EDGAR 10-K Filing

Company CIK: 711377
Filing Year: 2022
Filename: 711377_10-K_2022_0001193125-22-202902.json

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ITEM 1. BUSINESS
ITEM 1.
BUSINESS
Neogen Corporation and subsidiaries develop, manufacture and market a diverse line of products and services dedicated to food and animal safety. Our Food Safety segment consists primarily of diagnostic test kits and complementary products (e.g., culture media) sold to food producers and processors to detect dangerous and/or unintended substances in human food and animal feed, such as foodborne pathogens, spoilage organisms, natural toxins, food allergens, genetic modifications, ruminant by-products,
meat speciation, drug residues, pesticide residues and general sanitation concerns. Our diagnostic test kits are generally easier to use and provide greater accuracy and speed than conventional diagnostic methods. The majority of the test kits are disposable, single-use,
immunoassay and DNA detection products that rely on proprietary antibodies and RNA and DNA testing methodologies to produce rapid and accurate test results. Our expanding line of food safety products also includes genomics-based diagnostic technology, and advanced software systems that help testers to objectively analyze and store their results and perform analysis on the results from multiple locations over extended periods.
On December 13, 2021, Neogen and 3M announced plans to merge 3M’s Food Safety business with Neogen in a Reverse Morris Trust transaction. The transaction is expected to close by the end of the third calendar quarter of 2022. See Note 3, Business Combinations, to the consolidated financial statements for further discussion.
Neogen’s Animal Safety segment is engaged in the development, manufacture, marketing and distribution of veterinary instruments, pharmaceuticals, vaccines, topicals, parasiticides, diagnostic products, rodenticides, cleaners, disinfectants, insecticides and genomics testing services for the worldwide animal safety market. The majority of these consumable products are marketed through veterinarians, retailers, livestock producers and animal health product distributors. Our line of drug detection products is sold worldwide for the detection of abused and therapeutic drugs in animals and animal products, and has expanded into the workplace and human forensic markets.
Neogen’s products are marketed by our sales personnel in the U.S., Canada, Mexico, Central America, Brazil, Argentina, Uruguay, Chile, the United Kingdom, the European Union, China, India and Australia, and by distributors throughout the rest of the world.
Our mission is to be the leading company in the development and marketing of solutions for food and animal safety. To meet this mission, a growth strategy consisting of the following elements has been developed: (i) increasing sales of existing products; (ii) introducing innovative products and services; (iii) growing international sales; and (iv) acquiring businesses and forming strategic alliances. We have historically been successful at increasing product sales organically, including international growth, and maintain an active acquisition program to identify and capitalize on opportunities to acquire new products, businesses, or technology.
Neogen Corporation was formed as a Michigan corporation in June 1981 and operations began in 1982. Our principal executive offices are located at 620 Lesher Place, Lansing, Michigan 48912-1595 and our telephone number is (517) 372-9200.
Neogen’s Annual Report on Form 10-K,
Quarterly Reports on Form 10-Q,
Current Reports on Form 8-K,
and amendments to those reports are available free of charge via our website (www.neogen.com
) as soon as reasonably practicable after such information is filed with, or furnished to, the United States Securities and Exchange Commission. The content of our website or the website of any third party that may be noted herein is not incorporated by reference in this Form 10-K.
PRODUCTS
Product trademarks and registered trademarks owned by Neogen include:
CORPORATE:
Neogen®
, Neogen flask (logo)®
, Neogen and flask (logo)®
, NeoCenter™
FOOD SAFETY:
AccuClean®
, AccuPoint®
, AccuScan®
, Acumedia®
, Agri-Screen®
, Alert®
, ANSR®
, BetaStar®
, BioLumix®
, Ceralpha®
, Colitag™
, F.A.S.T.®
, GeneQuence®
, GENE-TRAK®
, Harlequin®
, ISO-GRID
®
, Lab M®
, Listeria
Right Now™
, Megazyme®
, Megazyme (design) ®
, MPNPlate™
, MPNTray™
, NeoCare™
, NeoColumn™
, NeoNet®
, NeoSeek™
, NEO-GRID
®
, Penzyme®
, Raptor®
, Reveal®
, Soleris®
, µPREP®
, Veratox®
, Simple. Accurate. Supported. Food Safety SolutionsSM
LIFE SCIENCES:
Alert®
, K-Blue
®
, K-Gold
®
, NeoSal®
ANIMAL SAFETY:
Acid-A-Foam
™
, Ag-Tek
®
, AluShield™
, AquaPrime®
, Assault®
, Barnstorm®
, BioCres™
50, BioPhene™
, BioQuat™
, BotVax®
, Breeder-Sleeve®
, Calf Eze™
, Chem-Tech, Ltd.™
, Chem-Tech’s CT logo (with circle)™
, Chlor-A-Foam
™
, COMPANION™
, CT-511
®
, Cykill™
, D3™
Needles, DC&R®
, DeciMax®
, Di-Kill
®
, Dr. Frank’s®
, Dy-Fly
®
, DX3™
, Dyne-O-Might
®
, ElectroJac®
, ELISA Technologies (design)®
, EqStim®
, EquiSleeve®
, E-Z
Bond™
, E-Z
Catch®
, Farm-Foam™
, Farmphene®
, Final-Fly-T
®
, Fly-Die
Defense™
, Fly-Die
Ultra™
, Fura-Zone®
, GenQuat™
, Horse Sense®
, Ideal®
, ImmunoRegulin®
, Iodis®
, Jolt®
, LD-44
®
, LD-44T
™
, MACLEOD®
, Maxi Sleeve®
, MaxKlor®
, MegaShot™
, ®
Viroxide Super™
, Neogen®
Viroxide Super and flask (design)®
, NFZ™
, Nu Dyne®
, PanaKare™
, Pantek™
, Paradefense®
, ParlorMint™
, Parvosol®
, Peraside™
, Place Pack®
, PolyPetite™
, PolyShield™
, PolySleeve®
, Preserve®
, Preserve International®
, Preserve International(design)®
, Prima®
, Prima Marc™
,
Prima-Shot™
, Prima Tech®
, Pro-Fix
®
, Pro-Flex
®
, Promar™
, Pro-Shot
™
, PRO-TECT
6 MIL®
, Protectus™
, Provecta Advanced®
, Prozap®
, Prozap (stylized mark w/fancy Z)™
, PY-75
™
, Ramik®
, RenaKare™
, Rodex™
, Safe-T-Flex
™
, Siloxycide®
, Spectrasol™
, Squire®
, Standguard®
, Starlicide®
, Stress-Dex
®
, SureBond®
, SureKill®
, Swine-O-Dyne
®
, Synergize®
, Tetrabase®
, Tetracid®
, Tetradyne®
, ThyroKare™
, Tri-Hist
®
, Paradefense®
, Turbocide®
, Turbocide Gold®
, Uniprim®
, VAP-5
™
, VAP-20
™
, Vet-Tie
™
, Vita-15
™
, War Paint®
, X-185
™
GENOMICS:
Deoxi™
, Envigor™
, GeneSeek®
, Genomic Profiler™
, Genomic Insight for Personalized Care™
, Igenity®
, Infiniseek™
, SeekGain™
, SeekSire™
, Skimseek™
, Early Warning™
LOGOTYPES:
BioSentry barn logo®
, BioSentry chicken logo®
, BioSentry pig logo®
, Circular design®
, TurboCide®
(stylized), D3 color mark - red®
Neogen operates in two business areas: the Food Safety and the Animal Safety segments. See the “Notes to Consolidated Financial Statements” section of this Form 10-K
for financial information about our business segments and international operations.
FOOD SAFETY SEGMENT
Neogen’s Food Safety segment is primarily engaged in the production and marketing of diagnostic test kits and complementary products marketed to food and feed producers and processors to detect dangerous and/or unintended substances in food and animal feed, such as foodborne pathogens, spoilage organisms, natural toxins, food allergens, genetic modifications, ruminant by-products,
meat speciation, drug residues, pesticide residues and general sanitation concerns. Our test kits are used to detect potential hazards or unintended substances in food and animal feed by testers ranging from small local grain elevators to the largest, best-known food and feed processors in the world, and numerous regulatory agencies. Neogen’s products include tests for:
Mycotoxins.
Grain producers and processors of all types and sizes use our Veratox, Agri-Screen, Reveal, Reveal Q+ and Reveal Q+ MAX tests to detect the presence of mycotoxins, including aflatoxin, aflatoxin M1, deoxynivalenol, fumonisin, ochratoxin, zearalenone, T-2/HT-2
toxin and ergot alkaloid, to help ensure product safety and quality in food and animal feed.
Food allergens.
The world’s largest producers of cookies, crackers, candy, ice cream and many other processed foods use our Veratox, Alert, Reveal, Reveal 3-D
and BioKits testing products to help protect their food-allergic customers from the inadvertent contamination of products with food allergens, including but not limited to peanut, milk, egg, almond, gliadin (gluten), soy, hazelnut and coconut residues.
Dairy antibiotics.
Dairy processors are the primary users of Neogen’s BetaStar diagnostic tests to detect the presence of veterinary antibiotics in milk. The presence of these drugs above a certain level in milk is a public health hazard and an economic risk to producers as it limits the milk’s further processing.
Foodborne pathogens.
Meat and poultry processors, seafood processors, fruit and vegetable producers and many other market segments are the primary users of Neogen’s ANSR and Reveal tests for foodborne bacteria, including E. coli
O157:H7, Salmonella
, Listeria
and Campylobacter
. Neogen’s ANSR pathogen detection system is an isothermal amplification reaction test method that exponentially amplifies the DNA of any bacteria present in food and environmental samples to detectable levels in 10 minutes. Combined with ANSR’s single enrichment step, Neogen’s pathogen detection method provides DNA-definitive
results in a fraction of the time of other molecular detection methods. Our Listeria
Right Now test detects the pathogen in less than 60 minutes without sample enrichment. Reveal’s lateral flow device combines an immunoassay with chromatography for a rapid and accurate one-step
result.
