10-Q 1 d311408d10q.htm 10-Q 10-Q
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 v
 
 
FORM
10-Q
 
 
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended February 28, 2022.
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 February 28, 2022 there were 107,818,159 shares of Common Stock outstanding.
 
 
 
 

NEOGEN CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
 
    
Page No.
 
  
Item 1.   Interim Consolidated Financial Statements (unaudited)      2  
  Consolidated Balance Sheets – February 28, 2022 and May 31, 2021      2  
  Consolidated Statements of Income – Three and nine months ended February 28, 2022 and 2021      3  
  Consolidated Statements of Comprehensive Income – Three and nine months ended February 28, 2022 and 2021      4  
  Consolidated Statements of Equity – Three and nine months ended February 28, 2022 and 2021      5  
  Consolidated Statements of Cash Flows – Nine months ended February 28, 2022 and 2021      6  
  Notes to Interim Consolidated Financial Statements – February 28, 2022      7  
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations      19  
Item 3.   Quantitative and Qualitative Disclosures About Market Risk      27  
Item 4.   Controls and Procedures      27  
  
Item 1.   Legal Proceedings      28  
Item 1A.   Risk Factors      28  
Item 6.   Exhibits      29  
SIGNATURES      30  
 
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)
 
    
February 28,
   
May 31,
 
    
2022
   
2021
 
Assets
                
Current Assets
                
Cash and cash equivalents
   $ 42,879     $ 75,602  
Marketable securities
     335,560       305,485  
Accounts receivable, less allowance of $1,600 and $1,400 at February 28, 2022 and May 31, 2021, respectively
     92,978       91,823  
Inventories
     113,395       100,701  
Prepaid expenses and other current assets
     24,821       17,840  
    
 
 
   
 
 
 
Total Current Assets
     609,633       591,451  
Net Property and Equipment
     104,699       100,453  
Other
Assets
                
Right of use assets
     2,762       2,477  
Goodwill
     150,029       131,476  
Other
non-amortizable
intangible assets
     15,451       15,545  
Amortizable intangible and other assets, net of accumulated amortization of $53,838 and $53,462 at February 28, 2022 and May 31, 2021, respectively
     96,613       76,771  
Other
non-current
assets
     2,018       2,019  
    
 
 
   
 
 
 
Total Assets
   $ 981,205     $ 920,192  
    
 
 
   
 
 
 
Liabilities and Stockholders’ Equity
                
Current Liabilities
                
Accounts payable
   $ 23,548     $ 23,900  
Accrued compensation
     9,655       11,251  
Income taxes
     0       1,848  
Other accruals
     32,507       16,600  
    
 
 
   
 
 
 
Total Current Liabilities
     65,710       53,599  
Deferred Income Taxes
     21,196       21,917  
Other
Non-Current
Liabilities
     18,755       4,299  
    
 
 
   
 
 
 
Total Liabilities
     105,661       79,815  
Commitments and Contingencies (note 10)
                
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, 107,818,159 and 107,468,304 shares issued and outstanding at February 28, 2022 and May 31, 2021, respectively
     17,251       17,195  
Additional
paid-in
capital
     307,780       294,953  
Accumulated other comprehensive loss
     (22,439     (11,375
Retained earnings
     572,952       539,604  
    
 
 
   
 
 
 
Total Stockholders’ Equity
     875,544       840,377  
    
 
 
   
 
 
 
Total Liabilities and Stockholders’ Equity
   $ 981,205     $ 920,192  
    
 
 
   
 
 
 
See notes to interim consolidated financial statements.
 
2

Neogen Corporation and Subsidiaries
Consolidated Statements of Income (unaudited)
(in thousands, except per share amounts)
 
    
Three Months Ended
   
Nine Months Ended
 
    
February 28,
   
February 28,
 
    
2022
   
2021
   
2022
   
2021
 
Revenues
                                
Product revenues
   $ 101,566     $ 92,816     $ 311,701     $ 273,288  
Service revenues
     26,678       23,893       75,365       67,746  
    
 
 
   
 
 
   
 
 
   
 
 
 
Total Revenues
     128,244       116,709       387,066       341,034  
Cost of Revenues
                                
Cost of product revenues
     56,550       49,466       167,650       145,336  
Cost of service revenues
     14,282       13,394       41,402       38,333  
    
