UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM

10-Q

(Mark One)

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

For the quarterly period ended February ~~28, 2018.~~

29, 2020.

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

For the transition period from
to

Commission file number

0-17988

Neogen Corporation

(Exact name of registrant as specified in its charter)


~~Michigan~~		~~38-2367843~~
Michigan		38-2367843
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification Number)

620 Lesher Place

Lansing, Michigan 48912

(Address of principal executive offices, including zip code)

(517)

372-9200

(Registrant’s telephone number, including area code)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:


Title of each Class	Trading Symbol(s)	Name of each exchange on which registered

N/A

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

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

☐

Indicate by check mark whether the registrant has submitted electronically ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ 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 ~~and post~~ such files). YES

☒

☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a

non-accelerated

filer (see definition of “accelerated filer and large accelerated filer” in Rule

12b-2

of the Exchange Act):


Large accelerated filer	☒	Accelerated filer	☐

Non-accelerated filer	☐	Smaller Reporting Company	☐

Emerging growth company	☐

~~Non-accelerated~~ ~~filer~~	~~☐ (Do not check if a smaller reporting company)~~	~~Smaller reporting company~~	☐

~~Emerging growth company~~	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended ~~transaction~~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

☐

☒

As of February ~~28, 2018,~~29, 2020 there were ~~51,583,085~~52,910,832 shares of Common Stock outstanding.

PART I – FINANCIAL INFORMATION

~~Item 1.~~

~~Interim Consolidated Financial Statements~~

Item 1. Interim Consolidated Financial Statements

Neogen Corporation and Subsidiaries

Consolidated Balance ~~Sheet~~

Sheets

(in thousands, except share and

per share amounts)

   February 28,
2018 May 31,
2017
   (Unaudited) (Audited)
Assets

Current Assets

Cash and cash equivalents
   $ 82,066 $ 77,567
Marketable securities (at fair value, which approximates cost)
   110,089 66,068
Accounts receivable, less allowance of $1,750 and $2,000
   73,209 68,576
Inventories, net
   77,506 73,144
Prepaid expenses and other current assets
   9,334 7,606


Total Current Assets
   352,204 292,961
Property and Equipment, net
   72,514 61,748
Other Assets

Goodwill
   99,478 104,759
Othernon-amortizable intangible assets
   15,011 14,323
Customer-based intangibles, net of accumulated amortization of $23,846 and $20,846 at February 28, 2018 and May 31, 2017
   33,518 35,983
Othernon-current assets, net of accumulated amortization of $11,893 and $9,931 at February 28, 2018 and May 31, 2017
   22,876 18,635


Total Assets
   $ 595,601 $ 528,409


Liabilities and Equity

Current Liabilities

Accounts payable
   $ 19,654 $ 16,244
Accrued compensation
   5,469 5,002
Income taxes
   960 936
Other accruals
   11,210 13,820


Total Current Liabilities
   37,293 36,002
Deferred Income Taxes
   11,400 17,048
Non-Current Liabilities
   4,973 3,602


Total Liabilities
   53,666 56,652
Commitments and Contingencies (note 9)

Equity

Preferred stock, $1.00 par value, 100,000 shares authorized, none issued and outstanding
   —   —
Common stock, $0.16 par value, 60,000,000 shares authorized, 51,583,085 and 50,932,489 shares issued and outstanding at February 28, 2018 and May 31, 2017, respectively
   8,253 8,149
Additionalpaid-in capital
   197,246 174,742
Accumulated other comprehensive loss
   (5,303 ) (7,203 )
Retained earnings
   341,459 295,926


Total Neogen Corporation Stockholders’ Equity
   541,655 471,614
Non-controlling interest
   280 143


Total Equity
   541,935 471,757


Total Liabilities and Equity
   $ 595,601 $ 528,409


	February 29, 2020			May 31, 2019
	Unaudited			Un a udited
Assets
Current Assets
Cash and cash equivalents	$	50,774		$	41,688
Marketable securities		277,149			225,836
Accounts receivable, less allowance of $1,400 and $1,700 at February 29, 2020 and May 31, 2019, respectively		80,692			82,582
Inventories		89,244			85,992
Prepaid expenses and other current assets		17,016			13,431

Total Current Assets		514,875			449,529
Net Property and Equipment		78,394			74,847
Other Assets
Goodwill		109,761			103,619
Other non-amortizable intangible assets		15,425			15,649
Amortizable intangible and other assets, net of accumulated amortization of $43,397 and $40,835 at February 29, 2020 and May 31, 2019, respectively		55,046			52,096

Total Assets	$	773,501		$	695,740

Liabilities and Stockholders’ Equity
Current Liabilities
Accounts payable	$	18,994		$	19,063
Accrued compensation		5,596			7,085
Income taxes		1,479			601
Other accruals		13,066			11,502

Total Current Liabilities		39,135			38,251
Deferred Income Taxes		16,343			15,618
Other Non-Current Liabilities		6,152			3,972

Total Liabilities		61,630			57,841
Commitments and Contingencies (note 8)
Equity
Preferred stock, $1.00 par value, 100,000 shares authorized, 0ne issued and outstanding		—			—
Common stock, $0.16 par value, 120,000,000 shares authorized, 52,910,832 and 52,216,589 shares issued and outstanding at February 29, 2020 and May 31, 2019, respectively		8,466			8,355
Additional paid-in capital		254,537			221,937
Accumulated other comprehensive loss		(13,507	)		(11,640	)
Retained earnings		462,375			419,247

Total Stockholders’ Equity		711,871			637,899

Total Liabilities and Stockholders’ Equity	$	773,501		$	695,740

See notes to interim consolidated financial statements.

Neogen Corporation and Subsidiaries

Consolidated Statements of Income (unaudited)

(in thousands, except per share amounts)

   Three Months Ended Nine Months Ended
   February 28, February 28,
   2018    2017 2018 2017
Revenues

Product revenues
   $ 78,142    $ 73,964 $ 244,298 $ 223,170
Service revenues
   17,750    14,421 48,667 39,577




Total Revenues
   95,892    88,385 292,965 262,747
Cost of Revenues

Cost of product revenues
   40,352    38,816 124,785 113,241
Cost of service revenues
   10,019    8,689 27,517 24,556




Total Cost of Revenues
   50,371    47,505 152,302 137,797




Gross Margin
   45,521    40,880 140,663 124,950
Operating Expenses

Sales and marketing
   17,492    15,340 52,331 45,824
General and administrative
   9,280    8,548 29,096 25,094
Research and development
   2,836    2,641 8,901 8,087




Total Operating Expenses
   29,608    26,529 90,328 79,005




Operating Income
   15,913    14,351 50,335 45,945
Other Income

Interest income
   524    271 1,322 690
Other income
   844    1,105 1,913 1,098




Total Other Income
   1,368    1,376 3,235 1,788




Income Before Taxes
   17,281    15,727 53,570 47,733
Provision for Income Taxes
   700    5,350 7,900 16,250




Net Income
   16,581    10,377 45,670 31,483
Net (Income)/Loss Attributable toNon-Controlling Interest
   5    (90 ) (70 ) (163 )




Net Income Attributable to Neogen
   $ 16,586    $ 10,287 $ 45,600 $ 31,320




Net Income Attributable to Neogen Per Share

Basic
   $ 0.32    $ 0.20 $ 0.89 $ 0.62




Diluted
   $ 0.32    $ 0.20 $ 0.88 $ 0.61


	Three Months Ended					Nine Months Ended
	February 29/28,					February 29/28,
	2020			2019		2020			2019
Revenues
Product revenues	$	77,736		$	77,375	$	247,071		$	249,897
Service revenues		22,133			20,325		62,025			54,527

Total Revenues		99,869			97,700		309,096			304,424
Cost of Revenues
Cost of product revenues		41,068			41,902		128,658			132,157
Cost of service revenues		13,471			11,170		35,888			30,877

Total Cost of Revenues		54,539			53,072		164,546			163,034

Gross Margin		45,330			44,628		144,550			141,390

Operating Expenses
Sales and marketing		17,675			16,722		53,206			52,454
General and administrative		10,789			10,018		32,473			30,337
Research and development		3,823			3,249		11,292			9,235

Total Operating Expenses		32,287			29,989		96,971			92,026

Operating Income		13,043			14,639		47,579			49,364

Other Income (Expense)
Interest income		1,600			1,335		4,381			3,290
Other income (expense)		(393	)		649		(832	)		807

Total Other Income		1,207			1,984		3,549			4,097

Income Before Taxes		14,250			16,623		51,128			53,461
Provision for Income Taxes		2,050			3,550		8,000			9,100

Net Income	$	12,200		$	13,073	$	43,128		$	44,361

Net Income Per Share
Basic	$	0.23		$	0.25	$	0.82		$	0.86

Diluted	$	0.23		$	0.25	$	0.82		$	0.85

See notes to interim consolidated financial statements.

Neogen Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income (unaudited)

(in thousands)

   Three Months Ended Nine Months Ended
   February 28, February 28,
   2018    2017 2018 2017
Net Income
   $ 16,581    $ 10,377 $ 45,670 $ 31,483
Other comprehensive income (loss), net of tax: currency translation adjustments
   1,163    441 1,900 (3,743 )




Comprehensive income
   17,744    10,818 47,570 27,740
Comprehensive loss (income) attributable tonon-controlling interest
   5    (90 ) (70 ) (163 )




Comprehensive income attributable to Neogen
   $ 17,749    $ 10,728 $ 47,500 $ 27,577


	Three Months Ended					Nine Months Ended
	February 29/28,					February 29/28,
	2020			2019		2020			2019
Net income	$	12,200		$	13,073	$	43,128		$	44,361
Other comprehensive income (loss), net of tax:
currency translation adjustments		(1,761	)		3,105		(2,452	)		617
Other comprehensive income, net of tax:
unrealized gain on marketable securities		172			—		585			—

Total comprehensive income	$	10,611		$	16,178	$	41,261		$	44,978

See notes to interim consolidated financial statements.

Neogen Corporation and Subsidiaries

Consolidated ~~Statement~~Statements of

Equity (unaudited)

(in thousands)

            Accumulated
         Additional    Other Non-
   Common Stock    Paid-in    Comprehensive Retained controlling
   Shares    Amount    Capital    Income (Loss) Earnings Interest    Total
Balance, May 31, 2017
   50,932    $ 8,149    $ 174,742    $ (7,203 ) $ 295,926 $ 143    $ 471,757
Issuance of shares under share-based compensation plan
   631    101    21,456       21,557
Issuance of shares under employee stock purchase plan
   20    3    1,048       1,051
Conversion of minority interest to retained earnings
            (67 ) 67    —
Net income for the nine months ended February 28, 2018
            45,600 70    45,670
Other comprehensive income
            1,900    1,900










Balance February 28, 2018
   51,583    $ 8,253    $ 197,246    $ (5,303 ) $ 341,459 $ 280    $ 541,935


							Accumulated
					Additional		Other
	Common Stock				Paid-in		Comprehensive			Retained
	Shares		Amount		Capital		Income (Loss)			Earnings		Total
Balance at May 31, 2019		52,217	$	8,355	$	221,937	$	(11,640	)	$	419,247	$	637,899
Issuance of shares under share-based compensation plan		196		30		9,683		—			—		9,713
Issuance of shares under employee stock purchase plan		10		2		536		—			—		538
Net income for the three months ended August 31, 2019		—		—		—		—			14,652		14,652
Other comprehensive loss for the three months ended August 31 , 2019		—		—		—		(2,496	)		—		(2,496	)

Balance at August 31, 2019		52,423	$	8,387	$	232,156	$	(14,136	)	$	433,899	$	660,306
Issuance of shares under share-based compensation plan		288		47		12,070		—			—		12,117
Net income for the three months ended November 30, 2019		—		—		—		—			16,276		16,276
Other comprehensive income for the three months ended November 30, 2019		—		—		—		2,218			—		2,218

Balance at November 30, 2019		52,711	$	8,434	$	244,226	$	(11,918	)	$	450,175	$	690,917
Issuance of shares under share-based compensation plan		188		31		9,705		—			—		9,736
Issuance of shares under employee stock purchase plan		12		1		606		—			—		607
Net income for the three months ended February 29, 2020		—		—		—		—			12,200		12,200
Other comprehensive loss for the three months ended February 29 , 2020		—		—		—		(1,589	)		—		(1,589	)

Balance at February 29, 2020		52,911	$	8,466	$	254,537	$	(13,507	)	$	462,375	$	711,871


										Accumulated
							Additional			Other
	Common Stock						Paid-in			Comprehensive			Retained
	Shares			Amount			Capital			Income (Loss)			Earnings		Total
Balance at May 31, 2018		51,736		$	8,278		$	202,572		$	(9,746	)	$	359,071	$	560,175
Issuance of shares under share-based compensation plan		251			40			8,433			—			—		8,473
Issuance of shares under employee stock purchase plan		8			2			517			—			—		519
Net income for the three months ended August 31, 2018		—			—			—			—			15,237		15,237
Other comprehensive loss for the three months ended August 31, 2018		—			—			—			(2,778	)		—		(2,778	)

Balance at August 31, 2018		51,995		$	8,320		$	211,522		$	(12,524	)	$	374,308	$	581,626
Issuance of shares under share-based compensation plan		87			14			4,093			—			—		4,107
Net income for the three months ended November 30, 2018		—			—			—			—			16,051		16,051
Other comprehensive income for the three months ended November 30, 2018		—			—			—			290			—		290

Balance at November 30, 2018		52,082		$	8,334		$	215,615		$	(12,234	)	$	390,359	$	602,074
Issuance of shares under share-based compensation plan		78			12			4,146			—			—		4,158
Issuance of shares under employee stock purchase plan		10			1			640			—			—		641
Shares repurchased		(50	)		(8	)		(3,127	)		—			—		(3,135	)
Net income for the three months ended February 28, 2019		—			—			—			—			13,073		13,073
Other comprehensive loss for the three months ended February 28, 2019		—			—			—			3,105			—		3,105

Balance at February 28, 2019		52,120		$	8,339		$	217,274		$	(9,129	)	$	403,432	$	619,916

See notes to interim consolidated financial statements.

