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☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
August 31, 2022.
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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 |
Large accelerated filer | ☒ | Accelerated filer | ☐ | |||||||
Non-accelerated filer | ☐ | Smaller Reporting Company | ☐ | |||||||
Emerging growth company | ☐ |
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CEO Certification | ||||||
CFO Certification | ||||||
Section 906 Certification |
Sheets (unaudited) Assets Current Assets Cash and cash equivalents Marketable securities (at fair value, which approximates cost) Accounts receivable, less allowance of $1,750 and $2,000 Inventories, net Prepaid expenses and other current assets Total Current Assets Property and Equipment, net Other Assets Goodwill Othernon-amortizable intangible assets Customer-based intangibles, net of accumulated amortization of $23,846 and $20,846 at February 28, 2018 and May 31, 2017 Othernon-current assets, net of accumulated amortization of $11,893 and $9,931 at February 28, 2018 and May 31, 2017 Total Assets Liabilities and Equity Current Liabilities Accounts payable Accrued compensation Income taxes Other accruals Total Current Liabilities Deferred Income Taxes Non-Current Liabilities Total Liabilities 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 Additionalpaid-in capital Accumulated other comprehensive loss Retained earnings Total Neogen Corporation Stockholders’ Equity Non-controlling interest Total Equity Total Liabilities and Equity Revenues Product revenues Service revenues Total Revenues Cost of Revenues Cost of product revenues Cost of service revenues Total Cost of Revenues Gross Margin Operating Expenses Sales and marketing General and administrative Research and development Total Operating Expenses Operating Income Other Income Interest income Other income Total Other Income Income Before Taxes Provision for Income Taxes Net Income Net (Income)/Loss Attributable toNon-Controlling Interest Net Income Attributable to Neogen Net Income Attributable to Neogen Per Share Basic Diluted Net Income Other comprehensive income (loss), net of tax: currency translation adjustments Comprehensive income Comprehensive loss (income) attributable tonon-controlling interest Comprehensive income attributable to Neogen Balance, May 31, 2017 Issuance of shares under share-based compensation plan Issuance of shares under employee stock purchase plan Conversion of minority interest to retained earnings Net income for the nine months ended February 28, 2018 Other comprehensive income Balance February 28, 2018 Cash Flows From Operating Activities Net Income Adjustments to reconcile net income to net cash provided from operating activities: Depreciation and amortization Share-based compensation Excess income tax benefit from the exercise of stock options (see note 5) Change in operating assets and liabilities, net of business acquisitions: Accounts receivable Inventories Prepaid expenses and other current assets Accounts payable, accruals and other changes Net Cash Provided By Operating Activities Cash Flows Used In Investing Activities Purchases of property, equipment and othernon-current intangible assets Proceeds from the sale of marketable securities Purchases of marketable securities Business acquisitions, net of cash acquired Net Cash Used In Investing Activities Cash Flows From Financing Activities Exercise of stock options Excess income tax benefit from the exercise of stock options Net Cash Provided By Financing Activities Effect of Exchange Rates on Cash Net Increase In Cash and Cash Equivalents Cash And Cash Equivalents At Beginning Of Period Cash And Cash Equivalents At End Of Period AND CONSOLIDATION 2022. Raw materials Work-in-process Finished and purchased goods Numerator for basic and diluted net income per share: Net income attributable to Neogen Denominator for basic net income per share: Weighted average shares Effect of dilutive stock options Denominator for diluted net income per share Net income attributable to Neogen per share: Basic Diluted As of and for the three months ended February 28, 2018 Product revenues to external customers Service revenues to external customers Total revenues to external customers Operating income (loss) Total assets As of and for the three months ended February 28, 2017 Product revenues to external customers Service revenues to external customers Total revenues to external customers Operating income (loss) Total assets For the nine months ended February 28, 2018 Product revenues to external customers Service revenues to external customers Total revenues to external customers Operating income (loss) For the nine months ended February 28, 2017 Product revenues to external customers Service revenues to external customers Total revenues to external customers Operating income (loss) Options outstanding June 1, 2017 Granted Exercised Forfeited Options outstanding February 28, 2018 Risk-free interest rate Expected dividend yield Expected stock price volatility Expected option life assumptions. No options were granted in the first quarter of fiscal year 2023. COMBINATIONS segment and are managed through Neogen’s Scotland operation. sheets. as follows: Natural Toxins, Allergens & Drug Residues Bacterial & General Sanitation Dehydrated Culture Media & Other Rodenticides, Insecticides & Disinfectants Genomics Services Life Sciences Veterinary Instruments & Disposables Animal Care & Other Rodenticides, Insecticides & Disinfectants Genomics Services Total Revenues Natural Toxins, Allergens & Drug Residues Bacterial & General Sanitation Dehydrated Culture Media & Other Rodenticides, Insecticides & Disinfectants Genomics Services Life Sciences Veterinary Instruments & Disposables Animal Care & Other Rodenticides, Insecticides & Disinfectants Genomics Services Total Revenues large research project which did not recur. exceeded revenue growth. bad debt write offs related to the pandemic.Sheet February 28,
2018 May 31,
