
            
Product revenues to external customers
 $
44,790
  $
32,585
  $
—  
  $
77,375
 
Service revenues to external customers
  
6,323
   
14,002
   
—  
   
20,325
 
                 
Total revenues to external customers
  
51,113
   
46,587
   
—  
   
97,700
 
Operating income (loss)
  
8,339
   
7,338
   
(1,038
)  
14,639
 
Total assets
  
204,570
   
221,335
   
246,680
   
672,585
 
(1)

Includes corporate assets, consisting principally of cash and cash equivalents, marketable

securities
, current and deferred tax accounts and overhead expenses not allocated to specific business segments. Also includes the elimination of intersegment transactions.

14

Table of Contents
                 
 
 
Food
Safety
  
Animal
Safety
  
Corporate and
Eliminations
(1)
  
Total
 
 
(in thousands)
 
As of and for the nine months ended February 29, 2020
            
Product revenues to external customers
 $
141,516
  $
105,555
  $
  $
247,071
 
Service revenues to external customers
  
16,858
   
45,167
   
   
62,025
 
                 
Total revenues to external customers
  
158,374
   
150,722
   
   
309,096
 
Operating income (loss)
  
24,571
   
26,521
   
(3,513
  
47,579
 
                 
As of and for the nine months ended February 28, 2019
            
Product revenues to external customers
 $
 139,979
  $
 109,918
  $
—  
  $
 249,897
 
Service revenues to external customers
  
17,067
   
37,460
   
—  
   
54,527
 
                 
Total revenues to external customers
  
157,046
   
147,378
   
—  
   
304,424
 
Operating income (loss)
  
29,554
   
23,101
   
(3,291
)  
49,364
 
(2)

Revenues for the three months ended February 28, 2018 have been revised as discussed in Note 1. For the three months ended February 28, 2018, product revenues were reduced by $332,000 in the Food Safety segment and $626,000 in the Animal Safety segment; service revenues were unchanged in the Food Safety segment and were reduced by $31,000 in the Animal Safety segment.

   Food
Safety
   Animal
Safety
   Corporate and
Eliminations
(1)
   Total 
   (in thousands) 

For the nine months ended February 28, 2019

        

Product revenues to external customers

  $139,979   $109,918   $—     $249,897 

Service revenues to external customers

   17,067    37,460    —      54,527 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues to external customers

   157,046    147,378    —      304,424 

Operating income (loss)

   29,554    23,101    (3,291   49,364 

For the nine months ended February 28, 2018 - Revised (2)

 

      

Product revenues to external customers

  $128,491   $112,709   $—     $241,200 

Service revenues to external customers

   14,319    34,292    —      48,611 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues to external customers

   142,810    147,001    —      289,811 

Operating income (loss)

   25,704    27,691    (3,060   50,335 

(1)

Includes the elimination of intersegment transactions.

(2)

Revenues for the nine months ended February 28, 2018 have been revised as discussed in Note 1. For the nine months ended February 28, 2018, product revenues were reduced by $1,130,000 in the Food Safety segment and $1,968,000 in the Animal Safety segment; service revenues were unchanged in the Food Safety segment and reduced by $56,000 in the Animal Safety segment.

The following table presents the Company’s revenue disaggregated by geographic location:

   Three Months ended
February 28,
   Nine Months Ended
February 28,
 
   2019   2018   2019   2018 
   (in thousands)   (in thousands) 

Revenues by Geographic Location

        

Domestic

  $57,422   $57,825   $182,298   $180,414 

International

   40,278    37,078    122,126    109,397 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

   97,700    94,903    304,424    289,811 
  

 

 

   

 

 

   

 

 

   

 

 

 

                 
 
Three months ended
  
Nine months ended
 
 
February 29/28,
  
February 29/28,
 
 
2020
  
2019
  
2020
  
2019
 
 
(in thousands)
  
(in thousands)
 
Revenues by Geographic Location
            
Domestic
 $
 59,762
  $
57,422
  $
 186,887
  $
 182,298
 
International
  
40,107
   
40,278
   
122,209
   
122,126
 
                 
Total revenue
  
99,869
   
97,700
   
309,096
   
304,424
 
                 

15

Table of Contents
5. EQUITY COMPENSATION PLANS

Qualified and
non-qualified
options to purchase shares of common stock may be granted to directors, officers and employees of the Company under the terms of our stock option plans. These options are granted at an exercise price of not less than the fair market value of the stock on the date of grant. Options vest ratably over three and five year periods and the contractual terms are generally five or ten years. A summary of stock option activity during the nine months ended February 28, 201929, 2020 follows:

   Shares   Weighted-
Average
Exercise Price
 

Options outstanding June 1, 2018

   2,497,124   $42.63 

Granted

   526,750    62.92 

Exercised

   (418,598   30.76 

Forfeited

   (105,835   46.50 
  

 

 

   

Options outstanding February 28, 2019

   2,499,441    48.78 

         
   
Weighted-
 
   
Average
 
(Options in thousands)
 
Shares
  
Exercise Price
 
Options outstanding June 1, 2019
  
2,385
  $
49.37
 
Granted
  
561
   
63.91
 
Exercised
  
(686
  
40.07
 
Forfeited
  
(56
  
56.67
 
         
Options outstanding February 29, 2020
  
2,204
  $
55.77
 
During the three and nine month periods ended February 29, 2020 and February 28, 2019, and 2018, the Company recorded $1,640,000 and $1,306,000 and $1,026,000$4,795,000 and $4,137,000, and $3,692,000, respectively, of compensation expense related to its share-based awards.

The weighted-average fair value per share of stock options granted during the first nine months of fiscal years 2019 and fiscal 2018,2020, estimated on the date of grant using the Black-Scholes option pricing model, was $14.91 and $14.44, respectively.$15.56. The fair value of stock options granted was estimated using the following weighted-average assumptions.

   FY 2019  FY 2018 

Risk-free interest rate

   2.6  1.6

Expected dividend yield

   0.0  0.0

Expected stock price volatility

   27.0  27.2

Expected option life

   3.5 years   4.0 years 

FY 2020
Risk-free interest rate
1.9%
Expected dividend yield
0.0%
Expected stock price volatility
29.4%
Expected option life
3.5 years
The Company has an employee stock purchase plan that provides for employee stock purchases at a 5% discount to market price. The discount is recorded in administrative expense as of the date of purchase.

6. BUSINESS AND PRODUCT LINE ACQUISITIONS

The Consolidated Statements of Income reflect the results of operations for business acquisitions since the respective dates of purchase. All are accounted for using the acquisition method. Goodwill recognized in the acquisitions discussed below relates primarily to enhancing the Company’s strategic platform for the expansion of available product offerings.

On September 1, 2017, the Company acquired the assets of The University of Queensland Animal Genetics Laboratory, an animal genomics laboratory located near Brisbane, Australia. This acquisition is intended to accelerate the growth of the Company’s animal genomics business in Australia and New Zealand. Consideration for the purchase was $2,063,000; $468,000 was paid in cash on the acquisition date with the remainder due in annual installments over the next five years. The final purchase price allocation, based upon the fair value of these assets and liabilities determined using the income approach, included inventory of $19,000, equipment of $419,000,non-current liabilities of $1,629,000, intangible assets of $902,000 (with an estimated life of5-15 years) and the remainder to goodwill(non-deductible for tax purposes). These values are Level 3 fair value measurements. The new business, renamed Neogen Australasia, continues to operate in its current location, reporting within the Animal Safety segment.

