What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-07-27 compared with 2021-07-30 · 245 added, 170 removed, 243 unchanged (63% of the section changed)

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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.

As we closely monitor the COVID-19

TRENDS AND UNCERTAINTIES

During fiscal 2022, we experienced higher than expected input cost inflation, including higher transportation, supply chain and labor costs, that negatively impacted operating results.

Pricing actions taken during fiscal 2022 mitigated some, but not all, of the inflationary pressures.

Ongoing inflation may also have an impact on our customer’s purchasing decisions and order patterns.

We estimate inflation will continue to affect us in fiscal 2023, although at this time it is impracticable to quantify the impact.

Although we have no operations in or direct exposure to Russia, Belarus and Ukraine, we have experienced intermittent shortages in materials and increased costs for transportation, energy and raw materials due, in part, to the negative impact of the Russia-Ukraine military conflict on the global economy.

To date, our European operations and customer base have not been materially impacted by the conflict, however, as the conflict continues or worsens, it may impact our business, financial condition or results of operations in fiscal 2023.

As we continue to monitor the ongoing COVID-19

pandemic, our top priority remains protecting the health and safety of our employees, their families, and those in our communities.

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

employees continue to work remotely and travel remains limited.

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

Safety guidelines and procedures have been developed for on-site

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

In fiscal 2021, the COVID-19

pandemic continued to impact our business operations and financial results.

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

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

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

In fiscal 2022, COVID-19,

including new strains of the virus such as Delta and Omicron, continued to impact our business operations and financial results.

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

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

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

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

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

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

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

We expect the COVID-19

pandemic will continue to impact our business operations and financial results through the majority of our 2022 fiscal year.

Overall, the impact of COVID-19

remains uncertain and ultimately depends on the length and severity of the pandemic, inclusive of the introduction of new strains of the virus;

government actions taken in response;

vaccination rates and effectiveness;

the impact of vaccination requirements;

extent of protection provided by prior viral infection;

and the macroeconomic environment.

We will continue to evaluate the nature and extent to which COVID-19

will impact our business, supply chain, including labor availability and attrition, consolidated results of operations, financial condition, and liquidity;

we expect it to impact us through at least the end of our fiscal year ending May 31, 2023.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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Actual results may differ from these estimates under different assumptions or conditions.

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

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

We account for income taxes using the asset and liability method.

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In addition, future period earnings may be adversely impacted by litigation costs, settlements, penalties, and/or interest assessments.

Our wholly owned foreign subsidiaries are comprised of Neogen Europe, Quat-Chem Ltd, Megazyme Ltd, Megazyme IP, Neogen Italia S.r.l., Neogen do Brasil, Rogama Industria e Comercio Ltda, Neogen Latinoamérica, Neogen Argentina, Neogen Uruguay, Neogen Chile SpA, Neogen Bio-Scientific

Technology Co (Shanghai), Neogen Food and Animal Security (India), Neogen Canada and Neogen Australasia Pty Limited.

Our wholly owned foreign subsidiaries are comprised of Neogen Europe, Quat-Chem Ltd, Abbott Analytical Limited, Delf (UK) Limited, Delf-Chem Solutions Limited, Megazyme Ltd, Megazyme IP, Neogen Italia S.r.l., Neogen do Brasil, Rogama Industria e Comercio Ltda, Neogen Latinoamérica, Neogen Guatemala, Neogen Argentina, Neogen Uruguay, Neogen Chile SpA, Neogen Bio-Scientific

Technology Co (Shanghai), Neogen Food and Animal Security (India), Neogen Canada, Neogen Canada Properties LLC and Neogen Australasia Pty Limited.

Based on historical experience, as well as management’s future plans, earnings from these subsidiaries are expected to be re-invested

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It is not practicable to determine the income tax liability that would be payable if such earnings were not reinvested indefinitely.

Business Combinations and Contingent Consideration

We allocate the purchase price of acquired companies to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values.

The estimates used to value the net assets acquired are based in part on historical experience and information obtained from management of the acquired company.

We generally value the identifiable intangible assets acquired using a discounted cash flow model.

The significant estimates used in valuing certain of the intangible assets include, but are not limited to:

future expected cash flows of the asset, discount rates to determine the present value of the future cash flows, attrition rates of customers, royalty rates and expected technology life cycles.

We also estimate the useful lives of the intangible assets based on the expected period over which we anticipate generating economic benefit from the asset.

Our estimates of fair value are based on assumptions believed to be reasonable at that time.

If we made different estimates or judgments, it may result in material differences in the fair values of the net assets acquired.

Certain business combinations involve potential payment of future consideration that is contingent upon the achievement of certain product development milestones and/or contingent on the acquired business reaching certain performance milestones.

We record contingent consideration at fair value at the date of acquisition based on the consideration expected to be transferred, estimated as the probability weighted future cash flows, discounted back to present value.

The fair value of contingent consideration is measured using projected payment dates, discount rates, probabilities of payment and projected revenues (for revenue-based considerations);

various methodologies can be used to determine fair value of contingent consideration, including Monte Carlo simulations, among others.

Projected revenues are based on our most recent internal operational budgets and long-range strategic plans.

The discount rate used is determined at the time of measurement in accordance with accepted valuation methodologies.

Changes in projected revenues, probabilities of payment, discount rates and projected payment dates may result in adjustments to the fair value measurements.

