What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-09-30 compared with 2021-03-31 · 134 added, 197 removed, 67 unchanged (83% of the section changed)

7 unchanged sentences

Without limiting the foregoing, the words “believes,” “anticipates,” “plans,” “expects,” “seeks,” “estimates,” and similar expressions are intended to identify forward-looking statements.

There are a number of important factors, including competition, recruitment and dependence on key employees, impact of weather on agriculture and food production, identification and integration of acquisitions, research and development risks, patent and trade secret protection, government regulation, widespread outbreak of an illness, including the COVID-19

pandemic, and other risks detailed from time to time in the Company’s reports on file at the Securities and Exchange Commission, that could cause Neogen Corporation’s results to differ materially from those indicated by such forward-looking statements, including those detailed in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

There are a number of important factors, including competition, recruitment and dependence on key employees, impact of weather on agriculture and food production, effects of the ongoing COVID-19

pandemic on our business, identification and integration of acquisitions, research and development risks, patent and trade secret protection, government regulation and other risks detailed from time to time in the Company’s reports on file at the Securities and Exchange Commission, that could cause Neogen Corporation’s results to differ materially from those indicated by such forward-looking statements, including those detailed in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

In addition, any forward-looking statements represent management’s views only as of the day this Quarterly Report on Form 10-Q

1 unchanged sentence

While management may elect to update forward-looking statements at some point in the future, it specifically disclaims any obligation to do so, even if its views change.

As we closely monitor the COVID-19

As we continue to closely monitor the COVID-19

pandemic, our top priority remains protecting the health and safety of our employees.

While essential operations continue in our locations around the world, the majority of our non-manufacturing

employees continue to work remotely and travel remains restricted.

While operations continue in our locations around the world, many of our non-manufacturing

employees continue to work remotely and, although it is starting to increase, business travel remains limited.

Safety guidelines and procedures, including social distancing and enhanced cleaning, have been developed for on-site

employees and these policies are regularly monitored and updated by our internal Emergency Response Team.

In the third quarter of fiscal 2021, the COVID-19

In the first quarter of fiscal 2022, the COVID-19

pandemic continued to impact our business operations and financial results.

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

A number of our food safety diagnostic product lines have been negatively impacted due to decreased demand in many of our customers’ businesses, particularly those serving restaurants, bars and other institutional food service markets;

supply chain difficulties including vendor disruptions, border closures and shipping issues;

A number of our food safety diagnostic product lines have been negatively impacted due to decreased demand in many of our customers’ businesses around the world, particularly those serving restaurants, bars and other institutional food service markets.

A number of our markets across the world are recovering, but the pandemic has continued to adversely impact our customers and, ultimately, our revenues.

We have also experienced supply chain difficulties including vendor disruptions, border closures, shipping issues and significantly increased shipping costs;

labor shortages and higher labor costs, as we have had to use staffing agencies and increase our base pay in many areas of the company to fill open positions;

and restricted travel, which hinders our ability to connect with customers.

During the current fiscal year, we have incurred less expense for travel, meals, trade shows and some other customer-facing marketing activities;

higher spend on shipping and personal protective equipment has somewhat offset these savings.

some of these activities have resumed but have not yet returned to pre-pandemic

Higher spend on shipping and labor are offsetting these savings.

We expect the COVID-19

pandemic will continue to impact our business operations and financial results through at least

the end of our current fiscal year.

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

Executive Overview

Consolidated revenues were $116.7 million in the third quarter of fiscal 2021, an increase of 17% compared to $99.9 million in the third quarter of fiscal 2020.

Organic sales growth in the third quarter of fiscal 2021 was 13%.

For the nine month period, consolidated revenues were $341.0 million, an increase of 10% compared to $309.1 million in the same period in the prior fiscal year.

On a year to date basis, organic sales rose 8%.

Food Safety segment sales were $58.4 million in the third quarter of fiscal 2021, an increase of 16% compared to $50.5 million in the same period a year ago.

Organic sales in this segment increased 11% for the comparative period, with revenues from the acquisitions of Neogen Italia (January 2020), Neogen Argentina (January 2020), Neogen Uruguay (January 2020), Abtek (January 2020), Neogen Chile (March 2020) and Megazyme (December 2020) providing the remainder of the increase in revenues for the segment.

