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Item 5. Market for Registrant’s Common Equity

2024-07-30 compared with 2023-08-15 · 11 added, 385 removed, 5 unchanged (99% of the section changed)

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

3 unchanged sentences

Neogen has never paid cash dividends on its Common Stock and does not expect to pay dividends in the foreseeable future.

Securities Authorized for Issuance under Equity Compensation Plans

The information regarding our securities authorized for issuance under equity compensation plans is incorporated by reference from our Proxy Statement.

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.

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.

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.

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.

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

(in thousands, except earnings per share)

Revenues, net

Core Sales Growth

Revenues, net

Core Sales Growth

Animal Safety

Revenues, net

Core Sales Growth

% of International Sales

Effective Tax Rate

Earnings per Diluted Share

Cash from Operations

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%.

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:

Local Currency

Operations (including Neogen Italia)

Brazil Operations

Neogen Latinoamerica

Neogen Argentina

Neogen Uruguay

Neogen Canada

Neogen Australasia

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.

(dollars in thousands)

Natural Toxins, Allergens & Drug Residues

Bacterial & General Sanitation

Culture Media & Other

Rodent Control, Insect Control & Disinfectants

Genomics Services

Animal Safety:

Life Sciences

Veterinary Instruments & Disposables

Animal Care & Other

Rodent Control, Insect Control & Disinfectants

Genomics Services

Total Revenue, net

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

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.

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

(dollars in thousands)

Sales and Marketing

General and Administrative

Research and Development

Total Operating Expense

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.

OTHER (EXPENSE) INCOME

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

(dollars in thousands)

Interest income

Interest expense

Foreign currency transactions

Loss on sale of minority interest

Loss on investment

Contingent consideration adjustments

Total Other Income

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.

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.

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.

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;

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:

Year ended May 31

(in thousands)

Net (Loss) Income

Net income margin %

Provision for income taxes

Depreciation and amortization

Interest expense (income), net

Share-based compensation

FX transaction loss (gain) on loan revaluation (1)

Certain transaction fees and integration costs

Contingent consideration adjustments

Restructuring

Loss on sale of minority interest

Loss on investment

Impairment and scrap of discontinued product lines (2)

Inventory step-up charge

Adjusted EBITDA

Adjusted EBITDA margin %

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

(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:

Year ended May 31

(in thousands, except earnings per share)

Net Income (Loss)

Earnings per diluted share

Amortization of acquisition-related intangibles

Share-based compensation

FX transaction loss (gain) on loan revaluation (1)

Certain transaction fees and integration costs

Contingent consideration adjustments

Restructuring

Loss on sale of minority interest

Loss on investment

Impairment and scrap of discontinued product lines (2)

Inventory step-up charge

Other adjustments (3)

Estimated tax effect of above adjustments (4)

Adjusted Net Income

Adjusted Earnings per Share

(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.

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;

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.

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.

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:

(dollars in thousands)

Long-Term Debt

Interest obligations

Operating Leases

Purchase Obligations (1)

(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.

Issuer Purchases of Equity Securities

The following is a summary of share repurchase activity during the fiscal quarter ended May 31, 2024:

(a) Shares Purchased

(b) Average Price Paid per Share

(d) Maximum Number of Shares That May Yet Be Purchased Under the Plans or Programs

In October 2018, the Company’s Board of Directors authorized a program to purchase, subject to market conditions, up to 6,000,000 shares of the Company’s common stock.

The program does not have any scheduled expiration date.

The Company did not repurchase any shares pursuant to this repurchase program during the fourth quarter of fiscal 2024.

As of May 31, 2024, a total of 5,900,000 shares of common stock remained available for repurchase under this program.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 5. Market for Registrant’s Common Equity