Table of Contents 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. 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 ...

Neogen Corporation (NASDAQ:NEOG) Q1 2022 Earnings Conference Call September 21, 2021 11:00 AM ET Company Participants John Adent - Chief Executive Officer and President Steve Quinlan - Chief Financial Officer Conference Call Participants David Westenberg - Guggenheim Securities John Kreger - William Blair Operator Good day, and welcome to the Neogen First Quarter Fiscal Year 2022 Earnings Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over ...

Table of Contents Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended May 31, 2021 or ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For The Transition Period From To . COMMISSION FILE NUMBER 0-17988 NEOGEN CORPORATION (Exact name of registrant as specified in its charter) MICHIGAN 38-2367843 (State of oth ...

Neogen Corporation (NASDAQ:NEOG) Q4 2021 Earnings Conference Call July 20, 2021 11:00 AM ET Company Participants John Adent - Chief Executive Officer and President Steve Quinlan - Chief Financial Officer Conference Call Participants David Westenberg - Guggenheim Securities John Kreger - William Blair Mark Connelly - Stephens Operator Good day and welcome to the Neogen Fiscal Year 2021 Year-End Earnings Results Conference call. All participants will be in a listen-only mode. [Operator Instructions] I would n ...

Table of Contents For the transition period from to Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 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, 2021. or Commission file number0-17988 Neogen Corporation (Exact name of registrant as specified in its charter) Michigan 3 ...

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to FORM 10-Q Commission file number 0-17988 (Mark One) Neogen Corporation (Exact name of registrant as specified in its charter) (State or other jurisdiction of incorporation or organization) ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended Nove ...

Financial Data and Key Metrics Changes - Revenues for Q2 FY 2021 were $115 million, up 7% from $107.8 million in the same quarter last year [11] - Year-to-date revenues were $224.3 million, a 7% increase over $209.2 million reported last year [12] - Net income for the first six months of FY 2021 was $31.7 million, or $0.60 per share, compared to $30.9 million, or $0.59 per share, a year ago [12] - Gross margins were 46.3% for the quarter, down from 47.3% in the previous year [27] - Operating income for Q2 was $19.2 million, compared to $18.3 million in the same quarter last year [28] Business Line Data and Key Metrics Changes - Food Safety segment revenues were $57.5 million, a 1% increase from $56.9 million last year [16] - Animal Safety segment revenues were $57.5 million, up 13% from $50.9 million in the previous year [23] - Sales of rodenticides increased by 24% due to ongoing rodent pressure [24] - Revenues from genomic testing and bioinformatics grew by 11% [25] Market Data and Key Metrics Changes - Revenues in China increased by 51% in local currency, driven by strong sales in genomic services [22] - Neogen Latino America saw a 23% growth in local currency, primarily from rodenticides and disinfectants [21] - European operations reported a 9% increase in revenues in U.S. dollars [19] - Brazilian operations rose 4% in local currency but declined by 22% after adjusting for currency translation [20] Company Strategy and Development Direction - The company is focused on an aggressive corporate development pipeline, having looked at over 90 companies for potential acquisitions [35] - Neogen is expanding its e-commerce capabilities, which saw a 29% increase in online orders after launching a new platform [37] - The company aims to leverage increased spending on pets during the COVID era to drive growth [36] Management's Comments on Operating Environment and Future Outlook - Management acknowledged the challenges posed by the COVID-19 pandemic but expressed optimism about future growth [32] - The company is actively managing supply chain disruptions and back order issues due to the pandemic [62] - Management believes that the food safety market will improve as the pandemic situation stabilizes [59] Other Important Information - The company incurred nearly $1 million in expenses for acquisitions that did not materialize [34] - Interest income for the quarter was $555,000, down from $1.3 million in the previous year [29] - The effective tax rate for the quarter was 17.8%, up from 15.3% in the previous year [29] Q&A Session Summary Question: Acquisition discipline in a high-asset-price environment - Management acknowledged the competitive nature of acquisitions and expressed confidence in their ability to pursue both large and small acquisitions [44] Question: Regional sales mix and COVID-19 impact - Management noted that the pandemic is affecting all regions, making it difficult to predict specific impacts [50] Question: Backorder issues and order fulfillment - Management confirmed some backorder challenges due to supply chain issues but emphasized efforts to fulfill orders [62] Question: Long-term growth in food safety testing - Management remains optimistic about growth in the food safety segment despite current challenges [59] Question: Impact of acquisitions on revenue - Recent acquisitions contributed approximately $2 million to revenues for the quarter [64] Question: Breakdown of international versus domestic sales - International sales accounted for about 39.3% of total sales for the quarter [66]

PART I. FINANCIAL INFORMATION [Item 1. Interim Consolidated Financial Statements (unaudited)](index=4&type=section&id=Item%201.%20Interim%20Consolidated%20Financial%20Statements%20(unaudited)) This section presents Neogen Corporation's unaudited consolidated financial statements and comprehensive notes for the period ended August 31, 2020 [Consolidated Balance Sheets](index=4&type=section&id=Consolidated%20Balance%20Sheets%20%E2%80%93%20August%2031%2C%202020%20and%20May%2031%2C%202020) This section provides a snapshot of Neogen's financial position, detailing assets, liabilities, and equity as of August 31, 2020, and May 31, 2020 Consolidated Balance Sheet Highlights (in thousands) | Item | August 31, 2020 | May 31, 2020 | | :-------------------------------- | :-------------- | :----------- | | Total Assets | $821,592 | $797,182 | | Total Liabilities | $70,046 | $72,005 | | Total Stockholders' Equity | $751,546 | $725,177 | | Cash and cash equivalents | $60,947 | $66,269 | | Marketable securities | $306,539 | $277,404 | | Accounts receivable, net | $77,685 | $84,681 | | Inventories | $97,573 | $95,053 | [Consolidated Statements of Income](index=5&type=section&id=Consolidated%20Statements%20of%20Income%20%E2%80%93%20Three%20months%20ended%20August%2031%2C%202020%20and%202019) This section outlines Neogen's financial performance, presenting revenues, expenses, and net income for the three months ended August 31, 2020, and 2019 Consolidated Statements of Income Highlights (Three Months Ended August 31, in thousands, except per share amounts) | Item | 2020 | 2019 | Change (YoY) | | :-------------------------- | :----- | :----- | :----------- | | Total Revenues | $109,325 | $101,424 | +7.8% | | Cost of Revenues | $59,023 | $53,230 | +10.9% | | Gross Margin | $50,302 | $48,194 | +4.4% | | Total Operating Expenses | $31,407 | $31,930 | -1.6% | | Operating Income | $18,895 | $16,264 | +16.2% | | Income Before Taxes | $19,810 | $17,652 | +12.2% | | Provision for Income Taxes | $3,950 | $3,000 | +31.7% | | Net Income | $15,860 | $14,652 | +8.2% | | Basic Net Income Per Share | $0.30 | $0.28 | +7.1% | | Diluted Net Income Per Share | $0.30 | $0.28 | +7.1% | [Consolidated Statements of Comprehensive Income](index=6&type=section&id=Consolidated%20Statements%20of%20Comprehensive%20Income%20%E2%80%93%20Three%20months%20ended%20August%2031%2C%202020%20and%202019) This section details Neogen's total comprehensive income, including net income and other comprehensive income items, for the three months ended August 31, 2020, and 2019 Consolidated Statements of Comprehensive Income (Three Months Ended August 31, in thousands) | Item | 2020 | 2019 | | :-------------------------------------------------- | :----- | :----- | | Net income | $15,860 | $14,652 | | Other comprehensive income (loss), net of tax: foreign currency translations | $4,121 | ($3,058) | | Other comprehensive income (loss), net of tax: unrealized gain (loss) on marketable securities | ($119) | $562 | | Total comprehensive income | $19,862 | $12,156 | [Consolidated Statements of Equity](index=7&type=section&id=Consolidated%20Statements%20of%20Equity%20%E2%80%93%20Three%20months%20ended%20August%2031%2C%202020%20and%202019) This section presents changes in Neogen's total stockholders' equity, including net income and other comprehensive income, for the three months ended August 31, 2020, and 2019 Consolidated Statements of Equity Highlights (Three Months Ended August 31, in thousands) | Item | August 31, 2020 | June 1, 2020 | | :------------------------------------------ | :-------------- | :----------- | | Total Stockholders' Equity | $751,546 | $725,177 | | Net income for the three months ended August 31, 2020 | $15,860 | N/A | | Other comprehensive income for the three months ended August 31, 2020 | $4,002 | N/A | | Exercise of options and share-based compensation expense | $5,839 | N/A | | Issuance of shares under employee stock purchase plan | $668 | N/A | [Consolidated Statements of Cash Flows](index=8&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows%20%E2%80%93%20Three%20months%20ended%20August%2031%2C%202020%20and%202019) This section details Neogen's cash inflows and outflows from operating, investing, and financing activities for the three months ended August 31, 2020, and 2019 Consolidated Statements of Cash Flows Highlights (Three Months Ended August 31, in thousands) | Item | 2020 | 2019 | | :------------------------------------------ | :----- | :----- | | Net Cash From Operating Activities | $25,134 | $23,719 | | Net Cash For Investing Activities | ($35,732) | ($15,361) | | Net Cash From Financing Activities | $5,095 | $8,708 | | Effect of Foreign Exchange Rates on Cash | $181 | ($2,465) | | Net Increase (Decrease) In Cash and Cash Equivalents | ($5,322) | $14,601 | | Cash and Cash Equivalents, End of Period | $60,947 | $56,289 | [Notes to Interim Consolidated Financial Statements](index=9&type=section&id=Notes%20to%20Interim%20Consolidated%20Financial%20Statements%20%E2%80%93%20August%2031%2C%202020) This section provides detailed information on Neogen's accounting policies, financial instruments, segment performance, and other significant financial commitments and contingencies [1. Accounting Policies](index=9&type=section&id=1.%20ACCOUNTING%20POLICIES) This section outlines Neogen's significant accounting policies, including the basis of presentation, recently adopted standards, and key estimates used in financial reporting - The financial statements are prepared in accordance with GAAP for interim financial information and Form 10-Q instructions, with all necessary recurring adjustments included[22](index=22&type=chunk)[23](index=23&type=chunk) - The Company's functional currency is the U.S. dollar; foreign currency translation adjustments are recorded in other comprehensive income (loss)[24](index=24&type=chunk) - Recently adopted accounting standards (ASU No. 2016-13 on Credit Losses, ASU 2018-13 on Fair Value Measurement, and ASU 2018-15 on Cloud Computing Implementation Cost) did not have a material impact on the consolidated financial statements[25](index=25&type=chunk)[26](index=26&type=chunk)[27](index=27&type=chunk) - Comprehensive income includes net income and other items excluded from net income, such as foreign currency translation adjustments and unrealized gains/losses on marketable securities[28](index=28&type=chunk) - Fair value measurements are categorized into a hierarchy: **Level 1** (quoted prices in active markets), **Level 2** (observable inputs other than quoted prices), and **Level 3** (unobservable inputs)[30](index=30&type=chunk) - Management makes estimates and judgments for financial reporting, including variable consideration, doubtful accounts, inventory valuation, stock-based compensation, income taxes, goodwill, and other intangible assets[31](index=31&type=chunk) [2. Cash and Marketable Securities](index=11&type=section&id=2.