For the year to date, Food Safety segment sales were $170.1 million, an increase of 7% compared to $158.4 million in the same period of the prior fiscal year;

the organic sales increase was 4% for the comparative period, with the acquisitions listed above providing the additional contributions to revenue.

Animal Safety segment sales were $58.3 million in the third quarter of fiscal 2021, an increase of 18% compared to $49.4 million in the third quarter of fiscal 2020.

Organic sales in this segment rose 16% in the third quarter, with additional contribution from the August 2020 acquisition of the StandGuard product line.

For the nine month period, Animal Safety segment sales were $170.9 million, an increase of 13% compared to $150.7 million in the same period a year ago.

Year to date organic sales rose 12%, with revenues from the StandGuard acquisition contributing the difference.

International sales in the third quarter of fiscal 2021 were 40% of total sales compared to 40% of total sales in the third quarter of fiscal 2020.

For the year to date, fiscal 2021 international sales were 39% of total sales compared to 40% of total sales in the same period of the prior year.

Our effective tax rate in the third quarter was 16.3% compared to an effective tax rate of 14.4% in the prior year third quarter;

the fiscal 2021 year to date effective tax rate was 18.1% compared to 15.6% for the same period a year ago.

Net income for the quarter ended February 28, 2021 was $13.4 million, or $0.25 per diluted share, compared to $12.2 million, or $0.23 per diluted share in the same period in the prior year.

For the year to date, net income was $45.1 million, an increase of 5% compared to prior year to date net income of $43.1 million.

Earnings per fully diluted share for the year to date was $0.85 compared to $0.82 per diluted share for the same period in the prior year.

Cash provided from operating activities in the first nine months of fiscal 2021 was $57.9 million, compared to $60.3 million in the same period of fiscal 2020.

International sales were $46.3 million in the third quarter of fiscal 2021, an increase of 15% compared to the same period a year ago;

for the year to date, international sales were $133.5 million, an increase of 9% compared to the same period in the prior year.

For the current quarter, strength in genomics services and biosecurity products in China and genomics services in Australia drove the increase, slightly offset by a net negative currency impact of approximately $150,000.

The rate of growth in our international revenues in the current fiscal year to date has been adversely impacted by currency devaluations in a number of the countries in which we operate and lower sales of our drug residue test kits by our largest European distributor.

Revenue changes, denominated in both the U.S.

dollar and as reported in the local currency, for the three and nine month periods of fiscal 2021 compared to the same respective periods in the prior year are as follows for each of our international locations:

Three Months Ended

Nine Months Ended

February 28, 2021,

Local Currency

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

Organic sales increased 14%.

Food Safety segment sales were $62.7 million in the first quarter of the current fiscal year, an increase of 16% compared to $54.2 million in the same period of the prior year.

Organic sales in this segment rose 10% for the comparative period, with revenues from the acquisition of Megazyme (December 2020) providing the remainder of the increase.

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

Organic sales in this segment also rose 19%.

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

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

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

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

Neogen’s results reflect a 20% increase in international sales in the first quarter of fiscal 2022 compared to the same period in the prior year.

Revenue changes, expressed in percentages, in the first quarter of fiscal 2022 compared to the same quarter in the prior year are as follows for each of our international locations:

Local Currency

Operations (including Neogen Italia)

Neogen Italia

Brazil Operations

Neogen Latinoamerica

Neogen Argentina

Neogen Uruguay

Neogen Canada

Neogen Australasia

Currency translations reduced comparative revenues by approximately $150,000 in the third quarter of fiscal 2021 compared to the same period last year, as continued weakness in the Brazilian real and the Mexican peso relative to the U.S.

dollar were almost entirely offset by recovery of the euro and pound.

For the year to date, comparative revenues were $3.4 million lower due to currency translations, due entirely to the devaluation of the Brazilian real and the Mexican peso relative to the U.S.

dollar, somewhat offset by the strengthening of the euro and pound, and to a lesser extent, the Chinese yuan and the Australian dollar.

Currency translations increased comparative revenues by approximately $2.3 million in the first quarter of fiscal 2022 compared to the same quarter a year ago, primarily due to increased strength of the British pound and Mexican peso relative to the U.S.