 
 
   
 
 
   
 
 
   
 
 
 
Total Cost of Revenues
     70,832       62,860       209,052       183,669  
    
 
 
   
 
 
   
 
 
   
 
 
 
Gross Margin
     57,412       53,849       178,014       157,365  
Operating Expenses
                                
Sales and marketing
     21,477       18,693       63,220       52,938  
General and administrative
     24,997       15,146       60,985       38,343  
Research and development
     4,561       4,236       13,218       12,170  
    
 
 
   
 
 
   
 
 
   
 
 
 
Total Operating Expenses
     51,035       38,075       137,423       103,451  
    
 
 
   
 
 
   
 
 
   
 
 
 
Operating Income
     6,377       15,774       40,591       53,914  
Other Income (Expense)
                                
Interest income
     314       294       741       1,571  
Other expense
     (48     (91     (34     (363
    
 
 
   
 
 
   
 
 
   
 
 
 
Total Other Income
     266       203       707       1,208  
    
 
 
   
 
 
   
 
 
   
 
 
 
Income Before Taxes
     6,643       15,977       41,298       55,122  
Provision for Income Taxes
     1,200       2,600       7,950       10,000  
    
 
 
   
 
 
   
 
 
   
 
 
 
Net Income
   $ 5,443     $ 13,377     $ 33,348     $ 45,122  
    
 
 
   
 
 
   
 
 
   
 
 
 
Net Income Per Share
                                
Basic
   $ 0.05     $ 0.13     $ 0.31     $ 0.42  
    
 
 
   
 
 
   
 
 
   
 
 
 
Diluted
   $ 0.05     $ 0.12     $ 0.31     $ 0.42  
    
 
 
   
 
 
   
 
 
   
 
 
 
Weighted Average Shares Outstanding
 
                       
Basic
     107,818       106,826       107,648       106,264  
Diluted
     108,133       107,390       108,130       106,768  
See notes to interim consolidated financial statements.
 
3

Neogen Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income (unaudited)
(in thousands)
 
    
Three Months Ended
   
Nine Months Ended
 
    
February 28,
   
February 28,
 
    
2022
   
2021
   
2022
   
2021
 
Net income
   $ 5,443     $ 13,377     $ 33,348     $ 45,122  
Other comprehensive income (loss), net of tax:
                                
foreign currency translations
     2,789       360       (9,482     5,419  
Other comprehensive loss, net of tax:
                                
unrealized loss on marketable securities
     (993     (115     (1,582     (552
    
 
 
   
 
 
   
 
 
   
 
 
 
Total comprehensive income
   $ 7,239     $ 13,622     $ 22,284     $ 49,989  
    
 
 
   
 
 
   
 
 
   
 
 
 
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
 
Exercise of options and share-based compensation expense
     26        4        1,848
       —         —          1,852  
Issuance of shares under employee stock purchase plan
 
 
 
24
 
 
 
4
 
 
 
 
973  
 
 
 
 
 
 
 
 
 
 
977
 
Net income for the three months ended February 28, 2022
     —          —          —  
       —         5,443        5,443  
Other comprehensive income for the three months ended February 28, 2022
     —          —          —  
       1,796       —          1,796  
    
 
 
    
 
 
    
 
 

    
 
 
   
 
 
    
 
 
 
Balance, February 28, 2022
  
 
107,818
 
  
 
17,251
 
  
 
307,780

 
  
 
(22,439
 
 
572,952
 
  
$
875,544
 
    
 
 
    
 
 
    
 
 

    
 
 
   
 
 
    
 
 
 
 
                         
Accumulated
              
                  
Additional
    
Other
              
    
Common Stock
    
Paid-in
    
Comprehensive
   
Retained
        
    
Shares
    
Amount
    
Capital
    
Income (Loss)
   
Earnings
    
Total
 
Balance, June 1, 2020
  
 
105,892
 
  
$
16,943
 
  
$
249,221
 
  
$
(19,709
 
$
478,722
 
  
$
725,177
 
Exercise of options and share-based compensation expense
     172        28        5,811        —         —          5,839  
Issuance of shares under employee stock purchase plan
     18        3        665        —         —          668  
Net income for the three months ended August 31, 2020
     —          —          —          —         15,860        15,860  
Other comprehensive income for the three months ended August 31, 2020
     —          —          —          4,002       —          4,002  
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
    
