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.~~

2022.

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

For the transition period from
to

Commission file number

0-17988

Neogen Corporation

(Exact name of registrant as specified in its charter)


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

620 Lesher Place

Lansing, ~~Michigan~~

Michigan

48912

(Address of principal executive offices, including zip code)

(517)

372-9200

(Registrant’s telephone number, including area code)

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


Title of each Class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.16 par value per share	NEOG	NASDAQ Global Select Market

N/A

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

Indicate by check mark 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 ☒ NO ☐

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

non-accelerated

filer, a smaller reporting company, or a~~non-accelerated~~ ~~filer (see definition~~an emerging growth company. See the definitions of ~~“accelerated filer and large~~“large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule

12b-2

of the Exchange ~~Act):~~

Act.


Large accelerated filer	☒	Accelerated filer	☐

Non-accelerated filer	☐	Smaller Reporting 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 ☐ NO ☒

As of February 28, ~~2018,~~2022 there were ~~51,583,085~~107,818,159 shares of Common Stock outstanding.

Table of Contents

NEOGEN CORPORATION AND SUBSIDIARIES

TABLE OF CONTENTS


			Page No.
PART I. FINANCIAL INFORMATION

Item 1.	Interim Consolidated Financial Statements (unaudited)	2

	Consolidated Balance Sheets – February 28, ~~2018~~2022 and May 31, ~~2017~~2021	2

	Consolidated Statements of Income – Three and nine months ended February 28, ~~2018~~2022 and ~~2017~~2021	3

	Consolidated Statements of Comprehensive Income – Three and nine months ended February 28, ~~2018~~2022 and ~~2017~~2021	4

	Consolidated ~~Statement~~Statements of Equity – ~~Nine~~Three and nine months ended February 28, ~~2018~~2022 and 2021	5

	Consolidated Statements of Cash Flows – Nine months ended February 28, ~~2018~~2022 and ~~2017~~2021	6

	Notes to Interim Consolidated Financial Statements – February 28, ~~2018~~2022	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1319

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	2027

Item 4.	Controls and Procedures	2027

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	2128

Item 1A.	Risk Factors	28

Item 6.	Exhibits	2129

SIGNATURES		2230

	CEO Certification ~~of Principal Executive Officer~~

	CFO Certification ~~of Principal Financial Officer~~

	Section 906 Certification

Table of Contents

PART I – FINANCIAL INFORMATION

~~Item 1.~~

~~Interim Consolidated Financial Statements~~

Item 1. Interim Consolidated Financial Statements

Neogen Corporation and Subsidiaries

Consolidated Balance ~~Sheet~~

Sheets (unaudited)

(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 28,			May 31,
	2022			2021
Assets
Current Assets
Cash and cash equivalents	$	42,879		$	75,602
Marketable securities		335,560			305,485
Accounts receivable, less allowance of $1,600 and $1,400 at February 28, 2022 and May 31, 2021, respectively		92,978			91,823
Inventories		113,395			100,701
Prepaid expenses and other current assets		24,821			17,840

Total Current Assets		609,633			591,451
Net Property and Equipment		104,699			100,453
Other Assets
Right of use assets		2,762			2,477
Goodwill		150,029			131,476
Other non-amortizable intangible assets		15,451			15,545
Amortizable intangible and other assets, net of accumulated amortization of $53,838 and $53,462 at February 28, 2022 and May 31, 2021, respectively		96,613			76,771
Other non-current assets		2,018			2,019

Total Assets	$	981,205		$	920,192

Liabilities and Stockholders’ Equity
Current Liabilities
Accounts payable	$	23,548		$	23,900
Accrued compensation		9,655			11,251
Income taxes		0			1,848
Other accruals		32,507			16,600

Total Current Liabilities		65,710			53,599
Deferred Income Taxes		21,196			21,917
Other Non-Current Liabilities		18,755			4,299

Total Liabilities		105,661			79,815
Commitments and Contingencies (note 10)		0			0
Equity
Preferred stock, $1.00 par value, 100,000 shares authorized, 0ne issued and outstanding		0			0
Common stock, $0.16 par value, 120,000,000 shares authorized, 107,818,159 and 107,468,304 shares issued and outstanding at February 28, 2022 and May 31, 2021, respectively		17,251			17,195
Additional paid-in capital		307,780			294,953
Accumulated other comprehensive loss		(22,439	)		(11,375	)
Retained earnings		572,952			539,604

Total Stockholders’ Equity		875,544			840,377

Total Liabilities and Stockholders’ Equity	$	981,205		$	920,192

See notes to interim consolidated financial statements.

Table of Contents

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 28,						February 28,
	2022			2021			2022			2021
Revenues
Product revenues	$	101,566		$	92,816		$	311,701		$	273,288
Service revenues		26,678			23,893			75,365			67,746

Total Revenues		128,244			116,709			387,066			341,034
Cost of Revenues
Cost of product revenues		56,550			49,466			167,650			145,336
Cost of service revenues		14,282			13,394			41,402			38,333

Total Cost of Revenues		70,832			62,860			209,052			183,669

Gross Margin		57,412			53,849			178,014			157,365
Operating Expenses
Sales and marketing		21,477			18,693			63,220			52,938
General and administrative		24,997			15,146			60,985			38,343
Research and development		4,561			4,236			13,218			12,170

Total Operating Expenses		51,035			38,075			137,423			103,451

Operating Income		6,377			15,774			40,591			53,914
Other Income (Expense)
Interest income		314			294			741			1,571
Other expense		(48	)		(91	)		(34	)		(363	)

Total Other Income		266			203			707			1,208

Income Before Taxes		6,643			15,977			41,298			55,122
Provision for Income Taxes		1,200			2,600			7,950			10,000

Net Income	$	5,443		$	13,377		$	33,348		$	45,122

Net Income Per Share
Basic	$	0.05		$	0.13		$	0.31		$	0.42

Diluted	$	0.05		$	0.12		$	0.31		$	0.42

Weighted Average Shares Outstanding
Basic		107,818			106,826			107,648			106,264
Diluted		108,133			107,390			108,130			106,768

See notes to interim consolidated financial statements.

Table of Contents

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, June 1, 2021		107,468	$	17,195	$	294,953	$	(11,375	)	$	539,604	$	840,377
Exercise of options and share-based compensation expense		6		1		1,838		—			—		1,839
Issuance of shares under employee stock purchase plan		19		3		896		—			—		899
Net income for the three months ended August 31, 2021		—		—		—		—			17,077		17,077
Other comprehensive loss for the three months ended August 31, 2021		—		—		—		(4,829	)		—		(4,829	)

Balance, August 31, 2021		107,493		17,199		297,687		(16,204	)		556,681	$	855,363
Exercise of options and share-based compensation expense		275		44		7,272		—			—		7,316
Net income for the three months ended November 30, 2021		—		—		—		—			10,828		10,828
Other comprehensive loss for the three months ended November 30, 2021		—		—		—		(8,031	)		—		(8,031	)

Balance, November 30, 2021		107,768		17,243		304,959		(24,235	)		567,509	$	865,476
Exercise of options and share-based compensation expense		26		4		1,848		—			—		1,852
Issuance of shares under employee stock purchase plan		24		4		973		—			—		977
Net income for the three months ended February 28, 2022		—		—		—		—			5,443		5,443
Other comprehensive income for the three months ended February 28, 2022		—		—		—		1,796			—		1,796

Balance, February 28, 2022		107,818		17,251		307,780		(22,439	)		572,952	$	875,544


							Accumulated
					Additional		Other
	Common Stock				Paid-in		Comprehensive			Retained
	Shares		Amount		Capital		Income (Loss)			Earnings		Total
Balance, June 1, 2020		105,892	$	16,943	$	249,221	$	(19,709	)	$	478,722	$	725,177
Exercise of options and share-based compensation expense		172		28		5,811		—			—		5,839
Issuance of shares under employee stock purchase plan		18		3		665		—			—		668
Net income for the three months ended August 31, 2020		—		—		—		—			15,860		15,860
Other comprehensive income for the three months ended August 31, 2020		—		—		—		4,002			—		4,002

Balance, August 31, 2020		106,082	$	16,974	$	255,697	$	(15,707	)	$	494,582	$	751,546
Exercise of options and share-based compensation expense		406		64		9,279		—			—		9,343
Net income for the three months ended November 30, 2020		—		—		—		—			15,885		15,885
Other comprehensive income for the three months ended November 30, 2020		—		—		—		621			—		621

Balance, November 30, 2020		106,488		17,038		264,976		(15,086	)		510,467		777,395
Exercise of options and share-based compensation expense		386		62		10,968		—			—		11,030
Issuance of shares under employee stock purchase plan		20		4		716							720
Issuance of shares for Megazyme acquisiton		128		20		4,896							4,916
Net income for the three months ended February 28, 2021		—		—		—		—			13,377		13,377
Other comprehensive income for the three months ended February 28, 2021		—		—		—		245			—		245

Balance, February 28, 2021		107,022		17,124		281,556		(14,841	)		523,844		807,683

See notes to interim consolidated financial statements.

