10-Q 1 neog-20230831.htm 10-Q 10-Q
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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 August 31, 2023.

or

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

For the transition period from to

Commission file number 0-17988

Neogen Corporation

(Exact name of registrant as specified in its charter)

Michigan

38-2367843

(State or other jurisdiction of

incorporation or organization)

(IRS Employer

Identification Number)

620 Lesher Place

Lansing, Michigan 48912

(Address of principal executive offices, including zip code)

(517) 372-9200

(Registrant’s telephone number, including area code)

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

 

Title of each Class

Trading
Symbol(s)

Name of each exchange

on which registered

Common Stock, $0.16 par value per share

NEOG

NASDAQ Global Select Market

N/A

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

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller Reporting Company

Emerging growth company

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

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

As of August 31, 2023 there were 216,310,582 shares of Common Stock outstanding.

 

 


 

NEOGEN CORPORATION

TABLE OF CONTENTS

 

Page No.

PART I. FINANCIAL INFORMATION

 

 

Item 1.

Interim Condensed Consolidated Financial Statements (unaudited)

 

2

Condensed Consolidated Balance Sheets – August 31, 2023 and May 31, 2023

 

2

Condensed Consolidated Statements of Income – three months ended August 31, 2023 and 2022

 

3

Condensed Consolidated Statements of Comprehensive Income (Loss) – three months ended August 31, 2023 and 2022

 

4

Condensed Consolidated Statements of Equity – three months ended August 31, 2023 and 2022

 

5

Condensed Consolidated Statements of Cash Flows – three months ended August 31, 2023 and 2022

 

6

Notes to Interim Condensed Consolidated Financial Statements – August 31, 2023

 

7

Item 2.

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

 

25

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

35

Item 4.

Controls and Procedures

 

36

 

 

PART II. OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

 

37

Item 1A.

Risk Factors

 

37

Item 6.

Exhibits

 

38

 

 

SIGNATURES

 

39

 

 

CEO Certification

 

 

 

 

CFO Certification

 

 

 

 

Section 906 Certification

 

 

1


 

PART I – FINANCIAL INFORMATION

Item 1. Interim Condensed Consolidated Financial Statements

Neogen Corporation

Condensed Consolidated Balance Sheets (unaudited)

(in thousands, except share and per share amounts)

 

 

August 31, 2023

 

 

May 31, 2023

 

Assets

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

Cash and cash equivalents

 

$

178,832

 

 

$

163,240

 

Marketable securities

 

 

60,424

 

 

 

82,329

 

Accounts receivable, net of allowance of $3,205 and $2,827

 

 

137,669

 

 

 

153,253

 

Inventories, net

 

 

140,692

 

 

 

133,812

 

Prepaid expenses and other current assets

 

 

66,176

 

 

 

53,297

 

Total Current Assets

 

 

583,793

 

 

 

585,931

 

Net Property and Equipment

 

 

221,090

 

 

 

198,749

 

Other Assets

 

 

 

 

 

 

Right of use assets

 

 

14,505

 

 

 

11,933

 

Goodwill

 

 

2,137,602

 

 

 

2,137,496

 

Intangible assets, net

 

 

1,588,066

 

 

 

1,605,103

 

Other non-current assets

 

 

16,049

 

 

 

15,220

 

Total Assets

 

$

4,561,105

 

 

$

4,554,432

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

Current portion of finance lease

 

$

2,642

 

 

$

-

 

Accounts payable

 

 

90,210

 

 

 

76,669

 

Accrued compensation

 

 

14,863

 

 

 

25,153

 

Income tax payable

 

 

5,399

 

 

 

6,951

 

Accrued interest

 

 

3,438

 

 

 

11,149

 

Deferred revenue

 

 

3,789

 

 

 

4,616

 

Other accruals

 

 

17,789

 

 

 

20,934

 

Total Current Liabilities

 

 

138,130

 

 

 

145,472

 

Deferred Income Tax Liability

 

 

354,792

 

 

 

353,427

 

Non-current debt

 

 

886,177

 

 

 

885,439

 

Other non-current liabilities

 

 

35,831

 

 

 

35,877

 

Total Liabilities

 

 

1,414,930

 

 