On August 1, 2018, the Company acquired the stock of Clarus Labs, Inc., a manufacturer of water testing products. Neogen has distributed Clarus’ Colitag water test to the food and beverage industries since 2004 and2004; this acquisition giveshas given the Company accessthe ability to sell this product to new markets. Consideration for the purchase was $4,204,000 in cash and approximately $1.3 million$1,256,000 of contingent consideration, due semiannually for the first five years, based on an excess net sales formula. The final purchase price allocation, based upon the fair value of these assets and liabilities determined using the income approach, included inventory of $32,000, machinery and equipment of $120,000, accounts payable of $53,000, contingent consideration accrual of $1,256,000,
non-current
deferred tax liability of $426,000,$544,000,
non-amortizable
intangible assets of $878,000, intangible assets of $1,487,000 (with an estimated life of
5-15
years) and the remainder to goodwill
(non-deductible
for tax purposes). These values are Level 3 fair value measurements. InSince February 2019, $90,000 was$270,000 has been paid to the former owners as contingent consideration from the accrual. Manufacturing of these products was moved to the Company’s Lansing, Michigan location in October 2018, reporting within the Food Safety segment.

On September 4, 2018, the Company acquired the assets of Livestock Genetic Services, LLC, a Virginia-based company that specializesspecialized in genetic evaluations and data management for cattle breeding organizations. Livestock Genetic Services hashad been a long-time strategic partner of Neogen and the acquisition will enhanceenhanced the Company’s

in-house
genetic evaluation capabilities. Consideration for the purchase was $1,100,000 in cash, with $700,000 paid at closing and $400,000 payable to the former owner on September 1, 2019, and approximately $385,000up to $585,000 of contingent consideration, payable over the next three years. The preliminaryfinal purchase price allocation, based upon the fair value of these assets and liabilities determined using the income approach, included office equipment of $15,000, contingent consideration accrual of $385,000, intangible assets of $860,000$942,000 (with an estimated life of
5-15
years) and the remainder to goodwill (deductible forto tax purposes). These values are Level 3 fair value measurements. In September 2019, the former owner was paid the
$400,000
installment of 
the purchase
 price owed
and was also paid $107,000 in contingent consideration based on the achievement of sales targets in the first year. Services provided by this operation are now performed at the Company’s Lincoln, Nebraska location, reporting within the Animal Safety segment.

16

Table of Contents
On January 1, 2019, the Company acquired the assets of Edmonton, Alberta-basedAlberta based Delta Genomics Centre, an animal genomics laboratory in Canada. Delta’s laboratory operations were renamed Neogen Canada and the acquisition iswas intended to accelerate growth of the Company’s animal genomics business in Canada. Consideration for the purchase was $1,485,000 in cash. The preliminaryfinal purchase price allocation, based upon the fair value of these assets and liabilities determined using the income approach, included inventory of $38,000, machinery and equipment of $371,000, unearned revenue liability of $125,000, intangible assets of $186,000$532,000 (with an estimated life of 5 to 10 years) and the remainder to goodwill (deductible for tax purposes). These values are Level 3 fair value measurements. Services provided by this operation continue to be performed in its current location,Edmonton, reporting within the Animal Safety segment.

On January 1, 2020, the Company acquired the stock of Productos Quimicos Magiar, a distributor of Neogen’s Food Safety products for the past 20 years, located in Argentina. Consideration for the purchase was $4,286,000 in net cash
,
with $3,786,000 paid at closing and $540,000 payable to the former owner on January 1, 2022, and up to $979,000 of contingent consideration, payable in one year, based upon an excess net sales formula.
The preliminary purchase price allocation, based upon the fair value of these assets and liabilities determined using the income approach, included accounts receivable of $603,000, inventory of $446,000, machinery and equipment of $36,000,
other current assets of
$221,000, accounts payable of $383,000, other current liabilities of $312,000
, contingent consideration accrual of $640,000
,
non-current
deferred tax liabilities of $
384,000
, intangible assets of $
1,282,000
(with an estimated life of
5-10
years) and the remainder to goodwill
(non-deductible
for tax purposes). These values are Level 3 fair value measurements. This operation continue
s
to operate from its current location in Buenos A
i
res, Argentina, reporting within the Food Safety segment. It
is
managed through
Neogen
’s Latin America operation.
On January 1, 2020, the Company acquired the stock of Productos Quimicos Magiar, a distributor of Neogen’s Food Safety products for the past 20 years, located in Uruguay. Consideration for the purchase was $1,596,000 in net cash
,
with $1,386,000 paid at closing and $210,000 payable to the former owner on January 1, 2022, and up to $241,000 in contingent consideration, payable in one year, based upon an excess net sales formula.
 The preliminary purchase price allocation, based upon the fair value of these assets and liabilities determined using the income approach, included accounts receivable of $
280,000
, inventory of $
174,000
, machinery and equipment of $
16,000
,
other current assets
of $
68,000
, accounts payable of $
204,000
, other current liabilities of $
11,000
,
contingent consideration accrual of $159,000,
non-current
deferred tax liabilities of $
125,000
, intangible assets of $
498,000
(with an estimated life of
5-10
years) and the remainder to goodwill
(non-deductible
for tax purposes). These values are Level 3 fair value measurements. This operation continue
s
to operate from its current location in Montevideo, Uruguay, reporting within the Food Safety segment. It
is
managed through
Neogen
’s Latin America operation.
On January 9, 2020, the Company acquired the stock of Diessechem Srl, a distributor of food and feed diagnostics for the past 27 years, located in Italy. Consideration for the purchase was $3,455,000 in net cash. The preliminary purchase price allocation, based upon the fair value of these assets and liabilities determined using the income approach, included accounts receivable of $780,000, inventory of $5,000,
other curre
nt
assets
 of $189,000, accounts payable of $140,000, other current liabilities of $334,000,
non-current
deferred tax liabilities of $203,000, intangible assets of $780,000 (with an estimated life of
5-10
years) and the remainder to goodwill
(non-deductible
for tax purposes). These values are Level 3 fair value measurements. This operation continue
s
to operate from its current location in Milan, Italy, reporting within the Food Safety segment. It
is
managed through Neogen’s Scotland operation.
On January 31, 2020, the Company acquired the stock of Abtek Biologicals Limited, a manufacturer and supplier of culture media supplements and microbiology technologies. This acquisition enhances the Company’s culture media product line offering for the worldwide industrial microbiology markets. Consideration for the purchase was $1,339,000 
in net cash, with $1,220,000 paid at closing and $119,000 payable to the former owner on January 31, 2021. 
The preliminary purchase price allocation, based upon
 the fair
value of these assets and liabilities determined using the income approach, included accounts receivable of $
135,000
, inventory of $
207,000
, machinery and equipment of $
105,000
, prepayments of $
6,000
, accounts payable of $
118,000
, other current liabilities of $
34,000
,
non-current
deferred tax liabilities of $
101,000
, intangible assets of $
435,000
(with an estimated life of
5-10
years) and the remainder to goodwill
(non-deductible
for tax purposes). These values are Level 3 fair value measurements. This manufacturing operation will continue to operate from its current location in Liverpool, England, reporting within the Food Safety segment. It
is
managed through
Neogen
’s Scotland operation.
On February 28, 2020, the Company acquired the assets of Cell BioSciences, an Australian distributor of food safety and industrial microbiology products. This acquisition gives Neogen a direct sales presence across Australasia for its entire product portfolio. Consideration for the purchase was $3,443,000 in cash. Due to the timing of the transaction, the preliminary purchase price allocation was not complete at the time of filing. The business
is
operated under Neogen’s name in Melbourne, Australia, reporting within the Animal Safety segment.
Subsequent to the end of the quarter, on March 26, 2020, the Company acquired the assets of Chile-based Magiar Chilena, a distributor of food, animal, and plant diagnostics, including Neogen products. Consideration for the purchase was $400,000 in cash, with $350,000 paid at closing and $50,000 payable to the former owner on March 26, 2021. Due to the timing of the transaction, the preliminary purchase price allocation was not complete at the time of filing. The business will be operated from its current location in Santiago, Chile, reporting within the Food Safety segment. It will be managed through Neogen’s Latin America operation.
17