Combined revenues at our U.K.

operations increased 4% in local currency in the third quarter, as lower economic activity caused by the COVID-19

pandemic resulted in sluggish sales performance across the organization;

after adjusting for the increased strength of the euro and pound, revenues rose 9% in U.S.

For the year to date, the 9% revenue increase in local currency was primarily from biosecurity products, the result of a large sale of hand sanitizer to the U.K.

government’s health organization in the first quarter of this fiscal year;

dollars, the increase was 13%.

Sales in Brazil increased 12% in local currency in this year’s third quarter, the result of 10% growth in food safety diagnostic test kits and genomics revenues, and a 17% increase in insecticides due to delivery on a large tender order.

For the nine month period, sales at our Brazilian operations increased 17% compared to the prior year on the strength of a 29% increase in sales of insecticides;

after adjusting for the currency devaluation, revenues declined 11% in U.S.

Neogen Latinoamerica sales rose 14% for the third quarter in local currency, primarily due to increases in biosecurity products and food safety diagnostic kit sales;

after adjusting for devaluation of the peso, the revenue increase was 7% in U.S.

Neogen China’s revenues approximately doubled for both the three and nine month periods, due to increased demand of biosecurity products and genomics services.

The Neogen Australasia location benefited in both the comparative quarter and year to date periods from the February 2020 acquisition of a food safety distributor;

the organic revenue increase at this location was 64% in the third quarter and 55% for the year to date period as this operation also recorded strong sales growth of genomics services in the bovine, companion animal and sheep markets.

Service revenue was $23.9 million in the third quarter of fiscal 2021, an increase of 8% over prior year third quarter revenues of $22.1 million.

For the nine month period, service revenue was $67.7 million, an increase of 9% over prior year revenues of $62.0 million.

The growth in each comparative period was led by increases of genomics revenues in the bovine, companion animal and sheep markets in Australia and strong growth in genomics revenues in the Chinese porcine and bovine markets as the country recovers from the COVID-19

and African swine fever outbreaks.

Additionally, for the year to date period, genomics testing in the domestic bovine and companion animal veterinary markets contributed to the growth.

Three Months Ended

February 28/29,

(in thousands)

Natural Toxins, Allergens & Drug Residues

Bacterial & General Sanitation

Culture Media & Other

Rodenticides, Insecticides & Disinfectants

Genomics Services

Animal Safety

Life Sciences

Veterinary Instruments & Disposables

Animal Care & Other

Rodenticides, Insecticides & Disinfectants

Genomics Services

Total Revenues

Nine Months Ended

February 28/29,

operations increased approximately 9%, with our Neogen Europe and Neogen Italia operations experiencing combined 17% growth in diagnostic test kits and genomics services.

This growth was partially offset by a 10% decrease in the first quarter at Quat-Chem, as the prior year quarter included a large shipment of hand sanitizers to the U.K.

government’s health organization and strong cleaner and disinfectant sales to China, Africa and the Middle East.

Due to shipping and tax issues caused by Brexit, Neogen Italia is fulfilling orders to many European Union customers that were previously managed through Neogen Europe in the U.K.

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

insecticide sale to a government health organization.

Additionally, an extended drought led to a significantly reduced corn crop and the associated testing, resulting in a 36% decrease in sales of aflatoxin test kits.

At Neogen Latinoamerica, the growth in local currency in the first quarter was led by strength in environmental sanitation and culture media.

Sales at Neogen China increased 59% from new sales of Megazyme products and strong growth in genomics, as the commercial dairy, swine and sheep markets have increased sampling volumes.

Service revenue, which consists primarily of genomics services to animal protein and companion animal markets, was $24.3 million in the first quarter of fiscal 2022, an increase of 14% over prior year first quarter revenues of $21.4 million.

The growth was led by strong increases in genomics revenues in our Australia, China and Canada genomics operations;

growth in our domestic operations was reduced by lower sales in companion animal markets, the result of difficult comparisons from a 61% increase in the prior year first quarter.

Three Months ended August 31,

(in thousands)

13 unchanged sentences

& Drug Residues –

Sales in this category increased 6% for the three month period ended February 28, 2021 and decreased 1% for the year to date, each compared to the same periods in the prior year.

