Table of Contents
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 v
 
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 November 30, 2021.August 31, 2022.
or
 
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
    
    
        
    
to
    
    
        
    
Commission file number
0-17988
 
 
Neogen Corporation
(Exact name of registrant as specified in its charter)
 
Michigan
 
38-2367843
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer
Identification Number)
620 Lesher Place
Lansing, Michigan 48912
(Address of principal executive offices, including zip code)
(517)
372-9200
(Registrant’s telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
 
Title of each Class
  
Trading
Symbol(s)
  
Name of each exchange
on which registered
Common Stock, $0.16 par value per share
  
NEOG
  
NASDAQ Global Select Market
N/A
(Former name, former address and former fiscal year, if changed since last report)
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ☒    No  ☐
Indicate by a check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.    Yes  ☐    No  ☒
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, a
non-accelerated
filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule
12b-2
of the Exchange Act.
Large accelerated filer
 
☒
  
Accelerated filer
 
☐
Non-accelerated filer 
Non-accelerated filer
☐		  
☐
Smaller Reporting Company		 
Smaller Reporting Company
☐
Emerging growth 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 November 30, 2021August 31, 2022 there were 107,768,342107,837,730 shares of Common Stock outstanding.
 
 
 
Table of Contents
NEOGEN CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
 
  
Page No.
 
PART I. FINANCIAL INFORMATION
  
Item 1.
 
Interim Consolidated Financial Statements (unaudited)
   2 
 
Consolidated Balance Sheets – November 30, 2021August 31, 2022 and May 31, 20212022
   2 
 
Consolidated Statements of Income – Three and six months ended November 30,August 31, 2022 and 2021 and 2020
   3 
 
Consolidated Statements of Comprehensive Income – Three and six months ended November 30,August 31, 2022 and 2021 and 2020
   4 
 
Consolidated Statements of Equity – Three and six months ended November 30,August 31, 2022 and 2021 and 2020
   5 
 
Consolidated Statements of Cash Flows – SixThree months ended November 30,August 31, 2022 and 2021 and 2020
   6 
 
Notes to Interim Consolidated Financial Statements – November 30, 2021August 31, 2022
   7 
Item 2.
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
   1920 
Item 3.
 
Quantitative and Qualitative Disclosures About Market Risk
   2729 
Item 4.
 
Controls and Procedures
   2729 
PART II. OTHER INFORMATION
  
Item 1.
 
Legal Proceedings
   2830 
Item 6.
 
Exhibits
   2831 
SIGNATURES
   2932 
 
CEO Certification
  
 
CFO Certification
  
 
Section 906 Certification
  
 
1
Table of Contents
PART I – FINANCIAL INFORMATION
Item 1. Interim Consolidated Financial Statements
Neogen Corporation and Subsidiaries
Consolidated Balance Sheets (unaudited)
(in thousands, except share and
per share amounts)
 
   
November 30,
  
May 31,
 
   
2021
  
2021
 
Assets
         
Current Assets
         
Cash and cash equivalents
  $51,119  $75,602 
Marketable securities
   338,130   305,485 
Accounts receivable, less allowance of $1,500 and $1,400 at November 30, 2021 and May 31, 2021, respectively
   92,498   91,823 
Inventories
   107,086   100,701 
Prepaid expenses and other current assets
   22,371   17,840 
   
 
 
  
 
 
 
Total Current Assets
   611,204   591,451 
Net Property and Equipment
   100,863   100,453 
Other assets
         
Right of use assets
   2,171   2,477 
Goodwill
   142,613   131,476 
Other
non-amortizable
intangible assets
   15,359   15,545 
Amortizable intangible and other assets, net of accumulated amortization of $51,012 and $53,462 at November 30, 2021 and May 31, 2021, respectively
   93,706   76,771 
Other
non-current
assets
   2,018   2,019 
   
 
 
  
 
 
 
Total Assets
  $967,934  $920,192 
   
 
 
  
 
 
 
Liabilities and Stockholders’ Equity
         
Current Liabilities
         
Accounts payable
  $34,222  $23,900 
Accrued compensation
   9,636   11,251 
Income taxes
   
0
 
 

   1,848 
Other accruals
   18,815   16,600 
   
 
 
  
 
 
 
Total Current Liabilities
   62,673   53,599 
Deferred Income Taxes
   21,829   21,917 
Other
Non-Current
Liabilities
   17,956   4,299 
   
 
 
  
 
 
 
Total Liabilities
   101,204   79,815 
Commitments and Contingencies (note 10)
   0    0  
Equity
         
Preferred stock, $1.00 par value, 100,000 shares authorized,NaN issued and outstanding
   0     0   
Common stock, $0.16 par value, 120,000,000 shares authorized, 107,768,342 and 107,468,304 shares issued and outstanding at November 30, 2021 and May 31, 2021, respectively
   17,243   17,195 
Additional
paid-in
capital
   304,959   294,953 
Accumulated other comprehensive loss
   (24,235)   (11,375) 
Retained earnings
   567,509   539,604 
   
 
 
  
 
 
 
Total Stockholders’ Equity
   865,476   840,377 
   
 
 
  
 
 
 
Total Liabilities and Stockholders’ Equity
  $967,934  $920,192 
   
 
 
  
 
 
 
   
August 31,
  
May 31,
 
   
2022
  
2022
 
Assets
   
Current Assets
   
Cash and cash equivalents  $107,098  $44,473 
Marketable securities   240,613   336,578 
Accounts receivable, net of allowance of $1,800 and $1,650 at August 31, 2022 and May 31, 2022, respectively   93,112   99,674 
Inventories   129,039   122,313 
Prepaid expenses and other current assets   38,045   23,760 
          
Total Current Assets   607,907   626,798 
Net Property and Equipment   121,021   110,584 
Other Assets         
Right of use assets   2,834   3,184 
Goodwill   140,067   142,704 
Other
non-amortizable
intangible assets
   15,182   15,397 
Amortizable intangible and other assets, net of accumulated amortization of $55,201 and $55,416 at August 31, 2022 and May 31, 2022, respectively   88,239   92,106 
Other
non-current
assets
   2,155   2,156 
          
Total Assets  $977,405  $992,929 
          
Liabilities and Stockholders’ Equity
         
Current Liabilities         
Accounts payable  $27,002  $34,614 
Accrued compensation   8,295   11,123 
Income tax payable   3,921   2,126 
Deferred revenue   5,464   5,460 
Other accruals   22,322   24,521 
          
Total Current Liabilities   67,004   77,844 
Deferred Income Tax Liability   15,949   17,011 
Other
Non-Current
Liabilities
   10,654   10,700 
          
Total Liabilities   93,607   105,555 
Commitments and Contingencies (note 10)         
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, 107,837,730 and 107,801,094 shares issued and outstanding at August 31, 2022 and May 31, 2022, respectively   17,254   17,248 
Additional
paid-in
capital
   312,750   309,984 
Accumulated other comprehensive loss   (39,326)   (27,769) 
Retained earnings   593,120   587,911 
          
Total Stockholders’ Equity   883,798   887,374 
          
Total Liabilities and Stockholders’ Equity  $977,405  $992,929 
          
See notes to interim consolidated financial statements.
 
2
Table of Contents
Neogen Corporation and Subsidiaries
Consolidated Statements of Income (unaudited)
(in thousands, except per share amounts)
 
   
Three Months Ended
  
Six Months Ended
 
   
November 30,
  
November 30,
 
   
2021
   
2020
  
2021
   
2020
 
Revenues
                   
Product revenues
  $106,111   $92,537  $210,124   $180,472 
Service revenues
   24,406    22,463   48,698    43,853 
   
 
 
   
 
 
  
 
 
   
 
 
 
Total Revenues
   130,517    115,000   258,822    224,325 
Cost of Revenues
                   
Cost of product revenues
   56,374    49,275   111,100    95,870 
Cost of service revenues
   13,549    12,511   27,120    24,939 
   
 
 
   
 
 
  
 
 
   
 
 
 
Total Cost of Revenues
   69,923    61,786   138,220    120,809 
   
 
 
   
 
 
  
 
 
   
 
 
 
Gross Margin
   60,594    53,214   120,602    103,516 
Operating Expenses
                   
Sales and marketing
   21,188    17,729   41,743    34,245 
General and administrative
   22,605    12,184   35,988    23,197 
Research and development
   4,332    4,056   8,657    7,934 
   
 
 
   
 
 
  
 
 
   
 
 
 
Total Operating Expenses
   48,125    33,969   86,388    65,376 
   
 
 
   
 
 
  
 
 
   
 
 
 
Operating Income
   12,469    19,245   34,214    38,140 
Other Income (Expense)
                   
Interest income
   224    555   427    1,277 
Other income (expense)
   235    (465)   14    (272) 
   
 
 
   
 
 
  
 
 
   
 
 
 
Total Other Income
   459    90   441    1,005 
   
 
 
   
 
 
  
 
 
   
 
 
 
Income Before Taxes
   12,928    19,335   34,655    39,145 
Provision for Income Taxes
   2,100    3,450   6,750    7,400 
   
 
 
   
 
 
  
 
 
   
 
 
 
Net Income
  $10,828   $15,885  $27,905   $31,745 
   
 
 
   
 
 
  
 
 
   
 
 
 
Net Income Per Share
                   
Basic
  $0.10   $0.15  $0.26   $0.30 
   
 
 
   
 
 
  
 
 
   
 
 
 
Diluted
  $0.10   $0.15  $0.26   $0.30 
   
 
 
   
 
 
  
 
 
   
 
 
 
Weighted Average Shares Outstanding
 
              
Basic
   107,641    106,258   107,565    106,044 
Diluted
   108,122    106,808   108,099    106,600 
   
Three Months Ended
 
   
August 31,
 
   
2022
  
2021
 
Revenues         
Product revenues  $106,792  $104,013 
Service revenues   25,557   24,292 
          
Total Revenues   132,349   128,305 
Cost of Revenues         
Cost of product revenues   55,441   54,726 
Cost of service revenues   14,638   13,571 
          
Total Cost of Revenues   70,079   68,297 
          
Gross Margin   62,270   60,008 
   
Operating Expenses         
Sales and marketing   23,383   20,555 
General and administrative   27,944   13,383 
Research and development   4,881   4,325 
          
Total Operating Expenses   56,208   38,263 
          
Operating Income   6,062   21,745 
   
Other Income (Expense)         
Interest income   969   203 
Other expense   (372)   (221) 
          
Total Other Income (Expense)
   597   (18) 
          
Income Before Taxes   6,659   21,727 
Provision for Income Taxes   1,450   4,650 
          
Net Income  $5,209  $17,077 
          
   
Net Income Per Share         
Basic  $0.05  $0.16 
          
Diluted  $0.05  $0.16 
          
   
Weighted Average Shares Outstanding         
Basic   107,837   107,490 
Diluted   107,857   108,109 
See notes to interim consolidated financial statements.
 
3
Table of Contents
Neogen Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss) (unaudited)
(in thousands)
 
   
Three Months Ended
  
Six Months Ended
 
   
November 30,
  
November 30,
 
   
2021
  
2020
  
2021
  
2020
 
Net income
  $10,828  $15,885  $27,905  $31,745 
Other comprehensive income (loss), net of tax:
                 
foreign currency translations
   (7,649)   938   (12,272)   5,059 
Other comprehensive loss, net of tax:
                 
unrealized loss on marketable securities
   (382)   (317)   (588)   (436) 
   
 
 
  
 
 
  
 
 
  
 
 
 
Total comprehensive income
  $2,797  $16,506  $15,045  $36,368 
   
 
 
  
 
 
  
 
 
  
 
 
 
         
   
Three Months Ended
 
   
August 31,
 
   
2022
  
2021
 
   
Net income  $5,209  $17,077 
Foreign currency translations   (11,133)   (4,623) 
Unrealized loss on marketable securities, net of tax   (424)   (206) 
          
Total comprehensive income (loss)  $(6,348)  $12,248 
          
See notes to interim consolidated financial statements.
 