%20CASH%20AND%20MARKETABLE%20SECURITIES) This section details Neogen's cash, cash equivalents, and marketable securities, including their fair value classification and maturity profiles - Cash and cash equivalents were **$60,947,000** at August 31, 2020, and **$66,269,000** at May 31, 2020, classified as **Level 1** fair value[39](index=39&type=chunk) - Marketable securities are classified as available for sale, recorded at fair value (**Level 2**), with the primary objective to preserve capital for operations, capital expenditures, and acquisitions[42](index=42&type=chunk) Marketable Securities by Classification and Maturity (August 31, 2020, in thousands) | Maturity | US Treasuries | Commercial Paper & Corporate Bonds | Certificates of Deposit | Total Marketable Securities | | :--------- | :------------ | :--------------------------------- | :---------------------- | :-------------------------- | | 0—90 days | $— | $120,055 | $4,908 | $124,963 | | 91—180 days | $2,516 | $93,239 | $1,257 | $97,012 | | 181 days—1 year | $— | $63,668 | $8,338 | $72,006 | | 1—2 years | $— | $10,012 | $2,546 | $12,558 | | **Total** | **$2,516** | **$286,974** | **$17,049** | **$306,539** | Marketable Securities Components (August 31, 2020, in thousands) | Item | Amortized Cost | Unrealized Gains | Unrealized Losses | Fair Value | | :-------------------------- | :------------- | :--------------- | :---------------- | :--------- | | US Treasuries | $2,502 | $14 | $— | $2,516 | | Commercial Paper & Corporate Bonds | $286,211 | $820 | ($57) | $286,974 | | Certificates of Deposit | $16,911 | $138 | $— | $17,049 | | **Total Marketable Securities** | **$305,624** | **$972** | **($57)** | **$306,539** | [3. Inventories](index=13&type=section&id=3.%20INVENTORIES) This section provides a breakdown of Neogen's inventory components, including raw materials, work-in-process, and finished goods Inventory Components (in thousands) | Item | August 31, 2020 | May 31, 2020 | | :---------------------- | :-------------- | :----------- | | Raw materials | $47,589 | $45,058 | | Work-in-process | $6,323 | $6,887 | | Finished and purchased goods | $43,661 | $43,108 | | **Total Inventories** | **$97,573** | **$95,053** | [4. Leases](index=13&type=section&id=4.%20LEASES) This section details Neogen's operating lease arrangements, including right-of-use assets, lease liabilities, and future minimum lease payments - All leases are classified as operating leases, with right-of-use assets and corresponding liabilities recognized on the balance sheet[48](index=48&type=chunk)[49](index=49&type=chunk) Operating Lease Information (in thousands) | Item | August 31, 2020 | May 31, 2020 | | :-------------------------- | :-------------- | :----------- | | Right of use—assets | $1,756 | $1,952 | | Lease liabilities—current | $803 | $1,054 | | Lease liabilities—non-current | $966 | $913 | | Weighted average remaining lease term | 2.4 years | 2.5 years | | Weighted average discount rate | 3.2% | 3.2% | Total Lease Expense (Three Months Ended August 31, in thousands) | Item | 2020 | 2019 | | :---------------- | :--- | :--- | | Operating leases | $205 | $240 | | Short term leases | $44 | $48 | | **Total lease expense** | **$249** | **$288** | Undiscounted Future Minimum Lease Payments (as of August 31, 2020, in thousands) | Years ending May 31, | Amount | | :------------------- | :----- | | 2021 (1) | $789 | | 2022 | $553 | | 2023 | $292 | | 2024 | $145 | | 2025 | $43 | | 2026 and thereafter | $— | | **Total lease payments** | **$1,822** | | Less: imputed interest | ($97) | | **Total lease liabilities** | **$1,725** | [5. Revenue Recognition](index=15&type=section&id=5.%20REVENUE%20RECOGNITION) This section describes Neogen's policies for recognizing revenue from product sales and services, including disaggregated revenue by major categories - Revenue is recognized when performance obligations are satisfied, transferring control of products or services to the customer, with collectability reasonably assured[55](index=55&type=chunk) - Variable consideration, such as volume rebates, is estimated using the most-likely-amount or expected-value methods and reduces recognized revenue[56](index=56&type=chunk) - The Company derives revenue from two primary sources: product revenue (diagnostic test kits, culture media, consumables, rodenticides, disinfectants, insecticides) and service revenue (genomic identification, commercial laboratory services)[58](index=58&type=chunk)[59](index=59&type=chunk)[60](index=60&type=chunk)[62](index=62&type=chunk) Disaggregated Revenue by Major Product and Service Categories (Three Months Ended August 31, in thousands) | Category | 2020 | 2019 | Change (YoY) | | :---------------------------------- | :----- | :----- | :----------- | | **Food Safety** | | | | | Natural Toxins, Allergens & Drug Residues | $19,015 | $20,115 | -5.5% | | Bacterial & General Sanitation | $9,931 | $10,316 | -3.7% | | Culture Media & Other | $11,393 | $11,279 | +1.0% | | Rodenticides, Insecticides & Disinfectants | $9,608 | $5,449 | +76.3% | | Genomics Services | $4,238 | $3,862 | +9.7% | | **Total Food Safety** | **$54,185** | **$51,021** | **+6.2%** | | **Animal Safety** | | | | | Life Sciences | $1,325 | $1,723 | -23.1% | | Veterinary Instruments & Disposables | $10,375 | $11,336 | -8.4% | | Animal Care & Other | $7,658 | $6,405 | +19.6% | | Rodenticides, Insecticides & Disinfectants | $19,914 | $16,718 | +19.1% | | Genomics Services | $15,868 | $14,221 | +11.6% | | **Total Animal Safety** | **$55,140** | **$50,403** | **+9.4%** | | **Total Revenues** | **$109,325** | **$101,424** | **+7.8%** | [6. Net Income Per Share](index=16&type=section&id=6.%20NET%20INCOME%20PER%20SHARE) This section outlines the calculation of Neogen's basic and diluted net income per share for the periods presented Net Income Per Share Calculation (Three Months Ended August 31, in thousands, except per share amounts) | Item | 2020 | 2019 | | :------------------------------------------ | :----- | :----- | | Net income attributable to Neogen | $15,860 | $14,652 | | Weighted average shares (Basic) | 52,992 | 52,292 | | Effect of dilutive stock options | 293 | 392 | | Weighted average shares (Diluted) | 53,285 | 52,684 | | Basic Net income per share | $0.30 | $0.28 | | Diluted Net income per share | $0.30 | $0.28 | [7. Segment Information and Geographic Data](index=17&type=section&id=7.%20SEGMENT%20INFORMATION%20AND%20GEOGRAPHIC%20DATA) This section provides financial data for Neogen's Food Safety and Animal Safety segments, along with revenue breakdown by geographic location - Neogen operates in two reportable segments: **Food Safety** (diagnostic test kits, culture media for toxins, bacteria, allergens) and **Animal Safety** (consumable products for veterinarians, genomic identification, rodenticides, disinfectants, insecticides)[65](index=65&type=chunk) - International operations in the U.K., Mexico, Brazil, China, and India primarily report through the Food Safety segment, while Australia (including Cell BioSciences acquisition) reports through the Animal Safety segment[66](index=66&type=chunk)[67](index=67&type=chunk) Segment Information (Three Months Ended August 31, 2020, in thousands) | Item | Food Safety | Animal Safety | Corporate and Eliminations | Total | | :-------------------------- | :---------- | :------------ | :------------------------- | :------ | | Product revenues | $48,663 | $39,272 | $— | $87,935 | | Service revenues | $5,522 | $15,868 | $— | $21,390 | | Total revenues | $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 | Revenue by Geographic Location (Three Months Ended August 31, in thousands) | Item | 2020 | 2019 | | :----------- | :----- | :----- | | Domestic | $67,324 | $63,340 | | International | $42,001 | $38,084 | | **Total revenue** | **$109,325** | **$101,424** | [8. Equity Compensation Plans](index=18&type=section&id=8.%20EQUITY%20COMPENSATION%20PLANS) This section details Neogen's equity compensation plans, including stock option activity and share-based compensation expense Stock Option Activity (Three Months Ended August 31, 2020, in thousands) | Item | Shares | Weighted Average Exercise Price | | :-------------------------- | :----- | :---------------------------- | | Options outstanding June 1, 2020 | 2,162 | $55.96 | | Exercised | (86) | $48.39 | | Forfeited | (7) | $57.81 | | Options outstanding August 31, 2020 | 2,069 | $56.27 | - Share-based compensation expense was **$1,681,000** for the three months ended August 31, 2020, compared to **$1,543,000** in the prior year[71](index=71&type=chunk) Black-Scholes Option Pricing Model Assumptions (FY 2020) | Assumption | Value | | :------------------------ | :---- | | Risk-free interest rate | 1.9% | | Expected dividend yield | 0.0% | | Expected stock price volatility | 29.4% | | Expected option life | 3.5 years | - The Company offers an Employee Stock Purchase Plan allowing eligible employees to purchase common stock at a **5% discount**[73](index=73&type=chunk) [9. Business and Product Line Acquisitions](index=18&type=section&id=9.%20BUSINESS%20AND%20PRODUCT%20LINE%20ACQUISITIONS) This section describes Neogen's recent business and product line acquisitions, highlighting their strategic purpose and impact - Neogen completed **seven acquisitions** between January 2020 and July 2020, primarily to expand direct sales presence in Argentina, Uruguay, Italy, Chile, and Australasia, and to enhance product lines (culture media, agricultural insecticides)[75](index=75&type=chunk)[76](index=76&type=chunk)[77](index=77&type=chunk)[78](index=78&type=chunk)[79](index=79&type=chunk)[80](index=80&type=chunk)[81](index=81&type=chunk) - Acquisitions include Productos Quimicos Magiar (Argentina and Uruguay), Diessechem Srl (Italy), Abtek Biologicals Limited (UK), Cell BioSciences (Australia), Magiar Chilena (Chile), and Elanco's StandGuard Pour-on product line (US)[75](index=75&type=chunk)[76](index=76&type=chunk)[77](index=77&type=chunk)[78](index=78&type=chunk)[79](index=79&type=chunk)[80](index=80&type=chunk)[81](index=81&type=chunk) - Goodwill recognized in these acquisitions primarily relates to enhancing the Company's strategic platform and expanding product offerings[74](index=74&type=chunk) [10. Long Term Debt](index=20&type=section&id=10.%20LONG%20TERM%20DEBT) This section outlines Neogen's long-term debt arrangements, including its revolving line of credit and compliance with financial covenants - The Company has a **$15,000,000** unsecured revolving line of credit expiring September 30, 2021, with no outstanding balance at August 31, 2020[84](index=84&type=chunk) - Interest on borrowings is LIBOR plus **100 basis points** (**1.20%** at August 31, 2020), and the Company was in compliance with all financial covenants[84](index=84&type=chunk) [11. Commitments and Contingencies](index=20&type=section&id=11.