NEOGEN CORP (NEOG)

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K.

In addition, any forward-looking statements represent management’s views only as of the day this Form 10-K was first filed with the Securities and Exchange Commission and should not be relied upon as representing management’s views as of any subsequent date. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if our views change.

COMPANY OVERVIEW

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

Neogen’s Animal Safety segment is engaged in the development, manufacture, marketing and distribution of veterinary instruments, pharmaceuticals, vaccines, topicals, parasiticides, diagnostic products, rodent control products, cleaners, disinfectants, insect control products and genomics testing services for the worldwide animal safety market. The majority of these consumable products are marketed through veterinarians, retailers, livestock producers and animal health product distributors.

TRENDS AND UNCERTAINTIES

In prior years, production was negatively impacted by broad supply chain challenges and labor market disruptions. Additionally, input cost inflation, including increases in certain raw materials, negatively impacted operating results. In fiscal 2023, these negative impacts steadily improved throughout the year. In fiscal 2024, despite a slowing of inflation rates, there remains economic headwinds of softening consumer demand and higher interest rates, coupled with ongoing geopolitical tension in certain regions.

Interest rates have risen sharply, particularly in fiscal 2023, as a way to combat inflation. This, subsequently, increased our borrowing costs and raised the overall cost of capital. While the frequent increases have largely subsided, the overall interest rate is significantly higher than in recent years, which increases interest expense on the unhedged portion of our Term Loan. In response to the historically high inflationary environment, we took pricing actions to mitigate the impacts on the business in the prior two fiscal years. The impact of inflation continued to affect us throughout fiscal year 2024, although at a continually decreasing rate compared to fiscal years 2022 and 2023.

Beginning in the second quarter of fiscal year 2024, we implemented a new enterprise resource planning system and began the exit of our transition distribution agreements with 3M, which led to certain shipment delays and an elevated backlog of open orders, specifically in the Food Safety segment. As of the end of fiscal year 2024, order fulfillment issues have largely been resolved, and order fulfillment rates have improved to meet the needs of our customers in this improving end-market environment.

Although we have no operations in or direct exposure to Russia, Belarus or Ukraine, we have experienced intermittent shortages in materials and increased costs for transportation, energy and raw materials due, in part, to the negative impact of the Russia-Ukraine military conflict, which began in February 2022, on the global economy. Our European operations and customer base have been negatively impacted by the conflict. Similarly, the military

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conflict between Israel and Hamas has increased overall geopolitical tensions. As the respective conflicts continue or worsen, they may further impact our business, financial condition or results of operations in fiscal year 2025.

We continue to evaluate the nature and extent to which these issues impact our business, including consolidated results of operations, financial condition and liquidity. We expect these issues to continue to impact us into fiscal year 2025.

RESULTS OF OPERATIONS

Historical Periods

Refer to Part II - Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Form 10-K for the fiscal year ended May 31, 2023 for discussion of the Results of Operations, Segment Results of Operations, and Financial Condition and Liquidity for the year ended May 31, 2023 compared to the year ended May 31, 2022, which is incorporated by reference herein.

Executive Overview

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REVENUE

Year Ended May 31, 2024 Compared to Year Ended May 31, 2023

Food Safety:

Revenue for the Food Safety segment increased $108.5 million in fiscal year 2024 compared to fiscal year 2023. The increase included a $98.6 million benefit from acquisitions, a $10.1 million adverse impact due to currency, and $20.0 million of growth in the business.

Natural Toxins & Allergens – Revenues in this category were relatively unchanged in fiscal 2024. Excluding first quarter revenue of the acquired allergen product line from 3M FSD, revenue in this category decreased 3% due to a decline in sales of natural toxin test kits, caused by product availability issues and prior year sales of discontinued dairy drug residue test kits. These declines were partially offset by growth in our line of allergen test kits.

Bacterial & General Sanitation – Revenue in this category increased 27% in fiscal 2024 compared to the prior fiscal year. Excluding the first quarter contribution of the Clean-Trace line of general sanitation products and the pathogen test kit product line, both acquired in the FSD transaction, revenue in this category increased 2% for the full year. This increase was driven by growth of the acquired product lines for the remainder of the year.

Indicator Testing, Culture Media & Other – Revenue in this category increased 25% in fiscal 2024 compared to the prior fiscal year, driven primarily from revenues resulting from FSD transaction. Excluding first quarter revenue of acquired Petrifilm® and sample handling product lines, revenue rose 2% for the year. Continued growth of the acquired product lines for the remainder of the year combined with higher sales of the Neogen Analytics software product more than offset a large non-recurring sale of culture media in fiscal year 2023.

Rodent Control, Insect Control & Disinfectants – Revenue of products in this category sold through our Food Safety operations increased 8% in fiscal 2024 compared to the prior fiscal year. Increased Cleaner & Disinfectants sales in Europe and a government tender for insect control products in Brazil contributed to the overall growth.

Genomics Services – Revenue of genomics services sold through our Food Safety operations increased 8% in fiscal 2024 compared to the prior fiscal year. Increased revenue to existing customers in Europe as well as new business in Brazil and China added to the overall growth during the year.

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Animal Safety:

Revenue for the Animal Safety segment decreased $6.8 million in fiscal year 2024 compared to fiscal year 2023. The decrease included $0.7 million due to discontinued product lines, a $0.6 million adverse impact due to currency, and a $5.5 million decline in the business.

Life Sciences – Revenue in this category increased 4% in fiscal 2024 compared to the prior fiscal year, driven by higher demand of substrate products from manufacturers of diagnostic tests.

Veterinary Instruments & Disposables – Revenue in this category increased 3% in fiscal 2024 compared to the prior fiscal year driven by higher sales of detectable needles and disposable syringes.

Animal Care & Other – Revenue of these products decreased 5% in fiscal 2024 compared to the prior fiscal year driven primarily by lower sales of small animal supplements and wound care products, due to supply constraints, and the discontinued Thyrokare product line. Higher sales of vitamin injectables products partially offset the decline.

Rodent Control, Insect Control & Disinfectants – Revenue in this category increased 1% in fiscal 2024, compared to the prior fiscal year, driven with higher sales of insect control products, partially offset by flat sales of rodent control products and cleaners and disinfectants.

Genomics Services – Revenue in this category decreased 10% in fiscal 2024 compared to the prior fiscal year. The decrease in this category was attributed to customer attrition in the poultry and porcine markets associated with a strategic shift in the business to focus primarily on large production animals.

Service Revenue

Service revenue, which consists primarily of genomics services provided to animal production and companion animal markets, was $102.4 million in fiscal 2024, a decrease of 5% over prior fiscal year revenue of $107.4 million. The decrease was primarily driven by customer attrition in the poultry market and a decrease in revenue in domestic porcine genomics testing, partially offset by strength in genomics testing in the U.K. and Australia, and new business gained with our Neogen Analytics software as a service.

International Revenue

Neogen’s international revenues were $459.0 million in fiscal year 2024, compared to $398.4 million in fiscal 2023, an increase of 15%. The increase was primarily due to $63.8 million of international revenue from 3M FSD during the first quarter of fiscal 2024. Excluding the first quarter of revenue from the FSD transaction, which did not occur in the prior year comparable period, international revenue slightly decreased, primarily driven by the adverse impact of currency.

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GROSS MARGIN

Gross margin, expressed as a percentage of revenue, was 50.2% during fiscal year 2024 compared to 49.4% during the prior fiscal year. The margin expansion was primarily due to a full year of higher-margin FSD sales in our Food Safety segment, which generated gross margin higher than the legacy company average gross margin. The increase was partially offset by a lower gross margin, expressed as a percentage of revenue, in our Animal Safety segment. The decline was primarily driven by our domestic genomics lab, where fixed costs were unable to decrease at the same proportion as the reduction in revenue due to customer attrition.

Within each reporting segment, increased raw material costs continue to pressure gross margins in certain product lines. However, while inflation continues to impact the business, the rate of raw material price and freight cost increases have significantly declined throughout both the current and prior year comparative periods. Pricing actions taken during these periods also mitigated the impact of cost increases.

OPERATING EXPENSES

Operating expenses were $405.2 million during fiscal year 2024, compared to $368.4 million during the prior fiscal year. The increase during the year was primarily the result of costs added to accommodate the increased size and complexity of the Company following the FSD transaction, which was included for only nine months in the prior year comparable period.

Sales and Marketing:

Sales and marketing expenses were $182.9 million during fiscal year 2024, compared to $141.2 million during the prior fiscal year. For the Food Safety segment, the increase was primarily driven by incremental costs resulting from the FSD transaction, including compensation and related expenses for the acquired sales and marketing teams and higher costs related to inefficiencies as we took over distribution from 3M. For the Animal Safety segment, the increase was primarily driven by employee costs resulting from headcount increases.

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General and Administrative:

General and administrative expenses were $199.9 million during fiscal year 2024, compared to $201.2 million during the prior fiscal year. For the Food Safety segment, an increase in these expenses was primarily the result of incremental intangible asset amortization and additional personnel hired to accommodate the increased size and complexity of the organization. These increases were partially offset by lower transaction fees and integration expenses compared to the prior year comparable period. For the Animal Safety segment, the decrease was driven by lower impairment expenses associated with discontinued product lines.

Research and Development:

Research and development expense was $22.5 million in fiscal year 2024, compared to $26.0 million during the prior fiscal year. The decrease during the year was primarily the result of lower contracted services and employee costs in the Food Safety segment, as we continue to integrate the 3M FSD business and realize synergies in certain areas.

OTHER (EXPENSE) INCOME

The net interest expense recorded during fiscal year 2024 was the result of debt incurred to fund the FSD transaction. In the first quarter of fiscal 2023, the Company had no debt outstanding. Interest income relates to earnings on our marketable securities and money market account portfolio. Higher balances in money market portfolios with higher yields drove the increase in interest income during fiscal year 2024. Other expense resulting from foreign currency transactions was the result of changes in the value of foreign currencies relative to the U.S. dollar in countries in which we operate.

PROVISION FOR INCOME TAXES

Income tax benefit during fiscal year 2024 was $4.9 million, compared to income tax expense of $0.8 million in the prior fiscal year. The net tax benefit in the current fiscal year was primarily related to pre-tax losses due to amortization expense and interest expense resulting from the FSD transaction. In the prior fiscal year, pre-tax loss due to the FSD transaction was offset primarily by nondeductible transaction costs.

The total amounts of unrecognized tax benefits that, if recognized, would affect the effective tax rate as of May 31, 2024 and May 31, 2023 are $2.7 million and $1.1 million, respectively. Increases in unrecognized tax benefits are primarily associated with transfer pricing, IRC Section 861 expense apportionment, and research and development credits.

NON-GAAP FINANCIAL MEASURES

This report includes certain financial information for the Company that differs from what is reported in accordance with U.S. GAAP. These non-GAAP financial measures consist of EBITDA, Adjusted EBITDA, and Adjusted EBITDA margin. These non-GAAP financial measures are included in this report because management believes that they provide investors with additional useful information to measure the performance of the Company, and because these non-GAAP financial measures are frequently used by securities analysts, investors and other interested parties as common performance measures to compare results or estimate valuations across companies in industries the Company operates in.

EBITDA

We define EBITDA as net income before interest, income taxes, and depreciation and amortization. We present EBITDA as a performance measure because it may allow for a comparison of results across periods and results across companies in the industries in which Neogen operates on a consistent basis, by removing the effects on operating performance of (a) capital structure (such as the varying levels of interest expense and interest income), (b) asset base and capital investment cycle (such as depreciation and amortization) and (c) items largely outside the control of management (such as income taxes). EBITDA also forms the basis for the measurement of Adjusted EBITDA (discussed below).

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Adjusted EBITDA

We define Adjusted EBITDA as EBITDA, adjusted for share-based compensation and certain transaction fees and expenses. We present Adjusted EBITDA because it provides an understanding of underlying business performance by excluding the following:

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Share-based compensation

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FX translation (gain)/loss on loan revaluation and other revaluation

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Certain transaction fees and integration costs

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Restructuring

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Contingent consideration adjustments

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ERP Expense

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Other income and expense items

Adjusted EBITDA margin

We define Adjusted EBITDA margin as Adjusted EBITDA as a percentage of total revenues. We present Adjusted EBITDA margin as a performance measure to analyze the level of Adjusted EBITDA generated from total revenue.

These non-GAAP financial measures are presented for informational purposes only. EBITDA, Adjusted EBITDA and Adjusted EBITDA margin are not recognized terms under GAAP and should not be considered in isolation or as a substitute for, or superior to, net (loss) income, operating income, cash flow from operating activities or other measures of financial performance. This information does not purport to represent the results Neogen would have achieved had any of the transactions for which an adjustment is made occurred at the beginning of the periods presented or as of the dates indicated. This information is inherently subject to risks and uncertainties. It may not give an accurate or complete picture of Neogen’s financial condition or results of operations for the periods presented and should not be relied upon when making an investment decision.

The use of the terms EBITDA, Adjusted EBITDA, and Adjusted EBITDA margin may not be comparable to similarly titled measures used by other companies or persons due to potential differences in the method of calculation.

These non-GAAP financial measures have limitations as analytical tools. For example, for EBITDA-based metrics:

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they do not reflect changes in, or cash requirements for, Neogen’s working capital needs;

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they do not reflect Neogen’s tax expense or the cash requirements to pay taxes;

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they do not reflect the historical cash expenditures or future requirements for capital expenditures or contractual commitments;

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they do not reflect any cash requirements for future replacements of assets that are being depreciated and amortized; and

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they may be calculated differently from other companies in Neogen’s industries limiting their usefulness as comparative measures.

