10-Q

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller Reporting Company

Emerging growth company

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM

10-Q

(Mark One)

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

For the quarterly period ended August 31, 2021.

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

For the transition period from

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 such 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.

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 Act). Yes ☐ No ☒

As of August 31, 2021, there were 107,493,015 shares of Common Stock outstanding.

Table of Contents

NEOGEN CORPORATION AND SUBSIDIARIES

TABLE OF CONTENTS


		Page No.
PART I. FINANCIAL INFORMATION

Item 1.	Interim Consolidated Financial Statements (unaudited)		2

	Consolidated Balance Sheets – August 31, 2021 and May 31, 2021		2

	Consolidated Statements of Income – Three months ended August 31, 2021 and 2020		3

	Consolidated Statements of Comprehensive Income – Three months ended August 31, 2021 and 2020		4

	Consolidated Statements of Equity – Three months ended August 31, 2021 and 2020		5

	Consolidated Statements of Cash Flows – Three months ended August 31, 2021 and 2020		6

	Notes to Interim Consolidated Financial Statements – August 31, 2021		7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		17

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		23

Item 4.	Controls and Procedures		23

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings		24

Item 6.	Exhibits		24

SIGNATURES			25

	CEO Certification

	CFO Certification

	Section 906 Certification

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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)


	August 31,			May 31,
	2021			2021
Assets
Current Assets
Cash and cash equivalents	$	71,283		$	75,602
Marketable securities		329,597			305,485
Accounts receivable, less allowance of $1,500 and $1,400 at August 31, 2021 and May 31, 2021, respectively		87,291			91,823
Inventories		102,109			100,701
Prepaid expenses and other current assets		18,844			17,840

Total Current Assets		609,124			591,451
Net Property and Equipment		99,515			100,453
Other Assets
Right of use assets		2,407			2,477
Goodwill		130,012			131,476
Other non-amortizable intangible assets		15,496			15,545
Amortizable intangible and other assets, net of accumulated amortization of $49,086 and $53,462 at August 31, 2021 and May 31, 2021, respectively		73,534			76,771
Other non-current assets		2,018			2,019

Total Assets	$	932,106		$	920,192

Liabilities and Stockholders’ Equity
Current Liabilities
Accounts payable	$	22,414		$	23,900
Accrued compensation		6,989			11,251
Income taxes		4,523			1,848
Other accruals		16,836			16,600

Total Current Liabilities		50,762			53,599
Deferred Income Taxes		21,827			21,917
Other Non-Current Liabilities		4,154			4,299

Total Liabilities		76,743			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, 107,493,015 and 107,468,304 shares issued and outstanding at August 31, 2021 and May 31, 2021, respectively		17,199			17,195
Additional paid-in capital		297,687			294,953
Accumulated other comprehensive loss		(16,204	)		(11,375	)
Retained earnings		556,681			539,604

Total Stockholders’ Equity		855,363			840,377

Total Liabilities and Stockholders’ Equity	$	932,106		$	920,192

See notes to interim consolidated financial statements.

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Neogen Corporation and Subsidiaries

Consolidated Statements of Income (unaudited)

(in thousands, except per share amounts)


	Three Months Ended
	August 31,
	2021			2020
Revenues
Product revenues	$	104,013		$	87,935
Service revenues		24,292			21,390

Total Revenues		128,305			109,325

Cost of Revenues
Cost of product revenues		54,726			46,595
Cost of service revenues		13,571			12,428

Total Cost of Revenues		68,297			59,023

Gross Margin		60,008			50,302
Operating Expenses
Sales and marketing		20,555			16,516
General and administrative		13,383			11,013
Research and development		4,325			3,878

Total Operating Expenses		38,263			31,407

Operating Income		21,745			18,895
Other Income (Expense)
Interest income		203			722
Other income (expense)		(221	)		193

Total Other Income (Expense)		(18	)		915

Income Before Taxes		21,727			19,810
Provision for Income Taxes		4,650			3,950

Net Income	$	17,077		$	15,860

Net Income Per Share
Basic	$	0.16		$	0.15
Diluted	$	0.16		$	0.15
Weighted Average Shares Outstanding
Basic		107,490			105,984
Diluted		108,109			106,570

See notes to interim consolidated financial statements.

