10-Q 1 d221995d10q.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 November 30, 2021.
or
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
    
    
    
    
to
    
    
    
    
Commission file number
0-17988
 
 
Neogen Corporation
(Exact name of registrant as specified in its charter)
 
 
 
Michigan
 
38-2367843
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer
Identification Number)
620 Lesher Place
Lansing, Michigan 48912
(Address of principal executive offices, including zip code)
(517)
372-9200
(Registrant’s telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
 
Title of each Class
  
Trading
Symbol(s)
  
Name of each exchange
on which registered
Common Stock, $0.16 par value per share
  
NEOG
  
NASDAQ Global Select Market
N/A
(Former name, former address and former fiscal year, if changed since last report)
 
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ☒    No  ☐
Indicate by a check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.    Yes  ☐    No  ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  ☒    NO  ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    YES  ☒    NO  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule
12b-2
of the Exchange Act.
 
Large accelerated filer
 
  
Accelerated filer
 
       
Non-accelerated filer
 
  
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 November 30, 2021 there were 107,768,342 shares of Common Stock outstanding.
 
 
 
 

NEOGEN CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
 
 
  
Page No.
 
  
Item 1.
 
  
 
2
 
 
  
 
2
 
 
  
 
3
 
 
  
 
4
 
 
  
 
5
 
 
  
 
6
 
 
  
 
7
 
Item 2.
 
  
 
19
 
Item 3.
 
  
 
27
 
Item 4.
 
  
 
27
 
  
Item 1.
 
  
 
28
 
Item 6.
 
  
 
28
 
  
 
29
 
 
CEO Certification
  
 
CFO Certification
  
 
Section 906 Certification
  
 
1

PART I – FINANCIAL INFORMATION
Item 1. Interim Consolidated Financial Statements
Neogen Corporation and Subsidiaries
Consolidated Balance Sheets (unaudited)
(in thousands, except share and
per share amounts)
 
    
November 30,
   
May 31,
 
    
2021
   
2021
 
Assets
                
Current Assets
                
Cash and cash equivalents
   $ 51,119     $ 75,602  
Marketable securities
     338,130       305,485  
Accounts receivable, less allowance of $1,500 and $1,400 at November 30, 2021 and May 31, 2021, respectively
     92,498       91,823  
Inventories
     107,086       100,701  
Prepaid expenses and other current assets
     22,371       17,840  
    
 
 
   
 
 
 
Total Current Assets
     611,204       591,451  
Net Property and Equipment
     100,863       100,453  
Other assets
                
Right of use assets
     2,171       2,477  
Goodwill
     142,613       131,476  
Other
non-amortizable
intangible assets
     15,359       15,545  
Amortizable intangible and other assets, net of accumulated amortization of $51,012 and $53,462 at November 30, 2021 and May 31, 2021, respectively
     93,706       76,771  
Other
non-current
assets
     2,018       2,019  
    
 
 
   
 
 
 
Total Assets
   $ 967,934     $ 920,192  
    
 
 
   
 
 
 
Liabilities and Stockholders’ Equity
                
Current Liabilities
                
Accounts payable
   $ 34,222     $ 23,900  
Accrued compensation
     9,636       11,251  
Income taxes
    
 
 

      1,848  
Other accruals
     18,815       16,600  
    
 
 
   
 
 
 
Total Current Liabilities
     62,673       53,599  
Deferred Income Taxes
     21,829       21,917  
Other
Non-Current
Liabilities
     17,956       4,299  
    
 
 
   
 
 
 
Total Liabilities
     101,204       79,815  
Commitments and Contingencies (note 10)
                
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, 107,768,342 and 107,468,304 shares issued and outstanding at November 30, 2021 and May 31, 2021, respectively
     17,243       17,195  
Additional
paid-in
capital
     304,959       294,953  
Accumulated other comprehensive loss
     (24,235     (11,375
Retained earnings
     567,509       539,604  
    
 
 
   
 
 
 
Total Stockholders’ Equity
     865,476       840,377  
    
 
 
   
 
 
 
Total Liabilities and Stockholders’ Equity
   $ 967,934     $ 920,192  
    
 
 
   
 
 
 
See notes to interim consolidated financial statements.
 
2

Neogen Corporation and Subsidiaries
Consolidated Statements of Income (unaudited)
(in thousands, except per share amounts)
 
    
Three Months Ended
   
Six Months Ended
 
    
November 30,
   
November 30,
 
    
2021
    
2020
   
2021
    
2020
 
Revenues
                                  
Product revenues
   $ 106,111      $ 92,537     $ 210,124      $ 180,472  
Service revenues
     24,406        22,463       48,698        43,853  
    
 
 
    
 
 
   
 
 
    
 
 
 
Total Revenues
     130,517        115,000       258,822        224,325  
Cost of Revenues
                                  
Cost of product revenues
     56,374        49,275       111,100        95,870  
Cost of service revenues
     13,549        12,511       27,120        24,939  
    
 
 
    
 
 
   
 
 
    
 
 
 
Total Cost of Revenues
     69,923        61,786       138,220        120,809  
    
 
 
    
 
 
   
 
 
    
 
 
 
Gross Margin
     60,594        53,214       120,602        103,516  
Operating Expenses
                                  
Sales and marketing
     21,188        17,729       41,743        34,245  
General and administrative
     22,605        12,184       35,988        23,197  
Research and development
     4,332        4,056       8,657        7,934  
    
 
 
    
 
 
   
 
 
    
 
 
 
Total Operating Expenses
     48,125        33,969       86,388        65,376  
    
 
 
    
 
 
   
 
 
    
 
 
 
Operating Income
     12,469        19,245       34,214        38,140  
Other Income (Expense)
                                  
Interest income
     224        555       427        1,277  
Other income (expense)
     235        (465     14        (272
    
 
 
    
 
 
   
 
 
    
 
 
 
Total Other Income
     459        90       441        1,005  
    
 
 
    
 
 
   
 
 
    
 
 
 
Income Before Taxes
     12,928        19,335       34,655        39,145  
Provision for Income Taxes
     2,100        3,450       6,750        7,400  
    
 
 
    
 
 
   
 
 
    
 
 
 
Net Income
   $ 10,828      $ 15,885     $ 27,905      $ 31,745  
    
 
 
    
 
 
   
 
 
    
 
 
 
Net Income Per Share
                                  
Basic
   $ 0.10      $ 0.15     $ 0.26      $ 0.30  
    
 
 
    
 
 
   
 
 
    
 
 
 
Diluted
   $ 0.10      $ 0.15     $ 0.26      $ 0.30  
    
 
 
    
 
 
   
 
 
    
 
 
 
Weighted Average Shares Outstanding
 
                         
Basic
     107,641        106,258       107,565        106,044  
Diluted
     108,122        106,808       108,099        106,600  
See notes to interim consolidated financial statements.
 
3

Neogen Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income (unaudited)
(in thousands)
 
    
Three Months Ended
   
Six Months Ended
 
    
November 30,
   
November 30,
 
    
2021
   
2020
   
2021
   
2020
 
Net income
   $ 10,828     $ 15,885     $ 27,905     $ 31,745  
Other comprehensive income (loss), net of tax:
                                
foreign currency translations
     (7,649     938       (12,272     5,059  
Other comprehensive loss, net of tax:
                                
unrealized loss on marketable securities
     (382     (317     (588     (436
    
 
 
   
 
 
   
 
 
   
 
 
 
Total comprehensive income
   $ 2,797     $ 16,506     $ 15,045     $ 36,368  
    
 
 
   
 
 
   
 
 
   
 
 
 
See notes to interim consolidated financial statements.
 