Contingent consideration is remeasured each reporting period using Level 3 inputs, and the change in fair value, including accretion for the passage of time, is recognized in other income (expense) in the consolidated statements of income.

Contingent consideration payments made soon after the acquisition date are classified as investing activities in the consolidated statements of cash flows.

Contingent consideration payments not made soon after the acquisition date that are related to the acquisition date fair value are reported as financing activities in the consolidated statements of cash flows, and amounts paid in excess of the original acquisition date fair value are reported as operating activities in the consolidated statements of cash flows.

RESULTS OF OPERATIONS

Executive Overview

Consolidated revenues were $468.5 million in fiscal 2021, an increase of 12% compared to $418.2 million in fiscal 2020.

Organic sales overall increased 9% compared to the prior year.

Food Safety segment sales were $234.2 million in fiscal 2021 compared to $212.7 million in fiscal 2020, an increase of 10%.

Organic sales increased 6%, while the purchase of four former distributors and a small manufacturer (Abtek) in fiscal 2020 and the December 2020 acquisition of Megazyme contributed $8.0 million in revenues.

Animal Safety segment sales were $234.2 million in fiscal 2021, an increase of 14% compared to $205.5 million in fiscal 2020.

Organic sales rose 13%, with the acquisitions of Cell BioSciences, in fiscal 2020, and StandGuard, in July 2020, contributing the remainder of the growth.

International sales were 39.1% of total sales in fiscal 2021 compared to 39.4% of total sales in fiscal 2020.

Our effective tax rate was 19.1% in fiscal 2021 compared to an effective tax rate of 17.7% in fiscal 2020.

Net income was $60.9 million, or $0.57 per diluted share, an increase of 2% compared to $59.5 million, or $0.56 per share, in the prior year.

Cash generated from operating activities in fiscal 2021 was $81.2 million, compared to $85.9 million in fiscal 2020.

Neogen’s international revenues were $183.2 million in fiscal 2021, compared to $164.7 million in fiscal 2020.

Currency translation had a negligible impact on revenues for the full year, with gains in the U.K., Italy, China, Australia and Canada almost entirely offset by negative impact in Brazil, Mexico and Argentina.

In a neutral currency environment, sales would have been $3.4 million higher than reported in the first nine months of fiscal 2021.

However, the Brazilian real and Mexican peso strengthened significantly in the fourth quarter, resulting in an overall positive effect of approximately $3.3 million from currency translations;

the full year impact from currency translations was minimal.

(in thousands, except earnings per share)

Organic Sales Growth

Animal Safety

Organic Sales Growth

% of International Sales

Effective Tax Rate

Earnings per Diluted Share

Cash from Operations

Food Safety organic sales exclude revenues from the acquisitions of Megazyme (December 2020) and Delf/Abbott Analytical (November 2021).

Animal Safety organic sales exclude revenues from the acquisitions of StandGuard (July 2020), CAPInnoVet (September 2021) and Genetic Veterinary Sciences (December 2021).

Net income was negatively impacted by $25.6 million in the current fiscal year due to legal and consulting expenses for due diligence related to our recently announced agreement to combine with 3M’s Food Safety business.

Neogen’s international revenues were $209.3 million in fiscal 2022, compared to $183.2 million in fiscal 2021, an increase of 14%.

Currency translation had a negligible impact on revenues for the full year, with gains in the U.K., Italy, Mexico, Brazil, China, and Canada partially offset by negative impact in Argentina, Chile, India and Australia.

In a neutral currency environment, sales would have been $844,000 lower than reported in fiscal 2022.

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

Local Currency

UK Operations

Operations (including Neogen Italia)

Brazil Operations

Neogen Latinoamerica

Neogen Australasia

Neogen Argentina

Neogen Uruguay

Neogen Canada

The revenue increase in U.S.

dollars at Neogen Europe was led by a 22% increase in sales of disinfectant and veterinary products, primarily due to COVID-19

related sales of hand sanitizer and disinfectant in the U.K.

in the first quarter and strong cleaner and disinfectant sales throughout the entire year to Asia to mitigate the impact of African Swine Fever.

Partially offsetting this growth were lower sales of diagnostic test kits due to COVID-19

additionally, a large portion of sales into European Union countries from January through May were sold through our Neogen Italia subsidiary as Brexit created export issues from the U.K.

Revenues in Brazil decreased 8% in USD in fiscal 2021 but increased 15% in local currency, as the Brazilian real devalued significantly against the U.S.

dollar during the year.

In local currency, sales of our diagnostic test kits increased 10%, genomics revenues increased 19%, due to new business in the beef market, and insecticides revenues grew 22%, partially the result of a large tender sale.

Neogen Latinoamerica grew revenues by 9% in USD, with growth in biosecurity products, veterinary instruments and diagnostic test kits.

China’s sales approximately doubled, from growth in biosecurity products and genomics services.

Neogen Australasia benefitted from the February 2020 acquisition of a food safety distributor;

organic sales increased 59% at this location in fiscal 2021, from strength in genomics services for the companion animal and bovine markets and increased market share of food safety diagnostic test kits.

Neogen Australasia

The 13% revenue increase at our combined U.K.

operations in fiscal 2022 was led by a 25% increase in sales of cleaners and disinfectants, primarily from strong sales in the U.K.

and Asia, and new culture media business with commercial laboratories in the U.K.