2017 (Unaudited) (Audited) $ 82,066 $ 77,567 110,089 66,068 73,209 68,576 77,506 73,144 9,334 7,606 352,204 292,961 72,514 61,748 99,478 104,759 15,011 14,323 33,518 35,983 22,876 18,635 $ 595,601 $ 528,409 $ 19,654 $ 16,244 5,469 5,002 960 936 11,210 13,820 37,293 36,002 11,400 17,048 4,973 3,602 53,666 56,652 — — 8,253 8,149 197,246 174,742 (5,303 ) (7,203 ) 341,459 295,926 541,655 471,614 280 143 541,935 471,757 $ 595,601 $ 528,409 Cash and cash equivalents $ 107,098 $ 44,473 Marketable securities 240,613 336,578 Accounts receivable, net of allowance of $1,800 and $1,650 at August 31, 2022 and May 31, 2022, respectively 93,112 99,674 Inventories 129,039 122,313 Prepaid expenses and other current assets 38,045 23,760 Total Current Assets 607,907 626,798 Net Property and Equipment 121,021 110,584 Other Assets Right of use assets 2,834 3,184 Goodwill 140,067 142,704 15,182 15,397 Amortizable intangible and other assets, net of accumulated amortization of $55,201 and $55,416 at August 31, 2022 and May 31, 2022, respectively 88,239 92,106 2,155 2,156 Total Assets $ 977,405 $ 992,929 Current Liabilities Accounts payable $ 27,002 $ 34,614 Accrued compensation 8,295 11,123 Income tax payable 3,921 2,126 Deferred revenue 5,464 5,460 Other accruals 22,322 24,521 Total Current Liabilities 67,004 77,844 Deferred Income Tax Liability 15,949 17,011 10,654 10,700 Total Liabilities 93,607 105,555 Commitments and Contingencies (note 10) Equity Preferred stock, $1.00 par value, 100,000 shares authorized, none issued and outstanding — — Common stock, $0.16 par value, 120,000,000 shares authorized, 107,837,730 and 107,801,094 shares issued and outstanding at August 31, 2022 and May 31, 2022, respectively 17,254 17,248 312,750 309,984 Accumulated other comprehensive loss (39,326 ) (27,769 ) Retained earnings 593,120 587,911 Total Stockholders’ Equity 883,798 887,374 Total Liabilities and Stockholders’ Equity $ 977,405 $ 992,929 Three Months Ended Nine Months Ended February 28, February 28, 2018 2017 2018 2017 $ 78,142 $ 73,964 $ 244,298 $ 223,170 17,750 14,421 48,667 39,577 95,892 88,385 292,965 262,747 40,352 38,816 124,785 113,241 10,019 8,689 27,517 24,556 50,371 47,505 152,302 137,797 45,521 40,880 140,663 124,950 17,492 15,340 52,331 45,824 9,280 8,548 29,096 25,094 2,836 2,641 8,901 8,087 29,608 26,529 90,328 79,005 15,913 14,351 50,335 45,945 524 271 1,322 690 844 1,105 1,913 1,098 1,368 1,376 3,235 1,788 17,281 15,727 53,570 47,733 700 5,350 7,900 16,250 16,581 10,377 45,670 31,483 5 (90 ) (70 ) (163 ) $ 16,586 $ 10,287 $ 45,600 $ 31,320 $ 0.32 $ 0.20 $ 0.89 $ 0.62 $ 0.32 $ 0.20 $ 0.88 $ 0.61 Revenues Product revenues $ 106,792 $ 104,013 Service revenues 25,557 24,292 Total Revenues 132,349 128,305 Cost of Revenues Cost of product revenues 55,441 54,726 Cost of service revenues 14,638 13,571 Total Cost of Revenues 70,079 68,297 Gross Margin 62,270 60,008 Operating Expenses Sales and marketing 23,383 20,555 General and administrative 27,944 13,383 Research and development 4,881 4,325 Total Operating Expenses 56,208 38,263 Operating Income 6,062 21,745 Other Income (Expense) Interest income 969 203 Other expense (372 ) (221 ) 597 (18 ) Income Before Taxes 6,659 21,727 Provision for Income Taxes 1,450 4,650 Net Income $ 5,209 $ 17,077 Net Income Per Share Basic $ 0.05 $ 0.16 Diluted $ 0.05 $ 0.16 Weighted Average Shares Outstanding Basic 107,837 107,490 Diluted 107,857 108,109 Three Months Ended Nine Months Ended February 28, February 28, 2018 2017 2018 2017 $ 16,581 $ 10,377 $ 45,670 $ 31,483 1,163 441 1,900 (3,743 ) 17,744 10,818 47,570 27,740 5 (90 ) (70 ) (163 ) $ 17,749 $ 10,728 $ 47,500 $ 27,577 Net income $ 5,209 $ 17,077 Foreign currency translations (11,133 ) (4,623 ) Unrealized loss on marketable securities, net of tax (424 ) (206 ) Total comprehensive income (loss) $ (6,348 ) $ 12,248 StatementStatements of Accumulated Additional Other Non- Common Stock Paid-in Comprehensive Retained controlling Shares Amount Capital Income (Loss) Earnings Interest Total 50,932 $ 8,149 $ 174,742 $ (7,203 ) $ 295,926 $ 143 $ 471,757 631 101 21,456 21,557 20 3 1,048 1,051 (67 ) 67 — 45,600 70 45,670 1,900 1,900 51,583 $ 8,253 $ 197,246 $ (5,303 ) $ 341,459 $ 280 $ 541,935 Balance, June 1, 2022 107,801 $ 17,248 $ 309,984 $ (27,769 ) $ 587,911 $ 887,374 Exercise of options and share-based compensation expense 4 1 1,904 — — 1,905 Issuance of shares under employee stock purchase plan 33 5 862 — — 867 Net income for the three months ended August 31, 2022 — — — — 5,209 5,209 Other comprehensive loss for the three months ended August 31, 2022 — — — (11,557 ) — (11,557 ) Balance, August 31, 2022 107,838 $ 17,254 $ 312,750 $ (39,326 ) $ 593,120 $ 883,798 Balance, June 1, 2021 107,468 $ 17,195 $ 294,953 $ (11,375 ) $ 539,604 $ 840,377 Exercise of options and share-based compensation expense 6 1 1,838 — — 1,839 Issuance of shares under employee stock purchase plan 19 3 896 — — 899 Net income for the three months ended August 31, 2021 — — — — 17,077 17,077 Other comprehensive income for the three months ended August 31, 2021 — — — (4,829 ) — (4,829 ) Balance, August 31, 2021 107,493 $ 17,199 $ 297,687 $ (16,204 ) $ 556,681 $ 855,363 Nine Months Ended February 28, 2018 2017 $ 45,670 $ 31,483 12,682 10,691 3,692 3,932 — (3,671 ) (4,013 ) 5,916 (3,859 ) (9,460 ) (7,316 ) 717 (280 ) 5,580 46,576 45,188 (16,297 ) (13,002 ) 211,327 102,957 (255,348 ) (115,117 ) (468 ) (34,027 ) (60,786 ) (59,189 ) 18,916 15,844 — 3,671 18,916 19,515 (207 ) (888 ) 4,499 4,626 77,567 55,257 $ 82,066 $ 59,883 Cash Flows (For) From Operating Activities Net Income $ 5,209 $ 17,077 Depreciation and amortization 5,729 5,682 Deferred income taxes (1,439 ) (15 ) Share-based compensation 1,867 1,690 Change in operating assets and liabilities, net of business acquisitions: Accounts receivable 4,819 4,036 Inventories (8,330 ) (1,863 ) Prepaid expenses and other current assets (14,682 ) (1,014 ) Accounts payable, accruals and other changes (7,316 ) (2,383 ) Net Cash (For) From Operating Activities (14,143 ) 23,210 Cash Flows From (For) Investing Activities (12,996 ) (1,295 ) Proceeds from the sale of marketable securities 108,488 112,636 Purchases of marketable securities (12,523 ) (136,748 ) Business acquisitions, net of cash acquired (1,331 ) — Net Cash From (For) Investing Activities 81,638 (25,407 ) Cash Flows From Financing Activities Exercise of stock options and issuance of employee stock purchase plan shares 905 1,048 Net Cash From Financing Activities 905 1,048 Effect of Foreign Exchange Rates on Cash (5,775 ) (3,170 ) Net Increase (Decrease) In Cash and Cash Equivalents 62,625 (4,319 ) Cash and Cash Equivalents, Beginning of Period 44,473 75,602 Cash and Cash Equivalents, End of Period $ 107,098 $ 71,283 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 periodsperiod ended February 28, 2018August 31, 2022 are not necessarily indicative of the results to be expected for the fiscal year ending May 31, 2018.2023. 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’sour Annual Report on Form2017.