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Neogen Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income (unaudited)

(in thousands)


	Three Months Ended
	August 31,
	2021			2020
Net income	$	17,077		$	15,860
Other comprehensive income (loss), net of tax: foreign currency translations		(4,623	)		4,121
Other comprehensive loss, net of tax: unrealized loss on marketable securities		(206	)		(119	)

Total comprehensive income	$	12,248		$	19,862

See notes to interim consolidated financial statements.

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Neogen Corporation and Subsidiaries

Consolidated Statements of

Equity (unaudited)

(in thousands)


							Accumulated
					Additional		Other
	Common Stock				Paid-in		Comprehensive			Retained
	Shares		Amount		Capital		(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


							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

See notes to interim consolidated financial statements.

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Neogen Corporation and Subsidiaries

Consolidated Statements of Cash Flows (unaudited)

(in thousands)


	Three Months Ended
	August 31,
	2021			2020
Cash Flows From Operating Activities
Net Income	$	17,077		$	15,860
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization		5,682			4,720
Share-based compensation		1,690			1,681
Change in operating assets and liabilities, net of business acquisitions:
Accounts receivable		4,036			8,350
Inventories		(1,863	)		(1,319	)
Prepaid expenses and other current assets		(1,029	)		(1,045	)
Accounts payable, accruals and other changes		(2,383	)		(3,113	)

Net Cash From Operating Activities		23,210			25,134
Cash Flows Used for Investing Activities
Purchases of property, equipment and other non-current intangible assets		(1,295	)		(4,248	)
Proceeds from the maturities of marketable securities		112,636			139,184
Purchases of marketable securities		(136,748	)		(168,318	)
Business acquisitions, net of cash acquired		—			(2,350	)

Net Cash Used for Investing Activities		(25,407	)		(35,732	)
Cash Flows From Financing Activities
Exercise of stock options and other		1,048			5,095

Net Cash From Financing Activities		1,048			5,095
Effects of Foreign Exchange Rates on Cash		(3,170	)		181

Net Increase (Decrease) in Cash and Cash Equivalents		(4,319	)		(5,322	)
Cash and Cash Equivalents, Beginning of Period		75,602			66,269

Cash and Cash Equivalents, End of Period	$	71,283		$	60,947

See notes to interim consolidated financial statements.

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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-month period ended August 31, 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.

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 and losses on our marketable securities.

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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 ownassumptions.

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 $2,407,000 and $2,477,000 at August 31, 2021 and May 31, 2021, respectively. The total current and

non-current

lease liabilities were $2,408,000 and $2,492,000 at August 31, 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, current economic conditions 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.

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.

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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 other 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 handle 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 8.

Income Taxes

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

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

2. CASH AND MARKETABLE SECURITIES

Cash and Cash Equivalents

Cash and cash equivalents consist of bank demand accounts, savings deposits, certificates of deposit and commercial paper with original maturities of 90 days or less. Cash and cash equivalents are maintained at financial institutions and, at times, balances may exceed federally insured limits. The Company has not experienced losses related to these balances and believes it is not exposed to significant credit risk regarding its cash and cash equivalents. Cash and cash equivalents were $71,283,000 and $75,602,000 at August 31, 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 August 31, 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 security investment is evaluated to determine the appropriate action to take to minimize the overall risk to our marketable security portfolio.

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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 August 31, 2021 and May 31, 2021 are listed below by classification and remaining maturities.


(in thousands)	Maturity	August 31, 2021		May 31, 2021
Commercial Paper & Corporate Bonds	0 - 90 days		82,115		106,631
	91 - 180 days		78,299		78,727
	181 days - 1 year		90,026		87,590
	1 - 2 years		76,647		26,752
Certificates of Deposit	0 - 90 days		1,253		3,262
	91 - 180 days		1,006		1,260
	181 days - 1 year		251		1,263
	1 - 2 years		—		—

Total Marketable Securities		$	329,597	$	305,485

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


(in thousands)	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
Commercial Paper & Corporate Bonds	$	327,157	$	53	$	(123	)	$	327,087
Certificates of Deposit		2,503		7		—			2,510

Total Marketable Securities	$	329,660	$	60	$	(123	)	$	329,597

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


(in thousands)	Amortized Cost		Unrealized Gains		Unrealized 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

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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:


(in thousands)	August 31, 2021		May 31, 2021
Raw materials	$	50,244	$	47,588
Work-in-process		6,704		6,412
Finished and purchased goods		45,161		46,701

	$	102,109	$	100,701

4. REVENUE RECOGNITION

We determine 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 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, 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

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•

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.