%20COMMITMENTS%20AND%20CONTINGENCIES) This section details Neogen's commitments and contingencies, including environmental remediation liabilities and other legal proceedings - Neogen is involved in environmental remediation at its Randolph, Wisconsin facility, with an estimated liability of **$916,000** at August 31, 2020, measured over **15 years**[85](index=85&type=chunk) - Discussions are ongoing with the Wisconsin Department of Natural Resources regarding potential alternative remediation strategies, which could increase the recorded liability[85](index=85&type=chunk) - The Company is subject to other legal proceedings in the normal course of business, which management believes will not have a material effect on future results or financial position[86](index=86&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=21&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides management's analysis of Neogen's financial performance, condition, and liquidity for the first quarter of fiscal 2021, including key drivers and trends [Executive Overview](index=22&type=section&id=Executive%20Overview) This section provides a high-level summary of Neogen's consolidated financial performance for the first quarter of fiscal 2021, including revenue growth and net income - Consolidated revenues increased **8%** to **$109.3 million** in Q1 FY2021 (**6% organic growth**) compared to **$101.4 million** in Q1 FY2020[94](index=94&type=chunk) - **Food Safety** segment sales rose **6%** (**4% organic**), while **Animal Safety** segment sales increased **9%** (**8% organic**)[94](index=94&type=chunk) - International sales grew **10%** and represented **38.4%** of total sales in Q1 FY2021, with significant local currency growth in Brazil (**+38%**), China (**+106%**), and Australasia (**+63%**)[91](index=91&type=chunk)[94](index=94&type=chunk) - Net income for the quarter increased **8%** to **$15.9 million**, or **$0.30** per diluted share[94](index=94&type=chunk) - Cash generated from operating activities was **$25.1 million**, up from **$23.7 million** in the prior year[94](index=94&type=chunk) [Revenues](index=23&type=section&id=Revenues) This section analyzes Neogen's revenue performance, detailing growth drivers and changes across major product and service categories Revenue Growth by Category (Three Months Ended August 31, YoY % Change) | Category | % Change | | :---------------------------------- | :------- | | **Food Safety** | | | Natural Toxins, Allergens & Drug Residues | -5% | | Bacterial & General Sanitation | -4% | | Culture Media & Other | +1% | | Rodenticides, Insecticides & Disinfectants | +76% | | Genomics Services | +10% | | **Animal Safety** | | | Life Sciences | -23% | | Veterinary Instruments & Disposables | -8% | | Animal Care & Other | +20% | | Rodenticides, Insecticides & Disinfectants | +19% | | Genomics Services | +12% | - **Food Safety's Rodenticides, Insecticides & Disinfectants** saw a **76% increase**, driven by hand/skin sanitizing products (UK) and a large non-recurring insecticide order (Brazil), and increased cleaner/disinfectant sales to China due to African swine fever and COVID-19[99](index=99&type=chunk) - **Animal Safety's Rodenticides, Insecticides & Disinfectants** increased **19%**, primarily due to a **47% rise** in rodenticide sales and the acquisition of the StandGuard product line[104](index=104&type=chunk) - **Genomics Services** for Food Safety more than doubled in China due to increased pork industry testing and aquaculture projects, while Animal Safety genomics grew **12%** from companion animal and Australian sheep markets, partially offset by declines in domestic commercial beef/dairy due to COVID-19[100](index=100&type=chunk)[105](index=105&type=chunk) - Drug residue test kits decreased **34%** in Food Safety due to lower demand in European dairy markets and a shift to direct marketing[96](index=96&type=chunk) [Gross Margin](index=24&type=section&id=Gross%20Margin) This section discusses the factors influencing Neogen's gross margin, including product mix shifts and operational efficiencies - Gross margin decreased to **46.0%** in Q1 FY2021 from **47.5%** in Q1 FY2020[106](index=106&type=chunk) - The decline was largely due to a shift in product mix within the Food Safety segment towards lower-margin products (cleaners, disinfectants, insecticides), the stronger U.S. dollar, and increased duties and freight charges[106](index=106&type=chunk) - Animal Safety gross margins improved by **290 basis points**, driven by increased sales of higher-margin rodenticides and disinfectants, and improved efficiencies from the Cell BioSciences acquisition[106](index=106&type=chunk) [Operating Expenses](index=24&type=section&id=Operating%20Expenses) This section details changes in Neogen's operating expenses, including sales and marketing, general and administrative, and research and development costs - Total operating expenses decreased by **$500,000**, or **2%**, to **$31.4 million** in Q1 FY2021[107](index=107&type=chunk) - Sales and marketing expenses declined **6%** due to reduced travel (**$900,000**) and trade show cancellations (**$353,000**) caused by the COVID-19 pandemic, partially offset by a **$1.0 million** increase in compensation costs[107](index=107&type=chunk) - General and administrative expenses increased **2.9%** due to higher compensation, legal/professional fees, depreciation from IT investments, and stock-based compensation[108](index=108&type=chunk) - Research and development expense increased by **$191,000**, primarily for third-party services and approval costs related to new product development, including the launch of the Soleris NG system[108](index=108&type=chunk) [Operating Income](index=25&type=section&id=Operating%20Income) This section analyzes Neogen's operating income and its percentage of revenue, highlighting the impact of revenue growth and expense management - Operating income increased to **$18.9 million** in Q1 FY2021, up **16.2%** from **$16.3 million** in the prior year[110](index=110&type=chunk) - As a percentage of revenue, operating income improved to **17.3%** from **16.0%**, driven by increased revenues and lower operating expenses[110](index=110&type=chunk) [Other Income](index=25&type=section&id=Other%20Income) This section presents Neogen's other income components, including interest income and foreign currency transaction gains or losses Other Income (Three Months Ended August 31, in thousands) | Item | 2020 | 2019 | | :-------------------------- | :----- | :----- | | Interest income (net of expense) | $722 | $1,510 | | Foreign currency transactions | $175 | ($117) | | Royalty income | $— | $1 | | Other | $18 | ($7) | | **Total Other Income** | **$915** | **$1,387** | - Interest income decreased due to lower yields on cash and marketable securities balances[111](index=111&type=chunk) - Foreign currency transactions resulted in a gain in Q1 FY2021 (**$175,000**) as the pound and euro strengthened against the U.S. dollar, contrasting with a loss in the prior year[111](index=111&type=chunk) [Income Tax Expense](index=25&type=section&id=Income%20Tax%20Expense) This section discusses Neogen's income tax expense and effective tax rate, explaining the factors contributing to changes - Income tax expense for Q1 FY2021 was **$3.95 million**, with an effective tax rate of **19.9%**, up from **17.0%** in the prior year[112](index=112&type=chunk) - The increase in the effective tax rate was primarily due to lower tax benefits from stock option exercises and reduced benefits from foreign derived income compared to the prior year[112](index=112&type=chunk) [Net Income](index=25&type=section&id=Net%20Income) This section summarizes the drivers behind Neogen's net income performance, including sales, gross margins, and operating expenses - Net income increased **8.2%** to **$15.9 million** in Q1 FY2021, driven by higher sales and gross margins, and decreased operating expenses, partially offset by increased income taxes[113](index=113&type=chunk) [Financial Condition and Liquidity](index=25&type=section&id=Financial%20Condition%20and%20Liquidity) This section assesses Neogen's financial condition and liquidity, focusing on cash, marketable securities, receivables, and inventory management - Overall cash, cash equivalents, and marketable securities increased to **$367.5 million** at August 31, 2020, from **$343.7 million** at May 31, 2020[114](index=114&type=chunk) - Net cash from operations was **$25.1 million** in Q1 FY2021[114](index=114&type=chunk) - Accounts receivable declined by **$7.0 million** to **$77.7 million**, with Days Sales Outstanding (DSOs) improving to **61 days**[115](index=115&type=chunk) - Inventory balances increased by **$2.5 million** to **$97.6 million** to ensure adequate supplies amidst COVID-19 and Brexit concerns[117](index=117&type=chunk) - Management believes existing cash and credit facilities are sufficient for the foreseeable future, but may seek additional financing for product commercialization or acquisitions[119](index=119&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=27&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) Neogen is exposed to market risks primarily from fluctuations in interest rates on short-term investments and foreign exchange rates due to its global operations, which involve transactions in various foreign currencies - The Company's primary interest rate risk stems from potential fluctuations in interest rates for short-term investments[121](index=121&type=chunk) - Foreign exchange risk arises from marketing and selling products globally, with revenues and expenses transacted in currencies such as the British pound sterling, euro, Mexican peso, Brazilian real, Chinese yuan, Australian dollar, and others[122](index=122&type=chunk)[123](index=123&type=chunk) - Changes in exchange rates can positively or negatively affect the dollar value of foreign-denominated revenues and previously invoiced amounts[122](index=122&type=chunk) [Item 4. Controls and Procedures](index=27&type=section&id=Item%204.%20Controls%20and%20Procedures) Management, including the Principal Executive Officer and Principal Financial Officer, evaluated the effectiveness of the Company's disclosure controls and procedures as of August 31, 2020, concluding they are effective, and reported no material changes in internal controls over financial reporting during the quarter - The Company's disclosure controls and procedures were evaluated and deemed effective as of August 31, 2020[124](index=124&type=chunk) - No changes in internal controls over financial reporting occurred during the quarter ended August 31, 2020, that materially affected or are reasonably likely to materially affect internal control over financial reporting[125](index=125&type=chunk) PART II. OTHER INFORMATION [Item 1. Legal Proceedings](index=28&type=section&id=Item%201.%20Legal%20Proceedings) This section states that the Company is involved in legal and other proceedings in the normal course of business, which management does not expect to have a material effect on its future results of operations or financial position - The Company is subject to legal and other proceedings in the normal course of business[126](index=126&type=chunk) - Management believes the outcomes of these matters are not expected to have a material effect on the Company's future results of operations or financial position[126](index=126&type=chunk) [Item 6. Exhibits](index=28&type=section&id=Item%206.%20Exhibits) This section lists the exhibits filed as part of the Form 10-Q, including the Amended and Restated Credit Agreement, certifications from the Principal Executive Officer and Principal Financial Officer, and various Inline XBRL documents - Exhibits include the Amended and Restated Credit Agreement, Certifications of Principal Executive Officer and Principal Financial Officer, Certification Pursuant to 18 U.S.C. Section 1350, and various Inline XBRL documents[127](index=127&type=chunk) SIGNATURES This section contains the official signatures of Neogen's principal executive and financial officers, certifying the accuracy of the report - The report is signed by John E. Adent, President & Chief Executive Officer, and Steven J. Quinlan, Vice President & Chief Financial Officer, on September 30, 2020[130](index=130&type=chunk)

Neogen Corporation (NASDAQ:NEOG) Q1 2021 Earnings Conference Call September 22, 2020 11:00 AM ET Company Participants John Adent - Chief Executive Officer and President Steve Quinlan - Chief Financial Officer Conference Call Participants David Westenberg - Guggenheim Securities John Kreger - William Blair Mark Connelly - Stephens, Inc Jon Braatz - Kansas City Capital Operator Good day, and welcome to the NEOGEN First Quarter Fiscal Year 2021 Earnings Results Conference Call. [Operator Instructions] Please ...