Spoilage microorganisms.
Neogen’s Soleris products are used by food processors to identify the presence of spoilage organisms (e.g., yeast and mold) and other microbiological contamination in food. The systems measure microbial growth by monitoring biochemical reactions that generate a color change in the media as microorganisms grow. The sensitivity of the system allows detection in a fraction of the time needed for traditional methods, with less labor and handling time. In July 2020, we launched Soleris NG, a next generation version of the platform, which features enhanced hardware and software for results that are easier to analyze and audit. Our NeoSeek genomics services utilize a novel application of metagenomics to determine all bacteria in a sample, without introducing biases from culture media, and without the need to generate a bacterial isolate for each possible microbe in a sample.
Sanitation monitoring.
Neogen manufactures and markets our AccuPoint Advanced rapid sanitation test to detect the presence of adenosine triphosphate (ATP), a chemical found in all living cells. This easy-to-use
and inexpensive test uses bioluminescence to quickly determine if a contact surface has been completely sanitized. When ATP comes into contact with reagents contained in the test device, a reaction takes place that produces light. More light is indicative of higher levels of ATP and a need for more thorough sanitation. In May 2021, we launched AccuPoint Advanced NG, a next generation version, designed to be simpler to use, and provide results that are easier to analyze. Our worldwide customer base for ATP sanitation testing products includes food and beverage processors, the food service and healthcare industries, as well as many other users.
Seafood contaminants.
Neogen’s specialty products for the seafood market include tests for histamine, a highly allergenic substance that occurs when certain species of fish begin to decay; sulfite, an effective but potentially allergenic shrimp preservative; and shellfish toxins. Neogen’s Reveal lateral
flow tests for shellfish toxins include rapid tests to detect the toxins that cause amnesic shellfish poisoning (ASP), diarrhetic shellfish poisoning (DSP) and paralytic shellfish poisoning (PSP).
Waterborne microorganisms.
Neogen offers the food and beverage industries, including water companies, several platforms for performing the microbial analysis of water. This includes Neogen’s filter tests, which are a combination of Neogen Filter membrane filtration and Neogen Culture Media ampouled media, and an easy-to-use
Colitag product. With Colitag, after an incubation period, the sample changes color in the presence of coliforms and fluoresces in the presence of E. coli
.
Culture media.
Neogen Culture Media, formerly Neogen’s Acumedia and Lab M products, offers culture media and prepared media for varied purposes, including traditional bacterial testing and the growth of beneficial bacteria, such as cultures for sausages and beer. Our customers for culture media also include commercial and research laboratories and producers of pharmaceuticals, cosmetics and veterinary vaccines.
Food quality diagnostics.
Through the December 2020 acquisition of Ireland-based Megazyme, Ltd., Neogen supplies diagnostic kits and specialty enzymes used worldwide by quality control laboratories in the food, animal feed and beverage industries. Megazyme’s validated assays and reagents are used across various food industries such as the grain, wine and dairy markets, to measure dietary fibers, complex carbohydrates, simple sugars and organic acids, such as lactose.
Digital services.
Our food safety and risk management software-as-a-service,
Neogen Analytics, delivers a comprehensive Environmental Monitoring Program (EMP) automation solution for food companies. The software reduces risk by increasing visibility to food safety testing results, elevating the ability to enforce and improve food safety standards. Neogen Analytics builds upon innovative technologies like our AccuPoint Advanced Next Generation and ANSR systems, offering floor plan mapping, smart test scheduling, easily filtered and auditable data management, and corrective actions.
Laboratory services.
Neogen offers food safety analysis services in the U.S., United Kingdom (U.K.) and India. These ISO-accredited
laboratories offer a variety of fee-for-service
tests for the food and feed industries.
The majority of Neogen’s food safety test kits use immunoassay technology to rapidly detect target substances. Our ability to produce high quality antibodies sets our products apart from immunoassay test kits produced and sold by other companies. Our kits are available in microwell formats, which allow for automated and rapid processing of a large number of samples, and lateral flow and other similar devices that provide distinct visual results. Typically, test kits use antibody-coated test devices and chemical reagents to indicate a positive or negative result for the presence of a target substance in a test sample; the simplicity of the tests makes them accessible to all levels of food producers, processors and handlers. Neogen also offers other testing methods and products to complement its immunoassay tests.
Our test kits are generally based on internally developed technology, licensed technology, or technology that is acquired as a result of acquisitions. In fiscal 2022, the Food Safety segment incurred expense totaling $1,779,000 for royalties for licensed technology used in our products, including expense of $800,000 for allergen products and $494,000 for the pathogen product line. Generally, royalty rates are in the range of 2% to 10% of revenues on products containing the licensed technology. Some licenses involve technology that is exclusive to Neogen’s use, while others are non-exclusive
and involve technology licensed to multiple licensees.
Neogen’s international operations in the U.K., Mexico, Guatemala, Brazil, Argentina, Uruguay, Chile, China and India originally focused on food safety products, and each of these units reports through the Food Safety segment. In recent years, these operations have expanded to offer our complete line of products and services, including those usually associated with the Animal Safety segment such as cleaners, disinfectants, rodenticides, insecticides, veterinary instruments and genomics services. These additional products and services are managed and directed by existing management at our international operations, and report through the Food Safety segment.
Revenues from Neogen’s Food Safety segment accounted for 49.3%, 50.0%, and 50.9% of our total revenues for fiscal years ended May 31, 2022, 2021 and 2020, respectively.
ANIMAL SAFETY SEGMENT
Neogen’s Animal Safety segment is primarily engaged in the development, manufacture, marketing and distribution of veterinary instruments, pharmaceuticals, vaccines, topicals, parasiticides, diagnostic products, a full suite of agricultural biosecurity products such as rodenticides, cleaners, disinfectants and insecticides, and genomics services.
Veterinary instruments.
Neogen markets a broad line of veterinary instruments and animal health delivery systems under the Ideal brand name. Approximately 250 different products are offered, many of which are used to deliver animal health products, such as antibiotics and vaccines. Ideal’s D3 Needles are stronger than conventional veterinary needles and are uniquely detectable by metal detectors at meat processing facilities - a potential market advantage in the safety-conscious beef and swine industries. Neogen’s Prima Tech product line consists of highly accurate devices used by farmers, ranchers and veterinarians to inject animals, provide topical applications and to use for oral administration. The Prima Tech line also includes products used in artificial insemination in the swine industry, animal identification products and handling equipment.
Veterinary pharmaceuticals.
Animal Safety’s NeogenVet product line provides innovative, value-added, high quality products to the veterinary market. Top NeogenVet products include PanaKare, a digestive aid that serves as a replacement therapy where digestion of protein, carbohydrate and fat is inadequate due to exocrine pancreatic insufficiency; Natural Vitamin E-AD,
which aids in the prevention and treatment of vitamin deficiencies in swine, cattle and sheep; RenaKare, a supplement for potassium deficiency in cats and dogs; and ThryroKare, a supplement used as replacement therapy for dogs with diminished thyroid function. Other products sold under the NeogenVet brand include Vita-15
and Liver 7, which are used in the treatment and prevention of nutritional deficiencies. Neogen also markets Uniprim, a veterinary antibiotic, and, through the Company’s September 2021 acquisition of CAPInnoVet, Inc., several companion animal parasiticides.
Veterinary biologics.
Neogen’s BotVax B vaccine has successfully protected thousands of horses and foals against Type B botulism, commonly known as Shaker Foal Syndrome. Our product is the only USDA-approved vaccine for the prevention of Type B botulism in horses. Years of research and many thousands of doses have proven Neogen’s EqStim immunostimulant to be safe and effective as a veterinarian-administered adjunct to conventional treatment of equine bacterial and viral respiratory infections. The Company’s ImmunoRegulin product uses similar immunostimulant technology to aid in the treatment of pyoderma (a bacterial skin inflammation) in dogs.
Veterinary OTC products.
Animal Safety products offered by Neogen to the retail over-the-counter
(OTC) market include Ideal brand veterinary instruments packaged for the retail market. OTC products also include Stress-Dex,
an oral electrolyte replacer for performance horses, and Fura-Zone, for the prevention and treatment of surface bacterial infections in wounds, burns and cutaneous ulcers. Hoof care, disposables and artificial insemination supplies are marketed to the dairy and veterinary industries.
Rodenticides.
Neogen’s comprehensive line of proven rodenticides, sold under brand names such as Ramik and Havoc, effectively address rodent problems of any size and serve as a critical component of an overall biosecurity plan for animal protein production operations. Neogen offers several rodenticide active ingredients including diphacinone, bromethalin, brodifacoum and zinc phosphide, formulated with food grade ingredients to generate the highest acceptance and most palatable bait possible.
Cleaners and disinfectants.
Used in animal and food production facilities, Neogen’s cleaners and disinfectants, including 904 Disinfectant, Acid-A-Foam,
Synergize, BioPhene, Neogen Viroxide Super, and Companion, prevent disease outbreaks. The products are also used in the veterinary clinic market to maintain sanitary conditions and limit the potential hazards of bacteria, fungi and viruses. Neogen’s water line cleaner and disinfectant products, including Peraside, NeoKlor, AquaPrime and Siloxycide, are used to clean water lines and provide continuous disinfection of a livestock facility’s water supply.
Insecticides.
Neogen’s highly effective insecticides utilize environmentally friendly technical formulas, and several are approved for use in food establishments and by pest control professionals in a wide range of environments. The Company’s Prozap insecticide brand is used in the large animal production industry, particularly with dairy and equine producers. Neogen’s SureKill line of products is used by professionals to control a variety of insects and the Company’s StandGuard Pour-on
solution, acquired in July 2020, is used for horn fly and lice control in beef cattle.