The following table presents disaggregated revenue by major product and service categories for the three month periods ended August 31, 2021 and 2020:


	Three Months ended August 31,
(in thousands)	2021		2020
Food Safety
Natural Toxins, Allergens & Drug Residues	$	20,408	$	19,015
Bacterial & General Sanitation		11,165		9,931
Culture Media & Other		18,046		12,171
Rodenticides, Insecticides & Disinfectants		7,649		8,830
Genomics Services		5,454		4,238

	$	62,722	$	54,185
Animal Safety
Life Sciences	$	1,363	$	1,325
Veterinary Instruments & Disposables		15,337		10,375
Animal Care & Other		9,219		7,658
Rodenticides, Insecticides & Disinfectants		22,149		19,914
Genomics Services		17,515		15,868

	$	65,583	$	55,140

Total Revenues	$	128,305	$	109,325

5. NET INCOME PER SHARE

The calculation of net income per share follows:


	Three Months Ended
	August 31,
(in thousands, except per share amounts)	2021		2020
Numerator for basic and diluted net income per share:
Net income	$	17,077	$	15,860
Denominator for basic net income per share:
Weighted average shares		107,490		105,984
Effect of dilutive stock options		619		586

Denominator for diluted net income per share		108,109		106,570
Net income per share:
Basic	$	0.16	$	0.15

Diluted	$	0.16	$	0.15

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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 August 31, 2021
Product revenues to external customers	$	55,945	$	48,068	$	—		$	104,013
Service revenues to external customers		6,777		17,515		—			24,292

Total revenues to external customers		62,722		65,583		—			128,305
Operating income (loss)		10,131		12,762		(1,148	)		21,745
Total assets		291,018		240,208		400,880			932,106
As of and for the three months ended August 31, 2020
Product revenues to external customers	$	48,663	$	39,272	$	—		$	87,935
Service revenues to external customers		5,522		15,868		—			21,390

Total revenues to external customers		54,185		55,140		—			109,325
Operating income (loss)		7,963		12,165		(1,233	)		18,895
Total assets		225,716		228,390		367,486			821,592

(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.

The following table presents the Company’s revenue disaggregated by geographic location:


	Three months ended August 31,
(in thousands)	2021		2020
Domestic	$	77,779	$	67,324
International		50,526		42,001

Total revenue		128,305		109,325

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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 three months ended August 31, 2021 follows:


				Weighted-
				Average
(Options in thousands)	Options			Exercise Price
Options outstanding June 1, 2021		2,957		$	30.38
Granted		—			—
Exercised		(5	)		27.71
Forfeited		(11	)		30.79

Options outstanding August 31, 2021		2,941		$	30.38

During the three-month periods ended August 31, 2021 and 2020, the Company recorded $1,690,000 and $1,681,000, respectively, of compensation expense related to its share-based awards.

The weighted-average fair value per share of stock options granted during fiscal year 2021, estimated on the date of grant using the Black-Scholes option pricing model, was $7.71. The fair value of stock options granted was estimated using the following weighted-average assumptions. No options were granted in the first quarter of fiscal year 2022.


	FY 2021
Risk-free interest rate		0.2	%
Expected dividend yield		0.0	%
Expected stock price volatility		31.3	%
Expected option life		3.25 years

The Company granted 118,250 restricted stock units (RSUs) to directors, officers and employees under the terms of the 2018 Omnibus Incentive Plan in fiscal year 2021, which vest ratably over three and five year periods. No RSUs were gra

ted in the first quarter of fiscal year 2022. RSUs have a weighted average value of $34.21 per share and will be expensed

on a

straight-line

basis

over the remaining weighted-average period of 4.0 years. On August 31, 2021 there was $2,908,000 in unamortized compensation cost related to

non-vested

RSUs.

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 the 2011 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 currently being toll manufactured for the Company but is eventually expected to be manufactured at Neogen’s operation in Iowa; the sales are reported within the Animal Safety segment.