Table of Contents
7. LONG TERM DEBT

We have a financing agreement with a bank providing for a $15,000,000 unsecured revolving line of credit, which was amended on November 30, 2018 to extend the maturity from September 30,1, 2019 to September 30, 2021. There were no0 advances against the line of credit during fiscal 20182019 and there have been none0ne thus far in fiscal 2019;2020; there was no0 balance outstanding at February 28, 2019.29, 2020. Interest on any borrowings is
w
ill be charged
 at LIBOR plus 100 basis points (rate under the terms of the agreement was 3.58%2.51% at February 28, 2019)29, 2020). Financial covenants include maintaining specified levels of tangible net worth, debt service coverage, and funded debt to EBITDA, each of which the Company was in compliance with at February 28, 2019.

29, 2020.

8. COMMITMENTS AND CONTINGENCIES

The Company is involved in environmental remediation and monitoring activities at its Randolph, Wisconsin manufacturing facility and accrues for related costs when such costs are determined to be probable and estimable. The Company currently utilizes a pump and treat remediation strategy, which includes semi-annual monitoring and reporting, consulting, and maintenance of monitoring wells. Neogen expenses these annual costs of remediation, which have ranged from $38,000 to $74,000$131,000 per year over the past five years. The Company’s estimated liability for these costs was $916,000 at both February 28, 201929, 2020 and May 31, 2018,2019, measured on an undiscounted basis over an estimated period of 15 years; $100,000 of the liability is recorded within current liabilities and the remainder is recorded within other
non-current
liabilities on the consolidated balance sheets. During the second quarter ofIn fiscal 2019, the Company’s environmental consultantCompany performed an updated Corrective Measures Study (CMS) on the Randolph site, per a request from the Wisconsin Department of Natural Resources. Based onResources (WDNR), and is currently in discussion with the resultsWDNR regarding potential alternative remediation strategies going forward. The Company believes that the current pump and treat strategy is appropriate for the site. At this time, the outcome of the study, the Company plans to continuereview in terms of approach and future costs is unknown, but a change in the current remediation and monitoring program,strategy, depending on the alternative selected, could require an increase in the currently recorded liability, with no changes proposed.

an offsetting charge to operations in the period recorded.

The Company is subject to certain legal and other proceedings in the normal course of business that, in the opinion of management, should not have a material effect on its future results of operations or financial position.

9. STOCK PURCHASE

In October 2018, the Company’s Board of Directors passed a resolution canceling the Company’s prior stock buyback program, which had been approved in December 2008, and authorized a new program to purchase, subject to market conditions, up to 3,000,000 shares of the Company’s common stock. In December 2018, the Company purchased 50,000 shares under the new program in negotiated and open market transactions for a total price, including commissions, of $3,134,727. Shares purchasedacquired under the program have been retired.

18

Table of Contents
PART I – FINANCIAL INFORMATION

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations

The information in this Management’s Discussion and Analysis of Financial Condition and Results of Operations contains both historical financial information and forward-looking statements. Neogen does not provide forecasts of future financial performance. While management is optimistic about ourthe Company’s long-term prospects, historical financial information may not be indicative of future financial results.

Safe Harbor and Forward-Looking Statements

Forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, are made throughout this Quarterly Report on Form10-Q. For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward lookingforward-looking statements. Without limiting the foregoing, the words “believes,” “anticipates,” “plans,” “expects,” “seeks,” “estimates,” and similar expressions are intended to identify forward-looking statements. There are a number of important factors, including competition, recruitment and dependence on key employees, impact of weather on agriculture and food production, identification and integration of acquisitions, research and development risks, patent and trade secret protection, government regulation, widespread outbreak of an illness, including the COVID-19 pandemic, and other risks detailed from time to time in the Company’s reports on file at the Securities and Exchange Commission, that could cause Neogen Corporation’s results to differ materially from those indicated by such forward-looking statements, including those detailed in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

In addition, any forward-looking statements represent management’s views only as of the day this Quarterly Report on Form
10-Q
was first filed with the Securities and Exchange Commission and should not be relied upon as representing management’s views as of any subsequent date. While management may elect to update forward-looking statements at some point in the future, it specifically disclaims any obligation to do so, even if its views change.

19

Table of Contents
Executive Overview

Consolidated revenues were $99.9 million in the third quarter of fiscal 2020, an increase of 2% compared to $97.7 million in the third quarter of fiscal 2019, an increase of 3% compared to $94.9 million2019. Organic sales growth in the third quarter of fiscal 2018. Organic sales in the third quarter also increased 3%2020 was 1%. For the nine monthyear to date period, consolidated revenues were $304.4$309.1 million, an increase of 5%2% compared to $289.8$304.4 million in the same period in the prior fiscal year. On a year to date basis, organicOrganic sales increased 4%.

rose 1% for the nine month period.

Food Safety segment sales were $51.1$50.5 million in the third quarter of the current fiscal year, an increasea decline of 8%1% compared to $47.3$51.1 million in the same period of the prior year. Organic sales in this segment also increased 8%, with a minor contributiondeclined 3% during the quarter; contributions from four acquisitions executed during the August 1, 2018 acquisition of Clarus Labs.quarter totaled $990,000. For the year to date, Food Safety segment sales were $157.0$158.4 million, an increase of 10%1% compared to $142.8$157.0 million in the same period of the prior fiscal year; the organicexcluding acquisitions, sales increase was also 10%.

were flat.

Animal Safety segment sales were $49.4 million in the third quarter of fiscal 2020, an increase of 6% compared to $46.6 million in the third quarter of fiscal 2019, a decrease of 2% compared to $47.6 million in the third quarter of fiscal 2018.2019. Organic sales in this segment decreased 3%also rose 6% in the third quarter, with only a minor contributionscontribution from the September 1, 2018 acquisition of Livestock Genetic Services and the January 1, 2019 acquisition of Delta Genomics. For the nine month period,year to date, Animal Safety segment sales were $147.4$150.7 million, flatan increase of 2% compared to $147.0$147.4 million in the same period a year ago. Year to date organic sales decreased 1%, after excluding three months of the September 1, 2017 acquisition of Neogen Australasia, six months of the Livestock Genetic Services acquisition and two months of the Delta Genomics acquisition.

also increased 2%.

International sales in the third quarter of fiscal 20192020 were 41%40% of total sales compared to 39%41% of total sales in the third quarter of fiscal 2018.2019. For theeach year to date fiscal 2019period presented, international sales were 40% of total sales compared to 38% of total sales in the same period of the prior year.

sales.