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

Revenues in Brazil increased 1% in USD in fiscal 2022 but decreased 2% in local currency;

market gains in genomics services in the beef market were offset by lower sales of dairy drug residue test kits, due to competitive pressures.

Neogen Latinoamerica revenues rose by 11% in USD in fiscal 2022, led by growth in natural toxins test kits, environmental sanitation products and culture media.

China’s sales were flat, as growth in the first half of the fiscal year was offset by lower sales in the last six months due to lockdowns and restrictions resulting from China’s “Zero COVID” strategy.

Sales at Neogen Australasia increased 25% for fiscal 2022, led by new genomics service business in the bovine, sheep and companion animal markets.

Service revenue, which consists primarily of genomics services sales to animal protein and companion animal markets, was $102.5 million in fiscal 2022, an increase of 11% over prior fiscal year sales of $92.2 million.

The growth was led by increases in sample volumes from the global companion animal and commercial beef markets and the Chinese porcine market, as that country has begun recovery from its African swine fever outbreak.

The growth was led by the previously mentioned strength in Australia and Brazil, and was partially offset by lower volumes of domestic companion animal samples, the result of a difficult comparison due to large increases in the prior year.

(dollars in thousands)

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

Natural Toxins, Allergens

& Drug Residues –

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

& General Sanitation –

Sales in this category increased 7% in fiscal 2022 compared to the prior year.

Sales of our AccuPoint ®

sanitation monitoring product line increased 12% aided by strong sales of our new reader.

Sales of our Listeria Right Now ™

product increased 25%, while sales of products to detect spoilage organisms in processed foods increased 4%.

Culture Media

Sales in this category increased 23% in fiscal 2022 compared to fiscal 2021;

excluding sales from the December 2020 acquisition of Megazyme, sales increased 11%.

Sales of Neogen Culture Media products rose 16% as our new workflow, One Broth One Plate, continued to drive growth and increased sales to commercial labs in the U.K.;

a large non-recurring

sale to a domestic vaccine manufacturer in the first quarter also contributed to the current year growth.

Rodenticides, Insecticides

& Disinfectants –

Revenues of products in this category sold through our Food Safety operations increased 11% in fiscal 2022 compared to fiscal 2021.

Excluding revenues from the November 2020 acquisition of Delf and Abbott Analytical, the growth was 3%.

The increase was primarily due to continued strength in sales of cleaners and disinfectants to Asia resulting from the African swine fever outbreak in that region increasing demand, and higher sales to a U.K.-based toll manufacturer.

Genomics Services –

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

Animal Safety:

Life Sciences –

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

commercial laboratory that moved to a different testing platform.

Veterinary Instruments

& Disposables –

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

Sales of these products increased 11% in fiscal 2022 compared to fiscal 2021;

excluding the contribution of parasiticides from the September 2021 acquisition of CAPInnoVet, revenues in this category rose 6%.

Growth in our biologics, small animal supplements and wound care product lines were partially offset by a large decline in sales of dairy supplies due to the June 2020 termination of an agreement under which we distributed these types of products for a large manufacturer of dairy equipment.

Rodenticides, Insecticides

& Disinfectants –

Sales in this category increased 8% in fiscal 2022, compared to the prior year.

Insecticide sales increased 32%, led by strong demand in the farm and home channels, and cleaners and disinfectants sales rose 6%.

These increases were partially offset by a 4% decline in rodenticide sales due to increased rodent pressure in the prior year, which resulted in a difficult comparison.

Genomics Services –

Sales in this category increased 11% in fiscal 2022 compared to fiscal 2021;

excluding the December 2021 acquisition of Genetic Veterinary Sciences, the organic increase was 5%.

The growth was led by increases in beef and sheep testing in Australia, due to improved market conditions, and higher sample volumes from domestic dairy and beef cattle and poultry customers.

The increase was partially offset by a decline in domestic companion animal revenues due to a difficult comparison from strong prior year sales growth.

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

pandemic, which began in the second half of fiscal 2020, continued to cause difficult operating conditions in many of our key market segments in fiscal 2021.

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these sales are not expected to continue long-term.

This category also includes sales of veterinary instruments transferred to our U.K.

sales team in fiscal 2021.

Sales of Neogen Culture Media increased 1% as new business gained in the U.S.

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Revenues in this category increased 12% in fiscal 2021 compared to fiscal 2020.

Veterinary instruments sales increased 16% for the year, led by increases in detectable needles and syringes as we gained new customers and benefitted from increased demand resulting from higher numbers of production animals in existing markets.

Veterinary instruments sales increased 16% for the year, led by increases in detectable needles and syringes as we gained new customers and market share from a key competitor.

Partially offsetting this increase was a 9% decline in protective wear sales, as gloves were on backorder for much of the current year due to COVID related demand.

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Gains in the commercial beef and beef association markets in the U.S., Canada and Australia also contributed to the growth, as well as the recent launch of a new high-density chip for white leg shrimp.

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

pandemic in the second half of fiscal 2020 resulted in difficult operating conditions in many of our key market segments.

Shelter in place orders across the U.S.

and in a number of our international markets, the closure or reduced output of businesses due to quarantine, disruption in the supply chain resulting from reduction in end-market

demand, and the inability of some markets to react quickly to these changes, each adversely impacted our revenues.