Table of Contents

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 28,
	2022			2021
Cash Flows From Operating Activities
Net Income	$	33,348		$	45,122
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization		17,833			15,107
Share-based compensation		5,045			4,773
Change in operating assets and liabilities, net of business acquisitions:
Accounts receivable		(883	)		1,019
Inventories		(11,956	)		3,328
Prepaid expenses and other current assets		(3,824	)		(1,908	)
Accounts payable, accruals and other changes		8,085			(8,321	)

Net Cash From Operating Activities		47,648			59,120
Cash Flows For Investing Activities
Purchases of property, equipment and other non-current intangible assets		(11,891	)		(19,393	)
Proceeds from the sale of marketable securities		284,367			602,233
Purchases of marketable securities		(314,442	)		(604,694	)
Business acquisitions, net of cash acquired		(38,164	)		(52,000	)

Net Cash For Investing Activities		(80,130	)		(73,854	)
Cash Flows From Financing Activities
Exercise of stock options and issuance of employee stock purchase plan shares		7,842			22,801

Net Cash From Financing Activities		7,842			22,801
Effect of Foreign Exchange Rates on Cash		(8,083	)		(854	)

Net Increase (Decrease) In Cash and Cash Equivalents		(32,723	)		7,213
Cash and Cash Equivalents, Beginning of Period		75,602			66,269

Cash and Cash Equivalents, End of Period	$	42,879		$	73,482

See notes to interim consolidated financial statements.

Table of Contents

NEOGEN CORPORATION AND SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. ACCOUNTING POLICIES

BASIS OF PRESENTATION

AND CONSOLIDATION

The accompanying unaudited consolidated financial statements include the accounts of Neogen Corporation (“Neogen” or the “Company”) and its wholly owned subsidiaries and have been prepared in accordance with accounting principles generally accepted in the United States of America (generally accepted accounting principles) for interim financial information and with the instructions to Form

10-Q

and Article 10 of Regulation

S-X.

Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been ~~included.~~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~~2022 are not necessarily indicative of the results to be expected for the fiscal year ending May 31, ~~2018.~~2022. 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 ~~the Company’s~~our Annual Report on Form

10-K

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

2021.

Our functional currency is the U.S. dollar. We translate our

non-U.S.

operations’ assets and liabilities denominated in foreign currencies into U.S. dollars at current rates of exchange as of the balance sheet date and income and expense items at the average exchange rate for the reporting period. Translation adjustments resulting from exchange rate fluctuations are recorded in other comprehensive income (loss). Gains or losses from foreign currency transactions are included in other income (expense) on our consolidated statement of income.

Share and per share amounts reflect the June 4, 2021

2-for-1

stock split as if it took place at the beginning of the periods presented.

Recently Adopted Accounting Standards

Income Tax Simplification

On June 1, 2021, the Company adopted

ASU 2019-12, Income

Taxes (Topic 740). This guidance provides amendments to simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. The adoption of this guidance did not have a material impact on our consolidated financial statements.

Recent Accounting Pronouncements Not Yet Adopted

Reference Rate Reform

In March 2020, the FASB issued Update

2020-04,

Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This update provides temporary optional expedients to applying the reference rate reform guidance to contracts that reference LIBOR or another reference rate expected to be discontinued. Under this update, contract modifications resulting in a new reference rate may be accounted for as a continuation of the existing contract. This guidance is effective upon issuance of the update and applies to contract modifications made through December 31, 2022. We will adopt this standard when LIBOR is discontinued and our lender begins using the new reference rate. We are evaluating the impact the new standard will have on our consolidated financial statements and related disclosures, but do not anticipate a material impact.

Table of Contents

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 our marketable securities.

Fair Value of Financial Instruments

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

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.

Leases

We lease various manufacturing, laboratory, warehousing and distribution facilities, administrative and sales offices, equipment and vehicles under operating leases. We evaluate our contracts to determine if an arrangement is a lease at inception and classify it as a finance or operating lease. Currently, all our leases are classified as operating leases. Topic 842 requires the Company to recognize in the statement of financial position a liability to make lease payments (the lease liability) and a

right-of-use

asset representing its right to use the underlying asset for the lease term.

Right-of-use

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

non-current

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

non-current

liabilities, respectively, on our consolidated balance sheets. Costs associated with operating leases are recognized on a straight-line basis within operating expenses over the term of the lease. The

right-of-use

assets were $2,762,000 and $2,477,000 at February 28, 2022 and May 31, 2021, respectively. The total current and

non-current

lease liabilities were $2,781,000 and $2,492,000 at February 28, 2022 and May 31, 2021, respectively.

ESTIMATES AND ASSUMPTIONS

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

Accounts Receivable Allowance

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

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Inventory

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

Goodwill and Other Intangible Assets

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

not-to-compete

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

non-amortizable

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

Long-Lived Assets

Management reviews the carrying values of its long-lived assets to be held and used, including definite-lived intangible assets, for

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

Equity Compensation Plans

Share options awarded to employees, restricted stock units (RSUs) and shares of stock awarded to employees under certain stock purchase plans are recognized as compensation expense based on their fair value at grant date. The fair market value of options granted under the Company stock option plans was estimated on the date of grant using the Black-Scholes option-pricing model with assumptions for inputs such as interest rates, expected dividends, an estimate of award forfeitures, volatility measures and specific employee exercise behavior patterns based on statistical data. Some of the inputs used are not market-observable and have to be estimated or derived from available data. Use of different estimates would produce different option values, which in turn would result in higher or lower compensation expense recognized. For RSUs, we use the intrinsic value method to value the units.

To value equity awards, several recognized valuation models exist; none of these models can be singled out as being the best or most correct. The model applied by us can accommodate most of the specific features included in the options granted, which are the reason for their use. If different models were used, the option values could differ despite using the same inputs. Accordingly, using different assumptions coupled with using a different valuation model could have a significant impact on the fair value of employee stock options. Fair value could be either higher or lower than the number provided by the model applied and the inputs used. Further information on our equity compensation plans, including inputs used to determine the fair value of options, is disclosed in Note 7.

Income Taxes

We account for income taxes using the asset and liability method. Under this method, deferred income tax assets and liabilities are

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

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2. CASH AND MARKETABLE SECURITIES

Cash and Cash Equivalents

Cash and cash equivalents consist of bank demand accounts, savings deposits, certificates of deposit and commercial paper with

original maturities of 90 days or less. Cash and cash equivalents are maintained at financial institutions and, at times, balances may exceed federally insured limits. The Company has not experienced losses related to these balances and believes it is not exposed to significant credit risk regarding its cash and cash equivalents. Cash and cash equivalents were $42,879,000 and $75,602,000 at February 28, 2022 and May 31, 2021, respectively. The carrying value of these assets approximates fair value due to the short maturity of these instruments and is classified as Level 1 in the fair value hierarchy.

Marketable Securities

The Company has marketable securities held by banks or broker-dealers at February 28, 2022. Changes in market value are monitored and recorded on a monthly basis; in the event of a downgrade in credit quality subsequent to purchase, the marketable securities investment is evaluated to determine the appropriate action to take to minimize the overall risk to our marketable securities portfolio. These securities are classified as available for sale. The primary objective of management’s short-term investment activity is to preserve capital for the purpose of funding current operations, capital expenditures and business acquisitions; short-term investments are not entered into for trading or speculative purposes. These securities are recorded at fair value based on recent trades or pricing models and therefore meet the Level 2 criteria. Interest income on these investments is recorded within other income on the income statement. Adjustments in the fair value of these assets are recorded in other comprehensive income.

Marketable Securities as of February 28, 2022 and May 31, 2021 are listed below by classification and remaining maturities.