4
Table of Contents
Neogen Corporation and Subsidiaries
Consolidated Statements of
Equity (unaudited)
(in thousands)
   
 
Common Stock
   
Additional

Paid-in

Capital
   
Accumulated

Other

Comprehensive

Income (Loss)
  
Retained

Earnings
   
Total
 
   
Shares
   
Amount
 
Balance, June 1, 2022   107,801   $17,248   $309,984   $(27,769)  $587,911   $887,374 
Exercise of options and share-based compensation expense   4    1    1,904    —     —      1,905 
Issuance of shares under employee stock purchase plan   33    5    862    —     —      867 
Net income for the three months ended August 31, 2022   —      —      —      —     5,209    5,209 
Other comprehensive loss for the three months ended August 31, 2022   —      —      —      (11,557)   —      (11,557) 
                              
Balance, August 31, 2022   107,838   $17,254   $312,750   $(39,326)  $593,120   $883,798 
 
               
Accumulated
        
           
Additional
   
Other
        
   
Common Stock
   
Paid-in
   
Comprehensive
  
Retained
     
   
Shares
   
Amount
   
Capital
   
Income (Loss)
  
Earnings
   
Total
 
Balance, June 1, 2021
  
 
107,468
 
  
$
17,195
 
  
$
294,953
 
  
$
(11,375
) 
 
$
539,604
 
  
$
840,377
 
Exercise of options and share-based compensation expense
   6    1    1,838    —     —      1,839 
Issuance of shares under employee stock purchase plan
   19    3    896    —     —      899 
Net income for the three months ended August 31, 2021
   —      —      —      —     17,077    17,077 
Other comprehensive loss for the three months ended August 31, 2021
   —      —      —      (4,829)   —      (4,829) 
   
 
 
   
 
 
   
 
 
   
 
 
  
 
 
   
 
 
 
Balance, August 31, 2021
  
 
107,493
 
  
$
17,199
 
  
$
297,687
 
  
$
(16,204
) 
 
$
556,681
 
  
$
855,363
 
Exercise of options and share-based compensation expense
   275    44    7,272    —     —      7,316 
Net income for the three months ended November 30, 2021
   —      —      —      —     10,828    10,828 
Other comprehensive loss for the three months ended November 30, 2021
   —      —      —      (8,031)   —      (8,031) 
   
 
 
   
 
 
   
 
 
   
 
 
  
 
 
   
 
 
 
Balance, November 30, 2021
  
 
107,768
 
  
 
17,243
 
  
 
304,959
 
  
$
(24,235
) 
 
$
567,509
 
  
$
865,476
 
   
 
 
   
 
 
   
 
 
   
 
 
  
 
 
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, June 1, 2020
  
 
105,892
 
  
$
16,943
 
  
$
249,221
 
  
$
(19,709
) 
 
$
478,722
 
  
$
725,177
 
Exercise of options and share-based compensation expense
   172    28    5,811    —     —      5,839 
Issuance of shares under employee stock purchase plan
   18    3    665    —     —      668 
Net income for the three months ended August 31, 2020
   —      —      —      —     15,860    15,860 
Other comprehensive income for the three months ended August 31, 2020
   —      —      —      4,002   —      4,002 
   
 
 
   
 
 
   
 
 
   
 
 
  
 
 
   
 
 
 
Balance, August 31, 2020
  
 
106,082
 
  
$
16,974
 
  
$
255,697
 
  
$
(15,707
) 
 
$
494,582
 
  
$
751,546
 
Exercise of options and share-based compensation expense
   406    64    9,279    —     —      9,343 
Net income for the three months ended November 30, 2020
   —      —      —      —     15,885    15,885 
Other comprehensive income for the three months ended November 30, 2020
   —      —      —      621   —      621 
   
 
 
   
 
 
   
 
 
   
 
 
  
 
 
   
 
 
 
Balance, November 30, 2020
  
 
106,488
 
  
 
17,038
 
  
 
264,976
 
  
 
(15,086
) 
 
 
510,467
 
  
 
777,395
 
   
 
 
   
 
 
   
 
 
   
 
 
  
 
 
   
 
 
 
   
 
Common Stock
   
Additional

Paid-in

Capital
   
Accumulated

Other

Comprehensive

Income (Loss)
  
Retained

Earnings
   
Total
 
   
Shares
   
Amount
 
Balance, June 1, 2021   107,468   $17,195   $294,953   $(11,375)  $539,604   $840,377 
Exercise of options and share-based compensation expense   6    1    1,838    —     —      1,839 
Issuance of shares under employee stock purchase plan   19    3    896    —     —      899 
Net income for the three months ended August 31, 2021   —      —      —      —     17,077    17,077 
Other comprehensive income for the three months ended August 31, 2021   —      —      —      (4,829)   —      (4,829) 
                              
Balance, August 31, 2021   107,493   $17,199   $297,687   $(16,204)  $556,681   $855,363 
See notes to interim consolidated financial statements.
 
5
Table of Contents
Neogen Corporation and Subsidiaries
Consolidated Statements of Cash Flows (unaudited)
(in thousands)
 
   
Six Months Ended
 
   
November 30,
 
   
2021
  
2020
 
Cash Flows From Operating Activities
         
Net Income
  $27,905  $31,745 
Adjustments to reconcile net income to net cash from operating activities:
         
Depreciation and amortization
   11,511   9,523 
Share-based compensation
   3,438   3,192 
Change in operating assets and liabilities, net of business acquisitions:
         
Accounts receivable
   (1,500)   6,662 
Inventories
   (6,929)   4,063 
Prepaid expenses and other current assets
   (3,709)   (2,080) 
Accounts payable, accruals and other changes
   10,341   (5,581) 
   
 
 
  
 
 
 
Net Cash From Operating Activities
   41,057   47,524 
Cash Flows For Investing Activities
         
Purchases of property, equipment and other
non-current
intangible assets
   (5,235)   (11,092) 
Proceeds from the sale of marketable securities
   197,941   309,030 
Purchases of marketable securities
   (230,586)   (308,524) 
Business acquisitions, net of cash acquired
   (26,864)   (2,350) 
   
 
 
  
 
 
 
Net Cash For Investing Activities
   (64,744)   (12,936) 
Cash Flows From Financing Activities
         
Exercise of stock options and issuance of employee stock purchase plan shares
   6,619   12,658 
   
 
 
  
 
 
 
Net Cash From Financing Activities
   6,619   12,658 
Effect of Foreign Exchange Rates on Cash
   (7,415)   352 
   
 
 
  
 
 
 
Net Increase (Decrease) In Cash and Cash Equivalents
   (24,483)   47,598 
Cash and Cash Equivalents, Beginning of Period
   75,602   66,269 
   
 
 
  
 
 
 
Cash and Cash Equivalents, End of Period
  $51,119  $113,867 
   
 
 
  
 
 
 
   
Three Months Ended
 
   
August 31,
 
   
2022
  
2021
 
Cash Flows (For) From Operating Activities         
Net Income  $5,209  $17,077 
Adjustments to reconcile net income to net cash (
f
or) from operating activities:
         
Depreciation and amortization   5,729   5,682 
Deferred income taxes   (1,439)   (15) 
Share-based compensation   1,867   1,690 
Change in operating assets and liabilities, net of business acquisitions:         
Accounts receivable   4,819   4,036 
Inventories   (8,330)   (1,863) 
Prepaid expenses and other current assets   (14,682)   (1,014) 
Accounts payable, accruals and other changes   (7,316)   (2,383) 
          
Net Cash (For) From Operating Activities   (14,143)   23,210 
   
Cash Flows From (For) Investing Activities         
Purchases of property, equipment and other
non-current
intangible assets
   (12,996)   (1,295) 
Proceeds from the sale of marketable securities   108,488   112,636 
Purchases of marketable securities   (12,523)   (136,748) 
Business acquisitions, net of cash acquired   (1,331)   —   
          
Net Cash From (For) Investing Activities   81,638   (25,407) 
   
Cash Flows From Financing Activities         
Exercise of stock options and issuance of employee stock purchase plan shares   905   1,048 
          
Net Cash From Financing Activities   905   1,048 
   
Effect of Foreign Exchange Rates on Cash   (5,775)   (3,170) 
          
   
Net Increase (Decrease) In Cash and Cash Equivalents   62,625   (4,319) 
Cash and Cash Equivalents, Beginning of Period   44,473   75,602 
          
Cash and Cash Equivalents, End of Period  $107,098  $71,283 
          
See notes to interim consolidated financial statements.
 
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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 six month periodsperiod ended November 30, 2021August 31, 2022 are not necessarily indicative of the results to be expected for the fiscal year ending May 31, 2022.2023. 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, 2021.2022.
Our functional currency is the U.S. dollar. We translate our
non-U.S.
operations’ assets and liabilities denominated in foreign currencies into U.S. dollars at current rates of exchange as of the balance sheet date and income and expense items at the average exchange rate for the reporting period. Translation adjustments resulting from exchange rate fluctuations are recorded in other comprehensive income (loss). Gains or losses from foreign currency transactions are included in other income (expense) on our consolidated statement of income.
Share and per share amounts reflect the June 4, 2021
2-for-1
stock split as if it took place at the beginning of the periods presented.
Recently Adopted Accounting Standards
Income Tax Simplification
On June 1, 2021, the Company adopted ASU 740 Update
2019-12,
Income Taxes (Topic 740). This guidance provides amendments to simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. The adoption of this guidance did not have a material impact on our consolidated financial statements.
Recent Accounting Pronouncements Not Yet Adopted
Reference Rate Reform
In March 2020, the FASB issued Update
2020-04,
Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This update provides temporary optional expedients to applying the reference rate reform guidance to contracts that reference LIBOR or another reference rate expected to be discontinued. Under this update, contract modifications resulting in a new reference rate may be accounted for as a continuation of the existing contract. This guidance is effective upon issuance of the update and applies to contract modifications made through December 31, 2022. We willWhen we adopt this standard when LIBOR is discontinued and our lender begins usingin the new reference rate. We are evaluatingsecond quarter of fiscal 2023, we will use the impact the newSecured Overnight Financing Rate (SOFR). Adoption of this standard will not have a material impact on our consolidated financial statements and related disclosures, but do not anticipate a material impact.disclosures.
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Comprehensive Income (Loss)
Comprehensive income (loss) represents net income and any revenues, expenses, gains and losses that, under U.S. generally accepted
accounting principles, are excluded from net income and recognized directly as a component of equity. Accumulated other
comprehensive income (loss) consists of foreign currency translation adjustments and unrealized gains or losses on our marketable securities.
Fair Value of Financial Instruments
The carrying amounts of the Company’s financial instruments other than cash equivalents and marketable securities, which include accounts receivable and accounts payable, approximate fair value based on either their short maturity or current terms for similar instruments.
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Fair value measurements are determined based upon the exit price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants exclusive of any transaction costs. The Company utilizes a fair value hierarchy based upon the observability of inputs used in valuation techniques as follows:
Level 1: Observable inputs such as quoted prices in active markets;
Level 2: Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and
Level 3: Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own
assumptions.
assumptions.
Leases
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. Topic 842 requires the Company to recognize in the statement of financial position a liability to make lease payments (the lease liability) and a
right-of-use
asset representing its right to use the underlying asset for the lease term.
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. Costs associated with operating leases are recognized on a straight-line basis within operating expenses over the term of the lease. The
right-of-use
assets were $2,171,000$2,834,000 and $2,477,000$3,184,000 at November 30, 2021August 31, 2022 and May 31, 2021,2022, respectively. The total current and
non-current
lease liabilities were $2,181,000$2,899,000 and $2,492,000$3,228,000 at November 30, 2021August 31, 2022 and May 31, 2021,2022, respectively.
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.
Accounts Receivable Allowance
Management attempts to minimize credit risk by reviewing customers’ credit history before extending credit and by monitoring credit exposure on a regular basis. An allowance for doubtful accounts is established based upon factors surrounding the credit risk of specific customers, historical trends and other information. Collateral or other security is generally not required for accounts receivable. Once a receivable balance has been determined to be uncollectible, generally after all collection efforts have been exhausted, that amount is charged against the allowance for doubtful accounts.
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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.
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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. If the carrying amounts of these assets are deemed to be less than fair value based upon a discounted cash flow analysis and comparison to comparable EBITDA multiples of peer companies, such assets are reduced to their estimated fair value and a charge is recorded to operations.
Long-Lived Assets
Management reviews the carrying values of its long-lived assets to be held and used, including definite-lived intangible assets, for
possible impairment whenever events or changes in business conditions warrant such a review. The carrying value of a long-lived asset is considered impaired when the anticipated separately identifiable undiscounted cash flows over the remaining useful life of the asset indicate that the carrying amount of the asset may not be recoverable. In such an event, fair value is determined using discounted cash flows and, if lower than the carrying value, impairment is recognized through a charge to operations.
Business Combinations
We utilize the acquisition method of accounting for business combinations
. This method requires, among other things, that results of operations of acquired companies are included in Neogen’s results of operations beginning on the respective acquisition dates and that assets acquired and liabilities assumed are recognized at fair value as of the acquisition date. Any excess of the fair value of consideration transferred over the fair values of the net assets acquired is recognized as goodwill. Contingent consideration liabilities are recognized at the estimated fair value on the acquisition date; these are recorded in either other accruals within current liabilities (for expected payments in less than a year) or other
non-current
liabilities (for expected payments in greater than a year), both on our consolidated balance sheets. Subsequent changes to the fair value of contingent consideration liabilities are recognized in other income (expense) in the consolidated statements of income. Contingent consideration payments made soon after the acquisition date are classified as investing activities in the consolidated statements of cash flows. Contingent consideration payments not made soon after the acquisition date that are related to the acquisition date fair value are reported as financing activities in the consolidated statements of cash flows, and amounts paid in excess of the original acquisition date fair value are reported as operating activities in the consolidated statements of cash flows. The fair value of assets acquired and liabilities assumed in certain cases may be subject to revision based on the final determination of fair value during a period of time not to exceed
12
months from the acquisition date. Legal costs, due diligence costs, business valuation costs and all other business acquisition costs are expensed when incurred.
Equity Compensation Plans
Share options awarded to employees, restricted stock units (RSUs) 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, an estimate of award forfeitures, 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. For RSUs, we use the intrinsic value method to value the units.
To value equity awards, several recognized valuation models exist; none of these models can be singled out as being the best or most correct. The model applied by us can
accommodate
most of the specific features included in the options granted, which are the reason for their use. If different models 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 7.
Income Taxes
We account for income taxes using the asset and liability method. Under this method, deferred income tax assets and liabilities are
determined based on differences between the financial reporting and tax bases of assets and liabilities and for tax credit carryforwards and are measured using the enacted tax rates in effect for the years in which the differences are expected to reverse. Deferred income tax expense represents the change in net deferred income tax assets and liabilities during the year.
 