A reader should compensate for these limitations by relying primarily on the financial statements of Neogen and using these non-GAAP financial measures only as a supplement to evaluate Neogen’s performance.

For each of these non-GAAP financial measures below, we are providing a reconciliation of the differences between the non-GAAP measure and the most directly comparable GAAP measure.

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Reconciliation between net (loss) income and EBITDA and Adjusted EBITDA is as follows:

(1) Net foreign currency transaction loss associated with the revaluation of non-functional currency intercompany loans established in connection with the 3M Food Safety transaction and other non-hedged foreign currency revaluation resulting from 3M agreements.

(2) Includes costs associated with the 3M transaction, including various transition agreements.

(3) Includes costs associated with consolidation of U.S. genomics labs.

(4) Expenses related to ERP implementation.

(5) Expenses associated with intangible asset impairments and inventory scrap amounts related to certain discontinued product lines.

Adjusted EBITDA increased $7.7 million in fiscal year 2024 compared to fiscal year 2023, primarily due to earnings generated from the 3M FSD business, which combined with Neogen on September 1, 2022. Expressed as a percentage of revenue, adjusted EBITDA was 23.1% in fiscal year 2024 compared to 25.0% in fiscal year 2023. The lower Adjusted EBITDA margin was driven primarily by higher operating expenses compared to the prior-year periods, reflecting additions to accommodate the integration of the 3M FSD.

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FUTURE OPERATING RESULTS

Neogen Corporation’s future operating results involve a number of risks and uncertainties. Actual events or results may differ materially from those discussed in this report. Factors that could cause or contribute to such differences include, but are not limited to, the factors discussed below as well as those discussed elsewhere in this report. Management’s ability to grow the business and its profitability in the future depends upon our ability to successfully implement various strategies, including:

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developing, manufacturing and marketing new products with new features and capabilities, and having those new products successfully accepted in the marketplace;

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expanding our markets by fostering increased use of our products by customers;

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maintaining or increasing gross and net operating margins in changing cost environments;

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strengthening operations and sales and marketing activities in geographies outside of the U.S.;

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developing and implementing new technology development strategies; and

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identifying and completing acquisitions that enhance existing product categories or creating new products or services, and successfully integrating completed acquisitions, including the FSD transaction.

FINANCIAL CONDITION AND LIQUIDITY

Overview

Our primary sources of liquidity are cash and cash equivalents, cash flows from the operations of our business, and available borrowing capacity under our Credit Facilities. Our principal uses of cash include working capital-related items, capital expenditures, debt service, and strategic investments.

Our future cash generation and borrowing capacity may not be sufficient to meet cash requirements to fund the operating business, repay debt obligations, construct new manufacturing facilities, commercialize products currently under development or execute our future plans to acquire additional businesses, technology and products that fit within our strategic plan. Accordingly, we may be required, or may choose, to issue additional equity securities or enter into other financing arrangements for a portion of our future capital needs. However, we continuously monitor and forecast our liquidity situation in light of industry, customer and economic factors, and take the necessary actions to preserve our liquidity and evaluate other financial alternatives that may be available to us should the need arise. As a result, we believe that our cash flows from operations, cash on hand, and borrowing capacity will enable us to fund the operating business, repay debt obligations, construct new manufacturing facilities, commercialize products currently under development, and execute our strategic plans.

We are subject to certain legal and other proceedings in the normal course of business that have not had, and, in the opinion of management, are not expected to have, a material effect on our results of operations or financial position.

As of May 31, 2024, we had cash and cash equivalents and marketable securities of $170.9 million, and borrowings available under our revolving line of credit of $150.0 million.

Cash Flows

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Comparing fiscal year 2024 to fiscal 2023, the lower inflow in cash from operating activities was primarily the result of working capital items, specifically a large outflow for inventory during fiscal year 2024 as we exited distribution agreements with 3M. This resulted in large purchases of inventory, as we are now stocking 3M FSD products.

In fiscal year 2024, the outflow in cash for investing activities was primarily the result of purchases of property, equipment and non-current intangible assets of $111.4 million. This was partially offset by the sale of marketable securities of $82.0 million. In fiscal year 2023, there were purchases of property, equipment and non-current intangible assets of $65.8 million and the maturity of marketable securities of $266.8 million, resulting in an inflow from investing activities.

Comparing fiscal year 2024 to fiscal 2023, the net inflow in cash from financing activities was primarily the result of the Company paying down $100 million of the $1 billion in debt incurred in connection with the FSD transaction in fiscal year 2023.

Net accounts receivable balances were $173.0 million as of May 31, 2024 compared to $153.3 million as of May 31, 2023. Days’ sales outstanding, a measurement of the time it takes to collect receivables, for the business was 61 days as of May 31, 2024, compared to 57 days for the legacy business as of May 31, 2023.

As part of transition services agreements between the Company and 3M, related to the merger of the Food Safety business, 3M invoiced our customers for products that 3M manufactured and shipped on our behalf through December 2023. We have completed the exit of distribution and back office-related service contracts and currently only have a contract manufacturing agreement in place with 3M for certain products.

Net inventory was $189.3 million as of May 31, 2024, an increase of $55.5 million, compared to $133.8 million as of May 31, 2023. The higher inventory levels are primarily the result of the Company now stocking 3M FSD products.

Contractual Obligations As of May 31, 2024, we have the following contractual obligations due by period:

(1)
Purchase obligations are primarily purchase orders for future inventory and capital equipment purchases.

We continue to make investments in our business and operating facilities. Our estimate for capital expenditures in fiscal 2025 is $85 million. This includes approximately $55 million in capital expenditures related to the integration of the acquired 3M FSD products, the most significant portion of which is related to the construction of and equipment for our new manufacturing facility in Lansing, Michigan

CRITICAL ACCOUNTING ESTIMATES

The discussion and analysis of our financial condition and results of operations are based on the consolidated financial statements that have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires that management make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, management evaluates the estimates, including but not limited to, those related to receivable allowances, inventories and intangible assets. These estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

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The following critical accounting estimates reflect management’s more significant judgments used in the preparation of the consolidated financial statements.

Income Taxes

We account for income taxes using the asset and liability method. Under this method, deferred income tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and for tax credit carryforwards and are measured using the enacted tax rates in effect for the years in which the differences are expected to reverse. Deferred income tax expense represents the change in net deferred income tax assets and liabilities during the year. The determination of income subject to income tax in each tax paying jurisdiction requires us to apply transfer pricing guidelines for certain intercompany transactions.

Our tax rate is subject to adjustment over the balance of the year due to, among other things, income tax rate changes by governments; the jurisdictions in which our profits are determined to be earned and taxed; changes in the valuation of our deferred tax assets and liabilities; adjustments to our interpretation of transfer pricing standards; changes in available tax credits or other incentives; changes in stock-based compensation expense; changes in tax laws or the interpretation of such tax laws; and changes in U.S. generally accepted accounting principles.

Although we believe our tax estimates are reasonable and we prepare our tax filings in accordance with all applicable tax laws, the final determination with respect to any audit, and any related litigation, could be materially different from our estimates or from our historical income tax provisions and accruals. The results of an audit or litigation could have a material effect on operating results and/or cash flows in the periods for which that determination is made. In addition, future period earnings may be adversely impacted by litigation costs, settlements, penalties, and/or interest assessments.

Goodwill

We record goodwill when the purchase price of acquired businesses exceeds the value of their identifiable net tangible and intangible assets acquired. We review our goodwill for impairment annually during the fourth quarter of our fiscal year. In addition, we review goodwill for impairment whenever adverse events or changes in circumstances indicate a possible impairment. We may elect to assess qualitative factors as a basis for determining whether it is necessary to perform quantitative impairment testing. If management’s assessment and conclusion of these qualitative factors indicates that it is more likely than not that the fair value of the reporting unit is more than its carrying value, then no further testing is required. Otherwise, the reporting unit is quantitatively tested for impairment.

Our business is organized into two reporting units: Food Safety and Animal Safety. The determination of our reporting units and impairment indicators also require us to make significant judgments.

In performing goodwill impairment testing, we utilize a third-party valuation specialist to assist management in determining the fair value of our reporting units. Fair value of the reporting unit is estimated based on a combination of an income-based approach consisting of a discounted cash flows analysis and the use of a market-based approach consisting of pricing multiples derived from an analysis of comparable public companies multiplied against historical and/or anticipated financial metrics of the reporting unit. The discounted cash flows approach is based on the reporting unit’s forecasted future cash flows, including forecasted revenue growth rates and gross margin assumptions, that are discounted to present value using the reporting unit’s weighted average cost of capital (WACC) as the discount rate. For the market-based approach, management uses the guideline public company method. The guideline public company method analyzes market multiples of revenues and earnings before interest, taxes, depreciation and amortization (“EBITDA”) for a group of comparable public companies. Valuation multiples are calculated utilizing actual transaction prices and revenue/EBITDA data from target companies deemed similar to the reporting unit. Management typically assigns more weight to the income-based valuation method. Management also evaluates the fair value estimates of the reporting units in the context of the Company’s total enterprise market value.

Based on the estimated fair value developed from the income and market-based methods, we determine the estimated fair value of the reporting unit. If the estimated fair value of the reporting unit exceeds its carrying value, the goodwill is not impaired and no analysis is required. However, if the estimated fair value of the reporting unit is less than its carrying value, the impairment loss is calculated as the difference between the carrying value of the reporting unit and the estimated fair value, limited to the amount of the goodwill assigned to the reporting unit.

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We develop our estimates based on information available as of the date of our assessment, using assumptions we believe market participants would use in performing an independent valuation of the business. Although we believe the estimates and assumptions used in the impairment assessment are reasonable and appropriate, it is possible that the assumptions and conclusions regarding the impairment of goodwill of the reporting unit could change in future periods. There can be no assurance the estimates and assumptions, in particular our long-term financial projections, that are based on information that are known or knowable by us at the time of our goodwill impairment assessment will prove to be accurate predictions of the future, if, for example, (i) the reporting unit does not perform as projected, (ii) overall economic conditions in future years vary from current assumptions (including a change in the discount rate), (iii) business conditions or strategies change from current assumptions, including loss of major customers or channels, (iv) investors require higher rates of return on equity investments in the marketplace, or (v) enterprise values of comparable publicly traded companies, or actual sales transactions of comparable companies, were to decline, resulting in lower multiples of revenues and EBITDA.

We conducted the impairment analysis in the fourth quarter of fiscal year 2024 and concluded that the fair value of our reporting units exceeded their respective carrying values, resulting in no impairment in fiscal year 2024.

Certain assumptions used by us in our impairment assessment for the food safety reporting unit are sensitive in nature. For example, an adverse 50 basis point change in the revenue growth rate or discount rate would result in an estimated fair value of the reporting unit that no longer exceeds the carrying value. As a result, a goodwill impairment charge would be recorded.

NEW ACCOUNTING PRONOUNCEMENTS

See discussion of any New Accounting Pronouncements in Note 1 to consolidated financial statements.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K.

In addition, any forward-looking statements represent management’s views only as of the day this Form 10-K was first filed with the Securities and Exchange Commission and should not be relied upon as representing management’s views as of any subsequent date. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if our views change.

TRENDS AND UNCERTAINTIES

During fiscal 2023, we experienced higher than normal input cost inflation, including increases in certain raw materials, labor costs and supply chain pressure that negatively impacted operating results. Pricing actions taken during fiscal 2022 and 2023 mitigated some, but not all, of the inflationary pressures on the business. Ongoing inflation also could have an impact on our customer’s purchasing decisions and order patterns. We estimate inflation will continue to affect us in fiscal year 2024, although at a decreasing rate compared to the prior two fiscal years.

Although we have no operations in or direct exposure to Russia, Belarus and Ukraine, we have experienced intermittent shortages in materials and increased costs for transportation, energy and raw materials due, in part, to the negative impact of the Russia-Ukraine military conflict, which began in February 2022, on the global economy. Our European operations and customer base have been adversely impacted by the conflict. As the conflict continues or worsens, it may further impact our business, financial condition or results of operations during fiscal year 2024.

While the impact of the COVID-19 global pandemic was more modest in fiscal 2023, it continued to impact our business operations and financial results, particularly in the first half of the fiscal year in Asia. A number of our product lines were negatively impacted due to vendor disruptions, border closures, shipping issues and labor shortages. Broadly speaking, many of our markets have recovered or are recovering from the pandemic, as supply chain difficulties and shipping costs have decreased. A renewed outbreak of COVID-19 could result in further uncertainty and business disruptions. However, the current trend is positive and negative impacts appear to be moderating.

Overall, the impact of inflation, the Russia-Ukraine military conflict and COVID-19 remains uncertain. We continue to evaluate the nature and extent to which these issues impact our business, including supply chain, labor availability and attrition, consolidated results of operations, financial condition and liquidity. We expect these issues to continue to impact us throughout fiscal year 2024.

CRITICAL ACCOUNTING ESTIMATES

The discussion and analysis of our financial condition and results of operations are based on the consolidated financial statements that have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires that management make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, management evaluates the estimates, including but not limited to, those related to receivable allowances, inventories and intangible assets. These estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

The following critical accounting estimates reflect management’s more significant judgments used in the preparation of the consolidated financial statements.

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Income Taxes

We account for income taxes using the asset and liability method. Under this method, deferred income tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and for tax credit carryforwards and are measured using the enacted tax rates in effect for the years in which the differences are expected to reverse. Deferred income tax expense represents the change in net deferred income tax assets and liabilities during the year. The determination of income subject to income tax in each tax paying jurisdiction requires us to apply transfer pricing guidelines for certain intercompany transactions.