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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 will allow 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 the next year, based upon an excess net sales formula. The preliminary purchase price allocation, based upon the fair value of these assets and liabilities determined using the income approach, included accounts receivable of $1,376,000, 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.

Subsequent to the end of the quarter, 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. 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 our location in Lexington, KY, reporting within the Animal Safety segment.

For each 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 August 31, 2021. Interest on any borrowings

at LIBOR plus 100 basis points (rate under the terms of the agreement was 1.08% at August 31, 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 August 31, 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 August 31, 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 sheet.

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.

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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

other

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.

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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 continue to 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

employees continue to work remotely and, although it is starting to increase, business travel remains limited. Safety guidelines and procedures, including social distancing 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 quarter of fiscal 2022, the

COVID-19

pandemic continued to impact our business operations and financial results. There has been a positive impact in sales of our biosecurity product lines, as the pandemic has created increased demand for these products, and sales into companion animal markets have benefitted, as remote work and stay at home orders have driven increased pet ownership. 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. A number 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. We expect the

COVID-19

pandemic will continue to impact our business operations and financial results through at least the end of our current fiscal year.

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Executive Overview

•

Consolidated revenues were $128.3 million in the first quarter of fiscal 2022, an increase of 17% compared to $109.3 million in the first quarter of fiscal 2020. Organic sales increased 14%.

•

Food Safety segment sales were $62.7 million in the first quarter of the current fiscal year, an increase of 16% compared to $54.2 million in the same period of the prior year. Organic sales in this segment rose 10% for the comparative period, with revenues from the acquisition of Megazyme (December 2020) providing the remainder of the increase.

•

Animal Safety segment sales were $65.6 million in the first quarter of fiscal 2022, an increase of 19% compared to prior year first quarter sales of $55.1 million. Organic sales in this segment also rose 19%.

•

International sales in the first quarter of fiscal 2022 were 39.4% of total sales compared to 38.4% of total sales in the first quarter of fiscal 2021.

•

The effective tax rate in the first quarter of fiscal 2022 was 21.4% compared to 19.9% in the prior year first quarter.

•

Net income for the quarter ended August 31, 2021 was $17.1 million, or $0.16 per diluted share, an increase of 8% compared to $15.9 million, or $0.15 per share, for the same period in the prior year.

•

Cash generated from operating activities in the first quarter of fiscal 2022 was $23.2 million, compared to $25.1 million in the first quarter of fiscal 2021.

Neogen’s results reflect a 20% increase in international sales in the first quarter of fiscal 2022 compared to the same period in the prior year. Revenue changes, expressed in percentages, in the first quarter of fiscal 2022 compared to the same quarter in the prior year are as follows for each of our international locations:


	Revenue Change USD			Revenue Change Local Currency
U.K. Operations (including Neogen Italia)		9	%		(2	)%
Neogen Italia		228	%		217	%
Brazil Operations		(15	)%		(17	)%
Neogen Latinoamerica		16	%		4	%
Neogen Argentina		15	%		54	%
Neogen Uruguay		15	%		17	%
Neogen Chile		71	%		63	%
Neogen China		59	%		47	%
Neogen India		15	%		14	%
Neogen Canada		89	%		75	%
Neogen Australasia		49	%		41	%

Currency translations increased comparative revenues by approximately $2.3 million in the first quarter of fiscal 2022 compared to the same quarter a year ago, primarily due to increased strength of the British pound and Mexican peso relative to the U.S. dollar. Combined revenues at our U.K. operations increased approximately 9%, with our Neogen Europe and Neogen Italia operations experiencing combined 17% growth in diagnostic test kits and genomics services. This growth was partially offset by a 10% decrease in the first quarter at Quat-Chem, as the prior year quarter included a large shipment of hand sanitizers to the U.K. government’s health organization and strong cleaner and disinfectant sales to China, Africa and the Middle East. Due to shipping and tax issues caused by Brexit, Neogen Italia is fulfilling orders to many European Union customers that were previously managed through Neogen Europe in the U.K.