Neogen Corporation and Subsidiaries

Consolidated Statements of Cash Flows (unaudited)

(in thousands)

   Nine Months Ended
   February 28,
   2018 2017
Cash Flows From Operating Activities

Net Income
   $ 45,670 $ 31,483
Adjustments to reconcile net income to net cash provided from operating activities:

Depreciation and amortization
   12,682 10,691
Share-based compensation
   3,692 3,932
Excess income tax benefit from the exercise of stock options (see note 5)
   —   (3,671 )
Change in operating assets and liabilities, net of business acquisitions:

Accounts receivable
   (4,013 ) 5,916
Inventories
   (3,859 ) (9,460 )
Prepaid expenses and other current assets
   (7,316 ) 717
Accounts payable, accruals and other changes
   (280 ) 5,580


Net Cash Provided By Operating Activities
   46,576 45,188
Cash Flows Used In Investing Activities

Purchases of property, equipment and othernon-current intangible assets
   (16,297 ) (13,002 )
Proceeds from the sale of marketable securities
   211,327 102,957
Purchases of marketable securities
   (255,348 ) (115,117 )
Business acquisitions, net of cash acquired
   (468 ) (34,027 )


Net Cash Used In Investing Activities
   (60,786 ) (59,189 )
Cash Flows From Financing Activities

Exercise of stock options
   18,916 15,844
Excess income tax benefit from the exercise of stock options
   —   3,671


Net Cash Provided By Financing Activities
   18,916 19,515
Effect of Exchange Rates on Cash
   (207 ) (888 )


Net Increase In Cash and Cash Equivalents
   4,499 4,626
Cash And Cash Equivalents At Beginning Of Period
   77,567 55,257


Cash And Cash Equivalents At End Of Period
   $ 82,066 $ 59,883


	Nine Months Ended February 29/28,
	2020			2019
Cash Flows From Operating Activities
Net Income	$	43,128		$	44,361
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization		13,542			13,028
Share-based compensation		4,795			4,137
Change in operating assets and liabilities, net of business acquisitions:
Accounts receivable		3,841			(898	)
Inventories		(2,238	)		(8,745	)
Prepaid expenses and other current assets		(3,119	)		(1,463	)
Accounts payable, accruals and other changes		301			(7,455	)

Net Cash From Operating Activities		60,250			42,965

Cash Flows For Investing Activities
Purchases of property, equipment and other assets		(16,322	)		(11,877	)
Proceeds from the sale of marketable securities		300,448			290,827
Purchases of marketable securities		(351,002	)		(316,195	)
Business acquisitions, net of cash acquired		(9,701	)		(6,388	)

Net Cash For Investing Activities		(76,577	)		(43,633	)

Cash Flows From Financing Activities
Exercise of stock options and issuance of employee stock purchase plan shares		27,915			13,752
Repurchase of common stock		—			(3,135	)

Net Cash From Financing Activities		27,915			10,617

Effect of Exchange Rates on Cash		(2,502	)		553

Net Increase In Cash and Cash Equivalents		9,086			10,502
Cash and Cash Equivalents, Beginning of Period		41,688			83,074

Cash and Cash Equivalents, End of Period	$	50,774		$	93,576

See notes to interim consolidated financial statements.

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.~~included in the accompanying unaudited consolidated financial statements. All intercompany balances and transactions have been eliminated in consolidation. The results of operations for the three and nine month periods ended February ~~28, 2018~~29, 2020 are not necessarily indicative of the results to be expected for the fiscal year ending May 31, ~~2018.~~2020. For more complete financial information, these consolidated financial statements should be read in conjunction with the ~~May 31, 2017~~ audited consolidated financial statements and the notes thereto included in our Annual Report on Form

10-K

for the fiscal year ended May 31, 2019.

Recently Adopted Accounting Standards

Leases

On June 1, 2019, the Company adopted ASU No.

2016-02—

Leases. Refer to Leases section of Note 1 for further information.

Recent Accounting Pronouncements Not Yet Adopted

Financial Instruments - Credit Losses

In June 2016, the FASB issued ASU No.

2016-13—Measurement

of Credit Losses on Financial Instruments, which changes how companies measure credit losses on most financial instruments measured at amortized cost and certain other instruments, such as loans, receivables and

held-to-maturity

debt securities. Rather than generally recognizing credit losses when it is probable that the loss has been incurred, the revised guidance requires companies to recognize an allowance for credit losses for the difference between the amortized cost basis of a financial instrument and the amount of amortized cost that the company expects to collect over the instrument’s contractual life. ASU

2016-13

is effective for fiscal periods beginning after December 15, 2019 and must be adopted as a cumulative effect adjustment to retained earnings. The Company does not believe adoption of this guidance will have a

material

impact on its consolidated financial statements.

Fair Value Measurements

In August 2018, the FASB issued ASU

2018-13—Fair

Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement, which modifies the disclosure requirements of fair value measurements. ASU

2018-13

is effective for fiscal years beginning after December 15, 2019. The Company does not believe adoption of this guidance will have an impact on its consolidated financial statements.

Cloud Computing Implementation Cost

In August 2018, the FASB issued ASU

2018-15—Intangible-Goodwill

and Other

Internal-Use

Software (Subtopic

350-40):

Customer’s Accounting for Implementation Cost Incurred in a Cloud Computing Arrangement That Is a Service Contract, which clarifies the accounting for implementation costs in cloud computing arrangements. ASU

2018-15

is effective for fiscal years beginning after December 15, 2019. The Company does not believe adoption of this guidance will have an impact on its consolidated financial statements.

Comprehensive Income

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

Fair Value of Financial Instruments

The carrying amounts of the Company’s financial instruments other than cash equivalents and marketable securities, which include accounts receivable and accounts payable, approximate fair value based on either their short maturity or current terms for similar instruments.

Fair value measurements are determined based upon the exit price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants exclusive of any transaction costs. The Company utilizes a fair value hierarchy based upon the observability of inputs used in valuation techniques as follows:

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

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

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

Cash and Cash Equivalents

Cash and cash equivalents consist of bank demand accounts, savings deposits, certificates of deposit and commercial paper with original maturities of 90 days or less. Cash and cash equivalents are maintained at financial institutions and, at times, balances may exceed federally insured limits. The Company has never experienced any losses related to these balances and believes it is not exposed to significant credit risk regarding its cash and cash equivalents.

Marketable Securities

The Company has marketable securities held by banks or broker-dealers at February 29, 2020, consisting of short-term domestic certificates of deposit, and commercial paper and U.S. treasuries rated at least

A-1/P-1

(short-term) and A/A2 (long-term) with maturities between 91 days and two years. These securities are classified as available for sale. The primary objective of the Company’s investment activity is to preserve capital for the purpose of funding operations, capital expenditures and business acquisitions; investments are not entered into for trading or speculative purposes. These securities are recorded at fair value based on recent trades or pricing models and therefore meet the Level 2 criteria. Interest income on these investments is recorded within other income on the consolidated statements of income.

ESTIMATES AND ASSUMPTIONS

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

There have been no significant changes to the critical accounting policies and estimates disclosed in the Company’s Annual Report on Form

10-K

for the fiscal year ended May 31, ~~2017.~~

2019.

There were no significant changes to the contractual obligations or contingent liabilities and commitments disclosed in the Company’s Annual Report on Form

10-K

for the fiscal year ended May 31, 2019.

Accounts Receivable Allowance

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

Inventory

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

Goodwill and Other Intangible Assets

Goodwill represents the excess of purchase price over fair value of tangible net assets of acquired businesses after amounts are allocated to other identifiable intangible assets. Other intangible assets include customer relationships, trademarks, licenses, trade names, covenants

not-to-compete

and patents. Customer-based intangibles are amortized on either an accelerated or straight-line basis, reflecting the pattern in which the economic benefits are consumed, while all other amortizable intangibles are amortized on a straight-line basis; intangibles are generally amortized over 5 to 25 years. We review the carrying amounts of goodwill and other

non-amortizable

intangible assets annually, or when indications of impairment exist, to determine if such assets may be impaired by performing a quantitative assessment. If the carrying amounts of these assets are deemed to be less than fair value based upon a discounted cash flow analysis and comparison to comparable EBITDA multiples of peer companies, such assets are reduced to their estimated fair value and a charge is recorded to operations.

Long-Lived Assets

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

Equity Compensation Plans

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

Income Taxes

We account for income taxes using the asset and liability method. Under this method, deferred income tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and for tax credit carryforwards and are measured using the enacted tax rates in effect for the years in which the differences are expected to reverse. Deferred income tax expense represents the change in net deferred income tax assets and liabilities during the year.

Leases

In February 2016, the FASB issued ASU No.

2016-02—Leases,

to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a

right-of-use

asset representing its right to use the underlying asset for the lease term. The recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessor have not significantly changed from previous U.S. GAAP. This ASU was effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2018. We adopted this ASU on June 1, 2019; the impact on our consolidated financial statements was immaterial.

We lease various manufacturing, laboratory, warehousing and distribution facilities, administrative and sales offices, equipment and vehicles under operating leases. We evaluate our contracts to determine if an arrangement is a lease at inception and classify it as a finance or operating lease. Currently, all our leases are classified as operating leases. Leased assets and corresponding liabilities are recognized based on the present value of the lease payments over the lease term. Our lease terms may include options to extend when it is reasonably certain that we will exercise that option.

Costs associated with operating leases are recognized on a straight-line basis within operating expenses over the term of the lease. With the adoption of ASC 842 on June 1, 2019, we recognized all leases with terms greater than 12 months in duration on our consolidated balance sheets as

right-of-use

assets and lease liabilities of approximately $2.0 million each as of June 1, 2019. We adopted the standard using the prospective approach and did not retrospectively apply to prior periods.

Right-of-use

assets are recorded in other assets on our consolidated balance sheets. Current and

non-current

lease liabilities are recorded in other accruals within current liabilities and other

non-current

liabilities, respectively, on our consolidated balance sheets.

We have made certain assumptions and judgments when applying ASC 842, the most significant of which are:

We elected the package of practical expedients available for transition that allow us to not reassess whether expired or existing contracts contain leases under the new definition of a lease, lease classification for expired or existing leases and whether previously capitalized initial direct costs would qualify for capitalization under ASC 842.

We did not elect to use hindsight when considering judgments and estimates such as assessments of lessee options to extend or terminate a lease or purchase the underlying asset.

For all asset classes, we elected to not recognize a

right-of-use

asset and lease liability for short-term leases.

For all asset classes, we elected to not separate

non-lease

components from lease components to which they relate and have accounted for the combined lease and

non-lease

components as a single lease component.

The determination of the discount rate used in a lease is our incremental borrowing rate that is based on what we would normally pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments.

Supplemental balance sheet information related to operating leases was as follows:


	February 29, 2020
	(in thousands)
Right of use - assets	$	1,755
Lease liabilities - current		325
Lease liabilities - non-current		1,467

The weighted average remaining lease term and weighted average discount rate were as follows:


	February 29, 2020
Weighted average remaining lease term		2.4 years
Weighted average discount rate		3.5%

Operating lease expenses are classified as cost of revenues or operating expenses on the consolidated statements of income. The components of lease expense were as follows:


	Three Months Ended February 29, 2020		Nine Months Ended February 29, 2020
	(in thousands)		(in thousands)
Operating leases	$	316	$	889
Short term leases		25		106

Total lease expense	$	341	$	995

Cash paid for amounts included in the measurement of lease liabilities for operating leases included in cash flows from operations on the statement of cash flows were approximately $868,000 for the nine months ended February 29, 2020. There were 0

non-cash

additions to

right-of-use

assets obtained from new operating lease liabilities for the nine months ended February 29, 2020.

Undiscounted minimum lease payments as of February 29, 2020 were as follows:


	Amount
	(in thousands)
Years ending May 31,
2020 (1)	$	289
2021		915
2022		358
2023		168
2024		94
2025 and thereafter		26

Total lease payments		1,850
Less: imputed interest		58

Total lease liabilities	$	1,792

(1)	Excluding the nine months ended February 29, 2020.

The aggregate amount of future minimum annual rental payments applicable to noncancelable leases as of May 31, 2019 were as follows:


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

	$	2,320

Table of Contents

Revenue Recognition

The Company determines the amount of revenue to be recognized through

application

of the following steps:

Identification of the contract with a customer;

Identification of the performance obligations in the contract;

Determination of the transaction price;

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

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

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

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

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

Product revenue consists of shipments of:

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

Consumable products marketed to veterinarians and animal health product distributors; and

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

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

Service revenue consists primarily of:

Genomic identification and related interpretive bioinformatic services; and

Other commercial laboratory services.