 
 
 
Balance, August 31, 2020
  
 
106,082
 
  
$
16,974
 
  
$
255,697
 
  
$
(15,707
 
$
494,582
 
  
$
751,546
 
Exercise of options and share-based compensation expense
     406        64        9,279        —         —          9,343  
Net income for the three months ended November 30, 2020
     —          —          —          —         15,885        15,885  
Other comprehensive income for the three months ended November 30, 2020
     —          —          —          621       —          621  
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
    
 
 
 
Balance, November 30, 2020
  
 
106,488
 
  
 
17,038
 
  
 
264,976
 
  
 
(15,086
 
 
510,467
 
  
 
777,395
 
Exercise of options and share-based compensation expense
     386        62        10,968        —         —          11,030  
Issuance of shares under employee stock purchase plan
     20        4        716                         720  
Issuance of shares for Megazyme acquisiton
     128        20        4,896                         4,916  
Net income for the three months ended February 28, 2021
     —          —          —          —         13,377        13,377  
Other comprehensive income for the three months ended February 28, 2021
     —          —          —          245       —          245  
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
    
 
 
 
Balance, February 28, 2021
  
 
107,022
 
  
 
17,124
 
  
 
281,556
 
  
 
(14,841
 
 
523,844
 
  
 
807,683
 
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
    
 
 
 
See notes to interim consolidated financial statements.
 
5

Neogen Corporation and Subsidiaries
Consolidated Statements of Cash Flows (unaudited)
(in thousands)
 
    
Nine Months Ended
 
    
February 28,
 
    
2022
   
2021
 
Cash Flows From Operating Activities
                
Net Income
   $ 33,348     $ 45,122  
Adjustments to reconcile net income to net cash from operating activities:
                
Depreciation and amortization
     17,833       15,107  
Share-based compensation
     5,045       4,773  
Change in operating assets and liabilities, net of business acquisitions:
                
Accounts receivable
     (883     1,019  
Inventories
     (11,956     3,328  
Prepaid expenses and other current assets
     (3,824     (1,908
Accounts payable, accruals and other changes
     8,085       (8,321
    
 
 
   
 
 
 
Net Cash From Operating Activities
     47,648       59,120  
Cash Flows For Investing Activities
                
Purchases of property, equipment and other
non-current
intangible assets
     (11,891     (19,393
Proceeds from the sale of marketable securities
     284,367       602,233  
Purchases of marketable securities
     (314,442     (604,694
Business acquisitions, net of cash acquired
     (38,164     (52,000
    
 
 
   
 
 
 
Net Cash For Investing Activities
     (80,130     (73,854
Cash Flows From Financing Activities
                
Exercise of stock options and issuance of employee stock purchase plan shares
     7,842       22,801  
    
 
 
   
 
 
 
Net Cash From Financing Activities
     7,842       22,801  
Effect of Foreign Exchange Rates on Cash
     (8,083     (854
    
 
 
   
 
 
 
Net Increase (Decrease) In Cash and Cash Equivalents
     (32,723     7,213  
Cash and Cash Equivalents, Beginning of Period
     75,602       66,269  
    
 
 
   
 
 
 
Cash and Cash Equivalents, End of Period
   $ 42,879     $ 73,482  
    
 
 
   
 
 
 
See notes to interim consolidated financial statements.
 
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 nine month periods ended February 28, 2022 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 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 $2,762,000 and $2,477,000 at February 28, 2022 and May 31, 2021, respectively. The total current and
non-current
lease liabilities were $2,781,000 and $2,492,000 at February 28, 2022 and May 31, 2021, respectively.
ESTIMATES AND ASSUMPTIONS
The preparation of these financial statements requires that management make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an ongoing basis, management evaluates the estimates, including, but not limited to, variable consideration related to revenue recognition, allowances for doubtful accounts, the market value of, and demand for, inventories, stock-based compensation, provision for income taxes and related balance sheet accounts, accruals, goodwill and other intangible assets. These estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Accounts Receivable Allowance
Management attempts to minimize credit risk by reviewing customers’ credit history before extending credit and by monitoring credit exposure on a regular basis. An allowance for doubtful accounts is established based upon factors surrounding the credit risk of specific customers, historical trends and other information. Collateral or other security is generally not required for accounts receivable. Once a receivable balance has been determined to be uncollectible, generally after all collection efforts have been exhausted, that amount is charged against the allowance for doubtful accounts.