4

Neogen Corporation and Subsidiaries
Consolidated Statements of
Equity (unaudited)
(in thousands)
 
                         
Accumulated
              
                  
Additional
    
Other
              
    
Common Stock
    
Paid-in
    
Comprehensive
   
Retained
        
    
Shares
    
Amount
    
Capital
    
Income (Loss)
   
Earnings
    
Total
 
Balance, June 1, 2021
  
 
107,468
 
  
$
17,195
 
  
$
294,953
 
  
$
(11,375
 
$
539,604
 
  
$
840,377
 
Exercise of options and share-based compensation expense
     6        1        1,838        —         —          1,839  
Issuance of shares under employee stock purchase plan
     19        3        896        —         —          899  
Net income for the three months ended August 31, 2021
     —          —          —          —         17,077        17,077  
Other comprehensive loss for the three months ended August 31, 2021
     —          —          —          (4,829     —          (4,829
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
    
 
 
 
Balance, August 31, 2021
  
 
107,493
 
  
$
17,199
 
  
$
297,687
 
  
$
(16,204
 
$
556,681
 
  
$
855,363
 
Exercise of options and share-based compensation expense
     275        44        7,272        —         —          7,316  
Net income for the three months ended November 30, 2021
     —          —          —          —         10,828        10,828  
Other comprehensive loss for the three months ended November 30, 2021
     —          —          —          (8,031     —          (8,031
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
    
 
 
 
Balance, November 30, 2021
  
 
107,768
 
  
 
17,243
 
  
 
304,959
 
  
$
(24,235
 
$
567,509
 
  
$
865,476
 
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
    
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, June 1, 2020
  
 
105,892
 
  
$
16,943
 
  
$
249,221
 
  
$
(19,709
 
$
478,722
 
  
$
725,177
 
Exercise of options and share-based compensation expense
     172        28        5,811        —         —          5,839  
Issuance of shares under employee stock purchase plan
     18        3        665        —         —          668  
Net income for the three months ended August 31, 2020
     —          —          —          —         15,860        15,860  
Other comprehensive income for the three months ended August 31, 2020
     —          —          —          4,002       —          4,002  
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
    
 
 
 
Balance, August 31, 2020
  
 
106,082
 
  
$
16,974
 
  
$
255,697
 
  
$
(15,707
 
$
494,582
 
  
$
751,546
 
Exercise of options and share-based compensation expense
     406        64        9,279        —         —          9,343  
Net income for the three months ended November 30, 2020
     —          —          —          —         15,885        15,885  
Other comprehensive income for the three months ended November 30, 2020
     —          —          —          621       —          621  
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
    
 
 
 
Balance, November 30, 2020
  
 
106,488
 
  
 
17,038
 
  
 
264,976
 
  
 
(15,086
 
 
510,467
 
  
 
777,395
 
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
    
 
 
 
See notes to interim consolidated financial statements.
 
5

Neogen Corporation and Subsidiaries
Consolidated Statements of Cash Flows (unaudited)
(in thousands)
 
    
Six Months Ended
 
    
November 30,
 
    
2021
   
2020
 
Cash Flows From Operating Activities
                
Net Income
   $ 27,905     $ 31,745  
Adjustments to reconcile net income to net cash from operating activities:
                
Depreciation and amortization
     11,511       9,523  
Share-based compensation
     3,438       3,192  
Change in operating assets and liabilities, net of business acquisitions:
                
Accounts receivable
     (1,500     6,662  
Inventories
     (6,929     4,063  
Prepaid expenses and other current assets
     (3,709     (2,080
Accounts payable, accruals and other changes
     10,341       (5,581
    
 
 
   
 
 
 
Net Cash From Operating Activities
     41,057       47,524  
Cash Flows For Investing Activities
                
Purchases of property, equipment and other
non-current
intangible assets
     (5,235     (11,092
Proceeds from the sale of marketable securities
     197,941       309,030  
Purchases of marketable securities
     (230,586     (308,524
Business acquisitions, net of cash acquired
     (26,864     (2,350
    
 
 
   
 
 
 
Net Cash For Investing Activities
     (64,744     (12,936
Cash Flows From Financing Activities
                
Exercise of stock options and issuance of employee stock purchase plan shares
     6,619       12,658  
    
 
 
   
 
 
 
Net Cash From Financing Activities
     6,619       12,658  
Effect of Foreign Exchange Rates on Cash
     (7,415     352  
    
 
 
   
 
 
 
Net Increase (Decrease) In Cash and Cash Equivalents
     (24,483     47,598  
Cash and Cash Equivalents, Beginning of Period
     75,602       66,269  
    
 
 
   
 
 
 
Cash and Cash Equivalents, End of Period
   $ 51,119     $ 113,867  
    
 
 
   
 
 
 
See notes to interim consolidated financial statements.
 
6

NEOGEN CORPORATION AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. ACCOUNTING POLICIES
BASIS OF PRESENTATION AND CONSOLIDATION
The accompanying unaudited consolidated financial statements include the accounts of Neogen Corporation (“Neogen” or the “Company”) and its wholly owned subsidiaries and have been prepared in accordance with accounting principles generally accepted in the United States of America (generally accepted accounting principles) for interim financial information and with the instructions to Form
10-Q
and Article 10 of Regulation
S-X.
Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included in the accompanying unaudited consolidated financial statements. All intercompany balances and transactions have been eliminated in consolidation. The results of operations for the three and six month periods ended November 30, 2021 are not necessarily indicative of the results to be expected for the fiscal year ending May 31, 2022. For more complete financial information, these consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in our Annual Report on Form
10-K
for the fiscal year ended May 31, 2021.
Our functional currency is the U.S. dollar. We translate our
non-U.S.
operations’ assets and liabilities denominated in foreign currencies into U.S. dollars at current rates of exchange as of the balance sheet date and income and expense items at the average exchange rate for the reporting period. Translation adjustments resulting from exchange rate fluctuations are recorded in other comprehensive income (loss). Gains or losses from foreign currency transactions are included in other income (expense) on our consolidated statement of income.
Share and per share amounts reflect the June 4, 2021
2-for-1
stock split as if it took place at the beginning of the periods presented.
Recently Adopted Accounting Standards
Income Tax Simplification
On June 1, 2021, the Company adopted ASU 740 Update
2019-12,
Income Taxes (Topic 740). This guidance provides amendments to simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. The adoption of this guidance did not have a material impact on our consolidated financial statements.
Recent Accounting Pronouncements Not Yet Adopted
Reference Rate Reform
In March 2020, the FASB issued Update
2020-04,
Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This update provides temporary optional expedients to applying the reference rate reform guidance to contracts that reference LIBOR or another reference rate expected to be discontinued. Under this update, contract modifications resulting in a new reference rate may be accounted for as a continuation of the existing contract. This guidance is effective upon issuance of the update and applies to contract modifications made through December 31, 2022. We will adopt this standard when LIBOR is discontinued and our lender begins using the new reference rate. We are evaluating the impact the new standard will have on our consolidated financial statements and related disclosures, but do not anticipate a material impact.
 