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

Payment terms for products and services are generally 30 to 60 days; international terms may be longer.

The following table presents disaggregated revenue by major product and service categories for the three and nine month periods ended February 29, 2020 and February 28, 2019:


	Three Months ended February 2 9 /2 8 ,				Nine Months ended February 2 9 /2 8 ,
	2020		2019		2020		2019
	(in thousands)
Food Safety
Natural Toxins, Allergens & Drug Residues	$	17,154	$	18,612	$	57,950	$	58,021
Bacterial & General Sanitation		9,413		9,519		31,345		30,807
Culture Media & Other		11,222		11,893		35,259		36,302
Rodenticides, Insecticides & Disinfectants		7,964		5,953		20,859		18,521
Genomics Services		4,745		5,136		12,961		13,395

	$	50,498	$	51,113	$	158,374	$	157,046
Animal Safety
Life Sciences	$	1,376	$	1,823	$	4,901	$	5,794
Veterinary Instruments & Disposables		10,799		10,682		32,621		32,769
Animal Care & Other		6,667		6,554		20,859		21,900
Rodenticides, Insecticides & Disinfectants		14,558		13,525		47,462		49,460
Genomics Services		15,971		14,003		44,879		37,455

	$	49,371	$	46,587	$	150,722	$	147,378

Total Revenues	$	99,869	$	97,700	$	309,096	$	304,424

2. INVENTORIES

Inventories are stated at the lower of cost, determined onby the

first-in,

first-out

method, or net realizable value. The components of inventories follow:

   February 28,
2018    May 31,
2017
   (in thousands)
Raw materials
   $ 35,774    $ 33,190
Work-in-process
   6,231    4,831
Finished and purchased goods
   35,501    35,123




   $ 77,506    $ 73,144


	February 29,		May 31,
	2020		2019
	(in thousands)
Raw materials	$	42,243	$	41,594
Work-in-process		5,402		5,581
Finished and purchased goods		41,599		38,817

	$	89,244	$	85,992

3. NET INCOME PER SHARE

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

   Three Months Ended
February 28,    Nine Months Ended
February 28,
   2018    2017    2018    2017
   (in thousands, except per share amounts)
Numerator for basic and diluted net income per share:

Net income attributable to Neogen
   $ 16,586    $ 10,287    $ 45,600    $ 31,320
Denominator for basic net income per share:

Weighted average shares
   51,537    50,746    51,253    50,438
Effect of dilutive stock options
   700    633    761    723








Denominator for diluted net income per share
   52,237    51,379    52,014    51,161
Net income attributable to Neogen per share:

Basic
   $ 0.32    $ 0.20    $ 0.89    $ 0.62








Diluted
   $ 0.32    $ 0.20    $ 0.88    $ 0.61

~~The Board~~


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

Denominator for diluted net income per share		53,048		52,472		52,783		52,448
Net income attributable to Neogen per share:
Basic	$	0.23	$	0.25	$	0.82	$	0.86

Diluted	$	0.23	$	0.25	$	0.82	$	0.85

4. SEGMENT INFORMATION

~~The Company has two~~ AND GEOGRAPHIC DATA

We have 2 reportable segments: Food Safety and Animal Safety. The Food Safety segment is primarily engaged in the development, production and marketing of diagnostic test kits, dehydrated culture media and related products used by food producers and processors to detect harmful natural toxins, foodborne bacteria, allergens and levels of general sanitation. The Animal Safety segment is primarily engaged in the development, production and marketing of products dedicated to animal safety, including a complete line of consumable products marketed to veterinarians and animal health product distributors; this segment also provides genomic identification and related interpretive bioinformatic services. Additionally, the Animal Safety segment produces and markets rodenticides, ~~cleaners,~~ disinfectants and insecticides to assist in the control of rodents, insects and disease in and around agricultural, food production and other facilities.

~~Neogen’s~~

Our international operations in the United Kingdom, Mexico, Brazil, China and India originally focused on the Company’s ~~Food Safety~~food safety products, and each of these units reports through the Food Safety segment. In recent years, these operations have expanded to offer ~~the Company’s~~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 ~~genomic~~genomics services. These additional products and services are managed and directed by existing management and are reported through the Food Safety segment.

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

Segment information follows:

   Food
Safety    Animal
Safety    Corporate and
Eliminations
(1)    Total
   (in thousands)
As of and for the three months ended February 28, 2018


Product revenues to external customers
   $ 42,618    $ 35,524    $ —      $ 78,142
Service revenues to external customers
   5,027    12,723    —      17,750








Total revenues to external customers
   47,645    48,247    —      95,892
Operating income (loss)
   8,258    8,493    (838 )    15,913
Total assets
   188,075    215,371    192,155    595,601
As of and for the three months ended February 28, 2017


Product revenues to external customers
   $ 39,318    $ 34,646    $ —      $ 73,964
Service revenues to external customers
   3,631    10,790    —      14,421








Total revenues to external customers
   42,949    45,436    —      88,385
Operating income (loss)
   7,403    7,743    (795 )    14,351
Total assets
   183,419    215,243    108,636    507,298

   Food
Safety    Animal
Safety    Corporate and
Eliminations
(1)    Total
   (in thousands)
For the nine months ended February 28, 2018

Product revenues to external customers
   $ 129,621    $ 114,677    $ —      $ 244,298
Service revenues to external customers
   14,319    34,348    —      48,667








Total revenues to external customers
   143,940    149,025    —      292,965
Operating income (loss)
   25,704    27,691    (3,060 )    50,335
For the nine months ended February 28, 2017

Product revenues to external customers
   $ 112,592    $ 110,578    $ —      $ 223,170
Service revenues to external customers
   10,475    29,102    —      39,577








Total revenues to external customers
   123,067    139,680    —      262,747
Operating income (loss)
   24,286    24,616    (2,957 )    45,945


	Food Safety		Animal Safety		Corporate and Eliminations (1)			Total
	(in thousands)
As of and for the three months ended February 29, 2020
Product revenues to external customers	$	44,450	$	33,286	$	—		$	77,736
Service revenues to external customers		6,048		16,085		—			22,133

Total revenues to external customers		50,498		49,371		—			99,869
Operating income (loss)		5,881		8,492		(1,330	)		13,043
Total assets		226,077		219,501		327,923			773,501

As of and for the three months ended February 28, 2019
Product revenues to external customers	$	44,790	$	32,585	$	—		$	77,375
Service revenues to external customers		6,323		14,002		—			20,325

Total revenues to external customers		51,113		46,587		—			97,700
Operating income (loss)		8,339		7,338		(1,038	)		14,639
Total assets		204,570		221,335		246,680			672,585

(1)	Includes corporate assets, consisting principally of cash and cash equivalents, marketable securities , current and deferred tax accounts and overhead expenses not allocated to specific business segments. Also includes the elimination of intersegment transactions.


	Food Safety		Animal Safety		Corporate and Eliminations (1)			Total
	(in thousands)
As of and for the nine months ended February 29, 2020
Product revenues to external customers	$	141,516	$	105,555	$	—		$	247,071
Service revenues to external customers		16,858		45,167		—			62,025

Total revenues to external customers		158,374		150,722		—			309,096
Operating income (loss)		24,571		26,521		(3,513	)		47,579

As of and for the nine months ended February 28, 2019
Product revenues to external customers	$	139,979	$	109,918	$	—		$	249,897
Service revenues to external customers		17,067		37,460		—			54,527

Total revenues to external customers		157,046		147,378		—			304,424
Operating income (loss)		29,554		23,101		(3,291	)		49,364

(1)	Includes elimination of intersegment transactions.

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


	Three months ended				Nine months ended
	February 29/28,				February 29/28,
	2020		2019		2020		2019
	(in thousands)				(in thousands)
Revenues by Geographic Location
Domestic	$	59,762	$	57,422	$	186,887	$	182,298
International		40,107		40,278		122,209		122,126

Total revenue		99,869		97,700		309,096		304,424

5. EQUITY COMPENSATION PLANS

Qualified and

non-qualified

options to purchase shares of common stock may be granted to directors, officers and employees of the

Company under the terms of ~~the Company’s~~our stock option plans. These options are granted at an exercise price of not less than the fair market value of the stock on the date of grant. Options vest ratably over three and five year periods and the contractual terms are generally five or ten years. A summary of stock option activity during the nine months ended February ~~28, 2018~~29, 2020 follows:

      Weighted-
      Average
   Shares    Exercise Price
   (in thousands)
Options outstanding June 1, 2017
   2,708    $ 32.88
Granted
   819    59.26
Exercised
   (668 )    28.23
Forfeited
   (144 )    37.31



Options outstanding February 28, 2018
   2,715    41.75


				Weighted-
				Average
(Options in thousands)	Shares			Exercise Price
Options outstanding June 1, 2019		2,385		$	49.37
Granted		561			63.91
Exercised		(686	)		40.07
Forfeited		(56	)		56.67

Options outstanding February 29, 2020		2,204		$	55.77

During the three and nine month periods ended February 29, 2020 and February 28, ~~2018 and 2017,~~2019, the Company recorded ~~$1,026,000~~$1,640,000 and ~~$1,198,000~~$1,306,000 and ~~$3,692,000~~$4,795,000 and ~~$3,932,000,~~$4,137,000, respectively, of compensation expense related to its share-based awards. ~~On June 1, 2017, the Company adopted ASUNo. 2016-09,~~ which simplifies the accounting for share-based payments to employees. The guidance requires the recognition of the income effects of awards in the income statement when the awards vest or are settled, thus eliminating additional~~paid-in~~ capital pools. The guidance also allows for a policy election to account for forfeitures as they occur, rather than on an estimated basis, and requires that excess tax benefits be classified as an operating activity on the Statement of Cash Flows. The adoption of this ASU increased income tax expense by $331,000 for the three months ended February 28, 2018 as the reduction in the corporate tax rate from the tax reform enacted in December 2017 resulted in a partial reversal of tax benefit previously recorded at the higher corporate rate in the first and second quarters of the current fiscal year; year to date, income tax expense decreased by $3,463,000 as a result of adoption of the ASU.

The weighted-average fair value per share of stock options granted during the first nine months of fiscal ~~2018 and fiscal 2017,~~2020, estimated on the date of grant using the Black-Scholes option pricing model, was ~~$14.44 and $11.84, respectively.~~$15.56. The fair value of stock options granted was estimated using the following weighted-average ~~assumptions:~~

   FY 2018 FY 2017
Risk-free interest rate
   1.6% 1.2%
Expected dividend yield
   0.0% 0.0%
Expected stock price volatility
   27.7% 35.2%
Expected option life
   4.0 years 4.0 years

assumptions.


	FY 2020
Risk-free interest rate		1.9%
Expected dividend yield		0.0%
Expected stock price volatility		29.4%
Expected option life		3.5 years

The Company has an employee stock purchase plan that provides for employee stock purchases at a 5% discount to market price. The discount is recorded in administrative expense as of the date of purchase.

6. ~~NEW ACCOUNTING PRONOUNCEMENTS~~

~~In May 2014, the FASB issued ASU No.2014-09—Revenue~~ from Contracts with Customers (Topic 606). The new standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard is designed to create greater comparability for financial statement users across industries and jurisdictions and also requires enhanced disclosures. In April 2016, the FASB issued Accounting Standards Update~~No. 2016-10—~~ ~~Revenue from Contracts with Customers (Topic 606), which amends and adds clarity to certain aspects of the guidance set forth in ASU2014-09~~ related to identifying performance obligations and licensing. The guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. The guidance permits two methods of adoption: a full retrospective method to each prior reporting period presented or a modified retrospective approach with the cumulative effect of initially applying the guidance recognized at the date of initial application. The Company has formed an internal team to implement the new standard. This team has identified all revenue streams at each significant subsidiary and is currently reviewing contracts to evaluate the potential impact of adopting the new standard on the Company’s revenue recognition policies, procedures and control framework and ultimately on the Company’s consolidated financial statements and related disclosures. The Company will adopt this ASU on June 1, 2018 using the modified retrospective approach.

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

~~In March 2016, the FASB issued ASUNo. 2016-09~~ — Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting to provide guidance that changes the accounting for certain aspects of share-based payments to employees. The guidance requires the recognition of the income tax effects of awards in the income statement when the awards vest or are settled, thus eliminating additional~~paid-in~~ capital pools. The guidance also allows for the employer to repurchase more of an employee’s shares for tax withholding purposes without triggering liability accounting. In addition, the guidance allows for a policy election to account for forfeitures as they occur rather than on an estimated basis. The Company adopted this standard effective June 1, 2017. Adoption of this ASU increased income tax expense by $331,000 for the three months ended February 28, 2018 as the reduction in the corporate tax rate from the tax reform enacted in December 2017 resulted in a partial reversal of tax benefit previously recorded at the higher corporate rate in the first and second quarters of the current fiscal year; year to date, income tax expense decreased by $3,463,000 as a result of adoption of the ASU.

~~In June 2016, the FASB issued ASU No.2016-13—Measurement~~ of Credit Losses on Financial Instruments, which changes how companies measure credit losses on most financial instruments measured at amortized cost and certain other instruments, such as loans, receivables and held-~~to-maturity~~ debt securities. Rather than generally recognizing credit losses when it is probable that the loss has been incurred, the revised guidance requires companies to recognize an allowance for credit losses for the difference between the amortized cost basis of a financial instrument and the amount of amortized cost the Company expects to collect over the instrument’s contractual life. ASU~~2016-13~~ is effective for fiscal periods beginning after December 15, 2019 and must be adopted as a cumulative effect adjustment to retained earnings. Early adoption is permitted. The Company does not believe the adoption of this guidance will have an impact on its consolidated financial statements.