In the third quarter, sales of natural toxins increased 14% as recent pet food recalls in the U.S.

have driven demand for increased testing.

The allergens product line increased 3% while drug residues sales decreased 10%, as we work to recover lost business with our in-house

sales team, which replaced an exclusive European distributor approximately a year ago.

The 1% decline on a year to date basis is due to lower sales of drug residue test kits in the first half of our fiscal year;

additionally, natural toxins sales were flat in the first six months of the year due to relatively clean crops during harvest season.

Sales in this category increased 7% in the first quarter of fiscal 2022 due primarily to a 17% increase in sales of our allergen test kits, as customers have increased their testing compared to the prior year when many were shut down or operating at lower capacity due to COVID-19

restrictions.

Sales of our natural toxin test kits rose 6%, as higher sales of deoxynivalenol (DON), zearalenone and fumonisin test kits were partially offset by lower aflatoxin test kit sales in Brazil, as a drought significantly reduced crop size and associated testing.

Drug residue test kit sales declined 22% due to the termination of a European distribution agreement and competitive pressure within the marketplace.

& General Sanitation –

Revenues in this category increased 10% in the third quarter and were flat for the year to date, both compared to the same periods in the prior year.

In the third quarter, sales of products to detect spoilage organisms in processed foods increased 19%, 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 increased 5%;

we plan to launch a next generation of reader for this product line in the fourth quarter at which time there will be significant sales and marketing focus on these products.

Sales of products to detect pathogens increased 8%, as we continue to gain new business with sales of our Listeria

Right Now test kit.

For the year to date, strong sales of our Soleris NG instrument and the associated consumables were offset by a small decline in sales of our AccuPoint product line and a 7% decrease in pathogen sales, primarily due to high equipment sales in the second quarter of the prior fiscal year.

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

Pathogen test kit revenues increased 15%, led by a 32% increase in sales of Listeria

products, including our innovative Listeria

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

Our Soleris ®

NG instrument was launched in the first quarter of the prior year;

equipment sales, although flat to prior year, are approximately double compared to the first quarter two years ago.

Culture Media

Sales in this category increased 33% in the quarter ended February 28, 2021 compared to the third quarter in the prior year;

for the nine month period, sales increased 12%.

Excluding sales from the December acquisition of Megazyme, sales in this category increased 16% and 7% for the three and nine month periods, respectively.

This category includes sales of personal protective equipment, primarily gloves, as well as hand sanitizers and sanitizing wipes;

these products experienced short-term increased demand in new markets due to shortages caused by the COVID-19

pandemic which is not expected to recur.

This category also 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 11% in the third quarter as we gained new business from a COVID-19

vaccine manufacturer;

for the year to date period, culture media sales were flat.

Sales in this category rose 48% in the first quarter of fiscal 2022 compared to the same period in the prior year;

excluding sales from the December 2020 acquisition of Megazyme, sales increased 21%.

Sales of Neogen Culture Media products increased 36%, due to high demand with diagnostics customers globally and a large domestic sale to a vaccine manufacturer.

Rodenticides, Insecticides

& Disinfectants –

Revenues in this category increased 21% in the third quarter of fiscal 2021 compared to the same period a year ago, 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

For the year to date, sales in this category increased 31%, as the first quarter also included strong sales of hand and skin sanitizing products at our U.K.

based Quat-Chem operation.

Sales of products in this category decreased 13% in the first quarter of fiscal 2022, compared to last year’s first quarter.

The prior year first quarter included a 73% increase in sales of hand sanitizing products at our U.K.

based Quat-Chem operation and a large non-recurring

insecticide order, recorded at our Brazilian operation, to a government health organization.

Additionally, sales of cleaners and disinfectants into China in the prior year more than doubled, primarily due to increased demand resulting from the African swine fever outbreak in that country and the COVID-19

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

Genomics Services –

Sales of genomics services sold through our international Food Safety operations increased 12% for both the three and nine month periods ended February 28, 2021.

The increase for both periods was primarily from sales increases in China, due to increased testing in the pork industry, gains in beef and dairy cattle testing and project work in aquaculture.

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

Genomics revenue in Europe also increased 15% on strength in poultry testing.