7

Comprehensive Income
Comprehensive income represents net income and any revenues, expenses, gains and losses that, under U.S. generally accepted
accounting principles, are excluded from net income and recognized directly as a component of equity. Accumulated other
comprehensive income (loss) consists of foreign currency translation adjustments and unrealized gains or losses on our marketable securities.
Fair Value of Financial Instruments
The carrying amounts of the Company’s financial instruments other than cash equivalents and marketable securities, which include accounts receivable and accounts payable, approximate fair value based on either their short maturity or current terms for similar instruments.
Fair value measurements are determined based upon the exit price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants exclusive of any transaction costs. The Company utilizes a fair value hierarchy based upon the observability of inputs used in valuation techniques as follows:
Level 1: Observable inputs such as quoted prices in active markets;
Level 2: Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and
Level 3: Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own
assumptions.
Leases
We lease various manufacturing, laboratory, warehousing and distribution facilities, administrative and sales offices, equipment and vehicles under operating leases. We evaluate our contracts to determine if an arrangement is a lease at inception and classify it as a finance or operating lease. Currently, all our leases are classified as operating leases. Topic 842 requires the Company to recognize in the statement of financial position a liability to make lease payments (the lease liability) and a
right-of-use
asset representing its right to use the underlying asset for the lease term.
Right-of-use
assets are recorded in other assets on our consolidated balance sheets. Current and
non-current
lease liabilities are recorded in other accruals within current liabilities and other
non-current
liabilities, respectively, on our consolidated balance sheets. Costs associated with operating leases are recognized on a straight-line basis within operating expenses over the term of the lease. The
right-of-use
assets were $2,171,000 and $2,477,000 at November 30, 2021 and May 31, 2021, respectively. The total current and
non-current
lease liabilities were $2,181,000 and $2,492,000 at November 30, 2021 and May 31, 2021, respectively.
ESTIMATES AND ASSUMPTIONS
The preparation of these financial statements requires that management make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an ongoing basis, management evaluates the estimates, including, but not limited to, variable consideration related to revenue recognition, allowances for doubtful accounts, the market value of, and demand for, inventories, stock-based compensation, provision for income taxes and related balance sheet accounts, accruals, goodwill and other intangible assets. These estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Accounts Receivable Allowance
Management attempts to minimize credit risk by reviewing customers’ credit history before extending credit and by monitoring credit exposure on a regular basis. An allowance for doubtful accounts is established based upon factors surrounding the credit risk of specific customers, historical trends and other information. Collateral or other security is generally not required for accounts receivable. Once a receivable balance has been determined to be uncollectible, generally after all collection efforts have been exhausted, that amount is charged against the allowance for doubtful accounts.
 
8

Inventory
The reserve for obsolete and slow-moving inventory is reviewed at least quarterly based on an analysis of the inventory, considering the current condition of the asset as well as other known facts and future plans. The reserve required to record inventory at lower of cost or net realizable value is adjusted as conditions change. Product obsolescence may be caused by shelf-life expiration, discontinuance of a product line, replacement products in the marketplace or other competitive situations.
Goodwill and Other Intangible Assets
Goodwill represents the excess of purchase price over fair value of tangible net assets of acquired businesses after amounts are allocated to other identifiable intangible assets. Other intangible assets include customer relationships, trademarks, licenses, trade names, covenants
not-to-compete
and patents. Customer-based intangibles are amortized on either an accelerated or straight-line basis, reflecting the pattern in which the economic benefits are consumed, while all other amortizable intangibles are amortized on a straight-line basis; intangibles are generally amortized over 5 to 25 years. We review the carrying amounts of goodwill and other
non-amortizable
intangible assets annually, or when indications of impairment exist, to determine if such assets may be impaired. If the carrying amounts of these assets are deemed to be less than fair value based upon a discounted cash flow analysis and comparison to comparable EBITDA multiples of peer companies, such assets are reduced to their estimated fair value and a charge is recorded to operations.
Long-Lived Assets
Management reviews the carrying values of its long-lived assets to be held and used, including definite-lived intangible assets, for
possible impairment whenever events or changes in business conditions warrant such a review. The carrying value of a long-lived asset is considered impaired when the anticipated separately identifiable undiscounted cash flows over the remaining useful life of the asset indicate that the carrying amount of the asset may not be recoverable. In such an event, fair value is determined using discounted cash flows and, if lower than the carrying value, impairment is recognized through a charge to operations.
Equity Compensation Plans
Share options awarded to employees, restricted stock units (RSUs) and shares of stock awarded to employees under certain stock purchase plans are recognized as compensation expense based on their fair value at grant date. The fair market value of options granted under the Company stock option plans was estimated on the date of grant using the Black-Scholes option-pricing model with assumptions for inputs such as interest rates, expected dividends, an estimate of award forfeitures, volatility measures and specific employee exercise behavior patterns based on statistical data. Some of the inputs used are not market-observable and have to be estimated or derived from available data. Use of different estimates would produce different option values, which in turn would result in higher or lower compensation expense recognized. For RSUs, we use the intrinsic value method to value the units.
To value equity awards, several recognized valuation models exist; none of these models can be singled out as being the best or most correct. The model applied by us can
accommodate
most of the specific features included in the options granted, which are the reason for their use. If different models were used, the option values could differ despite using the same inputs. Accordingly, using different assumptions coupled with using a different valuation model could have a significant impact on the fair value of employee stock options. Fair value could be either higher or lower than the number provided by the model applied and the inputs used. Further information on our equity compensation plans, including inputs used to determine the fair value of options, is disclosed in Note 7.
Income Taxes
We account for income taxes using the asset and liability method. Under this method, deferred income tax assets and liabilities are
determined based on differences between the financial reporting and tax bases of assets and liabilities and for tax credit carryforwards and are measured using the enacted tax rates in effect for the years in which the differences are expected to reverse. Deferred income tax expense represents the change in net deferred income tax assets and liabilities during the year.
 
9

2. CASH AND MARKETABLE SECURITIES
Cash and Cash Equivalents
Cash and cash equivalents consist of bank demand accounts, savings deposits, certificates of deposit and commercial paper with
original maturities of 90 days or less. Cash and cash equivalents are maintained at financial institutions and, at times, balances may exceed federally insured limits. The Company has not experienced losses related to these balances and believes it is not exposed to significant credit risk regarding its cash and cash equivalents. Cash and cash equivalents were $51,119,000 and $75,602,000 at November 30, 2021 and May 31, 2021, respectively. The carrying value of these assets approximates fair value due to the short maturity of these instruments and is classified as Level 1 in the fair value hierarchy.
Marketable Securities
The Company has marketable securities held by banks or broker-dealers at November 30, 2021. Changes in market value are monitored and recorded on a monthly basis; in the event of a downgrade in credit quality subsequent to purchase, the marketable securities investment is evaluated to determine the appropriate action to take to minimize the overall risk to our marketable securities portfolio. These securities are classified as available for sale. The primary objective of management’s short-term investment activity is to preserve capital for the purpose of funding current operations, capital expenditures and business acquisitions; short-term investments are not entered into for trading or speculative purposes. These securities are recorded at fair value based on recent trades or pricing models and therefore meet the Level 2 criteria. Interest income on these investments is recorded within other income on the income statement. Adjustments in the fair value of these assets are recorded in other comprehensive income.
Marketable Securities as of November 30, 2021 and May 31, 2021 are listed below by classification and remaining maturities.
 