~~In August 2016, the FASB issued ASUNo. 2016-15—~~ ~~Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force). The amendments in ASU2016-15~~ address eight specific cash flow issues and apply to all entities that are required to present a statement of cash flows under FASB Accounting Standards Codification (FASB ASC) 230, Statement of Cash Flows. The amendments in ASU~~2016-15~~ are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption during an interim period. The Company has not yet adopted this update and is currently evaluating the impact of ASU~~No. 2016-15~~ ~~on its consolidated financial statements.~~

7. BUSINESS AND PRODUCT LINE ACQUISITIONS

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

On ~~December~~August 1, ~~2016,~~2018, the Company acquired the stock of ~~Quat-Chem Ltd.~~Clarus Labs, Inc., a ~~chemical company that manufactures biosecurity products, based in Rochdale, England.~~manufacturer of water testing products. Neogen has distributed Clarus’ Colitag water test to the food and beverage industries since 2004; this acquisition has given the Company the ability to sell this product to new markets. Consideration for the purchase was ~~$21,606,000~~$4,204,000 in cash and ~~up to $3,778,000~~approximately $1,256,000 of contingent consideration, due ~~at the end of each of~~semiannually for the first ~~two~~five years, based on an excess net sales formula. The final purchase price allocation, based upon the fair value of these assets and liabilities determined using the income approach, included ~~accounts receivable of $4,684,000,~~ inventory of ~~$1,243,000, land, property~~$32,000, machinery and equipment of ~~$2,526,000,~~$120,000, accounts payable of ~~$2,197,000,~~ $53,000, contingent consideration accrual of $1,256,000,

non-current

deferred tax liability of ~~$1,133,000, contingent consideration accrual of $1,058,000, other current liabilities of $604,000,~~$544,000,

non-amortizable

intangible assets of ~~$1,889,000,~~$878,000, intangible assets of ~~$6,900,000~~$1,487,000 (with an estimated life of

5-15

years) and the remainder to goodwill

(non-deductible

for tax purposes). These values are Level 3 fair value measurements. ~~In January~~Since February 2019, $270,000 has been paid to the former owners as contingent consideration from the accrual. Manufacturing of these products was moved to the Company’s Lansing, Michigan location in October 2018, reporting within the Food Safety segment.

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

in-house

genetic evaluation capabilities. Consideration for the purchase was $1,100,000 in cash, with $700,000 paid at closing and $400,000 payable to the former ~~owners $249,000~~owner on September 1, 2019, and up to $585,000 of contingent consideration, payable over the next three years. The final purchase price allocation, based upon the fair value of these assets and liabilities determined using the income approach, included office equipment of $15,000, contingent consideration accrual of $385,000, intangible assets of $942,000 (with an estimated life of

5-15

years) and the remainder to goodwill (deductible to tax purposes). These values are Level 3 fair value measurements. In September 2019, the former owner was paid the

$400,000

installment of

the purchase

price owed

and was also paid $107,000 in contingent consideration based on the achievement of sales targets in the first ~~year, and recorded a credit of $255,000 to other income, reducing the contingent consideration accrual~~year. Services provided by ~~a corresponding amount; $554,000 remains accrued for contingent consideration payable~~this operation are now performed at the ~~end of the second year. This business continues to operate in its current~~Company’s Lincoln, Nebraska location, ~~and is managed by Neogen Europe,~~ reporting within the ~~Food~~Animal Safety segment.

Table of Contents

On ~~December 27, 2016,~~January 1, 2019, the Company acquired the assets of Edmonton, Alberta based Delta Genomics Centre, an animal genomics laboratory in Canada. Delta’s laboratory operations were renamed Neogen Canada and the acquisition was intended to accelerate growth of the Company’s animal genomics business in Canada. Consideration for the purchase was $1,485,000 in cash. The final purchase price allocation, based upon the fair value of these assets and liabilities determined using the income approach, included inventory of $38,000, machinery and equipment of $371,000, unearned revenue liability of $125,000, intangible assets of $532,000 (with an estimated life of 5 to 10 years) and the remainder to goodwill (deductible for tax purposes). These values are Level 3 fair value measurements. Services provided by this operation continue to be performed in Edmonton, reporting within the Animal Safety segment.

On January 1, 2020, the Company acquired the stock of ~~Rogama Industria e Comercio, Ltda.,~~Productos Quimicos Magiar, a ~~company that develops and manufactures rodenticides and insecticides, based near Sao Paulo, Brazil.~~distributor of Neogen’s Food Safety products for the past 20 years, located in Argentina. Consideration for the purchase was ~~$12,428,000~~$4,286,000 in net cash

with $3,786,000 paid at closing and $540,000 payable to the former owner on January 1, 2022, and up to ~~$2,069,000~~$979,000 of contingent consideration, ~~due at the end of each of the first two years,~~payable in one year, based onupon an excess net sales formula.

The ~~final~~preliminary purchase price allocation, based upon the fair value of these assets and liabilities determined using the income approach, included accounts receivable of ~~$1,866,000, othernon-current~~ ~~assets of $26,000,~~$603,000, inventory of ~~$960,000, land, property~~$446,000, machinery and equipment of ~~$4,734,000,~~$36,000,

other current assets of

$221,000, accounts payable of $383,000, other current liabilities of ~~$2,562,000,~~$312,000

, contingent consideration accrual of ~~$213,000,~~$640,000

non-current

deferred tax ~~liability~~liabilities of ~~$1,307,000,non-amortizable~~$

384,000

, intangible assets of ~~$870,000, intangible assets of $5,112,000 (with~~$

1,282,000

(with an estimated life of~~5-15~~

5-10

years) and the remainder to goodwill

(non-deductible

for tax purposes). These values are Level 3 fair value measurements. This ~~business continues~~ operation continue

to operate infrom its current location ~~and is managed by Neogen do Brasil,~~in Buenos A

res, Argentina, reporting within the Food Safety segment.

managed through

Neogen

’s Latin America operation.

On ~~September~~January 1, ~~2017,~~2020, the Company acquired the ~~assets~~stock of ~~The University~~Productos Quimicos Magiar, a distributor of ~~Queensland Animal Genetics Laboratory, an animal genomics laboratory~~Neogen’s Food Safety products for the past 20 years, located ~~near Brisbane, Australia. This acquisition is intended to accelerate the growth of the Company’s animal genomics business~~ in ~~Australia and New Zealand.~~Uruguay. Consideration for the purchase was ~~$2,063,000; $468,000 has been~~$1,596,000 in net cash

with $1,386,000 paid at closing and $210,000 payable to the former owner on January 1, 2022, and up to $241,000 in ~~cash with the remainder due~~contingent consideration, payable in ~~annual installments over the next five years.~~one year, based upon an excess net sales formula.

The preliminary purchase price allocation, based upon the fair value of these assets and liabilities determined using the income approach, included accounts receivable of $

280,000

, inventory of ~~$19,000,~~$

174,000

, machinery and equipment of ~~$419,000,non-current~~$

16,000

other current assets

of $

68,000

, accounts payable of $

204,000

, other current liabilities of ~~$1,629,000,~~$

11,000

contingent consideration accrual of $159,000,

non-current

deferred tax liabilities of $

125,000

, intangible assets of ~~$850,000 (with~~$

498,000

(with an estimated life of~~5-15~~

5-10

years) and the remainder to goodwill

(non-deductible

for tax purposes). These values are Level 3 fair value measurements. ~~The new business, renamed Neogen Australasia, continues~~ This operation continue

to operate infrom its current location in Montevideo, Uruguay, reporting within the Food Safety segment. It

managed through

Neogen

’s Latin America operation.

On January 9, 2020, the Company acquired the stock of Diessechem Srl, a distributor of food and feed diagnostics for the past 27 years, located in Italy. Consideration for the purchase was $3,455,000 in net cash. The preliminary purchase price allocation, based upon the fair value of these assets and liabilities determined using the income approach, included accounts receivable of $780,000, inventory of $5,000,

other curre

assets

of $189,000, accounts payable of $140,000, other current liabilities of $334,000,

non-current

deferred tax liabilities of $203,000, intangible assets of $780,000 (with an estimated life of

5-10

years) and the remainder to goodwill

(non-deductible

for tax purposes). These values are Level 3 fair value measurements. This operation continue

to operate from its current location in Milan, Italy, reporting within the Food Safety segment. It

managed through Neogen’s Scotland operation.

On January 31, 2020, the Company acquired the stock of Abtek Biologicals Limited, a manufacturer and supplier of culture media supplements and microbiology technologies. This acquisition enhances the Company’s culture media product line offering for the worldwide industrial microbiology markets. Consideration for the purchase was $1,339,000

in net cash, with $1,220,000 paid at closing and $119,000 payable to the former owner on January 31, 2021.

The preliminary purchase price allocation, based upon

the fair

value of these assets and liabilities determined using the income approach, included accounts receivable of $

135,000

, inventory of $

207,000

, machinery and equipment of $

105,000

, prepayments of $

6,000

, accounts payable of $

118,000

, other current liabilities of $

34,000

non-current

deferred tax liabilities of $

101,000

, intangible assets of $

435,000

(with an estimated life of

5-10

years) and the remainder to goodwill

(non-deductible

for tax purposes). These values are Level 3 fair value measurements. This manufacturing operation will continue to operate from its current location in Liverpool, England, reporting within the Food Safety segment. It

managed through

Neogen

’s Scotland operation.

On February 28, 2020, the Company acquired the assets of Cell BioSciences, an Australian distributor of food safety and industrial microbiology products. This acquisition gives Neogen a direct sales presence across Australasia for its entire product portfolio. Consideration for the purchase was $3,443,000 in cash. Due to the timing of the transaction, the preliminary purchase price allocation was not complete at the time of filing. The business

operated under Neogen’s name in Melbourne, Australia, reporting within the Animal Safety segment.

Subsequent to the end of the quarter, on March 26, 2020, the Company acquired the assets of Chile-based Magiar Chilena, a distributor of food, animal, and plant diagnostics, including Neogen products. Consideration for the purchase was $400,000 in cash, with $350,000 paid at closing and $50,000 payable to the former owner on March 26, 2021. Due to the timing of the transaction, the preliminary purchase price allocation was not complete at the time of filing. The business will be operated from its current location in Santiago, Chile, reporting within the Food Safety segment. It will be managed through Neogen’s Latin America operation.

7. LONG TERM DEBT

~~The Company has~~

We have a financing agreement with a bank providing for ana $15,000,000 unsecured revolving line of credit, ~~of $15,000,000,~~ which ~~expires~~was amended on November 30, 2018 to extend the maturity from September 1, 2019 to September 30, ~~2019.~~2021. There were no0 advances against the line of credit during fiscal ~~year 2017~~2019 and there have been ~~none~~0ne thus far in fiscal ~~year 2018;~~2020; there was no0 balance outstanding at February ~~28, 2018.~~29, 2020. Interest on any borrowings ~~remained~~

ill be charged

at LIBOR plus 100 basis points (rate under the terms of the agreement was ~~2.82%~~2.51% at February ~~28, 2018)~~29, 2020). Financial covenants include maintaining specified levels of tangible net worth, debt service coverage, and funded debt to EBITDA, each of which the Company was in compliance with at February ~~28, 2018.~~

9.29, 2020.

8. COMMITMENTS AND CONTINGENCIES

The Company is involved in environmental remediation and monitoring activities at its Randolph, Wisconsin manufacturing facility and accrues for related costs when such costs are determined to be probable and estimable. The Company currently utilizes a pump and treat remediation strategy, which includes semi-annual monitoring and reporting, consulting, and maintenance of monitoring wells. Neogen expenses these annual costs of remediation, which have ranged from $38,000 to ~~$57,000~~$131,000 per year over the past five years. The Company’s estimated liability for these costs was $916,000 at both February ~~28, 2018~~29, 2020 and May 31, ~~2017,~~2019, measured on an undiscounted basis over an estimated period of 15 years; ~~$54,000~~$100,000 of the liability is recorded within current liabilities and the remainder is recorded within other

non-current

liabilities inon the consolidated balance ~~sheet.~~

sheets. In fiscal 2019, the Company performed an updated Corrective Measures Study (CMS) on the site, per a request from the Wisconsin Department of Natural Resources (WDNR), and is currently in discussion with the WDNR regarding potential alternative remediation strategies going forward. The Company believes that the current pump and treat strategy is appropriate for the site. At this time, the outcome of the review in terms of approach and future costs is unknown, but a change in the current remediation strategy, depending on the alternative selected, could require an increase in the currently recorded liability, with an offsetting charge to operations in the period recorded.

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

~~10.~~

9. STOCK PURCHASE

~~The Company has a stock repurchase program, authorized by~~

In October 2018, the Company’s Board of Directors passed a resolution canceling the Company’s prior stock buyback program, which had been approved in ~~calendar year~~December 2008, and authorized a new program to purchase, subject to market conditions, up to ~~1,500,000~~3,000,000 shares of the Company’s common stock. ~~As of February 28,~~In December 2018, ~~1,350,632~~the Company purchased 50,000 shares ~~were available to be repurchased~~ under the ~~program. There were no purchases~~program in ~~fiscal year 2017~~negotiated and ~~there~~open market transactions for a total price, including commissions, of $3,134,727. Shares acquired under the program have been ~~none thus far in fiscal year 2018.~~

retired.