2022
2022 Commercial Paper & Corporate Bonds 0 - 90 days $ 63,375 $ 106,497 91 - 180 days 60,950 61,373 181 days - 1 year 57,135 91,706 1 - 2 years 59,153 77,002 Total Marketable Securities $ 240,613 $ 336,578
Cost
Gains
Losses Commercial Paper & Corporate Bonds $ 244,125 $ — $ (3,512 ) $ 240,613
Cost
Gains
Losses Commercial Paper & Corporate Bonds $ 339,540 $ 7 $ (2,969 ) $ 336,578 onby the February 28,
2018 May 31,
2017 (in thousands) $ 35,774 $ 33,190 6,231 4,831 35,501 35,123 $ 77,506 $ 73,144 3.
2022
2022 Raw materials $ 62,134 $ 58,667 6,241 6,388 Finished and purchased goods 60,664 57,258 $ 129,039 $ 122,313 Natural Toxins, Allergens & Drug Residues $ 19,787 $ 20,408 Bacterial & General Sanitation 10,728 11,165 Culture Media & Other 19,254 18,046 Rodent Control, Insect Control & Disinfectants 9,575 7,649 Genomics Services 5,299 5,454 $ 64,643 $ 62,722 Life Sciences $ 1,589 $ 1,363 Veterinary Instruments & Disposables 14,673 15,337 Animal Care & Other 10,526 9,219 Rodent Control, Insect Control & Disinfectants 22,214 22,149 Genomics Services 18,704 17,515 $ 67,706 $ 65,583 $ 132,349 $ 128,305 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) $ 16,586 $ 10,287 $ 45,600 $ 31,320 51,537 50,746 51,253 50,438 700 633 761 723 52,237 51,379 52,014 51,161 $ 0.32 $ 0.20 $ 0.89 $ 0.62 $ 0.32 $ 0.20 $ 0.88 $ 0.61 The Board Numerator for basic and diluted net income per share: Net income attributable to Neogen $ 5,209 $ 17,077 Denominator for basic net income per share: Weighted average shares 107,837 107,490 Effect of dilutive stock options and RSUs 20 619 Denominator for diluted net income per share $ 107,857 $ 108,109 Net income attributable to Neogen per share: Basic $ 0.05 $ 0.16 Diluted $ 0.05 $ 0.16 The Company has AND GEOGRAPHIC DATAcleaners, disinfectants and insecticides to assist in the control of rodents, insects and disease in and around agricultural, food production and other facilities.Neogen’sFood Safetyfood safety products, and each of these units reports through the Food Safety segment. In recent years, these operations have expanded to offer the Company’sour complete line of products and services, including those usually associated with the Animal Safety segment such as cleaners, disinfectants, rodenticides, insecticides, veterinary instruments and genomicgenomics services. These additional products and services are managed and directed by existing management and are reported through the Food Safety segment. Food
Safety Animal
Safety Corporate and
Eliminations
(1) Total (in thousands) $ 42,618 $ 35,524 $ — $ 78,142 5,027 12,723 — 17,750 47,645 48,247 — 95,892 8,258 8,493 (838 ) 15,913 188,075 215,371 192,155 595,601 $ 39,318 $ 34,646 $ — $ 73,964 3,631 10,790 — 14,421 42,949 45,436 — 88,385 7,403 7,743 (795 ) 14,351 183,419 215,243 108,636 507,298 8 Food
Safety Animal
Safety Corporate and
Eliminations
(1) Total (in thousands) $ 129,621 $ 114,677 $ — $ 244,298 14,319 34,348 — 48,667 143,940 149,025 — 292,965 25,704 27,691 (3,060 ) 50,335 $ 112,592 $ 110,578 $ — $ 223,170 10,475 29,102 — 39,577 123,067 139,680 — 262,747 24,286 24,616 (2,957 ) 45,945
Safety
Safety
Eliminations (1) Product revenues to external customers $ 57,790 $ 49,002 $ — $ 106,792 Service revenues to external customers 6,853 18,704 — 25,557 Total revenues to external customers 64,643 67,706 — 132,349 Operating income (loss) 8,597 11,881 (14,416 ) 6,062 Total assets 318,463 311,231 347,711 977,405 Product revenues to external customers $ 55,945 $ 48,068 $ — $ 104,013 Service revenues to external customers 6,777 17,515 — 24,292 Total revenues to external customers 62,722 65,583 — 128,305 Operating income (loss) 10,131 12,762 (1,148 ) 21,745 Total assets 291,018 240,208 400,880 932,106 (1) Includes corporate assets, consisting principally of cash and cash equivalents, marketable securities, current and deferred tax accounts and overhead expenses not allocated to specific business segments. Also includes the elimination of intersegment transactions. 95.