Animal Safety

Life Sciences –

Sales in this category increased 2% in the third quarter, compared to the same period in the prior year, but was down 16% for the year to date.

The increase for the third quarter is due to increased sales of reagents and substrates;

for the year to date, sales of forensic kits to commercial laboratories declined as the labs processed fewer samples due to slowdowns resulting from the COVID-19

Sales in this category increased 3% in the first quarter, due to drug testing at doctor’s offices and workplaces increasing to more normal levels following COVID-19

restrictions that impacted testing in the prior year.

The growth was partially offset by the loss of hair testing business with a large U.S.

commercial laboratory that moved to a different testing platform.

Veterinary Instruments

& Disposables –

Revenues in this category increased 16% and 7% for the three and nine month periods ended February 28, 2021, respectively, led by large 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.

In the third quarter, sales of disposable gloves increased significantly, as these products had previously been on backorder.

Sales of these products increased 33% in the third quarter and 24% for the year to date, respectively.

For both periods, 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.

Partially offsetting these gains were declines in sales of dairy supplies of 64% and 49% for the quarter and year to date periods, respectively, due to the June 2020 termination of an agreement in which we distributed these types of products for a large manufacturer of dairy equipment.

Revenues in this category increased 48% in the first quarter of fiscal 2022 compared to the prior year.

Veterinary instruments, including disposable syringes and needles, increased 52% as we gained new private label business.

Sales of these products increased 20% in the first quarter compared to the same period a year ago.

Small animal supplements, including our recently re-launched

product, increased 78% and antibiotics increased 56%, both due to strength in the veterinary market.

Partially offsetting these increases, sales of our dairy supply products decreased 81% due to termination of an agreement in which we distributed these products for a large manufacturer of dairy equipment, in the first quarter of fiscal 2021.

Rodenticides, Insecticides

& Disinfectants –

Revenues in this category increased 24% and 19% for the three and nine month periods ended February 28, 2021, respectively.

The growth in the quarter was led by a 79% increase in rodenticide sales as rodent pressure in certain areas of the U.S.

increased significantly;

year to date, rodenticide sales have increased 45%.

Insecticide sales rose 14% in the quarter, due in large part to our acquisition of the StandGuard product line for fly control on July 31, 2020.

For the year to date, the increase was 10%.

Cleaners and disinfectants sales decreased 9% resulting from lower sales of water treatment products and the transfer of a product line to our U.K.

Sales of these products for the year to date period were flat compared to a year ago, with increased sales of hand sanitizer products in the first half of our fiscal year offsetting the decline in water treatment products.

Sales in this category rose 11% in the first quarter of fiscal 2022 compared to the same period in the prior year.

Insect control products increased 23%, led by growth in the StandGuard ®

product line which was acquired in July 2020.

We also had higher sales to customers in the restaurant industry, due to many being affected in the prior year by COVID shutdowns.

Sales of rodenticides increased 5% on a difficult comparison to the prior year, when sales had increased 47%, and cleaners and disinfectant sales rose 6%.

Genomics Services –

Sales in this category increased 9% in the third quarter and 10% for the year to date periods, each compared to the prior year.

The growth in the three month period was led by gains in beef and companion animal testing in Australia, and commercial beef and beef associations in the U.S.

For the year to date, we also benefitted from strong increases in sales to the U.S.

companion animal veterinary market, driven by increased pet adoptions and higher consumer spending on pets during the COVID-19

pandemic, as well as the recent launch of a new high density chip for whiteleg shrimp.

Gross margin was 46.1% in the third quarter of fiscal 2021 compared to 45.4% in the same quarter a year ago.

The improvement in gross margin is primarily the result of increased rodenticide sales within the Animal Safety segment;

these products have higher gross margins within this segment.

Gross margins for the Food Safety segment were flat for the third quarter compared to last year’s third quarter.

For the year to date, gross margin was also 46.1% compared to 46.8% in the same period of the prior year.

The lower gross margin percentage for the year to date is the result of a shift in the proportion of overall sales to the Animal Safety segment, which have lower average gross margins than the Food Safety segment;

additionally, sales increases within the Food Safety segment were from product lines, such as genomics and biosecurity products, which have lower gross margins than the diagnostic test kits sold in that segment.