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2. CASH AND MARKETABLE SECURITIES
Cash and Cash Equivalents
Cash and cash equivalents consist of bank demand accounts, savings deposits, certificates of deposit and commercial paper with
original maturities of 90 days or less. Cash and cash equivalents are maintained at financial institutions and, at times, balances may exceed federally insured limits. The Company has not experienced losses related to these balances and believes it is not exposed to significant credit risk regarding its cash and cash equivalents. Cash and cash equivalents were $51,119,000$107,098,000 and $75,602,000$44,473,000 at November 30, 2021August 31, 2022 and May 31, 2021,2022, respectively. The carrying value of these assets approximates fair value due to the short maturity of these instruments and is classified as Level 1 in the fair value hierarchy.
Marketable Securities
The Company has marketable securities held by banks or broker-dealers at November 30, 2021.August 31, 2022. Changes in market value are monitored and recorded on a monthly basis; in the event of a downgrade in credit quality subsequent to purchase, the marketable securities investment is evaluated to determine the appropriate action to take to minimize the overall risk to our marketable securities portfolio. These securities are classified as available for sale. The primary objective of management’s short-term investment activity is to preserve capital for the purpose of funding current operations, capital expenditures and business acquisitions; short-term investments are not entered into for trading or speculative purposes. These securities are recorded at fair value based on recent trades or pricing models and therefore meet the Level 2 criteria. Interest income on these investments is recorded within other income on the income statement. Adjustments in the fair value of these assets are recorded in other comprehensive income.
Marketable Securities as of November 30, 2021August 31, 2022 and May 31, 20212022 are listed below by classification and remaining maturities.
 
     
November 30,
   
May 31,
 
(in thousands)
  
Maturity
  
2021
   
2021
   
Maturity
  
August 31,
2022
   
May 31,
2022
 
Commercial Paper & Corporate Bonds
  0 - 90 days   79,830    106,631   0 - 90 days  $63,375   $106,497 
  91 - 180 days   88,246    78,727   91 - 180 days   60,950    61,373 
  181 days - 1 year   64,526    87,590   181 days - 1 year   57,135    91,706 
  1 - 2 years   104,275    26,752   1 - 2 years   59,153    77,002 
Certificates of Deposit
  0 - 90 days   1,002    3,262 
  91 - 180 days   251    1,260 
  181 days - 1 year   0      1,263 
  1 - 2 years   0      0   
     
 
   
 
            
Total Marketable Securities
     $338,130   $305,485      $240,613   $336,578 
     
 
   
 
            
The components of marketable securities, consisting of commercial paper and corporate bonds, at November 30, 2021August 31, 2022 are as follows:
 
   
Amortized
   
Unrealized
   
Unrealized
     
(in thousands)
  
Cost
   
Gains
   
Losses
   
Fair Value
 
Commercial Paper & Corporate Bonds
   337,437    18    (578)    336,877 
Certificates of Deposit
   1,251    2    0—      1,253 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total Marketable Securities
  $338,688   $20   $(578)   $338,130 
   
 
 
   
 
 
   
 
 
   
 
 
 
10
(in thousands)
  
Amortized
Cost
   
Unrealized
Gains
   
Unrealized
Losses
   
Fair Value
 
Commercial Paper & Corporate Bonds  $244,125   $—     $(3,512)   $240,613 
The components of marketable securities, consisting of commercial paper and corporate bonds, at May 31, 20212022 are as follows:
(in thousands)
  
Amortized
Cost
   
Unrealized
Gains
   
Unrealized
Losses
   
Fair Value
 
Commercial Paper & Corporate Bonds  $339,540   $7   $(2,969)   $336,578 
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Amortized
   
Unrealized
   
Unrealized
     
(in thousands)
  
Cost
   
Gains
   
Losses
   
Fair Value
 
Commercial Paper & Corporate Bonds
   299,524    209    (33)    299,700 
Certificates of Deposit
   5,755    30    0—      5,785 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total Marketable Securities
  $305,279   $239   $(33)   $305,485 
   
 
 
   
 
 
   
 
 
   
 
 
 
3. 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:
 
  
November 30,
   
May 31,
 
(in thousands)
  
2021
   
2021
   
August 31,
2022
   
May 31,
2022
 
Raw materials
  $53,940   $47,588   $62,134   $58,667 
Work-in-process
   6,303    6,412    6,241    6,388 
Finished and purchased goods
   46,843    46,701    60,664    57,258 
  
 
   
 
         
  $107,086   $100,701   $129,039   $122,313 
  
 
   
 
         
4. 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 Neogen’s revenue is generated through contracts with its customers. A performance obligation is a promise in a contract to transfer a product or service to a customer. We generally recognize revenue at a point in time when all of our performance obligations under the terms of a contract are satisfied. Revenue is recognized upon transfer of control of promised products and services in an amount that reflects the consideration we expect to receive in exchange for those products or services. The collectability of consideration on the contract is reasonably assured before revenue is recognized. To the extent that customer payment has been received before all recognition criteria are met, these revenues are initially deferred in other accruals on the balance sheet and the revenue is recognized in the period that all recognition criteria have been met.
Certain agreements with customers include discounts or rebates on the sale of products and services applied retrospectively, such as volume rebates achieved by purchasing a specified purchase threshold of goods and services. We account for these discounts as variable consideration and estimate the likelihood of a customer meeting the threshold in order to determine the transaction price using the most predictive approach. We typically use the most-likely-amount method for incentives that are offered to individual customers, and the expected-value method for programs that are offered to a broad group of customers. Variable consideration reduces the amount of revenue that is recognized. Rebate obligations related to customer incentive programs are recorded in accrued liabilities; the rebate estimates are adjusted at the end of each applicable measurement period based on information currently available.
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The performance obligations in Neogen’s contracts are generally satisfied well within one year of contract inception. In such cases, management has elected the practical expedient to not adjust the promised amount of consideration for the effects of a significant financing component. Management has elected to utilize the practical expedient to recognize the incremental costs of obtaining a contract as an expense when incurred because the amortization period for the prepaid costs that would otherwise have been deferred and amortized is one year or less. We account for shipping and handling for products as a fulfillment activity when goods are shipped. Shipping and handling costs that are charged to and reimbursed by the customer are recognized as revenues, while the related expenses incurred by Neogen are recorded in sales and marketing expense. Revenue is recognized net of any tax collected from customers; the taxes are subsequently remitted to governmental authorities. Our terms and conditions of sale generally do not provide for returns of product or reperformance of service except in the case of quality or warranty issues. These situations are infrequent; due to immateriality of the amount, warranty claims are recorded in the period incurred.
The Company derives revenue from two primary sources—sources - product revenue and service revenue.
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Product revenue consists of shipments of:
 
Diagnostic test kits, dehydrated culture media and related products used by food producers and processors to detect harmful natural toxins, foodborne bacteria, allergens and levels of general sanitation;
 
Consumable products marketed to veterinarians, 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 Neogen’s genomics and commercial laboratory services are recognized and invoiced when the applicable laboratory service is performed and the results are conveyed to the customer.
Payment terms for products and services are generally 30 to 60 days.
The Company has no contract assets; contract liabilities represent deposits made by customers before the satisfaction of performance obligation(s) and recognition of revenue. Upon completion of the performance obligation(s) that the Company has with the customer, the liability for the customer deposit is relieved and revenue is recognized. These customer deposits are listed as Deferred revenue on the consolidated balance sheets.
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The following table presents disaggregated revenue by major product and service categories for the three and six month periods ended November 30, 2021August 31, 2022 and 2020:2021:
   
Three Months ended August 31,
 
(in thousands)
  
2022
   
2021
 
Food Safety
          
Natural Toxins, Allergens & Drug Residues  $19,787   $20,408 
Bacterial & General Sanitation   10,728    11,165 
Culture Media & Other   19,254    18,046 
Rodent Control, Insect Control & Disinfectants   9,575    7,649 
Genomics Services   5,299    5,454 
           
   $64,643   $62,722 
   
Animal Safety
          
Life Sciences  $1,589   $1,363 
Veterinary Instruments & Disposables   14,673    15,337 
Animal Care & Other   10,526    9,219 
Rodent Control, Insect Control & Disinfectants   22,214    22,149 
Genomics Services   18,704    17,515 
           
   $67,706   $65,583 
           
Total Revenues
  $132,349   $128,305 
           
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Three Months ended
November 30,
   
Six Months ended
November 30,
 
(in thousands)
  
2021
   
2020
   
2021
   
2020
 
Food Safety
                    
Natural Toxins, Allergens & Drug Residues
  $21,028   $20,001   $41,432   $39,016 
Bacterial & General Sanitation
   12,252    11,235    23,421    21,166 
Culture Media & Other
   19,935    14,215    37,981    26,387 
Rodenticides, Insecticides & Disinfectants
   8,232    7,059    15,882    15,888 
Genomics Services
   5,685    5,024    11,138    9,262 
   
 
 
   
 
 
   
 
 
   
 
 
 
   $67,132   $57,534   $129,854   $111,719 
Animal Safety
                    
Life Sciences
  $1,309   $1,398   $2,672   $2,723 
Veterinary Instruments & Disposables
   15,572    11,974    30,909    22,349 
Animal Care & Other
   10,849    9,371    20,068    17,029 
Rodenticides, Insecticides & Disinfectants
   18,269    18,471    40,418    38,385 
Genomics Services
   17,386    16,252    34,901    32,120 
   
 
 
   
 
 
   
 
 
   
 
 
 
   $63,385   $57,466   $128,968   $112,606 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total Revenues
  $130,517   $115,000   $258,822   $224,325 
   
 
 
   
 
 
   
 
 
   
 
 
 
5. NET INCOME PER SHARE
The calculation of net income per share follows:
 
  
Three Months Ended
   
Six Months Ended
   
Three Months Ended
 
  
November 30,
   
November 30,
   
August 31,
 
(in thousands, except per share amounts)
  
2021
   
2020
   
2021
   
2020
   
2022
   
2021
 
Numerator for basic and diluted net income per share:
                  
Net income attributable to Neogen
  $10,828   $15,885   $27,905   $31,745   $5,209   $17,077 
Denominator for basic net income per share:
                  
Weighted average shares
   107,641    106,258    107,565    106,044    107,837    107,490 
Effect of dilutive stock options and RSUs
   481    550    534    556    20    619 
  
 
   
 
   
 
   
 
         
Denominator for diluted net income per share
   108,122    106,808    108,099    106,600   $107,857   $108,109 
Net income attributable to Neogen per share:
                  
Basic
  $0.10   $0.15   $0.26   $0.30   $0.05   $0.16 
  
 
   
 
   
 
   
 
         
Diluted
  $0.10   $0.15   $0.26   $0.30   $0.05   $0.16 
  
 
   
 
   
 
   
 
         
 
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6. SEGMENT INFORMATION AND GEOGRAPHIC DATA
We have2have two reportable segments: Food Safety and Animal Safety. The Food Safety segment is primarily engaged in the development, production and marketing of diagnostic test kits, culture media and related products used by food producers and processors to detect harmful natural toxins, foodborne bacteria, allergens and levels of general sanitation. The Animal Safety segment is primarily engaged in the development, production and marketing of products dedicated to animal safety, including a complete line of consumable products marketed to veterinarians and animal health product distributors; this segment also provides genomic identification and related interpretive bioinformatic services. Additionally, the Animal Safety segment produces and markets rodenticides, disinfectants and insecticides to assist in the control of rodents, insects and disease in and around agricultural, food production and other facilities.
Our international operations in the United Kingdom, Mexico, Brazil, China and India originally focused on the Company’s food safety products, and each of these units reports through the Food Safety segment. In recent years, these operations have expanded to offer our complete line of products and services, including those usually associated with the Animal Safety segment such as cleaners, disinfectants, rodenticides, insecticides, veterinary instruments and genomics services. These additional products and services are managed and directed by existing management and are reported through the Food Safety segment.
Neogen’s operation in Australia originally focused on providing genomics services and sales of animal safety products and reports through the Animal Safety segment. With the acquisition of Cell BioSciences in February 2020, this operation has expanded to offer our complete line of products and services, including those usually associated with the Food Safety segment. These additional products are managed and directed by existing management at Neogen Australasia and report through the Animal Safety segment.
The accounting policies of each of the segments are the same as those described in Note 1.
Segment information follows:
 
           
Corporate and
     
   
Food
   
Animal
   
Eliminations
     
(in thousands)
  
Safety
   
Safety
   
(1)
   
Total
 
As of and for the three months ended November 30, 2021
 
               
Product revenues to external customers
  $60,112   $45,999   $—     $106,111 
Service revenues to external customers
   7,020    17,386    —      24,406 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total revenues to external customers
   67,132    63,385    —      130,517 
Operating income (loss)
   10,894    12,701    (11,126)    12,469 
Total assets
   298,437    278,994    390,503    967,934 
As of and for the three months ended November 30, 2020
 
               
Product revenues to external customers
  $51,323   $41,214   $—     $92,537 
Service revenues to external customers
   6,211    16,252    —      22,463 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total revenues to external customers
   57,534    57,466    —      115,000 
Operating income (loss)
   8,960    12,246    (1,961)    19,245 
Total assets
   226,735    228,126    390,765    845,626 
(in thousands)
  
Food
Safety
   
Animal
Safety
   
Corporate and
Eliminations (1)
   
Total
 
As of and for the three months ended August 31, 2022
                    
Product revenues to external customers  $57,790   $49,002   $—     $106,792 
Service revenues to external customers   6,853    18,704    —      25,557 
                     