PART I [ITEM 1. BUSINESS](index=5&type=section&id=ITEM%201.%20BUSINESS) Neogen Corporation develops and markets diverse food and animal safety products, focusing on growth through existing products, new offerings, international expansion, and strategic acquisitions - Neogen's core business involves developing, manufacturing, and marketing products and services for food and animal safety[16](index=16&type=chunk) - The company's growth strategy includes increasing sales of existing products, introducing new products and services, growing international sales, and acquiring businesses and forming strategic alliances[19](index=19&type=chunk) [Company Overview and Mission](index=5&type=section&id=1.1%20Company%20Overview%20and%20Mission) Neogen Corporation, formed in 1981, aims to be the leading provider of food and animal safety solutions - Neogen Corporation was formed in June 1981 and began operations in 1982, with principal executive offices in Lansing, Michigan[20](index=20&type=chunk) - The company's mission is to be the leading provider of solutions for food and animal safety[19](index=19&type=chunk) [Products and Trademarks](index=5&type=section&id=1.2%20Products%20and%20Trademarks) Neogen holds numerous product and registered trademarks across its corporate, food safety, life sciences, animal safety, and genomics categories - Neogen owns numerous product trademarks and registered trademarks across corporate, food safety, life sciences, animal safety, and genomics categories[22](index=22&type=chunk)[23](index=23&type=chunk) [Business Segments](index=6&type=section&id=1.3%20Business%20Segments) Neogen operates in two primary business segments: Food Safety and Animal Safety - Neogen operates in two main business segments: Food Safety and Animal Safety[24](index=24&type=chunk) [Food Safety Segment](index=6&type=section&id=1.3.1%20Food%20Safety%20Segment) The Food Safety segment provides diagnostic test kits and complementary products for detecting dangerous substances in food and animal feed - The Food Safety segment focuses on diagnostic test kits and complementary products for detecting dangerous or unintended substances in food and animal feed[25](index=25&type=chunk) - Key product categories include tests for mycotoxins, food allergens, dairy antibiotics, foodborne pathogens (e.g., ANSR, Listeria Right Now), spoilage microorganisms (Soleris, NeoSeek), sanitation monitoring (AccuPoint Advanced), seafood contaminants, and waterborne microorganisms[25](index=25&type=chunk)[26](index=26&type=chunk)[27](index=27&type=chunk)[28](index=28&type=chunk)[29](index=29&type=chunk)[30](index=30&type=chunk)[31](index=31&type=chunk)[33](index=33&type=chunk) - Food Safety segment revenues accounted for **50.9% of total revenues in fiscal 2020**, 51.5% in fiscal 2019, and 48.9% in fiscal 2018[39](index=39&type=chunk) [Animal Safety Segment](index=7&type=section&id=1.3.2%20Animal%20Safety%20Segment) The Animal Safety segment offers veterinary instruments, pharmaceuticals, vaccines, diagnostic products, biosecurity solutions, and genomics services - The Animal Safety segment focuses on veterinary instruments, pharmaceuticals, vaccines, topicals, diagnostic products, agricultural biosecurity products (rodenticides, cleaners, disinfectants, insecticides), and genomics services[40](index=40&type=chunk) - Key product lines include Ideal brand veterinary instruments, NeogenVet pharmaceuticals, veterinary biologics (BotVax B, EqStim, ImmunoRegulin), OTC products, rodenticides (Ramik, Havoc), cleaners and disinfectants, insecticides (Prozap, SureKill), animal genomics services (GeneSeek, Igenity), and life sciences drug detection kits[41](index=41&type=chunk)[42](index=42&type=chunk)[43](index=43&type=chunk)[45](index=45&type=chunk)[46](index=46&type=chunk)[47](index=47&type=chunk)[48](index=48&type=chunk)[49](index=49&type=chunk)[50](index=50&type=chunk) - Animal Safety segment revenues accounted for **49.1% of total revenues in fiscal 2020**, 48.5% in fiscal 2019, and 51.1% in fiscal 2018[53](index=53&type=chunk) [Sales and Marketing](index=8&type=section&id=1.4%20Sales%20and%20Marketing) Neogen's sales efforts are organized by specific markets within its Food Safety and Animal Safety segments, serving approximately 28,000 customers globally - Neogen's sales efforts are organized by specific markets within its Food Safety and Animal Safety segments, rather than by products or geography[54](index=54&type=chunk) - As of May 31, 2020, Neogen had approximately **28,000 customers** and 379 employees assigned to sales and marketing functions[54](index=54&type=chunk) - No single customer or distributor accounted for **10% or more of total revenues** in fiscal years 2020, 2019, or 2018[54](index=54&type=chunk) [Domestic Sales and Marketing](index=9&type=section&id=1.4.1%20Domestic%20Sales%20and%20Marketing) Domestic sales target diverse markets including milling, meat, dairy, and healthcare for Food Safety, and veterinarians, livestock producers, and breed associations for Animal Safety - Domestic Food Safety sales target milling and grain, meat and poultry, prepared foods and ingredients, fruits and vegetables, seafood, dairy, beverage, water, healthcare, traditional culture media, food service, and nutraceuticals markets[57](index=57&type=chunk) - Domestic Animal Safety sales target companion animal veterinarians, livestock producers, veterinarians and breed associations, distributors, retailers, breeding and genetics companies, diagnostic labs and universities, and other manufacturers and government agencies[58](index=58&type=chunk) [International Sales and Marketing](index=10&type=section&id=1.4.2%20International%20Sales%20and%20Marketing) Neogen maintains 15 international locations and a network of approximately 200 distributors across over 100 countries - Neogen maintains **15 company-owned international locations** and a network of approximately 200 distributors in over 100 countries[59](index=59&type=chunk)[69](index=69&type=chunk) - International operations include Neogen Europe (U.K., Europe, Middle East, Africa), Neogen Latinoamérica (Mexico, Central America, Argentina, Uruguay, Chile), Neogen do Brasil, Neogen China, Neogen India, Neogen Australasia, and Neogen Canada[60](index=60&type=chunk)[61](index=61&type=chunk)[62](index=62&type=chunk)[63](index=63&type=chunk)[64](index=64&type=chunk)[65](index=65&type=chunk)[67](index=67&type=chunk)[68](index=68&type=chunk) - Sales to customers outside the U.S. accounted for **39.4% of total revenues in fiscal 2020**, 40.1% in fiscal 2019, and 37.6% in fiscal 2018[70](index=70&type=chunk) [Research and Development](index=11&type=section&id=1.5%20Research%20and%20Development) Neogen is committed to research and development, focusing on enhancing existing products and developing new ones for Food Safety and Animal Safety markets - Neogen is committed to research and development, focusing on enhancing existing products and developing new ones for Food Safety and Animal Safety markets[71](index=71&type=chunk)[72](index=72&type=chunk) R&D Costs | Fiscal Year | R&D Costs (Millions) | % of Total Revenues | | :---------- | :------------------- | :------------------ | | 2020 | $14.8 | 3.5% | | 2019 | $12.8 | 3.1% | | 2018 | $10.9 | 2.7% | [Proprietary Protection and Approvals](index=11&type=section&id=1.6%20Proprietary%20Protection%20and%20Approvals) Neogen protects its intellectual property through trade secrets, unique antibodies, proprietary techniques, and patent and trademark applications - Neogen uses trade secrets, unique antibodies, and proprietary techniques for protection, alongside patent and trademark applications[74](index=74&type=chunk)[75](index=75&type=chunk) USA and International Patents by Product Category | Product Category | USA Patents | International Patents | Expiration Range | | :-------------------------------- | :---------- | :-------------------- | :--------------- | | Natural Toxins, Allergens, & Drug Residues | 21 | 33 | 2021-2026 | | Bacterial & General Sanitation | 5 | 0 | 2021-2022 | | Life Sciences | 0 | 4 | 2024 | | Vaccine | 1 | 0 | 2028 | | Veterinary Instruments & Other | 13 | 44 | 2020-2042 | | Genomics Services | 18 | 4 | 2021-2029 | - Products requiring regulatory approval (e.g., BotVax B, EqStim, ImmunoRegulin, Uniprim, BetaStar) are approved, and many disposable test kits have third-party validations (e.g., AOAC International, USDA FSIS)[78](index=78&type=chunk)[79](index=79&type=chunk) [Production and Supply](index=12&type=section&id=1.7%20Production%20and%20Supply) Neogen manufactures products and provides genomics services globally, with capacity to increase output by over 50% and a typical 48-hour shipment turnaround - Neogen manufactures products in various U.S. and international locations and provides genomics services globally[80](index=80&type=chunk) - As of May 31, 2020, **965 full-time employees** were assigned to manufacturing and services, with potential to increase output by over 50% with additional equipment[80](index=80&type=chunk) - The company purchases components and raw materials from over 1,000 suppliers, aiming to identify alternative sources for key items, and maintains a typical **48-hour shipment turnaround time**[88](index=88&type=chunk) [Competition](index=13&type=section&id=1.8%20Competition) Neogen faces intense competition across its product lines, differentiating through ease of use, speed, accuracy, product breadth, and customer service - Neogen faces intense competition across individual product lines but no single competitor matches its broad strategy of diverse food and animal safety solutions[89](index=89&type=chunk) - Competition is primarily based on ease of use, speed, accuracy, product line breadth, sales and customer service effectiveness, and pricing[89](index=89&type=chunk) - In Food Safety, Neogen leverages its comprehensive catalog, unique customer insights, and low-cost producer status[91](index=91&type=chunk)[93](index=93&type=chunk)[95](index=95&type=chunk) - In Animal Safety, it differentiates through product performance, customer support, and unique products like BotVax B[91](index=91&type=chunk)[93](index=93&type=chunk)[95](index=95&type=chunk) [Government Regulation](index=14&type=section&id=1.9%20Government%20Regulation) Neogen's products and revenues are significantly affected by domestic and foreign government regulations, requiring continuous monitoring for compliance - Neogen's products and revenues are significantly affected by regulations from domestic (USDA, EPA, FDA) and foreign government agencies[101](index=101&type=chunk) - Products like rodenticides, disinfectants, insecticides, dairy diagnostic products, and veterinary vaccines require specific registrations or approvals[103](index=103&type=chunk)[104](index=104&type=chunk)[107](index=107&type=chunk) - The company's regulatory staff continuously monitors amendments to ensure compliance, as changes could impact revenues and costs[108](index=108&type=chunk) [Employees](index=15&type=section&id=1.10%20Employees) As of May 31, 2020, Neogen employed 1,764 full-time persons worldwide, with generally good employee relations and no collective bargaining agreements - As of May 31, 2020, Neogen employed **1,764 full-time persons** worldwide[109](index=109&type=chunk) - No employees are covered by collective bargaining agreements, and management believes employee relations are generally good[109](index=109&type=chunk) [ITEM 1A. RISK FACTORS](index=16&type=section&id=ITEM%201A.