Our effective tax rate in the third quarter was 21.4%14.4% compared to an effective tax rate of 4.1%21.4% in the prior year third quarter; the fiscal 20192020 year to date effective tax rate was 17.0%15.6% compared to 17.0% for the same period a year to date effective tax rate of 14.7% in the prior fiscal year. The U.S. statutory rate is 21% in the current fiscal year and was 35% from June 1, 2017 until December 22, 2017, with the reminder of the prior fiscal year third quarter taxed at 21%. Differences from the statutory rate are primarily due to tax deductions resulting from stock option exercises, provisions included in the corporate tax reform, and state and local taxes. Additionally, the third quarter of the prior year included a favorable adjustment to income tax expense to adjust deferred tax balances due to the decrease in the U.S. statutory tax rate.

ago.

Net income for the quarter ended February 28, 201929, 2020 was $13.1$12.2 million, or $0.25$0.23 per diluted share, a decrease of 21%7% compared to $16.6$13.1 million, or $0.32$0.25 per share in the same period in the prior year. For the year to date, net income was $44.4$43.1 million, or $0.85$0.82 per diluted share, a decrease of 6%3% compared to prior year to date net income of $45.6$44.4 million, or $0.88$0.85 per diluted share.

Cash provided from operating activities in the first nine months of fiscal 20192020 was $43.0$60.3 million, compared to $46.6$43.0 million in the first three quarterssame period of fiscal 2018.

2019.

Neogen’s results reflect an increase

20

Table of Contents
International sales were flat in international sales of 9% inboth the third quarter of fiscal 20192020 and 12% for the year to date, each compared to the same respective periodperiods in the prior year. We continue to focus on increasingThe rate of growth in our presenceinternational revenues in the current fiscal year has been adversely impacted by currency devaluations in a number of the countries in which we operate, lower sales of our drug residue test kits by our largest European distributor, and market share throughout the world, while also integrating recent international acquisitions into our product portfolio. Sales fluctuationsloss of forensics business in Brazil. Revenue changes, denominated in both the U.S. dollar and as reported in the local currency, for the three and nine month periods of fiscal 20192020 compared to the same respective periods in the prior year are as follows for each of our international locations:

   

Three Months Ended

February 28, 2019

  

Nine Months Ended

February 28, 2019

 
   Revenue
% Increase/(Decrease)
USD
  Revenue
% Increase/(Decrease)
Local Currency
  Revenue
% Increase
USD
  Revenue
% Increase
Local Currency
 

Neogen Europe (including Lab M & Quat-Chem)

   11  18  12  15

Neogen do Brasil (including Deoxi & Rogama)

   (9)%   5  10  31

Neogen Latinoamerica

   19  22  12  17

Neogen China

   9  15  6  9

Neogen India

   94  115  86  104

                 
 
Three Months Ended
February 29, 2020
  
Nine Months Ended
February 29, 2020
 
 
Revenue
  
Revenue
  
Revenue
  
Revenue
 
 
% Increase/(Decrease)
USD
  
% Increase/(Decrease)
Local Currency
  
% Increase
USD
  
% Increase
Local Currency
 
UK Companies
  
5
%  
4
%  
3
%  
5
%
Brazilian Companies
  
(16
)%  
(6
)%  
(5
)%  
1
%
Neogen Latinoamerica
  
15
%  
11
%  
8
%  
7
%
Neogen China
  
37
%  
41
%  
20
%  
24
%
Neogen India
  
18
%  
19
%  
11
%  
11
%
Neogen Canada
  
75
%  
73
%  
135
%  
135
%
Neogen Australasia
  
7
%  
12
%  
15
%  
22
%

Currency translations reduced comparative revenues by approximately $2.5 million$357,000 in the third quarter of fiscal 20192020 compared to the same quarter a year ago, and by $2.5 million for the year to date compared to the same period last year, primarily due to the increased strength of the U.S. dollar relative to the British pound, the Brazilian real and the Australian dollar for each period. The Mexican peso and the British pound strengthened relative to the AustralianU.S. dollar during the third quarter of 2020.
The 5% increase in third quarter revenues at our Neogen Europe operations included a 24% increase in sales of cleaners, disinfectants and veterinary instruments, offset somewhat by a 9% decline in culture media products, due to orders delayed into the Mexican peso.fourth quarter and lower demand; sales of our allergen test kits increased 7%. For the year to date currency translations reduced revenues by approximately $5.8 millionperiod, overall sales increased 3%. Sales in Brazil declined 16% in the third quarter, primarily from the loss of forensics test kit business, due to a large commercial laboratory converting their testing protocol to a higher throughput method, and lower sales of genomics services due to a large sale in the prior year period which did not recur. Partially offsetting these declines was a large
non-recurring
sale of insecticides to a government agency. For the nine month period, sales at our Brazilian operations decreased 5% compared to the prior year.

The increase At Neogen Latinoamerica, sales increased 15% for the third quarter compared to the prior year, with strong sales of rodenticides in revenues at Neogen EuropeMexico and broad based strength across the diagnostics business during the period; for the year to date, strong diagnostics test kit sales were somewhat offset by lower sales of cleaners and disinfectants. Robust sales of cleaners and disinfectants in China in the third quarter of fiscal 2019 was led by an 18%2020, due in part to the

COVID-19
pandemic, drove the 38% increase in revenue and offset lower sales of genomics services, primarilydiagnostic test kit sales in the porcine and bovine markets; genomics sales increased 24%period; for the year to date. Neogen Europe continues to have strong sales of test kits to detect deoxynivalenol (DON) in grain, due todate, revenues increased testing after a DON outbreak in France’s wheat crops in the fall of 2018. At Neogen do Brasil, sales of natural toxins test kits increased 36% and 64% for the three and nine months, respectively, both compared to the same periods a year ago, as we gained significant new business testing for the presence of aflatoxin in corn. Sales of forensic test kits increased significantly in the third quarter and year to date20% over the prior year periods due to business that shifted from U.S. labs to labs in Brazil and increased demand from commercial laboratories located in Brazil. Neogen Latinoamerica’s third quarter sales increase of 19% was led by a 64% increase in sales of AccuPoint sanitation monitoring products, due to increased market share.

year.

Service revenue was $20.3$22.1 million in the third quarter of fiscal 2019,2020, an increase of 15%9% over prior year third quarter revenues of $17.7$20.3 million, including a minor contributionscontribution from the acquisitionsJanuary 1, 2019 acquisition of Livestock Genetics Services and Delta Genomics. For the nine month period, service revenue was $54.5$62.0 million, an increase of 12%14% over prior year revenues of $48.6$54.5 million. Year to date service revenues were aided by the Livestock Genetics Services and Delta Genomics acquisitionsacquisition and the September 20172018 acquisition of Neogen Australasia.Livestock Genetic Services. The growth in both the quarter and year to date periods was led by strong increases of genomic testing revenues to the domestic companion animal market, and to a lesser extent, increases in sales of genomic services to theour global beef markets, and porcine and bovine markets in Europe.

dairy cattle markets.