Total revenues to external customers   64,643    67,706    —      132,349 
Operating income (loss)   8,597    11,881    (14,416)    6,062 
Total assets   318,463    311,231    347,711    977,405 
     
As of and for the three months ended August 31, 2021
                    
Product revenues to external customers  $55,945   $48,068   $—     $104,013 
Service revenues to external customers   6,777    17,515    —      24,292 
                     
Total revenues to external customers   62,722    65,583    —      128,305 
Operating income (loss)   10,131    12,762    (1,148)    21,745 
Total assets   291,018    240,208    400,880    932,106 
 
(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.
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Corporate and
     
   
Food
   
Animal
   
Eliminations
     
(in thousands)
  
Safety
   
Safety
   
(1)
   
Total
 
As of and for the six months ended November 30, 2021
                    
Product revenues to external customers
  $116,057   $94,067   $—     $210,124 
Service revenues to external customers
   13,797    34,901    —      48,698 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total revenues to external customers
   129,854    128,968    —      258,822 
Operating income (loss)
   21,026    25,463    (12,275)    34,214 
As of and for the six months ended November 30, 2020
                    
Product revenues to external customers
  $99,986   $80,486   $—     $180,472 
Service revenues to external customers
   11,733    32,120    —      43,853 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total revenues to external customers
   111,719    112,606    —      224,325 
Operating income (loss)
   16,923    24,411    (3,194)    38,140 
Table of Contents
(1)
Includes elimination of intersegment transactions.
The following table presents the Company’s revenue disaggregated by geographic location:
 
   
                      
   
                      
   
                      
   
                      
 
   
Three months ended
   
Six months ended
 
   
November 30,
   
November 30,
 
(in thousands)
  
2021
   
2020
   
2021
   
2020
 
Domestic
  $76,378   $69,832   $154,156   $137,156 
International
   54,139    45,168    104,666    87,169 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total revenue
   130,517    115,000    258,822    224,325 
   
 
 
   
 
 
   
 
 
   
 
 
 
1
5
   
Three months ended
August 31,
 
(in thousands)
  
2022
   
2021
 
Domestic  $80,642   $77,779 
International   51,707    50,526 
           
Total revenue  
$

132,349   
$

128,305 
           
7. EQUITY COMPENSATION PLANS
Incentive and
non-qualified
options to purchase shares of common stock have been granted to directors, officers and employees of Neogen under the terms of the Company’s 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 sixthree months ended November 30, 2021August 31, 2022 follows:
 
      
Weighted-
 
      
Average
 
(Options in thousands)
  
Shares
   
Exercise Price
   
Shares
   
Weighted-
Average
Exercise Price
 
Options outstanding June 1, 2021
   2,957   $30.38 
Options outstanding June 1, 2022   3,244   $32.13 
Granted
   392    40.93    —      —   
Exercised
   (262)    22.42    (4)    10.75 
Forfeited
   (21)    31.11    (110)    26.94 
  
 
           
Options outstanding November 30, 2021
   3,066   $32.40 
Options outstanding August 31, 2022   3,130   $32.32 
During the three and six month periods ended November 30,August 31, 2022 and 2021, and 2020, the Company recorded $1,748,000$1,867,000 and $1,511,000 and $3,438,000 and $3,192,000,$1,690,000, respectively, of compensation expense related to its share-based awards.
The weighted-average fair value per share of stock options granted during the first six months of fiscal yearsyear 2022, and 2021, estimated on the date of grant using the Black-Scholes option pricing model, was $9.54 and $7.71, respectively.$8.49. The fair value of stock options granted was estimated using the following weighted-average assumptions. No options were granted in the first quarter of fiscal year 2023.
 
   
FY 2022
  
FY 2021
 
Risk-free interest rate
   0.4%   0.2% 
Expected dividend yield
   0.0%   0.0% 
Expected stock price volatility
   32.8%   31.3% 
Expected option life
   3.12 years   3.25 years 
FY 2022
Risk-free interest rate0.4% 
Expected dividend yield0.0% 
Expected stock price volatility32.8%
Expected option life3.12 years
The company grants restricted stock units (RSUs) to directors, officers and employees under the terms of the 2018 Omnibus Incentive Plan, which vest ratably over three and five year periods. The current units are expensed straight-line over the remaining weighted-average period of 4.323.8 years. On November 30, 2021August 31, 2022 there was $6,501,000$6,442,000 in unamortized compensation cost related to
non-vested
RSUs. A summary of RSU activity during the three months ended August 31, 2022 follows:
 
(Options in thousands)
  
Shares
   
Weighted-
Average
Fair Value
 
RSUs outstanding June 1, 2022   257   $36.14 
Granted   —      —   
Released   —      —   
Forfeited   (4)    37.60 
           
RSUs outstanding August 31, 2022   253   $36.12 
       
Weighted-
 
       
Average
 
(Options in thousands)
  
Shares
   
Fair Value
 
RSUs outstanding June 1, 2021
   121   $34.21 
Granted
   120    40.92 
Released
   (25)    34.24 
Forfeited
   (3)    34.49 
   
 
 
      
RSUs outstanding November 30, 2021
   213   $37.97 
15
Table of Contents
The Company offers eligible employees the option to purchase common stock at a 5% discount to the lower of the market value of the stock at the beginning or end of each participation period under the terms of either the 2011 or the 2021 Employee Stock Purchase Plan; the discount is recorded in general and administrative expense. Total individual purchases in any year are limited to 10% of compensation.
1
6
8. BUSINESS COMBINATIONS
The Consolidated Statements of Income reflect the results of operations for business acquisitions since the respective dates of purchase. A
l
lAll 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 July 31, 2020, the Company acquired the U.S. (including territories) rights to Elanco’s StandGuard
Pour-on
for horn fly and lice control in beef cattle, and related assets. This product line fits in well with Neogen’s existing agricultural insecticide portfolio and organizational capabilities. Consideration for the purchase was $2,351,000 in cash, all paid at closing. The final purchase price allocation, based upon the fair value of these assets determined using the income approach, included inventory of $51,000 and intangible assets of $2,300,000 (with an estimated life of 15 years). This product line is manufactured at Neogen’s operation in Iowa; the sales are reported within the Animal Safety segment.
On December 30, 2020, the Company acquired all of the stock of Megazyme, Ltd, an Ireland-based company, and its wholly-owned subsidiaries, U.S.-based Megazyme, Inc. and Ireland-based Megazyme IP. Megazyme is a manufacturer and supplier of diagnostic assay kits and enzymes to measure dietary fiber, complex carbohydrates and enzymes in food and beverages as well as animal feeds. This acquisition
has
 allow
ed
Neogen to expand its commercial relationships across food, feed and beverage companies, and provide additional food quality diagnostic products to commercial labs and food science research institutions. Consideration for the purchase was net cash of $39.8 million paid at closing, $8.6 million of cash placed in escrow payable to the former owner in two installments in two and four years, $4.9 million of stock issued at closing, and up to $2.5 million of contingent consideration, payable in two installments over
one
 year, based upon 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 accounts receivable of $1,376,000, inventory of $5,595,000, net property, plant and equipment of $12,599,000, prepayments of $69,000, accounts payable of $4,000, other current liabilities of $1,815,000, contingent consideration accrual of $2,458,000,
non-current
liabilities of $319,000,
non-current
deferred tax liabilities of $3,306,000, intangible assets of $22,945,000 (with an estimated life of
15-20
years) and the remainder to goodwill
(non-deductible
for tax purposes). These values are Level 3 fair value measurements. In February 2021, the former owner was paid $1,229,000 for the first installment of contingent consideration, based upon the achievement of sales targets. The Irish companies continue to operate from their current locations in Bray, Ireland, reporting within the Food Safety segment and are managed through Neogen’s Scotland operation. The U.S. company’s business is managed by our Lansing-based Food Safety team.
On September 17, 2021, the Company acquired the stock of CAPInnoVet, Inc., a companion animal health business that provides pet medications to the veterinary market. This acquisition provides entry into the retail parasiticide market and enhances the Company’s presence in companion animal markets. Consideration for the purchase was net cash of $17.9 million paid at closing, including $150,000 of cash placed in escrow payable to the former owners in twelve months. There is also the potential for
performance
milestone payments to the former owners of up to $6.5 million
and
the Company could incur up to $14.5 million in
future roya
lty payment
s
.royalty payments. The preliminaryfinal purchase allocation, based upon the fair value of these assets and liabilities determined using the income approach, included accounts receivable of $308,000, inventory of $408,000,$531,000, prepayments of $296,000, accounts payable of $120,000, other current liabilities of $132,000,$84,000,
non-current
liabilities of $13.9$6.5 million (contingent consideration accrual calculated using a Monte Carlo simulation utilizing inputs such as probability and timing of milestone achievements, revenue forecasts and volatility, and estimated discount rates relating to established future cash flows of the business), intangible assets of $21.0$19.2 million (with an estimated life of
15-20
years) and the remainder to goodwill
(non-deductible
(deductible for tax purposes). These values are Level 3 fair value measurements. The $150,000 placed in escrow was paid to the former owners on September 21, 2022. The business
is
operated from our location in Lexington, KY, reporting within the Animal Safety segment.
On November 30, 2021, the Company acquired the stock of Delf (UK)(U.K.) Ltd., a United Kingdom-based manufacturer and supplier of animal hygiene and industrial cleaning products, and
Abbott
Analytical Ltd.,
a related service provider. This acquisition will expand the Company’s line of dairy hygiene products and will enhance our cleaner and disinfectant product portfolio. Consideration for the purchase was net cash of $8.8$9.5 million paid at closing, including $722,000 of cash placed in escrow payable to the former owner in one year. The preliminary purchase price allocation, based upon the fair value of these assets and liabilities determined using the income approach, included accounts receivable of 806,000,$1,059,000, inventory of $659,000,$972,000, net property, plant and equipment of $160,000,$152,000, prepayments of $43,000,$31,000, accounts payable of $543,000,$497,000, other current liabilities of $489,000,$378,000,
non-current
deferred tax liabilities of $533,000,$780,000, intangible assets of $2.6$3.1 million (with an estimated life of
10-15
years) and the remainder to goodwill
(non-deductible
for tax purposes). These values are Level 3 fair value measurements. The companies continue to operate from their current location in Liverpool, England, reporting within the Food Safety segment and are managed through Neogen’s Scotland operation.
17