 
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 $42,879,000 and $75,602,000 at February 28, 2022 and May 31, 2021, respectively. The carrying value of these assets approximates fair value due to the short maturity of these instruments and is classified as Level 1 in the fair value hierarchy.
Marketable Securities
The Company has marketable securities held by banks or broker-dealers at February 28, 2022. Changes in market value are monitored and recorded on a monthly basis; in the event of a downgrade in credit quality subsequent to purchase, the marketable securities investment is evaluated to determine the appropriate action to take to minimize the overall risk to our marketable securities portfolio. These securities are classified as available for sale. The primary objective of management’s short-term investment activity is to preserve capital for the purpose of funding current operations, capital expenditures and business acquisitions; short-term investments are not entered into for trading or speculative purposes. These securities are recorded at fair value based on recent trades or pricing models and therefore meet the Level 2 criteria. Interest income on these investments is recorded within other income on the income statement. Adjustments in the fair value of these assets are recorded in other comprehensive income.
Marketable Securities as of February 28, 2022 and May 31, 2021 are listed below by classification and remaining maturities.
 
           
February 28,
    
May 31,
 
(in thousands)
  
Maturity
    
2022
    
2021
 
Commercial Paper & Corporate Bonds
     0 - 90 days        94,740        106,631  
      
91 - 180 days
       85,373        78,727  
      
181 days - 1 year
       57,310        87,590  
       1 - 2 years        97,887        26,752  
Certificates of Deposit
    
0 - 90 days
       250        3,262  
       91 - 180 days                  1,260  
       181 days - 1 year                  1,263  
       1 - 2 years                      
             
 
 
    
 
 
 
Total Marketable Securities
            $ 335,560      $ 305,485  
             
 
 
    
 
 
 
The components of marketable securities at February 28, 2022 are as follows:
 
    
Amortized
    
Unrealized
    
Unrealized
        
(in thousands)
  
Cost
    
Gains
    
Losses
    
Fair Value
 
Commercial Paper & Corporate Bonds
     337,159        7        (1,856      335,310  
Certificates of Deposit
     250        —          —          250  
    
 
 
    
 
 
    
 
 
    
 
 
 
Total Marketable Securities
   $ 337,409      $ 7      $ (1,856    $ 335,560  
    
 
 
    
 
 
    
 
 
    
 
 
 
 
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:
 
    
February 28,
    
May 31,
 
(in thousands)
  
2022
    
2021
 
Raw materials
   $ 54,747      $ 47,588  
Work-in-process
     6,314        6,412  
Finished and purchased goods
     52,334        46,701  
    
 
 
    
 
 
 
     $ 113,395      $ 100,701  
    
 
 
    
 
 
 
4. REVENUE RECOGNITION
The Company determines the amount of revenue to be recognized through application of the following steps:
 
   
Identification of the contract with a customer;
 
   
Identification of the performance obligations in the contract;
 
   
Determination of the transaction price;
 
   
Allocation of the transaction price to the performance obligations in the contract; and
 
   
Recognition of revenue when, or as, the Company satisfies the performance obligations.
Essentially all of Neogen’s revenue is generated through contracts with its customers. A performance obligation is a promise in a contract to transfer a product or service to a customer. We generally recognize revenue at a point in time when all of our performance obligations under the terms of a contract are satisfied. Revenue is recognized upon transfer of control of promised products and services in an amount that reflects the consideration we expect to receive in exchange for those products or services. The collectability of consideration on the contract is reasonably assured before revenue is recognized. To the extent that customer payment has been received before all recognition criteria are met, these revenues are initially deferred in other accruals on the balance sheet and the revenue is recognized in the period that all recognition criteria have been met.
Certain agreements with customers include discounts or rebates on the sale of products and services applied retrospectively, such as volume rebates achieved by purchasing a specified purchase threshold of goods and services. We account for these discounts as variable consideration and estimate the likelihood of a customer meeting the threshold in order to determine the transaction price using the most predictive approach. We typically use the most-likely-amount method for incentives that are offered to individual customers, and the expected-value method for programs that are offered to a broad group of customers. Variable consideration reduces the amount of revenue that is recognized. Rebate obligations related to customer incentive programs are recorded in accrued liabilities; the rebate estimates are adjusted at the end of each applicable measurement period based on information currently available.
The performance obligations in Neogen’s contracts are generally satisfied well within one year of contract inception. In such cases, management has elected the practical expedient to not adjust the promised amount of consideration for the effects of a significant financing component. Management has elected to utilize the practical expedient to recognize the incremental costs of obtaining a contract as an expense when incurred because the amortization period for the prepaid costs that would otherwise have been deferred
 