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

In addition, any forward-looking statements represent management’s views only as of the day this Quarterly Report on Form

10-Q

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

~~Critical Accounting Policies and Estimates~~

~~The discussion and analysis~~

Table of the Company’s financial condition and results of operations are based on the consolidated financial statements that have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires that management make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, management evaluates the estimates, including, but not limited to, those related to receivable allowances, inventories, accruals, goodwill and other intangible assets. These estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

~~There were no significant changes to the contractual obligations or contingent liabilities and commitments disclosed in the Company’s Annual Report on Form10-K~~ ~~for the fiscal year ended May 31, 2017.~~

~~The Company adopted ASUNo. 2016-09~~ ~~related to share-based compensation on June 1, 2017. (See Note 5 Equity Compensation Plans for further discussion).~~

On December 22, 2017, the Tax Cuts and Jobs Act, (“the Tax Act”) was enacted. Among the significant changes to the U.S. Internal Revenue Code, the Tax Act lowers the U.S. federal corporate income tax rate (“Federal Tax Rate”) from 35% to 21% effective January 1, 2018. The Company will compute its income tax for the fiscal year ending May 31, 2018 using a blended Federal Tax Rate of 29.2%.

In December 2017, the Securities and Exchange Commission staff issued Staff Accounting Bulletin No. 118, which addresses how a company recognizes provisional amounts when a company does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete its accounting for the effect of the changes in the Tax Act. The measurement period ends when a company has obtained, prepared and analyzed the information necessary to finalize its accounting, but cannot extend beyond one year.

As of February 28, 2018, the Company was able to determine a reasonable estimate for certain effects of tax reform and recorded that estimate as a provisional amount. The provisional remeasurement of the deferred tax assets and liabilities resulted in a $5.6 million discrete tax benefit. In addition, the Company was required to estimate its cumulative unrepatriated foreign earnings and profits and

calculate estimated tax owed on those earnings and profits; this tax was provisionally estimated at $2.7 million. The provisional remeasurement and repatriation amounts are anticipated to change as more data becomes available allowing more accurate computations of the amounts.

~~There have been no other material changes to the critical accounting policies and estimates disclosed in the Company’s Annual Report on Form10-K~~ ~~for the fiscal year ended May 31, 2017.~~

Contents

Executive Overview

~~Revenues for the Company for~~

Consolidated revenues were $99.9 million in the third quarter ~~ended February 28, 2018~~of fiscal 2020, an increase of 2% compared to $97.7 million in the third quarter of fiscal 2019. Organic sales growth in the third quarter of fiscal 2020 was 1%. For the year to date period, consolidated revenues were ~~$95.9~~$309.1 million, an increase of ~~8%, or $7.5 million,~~2% compared to ~~revenues~~$304.4 million in the same period in the prior fiscal year. Organic sales rose 1% for the nine month period.

Food Safety segment sales were $50.5 million in the third quarter of ~~$88.4~~the current fiscal year, a decline of 1% compared to $51.1 million in the same period of the prior year. Organic sales declined 3% during the quarter; contributions from four acquisitions executed during the quarter totaled $990,000. For the year to date, Food Safety segment sales were $158.4 million, an increase of 1% compared to $157.0 million in the same period of the prior fiscal year; excluding acquisitions, sales were flat.

Animal Safety segment sales were $49.4 million in the third quarter of fiscal 2020, an increase of 6% compared to $46.6 million in the third quarter of fiscal 2019. Organic sales in this segment also rose 6% in the third quarter, with only a minor contribution from the January 1, 2019 acquisition of Delta Genomics. For the year to date, Animal Safety segment sales were $150.7 million, an increase of 2% compared to $147.4 million in the same period a year ago. Year to date organic sales also increased 2%.

International sales in the third quarter of fiscal 2020 were 40% of total sales compared to 41% of total sales in the third quarter of fiscal 2019. For each year to date period presented, international sales were 40% of total sales.

Our effective tax rate in the third quarter was 14.4% compared to 21.4% in the prior year third quarter; the fiscal 2020 year to date effective tax rate was 15.6% compared to 17.0% for the same period a year ago.

Net income for the quarter ended February 29, 2020 was $12.2 million, or $0.23 per diluted share, a decrease of 7% compared to $13.1 million, or $0.25 per share in the same period in the prior year. For the year to date, ~~period, revenues were $293.0~~net income was $43.1 million, ~~an increase~~or $0.82 per share, a decrease of ~~12%, or $30.3 million,~~3% compared to ~~revenues~~prior year to date net income of ~~$262.7~~$44.4 million, or $0.85 per diluted share.

Cash provided from operating activities in the first nine months of fiscal ~~year 2017. Net income attributable~~2020 was $60.3 million, compared to ~~Neogen for~~$43.0 million in the same period of fiscal 2019.

Table of Contents

International sales were flat in both the third quarter of fiscal ~~2018 increased 61%~~2020 and for the year to ~~$16.6 million,~~date, each compared to ~~$10.3~~the same respective periods in the prior year. The rate of growth in our international revenues in the current fiscal year has been adversely impacted by currency devaluations in a number of the countries in which we operate, lower sales of our drug residue test kits by our largest European distributor, and the loss of forensics business in Brazil. Revenue changes, denominated in both the U.S. dollar and as reported in the local currency, for the three and nine month periods of fiscal 2020 compared to the same respective periods in the prior year are as follows for each of our international locations:


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

Currency translations reduced comparative revenues by approximately $357,000 in the third quarter of fiscal 2020 compared to the same quarter a year ago, and by $2.5 million for the year to date compared to the same period last year, primarily due to the increased strength of the U.S. dollar relative to the British pound, the Brazilian real and the Australian dollar for each period. The Mexican peso and the British pound strengthened relative to the U.S. dollar during the third quarter of 2020.

The 5% increase in third quarter revenues at our Neogen Europe operations included a 24% increase in sales of cleaners, disinfectants and veterinary instruments, offset somewhat by a 9% decline in culture media products, due to orders delayed into the fourth quarter and lower demand; sales of our allergen test kits increased 7%. For the year to date period, overall sales increased 3%. Sales in Brazil declined 16% in the third quarter, primarily from the loss of forensics test kit business, due to a large commercial laboratory converting their testing protocol to a higher throughput method, and lower sales of genomics services due to a large sale in the prior year period which did not recur. Partially offsetting these declines was a large

non-recurring

sale of insecticides to a government agency. For the nine month period, sales at our Brazilian operations decreased 5% compared to the prior year. At Neogen Latinoamerica, sales increased 15% for the third quarter compared to the prior year, with strong sales of rodenticides in Mexico and broad based strength across the diagnostics business during the period; for the year to date, strong diagnostics test kit sales were somewhat offset by lower sales of cleaners and disinfectants. Robust sales of cleaners and disinfectants in China in the third quarter of fiscal 2020, due in part to the

COVID-19

pandemic, drove the 38% increase in revenue and offset lower sales of diagnostic test kit sales in the period; for the year to date, revenues increased 20% over the prior year.

Service revenue was $22.1 million in the third quarter of fiscal 2020, an increase of 9% over prior year ~~2017. Earnings per share~~third quarter revenues of $20.3 million, including a minor contribution from the January 1, 2019 acquisition of Delta Genomics. For the nine month period, service revenue was $62.0 million, an increase of 14% over prior year revenues of $54.5 million. Year to date service revenues were aided by the Delta Genomics acquisition and the September 2018 acquisition of Livestock Genetic Services. The growth in both the quarter and year to date periods was led by strong increases of genomic testing revenues to the domestic companion animal market, and to a lesser extent, increases in our global beef and dairy cattle markets.

Table of Contents

Revenues


	Three Months Ended February 29/28,
	2020		2019		Increase/ (Decrease)			%
			(in thousands)
Food Safety
Natural Toxins, Allergens & Drug Residues	$	17,154	$	18,612	$	(1,458	)		(8	)%
Bacterial & General Sanitation		9,413		9,519		(106	)		(1	)%
Culture Media & Other		11,222		11,893		(671	)		(6	)%
Rodenticides, Insecticides & Disinfectants		7,964		5,953		2,011			34	%
Genomics Services		4,745		5,136		(391	)		(8	)%

	$	50,498	$	51,113	$	(615	)		(1	)%

Animal Safety
Life Sciences	$	1,376	$	1,823	$	(447	)		(25	)%
Veterinary Instruments & Disposables		10,799		10,682		117			1	%
Animal Care & Other		6,667		6,554		113			2	%
Rodenticides, Insecticides & Disinfectants		14,558		13,525		1,033			8	%
Genomics Services		15,971		14,003		1,968			14	%

	$	49,371	$	46,587	$	2,784			6	%

Total Revenues	$	99,869	$	97,700	$	2,169			2	%


	Nine Months Ended February 29/28,
	2020		2019		Increase/ (Decrease)			%
			(in thousands)
Food Safety
Natural Toxins, Allergens & Drug Residues	$	57,950	$	58,021	$	(71	)		0	%
Bacterial & General Sanitation		31,345		30,807		538			2	%
Culture Media & Other		35,259		36,302		(1,043	)		(3	)%
Rodenticides, Insecticides & Disinfectants		20,859		18,521		2,338			13	%
Genomics Services		12,961		13,395		(434	)		(3	)%

	$	158,374	$	157,046	$	1,328			1	%

Animal Safety
Life Sciences	$	4,901	$	5,794	$	(893	)		(15	)%
Veterinary Instruments & Disposables		32,621		32,769		(148	)		0	%
Animal Care & Other		20,859		21,900		(1,041	)		(5	)%
Rodenticides, Insecticides & Disinfectants		47,462		49,460		(1,998	)		(4	)%
Genomics Services		44,879		37,455		7,424			20	%

	$	150,722	$	147,378	$	3,344			2	%

Total Revenues	$	309,096	$	304,424	$	4,672			2	%

Table of Contents

Food Safety

Natural Toxins, Allergens & Drug Residues –

Sales in this category decreased 8% and were flat for the nine month period ended February 29, 2020, respectively, compared to the same periods in the prior year. In the third quarter, sales of drug residue test kits were down 47%, resulting from lower demand at our European distributor. Effective January 1, 2020, we have modified our contract with this distributor to eliminate their exclusive distribution of our dairy drug residue test kits and we have begun selling this product line directly to end customers through Neogen Europe. Partially offsetting this decrease, sales of our allergens product line and natural toxin test kit revenues both increased 4%. For the nine month period, sales of our allergens product line increased 8% and natural toxins test kit revenues increased 5%, while sales of drug residue test kits declined 29%.

Bacterial & General Sanitation –

Revenues in this category decreased 1% in the third quarter and increased 2% for the year to date, both compared to the same periods in the prior year. In the third quarter, sales of our AccuPoint sanitation monitoring product line increased 5% on higher sales of both equipment and related samplers; sales of test kits to detect pathogens decreased 7%, in part due to higher equipment sales in the prior year third quarter. Sales of products to detect spoilage organisms in processed foods decreased 3%, due to lack of availability of certain consumable vials because of manufacturing issues, which have since been resolved. For the year to date, sales of our AccuPoint product line increased 13% and pathogen test kit revenues increased 2%, while sales of products to detect spoilage organisms decreased 10%.

Culture Media & Other –

Sales in this category decreased 6% in the quarter ended February 29, 2020 compared to the third quarter in the prior year; for the nine month period, sales decreased 3%. Sales of Neogen Culture Media decreased 7% and were flat for the quarter and year to date periods, respectively. The decrease in the third quarter is primarily due to order timing and lower end market demand. This category also includes forensic test kits sold within Brazil, which decreased significantly in both the third quarter and for the year to date as a large customer moved to a higher throughput testing method. For both periods, this category also benefitted from lower rebate payments to a European distributor in the current fiscal year.

Rodenticides, Insecticides & Disinfectants –

Revenues in this category increased 34% in the third quarter of fiscal ~~2018 were $0.32~~2020 compared to ~~$0.20 per share in~~ the same period a year ~~ago. Net earnings for~~ago, primarily from strength of disinfectant products in China due to the ~~third~~

COVID-19

outbreak. The quarter ~~were favorably impacted~~was also aided by ~~adjustments resulting from tax reform legislation enacted~~a large sale of rodenticides in ~~December 2017. For~~Mexico and the ~~first nine months~~final shipment of ~~the current fiscal year, net income attributable~~a

non-recurring

sale of insecticide products to ~~Neogen increased 46% to $45.6 million, or $0.88 per fully diluted share, compared to $31.3 million, or $0.61, for the same period~~a governmental agency in ~~the prior fiscal year.~~Nicaragua. For the year to date, ~~period, net earnings were favorably impacted by tax reform, excess tax benefits from stock option exercises, and the favorable conclusion~~sales in this category increased 8%.

Genomics Services –

Sales of ~~an IRS audit.~~

genomics services sold through our international Food Safety ~~segment revenues increased 11% and Animal Safety segment revenues increased 6%~~operations decreased 8% for the three month period ended February 28, 2018, each compared to the same period in the prior year. For the quarter, the overall organic sales increase was 7%; organic growth in the Food Safety and Animal Safety segments was 9% and 5%, respectively. The acquisitions of Rogama, purchased in~~mid-December~~ ~~2016, and Neogen Australasia, in September 2017, contributed $1.6 million to the overall revenue growth in the third quarter. Food Safety segment~~29, 2020; revenues increased 17% and Animal Safety segment revenues increased 7% for the year to date period. Overall organic sales increased 7% for the year to date period; the organic increases were 9% for the Food Safety segment and 6% for the Animal Safety segment. The previously discussed acquisitions, and Quat-Chem, purchased on December 1, 2016, contributed $11.1 million to the overall sales increasedecreased 3% for the nine month period.