Subsequent to the end of the quarter, onOn December 9, 2021, the Company acquired the stock of Genetic Veterinary Services,Sciences, Inc., a companion animal genetic testing business providing genetic information for dogs, cats and birds to animal owners, breeders and veterinarians. This acquisition will further expand the Company’s presence in the companion animal market. Consideration for the purchase was $11.8$11.4 million in net cash. Due to the timing of the transaction, theThe preliminary purchase price allocation, was not complete atbased upon the timefair value of filing.these assets and liabilities determined using the income approach, included accounts receivable of $38,000, net inventory of $292,000, net property, plant and equipment of $399,000, prepayments of $54,000, accounts payable of $325,000, unearned revenue of $1.9 million, other current liabilities of $321,000, intangible assets of $5.5 million (with an estimated life of
5-15
years) and the remainder to goodwill (deductible for tax purposes). These values are Level 3 fair value measurements. The business will beis operated from its current location in Spokane, Washington, reporting within the Animal Safety segment.
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Table of Contents
Subsequent
to the end
On July 1, 2022, Neogen acquired all of the quarter, on December 13, 2021, the Company entered into an agreement to combine with 3M’sstock of
Thai-Neo
Biotech Co., Ltd., a longstanding distributor of Neogen’s food safety products to Thailand and Southeast Asia. This acquisition gives Neogen a direct sales presence in Thailand. Consideration for the purchase was $1,558,000 in net cash, with $1,311,000 paid at closing and $234,000 payable on October 1, 2023. The preliminary purchase price allocation, based upon the fair value of these assets and liabilities determined using the income approach, included accounts receivable of $179,000, inventory of $232,000, net property, plant and equipment of $16,000, other
non-current
assets of $6,000, accounts payable of $3,000,
non-current deferred
 tax
liabilities of $120,000,
intangible assets of $
600,000
(with an estimated life of
5-15
years) and the remainder to goodwill
(non-deductible
for tax purposes). The business continues to operate in a Reverse Morris Trust transaction. Please refer to Forms
8-K
and Forms 425 filed withBangkok, Thailand, reporting within the Securities and Exchange Commission for more information.Food Safety segment.
For each completed acquisition listed above, the revenues and net income were not considered material and were therefore not disclosed.
3M Food Safety transaction
On September 1, 2022, after the close of the first quarter, Neogen, 3M, and Garden SpinCo, a newly formed subsidiary of 3M created to carve out 3M’s Food Safety business, closed on the transaction which had previously been announced in December 2021, combining 3M’s Food Safety business with Neogen in a Reverse Morris Trust transaction. Immediately following the transaction, Garden SpinCo stockholders own, in the aggregate, approximatel
y 50.1% of the issued and outstanding shares of Neogen common stock and
pre-merger
Neogen shareholders own, in the aggregate, approximately 49.9%
of the issued and outstanding shares of Neogen common stock. Garden SpinCo became a subsidiary of Neogen on September 1. On closing, the transaction valued the 3M’s Food Safety business at approximate
ly $3.3 
billion based on the issuance of 108,269,946 shares of Neogen common stock at a price of
$20.90
per share on August 31, 2022 and
 $1 
billion in debt assumed by Neogen post close. 3M’s Food Safety business funded 3M consideration valued at approximat
ely $1 billion at
close.
3M’s former Food Safety business is a leading provider of food safety testing solutions. It offers a broad range of food safety testing solutions that support multiple industries within food and beverage, helping producers to prevent and protect consumers from foodborne illnesses. The business has a broad global presence with products used in more than 60 countries and a diversified revenue base of more than 100,000 end-user customers. The combination of Neogen and 3M’s Food Safety business creates a leading innovator with an enhanced geographic footprint, innovative product offerings, digitization capabilities, and financial flexibility to capitalize on robust growth trends in sustainability, food safety, and supply chain integrity.
This transaction is a business combination and will be accounted for using the acquisition method. The purchase price of 3M’s Food Safety business will be allocated to the tangible and intangible assets acquired and liabilities assumed based on their fair value at the acquisition date. Any excess of the purchase price over the fair value of the net identified assets acquired and liabilities assumed will be recorded as goodwill. Transaction costs related to the transaction will be expensed as incurred. We are currently preparing the valuations and other procedures necessary to determine the purchase price allocation and will record our initial fair value estimates and the results of operations of the acquired business from the acquisition date forward in our condensed consolidated financial statement for the second quarter of fiscal 2023.
9. LONG TERM DEBT
We haveAt August 31, 2022, the Company had a financing agreement with a bank providing for a $15,000,000 unsecured revolving line of credit, which expires
originally
expire
d
 on November 30, 2023. There were 0no advances against the line of credit during fiscal 20212022 and there have been none thus far in fiscal 2022; there was 0 balance outstanding at November 30, 2021.were no advances through August 31, 2022. Interest on any borrowings iswas at LIBOR plus 100 basis points (rate under the terms of the agreement was 1.09%3.55% at November 30, 2021)August 31, 2022). Financial covenants includeincluded 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 NovemberAugust 31, 2022. This facility was replaced by the five-year secured term loan facility and five-year
secured
revolving facility described below.
On June 30, 2021.2022, Garden Spin
C
o entered into a credit agreement consisting of a five-year senior secured term loan facility in the amount of $650.0 million and a five-year senior secured revolving facility in the amount of $150.0 million (collectively, the “Credit Facilities”), which became available in connection with the merger and related transactions. The loan facility was funded to Garden Spinco on August 31, 2022, and upon the effectiveness of the merger on September 1, 2022, became Neogen’s obligation. Financial covenants include maintaining specified levels of funded debt to EBITDA, and debt service coverage. Pricing for the loan is term SOFR plus 235 basis points. The Credit Facilities, together with the Notes below, when incurred, represent the financing incurred in connection with the merger
of the 3M Food Safety business with Neogen.
In July 2022, Garden SpinCo closed on an offering of $350.0 million aggregate principal amount of 8.625% senior notes due 2030 (the “Notes”) in a private placement at par.
The Notes were initially issued by Garden SpinCo to 3M and were transferred and delivered by 3M to the selling securityholder in the offering, in satisfaction of certain of 3M’s existing debt. Garden SpinCo did not receive any proceeds from the sale of the Notes by the selling securityholder. Prior to the distribution of the shares of Garden SpinCo’s common stock to 3M stockholders, the Notes were guaranteed on a senior unsecured basis by 3M. Upon consummation of such distribution, 3M was released from all obligations under its guarantee. Upon the effectiveness of the merger on September 1, 2022, the Notes became guaranteed on a senior unsecured basis by Neogen and certain wholly-owned domestic subsidiaries of Neogen.
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Table of Contents
10. 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. We expense these annual costs of remediation, which have ranged from $38,000 to $131,000 per year over the past five years. The Company’s estimated remaining liability for these costs was $916,000 at both November 30, 2021August 31, 2022 and May 31, 2021,2022, measured on an undiscounted basis over an estimated period of 15 years. In fiscal 2019, the Company performed an updated Corrective Measures Study on the site, per a request from the Wisconsin Department of Natural Resources (WDNR) and is currently in discussion with the WDNR regarding potential alternative remediation strategies going forward. The Company believes that the current pump and treat strategy is appropriate for the site. However, the Company has agreed to a pilot study in which chemical reagents are injected into the ground in an attempt to reduce
on-site
contamination and is currently working with its consultant to design the system. At this time, the outcome of the pilot study is unknown, but a change in the current remediation strategy, depending on the alternative selected, could result in an increase in future costs and ultimately, an increase in the currently recorded liability, with an offsetting charge to operations in the period recorded. The Company has recorded $300,000$100,000 as a current liability, and the remaining $616,000$816,000 is recorded in other
non-current
liabilities in the consolidated balance sheets.
On March 6, 2020, the Company received an administrative subpoena from the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) regarding activities or transactions involving parties located in Iran. The Company subsequently conducted an internal investigation under the direction of outside legal counsel and disclosed information concerning certain genomic testing services provided to an unrelated U.S.-based party engaged in veterinary activities involving an Iranian party. The Company continues to cooperate with OFAC’s investigation and is currently examining whether certain of these activities may be eligible for OFAC General Licenses authorizing agricultural and veterinary activities.
In addition to responding to the administrative subpoena, the Company is implementinghas implemented additional compliance measures to prevent inadvertent dealings with restricted countries or parties. These measures will further enhance the Company’s international trade compliance program, which is designed to assure that the Company does not conduct business directly or indirectly with any countries or parties subject to U.S. economic sanctions and export control laws. Although it is too early to predict what action, if any, that OFAC will take, the Company does not currently have any reason to believe that OFAC’s pending investigation will have a material impact on its operations, the results of operations for any future period, or its overall financial condition. In fiscal 2020, the Company took a charge to expense and recorded a reserve of $600,000 to provide for potential fines or penalties on this matter. At this time, the Company believes that it is adequately reserved for
this issue.
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.
11. DERIVATIVES
We operate on a global basis and are exposed to the risk that our financial condition, results of operations and cash flows could be adversely affected by changes in foreign currency exchange rates. To reduce the potential effects of foreign currency exchange rate movements on net earnings, we enter into derivative financial instruments in the form of foreign currency exchange forward contracts with major financial institutions.
Derivatives Not Designated as Hedging Instruments
We forecast our net exposure in various receivables and payables to fluctuations in the value of various currencies, and we enter into approximately 11 foreign currency forward contracts each month to mitigate that exposure. These contracts are recorded net at fair value on our consolidated balance sheets, classified as Level 2 in the fair value hierarchy; gains and losses from these contracts were recognized in other income in our consolidated statements of income. The notional amount of forward contracts in place was $18,221,000 and $4,424,000 as of August 31, 2022 and May 31, 2022, respectively.
1
8
18
Table of Contents
(In thousands)
           
Fair Value of Derivatives Not Designated as Hedging Instruments
  
Balance Sheet Location
  
August 31, 2022
   
May 31, 2022
 
Foreign currency forward contracts, net  Prepaid and Other  $421   $(78) 
The location and amount of gains from derivatives not designated as hedging instruments in our consolidated statements of income were as follows:
(In thousands)
           
Derivatives Not Designated as Hedging Instruments
  
Location in statements of income
  
August 31, 2022
   
August 31, 2021
 
Foreign currency forward contracts  Other income (expense)  $882   $521 
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Table of Contents
PART I – FINANCIAL INFORMATION

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The information in this Management’s Discussion and Analysis of Financial Condition and Results of Operations contains both historical financial information and forward-looking statements. Neogen does not provide forecasts of future financial performance. While management is optimistic about the Company’s long-term prospects, historical financial information may not be indicative of future financial results.
Safe Harbor and Forward-Looking Statements
Forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, are made throughout this Quarterly Report on Form
10-Q.
For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words “believes,” “anticipates,” “plans,” “expects,” “seeks,” “estimates,” and similar expressions are intended to identify forward-looking statements. There are a number of important factors, including competition, recruitment and dependence on key employees, impact of weather on agriculture and food production, effects of the ongoing
COVID-19
pandemic on our business, global business disruption caused by the Russia invasion in Ukraine and related sanctions, identification and integration of acquisitions, research and development risks, patent and trade secret protection, government regulation and other risks detailed from time to time in the Company’s reports on file at the Securities and Exchange Commission, that could cause Neogen Corporation’s results to differ materially from those indicated by such forward-looking statements, including those detailed in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
In addition, any forward-looking statements represent management’s views only as of the day this Quarterly Report on Form
10-Q
was first filed with the Securities and Exchange Commission and should not be relied upon as representing management’s views as of any subsequent date. While management may elect to update forward-looking statements at some point in the future, it specifically disclaims any obligation to do so, even if its views change.
COVID-19TRENDS AND UNCERTAINTIES
During fiscal 2022 and the first quarter of fiscal 2023, we have experienced higher than expected input cost inflation, including higher transportation, supply chain and labor costs, that negatively impacted operating results. Pricing actions taken during fiscal 2022 and the first quarter of fiscal 2023 mitigated some, but not all, of the inflationary pressures. Ongoing inflation may also have an impact on our customer’s purchasing decisions and order patterns. We estimate inflation will continue to affect us in the remainder of fiscal 2023, although at this time it is impracticable to quantify the impact.
Although we have no operations in or direct exposure to Russia, Belarus and Ukraine, we have experienced intermittent shortages in materials and increased costs for transportation, energy and raw materials due, in part, to the negative impact of the Russia-Ukraine military conflict on the global economy. To date, our European operations and customer base have not been materially impacted by the conflict, however, as the conflict continues or worsens, it may impact our business, financial condition or results of operations in the remainder of fiscal 2023.
As we closelycontinue to monitor the ongoing
COVID-19
pandemic, our top priority remains protecting the health and safety of our employees. While operations continueemployees, their families, and those in our locations around the world, many of our
non-manufacturing
and distribution employees continue to work remotely and travel remains limited.communities. Safety guidelines and procedures including social distancing, mask wearing and enhanced cleaning, have been developed for
on-site
employees and these policies are regularly monitored and updated by our internal Emergency Response Team.
In the first half of fiscal 2022, the
COVID-19
pandemic continuedcontinues to impact our business operations and financial results. A number of our food safety diagnostic product lines have been negatively impacted due to decreased demand in many of our customers’ businesses around the world, particularly those serving restaurants, bars and other institutional food service markets.world. Many of our markets across the world are recovering, but the pandemic has continued to adversely impact our customers and ultimately, our revenues. We have also experienced supply chain difficulties including vendor disruptions, border closures, shipping issues and significantly increased shipping costs; labor shortages and higher labor costs, as we have had to use staffing agencies and increase our base pay in manya number of areas of the companyCompany to fill open positions;positions and to cover for COVID-related absences, and restricted travel, which hinders our ability to connect with customers. During the current fiscal year, we have incurred less expense for travel, meals, trade shows and some other customer-facing marketing activities; some of these activities have resumed but have not yet returned to
pre-pandemic
levels. Higher spend on shipping and labor are offsetting these savings.
Overall, the impact of
of COVID-19
remains
uncertain and ultimately depends on the length and severity of the pandemic, inclusive of the introduction of new strains of the virus; the federal, state, and local government actions taken in response; vaccination rates and effectiveness; the impact of vaccination requirements; extent of protection provided by prior viral infection; and the macroeconomic environment. We will continue to evaluate the nature and extent to which
which COVID-19 will
impacthas impacted our business, supply chain, including labor availability and attrition, consolidated results of operations, financial condition, and liquidity; we expect it to continue to impact us through at least the end of our current fiscal year.
year ending May 31, 2023.
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Table of Contents
Executive Overview
 
                                                    
   
August 31,
    
(in thousands)
  
2022
  
2021
  
%
 
Consolidated
             
Revenues
  $132,349  $128,305   3% 
Organic Sales Growth
          
 
0
% 
Food Safety
             
Revenues
  $64,643  $62,722   3% 
Organic Sales Growth
          
 
1
% 
Animal Safety
             
Revenues
  $67,706  $65,583   3% 
Organic Sales Growth
          
 
0
% 
    
% of International Sales
   39%   39%     
Effective Tax Rate
   21.8%   21.4%     
Net Income
  $5,209  $17,077   -69% 
EBITDA*
  $11,419  $27,206   -58% 
Adjusted EBITDA*
  $27,018  $28,896   -6% 
Per Diluted Share
  $0.05  $0.16     
Cash (for) from Operations
  $(14,143)  $23,210     
Consolidated revenues were $130.5 million in the second quarter of fiscal 2022, an increase of 13% compared to $115.0 million in the second quarter of fiscal 2021. Organic sales growth in the second quarter of fiscal 2022 was 10%. For the six month period, consolidated revenues were $258.8 million, an increase of 15% compared to $224.3 million in the same period in the prior fiscal year. On a year to date basis, organic sales rose 12%.
*
Refer to
non-GAAP
financial measure section in this document.
 
Food Safety segmentorganic sales were $67.1 million in the second quarter of fiscal 2022, an increase of 17% compared to $57.5 million in the same period a year ago. Organic sales in this segment rose 11% for the comparative period, withexclude revenues from the acquisitionacquisitions of Megazyme (December 2020) providing the remainder of the increase in revenues for the segment. For the year to date, Food Safety segment sales were $129.9 million, an increase of 16% compared to $111.7 million in the same period of the prior fiscal year; the organic sales increase was 10% for the comparative period, with the Megazyme acquisition providing the additional contribution to revenue.Delf/Abbott Analytical (November 2021) and
Thai-Neo
Biotech (July 2022).
 