Our tax rate is subject to adjustment over the balance of the year due to, among other things, income tax rate changes by governments; the jurisdictions in which our profits are determined to be earned and taxed; changes in the valuation of our deferred tax assets and liabilities; adjustments to our interpretation of transfer pricing standards; changes in available tax credits or other incentives; changes in stock-based compensation expense; changes in tax laws or the interpretation of such tax laws; and changes in U.S. generally accepted accounting principles.

Although we believe our tax estimates are reasonable and we prepare our tax filings in accordance with all applicable tax laws, the final determination with respect to any audit, and any related litigation, could be materially different from our estimates or from our historical income tax provisions and accruals. The results of an audit or litigation could have a material effect on operating results and/or cash flows in the periods for which that determination is made. In addition, future period earnings may be adversely impacted by litigation costs, settlements, penalties, and/or interest assessments.

As of May 31, 2023, the Company has approximately $153 million of undistributed earnings in its foreign subsidiaries. Approximately $41 million of these earnings are no longer considered permanently reinvested. The incremental tax cost to repatriate these earnings to the U.S. is immaterial. The Company has not provided deferred taxes on approximately $112 million of undistributed earnings from non-U.S. subsidiaries as of May 31, 2023 which are indefinitely reinvested in operations. Based on historical experience, as well as management’s future plans, earnings from these subsidiaries will continue to be re-invested indefinitely for future expansion and working capital needs. On an annual basis, we evaluate the current business environment and whether any new events or other external changes might require future evaluation of the decision to indefinitely re-invest these foreign earnings. It is not practical to determine the income tax liability that would be payable if such earnings were not reinvested indefinitely.

Additionally, the company has elected to treat Global Intangible Low Tax Income (“GILTI”), as a period cost, and therefore, has not recognized deferred taxes for basis differences that may reverse as GILTI tax in future years.

Business Combinations and Customer Relationships Intangibles

We utilize the acquisition method of accounting for business combinations. This method requires, among other things, that results of operations of acquired companies are included in Neogen’s results of operations beginning on the respective acquisition dates and that assets acquired and liabilities assumed are recognized at fair value as of the acquisition date. Any excess of the fair value of consideration transferred over the fair values of the net assets acquired is recognized as goodwill.

As described in Note 3 "Business Combinations" to the consolidated financial statements, on September 1, 2022, we completed a transaction combining 3M’s food safety division with Neogen in a Reverse Morris Trust transaction for consideration of approximately $3.2 billion, which resulted in recording of a customer relationships intangible assets valued at $1.17 billion. We determined the fair value of the acquired customer relationships intangible assets by applying the multi-period excess earnings method, which involved the use of significant estimates and assumptions related to forecasted revenue growth rate and customer attrition rate. Valuation specialists were used to develop and evaluate the appropriateness of the multi-period excess earnings method, our discount rates, our attrition rate and our fair value estimates using our cash flow projections.

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

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

Goodwill

We record goodwill when the purchase price of acquired businesses exceeds the value of their identifiable net tangible and intangible assets acquired. We periodically evaluate goodwill for impairment in accordance with the accounting guidance for goodwill and other indefinite-lived intangibles that are not amortized. We review our goodwill for impairment annually during the fourth quarter. In addition, we review goodwill for impairment whenever adverse events or changes in circumstances indicate a possible impairment.

This review is performed at the reporting unit level, and involves a comparison of the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered impaired. If the carrying amount of the reporting unit exceeds its fair value, an impairment loss is recognized in an amount equal to the excess carrying value over fair value.

In performing goodwill impairment testing, we utilize a third-party valuation specialist to assist management in determining the fair value of our reporting units. Fair value of each reporting unit is estimated based on a combination of discounted cash flows and the use of pricing multiples derived from an analysis of comparable public companies multiplied against historical and/or anticipated financial metrics of each reporting unit. These calculations contain uncertainties as they require management to make assumptions including, but not limited to, market comparables, future cash flows of the reporting units, and appropriate discount and long-term growth rates.

During fiscal year 2023, our business was organized into two reporting units: Food Safety and Animal Safety. The determination of our reporting units and impairment indicators also require us to make significant judgments.

As a result of our test in the fourth quarter of fiscal year 2023, we determined that the fair value of our reporting units exceeded their respective carrying values. As such, the annual impairment analysis resulted in no impairment in fiscal year 2023.

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RESULTS OF OPERATIONS

Historical Periods

Refer to Part II - Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Form 10-K for the fiscal year ended May 31, 2022 for discussion of the Results of Operations, Segment Results of Operations, and Financial Condition and Liquidity for the year ended May 31, 2022 compared to the year ended May 31, 2021, which is incorporated by reference herein.

Executive Overview

•
Food Safety fiscal year 2023 core sales exclude revenues from the acquisitions of Corvium (February 2023), 3M FSD (September 2022), Thai-Neo Biotech (July 2022), and Delf/Abbott Analytical (November 2021) and also excludes the impact of changes in currency rates.

•
Food Safety revenues include $279.5 million from 3M FSD, which we combined with on September 1, 2022. All of the global revenue from this business is reported within the Food Safety segment.

•
Animal Safety fiscal year 2023 core sales exclude revenues from the acquisitions of Genetic Veterinary Sciences (December 2021) and CAPInnoVet (September 2021) and also excludes the impact of changes in currency rates.

International Revenue

Neogen’s international revenues were $398.4 million in fiscal year 2023, compared to $209.3 million in fiscal 2022, an increase of 90%. Revenues from 3M FSD drove the international sales increase. Since September 1, 2022, 67% of 3M FSD revenues were international sales, compared to Neogen’s historical average of approximately 40%.

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Revenue changes, expressed in percentages, for fiscal 2023 compared to the prior year are as follows for the legacy business at each of our international locations:

Excluding the December 2021 acquisition of Delf, sales at our U.K. operations increased 5% in local currency, which was led by increased sample volume in the pig and poultry markets. In local currency, revenue in Brazil increased 10% in fiscal 2023, driven by strong sales of the company’s natural toxin test kits, including tests to detect aflatoxin in corn, as well as increases in insect and rodent control products, and genomics testing. In local currency, Neogen Latinoamerica revenues rose by 4% in fiscal 2023, led by our diagnostic testing portfolio and culture media.

China’s revenue decreased 4% in local currency, which was primarily the result of COVID-19 lockdowns in the first half of the fiscal year. In local currency, revenue at Neogen Australasia increased 11% in fiscal 2023, led by increased sales of bovine genomic services.

Service Revenue

Service revenue, which consists primarily of genomics services to animal protein and companion animal markets, was $107.4 million in fiscal 2023, an increase of 5% over prior fiscal year sales of $102.5 million. The increase was primarily driven by growth in the U.S. beef and companion animal markets for genomics testing and higher sales of our Neogen Analytics software as a service (SaaS) product. These increases were partially offset by COVID-related shutdowns in China in the first half of fiscal 2023 and lower genomics sales to the U.S. porcine and poultry markets, as two significant customer shifted to lower-cost competitors.

REVENUES

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Year Ended May 31, 2023 Compared to Year Ended May 31, 2022

Food Safety:

Natural Toxins, Allergens & Drug Residues – Revenues in this category increased 4% in fiscal 2023. Excluding sales of the acquired allergen product line from 3M FSD, sales in this category decreased 3% due to a large decline in sales of drug residue test kits that were largely discontinued in fiscal 2023.

Bacterial & General Sanitation – Sales in this category increased 185% in fiscal 2023 compared to the prior fiscal year. Excluding the contribution of the Clean-Trace® line of general sanitation products and the pathogen test kit product line, both acquired from 3M FSD, organic sales in this category were flat for the full year. A 3% increase in sales of our Soleris line of spoilage detection consumables was offset by a decline in sales of our AccuPoint line of general sanitation products, primarily caused by lack of supply of critical components for our reader.

Culture Media & Other – Sales in this category increased 255% in fiscal 2023 compared to the prior fiscal year, driven primarily from revenues resulting from 3M FSD. Excluding sales of the Petrifilm indicator organism and sample handling product lines acquired in the Transaction, sales rose 7% for the year. Culture media revenues rose 13%, primarily due to a large custom order in the third quarter of the year. Additionally, sales of our Neogen Analytics software as a service platform increased significantly during the year, with approximately 250 sites now on contract.

Rodent Control, Insect Control & Disinfectants – Sales of products in this category sold through our Food Safety operations increased 11% in fiscal 2023 compared to the prior fiscal year. Excluding the November 2021 acquisition of Delf, the increase was 4%, led by higher sales of cleaners and disinfectants in China.

Genomics Services – Sales of genomics services sold through our Food Safety operations increased 1% in fiscal 2023 compared to the prior fiscal year, with increases in beef business in Brazil and the U.K. partially offset by a decline in sample volumes in China, as the first half of the fiscal year was negatively impacted by COVID-19 shutdowns.

Animal Safety:

Life Sciences – Sales in this category increased 10% in fiscal 2023 compared to the prior fiscal year, primarily due to higher demand from customers purchasing substrates and reagents used in clinical diagnostic test kits.

Veterinary Instruments & Disposables – Sales in this category were flat in fiscal 2023 compared to the prior fiscal year, as significant increases in cohesive wrap business won in the second half of the year were offset by lower sales of veterinary instruments, reflecting difficult comparisons to large stocking orders of needles and syringes in the prior year from new business earned in that period.

Animal Care & Other – Sales of these products decreased 2% in fiscal 2023 compared to the prior fiscal year. Lower sales of vitamin injectables and veterinary antibiotics, primarily due to supply constraints, more than offset a 7% increase in sales of vaccines and biologics products and a 4% increase in sales of small animal supplements.

Rodent Control, Insect Control & Disinfectants – Sales in this category increased 5% in fiscal 2023, compared to the prior fiscal year. Cleaner and disinfectants sales rose 11% on new business earned, insect control product sales increased 6%, and rodenticide revenues increased 1%, each compared to the prior year.

Genomics Services – Sales in this category increased 7% in fiscal 2023 compared to the prior fiscal year. Excluding the December 2021 acquisition of Genetic Veterinary Sciences, the growth was 2%. Growth was led by increases in beef and dairy cattle testing in the U.S., Canada and Australia, and strength in domestic companion animal revenues. These increases were partially offset by declines in porcine and poultry testing revenues, due to the loss of two large customer to lower cost competitors.

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GROSS MARGIN

Gross margin, expressed as a percentage of sales, was 49.4% during fiscal year 2023 compared to 46.1% during the prior fiscal year. The increase was primarily due to the incremental revenues from the 3M FSD merger, which generated gross margin higher than the legacy company average margin. Within each reporting segment, increased raw material costs pressured gross margins in certain product lines. However, freight costs declined significantly during the comparative period particularly benefitting the Animal Safety segment, although they remained higher than pre-pandemic levels in some areas. Pricing actions taken during the year also mitigated the impact of cost increases.

OPERATING EXPENSES

Operating expenses were $368.4 million during fiscal year 2023, compared to $184.4 million during the prior fiscal year. The increase was primarily the result of $58.2 million of legal, consulting and other expenses related to the 3M FSD transaction and incremental ongoing expenses resulting from the employees who conveyed over to Neogen from 3M FSD and the amortization of intangible assets acquired in the Transaction.

Sales and Marketing:

Sales and marketing expenses were $141.2 million during fiscal year 2023, compared to $84.6 million during the prior fiscal year. The increase in expense was due primarily to $45.4 million in costs incurred for the 3M FSD business, primarily consisting of compensation and related expenses for the conveying 3M FSD sales and marketing team, and the charges for transition services provided by 3M FSD. These invoicing and distribution services will be provided under contract for a period of up to 18 months, concluding by March 1, 2024. The remainder of the increase during the year was due primarily to higher personnel related spending in the legacy business, the result of headcount additions and compensation increases. In addition, travel, trade shows and other customer facing activities continued to increase during the year with the easing of COVID-19 restrictions and greater willingness by customers to interact.

General and Administrative:

General and administrative expenses were $201.2 million during fiscal year 2023, compared to $82.7 million during the prior fiscal year. The current fiscal year included $58.2 million in transaction fees and integration expenses resulting from the 3M FSD transaction and $60.9 million in amortization of intangible assets acquired in the Transaction. Remaining increases for the year were primarily the result of additional personnel hired to accommodate the increased size and complexity of the organization, compensation increases across the organization, the issuance of share based compensation grants, software license fees and other information technology infrastructure investments. Fiscal year 2022 included $25.6 million of 3M FSD-related transaction fees.

Research and Development:

Research and development expense was $26.0 million in fiscal year 2023, compared to $17.0 million during the prior fiscal year. The increase was primarily the result of $8.4 million of ongoing costs associated with the conveying 3M FSD employees.

OPERATING INCOME

Operating income was $37.5 million during fiscal year 2023, compared to operating income of $58.6 million in the prior fiscal year. Expressed as a percentage of sales, operating income was 4.6% during fiscal year 2023 and 11.1% during fiscal year 2022. Operating income, both in dollars and expressed as a percentage of sales, declined compared to the prior year period primarily due to transaction costs resulting from the 3M FSD transaction and amortization of the intangible assets acquired.

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OTHER (EXPENSE) INCOME

Other (Expense) Income for the previous two fiscal years consisted of the following:

The net interest expense recorded during fiscal year 2023 was the result of debt incurred to fund the 3M FSD transaction. In fiscal 2022, the Company had no debt outstanding. Interest income relates to earnings on our marketable securities portfolio. Higher yields on the portfolio were partially offset by lower balances in fiscal year 2023. Other expense resulting from foreign currency transactions was the result of changes in the value of foreign currencies relative to the U.S. dollar in countries in which we operate. The increase in expense during fiscal year 2023 was due to U.S. dollar denominated intercompany loans incurred in our international subsidiaries as the result of the 3M FSD transaction on September 1, 2022. Due to our acquisition of Corvium, Inc. in February 2023, we recorded a loss of $1.5 million in fiscal year 2023 on dissolution of our minority interest in that company. Finally, we recorded a loss on investment during fiscal year 2023 related to our investment interest of a start-up entity that was encountering liquidity issues.