Animal genomics services.
Neogen Genomics, formerly known as GeneSeek, provides value-added services to leading agricultural genetics providers, large national cattle associations, companion animal breed registries and direct to consumer canine genetic test providers, university researchers, and numerous commercial beef and dairy cattle, swine, sheep and poultry producers. With state-of-the-art
genomics laboratories and the comprehensive bioinformatics to interpret genomics test results, Neogen Genomics offers identity and trait determination and analysis. Our technology employs high-density DNA genotyping and genomic sequencing for identity and trait analysis in a variety of important animal and agricultural plant species. Our extensive bioinformatics database identifies and predicts an animal’s positive or negative traits based on DNA test results. This information has helped livestock producers increase the speed of genetic improvement in their herds and overall performance and quality of their animals. Neogen’s December 2021 acquisition of Genetic Veterinary Sciences, Inc. expanded the Company’s portfolio through the addition of a number of genetic tests for companion animals, including dogs, cats and birds.
Life sciences.
Neogen’s line of approximately 100 drug detection immunoassay test kits is sold worldwide for the detection of approximately 300 abused and therapeutic drugs in farm animals and racing animals, and for the detection of drug residues in meat and meat products. The test kits are also used for human forensic toxicology drug screening applications. This line includes tests for narcotics, analgesics, stimulants, depressants, tranquilizers, anesthetics, steroids and diuretics. Neogen also has several products used by researchers for the detection of biologically active substances.
Many of the products and services in the Animal Safety segment use licensed technology. In fiscal 2022, the Animal Safety segment incurred expense totaling $220,000 for royalties for licensed technology used in our products and services, including expense of $122,000 related to genomics services.
Neogen’s operation in Australia originally focused on providing genomics services and sales of animal safety products and reports through the Animal Safety segment. With the acquisition of Cell BioSciences in February 2020, our Australian operation has expanded to offer our complete line of products and services, including those usually associated with the Food Safety segment. These additional products are managed and directed by existing management at Neogen Australasia and report through the Animal Safety segment.
Revenues from Neogen’s Animal Safety segment accounted for 50.7%, 50.0%, and 49.1% of our total revenues for fiscal years ended May 31, 2022, 2021 and 2020, respectively.
GENERAL SALES AND MARKETING
Neogen is organized under two segments - Food Safety and Animal Safety. Within these segments, our sales efforts are generally organized by specific markets, and/or geography. During the fiscal year that ended May 31, 2022, we had approximately 32,000 customers for our products. As many of our customers are distributors and certain animal safety products are offered to the general retail market, the total number of end users of our products is considerably greater than 32,000. As of May 31, 2022, a total of 573 employees were assigned to sales and marketing functions, compared to 494 at the end of May 2021. During the fiscal years ended May 31, 2022, 2021 and 2020, no single customer or distributor accounted for 10% or more of our revenues.
DOMESTIC SALES AND MARKETING
FOOD SAFETY
To reach each customer and prospect with expertise and experience, Neogen has a staff of specialized food safety sales and technical service representatives assigned to specific markets or geographies. This staff sells our products directly to end users, and also handles technical support issues that arise with customers.
Neogen’s food safety markets are primarily comprised of:
•
Milling and grain
, including grain elevators, feed mills, pet food manufacturers and grain inspection companies;
•
Meat and poultry
, including meat and poultry processors, producers of ready-to-eat
meat and poultry products, and the USDA’s Food Safety Inspection Service (FSIS);
•
Prepared foods and ingredients
, including flour millers, malters, bakeries, candy and confection manufacturers, manufacturers of prepared meals, nuts, spices, cookies, crackers and other snack foods;
•
Fruits and vegetables
, including growers and processors of juice and packaged fresh cut grocery items;
•
Seafood
, including harvesters and processors of a wide variety of seafood products;
•
Dairy
, including milk and yogurt processors;
•
Beverage
, including soft drink bottlers and beer and wine producers;
•
Water,
including food producers, water bottlers and municipal water departments;
•
Healthcare
, including hospitals and distributors to the healthcare industry;
•
Traditional culture media markets
, including commercial and research laboratories and producers of pharmaceuticals, cosmetics and veterinary vaccines;
•
Food service
, including fast food service establishments and retail grocery market chains; and
•
Dietary supplements
, including producers and marketers of a wide variety of nutritional and holistic consumer products.
ANIMAL SAFETY
Neogen’s staff of specialized animal safety sales, marketing, customer and technical service representatives sell our products and services directly to consumers, dealers, veterinarians, distributors and other manufacturers and also handle technical support issues. Neogen further supports its distribution channels through product training, field support, various promotions and advertising.
Neogen’s animal safety markets are primarily comprised of:
•
Companion animal veterinarians.
Neogen has a dedicated sales group that sells and technically supports the Company’s animal care, biosecurity and disposable products to the companion animal veterinary market.
•
Livestock producers, veterinarians and breed associations.
Neogen has a dedicated group of sales professionals that sells the Company’s comprehensive suite of biosecurity and husbandry products and genomics services directly to livestock producers, and livestock veterinarians and veterinary clinics.
•
Distributors.
To expand the reach of its animal safety OTC and veterinary products, Neogen has a dedicated sales team that sells the Company’s products to animal health product distributors.
•
Retailers.
Neogen offers select animal care and biosecurity products directly to large farm and ranch retailers for sale to consumers.
•
Breeding and genetics companies.
Neogen has sales professionals who sell directly to the large dairy artificial insemination providers, poultry and swine genetics companies and the aquaculture industry.
•
Diagnostic labs and universities.
Neogen has a dedicated lab, manufacturing, sales and technical service group that calls on large commercial and forensic testing laboratories and universities.
•
Other manufacturers and government agencies.
Neogen has an experienced group of professionals who work directly with other manufacturers and government agencies to provide custom solution products and services for their needs.
INTERNATIONAL SALES AND MARKETING
Neogen maintains Company-owned locations outside of the United States in 14 countries to provide a direct presence in regions of particular importance to us; we maintain an extensive network of distributors to reach countries where we do not have a direct presence.
Neogen Europe and subsidiaries.
Neogen Europe, Ltd., headquartered in Ayr, Scotland, sells products and services to our network of customers and distributors throughout the United Kingdom (U.K.), Europe, the Middle East and Africa. Customers in the U.K., France, Germany, Italy, the Netherlands and the United Arab Emirates (U.A.E.) are served by our employees. In other regions, customers are generally serviced by distributors managed by Neogen Europe personnel.
Neogen Europe management is also responsible for Neogen’s other European operations, which include:
•
Quat-Chem, Ltd.,
a Rochdale, England-based chemical company that specializes in the development, manufacture and sale of agricultural, industrial and food processing biocidal hygiene products, including cleaners and disinfectants. Quat-Chem sells its products on a global basis, with a focus on markets in the U.K., Europe, Middle East, Africa and Asia.
•
Neogen Italia
, a Milan, Italy-based business, which directly markets Neogen’s products in Italy.
•
Megazyme, Ltd
., a Bray, Ireland-based food quality diagnostics company, acquired in December 2020, which develops and refines the analytical methods used to measure the carbohydrates and enzymes in food and feed products that affect quality.
•
Delf, Ltd
., a Liverpool, England-based manufacturer and supplier of animal hygiene and industrial cleaning products, acquired in November 2021.
•
Abbott Analytical, Ltd.
, a Liverpool, England-based service provider, acquired in November 2021.
Neogen Europe has two additional manufacturing locations in:
•
Heywood, England, which manufactures an extensive range of microbiological culture media, supplements and immunomagnetic separation techniques.
•
Liverpool, England, which manufacturers culture media supplements and microbiology technologies.
Neogen Latinoam
é
rica and Neogen Guatemala.
Neogen Latinoamérica is headquartered near Mexico City and Neogen Guatemala is located in Guatemala City. Combined, the two businesses distribute Neogen’s products throughout Mexico and Central America. Neogen Latinoamérica manages our business activities throughout the region by marketing to animal and crop producers and food processors, utilizing our direct sales representatives to sell food safety products and genomics services, while marketing cleaners, disinfectants, rodenticides and other animal safety products primarily through distributors.
Neogen Argentina, Neogen Uruguay and Neogen Chile.
These three countries provide Neogen with a physical presence in the important agricultural Southern Cone region of South America, which has large beef and dairy populations with significant export markets. The operations are managed through Neogen’s Latin American operations and offer direct sales of Neogen food safety, animal safety and genomics products into Argentina, Uruguay and Chile.
Neogen do Brasil.
Neogen do Brasil, headquartered near São Paulo, distributes Neogen’s products throughout Brazil. Brazil is a world leader in the export of numerous food commodities, including beef, poultry, soybeans, coffee, corn, sugar and orange juice, and this operation gives us direct sales representation to these important markets. Neogen do Brasil management is also responsible for manufacturing, marketing and sales for Rogama, located in Pindamonhangaba, Brazil. This company operates a genomics testing laboratory (formerly named Deoxi) and develops, manufactures and markets rodenticides and insecticides. Rogama offers more than 70 registered pest control products to Brazil’s agronomic, professional and retail markets.
Neogen China.
Our Chinese subsidiary, located in Shanghai, employs sales representatives who sell directly to Chinese customers. China’s burgeoning middle class, with its rapidly growing demand for higher quality meat and dairy products, makes the country a growth opportunity for Neogen’s products and services - both for animal production on the country’s farms, and in processing plants throughout China’s food production and distribution channels. The business also operates a genomics testing laboratory. We utilize both direct sales representatives and distributors to sell our complete portfolio in this growing market.
Neogen India.