Animal Safety segment sales were $63.4 million in the second quarter of fiscal 2022, an increase of 10% compared to $57.5 million in the second quarter of fiscal 2021. Organic sales in this segment also rose 10% in the second quarter, with a minor contribution from the CAPInnovet acquisition (September 2021). For the six month period, Animal Safety segment sales were $129.0 million, an increase of 15%, compared to $112.6 million in the same period a year ago. Year to date organic sales rose 14%, withexclude revenues from the StandGuard (July 2020)acquisitions of CAPInnoVet (September 2021) and CAPInnovet acquisitions contributing the difference.
International sales in the second quarter of fiscal 2022 were 41% of total sales compared to 39% of total sales in the second quarter of fiscal 2021. For the year to date, fiscal 2022 international sales were 40% of total sales compared to 39% of total sales in the same period of the prior year.
Our effective tax rate in the second quarter was 16.2% compared to an effective tax rate of 17.8% in the prior year second quarter; the fiscal 2022 year to date effective tax rate was 19.5% compared to 18.9% for the same period a year ago.Genetic Veterinary Sciences (December 2021).
 
Net income forwas $5.2 million in the first quarter ended November 30, 2021 was $10.8 million, or $0.10 per diluted share,of fiscal 2023 compared to $15.9$17.1 million or $0.15 per diluted share in the first quarter of the prior year, adversely impacted by $13.7 million in legal, consulting and other expenses related to our agreement to combine with 3M’s Food Safety business. This transition closed on September 1, 2022, after the close of the first quarter.
21
Table of Contents
International sales rose 2% in the first quarter of fiscal 2023 compared to the same period in the prior year. For the year to date, net income was $27.9 million, or $0.26 per diluted share compared to prior year to date net income of $31.7 million, or $0.30 per diluted share. Net income wasCurrency translations decreased comparative revenues by $9.3 million of legal and consulting expenses for due diligence related to our recently announced agreement to combine with 3M’s Food Safety business.
Cash provided from operating activities in the first six months of fiscal 2022 was $41.1 million, compared to $47.5approximately $3.9 million in the first half of fiscal 2021.
20
International sales rose 20% in both the second quarter of fiscal 20222023, due to the stronger U.S. dollar relative to currencies in the United Kingdom, Europe, Australia, and also increased 20%Argentina for the year to date, each compared to the same respective periods in the prior year. Excludingcomparative period. On a neutral currency basis, international sales ofincreased 10%. Excluding revenues from the Megazyme acquisition,Delf/Abbott Analytical and
Thai-Neo
Biotech acquisitions, the increase was 14% for both the quarter and year to date periods.7% on a neutral currency basis. Revenue changes, expressed in percentages, for the three and six month periodsperiod of fiscal 20222023 compared to the same respective periodsperiod in the prior year are as follows for each of our international locations:
 
                                                              
  
Three Months Ended
 
Six Months Ended
   
Three Months Ended
August 31, 2022
 
  
November 30, 2021
 
November 30, 2021
   
Revenue
% Inc (Dec)
USD
 
Revenue
% Inc (Dec)
Local Currency
 
  
Revenue
 
Revenue
 
Revenue
 
Revenue
 
  
% Inc (Dec)
 
% Inc (Dec)
 
% Inc (Dec)
 
% Inc (Dec)
 
  
USD
 
Local Currency
 
USD
 
Local Currency
 
U.K Operations (including Neogen Italia)
   20%   14%   13%   6% 
U.K. Operations (including Neogen Italia)
   5%   19% 
Megazyme
   (13)%   1% 
Brazil Operations
   (5)%   (6)%   (10)%   (12)%    13%   14% 
Neogen Latinoamerica
   13%   10%   18%   10%    19%   20% 
Neogen Argentina
   44%   84%   28%   68%    34%   78% 
Neogen Uruguay
   (4)%   (2)%   3%   5%    1%   (6)% 
Neogen Chile
   48%   54%   59%   59%    (4)%   16% 
Neogen China
   28%   22%   42%   34%    (18)%   (14)% 
Neogen India
   (10)%   (9)%   1%   1%    25%   33% 
Neogen Canada
   34%   28%   60%   50%    (7)%   (3)% 
Neogen Australasia
   29%   27%   38%   33%    (8)%   (2)% 
Currency translations increased comparative revenues by approximately $1.0 million in the second quarter of fiscal 2022 and $3.3 million for the year to date, each compared to the same periods a year ago, primarily due to the increased strength of the British pound and Mexican peso relative to the U.S. dollar.
Combined revenues at our U.K. operations increased 20% in the second quarter; growth was led by strong cleaner and disinfectant sales into Asia, as the African swine fever outbreak continues to drive demand, and new culture media business with commercial laboratories in the U.K. that have adopted our recently launched One Broth One Plate workflow. For the six month period, revenues at our U.K. operations increased 13% as a large
non-recurring
prior year shipment of hand sanitizers to the U.K. government’s health organization affected growth5% in the first quarter.quarter, led by a 31% increase in sales of cleaners and disinfectants, aided by the acquisition of Delf (UK) Ltd. in December 2021; in local currency, the organic increase was 12%. For the Megazyme operation, located in Ireland, the prior year first quarter included end sales to customers in the U.S. These end customer sales were transitioned to our U.S. operations in August 2021.
Sales in Brazil decreased 5%increased 13% in this year’s secondfirst quarter, as an extended drought led to a significantly reduced corn crop and the associated testing, resulting in a large decrease indriven by strong sales of the company’s mycotoxin test kits, including tests to detect aflatoxin test kits. Forand deoxynivalenol (DON), as well as increases in veterinary instruments, insect and rodent controls products, and genomics testing. Neogen Latinoamerica sales rose 19% for the sixfirst quarter, led by increases across the company’s diagnostic testing portfolio and culture media, as well as higher sales of rodent control products and cleaners and disinfectants. Sales at Neogen China decreased 18% for the three month period sales at our Brazilian operations decreased 10%, primarily dueas the country’s
COVID-19
related lockdowns continued to the reduced aflatoxin test kitnegatively impact sales and a large
non-recurring
insecticide sale to a government health organization in the first quarter of the prior fiscal year. Neogen Latinoamerica sales rose 13% for the second quarter, primarily due to increases in natural toxins test kits, environmental sanitation, Revenues at Neogen’s Australasia operations decreased 8% as a large
non-recurring
culture media and biosecurity products. Sales at Neogen China increased 28% and 42% for the three and six month periods, respectively, from new sales of Megazyme products and growth in genomics, as the commercial dairy, swine and sheep markets have increased sampling volumes. The Neogen Australasia location benefitted from increased genomics business with customersorder in the beef and sheep markets.prior year was only partially offset by bovine genomic service increases.
Service revenue, which includes genomics testing and other laboratory services, was $24.4$25.6 million in the secondfirst quarter of fiscal 2022,2023, an increase of 9%5% over the prior year secondfirst quarter revenues of $22.5$24.3 million. ForExcluding the six month period,contribution from the December 2021 acquisition of Genetic Veterinary Sciences and negative currency impact, service revenue increased 2%. Growth in the beef markets in the U.S. and Brazil was $48.7 million, an increase of 11% over prior year revenues of $43.9 million. The growth for both the quarterpartially offset by COVID-related shutdowns in China and year to date periods was led by increases in revenues at our Australia, China, U.K., Brazil and Canada genomics operations; growth in our domestic operation was reduced by lower volumes of companion animal samples, the result ofa difficult comparison fromdue to a large increasesdomestic research project recorded in the prior year.
 
2122
Table of Contents
Revenues
 
   
Three Months Ended November 30,
 
           
Increase/
     
(in thousands)
  
2021
   
2020
   
(Decrease)
   
%
 
Food Safety
        
Natural Toxins, Allergens & Drug Residues
  $21,028   $20,001   $1,027    5% 
Bacterial & General Sanitation
   12,252    11,235    1,017    9% 
Culture Media & Other
   19,935    14,215    5,720    40% 
Rodenticides, Insecticides & Disinfectants
   8,232    7,059    1,173    17% 
Genomics Services
   5,685    5,024    661    13% 
  
 
 
   
 
 
   
 
 
   
  $67,132   $57,534   $9,598    17% 
Animal Safety
        
Life Sciences
  $1,309   $1,398   $(89)    (6)% 
Veterinary Instruments & Disposables
   15,572    11,974    3,598    30% 
Animal Care & Other
   10,849    9,371    1,478    16% 
Rodenticides, Insecticides & Disinfectants
   18,269    18,471    (202)    (1)% 
Genomics Services
   17,386    16,252    1,134    7% 
  
 
 
   
 
 
   
 
 
   
  $63,385   $57,466   $5,919    10% 
  
 
 
   
 
 
   
 
 
   
Total Revenues
  $130,517   $115,000   $15,517    13% 
  
 
 
   
 
 
   
 
 
   
  
Six Months Ended November 30,
 
          
Increase/
       
Three Months Ended August 31,
   
Increase/
(Decrease)
   
%
 
(in thousands)
  
2021
   
2020
   
(Decrease)
   
%
   
2022
   
2021
 
Food Safety
                    
Natural Toxins, Allergens & Drug Residues
  $41,432   $39,016   $2,416    6%   $19,787   $20,408   $(504)    (3)% 
Bacterial & General Sanitation
   23,421    21,166    2,255    11%    10,728    11,165    (437)    (4)% 
Culture Media & Other
   37,981    26,387    11,594    44%    19,254    18,046    1,091    7% 
Rodenticides, Insecticides & Disinfectants
   15,882    15,888    (6)    0% 
Rodent Control, Insect Control & Disinfectants
   9,575    7,649    1,926    25% 
Genomics Services
   11,138    9,262    1,876    20%    5,299    5,454    (155)    (3)% 
  
 
   
 
   
 
     
 
   
 
   
 
    
  $129,854   $111,719   $18,135    16%   $64,643   $62,722   $1,921    3% 
Animal Safety
                    
Life Sciences
  $2,672   $2,723   $(51)    (2)%   $1,589   $1,363   $226    17% 
Veterinary Instruments & Disposables
   30,909    22,349    8,560    38%    14,673    15,337    (664)    (4)% 
Animal Care & Other
   20,068    17,029    3,039    18%    10,526    9,219    1,307    14% 
Rodenticides, Insecticides & Disinfectants
   40,418    38,385    2,033    5% 
Rodent Control, Insect Control & Disinfectants
   22,214    22,149    65    0% 
Genomics Services
   34,901    32,120    2,781    9%    18,704    17,515    1,189    7% 
  
 
   
 
   
 
     
 
   
 
   
 
    
  $128,968   $112,606   $16,362    15%   $67,706   $65,583   $2,123    3% 
  
 
   
 
   
 
     
 
   
 
   
 
    
Total Revenues
  $258,822   $224,325   $34,497    15%   $132,349   $128,305   $4,044    3% 
  
 
   
 
   
 
     
 
   
 
   
 
    
