What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-12-30 compared with 2021-09-30 · 178 added, 125 removed, 76 unchanged (80% of the section changed)

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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 continue to closely monitor the COVID-19

As we closely monitor the COVID-19

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

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

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

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

and distribution employees continue to work remotely and travel remains limited.

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

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

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

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

pandemic continued to impact our business operations and financial results.

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

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

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

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;

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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.

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;

the federal, state, and local government actions taken in response;

vaccination rates and effectiveness;

the impact of vaccination requirements;

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 current fiscal year.

Executive Overview

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

Organic sales increased 14%.

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

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

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

Organic sales in this segment also rose 19%.

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

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

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

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

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

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

Consolidated revenues were $130.5 million in the second quarter of fiscal 2022, an increase of 13% compared to $115.0 million in the second quarter of fiscal 2021.

Organic sales growth in the second quarter of fiscal 2022 was 10%.

For the six month period, consolidated revenues were $258.8 million, an increase of 15% compared to $224.3 million in the same period in the prior fiscal year.

On a year to date basis, organic sales rose 12%.

Food Safety segment sales were $67.1 million in the second quarter of fiscal 2022, an increase of 17% compared to $57.5 million in the same period a year ago.

Organic sales in this segment rose 11% for the comparative period, with revenues from the acquisition of Megazyme (December 2020) providing the remainder of the increase in revenues for the segment.

For the year to date, Food Safety segment sales were $129.9 million, an increase of 16% compared to $111.7 million in the same period of the prior fiscal year;

the organic sales increase was 10% for the comparative period, with the Megazyme acquisition providing the additional contribution to revenue.

Animal Safety segment sales were $63.4 million in the second quarter of fiscal 2022, an increase of 10% compared to $57.5 million in the second quarter of fiscal 2021.

Organic sales in this segment also rose 10% in the second quarter, with a minor contribution from the CAPInnovet acquisition (September 2021).

For the six month period, Animal Safety segment sales were $129.0 million, an increase of 15%, compared to $112.6 million in the same period a year ago.

Year to date organic sales rose 14%, with revenues from the StandGuard (July 2020) and CAPInnovet acquisitions contributing the difference.

International sales in the second quarter of fiscal 2022 were 41% of total sales compared to 39% of total sales in the second quarter of fiscal 2021.

For the year to date, fiscal 2022 international sales were 40% of total sales compared to 39% of total sales in the same period of the prior year.

Our effective tax rate in the second quarter was 16.2% compared to an effective tax rate of 17.8% in the prior year second quarter;

the fiscal 2022 year to date effective tax rate was 19.5% compared to 18.9% for the same period a year ago.

Net income for the quarter ended November 30, 2021 was $10.8 million, or $0.10 per diluted share, compared to $15.9 million, or $0.15 per diluted share in the same period in the prior year.

For the year to date, net income was $27.9 million, or $0.26 per diluted share compared to prior year to date net income of $31.7 million, or $0.30 per diluted share.

Net income was decreased by $9.3 million of legal and consulting expenses for due diligence related to our recently announced agreement to combine with 3M’s Food Safety business.

Cash provided from operating activities in the first six months of fiscal 2022 was $41.1 million, compared to $47.5 million in the first half of fiscal 2021.

International sales rose 20% in both the second quarter of fiscal 2022 and also increased 20% for the year to date, each compared to the same respective periods in the prior year.

Excluding international sales of the Megazyme acquisition, the increase was 14% for both the quarter and year to date periods.

Revenue changes, expressed in percentages, for the three and six month periods of fiscal 2022 compared to the same respective periods in the prior year are as follows for each of our international locations:

Three Months Ended

Six Months Ended

November 30, 2021

Local Currency

Operations (including Neogen Italia)

Neogen Italia

Local Currency

U.K Operations (including Neogen Italia)

Brazil Operations

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Neogen Australasia

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.

Currency translations increased comparative revenues by approximately $1.0 million in the second quarter of fiscal 2022 and $3.3 million for the year to date, each compared to the same periods a year ago, primarily due to the increased strength of the British pound and Mexican peso relative to the U.S.

Combined revenues at our U.K.

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

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

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

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

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

insecticide sale to a government health organization.

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

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

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

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

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

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

Three Months ended August 31,

operations increased 20% in the second quarter;

growth was led by strong cleaner and disinfectant sales into Asia, as the African swine fever outbreak continues to drive demand, and new culture media business with commercial laboratories in the U.K.

that have adopted our recently launched One Broth One Plate workflow.

For the six month period, revenues at our U.K.

operations increased 13% as a large non-recurring

prior year shipment of hand sanitizers to the U.K.

government’s health organization affected growth in the first quarter.