PROVISION FOR INCOME TAXES

Income tax expense during fiscal year 2023 was $0.8 million, compared to $11.9 million in the prior fiscal year, primarily resulting from the additional pre-tax loss due to the 3M FSD acquisition, share-based compensation, and foreign rate differential. This was offset primarily by an increase in GILTI income and nondeductible transaction costs.

The total amounts of unrecognized tax benefits that, if recognized, would affect the effective tax rate as of May 31, 2023 and May 31, 2022 are $1.1 million and $0.8 million, respectively. The increase in unrecognized tax benefits is primarily associated with the combined 3M FSD, including positions for transfer pricing and research and development credits.

NET INCOME AND INCOME PER SHARE

Net loss was $22.9 million during fiscal year 2023, compared to net income of $48.3 million in the prior fiscal year. The decrease in earnings was primarily the result of $56.0 million of interest expense from the $1 billion in debt incurred in the Transaction, $59.8 million of transaction fees and integration expenses, and $60.9 million in incremental amortization expenses related to 3M FSD intangibles.

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NON-GAAP FINANCIAL MEASURES

This report includes certain financial information of Neogen that differs from what is reported in accordance with GAAP. These non-GAAP financial measures consist of EBITDA, Adjusted EBITDA, Adjusted EBITDA margin, adjusted net income and adjusted earnings per share. These non-GAAP financial measures are included in this report because management believes that they provide investors with additional useful information to measure the performance of Neogen, and because these non-GAAP financial measures are frequently used by securities analysts, investors and other interested parties as common performance measures to compare results or estimate valuations across companies in Neogen’s industries.

EBITDA

We define EBITDA as net income before interest, income taxes, and depreciation and amortization. We present EBITDA as a performance measure because it may allow for a comparison of results across periods and results across companies in the industries in which Neogen operates on a consistent basis, by removing the effects on operating performance of (a) capital structure (such as the varying levels of interest expense and interest income), (b) asset base and capital investment cycle (such as depreciation and amortization) and (c) items largely outside the control of management (such as income taxes). EBITDA also forms the basis for the measurement of Adjusted EBITDA (discussed below).

Adjusted EBITDA

We define Adjusted EBITDA as EBITDA, adjusted for share-based compensation and certain transaction fees and expenses. We present Adjusted EBITDA because it provides an understanding of underlying business performance by excluding the following:

•
Share-based compensation. We believe it is useful to exclude share-based compensation to better understand the long-term performance of our core business and to facilitate comparison with the results of peer companies.

•
FX translation gain/(loss) on loan revaluation. We exclude the revaluation impacts of foreign currency fluctuations on our intercompany loan balances.

•
Certain transaction fees and expenses. We exclude fees and expenses related to certain transactions because they are outside of Neogen’s underlying core performance. These fees and expenses include deal related professional and legal fees and foreign currency transactions.

•
Impairment and scrap of discontinued product lines. We exclude expenses associated with impairments and inventory scrap amounts related to certain discontinued product lines.

•
Other one-time adjustments. We exclude one-time adjustments recorded within operating or other (expense) income to better understand the long-term performance of our core business.

Adjusted EBITDA margin

We define Adjusted EBITDA margin as Adjusted EBITDA as a percentage of total revenues. We present Adjusted EBITDA margin as a performance measure to analyze the level of Adjusted EBITDA generated from total revenue.

Adjusted Net Income

We define Adjusted Net Income as Net Income, adjusted for share-based compensation, FX translation gain/(loss) on loan revaluation, certain transaction fees and expenses, impairment and scrap of discontinued product lines and other one-time adjustments, all of which are tax effected.

Adjusted Earnings per Share

We define Adjusted Earnings per Share as Adjusted Net Income divided by diluted average shares outstanding.

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These non-GAAP financial measures are presented for informational purposes only. EBITDA, Adjusted EBITDA, Adjusted EBITDA margin, Adjusted Net Income and Adjusted Earnings per Share are not recognized terms under GAAP and should not be considered in isolation or as a substitute for, or superior to, net income (loss), operating income, cash flow from operating activities or other measures of financial performance. This information does not purport to represent the results Neogen would have achieved had any of the transactions for which an adjustment is made occurred at the beginning of the periods presented or as of the dates indicated. This information is inherently subject to risks and uncertainties. It may not give an accurate or complete picture of Neogen’s financial condition or results of operations for the periods presented and should not be relied upon when making an investment decision.

The use of the terms EBITDA, Adjusted EBITDA, Adjusted EBITDA margin, Adjusted Net Income and Adjusted Earnings per Share may not be comparable to similarly titled measures used by other companies or persons due to potential differences in the method of calculation.

These non-GAAP financial measures have limitations as analytical tools. For example, for EBITDA-based metrics:

•
they do not reflect changes in, or cash requirements for, Neogen’s working capital needs;

•
they do not reflect Neogen’s tax expense or the cash requirements to pay taxes;

•
they do not reflect the historical cash expenditures or future requirements for capital expenditures or contractual commitments;

•
they do not reflect any cash requirements for future replacements of assets that are being depreciated and amortized; and

•
they may be calculated differently from other companies in Neogen’s industries limiting their usefulness as comparative measures.

A reader should compensate for these limitations by relying primarily on the financial statements of Neogen and using these non-GAAP financial measures only as a supplement to evaluate Neogen’s performance.

For each of these non-GAAP financial measures below, we are providing a reconciliation of the differences between the non-GAAP measure and the most directly comparable GAAP measure.

Reconciliation between net income and EBITDA and Adjusted EBITDA is as follows:

(1) Net foreign currency transaction loss (gain) associated with the revaluation of non-functional currency intercompany loans established in connection with FSD transaction.

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(2) Expenses associated with intangible asset impairments and inventory scrap amounts related to certain discontinued product lines.

Adjusted EBITDA increased $90.1 million in fiscal year 2023 compared to fiscal year 2022, primarily due to earnings generated from the 3M FSD business, which combined with Neogen on September 1, 2022. Expressed as a percentage of revenue, adjusted EBITDA was 25.0% in fiscal year 2023 compared to 21.9% in fiscal year 2022. Increases in the margin reflect the higher margin products sold by the 3M FSD business, which was not a part of the Company in the prior fiscal year.

Reconciliation between net income and Adjusted Net Income and earnings per share and Adjusted Earnings per Share are as follows:

(1) Net foreign currency transaction loss (gain) associated with the revaluation of non-functional currency intercompany loans established in connection with the 3M FSD transaction.

(2) Expenses associated with intangible asset impairments and inventory scrap amounts related to certain discontinued product lines.

(3) Income tax benefit associated with non-deductible transaction costs that were recognized as expense in prior periods.

(4) Tax effect of adjustments is calculated using projected effective tax rates for each applicable item.

Adjusted Net Income increased $26.4 million during the twelve months ended May 31, 2023 due to the higher Adjusted EBITDA.

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FUTURE OPERATING RESULTS

Neogen Corporation’s future operating results involve a number of risks and uncertainties. Actual events or results may differ materially from those discussed in this report. Factors that could cause or contribute to such differences include, but are not limited to, the factors discussed below as well as those discussed elsewhere in this report. Management’s ability to grow the business in the future depends upon our ability to successfully implement various strategies, including:

•
developing, manufacturing and marketing new products with new features and capabilities, and having those new products successfully accepted in the marketplace;

•
expanding our markets by fostering increased use of our products by customers;

•
maintaining or increasing gross and net operating margins in changing cost environments;

•
strengthening operations and sales and marketing activities in geographies outside of the U.S.;

•
developing and implementing new technology development strategies; and

•
identifying and completing acquisitions that enhance existing product categories or create new products or services, and successfully integrating completed acquisitions, including the FSD transaction.

FINANCIAL CONDITION AND LIQUIDITY

As of May 31, 2023, the overall cash, cash equivalents and marketable securities position of Neogen was $245.6 million. During the fiscal year ended 2023, cash generated from operating activities was $41.0 million, compared to $68.0 million generated in fiscal 2022. The decrease was primarily the result of 3M FSD transaction costs and the addition of FSD accounts receivable. Cash flow from investing activities was $201.0 million during the fiscal year ended 2023, which was primarily the result of proceeds from the sale of marketable securities of $266.8 million. This was partially offset by purchases of property, equipment and non-current intangible assets of $65.8 million. Cash flow for financing activities was $118.1 million during the fiscal year ended 2023, which was primarily the result of the Company paying down $100 million of the $1 billion in debt taken on to enact the FSD transaction.

Net accounts receivable balances were $153.3 million as of May 31, 2023 compared to $99.7 million as of May 31, 2022. Days’ sales outstanding, a measurement of the time it takes to collect receivables, for the legacy business was 57 days as of May 31, 2023, compared to 62 days as of May 31, 2022. The increase in receivables is primarily attributable to the recording of FSD customer balances, currently managed by 3M as a transition service.

As part of transition services agreements between the Company and 3M, related to the merger of the Food Safety business, 3M is invoicing our customers for products that 3M is manufacturing and shipping on our behalf. As of May 31, 2023, there were $57.3 million in customer receivables billed by 3M on our behalf. The Company is working collaboratively with 3M on managing the credit risk associated with the former FSD customers during the period while 3M is providing transition invoicing and distribution services to the Company.

Net inventory was $133.8 million as of May 31, 2023, an increase of $11.5 million, compared to $122.3 million as of May 31, 2022. The higher inventory levels are primarily the result of ongoing inflationary pressures on raw materials at our legacy businesses and raw material inventories purchased to support the FSD. Supply chain issues have moderated throughout fiscal 2023, and we continue to monitor our key raw materials to ensure adequate stock on hand.

Debt and Liquidity

On September 1, 2022, Neogen, 3M, and Neogen Food Safety Corporation, a subsidiary of 3M created to carve out 3M’s Food Safety business, closed on the Transaction that previously was announced in December 2021, combining 3M’s Food Safety business with Neogen in a Reverse Morris Trust transaction.

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On June 30, 2022, Neogen Food Safety Corporation entered into a credit agreement consisting of a five-year senior secured term loan facility in the amount of $650 million and a five-year senior secured revolving facility in the amount of $150 million (collectively, the “Credit Facilities”), which became available in connection with the merger and related transactions. The loan facility was funded to Neogen Food Safety Corporation on August 31, 2022, and upon the effectiveness of the merger on September 1, 2022, became Neogen’s obligation. Financial covenants include maintaining specified levels of funded debt to EBITDA and debt service coverage. Pricing for the term loan is term SOFR plus 235 basis points. The Credit Facilities, together with the Notes described below, represent the financing incurred in connection with the merger of the 3M FSD with Neogen. In September 2022, we paid down $60 million in principal on the term loan and paid an additional $40 million in principal on the term loan in December 2022, in order to decrease the outstanding debt balance.

On July 20, 2022, Neogen Food Safety Corporation closed on an offering of $350 million aggregate principal amount of 8.625% senior notes due 2030 (the “Notes”) in a private placement at par. The Notes were initially issued by Neogen Food Safety Corporation to 3M and were transferred and delivered by 3M to the selling securityholder in the offering, in satisfaction of certain of 3M’s existing debt. Neogen Food Safety Corporation did not receive any proceeds from the sale of the Notes by the selling securityholder. Prior to the distribution of the shares of Neogen Food Safety Corporation’s common stock to 3M stockholders, the Notes were guaranteed on a senior unsecured basis by 3M. Upon consummation of such distribution, 3M was released from all obligations under its guarantee. Upon the effectiveness of the merger on September 1, 2022, the Notes became guaranteed on a senior unsecured basis by Neogen and certain wholly-owned domestic subsidiaries of Neogen.

In addition to the 3M transaction described above, our future cash generation and borrowing capacity may not be sufficient to meet cash requirements to fund the operating business, repay debt obligations, construct new manufacturing facilities, commercialize products currently under development or execute our future plans to acquire additional businesses, technology and products that fit within our strategic plan. Accordingly, we may be required, or may choose, to issue additional equity securities or enter into other financing arrangements for a portion of our future capital needs. There is no guarantee that we will be successful in issuing additional equity securities or entering into other financing arrangements.

We are subject to certain legal and other proceedings in the normal course of business that have not had, and, in the opinion of management, are not expected to have, a material effect on our results of operations or financial position.

Contractual Obligations As of May 31, 2023, we have the following contractual obligations due by period:

(1)
Purchase obligations are primarily purchase orders for future inventory and capital equipment purchases.

We continue to make investments in our business and operating facilities. Our preliminary estimate for capital expenditures related to our legacy operations in fiscal 2024 is $30 to $40 million. We also expect to spend approximately $120 million over the next two fiscal years to construct a manufacturing facility in Lansing, Michigan to produce a significant portion of the acquired FSD products and to add additional production capacity for projected growth of existing product lines. Additionally, we expect to spend approximately $30 million over the next two fiscal years to implement a new enterprise resource planning solution.

NEW ACCOUNTING PRONOUNCEMENTS

See discussion of any New Accounting Pronouncements in Note 1 to consolidated financial statements.

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form
10-K.

In addition, any forward-looking statements represent management’s views only as of the day this Form
10-K
was first filed with the Securities and Exchange Commission and should not be relied upon as representing management’s views as of any subsequent date. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if our views change.

TRENDS AND UNCERTAINTIES

During fiscal 2022, we experienced higher than expected input cost inflation, including higher transportation, supply chain and labor costs, that negatively impacted operating results. Pricing actions taken during fiscal 2022 mitigated some, but not all, of the inflationary pressures. Ongoing inflation may also have an impact on our customer’s purchasing decisions and order patterns. We estimate inflation will continue to affect us in fiscal 2023, although at this time it is impracticable to quantify the impact.