21

Table of Contents
Revenues

   Three Months Ended February 28, 
   2019   2018   Increase/
(Decrease)
   % 
   (in thousands)     

Food Safety

        

Natural Toxins, Allergens & Drug Residues

  $ 18,612   $ 16,807   $1,805    11

Bacterial & General Sanitation

   9,519    8,992    527    6

Culture Media & Other

   11,893    10,179    1,714    17

Rodenticides, Insecticides & Disinfectants

   5,953    7,359    (1,406   (19)% 

Genomics Services

   5,136    3,976    1,160    29
  

 

 

   

 

 

   

 

 

   
  $51,113   $47,313   $3,800    8

Animal Safety

        

Life Sciences

  $1,823   $2,769   $(946   (34)% 

Veterinary Instruments & Disposables

   10,682    10,630    52    0

Animal Care & Other

   6,823    7,245    (422   (6)% 

Rodenticides, Insecticides & Disinfectants

   13,256    14,255    (999   (7)% 

Genomics Services

   14,003    12,691    1,312    10
  

 

 

   

 

 

   

 

 

   
  $46,587   $47,590   $(1,003   (2)% 
  

 

 

   

 

 

   

 

 

   

Total Revenues

  $97,700   $94,903   $2,797    3
  

 

 

   

 

 

   

 

 

   
   Nine Months Ended February 28, 
   2019   2018   Increase/
(Decrease)
   % 
   (in thousands)     

Food Safety

        

Natural Toxins, Allergens & Drug Residues

  $58,021   $54,960   $3,061    6

Bacterial & General Sanitation

   30,807    27,435    3,372    12

Culture Media & Other

   36,302    31,353    4,949    16

Rodenticides, Insecticides & Disinfectants

   18,521    18,175    346    2

Genomics Services

   13,395    10,887    2,508    23
  

 

 

   

 

 

   

 

 

   
  $157,046   $142,810   $14,236    10

Animal Safety

        

Life Sciences

  $5,794   $7,589   $(1,795   (24)% 

Veterinary Instruments & Disposables

   32,769    32,804    (35   0

Animal Care & Other

   22,439    22,894    (455   (2)% 

Rodenticides, Insecticides & Disinfectants

   48,921    49,422    (501   (1)% 

Genomics Services

   37,455    34,292    3,163    9
  

 

 

   

 

 

   

 

 

   
  $147,378   $147,001   $377    0
  

 

 

   

 

 

   

 

 

   

Total Revenues

  $ 304,424   $ 289,811   $ 14,613    5
  

 

 

   

 

 

   

 

 

   

                 
 
Three Months Ended
February 29/28,
     
 
2020
  
2019
  
Increase/
(Decrease)
  
%
 
   
(in thousands)
     
Food Safety
            
Natural Toxins, Allergens & Drug Residues
 $
17,154
  $
18,612
  $
(1,458
)  
(8
)%
Bacterial & General Sanitation
  
9,413
   
9,519
   
(106
)  
(1
)%
Culture Media & Other
  
11,222
   
11,893
   
(671
)  
(6
)%
Rodenticides, Insecticides & Disinfectants
  
7,964
   
5,953
   
2,011
   
34
%
Genomics Services
  
4,745
   
5,136
   
(391
)  
(8
)%
                 
 $
50,498
  $
51,113
  $
(615
)  
(1
)%
                 
Animal Safety
            
Life Sciences
 $
1,376
  $
1,823
  $
(447
)  
(25
)%
Veterinary Instruments & Disposables
  
10,799
   
10,682
   
117
   
1
%
Animal Care & Other
  
6,667
   
6,554
   
113
   
2
%
Rodenticides, Insecticides & Disinfectants
  
14,558
   
13,525
   
1,033
   
8
%
Genomics Services
  
15,971
   
14,003
   
1,968
   
14
%
                 
 $
49,371
  $
46,587
  $
2,784
   
6
%
                 
Total Revenues
 $
99,869
  $
97,700
  $
2,169
   
2
%
                 

                 
 
Nine Months Ended
February 29/28,
     
 
2020
  
2019
  
Increase/
(Decrease)
  
%
 
   
(in thousands)
     
Food Safety
            
Natural Toxins, Allergens & Drug Residues
 $
57,950
  $
58,021
  $
(71
)  
0
%
Bacterial & General Sanitation
  
31,345
   
30,807
   
538
   
2
%
Culture Media & Other
  
35,259
   
36,302
   
(1,043
)  
(3
)%
Rodenticides, Insecticides & Disinfectants
  
20,859
   
18,521
   
2,338
   
13
%
Genomics Services
  
12,961
   
13,395
   
(434
)  
(3
)%
                 
 $
158,374
  $
157,046
  $
1,328
   
1
%
                 
Animal Safety
            
Life Sciences
 $
4,901
  $
5,794
  $
(893
)  
(15
)%
Veterinary Instruments & Disposables
  
32,621
   
32,769
   
(148
)  
0
%
Animal Care & Other
  
20,859
   
21,900
   
(1,041
)  
(5
)%
Rodenticides, Insecticides & Disinfectants
  
47,462
   
49,460
   
(1,998
)  
(4
)%
Genomics Services
  
44,879
   
37,455
   
7,424
   
20
%
                 
 $
150,722
  $
147,378
  $
3,344
   
2
%
                 
Total Revenues
 $
309,096
  $
304,424
  $
4,672
   
2
%
                 
22

Food Safety

Natural Toxins, Allergens & Drug Residues –
Sales in this category increased 11%decreased 8% and 6%were flat for the three and nine month periodsperiod ended February 28, 2019,29, 2020, respectively, compared to the same periods in the prior year. ForIn the third quarter, sales of drug residue test kits were down 47%, resulting from lower demand at our European distributor. Effective January 1, 2020, we have modified our contract with this distributor to eliminate their exclusive distribution of our dairy drug residue test kits and we have begun selling this product line directly to end customers through Neogen Europe. Partially offsetting this decrease, sales of our allergens product line and natural toxin test kit revenues both increased 17%, due to new business for aflatoxin test kits in Brazil and DON test kits in4%. For the U.S. and France, the result of mild outbreaks. Sales of drug residue test kits, including dairy antibiotics, increased 8% andnine month period, sales of our allergens product line increased 7%. For the year to date period,8% and natural toxintoxins test kit salesrevenues increased 12%5%, sales of our allergens product line increased 6% andwhile sales of drug residue test kits decreased 7%, the result of lower demand in Europe.

declined 29%.

Bacterial & General Sanitation –
Revenues in this category increased 6%decreased 1% in the third quarter and 12%increased 2% for the year to date, both compared to the same periods in the prior year. In the third quarter, sales of test kits to detect pathogens increased 16%, and rose 27% for the year to date, as we continued to gain new business with ourListeriaRight Now test kit that launched in fiscal 2018, and sales of our AccuPoint sanitation monitoring product line increased 11% for5% on higher sales of both equipment and related samplers; sales of test kits to detect pathogens decreased 7%, in part due to higher equipment sales in the quarter andprior year to date periods.third quarter. Sales of products to detect spoilage organisms in processed foods decreased 3%, due to lack of availability of certain consumable vials because of manufacturing issues, which have since been resolved. For the year to date, sales of our AccuPoint product line increased 13% and pathogen test kit revenues increased 2%, while sales of products to detect spoilage organisms decreased 10%.
Culture Media & Other –
Sales in this category decreased 6% in the quarter ended February 29, 2020 compared to the third quarter due to higher equipment placements in the prior year; for the nine month period, sales of this product line increased 7%.