 
2223
Table of Contents
Food Safety
Natural Toxins, Allergens
 & Drug Residues –
Sales in this category increased 5% and 6%decreased 3% for the three and six month periodsperiod ended November 30, 2021, respectively,August 31, 2022, compared to the same periodsperiod in the prior year. In the secondfirst quarter, sales of our natural toxinaflatoxin test kits rose 10% as higher saleskit revenues increased 25% primarily from an aflatoxin outbreak in the domestic pet food marketBrazil and Europe were partiallynew business earned in Mexico and Central America. This increase was offset by lower aflatoxin sales in Brazil, as a drought significantly reduced crop size9% decline across the company’s allergen testing portfolio caused by softening market conditions and associated testing. Sales of allergen test kits rose 6% in the second quarter, while sales of our drug residue test kits declined 23% due to the termination of a European distribution agreement and competitive pressure within the marketplace.supply disruptions for certain products.
Bacterial
 & General Sanitation –
Revenues in this category increased 9% and 11%decreased 4% for the secondfirst quarter and for the year to date, compared to the same periodsperiod in the prior year. In the secondfirst quarter this year, there was a significant decrease in Soleris
®
equipment sales of productsdue to detect spoilage organisms in processed foods increased 22%, resulting from sales of our new instrument which continueda difficult comparison to gain market acceptance after launchingstrong prior year placements. Soleris
®
consumables recorded a 6% increase over athe prior year, ago. Sales of our AccuPoint sanitation monitoringand the ANSR pathogen detection product line increased 8% in the second quarter as strong sales of ourgrew 13% from new reader partially offset lower sales of consumables due to supply issues. Sales of products to detect pathogens increased 3% in the second quarter.equipment placements and higher test kit sales.
Culture Media
 & Other –
Sales in this category increased 40%7% in the quarter ended November 30, 2021August 31, 2022 compared to the secondfirst quarter in the prior year; for the six month period, salesyear. Sales of food quality and nutritional analysis products increased 44%. Excluding sales from the December 2020 acquisition of Megazyme, Veterinary which are reported in this category, sales increased 17% and 19% for the three and six month periods, respectively. This category includes sales of instruments and other veterinary products at some of our international locations; these sales increased significantlyby 9% over the prior year, dueas the products were integrated into U.S. channels. The recently introduced Neogen Analytics platform continued to recovering markets and expanded market share. Sales of Neogen Culture Media products increased 11%make strong inroads in the second quarter as our new workflow, One Broth One Plate, continued to drive increased sales to commercial labs in the U.K.; the growth was partially offset by a decline in domestic sales due to
non-recurring
business in the prior year. For the six month period, Neogen Culture Media sales increased 22%, due to strength in the U.K. and also a large domestic sale to a vaccine manufacturer in the first quarter.market.
Rodenticides, InsecticidesRodent Control, Insect Control
 & Disinfectants –
Revenues in this category increased 17%25% in the secondfirst quarter of fiscal 20222023 compared to the same period a year ago,ago. Excluding the revenue contribution from the Delf acquisition in this category, the overall increase was 9%, primarily due primarily to continued strength inhigher demand of cleaners and disinfectants into Asia resulting from increased demand from the African swine fever outbreak in that region; there was also higher sales of rodenticides in Mexico. For the year to date, sales were flat, with the previously discussed increases being offset by large
non-recurring
sales of hand sanitizers in the U.K.Europe, Brazil, Mexico and insecticides in Brazil in the first quarter of the prior fiscal year.Central America.
Genomics Services –
Sales of genomics services sold through our international Food Safety operations increased 13% and 20%decreased 3% for the three and six month periodsperiod ended November 30, 2021, respectively. The increaseAugust 31, 2022. Increased beef business in Brazil was more than offset by unfavorable currency comparisons in the second quarter was from overall strength at our labsU.K. and COVID-related lab closures in the U.K., Brazil and China as improved economic conditions in several markets have contributed to increased testing.China.
Animal Safety
Life Sciences –
Sales in this category decreased 6%increased 17% in the secondfirst quarter, compared to the same period in the prior year; for the year to date, the decrease in this product line was 2%.year. The decline in both periodsincrease was due primarily to the loss of hair testing business with a large U.S. commercial laboratory that moved to a different testing platform.higher demand from customers purchasing substrates and reagents used in clinical diagnostic test kits.
Veterinary Instruments
 & Disposables –
Revenues in this category increased 30%decreased 4% for the three month period ended November 30, 2021, ledAugust 31, 2022, primarily due to a 6% decrease in sales of veterinary instruments. This category had increased by a large increase sales ofstrong 52% in veterinary instruments, including needles and syringes, resulting from recently won private label business; revenues increased 38% for the first quarter a year to date.ago.
Animal Care
 & Other –
Sales of these products increased 16% and 18%14% in the three and six month periodsperiod ended November 30, 2021, respectively. ExcludingAugust 31, 2022; excluding the contribution of parasiticides from the September acquisition of CAPInnovet,CAPInnoVet, revenues in this category increased 13% in the second quarter, primarily due to strength in equine9%. Sales of other animal care products, including supplements and companion animal markets. Additionally, wevitamin injectables, increased 16% on continued to regain customers with our recently
re-launched
ThyroKare
™
product. Partially offsetting these gains was a decline in sales of dairy supplies of 67% and 76% for the quarter and year to date periods, respectively, due to the June 2020 termination of an agreement in which we distributed these types of products for a large manufacturer of dairy equipment.
23
strong end customer demand.
Rodenticides, InsecticidesRodent Control, Insect Control
 & Disinfectants –
Revenues in this category decreased 1%were flat for the three month period ended November 30, 2021, resulting fromAugust 31, 2022, as compared to the same period in the prior year. Sales of insect control products rose 14% in the quarter and cleaners and disinfectants sales increased 7%. These increases were offset by a 14%12% decrease in rodenticide sales, due to supply constraints and a
non-outbreak
year. Insecticide sales rose 46%the result of diminished rodent pressure in the quarter, led by growth in the StandGuard
®
product line acquired in July 2020. Cleaners and disinfectants sales decreased 2% due to a difficult prior year comparison that included a large
non-recurring
sale. Sales of these products for the year to date period increased 5%, as compared to a year ago, for the same reasons.U.S.
Genomics Services –
Sales in this category increased 7% and 9% in the secondfirst quarter and the year to date periods, each compared to the prior year. The growth in both periods was led byyear; excluding the contribution from Genetic Veterinary Sciences, revenues declined 3%. Domestic increases in the beef and sheep testingmarket were more than offset by unfavorable currency comparisons in Australia, due to improved market conditions and higherlower sample volumes from domestic dairya large customer in the porcine market and beef cattle and poultry customers. Growth in both the three and six month periods was partially offset by lower domestic companion animal revenues due toa difficult prior year comparisons.comparison due to a large research project which did not recur.
Gross Margin
Gross margin, expressed as a percentage of sales, was 46.4%47.0% in the secondfirst quarter of fiscal 20222023 compared to 46.3%46.8% in the same quarter a year ago. The slight changeAnimal Safety gross margins increased 200 basis points, with pricing actions taken in grossthe prior fiscal year and a mix shift towards higher margin percentage isanimal care products driving the result of a 30 basis point improvement inimprovement. Food Safety gross margins partially offset by a 20declined 160 basis point decline in gross margin percentage in the Animal Safety segment. The primary driver of the improved Food Safety gross margin percentage was incremental revenuepoints, primarily from the Megazyme product line; these products generate higherimpact of lower gross margins thanfrom the average in this segment. In the Animal Safety segment, the slight decline in gross margin percentage was the result of lower sales of higher margin rodenticide products due to a lessening of vole pressure across the domestic market, and a reduction in genomics service revenues in the domestic companion animal markets.Delf acquisition. Within each segment, higherincreased raw material and freight in costs resulting from continued supply chain issues across mostto pressure gross margins in certain product lines.
24
Table of our markets, put downward pressure on gross margins. The company has taken pricing actions where appropriate in response to these cost increases. For the year to date, gross margin was 46.6% compared to 46.1% in the prior year, for the same reasons.Contents
Operating Expenses
Operating expenses were $48.1$56.2 million in the secondfirst quarter of fiscal 2023, compared to $34.0$38.3 million in the same quarter of the prior year, an increase of $14.2 million, or 42%.year. Legal, consulting and other professional fees and expenses totaling $9.3$13.7 million were incurred in the secondfirst quarter in conjunction with due diligence and negotiation of terms for the proposed businesscurrent fiscal year related to our combination with 3M’s Food Safety business, which was announcedclosed on December 14, 2021.September 1, 2022. Excluding costs related to the transaction, run rate operating expenses for the first quarter were $38.8$42.5 million, an increase of 14%11% compared to the prior year. ForOperating expenses for businesses acquired in the six month period ended November 30, 2021, excludingpast year totaled $2.1 million and represented 50% of the $9.3 million in deal costs, operating expenses were $77.1 million, an increase for the first quarter of 18% compared to the prior year.fiscal 2023.
Sales and marketing expenses increased $3.5were $23.4 million or 20%, in the secondfirst quarter primarily dueof fiscal 2023, compared to increases$20.6 million in last year’s first quarter, an increase of 14%. The increase in expense was driven by higher personnel related expenses,spending, the result of higher sales volumesheadcount additions and headcount. Additionally,compensation increases. In addition, travel, trade shows and other customer facing activities have continued to rise,increased significantly, as the result of easing of restrictions in a number of our marketsprior year first quarter was affected by global
COVID-19
restrictions. Shipping expense increased 10% for the quarter, primarily due to the
COVID-19
pandemic; for the year to date, salesrate increases and marketing expenses increased 22% compared to the same period last year.fuel surcharges from both small package and truckload shippers.
General and administrative expense increased $10.4expenses were $27.9 million in the secondfirst quarter, primarily the result of $9.3and included $13.7 million in legal, consulting and other professional fees resulting from due diligence efforts and negotiation of terms relatingexpenses related to the proposed transactionour combination with 3M referenced above. Run3M’s Food Safety business, which closed on September 1, 2022. After adjusting for these deal-related expenses, first quarter run rate general and administrative expenses rose $1.1were $14.2 million, an increase of $829,000, or 9%, due6%. The increase was primarily to increases in salaries and bonuses resultingthe result of incremental expense from improved operating performance and additional senior management hires, higheracquisitions, including amortization, expenses from the Megazyme and CAPInnovet acquisitions, increased stock based compensation expense and higher depreciationgrants, and license fees relating to information technology infrastructure and software. These increases were partially offset by $1 million in spending on strategic consulting, legal and other professional fees related to acquisition activity in the prior year second quarter for businesses which we were not ultimately successful in acquiring. Year to date, run rate general and administrative expenses increased 15%, for the same reasons.software investments.
Research and development expense was $4.3$4.9 million in the secondfirst quarter of fiscal 2023, an increase of $270,000,$557,000, or 7%13%, compared to the same period in the prior year. The increase was primarily the result of incremental costs of personnel absorbed from the Megazyme acquisition and outside serviceexternal costs for development spending ontesting and validation for new products. Forcommercial products in the yearAnimal Safety segment, and to date, researcha lesser extent, compensation and development expenses increased 9% over the same period last year, for the same reasons.other personnel related increases.
24
Operating Income
Operating income was $12.5$6.1 million in the secondfirst quarter of fiscal 2022,2023, compared to $19.2$21.7 million in the same period of the prior year; year to date operating income was $34.2 million compared to $38.1 million in the prior year. Expressed as a percentage of sales, operating income was 9.6%4.6% for the secondfirst quarter and 13.2% for the year to date,of fiscal 2023 compared to 16.7% and 17.0%16.9%, respectively, for the same periodsperiod in the prior year. Adjusting for the $9.3 million in transaction costs resulting from the proposed 3M transaction, operating income was 16.7% in the second quarter and 16.8%$19.8 million, or 15.0%, for the year to date.first quarter of the 2023 fiscal year.
Other Income
 
  
Three Months Ended
   
Six Months Ended
 
  
November 30,
   
November 30,
   
Three Months Ended
August 31,
 
(dollars in thousands)
  
2021
   
2020
   
2021
   
2020
   
2022
   
2021
 
Interest income (net of expense)
  $217   $555   $420   $1,277   $969   $203 
Foreign currency transactions
   167    (432)    15    (256)    (421)    (151) 
Insurance settlement
   —      309    —      —   
Legal settlement
   —      (300)    —      —   
LGS contingent consideration
   (135)    —      (135)    —   
Other
   210    (42)    141    (16)    49    (70) 
  
 
   
 
   
 
   
 
   
 
   
 
 
Total Other Income
  $459   $90   $441   $1,005   $597   $(18) 
  
 
   
 
   
 
   
 
   
 
   
 
 
The decreaseincrease in interest income in the six month periodfirst three months of fiscal 20222023, compared to the same period a year ago, was the result of continued lowerimproved yields on our marketable securities balances.balances due to higher interest rates on fixed income investments. Other income or expense resulting from foreign currency transactions was the result of changes in the value of foreign currencies relative to the U.S. dollar in countries in which we operate. In the second quarter
25
Table of the current fiscal year, we recorded a charge of $135,000 for additional contingent consideration in the final payment to the former owner of Livestock Genomic Services.Contents
Income Tax Expense
Income tax expense in the secondfirst quarter of fiscal 20222023 was $2.1$1.5 million, an effective tax rate of 16.2%21.8%, compared to $3.5$4.7 million, an effective tax rate of 17.8%21.4%, in the same period of the prior year. For the year to date, income tax expense was $6.8 million, an effective ratefirst quarter of 19.5%, in fiscal 2022 and $7.4 million, an effective rate of 18.9%, in fiscal 2021. For each period,2023, the primary difference between the statutory rate of 21% and the effective rates recorded is the impact of higher tax rates in international countries we do business in, and also state taxes. In both periods, there was minimal benefit resulting from the exercise of stock options; this benefit was $859,000 in the second quarter of fiscal 2022 compared to $1,060,000 in the second quarter of the prior year. For the year to date, the benefit was $874,000 in fiscal 2022 compared to $1,481,000 in fiscal 2021. The decrease in the effective tax rate for the second quarter was primarily due to lower taxable income resulting from fees related to the 3M combination. The increase in effective rate for the year to date period is the result of lower benefit from stock option exercises and a $548,000 charge to expense in the first quarter because the U.K. enacted a higher tax rate effective in 2023. Since our deferred tax balances at this operation are expected to reverse in the future at the higher tax rate, we were required to revalue them when the new rate was passed.options.
Net Income
Net income was $10.9$5.2 million in the secondfirst quarter of fiscal 2022,2023, compared to $15.9$17.1 million in the same period in the prior year. The decline in earnings for this year’s secondthe quarter was primarily the result of $9.3$13.7 million in legal, consulting, professional fees and other professional feesexpenses from the intended transaction with 3M.3M Food Safety transaction. Excluding those charges net income rose 14% in the second quarter of fiscal 2021 comparedand adjusting to the same period in the prior year. For the year to date,effective tax rate, net income was $27.9 million,$15.9 million.
Non-GAAP
Financial Measures
This report includes certain financial information for the Company that differs from what is reported in accordance with GAAP. These
non-GAAP
financial measures consist of EBITDA, Adjusted EBITDA and Adjusted EBITDA margin. These
non-GAAP
financial measures are included in this report because management believes that they provide investors with additional useful information to measure the performance of the Company, and because these
non-GAAP
financial measures are frequently used by securities analysts, investors and other interested parties as common performance measures to compare results or estimate valuations across companies in industries the Company operates in.
EBITDA
We define EBITDA as net income before interest, income taxes, and depreciation and amortization. We present EBITDA as a decreaseperformance measure because it may allow for a comparison of 12% compared to $31.7 millionresults across periods and results across companies in the prior year;industries in which Neogen operates on a consistent basis, by removing the effects on operating performance of (a) capital structure (such as the varying levels of interest expense and interest income), (b) asset base and capital investment cycle (such as depreciation and amortization) and (c) items largely outside the control of management (such as income taxes). EBITDA also forms the basis for the measurement of Adjusted EBITDA (discussed below).
Adjusted EBITDA
We define Adjusted EBITDA as EBITDA, adjusted for stock-based compensation and certain transaction fees and expenses. We present EBITDA because it provides an understanding of underlying business performance by excluding the $9.3 million of expense, net income rose 11% year to date. Six month net income in fiscal 2022 was also negatively impacted by a higher effective tax rate.following:
 