International sales were $37.4 million in the third quarter of fiscal 2018, an increase of 17% compared to the same period in the prior year. Expressed as a percentage of sales, international sales were 39.0% in the quarter, compared to 36.3% in the third quarter a year ago. For the year to date, international sales were $110.5 million, an increase of 20%; international sales were 37.7% of total sales in the current year to date period and 35.1% in the prior year. For each comparative period, ~~international revenue increases were~~ the ~~result of the acquisitions of Quat-Chem (England), Rogama (Brazil) and Neogen Australasia (Australia), and to~~decrease was caused primarily by lower sample volumes in our Brazilian genomics operations, resulting from a ~~lesser extent, revenue increases at existing Company locations. Currency translation had a positive effect on international revenues of approximately $1.9 million~~large government order in the ~~third quarter of~~prior year which has not recurred in the current year. Currency also negatively impacted revenues in the current fiscal ~~2018~~year as both the British pound and the Brazilian real have weakened relative to the U.S. dollar. The Company has sizable genomics revenues in the U.K. and in Brazil, where the pound ~~euro,~~ and ~~peso were stronger on average against~~real, respectively, are the ~~dollar than the same period a year ago; for the year to date period, the positive revenue impact was $2.5 million.~~

~~Revenues at Neogen Europe increased 16%~~functional currencies.

Animal Safety

Life Sciences –

Sales in ~~U.S. dollars~~this category decreased 25% in the third quarter, compared to the same period in the prior year; for the year to date, the decrease in this product line is 15%. The prior year included sales to a commercial laboratory customer which did not recur in fiscal 2020. Additionally, sales of substrates and reagents declined significantly in the third quarter, the result of order timing from a large customer.

Veterinary Instruments & Disposables –

Revenues in this category increased 1% for the three month period ended February 29, 2020; for the year to date, sales were flat. For both the quarter and year to date periods, growth in marking and other disposable products was essentially offset by decreased sales of various types of needles, due to high inventory levels at our largest distributors.

Animal Care & Other –

Sales of these products increased 2% in the third quarter and decreased 5% for the year to date. In the third quarter, animal care revenues decreased 4% due to lower sales to our larger U.S. distributors while sales of disposable dairy supplies rose 5%. For the year to date period, animal care revenues were 4% lower than the prior year, while dairy supplies were 2% lower. Timing of adjustments to promotional programs with distributors, which are recorded as contra revenues within this category, also contributed to the year to date decline.

Table of Contents

Rodenticides, Insecticides & Disinfectants –

Revenues in this category increased 8% for the three month period ended February 29, 2020, but decreased 4% for the year to date period. For the quarter, rodenticide sales rose 26% on the success of retail marketing programs and insecticide sales were up 5%. These gains for the three month period were partially offset by a 1% decline in sales of cleaners and disinfectants. For the year to date, rodenticides were down 2%, insecticides were down 6%, and cleaners and disinfectants declined 5%.

Genomics Services –

Sales in this category increased 14% in the third quarter and 20% for the year to date period, both compared to the prior year; the September 2018 acquisition of Livestock Genetic Services and the January 2019 acquisition of Delta Genomics contributed a minor amount of the growth in this category. The growth in both the three and nine month periods was the result of significant volume increases to the companion animal market due to product uptake at a large customer and, to a lesser extent, continued growth in the beef and dairy cattle, and porcine markets.

Gross Margin

Gross margin was 45.4% in the third quarter of fiscal 2020 compared to 45.7% in the same quarter a year ago. The change in gross margin is due primarily to a change in product mix resulting from a higher proportion of sales from the Animal Safety segment, which have lower gross margins than products sold through the Food Safety segment. Gross margin for the nine month period ~~sales~~ended February 29, 2020 was 46.8% compared to 46.4% in the same period of the prior year, primarily the result of higher gross margins within the Animal Safety segment resulting from a 250 basis point margin improvement in the domestic genomics service business, due to a significant increase in revenues in the companion animal testing business, which have higher gross margins than other services within this business.

Operating Expenses

Operating expenses were $32.3 million in the third quarter, compared to $30.0 million in the same quarter of the prior year, an increase of 8%. Sales and marketing expenses rose ~~10%. For~~$953,000, or 6%, primarily due to personnel related expenses, and higher shipping, regulatory and product registration costs. General and administrative expense rose $771,000, or 8%, resulting from increases in stock based compensation expense, personnel costs, legal and professional fees resulting from acquisitions completed in the quarter, and depreciation related to investments in information technology. Research and development expense was $3.8 million in the third quarter, an increase of $574,000, or 18%, compared to the same period in the prior year. The increase is primarily the result of development spending and outside services relating to a ~~39%~~number of new products, which are expected to be launched in late fiscal 2020 or early fiscal 2021.

Operating expenses for the nine month period ended February 29, 2020 were $97.0 million, an increase of $4.9 million, or 5%, compared to the prior year. Driving the increase were research and development spending increases of $2.1 million, or 22%, due primarily to new product development, and a $2.1 million, or 7%, increase in ~~genomics revenues offset lower mycotoxin test kit sales, as last year’s deoxynivalenol (DON) outbreak~~general and administrative expense. The increase in ~~corn crops~~general and administrative expense was led by increased stock based compensation expense, higher legal and professional fees, and an increase in ~~western Europe did not repeat~~depreciation expense.

Operating Income

Operating income was $13.0 million in the third quarter of fiscal 2020, compared to $14.6 million in the same period of the prior year; year to date operating income was $47.6 million compared to $49.4 million in the prior year. Expressed as a percentage of sales, operating income was 13.1% for the third quarter and 15.4% for the year to date, compared to 15.0% and 16.2%, respectively, in the prior year. The decline in operating margin percentage for each period in the current fiscal year was primarily the result of operating expenses that increased more than the rate of revenue growth. Additionally, in the third quarter of fiscal 2020, the gross margin percentage declined by 30 basis points; for the year to date, the gross margin percentage has increased by 40 basis points.

Table of Contents

Other Income


	Three Months Ended					Nine Months Ended
	February 29/28					February 29/28
(dollars in thousands)	2020			2019		2020			2019
Interest income (net of expense)	$	1,600		$	1,335	$	4,381		$	3,290
Foreign currency transactions		(420	)		104		(889	)		(354	)
Royalty income		—			—		1			60
Deoxi contingent consideration		—			—		—			(9	)
Quat-Chem contingent consideration		—			—		—			422
Other		28			545		56			688

Total Other Income	$	1,208		$	1,984	$	3,549		$	4,097

The increase in interest income in both the three and nine month periods of fiscal 2020 compared to the same periods a year ago was the result of higher cash and marketable securities balances. Other expense resulting from foreign currency transactions was primarily the result of changes in the value of foreign currencies relative to the U.S. dollar in countries in which we operate.

Income Tax Expense

Income tax expense in the third quarter of fiscal 2020 was $2.1 million, an effective tax rate of 14.4%, compared to $3.6 million, an effective tax rate of 21.4%, in the same period of the prior year. For the year to date, income tax expense was $8.0 million, an effective rate of 15.6%, in fiscal 2020 and $9.1 million, an effective rate of 17.0%, in fiscal 2019. For each period, ~~genomics sales increased 34%~~the primary difference between the statutory rate of 21% and ~~helped to offset lower DON test kit sales. Sales at Lab M,~~ the ~~Company’s subsidiary in England, increased 20%~~effective rates recorded is the benefit resulting from the exercise of stock options; this benefit was $781,000 in the third quarter ~~and 25% for the nine month period, as its culture media products continued to be integrated into Neogen’s global sales and marketing channels. Neogen Latinoamerica recorded a sales increase~~ of 19% in the third quarter; Food Safety products increased 21% and Animal Safety products increased 17%, with broad-based gains recorded in both categories. For the year to date, revenues rose 18%, with Food Safety products and increases in genomics services providing the majority of the increase. Revenues at Neogen do Brasil declined 2% in the year’s third quarter, as a decrease in forensic test kit sales resulting from increased competition and customer losses caused by conversion to different testing methods more than offset increased sales of mycotoxin and dairy drug residue test kits. For the year to date, revenues increased 18%. Neogen China sales increased 28% in the third quarter and 21% for the year to date period, eachfiscal 2020 compared to the same periods in the prior year; for each period, increases were driven by strength in genomics services and animal safety products. Revenues for Neogen India declined 37% for the quarter, as a large cleaner and disinfectant order in the prior year’s third quarter did not repeat; for the year to date, revenues were flat, as higher sales of Food Safety products and testing services were almost entirely offset by the cleaner and disinfectant revenue from last year’s third quarter which did not repeat this year.

~~Service revenue was $17.8 million in the quarter ended February 28, 2018, an increase of $3.4 million, or 24%, compared to $14.4 million~~$291,000 in the third quarter of the prior year. For the year to date, ~~period, service revenue~~the benefit was ~~$48.7 million, an increase of $9.1 million, or 23%,~~$2,754,000 in fiscal 2020 compared to ~~$39.6 million~~$3,065,000 in ~~the prior year. The growth, for~~fiscal 2019. For both ~~the quarter and year to date~~ periods was led by increases in sales to the global cattle and companion animal markets, increased testing volumes with a large poultry customer and, to a lesser extent, revenues from the acquisition of Neogen Australasia, in September 2017.

~~Revenues~~

   Three Months ended February 28,
         Increase/
   2018    2017    (Decrease)    %
      (in thousands)
Food Safety
Natural Toxins, Allergens & Drug Residues
   $ 16,807    $ 16,453    $ 354    2 %
Bacterial & General Sanitation
   8,992    8,348    644    8 %
Dehydrated Culture Media & Other
   10,511    10,383    128    1 %
Rodenticides, Insecticides & Disinfectants
   7,359    5,040    2,319    46 %
Genomics Services
   3,976    2,725    1,251    46 %







   $ 47,645    $ 42,949    $ 4,696    11 %
Animal Safety
Life Sciences
   $ 2,769    $ 2,332    $ 437    19 %
Veterinary Instruments & Disposables
   10,630    10,000    630    6 %
Animal Care & Other
   7,535    6,311    1,224    19 %
Rodenticides, Insecticides & Disinfectants
   14,590    16,111    (1,521 )    (9 )%
Genomics Services
   12,723    10,682    2,041    19 %







   $ 48,247    $ 45,436    $ 2,811    6 %







Total Revenues
   $ 95,892    $ 88,385    $ 7,507    8 %







   Nine Months ended February 28,
         Increase/
   2018    2017    (Decrease)    %
      (in thousands)
Food Safety
Natural Toxins, Allergens & Drug Residues
   $ 54,960    $ 53,090    $ 1,870    4 %
Bacterial & General Sanitation
   27,435    25,340    2,095    8 %
Dehydrated Culture Media & Other
   32,483    29,792    2,691    9 %
Rodenticides, Insecticides & Disinfectants
   18,175    7,088    11,087    156 %
Genomics Services
   10,887    7,757    3,130    40 %







   $ 143,940    $ 123,067    $ 20,873    17 %
Animal Safety
Life Sciences
   $ 7,589    $ 7,261    $ 328    5 %
Veterinary Instruments & Disposables
   32,804    29,281    3,523    12 %
Animal Care & Other
   24,056    21,563    2,493    12 %
Rodenticides, Insecticides & Disinfectants
   50,228    52,796    (2,568 )    (5 )%
Genomics Services
   34,348    28,779    5,569    19 %







   $ 149,025    $ 139,680    $ 9,345    7 %







Total Revenues
   $ 292,965    $ 262,747    $ 30,218    12 %

The Company’s Food Safety segment revenues were $47.6 million in the quarter ended February 28, 2018, an increase of 11% compared to the same period in the prior year. For the nine month period, Food Safety revenues increased 17% to $143.9 million. Organic growth for the segment was 9% for both the quarter and year to date periods, with the acquisition of Rogama, occurring on December 21, 2016, contributing the remainder of the growth.

Natural Toxins, Allergens & Drug Residues sales increased 2% in the third quarter; revenues for the year to date period increased 4%. Sales of dairy drug residue kits, used to detect the presence of antibiotics in raw milk, increased 29% in the third quarter as new products continued to gain share, particularly in international markets; for the year to date period, dairy drug residue test kit revenues rose 15%. Allergen test kit sales increased 14% and 13% in the three and nine month periods ended February 28, 2018, respectively, as product recalls relating to allergenic contamination of food continued to expand the market. Sales of test kits to detect the presence of natural toxins in grain crops decreased 17% in the third quarter. An 11% increase in aflatoxin test kit sales, due to moderate

outbreaks in U.S. and Brazilian corn crops, was offset by a 41% decrease in sales of deoxynivalenol (DON) test kits, as prior year outbreaks of DON in corn crops in the U.S., Canada and Europe did not recur in the current ~~year. For the~~fiscal year, adjustments to ~~date period, sales of natural toxin test kits decreased 7%.~~

~~Bacterial & General Sanitation sales increased 8% in both the three~~research and ~~nine month periods ended February 28, 2018. Within this category, the Company’s AccuPoint sanitation monitoring product line increased 18% in the third quarter~~development credits and ~~19% for the year to date period, on sales strength in both reader equipment and consumable supplies. Sales of test kits to detect pathogens increased 22% in the third quarter, led by strength in~~~~Listeria~~ ~~products, including the Company’s new~~~~Listeria~~ Right Now test kit that launched earlier in the fiscal year. The Company also benefitted from strong sales of equipment used with the Company’s ANSR line of test kits to detect various pathogens, as the Company gained new customers; overall pathogen revenues increased 14% for the year to date period. Revenues for the Company’s consumable product lines to detect spoilage organisms in processed foods decreased 2% in the current quarter but increased 3% for the nine month period.