 

1,420,215

 

Commitments and Contingencies (note 12)

 

 

 

 

 

 

Equity

 

 

 

 

 

 

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

 

 

 

 

 

 

Common stock, $0.16 par value, 315,000,000 shares authorized, 216,310,582 and 216,245,501 shares issued and outstanding at August 31, 2023 and May 31, 2023, respectively

 

 

34,610

 

 

 

34,599

 

Additional paid-in capital

 

 

2,571,517

 

 

 

2,567,828

 

Accumulated other comprehensive loss

 

 

(26,496

)

 

 

(33,251

)

Retained earnings

 

 

566,544

 

 

 

565,041

 

Total Stockholders’ Equity

 

 

3,146,175

 

 

 

3,134,217

 

Total Liabilities and Stockholders’ Equity

 

$

4,561,105

 

 

$

4,554,432

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

2


 

Neogen Corporation

Condensed Consolidated Statements of Income (unaudited)

(in thousands, except per share amounts)

 

 

Three Months Ended August 31,

 

 

2023

 

 

2022

 

Revenues

 

 

 

 

 

 

Product revenues

 

$

204,401

 

 

$

106,792

 

Service revenues

 

 

24,586

 

 

 

25,557

 

Total Revenues

 

 

228,987

 

 

 

132,349

 

Cost of Revenues

 

 

 

 

 

 

Cost of product revenues

 

 

96,959

 

 

 

55,441

 

Cost of service revenues

 

 

15,267

 

 

 

14,638

 

Total Cost of Revenues

 

 

112,226

 

 

 

70,079

 

Gross Profit

 

 

116,761

 

 

 

62,270

 

Operating Expenses

 

 

 

 

 

 

Sales and marketing

 

 

45,783

 

 

 

23,383

 

General and administrative

 

 

45,121

 

 

 

27,944

 

Research and development

 

 

6,722

 

 

 

4,881

 

Total Operating Expenses

 

 

97,626

 

 

 

56,208

 

Operating Income

 

 

19,135

 

 

 

6,062

 

Other (Expense) Income

 

 

 

 

 

 

Interest income

 

 

1,790

 

 

 

971

 

Interest expense

 

 

(18,456

)

 

 

(2

)

Other expense

 

 

(806

)

 

 

(372

)

Total Other (Expense) Income

 

 

(17,472

)

 

 

597

 

Income Before Taxes

 

 

1,663

 

 

 

6,659

 

Provision for Income Taxes

 

 

160

 

 

 

1,450

 

Net Income

 

$

1,503

 

 

$

5,209

 

Net Income Per Share

 

 

 

 

 

 

Basic

 

$

0.01

 

 

$

0.05

 

Diluted

 

$

0.01

 

 

$

0.05

 

Weighted Average Shares Outstanding

 

 

 

 

 

 

Basic

 

 

216,309,084

 

 

 

107,837,295

 

Diluted

 

 

216,846,106

 

 

 

107,857,477

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

3


 

Neogen Corporation

Condensed Consolidated Statements of Comprehensive Income (Loss) (unaudited)

(in thousands)

 

 

Three Months Ended August 31,

 

 

2023

 

 

2022

 

Net income

 

$

1,503

 

 

$

5,209

 

Foreign currency translation gain (loss)

 

 

3,223

 

 

 

(11,133

)

Unrealized gain (loss) on marketable securities, net of tax of $183 and ($126)

 

 

576

 

 

 

(424

)

Unrealized gain on derivative instruments, net of tax of $933

 

 

2,956

 

 

 

 

Other comprehensive income (loss), net of tax:

 

 

6,755

 

 

 

(11,557

)

Total comprehensive income (loss)

 

$

8,258

 

 

$

(6,348

)

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

4


 

Neogen Corporation

Condensed Consolidated Statements of Equity (unaudited)

(in thousands, except shares)

 

 

 

 

 

 

 

 

Additional

 

 

Accumulated
Other

 

 

 

 

 

 

 

 

Common Stock

 

 

Paid-in

 

 

Comprehensive

 

 

Retained

 

 

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Loss

 

 

Earnings

 

 

Total

 

Balance, June 1, 2023

 

 

216,245,501

 