This business operates an accredited laboratory which performs food safety and water quality testing for food producers, major hotels and restaurants in its home region, as well as safety and quality analysis for the country’s expanding nutraceutical market, and growing food export businesses. The laboratory is located in Kochi, in the state of Kerala, which is India’s leading region for the export of spices, tea, and fresh fruits and vegetables. Neogen India is also responsible for sales of our food safety and animal safety products to customers and distributors in India and nearby countries.
Neogen Australasia.
Neogen Australasia operates a genomics testing laboratory, focusing on the sheep and cattle markets in Australia and New Zealand, and also directly markets and sells our food and animal safety products in those countries.
Neogen Canada.
This business operates a genomics testing laboratory in Edmonton, Alberta.
Other distributor partners.
Outside of our physical locations, Neogen uses our own sales managers in both the Food Safety and Animal Safety segments to work closely with and coordinate the efforts of a network of approximately 600 distributors in more than 100 countries. The distributors provide local training and technical support, perform market research and promote Company products within designated countries around the world.
Sales to customers outside the United States accounted for 39.7%, 39.1%, and 39.4% of our total revenues for fiscal years ended May 31, 2022, 2021 and 2020, respectively. No individual foreign country contributed 10% or more of our revenues for those same periods.
RESEARCH AND DEVELOPMENT
Management maintains a strong commitment to Neogen’s research and development activities. Our product development efforts are focused on the enhancement of existing products and on the development of new products that fit our business strategy. As of May 31, 2022, we employed 121 scientists and support staff in our worldwide research and development group, including immunologists, chemists and microbiologists. Research and development costs were approximately $17.0 million, $16.2 million, and $14.8 million representing 3.2%, 3.5%, and 3.5% of total revenues in fiscal years 2022, 2021 and 2020, respectively. Management currently expects our future research and development expenditures to approximate 3% to 4% of total revenues annually.
Neogen has ongoing development projects for several new and improved diagnostic tests and other complementary products for both the Food Safety and Animal Safety markets. Management expects that a number of these products will be commercially available at various times during fiscal years 2023 and 2024.
Certain technologies used in some products manufactured and marketed by Neogen were acquired from or developed in collaboration with affiliated partners, independent scientists, governmental agencies, universities and other third parties. We have entered into agreements with these parties that provide for the payment of royalties based upon sales of products that use the pertinent licensed technology. Royalties, expensed to sales and marketing, under these agreements amounted to $1,999,000, $2,129,000, and $2,524,000 in fiscal years 2022, 2021 and 2020, respectively.
PROPRIETARY PROTECTION AND APPROVALS
Neogen uses trade secrets as proprietary protection in many of its food and animal safety products. In many cases, we have developed unique antibodies capable of detecting microorganisms and residues at minute levels. The supply of these antibodies, and the proprietary techniques utilized for their development, may offer better protection than filing patents. Such proprietary reagents are maintained in secure facilities and stored in more than one location to reduce exposure to complete destruction by natural disaster or other means.
Patent and trademark applications are submitted whenever appropriate. Since its inception, Neogen has acquired and been granted numerous patents and trademarks and has numerous pending patents and trademark applications. The patents expire at various times over the next 20 years.
A summary of patents by product categories follows:
USA
International
Expiration
Natural Toxins, Allergens, & Drug Residues
2023-2042
Life Sciences
Vaccine
Veterinary Instruments & Other
2023-2042
Genomics Services
2024-2029
We do not expect the near-term expiration of any single patent to have a significant effect on future results of operations.
Management believes that Neogen has adequate rights to commercialize our products. However, we are aware that substantial research is conducted at universities, governmental agencies and other companies throughout the world and that it is always possible that patents have been applied for and could be granted that are relevant to technologies that may be used in our products. To the extent some of our products may now, or in the future, embody technologies protected by patents or trade secrets of others, we may need to obtain licenses to use such technologies to continue to sell the products. These licenses may not be available on commercially reasonable terms. Failure to obtain any such licenses could delay or prevent the sale of certain new or existing products. In addition, patent litigation is not uncommon. Accordingly, there can be no assurance that we will continue to have adequate rights to commercialize our new products or that we will avoid litigation.
One of the major areas affecting the success of biotechnology development involves the time, cost and uncertainty surrounding regulatory approvals. Neogen products requiring regulatory approval, which we currently have in place, include BotVax B, EqStim, ImmunoRegulin, Uniprim and BetaStar. Our general strategy is to focus on technical and proprietary products that do not require mandatory approval by regulatory bodies to be marketed. Neogen’s rodenticide, disinfectant and insecticide products are subject to registration in the United States and internationally.
Neogen utilizes third-party validations on many of our disposable test kits to provide our customers with assurances that our products perform to specified levels. These include validation by the AOAC International, independently administered third-party, multi-laboratory collaborative studies and approvals by the USDA Food Safety Inspection Service for the use of our products in their operations.
PRODUCTION AND SUPPLY
Neogen manufactures our products in Michigan, Kentucky, Wisconsin, North Carolina, Iowa, Tennessee, California, Ireland, the United Kingdom and Brazil and provides genomics services in Nebraska, Washington, Scotland, Brazil, Australia, China and Canada. As of May 31, 2022, there were approximately 1,039 full-time employees assigned to manufacturing operations and providing of services in these locations, operating on multiple shift schedules; with occasional 24/7 production during high demand periods. Future demand increases could be accommodated by adding shifts. Management believes we could increase the current output of our primary product lines by more than 30% using the current space available; however, to do so would require investment in additional equipment.
Food safety diagnostics.
Manufacturing of diagnostic tests for the detection of natural toxins, pathogens, food allergens, dairy antibiotics, spoilage organisms and pesticides, final kit assembly, quality assurance and shipping takes place at our facilities in Lansing, Michigan. Proprietary monoclonal and polyclonal antibodies for Neogen’s diagnostic kits are produced on a regular schedule in our immunology laboratories in Lansing. Generally, final assembly and shipment of diagnostic test kits to customers in Europe is performed in our Ayr, Scotland facility. Most of the Company’s food safety
diagnostic instruments and readers are produced by third-party vendors to our specifications, quality tested in Lansing, and then shipped to customers. Culture media products are manufactured in an ISO-approved
facility in Lansing and in Heywood and Liverpool, England. Products are blended following strict formulations or custom blended to customer specifications and shipped directly to customers from Lansing and the United Kingdom. The Heywood location produces prepared media plates, sterile liquid media, and other related products in ready to use format for food testing laboratories across the U.K. and western Europe. Enzyme substrates are manufactured at Megazyme in Bray, Ireland.
Animal health products.
Manufacturing of animal health products, pharmacological diagnostic test kits and test kits for drug residues takes place in our FDA-registered
facilities in Lexington, Kentucky. In general, manufacturing operations including reagent manufacturing, quality assurance, final kit assembly and packaging are performed by Neogen personnel. Certain animal health products and veterinary instruments that are purchased finished or that are toll manufactured by third party vendors are warehoused and shipped from our Lexington facilities. Some veterinary instruments are produced in our facilities in Lansing, and are generally then shipped to Lexington for distribution to customers. Manufacturing and shipment of devices used for animal injections, topical applications and oral administration occurs in Kenansville, North Carolina.
Veterinary biologics.
Neogen maintains a Lansing-based USDA-approved manufacturing facility devoted to the production of the biologic products EqStim and ImmunoRegulin. P.acnes
seed cultures are added to media and then subjected to several stages of further processing resulting in a finished product that is filled and packaged within the facility. Our BotVax B vaccine is also produced in the Lansing facility utilizing Type B botulism seed cultures and a traditional fermentation process. All completed biologic products are then shipped to Neogen’s Lexington facilities where they are inventoried prior to distribution to customers.
Agricultural genomics services.
Neogen offers agricultural genomics laboratory services and bioinformatics at our locations in Nebraska, Washington, Scotland, Brazil, Australia, China and Canada. Through our laboratory services and bioinformatics (primarily in beef and dairy cattle, pigs, sheep, poultry, horses and dogs), Neogen Genomics allows our customers to speed genetic improvement efforts, as well as identify economically important diseases.
Cleaners, disinfectants and rodenticides.
Manufacturing of rodenticides and/or cleaners and disinfectants takes place in the following locations: Wisconsin, Tennessee, California, England and Brazil. Manufacturing of rodenticides consists of blending technical material (active ingredient) with bait consisting principally of various grains. Certain cleaners and disinfectants are manufactured in Neogen facilities, while others are purchased from other manufacturers for resale, or toll manufactured by third parties.
Insecticides.
Neogen manufactures insecticides and other pesticides at its facilities in Iowa and Brazil.
Neogen purchases component parts and raw materials from more than 1,000 suppliers. Though many of these items are purchased from a single source to achieve the greatest volume discounts, we believe we have identified acceptable alternative suppliers for most of our key components and raw materials where it is economically feasible to do so. There can be no assurance that we would avoid a disruption of supply in the event a supplier discontinues shipment of product. Shipments of higher volume products are generally accomplished within a 48-hour
turnaround time. Our backlog of unshipped orders at any given time has historically not been significant.
COMPETITION
Although competitors vary in individual markets, management knows of no single competitor that is pursuing Neogen’s fundamental strategy of developing and marketing a broad line of products, ranging from disposable tests and culture media to veterinary pharmaceuticals and instruments for a large number of food safety and animal safety concerns. For each of our individual products or product lines, we face intense competition from companies ranging from small businesses to divisions of large multinational companies. Some of these organizations have substantially greater financial resources than Neogen. We compete primarily on the basis of ease of use, speed, accuracy and other similar performance characteristics of our products. The breadth of our product line, the effectiveness of our sales and customer service organizations, and pricing are also components in management’s competitive strategy.