Sales in Brazil decreased 5% in this year’s second quarter, as an extended drought led to a significantly reduced corn crop and the associated testing, resulting in a large decrease in sales of aflatoxin test kits.

For the six month period, sales at our Brazilian operations decreased 10%, primarily due to the reduced aflatoxin test kit sales and a large non-recurring

insecticide sale to a government health organization in the first quarter of the prior fiscal year.

Neogen Latinoamerica sales rose 13% for the second quarter, primarily due to increases in natural toxins test kits, environmental sanitation, culture media and biosecurity products.

Sales at Neogen China increased 28% and 42% for the three and six month periods, respectively, from new sales of Megazyme products and growth in genomics, as the commercial dairy, swine and sheep markets have increased sampling volumes.

The Neogen Australasia location benefitted from increased genomics business with customers in the beef and sheep markets.

Service revenue, which includes genomics testing and other laboratory services, was $24.4 million in the second quarter of fiscal 2022, an increase of 9% over prior year second quarter revenues of $22.5 million.

For the six month period, service revenue was $48.7 million, an increase of 11% over prior year revenues of $43.9 million.

The growth for both the quarter and year to date periods was led by increases in revenues at our Australia, China, U.K., Brazil and Canada genomics operations;

growth in our domestic operation was reduced by lower volumes of companion animal samples, the result of difficult comparison from large increases in the prior year.

Three Months Ended November 30,

(in thousands)

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Total Revenues

Six Months Ended November 30,

(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

Natural Toxins, Allergens

& Drug Residues –

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

restrictions.

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

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

Sales in this category increased 5% and 6% for the three and six month periods ended November 30, 2021, respectively, compared to the same periods in the prior year.

In the second quarter, sales of our natural toxin test kits rose 10% as higher sales in the domestic pet food market and Europe were partially offset by lower aflatoxin sales in Brazil, as a drought significantly reduced crop size and associated testing.

Sales of allergen test kits rose 6% in the second quarter, while sales of our drug residue test kits declined 23% due to the termination of a European distribution agreement and competitive pressure within the marketplace.

& General Sanitation –

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

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

products, including our innovative Listeria

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.

Revenues in this category increased 9% and 11% for the second quarter and for the year to date, compared to the same periods in the prior year.

In the second quarter, sales of products to detect spoilage organisms in processed foods increased 22%, resulting from sales of our new instrument which continued to gain market acceptance after launching over a year ago.

Sales of our AccuPoint sanitation monitoring product line increased 8% in the second quarter as strong sales of our new reader partially offset lower sales of consumables due to supply issues.

Sales of products to detect pathogens increased 3% in the second quarter.

Culture Media

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.

Sales in this category increased 40% in the quarter ended November 30, 2021 compared to the second quarter in the prior year;

for the six month period, sales increased 44%.

Excluding sales from the December 2020 acquisition of Megazyme, Veterinary which are reported in this category, sales increased 17% and 19% for the three and six month periods, respectively.

This category includes sales of instruments and other veterinary products at some of our international locations;

these sales increased significantly over the prior year due to recovering markets and expanded market share.

Sales of Neogen Culture Media products increased 11% in the second quarter as our new workflow, One Broth One Plate, continued to drive increased sales to commercial labs in the U.K.;

the growth was partially offset by a decline in domestic sales due to non-recurring

business in the prior year.

For the six month period, Neogen Culture Media sales increased 22%, due to strength in the U.K.

and also a large domestic sale to a vaccine manufacturer in the first quarter.

Rodenticides, Insecticides

& Disinfectants –

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

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

based Quat-Chem operation and a large non-recurring

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

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

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

Revenues in this category increased 17% in the second quarter of fiscal 2022 compared to the same period a year ago, due primarily to continued strength in cleaners and disinfectants into Asia resulting from increased demand from the African swine fever outbreak in that region;

there was also higher sales of rodenticides in Mexico.

For the year to date, sales were flat, with the previously discussed increases being offset by large non-recurring

sales of hand sanitizers in the U.K.

and insecticides in Brazil in the first quarter of the prior fiscal year.

Genomics Services –

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

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

Sales of genomics services sold through our international Food Safety operations increased 13% and 20% for the three and six month periods ended November 30, 2021, respectively.

The increase in the second quarter was from overall strength at our labs in the U.K., Brazil and China as improved economic conditions in several markets have contributed to increased testing.

Animal Safety

Life Sciences –

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

restrictions that impacted testing in the prior year.

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

Sales in this category decreased 6% in the second quarter, compared to the same period in the prior year;

for the year to date, the decrease in this product line was 2%.

The decline in both periods was due primarily to the loss of hair testing business with a large U.S.

commercial laboratory that moved to a different testing platform.

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& Disposables –

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

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

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.