 

$

34,599

 

 

$

2,567,828

 

 

$

(33,251

)

 

$

565,041

 

 

$

3,134,217

 

Exercise of options and share-based compensation expense

 

 

2,591

 

 

 

 

 

 

2,661

 

 

 

 

 

 

 

 

 

2,661

 

Issuance of shares under employee stock purchase plan

 

 

62,490

 

 

 

11

 

 

 

1,028

 

 

 

 

 

 

 

 

 

1,039

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,503

 

 

 

1,503

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

6,755

 

 

 

 

 

 

6,755

 

Balance, August 31, 2023

 

 

216,310,582

 

 

$

34,610

 

 

$

2,571,517

 

 

$

(26,496

)

 

$

566,544

 

 

$

3,146,175

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

Other

 

 

 

 

 

 

 

 

Common Stock

 

 

Paid-in

 

 

Comprehensive

 

 

Retained

 

 

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Loss

 

 

Earnings

 

 

Total

 

Balance, June 1, 2022

 

 

107,801,094

 

 

$

17,248

 

 

$

309,984

 

 

$

(27,769

)

 

$

587,911

 

 

$

887,374

 

Exercise of options and share-based compensation expense

 

 

4,000

 

 

 

1

 

 

 

1,904

 

 

 

 

 

 

 

 

 

1,905

 

Issuance of shares under employee stock purchase plan

 

 

32,636

 

 

 

5

 

 

 

862

 

 

 

 

 

 

 

 

 

867

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5,209

 

 

 

5,209

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

(11,557

)

 

 

 

 

 

(11,557

)

Balance, August 31, 2022

 

 

107,837,730

 

 

$

17,254

 

 

$

312,750

 

 

$

(39,326

)

 

$

593,120

 

 

$

883,798

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

5


 

Neogen Corporation

Condensed Consolidated Statements of Cash Flows (unaudited)

(in thousands)

 

 

Three Months Ended August 31,

 

 

2023

 

 

2022

 

Cash Flows From (For) Operating Activities

 

 

 

 

 

 

Net income

 

$

1,503

 

 

$

5,209

 

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

 

 

 

 

 

 

Depreciation and amortization

 

 

28,734

 

 

 

5,729

 

Deferred income taxes

 

 

998

 

 

 

(1,439

)

Share-based compensation

 

 

2,638

 

 

 

1,867

 

Amortization of debt issuance costs

 

 

860

 

 

 

 

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

 

 

 

 

 

 

Accounts receivable, net

 

 

16,242

 

 

 

4,819

 

Inventories

 

 

(6,304

)

 

 

(8,330

)

Prepaid expenses and other current assets

 

 

(12,925

)

 

 

(14,682

)

Accounts payable and accrued liabilities

 

 

4,980

 

 

 

(13,278

)

Interest expense accrual

 

 

(7,711

)

 

 

 

Change in other assets and liabilities

 

 

(6,006

)

 

 

5,962

 

Net Cash From (For) Operating Activities

 

 

23,009

 

 

 

(14,143

)

Cash Flows (For) From Investing Activities

 

 

 

 

 

 

Purchases of property, equipment and other non-current intangible assets

 

 

(30,630

)

 

 

(12,996

)

Proceeds from the maturities of marketable securities

 

 

21,905

 

 

 

108,488

 

Purchases of marketable securities

 

 

 

 

 

(12,523

)

Proceeds from the sale of property and equipment and other

 

 

41

 

 

 

 

Business acquisitions, net of working capital adjustments and cash acquired

 

 

 

 

 

(1,331

)

Net Cash (For) From Investing Activities

 

 

(8,684

)

 

 

81,638

 

Cash Flows From Financing Activities

 

 

 

 

 

 

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

 

 

1,062

 

 

 

905

 

Net Cash From Financing Activities

 

 

1,062

 

 

 

905

 

Effect of Foreign Exchange Rates on Cash

 

 

205

 

 

 

5,775

 

Net Increase In Cash and Cash Equivalents

 

 

15,592

 

 

 

62,625

 

Cash and Cash Equivalents, Beginning of Period

 

 

163,240

 

 

 

44,473

 

Cash and Cash Equivalents, End of Period

 