Natural Toxins, Allergens

& Drug Residues –

Sales in this category were 3% lower in fiscal 2020 compared to the prior year, driven by a 30% decline in sales of drug residues test kits, due to lower demand from a large distributor in Europe.

In January 2020, we ended our exclusive relationship with this distributor and have begun marketing these products directly into the European market.

Partially offsetting the decrease in drug residue testing, the natural toxins and allergens product lines each increased 4% for the year.

The natural toxin increase was due to continued new business earned in Brazil for aflatoxin and DON test kits, partially offset by lower sales of DON test kits in the U.S.

and France, the result of mild outbreaks in the prior year which did not recur in fiscal 2020.

The allergen test kit increase was primarily the result of strong gliadin, milk and coconut allergen test kit sales in the U.S.

market, although fourth quarter sales declined 7% due to lower business with customers supplying restaurants and other food service organizations, which were adversely impacted by COVID-19.

& General Sanitation –

Sales in this category were essentially flat in fiscal 2020 compared to the prior year.

Sales of test kits to detect pathogens decreased 2%, as lower sales of ANSR equipment were only partially offset by increases from our Listeria

Right Now test kit, which grew 24% in fiscal 2020.

Sales of our AccuPoint sanitation monitoring product line increased 6%, on increases in both readers and samplers.

Sales of products to detect spoilage organisms in foods decreased 7% in fiscal 2020 on reduced sales of readers and consumable vials during the year, resulting from lower market demand and customer losses.

Culture Media

Sales in this category decreased 4% in fiscal 2020 compared to fiscal 2019.

This category includes forensic drug test kits sold within Brazil, which declined significantly as a large commercial lab customer in that country moved to an alternative new technology which provided higher throughput.

Culture media revenues declined 5%, due to lower end market demand from several large customers in the U.S.

Higher shipping revenues, which rose 12% for the year, and lower rebates offered to certain customers, both of which are reported in this category, partially offset the lower forensic and culture media revenues.

Rodenticides, Insecticides

& Disinfectants –

Revenues of products in this category sold through our Food Safety operations increased 13% in fiscal 2020 compared to fiscal 2019.

This category was led by increases in sales of cleaners and disinfectants to customers in Europe, the Middle East and China, partially offset by a decrease in sales of rodenticides in Central America due to lower demand from a large distributor, and reduced demand of cleaners and disinfectants in India, due to a large order in 2019 which did not recur in fiscal 2020.

Genomics Services –

Sales of genomics services sold through our Food Safety operations increased 2% in fiscal 2020 compared to the prior year, primarily due to higher sales in the European bovine and equine markets.

Partially offsetting this increase were lower revenues from our genomics operation in Brazil due to a research project with the Brazilian government from 2019 which did not recur in fiscal 2020.

Animal Safety:

A significant proportion of the Animal Safety products are marketed and sold through our veterinary distributor network;

this channel was impacted in both fiscal years 2019 and 2020, as difficult market conditions resulting from increased tariffs and political uncertainties in our agricultural and animal protein markets continued.

pandemic in the second half of fiscal 2020 has exacerbated these market conditions;

further, the market uncertainty resulting from COVID-19

has caused our larger distributor partners to implement working capital improvement programs by lowering inventory levels which resulted in lower sales of many products in our animal health portfolio.

Partially offsetting this weakness in the fourth quarter were higher sales of several of our cleaning and disinfecting products due to demand caused by the COVID-19

Life Sciences –

Sales in this category decreased 20% in fiscal 2020 compared to the same period in the prior year, the result of lower forensic drug test kit sales to a large commercial lab in the U.S.

serving the Brazilian market, a reduction in sales of products to the U.S.

horse racing industry in the U.S.

due to a decline in domestic racing activity, and the consolidation of several state laboratories.

Veterinary Instruments

& Disposables –

Revenues in this category decreased 4% in fiscal 2020 compared to fiscal 2019.

Veterinary instruments sales were down 7% for the year, primarily the result of a 20% decline in needles and 3% decline in syringes, due to lower demand from our largest distributors.

Partially offsetting these decreases, protective wear and consumables increased 24% for the year, on the strength of a $956,000 increase in gloves in the fourth quarter of fiscal 2020, the result of demand caused by the COVID-19

Sales of these products decreased 5% in fiscal 2020 compared to fiscal 2019.

Antibiotics and injectable vitamin products were down 20% and 15%, respectively, due primarily to inventory destocking at distributors.

Sales of our biologics product line, marketed primarily into the equine market, declined 17%, and our equine supplements were also down 20%, due to lower demand from end customers in this market.

Sales of wound care products rose 9% to partially offset these losses.

Rodenticides, Insecticides

& Disinfectants –

Sales in this category increased 4% in fiscal 2020, compared to the prior year.

The increase was due primarily to a $2.6 million increase in sales of cleaners and disinfectants for the year, driven in large part by growth in hand sanitizers, disinfectants, and disinfecting wipes in the fourth quarter resulting from the COVID-19

Revenues for water disinfection in animal protein production environments rose 8% over fiscal 2019.

Rodenticide sales increased 1% over the prior year, as strong growth in the retail market was almost entirely offset by lower sales to agricultural markets in the northwest U.S., due to lower rodent pressure.