Although we have no operations in or direct exposure to Russia, Belarus and Ukraine, we have experienced intermittent shortages in materials and increased costs for transportation, energy and raw materials due, in part, to the negative impact of the Russia-Ukraine military conflict on the global economy. To date, our European operations and customer base have not been materially impacted by the conflict, however, as the conflict continues or worsens, it may impact our business, financial condition or results of operations in fiscal 2023.

As we continue to monitor the ongoing
COVID-19
pandemic, our top priority remains protecting the health and safety of our employees, their families, and those in our communities. Safety guidelines and procedures have been developed for
on-site
employees and these policies are regularly monitored and updated by our internal Emergency Response Team.

In fiscal 2022,
COVID-19,
including new strains of the virus such as Delta and Omicron, continued to impact our business operations and financial results. A number of our food safety diagnostic product lines have been negatively impacted due to decreased demand in many of our customers’ businesses around the world, particularly those serving restaurants, bars and other institutional food service markets. Many of our markets across the world are recovering, but the pandemic has continued to adversely impact our customers and ultimately, our revenues. We have also experienced supply chain difficulties including vendor disruptions, border closures, shipping issues and significantly increased shipping costs; labor shortages and higher labor costs, as we have had to use staffing agencies and increase our base pay in many areas of the Company to fill open positions; and restricted travel, which hinders our ability to connect with customers.

Overall, the impact of
COVID-19
remains uncertain and ultimately depends on the length and severity of the pandemic, inclusive of the introduction of new strains of the virus; government actions taken in response; vaccination rates and effectiveness; the impact of vaccination requirements; extent of protection provided by prior viral infection; and the macroeconomic environment. We will continue to evaluate the nature and extent to which
COVID-19
will impact our business, supply chain, including labor availability and attrition, consolidated results of operations, financial condition, and liquidity; we expect it to impact us through at least the end of our fiscal year ending May 31, 2023.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The discussion and analysis of our financial condition and results of operations are based on the consolidated financial statements that have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires that management make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, management evaluates the estimates, including but not limited to, those related to receivable allowances, inventories and intangible assets. These estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Though the impact of the
COVID-19
pandemic to our business and operating results presents additional uncertainty, we continue to use the best information available to inform our critical accounting estimates. Actual results may differ from these estimates under different assumptions or conditions.

The following critical accounting policies reflect management’s more significant judgments and estimates used in the preparation of the consolidated financial statements.

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Income Taxes

We account for income taxes using the asset and liability method. Under this method, deferred income tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and for tax credit carryforwards and are measured using the enacted tax rates in effect for the years in which the differences are expected to reverse. Deferred income tax expense represents the change in net deferred income tax assets and liabilities during the year. The determination of income subject to income tax in each tax paying jurisdiction requires us to apply transfer pricing guidelines for certain intercompany transactions.

Our tax rate is subject to adjustment over the balance of the year due to, among other things, income tax rate changes by governments; the jurisdictions in which our profits are determined to be earned and taxed; changes in the valuation of our deferred tax assets and liabilities; adjustments to our interpretation of transfer pricing standards; changes in available tax credits or other incentives; changes in stock-based compensation expense; changes in tax laws or the interpretation of such tax laws; and changes in U.S. generally accepted accounting principles.

Although we believe our tax estimates are reasonable and we prepare our tax filings in accordance with all applicable tax laws, the final determination with respect to any audit, and any related litigation, could be materially different from our estimates or from our historical income tax provisions and accruals. The results of an audit or litigation could have a material effect on operating results and/or cash flows in the periods for which that determination is made. In addition, future period earnings may be adversely impacted by litigation costs, settlements, penalties, and/or interest assessments.

Our wholly owned foreign subsidiaries are comprised of Neogen Europe, Quat-Chem Ltd, Abbott Analytical Limited, Delf (UK) Limited, Delf-Chem Solutions Limited, Megazyme Ltd, Megazyme IP, Neogen Italia S.r.l., Neogen do Brasil, Rogama Industria e Comercio Ltda, Neogen Latinoamérica, Neogen Guatemala, Neogen Argentina, Neogen Uruguay, Neogen Chile SpA, Neogen
Bio-Scientific
Technology Co (Shanghai), Neogen Food and Animal Security (India), Neogen Canada, Neogen Canada Properties LLC and Neogen Australasia Pty Limited. Based on historical experience, as well as management’s future plans, earnings from these subsidiaries are expected to be
re-invested
indefinitely for future expansion and working capital needs. Furthermore, our domestic operations have historically produced sufficient operating cash flow to mitigate the need to remit foreign earnings. On an annual basis, we evaluate the current business environment and whether any new events or other external changes might require a
re-evaluation
of the decision to indefinitely
re-invest
foreign earnings. It is not practicable to determine the income tax liability that would be payable if such earnings were not reinvested indefinitely.

Business Combinations and Contingent Consideration

We allocate the purchase price of acquired companies to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values. The estimates used to value the net assets acquired are based in part on historical experience and information obtained from management of the acquired company. We generally value the identifiable intangible assets acquired using a discounted cash flow model. The significant estimates used in valuing certain of the intangible assets include, but are not limited to: future expected cash flows of the asset, discount rates to determine the present value of the future cash flows, attrition rates of customers, royalty rates and expected technology life cycles. We also estimate the useful lives of the intangible assets based on the expected period over which we anticipate generating economic benefit from the asset.

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

Certain business combinations involve potential payment of future consideration that is contingent upon the achievement of certain product development milestones and/or contingent on the acquired business reaching certain performance milestones. We record contingent consideration at fair value at the date of acquisition based on the consideration expected to be transferred, estimated as the probability weighted future cash flows, discounted back to present value. The fair value of contingent consideration is measured using projected payment dates, discount rates, probabilities of payment and projected revenues (for revenue-based considerations); various methodologies can be used to determine fair value of contingent consideration, including Monte Carlo simulations, among others. Projected revenues are based on our most recent internal operational budgets and long-range strategic plans. The discount rate used is determined at the time of measurement in accordance with accepted valuation methodologies. Changes in projected revenues, probabilities of payment, discount rates and projected payment dates may result in adjustments to the fair value measurements. Contingent consideration is remeasured each reporting period using Level 3 inputs, and the change in fair value, including accretion for the passage of time, is recognized in other income (expense) in the consolidated statements of income. Contingent consideration payments made soon after the acquisition date are classified as investing activities in the consolidated statements of cash flows. Contingent consideration payments not made soon after the acquisition date that are related to the acquisition date fair value are reported as financing activities in the consolidated statements of cash flows, and amounts paid in excess of the original acquisition date fair value are reported as operating activities in the consolidated statements of cash flows.

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RESULTS OF OPERATIONS

Executive Overview

Neogen’s international revenues were $209.3 million in fiscal 2022, compared to $183.2 million in fiscal 2021, an increase of 14%. Currency translation had a negligible impact on revenues for the full year, with gains in the U.K., Italy, Mexico, Brazil, China, and Canada partially offset by negative impact in Argentina, Chile, India and Australia. In a neutral currency environment, sales would have been $844,000 lower than reported in fiscal 2022.

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Sales results for fiscal 2022 compared to the prior year are as follows for each of our international locations:

The 13% revenue increase at our combined U.K. operations in fiscal 2022 was led by a 25% increase in sales of cleaners and disinfectants, primarily from strong sales in the U.K. and Asia, and new culture media business with commercial laboratories in the U.K. that have adopted our recently launched One Broth One Plate workflow. Revenues in Brazil increased 1% in USD in fiscal 2022 but decreased 2% in local currency; market gains in genomics services in the beef market were offset by lower sales of dairy drug residue test kits, due to competitive pressures.

Neogen Latinoamerica revenues rose by 11% in USD in fiscal 2022, led by growth in natural toxins test kits, environmental sanitation products and culture media. China’s sales were flat, as growth in the first half of the fiscal year was offset by lower sales in the last six months due to lockdowns and restrictions resulting from China’s “Zero COVID” strategy. Sales at Neogen Australasia increased 25% for fiscal 2022, led by new genomics service business in the bovine, sheep and companion animal markets.

Service revenue, which consists primarily of genomics services sales to animal protein and companion animal markets, was $102.5 million in fiscal 2022, an increase of 11% over prior fiscal year sales of $92.2 million. The growth was led by the previously mentioned strength in Australia and Brazil, and was partially offset by lower volumes of domestic companion animal samples, the result of a difficult comparison due to large increases in the prior year.

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REVENUES

Year Ended May 31, 2022 Compared to Year Ended May 31, 2021

Food Safety:

Natural Toxins, Allergens

& Drug Residues –

Sales in this category increased 4% in fiscal 2022, with a 6% increase in sales of natural toxin test kits and a 9% increase in sales of our allergens product line partially offset by a 33% decrease in sales of drug residue test kits, as we are discontinuing sales of certain lower margin products due to competitive market pressure.

Bacterial

& General Sanitation –

Sales in this category increased 7% in fiscal 2022 compared to the prior year. Sales of our AccuPoint
®
sanitation monitoring product line increased 12% aided by strong sales of our new reader. Sales of our Listeria Right Now
™
product increased 25%, while sales of products to detect spoilage organisms in processed foods increased 4%.

Culture Media

& Other –

Sales in this category increased 23% in fiscal 2022 compared to fiscal 2021; excluding sales from the December 2020 acquisition of Megazyme, sales increased 11%. Sales of Neogen Culture Media products rose 16% as our new workflow, One Broth One Plate, continued to drive growth and increased sales to commercial labs in the U.K.; a large
non-recurring
sale to a domestic vaccine manufacturer in the first quarter also contributed to the current year growth.

Rodenticides, Insecticides

& Disinfectants –

Revenues of products in this category sold through our Food Safety operations increased 11% in fiscal 2022 compared to fiscal 2021. Excluding revenues from the November 2020 acquisition of Delf and Abbott Analytical, the growth was 3%. The increase was primarily due to continued strength in sales of cleaners and disinfectants to Asia resulting from the African swine fever outbreak in that region increasing demand, and higher sales to a U.K.-based toll manufacturer.

Genomics Services –

Sales of genomics services sold through our Food Safety operations increased 11% in fiscal 2022 compared to the prior year, primarily due to increased beef business in Brazil and higher sample volumes from a large customer in China.

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Animal Safety:

Life Sciences –

Sales in this category decreased 1% in fiscal 2022 compared to the same period in the prior year, primarily due to the loss of hair testing business with a large U.S. commercial laboratory that moved to a different testing platform.

Veterinary Instruments

& Disposables –

Revenues in this category increased 33% in fiscal 2022 compared to fiscal 2021, led by a large increase in sales of veterinary instruments, including needles and syringes, resulting from recently won private label business.

Animal Care

& Other –

Sales of these products increased 11% in fiscal 2022 compared to fiscal 2021; excluding the contribution of parasiticides from the September 2021 acquisition of CAPInnoVet, revenues in this category rose 6%. Growth in our biologics, small animal supplements and wound care product lines were partially offset by a large decline in sales of dairy supplies due to the June 2020 termination of an agreement under which we distributed these types of products for a large manufacturer of dairy equipment.

Rodenticides, Insecticides

& Disinfectants –

Sales in this category increased 8% in fiscal 2022, compared to the prior year. Insecticide sales increased 32%, led by strong demand in the farm and home channels, and cleaners and disinfectants sales rose 6%. These increases were partially offset by a 4% decline in rodenticide sales due to increased rodent pressure in the prior year, which resulted in a difficult comparison.

Genomics Services –

Sales in this category increased 11% in fiscal 2022 compared to fiscal 2021; excluding the December 2021 acquisition of Genetic Veterinary Sciences, the organic increase was 5%. The growth was led by increases in beef and sheep testing in Australia, due to improved market conditions, and higher sample volumes from domestic dairy and beef cattle and poultry customers. The increase was partially offset by a decline in domestic companion animal revenues due to a difficult comparison from strong prior year sales growth.

Year Ended May 31, 2021 Compared to Year Ended May 31, 2020

Food Safety:

The
COVID-19
pandemic, which began in the second half of fiscal 2020, continued to cause difficult operating conditions in many of our key market segments in fiscal 2021. Shelter in place orders across the U.S. and in most of our international markets, the closure or reduced output of businesses due to quarantine and/or local legislation, disruption in the supply chain resulting from reduction in
end-market
demand and shipping issues, and the inability of some markets to react quickly to these changes, each disrupted our revenues.

Natural Toxins, Allergens

& Drug Residues –

Sales in this category increased 1% in fiscal 2021, with a 6% increase in sales of natural toxin test kits and a 5% increase in our allergens product line partially offset by a 30% decrease in sales of drug residue test kits. Sales of drug residue test kits have continued to decline as we ended an exclusive distributor agreement in Europe and faced competitive pressure and lower demand due to poor economic conditions.

Bacterial

& General Sanitation –

Sales in this category increased 5% in fiscal 2021 compared to the prior year. Sales of products to detect spoilage organisms in processed foods increased 19% in fiscal 2021, resulting from sales of our new instrument (Soleris NG), which launched in the first quarter, and increased consumables sales from new instrument placements. Sales of our AccuPoint sanitation monitoring product line were flat as many customers were shut down or operating at reduced capacity for a portion of the year, resulting in use of less consumables. A next generation reader for this product line was launched late in the fourth quarter; there will be significant sales and marketing focus on this product line in fiscal 2022. Sales of test kits to detect pathogens decreased 2%, as lower sales of ANSR equipment were only partially offset by increases from our

Listeria

Right Now test kit, which grew 21% in fiscal 2021.