			February 28,		May 31,
(in thousands)	Maturity		2022		2021
Commercial Paper & Corporate Bonds		0 - 90 days		94,740		106,631
		91 - 180 days		85,373		78,727
		181 days - 1 year		57,310		87,590
		1 - 2 years		97,887		26,752
Certificates of Deposit		0 - 90 days		250		3,262
		91 - 180 days		0		1,260
		181 days - 1 year		0		1,263
		1 - 2 years		0		0

Total Marketable Securities			$	335,560	$	305,485

The components of marketable securities at February 28, 2022 are as follows:


	Amortized		Unrealized		Unrealized
(in thousands)	Cost		Gains		Losses			Fair Value
Commercial Paper & Corporate Bonds		337,159		7		(1,856	)		335,310
Certificates of Deposit		250		0—		0—			250

Total Marketable Securities	$	337,409	$	7	$	(1,856	)	$	335,560

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The components of marketable securities at May 31, 2021 are as follows:


	Amortized		Unrealized		Unrealized
(in thousands)	Cost		Gains		Losses			Fair Value
Commercial Paper & Corporate Bonds		299,524		209		(33	)		299,700
Certificates of Deposit		5,755		30		0—			5,785

Total Marketable Securities	$	305,279	$	239	$	(33	)	$	305,485

3. INVENTORIES

Inventories are stated at the lower of cost, determined 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 28,		May 31,
(in thousands)	2022		2021
Raw materials	$	54,747	$	47,588
Work-in-process		6,314		6,412
Finished and purchased goods		52,334		46,701

	$	113,395	$	100,701

4. REVENUE RECOGNITION

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

Identification of the contract with a customer;

Identification of the performance obligations in the contract;

Determination of the transaction price;

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

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

Essentially all of Neogen’s revenue is generated through contracts with its customers. A performance obligation is a promise in a contract to transfer a product or service to a customer. We generally recognize revenue at a point in time when all of our performance obligations under the terms of a contract are satisfied. Revenue is recognized upon transfer of control of promised products and services in an amount that reflects the consideration we expect to receive in exchange for those products or services. The collectability of consideration on the contract is reasonably assured before revenue is recognized. To the extent that customer payment has been received before all recognition criteria are met, these revenues are initially deferred in other accruals on the balance sheet and the revenue is recognized in the period that all recognition criteria have been met.

Certain agreements with customers include discounts or rebates on the sale of products and services applied retrospectively, such as volume rebates achieved by purchasing a specified purchase threshold of goods and services. We account for these discounts as variable consideration and estimate the likelihood of a customer meeting the threshold in order to determine the transaction price using the most predictive approach. We typically use the most-likely-amount method for incentives that are offered to individual customers, and the expected-value method for programs that are offered to a broad group of customers. Variable consideration reduces the amount of revenue that is recognized. Rebate obligations related to customer incentive programs are recorded in accrued liabilities; the rebate estimates are adjusted at the end of each applicable measurement period based on information currently available.

The performance obligations in Neogen’s contracts are generally satisfied well within one year of contract inception. In such cases, management has elected the practical expedient to not adjust the promised amount of consideration for the effects of a significant financing component. Management has elected to utilize the practical expedient to recognize the incremental costs of obtaining a contract as an expense when incurred because the amortization period for the prepaid costs that would otherwise have been deferred

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and amortized is one year or less. We account for shipping and handling for products as a fulfillment activity when goods are shipped. Shipping and handling costs that are charged to and reimbursed by the customer are recognized as revenues, while the related expenses incurred by Neogen are recorded in sales and marketing expense. Revenue is recognized net of any tax collected from customers; the taxes are subsequently remitted to governmental authorities. Our terms and conditions of sale generally do not provide for returns of product or reperformance of service except in the case of quality or warranty issues. These situations are infrequent; due to immateriality of the amount, warranty claims are recorded in the period incurred.

The Company derives revenue from two primary sources - 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, retailers, livestock producers and animal health product distributors; and

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

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

Service revenue consists primarily of:

Genomic identification and related interpretive bioinformatic services; and

Other commercial laboratory services.

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

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

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The following table presents disaggregated revenue by major product and service categories for the three and nine month periods ended February 28, 2022 and 2021:


	Three Months ended February 28,				Nine Months ended February 28,
(in thousands)	2022		2021		2022		2021
Food Safety
Natural Toxins, Allergens & Drug Residues	$	17,965	$	18,255	$	59,397	$	57,271
Bacterial & General Sanitation		11,288		10,335		34,709		31,502
Culture Media & Other		18,145		16,094		56,136		42,480
Rodenticides, Insecticides & Disinfectants		9,577		8,436		25,459		24,324
Genomics Services		5,781		5,304		16,909		14,566

	$	62,756	$	58,424	$	192,610	$	170,143
Animal Safety
Life Sciences	$	1,339	$	1,399	$	4,011	$	4,122
Veterinary Instruments & Disposables		17,047		12,494		47,956		34,843
Animal Care & Other		9,449		8,873		29,517		25,902
Rodenticides, Insecticides & Disinfectants		18,359		18,085		58,777		56,470
Genomics Services		19,294		17,434		54,195		49,554

	$	65,488	$	58,285	$	194,456	$	170,891

Total Revenues	$	128,244	$	116,709	$	387,066	$	341,034

5. 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 28,				February 28,
(in thousands, except per share amounts)	2022		2021		2022		2021
Numerator for basic and diluted net income per share:
Net income attributable to Neogen	$	5,443	$	13,377	$	33,348	$	45,122
Denominator for basic net income per share:
Weighted average shares		107,818		106,826		107,648		106,264
Effect of dilutive stock options and RSUs		315		564		482		504

Denominator for diluted net income per share		108,133		107,390		108,130		106,768
Net income attributable to Neogen per share:
Basic	$	0.05	$	0.13	$	0.31	$	0.42

Diluted	$	0.05	$	0.12	$	0.31	$	0.42

6. 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, 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.

Neogen’s operation in Australia originally focused on providing genomics services and sales of animal safety products and reports through the Animal Safety segment. With the acquisition of Cell BioSciences in February 2020, this operation has expanded to offer our complete line of products and services, including those usually associated with the Food Safety segment. These additional products are managed and directed by existing management at Neogen Australasia and report through the Animal Safety segment.

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

Segment information follows:

   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


					Corporate and
	Food		Animal		Eliminations
(in thousands)	Safety		Safety		(1)			Total
As of and for the three months ended February 28, 2022
Product revenues to external customers	$	55,372	$	46,194	$	—		$	101,566
Service revenues to external customers		7,384		19,294		—			26,678

Total revenues to external customers		62,756		65,488		—			128,244
Operating income (loss)		8,191		10,783		(12,597	)		6,377
Total assets		302,605		298,854		379,746			981,205
As of and for the three months ended February 28, 2021
Product revenues to external customers	$	51,965	$	40,851	$	—		$	92,816
Service revenues to external customers		6,459		17,434		—			23,893

Total revenues to external customers		58,424		58,285		—			116,709
Operating income (loss)		7,911		11,657		(3,794	)		15,774
Total assets		287,690		239,179		353,347			880,216

(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.~~transactions


					Corporate and
	Food		Animal		Eliminations
(in thousands)	Safety		Safety		(1)			Total
As of and for the nine months ended February 28, 2022
Product revenues to external customers	$	171,439	$	140,261	$	—		$	311,700
Service revenues to external customers		21,171		54,195		—			75,366

Total revenues to external customers		192,610		194,456		—			387,066
Operating income (loss)		29,216		36,246		(024,871	)		40,591
As of and for the nine months ended February 28, 2021
Product revenues to external customers	$	151,951	$	121,337	$	—		$	273,288
Service revenues to external customers		18,192		49,554		—			67,746

Total revenues to external customers		170,143		170,891		—			341,034
Operating income (loss)		24,834		36,068		(6,988	)		53,914

(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 28,				February 28,
(in thousands)	2022		2021		2022		2021
Domestic	$	77,297	$	70,387	$	231,454	$	207,544
International		50,947		46,322		155,612		133,490

Total revenue		128,244		116,709		387,066		341,034

7. EQUITY COMPENSATION PLANS

~~Qualified~~

Incentive and

non-qualified

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

~~Company~~Neogen under the terms of the Company’s stock option plans. These options are granted at an exercise price of not less than the fair market value of the stock on the date of grant. Options vest ratably over three and five year periods and the contractual terms are generally five or ten years. A summary of stock option activity during the nine months ended February 28, ~~2018~~2022 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, 2021		2,957		$	30.38
Granted		393			40.93
Exercised		(276	)		22.69
Forfeited		(27	)		31.18

Options outstanding February 28, 2022		3,047		$	32.43

During the three and nine month periods ended February 28, ~~2018~~2022 and ~~2017,~~2021, the Company recorded ~~$1,026,000~~$1,607,000 and ~~$1,198,000~~$1,581,000 and ~~$3,692,000~~$5,045,000 and ~~$3,932,000,~~$4,773,000, 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~~

The weighted-average fair value per share of stock options granted during the first nine months of fiscal ~~2018~~years 2022 and ~~fiscal 2017,~~2021, estimated on the date of grant using the Black-Scholes option pricing model, was ~~$14.44~~$9.54 and ~~$11.84,~~$7.71, respectively. 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 2022	FY 2021
Risk-free interest rate	0.4%	0.2%
Expected dividend yield	0.0%	0.0%
Expected stock price volatility	32.8%	31.3%
Expected option life	3.12 years	3.25 years

The company grants restricted stock units (RSUs) to directors, officers and employees under the terms of the 2018 Omnibus Incentive Plan, which vest ratably over three and five year periods. The current units are expensed straight-line over the remaining weighted-average period of 4.32 years. On February 28, 2022 there was $6,203,000 in unamortized compensation cost related to

non-vested

RSUs.