At our Brazilian operations, fiscal 2022 first quarter sales decreased 15% as the prior year first quarter included a large

non-recurring

insecticide sale to a government health organization. Additionally, an extended drought led to a significantly reduced corn crop and the associated testing, resulting in a 36% decrease in sales of aflatoxin test kits. At Neogen Latinoamerica, the growth in local currency in the first quarter was led by strength in environmental sanitation and culture media. Sales at Neogen China increased 59% from new sales of Megazyme products and strong growth in genomics, as the commercial dairy, swine and sheep markets have increased sampling volumes.

Service revenue, which consists primarily of genomics services to animal protein and companion animal markets, was $24.3 million in the first quarter of fiscal 2022, an increase of 14% over prior year first quarter revenues of $21.4 million. The growth was led by strong increases in genomics revenues in our Australia, China and Canada genomics operations; growth in our domestic operations was reduced by lower sales in companion animal markets, the result of difficult comparisons from a 61% increase in the prior year first quarter.

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Revenues


	Three Months ended August 31,
(in thousands)	2021		2020		Increase/ (Decrease)			%
Food Safety
Natural Toxins, Allergens & Drug Residues	$	20,408	$	19,015	$	1,393			7	%
Bacterial & General Sanitation		11,165		9,931		1,234			12	%
Culture Media & Other		18,046		12,171		5,875			48	%
Rodenticides, Insecticides & Disinfectants		7,649		8,830		(1,181	)		(13	)%
Genomics Services		5,454		4,238		1,216			29	%

	$	62,722	$	54,185	$	8,537			16	%
Animal Safety
Life Sciences	$	1,363	$	1,325	$	38			3	%
Veterinary Instruments & Disposables		15,337		10,375		4,962			48	%
Animal Care & Other		9,219		7,658		1,561			20	%
Rodenticides, Insecticides & Disinfectants		22,149		19,914		2,235			11	%
Genomics Services		17,515		15,868		1,647			10	%

	$	65,583	$	55,140	$	10,443			19	%

Total Revenues	$	128,305	$	109,325	$	18,980			17	%

Food Safety

Natural Toxins, Allergens

& Drug Residues –

Sales in this category increased 7% in the first quarter of fiscal 2022 due primarily to a 17% increase in sales of our allergen test kits, as customers have increased their testing compared to the prior year when many were shut down or operating at lower capacity due to

COVID-19

restrictions. Sales of our natural toxin test kits rose 6%, as higher sales of deoxynivalenol (DON), zearalenone and fumonisin test kits were partially offset by lower aflatoxin test kit sales in Brazil, as a drought significantly reduced crop size and associated testing. Drug residue test kit sales declined 22% due to the termination of a European distribution agreement and competitive pressure within the marketplace.

Bacterial

& General Sanitation –

Revenues in this category increased 12% in the first quarter, led by a 14% increase in sales of our environmental sanitation product line, in which we launched a new reader in the previous quarter. Pathogen test kit revenues increased 15%, led by a 32% increase in sales of

Listeria

products, including our innovative

Listeria

Right Now

™

system. Sales of our Soleris product line to detect spoilage organisms increased 6% as 9% growth in our consumable vials was partially offset by flat sales of equipment. Our Soleris

NG instrument was launched in the first quarter of the prior year; equipment sales, although flat to prior year, are approximately double compared to the first quarter two years ago.

Culture Media

& Other –

Sales in this category rose 48% in the first quarter of fiscal 2022 compared to the same period in the prior year; excluding sales from the December 2020 acquisition of Megazyme, sales increased 21%. Sales of Neogen Culture Media products increased 36%, due to high demand with diagnostics customers globally and a large domestic sale to a vaccine manufacturer.

Rodenticides, Insecticides

& Disinfectants –

Sales of products in this category decreased 13% in the first quarter of fiscal 2022, compared to last year’s first quarter. The prior year first quarter included a 73% increase in sales of hand sanitizing products at our U.K. based Quat-Chem operation and a large

non-recurring

insecticide order, recorded at our Brazilian operation, to a government health organization. Additionally, sales of cleaners and disinfectants into China in the prior year more than doubled, primarily due to increased demand resulting from the African swine fever outbreak in that country and the

COVID-19

pandemic. Sales of cleaners and disinfectants into Asia in the first quarter of fiscal 2022 continued to be strong, increasing approximately 18%.