11

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 nine month periods ended February 28, 2022 and 2021:
 
    
Three Months ended February 28,
    
Nine Months ended February 28,
 
(in thousands)
  
2022
    
2021
    
2022
    
2021
 
Food Safety
                                   
Natural Toxins, Allergens & Drug Residues
   $ 17,965      $ 18,255      $ 59,397      $ 57,271  
Bacterial & General Sanitation
     11,288        10,335        34,709        31,502  
Culture Media & Other
     18,145        16,094        56,136        42,480  
Rodenticides, Insecticides & Disinfectants
     9,577        8,436        25,459        24,324  
Genomics Services
     5,781        5,304        16,909        14,566  
    
 
 
    
 
 
    
 
 
    
 
 
 
     $ 62,756      $ 58,424      $ 192,610      $ 170,143  
Animal Safety
                                   
Life Sciences
   $ 1,339      $ 1,399      $ 4,011      $ 4,122  
Veterinary Instruments & Disposables
     17,047        12,494        47,956        34,843  
Animal Care & Other
     9,449        8,873        29,517        25,902  
Rodenticides, Insecticides & Disinfectants
     18,359        18,085        58,777        56,470  
Genomics Services
     19,294        17,434        54,195        49,554  
    
 
 
    
 
 
    
 
 
    
 
 
 
     $ 65,488      $ 58,285      $ 194,456      $ 170,891  
    
 
 
    
 
 
    
 
 
    
 
 
 
Total Revenues
   $ 128,244      $ 116,709      $ 387,066      $ 341,034  
    
 
 
    
 
 
    
 
 
    
 
 
 
                                     
5. NET INCOME PER SHARE
The calculation of net income per share follows:
 
    
Three Months Ended
    
Nine Months Ended
 
    
February 28,
    
February 28,
 
(in thousands, except per share amounts)
  
2022
    
2021
    
2022
    
2021
 
Numerator for basic and diluted net income per share:
                                   
Net income attributable to Neogen
   $ 5,443      $ 13,377      $ 33,348      $ 45,122  
Denominator for basic net income per share:
                                   
Weighted average shares
     107,818        106,826        107,648        106,264  
Effect of dilutive stock options and RSUs
     315        564        482        504  
    
 
 
    
 
 
    
 
 
    
 
 
 
Denominator for diluted net income per share
     108,133        107,390        108,130        106,768  
Net income attributable to Neogen per share:
                                   
Basic
   $ 0.05      $ 0.13      $ 0.31      $ 0.42  
    
 
 
    
 
 
    
 
 
    
 
 
 
Diluted
   $ 0.05      $ 0.12      $ 0.31      $ 0.42  
    
 
 
    
 
 
    
 
 
    
 
 
 
 
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 February 28, 2022
 
                          
Product revenues to external customers
   $ 55,372      $ 46,194      $ —        $ 101,566  
Service revenues to external customers
     7,384        19,294        —          26,678  
    
 
 
    
 
 
    
 
 
    
 
 
 
Total revenues to external customers
     62,756        65,488        —          128,244  
Operating income (loss)
     8,191        10,783        (12,597      6,377  
Total assets
     302,605        298,854        379,746        981,205  
As of and for the three months ended February 28, 2021
 
                          
Product revenues to external customers
   $ 51,965      $ 40,851      $ —        $ 92,816  
Service revenues to external customers
     6,459        17,434        —          23,893  
    
 
 
    
 
 
    
 
 
    
 
 
 
Total revenues to external customers
     58,424        58,285        —          116,709  
Operating income (loss)
     7,911        11,657        (3,794      15,774  
Total assets
     287,690        239,179        353,347        880,216  
 
  (1)
Includes corporate assets, consisting principally of cash and cash equivalents, marketable securities, current and deferred tax accounts and overhead expenses not allocated to specific business segments. Also includes the elimination of intersegment transactions
.
 