Dehydrated Culture Media & Other sales increased 1% in the third quarter. This category includes forensic test kits sold through the Company’s Brazilian subsidiary. Demand for these kits from customers located in Brazil had increased dramatically in the prior year due to a new requirement for drug testing of commercial truck drivers, however, sales of these kits in Brazil have decreased in the current year as a result of increased competition and customer losses caused by conversion to different testing methods. In the third quarter, the Company’s worldwide Lab M sales increased 21% and Acumedia sales increased 6%.

Sales of Rodenticides, Insecticides & Disinfectants products sold through the Company’s Food Safety operations increased 46% in the third quarter; the organic sales increase in this category was 29%. For the nine month period, sales increased $11.1 million; excluding first year sales of the Quat-Chem and Rogama acquisitions, the year to date sales increase was 16%. In the third quarter, the increase was primarily due to Rogama shipping a large order resulting from a government contract; this sale is unlikely to recur in the next 12 months. The increase in sales was partially offset by termination of a distribution agreement in January 2017, which resulted in a decline in sales for those distributed products of $143,000 in the third quarter and $859,000 for the year to date.

~~Genomics Services revenue recorded in the Food Safety segment increased 46% and 40% for the three and nine month periods, respectively, due primarily to growth of these services in Europe.~~

Sales for the Company’s Animal Safety segment were $48.2 million in the third quarter, an increase of 6% over the same period a year ago. Revenues for the nine month period increased 7% to $149 million compared to $139.7 million in the prior year. Organic growth in this segment was 5% and 6% in the three and nine month periods, respectively; the Neogen Australasia acquisition in September 2017 contributed the remainder of the growth. Sales of Life Sciences products increased 19% in the third quarter, partially due to order timing, and have risen 5% for the year to date period. The Company has increased volumes of forensic test kits sold to commercial labs in the U.S.

Veterinary Instruments & Disposables revenues increased 6% and 12% for the three and nine month periods, respectively. For both periods, the increase is primarily the result of strength in detectable needles, syringes and animal marking products. Sales of Animal Care & Other products increased 19% in the quarter ended February 28, 2018, comparedother deductions related to the ~~same period in the prior year; the year to date increase was 12%. The increase in the current year is due to market share gains~~Tax Reform Act of supplements for companion animals and vitamin injectables, and increased sales of vaccines to a large distributor; additionally, last year’s results included sales credits totaling $1.1 million in the first quarter as the Company removed its canine thyroid product from its distribution channels, after the FDA approved a new drug application for a competitive product.

Rodenticides, Insecticides & Disinfectants sales decreased 9% in the quarter and 5% for the year to date period, as the termination of a distribution agreement with a manufacturer of cleaners and disinfectants in January 2017 resulted in ~~lost sales for those distributed products of $1.4~~lower effective income tax rates.

Net Income

Net income was $12.2 million in the third quarter of ~~the current~~ fiscal year and $3.9 million for the year to date period. These losses were offset by an 11% increase in rodenticide sales in the third quarter as the Company gained incremental business with several large customers; year to date sales rose by 9%.

~~Genomics Services increased 19% in both the third quarter and year to date periods, respectively, each~~2020, a 7% decrease compared to $13.1 million in the same period in the prior year. The ~~growth~~change in earnings for ~~both periods~~this year’s third quarter was ~~led~~the result of lower pretax income, offset somewhat by ~~increases in sales to~~ the ~~global cattle and companion animal markets, higher volumes from a large poultry customer and, to a lesser extent, revenues from the acquisition of Neogen Australasia, in September 2017.~~

~~Gross Margin~~

~~Gross margin was 47.5%~~decrease in the ~~third quarter of fiscal 2018 compared~~effective tax rate. For the year to 46.3% in the same quarter a year ago. Gross margins for the quarter were positively impacted by lower costs inputs at the Company’s genomics operations and favorable product mix towards higher margin diagnostic and animal care products; this improvement was somewhat offset by lower sales of mycotoxin test kits duedate, net income decreased 3% from $44.4 million to ~~a prior year outbreak of DON in corn crops in the U.S. and western Europe, which did not recur in the current fiscal year. Gross margin~~$43.1 million; for the nine month period, ~~ended February 28, 2018~~current year net income was ~~48.0% compared to 47.6% in the same period of the prior year. Gross margins for the year to date were positively~~also negatively impacted by ~~improved raw material costs at the Company’s genomics operations and favorable product mix towards higher margin diagnostic and animal care products; this improvement was somewhat offset by mix~~

~~changes resulting from the three most recent acquisitions (Rogama, Quat-Chem and Neogen Australasia), all of which have gross margins that are~~ lower than the historical average for the Company, and lower sales of mycotoxin test kits due to a prior year outbreak of DON in corn crops in the U.S. and western Europe, which did not recur in the current fiscal year.

~~Operating Expenses~~

~~Operating expenses were $29.6 million in the third quarter, compared to $26.5 million in the same quarter of last fiscal year, an~~

increase of $3.1 million, or 12%. Sales and marketing expenses were $17.5 million, compared to $15.3 million in last year’s third quarter, an increase of 14%, primarily due to increases in salaries and related personnel costs, shipping expense, and higher advertising expenses in support of new product launches. General and administrative expense increased $700,000, or 9%, in the third quarter; increases in amortization of acquired intangible assets, IT consulting, and higher salary expenses were partially offset by lower stock based compensation expense resulting from forfeitures due to employee retirements and reduced legal expenses. In last year’s third quarter, the Company closed on two acquisitions, while there were none in this year’s third quarter. For the year to date period, research and development expense increased 7% in the third quarter to a total of $2.8 million. Increases were due to increases in compensation, higher depreciation resulting from investments in laboratory equipment, and projects relating to product improvements and new product development. For the year to date, research and development expenses increased 10%. Operating expenses for the nine month period were $90.3 million, an increase of $11.3 million, or 14% over the same period last fiscal year. The recent acquisitions accounted for $2.8 million of the increase.

~~Operating Income~~

~~Operating~~pretax income, ~~was $15.9 million in the third quarter, an increase of $1.5 million, or 11%, compared to operating income of~~

~~$14.4 million in the prior year. Expressed as a percentage of revenue, operating income was 16.6% compared to 16.2% in last year’s~~

~~third quarter. The improvement in operating margin percentage for the comparative quarter was primarily the result of higher gross margins~~ offset somewhat by operating expenses which rose more than the rate of the overall revenue increase. For the nine months ended February 28, 2018, operating income was $50.3 million, an increase of $4.4 million, or 10%, compared to operating income of $45.9 million for the same period last year. Expressed as a ~~percentage of revenue, year to date operating income was 17.2% compared to 17.5% in the prior year.~~

~~Other Income and Income Tax~~

Other income was $1.4 million for both the third quarter of fiscal 2018 and the same period in 2017. Components of other income in this year’s third quarter included $525,000 of interest income, $360,000 from an insurance settlement, $179,000 in currency gains and a $255,000 gain recorded on the settlement of contingent consideration related to the Quat-Chem acquisition. Last year’s fiscal third quarter included a gain on the settlement of a licensing agreement of $660,000, currency gains of $442,000, and interest income of $271,000. For the year to date period in fiscal 2018, other income was $3.2 million, primarily comprised of $1.3 million of interest income, currency gains of $1.1 million, $360,000 from an insurance settlement, $255,000 gain recorded on the settlement of contingent consideration related to the Quat-Chem acquisition, and $78,000 of royalty income. For the same period in fiscal 2017, other income was $1.8 million, which included interest income of $691,000, gain on the settlement of a licensing agreement of $660,000, currency gains of $263,000, and royalty income of $79,000.

~~Income tax expense in the third quarter was $700,000, an~~lower effective tax rate of 4%, compared to prior year third quarter expense of $5.4 million, an effective tax rate of 34%. The Company recorded favorable tax adjustments totaling $2.9 million during the quarter as the result of tax reform passed in the U.S. in December 2017. The tax reform reduced the statutory federal income tax rate from 35% to 21%, and also resulted in other adjustments to income tax expense. The Company will compute its income tax for the fiscal year ending May 31, 2018 using a blended Federal Tax Rate of 29.2%. Accordingly, first and second quarter income previously subject to tax at the 35% Federal Tax Rate benefitted from the 29.2% Federal Tax Rate. As required by generally accepted accounting principles, the Company revalued its net deferred tax liabilities during the quarter to reflect the lower rate, resulting in a credit to income tax expense of $5.6 million. In addition, the Company was required to estimate its cumulative unrepatriated foreign earnings and profits and calculate tax owed on those earnings and profits during the third quarter. This tax was estimated at $2.7 million, and the amount was recorded as federal income tax expense; payment of the tax is permitted over an eight year period.

For the first nine months of fiscal 2018, income tax expense was $7.9 million compared to $16.3 million in the prior year; the current year to date effective tax rate was 15%, compared to an effective tax rate of 34% in the prior fiscal year. For the year to date period, the lower effective rate is primarily the result of the tax reform passed in the U.S. in December 2017 as discussed in the preceding paragraph. Additionally, during the year the Company has recorded credits of $3.4 million to federal income tax expense for excess tax benefits from the exercise of stock options, due to the adoption of ASU~~2016-09;~~ refer to Note 5 of the Company’s Consolidated Financial Statements for further information. In the second quarter of fiscal 2018, an IRS examination of the Company’s federal income tax returns for fiscal years 2014, 2015 and 2016 was concluded. As a result of the favorable outcome of the audit, the Company reversed a total of $816,000 from its reserve for uncertain tax positions, which had been accrued in prior fiscal years, with a corresponding credit to federal income tax expense.

~~Net Income~~

~~Net income attributable to Neogen increased 61% from $10.3 million to $16.6 million for the three month period ended February 28,~~

2018. For the year to date period, net income was $45.6 million, a 46% increase over prior year net income of $31.3 million. Pre tax income increases of 10% for the quarter and 12% for the year to date were favorably impacted by the effects of tax reform, excess tax benefits from the exercise of stock options, and positive results from the IRS examination that concluded during the year’s second quarter.

rate.

Financial Condition and Liquidity

The overall cash, cash equivalents and marketable securities position of ~~the Company~~Neogen was ~~$192.2~~$327.9 million at February ~~28, 2018~~29, 2020, compared to ~~$143.6~~$267.5 million at May 31, ~~2017.~~2019. Approximately ~~$46.5~~$60.3 million was generated from operations during the first nine months of fiscal ~~2018.~~2020. Net cash proceeds of ~~$18.9~~$27.9 million were realized from the exercise of stock options and issuance of shares under ~~the Company’s employee stock purchase plan~~our Employee Stock Purchase Plan during the ~~same period. The Company~~first nine months of fiscal 2020. We spent $16.3 million for property, equipment and other

non-current

assets ~~during~~in the first nine months of fiscal ~~2018.~~

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

Net accounts receivable balances were ~~$73.2~~$80.7 million at February ~~28, 2018, an increase~~29, 2020, a decrease of ~~$4.6~~$1.9 million, ~~or 7%,~~ compared to ~~$68.6~~$82.6 million at May 31, ~~2017, less than the increase in revenue.~~2019. Days sales outstanding, a measurement of the time it takes to collect receivables, were 6366 days at February 29, 2020, compared to 61 days at May 31, 2019 and 68 days at February 28, ~~2018 compared to 60 days at May 31, 2017.~~2019. All customer accounts are actively managed and no losses in excess of amounts reserved are currently ~~expected.~~

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

Table of Contents

Net inventory balances were ~~$77.5~~$89.2 million at February ~~28, 2018,~~29, 2020, an increase of ~~$4.4~~$3.2 million ~~or 6%,~~ compared to ~~$73.1 million at~~a May 31, ~~2017. The Company~~2019 balance of $86.0 million. We actively ~~monitors its~~monitor our inventory levels and ~~balances~~balance the need for adequate levels of product availability to minimize backorders with a desire to improve inventory turnover and efficiency levels. ~~Formal~~We have programs ~~have been instituted~~in place to improve our turnover in fiscal ~~2018~~2020; however, during the year we have increased inventory levels at our European operations to ~~improve inventory turnover.~~

mitigate potential supply chain disruptions from a disorderly Brexit. Also, during the third quarter, in anticipation of possible supply disruptions due to the

COVID-19

pandemic, we reviewed our inventories of key raw materials and adjusted levels upward in some instances to ensure product availability.

Inflation and changing prices are not expected to have a material effect on operations, as management believes it will continue to be successful in offsetting increased input costs with price increases and/or cost efficiencies.