Revenues in this category increased 30% for the three month period ended November 30, 2021, led by a large increase sales of in veterinary instruments, including needles and syringes, resulting from recently won private label business;

revenues increased 38% for the year to date.

Sales of these products increased 16% and 18% in the three and six month periods ended November 30, 2021, respectively.

Excluding the contribution of parasiticides from the September acquisition of CAPInnovet, revenues in this category increased 13% in the second quarter, primarily due to strength in equine and companion animal markets.

Additionally, we continued to regain customers with our recently re-launched

Partially offsetting these gains was a decline in sales of dairy supplies of 67% and 76% 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.

Rodenticides, Insecticides

& Disinfectants –

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

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

product line which was acquired in July 2020.

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

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

Revenues in this category decreased 1% for the three month period ended November 30, 2021, resulting from a 14% decrease in rodenticide sales due to supply constraints and a non-outbreak

Insecticide sales rose 46% in the quarter, led by growth in the StandGuard ®

product line acquired in July 2020.

Cleaners and disinfectants sales decreased 2% due to a difficult prior year comparison that included a large non-recurring

Sales of these products for the year to date period increased 5%, as compared to a year ago, for the same reasons.

Genomics Services –

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

a large non-recurring

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

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

due to lower sampling volumes.

Gross margin 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.

Sales in this category increased 7% and 9% in the second quarter and the year to date periods, each compared to the prior year.

The growth in both periods 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.

Growth in both the three and six month periods was partially offset by lower domestic companion animal revenues due to difficult prior year comparisons.

Gross margin, expressed as a percentage of sales, was 46.4% in the second quarter of fiscal 2022 compared to 46.3% in the same quarter a year ago.

The slight change in gross margin percentage is the result of a 30 basis point improvement in Food Safety gross margins, partially offset by a 20 basis point decline in gross margin percentage in the Animal Safety segment.

The primary driver of the improved Food Safety gross margin percentage was incremental revenue from the Megazyme product line;

these products generate higher gross margins than the average in this segment.

In the Animal Safety segment, the slight decline in gross margin percentage was the result of lower sales of higher margin rodenticide products due to a lessening of vole pressure across the domestic market, and a reduction in genomics service revenues in the domestic companion animal markets.

Within each segment, higher raw material and freight costs, resulting from continued supply chain issues across most of our markets, put downward pressure on gross margins.

The company has taken pricing actions where appropriate in response to these cost increases.

For the year to date, gross margin was 46.6% compared to 46.1% in the prior year, for the same reasons.

Operating Expenses

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

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

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

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

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

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

orders and a reduction in non-emergency

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

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

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

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

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

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

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

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

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 expenses were $48.1 million in the second quarter, compared to $34.0 million in the same quarter of the prior year, an increase of $14.2 million, or 42%.

Legal, consulting and other professional fees totaling $9.3 million were incurred in the second quarter in conjunction with due diligence and negotiation of terms for the proposed business combination with 3M’s Food Safety business, which was announced on December 14, 2021.

Excluding costs related to the transaction, run rate operating expenses were $38.8 million, an increase of 14% compared to the prior year.

For the six month period ended November 30, 2021, excluding the $9.3 million in deal costs, operating expenses were $77.1 million, an increase of 18% compared to the prior year.

Sales and marketing expenses increased $3.5 million, or 20%, in the second quarter, primarily due to increases in personnel related expenses, the result of higher sales volumes and headcount.

Additionally, travel, trade shows and other customer facing activities have continued to rise, the result of easing of restrictions in a number of our markets due to the COVID-19

for the year to date, sales and marketing expenses increased 22% compared to the same period last year.

General and administrative expense increased $10.4 million in the second quarter, primarily the result of $9.3 million in legal, consulting and other professional fees resulting from due diligence efforts and negotiation of terms relating to the proposed transaction with 3M referenced above.

Run rate general and administrative expenses rose $1.1 million, or 9%, due primarily to increases in salaries and bonuses resulting from improved operating performance and additional senior management hires, higher amortization expenses from the Megazyme and CAPInnovet acquisitions, increased stock based compensation expense and higher depreciation and license fees relating to information technology infrastructure and software.

These increases were partially offset by $1 million in spending on strategic consulting, legal and other professional fees related to acquisition activity in the prior year second quarter for businesses which we were not ultimately successful in acquiring.

Year to date, run rate general and administrative expenses increased 15%, for the same reasons.

Research and development expense was $4.3 million in the second quarter, an increase of $270,000, or 7%, compared to the same period in the prior year.

The increase was primarily the result of incremental costs of personnel absorbed from the Megazyme acquisition and outside service costs for development spending on new products.

For the year to date, research and development expenses increased 9% over the same period last year, for the same reasons.