Future competition may become even more intense, and could result from the development of new technologies, which could affect the marketability and profitability of Neogen’s products. Our competitive position will also depend on our ability to continue to develop proprietary products, attract and retain qualified scientific and other personnel, develop and implement production and marketing plans and obtain patent protection for new products. Additionally, we must continue to generate or have access to adequate capital resources to execute our strategy.
FOOD SAFETY:
With a large professional sales organization offering a comprehensive catalog of food safety solutions, management believes we maintain a general advantage over competitors offering only limited product lines. In most cases, Neogen sales and technical service personnel can offer unique insight into a customer’s numerous safety and quality challenges, and offer testing and other solutions to help the customer overcome those challenges.
Competition for pathogen detection products includes traditional methods and antibody and genetic-based platforms; competition for natural toxins and allergen detection products include instrumentation and antibody-based tests. While our offerings will not always compete on all platforms in all markets, the products we offer provide tests that can be utilized by most customers to meet their testing needs.
In addition to our extensive product offerings and robust distribution network, we focus our competitive advantage in the areas of customer service, product performance, speed, and ease of use of our products. Additionally, by aggressively maintaining Neogen’s ability to produce at low cost, we believe that we can be competitive with new market entrants that may choose a low pricing strategy in an attempt to gain market share.
ANIMAL SAFETY:
Neogen’s Animal Safety segment faces no single competitor across the products and markets we serve. In the racing industry market, we believe we hold a leading market share position. In the life sciences and forensics markets, we compete against several other diagnostic and reagent companies with similar product offerings.
In the veterinary market, Neogen markets BotVax B, the only USDA-approved vaccine for the prevention of botulism Type B in horses. We compete on other key products through differentiated product performance and superior customer and technical support. With some of our products, we provide solutions as a lower cost alternative and also offer a private label option for our distributors.
Competition in the rodenticide market includes several companies of comparable size that offer products into similar market segments. The retail rodenticide market is not dominated by a single brand. While the technical materials used by competing companies are similar, Neogen uses manufacturing and bait formula techniques which we believe may better attract rodents to the product and thereby improves overall product performance.
Within the insecticide market, Chem-Tech products specifically focus on the area of insect control for food and animal safety applications. There are several competitors offering similar products, however, we have a proprietary formulation chemistry that optimizes the delivery and safe application of insecticides at the customer’s location. These products are currently only sold in the U.S. through a combination of direct sales and distributors.
Numerous companies, including a number of large multinationals, compete for sales in the cleaner and disinfectant product segment. Neogen’s broad line of products are sold through our distributor network around the world, primarily to assist in the cleaning and disinfecting of animal production facilities.
In addition to our extensive portfolio of animal safety products, Neogen also competes in the retail market by providing solutions to common retail problems, such as stock outs, wasted floor space and inconsistent brand identity. We differentiate ourselves by offering planograms and convenient reordering systems to maximize turns and profitability for our retail customers.
Neogen Genomics, the leading worldwide commercial agricultural genomics laboratory in the U.S., employs cutting-edge technology in the area of genomics. The result of this technology allows the acceleration of natural selection through parentage testing and selective breeding of traits such as disease resistance, yield improvement and meat quality. Competition comes mainly from a number of service providers, some significantly larger than us as well as several smaller companies offering genomics services. Neogen Genomics is not involved in cloning or the development of transgenic animals.
GOVERNMENT REGULATION
A significant portion of Neogen’s products and revenues are affected by the regulations of various domestic and foreign government agencies, including the U.S. Department of Agriculture (USDA), the Environmental Protection Agency (EPA) and the U.S. Food and Drug Administration (FDA). Changes in these regulations could affect revenues and/or costs of production and distribution.
Neogen’s development and manufacturing processes involve the use of certain hazardous materials, chemicals and compounds. Management believes that our safety procedures for handling and disposing of such commodities comply with the standards prescribed by federal, state and local regulations; however, changes in such regulations or rules could involve significant costs to us and could be materially adverse to our business.
The rodenticides, insecticides, cleaners, disinfectants and sanitizers manufactured and distributed by Neogen are subject to EPA and various state regulations. In general, any international sale of our products must also comply with similar regulatory requirements in the country of destination. Each country has its own individual regulatory construct with specific requirements (e.g., label in the language of the importing country). To the best of our knowledge, Neogen products are compliant with applicable regulations in the countries where such products are sold.
Many of the food safety diagnostic products do not require direct government approval. However, we have pursued AOAC approval for a number of these products to enhance their marketability. Our BetaStar Advanced U.S. dairy antibiotic residue testing product has been reviewed and/or approved by the appropriate regulatory bodies.
Neogen’s veterinary vaccine products and some pharmaceutical products require government approval to allow for lawful sales. The vaccine products are approved by the U.S. Department of Agriculture, Center for Veterinary Biologics (USDA-CVB)
and the pharmaceutical products are approved by the FDA. The products, and the facilities in which they are manufactured, are in a position of good standing with both agencies. We have no warning letters based on any review of these products or facility inspections, no recalls on any of these products, and are not aware of any reason why we could not manufacture and market such products in the future.
Other animal safety and food safety products generally do not require additional registrations or approvals. However, Neogen’s regulatory staff routinely monitors amendments to current regulatory requirements to ensure compliance.
HUMAN CAPITAL MANAGEMENT
Our people are a critical component in our continued success. As a team, they put Neogen’s core values into action, while executing on key growth initiatives to maintain long-term sustainable growth. We strive to create a workplace of choice to attract, retain and develop top talent to achieve our vision and deliver shareholder results. As of May 31, 2022, we employed 2,108 people worldwide, with 1,264 located in the U.S. and 844 international. None of these employees are covered by collective bargaining agreements.
The Company is committed to fostering a diverse and inclusive workplace that attracts and retains exceptional talent. Through ongoing employee development, comprehensive compensation and benefits, and a focus on health, safety and employee wellbeing, the Company strives to help its employees in all aspects of their lives so they can do their best work.
Workplace Culture and Employee Engagement
. We have established our One Neogen Pillars of Trust which are the principles that guide our decision making every day: • Openness • Honesty • Credibility • Respect • Service. We value responsibility, consistency and integrity. Our Code of Conduct contains general guidelines for conducting business ethically.
Inclusion, Diversity, Equity and Belonging (IDEB)
.
We strive to create an environment where colleagues feel valued and cared for and understand the important role we play in embracing diversity to improve the quality of our innovation, collaboration and relationships. We are dedicated to executing on our diversity, equity and inclusion initiatives.
Talent Recruitment, Development and Retention
.
We employ a variety of career development, employee benefits, policies and compensation programs designed to attract, develop and retain our colleagues. Employee benefits and policies are designed for diverse needs. We have internal programs designed to develop and retain talent, including career planning, leadership development programs, performance management and training programs.
Compensation and Benefits
. We strive to support our colleagues’ well-being and enable them to achieve their best at work and at home. Our compensation and benefits programs are designed to be competitive and support colleague well-being including physical and mental health, financial wellness, and family resources.
Employee Health and Safety
. We are committed to ensuring a safe working environment for our colleagues. Our sites have injury prevention programs, and we strive to build on our safety culture. Our procedures emphasize the need for the cause of injuries to be investigated and for action plans to be implemented to mitigate potential recurrence. Our safety programs have resulted in strong safety performance.

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ITEM 1A. RISK FACTORS
ITEM 1A.
RISK FACTORS
Investing in our securities involves a variety of risks and uncertainties, known and unknown, including, among others, those discussed below. Each of the following risks should be carefully considered, together with all the other information included in this Annual Report on Form 10-K,
including our consolidated financial statements and the related notes and in our other filings with the SEC. Furthermore, additional risks and uncertainty not presently known to us or that we currently believe to be immaterial may also adversely affect our business. Our business, results of operations, financial condition and cash flow could be materially and adversely affected by any of these risks or uncertainties.
RISKS RELATING TO REVERSE MORRIS TRUST TRANSACTION WITH 3M CORPORATION
The pending Reverse Morris Trust transaction with 3M may not be completed on the terms or timeline currently contemplated, or at all, and the failure to complete the transaction could adversely impact the market price of Neogen common stock, as well as its business and operating results.
On December 13, 2021, Neogen, 3M and Garden SpinCo, a newly formed subsidiary of 3M created to carve out 3M’s Food Safety business, entered into a number of agreements pursuant to which, among other things, 3M’s Food Safety business will combine with Neogen in a Reverse Morris Trust transaction, intended to be tax-efficient to
3M and its shareholders for U.S. federal income tax purposes. Immediately following the transaction, Garden SpinCo stockholders will own, in the aggregate, approximately 50.1% of the issued and outstanding shares of Neogen common stock and pre-merger
Neogen shareholders will own, in the aggregate, approximately 49.9% of the issued and outstanding shares of Neogen common stock. The transaction implies an enterprise value for 3M’s Food Safety business of approximately $3.4 billion based on Neogen’s stock price at July 22, 2022, including $1 billion in new debt to be incurred by 3M’s Food Safety business. 3M’s Food Safety business will fund to 3M consideration valued at approximately $1 billion, subject to closing and other adjustments.
The consummation of the transaction is subject to certain conditions, including: (i) the effectiveness of Neogen’s registration statement registering the Neogen common stock to be issued pursuant to the merger agreement, and of Garden SpinCo’s registration statement registering the shares of Garden SpinCo common stock in connection with the distribution; (ii) the approval for listing on NASDAQ of the shares of Neogen common stock to be issued in the merger; and (iii) approval of the share issuance and certain Neogen charter and bylaw amendments by the requisite vote of Neogen’s shareholders. There is no assurance that these conditions will be met or that the transaction will be completed on the terms or timeline currently contemplated, or at all.
If the transaction is not completed for any reason, the price of Neogen common stock could decline. Neogen also could experience negative reactions from employees, customers, suppliers or other third parties if the transaction is not completed.