14

                  
Corporate and
        
    
Food
    
Animal
    
Eliminations
        
(in thousands)
  
Safety
    
Safety
    
(1)
    
Total
 
As of and for the nine months ended February 28, 2022
                                   
Product revenues to external customers
   $ 171,439      $ 140,261      $ —        $ 311,700  
Service revenues to external customers
     21,171        54,195        —          75,366  
    
 
 
    
 
 
    
 
 
    
 
 
 
Total revenues to external customers
     192,610        194,456        —          387,066  
Operating income (loss)
     29,216        36,246        (24,871      40,591  
As of and for the nine months ended February 28, 2021
 
                          
Product revenues to external customers
   $ 151,951      $ 121,337      $ —        $ 273,288  
Service revenues to external customers
     18,192        49,554        —          67,746  
    
 
 
    
 
 
    
 
 
    
 
 
 
Total revenues to external customers
     170,143        170,891        —          341,034  
Operating income (loss)
     24,834        36,068        (6,988      53,914  
(1) Includes elimination of intersegment transactions.
The following table presents the Company’s revenue disaggregated by geographic location:
 
    
Three months ended
    
Nine months ended
 
    
February 28,
    
February 28,
 
(in thousands)
  
2022
    
2021
    
2022
    
2021
 
Domestic
   $ 77,297      $ 70,387      $ 231,454      $ 207,544  
International
     50,947        46,322        155,612        133,490  
    
 
 
    
 
 
    
 
 
    
 
 
 
Total revenue
     128,244        116,709        387,066        341,034  
    
 
 
    
 
 
    
 
 
    
 
 
 
7. EQUITY COMPENSATION PLANS
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 nine months ended February 28, 2022 follows:
 
           
Weighted-
 
           
Average
 
(Options in thousands)
  
Shares
    
Exercise Price
 
Options outstanding June 1, 2021
     2,957      $ 30.38  
Granted
     393        40.93  
Exercised
     (276      22.69  
Forfeited
     (27      31.18  
    
 
 
          
Options outstanding February 28, 2022
     3,047      $ 32.43  
During the three and nine month periods ended February 28, 2022 and 2021, the Company recorded $1,607,000 and $1,581,000 and $5,045,000 and $4,773,000, respectively, of compensation expense related to its share-based awards.
 
15

The weighted-average fair value per share of stock options granted during the first nine 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 February 28, 2022 there was $6,203,000 in unamortized compensation cost related to
non-vested
RSUs.
 
           
Weighted-
 
           
Average
 
(Options in thousands)
  
Shares
    
Fair Value
 
RSUs outstanding June 1, 2021
     121      $ 34.21  
Granted
     120        40.91  
Released
     (25      34.24  
Forfeited
     (4      35.61  
    
 
 
          
RSUs outstanding February 28, 2022
     212      $ 37.98  
The Company 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.
8. BUSINESS COMBINATIONS
The Consolidated Statements of Income reflect the results of operations for business acquisitions since the respective dates of purchase. All are accounted for using the acquisition method. Goodwill recognized in the acquisitions discussed below relates primarily to enhancing the Company’s strategic platform for the expansion of available product offerings.
On July 31, 2020, the Company acquired the U.S. (including territories) rights to Elanco’s StandGuard
Pour-on
for horn fly and lice control in beef cattle, and related assets. This product line fits in well with Neogen’s existing agricultural insecticide portfolio and organizational capabilities. Consideration for the purchase was $2,351,000 in cash, all paid at closing. The final purchase price allocation, based upon the fair value of these assets determined using the income approach, included inventory of $51,000 and intangible assets of $2,300,000 (with an estimated life of 15 years). This product line is manufactured at Neogen’s operation in Iowa; the sales are reported within the Animal Safety segment.
On December 30, 2020, the Company acquired all of the stock of Megazyme, Ltd, an Ireland-based company, and its wholly-owned subsidiaries, U.S.-based Megazyme, Inc. and Ireland-based Megazyme IP. Megazyme is a manufacturer and supplier of diagnostic assay kits and enzymes to measure dietary fiber, complex carbohydrates and enzymes in food and beverages as well as animal feeds. This acquisition has allowed Neogen to expand its commercial relationships across food, feed and beverage companies, and provide additional food quality diagnostic products to commercial labs and food science research institutions. Consideration for the purchase was net cash of $39.8 million paid at closing, $8.6 million of cash placed in escrow payable to the former owner in two installments in two and four years, $4.9 million of stock issued at closing, and up to $2.5 million of contingent consideration, payable in two installments over one year, based upon an excess net sales formula. The final purchase price allocation, based upon the fair value of
 