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

a large non-recurring

plant research project also contributed to the growth in this category.

Partially offsetting these gains was a decrease in companion animal testing services in the U.S.

due to lower sampling volumes.

Gross margin was 46.8% in the first quarter of fiscal 2022 compared to 46.0% in the same quarter a year ago.

The improvement was due primarily to a shift in product mix within the Food Safety segment resulting from the incremental sales generated by Megazyme, which has products with higher gross margins.

Reduced sales of lower margin cleaners and disinfectants from our European and Chinese operations and insecticides from our Brazilian operations also contributed to the Food Safety gross margin improvement of 360 basis points.

Animal Safety gross margins declined by 190 basis points, primarily due to lower sales of companion animal services (a higher gross margin product), a mix shift towards lower margin products in our rodenticide line, and significantly increased international freight costs, the result of ongoing global supply chain issues.

Increased health insurance costs and the resumption of the 401k match, which had been suspended in last year’s first fiscal quarter, resulted in an incremental $530,000 expense within overhead on a consolidated basis.

Operating Expenses

Operating expenses were $38.1 million in the third quarter, compared to $32.3 million in the same quarter of the prior year, an increase of $5.8 million, or 18%.

For the nine month period ended February 28, 2021, operating expenses were $103.5 million, an increase of $6.5 million, or 7%, compared to the prior year.

Sales and marketing expenses increased $1.0 million, or 6%, in the third quarter, primarily due to increased compensation and higher shipping costs, offset somewhat by continued lower spending on travel, meetings, trade shows and other customer facing activities as a result of the COVID-19

For the year to date, sales and marketing expenses were $270,000 lower than the same period last year, also due to COVID-19

pandemic restrictions.

General and administrative expense was $15.1 million, an increase of $4.4 million, or 40%, in the third quarter, resulting primarily from $2.1 million in spending on strategic consulting, legal and other professional fees related to acquisition activity for businesses which we were ultimately not successful in acquiring.

Other increases in the quarter were for incremental amortization expenses (non-cash)

primarily for recent acquisitions, non-deal

related legal fees for a number of corporate matters, and reduced economic incentives recognized from state and local governments.

Year to date, general and administrative expenses were $38.3 million, an increase of 18% compared to the same period last year, with $3.1 million incurred in unsuccessful acquisition activities the largest component of the increase.

Other year-over-year increases were higher performance-based compensation expenses due to higher revenue and improved operating results compared to the prior year, amortization expense primarily related to recent acquisitions and non-deal

legal expenses.

Research and development expense was $4.2 million in the third quarter, an increase of $413,000, or 11%, compared to the same period in the prior year.

The increase is primarily the result of spending on outside services for the continued development of several new products, which have either been recently launched or are expected to be launched in the fourth quarter of fiscal 2021.

For the year to date, research and development expenses increased 8% over the same period last year, for the same reasons.

Operating expenses were $38.3 million in the first quarter of fiscal 2022, compared to $31.4 million in the first quarter of fiscal 2021, an increase of $6.9 million, or 22%.

It is important to note that in last year’s first quarter, with the economic impact of the COVID-19

pandemic uncertain, the Company took aggressive steps to control operating expenses and made cost reductions where possible.

These steps included a reduction in workforce, temporary furloughs and reduced hours for a number of employees.

In addition, the Company temporarily eliminated the match on the 401k plan during that period.

These steps, in addition to the elimination of travel across most of the organization, and lower utilization of medical services by our employees resulting from stay-at-home

orders and a reduction in non-emergency

procedures, resulted in an approximately $2.5 million reduction in operating expense in the first quarter of fiscal 2021 compared to the prior year.

The 401k match was restored in the second quarter of fiscal 2021, and medical service utilization has recovered, with procedures delayed in calendar 2020 now driving a significant increase in the last two consecutive quarters.

These two expense items had an adverse impact on operating expenses of $546,000 in the first quarter of fiscal 2022 compared to the same period a year ago.

Sales and marketing expenses in this fiscal year’s first quarter were $20.6 million, an increase of $4.0 million, or 25%, compared to $16.5 million in last year’s first quarter.

Personnel related expenses rose by $1.2 million due to an increase in headcount and performance-based incentives, reflective of the revenue increases across the Company.