Neogen and 3M have expended and will continue to expend significant management time and resources and have incurred and will continue to incur significant expenses related to the transaction, including legal, advisory, printing and financial services fees. Even if the transaction is completed, any delay in the completion of the transaction could diminish the anticipated benefits of the transaction or result in additional transaction expenses, loss of revenue or other effects associated with uncertainty about the transaction. If the transaction is not consummated because the merger agreement is terminated, Neogen may be required under certain circumstances to pay 3M a termination fee of $140 million or may be required to reimburse 3M for expenses incurred in connection with the transaction.
If the transaction is completed, Neogen may not realize the anticipated financial and other benefits, including growth opportunities, expected from the transaction.
Neogen expects that it will realize synergies, growth opportunities and other financial and operating benefits as a result of the transaction. Neogen’s success in realizing these benefits, and the timing of their realization, depends, among other things, on the successful integration of the business operations of the 3M Food Safety business with Neogen. Even if Neogen is able to integrate the 3M Food Safety business successfully, Neogen cannot predict with certainty if or when these synergies, growth opportunities and other benefits will be realized, or the extent to which they will actually be achieved. For example, the benefits from the transaction could be offset by costs incurred in integrating the 3M Food Safety business or in otherwise consummating the transaction. Realization of any synergies, growth opportunities or other benefits could be affected by the factors described in other risk factors and a number of factors beyond Neogen’s control, including, without limitation, general economic conditions, increased operating costs and regulatory developments.
The integration of the 3M Food Safety business with Neogen following the transaction could present significant challenges, and the failure to successfully integrate the 3M Food Safety business could have a material adverse effect on the combined company’s business, financial condition or results of operations.
There is a significant degree of difficulty inherent in the process of integrating the 3M Food Safety business with Neogen. These difficulties include:
•
the integration of the 3M Food Safety business with Neogen’s current businesses while carrying on the ongoing operations of all businesses;
•
managing a significantly larger company than before the consummation of the transaction;
•
integrating the business cultures of the 3M Food Safety business and Neogen, which could prove to be incompatible;
•
creating uniform standards, controls, procedures, policies and information systems and controlling the costs associated with such matters;
•
the ability to ensure the effectiveness of internal control over financial reporting across the combined company;
•
integrating certain information technology, purchasing, accounting, finance, sales, billing, human resources, payroll and regulatory compliance systems; and
•
the potential difficulty in retaining key officers and personnel of Neogen and the 3M Food Safety business.
The process of integrating operations could result in significant costs and cause an interruption of, or loss of momentum in, the activities of Neogen’s business. Members of Neogen’s senior management following the transaction may be required to devote considerable amounts of time to this integration process, which could decrease the time they will have to manage the combined company’s business, serve the existing business or operations of Neogen or develop new products or strategies. If Neogen’s senior management is not able to effectively manage the integration process, or if any significant business activities are interrupted as a result of the integration process, the existing business of Neogen or the 3M Food Safety business could be materially adversely affected.
Neogen’s successful integration of the 3M Food Safety business cannot be assured. The failure to do so could have a material adverse effect on Neogen’s business, financial condition or results of operations after the transaction.
Pursuant to the terms of the transaction, Neogen and Garden SpinCo will be restricted from taking certain actions that could adversely affect the intended tax treatment of the transaction, and such restrictions could significantly impair Neogen’s and Garden SpinCo’s ability to implement strategic initiatives that otherwise would be beneficial.
The Tax Matters Agreement executed in connection with the Transaction generally restricts Neogen, Garden SpinCo and their affiliates from taking certain actions after the distribution of Neogen shares that could adversely affect the intended tax treatment of the transaction. In particular:
•
for a two-year
period following the distribution date, except as described below:
•
Garden SpinCo will continue the active conduct of its trade or business and the trade or business of certain Garden SpinCo subsidiaries;
•
Garden SpinCo will not voluntarily dissolve or liquidate or permit certain Garden SpinCo subsidiaries to voluntarily dissolve or liquidate;
•
Neogen and Garden SpinCo will not enter into any transaction or series of transactions (or any agreement, understanding or arrangement) as a result of which one or more persons would acquire (directly or indirectly) stock comprising 50% or more of the vote or value of Garden SpinCo or Neogen (taking into account the stock acquired pursuant to the merger);
•
Neogen and Garden SpinCo will not engage in certain mergers or consolidations;
•
Garden SpinCo will not, and will not permit certain Garden SpinCo subsidiaries to, sell, transfer or otherwise dispose of 30% or more of the gross assets of Garden SpinCo, such subsidiaries, the Garden SpinCo group or the active trade or business of Garden SpinCo or certain Garden SpinCo subsidiaries, subject to certain exceptions;
•
Neogen and Garden SpinCo will not, and will not permit certain Garden SpinCo subsidiaries to, redeem or repurchase stock or rights to acquire stock, unless certain requirements are met;
•
Neogen and Garden SpinCo will not, and will not permit certain Garden SpinCo subsidiaries to, amend their certificates of incorporation (or other organizational documents) or take any other action affecting the voting rights of any stock or stock rights of Neogen or Garden SpinCo; and
•
Neogen and Garden SpinCo will not, and will not permit any member of the Garden SpinCo group or Neogen to, take any other action that would, when combined with any other direct or indirect changes in ownership of Garden SpinCo and Neogen stock (including pursuant to the merger), have the effect of causing one or more persons to acquire stock representing 50% or more of the vote or value of Garden SpinCo or Neogen, or otherwise jeopardize the tax-free
status of the transaction;
•
during the time period ending three years after the date of the distribution, Garden SpinCo and Neogen also will be subject to certain restrictions relating to the SpinCo Business in Switzerland; and
•
additionally, none of Garden SpinCo, Neogen or any member of Garden SpinCo group or Neogen may:
•
take, or permit to be taken, any action that could reasonably be expected to jeopardize the qualification of certain Garden SpinCo debt as a security under Section 361(a) of the Code (other than making any payment permitted or required by the terms of the Garden SpinCo debt);
•
within 90 days of the distribution date, refinance or repay (other than in the ordinary course of business) any third-party debt of any member of the Garden SpinCo group, except as required by the transaction documents; or
•
permit any portion of certain nonqualified preferred stock to cease to be outstanding or modify the terms of such stock;
unless, in each case, prior to taking any such action, Neogen and Garden SpinCo shall have requested that 3M obtain, or request and receive 3M’s prior written consent to obtain, an IRS ruling satisfactory to 3M in its reasonable discretion or provide 3M with an unqualified tax opinion satisfactory to 3M in its sole and absolute discretion to the effect that such action would not jeopardize the intended tax treatment of the transaction, unless 3M waives such requirement. Failure to adhere to these requirements could result in tax being imposed on 3M for which Neogen and Garden SpinCo could bear responsibility and for which Neogen and Garden SpinCo could be obligated to indemnify 3M. Any such indemnification obligation would likely be substantial and would likely have a material adverse effect on Neogen. These restrictions could have a material adverse effect on Neogen’s liquidity and financial condition, and otherwise could impair Neogen’s and Garden SpinCo’s ability to implement strategic initiatives and Garden SpinCo’s and Neogen’s indemnity obligation to 3M might discourage, delay or prevent a change of control that shareholders of Neogen may consider favorable.
Current Neogen shareholders’ percentage ownership interest in Neogen will be substantially diluted in the transaction.
Immediately following the merger with Garden SpinCo, the pre-merger
Neogen shareholders will own, in the aggregate, approximately 49.9% of the issued and outstanding shares of Neogen common stock. Consequently, Neogen’s pre-merger
shareholders, as a group, will be substantially diluted in the transaction and have less ability to exercise influence over the management and policies of Neogen following the merger than immediately prior to the transaction.
RISKS RELATING TO COVID-19
The ongoing effects of the COVID-19
pandemic could adversely affect our business, results of operations and financial condition.
Since March 2020, the COVID-19
pandemic has negatively impacted the global economy, disrupted global supply chains, and created significant volatility and disruption of financial markets.
The extent of the impact of the COVID-19
pandemic on our operational and financial performance, including our ability to execute our business strategies and initiatives in the expected time frame, continues to depend on many factors outside our control, including, without limitation, the timing, extent, trajectory and duration of the pandemic, related restrictions on travel and transports, the development and availability of effective treatments and vaccines, the imposition of protective public safety measures including lockdowns, and the impact of the pandemic on the global economy and consumer demand.
During the course of the pandemic, we modified our business practices to comply with safety measures required by federal, state and local governments, as well as those we determine to be in the best interests of our employees and customers, including implementing social distancing, remote work, reducing employee travel, restricting building access and more. In taking such precautionary actions, we may experience disruptions in our supply chain, operations, facilities and workforce, which could negatively affect efficiency and productivity, cause delays in developing new products, our ability to market products and services, and, ultimately, our stock price and financial performance.
Additional future impacts to us may include, but are not limited to, material adverse effects on the demand for our products and services, our supply chain and sales and distribution channels, our cost structure and profitability. An extended period of global supply chain and economic disruption could materially affect our business, results of operations and financial condition.
The situation regarding the pandemic continues to evolve, and future strains of the COVID-19
virus may impact us. To the extent the COVID-19
pandemic adversely affects our business, results of operations, financial condition and stock price, it may also have the effect of heightening many of the other risks described in this section.
RISKS RELATING TO OUR BUSINESS AND INDUSTRY
Our business strategy is dependent on successfully promoting internal growth and identifying and integrating acquisitions.
Our business has grown significantly over the past several years as a result of both internal growth and acquisitions of existing businesses and their products. Management initiatives may be attempted to augment internal growth, such as strengthening our presence in select markets, reallocating research and development funds to products with higher growth potential, development of new applications for our technologies, enhancing our service offerings, continuing key customer efforts, and finding new markets for our products. Failure of these management initiatives may have a material adverse effect on our operating results and financial condition.