16

these assets and liabilities determined using the income approach, included accounts receivable of $1,376,000, inventory of $5,595,000, net property, plant and equipment of $12,599,000, prepayments of $69,000, accounts payable of $4,000, other current liabilities of $1,815,000, contingent consideration accrual of $2,458,000,
non-current
liabilities of $319,000,
non-current
deferred tax liabilities of $3,306,000, intangible assets of $22,945,000 (with an estimated life of
15-20
years) and the remainder to goodwill
(non-deductible
for tax purposes). These values are Level 3 fair value measurements. In February 2021, the former owner was paid $1,229,000 for the first installment of contingent consideration, based upon the achievement of sales targets. In January 2022, the former order was paid $1,120,000 for the second installment of contingent consideration, also based upon the achievement of sales targets, less a deduction of $120,000
related to a prior period tax adjustment. The Irish companies continue to operate from their current locations in Bray, Ireland, reporting within the Food Safety segment and are managed through Neogen’s Scotland operation. The company’s U.S. business is managed by our Lansing-based Food Safety team.
On September 17, 2021, the Company acquired the stock of 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 royalty payments. 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 $482,000, prepayments of $296,000, accounts payable of $120,000, other current liabilities of $132,000,
non-current
liabilities of $13.9 million, intangible assets of $21.0 million (with an estimated life of
15-20
years) and the remainder to goodwill
(non-deductible
for tax purposes). These values are Level 3 fair value measurements. The business is operated from our location in Lexington, KY, reporting within the Animal Safety segment.
On November 30, 2021, the Company acquired the stock of Delf (U.K.) Ltd., a United Kingdom-based manufacturer and supplier of animal hygiene and industrial cleaning products, and Abbott Analytical Ltd., a related service provider. This acquisition will expand the Company’s line of dairy hygiene products and will enhance our cleaner and disinfectant product portfolio. Consideration for the purchase was net cash of $9.5 million paid at closing, including $722,000 of cash placed in escrow payable to the 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 $1,059,000, inventory of $891,000, net property, plant and equipment of $152,000, prepayments of $31,000, accounts payable of $497,000, other current liabilities of $378,000,
non-current
deferred tax liabilities of $669,000, 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.
On December 9, 2021, the Company acquired the stock of Genetic Veterinary Sciences, 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 $11.4 million in net cash. The preliminary purchase price allocation, based upon the fair value of these assets and liabilities determined using the income approach, included accounts receivable of $38,000, inventory of $523,000, net property, plant and equipment of $400,000, prepayments of $55,000, accounts payable of $297,000, unearned revenue of $1.6 million, other current liabilities of $287,000, intangible assets of $5.0 million (with an estimated life of
10-15
years) and the remainder to goodwill (deductible for tax purposes). These values are Level 3 fair value measurements. The business
is
operated from its current location in Spokane, Washington, reporting within the Animal Safety segment.
On December 13, 2021, the Company entered into a series of agreements to combine with 3M’s Food Safety business in a Reverse Morris Trust transaction, which is expected to close in the first quarter of our next fiscal year. Please refer to Forms
 
8-K,
 
dated December 14 and 15, 2021, Forms 425, dated December 14 and 15, 2021 and March 11, 2022, and
F
orm S-4, dated March 17, 2022, filed with the Securities and Exchange Commission for more information.
For each completed acquisition listed above, the revenues and net income were not considered material and were therefore not disclosed.
 
17

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 February 28, 2022. Interest on any borrowings is at LIBOR plus 100 basis points (rate under the terms of the agreement was 1.24% at February 28, 2022). Financial covenants include maintaining specified levels of tangible net worth, debt service coverage, and funded debt to EBITDA, each of which the Company was in compliance with at February 28, 2022.
10. COMMITMENTS AND CONTINGENCIES
The Company is involved in environmental remediation and monitoring activities at its Randolph, Wisconsin manufacturing facility and accrues for related costs when such costs are determined to be probable and estimable. The Company 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 February 28, 2022 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.
 