				Weighted-
				Average
(Options in thousands)	Shares			Fair Value
RSUs outstanding June 1, 2021		121		$	34.21
Granted		120			40.91
Released		(25	)		34.24
Forfeited		(4	)		35.61

RSUs outstanding February 28, 2022		212		$	37.98

The Company ~~has an employee~~offers eligible employees the option to purchase common stock ~~purchase plan that provides for employee stock purchases~~ at a 5% discount to the lower of the market ~~price. The~~value of the stock at the beginning or end of each participation period under the terms of either the 2011 or the 2021 Employee Stock Purchase Plan; the discount is recorded in general and administrative ~~expense as~~expense. Total individual purchases in any year are limited to 10% 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.compensation.

8. BUSINESS ~~AND PRODUCT LINE ACQUISITIONS~~

COMBINATIONS

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 July 31, 2020, the Company acquired the U.S. (including territories) rights to Elanco’s StandGuard

Pour-on

for horn fly and lice control in beef cattle, and related assets. This product line fits in well with Neogen’s existing agricultural insecticide portfolio and organizational capabilities. Consideration for the purchase was $2,351,000 in cash, all paid at closing. The final purchase price allocation, based upon the fair value of these assets determined using the income approach, included inventory of $51,000 and intangible assets of $2,300,000 (with an estimated life of 15 years). This product line is manufactured at Neogen’s operation in Iowa; the sales are reported within the Animal Safety segment.

On December ~~1, 2016,~~30, 2020, the Company acquired all of the stock of Megazyme, Ltd, an Ireland-based company, and its wholly-owned subsidiaries, U.S.-based Megazyme, Inc. and Ireland-based Megazyme IP. Megazyme is a manufacturer and supplier of diagnostic assay kits and enzymes to measure dietary fiber, complex carbohydrates and enzymes in food and beverages as well as animal feeds. This acquisition has allowed Neogen to expand its commercial relationships across food, feed and beverage companies, and provide additional food quality diagnostic products to commercial labs and food science research institutions. Consideration for the purchase was net cash of $39.8 million paid at closing, $8.6 million of cash placed in escrow payable to the former owner in two installments in two and four years, $4.9 million of stock issued at closing, and up to $2.5 million of contingent consideration, payable in two installments over one year, based upon an excess net sales formula. The final purchase price allocation, based upon the fair value of

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these assets and liabilities determined using the income approach, included accounts receivable of $1,376,000, inventory of $5,595,000, net property, plant and equipment of $12,599,000, prepayments of $69,000, accounts payable of $4,000, other current liabilities of $1,815,000, contingent consideration accrual of $2,458,000,

non-current

liabilities of $319,000,

non-current

deferred tax liabilities of $3,306,000, intangible assets of $22,945,000 (with an estimated life of

15-20

years) and the remainder to goodwill

(non-deductible

for tax purposes). These values are Level 3 fair value measurements. In February 2021, the former owner was paid $1,229,000 for the first installment of contingent consideration, based upon the achievement of sales targets. In January 2022, the former order was paid $1,120,000 for the second installment of contingent consideration, also based upon the achievement of sales targets, less a deduction of $120,000

related to a prior period tax adjustment. The Irish companies continue to operate from their current locations in Bray, Ireland, reporting within the Food Safety segment and are managed through Neogen’s Scotland operation. The company’s U.S. business is managed by our Lansing-based Food Safety team.

On September 17, 2021, the Company acquired the stock of ~~Quat-Chem Ltd.~~CAPInnoVet, Inc., a ~~chemical company~~companion animal health business that ~~manufactures biosecurity products, based~~provides pet medications to the veterinary market. This acquisition provides entry into the retail parasiticide market and enhances the Company’s presence in ~~Rochdale, England.~~companion animal markets. Consideration for the purchase was ~~$21,606,000~~net cash of $17.9 million paid at closing, including $150,000 of cash placed in ~~cash and~~escrow payable to the former owners in twelve months. There is also the potential for performance milestone payments to the former owners of up to ~~$3,778,000~~$6.5 million and the Company could incur up to $14.5 million in future royalty payments. The preliminary purchase allocation, based upon the fair value of ~~contingent consideration, due~~these assets and liabilities determined using the income approach, included accounts receivable of $308,000, inventory of $482,000, prepayments of $296,000, accounts payable of $120,000, other current liabilities of $132,000,

non-current

liabilities of $13.9 million, intangible assets of $21.0 million (with an estimated life of

15-20

years) and the remainder to goodwill

(non-deductible

for tax purposes). These values are Level 3 fair value measurements. The business is operated from our location in Lexington, KY, reporting within the Animal Safety segment.

On November 30, 2021, the Company acquired the stock of Delf (U.K.) Ltd., a United Kingdom-based manufacturer and supplier of animal hygiene and industrial cleaning products, and Abbott Analytical Ltd., a related service provider. This acquisition will expand the Company’s line of dairy hygiene products and will enhance our cleaner and disinfectant product portfolio. Consideration for the purchase was net cash of $9.5 million paid at closing, including $722,000 of cash placed in escrow payable to the ~~end of each of the first two years, based on an excess net sales formula.~~former owner in one year. 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 ~~$4,684,000,~~$1,059,000, inventory of ~~$1,243,000, land,~~$891,000, net property, plant and equipment of ~~$2,526,000,~~$152,000, prepayments of $31,000, accounts payable of ~~$2,197,000, deferred tax liability of $1,133,000, contingent consideration accrual of $1,058,000,~~$497,000, other current liabilities of ~~$604,000,non-amortizable~~$378,000,

non-current

deferred tax liabilities of $669,000, intangible assets of ~~$1,889,000, intangible assets of $6,900,000~~$2.6 million (with an estimated life of~~5-15~~

10-15

years) and the remainder to goodwill

(non-deductible

for tax purposes). These values are Level 3 fair value measurements. In January 2018, the Company paid the former owners $249,000 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 by a corresponding amount; $554,000 remains accrued for contingent consideration payable at the end of the second year. This business continuesThe companies continue to operate ~~in its~~from their current location ~~and is managed by Neogen Europe,~~in Liverpool, England, reporting within the Food Safety ~~segment.~~

segment and are managed through Neogen’s Scotland operation.

On December ~~27, 2016,~~9, 2021, the Company acquired the stock of ~~Rogama Industria e Comercio, Ltda.~~Genetic Veterinary Sciences, Inc., a ~~company that develops~~companion animal genetic testing business providing genetic information for dogs, cats and ~~manufactures rodenticides~~birds to animal owners, breeders and ~~insecticides, based near Sao Paulo, Brazil.~~veterinarians. This acquisition will further expand the Company’s presence in the companion animal market. Consideration for the purchase was ~~$12,428,000~~$11.4 million in ~~cash and up to $2,069,000 of contingent consideration, due at the end of each of the first two years, based on an excess~~ net ~~sales formula.~~cash. 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,~~$38,000, inventory of ~~$960,000, land,~~$523,000, net property, plant and equipment of ~~$4,734,000,~~$400,000, prepayments of $55,000, accounts payable of $297,000, unearned revenue of $1.6 million, other current liabilities of ~~$2,562,000, contingent consideration accrual of $213,000,non-current~~ ~~deferred tax liability of $1,307,000,non-amortizable~~$287,000, intangible assets of ~~$870,000, intangible assets of $5,112,000~~$5.0 million (with an estimated life of~~5-15~~

10-15

years) and the remainder to goodwill~~(non-deductible~~ for tax purposes). These values are Level 3 fair value measurements. This business continues to operate in its current location and is managed by Neogen do Brasil, reporting within the Food Safety segment.

On September 1, 2017, the Company acquired the assets of The University of Queensland Animal Genetics Laboratory, an animal genomics laboratory located near Brisbane, Australia. This acquisition is intended to accelerate the growth of the Company’s animal genomics business in Australia and New Zealand. Consideration for the purchase was $2,063,000; $468,000 has been paid in cash with the remainder due in annual installments over the next five years. The preliminary purchase price allocation included inventory of $19,000, equipment of $419,000,~~non-current~~ ~~liabilities of $1,629,000, intangible assets of $850,000 (with an estimated life of5-15~~ ~~years) and the remainder to goodwill(non-deductible~~ (deductible for tax purposes). These values are Level 3 fair value measurements. The ~~new~~ business ~~renamed Neogen Australasia, continues to operate in~~

operated from its current location in Spokane, Washington, reporting within the Animal Safety segment.

On December 13, 2021, the Company entered into a series of agreements to combine with 3M’s Food Safety business in a Reverse Morris Trust transaction, which is expected to close in the first quarter of our next fiscal year. Please refer to Forms

8-K,

dated December 14 and 15, 2021, Forms 425, dated December 14 and 15, 2021 and March 11, 2022, and

orm S-4, dated March 17, 2022, filed with the Securities and Exchange Commission for more information.