Culture Media

& Other –

Sales in this category increased 28% in fiscal 2021 compared to fiscal 2020. Excluding sales from the December 2020 acquisition of Megazyme, sales increased 18%. This category includes sales of acquired inventory of
non-Neogen
manufactured products from our new businesses in Italy and the South American southern cone countries; these sales are not expected to continue long-term. This category also includes sales of veterinary instruments transferred to our U.K. sales team in fiscal 2021. Sales of Neogen Culture Media increased 1% as new business gained in the U.S. from a
COVID-19
vaccine manufacturer offset the loss of some business due to competitor pricing.

Rodenticides, Insecticides

& Disinfectants –

Revenues of products in this category sold through our Food Safety operations increased 12% in fiscal 2021 compared to fiscal 2020, due primarily to continued strength in cleaners and disinfectant sales in China resulting from increased demand due to the African swine fever outbreak in that country and the
COVID-19
pandemic. We also benefitted from strong sales of hand and skin sanitizing products at our U.K.-based Quat-Chem location in the first quarter of this fiscal year.

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Genomics Services –

Sales of genomics services sold through our Food Safety operations increased 12% in fiscal 2021 compared to the prior year, primarily due to higher sales in the Chinese porcine and bovine markets.

Animal Safety:

Life Sciences –

Sales in this category decreased 10% in fiscal 2021 compared to the same period in the prior year, primarily the result of lower forensic drug test kit sales to large commercial labs in the U.S. as the
COVID-19
pandemic created less demand for testing; a reduction in sales of products to the U.S. horse racing industry in the U.S. also contributed to the decline, as racing activity was down.

Veterinary Instruments

& Disposables –

Revenues in this category increased 12% in fiscal 2021 compared to fiscal 2020. Veterinary instruments sales increased 16% for the year, led by increases in detectable needles and syringes as we gained new customers and market share from a key competitor. Partially offsetting this increase was a 9% decline in protective wear sales, as gloves were on backorder for much of the current year due to COVID related demand.

Animal Care

& Other –

Sales of these products increased 26% in fiscal 2021 compared to fiscal 2020; this category includes sales of food safety products sold through our Australian operation, the result of a February 2020 acquisition of a distributor. Excluding these sales, revenues in this category increased 21%. Sales of our small animal supplements, vitamin injectables, and joint pain products benefitted from growth in veterinary markets, as the
COVID-19
pandemic has led to an increase in pet ownership, particularly dogs and cats. Additionally, sales rose for our equine supplements and antibiotics, due to strong demand in these markets. This category also includes sales of our thyroid treatment for dogs, which became available for sale late in the fourth quarter. Partially offsetting these gains was a 49% decline in sales of dairy supplies due to the June 2020 termination of an agreement in which we distributed these products for a large manufacturer of dairy equipment.

Rodenticides, Insecticides

& Disinfectants –

Sales in this category increased 13% in fiscal 2021, compared to the prior year. Rodenticide sales increased 42% as rodent pressure in certain areas of the U.S. increased significantly. Insecticide sales rose 15%, due in part to our acquisition of the StandGuard product line for fly control on July 31, 2020; organic sales in this category increased 7%. Cleaners and disinfectants sales decreased 15% resulting from lower sales of water treatment products and the transfer of a product line to our U.K. operation; additionally, opportunistic sales of sanitizing products in the fourth quarter of the prior year, due to extremely high demand early in the
COVID-19
pandemic, did not continue at those levels in fiscal 2021.

Genomics Services –

Sales in this category increased 14% in fiscal 2021 compared to fiscal 2020. The growth was led by strong increases to the U.S. and Australian companion animal markets, driven by increased pet adoption and higher consumer spending on pets during the
COVID-19
pandemic. Gains in the commercial beef and beef association markets in the U.S., Canada and Australia also contributed to the growth, as well as the recent launch of a new high-density chip for white leg shrimp.

COST OF REVENUES

Cost of revenues increased 12% in fiscal 2022 compared to fiscal 2021 and increased 14% in fiscal 2021 compared to fiscal 2020. This compares with revenue increases of 13% in fiscal 2022 and 12% in fiscal 2021. Expressed as a percentage of sales, cost of revenues was 53.9%, 54.1% and 53.1% in fiscal years 2022, 2021 and 2020, respectively. Gross margins were 46.1%, 45.9%, and 46.9% for fiscal years 2022, 2021, and 2020, respectively.

Fiscal 2022

– Our overall gross margin increased 20 basis points in fiscal 2022, primarily from a product mix shift to higher margin products in the Animal Safety segment. Partially offsetting this were higher raw material and freight costs within each segment, which resulted from continued supply chain disruptions, inflationary pressure, and ongoing issues related to
COVID-19
and its variants across most of our markets. The Company has taken pricing actions where appropriate in response to these cost increases.

Fiscal 2021

– Our overall gross margin declined 100 basis points in fiscal 2021 as pressure on the worldwide supply chain caused by the
COVID-19
pandemic resulted in increased overhead costs; in particular, freight costs on inventory purchases increased 53% in fiscal 2021 compared to the prior year. Additional cost increases resulted from personnel costs, in part from the increased volumes, but also due to labor

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shortages, contracted services primarily related to our recently launched instruments, and higher health insurance costs domestically, as employees and their families utilized elective medical services postponed from the fourth quarter of fiscal 2020 due to
COVID-19.
To a lesser extent, the shift in mix within the Food Safety segment towards products with lower gross margins negatively impacted the consolidated gross margin percentage.

Food Safety Gross Margins:

Food Safety gross margins were 50.2%, 49.2% and 51.4% in fiscal years 2022, 2021 and 2020, respectively.

Fiscal 2022 –

Food Safety margins increased 100 basis points in fiscal 2022, due to a product mix shift within the segment toward higher sales of diagnostic test kits in fiscal 2022; gross margin was also aided by a full year of sales of food quality products and enzymes from the Megazyme acquisition.

Fiscal 2021 –

Food Safety margins decreased 220 basis points in fiscal 2021, primarily due to higher sales of equipment such as the Soleris NG, which was launched in the current year and has lower gross margins than our diagnostic test kits, and cleaners and disinfectants sold through our China location, which reports through the Food Safety segment. We were also negatively impacted by increased freight, labor and other overhead costs throughout the segment.

Animal Safety Gross Margins:

Animal Safety gross margins were 42.1%, 42.6% and 42.3% in fiscal years 2022, 2021 and 2020, respectively.

Fiscal 2022 –

Animal Safety gross margins decreased by 50 basis points in fiscal 2022, primarily due to significant product cost increases and international freight charges. Negative mix effects occurred from lower sales of higher margin rodenticide products and companion animal services.

Fiscal 2021 –

Animal Safety gross margins increased by 30 basis points, primarily from strong sales of higher margin rodenticide and companion animal products and cost efficiencies; somewhat offsetting these gains, gross margin in this segment was negatively impacted by higher freight costs as rates to bring product into inventory rose significantly during the year, from both domestic and international sources.

OPERATING EXPENSES

Overall operating expenses increased by 31% in fiscal 2022 and 9% in fiscal 2021, each compared to the prior year. Legal, consulting and other professional fees totaling $25.6 million were incurred in conjunction with due diligence, negotiation of terms and integration planning for our proposed business combination with 3M’s Food Safety business, which was announced on December 14, 2021. Excluding costs related to the 3M transaction, operating expenses were $158.8 million, an increase of 13% compared to the prior year.

Sales and Marketing:

Sales and marketing expenses increased by 15% in fiscal 2022 compared to fiscal 2021 and increased 5% in fiscal 2021 compared to the prior year. As a percentage of sales, sales and marketing expense was 16.0%, 15.7% and 16.7% in fiscal years 2022, 2021 and 2020, respectively.

Fiscal 2022

– The $11.2 million, or 15%, increase in sales and marketing expenses in fiscal 2022 resulted primarily from increases in employee compensation expenses such as salaries, bonuses, and commissions, and shipping expense, both reflecting the increase in revenues. Travel, meals and entertainment, and tradeshow expense were also higher, with customer-facing activities increasing significantly, the result of the easing of COVID-19 restrictions.

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Fiscal 2021

– The $3.8 million, or 5%, increase in sales and marketing expenses in fiscal 2021 resulted primarily from increases in employee compensation expenses such as salaries, bonuses, and commissions, reflecting the increase in sales for the year, as well as increased headcount as we returned to normal staffing levels. In addition, shipping costs rose in line with revenues, health insurance costs rose as employees and their families resumed receiving medical treatment and procedures which had been deferred in the fourth quarter of the prior fiscal year. Advertising and outside services also increased to support the launch of a number of new products during the year, most notably the Soleris NG and AccuPoint NG readers. Partially offsetting these increases was $3 million in decreased spending for travel and meals and entertainment for the year, the result of travel restrictions and reductions in

face-to-face

sales activities in most of our markets for the majority of the year. Travel and in person customer meetings did begin to pick up in some geographic areas in the second half of fiscal 2021 as
COVID-19
restrictions were eased.

General and Administrative:

General and administrative expenses rose 62% in fiscal 2022 compared to fiscal 2021 and by 15% in fiscal 2021 compared to fiscal 2020. Legal, consulting and other professional fees totaling $25.6 million were incurred in conjunction with due diligence, negotiation of terms and integration planning for our proposed transaction to combine with 3M’s Food Safety business. Excluding costs related to the 3M transaction, general and administrative expenses increased 12% compared to the prior year. As a percentage of sales, general and administrative expense was 15.7% (10.8% excluding 3M transaction costs), 10.9% and 10.6% in fiscal years 2022, 2021 and 2020, respectively.

Fiscal 2022 –

In fiscal 2022, we spent $25.6 million on strategic consulting, legal and other professional fees related to due diligence, negotiation of terms and integration planning for our proposed transaction to combine with 3M’s Food Safety business. Excluding these costs, the increase in general and administrative expense in fiscal 2022 was 12%. Other increases in the current year included compensation related costs due to increased headcount and improved operating performance, incremental amortization expenses
(non-cash)
from recent acquisitions, higher levels of depreciation
(non-cash)
and related software and licensing costs from continued investments in information technology infrastructure and applications.

Fiscal 2021 –

In fiscal 2021, we spent $3.1 million on strategic consulting, legal and other professional fees related to acquisition activity for businesses which we were ultimately not successful in acquiring. Excluding these costs, the increase in general and administrative expense in fiscal 2021 was 8%. Other increases in the current year included compensation increases due to increased headcount, including the addition of a number of senior management positions, incremental amortization expenses
(non-cash)
resulting from recent acquisitions, and higher levels of depreciation
(non-cash)
and related software and licensing costs from continued investments in information technology infrastructure and applications. Increases in this cost category resulting from the Megazyme acquisition totaled $957,000.

Research and Development:

Research and development expenses increased 5% in fiscal 2022 and 10% in fiscal 2021, each compared to the prior year. As a percentage of revenue, these expenses were 3.2% in fiscal year 2022, 3.5% in fiscal year 2021 and 3.5% in fiscal year 2020; we expect to spend between 3% and 4% of total revenue on research and development annually as we continue to make investments in our future growth.

Fiscal 2022 –

The 5% increase in research and development expenses in fiscal 2022 was primarily the result of increased compensation expense, resulting from scheduled annual increases and additional headcount, and increases in contracted services related to new product development. These increases were partially offset by a decrease in external reader development costs; these projects were completed in the prior fiscal year.

Fiscal 2021 –

The 10% increase in research and development expenses in fiscal 2021 was primarily the result of increased compensation expense, resulting from scheduled annual increases and additional headcount from the Megazyme acquisition, project expense relating to new product innovation, spending with outside partners on the new readers launched in this fiscal year, and testing and approval costs for new product development.

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OPERATING INCOME

Operating income decreased 21% in fiscal 2022 compared to fiscal 2021 and increased by 10% in fiscal 2021 compared to fiscal 2020. Excluding the $25.6 million in transaction costs associated with 3M’s Food Safety business, operating income increased 13% in fiscal 2022 compared to the prior year. Expressed as a percentage of revenues, operating income was 11.1% (16.0% excluding 3M transaction costs), 15.8% and 16.1% in fiscal years 2022, 2021 and 2020, respectively. Gross margins rose by $28.0 million, or 13% in fiscal 2022 compared to the prior fiscal year; this was more than offset by a $43.5 million increase in operating expenses (including $25.6 million of 3M transaction costs).

In fiscal 2021, gross margins rose by $18.8 million, or 10%; this increase was partially offset by an increase of $12.1 million, or 9%, in operating expenses, resulting in a $6.6 million, or 10%, increase in operating income compared to fiscal 2020.

OTHER INCOME (EXPENSE)

Other Income (Expense) for the previous three fiscal years consisted of the following:

Interest income decreased by $347,000 in fiscal 2022 compared to fiscal 2021, due to lower interest rates in effect for most of the fiscal year. The loss from foreign currency translations in fiscal years 2022, 2021 and 2020 is the result of the changes in the value of foreign currencies relative to the U.S. dollar in countries in which we operate; the dollar strengthened against most of these currencies in all three years.

In fiscal 2022, we recorded adjustments totaling $220,000 for contingent consideration accruals related to acquisitions completed in prior years. In fiscal 2021, we received proceeds of $309,000 for a property loss settlement and recorded $300,000 of expense resulting from a legal settlement with a vendor. Additionally, adjustments to contingent consideration accruals in fiscal 2021 resulted in $148,000 of income. In fiscal 2020, we took a charge to expense and recorded a reserve of $600,000 to provide for potential fines or penalties resulting from an administrative subpoena issued by the U.S. Treasury Department’s Office of Foreign Asset Control. This was partially offset by a $483,000 gain resulting from a settlement with the Brazilian government related to sales taxes charged over several years, and proceeds received for a property loss settlement.