Management believes that ~~the Company’s~~our existing cash and marketable securities balances at February ~~28, 2018~~29, 2020, along with available borrowings under ~~its~~our credit facility and cash expected to be generated from future operations, will be sufficient to fund activities for the foreseeable future. However, existing cash and borrowing capacity may not be sufficient to meet ~~the Company’s~~our cash requirements to commercialize products currently under development or ~~its~~execute our plans to acquire other organizations, technologies or products that fit within ~~the Company’s~~our mission statement. Accordingly, ~~the Company~~we may choose to issue equity securities or enter into other financing arrangements for a portion of ~~its~~our future financing needs.

The

COVID-19

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

Table of Contents

PART I – FINANCIAL INFORMATION

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

~~The Company has~~

We have interest rate and foreign exchange rate risk exposure but no long-term fixed rate investments or borrowings. ~~The Company’s~~Our primary interest rate risk is due to potential fluctuations of interest rates for variable rate borrowings (no long-term borrowings at February ~~28, 2018)~~29, 2020) and short-term investments.

Foreign exchange risk exposure arises because ~~the Company markets~~we market and ~~sells its~~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. ~~The Company’s~~Our operating results are exposed to changes in exchange rates between the U.S. dollar and the British pound sterling, the euro, the Brazilian real, the Mexican peso, the Chinese yuan, the Australian dollar, and to a lesser extent, the Indian rupee, the Canadian dollar, the Argentine peso and the ~~Australian dollar.~~Uruguayan peso. When the U.S. dollar weakens against foreign currencies, the dollar value of revenues denominated in foreign currencies increases. When the U.S. dollar strengthens, the opposite situation occurs. Additionally, previously recognized revenues in the course of collection can be affected positively or negatively by changes in exchange rates. The Company enters into forward contracts to help mitigate the economic impact of fluctuations in certain currency exchange rates. These contracts are adjusted to fair value through earnings.

Neogen has assets, liabilities and operations outside of the United States, located in Scotland, England, Italy, Brazil, Mexico, Argentina, Uruguay, China, India, Canada, and Australia where the functional currency is the British pound sterling, euro, Brazilian real, Mexican peso, Argentine peso, Uruguay peso, Chinese yuan, Indian rupee, Canadian dollar and the Australian dollar respectively, and also transacts business throughout Europe in the euro. The Company’s investments in foreign subsidiaries are considered to be ~~primarily~~ long-term.

PART I – FINANCIAL INFORMATION

Item 4.

Controls and Procedures

~~Evaluation of Disclosure Controls and Procedures~~

Evaluation

of Disclosure Controls and Procedures

An evaluation of the effectiveness of the design and operation of ~~the Company’s~~our disclosure controls and procedures as of February ~~28, 2018~~29, 2020 was carried out under the supervision and with the participation of the Company’s management, including the President & Chief Executive ~~Chairman~~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 February ~~28, 2018~~29, 2020 that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting.

Table of Contents

PART II – OTHER INFORMATION

Item 1.

Legal Proceedings

The Company is subject to ~~certain~~ 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 ~~its~~the Company’s future results of operations or financial position.

Item 1A.

Risk Factors

Other than the risk factors set forth below, there have been no material changes from the risk factors disclosed in our Annual Report on Form

10-K

for the fiscal year ended May 31, 2019.

The widespread outbreak of an illness or any other communicable disease, or any other public health crisis, could adversely affect our business, results of operations and financial condition.

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

(“COVID-19”)

began in Wuhan, Hubei Province, China. In March 2020, the World Health Organization declared

COVID-19

a pandemic. The

COVID-19

pandemic has negatively impacted the global economy, disrupted global supply chains and created significant volatility and disruption of financial markets. The extent of the impact of the

COVID-19

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

Item 6.

Exhibits

(a) Exhibit Index



~~31.1~~	3	Articles of Incorporation, as restated (incorporated by reference to Exhibit 3 to the registrant’s Form 10-Q filed on December 28, 2018)

	10	Amended and Restated Credit Agreement dated as of November 30, 2018 between Registrant and JP Morgan Chase N.A. (incorporated by reference to Exhibit 10.A of the registrant’s Form 8-K filed on December 6, 2018)

	31.1	Certification of ~~Principal~~Chief Executive Officer pursuant to Rule13a-14(a).

~~31.2~~
	31.2	Certification of ~~Principal~~Chief Financial Officer pursuant to Rule13a-14(a).

32
	32	Certification pursuant to 18 U.S.C. section 1350

~~101.INS~~
	101.INS	Inline XBRL Instance Document

~~101.SCH~~
	101.SCH	Inline XBRL Taxonomy Extension Schema Document

~~101.CAL~~
	101.CAL	Inline XBRL Taxonomy Extension Calculation Linkbase Document

~~101.DEF~~
	101.DEF	Inline XBRL Taxonomy Extension Definition Document

~~101.LAB~~
	101.LAB	Inline XBRL Taxonomy Extension Label Linkbase Document

~~101.PRE~~
	101.PRE	Inline XBRL Taxonomy Extension Presentation Linkbase Document

	EX-104	Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)

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

Table of Contents

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: ~~March 29, 2018~~ April 3, 2020

		/s/ ~~James L. Herbert~~ John E. Adent
	~~James L. Herbert~~	John E. Adent
		President & Chief Executive ~~Chairman~~Officer
		(Principal Executive Officer)

Dated: ~~March 29, 2018~~ April 3, 2020

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


		Page No.
PART I. FINANCIAL INFORMATION
		~~Page No.~~
Item 1.	~~PART I. FINANCIAL INFORMATION~~Interim Consolidated Financial Statements (unaudited)		2


~~Item 1.~~	~~Interim Consolidated Financial Statements (unaudited)~~		2

	Consolidated Balance Sheets – February ~~28, 2018~~29, 2020 and May 31, ~~2017~~2019		2


	Consolidated Statements of Income – Three and nine months ended February 29, 2020 and February 28, ~~2018 and 2017~~2019		3


	Consolidated Statements of Comprehensive Income – Three and nine months ended February 29, 2020 and February 28, ~~2018 and 2017~~2019		4

	Consolidated Statements of Equity – Three and nine months ended February 29, 2020 and February 28, 2019		5

	~~Consolidated Statement of Equity – Nine months ended February 28, 2018~~		5

	Consolidated Statements of Cash Flows – Nine months ended February 29, 2020 and February 28, ~~2018 and 2017~~2019		6


	Notes to Interim Consolidated Financial Statements – February ~~28, 2018~~29, 2020		7

~~Item 2.~~
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		13 19

~~Item 3.~~
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		20 27

Item 4.	Controls and Procedures		27

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings		28

Item 1A.	Risk Factors		28

Item 6.	Exhibits		28

SIGNATURES			29


~~Item 4.~~	~~Controls and Procedures~~CEO Certification		20


~~PART II. OTHER INFORMATION~~

~~Item 1.~~	~~Legal Proceedings~~CFO Certification		21


~~Item 6.~~	~~Exhibits~~Section 906 Certification		21

~~SIGNATURES~~			22

	~~Certification of Principal Executive Officer~~

	~~Certification of Principal Financial Officer~~

	~~Section 906 Certification~~


	February 28, 2018			May 31, 2017
	(Unaudited)			(Audited)
Assets
Current Assets
Cash and cash equivalents	$	82,066		$	77,567
Marketable securities (at fair value, which approximates cost)		110,089			66,068
Accounts receivable, less allowance of $1,750 and $2,000		73,209			68,576
Inventories, net		77,506			73,144
Prepaid expenses and other current assets		9,334			7,606

Total Current Assets		352,204			292,961
Property and Equipment, net		72,514			61,748
Other Assets
Goodwill		99,478			104,759
Othernon-amortizable intangible assets		15,011			14,323
Customer-based intangibles, net of accumulated amortization of $23,846 and $20,846 at February 28, 2018 and May 31, 2017		33,518			35,983
Othernon-current assets, net of accumulated amortization of $11,893 and $9,931 at February 28, 2018 and May 31, 2017		22,876			18,635

Total Assets	$	595,601		$	528,409

Liabilities and Equity
Current Liabilities
Accounts payable	$	19,654		$	16,244
Accrued compensation		5,469			5,002
Income taxes		960			936
Other accruals		11,210			13,820

Total Current Liabilities		37,293			36,002
Deferred Income Taxes		11,400			17,048
Non-Current Liabilities		4,973			3,602

Total Liabilities		53,666			56,652
Commitments and Contingencies (note 9)
Equity
Preferred stock, $1.00 par value, 100,000 shares authorized, none issued and outstanding		—			—
Common stock, $0.16 par value, 60,000,000 shares authorized, 51,583,085 and 50,932,489 shares issued and outstanding at February 28, 2018 and May 31, 2017, respectively		8,253			8,149
Additionalpaid-in capital		197,246			174,742
Accumulated other comprehensive loss		(5,303	)		(7,203	)
Retained earnings		341,459			295,926

Total Neogen Corporation Stockholders’ Equity		541,655			471,614
Non-controlling interest		280			143

Total Equity		541,935			471,757

Total Liabilities and Equity	$	595,601		$	528,409


	Three Months Ended					Nine Months Ended
	February 28,					February 28,
	2018		2017			2018			2017
Revenues
Product revenues	$	78,142	$	73,964		$	244,298		$	223,170
Service revenues		17,750		14,421			48,667			39,577

Total Revenues		95,892		88,385			292,965			262,747
Cost of Revenues
Cost of product revenues		40,352		38,816			124,785			113,241
Cost of service revenues		10,019		8,689			27,517			24,556

Total Cost of Revenues		50,371		47,505			152,302			137,797

Gross Margin		45,521		40,880			140,663			124,950

Operating Expenses
Sales and marketing		17,492		15,340			52,331			45,824
General and administrative		9,280		8,548			29,096			25,094
Research and development		2,836		2,641			8,901			8,087

Total Operating Expenses		29,608		26,529			90,328			79,005

Operating Income		15,913		14,351			50,335			45,945

Other Income
Interest income		524		271			1,322			690
Other income		844		1,105			1,913			1,098

Total Other Income		1,368		1,376			3,235			1,788

Income Before Taxes		17,281		15,727			53,570			47,733
Provision for Income Taxes		700		5,350			7,900			16,250

Net Income		16,581		10,377			45,670			31,483
Net (Income)/Loss Attributable toNon-Controlling Interest		5		(90	)		(70	)		(163	)

Net Income Attributable to Neogen	$	16,586	$	10,287		$	45,600		$	31,320

Net Income Attributable to Neogen Per Share
Basic	$	0.32	$	0.20		$	0.89		$	0.62

Diluted	$	0.32	$	0.20		$	0.88		$	0.61


	Three Months Ended February 28,				Nine Months Ended February 28,
	2018		2017		2018		2017
	(in thousands, except per share amounts)
Numerator for basic and diluted net income per share:
Net income attributable to Neogen	$	16,586	$	10,287	$	45,600	$	31,320
Denominator for basic net income per share:
Weighted average shares		51,537		50,746		51,253		50,438
Effect of dilutive stock options		700		633		761		723

Denominator for diluted net income per share		52,237		51,379		52,014		51,161

Net income attributable to Neogen per share:
Basic	$	0.32	$	0.20	$	0.89	$	0.62

Diluted	$	0.32	$	0.20	$	0.88	$	0.61


	FY 2018	FY 2017
Risk-free interest rate	1.6%	1.2%
Expected dividend yield	0.0%	0.0%
Expected stock price volatility	27.7%	35.2%
Expected option life	4.0 years	4.0 years


	Three Months ended February 28,
					Increase/
	2018		2017		(Decrease)			%
			(in thousands)
Food Safety
Natural Toxins, Allergens & Drug Residues	$	16,807	$	16,453	$	354			2	%
Bacterial & General Sanitation		8,992		8,348		644			8	%
Dehydrated Culture Media & Other		10,511		10,383		128			1	%
Rodenticides, Insecticides & Disinfectants		7,359		5,040		2,319			46	%
Genomics Services		3,976		2,725		1,251			46	%

	$	47,645	$	42,949	$	4,696			11	%
Animal Safety
Life Sciences	$	2,769	$	2,332	$	437			19	%
Veterinary Instruments & Disposables		10,630		10,000		630			6	%
Animal Care & Other		7,535		6,311		1,224			19	%
Rodenticides, Insecticides & Disinfectants		14,590		16,111		(1,521	)		(9	)%
Genomics Services		12,723		10,682		2,041			19	%

	$	48,247	$	45,436	$	2,811			6	%

Total Revenues	$	95,892	$	88,385	$	7,507			8	%


	Nine Months ended February 28,
					Increase/
	2018		2017		(Decrease)			%
			(in thousands)
Food Safety
Natural Toxins, Allergens & Drug Residues	$	54,960	$	53,090	$	1,870			4	%
Bacterial & General Sanitation		27,435		25,340		2,095			8	%
Dehydrated Culture Media & Other		32,483		29,792		2,691			9	%
Rodenticides, Insecticides & Disinfectants		18,175		7,088		11,087			156	%
Genomics Services		10,887		7,757		3,130			40	%

	$	143,940	$	123,067	$	20,873			17	%
Animal Safety
Life Sciences	$	7,589	$	7,261	$	328			5	%
Veterinary Instruments & Disposables		32,804		29,281		3,523			12	%
Animal Care & Other		24,056		21,563		2,493			12	%
Rodenticides, Insecticides & Disinfectants		50,228		52,796		(2,568	)		(5	)%
Genomics Services		34,348		28,779		5,569			19	%

	$	149,025	$	139,680	$	9,345			7	%

Total Revenues	$	292,965	$	262,747	$	30,218			12	%