Insecticide revenues declined 2% for the year.

Genomics Services –

Sales in this category increased 14% in fiscal 2020, aided by the acquisition of Livestock Genetics (September 2018) and Delta Genomics (January 2019);

organic growth in this category was 12%.

Strong growth in the companion animal and commercial beef cattle markets was partially offset by revenue decreases in the U.S.

commercial dairy market due to weak economic conditions in that market, resulting from a movement away from dairy milk towards alternative products.

COST OF REVENUES

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Cost of Revenues

Cost of revenues increased 14% in fiscal 2021 compared to fiscal 2020 and was essentially flat in fiscal 2020 compared to fiscal 2019.

Cost of revenues increased 12% in fiscal 2022 compared to fiscal 2021 and increased 14% in fiscal 2021 compared to fiscal 2020.

This compares with revenue increases of 13% in fiscal 2022 and 12% in fiscal 2021.

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Gross margins were 46.1%, 45.9%, and 46.9% for fiscal years 2022, 2021, and 2020, respectively.

– Our overall gross margin increased 20 basis points in fiscal 2022, primarily from a product mix shift to higher margin products in the Animal Safety segment.

Partially offsetting this were higher raw material and freight costs within each segment, which resulted from continued supply chain disruptions, inflationary pressure, and ongoing issues related to COVID-19

and its variants across most of our markets.

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

– Our overall gross margin declined 100 basis points in fiscal 2021 as pressure on the worldwide supply chain caused by the COVID-19

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in particular, freight costs on inventory purchases increased 53% in fiscal 2021 compared to the prior year.

Additional cost increases resulted from personnel costs, in part from the increased volumes, but also due to labor shortages, contracted services primarily related to our recently launched instruments, and higher health insurance costs domestically, as employees and their families utilized elective medical services postponed from the fourth quarter of fiscal 2020 due to COVID-19.

Additional cost increases resulted from personnel costs, in part from the increased volumes, but also due to labor

shortages, contracted services primarily related to our recently launched instruments, and higher health insurance costs domestically, as employees and their families utilized elective medical services postponed from the fourth quarter of fiscal 2020 due to COVID-19.

To a lesser extent, the shift in mix within the Food Safety segment towards products with lower gross margins negatively impacted the consolidated gross margin percentage.

– Our overall gross margin improved 60 basis points in fiscal 2020, primarily from improved gross margin in the Animal Safety segment and improved efficiencies, resulting from a focus on cost reductions in certain areas.

These efforts resulted in a slight decrease in cost of revenues compared to the prior fiscal year.

Food Safety Gross Margins:

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Fiscal 2022 –

Food Safety margins increased 100 basis points in fiscal 2022, due to a product mix shift within the segment toward higher sales of diagnostic test kits in fiscal 2022;

gross margin was also aided by a full year of sales of food quality products and enzymes from the Megazyme acquisition.

Fiscal 2021 –

Food Safety margins decreased 220 basis points in fiscal 2021, primarily due to higher sales of equipment such as the Soleris NG, which was launched in the current year and has lower gross margins than our diagnostic test kits, and cleaners and disinfectants sold through our China location, which reports through the Food Safety segment.

We were also negatively impacted by increased freight, labor and other overhead costs throughout the segment.

Fiscal 2020 –

Food Safety margins decreased 40 basis points in fiscal 2020, primarily due to lower sales of higher margin forensic test kits in Brazil, and the continued strength of the U.S.

dollar against currencies in the countries in which we operate;

our international operations pay for their inventory primarily in U.S.

In a neutral currency environment, Food Safety segment sales would have been $5.4 million higher in fiscal 2020.

Animal Safety Gross Margins:

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Fiscal 2022 –

Animal Safety gross margins decreased by 50 basis points in fiscal 2022, primarily due to significant product cost increases and international freight charges.

Negative mix effects occurred from lower sales of higher margin rodenticide products and companion animal services.

Fiscal 2021 –

Animal Safety gross margins increased by 30 basis points, primarily from strong sales of higher margin rodenticide and companion animal products and cost efficiencies;

somewhat offsetting these gains, gross margin in this segment was negatively impacted by higher freight costs as rates to bring product into inventory rose significantly during the year, from both domestic and international sources.

Fiscal 2020 –

Animal Safety gross margins increased by 170 basis points, driven by increased sales of higher margin disinfectant products, particularly in the fourth quarter of the year as a result of the COVID-19

pandemic, which caused heavy demand for our sanitizing products.

In addition, a mix shift towards genomics services for the companion animal markets, which have higher gross margins within the genomics business, contributed to the improvement.

OPERATING EXPENSES

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Overall operating expenses increased by 31% in fiscal 2022 and 9% in fiscal 2021, each compared to the prior year.

These increases compare to revenue increases of 12% and 1%, respectively, for each comparative period.

Legal, consulting and other professional fees totaling $25.6 million were incurred in conjunction with due diligence, negotiation of terms and integration planning for our proposed business combination with 3M’s Food Safety business, which was announced on December 14, 2021.

Excluding costs related to the 3M transaction, operating expenses were $158.8 million, an increase of 13% compared to the prior year.

Sales and Marketing:

Sales and marketing expenses increased by 5% in fiscal 2021 compared to fiscal 2020 and decreased 1% in fiscal 2020 compared to the prior year.