Genomics Services –

Sales of genomics services sold through our Food Safety operations rose 29% in the first quarter of fiscal 2022, compared to the same period last year, as genomics services in China more than doubled, due to increased commercial dairy and swine business. Genomics revenue in Europe also increased 15% on strength in poultry testing.

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Animal Safety

Life Sciences –

Sales in this category increased 3% in the first quarter, due to drug testing at doctor’s offices and workplaces increasing to more normal levels following

COVID-19

restrictions that impacted testing in the prior year. The growth was partially offset by the loss of hair testing business with a large U.S. commercial laboratory that moved to a different testing platform.

Veterinary Instruments

& Disposables –

Revenues in this category increased 48% in the first quarter of fiscal 2022 compared to the prior year. Veterinary instruments, including disposable syringes and needles, increased 52% as we gained new private label business.

Animal Care

& Other –

Sales of these products increased 20% in the first quarter compared to the same period a year ago. Small animal supplements, including our recently

re-launched

ThyroKare

™

product, increased 78% and antibiotics increased 56%, both due to strength in the veterinary market. Partially offsetting these increases, sales of our dairy supply products decreased 81% due to termination of an agreement in which we distributed these products for a large manufacturer of dairy equipment, in the first quarter of fiscal 2021.

Rodenticides, Insecticides

& Disinfectants –

Sales in this category rose 11% in the first quarter of fiscal 2022 compared to the same period in the prior year. Insect control products increased 23%, led by growth in the StandGuard

product line which was acquired in July 2020. We also had higher sales to customers in the restaurant industry, due to many being affected in the prior year by COVID shutdowns. Sales of rodenticides increased 5% on a difficult comparison to the prior year, when sales had increased 47%, and cleaners and disinfectant sales rose 6%.

Genomics Services –

Sales in this category increased 10% in the first three months, led by increased business in the beef cattle and swine markets; a large

non-recurring

plant research project also contributed to the growth in this category. Partially offsetting these gains was a decrease in companion animal testing services in the U.S. due to lower sampling volumes.

Gross Margin

Gross margin was 46.8% in the first quarter of fiscal 2022 compared to 46.0% in the same quarter a year ago. The improvement was due primarily to a shift in product mix within the Food Safety segment resulting from the incremental sales generated by Megazyme, which has products with higher gross margins. Reduced sales of lower margin cleaners and disinfectants from our European and Chinese operations and insecticides from our Brazilian operations also contributed to the Food Safety gross margin improvement of 360 basis points. Animal Safety gross margins declined by 190 basis points, primarily due to lower sales of companion animal services (a higher gross margin product), a mix shift towards lower margin products in our rodenticide line, and significantly increased international freight costs, the result of ongoing global supply chain issues. Increased health insurance costs and the resumption of the 401k match, which had been suspended in last year’s first fiscal quarter, resulted in an incremental $530,000 expense within overhead on a consolidated basis.

Operating Expenses

Operating expenses were $38.3 million in the first quarter of fiscal 2022, compared to $31.4 million in the first quarter of fiscal 2021, an increase of $6.9 million, or 22%. It is important to note that in last year’s first quarter, with the economic impact of the

COVID-19

pandemic uncertain, the Company took aggressive steps to control operating expenses and made cost reductions where possible. These steps included a reduction in workforce, temporary furloughs and reduced hours for a number of employees. In addition, the Company temporarily eliminated the match on the 401k plan during that period. These steps, in addition to the elimination of travel across most of the organization, and lower utilization of medical services by our employees resulting from

stay-at-home

orders and a reduction in

non-emergency

procedures, resulted in an approximately $2.5 million reduction in operating expense in the first quarter of fiscal 2021 compared to the prior year. The 401k match was restored in the second quarter of fiscal 2021, and medical service utilization has recovered, with procedures delayed in calendar 2020 now driving a significant increase in the last two consecutive quarters. These two expense items had an adverse impact on operating expenses of $546,000 in the first quarter of fiscal 2022 compared to the same period a year ago.

Sales and marketing expenses in this fiscal year’s first quarter were $20.6 million, an increase of $4.0 million, or 25%, compared to $16.5 million in last year’s first quarter. Personnel related expenses rose by $1.2 million due to an increase in headcount and performance-based incentives, reflective of the revenue increases across the Company. Shipping costs increased by $900,000, due to the increase in volume and an increase in rates. Travel and trade shows, which had declined by $1.3 million in last year’s first quarter due to restrictions resulting from the

COVID-19

pandemic, increased $780,000 in this year’s first quarter, as restrictions eased in a number of our markets and our sales force was able to resume face to face meetings.