         
November 30,
    
May 31,
 
(in thousands)
  
Maturity
  
2021
    
2021
 
Commercial Paper & Corporate Bonds
   0 - 90 days      79,830        106,631  
     91 - 180 days      88,246        78,727  
     181 days - 1 year      64,526        87,590  
     1 - 2 years      104,275        26,752  
Certificates of Deposit
   0 - 90 days      1,002        3,262  
     91 - 180 days      251        1,260  
     181 days - 1 year                1,263  
     1 - 2 years                    
         
 
 
    
 
 
 
Total Marketable Securities
        $ 338,130      $ 305,485  
         
 
 
    
 
 
 
The components of marketable securities at November 30, 2021 are as follows:
 
    
Amortized
    
Unrealized
    
Unrealized
        
(in thousands)
  
Cost
    
Gains
    
Losses
    
Fair Value
 
Commercial Paper & Corporate Bonds
     337,437        18        (578      336,877  
Certificates of Deposit
     1,251        2        —          1,253  
    
 
 
    
 
 
    
 
 
    
 
 
 
Total Marketable Securities
   $ 338,688      $ 20      $ (578    $ 338,130  
    
 
 
    
 
 
    
 
 
    
 
 
 
 
10

The components of marketable securities at May 31, 2021 are as follows:
 
    
Amortized
    
Unrealized
    
Unrealized
        
(in thousands)
  
Cost
    
Gains
    
Losses
    
Fair Value
 
Commercial Paper & Corporate Bonds
     299,524        209        (33      299,700  
Certificates of Deposit
     5,755        30        —          5,785  
    
 
 
    
 
 
    
 
 
    
 
 
 
Total Marketable Securities
   $ 305,279      $ 239      $ (33    $ 305,485  
    
 
 
    
 
 
    
 
 
    
 
 
 
3. INVENTORIES
Inventories are stated at the lower of cost, determined by the
first-in,
first-out
method, or net realizable value. The components of inventories follow:
 
    
November 30,
    
May 31,
 
(in thousands)
  
2021
    
2021
 
Raw materials
   $ 53,940      $ 47,588  
Work-in-process
     6,303        6,412  
Finished and purchased goods
     46,843        46,701  
    
 
 
    
 
 
 
     $ 107,086      $ 100,701  
    
 
 
    
 
 
 
4. REVENUE RECOGNITION
The Company determines the amount of revenue to be recognized through application of the following steps:
 
   
Identification of the contract with a customer;
 
   
Identification of the performance obligations in the contract;
 
   
Determination of the transaction price;
 
   
Allocation of the transaction price to the performance obligations in the contract; and
 
   
Recognition of revenue when, or as, the Company satisfies the performance obligations.
Essentially all of Neogen’s revenue is generated through contracts with its customers. A performance obligation is a promise in a contract to transfer a product or service to a customer. We generally recognize revenue at a point in time when all of our performance obligations under the terms of a contract are satisfied. Revenue is recognized upon transfer of control of promised products and services in an amount that reflects the consideration we expect to receive in exchange for those products or services. The collectability of consideration on the contract is reasonably assured before revenue is recognized. To the extent that customer payment has been received before all recognition criteria are met, these revenues are initially deferred in other accruals on the balance sheet and the revenue is recognized in the period that all recognition criteria have been met.
Certain agreements with customers include discounts or rebates on the sale of products and services applied retrospectively, such as volume rebates achieved by purchasing a specified purchase threshold of goods and services. We account for these discounts as variable consideration and estimate the likelihood of a customer meeting the threshold in order to determine the transaction price using the most predictive approach. We typically use the most-likely-amount method for incentives that are offered to individual customers, and the expected-value method for programs that are offered to a broad group of customers. Variable consideration reduces the amount of revenue that is recognized. Rebate obligations related to customer incentive programs are recorded in accrued liabilities; the rebate estimates are adjusted at the end of each applicable measurement period based on information currently available.
 
11

The performance obligations in Neogen’s contracts are generally satisfied well within one year of contract inception. In such cases, management has elected the practical expedient to not adjust the promised amount of consideration for the effects of a significant financing component. Management has elected to utilize the practical expedient to recognize the incremental costs of obtaining a contract as an expense when incurred because the amortization period for the prepaid costs that would otherwise have been deferred and amortized is one year or less. We account for shipping and handling for products as a fulfillment activity when goods are shipped. Shipping and handling costs that are charged to and reimbursed by the customer are recognized as revenues, while the related expenses incurred by Neogen are recorded in sales and marketing expense. Revenue is recognized net of any tax collected from customers; the taxes are subsequently remitted to governmental authorities. Our terms and conditions of sale generally do not provide for returns of product or reperformance of service except in the case of quality or warranty issues. These situations are infrequent; due to immateriality of the amount, warranty claims are recorded in the period incurred.
The Company derives revenue from two primary sources—product revenue and service revenue.
Product revenue consists of shipments of:
 
   
Diagnostic test kits, dehydrated culture media and related products used by food producers and processors to detect harmful natural toxins, foodborne bacteria, allergens and levels of general sanitation;
 
   
Consumable products marketed to veterinarians, retailers, livestock producers and animal health product distributors; and
 
   
Rodenticides, disinfectants and insecticides to assist in the control of rodents, insects and disease in and around agricultural, food production and other facilities.
Revenues for our products are recognized and invoiced when the product is shipped to the customer.
Service revenue consists primarily of:
 
   
Genomic identification and related interpretive bioinformatic services; and
 
   
Other commercial laboratory services.
Revenues for Neogen’s genomics and commercial laboratory services are recognized and invoiced when the applicable laboratory service is performed and the results are conveyed to the customer.
Payment terms for products and services are generally 30 to 60 days.
 
12

The following table presents disaggregated revenue by major product and service categories for the three and six month periods ended November 30, 2021 and 2020:
 
    
Three Months ended
November 30,
    
Six Months ended
November 30,
 
(in thousands)
  
2021
    
2020
    
2021
    
2020
 
Food Safety
                                   
Natural Toxins, Allergens & Drug Residues
   $ 21,028      $ 20,001      $ 41,432      $ 39,016  
Bacterial & General Sanitation
     12,252        11,235        23,421        21,166  
Culture Media & Other
     19,935        14,215        37,981        26,387  
Rodenticides, Insecticides & Disinfectants
     8,232        7,059        15,882        15,888  
Genomics Services
     5,685        5,024        11,138        9,262  
    
 
 
    
 
 
    
 
 
    
 
 
 
     $ 67,132      $ 57,534      $ 129,854      $ 111,719  
Animal Safety
                                   
Life Sciences
   $ 1,309      $ 1,398      $ 2,672      $ 2,723  
Veterinary Instruments & Disposables
     15,572        11,974        30,909        22,349  
Animal Care & Other
     10,849        9,371        20,068        17,029  
Rodenticides, Insecticides & Disinfectants
     18,269        18,471        40,418        38,385  
Genomics Services
     17,386        16,252        34,901        32,120  
    
 
 
    
 
 
    
 
 
    
 
 
 