Operating Income

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

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

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

Three Months ended August 31,

Operating income was $12.5 million in the second quarter of fiscal 2022, compared to $19.2 million in the same period of the prior year;

year to date operating income was $34.2 million compared to $38.1 million in the prior year.

Expressed as a percentage of sales, operating income was 9.6% for the second quarter and 13.2% for the year to date, compared to 16.7% and 17.0%, respectively, for the same periods in the prior year.

Adjusting for the $9.3 million in transaction costs resulting from the proposed 3M transaction, operating income was 16.7% in the second quarter and 16.8% for the year to date.

Three Months Ended

Six Months Ended

(dollars in thousands)

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Foreign currency transactions

Insurance settlement

Legal settlement

LGS contingent consideration

Total Other Income

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.

The decrease in interest income in the six month period of fiscal 2022 compared to the same period a year ago was the result of continued lower yields on our marketable securities balances.

Other income or 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.

In the second quarter of the current fiscal year, we recorded a charge of $135,000 for additional contingent consideration in the final payment to the former owner of Livestock Genomic Services.

Income Tax Expense

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

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

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

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

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

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

Net income 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.

Income tax expense in the second quarter of fiscal 2022 was $2.1 million, an effective tax rate of 16.2%, compared to $3.5 million, an effective tax rate of 17.8%, in the same period of the prior year.

For the year to date, income tax expense was $6.8 million, an effective rate of 19.5%, in fiscal 2022 and $7.4 million, an effective rate of 18.9%, in fiscal 2021.

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

this benefit was $859,000 in the second quarter of fiscal 2022 compared to $1,060,000 in the second quarter of the prior year.

For the year to date, the benefit was $874,000 in fiscal 2022 compared to $1,481,000 in fiscal 2021.

The decrease in the effective tax rate for the second quarter was primarily due to lower taxable income resulting from fees related to the 3M combination.

The increase in effective rate for the year to date period is the result of lower benefit from stock option exercises and a $548,000 charge to expense in the first quarter because the U.K.

enacted a higher tax rate effective in 2023.

Since our deferred tax balances at this operation are expected to reverse in the future at the higher tax rate, we were required to revalue them when the new rate was passed.

Net income was $10.9 million in the second quarter of fiscal 2022, compared to $15.9 million in the same period in the prior year.

The decline in earnings for this year’s second quarter was the result of $9.3 million in legal, consulting and other professional fees from the intended transaction with 3M.

Excluding those charges, net income rose 14% in the second quarter of fiscal 2021 compared to the same period in the prior year.

For the year to date, net income was $27.9 million, a decrease of 12% compared to $31.7 million in the prior year;

excluding the $9.3 million of expense, net income rose 11% year to date.

Six month net income in fiscal 2022 was also negatively impacted by a higher effective tax rate.

Financial Condition and Liquidity

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

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

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

The overall cash, cash equivalents and marketable securities position of Neogen was $389.2 million at November 30, 2021, compared to $381.1 million at May 31, 2021.

Approximately $41.1 million was generated from operations during the first six months of fiscal 2022 and spent $26.9 million on acquisitions.

Net cash proceeds of $6.6 million were realized from the exercise of stock options and issuance of shares under our Employee Stock Purchase Plan during the first six months of fiscal 2022.

We spent $5.2 million for property, equipment and other non-current

assets in the first three months of fiscal 2022.

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

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

assets in the first half of fiscal 2022.

Net accounts receivable balances were $92.5 million at November 30, 2021, an increase of $700,000, compared to $91.8 million at May 31, 2021.

Days’ sales outstanding, a measurement of the time it takes to collect receivables, were 63 days at November 30, 2021, compared to 66 days at May 31, 2021 and 61 days at November 30, 2020.

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

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

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

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

pandemic and Brexit.

Net inventory was $107.1 million at November 30, 2021, an increase of $6.4 million, compared to a May 31, 2021 balance of $100.7 million.

The two acquisitions completed in the second quarter added approximately $1.0 million to our inventory balance.

Additionally, we have been increasing inventory levels recently in an effort to reduce freight costs and prevent backorders, as shipments are taking longer and some suppliers are requiring higher orders due to their supply constraints.

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

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

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

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

Management believes that our existing cash and marketable securities balances at November 30, 2021, along with available borrowings under our credit facility and cash expected to be generated from operations, will be sufficient to fund activities for the remainder of the current fiscal year.

However, existing cash and borrowing capacity will be insufficient to meet cash requirements for our planned combination with the 3M Food Safety business, which is currently expected to close in the third quarter of calendar year 2022.

The transaction will be funded by issuing equity securities to 3M’s shareholders and borrowing approximately $1 billion in cash under an agreement with JPMorgan Chase.

PART I – FINANCIAL INFORMATION

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What changed 10-Q

Item 2. Management’s Discussion and Analysis