%20RISK%20FACTORS) Neogen faces diverse risks including widespread illnesses, growth management, cybersecurity, supply chain disruptions, market competition, regulatory compliance, and international operational challenges - Risks include the impact of widespread illnesses (e.g., COVID-19) on business, supply chains, and financial markets[111](index=111&type=chunk) - Challenges in business strategy execution, including promoting internal growth and successfully identifying and integrating acquisitions, pose significant risks[112](index=112&type=chunk)[113](index=113&type=chunk)[114](index=114&type=chunk)[115](index=115&type=chunk) - Dependence on information systems infrastructure and the risk of security breaches or cyberattacks could damage reputation and operations[116](index=116&type=chunk)[117](index=117&type=chunk)[118](index=118&type=chunk)[119](index=119&type=chunk)[120](index=120&type=chunk)[121](index=121&type=chunk) - Other risks include disruption of manufacturing and service operations, dependence on third-party suppliers and package delivery services, risks associated with distributors, product development failures, intense market competition, dependence on the agricultural marketplace, and fluctuations in quarterly operating results[122](index=122&type=chunk)[123](index=123&type=chunk)[125](index=125&type=chunk)[126](index=126&type=chunk)[127](index=127&type=chunk)[128](index=128&type=chunk)[129](index=129&type=chunk)[130](index=130&type=chunk) - Intellectual property protection, substantial governmental regulation, dependence on key employees, and product or service liability claims are also significant risk factors[132](index=132&type=chunk)[133](index=133&type=chunk)[134](index=134&type=chunk)[135](index=135&type=chunk)[136](index=136&type=chunk)[137](index=137&type=chunk)[139](index=139&type=chunk) - International operations are subject to different product standards, operational risks, foreign currency fluctuations, and changing political conditions (e.g., Brexit)[141](index=141&type=chunk)[142](index=142&type=chunk) [ITEM 1B. UNRESOLVED STAFF COMMENTS](index=21&type=section&id=ITEM%201B.%20UNRESOLVED%20STAFF%20COMMENTS) There are no unresolved staff comments reported for Neogen Corporation - No unresolved staff comments were reported[147](index=147&type=chunk) [ITEM 2. PROPERTIES](index=21&type=section&id=ITEM%202.%20PROPERTIES) Neogen operates numerous manufacturing, distribution, and administrative facilities globally, with most properties owned and considered adequate for business needs - Neogen operates principal manufacturing, distribution, and administrative locations across the U.S. (e.g., Lansing, Lexington, Randolph) and internationally (e.g., Ayr, Heywood, Pindamonhangaba)[147](index=147&type=chunk) - The majority of these properties are owned, with some leased, and are considered to be in good condition and adequate for business operations[147](index=147&type=chunk) [ITEM 3. LEGAL PROCEEDINGS](index=22&type=section&id=ITEM%203.%20LEGAL%20PROCEEDINGS) Neogen is involved in certain legal proceedings in the normal course of business, which management believes will not materially affect future results or financial position - Neogen is subject to legal proceedings in the normal course of business, which management does not expect to materially affect future results or financial position[148](index=148&type=chunk) [ITEM 4. MINE SAFETY DISCLOSURES](index=22&type=section&id=ITEM%204.%20MINE%20SAFETY%20DISCLOSURES) This item is not applicable to Neogen Corporation - Mine Safety Disclosures are not applicable[149](index=149&type=chunk) PART II [ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES](index=22&type=section&id=ITEM%205.%20MARKET%20FOR%20REGISTRANT'S%20COMMON%20EQUITY,%20RELATED%20STOCKHOLDER%20MATTERS%20AND%20ISSUER%20PURCHASES%20OF%20EQUITY%20SECURITIES) Neogen Common Stock trades on NASDAQ under NEOG, with approximately 245 stockholders of record, no cash dividends paid, and stock performance outperforming the NASDAQ Composite over five years [Market Information and Holders](index=22&type=section&id=2.1%20Market%20Information%20and%20Holders) Neogen Common Stock trades on the NASDAQ Global Select Market under the symbol NEOG, with approximately 245 stockholders of record as of June 30, 2020 - Neogen Common Stock trades on the NASDAQ Global Select Market under the symbol NEOG[150](index=150&type=chunk) - As of June 30, 2020, there were approximately **245 stockholders of record** and an estimated 10,000 beneficial holders[151](index=151&type=chunk) [Dividends](index=22&type=section&id=2.2%20Dividends) Neogen has never paid cash dividends on its Common Stock and does not anticipate doing so in the foreseeable future - Neogen has never paid cash dividends on its Common Stock and does not anticipate paying them in the foreseeable future[152](index=152&type=chunk) [Stock Performance Graph](index=23&type=section&id=2.3%20Stock%20Performance%20Graph) Neogen's stock performance over five years ending May 31, 2020, outpaced the NASDAQ Composite but lagged the NASDAQ Medical Equipment index Stock Performance Comparison | Date | Neogen Corporation | NASDAQ Composite | NASDAQ Medical Equipment | | :--------- | :----------------- | :--------------- | :----------------------- | | 5/31/2015 | 100.00 | 100.00 | 100.00 | | 5/31/2016 | 105.63 | 98.82 | 105.80 | | 5/31/2017 | 135.41 | 125.26 | 140.72 | | 5/31/2018 | 215.97 | 152.00 | 197.84 | | 5/31/2019 | 160.75 | 153.87 | 194.22 | | 5/31/2020 | 203.17 | 197.98 | 235.57 | [ITEM 6. SELECTED FINANCIAL DATA](index=24&type=section&id=ITEM%206.%20SELECTED%20FINANCIAL%20DATA) This section presents Neogen's selected consolidated financial data from fiscal 2016 to 2020, showing total revenues increasing to $418.2 million and net income reaching $59.5 million in 2020 Selected Financial Data (in thousands) | Income Statement Data (in thousands) | 2020 | 2019 | 2018 | 2017 | 2016 | | :----------------------------------- | :---------- | :---------- | :---------- | :---------- | :---------- | | Food Safety Revenues | $212,691 | $213,474 | $194,477 | $170,034 | $145,057 | | Animal Safety Revenues | $205,479 | $200,712 | $203,453 | $188,243 | $172,172 | | Total Revenues | $418,170 | $414,186 | $397,930 | $358,277 | $317,229 | | Gross Margin | $196,279 | $191,920 | $186,272 | $168,924 | $149,331 | | Operating Income | $67,523 | $68,094 | $70,194 | $64,945 | $56,386 | | Net Income Attributable to Neogen | $59,475 | $60,176 | $63,145 | $43,793 | $36,564 | | Net Income per Share (diluted) | $1.13 | $1.15 | $1.21 | $0.86 | $0.72 | Selected Balance Sheet Data (in thousands) | Balance Sheet Data (in thousands) | 2020 | 2019 | 2018 | 2017 | 2016 | | :----------------------------------------- | :---------- | :---------- | :---------- | :---------- | :---------- | | Cash and Cash Equivalents and Marketable Securities | $343,673 | $267,524 | $210,810 | $143,635 | $107,796 | | Total Assets | $797,182 | $695,740 | $618,009 | $528,409 | $449,940 | | Total Equity | $725,177 | $637,899 | $560,175 | $471,757 | $404,161 | [ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS](index=25&type=section&id=ITEM%207.%20MANAGEMENT'S%20DISCUSSION%20AND%20ANALYSIS%20OF%20FINANCIAL%20CONDITION%20AND%20RESULTS%20OF%20OPERATIONS) Neogen's fiscal 2020 revenues grew 1.0% to $418.2 million, with net income decreasing 1% to $59.5 million, while maintaining strong liquidity and improved gross margin [Critical Accounting Policies and Estimates](index=25&type=section&id=3.1%20Critical%20Accounting%20Policies%20and%20Estimates) Management's financial statements rely on estimates and judgments for receivables, inventories, and intangible assets, with income taxes accounted for using the asset and liability method - Management's financial statements rely on estimates and judgments for receivable allowances, inventories, and intangible assets[162](index=162&type=chunk) - Income taxes are accounted for using the asset and liability method, with deferred income tax assets and liabilities based on differences between financial reporting and tax bases[164](index=164&type=chunk) - Earnings from wholly-owned foreign subsidiaries are expected to be reinvested indefinitely for future expansion and working capital needs[165](index=165&type=chunk) - The U.S. Tax Act of 2017 significantly changed tax laws, including reducing the federal corporate tax rate to **21%** and introducing GILTI and FDII provisions[166](index=166&type=chunk) [Results of Operations - Executive Overview](index=26&type=section&id=3.2%20Results%20of%20Operations%20-%20Executive%20Overview) In fiscal 2020, Neogen's consolidated revenues increased by 1.0% to $418.2 million, with net income decreasing 1% to $59.5 million, while cash from operating activities rose 34.6% Fiscal Year Performance Overview | Metric | Fiscal 2020 | Fiscal 2019 | Change (YoY) | | :----------------------------------- | :----------- | :----------- | :----------- | | Consolidated Revenues | $418.2 million | $414.2 million | +1.0% | | Organic Sales Growth | +0.2% | N/A | N/A | | Food Safety Segment Sales | $212.7 million | $213.5 million | -0.4% | | Food Safety Organic Sales Growth | -1.3% | N/A | N/A | | Animal Safety Segment Sales | $205.5 million | $200.7 million | +2.4% | | Animal Safety Organic Sales Growth | +1.9% | N/A | N/A | | International Sales (% of total) | 39.4% | 40.1% | -0.7 pp | | Effective Tax Rate | 17.7% | 17.5% | +0.2 pp | | Net Income | $59.5 million | $60.2 million | -1% | | Net Income per Diluted Share | $1.13 | $1.15 | -1.7% | | Cash from Operating Activities | $85.9 million | $63.8 million | +34.6% | - Currency translation had a negative impact of approximately **$6.0 million on international revenues in fiscal 2020**, with a $3.5 million negative impact in Q4 fiscal 2020 due to devaluation of the Brazilian real and Mexican peso[169](index=169&type=chunk) [Revenues](index=27&type=section&id=3.3%20Revenues) Total revenues increased 1% to $418.17 million in fiscal 2020, with service revenue, primarily genomics, growing 11% to $82.6 million Revenue by Category (in thousands) | Revenue Category (in thousands) | May 31, 2020 | Change (YoY) | May 31, 2019 | Change (YoY) | May 31, 2018 | | :------------------------------ | :----------- | :----------- | :----------- | :----------- | :----------- | | **Food Safety:** | | | | | | | Natural Toxins, Allergens & Drug Residues | $76,207 | (3)% | $78,373 | 7% | $72,962 | | Bacterial & General Sanitation | $41,780 | (0)% | $41,966 | 10% | $38,156 | | Culture Media & Other | $47,847 | (4)% | $49,857 | 13% | $44,271 | | Rodenticides, Insecticides & Disinfectants | $28,890 | 13% | $25,584 | 7% | $23,821 | | Genomics Services | $17,967 | 2% | $17,694 | 16% | $15,267 | | **Total Food Safety** | **$212,691** | **(0)%** | **$213,474** | **10%** | **$194,477** | | **Animal Safety:** | | | | | | | Life Sciences | $6,322 | (20)% | $7,858 | (25)% | $10,411 | | Veterinary Instruments & Disposables | $42,941 | (4)% | $44,582 | (7)% | $47,749 | | Animal Care & Other | $28,389 | (5)% | $29,941 | (3)% | $30,930 | | Rodenticides, Insecticides & Disinfectants | $68,815 | 4% | $66,389 | (2)% | $67,646 | | Genomics Services | $59,012 | 14% | $51,942 | 11% | $46,717 | | **Total Animal Safety** | **$205,479** | **2%** | **$200,712** | **(1)%** | **$203,453** | | **Total Revenue** | **$418,170** | **1%** | **$414,186** | **4%** | **$397,930** | - Service revenue, primarily genomics services, increased **11% in fiscal 2020 to $82.6 million**, driven by higher sample volumes from global commercial beef, sheep, and companion animal markets[175](index=175&type=chunk) [Food Safety Segment Revenue Analysis](index=27&type=section&id=3.3.1%20Food%20Safety%20Segment%20Revenue%20Analysis) Food Safety revenues remained flat in fiscal 