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PROVISION FOR INCOME TAXES

Income tax expense for fiscal 2022 was $11.9 million, an effective tax rate of 19.8%, compared to income tax expense of $14.4 million in 2021, an effective tax rate of 19.1%. For fiscal 2020, income tax expense of $12.8 million represented an effective tax rate of 17.7%.

Differences from the U. S. statutory rate of 21% to our effective rate are primarily due to provisions in the U.S. Tax Act and the exercise of stock options. Please refer to Note 6 to the consolidated financial statements for more information.

NET INCOME AND INCOME PER SHARE

Net income decreased 21% in fiscal 2022 compared to fiscal 2021, due to $25.6 million of professional fees related to the 3M transaction. Excluding these costs and adjusting the tax rate accordingly, net income would have been $67.9 million, an increase of 12% compared to fiscal 2021.

Net income increased 2% in fiscal 2021 compared to fiscal 2020, primarily due to the $6.7 million increase in operating income. The increase in operating income was partially offset by lower other income and higher tax expense for the year.

NON-GAAP
FINANCIAL MEASURES

This report includes certain financial information of Neogen that differs from what is reported in accordance with GAAP. These
non-GAAP
financial measures consist of EBITDA, Adjusted EBITDA and Adjusted EBITDA margin. These
non-GAAP
financial measures are included in this report because management believes that they provide investors with additional useful information to measure the performance of Neogen, and because these
non-GAAP
financial measures are frequently used by securities analysts, investors and other interested parties as common performance measures to compare results or estimate valuations across companies in Neogen’s industries.

EBITDA

We define EBITDA as net income before interest, income taxes, and depreciation and amortization. We present EBITDA as a performance measure because it may allow for a comparison of results across periods and results across companies in the industries in which Neogen operates on a consistent basis, by removing the effects on operating performance of (a) capital structure (such as the varying levels of interest expense and interest income), (b) asset base and capital investment cycle (such as depreciation and amortization) and (c) items largely outside the control of management (such as income taxes). EBITDA also forms the basis for the measurement of Adjusted EBITDA (discussed below).

Adjusted EBITDA

We define Adjusted EBITDA as EBITDA, adjusted for stock-based compensation and certain transaction fees and expenses. We present EBITDA because it provides an understanding of underlying business performance by excluding the following:

Adjusted EBITDA margin

We define Adjusted EBITDA margin as Adjusted EBITDA as a percentage of total revenues. We present Adjusted EBITDA margin as a performance measure to analyze the level of Adjusted EBITDA generated from total revenue.

These
non-GAAP
financial measures are presented for informational purposes only. EBITDA, Adjusted EBITDA and Adjusted EBITDA margin are not recognized terms under GAAP and should not be considered in isolation or as a substitute for, or superior to, net income (loss), operating income, cash flow from operating activities or other measures of financial performance. This information does not purport to represent the results Neogen would have achieved had any of the transactions for which an adjustment is made occurred at the beginning of the periods presented or as of the dates indicated. This information is inherently subject to risks and uncertainties. It may not give an accurate or complete picture of Neogen’s financial condition or results of operations for the periods presented and should not be relied upon when making an investment decision.

The use of the terms EBITDA, Adjusted EBITDA and Adjusted EBITDA margin may not be comparable to similarly titled measures used by other companies or persons due to potential differences in the method of calculation.

These
non-GAAP
financial measures have limitations as analytical tools. For example, for EBITDA-based metrics:

You should compensate for these limitations by relying primarily on the financial statements of Neogen and using these
non-GAAP
financial measures only as a supplement to evaluate Neogen’s performance.

For each of these
non-GAAP
financial measures below, we are providing a reconciliation of the differences between the
non-GAAP
measure and the most directly comparable GAAP measure.

Reconciliation between net income and EBITDA and Adjusted EBITDA is as follows:

EBITDA, ADJUSTED EBITDA AND ADJUSTED EBITDA MARGIN %

Adjusted EBITDA increased 11% in fiscal 2022 compared to fiscal 2021, due to revenue growth and improved gross margins. Adjusted EBITDA increased 14% in fiscal 2021 compared to fiscal 2020, the result of revenue growth and lower spending on travel and other customer-facing activities.

FUTURE OPERATING RESULTS

Neogen Corporation’s future operating results involve a number of risks and uncertainties. Actual events or results may differ materially from those discussed in this report. Factors that could cause or contribute to such differences include, but are not limited to, the factors discussed below as well as those discussed elsewhere in this report. Management’s ability to grow the business in the future depends upon our ability to successfully implement various strategies, including:

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FINANCIAL CONDITION AND LIQUIDITY

On May 31, 2022, we had $44.5 million in cash and cash equivalents, $336.6 million in marketable securities, and net working capital of $549.0 million. For the year ended May 31, 2022, cash generated from operating activities was $68.0 million, compared to $81.1 million generated in fiscal 2021; proceeds from stock option exercises provided an additional $7.9 million of cash. For the same period, additions to property, equipment and other
non-current
assets were $24.4 million and business acquisitions used cash of $38.7 million. We have a financing agreement with a bank providing for an unsecured revolving line of credit of $15.0 million, which expires on November 30, 2023. Upon close of the 3M Food Safety transaction, this credit facility will terminate and be replaced with a larger, revolving facility. There were no advances against this line of credit during fiscal years 2022, 2021 and 2020, and no balance outstanding at May 31, 2022 and 2021.

Net accounts receivable at May 31, 2022 were $99.7 million, compared to $91.8 million at May 31, 2021; the increase is primarily due to the increased sales in the fourth quarter of fiscal 2022 compared to the corresponding period a year ago. Our days sales outstanding, a measurement of the time it takes to collect receivables, improved to 62 days at May 31, 2022 compared to 66 days at May 31, 2021.

Inventory balances were $122.3 million at May 31, 2022, an increase of $21.6 million, or 21%, compared to $100.7 million at May 31, 2021, In addition to adding $1.7 million of acquired inventory in fiscal 2022, we also increased ordering quantities and inventory levels to overcome supply chain constraints and minimize delays to customers.

On December 13, 2021, Neogen, 3M, and Garden Spinco, a newly formed subsidiary of 3M created to carve out 3M’s Food Safety business announced that they had entered into a definitive agreement pursuant to which 3M would separate its Food Safety business and simultaneously combine it with Neogen in a Reverse Morris Trust transaction, which is intended to be tax-efficient to 3M and its shareholders for U.S. federal income tax purposes. Under the terms of the definitive agreements, at the completion of the transaction, Neogen will issue a number of shares to 3M shareholders such that 3M shareholders will receive approximately 50.1% of the combined company and existing Neogen shareholders will continue to own approximately 49.9% of the combined company. In connection with the transaction, 3M will also receive consideration valued at approximately $1 billion, subject to closing and other adjustments. The transaction is expected to close by the end of the third quarter calendar year 2022, subject to approval by Neogen shareholders and the satisfaction of other customary closing conditions.

On June 30, 2022, Garden Spinco entered into a credit agreement consisting of a five-year senior secured term loan facility in the amount of $650.0 million and a five-year senior secured revolving facility in the amount of $150.0 million (collectively, the “Credit Facilities”), which, subject to customary closing conditions, will be available in connection with the merger and related transactions. The Credit Facilities, together with the Notes below, when incurred, represent the financing contemplated in connection with the merger.

In July 2022 Garden SpinCo closed on an offering of $350.0 million aggregate principal amount of 8.625% senior notes due 2030 (the “Notes”) in a private placement at par. The Notes were initially issued by Garden SpinCo to 3M and were transferred and delivered by 3M to the selling securityholder in the offering, in satisfaction of certain of 3M’s existing debt. Garden SpinCo did not receive any proceeds from the sale of the Notes by the selling securityholder. Prior to the distribution of the shares of Garden SpinCo’s common stock to 3M stockholders, the Notes will be guaranteed on a senior unsecured basis by 3M. Upon consummation of such distribution, 3M will be released from all obligations under its guarantee. Upon the effectiveness of the merger, the Notes will be guaranteed on a senior unsecured basis by Neogen and certain wholly-owned domestic subsidiaries of Neogen.

In addition to the 3M transaction described above, our future cash on hand and borrowing capacity may not be sufficient to meet cash requirements to commercialize products currently under development or execute our future plans to acquire additional businesses, technology and products that fit within our strategic plan. Accordingly, we may be required, or may choose, to issue additional equity securities or enter into other financing arrangements for a portion of our future capital needs.

We are subject to certain legal and other proceedings in the normal course of business that have not had, and, in the opinion of management, are not expected to have, a material effect on our results of operations or financial position.

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CONTRACTUAL OBLIGATIONS

As of May 31, 2022, we have the following contractual obligations due by period:

We continue to make investments in our business and operating facilities. Our preliminary estimate for capital expenditures related to our existing operations in fiscal 2023 is $20 to $25 million; we also expect to spend approximately $70 million over the next two fiscal years to construct a manufacturing facility and $50 million over the next two fiscal years to implement a new enterprise resource planning solution. In conjunction with our planned transaction with 3M’s food safety business, we will spend an additional $3 to $5 million on capital leases and capital improvements on leased facilities in fiscal 2023.

NEW ACCOUNTING PRONOUNCEMENTS

See discussion of any New Accounting Pronouncements in Note 1 to consolidated financial statements.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form
10-K.

In addition, any forward-looking statements represent management’s views only as of the day this Form
10-K
was first filed with the Securities and Exchange Commission and should not be relied upon as representing management’s views as of any subsequent date. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if our views change.

COVID-19

As we closely monitor the
COVID-19
pandemic, our top priority remains protecting the health and safety of our employees, their families, and those in our communities. While essential operations continue in our locations around the world, many of our
non-manufacturing
employees continue to work remotely and travel remains limited. Safety guidelines and procedures, including social distancing and enhanced cleaning, have been developed for
on-site
employees and these policies are regularly monitored and updated by our internal Emergency Response Team.

In fiscal 2021, the
COVID-19
pandemic continued to impact our business operations and financial results. There has been a positive impact in sales of our biosecurity product lines, as the pandemic has created increased demand for these products, and sales into companion animal markets have benefitted, as remote work and stay at home orders have driven increased pet ownership. A number of our food safety diagnostic product lines have been negatively impacted due to decreased demand in many of our customers’ businesses, particularly those serving restaurants, bars and other institutional food service markets; supply chain difficulties including vendor disruptions, border closures and shipping issues; and restricted travel, which hinders our ability to connect with customers. During the current fiscal year, we have incurred less expense for travel, meals, trade shows and some other customer-facing marketing activities; higher spend on shipping, cleaning activities and personal protective equipment has somewhat offset these savings. We expect the
COVID-19
pandemic will continue to impact our business operations and financial results through the majority of our 2022 fiscal year.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The discussion and analysis of our financial condition and results of operations are based on the consolidated financial statements that have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires that management make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, management evaluates the estimates, including but not limited to, those related to receivable allowances, inventories and intangible assets. These estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Though the impact of the
COVID-19
pandemic to our business and operating results presents additional uncertainty, we continue to use the best information available to inform our critical accounting estimates. Actual results may differ from these estimates under different assumptions or conditions.

The following critical accounting policy reflects management’s more significant judgments and estimates used in the preparation of the consolidated financial statements.

Income Taxes

We account for income taxes using the asset and liability method. Under this method, deferred income tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and for tax credit carryforwards and are measured using the enacted tax rates in effect for the years in which the differences are expected to reverse. Deferred income tax expense represents the change in net deferred income tax assets and liabilities during the year. The determination of income subject to income tax in each tax paying jurisdiction requires us to apply transfer pricing guidelines for certain intercompany transactions.

Our tax rate is subject to adjustment over the balance of the year due to, among other things, income tax rate changes by governments; the jurisdictions in which our profits are determined to be earned and taxed; changes in the valuation of our deferred tax assets and liabilities; adjustments to our interpretation of transfer pricing standards; changes in available tax credits or other incentives; changes in stock-based compensation expense; changes in tax laws or the interpretation of such tax laws; and changes in U.S. generally accepted accounting principles.

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Although we believe our tax estimates are reasonable and we prepare our tax filings in accordance with all applicable tax laws, the final determination with respect to any audit, and any related litigation, could be materially different from our estimates or from our historical income tax provisions and accruals. The results of an audit or litigation could have a material effect on operating results and/or cash flows in the periods for which that determination is made. In addition, future period earnings may be adversely impacted by litigation costs, settlements, penalties, and/or interest assessments.

Our wholly owned foreign subsidiaries are comprised of Neogen Europe, Quat-Chem Ltd, Megazyme Ltd, Megazyme IP, Neogen Italia S.r.l., Neogen do Brasil, Rogama Industria e Comercio Ltda, Neogen Latinoamérica, Neogen Argentina, Neogen Uruguay, Neogen Chile SpA, Neogen
Bio-Scientific
Technology Co (Shanghai), Neogen Food and Animal Security (India), Neogen Canada and Neogen Australasia Pty Limited. Based on historical experience, as well as management’s future plans, earnings from these subsidiaries are expected to be
re-invested
indefinitely for future expansion and working capital needs. Furthermore, our domestic operations have historically produced sufficient operating cash flow to mitigate the need to remit foreign earnings. On an annual basis, we evaluate the current business environment and whether any new events or other external changes might require a
re-evaluation
of the decision to indefinitely
re-invest
foreign earnings. It is not practicable to determine the income tax liability that would be payable if such earnings were not reinvested indefinitely.