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General and administrative expenses were $13.4 million, an increase of $2.4 million, or 22%, compared to $11.0 million in last year’s first quarter, primarily due to a $791,000 increase in compensation related expense, the result of a number of senior management hires and higher performance-based incentives, a $608,000 increase in amortization expense resulting primarily from our acquisition of Megazyme in December 2020, higher depreciation and licensing costs related to continued investments in information technology infrastructure, and increases in legal and professional fees. Research and development expense was $4.3 million in the first quarter of fiscal 2021, an increase of $447,000 compared to the same period in the prior year, due primarily to personnel absorbed in the Megazyme acquisition and compensation increases for domestic employees.

Operating Income

Operating income was $21.7 million in the first quarter of fiscal 2022, compared to $18.9 million in the same period of the prior year. Expressed as a percentage of revenue, operating income was 16.9% compared to 17.3% in last year’s first quarter. The decline in operating income as a percentage of sales is primarily the result of the 22% increase in operating expenses for the quarter.

Other Income


	Three Months ended August 31,
(dollars in thousands)	2021			2020
Interest income (net of expense)	$	203		$	722
Foreign currency transactions		(151	)		175
Other		(70	)		18

Total Other Income	$	(18	)	$	915

The reduction in interest income in the first quarter of fiscal 2022 compared to the prior year is primarily the result of lower yields on our cash and marketable securities balances, as interest rates have dropped significantly compared to rates in the first quarter of fiscal 2021. Other income resulting from foreign currency transactions is the result of changes in the value of foreign currencies relative to the U.S. dollar in countries in which we operate.

Income Tax Expense

Income tax expense for the first quarter of fiscal 2022 was $4,650,000, an effective tax rate of 21.4%, compared to prior year first quarter income tax expense of $3,950,000, an effective tax rate of 19.9%. For each quarter, the primary difference between the statutory rate of 21% and the effective rate recorded is the benefit resulting from the exercise of stock options; this benefit was $15,000 in the first quarter of fiscal 2022 compared to $421,000 in the first quarter of the prior year. The benefit was lower due to the decreased volume of option exercises during the comparative periods, and a reduction in benefit realized, on average, for each transaction. Additionally, as the result of a higher tax rate enacted in the U.K., effective in 2023, we were required to revalue our deferred tax balances at our U.K. operations to the rate we expect them to reverse in the future, resulting in $548,000 of expense in this year’s first quarter.

Net Income

Net income was $17.1 million in the first quarter of fiscal 2022, an increase of 8% compared to $15.9 million earned in the first quarter of fiscal 2021. The increased earnings were the result of higher sales and gross margins, partially offset by increased operating expenses, the $933,000 decline in other income and higher income tax expense.

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Financial Condition and Liquidity

The overall cash, cash equivalents and marketable securities position of Neogen was $400.9 million at August 31, 2021, compared to $381.1 million at May 31, 2021. Approximately $23.2 million was generated from operations during the first three months of fiscal 2022. Net cash proceeds of $1.0 million were realized from the exercise of stock options and issuance of shares under our Employee Stock Purchase Plan during the first quarter. We spent $1.3 million for property, equipment and other

non-current

assets in the first three months of fiscal 2022.

Net accounts receivable balances were $87.3 million at August 31, 2021, a decline of $4.5 million, compared to $91.8 million at May 31, 2021. Days sales outstanding, a measurement of the time it takes to collect receivables, were 59 days at August 31, 2021, compared to 66 days at May 31, 2021 and 61 days at August 31, 2020. We have been carefully monitoring our customer receivables as the

COVID-19

pandemic has spread across our global markets; to date, we have not experienced an appreciable increase in bad debt write offs.

Net inventory balances were $102.1 million at August 31, 2021, an increase of $1.4 million, or 1%, compared to May 31, 2021 balances of $100.7 million. We increased inventory levels during fiscal 2021 to ensure we have adequate supplies of critical raw and finished products in the event our supply chain is adversely impacted by the

COVID-19

pandemic and Brexit.