2020, impacted by COVID-19 and a 30% decline in drug residue test kits, despite growth in natural toxins, allergens, and sanitation monitoring - Food Safety revenues were essentially flat in fiscal 2020, impacted by COVID-19 and a **30% decline in drug residue test kits** due to a change in European distribution strategy[177](index=177&type=chunk)[178](index=178&type=chunk)[179](index=179&type=chunk) - Natural toxins and allergens product lines each increased **4%**, driven by new business in Brazil for aflatoxin and DON test kits, and strong gliadin, milk, and coconut allergen test kit sales in the U.S[179](index=179&type=chunk) - Pathogen test kits decreased 2%, but Listeria Right Now test kit sales grew **24%**[180](index=180&type=chunk) - AccuPoint sanitation monitoring increased **6%**[180](index=180&type=chunk) - Culture media revenues declined 5%, and forensic drug test kits in Brazil significantly decreased due to a large commercial lab switching to an alternative technology[181](index=181&type=chunk) - Rodenticides, insecticides, and disinfectants increased **13%**, led by sales in Europe, the Middle East, and China, partially offset by decreases in Central America and India[182](index=182&type=chunk) - Genomics services in Food Safety increased **2%**, primarily from European bovine and equine markets, partially offset by lower revenues from a Brazilian government research project[183](index=183&type=chunk) [Animal Safety Segment Revenue Analysis](index=28&type=section&id=3.3.2%20Animal%20Safety%20Segment%20Revenue%20Analysis) Animal Safety revenues increased 2% in fiscal 2020, driven by strong genomics services and biosecurity products, despite soft market conditions and declines in life sciences and veterinary instruments - Animal Safety revenues increased **2% in fiscal 2020**, despite soft market conditions from COVID-19, tariffs, and political uncertainties, which led to distributor inventory destocking[184](index=184&type=chunk) - Life Sciences sales decreased **20%** due to lower forensic drug test kit sales and reduced U.S. horse racing activity[185](index=185&type=chunk) - Veterinary Instruments & Disposables decreased 4%, with needles and syringes down, but protective wear and consumables increased **24%** due to COVID-19 related demand for gloves[186](index=186&type=chunk) - Animal Care & Other sales decreased 5%, primarily due to distributor destocking of antibiotics and injectable vitamins, and lower demand for biologics and equine supplements[187](index=187&type=chunk) - Rodenticides, Insecticides & Disinfectants increased **4%**, driven by a **$2.6 million increase in cleaners and disinfectants**, particularly hand sanitizers and disinfecting wipes, due to the COVID-19 pandemic[188](index=188&type=chunk) - Genomics Services increased **14%**, with strong growth in companion animal and commercial beef cattle markets, partially offset by revenue decreases in the U.S. commercial dairy market[189](index=189&type=chunk) [Cost of Revenues and Gross Margin](index=30&type=section&id=3.4%20Cost%20of%20Revenues%20and%20Gross%20Margin) Overall gross margin improved by 60 basis points to 46.9% in fiscal 2020, driven by Animal Safety segment margins and manufacturing cost reductions Cost of Revenues and Gross Margin (in thousands) | Metric (in thousands) | 2020 | 2019 | 2018 |\n| :-------------------- | :---------- | :---------- | :---------- | | Total Cost of Revenues | $221,891 | $222,266 | $211,658 | | Gross Margin | $196,279 | $191,920 | $186,272 | | Gross Margin % | 46.9% | 46.3% | 46.8% | - Overall gross margin improved by **60 basis points in fiscal 2020**, driven by improved Animal Safety segment margins and manufacturing cost reductions[202](index=202&type=chunk) - In fiscal 2019, gross margin decreased due to a product mix shift towards lower-margin products within each segment and the strengthening U.S. dollar impacting international operations[203](index=203&type=chunk) [Operating Expenses](index=31&type=section&id=3.5%20Operating%20Expenses) Total operating expenses increased 4% to $128.76 million in fiscal 2020, driven by higher general and administrative, and research and development costs Operating Expenses (in thousands) | Operating Expenses (in thousands) | 2020 | Change (YoY) | 2019 | Change (YoY) | 2018 | | :-------------------------------- | :---------- | :----------- | :---------- | :----------- | :---------- | | Sales and Marketing | $69,675 | -1% | $70,230 | 5% | $66,929 | | General and Administrative | $44,331 | 9% | $40,791 | 7% | $38,294 | | Research and Development | $14,750 | 15% | $12,805 | 18% | $10,855 | | **Total Operating Expense** | **$128,756** | **4%** | **$123,826** | **7%** | **$116,078** | [Sales and Marketing](index=31&type=section&id=3.5.1%20Sales%20and%20Marketing) Sales and marketing expenses decreased by 1% in fiscal 2020, primarily due to COVID-19 related reductions in travel and trade show activities - Sales and marketing expenses decreased by **1% in fiscal 2020**, driven by a $1.3 million decline in Q4 due to COVID-19 related reductions in business travel, meals, entertainment, and trade shows[213](index=213&type=chunk) - Fiscal 2019 saw a **5% increase in sales and marketing expenses**, primarily due to higher salaries, commissions, and shipping costs[214](index=214&type=chunk) [General and Administrative](index=32&type=section&id=3.5.2%20General%20and%20Administrative) General and administrative expenses rose 9% in fiscal 2020, mainly due to increased stock-based compensation, legal fees from acquisitions, and IT infrastructure investments - General and administrative expenses rose **9% in fiscal 2020**, primarily due to higher stock-based compensation, increased legal fees from acquisitions, and investments in IT infrastructure[216](index=216&type=chunk) - Fiscal 2019 saw a **7% increase**, driven by higher salary and stock-based compensation costs, IT investments, and increased training, recruiting, and legal fees[217](index=217&type=chunk) [Research and Development](index=32&type=section&id=3.5.3%20Research%20and%20Development) Research and development expenses increased 15% in fiscal 2020, driven by spending on new readers, increased compensation, and higher depreciation from analytical equipment - Research and development expenses increased **15% in fiscal 2020**, mainly due to spending on two new readers, increased compensation, higher depreciation from analytical equipment, and increased contracted services[219](index=219&type=chunk) - Fiscal 2019 saw an **18% increase**, driven by development spending for next-generation products and expenditures for regulatory approvals[220](index=220&type=chunk) [Operating Income](index=32&type=section&id=3.6%20Operating%20Income) Operating income decreased 1% in fiscal 2020 to $67.52 million, as increased operating expenses offset gross margin improvements Operating Income (in thousands) | Metric (in thousands) | 2020 | Change (YoY) | 2019 | Change (YoY) | 2018 | | :-------------------- | :---------- | :----------- | :---------- | :----------- | :---------- | | Operating Income | $67,523 | -1% | $68,094 | -3% | $70,194 | | Operating Income % of Revenues | 16.1% | -0.3 pp | 16.4% | -1.2 pp | 17.6% | - The **1% decrease in operating income in fiscal 2020** was due to a $4.9 million increase in operating expenses, which more than offset a $4.4 million rise in gross margins[222](index=222&type=chunk) [Other Income (Expense)](index=33&type=section&id=3.7%20Other%20Income%20(Expense)) Total other income was $4.78 million in fiscal 2020, primarily driven by increased interest income, partially offset by foreign currency transaction losses and a sanctions program settlement expense Other Income (Expense) (in thousands) | Other Income (Expense) (in thousands) | 2020 | 2019 | 2018 | | :------------------------------------ | :---------- | :---------- | :---------- | | Interest income (net of expense) | $5,992 | $4,683 | $2,043 | | Foreign currency transactions | $(1,178) | $(1,279) | $274 | | Royalty income | $1 | $150 | $147 | | Licenses and settlements | $(38) | $672 | $360 | | Quat-Chem contingent consideration | $— | $422 | $255 | | Deoxi contingent consideration | $— | $(10) | $(42) | | Other | $5 | $227 | $234 | | **Total Other Income** | **$4,782** | **$4,865** | **$3,271** | - Interest income increased in fiscal 2020 and 2019 due to higher cash balances and rising interest rates, though yields declined in late fiscal 2020[223](index=223&type=chunk) - Foreign currency transactions resulted in losses in fiscal 2020 and 2019 due to the strengthening U.S. dollar[223](index=223&type=chunk)[241](index=241&type=chunk) - Fiscal 2020 included a **$600,000 expense for a sanctions program violation settlement**, partially offset by a $483,000 gain from a Brazilian sales tax settlement and property loss proceeds[224](index=224&type=chunk) [Provision for Income Taxes](index=33&type=section&id=3.8%20Provision%20for%20Income%20Taxes) The provision for income taxes remained flat at $12.83 million in fiscal 2020, with an effective tax rate of 17.7%, influenced by the U.S. Tax Act of 2017 Provision for Income Taxes (in thousands) | Metric (in thousands) | 2020 | Change (YoY) | 2019 | Change (YoY) | 2018 | | :-------------------- | :---------- | :----------- | :---------- | :----------- | :---------- | | Provision for Income Taxes | $12,830 | 0% | $12,783 | 25% | $10,250 | | Effective Tax Rate | 17.7% | +0.2 pp | 17.5% | +3.5 pp | 14.0% | - The U.S. Tax Act reduced the statutory income tax rate from **35% to 21%** for tax years beginning after December 31, 2017, impacting fiscal 2019 and 2020 with a 21% rate, compared to a blended rate of 29.2% in fiscal 2018[226](index=226&type=chunk) - Differences from the U.S. statutory rate are mainly due to U.S. Tax Act provisions and stock option exercises[227](index=227&type=chunk) [Net Income and Income Per Share](index=33&type=section&id=3.9%20Net%20Income%20and%20Income%20Per%20Share) Net income attributable to Neogen decreased 1% to $59.48 million in fiscal 2020, resulting in diluted net income per share of $1.13 Net Income and Income Per Share (in thousands, except per share) | Metric (in thousands, except per share) | 2020 | Change (YoY) | 2019 | Change (YoY) | 2018 | | :-------------------------------------- | :---------- | :----------- | :---------- | :----------- | :---------- | | Net Income Attributable to Neogen | $59,475 | -1% | $60,176 | -5% | $63,145 | | Net Income Per Share-Basic | $1.13 | -2.6% | $1.16 | -5.7% | $1.23 | | Net Income Per Share-Diluted | $1.13 | -1.7% | $1.15 | -4.9% | $1.21 | - The decrease in net income in fiscal 2020 was primarily due to a decrease in pre-tax income[228](index=228&type=chunk) - The decrease in net income in fiscal 2019 was due to an increase in the effective tax rate and a slight decrease in pre-tax income[229](index=229&type=chunk) [Future Operating Results](index=34&type=section&id=3.10%20Future%20Operating%20Results) Future operating results depend on successfully implementing strategies including new product development, market expansion, margin maintenance, international growth, technology strategies, and strategic acquisitions - Future operating results depend on successfully implementing strategies including developing and marketing new products, expanding markets, maintaining margins, strengthening international operations, developing new technology strategies, and completing strategic acquisitions[231](index=231&type=chunk) [Financial Condition and Liquidity](index=34&type=section&id=3.11%20Financial%20Condition%20and%20Liquidity) Neogen maintains strong liquidity with $343.7 million in