Sales and marketing expenses increased by 15% in fiscal 2022 compared to fiscal 2021 and increased 5% in fiscal 2021 compared to the prior year.

As a percentage of sales, sales and marketing expense was 16.0%, 15.7% and 16.7% in fiscal years 2022, 2021 and 2020, respectively.

– The $11.2 million, or 15%, increase in sales and marketing expenses in fiscal 2022 resulted primarily from increases in employee compensation expenses such as salaries, bonuses, and commissions, and shipping expense, both reflecting the increase in revenues.

Travel, meals and entertainment, and tradeshow expense were also higher, with customer-facing activities increasing significantly, the result of the easing of COVID-19 restrictions.

– The $3.8 million, or 5%, increase in sales and marketing expenses in fiscal 2021 resulted primarily from increases in employee compensation expenses such as salaries, bonuses, and commissions, reflecting the increase in sales for the year, as well as increased headcount as we returned to normal staffing levels.

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restrictions were eased.

– The $550,000 decline in sales and marketing expenses in fiscal 2020 was driven by a $1.3 million, or 7.4%, decline in spending in this category in the fourth quarter of the year, caused by a reduction in business travel, meals and entertainment, trade shows, and related marketing expenses, as the COVID-19

global pandemic resulted in strict travel restrictions and reductions in face to face sales activities in many of our markets during the quarter.

Partially offsetting these declines were higher compensation and related fringe benefits, the result of increased headcount, increased shipping expenses, and higher regulatory expense due to product registration efforts in our international markets.

General and Administrative:

General and administrative expenses rose 62% in fiscal 2022 compared to fiscal 2021 and by 15% in fiscal 2021 compared to fiscal 2020.

As a percentage of sales, general and administrative expense was 10.9%, 10.6% and 9.8% in fiscal years 2021, 2020 and 2019, respectively.

Legal, consulting and other professional fees totaling $25.6 million were incurred in conjunction with due diligence, negotiation of terms and integration planning for our proposed transaction to combine with 3M’s Food Safety business.

Excluding costs related to the 3M transaction, general and administrative expenses increased 12% compared to the prior year.

As a percentage of sales, general and administrative expense was 15.7% (10.8% excluding 3M transaction costs), 10.9% and 10.6% in fiscal years 2022, 2021 and 2020, respectively.

Fiscal 2022 –

In fiscal 2022, we spent $25.6 million on strategic consulting, legal and other professional fees related to due diligence, negotiation of terms and integration planning for our proposed transaction to combine with 3M’s Food Safety business.

Excluding these costs, the increase in general and administrative expense in fiscal 2022 was 12%.

Other increases in the current year included compensation related costs due to increased headcount and improved operating performance, incremental amortization expenses (non-cash)

from recent acquisitions, higher levels of depreciation (non-cash)

and related software and licensing costs from continued investments in information technology infrastructure and applications.

Fiscal 2021 –

In fiscal 2021, we spent $3.1 million on strategic consulting, legal and other professional fees related to acquisition activity for businesses which we were ultimately not successful in acquiring.

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Increases in this cost category resulting from the Megazyme acquisition totaled $957,000.

Fiscal 2020 –

Higher stock-based compensation costs and a significant uptick in legal fees, driven in part from the number of acquisitions completed during the year, resulted in the overall 9% expense increase.

In addition, the Company continued to invest in information technology infrastructure, network capabilities and e-commerce

This resulted in higher depreciation on IT-related

hardware and increased license fees on software investments.

These increases were somewhat offset by a reduction in outside consulting.

General and administrative expenses at five new company locations, the result of acquisitions in the second half of fiscal 2020, totaled $520,000.

Research and Development:

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Fiscal 2022 –

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

The 5% increase in research and development expenses in fiscal 2022 was primarily the result of increased compensation expense, resulting from scheduled annual increases and additional headcount, and increases in contracted services related to new product development.

These increases were partially offset by a decrease in external reader development costs;

these projects were completed in the prior fiscal year.

Fiscal 2021 –

The 15% increase in research and development expenses in fiscal 2020 was primarily the result of continued spending with development partners for two new readers, launched in fiscal 2021.

Increased compensation expense, resulting from investments in people as we heighten the development capabilities of the group, higher depreciation expense from continued investment in analytical equipment, and an increase in contracted services also contributed to the expense growth.

OPERATING INCOME

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Operating Income

Our operating income rose 10% in fiscal 2021 compared to fiscal 2020 and decreased by 1% in fiscal 2020 compared to fiscal 2019.

Expressed as a percentage of revenues, operating income was 15.8%, 16.1% and 16.4% in fiscal years 2021, 2020 and 2019, respectively.

Gross margins rose by $18.8 million, or 10% in fiscal 2021;

Operating income decreased 21% in fiscal 2022 compared to fiscal 2021 and increased by 10% in fiscal 2021 compared to fiscal 2020.

Excluding the $25.6 million in transaction costs associated with 3M’s Food Safety business, operating income increased 13% in fiscal 2022 compared to the prior year.

Expressed as a percentage of revenues, operating income was 11.1% (16.0% excluding 3M transaction costs), 15.8% and 16.1% in fiscal years 2022, 2021 and 2020, respectively.