August 31, Domestic $ 80,642 $ 77,779 International 51,707 50,526 Total revenue 132,349 128,305 Qualifiedmay behave been granted to directors, officers and employees of theCompanyNeogen 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 ninethree months ended February 28, 2018August 31, 2022 follows: Weighted- Average Shares Exercise Price (in thousands) 2,708 $ 32.88 819 59.26 (668 ) 28.23 (144 ) 37.31 2,715 41.75
Average
Exercise Price Options outstanding June 1, 2022 3,244 $ 32.13 Granted — — Exercised (4 ) 10.75 Forfeited (110 ) 26.94 Options outstanding August 31, 2022 3,130 $ 32.32 and nine month periods ended February 28, 2018August 31, 2022 and 2017,2021, the Company recorded $1,026,000$1,867,000 and $1,198,000 and $3,692,000 and $3,932,000,$1,690,000, respectively, of compensation expense related to its share-based awards. On June 1, 2017, the Company adopted ASUNo. 2016-09, which simplifies the accounting for share-based payments to employees. The guidance requires the recognition of the income effects of awards in the income statement when the awards vest or are settled, thus eliminating additionalpaid-in capital pools. The guidance also allows for a policy election to account for forfeitures as they occur, rather than on an estimated basis, and requires that excess tax benefits be classified as an operating activity on the Statement of Cash Flows. The adoption of this ASU increased income tax expense by $331,000 for the three months ended February 28, 2018 as the reduction in the corporate tax rate from the tax reform enacted in December 2017 resulted in a partial reversal of tax benefit previously recorded at the higher corporate rate in the first and second quarters of the current fiscal year; year to date, income tax expense decreased by $3,463,000 as a result of adoption of the ASU.2018 and fiscal 2017,year 2022, estimated on the date of grant using the Black-Scholes option pricing model, was $14.44 and $11.84, respectively.$8.49. The fair value of stock options granted was estimated using the following weighted-average assumptions: FY 2018 FY 2017 1.6% 1.2% 0.0% 0.0% 27.7% 35.2% 4.0 years 4.0 years Risk-free interest rate 0.4 % Expected dividend yield 0.0 % Expected stock price volatility 32.8 % Expected option life 3.12 years
Average
Fair Value RSUs outstanding June 1, 2022 257 $ 36.14 Granted — — Released — — Forfeited (4 ) 37.60 RSUs outstanding August 31, 2022 253 $ 36.12 has an employeeoffers 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. Thevalue 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 asexpense. Total individual purchases in any year are limited to 10% of the date of purchase.6. NEW ACCOUNTING PRONOUNCEMENTSIn 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 UpdateNo. 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.10In February 2016, the FASB issued ASU No.2016-02—Leases to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and aright-of-use asset representing its right to use the underlying asset for the lease term. The recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessor have not significantly changed from previous U.S. GAAP. This ASU is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2018; 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 additionalpaid-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. ASU2016-13 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 ASU2016-15 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 ASUNo. 2016-15 on its consolidated financial statements.7.compensation.AND PRODUCT LINE ACQUISITIONSDecember 1, 2016,September 17, 2021, the Company acquired the stock of Quat-Chem Ltd.CAPInnoVet, Inc., a chemical companycompanion animal health business that manufactures biosecurity products, basedprovides 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 $21,606,000net cash of $17.9 million paid at closing, including $150,000 of cash placed in cash andescrow 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 final purchase allocation, based upon the fair value of contingentthese assets and liabilities determined using the income approach, included accounts receivable of $308,000, inventory of $531,000, prepayments of $296,000, accounts payable of $120,000, other current liabilities of $84,000,due at the endaccrual calculated using a Monte Carlo simulation utilizing inputs such as probability and timing of eachmilestone achievements, revenue forecasts and volatility, and estimated discount rates relating to established future cash flows of the first two years, basedbusiness), intangible assets of $19.2 million (with an estimated life ofan excessSeptember 21, 2022. The business is operated from our location in Lexington, KY, reporting within the Animal Safety segment.sales formula.cash of $9.5 million paid at closing, including $722,000 of cash placed in escrow payable to the former owner in one year. The finalpreliminary 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,$972,000, 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,$1,889,000, intangible assets of $6,900,000$3.1 million (with an estimated life of5-15In 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 itsfrom their current location and is managed by Neogen Europe,in Liverpool, England, reporting within the Food Safety segment.1127, 2016,9, 2021, the Company acquired the stock of Rogama Industria e Comercio, Ltda.Genetic Veterinary Sciences, Inc., a company that developscompanion animal genetic testing business providing genetic information for dogs, cats and manufactures rodenticidesbirds 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 finalpreliminary 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, net inventory of $960,000, land,$292,000, net property, plant and equipment of $4,734,000,$399,000, prepayments of $54,000, accounts payable of $325,000, unearned revenue of $1.9 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$321,000, intangible assets of $870,000, intangible assets of $5,112,000$5.5 million (with an estimated life of(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 inis operated from its current location in Spokane, Washington, reporting within the Animal Safety segment.8.Thehashad a financing agreement with a bank providing for ana $15,000,000 unsecured revolving line of credit, of $15,000,000, which expiresSeptemberNovember 30, 2019.2023. There were no advances against the line of credit during fiscal year 20172022 and there have been none thus far in fiscal year 2018; there waswere no balance outstanding at February 28, 2018.advances through August 31, 2022. Interest on any borrowings remainedwas at LIBOR plus 100 basis points (rate under the terms of the agreement was 2.82%3.55% at February 28, 2018)August 31, 2022). Financial covenants includeincluded maintaining specified levels of tangible net worth, debt service coverage, and funded debt to EBITDA, each of which the Company was in compliance with at February 28, 2018.9.August 31, 2022. This facility was replaced by the five-year secured term loan facility and five-yearexpensescurrently 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 February 28, 2018both August 31, 2022 and May 31, 2017,2022, measured on an undiscounted basis over an estimated period of 15 years; $54,000years. 