Culture Media & Other – Sales in this category increased 17% in the quarter ended February 28, 2019 compared to the third quarter in the prior year; the year to date increase is 16%decreased 3%. In the third quarter, salesSales of Neogen Culture Media formerly marketed asdecreased 7% and were flat for the Acumediaquarter and Lab M brands, increased 5%, aided in part by the August 2018 acquisition of Clarus Labs, which consists of the Colitag product and reportsyear to date periods, respectively. The decrease in the culture media product line.third quarter is primarily due to order timing and lower end market demand. This category also includes forensic test kits sold within Brazil, which increaseddecreased significantly in both the third quarter and for the year to date periods dueas a large customer moved to a shift in businesshigher throughput testing method. For both periods, this category also benefitted from labslower rebate payments to a European distributor in the U.S. to labs in Brazil and increased demand from commercial laboratories in that country.

current fiscal year.

Rodenticides, Insecticides & Disinfectants –
Revenues in this category decreased 19%increased 34% in the third quarter of fiscal 20192020 compared to the same period a year ago, primarily from strength of disinfectant products in China due to the
COVID-19
outbreak. The quarter was also aided by a largeone-time sale of rodenticides in Mexico and the final shipment of a
non-recurring
sale of insecticide products to a governmental agency in Nicaragua. For the year to date, sales in this category increased 8%.
Genomics Services –
Sales of genomics services sold through our international Food Safety operations decreased 8% for the three month period ended February 29, 2020; revenues decreased 3% for the nine month period. For each comparative period, the decrease was caused primarily by lower sample volumes in our Brazilian genomics operations, resulting from a large government order in the prior year at Rogamawhich has not recurred in the current year. Currency also negatively impacted revenues in the current fiscal year as both the British pound and the Brazilian real have weakened relative to the U.S. dollar. The Company has sizable genomics revenues in the U.K. and in Brazil, resulting from a government contract. Partially offsetting this were increases of disinfectant sales to customers in Europe, Chinawhere the pound and India. Year to date revenues increased 2%.

Genomics Services –Sales in this category increased 29% and 23% forreal, respectively, are the three and nine month periods, ended February 28, 2019, respectively. The increase for both the third quarter and year to date periods was primarily from higher sales in the European porcine and bovine markets; additionally, the third quarter benefited from a large research project with the Brazilian government.

functional currencies.

Animal Safety

Life Sciences –
Sales in this category decreased 34%25% in the third quarter, as compared to the same period in the prior year, as approximately $740,000 of forensic test kit sales shifted to our operations in Brazil, which are reported in the Food Safety Segment. The products were formerly served by our Animal Safety operation in Lexington, KY. Additionally, revenuesyear; for two large customers in the forensics market were down in the third quarter due to order timing. For the year to date, the decrease in this product line was 24%is 15%.

The prior year included sales to a commercial laboratory customer which did not recur in fiscal 2020. Additionally, sales of substrates and reagents declined significantly in the third quarter, the result of order timing from a large customer.

Veterinary Instruments & Disposables –
Revenues in this category increased 1% for the three month period ended February 29, 2020; for the year to date, sales were flat compared to the prior year, forflat. For both the threequarter and nine monthyear to date periods, ended February 28, 2019. Protective weargrowth in marking and consumables sales decreased 36% in the third quarter, resulting from continued poor economic conditions in the commercial dairy production market; this declineother disposable products was essentially offset by a 12% increase in veterinary instrumentsdecreased sales led by strength inof various types of needles, and syringes.

due to high inventory levels at our largest distributors.

Animal Care & Other –
Sales of these products decreased 6%increased 2% in the third quarter and 2%decreased 5% for the year to date. Promotional programs with distributors are recorded as a contra revenue within this category. In the third quarter, of the current fiscal year, several annual promotional programs ended and the final adjustmentsanimal care revenues decreased 4% due to estimates previously recorded resulted in a higher reduction of revenues than in the prior year. Partially offsetting these adjustments was a 13% increase inlower sales to our larger U.S. distributors while sales of vaccines.

Rodenticides, Insecticides & Disinfectants –Revenues in this category decreased 7% and 1% for the three and nine month periods ended February 28, 2019, respectively. In the third quarter, rodenticide sales decreased 28%, the result of poor weather conditions causing lower demand and a weak U.S. animal protein market partially caused by tariff issues; the year to date decrease was 6% due to the loss of toll manufacturing business from the first half of the prior year. Also in the third quarter, cleaner and disinfectant sales grew 18% due to increased demand from international customers.disposable dairy supplies rose 5%. For the year to date cleanerperiod, animal care revenues were 4% lower than the prior year, while dairy supplies were 2% lower. Timing of adjustments to promotional programs with distributors, which are recorded as contra revenues within this category, also contributed to the year to date decline.

23

Table of Contents
Rodenticides, Insecticides & Disinfectants –
Revenues in this category increased 8% for the three month period ended February 29, 2020, but decreased 4% for the year to date period. For the quarter, rodenticide sales rose 26% on the success of retail marketing programs and disinfectantinsecticide sales increased 4%were up 5%.

These gains for the three month period were partially offset by a 1% decline in sales of cleaners and disinfectants. For the year to date, rodenticides were down 2%, insecticides were down 6%, and cleaners and disinfectants declined 5%.

Genomics Services –
Sales in this category increased 10%14% in the third quarter and 9%20% for the year to date period, both compared to the prior year. The third quarter increase included minor contributions fromyear; the September 2018 acquisition of Livestock GeneticsGenetic Services and the January 2019 acquisition of Delta Genomics acquisitions whilecontributed a minor amount of the year to date increase included those acquisitions and three months of sales from the September 2017 acquisition of Neogen Australasia. Forgrowth in this category. The growth in both the three and nine month periods was the result of significant volume increases to the companion animal market due to product uptake at a large customer and, to a lesser extent, continued growth in the beef and dairy cattle, and companion animal markets was offset by revenue

decreases in U.S. poultry and porcine markets, despite increases in sample volumes, resulting from a shift to lower priced chips and services.

markets.

Gross Margin

Gross margin was 45.7%45.4% in the third quarter of fiscal 20192020 compared to 47.0%45.7% in the same quarter a year ago. The declinechange in gross margin for the three month period is due primarily to stronger growth in our international markets, which were adversely impacted by currency fluctuations, and a shiftchange in product mix within both the Food Safety andresulting from a higher proportion of sales from the Animal Safety segments, with higher revenue increases on product lines withsegment, which have lower gross margins than products sold through the historical averages within these segments.Food Safety segment. Gross margin for the nine month period ended February 28, 201929, 2020 was 46.4%46.8% compared to 47.5%46.4% in the same period of the prior year, forprimarily the same reasons.

result of higher gross margins within the Animal Safety segment resulting from a 250 basis point margin improvement in the domestic genomics service business, due to a significant increase in revenues in the companion animal testing business, which have higher gross margins than other services within this business.

Operating Expenses

Operating expenses were $30.0$32.3 million in the third quarter, of fiscal 2019, compared to $28.7$30.0 million in the same quarter of the prior year, an increase of $1.3 million, or 5%8%. Sales and marketing expenses increased 1%rose $953,000, or 6%, as increases inprimarily due to personnel related expenses, and higher shipping, regulatory and contracted services were almost entirely offset by lower promotional and advertising expenses. For the year to date, sales and marketing expenses have increased 6%.product registration costs. General and administrative expense increased $738,000,rose $771,000, or 8%, for the third quarter, resulting from increases in share-basedstock based compensation expense, personnel costs, legal and professional fees resulting from acquisitions completed in the quarter, and depreciation related to investments in information technology. Research and development expense was $3.8 million in the third quarter, an increase of $574,000, or 18%, compared to the same period in the prior year. The increase is primarily the result of development spending and outside services relating to a number of new products, which are expected to be launched in late fiscal 2020 or early fiscal 2021.    
Operating expenses for the nine month period ended February 29, 2020 were $97.0 million, an increase of $4.9 million, or 5%, compared to the prior year. Driving the increase were research and development spending increases of $2.1 million, or 22%, due primarily to new product development, and a $2.1 million, or 7%, increase in general and administrative expense. The increase in general and administrative expense was led by increased stock based compensation expense, higher legal and professional fees, and training costs. For the year to date, general and administrative expenses have risen by 4%. Research and development expense increased $413,000, or 15%, primarily the result of contracted services supporting new product development. For the year to date, research and development expense has increased 4%, and overall operating expenses for the Company increased $4.6 million, or 5%.

an increase in depreciation expense.