Inflation and changing prices are not expected to have a material effect on operations, as management believes it will continue to be successful in offsetting increased input costs with price increases and/or cost efficiencies.

Management believes that our existing cash and marketable securities balances at August 31, 2021, along with available borrowings under our credit facility and cash expected to be generated from future operations, will be sufficient to fund activities for the foreseeable future. However, existing cash and borrowing capacity may not be sufficient to meet our cash requirements to commercialize products currently under development or our plans to acquire other organizations, technologies or products that fit within our mission statement. Accordingly, we may choose to issue equity securities or enter into other financing arrangements for a portion of our future financing needs.

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PART I – FINANCIAL INFORMATION

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We have interest rate and foreign exchange rate risk exposure but no long-term fixed rate investments or borrowings. Our primary interest rate risk is due to potential fluctuations of interest rates for short-term investments.

Foreign exchange risk exposure arises because we market and sell our products throughout the world. Revenues in certain foreign countries as well as certain expenses related to those revenues are transacted in currencies other than the U.S. dollar. Our operating results are exposed to changes in exchange rates between the U.S. dollar and the British pound sterling, euro, Mexican peso, Brazilian real, Chinese yuan, Australian dollar and to a lesser extent, the Indian rupee, Canadian dollar, Guatemalan quetzal, Argentine peso, Uruguayan peso and Chilean peso; there is also exposure to a change in exchange rate between the British pound sterling and the euro. When the U.S. dollar weakens against foreign currencies, the dollar value of revenues denominated in foreign currencies increases. When the U.S. dollar strengthens, the opposite situation occurs. Additionally, previously invoiced amounts can be positively or negatively affected by changes in exchange rates in the course of collection.

Neogen has assets, liabilities and operations outside of the U.S., located in Scotland, England, Ireland, Italy, Brazil, Mexico, Guatemala, Argentina, Uruguay, Chile, China, India, Canada and Australia where the functional currency is the British pound sterling, euro, Brazilian real, Mexican peso, Guatemalan quetzal, Argentine peso, Uruguayan peso, Chilean peso, Chinese yuan, Indian rupee, Canadian dollar and Australian dollar, respectively. Our investments in foreign subsidiaries are considered long-term. As discussed in ITEM 1A. RISK FACTORS of the Form

10-K

annual filing, our financial condition and results of operations could be adversely affected by currency fluctuations.

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


Risk Category	Hypothetical Change	August 31, 2021		Impact
(dollars in thousands)
Foreign Currency - Revenue	10% Decrease in exchange rates	$	5,053		Earnings
Foreign Currency - Hedges	10% Decrease in exchange rates		1,990		Earnings

PART I – FINANCIAL INFORMATION

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

An evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of August 31, 2021 was carried out under the supervision and with the participation of the Company’s management, including the President & Chief Executive Officer and the Vice President & Chief Financial Officer (“the Certifying Officers”). Based on the evaluation, the Certifying Officers concluded that the Company’s disclosure controls and procedures are effective.

Changes in Internal Controls over Financial Reporting

No changes in our control over financial reporting were identified as having occurred during the quarter ended August 31, 2021 that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting.

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PART II – OTHER INFORMATION

Item 1. Legal Proceedings

The Company is subject to legal and other proceedings in the normal course of business. In the opinion of management, the outcomes of these matters are not expected to have a material effect on the Company’s future results of operations or financial position.

tem

6. Exhibits

(a) Exhibit Index


31.1		Certification of Principal Executive Officer

31.2		Certification of Principal Financial Officer

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

101.INS		Inline XBRL Instance Document

101.SCH		Inline XBRL Taxonomy Extension Schema Document

101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF		Inline XBRL Taxonomy Extension Definition Document

101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document

104		Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)

Items 1A, 2, 3, 4, and 5 are not applicable or removed or reserved and have been omitted.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

NEOGEN CORPORATION

(Registrant)

Dated: September 30, 2021

/s/ John E. Adent

John E. Adent

President & Chief Executive Officer

(Principal Executive Officer)

Dated: September 30, 2021

/s/ Steven J. Quinlan

Steven J. Quinlan

Vice President & Chief Financial Officer

(Principal Financial Officer and Principal Accounting Officer)

SEC Form 10-Q filed by Neogen Corporation