For each completed acquisition listed above, the revenues and net income were not considered material and were therefore not disclosed.

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9. 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 on ~~September~~November 30, ~~2019.~~2023. There were no0 advances against the line of credit during fiscal ~~year 2017~~2021 and there have been none thus far in fiscal ~~year 2018;~~2022; there was no0 balance outstanding at February 28, ~~2018.~~2022. Interest on any borrowings ~~remained~~is at LIBOR plus 100 basis points (rate under the terms of the agreement was ~~2.82%~~1.24% at February 28, ~~2018)~~2022). 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.~~

9.2022.

10. COMMITMENTS AND CONTINGENCIES

The Company is involved in environmental remediation and monitoring activities at its Randolph, Wisconsin manufacturing facility and accrues for related costs when such costs are determined to be probable and estimable. The Company ~~expenses~~currently utilizes a pump and treat remediation strategy, which includes semi-annual monitoring and reporting, consulting, and maintenance of monitoring wells. We expense these annual costs of remediation, which have ranged from $38,000 to ~~$57,000~~$131,000 per year over the past five years. The Company’s estimated remaining liability for these costs was $916,000 at both February 28, ~~2018~~2022 and May 31, ~~2017,~~2021, measured on an undiscounted basis over an estimated period of 15 ~~years; $54,000~~years. In fiscal 2019, the Company performed an updated Corrective Measures Study on the site, per a request from the Wisconsin Department of Natural Resources (WDNR) and is currently in discussion with the WDNR regarding potential alternative remediation strategies going forward. The Company believes that the current pump and treat strategy is appropriate for the site. However, the Company has agreed to a pilot study in which chemical reagents are injected into the ground in an attempt to reduce

on-site

contamination and is currently working with its consultant to design the system. At this time, the outcome of the pilot study is unknown, but a change in the current remediation strategy, depending on the alternative selected, could result in an increase in future costs and ultimately, an increase in the currently recorded liability, with an offsetting charge to operations in the period recorded. The Company has recorded $300,000 as a current liability, and the remaining $616,000 is recorded ~~within current liabilities and the remainder is recorded within~~in other

non-current

liabilities in the consolidated balance ~~sheet.~~

sheets.

On March 6, 2020, the Company received an administrative subpoena from the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) regarding activities or transactions involving parties located in Iran. The Company subsequently conducted an internal investigation under the direction of outside legal counsel and disclosed information concerning certain genomic testing services provided to an unrelated U.S.-based party engaged in veterinary activities involving an Iranian party. The Company continues to cooperate with OFAC’s investigation and is currently examining whether certain of these activities may be eligible for OFAC General Licenses authorizing agricultural and veterinary activities.

In addition to responding to the administrative subpoena, the Company is implementing additional compliance measures to prevent inadvertent dealings with restricted countries or parties. These measures will further enhance the Company’s international trade compliance program, which is designed to assure that the Company does not conduct business directly or indirectly with any countries or parties subject to U.S. economic sanctions and export control laws. Although it is too early to predict what action, if any, that OFAC will take, the Company does not currently have any reason to believe that OFAC’s pending investigation will have a material impact on its operations, the results of operations for any future period, or its overall financial condition. In fiscal 2020, the Company took a charge to expense and recorded a reserve of $600,000

to provide for potential fines or penalties on this matter. At this time, the Company believes that it is adequately reserved for this issue. The Company is subject to certain legal and other proceedings in the normal course of business that, in the opinion of management, should not have a material effect on its future results of operations or financial position.

~~10. STOCK PURCHASE~~

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

Table of Directors in calendar year 2008, to purchase, subject to market conditions, up to 1,500,000 shares of the Company’s common stock. As of February 28, 2018, 1,350,632 shares were available to be repurchased under the program. There were no purchases in fiscal year 2017 and there have been none thus far in fiscal year 2018.

Contents

PART I – FINANCIAL INFORMATION

~~Item 2.~~

~~Management’s Discussion and Analysis of Financial Condition and Results of Operations~~

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

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

Safe Harbor and Forward-Looking Statements

Forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, are made throughout this Quarterly Report on Form

10-Q.

For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be ~~forward looking~~forward-looking statements. Without limiting the foregoing, the words “believes,” “anticipates,” “plans,” “expects,” “seeks,” “estimates,” and similar expressions are intended to identify forward-looking statements. There are a number of important factors, including competition, recruitment and dependence on key employees, impact of weather on agriculture and food production, effects of the ongoing

COVID-19

pandemic on our business, global business disruption caused by the Russia invasion in Ukraine and related sanctions, identification and integration of acquisitions, research and development risks, patent and trade secret protection, government regulation and other risks detailed from time to time in the Company’s reports on file at the Securities and Exchange Commission, that could cause Neogen Corporation’s results to differ materially from those indicated by such forward-looking statements, including those detailed in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

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

10-Q

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

~~Critical Accounting Policies~~

COVID-19

As we closely monitor the

COVID-19

pandemic, our top priority remains protecting the health and ~~Estimates~~

~~The discussion~~ safety of our employees. While operations continue in our locations around the world, many of our

non-manufacturing

and ~~analysis of the Company’s financial condition~~distribution employees continue to work remotely and ~~results of operations are based on the consolidated financial statements that~~travel remains limited. Safety guidelines and procedures, including social distancing, mask wearing and enhanced cleaning, have been ~~prepared in accordance with accounting principles generally accepted in the United States. The preparation of~~developed for

on-site

employees and these ~~financial statements requires that management make estimates~~policies are regularly monitored 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%.

updated by our internal Emergency Response Team.

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.~~

~~Executive Overview~~

Revenues for the Company for the third quarter ended February 28, 2018 were $95.9 million, an increase of 8%, or $7.5 million, compared to revenues of $88.4 million for the same period in the prior year. For the year to date period, revenues were $293.0 million, an increase of 12%, or $30.3 million, compared to revenues of $262.7 million in the first nine months of fiscal 2022,

COVID-19,

including new strains of the virus such as Delta and Omicron, continued to impact our business operations and financial results. A number of our food safety diagnostic product lines have been negatively impacted due to decreased demand in many of our customers’ businesses around the world, particularly those serving restaurants, bars and other institutional food service markets. Many of our markets across the world are recovering, but the pandemic has continued to adversely impact our customers and ultimately, our revenues. We have also experienced supply chain difficulties including vendor disruptions, border closures, shipping issues and significantly increased shipping costs; labor shortages and higher labor costs, as we have had to use staffing agencies and increase our base pay in many areas of the company to fill open positions; and restricted travel, which hinders our ability to connect with customers. During the current fiscal year, ~~2017.~~ we have incurred less expense for travel, meals, trade shows and some other customer-facing marketing activities; some of these activities have resumed but have not yet returned to

pre-pandemic

levels. Higher spend on shipping and labor are offsetting these savings.

Overall, the impact

of COVID-19 remains

uncertain and ultimately depends on the length and severity of the pandemic, inclusive of the introduction of new strains of the virus; the federal, state, and local government actions taken in response; vaccination rates and effectiveness; the impact of vaccination requirements; and the macroeconomic environment. We will continue to evaluate the nature and extent to

which COVID-19 will

impact our business, supply chain, including labor availability and attrition, consolidated results of operations, financial condition, and liquidity; we expect it to impact us through at least the end of our current fiscal year.

International sales rose 10% in the third quarter of fiscal ~~2018~~2022 and increased ~~61%~~17% year to ~~$16.6 million,~~date, each compared to ~~$10.3~~the same respective periods in the prior year. Excluding international sales from the Megazyme and Delf/Abbott Analytical acquisitions, the increase was 5% in the third quarter and 10% for the year to date. Revenue changes, expressed in percentages, for the three and nine month periods of fiscal 2022 compared to the same respective periods in the prior year are as follows for each of our international locations:


	Three Months Ended						Nine Months Ended
	February 28, 2022						February 28, 2022
	Revenue			Revenue			Revenue			Revenue
	% Inc (Dec)			% Inc (Dec)			% Inc (Dec)			% Inc (Dec)
	USD			Local Currency			USD			Local Currency
U.K. Operations (including Neogen Italia)		16	%		18	%		14	%		10	%
Brazil Operations		(2	)%		0	%		(8	)%		(8	)%
Neogen Latinoamerica		1	%		4	%		12	%		8	%
Neogen Argentina		18	%		44	%		25	%		59	%
Neogen Uruguay		22	%		27	%		8	%		11	%
Neogen Chile		13	%		28	%		40	%		46	%
Neogen China		(17	)%		(19	)%		13	%		9	%
Neogen India		53	%		57	%		19	%		20	%
Neogen Canada		10	%		10	%		38	%		33	%
Neogen Australasia		20	%		29	%		32	%		32	%

Currency translations decreased comparative revenues by approximately $891,000 in the third quarter of fiscal 2022, due to currencies in several countries, including Australia, Argentina, the U.K., Mexico and Brazil, weakening relative to the U.S. dollar. For the year to date, comparative revenues were $2.4 million higher due to increased strength of the British pound and Mexican peso relative to the U.S. dollar in the first half of the fiscal year. Combined revenues at our U.K. operations increased 16% in the third quarter, with growth from strong cleaner and disinfectant sales into the U.K. and Asia and new culture media business with commercial laboratories in the U.K. that have adopted our recently launched One Broth One Plate workflow. For the nine month period, revenues at our U.K. operations increased 14%.