Operating Income

Operating income was $14.6$13.0 million in the third quarter of fiscal 2019,2020, compared to $15.9$14.6 million in the same period of the prior year; year to date operating income was $49.4$47.6 million compared to $50.3$49.4 million in the prior year. Expressed as a percentage of sales, operating income was 15.0%13.1% for the third quarter of fiscal 2019 compared to 16.8% in last year’s third quarter;and 15.4% for the year to date, operating income was 16.2%, compared to 17.4%15.0% and 16.2%, respectively, in the prior fiscal year. The decline in operating margin percentage for each period in the current fiscal year was primarily the result of the lower gross margin percentage, and to a lesser extent, operating expenses which rose at a rate greaterthat increased more than or equal to the rate of revenue growth.

Additionally, in the third quarter of fiscal 2020, the gross margin percentage declined by 30 basis points; for the year to date, the gross margin percentage has increased by 40 basis points.

24

Table of Contents
Other Income

   Three Months Ended   Nine Months Ended 
   February 28,   February 28, 

(dollars in thousands)

  2019   2018   2019   2018 

Interest income (net of expense)

  $1,335   $524   $3,290   $1,322 

Foreign currency transactions

   104    179    (354   1,140 

Royalty income

   —      —      60    78 

Deoxi contingent consideration

   —      (49   (9   (148

Quat-Chem contingent consideration

   —      255    422    255 

Other

   545    459    688    588 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Other Income

  $1,984   $1,368   $4,097   $3,235 
  

 

 

   

 

 

   

 

 

   

 

 

 

                 
 
Three Months Ended
  
Nine Months Ended
 
 
February 29/28
  
February 29/28
 
(dollars in thousands)
 
2020
  
2019
  
2020
  
2019
 
Interest income (net of expense)
 $
1,600
  $
1,335
  $
4,381
  $
3,290
 
Foreign currency transactions
  
(420
)  
104
   
(889
)  
(354
)
Royalty income
  
—  
   
—  
   
1
   
60
 
Deoxi contingent consideration
  
—  
   
—  
   
—  
   
(9
)
Quat-Chem contingent consideration
  
—  
   
—  
   
—  
   
422
 
Other
  
28
   
545
   
56
   
688
 
                 
Total Other Income
 $
1,208
  $
1,984
  $
3,549
  $
4,097
 
                 
The increase in interest income in both the three and nine month periods of fiscal 2020 compared to the same periods a year ago was the result of higher cash and marketable securities balances. Other expense resulting from foreign currency transactions was primarily the result of changes in the value of foreign currencies relative to the U.S. dollar in countries in which we operate.
Income Tax Expense

Income tax expense in the third quarter of fiscal 20192020 was $2.1 million, an effective tax rate of 14.4%, compared to $3.6 million, an effective tax rate of 21.4% compared to $0.7 million, an effective tax rate of 4%, in the same period of the prior year. InFor the year to date, income tax expense was $8.0 million, an effective rate of 15.6%, in fiscal 2020 and $9.1 million, an effective rate of 17.0%, in fiscal 2019. For each period, the primary difference between the statutory rate of 21% and the effective rates recorded is the benefit resulting from the exercise of stock options; this benefit was $781,000 in the third quarter of fiscal 2020 compared to $291,000 in the third quarter of the prior year, the Company recorded favorable tax adjustments totaling $2.9 million as the result of corporate tax reform enacted in December 2017, which reduced the U.S. statutory income tax rate from 35% to 21%. For the first nine months of fiscal 2019, income tax expense was $9.1 million compared to $7.9 million in the prior year; the year to date effective tax rate was 17.0%, compared to an effective tax rate of 14.7% in the prior fiscal year. For the year to date, period, the Company recorded a total creditbenefit was $2,754,000 in fiscal 2020 compared to $3,065,000 in fiscal 2019. For both periods in the current fiscal year, adjustments to research and development credits and other deductions related to the Tax Reform Act of $3.0 million to federal2017 resulted in lower effective income tax expense for tax benefits resulting from the exercise of stock options, compared to $3.4 million in the prior year. In the first half of fiscal 2018, the Company also reversed a total of $816,000 from its reserve for uncertain tax positions, which had been accrued in prior fiscal years, with a corresponding credit to federal income tax expense, due to the conclusion of an IRS audit for fiscal years 2014, 2015, and 2016.

rates.

Net Income

Net income was $13.1$12.2 million in the third quarter of fiscal 2019,2020, a 7% decrease compared to $16.6$13.1 million in the same period in the prior year. EarningsThe change in earnings for this year’s third quarter was the result of lower pretax income, offset somewhat by the decrease in the prior year quarter were favorably impacted by the lowereffective tax expense resulting from the corporate tax reform and revaluation of deferred tax balances in that quarter.rate. For the year to date, net income wasdecreased 3% from $44.4 million compared to $45.6 million in$43.1 million; for the samenine month period, last year; the $1.2 million declinecurrent year net income was due to thealso negatively impacted by lower pretax income, offset somewhat by a lower effective tax expense in the prior year.

rate.

Financial Condition and Liquidity

The overall cash, cash equivalents and marketable securities position of Neogen was $246.7$327.9 million at February 28, 2019,29, 2020, compared to $210.8$267.5 million at May 31, 2018.2019. Approximately $43.0$60.3 million was generated from operations during the first nine months of fiscal 2019.2020. Net cash proceeds of $13.8$27.9 million were realized from the exercise of stock options and issuance of shares under our Employee Stock Purchase Plan during the first nine months of fiscal 2019.2020. We spent $11.9$16.3 million for property, equipment and other
non-current
assets in the first nine months of fiscal 2019.

2020, and approximately $9.7 million on acquisitions during the same period.

Net accounts receivable balances were $80.0$80.7 million at February 28, 2019, an increase29, 2020, a decrease of $0.9$1.9 million, compared to $79.1$82.6 million at May 31, 2018.2019. Days sales outstanding, a measurement of the time it takes to collect receivables, were 66 days at February 29, 2020, compared to 61 days at May 31, 2019 and 68 days at February 28, 2019, compared to 63 days at November 30, 2018, 64 days at August 31, 2018 and 60 days at May 31, 2018; the increase in the current year is primarily attributable to the higher levels of sales at our international operations, which generally take more time to collect.2019. All customer accounts are actively managed and no losses in excess of amounts reserved are currently expected.

expected; attention is being paid to the potential negative impact of COVID-19 on our customers’ ability to pay their bills.