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 reducewithin current liabilities and the remainder is recorded withinin othersheet.10. STOCK PURCHASECompany has a stock repurchase program, authorized by the Boardnotional amount of Directorsforward contracts in calendar year 2008, to purchase, subject to market conditions, up to 1,500,000 sharesplace was $18,221,000 and $4,424,000 as of the Company’s common stock. AsAugust 31, 2022 and May 31, 2022, respectively. Foreign currency forward contracts, net Prepaid and Other $ 421 $ (78 ) 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 2018.12 Foreign currency forward contracts Other income (expense) $ 882 $ 521 Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operationsforward lookingforward-looking statements. Without limiting the foregoing, the words “believes,” “anticipates,” “plans,” “expects,” “seeks,” “estimates,” and similar expressions are intended to identify forward-looking statements. There are a number of important factors, including competition, recruitment and dependence on key employees, impact of weather on agriculture and food production, effects of the ongoingCritical Accounting PoliciesEstimatesThe discussionthe first quarter of fiscal 2023, we have experienced higher than expected input cost inflation, including higher transportation, supply chain and analysislabor costs, that negatively impacted operating results. Pricing actions taken during fiscal 2022 and the first quarter of fiscal 2023 mitigated some, but not all, of the Company’sinflationary pressures. Ongoing inflation may also have an impact on our customer’s purchasing decisions and order patterns. We estimate inflation will continue to affect us in the remainder of fiscal 2023, although at this time it is impracticable to quantify the impact.resultsliquidity; we expect it to continue to impact us through at least the end of operations are based on the consolidated financial statements that have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires that management make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, management evaluates the estimates, including, but not limited to, those related to receivable allowances, inventories, accruals, goodwill and other intangible assets. These estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.There were no significant changes to the contractual obligations or contingent liabilities and commitments disclosed in the Company’s Annual Report on Form10-K for the fiscal year ended May 31, 2017.The Company adopted ASUNo. 2016-09 related to share-based compensation on June 1, 2017. (See Note 5 Equity Compensation Plans for further discussion).On December 22, 2017, the Tax Cuts and Jobs Act, (“the Tax Act”) was enacted. Among the significant changes to the U.S. Internal Revenue Code, the Tax Act lowers the U.S. federal corporate income tax rate (“Federal Tax Rate”) from 35% to 21% effective January 1, 2018. The Company will compute its income tax for theour fiscal year ending May 31, 2018 using a blended Federal Tax Rate2023. $ 132,349 $ 128,305 3 % $ 64,643 $ 62,722 3 % $ 67,706 $ 65,583 3 % 39 % 39 % 21.8 % 21.4 % $ 5,209 $ 17,077 -69 % $ 11,419 $ 27,206 -58 % $ 27,018 $ 28,896 -6 % $ 0.05 $ 0.16 $ (14,143 ) $ 23,210 * Securitiesacquisitions of Delf/Abbott Analytical (November 2021) and Exchange Commission staff issued Staff Accounting Bulletin No. 118, which addresses how a company recognizes provisional amounts when a company does not havenecessary information available, prepared or analyzed (including computations) in reasonable detail to complete its accounting for the effectacquisitions of the changes in the Tax Act. The measurement period ends when a company has obtained, preparedCAPInnoVet (September 2021) and analyzed the information necessary to finalize its accounting, but cannot extend beyond one year.As of February 28, 2018, the CompanyGenetic Veterinary Sciences (December 2021).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 and13calculate 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, 2017.14Executive OverviewRevenues 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$5.2 million in the first nine months of fiscal year 2017. Net income attributable to Neogen for the third quarter of fiscal 2018 increased 61% to $16.6 million,2023 compared to $10.3$17.1 million in the thirdfirst quarter of the prior year, adversely impacted by $13.7 million in legal, consulting and other expenses related to our agreement to combine with 3M’s Food Safety business. This transition closed on September 1, 2022, after the close of the first quarter.year 2017. Earnings per share for the third quarter 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. 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, each2023 compared to the same period in the prior year. ForCurrency translations decreased comparative revenues by approximately $3.9 million in the first quarter of fiscal 2023, due to the overall organicstronger U.S. dollar relative to currencies in the United Kingdom, Europe, Australia, and Argentina for the comparative period. On a neutral currency basis, international sales increased 10%. Excluding revenues from the Delf/Abbott Analytical and; organic growth on a neutral currency basis. Revenue changes, expressed in percentages, for the three month period of fiscal 2023 compared to the same period in the Food Safety and Animal Safety segments was 9% andprior year are as follows for each of our international locations:
% Inc (Dec)
USD
% Inc (Dec)
Local Currency 5 % 19 % (13 )% 1 % 13 % 14 % 19 % 20 % 34 % 78 % 1 % (6 )% (4 )% 16 % (18 )% (14 )% 25 % 33 % (7 )% (3 )% (8 )% (2 )% , respectively. The acquisitions of Rogama, purchased inmid-December 2016, and Neogen Australasia, in September 2017, contributed $1.6 million to the overall revenue growth in the third quarter. Food Safety segment revenuesfirst quarter, led by a 31% increase in sales of cleaners and disinfectants, aided by the acquisition of Delf (UK) Ltd. in December 2021; in local currency, the organic increase was 12%. For the Megazyme operation, located in Ireland, the prior year first quarter included end sales to customers in the U.S. These end customer sales were transitioned to our U.S. operations in August 2021.17%13% in this year’s first quarter, driven by strong sales of the company’s mycotoxin test kits, including tests to detect aflatoxin and Animal Safety segment revenues increased 7%deoxynivalenol (DON), as well as increases in veterinary instruments, insect and rodent controls products, and genomics testing. Neogen Latinoamerica sales rose 19% for the year to date period. Overall organicfirst quarter, led by increases across the company’s diagnostic testing portfolio and culture media, as well as higher sales increased 7%of rodent control products and cleaners and disinfectants. Sales at Neogen China decreased 18% for the three month period as the country’sto date period; the organic increases were 9% for the Food Safety segmentwas only partially offset by bovine genomic service increases.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 $37.4other laboratory services, was $25.6 million in the thirdfirst quarter of fiscal 2018,2023, an increase of 17%5% over the prior year first quarter revenues of $24.3 million. Excluding the contribution from the December 2021 acquisition of Genetic Veterinary Sciences and negative currency impact, service revenue increased 2%. Growth in the beef markets in the U.S. and Brazil was partially offset by COVID-related shutdowns in China and a difficult comparison due to a large domestic research project recorded in the prior year.