Identifying and pursuing acquisition opportunities, integrating these acquisitions into our business and managing their growth requires a significant amount of management’s time and skill. We cannot assure that we will be effective in identifying, integrating or managing future acquisition targets. Our failure to successfully integrate and manage a future acquisition may have a material adverse effect on our operating results and financial condition.
In addition, if we continue to experience growth in our business, such growth could place a significant strain on our management, customer service, operations, sales and administrative personnel, and other resources. To serve the needs of our existing and future customers we will be required to recruit, train, motivate and manage qualified employees. We have incurred and will continue to incur significant costs to retain qualified management, sales and marketing, engineering, production, manufacturing and administrative personnel, as well as expenses for marketing and promotional activities. Our ability to manage our planned growth depends upon our success in expanding our operating, management, information and financial systems, which might significantly increase our operating expenses.
We may not be able to effectively manage our future growth, and if we fail to do so, our business, financial condition and results of operations could be adversely affected.
We are subject to risks relating to existing international operations and expansion into new geographical markets.
We focus on expanding sales globally as part of our overall growth strategy and expect sales from outside the United States to continue to represent a significant portion of our revenue. In fiscal 2022, sales to customers outside of the U.S. accounted for 39.7% of our total revenue. Neogen’s international operations are subject to general risks related to such operations, including:
•
political, social and economic instability and disruptions, including social unrest, geopolitical tensions, currency, inflation and interest rate uncertainties;
•
government export controls, economic sanctions, embargoes or trade restrictions;
•
the imposition of duties and tariffs and other trade barriers;
•
limitations on ownership and on repatriation or dividend of earnings;
•
transportation delays and interruptions;
•
labor unrest and current and changing regulatory environments;
•
increased compliance costs, including costs associated with disclosure requirements and related due diligence;
•
difficulties in staffing and managing multi-national operations;
•
limitations on Neogen’s ability to enforce legal rights and remedies;
•
current products may not comply with product standards established by foreign regulatory bodies;
•
access to or control of networks and confidential information due to local government controls and vulnerability of local networks to cyber risks; and
•
fluctuations in foreign currency exchange rates.
If Neogen is unable to successfully manage the risks associated with expanding our global business or adequately manage operational risks of our existing international operations, these risks could have a material adverse effect on our growth strategy into new geographical markets, our reputation, our business, results of operations, financial condition and cash flows. In addition, the impact of such risks may be outside of Neogen’s control and could decrease our ability to sell products internationally, which could adversely affect our business, financial condition, results of operations or cash flows. For example, as a result of the ongoing military conflict between Russia and Ukraine and resulting heightened economic sanctions from the United States and the international community, Neogen has discontinued sales into Russia and Belarus. The United States and other countries have imposed significant sanctions and could impose even wider sanctions and take other actions should the conflict further escalate. While it is difficult to anticipate the effect the sanctions announced to date may have on Neogen, any further sanctions imposed or actions taken by the United States or other countries, including any expansion of sanctions beyond Russia and Belarus, could affect the global price and availability of raw materials, reduce our sales and earnings or otherwise have an adverse effect on our business and results of operations.
We rely significantly on our information systems’ infrastructure to support our operations and a failure of these systems and infrastructure and/or a security breach of our information systems could damage our reputation and have an adverse effect on operations and results.
We rely on our information systems’ infrastructure to integrate departments and functions, to enhance our ability to service customers, to improve our control environment and to manage our cost reduction initiatives. If a security breach or cyberattack of our IT networks and systems occurs, our operations could be interrupted. Any issues involving our critical business applications and infrastructure may adversely impact our ability to manage our operations and the customers we serve. Although we have controls and security measures in place to prevent such attacks, experienced computer hackers are increasingly organized and sophisticated. Malicious attack efforts operate on a large scale and sometimes offer targeted attacks as a paid-for
service. In addition, the techniques used to access or sabotage networks change frequently and generally are not recognized until launched against a target.
We rely on several information systems throughout our company, as well as those of our third-party business partners, to provide access to our web-based
products and services, keep financial records, analyze results of operations, process customer orders, manage inventory, process shipments to customers, store confidential or proprietary information and operate other critical functions. Although Neogen employs system backup measures and engages in information system redundancy planning and processes, such measures, as well as our current disaster recovery plan, may be ineffective or inadequate to address all vulnerabilities. Further, our information systems and our business partners’ and suppliers’ information systems may be vulnerable to attacks by hackers and other security breaches, including computer viruses and malware, through the internet (including via devices and applications connected to the internet), email attachments and persons with access to these information systems, such as our employees or third parties with whom we do business. As information systems and the use of software and related applications by us, our business partners, suppliers and customers become more cloud-based, there has been an increase in global cybersecurity vulnerabilities and threats, including more sophisticated and targeted cyber-related attacks that pose a risk to the security of our information systems and networks and the confidentiality, availability and integrity of data and information.
While we have implemented network security and internal control measures, especially for the purpose of protecting our connected products and services from cyberattacks, and invested in our data and information technology infrastructure, there can be no assurance that these efforts will prevent a system disruption, attack, or security breach and, as such, the risk of system disruptions and security breaches from a cyberattack remains.
If our security and information systems are compromised, or employees fail to comply with the applicable laws and regulations, or this information is obtained by unauthorized persons or used inappropriately, it could adversely affect our reputation, as well as results of operations, and could result in litigation, the imposition of penalties, or significant expenditures to remediate any damage to persons whose personal information has been compromised.
Disruption of our manufacturing and service operations could have an adverse effect on our financial condition and results of operations.
Our facilities and our distribution systems are subject to catastrophic loss due to fire, flood, terrorism or other natural or man-made
disasters. If any of our facilities were to experience a catastrophic loss, it could disrupt our operations, delay production, shipments and revenue and result in significant expenses to repair or replace the facility and/or distribution system. If such a disruption were to occur, we could breach agreements, our reputation could be harmed, and our business and operating results could be adversely affected. Although we carry insurance for property damage and business interruption, we do not carry insurance or financial reserves for interruptions or potential losses arising from terrorism. Economic conditions and uncertainties in global markets may adversely affect the cost and other terms upon which we are able to obtain third party insurance. If we are unable to obtain sufficient and cost-effective third-party insurance coverage, or to the extent we have elected to self-insure, we may be at greater risk that our operations will be harmed by a catastrophic loss.
Our dependence on suppliers could limit our ability to sell certain products or negatively affect our operating results.
We rely on third-party suppliers to provide raw materials and other components in our products, manufacture products that we do not manufacture ourselves and perform services that we do not provide ourselves. Because these suppliers are independent third parties with their own financial objectives, actions taken by them could have a negative effect on our results of operations. The risks of relying on suppliers include our inability to enter into contracts with third party suppliers on reasonable terms, inconsistent or inadequate quality control, relocation of supplier facilities, supplier work stoppages and suppliers’ failure to comply with their contractual obligations. In addition, we currently purchase some raw materials and products from sole or single sources. Some of the products that we purchase from these sources are proprietary and, therefore, cannot be readily or easily replaced by alternative sources. Problems with suppliers and the supply chain could negatively impact our ability to supply the market, substantially decrease sales, lead to higher costs or damage our reputation with our customers.
We rely heavily on third-party package delivery services, and a significant disruption in these services or significant increases in prices may disrupt our ability to ship products, increase our costs and lower our profitability.
We ship a significant portion of our products to customers through independent package delivery companies, such as UPS, Federal Express and DHL. We also ship our products through other carriers, including national and regional trucking firms, overnight carrier services and the U.S. Postal Service. If one or more of these third-party package delivery providers were to experience a major work stoppage, preventing our products from being delivered in a timely fashion or causing us to incur additional shipping costs we could not pass on to our customers, our costs could increase and our relationships with some of our customers could be adversely affected. In addition, if one or more of our third-party package delivery providers were to increase prices, and we were not able to find comparable alternatives or make adjustments within our delivery network, our profitability could be adversely affected.
Our business sells many products through distributors, which present risks that could negatively affect our operating results.
We sell many of our products, both within and outside of the U.S., through distribution. As a result, we are dependent on distributors to sell our products and assist us in promoting and creating demand for our products. Our distributors sometimes offer products from several different companies, and those distributors may carry our competitors’ products and promote our competitors’ products over our own. We have limited ability, if any, to cause our distributors to devote adequate resources to promoting, marketing, selling and supporting our products. We cannot assure that we will be successful in maintaining and strengthening our relationships with our distributors or establishing relationships with new distributors who have the ability to market, sell and support our products effectively. We may rely on one or more key distributors for a product or region, and the loss of one or more of these distributors could reduce our revenue. Distributors could face financial difficulties, including bankruptcy, which could impact our ability to collect our accounts receivable and negatively impact our financial results. In addition, violations of anti-bribery and anti-corruption or similar laws by our distributors could have a material impact on our business. Further, termination of a distributor relationship could result in increased competition in the applicable jurisdiction. Failing to manage the risks associated with our use of distributors could reduce sales, increase expenses and weaken our competitive position, which could have a negative impact on our operating results.
The development of new products entails substantial risk of failure due to the production of non-viable
products, lack of properly identifying market potential, and competitors better serving the marketplace.
Our growth strategy includes significant investment in and expenditures for product development. To execute this strategy, we are continually developing new products for which we believe there should be significant market demand. We cannot assure that we will successfully develop commercially viable products, that the products will be developed on a timely basis to meet market demand or that the relevant market will be properly identified. Our competitors may also adapt more quickly, and deliver superior technologies, price and/or service to better fit our customers’ requirements. If we expend substantial resources in developing an unsuccessful product, whether that lack of success is the result of our production of a non-viable
product, a misidentified market, or a competitor’s superior ability to meet our customers’ requirements, operating results could be adversely affected.