25

Table of Contents
Net inventory balances were $84.9$89.2 million at February 28, 2019,29, 2020, an increase of $8.9$3.2 million or 12%, compared to a May 31, 20182019 balance of $76.0 million; the increase is due to lower than forecasted sales at the end of the quarter, and to higher levels necessary to support the business.$86.0 million. We actively monitor our inventory levels and balance the need for adequate levels of product availability to minimize backorders with a desire to improve inventory turnover and efficiency levels. We have continued with our active programs in place to improve our turnover in fiscal 2019.

2020; however, during the year we have increased inventory levels at our European operations to mitigate potential supply chain disruptions from a disorderly Brexit. Also, during the third quarter, in anticipation of possible supply disruptions due to the

COVID-19
pandemic, we reviewed our inventories of key raw materials and adjusted levels upward in some instances to ensure product availability.
Inflation and changing prices are not expected to have a material effect on operations, as management believes it will continue to be successful in offsetting increased input costs with price increases and/or efficiency improvements.

cost efficiencies.

Management believes that our existing cash and marketable securities balances at February 28, 2019,29, 2020, along with available borrowings under our credit facility and cash expected to be generated from future operations, will be sufficient to fund activities for the foreseeable future. However, existing cash and borrowing capacity may not be sufficient to meet our cash requirements to commercialize products currently under development or itsexecute our plans to acquire other organizations, technologies or products that fit within our mission statement. Accordingly, we may choose to issue equity securities or enter into other financing arrangements for a portion of our future financing needs.

The

COVID-19
pandemic has negatively impacted the global economy, disrupted global supply chains and created significant volatility and disruption of financial markets. An extended period of global supply chain and economic disruption could materially affect our business, results of operations, access to sources of liquidity and financial condition.
26

Table of Contents
PART I – FINANCIAL INFORMATION

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Item 3.
Quantitative and Qualitative Disclosures About Market Risk
We have interest rate and foreign exchange rate risk exposure but no long-term fixed rate investments or borrowings. Our primary interest rate risk is due to potential fluctuations of interest rates for variable rate borrowings (no long-term borrowings at February 28, 2019)29, 2020) and short-term investments.

Foreign exchange risk exposure arises because we market and sell our products throughout the world. Revenues in certain foreign countries as well as certain expenses related to those revenues are transacted in currencies other than the U.S. dollar. Our operating results are exposed to changes in exchange rates between the U.S. dollar and the British pound sterling, the euro, the Brazilian real, the Mexican peso, the Chinese yuan, the Australian dollar, and to a lesser extent, the Indian rupee, the Canadian dollar, the Argentine peso and the Canadian dollar.Uruguayan peso. 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 recognized revenues in the course of collection can be affected positively or negatively by changes in exchange rates. The Company enters into forward contracts to help mitigate 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 United States, located in Scotland, England, Italy, Brazil, Mexico, Argentina, Uruguay, China, India, Canada, and Australia where the functional currency is the British pound sterling, euro, Brazilian real, Mexican peso, Argentine peso, Uruguay peso, Chinese yuan, Indian rupee, Canadian dollar and the Australian dollar respectively, and also transacts business throughout Europe in the euro. The Company’s investments in foreign subsidiaries are considered to be long-term.

PART I – FINANCIAL INFORMATION

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Item 4.
Controls and Procedures
Evaluation
of Disclosure Controls and Procedures
An evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of February 28, 201929, 2020 was carried out under the supervision and with the participation of the Company’s management, including the President & Chief Executive Officer and the Vice President & Chief Financial Officer (“the Certifying Officers”). Based on the evaluation, the Certifying Officers concluded that the Company’s disclosure controls and procedures are effective.

Changes in Internal ControlControls over Financial Reporting

No changes in our controlscontrol over financial reporting were identified as having occurred during the quarter ended February 28, 201929, 2020 that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting.

27

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

Subsequent to the end of the third quarter, the Company settled a dispute with PerkinElmer, Bioo Scientific and Richard E. Calk, Jr., the former President and Chief Operating Officer of Neogen, regarding non-compliance with the terms of Mr. Calk’s non-competition agreement following his departure from Neogen in September, 2017. Per the terms of a court order, entered into on March 15, 2019, Mr. Calk was ordered to strictly comply with the non-competition clause of his separation agreement with the Company through September 1, 2019, and PerkinElmer and Bioo Scientific are prohibited from either directly or indirectly rehiring or engaging Mr. Calk for a period of 18 months.

Item 1.
Legal Proceedings
The Company is subject to other legal and other proceedings in the normal course of business. In the opinion of management, the outcomes of these matters are not expected to have a material effect on the Company’s future results of operations or financial position.

Item 2. Unregistered Sales

Item 1A.
Risk Factors
Other than the risk factors set forth below, there have been no material changes from the risk factors disclosed in our Annual Report on Form
10-K
for the fiscal year ended May 31, 2019.
The widespread outbreak of Equity Securitiesan illness or any other communicable disease, or any other public health crisis, could adversely affect our business, results of operations and Use of Proceeds

Purchases of Equity Securitiesfinancial condition.

We could be negatively impacted by the Issuer

widespread outbreak of an illness or any other communicable disease, or any other public health crisis that results in economic and trade disruptions, including the disruption of global supply chains. In December 2019, an outbreak of a new strain of coronavirus

(“COVID-19”)
began in Wuhan, Hubei Province, China. In March 2020, the World Health Organization declared
COVID-19
a pandemic. The
COVID-19
pandemic has negatively impacted the global economy, disrupted global supply chains and created significant volatility and disruption of financial markets. The following table summarizes shares repurchased pursuantextent of the impact of the
COVID-19
pandemic on our operational and financial performance, including our ability to execute our share repurchase program duringbusiness strategies and initiatives in the three months ended February 28, 2019 (in thousands except for price per share):

Period  Total Number
of Shares
Purchased
  Average Price
Paid per Share
  Total Number of
Shares Purchased as
Part of Publicly
Announced Programs
  Approximate
Number of Shares
that May Yet Be
Purchased Under
the  Programs
 

December 1, 2018 - December 31, 2018

   50  $62.69   50   2,950 

January 1, 2019 - January 31, 2019

   —     —     —     —   

February 1, 2019 - February 28, 2019

   —     —     —     —   
  

 

 

  

 

 

  

 

 

  

 

 

 

Total

   50  $62.69   50   2,950 
  

 

 

  

 

 

  

 

 

  

 

 

 

Item 6. Exhibits

expected time frame, will depend on future developments, including the duration and spread of the pandemic and related restrictions on travel and transports, all of which are uncertain and cannot be predicted. An extended period of global supply chain and economic disruption could materially affect our business, results of operations, access to sources of liquidity and financial condition.

Item 6.
Exhibits
(a) Exhibit Index

3 
    3
10 
  10
31.1 
  31.1
31.2 
  31.2
32 
  32
101.INS 
101.INS
Inline XBRL Instance Document
101.SCH 
101.SCH
Inline XBRL Taxonomy Extension Schema Document
101.CAL 
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF 
101.DEF
Inline XBRL Taxonomy Extension Definition Document
101.LAB 
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE 
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document
EX-104
Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)

Items 1A, 2, 3, 4, and 5 are not applicable or removed or reserved and have been omitted.

28

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

NEOGEN CORPORATION
    (Registrant)
Dated: April 3, 2020
NEOGEN CORPORATION
(Registrant)

Dated: March 29, 2019

/s/ John E. Adent

John E. Adent
President & Chief Executive Officer
(Principal Executive Officer)

Dated: March 29, 2019

Dated: April 3, 2020

/s/ Steven J. Quinlan

Steven J. Quinlan
Vice President & Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)

27

29