     $ 63,385      $ 57,466      $ 128,968      $ 112,606  
    
 
 
    
 
 
    
 
 
    
 
 
 
Total Revenues
   $ 130,517      $ 115,000      $ 258,822      $ 224,325  
    
 
 
    
 
 
    
 
 
    
 
 
 
5. NET INCOME PER SHARE
The calculation of net income per share follows:
 
    
Three Months Ended
    
Six Months Ended
 
    
November 30,
    
November 30,
 
(in thousands, except per share amounts)
  
2021
    
2020
    
2021
    
2020
 
Numerator for basic and diluted net income per share:
                                   
Net income attributable to Neogen
   $ 10,828      $ 15,885      $ 27,905      $ 31,745  
Denominator for basic net income per share:
                                   
Weighted average shares
     107,641        106,258        107,565        106,044  
Effect of dilutive stock options and RSUs
     481        550        534        556  
    
 
 
    
 
 
    
 
 
    
 
 
 
Denominator for diluted net income per share
     108,122        106,808        108,099        106,600  
Net income attributable to Neogen per share:
                                   
Basic
   $ 0.10      $ 0.15      $ 0.26      $ 0.30  
    
 
 
    
 
 
    
 
 
    
 
 
 
Diluted
   $ 0.10      $ 0.15      $ 0.26      $ 0.30  
    
 
 
    
 
 
    
 
 
    
 
 
 
 
13

6. SEGMENT INFORMATION AND GEOGRAPHIC DATA
We have two reportable segments: Food Safety and Animal Safety. The Food Safety segment is primarily engaged in the development, production and marketing of diagnostic test kits, culture media and related products used by food producers and processors to detect harmful natural toxins, foodborne bacteria, allergens and levels of general sanitation. The Animal Safety segment is primarily engaged in the development, production and marketing of products dedicated to animal safety, including a complete line of consumable products marketed to veterinarians and animal health product distributors; this segment also provides genomic identification and related interpretive bioinformatic services. Additionally, the Animal Safety segment produces and markets rodenticides, disinfectants and insecticides to assist in the control of rodents, insects and disease in and around agricultural, food production and other facilities.
Our international operations in the United Kingdom, Mexico, Brazil, China and India originally focused on the Company’s food safety products, and each of these units reports through the Food Safety segment. In recent years, these operations have expanded to offer our complete line of products and services, including those usually associated with the Animal Safety segment such as cleaners, disinfectants, rodenticides, insecticides, veterinary instruments and genomics services. These additional products and services are managed and directed by existing management and are reported through the Food Safety segment.
Neogen’s operation in Australia originally focused on providing genomics services and sales of animal safety products and reports through the Animal Safety segment. With the acquisition of Cell BioSciences in February 2020, this operation has expanded to offer our complete line of products and services, including those usually associated with the Food Safety segment. These additional products are managed and directed by existing management at Neogen Australasia and report through the Animal Safety segment.
The accounting policies of each of the segments are the same as those described in Note 1.
Segment information follows:
 
                  
Corporate and
        
    
Food
    
Animal
    
Eliminations
        
(in thousands)
  
Safety
    
Safety
    
(1)
    
Total
 
As of and for the three months ended November 30, 2021
 
                          
Product revenues to external customers
   $ 60,112      $ 45,999      $ —        $ 106,111  
Service revenues to external customers
     7,020        17,386        —          24,406  
    
 
 
    
 
 
    
 
 
    
 
 
 
Total revenues to external customers
     67,132        63,385        —          130,517  
Operating income (loss)
     10,894        12,701        (11,126      12,469  
Total assets
     298,437        278,994        390,503        967,934  
As of and for the three months ended November 30, 2020
 
                          
Product revenues to external customers
   $ 51,323      $ 41,214      $ —        $ 92,537  
Service revenues to external customers
     6,211        16,252        —          22,463  
    
 
 
    
 
 
    
 
 
    
 
 
 
Total revenues to external customers
     57,534        57,466        —          115,000  
Operating income (loss)
     8,960        12,246        (1,961      19,245  
Total assets
     226,735        228,126        390,765        845,626  
 
(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.
 
14

                                                                                                                     
                  
Corporate and
        
    
Food
    
Animal
    
Eliminations
        
(in thousands)
  
Safety
    
Safety
    
(1)
    
Total
 
As of and for the six months ended November 30, 2021
                                   
Product revenues to external customers
  
$
116,057
 
  
$
94,067
 
  
$
—  
 
  
$
210,124
 
Service revenues to external customers
  
 
13,797
 
  
 
34,901
 
  
 
—  
 
  
 
48,698
 
    
 
 
    
 
 
    
 
 
    
 
 
 
Total revenues to external customers
  
 
129,854
 
  
 
128,968
 
  
 
—  
 
  
 
258,822
 
Operating income (loss)
  
 
21,026
 
  
 
25,463
 
  
 
(12,275
  
 
34,214
 
As of and for the six months ended November 30, 2020
                                   
Product revenues to external customers
  
$
99,986
 
  
$
80,486
 
  
$
—  
 
  
$
180,472
 
Service revenues to external customers
  
 
11,733
 
  
 
32,120
 
  
 
—  
 
  
 
43,853
 
    
 
 
    
 
 
    
 
 
    
 
 
 
Total revenues to external customers
  
 
111,719
 
  
 
112,606
 
  
 
—  
 
  
 
224,325
 
Operating income (loss)
  
 
16,923
 
  
 
24,411
 
  
 
(3,194
  
 
38,140
 
 
(1)
Includes elimination of intersegment transactions.
The following table presents the Company’s revenue disaggregated by geographic location:
 
     
                      
     
                      
     
                      
     
                      
 
    
Three months ended
    
Six months ended
 
    
November 30,
    
November 30,
 
(in thousands)
  
2021
    
2020
    
2021
    
2020
 
Domestic
  
$
76,378
 
  
$
69,832
 
  
$
154,156
 
  
$
137,156
 
International
  
 
54,139
 
  
 
45,168
 
  
 
104,666
 
  
 
87,169
 
    
 
 
    
 
 
    
 
 
    
 
 
 
Total revenue
  
 
130,517
 
  
 
115,000
 
  
 
258,822
 
  
 
224,325
 
    
 
 
    
 
 
    
 
 
    
 
 
 
 
1
5

7. EQUITY COMPENSATION PLANS
Incentive and
non-qualified
options to purchase shares of common stock have been granted to directors, officers and employees of Neogen under the terms of the Company’s stock option plans. These options are granted at an exercise price of not less than the fair market value of the stock on the date of grant. Options vest ratably over three and five year periods and the contractual terms are generally five or ten years. A summary of stock option activity during the six months ended November 30, 2021 follows:
 
           
Weighted-
 
           
Average
 
(Options in thousands)
  
Shares
    
Exercise Price
 
Options outstanding June 1, 2021
     2,957      $ 30.38  
Granted
     392        40.93  
Exercised
     (262      22.42  
Forfeited
     (21      31.11  
    
 
 
          
Options outstanding November 30, 2021
     3,066      $ 32.40  
During the three and six month periods ended November 30, 2021 and 2020, the Company recorded $1,748,000 and $1,511,000 and $3,438,000 and $3,192,000, respectively, of compensation expense related to its share-based awards.
The weighted-average fair value per share of stock options granted during the first six months of fiscal years 2022 and 2021, estimated on the date of grant using the Black-Scholes option pricing model, was $9.54 and $7.71, respectively. The fair value of stock options granted was estimated using the following weighted-average assumptions.
 