(Decrease) $ 19,787 $ 20,408 $ (504 ) (3 )% 10,728 11,165 (437 ) (4 )% 19,254 18,046 1,091 7 % 9,575 7,649 1,926 25 % 5,299 5,454 (155 ) (3 )% $ 64,643 $ 62,722 $ 1,921 3 % $ 1,589 $ 1,363 $ 226 17 % 14,673 15,337 (664 ) (4 )% 10,526 9,219 1,307 14 % 22,214 22,149 65 0 % 18,704 17,515 1,189 7 % $ 67,706 $ 65,583 $ 2,123 3 % $ 132,349 $ 128,305 $ 4,044 3 % Expressed asIn the first quarter, aflatoxin test kit revenues increased 25% primarily from an aflatoxin outbreak in Brazil and new business earned in Mexico and Central America. This increase was offset by a percentage of sales, international sales were 39.0%9% decline across the company’s allergen testing portfolio caused by softening market conditions and supply disruptions for certain products.the quarter, compared to 36.3% in the third quarter a year ago. For the year to date, international sales were $110.5 million, an increase of 20%; international sales were 37.7% of total sales in the current year to date period and 35.1% in the prior year. For each comparative period, international revenue increases were the result of the acquisitions of Quat-Chem (England), Rogama (Brazil) and Neogen Australasia (Australia), and to 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;this category decreased 4% for the year to date period, the positive revenue impact was $2.5 million.Revenues at Neogen Europe increased 16% in U.S. dollars in the thirdfirst quarter compared to the same period in the prior year; foryear. In the nine month period,first quarter this year, there was a significant decrease in Solerisrose 10%. Fordue to a difficult comparison to strong prior year placements. Solerisquarter, a 39% increase in genomics revenues offset lower mycotoxinprior year, and the ANSR pathogen detection product line grew 13% from new equipment placements and higher test kit sales, as last year’s deoxynivalenol (DON) outbreaksales.corn crops in western Europe did not repeat in the current year. For the year to date period, genomics salesthis category 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 million7% in the quarter ended February 28, 2018, an increase of $3.4 million, or 24%,August 31, 2022 compared to $14.4 million in the thirdfirst 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 to the global cattle and companion animal markets, increased testing volumes with a large poultry customer and, to a lesser extent, revenues from the acquisition of Neogen Australasia, in September 2017.15Revenues Three Months ended February 28, Increase/ 2018 2017 (Decrease) % (in thousands) Food Safety $ 16,807 $ 16,453 $ 354 2 % 8,992 8,348 644 8 % 10,511 10,383 128 1 % 7,359 5,040 2,319 46 % 3,976 2,725 1,251 46 % $ 47,645 $ 42,949 $ 4,696 11 % Animal Safety $ 2,769 $ 2,332 $ 437 19 % 10,630 10,000 630 6 % 7,535 6,311 1,224 19 % 14,590 16,111 (1,521 ) (9 )% 12,723 10,682 2,041 19 % $ 48,247 $ 45,436 $ 2,811 6 % $ 95,892 $ 88,385 $ 7,507 8 % Nine Months ended February 28, Increase/ 2018 2017 (Decrease) % (in thousands) Food Safety $ 54,960 $ 53,090 $ 1,870 4 % 27,435 25,340 2,095 8 % 32,483 29,792 2,691 9 % 18,175 7,088 11,087 156 % 10,887 7,757 3,130 40 % $ 143,940 $ 123,067 $ 20,873 17 % Animal Safety $ 7,589 $ 7,261 $ 328 5 % 32,804 29,281 3,523 12 % 24,056 21,563 2,493 12 % 50,228 52,796 (2,568 ) (5 )% 34,348 28,779 5,569 19 % $ 149,025 $ 139,680 $ 9,345 7 % $ 292,965 $ 262,747 $ 30,218 12 % The Company’s Food Safety segment revenues were $47.6 million in the quarter ended February 28, 2018, an increase of 11% compared to the same period in the prior year. For the nine month period, Food Safety revenues increased 17% to $143.9 million. Organic growth for the segment was 9% for both the quarter and year to date periods, with the acquisition of Rogama, occurring on December 21, 2016, contributing the remainder of the growth.Natural Toxins, Allergens & Drug Residues sales increased 2% in the third quarter; revenues for the year to date period increased 4%. Sales of dairy drug residue kits, used to detect the presence of antibiotics in raw milk,food quality and nutritional analysis products 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 moderate16outbreaks 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 inListeria products, including the Company’s newListeria 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 in9% over the prior year, dueas the products were integrated into U.S. channels. The recently introduced Neogen Analytics platform continued to a new requirement for drug testing of commercial truck drivers, however, sales of these kits in Brazil have decreasedmake strong inroads 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, Insecticidesmarket.products sold through the Company’s Food Safety operations increased 46% in the third quarter; the organic sales increase–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 recur25% in the next 12 months. The increase in sales was partially offset by terminationfirst quarter 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 yearfiscal 2023 compared 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 forExcluding the nine month period increased 7% to $149 million compared to $139.7 million inrevenue contribution from the prior year. Organic growthDelf acquisition in this segmentcategory, the overall increase 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, partially9%, primarily due to order timing, and have risen 5% for the year to date period. The Company has increased volumes of forensic test kits sold to commercial labs in the U.S.Veterinary Instruments & Disposables revenues increased 6% and 12% for the three and nine month periods, respectively. For both periods, the increase is primarily the result of strength in detectable needles, syringes and animal marking products. Sales of Animal Care & Other products increased 19% in the quarter ended February 28, 2018, compared to the same period in the prior year; the year to date increase was 12%. The increase in the current year is due to market share gains 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 manufacturerhigher demand of cleaners and disinfectants in January 2017 resultedEurope, Brazil, Mexico and Central America.lost sales for those distributed products of $1.4 millionBrazil was more than offset by unfavorable currency comparisons in the third quarter of the current fiscal yearU.K. and $3.9 million for the year to date period. These losses were offset by an 11% increaseCOVID-related lab closures in rodenticide salesChina.thirdfirst 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 growthincrease was due to higher demand from customers purchasing substrates and reagents used in clinical diagnostic test kits.both periods was ledthe three month period ended August 31, 2022, primarily due