Shipping costs increased by $900,000, due to the increase in volume and an increase in rates.

Travel and trade shows, which had declined by $1.3 million in last year’s first quarter due to restrictions resulting from the COVID-19

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

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

Research and development expense was $4.3 million in the first quarter of fiscal 2021, an increase of $447,000 compared to the same period in the prior year, due primarily to personnel absorbed in the Megazyme acquisition and compensation increases for domestic employees.

Operating Income

Operating income was $15.8 million in the third quarter of fiscal 2021, compared to $13.0 million in the same period of the prior year;

year to date operating income was $53.9 million compared to $47.6 million in the prior year.

Expressed as a percentage of sales, operating income was 13.5% for the third quarter and 15.8% for the year to date, compared to 13.1% and 15.4%, respectively, for the same periods in the prior year.

The improvement in margin percentage for the current fiscal year third quarter was due primarily to the increased revenues and 70 basis point improvement in gross margin percentage, offset somewhat by increased operating expenses, caused in part by the $2.1 million in acquisition related expenses.

Three Months Ended

Nine Months Ended

February 28/29,

(in thousands)

Operating income was $21.7 million in the first quarter of fiscal 2022, compared to $18.9 million in the same period of the prior year.

Expressed as a percentage of revenue, operating income was 16.9% compared to 17.3% in last year’s first quarter.

The decline in operating income as a percentage of sales is primarily the result of the 22% increase in operating expenses for the quarter.

Three Months ended August 31,

(dollars in thousands)

Interest income (net of expense)

Foreign currency transactions

Insurance settlement

Legal settlement

Contingent consideration

Total Other Income

The decrease in interest income in both the three and nine month periods of fiscal 2021 compared to the same periods a year ago was the result of a significant reduction in rates earned on marketable securities balances.

Other expense resulting from foreign currency transactions was primarily the result of changes in the value of foreign currencies relative to the U.S.

The reduction in interest income in the first quarter of fiscal 2022 compared to the prior year is primarily the result of lower yields on our cash and marketable securities balances, as interest rates have dropped significantly compared to rates in the first quarter of fiscal 2021.

Other income resulting from foreign currency transactions is the result of changes in the value of foreign currencies relative to the U.S.

dollar in countries in which we operate.

Income Tax Expense

Income tax expense in the third quarter of fiscal 2021 was $2.6 million, an effective tax rate of 16.3%, compared to $2.1 million, an effective tax rate of 14.4%, in the same period of the prior year.

For the year to date, income tax expense was $10.0 million, an effective rate of 18.1%, in fiscal 2021 and $8.0 million, an effective rate of 15.6%, in fiscal 2020.

For each period, the primary difference between the U.S.

statutory rate of 21% and the effective rates recorded is the benefit resulting from the exercise of stock options;

this benefit was $1,083,000 in the third quarter of fiscal 2021 compared to $781,000 in the third quarter of the prior year.

For the year to date, the benefit was $2,564,000 in fiscal 2021 compared to $2,754,000 in fiscal 2020.

The increase in the effective tax rate for both the third quarter and year to date periods, each compared to the same period in the prior year, is the result of increased taxes at international operations, higher state tax provisions and a lower projected U.S.

deduction in fiscal 2021 relating to foreign derived income.

Net income was $13.4 million in the third quarter of fiscal 2021, compared to $12.2 million in the same period in the prior year, an increase of 10%.

For the year to date, net income of $45.1 million was an increase of 5% from $43.1 million earned in the same period a year ago.

Income tax expense for the first quarter of fiscal 2022 was $4,650,000, an effective tax rate of 21.4%, compared to prior year first quarter income tax expense of $3,950,000, an effective tax rate of 19.9%.

For each quarter, the primary difference between the statutory rate of 21% and the effective rate recorded is the benefit resulting from the exercise of stock options;

this benefit was $15,000 in the first quarter of fiscal 2022 compared to $421,000 in the first quarter of the prior year.

The benefit was lower due to the decreased volume of option exercises during the comparative periods, and a reduction in benefit realized, on average, for each transaction.

Additionally, as the result of a higher tax rate enacted in the U.K., effective in 2023, we were required to revalue our deferred tax balances at our U.K.

operations to the rate we expect them to reverse in the future, resulting in $548,000 of expense in this year’s first quarter.