    
FY 2022
   
FY 2021
 
Risk-free interest rate
     0.4     0.2
Expected dividend yield
     0.0     0.0
Expected stock price volatility
     32.8     31.3
Expected option life
     3.12 years       3.25 years  
The company grants restricted stock units (RSUs) to directors, officers and employees under the terms of the 2018 Omnibus Incentive Plan, which vest ratably over three and five year periods. The current units are expensed straight-line over the remaining weighted-average period of 4.32 years. On November 30, 2021 there was $6,501,000 in unamortized compensation cost related to
non-vested
RSUs.
 
 
  
 
 
  
Weighted-
 
 
  
 
 
  
Average
 
(Options in thousands)
  
Shares
 
  
Fair Value
 
RSUs outstanding June 1, 2021
     121      $ 34.21  
Granted
     120        40.92  
Released
     (25      34.24  
Forfeited
     (3      34.49  
    
 
 
          
RSUs outstanding November 30, 2021
     213      $ 37.97  
The Company offers eligible employees the option to purchase common stock at a 5% discount to the lower of the market value of the stock at the beginning or end of each participation period under the terms of either the 2011 or the 2021 Employee Stock Purchase Plan; the discount is recorded in general and administrative expense. Total individual purchases in any year are limited to 10% of compensation.
 
1
6

8. BUSINESS COMBINATIONS
The Consolidated Statements of Income reflect the results of operations for business acquisitions since the respective dates of purchase. A
l
l are accounted for using the acquisition method. Goodwill recognized in the acquisitions discussed below relates primarily to enhancing the Company’s strategic platform for the expansion of available product offerings.
On July 31, 2020, the Company acquired the U.S. (including territories) rights to Elanco’s StandGuard
Pour-on
for horn fly and lice control in beef cattle, and related assets. This product line fits in well with Neogen’s existing agricultural insecticide portfolio and organizational capabilities. Consideration for the purchase was $2,351,000 in cash, all paid at closing. The final purchase price allocation, based upon the fair value of these assets determined using the income approach, included inventory of $51,000 and intangible assets of $2,300,000 (with an estimated life of 15 years). This product line is manufactured at Neogen’s operation in Iowa; the sales are reported within the Animal Safety segment.
On December 30, 2020, the Company acquired all of the stock of Megazyme, Ltd, an Ireland-based company, and its wholly-owned subsidiaries, U.S.-based Megazyme, Inc. and Ireland-based Megazyme IP. Megazyme is a manufacturer and supplier of diagnostic assay kits and enzymes to measure dietary fiber, complex carbohydrates and enzymes in food and beverages as well as animal feeds. This acquisition
has
 allow
ed
Neogen to expand its commercial relationships across food, feed and beverage companies, and provide additional food quality diagnostic products to commercial labs and food science research institutions. Consideration for the purchase was net cash of $39.8 million paid at closing, $8.6 million of cash placed in escrow payable to the former owner in two installments in two and four years, $4.9 million of stock issued at closing, and up to $2.5 million of contingent consideration, payable in two installments over
one
 year, based upon an excess net sales formula. The
final
 purchase price allocation, based upon the fair value of these assets and liabilities determined using the income approach, included accounts receivable of $1,376,000, inventory of $5,595,000, net property, plant and equipment of $12,599,000, prepayments of $69,000, accounts payable of $4,000, other current liabilities of $1,815,000, contingent consideration accrual of $2,458,000,
non-current
liabilities of $319,000,
non-current
deferred tax liabilities of $3,306,000, intangible assets of $22,945,000 (with an estimated life of
15-20
years) and the remainder to goodwill
(non-deductible
for tax purposes). These values are Level 3 fair value measurements. In February 2021, the former owner was paid $1,229,000 for the first installment of contingent consideration, based upon the achievement of sales targets. The Irish companies continue to operate from their current locations in Bray, Ireland, reporting within the Food Safety segment and are managed through Neogen’s Scotland operation. The U.S. company’s business is managed by our Lansing-based Food Safety team.
On September 17, 2021, the Company acquired the stock of CAPInnoVet, Inc., a companion animal health business that provides pet medications to the veterinary market. This acquisition provides entry into the retail parasiticide market and enhances the Company’s presence in companion animal markets. Consideration for the purchase was net cash of $17.9 million paid at closing, including $150,000 of cash placed in escrow payable to the former owners in twelve months. There is also the potential for
 performance
milestone payments to the former owners of up to $6.5 million
and
 the Company could incur up to $14.5 million in
future roya
lty payment
s
. The preliminary purchase allocation, based upon the fair value of these assets and liabilities determined using the income approach, included accounts receivable of $308,000, inventory of $408,000, prepayments of $296,000, accounts payable of $120,000, other current liabilities of $132,000,
non-current
liabilities of $13.9 million, intangible assets of $21.0 million (with an estimated life of
15-20
years) and the remainder to goodwill
(non-deductible
for tax purposes). These values are Level 3 fair value measurements. The business
is
operated from our location in Lexington, KY, reporting within the Animal Safety segment.
On November 30, 2021, the Company acquired the stock of Delf (UK) Ltd., a United Kingdom-based manufacturer and supplier of animal hygiene and industrial cleaning products, and
Abbott
Analytical Ltd.,
 a related service provider. This acquisition will expand the Company’s line of dairy hygiene products and will enhance our cleaner and disinfectant product portfolio. Consideration for the purchase was net cash of $8.8 million paid at closing, including $722,000 of cash placed in escrow payable to the former owner in one year. The preliminary purchase price allocation, based upon the fair value of these assets and liabilities determined using the income approach, included accounts receivable of 806,000, inventory of $659,000, net property, plant and equipment of $160,000, prepayments of $43,000, accounts payable of $543,000, other current liabilities of $489,000,
non-current
deferred tax liabilities of $533,000, intangible assets of $2.6 million (with an estimated life of
10-15
years) and the remainder to goodwill
(non-deductible
for tax purposes). These values are Level 3 fair value measurements. The companies continue to operate from their current location in Liverpool, England, reporting within the Food Safety segment and are managed through Neogen’s Scotland operation.
 