18

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, global business disruption caused by the Russia invasion in Ukraine and related sanctions, identification and integration of acquisitions, research and development risks, patent and trade secret protection, government regulation and other risks detailed from time to time in the Company’s reports on file at the Securities and Exchange Commission, that could cause Neogen Corporation’s results to differ materially from those indicated by such forward-looking statements, including those detailed in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
In addition, any forward-looking statements represent management’s views only as of the day this Quarterly Report on Form
10-Q
was first filed with the Securities and Exchange Commission and should not be relied upon as representing management’s views as of any subsequent date. While management may elect to update forward-looking statements at some point in the future, it specifically disclaims any obligation to do so, even if its views change.
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 nine months of fiscal 2022,
COVID-19,
including new strains of the virus such as Delta and Omicron, continued to impact our business operations and financial results. A number of our food safety diagnostic product lines have been negatively impacted due to decreased demand in many of our customers’ businesses around the world, particularly those serving restaurants, bars and other institutional food service markets. Many of our markets across the world are recovering, but the pandemic has continued to adversely impact our customers and ultimately, our revenues. We have also experienced supply chain difficulties including vendor disruptions, border closures, shipping issues and significantly increased shipping costs; labor shortages and higher labor costs, as we have had to use staffing agencies and increase our base pay in many areas of the company to fill open positions; and restricted travel, which hinders our ability to connect with customers. During the current fiscal year, 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.
 
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Executive Overview
 
    
Three Months ended
February 28,
         
Nine Months ended
February 28,
       
(in thousands)
  
2022
   
2021
   
%
   
2022
   
2021
   
%
 
Consolidated
            
Revenues
   $ 128,244     $ 116,709       10   $ 387,066     $ 341,034       13
Organic Sales Growth
      
 
6
     
 
10
Food Safety
            
Revenues
   $ 62,756     $ 58,424       7   $ 192,610     $ 170,143       13
Organic Sales Growth
 
   
 
4
     
 
8
Animal Safety
            
Revenues
   $ 65,488     $ 58,285       12   $ 194,456     $ 170,891       14
Organic Sales Growth
      
 
9
     
 
12
% of International Sales
     40     40       40     39  
Effective Tax Rate
     18.1     16.3       19.3     18.1  
Net Income
   $ 5,443     $ 13,377       -59   $ 33,348     $ 45,122       -26
Per Diluted Share
   $ 0.05     $ 0.12       $ 0.31     $ 0.42    
Cash from Operations
         $ 47,648     $ 59,120    
 
   
Food Safety organic sales exclude revenues from the acquisitions of Megazyme (December 2020) and Delf/Abbott Analytical (November 2021).
 
   
Animal Safety organic sales exclude revenues from the acquisitions of StandGuard (July 2020), CAPInnoVet (September 2021) and Genetic Veterinary Sciences (December 2021).
 
   
Net income decreased by $9.3 million and $10.6 million in the second and third quarters, respectively, of the current fiscal year primarily due to legal and consulting expenses for due diligence related to our recently announced agreement to combine with 3M’s Food Safety business.
 
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International sales rose 10% in the third quarter of fiscal 2022 and increased 17% year to date, each compared to the same respective periods in the prior year. Excluding international sales from the Megazyme and Delf/Abbott Analytical acquisitions, the increase was 5% in the third quarter and 10% for the year to date. Revenue changes, expressed in percentages, for the three and nine month periods of fiscal 2022 compared to the same respective periods in the prior year are as follows for each of our international locations:
 
    
Three Months Ended
   
Nine Months Ended
 
    
February 28, 2022
   
February 28, 2022
 
    
Revenue
   
Revenue
   
Revenue
   
Revenue
 
    
% Inc (Dec)
   
% Inc (Dec)
   
% Inc (Dec)
   
% Inc (Dec)
 
    
USD
   
Local Currency
   
USD
   
Local Currency
 
U.K. Operations (including Neogen Italia)
     16     18     14     10
Brazil Operations
     (2 )%      0     (8 )%      (8 )% 
Neogen Latinoamerica
     1     4     12     8
Neogen Argentina
     18     44