$

178,832

 

 

$

107,098

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

6


 

NEOGEN CORPORATION

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollar amounts in thousands except per share and share amounts)

1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

DESCRIPTION OF BUSINESS

Neogen Corporation and subsidiaries ("Neogen," "we," "our," or the "Company") develop, manufacture and market a diverse line of products and services dedicated to food and animal safety. Our Food Safety segment consists primarily of diagnostic test kits and complementary products (e.g., culture media) sold to food producers and processors to detect dangerous and/or unintended substances in human food and animal feed, such as foodborne pathogens, spoilage organisms, natural toxins, food allergens, genetic modifications, ruminant by-products, meat speciation, drug residues, pesticide residues and general sanitation concerns. Our diagnostic test kits are generally easier to use and provide quicker results than conventional diagnostic methods. The majority of the test kits are disposable, single-use, immunoassay and DNA detection products that rely on proprietary antibodies and RNA and DNA testing methodologies to produce rapid and accurate test results. Our expanding line of food safety products also includes genomics-based diagnostic technology, and advanced software systems that help testers to objectively analyze and store their results and perform analysis on the results from multiple locations over extended periods.

Neogen’s Animal Safety segment is engaged in the development, manufacture, marketing and distribution of veterinary instruments, pharmaceuticals, vaccines, topicals, parasiticides, diagnostic products, rodent control products, cleaners, disinfectants, insect control products and genomics testing services for the worldwide animal safety market. The majority of these consumable products are marketed through veterinarians, retailers, livestock producers and animal health product distributors. Our line of drug detection products is sold worldwide for the detection of abused and therapeutic drugs in animals and animal products, and has expanded into the workplace and human forensic markets.

BASIS OF PRESENTATION AND CONSOLIDATION

The accompanying unaudited condensed 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 of the results of the interim period have been included in the accompanying unaudited condensed consolidated financial statements. All intercompany balances and transactions have been eliminated in consolidation. The results of operations during the three months ended August 31, 2023 are not necessarily indicative of the results to be expected for the full fiscal year ending May 31, 2024. For more complete financial information, these condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the fiscal year ended May 31, 2023.

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 (expense) income on our condensed consolidated statements of income.

7


 

ACCOUNTING POLICIES

Comprehensive Income (Loss)

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

Fair Value of Financial 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.

The carrying amounts of certain financial instruments, consisting of cash and cash equivalents, accounts receivable, accounts payable, our revolving credit agreement, and long-term debt, approximate their fair value based on either their short maturity or current terms for similar instruments.

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, many our leases are classified as operating leases. Operating leases are included in Other assets, Other accruals and Other non-current liabilities on the Company’s condensed consolidated balance sheets. Finance leases are included in Net property and equipment, debt payable within one year and Non-current debt on the Company’s condensed consolidated balance sheets.

Costs associated with operating leases are recognized on a straight-line basis within operating expenses over the term of the lease. Costs associated with finance leases are recognized on a straight-line basis within depreciation and interest expense over the term of the lease. The right-of-use operating lease assets were $14,505 and $11,933 as of August 31, 2023 and May 31, 2023, respectively. The total current and non-current operating lease liabilities were $14,196 and $12,089 as of August 31, 2023 and May 31, 2023, respectively. The finance lease assets were $2,642 as of August 31, 2023. There were no finance leases recorded as of May 31, 2023. See Note 10. "Debt" for detail on the finance lease liabilities.

8


 

Derivatives

The Company operates on a global basis and is exposed to the risk that its financial condition, results of operations and cash flows could be adversely affected by changes in foreign currency exchange rates and changes in interest rates. To reduce the potential effects of foreign currency exchange rate movements on net earnings, the Company enters into derivative financial instruments in the form of foreign currency exchange forward contracts with major financial institutions and have also entered into interest rate swap contracts as a hedge against changes in interest rates. The Company has established policies and procedures for risk assessment and the approval, reporting and monitoring of derivative financial instrument activities. On the date the derivative is established, the Company designates the derivative as either a fair value hedge, a cash flow hedge or a net investment hedge in accordance with its established policy. Each reporting period, derivatives are recorded at fair value in other current assets, other assets, accrued liabilities and other long-term liabilities. The change in fair value is recorded in accumulated other comprehensive income (loss), and amounts are reclassified into earnings on the condensed consolidated statement of income when transactions are realized. Derivatives that are not determined to be effective hedges are adjusted to fair value with a corresponding adjustment to earnings. The Company does not enter into derivative financial instruments for trading or speculative purposes.