Gross margins rose by $28.0 million, or 13% in fiscal 2022 compared to the prior fiscal year;

this was more than offset by a $43.5 million increase in operating expenses (including $25.6 million of 3M transaction costs).

In fiscal 2021, gross margins rose by $18.8 million, or 10%;

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

Gross margins rose by $4.4 million in fiscal 2020;

the increase was more than offset by an overall increase of $4.9 million, or 4.0%, in operating expenses, resulting in a 1% decrease in operating income compared to fiscal 2019.

OTHER INCOME (EXPENSE)

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Foreign currency transactions

Royalty income

Licenses and settlements

Quat-Chem contingent consideration

Deoxi contingent consideration

Magiar contingent consideration

Clarus contigent consideration

Livestock Genomics contingent consideration

Total Other Income

Interest income declined by $4.4 million in fiscal 2021 compared to fiscal 2020, despite higher cash and marketable securities balances, as yields on fixed income securities declined significantly during the year;

Federal Reserve intervened in markets to lower rates to stimulate the economy during the COVID-19

Interest income rose in fiscal year 2020 compared to fiscal 2019, due to higher cash balances and rising interest rates during most of fiscal 2020.

The loss from foreign currency translations in fiscal years 2021, 2020 and 2019 is primarily the result of the changes in the value of foreign currencies relative to the U.S.

Interest income decreased by $347,000 in fiscal 2022 compared to fiscal 2021, due to lower interest rates in effect for most of the fiscal year.

The loss from foreign currency translations in fiscal years 2022, 2021 and 2020 is the result of the changes in the value of foreign currencies relative to the U.S.

dollar in countries in which we operate;

the dollar strengthened against most of these currencies in all three years.

In fiscal 2022, we recorded adjustments totaling $220,000 for contingent consideration accruals related to acquisitions completed in prior years.

In fiscal 2021, we received proceeds of $309,000 for a property loss settlement and recorded $300,000 of expense resulting from a legal settlement with a vendor.

Additionally, adjustments to contingent consideration accruals resulted in $148,000 of income.

Additionally, adjustments to contingent consideration accruals in fiscal 2021 resulted in $148,000 of income.

In fiscal 2020, we took a charge to expense and recorded a reserve of $600,000 to provide for potential fines or penalties resulting from an administrative subpoena issued by the U.S.

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This was partially offset by a $483,000 gain resulting from a settlement with the Brazilian government related to sales taxes charged over several years, and proceeds received for a property loss settlement.

In fiscal 2019, gains were recognized on insurance proceeds received for property loss settlements;

additionally, adjustments were made to Quat-Chem and Deoxi contingent consideration amounts based on the level of achievement of revenue targets for the acquired businesses in that fiscal year.

PROVISION FOR INCOME TAXES

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(dollars in thousands, except per share data)

Net Income Attributable to Neogen

Net Income Per Share-Basic

Net Income Per Share-Diluted

Net income decreased 21% in fiscal 2022 compared to fiscal 2021, due to $25.6 million of professional fees related to the 3M transaction.

Excluding these costs and adjusting the tax rate accordingly, net income would have been $67.9 million, an increase of 12% compared to fiscal 2021.

Net income increased 2% in fiscal 2021 compared to fiscal 2020, primarily due to the $6.7 million increase in operating income.

The increase in operating income was partially offset by lower other income and higher tax expense for the year.

Net income decreased $701,000 in fiscal 2020 compared to fiscal 2019, primarily due to the $654,000 decrease in pre-tax

FINANCIAL MEASURES

This report includes certain financial information of Neogen that differs from what is reported in accordance with GAAP.

These non-GAAP

financial measures consist of EBITDA, Adjusted EBITDA and Adjusted EBITDA margin.

These non-GAAP

financial measures are included in this report because management believes that they provide investors with additional useful information to measure the performance of Neogen, and because these non-GAAP

financial measures are frequently used by securities analysts, investors and other interested parties as common performance measures to compare results or estimate valuations across companies in Neogen’s industries.

We define EBITDA as net income before interest, income taxes, and depreciation and amortization.

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

EBITDA also forms the basis for the measurement of Adjusted EBITDA (discussed below).

Adjusted EBITDA

We define Adjusted EBITDA as EBITDA, adjusted for stock-based compensation and certain transaction fees and expenses.

We present EBITDA because it provides an understanding of underlying business performance by excluding the following:

Stock-based compensation

We believe it is useful to exclude stock-based compensation to better understand the long-term performance of the respective core businesses and to facilitate comparison with the results of peer companies.

Certain transaction fees and expenses.

We exclude fees and expenses related to certain transactions because they are outside of Neogen’s underlying core performance.

Adjusted EBITDA margin

We define Adjusted EBITDA margin as Adjusted EBITDA as a percentage of total revenues.

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

These non-GAAP

financial measures are presented for informational purposes only.

EBITDA, Adjusted EBITDA and Adjusted EBITDA margin are not recognized terms under GAAP and should not be considered in isolation or as a substitute for, or superior to, net income (loss), operating income, cash flow from operating activities or other measures of financial performance.

This information does not purport to represent the results Neogen would have achieved had any of the transactions for which an adjustment is made occurred at the beginning of the periods presented or as of the dates indicated.

This information is inherently subject to risks and uncertainties.

It may not give an accurate or complete picture of Neogen’s financial condition or results of operations for the periods presented and should not be relied upon when making an investment decision.