to a 6% decrease in sales of veterinary instruments. This category had increased by a strong 52% in the first quarter a year ago.sales to the global cattle and companion animal markets, higherbeef market were more than offset by unfavorable currency comparisons in Australia, lower sample volumes from a large poultry customer in the porcine market and a difficult prior year comparison due to a lesser extent, revenues from the acquisition of Neogen Australasia, in September 2017.47.5%47.0% in the thirdfirst quarter of fiscal 20182023 compared to 46.3%46.8% in the same quarter a year ago. GrossAnimal Safety gross margins increased 200 basis points, with pricing actions taken in the prior fiscal year and a mix shift towards higher margin animal care products driving the improvement. Food Safety gross margins declined 160 basis points, primarily from the impact of lower gross margins from the Delf acquisition. Within each segment, increased raw material and freight in costs continued to pressure gross margins in certain product lines.were positively impacted by lower costs inputs at the Company’s genomics operations and favorable product mix towards higher margin diagnostic and animal care products; this improvement was somewhat offset by lower sales of mycotoxin test kitsprimarily due to a prior year outbreak of DON in corn cropsrate increases and fuel surcharges from both small package and truckload shippers.U.S.first quarter, and western Europe,included $13.7 million in legal, consulting and other professional fees and expenses related to our combination with 3M’s Food Safety business, which did not recurclosed on September 1, 2022. After adjusting for these deal-related expenses, first quarter run rate general and administrative expenses were $14.2 million, an increase of $829,000, or 6%. The increase was primarily the result of incremental expense from acquisitions, including amortization, stock based compensation grants, and license fees relating to information technology infrastructure and software investments.currentfirst quarter of fiscal year. Gross margin for the nine month period ended February 28, 2018 was 48.0%2023, an increase of $557,000, or 13%, compared to 47.6%the same period in the prior year. The increase was primarily the result of external costs for testing and validation for new commercial products in the Animal Safety segment, and to a lesser extent, compensation and other personnel related increases.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 mix17changes 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 ExpensesOperating expenses were $29.6 million in the third quarter, compared to $26.5 million in the same quarter of last fiscal year, anincrease 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 IncomeOperating 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,sales, operating income was 16.6%4.6% for the first quarter of fiscal 2023 compared to 16.2% in last year’sthird quarter. The improvement in operating margin percentage16.9%, respectively, for the comparativesame period in the prior year. Adjusting for the costs resulting from the 3M transaction, operating income was $19.8 million, or 15.0%, for the first quarter of the 2023 fiscal year.
August 31, $ 969 $ 203 (421 ) (151 ) 49 (70 ) $ 597 $ (18 ) higher gross margins offset somewhat by operating$13.7 million in legal, consulting, professional fees and other expenses which rose more thanfrom the 3M Food Safety transaction. Excluding those charges and adjusting to the effective tax rate, net income was $15.9 million.overall revenue increase. ForCompany, and because thesenine months ended February 28, 2018,Company operates in.was $50.3 million, an increase of $4.4 million, or 10%, compared to operating income of $45.9 milliontaxes). EBITDA also forms the basis for the same period last year. Expressedmeasurement of Adjusted EBITDA (discussed below).revenue, yeartotal revenues. We present Adjusted EBITDA margin as a performance measure to dateanalyze the level of Adjusted EBITDA generated from total revenue.was 17.2% comparedcash flow from operating activities or other measures of financial performance. This information does not purport to 17.5%represent the results Neogen would have achieved had any of the transactions for which an adjustment is made occurred at the beginning of the periods presented or as of the dates indicated. This information is inherently subject to risks and uncertainties. It may not give an accurate or complete picture of Neogen’s financial condition or results of operations for the periods presented and should not be relied upon when making an investment decision.prior year.Other Incomemethod of calculation.Income TaxOther income was $1.4 millionamortized; andboththese limitations by relying primarily on the third quarterfinancial statements of fiscal 2018Neogen and using thesesame period in 2017. Components of othermost directly comparable GAAP measure.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,EBITDA 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 of 4%, compared to prior year third quarter expense of $5.4 million, an effective tax rate of 34%. The Company recorded favorable tax adjustments totaling $2.9 million during the quarterAdjusted EBITDA is as the result of tax reform passed in the U.S. in December 2017. The tax reform reduced the statutory federal income tax rate from 35% to 21%, and also resulted in other adjustments to income tax expense. The Company will compute its income taxfollows: $ 5,209 $ 17,077 1,450 4,650 5,729 5,682 (969 ) (203 ) 1,867 1,690 13,732 — fiscal year ending May 31, 2018 using a blended Federal Tax Rate of 29.2%. Accordingly, first and second quarter income previously subject to tax at the 35% Federal Tax Rate benefitted from the 29.2% Federal Tax Rate. As required by generally accepted accounting principles, the Company revalued its net deferred tax liabilities during the quarter to reflect the lower rate, resulting in a credit to income tax expense of $5.6 million. In addition, the Company was required to estimate its cumulative unrepatriated foreign earnings and profits and calculate tax owed on those earnings and profits during the third quarter. This tax was estimated at $2.7 million, and the amount was recorded as federal income tax expense; payment of the tax is permitted over an eight year period.18For the first ninethree months of fiscal 2018, income tax expense was $7.9 million2023 compared to $16.3 million in the prior year; the current year to date effective tax rate was 15%, compared to an effective tax ratefirst three months of 34% in the prior fiscal year. For the year to date period, the lower effective rate is primarily the result of the tax reform passed in the U.S. in December 2017 as discussed