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 and derivatives. 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 and Concentrations of Credit Risk

Financial instruments which potentially subject Neogen to concentrations of credit risk consist principally of accounts receivable. Management attempts to minimize credit risk by reviewing customers’ credit histories before extending credit and by monitoring credit exposure on a regular basis. Collateral or other security is generally not required for accounts receivable. We maintain an allowance for customer accounts that reduces receivables to amounts that are expected to be collected. In estimating the allowance for doubtful accounts, management considers relevant information about past events, current conditions and reasonable and supportable forecasts that affect the collectability of financial assets. 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. No customer accounted for more than 10% of accounts receivable at August 31, 2023 or May 31, 2023, respectively.

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.

9


 

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. The Company's business is organized into two operating segments: Food Safety and Animal Safety. Under the goodwill guidance, management determined that each of its segments represents a reporting unit. Other intangible assets include customer relationships, trademarks, licenses, trade names, covenants not-to-compete and patents. Customer relationships 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 amortized over 2 to 25 years.

Management reviews the carrying amounts of goodwill annually at the reporting unit level, or when indications of impairment exist, to determine if goodwill may be impaired. Goodwill is tested for impairment annually in the fourth quarter. During management's annual test or when there are indicators of impairment, if the carrying amount is deemed to be less than fair value based upon a discounted cash flow analysis and comparison to comparable EBITDA multiples of peer companies, goodwill is reduced to the estimated fair value and a charge is recorded to operations.

Amortizable intangible assets are tested for impairment when indications of impairment exist. If the carrying amounts of these assets are deemed to be less than fair value based upon a discounted cash flow analysis, such assets are reduced to their estimated fair value and a charge is recorded to operations.

Long-Lived Assets

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

Business Combinations

We utilize the acquisition method of accounting for business combinations. This method requires, among other things, that results of operations of acquired companies are included in Neogen’s results of operations beginning on the respective acquisition dates and that assets acquired and liabilities assumed are recognized at fair value as of the acquisition date. Any excess of the fair value of consideration transferred over the fair values of the net assets acquired is recognized as goodwill. As part of our acquisition accounting, the Company will recognize intangible assets. Management determines the fair value of the intangible assets by applying certain valuation methodologies, including the multi-period excess earnings method, which involves the use of significant estimates and assumptions related to forecasted revenue growth rate and customer attrition rate. Valuation specialists are often used to develop and evaluate the appropriateness of the multi-period excess earnings method, our discount rates, our attrition rate and our fair value estimates using our cash flow projections.

The fair value of assets acquired and liabilities assumed in certain cases may be subject to revision based on the final determination of fair value during a period of time not to exceed 12 months from the acquisition date. Legal costs, due diligence costs, business valuation costs and all other business acquisition costs are expensed when incurred.

Our estimates of fair value are based on assumptions believed to be reasonable at that time. If we made different estimates or judgments, it could result in material differences in the fair values of the net assets acquired.

10


 

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. "Equity Compensation Plans".

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.

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 $178,832 and $163,240 as of August 31, 2023 and May 31, 2023, 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 consisting of commercial paper and corporate bonds rated at least A-1/P-1 (short-term) and A/A2 (long-term) with original maturities between 91 days and two years. These securities are classified as available for sale. Changes in fair value are monitored and recorded on a monthly basis and are recorded in other comprehensive income (loss). 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. If fair value is less than its amortized cost basis, then the Company evaluates whether the decline is the result of a credit loss, in which case an impairment is recorded through an allowance for credit losses. Where there is an intention or a requirement to sell an impaired available-for-sale debt security, the entire impairment is recognized in earnings with a corresponding adjustment to the amortized cost basis of the security. 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 (expense) income on the condensed consolidated statements of income.

11


 

Marketable Securities as of August 31, 2023 and May 31, 2023 are listed below by classification and remaining maturities.