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

These non-GAAP

financial measures have limitations as analytical tools.

For example, for EBITDA-based metrics:

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.

You should compensate for these limitations by relying primarily on the financial statements of Neogen and using these non-GAAP

financial measures only as a supplement to evaluate Neogen’s performance.

For each of these non-GAAP

financial measures below, we are providing a reconciliation of the differences between the non-GAAP

measure and the most directly comparable GAAP measure.

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

Year ended May 31

(in thousands)

Net Income margin %

Provision for income taxes

Interest income, net

Depreciation and amortization

Stock-based compensation

Certain transaction fees and expenses

Adjusted EBITDA

Adjusted EBITDA margin %

EBITDA, ADJUSTED EBITDA AND ADJUSTED EBITDA MARGIN %

(dollars in thousands)

Adjusted EBITDA

Adjusted EBITDA Margin %

Adjusted EBITDA increased 11% in fiscal 2022 compared to fiscal 2021, due to revenue growth and improved gross margins.

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

FUTURE OPERATING RESULTS

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developing and implementing new technology development strategies;

identifying and completing acquisitions that enhance existing product categories or create new products or services.

identifying and completing acquisitions that enhance existing product categories or create new products or services, and successfully integrating completed acquisitions, including our previously announced proposed transaction to combine with 3M’s Food Safety business.

FINANCIAL CONDITION AND LIQUIDITY

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We have a financing agreement with a bank providing for an unsecured revolving line of credit of $15.0 million, which expires on November 30, 2023.

Upon close of the 3M Food Safety transaction, this credit facility will terminate and be replaced with a larger, revolving facility.

There were no advances against this line of credit during fiscal years 2022, 2021 and 2020, and no balance outstanding at May 31, 2022 and 2021.

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Our days sales outstanding, a measurement of the time it takes to collect receivables, improved to 62 days at May 31, 2022 compared to 66 days at May 31, 2021.

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

pandemic has spread across our global markets;

to date, although there has been some slowdown in collections, we have not experienced an appreciable increase in bad debt write offs.

Inventory balances were $100.7 million at May 31, 2021, an increase of $5.6 million, or 6%, compared to $95.1 million at May 31, 2020;

excluding inventory from the Megazyme acquisition in December 2020, our inventory is flat compared to a year ago.

While we took proactive measures over the last 18 months to ensure adequate supply of inventory during the COVID-19

pandemic, we have also continued to focus on improving inventory turns across the business.

Neogen has been consistently profitable and has generated strong cash flow from operations during each of the past three fiscal years.

However, our cash on hand and current borrowing capacity may not be sufficient to meet our cash requirements to commercialize products currently under development or 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 equity securities or enter into other financing arrangements for a portion of our future capital needs.

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

On December 13, 2021, Neogen, 3M, and Garden Spinco, a newly formed subsidiary of 3M created to carve out 3M’s Food Safety business announced that they had entered into a definitive agreement pursuant to which 3M would separate its Food Safety business and simultaneously combine it with Neogen in a Reverse Morris Trust transaction, which is intended to be tax-efficient to 3M and its shareholders for U.S.

federal income tax purposes.

Under the terms of the definitive agreements, at the completion of the transaction, Neogen will issue a number of shares to 3M shareholders such that 3M shareholders will receive approximately 50.1% of the combined company and existing Neogen shareholders will continue to own approximately 49.9% of the combined company.

In connection with the transaction, 3M will also receive consideration valued at approximately $1 billion, subject to closing and other adjustments.

The transaction is expected to close by the end of the third quarter calendar year 2022, subject to approval by Neogen shareholders and the satisfaction of other customary closing conditions.

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

The Credit Facilities, together with the Notes below, when incurred, represent the financing contemplated in connection with the merger.

In July 2022 Garden SpinCo closed on an offering of $350.0 million aggregate principal amount of 8.625% senior notes due 2030 (the “Notes”) in a private placement at par.

The Notes were initially issued by Garden SpinCo to 3M and were transferred and delivered by 3M to the selling securityholder in the offering, in satisfaction of certain of 3M’s existing debt.

Garden SpinCo did not receive any proceeds from the sale of the Notes by the selling securityholder.

Prior to the distribution of the shares of Garden SpinCo’s common stock to 3M stockholders, the Notes will be guaranteed on a senior unsecured basis by 3M.

Upon consummation of such distribution, 3M will be released from all obligations under its guarantee.

Upon the effectiveness of the merger, the Notes will be guaranteed on a senior unsecured basis by Neogen and certain wholly-owned domestic subsidiaries of Neogen.

In addition to the 3M transaction described above, our future cash on hand and borrowing capacity may not be sufficient to meet cash requirements to commercialize products currently under development or execute our future plans to acquire additional businesses, technology and products that fit within our strategic plan.

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

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

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Unconditional 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 existing operations in fiscal 2023 is $20 to $25 million;

we also expect to spend approximately $70 million over the next two fiscal years to construct a manufacturing facility and $50 million over the next two fiscal years to implement a new enterprise resource planning solution.

In conjunction with our planned transaction with 3M’s food safety business, we will spend an additional $3 to $5 million on capital leases and capital improvements on leased facilities in fiscal 2023.

NEW ACCOUNTING PRONOUNCEMENTS

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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 7. Management’s Discussion and Analysis