17


Subsequent to the end of the quarter, on December 9, 2021, the Company acquired the stock of Genetic Veterinary Services, Inc., a companion animal genetic testing business providing genetic information for dogs, cats and birds to animal owners, breeders and veterinarians. This acquisition will further expand the Company’s presence in the companion animal market. Consideration for the purchase was $11.8 million in cash. Due to the timing of the transaction, the preliminary purchase price allocation was not complete at the time of filing. The business will be operated from its current location in Spokane, Washington, reporting within the Animal Safety segment.
Subsequent
to the end of the quarter, on December 13, 2021, the Company entered into an agreement to combine with 3M’s food safety business in a Reverse Morris Trust transaction. Please refer to Forms
8-K
and Forms 425 filed with the Securities and Exchange Commission for more information.
For each completed acquisition listed above, the revenues and net income were not considered material and were therefore not disclosed.
9. LONG TERM DEBT
We have a financing agreement with a bank providing for a $15,000,000 unsecured revolving line of credit, which expires on November 30, 2023. There were no advances against the line of credit during fiscal 2021 and there have been none thus far in fiscal 2022; there was no balance outstanding at November 30, 2021. Interest on any borrowings is at LIBOR plus 100 basis points (rate under the terms of the agreement was 1.09% at November 30, 2021). Financial covenants include maintaining specified levels of tangible net worth, debt service coverage, and funded debt to EBITDA, each of which the Company was in compliance with at November 30, 2021.
10. COMMITMENTS AND CONTINGENCIES
The Company is involved in environmental remediation and monitoring activities at its Randolph, Wisconsin manufacturing facility and accrues for related costs when such costs are determined to be probable and estimable. The Company currently utilizes a pump and treat remediation strategy, which includes semi-annual monitoring and reporting, consulting, and maintenance of monitoring wells. We expense these annual costs of remediation, which have ranged from $38,000 to $131,000 per year over the past five years. The Company’s estimated remaining liability for these costs was $916,000 at both November 30, 2021 and May 31, 2021, measured on an undiscounted basis over an estimated period of 15 years. In fiscal 2019, the Company performed an updated Corrective Measures Study on the site, per a request from the Wisconsin Department of Natural Resources (WDNR) and is currently in discussion with the WDNR regarding potential alternative remediation strategies going forward. The Company believes that the current pump and treat strategy is appropriate for the site. However, the Company has agreed to a pilot study in which chemical reagents are injected into the ground in an attempt to reduce
on-site
contamination and is currently working with its consultant to design the system. At this time, the outcome of the pilot study is unknown, but a change in the current remediation strategy, depending on the alternative selected, could result in an increase in future costs and ultimately, an increase in the currently recorded liability, with an offsetting charge to operations in the period recorded. The Company has recorded $300,000 as a current liability, and the remaining $616,000 is recorded in other
non-current
liabilities in the consolidated balance sheets.
On March 6, 2020, the Company received an administrative subpoena from the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) regarding activities or transactions involving parties located in Iran. The Company subsequently conducted an internal investigation under the direction of outside legal counsel and disclosed information concerning certain genomic testing services provided to an unrelated U.S.-based party engaged in veterinary activities involving an Iranian party. The Company continues to cooperate with OFAC’s investigation and is currently examining whether certain of these activities may be eligible for OFAC General Licenses authorizing agricultural and veterinary activities.
In addition to responding to the administrative subpoena, the Company is implementing additional compliance measures to prevent inadvertent dealings with restricted countries or parties. These measures will further enhance the Company’s international trade compliance program, which is designed to assure that the Company does not conduct business directly or indirectly with any countries or parties subject to U.S. economic sanctions and export control laws. Although it is too early to predict what action, if any, that OFAC will take, the Company does not currently have any reason to believe that OFAC’s pending investigation will have a material impact on its operations, the results of operations for any future period, or its overall financial condition. In fiscal 2020, the Company took a charge to expense and recorded a reserve of $600,000 to provide for potential fines or penalties on this matter. At this time, the Company believes that it is adequately reserved for
this issue.
The Company is subject to certain legal and other proceedings in the normal course of business that, in the opinion of management, should not have a material effect on its future results of operations or financial position.
 
1
8

PART I – FINANCIAL INFORMATION

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The information in this Management’s Discussion and Analysis of Financial Condition and Results of Operations contains both historical financial information and forward-looking statements. Neogen does not provide forecasts of future financial performance. While management is optimistic about the Company’s long-term prospects, historical financial information may not be indicative of future financial results.
Safe Harbor and Forward-Looking Statements
Forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, are made throughout this Quarterly Report on Form
10-Q.
For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words “believes,” “anticipates,” “plans,” “expects,” “seeks,” “estimates,” and similar expressions are intended to identify forward-looking statements. There are a number of important factors, including competition, recruitment and dependence on key employees, impact of weather on agriculture and food production, effects of the ongoing
COVID-19
pandemic on our business, identification and integration of acquisitions, research and development risks, patent and trade secret protection, government regulation and other risks detailed from time to time in the Company’s reports on file at the Securities and Exchange Commission, that could cause Neogen Corporation’s results to differ materially from those indicated by such forward-looking statements, including those detailed in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
In addition, any forward-looking statements represent management’s views only as of the day this Quarterly Report on Form
10-Q
was first filed with the Securities and Exchange Commission and should not be relied upon as representing management’s views as of any subsequent date. While management may elect to update forward-looking statements at some point in the future, it specifically disclaims any obligation to do so, even if its views change.
COVID-19
As we closely monitor the
COVID-19
pandemic, our top priority remains protecting the health and safety of our employees. While operations continue in our locations around the world, many of our
non-manufacturing
and distribution employees continue to work remotely and travel remains limited. Safety guidelines and procedures, including social distancing, mask wearing and enhanced cleaning, have been developed for
on-site
employees and these policies are regularly monitored and updated by our internal Emergency Response Team.
In the first half of fiscal 2022, the
COVID-19
pandemic continued to impact our business operations and financial results. A number of our food safety diagnostic product lines have been negatively impacted due to decreased demand in many of our customers’ businesses around the world, particularly those serving restaurants, bars and other institutional food service markets. Many of our markets across the world are recovering, but the pandemic has continued to adversely impact our customers and ultimately, our revenues. We have also experienced supply chain difficulties including vendor disruptions, border closures, shipping issues and significantly increased shipping costs; labor shortages and higher labor costs, as we have had to use staffing agencies and increase our base pay in many areas of the company to fill open positions; and restricted travel, which hinders our ability to connect with customers. During the current fiscal year, we have incurred less expense for travel, meals, trade shows and some other customer-facing marketing activities; some of these activities have resumed but have not yet returned to
pre-pandemic
levels. Higher spend on shipping and labor are offsetting these savings.
Overall, the impact
of COVID-19 remains
uncertain and ultimately depends on the length and severity of the pandemic, inclusive of the introduction of new strains of the virus; the federal, state, and local government actions taken in response; vaccination rates and effectiveness; the impact of vaccination requirements; and the macroeconomic environment. We will continue to evaluate the nature and extent to
which COVID-19 will
impact our business, supply chain, including labor availability and attrition, consolidated results of operations, financial condition, and liquidity; we expect it to impact us through at least the end of our current fiscal year.
 
19

Executive Overview
 
   
Consolidated revenues were $130.5 million in the second quarter of fiscal 2022, an increase of 13% compared to $115.0 million in the second quarter of fiscal 2021. Organic sales growth in the second quarter of fiscal 2022 was 10%. For the six month period, consolidated revenues were $258.8 million, an increase of 15% compared to $224.3 million in the same period in the prior fiscal year. On a year to date basis, organic sales rose 12%.
 
   
Food Safety segment sales were $67.1 million in the second quarter of fiscal 2022, an increase of 17% compared to $57.5 million in the same period a year ago. Organic sales in this segment rose 11% for the comparative period, with revenues from the acquisition of Megazyme (December 2020) providing the remainder of the increase in revenues for the segment. For the year to date, Food Safety segment sales were $129.9 million, an increase of 16% compared to $111.7 million in the same period of the prior fiscal year; the organic sales increase was 10% for the comparative period, with the Megazyme acquisition providing the additional contribution to revenue.
 