 

 

 

Maturity

 

August 31, 2023

 

 

May 31, 2023

 

Commercial Paper & Corporate Bonds

 

0 - 90 days

 

$

36,147

 

 

$

22,552

 

 

91 - 180 days

 

 

17,361

 

 

 

35,692

 

 

181 days - 1 year

 

 

6,916

 

 

 

23,768

 

 

1 - 2 years

 

 

 

 

 

317

 

Total Marketable Securities

 

 

 

$

60,424

 

 

$

82,329

 

 

The components of marketable securities, consisting of commercial paper and corporate bonds, as of August 31, 2023 are as follows:

 

 

Amortized Cost

 

 

Unrealized Gains

 

 

Unrealized Losses

 

 

Fair Value

 

Commercial Paper & Corporate Bonds

 

$

60,885

 

 

$

 

 

$

(461

)

 

$

60,424

 

 

The components of marketable securities, consisting of commercial paper and corporate bonds, as of May 31, 2023 are as follows:

 

 

 

Amortized Cost

 

 

Unrealized Gains

 

 

Unrealized Losses

 

 

Fair Value

 

Commercial Paper & Corporate Bonds

 

$

83,549

 

 

$

 

 

$

(1,220

)

 

$

82,329

 

 

3. INVENTORIES

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

 

 

 

August 31, 2023

 

 

May 31, 2023

 

Raw materials

 

$

64,695

 

 

$

64,971

 

Work-in-process

 

 

6,015

 

 

 

5,369

 

Finished and purchased goods

 

 

69,982

 

 

 

63,472

 

 

$

140,692

 

 

$

133,812

 

 

4. REVENUE RECOGNITION

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
Rodent control products, disinfectants and insect control products 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

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Other commercial laboratory services.

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

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

The Company has no contract assets. Contract liabilities represent deposits made by customers before the satisfaction of performance obligation(s) and recognition of revenue. Upon completion of the performance obligation(s) that the Company has with the customer, the liability for the customer deposit is relieved and revenue is recognized. These customer deposits are recorded within Deferred revenue on the condensed consolidated balance sheets. During the three months ended August 31, 2023 and 2022, the Company recorded additions of $1,857 and $2,192 to deferred revenue, respectively. During the three months ended August 31, 2023 and 2022, the Company recognized $2,684 and $2,188, respectively of deferred revenue amounts into revenue. Changes in the balances relate primarily to sales of the Company's genomics services.

On September 1, 2022, Neogen closed on a Reverse Morris Trust transaction to combine with 3M Company's ("3M") Food Safety Division (“3M FSD”, “FSD”). Similar to Neogen, 3M’s former FSD sells diagnostic test kits, dehydrated culture media, and related products used by food producers and processors to detect foodborne bacteria, allergens and levels of general sanitation. Revenue for these products are recognized and invoiced when the product is shipped to the customer. These products are currently manufactured, invoiced, and distributed by 3M on behalf of Neogen under a number of transition service contracts.

The following table presents disaggregated revenue by major product and service categories during the three months ended August 31, 2023 and 2022:

 

 

Three Months Ended August 31,

 

 

 

2023

 

 

2022

 

Food Safety

 

 

 

 

 

 

Natural Toxins & Allergens

 

 

22,268

 

 

$

19,787

 

Bacterial & General Sanitation

 

 

45,224

 

 

 

10,728

 

Indicator Testing, Culture Media & Other

 

 

81,886

 

 

 

19,254

 

Rodent Control, Insect Control & Disinfectants

 

 

11,090

 

 

 

9,575

 

Genomics Services

 

 

5,810

 

 

 

5,299

 

 

$

166,278

 

 

$

64,643

 

Animal Safety

 

 

 

 

 

 

Life Sciences

 

$

1,661

 

 

$

1,589

 

Veterinary Instruments & Disposables

 

 

12,932

 

 

 

14,673

 

Animal Care & Other

 

 

8,175

 

 

 

10,526

 

Rodent Control, Insect Control & Disinfectants

 

 

22,686

 

 

 

22,214

 

Genomics Services

 

 

17,255

 

 

 

18,704

 

 

 

62,709

 

 

 

67,706

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