Net income was $17.1 million in the first quarter of fiscal 2022, an increase of 8% compared to $15.9 million earned in the first quarter of fiscal 2021.

The increased earnings were the result of higher sales and gross margins, partially offset by increased operating expenses, the $933,000 decline in other income and higher income tax expense.

Financial Condition and Liquidity

The overall cash, cash equivalents and marketable securities position of Neogen was $353.3 million at February 28, 2021, compared to $343.7 million at May 31, 2020.

Approximately $59.1 million was generated from operations during the first nine months of fiscal 2021.

Net cash proceeds of $22.8 million were realized from the exercise of stock options and issuance of shares under our Employee Stock Purchase Plan during the first nine months of fiscal 2021.

The overall cash, cash equivalents and marketable securities position of Neogen was $400.9 million at August 31, 2021, compared to $381.1 million at May 31, 2021.

Approximately $23.2 million was generated from operations during the first three months of fiscal 2022.

Net cash proceeds of $1.0 million were realized from the exercise of stock options and issuance of shares under our Employee Stock Purchase Plan during the first quarter.

We spent $1.3 million for property, equipment and other non-current

assets in the first nine months of fiscal 2021, and a total of $52.0 million on acquisitions.

Net accounts receivable balances were $87.2 million at February 28, 2021, an increase of $2.6 million, compared to $84.7 million at May 31, 2020.

Days sales outstanding, a measurement of the time it takes to collect receivables, were 65 days at February 28, 2021, compared to 68 days at May 31, 2020 and 66 days at February 29, 2020.

assets in the first three months of fiscal 2022.

Net accounts receivable balances were $87.3 million at August 31, 2021, a decline of $4.5 million, compared to $91.8 million at May 31, 2021.

Days sales outstanding, a measurement of the time it takes to collect receivables, were 59 days at August 31, 2021, compared to 66 days at May 31, 2021 and 61 days at August 31, 2020.

We have been carefully monitoring our customer receivables as the COVID-19

1 unchanged sentence

to date, we have not experienced an appreciable increase in bad debt write offs.

We did provide an additional $100,000 at May 31, 2020 in our allowance for bad debts to account for potential write offs related to COVID-19;

we will continue to actively manage our customer accounts and adjust the allowance account as circumstances change.

Net inventory was $99.3 million at February 28, 2021, an increase of $4.2 million, compared to a May 31, 2020 balance of $95.1 million;

excluding the amount recorded from the December 2020 acquisition of Megazyme, inventory is down $1.4 million.

We increased inventory levels in fiscal 2020 to ensure we had adequate supplies of critical raw and finished products in the event our supply chain was adversely impacted by the COVID-19

pandemic and Brexit, however we have now put programs in place to lower inventory levels, while not adversely impacting customers.

Net inventory balances were $102.1 million at August 31, 2021, an increase of $1.4 million, or 1%, compared to May 31, 2021 balances of $100.7 million.

We increased inventory levels during fiscal 2021 to ensure we have adequate supplies of critical raw and finished products in the event our supply chain is adversely impacted by the COVID-19

pandemic and Brexit.

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

Management believes that our existing cash and marketable securities balances at February 28, 2021, along with available borrowings under our credit facility and cash expected to be generated from future operations, will be sufficient to fund activities for the foreseeable future.

However, existing cash and borrowing capacity may not be sufficient to meet our cash requirements to commercialize products that are currently under development or plans to acquire other organizations, technologies or products that fit within our mission statement.

Accordingly, we may choose to enter into other financing arrangements or issue equity securities for all, or a portion, of our future financing needs.

Management believes that our existing cash and marketable securities balances at August 31, 2021, along with available borrowings under our credit facility and cash expected to be generated from future operations, will be sufficient to fund activities for the foreseeable future.

However, existing cash and borrowing capacity may not be sufficient to meet our cash requirements to commercialize products currently under development or our plans to acquire other organizations, technologies or products that fit within our mission statement.

Accordingly, we may choose to issue equity securities or enter into other financing arrangements for a portion of our future financing needs.

PART I – FINANCIAL INFORMATION

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What changed 10-Q

Item 2. Management’s Discussion and Analysis