in the preceding paragraph. Additionally, during the year the Company has recorded credits of $3.4 million to federal income tax expense for excess tax benefits from the exercise of stock options,2022, due to the adoption of ASU2016-09; refer to Note 5 of the Company’s Consolidated Financial Statements for further information. In the second quarter of fiscal 2018, an IRS examination of the Company’s federal income tax returns for fiscal years 2014, 2015 and 2016 was concluded. As a result of the favorable outcome of the audit, the Company reversed a total of $816,000 from its reserve for uncertain tax positions,operating expenses growth which had been accrued in prior fiscal years, with a corresponding credit to federal income tax expense.Net IncomeNet income attributable to Neogen increased 61% from $10.3 million to $16.6 million for the three month period ended February 28,2018. For the year to date period, net income was $45.6 million, a 46% increase over prior year net income of $31.3 million. Pre tax income increases of 10% for the quarter and 12% for the year to date were favorably impacted by the effects of tax reform, excess tax benefits from the exercise of stock options, and positive results from the IRS examination that concluded during the year’s second quarter.the CompanyNeogen was $192.2$347.7 million at February 28, 2018August 31, 2022, compared to $143.6$381.1 million at May 31, 2017. Approximately $46.52022. Cash flow from operating activities was negative $14.1 million was generated from operations during the first ninethree months of fiscal 2018.2023, the result of deal-related expenses, inventory increases, and $1.3 million on business acquisitions. Net cash proceeds of $18.9 million$905,000 were realized from the exercise of stock options and issuance of shares under the Company’s employee stock purchase planour Employee Stock Purchase Plan during the same period. The Companyfirst three months of fiscal 2023. We spent $16.3$13.0 million for property, equipment and otherduringin the first ninethree months of fiscal 2018.Accounts2023, with a significant portion of expenditures on IT for items such as laptops and software related to the 3M Food Safety business.$73.2$93.1 million at February 28, 2018, an increase of $4.6 million, or 7%,August 31, 2022 compared to $68.6$99.7 million at May 31, 2017, less than the increase in revenue. Days2022. Days’ sales outstanding, a measurement of the time it takes to collect receivables, were 6360 days at February 28, 2018August 31, 2022, compared to 6062 days at May 31, 2017. All2022 and 59 days at August 31, 2021. We have continued to carefully monitor our customer accounts are actively managed and no lossesreceivables during theexcess of amounts reserved are currently expected.balances were $77.5was $129.0 million at February 28, 2018,August 31, 2022, an increase of $4.4$6.7 million, or 6%, compared to $73.1 million ata May 31, 2017.2022 balance of $122.3 million. The Company actively monitors itshigher inventory and balanceslevels are primarily reflective of the need for adequate product availability to minimize backorders with a desire to improve inventory turnover and efficiency levels. Formal programsinflationary pressures on raw material costs. Additionally, we have been institutedincreasing inventory levels in an effort to reduce the impact of higher freight costs and to prevent backorders, as vendor order fulfillment has been erratic and certain suppliers are requiring higher minimum order levels due to their capacity constraints.20182023, Neogen, 3M, and Garden Spinco, a newly formed subsidiary of 3M created to improve inventory turnover.Inflationcarve out 3M’s Food Safety business, closed on the transaction which had previously been announced in December 2021, combining 3M’s Food Safety business with Neogen in a Reverse Morris Trust transaction.changing prices area five-year senior secured revolving facility in the amount of $150.0 million (collectively, the “Credit Facilities”), which became available in connection with the merger and related transactions. The loan facility was funded to Garden Spinco on August 31, 2022, and upon the effectiveness of the merger on September 1, 2022, became Neogen’s obligation. Financial covenants include maintaining specified levels of funded debt to EBITDA, and debt service coverage. Pricing for the term loan is term SOFR plus 235 basis points. The Credit Facilities, together with the Notes below, represent the financing incurred in connection with the merger of the 3M Food Safety business with Neogen’s.expectedreceive any proceeds from the sale of the Notes by the selling securityholder. Prior to havethe distribution of the shares of Garden SpinCo’s common stock to 3M stockholders, the Notes were guaranteed on 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 existing cash and marketable securities balances at February 28, 2018 along with available borrowingssenior unsecured basis by 3M. Upon consummation of such distribution, 3M was released from all obligations under its credit facilityguarantee. Upon the effectiveness of the merger on September 1, 2022, the Notes became guaranteed on a senior unsecured basis by Neogen and certain wholly-owned domestic subsidiaries of Neogen.expected to be generated from future operations, will be sufficient to fund activities for the foreseeable future. However, existing cashgeneration and borrowing capacity may not be sufficient to meet the Company’s cash requirements to fund the operating business, repay debt obligations, commercialize products currently under development or itsexecute our future plans to acquire other organizations, technologies oradditional businesses, technology and products that fit within the Company’s mission statement.our strategic plan. Accordingly, the Companywe may be required, or may choose, to issue additional equity securities or enter into other financing arrangements for a portion of itsour future financingcapital needs.19
adversely affected by currency fluctuations.
Risk Category | Hypothetical Change | August 31, 2022 | Impact | |||||
(dollars in thousands) | ||||||||
Foreign Currency - Revenue | 10% Decrease in exchange rates | $ | 4,309 | Earnings | ||||
Foreign Currency - Hedges | 10% Decrease in exchange rates | 1,822 | Fair Value | |||||
Interest Income | 10% Decrease in exchange rates | 97 | Earnings |
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subject to certain legal and other proceedings in the normal courseincorporated by reference.21
NEOGEN CORPORATION Dated: March 29, 2018John E. Adent /s/ James L. HerbertJames L. HerbertExecutive Chairman(Principal Executive Officer) Dated: March 29, 2018Steven J. Quinlan Vice President & Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) 22