25
Stock-based compensation
. We believe it is useful to exclude stock-based compensation to better understand the long-term performance of the respective core businesses and to facilitate comparison with the results of peer companies.
Certain transaction fees and expenses.
We exclude fees and expenses related to certain transactions because they are outside of Neogen’s underlying core performance.
Adjusted EBITDA margin
We define Adjusted EBITDA margin as Adjusted EBITDA as a percentage of total revenues. We present Adjusted EBITDA margin as a performance measure to analyze the level of Adjusted EBITDA generated from total revenue.
These
non-GAAP
financial measures are presented for informational purposes only. EBITDA, Adjusted EBITDA and Adjusted EBITDA margin are not recognized terms under GAAP and should not be considered in isolation or as a substitute for, or superior to, net income (loss), operating income, cash flow from operating activities or other measures of financial performance. This information does not purport to represent the results Neogen would have achieved had any of the transactions for which an adjustment is made occurred at the beginning of the periods presented or as of the dates indicated. This information is inherently subject to risks and uncertainties. It may not give an accurate or complete picture of Neogen’s financial condition or results of operations for the periods presented and should not be relied upon when making an investment decision.
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The use of the terms EBITDA, Adjusted EBITDA and Adjusted EBITDA margin may not be comparable to similarly titled measures used by other companies or persons due to potential differences in the method of calculation.
These
non-GAAP
financial measures have limitations as analytical tools. For example, for EBITDA-based metrics:
they do not reflect changes in, or cash requirements for, Neogen’s working capital needs;
they do not reflect Neogen’s tax expense or the cash requirements to pay taxes;
they do not reflect the historical cash expenditures or future requirements for capital expenditures or contractual commitments;
they do not reflect any cash requirements for future replacements of assets that are being depreciated and amortized; and
they may be calculated differently from other companies in Neogen’s industries limiting their usefulness as comparative measures.
You should compensate for these limitations by relying primarily on the financial statements of Neogen and using these
non-GAAP
financial measures only as a supplement to evaluate Neogen’s performance.
For each of these
non-GAAP
financial measures below, we are providing a reconciliation of the differences between the
non-GAAP
measure and the most directly comparable GAAP measure.
Reconciliation between net income and EBITDA and Adjusted EBITDA is as follows:
   
Three Months Ended August 31
 
(Dollars in thousands)
  
2022
  
2021
 
Net Income
  $5,209  $17,077 
Net income margin %
  
 
3.9
% 
 
 
13.3
% 
Provision for income taxes
   1,450   4,650 
Depreciation and amortization
   5,729   5,682 
Interest income, net
   (969)   (203) 
  
 
 
  
 
 
 
EBITDA
  
$
11,419
 
 
$
27,206
 
Stock-based compensation
   1,867   1,690 
Certain transaction fees and expenses
   13,732   —   
  
 
 
  
 
 
 
Adjusted EBITDA
  
$
27,018
 
 
$
28,896
 
  
 
 
  
 
 
 
Adjusted EBITDA margin %
  
 
20.4
% 
 
 
22.5
% 
Adjusted EBITDA decreased 6% for the first three months of fiscal 2023 compared to the first three months of fiscal 2022, due to operating expenses growth which exceeded revenue growth.
Financial Condition and Liquidity
The overall cash, cash equivalents and marketable securities position of Neogen was $389.2$347.7 million at November 30, 2021,August 31, 2022, compared to $381.1 million at May 31, 2021. Approximately $41.12022. Cash flow from operating activities was negative $14.1 million was generated from operations during the first sixthree months of fiscal 20222023, the result of deal-related expenses, inventory increases, and spent $26.9$1.3 million on business acquisitions. Net cash proceeds of $6.6 million$905,000 were realized from the exercise of stock options and issuance of shares under our Employee Stock Purchase Plan during the first sixthree months of fiscal 2022.2023. We spent $5.2$13.0 million for property, equipment and other
non-current
assets in the first halfthree months of fiscal 2022.2023, with a significant portion of expenditures on IT for items such as laptops and software related to the 3M Food Safety business.
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Net accounts receivable balances were $92.5$93.1 million at November 30, 2021, an increase of $700,000,August 31, 2022 compared to $91.8$99.7 million at May 31, 2021.2022. Days’ sales outstanding, a measurement of the time it takes to collect receivables, were 6360 days at November 30, 2021,August 31, 2022, compared to 6662 days at May 31, 20212022 and 6159 days at November 30, 2020.August 31, 2021. We have beencontinued to carefully monitoringmonitor our customer receivables asduring the
COVID-19
pandemic has spread across our global markets;pandemic; to date, we have not experienced an appreciable increase in bad debt write offs.offs related to the pandemic.
Net inventory was $107.1$129.0 million at November 30, 2021,August 31, 2022, an increase of $6.4$6.7 million, compared to a May 31, 20212022 balance of $100.7$122.3 million. The two acquisitions completed inhigher inventory levels are primarily reflective of the second quarter added approximately $1.0 million to our inventory balance.inflationary pressures on raw material costs. Additionally, we have been increasing inventory levels recently in an effort to reduce the impact of higher freight costs and to prevent backorders, as shipments are taking longervendor order fulfillment has been erratic and somecertain suppliers are requiring higher ordersminimum order levels due to their supplycapacity constraints.
InflationOn September 1, 2022, after the close of the first quarter of fiscal 2023, Neogen, 3M, and changing prices are not expectedGarden Spinco, a newly formed subsidiary of 3M created to havecarve out 3M’s Food Safety business, closed on the transaction which had previously been announced in December 2021, combining 3M’s Food Safety business with Neogen in a material effect on operations, as management believes it will continue to be successful in offsetting increased input costs with price increases and/or cost efficiencies.Reverse Morris Trust transaction.
Management believes that our existing cashOn June 30, 2022, Garden SpinCo entered into a credit agreement consisting of a five-year senior secured term loan facility in the amount of $650.0 million and marketable securities balances at November 30, 2021, alonga five-year senior secured revolving facility in the amount of $150.0 million (collectively, the “Credit Facilities”), which became available in connection with available borrowings under our creditthe merger and related transactions. The loan facility was funded to Garden Spinco on August 31, 2022, and cash expectedupon the effectiveness of the merger on September 1, 2022, became Neogen’s obligation. Financial covenants include maintaining specified levels of funded debt to be generated from operations, will be sufficient to fund activitiesEBITDA, and debt service coverage. Pricing for the remainderterm loan is term SOFR plus 235 basis points. The Credit Facilities, together with the Notes below, represent the financing incurred in connection with the merger of the current fiscal year. However, existing cash and borrowing capacity will be insufficient to meet cash requirements for our planned combination with the 3M Food Safety business which is currently expectedwith Neogen’s.
In July 2022 Garden SpinCo closed on an offering of $350.0 million aggregate principal amount of 8.625% senior notes due 2030 (the “Notes”) in a private placement at par. The Notes were initially issued by Garden SpinCo to close3M and were transferred and delivered by 3M to the selling securityholder in the third quarteroffering, in satisfaction of calendar year 2022. Thecertain of 3M’s existing debt. Garden SpinCo did not receive any proceeds from the sale of the Notes by the selling securityholder. Prior to the distribution of the shares of Garden SpinCo’s common stock to 3M stockholders, the Notes were guaranteed on a senior unsecured basis by 3M. Upon consummation of such distribution, 3M was released from all obligations under its guarantee. Upon the effectiveness of the merger on September 1, 2022, the Notes became guaranteed on a senior unsecured basis by Neogen and certain wholly-owned domestic subsidiaries of Neogen.
In addition to the 3M transaction willdescribed above, our future cash generation and borrowing capacity may not be funded by issuingsufficient to meet cash requirements to fund the operating business, repay debt obligations, commercialize products currently under development or execute our future plans to acquire additional businesses, technology and products that fit within our strategic plan. Accordingly, we may be required, or may choose, to issue additional equity securities to 3M’s shareholders and borrowing approximately $1 billion in cash under an agreement with JPMorgan Chase.or enter into other financing arrangements for a portion of our future capital needs.
 
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PART I – FINANCIAL INFORMATION
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 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, euro, Mexican peso, Brazilian real, Chinese yuan, Australian dollar and to a lesser extent, the Thai baht, Japanese yen, South Korean won, Indian rupee, Canadian dollar, Guatemalan quetzal, Argentine peso, Uruguayan peso and Chilean peso; there is also exposure to a change in exchange rate between the British pound sterling and the euro. When the U.S. dollar weakens against foreign currencies, the dollar value of revenues denominated in foreign currencies increases. When the U.S. dollar strengthens, the opposite situation occurs. Additionally, previously invoiced amounts can be positively or negatively affected by changes in exchange rates in the course of collection. We use derivative financial instruments to help manage the economic impact of fluctuations in certain currency exchange rates. These contracts are adjusted to fair value through earnings.
Neogen has assets, liabilities and operations outside of the U.S., located in Scotland, England, Ireland, Italy, Switzerland, Poland, Brazil, Mexico, Guatemala, Argentina, Uruguay, Chile, China, Thailand, Japan, Korea, India, Canada and Australia where the functional currency is the British pound sterling, euro, Brazilian real, Mexican peso, Guatemalan quetzal, Argentine peso, Uruguayan peso, Chilean peso, Chinese yuan, Thai baht, Japanese yen, South Korean won, Indian rupee, Canadian dollar and Australian dollar, respectively. Our investments in foreign subsidiaries are considered long-term. As discussed in ITEM 1A. RISK FACTORS of theour Annual Report on Form
10-K
annual filing,for the year ended May 31, 2022, our financial condition and results of operations could be adversely affected by currency fluctuations.
The following table sets forth the potential loss in future earnings or fair values, resulting from hypothetical changes in relevant market rates or prices:
 
Risk Category
  
Hypothetical Change
  
November 30, 2021
   
Impact
   
Hypothetical Change
  
August 31, 2022
   
Impact
(dollars in thousands)
            
Foreign Currency - Revenue
  10% Decrease in exchange rates  $5,414    Earnings   10% Decrease in exchange rates  $4,309   Earnings
Foreign Currency - Hedges
  10% Decrease in exchange rates   1,959    Earnings   10% Decrease in exchange rates   1,822   Fair Value
Interest Income
  10% Decrease in exchange rates   97   Earnings
PART I – FINANCIAL INFORMATION
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 November 30, 2021August 31, 2022 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 Controls over Financial Reporting
No changes in our control over financial reporting were identified as having occurred during the quarter ended November 30, 2021August 31, 2022 that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting.
 
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PART II – OTHER INFORMATION
Item 1. Legal Proceedings
For a description of our material pending legal proceedings, see Note 10 “Commitments and Contingencies” of the Notes to consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form
The Company10-Q,
which is subject to 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.
incorporated by reference.
I
tem
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Item 6. Exhibits
(a) Exhibit Index
 
3.1Certificate of Amendment to Articles of Incorporation filed on October 11, 2010 (incorporated by reference to Exhibit 3.2 filed with the Registrant’s Annual Report on Form 10-K filed on July 30, 2020).
3.2Restated Articles of Incorporation, as amended on November 23, 2011 (incorporated by reference to Exhibit 3.1 filed with the Registrant’s Quarterly Report on Form 10-Q filed December 30, 2011).
3.3Certificate of Amendment to Articles of Incorporation filed on November 20, 2018 (incorporated by reference to Exhibit 3 filed with the Registrant’s Quarterly Report on Form 10-Q filed December 28, 2018).
3.4Certificate of Amendment to Articles of Incorporation of Neogen Corporation filed on March 14, 2022 (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed by Neogen Corporation on March 17, 2022).
3.5Certificate of Amendment to Articles of Incorporation of Neogen Corporation filed on September 1, 2022 (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed by Neogen Corporation on September 1, 2022).
3.6By-Laws, as amended (incorporated by reference to Exhibit 3.2 to the Registrant’s Quarterly Report on Form 10-Q filed April 14, 2000).
3.7Amendment to the By-Laws, as amended (incorporated by reference to Exhibit 3.2 to the Registrant’s Current Report on Form 8-K filed by Neogen Corporation on September 1, 2022).
10.1Credit Agreement, dated as of June 30, 2022, among Garden SpinCo Corporation, as borrower, the lenders from time to time party thereto, and JPMorgan Chase Bank, N.A., as administrative agent, and joined thereto as of September 1, 2022 by Neogen Corporation, as a borrower (incorporated by reference to Exhibit 10.9 to Neogen’s Registration Statement on Form S-4 (Registration No. 333-263667), filed with the SEC on July 27, 2022).
31.1  Certification of Principal Executive Officer
31.2  Certification of Principal Financial Officer
32  Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS  Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File as its XBRL tags are embedded within the Inline XBRL document
101.SCH  Inline XBRL Taxonomy Extension Schema Document
101.CAL  Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF  Inline XBRL Taxonomy Extension Definition Document
101.LAB  Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE  Inline XBRL Taxonomy Extension Presentation Linkbase Document
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.
 
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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: DecemberSeptember 30, 20212022
 
/s/ John E. Adent
John E. Adent
President & Chief Executive Officer
(Principal Executive Officer)
Dated: DecemberSeptember 30, 20212022
 
/s/ Steven J. Quinlan
Steven J. Quinlan
Vice President & Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)
 
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