cash and marketable securities and $488.9 million in working capital as of May 31, 2020 Financial Condition and Liquidity (in millions) | Metric (in millions) | May 31, 2020 | May 31, 2019 | Change (YoY) | | :------------------- | :----------- | :----------- | :----------- | | Cash and Cash Equivalents | $66.3 | $41.7 | +$24.6 | | Marketable Securities | $277.4 | $225.8 | +$51.6 | | Working Capital | $488.9 | $411.3 | +$77.6 | | Cash from Operating Activities (FY) | $85.9 | $63.8 | +$22.1 | | Accounts Receivable, net | $84.7 | $82.6 | +$2.1 | | Days Sales Outstanding (DSO) | 68 days | 61 days | +7 days | | Inventory | $95.1 | $86.0 | +$9.1 | - Neogen has a **$15.0 million unsecured revolving line of credit**, which was unused in fiscal years 2020, 2019, and 2018[232](index=232&type=chunk) - Inventory levels increased by **$9.1 million (11%) in fiscal 2020**, partly due to preparations for Brexit and ensuring adequate supplies during the COVID-19 pandemic[234](index=234&type=chunk) [Contractual Obligations](index=35&type=section&id=3.12%20Contractual%20Obligations) Neogen's total contractual obligations amount to $57.28 million, primarily consisting of unconditional purchase obligations and operating leases Contractual Obligations (in thousands) | Contractual Obligation (in thousands) | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | | :------------------------------------ | :---------- | :--------------- | :-------- | :-------- | :---------------- | | Long-Term Debt | $— | $— | $— | $— | $— | | Operating Leases | $2,094 | $1,080 | $973 | $41 | $— | | Unconditional Purchase Obligations | $55,180 | $48,681 | $6,499 | $— | $— | | **Total** | **$57,283** | **$49,763** | **$7,478** | **$42** | **$—** | [New Accounting Pronouncements](index=35&type=section&id=3.13%20New%20Accounting%20Pronouncements) Neogen adopted ASU No. 2016-02 (Leases) in fiscal 2019, recognizing $2.0 million in right-of-use assets and lease liabilities, with other upcoming pronouncements not expected to have a material impact - Neogen adopted ASU No. 2016-02 (Leases) on June 1, 2019, recognizing right-of-use assets and lease liabilities of approximately **$2.0 million each**[318](index=318&type=chunk)[348](index=348&type=chunk) - Upcoming accounting pronouncements (ASU No. 2016-13 on Credit Losses, ASU 2018-3 on Fair Value Measurement, and ASU 2018-15 on Cloud Computing Implementation Cost) are not expected to have a material impact on the consolidated financial statements[319](index=319&type=chunk)[320](index=320&type=chunk)[321](index=321&type=chunk) [ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS](index=36&type=section&id=ITEM%207A.%20QUANTITATIVE%20AND%20QUALITATIVE%20DISCLOSURES%20ABOUT%20MARKET%20RISKS) Neogen is exposed to interest rate risk from short-term investments and significant foreign exchange rate risk due to international operations in multiple currencies, leading to transaction losses from a strengthening U.S. dollar - Neogen has interest rate risk exposure from potential fluctuations of interest rates for short-term investments[240](index=240&type=chunk) - Foreign exchange risk arises from international operations transacting in currencies other than the U.S. dollar, including the British pound sterling, euro, Mexican peso, Brazilian real, Chinese yuan, Australian dollar, Indian rupee, Canadian dollar, Argentine peso, and Chilean peso[241](index=241&type=chunk)[242](index=242&type=chunk) - The strengthening U.S. dollar against foreign currencies in fiscal 2020 and 2019 led to foreign currency transaction losses[223](index=223&type=chunk)[241](index=241&type=chunk) [ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA](index=36&type=section&id=ITEM%208.%20FINANCIAL%20STATEMENTS%20AND%20SUPPLEMENTAL%20DATA) This section includes Neogen's audited consolidated financial statements for fiscal years 2018-2020, along with the independent auditor's report and detailed notes on accounting policies and segment information [Report of Independent Registered Public Accounting Firm](index=37&type=section&id=4.1%20Report%20of%20Independent%20Registered%20Public%20Accounting%20Firm) BDO USA, LLP issued unqualified opinions on Neogen's consolidated financial statements and internal control over financial reporting, noting income tax accounting as a critical audit matter - BDO USA, LLP issued an unqualified opinion on Neogen's consolidated financial statements for the periods ended May 31, 2020 and 2019[291](index=291&type=chunk) - An unqualified opinion was also issued on the effectiveness of the company's internal control over financial reporting as of May 31, 2020[292](index=292&type=chunk) - The evaluation of accounting for income taxes was identified as a critical audit matter due to the complexity of tax laws in multiple jurisdictions, transfer pricing guidelines, and subjective allocation methodologies[297](index=297&type=chunk)[299](index=299&type=chunk) [Consolidated Balance Sheets](index=46&type=section&id=4.2%20Consolidated%20Balance%20Sheets) Neogen's consolidated balance sheets show total assets of $797.18 million and total stockholders' equity of $725.18 million as of May 31, 2020 Consolidated Balance Sheets (in thousands) | Balance Sheet Item (in thousands) | May 31, 2020 | May 31, 2019 | | :-------------------------------- | :----------- | :----------- | | Cash and cash equivalents | $66,269 | $41,688 | | Marketable securities | $277,404 | $225,836 | | Accounts receivable, net | $84,681 | $82,582 | | Inventories | $95,053 | $85,992 | | Total Current Assets | $537,406 | $449,529 | | Net Property and Equipment | $78,671 | $74,847 | | Goodwill | $110,340 | $103,619 | | Total Assets | $797,182 | $695,740 | | Total Current Liabilities | $48,489 | $38,251 | | Total Liabilities | $72,005 | $57,841 | | Total Stockholders' Equity | $725,177 | $637,899 | [Consolidated Statements of Income](index=48&type=section&id=4.3%20Consolidated%20Statements%20of%20Income) Neogen's consolidated statements of income show total revenues of $418.17 million and net income attributable to Neogen of $59.48 million for fiscal 2020 Consolidated Statements of Income (in thousands, except per share) | Income Statement Item (in thousands, except per share) | 2020 | 2019 | 2018 | | :----------------------------------------------------- | :---------- | :---------- | :---------- | | Product revenues | $335,539 | $339,439 | $331,288 | | Service revenues | $82,631 | $74,747 | $66,642 | | Total Revenues | $418,170 | $414,186 | $397,930 | | Total Cost of Revenues | $221,891 | $222,266 | $211,658 | | Gross Margin | $196,279 | $191,920 | $186,272 | | Total Operating Expenses | $128,756 | $123,826 | $116,078 | | Operating Income | $67,523 | $68,094 | $70,194 | | Income Before Income Taxes | $72,305 | $72,959 | $73,465 | | Provision for Income Taxes | $12,830 | $12,783 | $10,250 | | Net Income Attributable to Neogen | $59,475 | $60,176 | $63,145 | | Net Income Per Share (Diluted) | $1.13 | $1.15 | $1.21 | [Consolidated Statements of Comprehensive Income](index=49&type=section&id=4.4%20Consolidated%20Statements%20of%20Comprehensive%20Income) Neogen's comprehensive income attributable to Neogen was $51.41 million in fiscal 2020, reflecting net income adjusted for foreign currency translation losses and unrealized gains on marketable securities Consolidated Statements of Comprehensive Income (in thousands) | Comprehensive Income Item (in thousands) | 2020 | 2019 | 2018 | | :--------------------------------------- | :---------- | :---------- | :---------- | | Net Income | $59,475 | $60,176 | $63,215 | | Other comprehensive loss, net of tax: foreign currency translations | $(8,495) | $(1,894) | $(2,543) | | Other comprehensive income, net of tax: unrealized gain on marketable securities | $426 | $— | $— | | Comprehensive income attributable to Neogen | $51,406 | $58,282 | $60,602 | [Consolidated Statements of Stockholders' Equity](index=50&type=section&id=4.5%20Consolidated%20Statements%20of%20Stockholders'%20Equity) Neogen's total equity increased to $725.18 million in fiscal 2020, driven by net income, stock option exercises, and employee stock purchases Consolidated Statements of Stockholders' Equity (in thousands) | Stockholders' Equity Item (in thousands) | May 31, 2020 | May 31, 2019 | May 31, 2018 | | :--------------------------------------- | :----------- | :----------- | :----------- | | Common Stock | $8,471 | $8,355 | $8,278 | | Additional Paid-in Capital | $257,693 | $221,937 | $202,572 | | Accumulated Other Comprehensive Loss | $(19,709) | $(11,640) | $(9,746) | | Retained Earnings | $478,722 | $419,247 | $359,071 | | **Total Equity** | **$725,177** | **$637,899** | **$560,175** | - Key drivers of equity increase in fiscal 2020 included net income (**$59.5 million**), exercise of options and share-based compensation (**$34.7 million**), and employee stock purchases (**$1.2 million**), partially offset by other comprehensive loss[310](index=310&type=chunk) [Consolidated Statements of Cash Flows](index=51&type=section&id=4.6%20Consolidated%20Statements%20of%20Cash%20Flows) Net cash from operating activities increased to $85.88 million in fiscal 2020, while investing activities resulted in an $88.79 million outflow, and financing activities provided $29.41 million Consolidated Statements of Cash Flows (in thousands) | Cash Flow Item (in thousands) | 2020 | 2019 | 2018 | | :---------------------------- | :---------- | :---------- | :---------- | | Net Cash From Operating Activities | $85,878 | $63,842 | $69,131 | | Net Cash For Investing Activities | $(88,785) | $(119,148) | $(83,082) |\n| Net Cash From Financing Activities | $29,405 | $13,899 | $22,838 | | Net Increase (Decrease) in Cash and Cash Equivalents | $24,581 | $(41,386) | $5,507 | | Cash and Cash Equivalents, End of Year | $66,269 | $41,688 | $83,074 | - Cash generated from operating activities increased to **$85.9 million in fiscal 2020** from $63.8 million in 2019[312](index=312&type=chunk) - Investing activities resulted in a net cash outflow of **$88.8 million in fiscal 2020**, driven by purchases of marketable securities ($458.3 million) and business acquisitions ($13.2 million), partially offset by sales of marketable securities ($406.7 million)[312](index=312&type=chunk) - Financing activities provided **$29.4 million in fiscal 2020**, primarily from the exercise of stock options[312](index=312&type=chunk) [Notes to Consolidated Financial Statements](index=52&type=section&id=4.7%20Notes%20to%20Consolidated%20Financial%20Statements) This section provides detailed notes on Neogen's accounting policies, goodwill, business combinations, debt, equity compensation, income taxes, commitments, and segment information [Summary of Significant Accounting Policies](index=52&type=section&id=4.7.1%20Summary%20of%20Significant%20Accounting%20Policies) Neogen's consolidated financial statements include wholly-owned subsidiaries, with foreign operations translated at current rates, and marketable securities classified as available for sale to preserve capital - Neogen's consolidated financial statements include wholly-owned subsidiaries, with all intercompany accounts and transactions eliminated[315](index=315&type=chunk)[316](index=316&type=chunk) - The functional currency is the U.S. dollar, with foreign operations' assets and liabilities translated at current rates and income/expense at average rates, and translation adjustments recorded in other comprehensive income[317](index=317&type=chunk) - The company adopted ASU No. 2016-02 (Leases) on June 1, 2019, recognizing right-of-use assets and lease liabilities of approximately **$2.0 million