Sales in Brazil decreased 2% in this year’s third quarter; the Company is discontinuing sales of lower gross margin dairy drug residue test kits which further contributed to an unfavorable comparison against the prior year. For the nine month period, sales at our Brazilian operations were down 8%, due to the previously mentioned decrease in dairy drug residue test kit sales and a large insecticide shipment that occurred in the first quarter of the prior year. Neogen Latinoamerica sales rose 1% for the third quarter; 10% growth in Food Safety products was offset by a decrease in sales of rodent control products to a large customer, due to the timing of shipments. For the year to date, sales increased 12%, primarily due to increases in natural toxins test kits, environmental sanitation products, culture media and biosecurity products. Sales at Neogen China decreased 17% for the three month period as China’s “Zero COVID” strategy created lockdowns and restricted travel, which limited our ability to record sales. For the nine month period, sales in China increased 13% from new sales of Megazyme products and growth in genomics services, partially offset by a decrease in sales of biosecurity products in the third quarter. The Neogen Australasia location benefitted from increased genomics business with customers in the beef and sheep markets.

Service revenue, which includes genomics testing and other laboratory services, was $26.7 million in the third quarter of fiscal 2022, an increase of 12% over the prior year ~~2017. Earnings per share for the~~ third quarter revenues of fiscal 2018 were $0.32 compared to $0.20 per share in the same period a year ago. Net earnings for the third quarter were favorably impacted by adjustments resulting from tax reform legislation enacted in December 2017.$23.9 million. For the first nine months of the current fiscal year, net income attributable 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 in the prior fiscal year. 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 of an IRS audit.

Food Safety segment revenues increased 11% and Animal Safety segment revenues increased 6% 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 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 increase 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 $110.5service revenue was $75.4 million, an increase of ~~20%; international sales were 37.7% of total sales in the current~~11% over prior 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 a lesser extent, revenue increases at existing Company locations. Currency translation had a positive effect on international revenues of approximately $1.9 million in the third quarter of fiscal 2018 as the pound, euro, and peso were stronger on average against the dollar than the same period a year ago; for the year to date period, the positive revenue impact was $2.5$67.7 million.

Revenues at Neogen Europe increased 16% in U.S. dollars in the third quarter compared to the same period in the prior year; for the nine month period, sales rose 10%. For the quarter, a 39% increase in genomics revenues offset lower mycotoxin test kit sales, as last year’s deoxynivalenol (DON) outbreak in corn crops in western Europe did not repeat in the current year. For the year to date period, genomics sales increased 34% and helped to offset lower DON test kit sales. Sales at Lab M, the Company’s subsidiary in England, increased 20% 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, each 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 in the third quarter of the prior year. For the year to date period, service revenue was $48.7 million, an increase of $9.1 million, or 23%, compared to $39.6 million in the prior year. The growth for both the quarter and year to date periods was led by increases in ~~sales~~revenues at our international genomics operations and domestic growth in our Food Safety lab services; revenues at our domestic genomics operation were reduced by lower volumes of companion animal samples, the result of a difficult comparison due to large increases in the prior year.

Food Safety

Natural Toxins, Allergens

& Drug Residues –

Sales in this category decreased 2% for the three month period and increased 4% for the nine month period ended February 28, 2022, respectively, compared to the ~~global cattle~~same periods in the prior year. In the third quarter, a 12% increase in sales of allergen test kits was offset by a 55% decline in sales of dairy drug residue test kits, as we are discontinuing sales of certain lower margin products; sales of natural toxins test kits decreased 1%. For the year to date, sales of allergen test kits rose 11% and ~~companion animal markets,~~natural toxins test kits sales increased ~~testing volumes~~5%, partially offset by a 33% decline in the drug residue product line, as compared to the same period in the prior year.

Bacterial

& General Sanitation –

Revenues in this category increased 9% and 10% for the third quarter and for the year to date, compared to the same periods in the prior year. In the third quarter, sales of our AccuPoint

sanitation monitoring product line increased 16% aided by strong sales of our new reader. Sales of our Listeria Right Now

™

product continued to gain market share with ~~a large poultry customer and,~~an increase of 13%, while sales of products to ~~a lesser extent, revenues from the acquisition of Neogen Australasia,~~detect spoilage organisms 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~~processed foods increased 4%.

Culture Media

& Other –

Sales in this category increased 13% in the quarter ended February 28, ~~2018,~~2022 compared to the third quarter in the prior year; for the nine month period, sales increased 32%. Excluding sales from the December 2020 acquisition of Megazyme, which are reported in this category, sales increased 7% and 14% for the three and nine month periods, respectively. This category includes sales of veterinary instruments and other veterinary products at some of our international locations; these sales increased significantly over the prior year due to recovering markets and expanded market share. Sales of Neogen Culture Media products increased 11% in the third quarter as our new workflow, One Broth One Plate, continued to drive increased sales to commercial labs in the U.K. For the nine month period, Neogen Culture Media sales increased 18%, due to new business in the U.K. generated from our One Broth One Plate workflow; we also recorded a large domestic sale to a vaccine manufacturer in the first quarter of the current fiscal year.

Rodenticides, Insecticides

& Disinfectants –

Revenues in this category increased 14% in the third quarter of fiscal 2022 compared to the same period a year ago, primarily due to the continued strength in sales of cleaners and disinfectants to Asia resulting from the African swine fever outbreak in that region increasing demand, and higher sales to a U.K.-based toll manufacturer. For the year to date, sales increased 5%.

Genomics Services –

Sales of genomics services sold through our international Food Safety operations increased 9% and 16% for the three and nine month periods ended February 28, 2022, respectively. The increase in the third quarter resulted from overall strength at our labs in the U.K and Brazil as improved economic conditions in several markets have led to increased testing; our lab in China also contributed to the growth for the year to date period.

Animal Safety

Life Sciences –

Sales in this category decreased 4% in the third quarter, compared to the same period in the prior year; for the year to date, the decrease in this product line was 3%. The decline in both periods was primarily due to the loss of hair testing business with a large U.S. commercial laboratory that moved to a different testing platform and a decrease in workplace drug testing.

Veterinary Instruments

& Disposables –

Revenues in this category increased 36% for the three month period ended February 28, 2022, led by a large increase in sales of veterinary instruments, including needles and syringes, resulting from recently won private label business; revenues increased 38% for the year to date.

Animal Care

& Other –

Sales of these products increased 6% and 14% in the three and nine month periods ended February 28, 2022, respectively; excluding the contribution of parasiticides from the September acquisition of CAPInnoVet, revenues in this category increased 1% in the third quarter and 11% year to date. For both periods, the growth in our vitamin injectables and antibiotics product lines were partially offset by a decline in sales of dairy supplies due to the June 2020 termination of an agreement under which we distributed these types of products for a large manufacturer of dairy equipment.

Rodenticides, Insecticides

& Disinfectants –

Revenues in this category increased 2% for the three month period ended February 28, 2022. Insecticide sales rose 11% in the quarter, led by strong demand in the farm and home channels, and cleaners and disinfectants sales increased 2%. These increases were somewhat offset by a 5% decrease in rodenticide sales due to a difficult comparison resulting from strong sales in the prior year. Sales in this product category for the year to date period increased 4%, as compared to a year ago, for the same reasons.

Genomics Services –

Sales in this category increased 11% and 9% in the third quarter and the year to date period, each compared to the prior year. The growth in both periods was led by increases in beef and sheep testing in Australia, due to improved market conditions and higher sample volumes from domestic dairy and beef cattle and poultry customers. Growth in both the three and nine month periods was partially offset by lower domestic companion animal revenues due to difficult prior year comparisons resulting from strong sales growth in those periods.