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RESULTS OF OPERATIONS

Executive Overview

Neogen’s international revenues were $183.2 million in fiscal 2021, compared to $164.7 million in fiscal 2020. Currency translation had a negligible impact on revenues for the full year, with gains in the U.K., Italy, China, Australia and Canada almost entirely offset by negative impact in Brazil, Mexico and Argentina. In a neutral currency environment, sales would have been $3.4 million higher than reported in the first nine months of fiscal 2021. However, the Brazilian real and Mexican peso strengthened significantly in the fourth quarter, resulting in an overall positive effect of approximately $3.3 million from currency translations; the full year impact from currency translations was minimal.

Sales results for fiscal 2021 compared to the prior year are as follows for each of our international locations:

The revenue increase in U.S. dollars at Neogen Europe was led by a 22% increase in sales of disinfectant and veterinary products, primarily due to
COVID-19
related sales of hand sanitizer and disinfectant in the U.K. in the first quarter and strong cleaner and disinfectant sales throughout the entire year to Asia to mitigate the impact of African Swine Fever. Partially offsetting this growth were lower sales of diagnostic test kits due to
COVID-19
shutdowns; additionally, a large portion of sales into European Union countries from January through May were sold through our Neogen Italia subsidiary as Brexit created export issues from the U.K.

Revenues in Brazil decreased 8% in USD in fiscal 2021 but increased 15% in local currency, as the Brazilian real devalued significantly against the U.S. dollar during the year. In local currency, sales of our diagnostic test kits increased 10%, genomics revenues increased 19%, due to new business in the beef market, and insecticides revenues grew 22%, partially the result of a large tender sale. Neogen Latinoamerica grew revenues by 9% in USD, with growth in biosecurity products, veterinary instruments and diagnostic test kits. China’s sales approximately doubled, from growth in biosecurity products and genomics services. Neogen Australasia benefitted from the February 2020 acquisition of a food safety distributor; organic sales increased 59% at this location in fiscal 2021, from strength in genomics services for the companion animal and bovine markets and increased market share of food safety diagnostic test kits.

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Service revenue, which consists primarily of genomics services sales to animal protein and companion animal markets, was $92.2 million in fiscal 2021, an increase of 12% over prior fiscal year sales of $82.6 million. The growth was led by increases in sample volumes from the global companion animal and commercial beef markets and the Chinese porcine market, as that country has begun recovery from its African swine fever outbreak.

REVENUES

Year Ended May 31, 2021 Compared to Year Ended May 31, 2020

Food Safety:

The
COVID-19
pandemic, which began in the second half of fiscal 2020, continued to cause difficult operating conditions in many of our key market segments in fiscal 2021. Shelter in place orders across the U.S. and in most of our international markets, the closure or reduced output of businesses due to quarantine and/or local legislation, disruption in the supply chain resulting from reduction in
end-market
demand and shipping issues, and the inability of some markets to react quickly to these changes, each disrupted our revenues.

Natural Toxins, Allergens

& Drug Residues –

Sales in this category increased 1% in fiscal 2021, with a 6% increase in sales of natural toxin test kits and a 5% increase in our allergens product line partially offset by a 30% decrease in sales of drug residue test kits. Sales of drug residue test kits have continued to decline as we ended an exclusive distributor agreement in Europe and faced competitive pressure and lower demand due to poor economic conditions.

Bacterial

& General Sanitation –

Sales in this category increased 5% in fiscal 2021 compared to the prior year. Sales of products to detect spoilage organisms in processed foods increased 19% in fiscal 2021, resulting from sales of our new instrument (Soleris NG), which launched in the first quarter, and increased consumables sales from new instrument placements. Sales of our AccuPoint sanitation monitoring product line were flat as many customers were shut down or operating at reduced capacity for a portion of the year, resulting in use of less consumables. A next generation reader for this product line was launched late in the fourth quarter; there will be significant sales and marketing focus on this product line in fiscal 2022. Sales of test kits to detect pathogens decreased 2%, as lower sales of ANSR equipment were only partially offset by increases from our

Listeria

Right Now test kit, which grew 21% in fiscal 2021.

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Culture Media

& Other –

Sales in this category increased 19% in fiscal 2021 compared to fiscal 2020. Excluding sales from the December 2020 acquisition of Megazyme, sales increased 8%. This category includes sales of acquired inventory of
non-Neogen
manufactured products from our new businesses in Italy and the South American southern cone countries; these sales are not expected to continue long-term. Sales of Neogen Culture Media increased 1% as new business gained in the U.S. from a
COVID-19
vaccine manufacturer offset the loss of some business due to competitor pricing.

Rodenticides, Insecticides

& Disinfectants –

Revenues of products in this category sold through our Food Safety operations increased 26% in fiscal 2021 compared to fiscal 2020, due primarily to continued strength in cleaners and disinfectant sales in China resulting from increased demand due to the African swine fever outbreak in that country and the
COVID-19
pandemic. We also benefitted from strong sales of hand and skin sanitizing products at our U.K.-based Quat-Chem location in the first quarter of this fiscal year.

Genomics Services –

Sales of genomics services sold through our Food Safety operations increased 12% in fiscal 2021 compared to the prior year, primarily due to higher sales in the Chinese porcine and bovine markets.

Animal Safety:

Life Sciences –

Sales in this category decreased 10% in fiscal 2021 compared to the same period in the prior year, primarily the result of lower forensic drug test kit sales to large commercial labs in the U.S. as the
COVID-19
pandemic created less demand for testing; a reduction in sales of products to the U.S. horse racing industry in the U.S. also contributed to the decline, as racing activity was down.

Veterinary Instruments

& Disposables –

Revenues in this category increased 12% in fiscal 2021 compared to fiscal 2020. Veterinary instruments sales increased 16% for the year, led by increases in detectable needles and syringes as we gained new customers and benefitted from increased demand resulting from higher numbers of production animals in existing markets. Partially offsetting this increase was a 9% decline in protective wear sales, as gloves were on backorder for much of the current year due to COVID related demand.

Animal Care

& Other –

Sales of these products increased 26% in fiscal 2021 compared to fiscal 2020; this category includes sales of food safety products sold through our Australian operation, the result of a February 2020 acquisition of a distributor. Excluding these sales, revenues in this category increased 21%. Sales of our small animal supplements, vitamin injectables, and joint pain products benefitted from growth in veterinary markets, as the
COVID-19
pandemic has led to an increase in pet ownership, particularly dogs and cats. Additionally, sales rose for our equine supplements and antibiotics, due to strong demand in these markets. This category also includes sales of our thyroid treatment for dogs, which became available for sale late in the fourth quarter. Partially offsetting these gains was a 49% decline in sales of dairy supplies due to the June 2020 termination of an agreement in which we distributed these products for a large manufacturer of dairy equipment.

Rodenticides, Insecticides

& Disinfectants –

Sales in this category increased 13% in fiscal 2021, compared to the prior year. Rodenticide sales increased 42% as rodent pressure in certain areas of the U.S. increased significantly. Insecticide sales rose 15%, due in part to our acquisition of the StandGuard product line for fly control on July 31, 2020; organic sales in this category increased 7%. Cleaners and disinfectants sales decreased 15% resulting from lower sales of water treatment products and the transfer of a product line to our U.K. operation; additionally, opportunistic sales of sanitizing products in the fourth quarter of the prior year, due to extremely high demand early in the
COVID-19
pandemic, did not continue at those levels in fiscal 2021.

Genomics Services –

Sales in this category increased 14% in fiscal 2021 compared to fiscal 2020. The growth was led by strong increases to the U.S. and Australian companion animal markets, driven by increased pet adoption and higher consumer spending on pets during the
COVID-19
pandemic. Gains in the commercial beef and beef association markets in the U.S., Canada and Australia also contributed to the growth, as well as the recent launch of a new high-density chip for white leg shrimp.

Year Ended May 31, 2020 Compared to Year Ended May 31, 2019

Food Safety:

The
COVID-19
pandemic in the second half of fiscal 2020 resulted in difficult operating conditions in many of our key market segments. Shelter in place orders across the U.S. and in a number of our international markets, the closure or reduced output of businesses due to quarantine, disruption in the supply chain resulting from reduction in
end-market
demand, and the inability of some markets to react quickly to these changes, each adversely impacted our revenues.

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Natural Toxins, Allergens

& Drug Residues –

Sales in this category were 3% lower in fiscal 2020 compared to the prior year, driven by a 30% decline in sales of drug residues test kits, due to lower demand from a large distributor in Europe. In January 2020, we ended our exclusive relationship with this distributor and have begun marketing these products directly into the European market. Partially offsetting the decrease in drug residue testing, the natural toxins and allergens product lines each increased 4% for the year. The natural toxin increase was due to continued new business earned in Brazil for aflatoxin and DON test kits, partially offset by lower sales of DON test kits in the U.S. and France, the result of mild outbreaks in the prior year which did not recur in fiscal 2020. The allergen test kit increase was primarily the result of strong gliadin, milk and coconut allergen test kit sales in the U.S. market, although fourth quarter sales declined 7% due to lower business with customers supplying restaurants and other food service organizations, which were adversely impacted by
COVID-19.

Bacterial

& General Sanitation –

Sales in this category were essentially flat in fiscal 2020 compared to the prior year. Sales of test kits to detect pathogens decreased 2%, as lower sales of ANSR equipment were only partially offset by increases from our

Listeria

Right Now test kit, which grew 24% in fiscal 2020. Sales of our AccuPoint sanitation monitoring product line increased 6%, on increases in both readers and samplers. Sales of products to detect spoilage organisms in foods decreased 7% in fiscal 2020 on reduced sales of readers and consumable vials during the year, resulting from lower market demand and customer losses.

Culture Media

& Other –

Sales in this category decreased 4% in fiscal 2020 compared to fiscal 2019. This category includes forensic drug test kits sold within Brazil, which declined significantly as a large commercial lab customer in that country moved to an alternative new technology which provided higher throughput. Culture media revenues declined 5%, due to lower end market demand from several large customers in the U.S. Higher shipping revenues, which rose 12% for the year, and lower rebates offered to certain customers, both of which are reported in this category, partially offset the lower forensic and culture media revenues.

Rodenticides, Insecticides

& Disinfectants –

Revenues of products in this category sold through our Food Safety operations increased 13% in fiscal 2020 compared to fiscal 2019. This category was led by increases in sales of cleaners and disinfectants to customers in Europe, the Middle East and China, partially offset by a decrease in sales of rodenticides in Central America due to lower demand from a large distributor, and reduced demand of cleaners and disinfectants in India, due to a large order in 2019 which did not recur in fiscal 2020.

Genomics Services –

Sales of genomics services sold through our Food Safety operations increased 2% in fiscal 2020 compared to the prior year, primarily due to higher sales in the European bovine and equine markets. Partially offsetting this increase were lower revenues from our genomics operation in Brazil due to a research project with the Brazilian government from 2019 which did not recur in fiscal 2020.

Animal Safety:

A significant proportion of the Animal Safety products are marketed and sold through our veterinary distributor network; this channel was impacted in both fiscal years 2019 and 2020, as difficult market conditions resulting from increased tariffs and political uncertainties in our agricultural and animal protein markets continued. The
COVID-19
pandemic in the second half of fiscal 2020 has exacerbated these market conditions; further, the market uncertainty resulting from
COVID-19
has caused our larger distributor partners to implement working capital improvement programs by lowering inventory levels which resulted in lower sales of many products in our animal health portfolio. Partially offsetting this weakness in the fourth quarter were higher sales of several of our cleaning and disinfecting products due to demand caused by the
COVID-19
pandemic.

Life Sciences –

Sales in this category decreased 20% in fiscal 2020 compared to the same period in the prior year, the result of lower forensic drug test kit sales to a large commercial lab in the U.S. serving the Brazilian market, a reduction in sales of products to the U.S. horse racing industry in the U.S. due to a decline in domestic racing activity, and the consolidation of several state laboratories.

Veterinary Instruments

& Disposables –

Revenues in this category decreased 4% in fiscal 2020 compared to fiscal 2019. Veterinary instruments sales were down 7% for the year, primarily the result of a 20% decline in needles and 3% decline in syringes, due to lower demand from our largest distributors. Partially offsetting these decreases, protective wear and consumables increased 24% for the year, on the strength of a $956,000 increase in gloves in the fourth quarter of fiscal 2020, the result of demand caused by the
COVID-19
pandemic.

Animal Care

& Other –

Sales of these products decreased 5% in fiscal 2020 compared to fiscal 2019. Antibiotics and injectable vitamin products were down 20% and 15%, respectively, due primarily to inventory destocking at distributors. Sales of our biologics product line, marketed primarily into the equine market, declined 17%, and our equine supplements were also down 20%, due to lower demand from end customers in this market. Sales of wound care products rose 9% to partially offset these losses.

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Rodenticides, Insecticides

& Disinfectants –

Sales in this category increased 4% in fiscal 2020, compared to the prior year. The increase was due primarily to a $2.6 million increase in sales of cleaners and disinfectants for the year, driven in large part by growth in hand sanitizers, disinfectants, and disinfecting wipes in the fourth quarter resulting from the
COVID-19
pandemic. Revenues for water disinfection in animal protein production environments rose 8% over fiscal 2019. Rodenticide sales increased 1% over the prior year, as strong growth in the retail market was almost entirely offset by lower sales to agricultural markets in the northwest U.S., due to lower rodent pressure. Insecticide revenues declined 2% for the year.

Genomics Services –

Sales in this category increased 14% in fiscal 2020, aided by the acquisition of Livestock Genetics (September 2018) and Delta Genomics (January 2019); organic growth in this category was 12%. Strong growth in the companion animal and commercial beef cattle markets was partially offset by revenue decreases in the U.S. commercial dairy market due to weak economic conditions in that market, resulting from a movement away from dairy milk towards alternative products.

COST OF REVENUES