each**[318](index=318&type=chunk)[348](index=348&type=chunk) - Marketable securities, classified as available for sale, consist of short-term domestic certificates of deposit, commercial paper, and U.S. treasuries, with a primary objective to preserve capital for funding operations, capital expenditures, and acquisitions[327](index=327&type=chunk) - Inventories are stated at the lower of cost or net realizable value using the first-in, first-out method, with a valuation allowance for slow-moving, expired, and obsolete items[333](index=333&type=chunk) - Goodwill and other non-amortizable intangible assets are reviewed annually for impairment, with no impairments identified in fiscal years 2018-2020[335](index=335&type=chunk)[336](index=336&type=chunk) [Goodwill and Other Intangible Assets](index=62&type=section&id=4.7.2%20Goodwill%20and%20Other%20Intangible%20Assets) Neogen's goodwill increased to $110.34 million by May 31, 2020, with amortizable intangible assets totaling $51.36 million, and no impairment identified in recent fiscal years Goodwill by Segment (in thousands) | Goodwill (in thousands) | Food Safety | Animal Safety | Total | | :---------------------- | :---------- | :------------ | :---------- | | Balance, May 31, 2018 | $40,001 | $59,557 | $99,558 | | Goodwill acquired | $3,796 | $1,196 | $4,992 | | Adjustments | $(1,244) | $313 | $(931) | | Balance, May 31, 2019 | $42,553 | $61,066 | $103,619 | | Goodwill acquired | $6,254 | $2,095 | $8,349 | | Adjustments | $(1,592) | $(36) | $(1,628) | | Balance, May 31, 2020 | $47,215 | $63,125 | $110,340 | Amortizable Intangible Assets (in thousands) | Amortizable Intangible Assets (in thousands) | May 31, 2020 Net Carrying Amount | May 31, 2019 Net Carrying Amount | | :------------------------------------------- | :------------------------------- | :------------------------------- | | Licenses | $7,016 | $6,631 | | Covenants not to compete | $299 | $320 | | Patents | $4,391 | $4,588 | | Customer-based intangibles | $29,949 | $29,617 | | Other products and service-related intangibles | $9,709 | $10,940 | | **Total Amortizable Intangible Assets** | **$51,364** | **$52,096** | - Amortization expense for intangibles totaled **$6.489 million in fiscal 2020**, $6.309 million in fiscal 2019, and $6.743 million in fiscal 2018[367](index=367&type=chunk) [Business Combinations](index=63&type=section&id=4.7.3%20Business%20Combinations) Neogen completed several acquisitions in fiscal years 2018-2020, including five in fiscal 2020, to enhance its strategic platform and expand product offerings in international markets - Neogen completed several acquisitions in fiscal years 2018-2020 to enhance its strategic platform and expand product offerings[368](index=368&type=chunk) - Fiscal 2020 acquisitions included Productos Quimicos Magiar (Argentina and Uruguay), Diessechem Srl (Italy), Abtek Biologicals Limited (England), Cell BioSciences (Australia), and Magiar Chilena (Chile)[374](index=374&type=chunk)[375](index=375&type=chunk)[377](index=377&type=chunk)[378](index=378&type=chunk)[379](index=379&type=chunk)[380](index=380&type=chunk) - These acquisitions primarily aimed to establish direct sales presence, expand culture media offerings, and enhance product portfolios in international markets[374](index=374&type=chunk)[377](index=377&type=chunk)[378](index=378&type=chunk)[379](index=379&type=chunk)[380](index=380&type=chunk) - Cash used for business acquisitions, net of cash acquired, was **$13.164 million in fiscal 2020**[312](index=312&type=chunk) [Long-Term Debt](index=65&type=section&id=4.7.4%20Long-Term%20Debt) Neogen has a $15.0 million unsecured revolving line of credit, which was unused in fiscal years 2020 and 2019, and the company was in compliance with all financial covenants - Neogen has a **$15.0 million unsecured revolving line of credit** expiring September 30, 2021[382](index=382&type=chunk) - The line of credit was unused in fiscal years 2020 and 2019, with no outstanding balance at May 31, 2020[382](index=382&type=chunk) - The company was in compliance with all financial covenants as of May 31, 2020[382](index=382&type=chunk) [Equity Compensation Plans](index=66&type=section&id=4.7.5%20Equity%20Compensation%20Plans) Neogen grants incentive and non-qualified stock options to directors, officers, and employees, with compensation expense totaling $6.47 million in fiscal 2020, and offers an Employee Stock Purchase Plan - Neogen grants incentive and non-qualified stock options to directors, officers, and employees, with exercise prices not less than fair market value[384](index=384&type=chunk) Stock Options Summary (in thousands) | Stock Options Summary (in thousands) | Options Outstanding (May 31, 2020) | Weighted-Average Exercise Price | Options Exercisable (May 31, 2020) | Weighted-Average Exercise Price | | :----------------------------------- | :--------------------------------- | :------------------------------ | :--------------------------------- | :------------------------------ | | Total Outstanding | 2,162 | $55.96 | 486 | $48.94 | - Compensation expense related to share-based awards was **$6.468 million in fiscal 2020**, $5.543 million in fiscal 2019, and $4.909 million in fiscal 2018[386](index=386&type=chunk) - The company offers an Employee Stock Purchase Plan, allowing eligible employees to purchase common stock at a **5% discount**[388](index=388&type=chunk) [Income Taxes](index=67&type=section&id=4.7.6%20Income%20Taxes) Neogen's income before income taxes was $72.31 million in fiscal 2020, with a provision for income taxes of $12.83 million, influenced by the U.S. Tax Act of 2017 Income Before Income Taxes (in thousands) | Income Before Income Taxes (in thousands) | 2020 | 2019 | 2018 | | :---------------------------------------- | :---------- | :---------- | :---------- | | U.S. | $62,329 | $58,479 | $62,310 | | Foreign | $9,976 | $14,480 | $11,155 | | **Total** | **$72,305** | **$72,959** | **$73,465** | Provision for Income Taxes (in thousands) | Provision for Income Taxes (in thousands) | 2020 | 2019 | 2018 | | :---------------------------------------- | :---------- | :---------- | :---------- | | Current | $10,832 | $12,257 | $13,195 | | Deferred | $1,938 | $574 | $(2,945) | | **Total Provision** | **$12,830** | **$12,783** | **$10,250** | - The U.S. Tax Act of 2017 reduced the federal corporate tax rate to **21%** and introduced provisions for Global Intangible Low-Taxed Income (GILTI) and Foreign Derived Intangible Income (FDII)[391](index=391&type=chunk) Deferred Income Tax (in thousands) | Deferred Income Tax (in thousands) | May 31, 2020 | May 31, 2019 | | :--------------------------------- | :----------- | :----------- | | Deferred income tax liabilities | $(21,662) | $(19,549) | | Deferred income tax assets | $3,537 | $3,931 | | **Net deferred income tax liabilities** | **$(18,125)** | **$(15,618)** | [Commitments and Contingencies](index=70&type=section&id=4.7.7%20Commitments%20and%20Contingencies) Neogen has an estimated environmental remediation liability of $916,000 for its Randolph, Wisconsin facility and incurred $2.52 million in royalty expense in fiscal 2020 - Neogen has an estimated environmental remediation liability of **$916,000** at May 31, 2020, for its Randolph, Wisconsin facility, measured on an undiscounted basis over 15 years[398](index=398&type=chunk) - Royalty expense for licensed technologies totaled **$2.524 million in fiscal 2020**, $2.795 million in fiscal 2019, and $2.876 million in fiscal 2018[399](index=399&type=chunk) - Future minimum royalty payments are **$182,000 in 2021**, $110,000 in 2022, $105,000 in 2023, $105,000 in 2024, and $105,000 in 2025[399](index=399&type=chunk) - Rent expense for operating leases was **$1.373 million in fiscal 2020**[400](index=400&type=chunk) [Defined Contribution Benefit Plan](index=70&type=section&id=4.7.8%20Defined%20Contribution%20Benefit%20Plan) Neogen maintains a 401(k) defined contribution plan for domestic employees, with matching contributions, incurring an expense of $1.54 million in fiscal 2020 - Neogen maintains a 401(k) defined contribution plan for domestic employees, matching **100% of the first 3%** and **50% of the next 2%** of deferred compensation[401](index=401&type=chunk) - Neogen's expense under this plan was **$1.535 million in fiscal 2020**, $1.361 million in fiscal 2019, and $1.325 million in fiscal 2018[401](index=401&type=chunk) [Segment Information](index=70&type=section&id=4.7.9%20Segment%20Information) Neogen operates in two reportable segments, Food Safety and Animal Safety, with international operations expanding to offer full product lines and reporting through these segments - Neogen has two reportable segments: Food Safety (diagnostic test kits for food/feed) and Animal Safety (animal health products, biosecurity, genomics services)[402](index=402&type=chunk) - International operations, including those in the UK, Mexico, Brazil, China, and India, initially focused on food safety but have expanded to offer a complete product line, reporting through the Food Safety segment[403](index=403&type=chunk) - The Australian operation, initially focused on genomics and animal safety, expanded to offer a full product line and reports through the Animal Safety segment[404](index=404&type=chunk) Segment Information (in thousands) | Segment Information (in thousands) | Food Safety | Animal Safety | Corporate and Eliminations | Total | | :--------------------------------- | :---------- | :------------ | :------------------------- | :---------- | | **Fiscal 2020** | | | | | | Total revenues to external customers | $212,691 | $205,479 | $— | $418,170 | | Operating income (loss) | $33,526 | $39,051 | $(5,054) | $67,523 | | Total Assets | $222,331 | $231,178 | $343,673 | $797,182 | | **Fiscal 2019** | | | | | | Total revenues to external customers | $213,474 | $200,712 | $— | $414,186 | | Operating income (loss) | $39,020 | $33,875 | $(4,801) | $68,094 | | Total Assets | $206,267 | $221,950 | $267,523 | $695,740 | | **Fiscal 2018** | | | | | | Total revenues to external customers | $194,477 | $203,453 | $— | $397,930 | | Operating income (loss) | $34,561 | $39,529 | $(3,896) | $70,194 | | Total Assets | $186,570 | $220,629 | $210,810 | $618,009 | Revenue by Geographical Location (in thousands) | Revenue by Geographical Location (in thousands) | 2020 | 2019 | | :---------------------------------------------- | :---------- | :---------- | | Domestic | $253,458 | $248,304 | | International | $164,712 | $165,882 | | **Total Revenue** | **$418,170** | **$414,186** | [Stock Repurchases](index=72&type=section&id=4.7.10%20Stock%20Repurchases) In October 2018, Neogen's Board authorized a stock buyback program for up to 3,000,000 shares, with 50,000 shares repurchased in December 2018 - In October 2018, the Board authorized a new stock buyback program for up to **3,000,000 shares**[409](index=409&type=chunk) - In December 2018, **50,000 shares were repurchased for approximately $3.135 million**[310](index=310&type=chunk)[409](index=409&type=chunk) - As of May 31, 2020, **2,950,000 shares remained available** for repurchase under the program[409](index=409&type=chunk) [Summary of Quarterly Data (Unaudited)](index=72&type=section&id=4.7.11%20Summary%20of%20Quarterly%20Data%20(Unaudited)) This section provides unaudited quarterly financial data for fiscal years 2019 and 2020, including total revenue, gross margin, and net income per share Quarterly Data (in thousands, except per share) | Quarter Ended (in thousands, except per share) | August 2019 | November 2019 | February 2020 | May 2020 | | :--------------------------------------------- | :-----