Gross Margin

Gross margin, expressed as a percentage of sales, was 44.8% in the third quarter of fiscal 2022 compared to 46.1% in the same quarter a year ago. The decline in gross margin percentage is the result of a 260 basis point decline in gross margin percentage in the Animal Safety segment; Food Safety gross margins remained constant compared to those in last year’s third quarter, as a favorable product mix shift was offset by increased overhead costs. In the Animal Safety segment, the decline in gross margin percentage at the raw material line was the result of a mix shift resulting from lower sales of higher margin rodenticide products, due to a lessening of vole pressure across the domestic market, and a reduction in genomics service revenues in the domestic companion animal markets. Each of those product lines experienced significant growth in the prior year periods, resulting in difficult comparisons in the current year. Within each segment, higher raw material and freight costs, which resulted from continued supply chain disruptions and ongoing issues related to

COVID-19

and its variants across most of our markets, put downward pressure on gross margins. The Company has taken pricing actions where appropriate in response to these cost increases. For the year to date, gross margin was 46.0% compared to 46.1% in the prior year, for the same reasons listed above.

Operating Expenses

Operating expenses were $51.0 million in the third quarter, compared to $38.1 million in the same quarter of the prior year, an increase of ~~11%~~$12.9 million, or 34%. Legal, consulting and other professional fees totaling $10.6 million were incurred in the third quarter in conjunction with due diligence and negotiation of terms for our proposed business combination with 3M’s Food Safety business, which was announced on December 14, 2021. Excluding costs related to the transaction, run rate operating expenses for the third quarter were $40.4 million, an increase of 6% compared to the prior year. For the nine month period ended February 28, 2022, operating expenses were $137.4 million, an increase of 33% compared to the prior year. Legal, consulting and other professional fees totaling $19.9 million have been incurred year to date in conjunction with due diligence and negotiation of terms for the proposed business combination with 3M’s Food Safety business. Excluding the costs related to the transaction, run rate operating expenses year to date were $117.5 million, an increase of 14% compared to the prior year.

Sales and marketing expenses increased $2.8 million, or 15%, in the third quarter, primarily due to increases in personnel related expenses, the result of higher sales volumes and headcount. Additionally, travel, trade shows and other customer facing activities have continued to increase, the result of the easing of certain

COVID-19

pandemic restrictions in a number of our markets. Shipping expenses increased 10% for the quarter and were up 19% for the year to date on increased volume and rates; for the year to date, sales and marketing expenses increased 19% compared to the same period last year.

General and administrative expense increased $9.9 million in the third quarter, primarily the result of $10.6 million in legal, consulting and other professional fees resulting from due diligence efforts and negotiation of terms relating to the proposed transaction with 3M referenced above. In the prior year third quarter, $2.3 million was incurred on strategic consulting, legal and other professional fees for an acquisition which we the Company was unsuccessful in completing. After adjusting for these acquisition expenses, third quarter run rate general and administrative expenses increased $1,532,000, or 12%. Year to date run rate general and administrative expenses rose $5.4 million, or 15%. For each comparative period, increases were the result of higher salaries and bonuses resulting from improved operating performance and additional senior management hires, amortization expenses from the Megazyme, CAPInnoVet and Delf (U.K.) acquisitions and higher depreciation and license fees relating to information technology infrastructure and software.

Research and development expense was $4.6 million in the third quarter, an increase of $325,000, or 8%, compared to the same period in the prior year. The increase was primarily the result of compensation and other personnel related increases and, for the three month period, incremental costs of personnel absorbed from the GVS acquisition in December 2021. For the year to date, research and development expenses increased 9% over the same period last year; the increases were the result of compensation and other personnel related increases, and the incremental costs of personnel absorbed from the Megazyme and GVS acquisitions. For each comparative period, these increases were somewhat offset by decreased outside service costs for new reader development, as these products were launched in the prior year.

Operating Income

Operating income was $6.4 million in the third quarter of fiscal 2022, compared to $15.8 million in the same period of the prior year. Adjusting for $10.6 million in costs resulting from the proposed 3M transaction, operating income was $17.0 million for the third quarter. Year to date operating income was $40.6 million compared to $53.9 million in the prior year; excluding $19.9 million in

3M-related

costs, operating income was $60.5 million.. Expressed as a percentage of sales, operating income was 5% for the third quarter and 10.5% for the year to date, compared to 13.5% and 15.8%, respectively, for the same periods in the prior year. Adjusting for the costs resulting from the proposed 3M transaction, operating income was 13.2% for the third quarter and 15.6% for the year to date.

Other Income


	Three Months Ended						Nine Months Ended
	February 28,						February 28,
(dollars in thousands)	2022			2021			2022			2021
Interest income (net of expense)	$	314		$	294		$	741		$	1,571
Foreign currency transactions		(185	)		(118	)		(170	)		(374	)
Insurance settlement		—			—			—			309
Legal settlement		—			—			—			(300	)
LGS contingent consideration		—			111			(135	)		111
Other		137			(84	)		271			(109	)

Total Other Income	$	266		$	203		$	707		$	1,208

The decrease in interest income in the nine month period of fiscal 2022, compared to the same period a year ago was the result of lower yields on our marketable securities balances. Other income or expense resulting from foreign currency transactions was the result of changes in the value of foreign currencies relative to the U.S. dollar in countries in which we operate. In the second quarter of the current fiscal year, we recorded a charge of $135,000 for additional contingent consideration in the final payment to the former owner of Livestock Genomic Services.

Income Tax Expense

Income tax expense in the third quarter of fiscal 2022 was $1.2 million, an effective tax rate of 18.1%, compared to $2.6 million, an effective tax rate of 16.3%, in the same period of the prior year. For the year to date, income tax expense was $8.0 million, an effective rate of 19.3%, in fiscal 2022 and $10.0 million, an effective rate of 18.1%, in fiscal 2021. For each period, the primary difference between the statutory rate of 21% and the effective rates recorded is the benefit resulting from the exercise of stock options; due to lower exercises in the third quarter of the current fiscal year, this benefit was $33,000, compared to $1,083,000 in the third quarter of the prior year. For the year to date, the benefit was $907,000 in fiscal 2022 compared to $2,564,000 in fiscal 2021. Additionally, we incurred a $548,000 charge to expense in the first quarter of this fiscal year, due to the U.K. enacting a higher tax rate effective in April 2023. Since our deferred tax balances in the U.K. are expected to reverse in the future at the higher tax rate, we were required to revalue them when the new rate was passed.

Net Income

Net income was $5.4 million in the third quarter of fiscal 2022, compared to $13.4 million in the same period in the prior year. The decline in earnings for the year to date was the result of $10.6 million in legal, consulting and other professional fees from the intended transaction with 3M. Excluding those charges, net income rose 2% 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~~net income was $33.3 million, a decrease 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 year to date period, sales of natural toxin test kits decreased 7%.

Bacterial & General Sanitation sales increased 8% in both the three 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 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 million26% compared to ~~$139.7~~$45.1 million in the prior year. ~~Organic growth~~The decline 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%earnings 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~~was the result of ~~strength~~$19.9 million in ~~detectable needles, syringes~~legal, consulting and ~~animal marking products. Sales of Animal Care & Other products increased 19% in~~other professional fees from the ~~quarter ended February 28, 2018, compared to the same period in the prior year; the~~intended transaction with 3M. Excluding those charges, net income rose 8% year to date increase was 12%. The increase in the current year is due to market share gains 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 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~~ compared to the same period in the prior year. ~~The growth for both periods~~Nine month net income in fiscal 2022 was led 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% in the third quarter of fiscal 2018 compared to 46.3% in the same quarter a year ago. Gross margins for the quarter were positively~~also negatively impacted by ~~lower costs inputs at the Company’s genomics operations and favorable product mix towards~~a higher margin diagnostic and animal care products; this improvement was somewhat offset by 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. Gross margin for the nine month period ended February 28, 2018 was 48.0% compared to 47.6% in the same period of the prior year. Gross margins for the year to date were positively 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 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~~ effective tax ~~rate~~rate.

Financial Condition and Liquidity

The overall cash, cash equivalents and marketable securities position of ~~the Company~~Neogen was ~~$192.2~~$378.4 million at February 28, ~~2018~~2022, compared to ~~$143.6~~$381.1 million at May 31, ~~2017.~~2021. Approximately ~~$46.5~~$47.6 million was generated from operations during the first nine months of fiscal ~~2018.~~2022 and we spent $38.2 million on business acquisitions. Net cash proceeds of ~~$18.9~~$7.8 million were realized from the exercise of stock options and issuance of shares under ~~the Company’s employee stock purchase plan during the same period. The Company spent $16.3 million for property, equipment and othernon-current~~ ~~assets~~our Employee Stock Purchase Plan during the first nine months of fiscal ~~2018.~~

~~Accounts~~2022. We spent $11.9 million for property, equipment and other

non-current

assets in the first nine months of fiscal 2022.