   
Animal Safety segment sales were $63.4 million in the second quarter of fiscal 2022, an increase of 10% compared to $57.5 million in the second quarter of fiscal 2021. Organic sales in this segment also rose 10% in the second quarter, with a minor contribution from the CAPInnovet acquisition (September 2021). For the six month period, Animal Safety segment sales were $129.0 million, an increase of 15%, compared to $112.6 million in the same period a year ago. Year to date organic sales rose 14%, with revenues from the StandGuard (July 2020) and CAPInnovet acquisitions contributing the difference.
 
   
International sales in the second quarter of fiscal 2022 were 41% of total sales compared to 39% of total sales in the second quarter of fiscal 2021. For the year to date, fiscal 2022 international sales were 40% of total sales compared to 39% of total sales in the same period of the prior year.
 
   
Our effective tax rate in the second quarter was 16.2% compared to an effective tax rate of 17.8% in the prior year second quarter; the fiscal 2022 year to date effective tax rate was 19.5% compared to 18.9% for the same period a year ago.
 
   
Net income for the quarter ended November 30, 2021 was $10.8 million, or $0.10 per diluted share, compared to $15.9 million, or $0.15 per diluted share in the same period in the prior year. For the year to date, net income was $27.9 million, or $0.26 per diluted share compared to prior year to date net income of $31.7 million, or $0.30 per diluted share. Net income was decreased by $9.3 million of legal and consulting expenses for due diligence related to our recently announced agreement to combine with 3M’s Food Safety business.
 
   
Cash provided from operating activities in the first six months of fiscal 2022 was $41.1 million, compared to $47.5 million in the first half of fiscal 2021.
 
20

International sales rose 20% in both the second quarter of fiscal 2022 and also increased 20% for the year to date, each compared to the same respective periods in the prior year. Excluding international sales of the Megazyme acquisition, the increase was 14% for both the quarter and year to date periods. Revenue changes, expressed in percentages, for the three and six month periods of fiscal 2022 compared to the same respective periods in the prior year are as follows for each of our international locations:
 
    
Three Months Ended
   
Six Months Ended
 
    
November 30, 2021
   
November 30, 2021
 
    
Revenue
   
Revenue
   
Revenue
   
Revenue
 
    
% Inc (Dec)
   
% Inc (Dec)
   
% Inc (Dec)
   
% Inc (Dec)
 
    
USD
   
Local Currency
   
USD
   
Local Currency
 
U.K Operations (including Neogen Italia)
     20     14     13     6
Brazil Operations
     (5 )%      (6 )%      (10 )%      (12 )% 
Neogen Latinoamerica
     13     10     18     10
Neogen Argentina
     44     84     28     68
Neogen Uruguay
     (4 )%      (2 )%      3     5
Neogen Chile
     48     54     59     59
Neogen China
     28     22     42     34
Neogen India
     (10 )%      (9 )%      1     1
Neogen Canada
     34     28     60     50
Neogen Australasia
     29     27     38     33
Currency translations increased comparative revenues by approximately $1.0 million in the second quarter of fiscal 2022 and $3.3 million for the year to date, each compared to the same periods a year ago, primarily due to the increased strength of the British pound and Mexican peso relative to the U.S. dollar. Combined revenues at our U.K. operations increased 20% in the second quarter; growth was led by strong cleaner and disinfectant sales into Asia, as the African swine fever outbreak continues to drive demand, and new culture media business with commercial laboratories in the U.K. that have adopted our recently launched One Broth One Plate workflow. For the six month period, revenues at our U.K. operations increased 13% as a large
non-recurring
prior year shipment of hand sanitizers to the U.K. government’s health organization affected growth in the first quarter.
Sales in Brazil decreased 5% in this year’s second quarter, as an extended drought led to a significantly reduced corn crop and the associated testing, resulting in a large decrease in sales of aflatoxin test kits. For the six month period, sales at our Brazilian operations decreased 10%, primarily due to the reduced aflatoxin test kit sales and a large
non-recurring
insecticide sale to a government health organization in the first quarter of the prior fiscal year. Neogen Latinoamerica sales rose 13% for the second quarter, primarily due to increases in natural toxins test kits, environmental sanitation, culture media and biosecurity products. Sales at Neogen China increased 28% and 42% for the three and six month periods, respectively, from new sales of Megazyme products and growth in genomics, as the commercial dairy, swine and sheep markets have increased sampling volumes. The Neogen Australasia location benefitted from increased genomics business with customers in the beef and sheep markets.
Service revenue, which includes genomics testing and other laboratory services, was $24.4 million in the second quarter of fiscal 2022, an increase of 9% over prior year second quarter revenues of $22.5 million. For the six month period, service revenue was $48.7 million, an increase of 11% over prior year revenues of $43.9 million. The growth for both the quarter and year to date periods was led by increases in revenues at our Australia, China, U.K., Brazil and Canada genomics operations; growth in our domestic operation was reduced by lower volumes of companion animal samples, the result of difficult comparison from large increases in the prior year.
 
21

Revenues
 
    
Three Months Ended November 30,
 
                  
Increase/
        
(in thousands)
  
2021
    
2020
    
(Decrease)
    
%
 
Food Safety
           
Natural Toxins, Allergens & Drug Residues
   $ 21,028      $ 20,001      $ 1,027        5
Bacterial & General Sanitation
     12,252        11,235        1,017        9
Culture Media & Other
     19,935        14,215        5,720        40
Rodenticides, Insecticides & Disinfectants
     8,232        7,059        1,173        17
Genomics Services
     5,685        5,024        661        13
  
 
 
    
 
 
    
 
 
    
   $ 67,132      $ 57,534      $ 9,598        17
Animal Safety
           
Life Sciences
   $ 1,309      $ 1,398      $ (89      (6 )% 
Veterinary Instruments & Disposables
     15,572        11,974        3,598        30
Animal Care & Other
     10,849        9,371        1,478        16
Rodenticides, Insecticides & Disinfectants
     18,269        18,471        (202      (1 )% 
Genomics Services
     17,386        16,252        1,134        7
  
 
 
    
 
 
    
 
 
    
   $ 63,385      $ 57,466      $ 5,919        10
  
 
 
    
 
 
    
 
 
    
Total Revenues
   $ 130,517      $ 115,000      $ 15,517        13
  
 
 
    
 
 
    
 
 
    
 
    
Six Months Ended November 30,
 
                  
Increase/
        
(in thousands)
  
2021
    
2020
    
(Decrease)
    
%
 
Food Safety
           
Natural Toxins, Allergens & Drug Residues
   $ 41,432      $ 39,016      $ 2,416        6
Bacterial & General Sanitation
     23,421        21,166        2,255        11
Culture Media & Other
     37,981        26,387        11,594        44
Rodenticides, Insecticides & Disinfectants
     15,882        15,888        (6      0
Genomics Services
     11,138        9,262        1,876        20
  
 
 
    
 
 
    
 
 
    
   $ 129,854      $ 111,719      $ 18,135        16
Animal Safety
           
Life Sciences
   $ 2,672      $ 2,723      $ (51      (2 )% 
Veterinary Instruments & Disposables
     30,909        22,349        8,560        38
Animal Care & Other
     20,068        17,029        3,039        18
Rodenticides, Insecticides & Disinfectants
     40,418        38,385        2,033        5
Genomics Services
     34,901        32,120        2,781        9
  
&