Net accounts receivable balances were ~~$73.2~~$93.0 million at February 28, ~~2018,~~2022, an increase of ~~$4.6~~$1.2 million, ~~or 7%,~~ compared to ~~$68.6~~$91.8 million at May 31, ~~2017, less than the increase in revenue. Days~~2021. Days’ sales outstanding, a measurement of the time it takes to collect receivables, were 6364 days at February 28, ~~2018~~2022, compared to 6066 days at May 31, ~~2017. All~~2021 and 65 days at February 28, 2021. We have been carefully monitoring our customer ~~accounts are actively managed and no losses~~receivables as the

COVID-19

pandemic has spread across our global markets; to date, we have not experienced an appreciable increase in ~~excess of amounts reserved are currently expected.~~

bad debt write offs related to the pandemic.

Net inventory ~~balances were $77.5~~was $113.4 million at February 28, ~~2018,~~2022, an increase of ~~$4.4~~$12.7 million, ~~or 6%,~~ compared to ~~$73.1 million at~~a May 31, ~~2017.~~2021 balance of $100.7 million. The ~~Company actively monitors its~~two acquisitions completed in the second quarter added approximately $2.0 million to our inventory ~~and balances~~balance. The higher inventory levels are reflective of the ~~need for adequate product availability to minimize backorders with a desire to improve inventory turnover and efficiency levels. Formal programs~~inflationary pressures on raw material costs. Additionally, we have been ~~instituted~~increasing inventory levels recently in ~~fiscal 2018~~an effort to ~~improve inventory turnover.~~

reduce freight costs and prevent backorders, as shipments from vendors are taking longer and some suppliers are requiring higher minimum order levels due to their supply constraints.

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~~2022, 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.~~remainder of the current fiscal year. However, existing cash and borrowing capacity ~~may not~~will be ~~sufficient~~insufficient to meet ~~the Company’s~~ cash requirements for our planned combination with the 3M Food Safety business, which is currently expected to ~~commercialize products currently~~close in the third quarter of calendar year 2022. The transaction will be funded by issuing common stock to 3M’s shareholders and borrowing approximately $1 billion in cash under development or its plans to acquire other organizations, technologies or products that fit within the Company’s mission statement. Accordingly, the Company may choose to issue equity securities or enter into othera financing ~~arrangements for a portion~~agreement with JPMorgan Chase.

PART I – FINANCIAL INFORMATION

~~Item 3.~~

~~Quantitative and Qualitative Disclosures About Market Risk~~

~~The Company has~~

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We have interest rate and foreign exchange rate risk exposure but no long-term fixed rate investments or borrowings. ~~The Company’s~~Our primary interest rate risk is due to potential fluctuations of interest rates for ~~variable rate borrowings (no borrowings at February 28, 2018) 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~~Mexican peso, Brazilian real, ~~the Mexican peso, the~~ Chinese yuan, Australian dollar and to a lesser extent, the Indian rupee, ~~the~~ Canadian dollar, Guatemalan quetzal, Argentine peso, Uruguayan peso and Chilean peso; there is also exposure to a change in exchange rate between the British pound sterling and the ~~Australian dollar.~~euro. When the U.S. dollar weakens against foreign currencies, the dollar value of revenues denominated in foreign currencies increases. When the U.S. dollar strengthens, the opposite situation occurs. Additionally, previously ~~recognized revenues~~invoiced amounts can be positively or negatively affected by changes in exchange rates 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.

collection.

Neogen has assets, liabilities and operations outside of the ~~United States,~~U.S., located in Scotland, England, Ireland, Italy, Brazil, Mexico, Guatemala, Argentina, Uruguay, Chile, China, India, Canada and Australia where the functional currency is the British pound sterling, euro, Brazilian real, Mexican peso, Guatemalan quetzal, Argentine peso, Uruguayan peso, Chilean peso, Chinese yuan, Indian rupee, Canadian dollar and Australian dollar, ~~respectively, and also transacts business throughout Europe in the euro. The Company’s~~respectively. Our investments in foreign subsidiaries are considered tolong-term. As discussed in ITEM 1A. RISK FACTORS of our Annual Report on

Form 10-K

for the year ended May 31, 2021, our financial condition and results of operations could be ~~primarily long-term.~~

adversely affected by currency fluctuations.

The following table sets forth the potential loss in future earnings or fair values, resulting from hypothetical changes in relevant market rates or prices:


Risk Category	Hypothetical Change	February 28, 2022		Impact
(dollars in thousands)
Foreign Currency - Revenue	10% Decrease in exchange rates	$	15,561	Earnings
Foreign Currency - Hedges	10% Decrease in exchange rates		1,973	Fair Value

PART I – FINANCIAL INFORMATION

~~Item 4.~~

~~Controls and Procedures~~

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

An evaluation of the effectiveness of the design and operation of ~~the Company’s~~our disclosure controls and procedures as of February 28, ~~2018~~2022 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~~2022 that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting.

PART II – OTHER INFORMATION

~~Item 1.~~

~~Legal Proceedings~~

~~The Company~~

Item 1. Legal Proceedings

For a description of our material pending legal proceedings, see Note 10 “Commitments and Contingencies” of the Notes to consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, which is incorporated by reference.

Item 1A. Risk Factors

There have been no material changes to the risk factors described in the section captioned “Part I, Item 1A, Risk Factors” in our Annual Report on Form

10-K

for the fiscal year ended May 31, 2021, except for the following risk factor, which has been added to reflect risks associated with current global conditions:

We are subject to ~~certain legal~~risks relating to existing international operations and expansion into new geographical markets.

We focus on expanding sales globally as part of our overall growth strategy and expect sales from outside the United States to continue to represent a significant portion of our revenue. Neogen’s international operations are subject to general risks related to such operations, including:

political, social and economic instability and disruptions, including social unrest, geopolitical tensions, currency, inflation and interest rate uncertainties;

government export controls, economic sanctions, embargoes or trade restrictions;

the imposition of duties and tariffs and other ~~proceedings~~trade barriers;

limitations on ownership and on repatriation or dividend of earnings;

transportation delays and interruptions;

labor unrest and current and changing regulatory environments;

increased compliance costs, including costs associated with disclosure requirements and related due diligence;

difficulties in staffing and managing multi-national operations;

limitations on Neogen’s ability to enforce legal rights and remedies;

access to or control of networks and confidential information due to local government controls and vulnerability of local networks to cyber risks; and

fluctuations in foreign currency exchange rates.

If Neogen is unable to successfully manage the ~~normal course~~risks associated with expanding our global business or adequately manage operational risks of ~~business. In the opinion of management, the outcomes of~~our existing international operations, these ~~matters are not expected to~~risks could have a material adverse effect on ~~its future~~our growth strategy into new geographical markets, our reputation, our business, results of operations, financial condition and cash flows. In addition, the impact of such risks may be outside of Neogen’s control and could decrease our ability to sell products internationally, which could adversely affect our business, financial condition, results of operations or ~~financial position.~~

~~Item 6.~~

~~Exhibits~~

cash flows. For example, as a result of the ongoing military conflict between Russia and Ukraine and resulting heightened economic sanctions from the United States and the international community, Neogen has discontinued sales into Russia. The United States and other countries have imposed significant sanctions and could impose even wider sanctions and take other actions should the conflict further escalate. While it is difficult to anticipate the effect the sanctions announced to date may have on Neogen, any further sanctions imposed or actions taken by the United States or other countries, including any expansion of sanctions beyond Russia, could affect the global price and availability of raw materials, reduce our sales and earnings or otherwise have an adverse effect on our business and results of operations.


~~Dated: March 29, 2018~~		/s/ John E. Adent
	John E. Adent
		~~/s/ James L. Herbert~~ President & Chief Executive Officer
		~~James L. Herbert~~
		~~Executive Chairman~~
		(Principal Executive Officer)


~~Dated: March 29, 2018~~

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


	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


	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


	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


	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


	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,
	Three Months Ended February 28,				Increase/
(in thousands)	2022		2021		(Decrease)			%
Food Safety
Natural Toxins, Allergens & Drug Residues	$	17,965	$	18,255	$	(290	)		(2	)%
Bacterial & General Sanitation		11,288		10,335		953			9	%
Culture Media & Other		18,145		16,094		2,051			13	%
Rodenticides, Insecticides & Disinfectants		9,577		8,436		1,141			14	%
Genomics Services		5,781		5,304		477			9	%

	$	62,756	$	58,424	$	4,332			7	%
Animal Safety
Life Sciences	$	1,339	$	1,399	$	(60	)		(4	)%
Veterinary Instruments & Disposables		17,047		12,494		4,553			36	%
Animal Care & Other		9,449		8,873		576			6	%
Rodenticides, Insecticides & Disinfectants		18,359		18,085		274			2	%
Genomics Services		19,294		17,434		1,860			11	%

	$	65,488	$	58,285	$	7,203			12	%

Total Revenues	$	128,244	$	116,709	$	11,535			10	%


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


32		Certification ~~pursuant~~Pursuant to 18 U.S.C. ~~section~~Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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