The markets for our products are extremely competitive, and our competitors could use existing resource advantages to our detriment.
The markets in which we compete are subject to rapid and substantial changes in technology and are characterized by extensive research and development and intense competition. Our competitors and potential competitors may have greater financial, technical, manufacturing, marketing, research and development and management resources than we do. These competitors could use their resources, reputations and ability to leverage existing customer relationships to give them a competitive advantage over us. They might also succeed in developing products that are more reliable and effective than our products, are less costly than our products or provide alternatives to our products.
We are dependent on the agricultural marketplace, which is affected by factors beyond our control.
Our primary customers are in the agricultural and food production industries. Economic conditions affecting agricultural industries are cyclical and are dependent upon many factors outside of our control, including weather conditions, changes in consumption patterns or commodity prices. Any of these factors in the agricultural marketplace could affect our sales and overall financial performance.
RISKS RELATED TO AN INVESTMENT IN OUR SECURITIES
Our quarterly or annual operating results are subject to significant fluctuations.
We have experienced, and may experience in the future, significant fluctuations in our quarterly or annual operating results. The mix of products sold and the acceptance of new products, in addition to other factors such as cost increases, could contribute to this variability. We operate with relatively little backlog and have few long-term customer contracts. Substantially all our product revenue in each period results from orders received in that period. In addition, our expense levels are based, in part, on our expectation of future revenue levels. Therefore, a shortfall in expected revenue could result in a disproportionate decrease in our net income.
The market price of our common stock may be highly volatile.
The trading price of our common stock may be volatile. Securities markets worldwide experience significant price and volume fluctuations. This market volatility, as well as other general economic, market or political conditions, could reduce the market price of our common stock rapidly and unexpectedly, despite our operating performance. Factors that may impact the market price of our common stock include the factors described in this “Risk Factors” section and elsewhere in this Form 10-K,
as well as:
•
Public announcements (including the timing of these announcements) regarding our business, financial performance, acquisitions and prospects or new products or services, product enhancements or technological advances by our competitors or us;
•
Trading activity in our stock, including transactions by us, our executive officers and directors, and significant stockholders; trading activity that results from the ordinary course rebalancing of stock indices in which we may be included, such as the S&P Mid-Cap
400 Index; trading activity related to our inclusion in, or removal from, any stock indices; and short-interest in our common stock, which could be significant from time to time;
•
Investor perception of us and the industry and markets in which we operate, including changes in earnings estimates or buy/sell recommendations by securities analysts; and whether or not we meet earnings estimates of securities analysts who follow us; and
•
General financial, domestic, international, economic and market conditions, including overall fluctuations in the U.S. equity markets, which may experience extreme volatility that, in some cases, is unrelated or disproportionate to the operating performance of particular companies.
GENERAL RISK FACTORS
Our success is highly dependent on our ability to obtain protection for the intellectual property utilized in our products; these products could be the subject of patent infringement challenges.
Our success and ability to compete depends in part on our ability to obtain protection in the U.S. and other countries for our products by establishing and maintaining intellectual property rights capable of protecting our technology and products. Patent applications filed by us may not result in the issuance of patents or, if granted, may not be granted in a form that will be commercially advantageous to us. Even if granted, patents can be challenged, narrowed, invalidated or circumvented, which could limit our ability to stop competitors from marketing similar products or limit the length of time we have patent protection for our products. We also cannot assure that our nondisclosure agreements, together with trade secrets and other common law rights, will provide meaningful protection for our trade secrets and other proprietary information. Moreover, the laws of some foreign jurisdictions may not protect intellectual property rights to the same extent as in the U.S., and many companies have encountered significant difficulties in protecting and defending such rights in foreign jurisdictions. If we encounter such difficulties or we are otherwise precluded from effectively protecting our intellectual property rights domestically or in foreign jurisdictions, we could incur substantial costs and our business, including our business prospects, could be substantially harmed.
From time to time, we have received notices alleging that our products infringe third-party proprietary rights. Whether the manufacture, sale or use of current products, or whether any products under development would, upon commercialization, infringe any patent claim cannot be known with certainty unless and until a court interprets the patent claim in the context of litigation. When an infringement allegation is made against us, we may seek to invalidate the asserted patent claim and/or to allege non-infringement
of the asserted patent claim. For us to invalidate a U.S. patent claim, we would need to rebut the presumption of validity afforded to issued patents in the U.S. with clear and convincing evidence of invalidity, which is a high burden of proof. The outcome of infringement litigation is subject to substantial uncertainties, and also the testimony of experts as to technical facts upon which experts may reasonably disagree. Our defense of an infringement litigation lawsuit could result in significant expense. Regardless of the outcome, infringement litigation could significantly disrupt our marketing, development and commercialization efforts, divert management’s attention and consume our financial resources. In the event that we are found to infringe any valid claim in a patent held by a third party, we could, among other things, be required to:
•
Pay damages, including up to treble damages and the other party’s attorneys’ fees, which may be substantial;
•
Cease the development, manufacture, importation, use and sale of products that infringe the patent rights of others, through a court-imposed injunction;
•
Expend significant resources to redesign our technology so that it does not infringe others’ patent rights, or develop or acquire non-infringing
intellectual property, which may not be possible;
•
Discontinue manufacturing or other processes incorporating infringing technology; and/or
•
Obtain licenses to the infringed intellectual property, which may not be available to us on acceptable terms, or at all.
Any development or acquisition of non-infringing
products, technology or licenses could require the expenditure of substantial time and other resources and could have a material adverse effect on our business and financial results. If we are required to, but cannot, obtain a license to valid patent rights held by a third party, we would likely be prevented from commercializing the relevant product, or from further manufacture, sale or use of the relevant product.
We are subject to substantial governmental regulation.
A portion of our products and facilities are regulated by various domestic and foreign government agencies including, but not limited to, the U.S. Department of Agriculture, the U.S. Food and Drug Administration and the Environmental Protection Agency. A significant portion of our revenue is derived from products used to monitor and detect the presence of residues that are regulated by various government agencies. Furthermore, our growth may be adversely affected by the implementation of new regulations. The costs of compliance or failure to comply with any obligations related to these laws or regulations could adversely impact our business.
We are dependent on key employees.
Our success depends, in large part, on members of our management team. Our loss of any of these, or other key employees could have a material adverse effect on us. We have not executed long-term employment agreements with any of these employees and do not expect to do so in the foreseeable future. Our success depends, significantly, on our ability to continue to attract and retain such personnel. We cannot assure that we will be able to retain our existing personnel or attract additional qualified persons when required and on acceptable terms.
Our business may be subject to product or service liability claims.
The manufacturing and distribution of our products or performance of our services involves an inherent risk of liability claims being asserted against us. Regardless of whether we are ultimately determined to be liable or our products are determined to be defective, we might incur significant legal
expenses not covered by insurance. In addition, product or service liability litigation could damage our reputation and impair our ability to market our products and services, regardless of the outcome. Litigation could also impair our ability to retain product liability insurance or make our insurance more expensive. Although we currently maintain liability insurance, we cannot assure that we will be able to continue to obtain such insurance on acceptable terms, or that such insurance will provide adequate coverage against all potential claims. If we are subject to an uninsured or inadequately insured product or services liability claim, our business, financial condition and results of operations could be adversely affected.
Changing political conditions could adversely impact our business and financial results.
Changes in the political conditions in markets in which we manufacture, sell or distribute our products may be difficult to predict and may adversely affect our business and financial results. In addition, results of elections, referendums or other political processes in certain markets in which our products are manufactured, sold or distributed could create uncertainty regarding how existing governmental policies, laws and regulations may change, including with respect to sanctions, taxes, the movement of goods, services, capital and people between countries and other matters. The potential implications of such uncertainty, which include, among others, exchange rate fluctuations, trade barriers and market contraction, could adversely affect the Company’s business and financial results.
Climate change, or legal, regulatory or market measures to address climate change may materially adversely affect our financial condition and business operations.
Climate change resulting from increased concentrations of carbon dioxide and other greenhouse gases in the atmosphere could present risks to our future operations from natural disasters and extreme weather conditions, such as hurricanes, tornadoes, earthquakes, wildfires or flooding. Such extreme weather conditions could pose physical risks to our facilities and disrupt operation of our supply chain and may impact operational costs. The impacts of climate change on global water resources may result in water scarcity, which could in the future impact our ability to access sufficient quantities of water in certain locations and result in increased costs. Concern over climate change could result in new legal or regulatory requirements designed to mitigate the effects of climate change on the environment. If such laws or regulations are more stringent than current legal or regulatory requirements, we may experience increased compliance burdens and costs to meet the regulatory obligations and may adversely affect raw material sourcing, manufacturing operations and the distribution of our products.
Tax legislation could materially adversely affect our financial results and tax liabilities.
The Company’s business is subject to tax-related
external conditions, such as tax rates, tax laws and regulations, changing political environments in the U.S. and foreign jurisdictions that impact tax examination, assessment and enforcement approaches. In addition, changes in tax laws including further regulatory developments arising from U.S. tax reform legislation and/or regulations around the world could result in a tax expense or benefit recorded to the Company’s consolidated statement of earnings. In connection with guidance such as the Base Erosion and Profit Shifting (BEPS) Integrated Framework provided by Organization for Economic Cooperation and Development (OECD), determination of multi-jurisdictional taxation rights and the rate of tax applicable to certain types of income may be subject to potential change. Due to uncertainty of the regulation changes and other tax-related
factors stated above, it is currently not possible to assess the ultimate impact of these actions on our financial statements.
Although we believe that our historical tax positions are sound and consistent with applicable laws, regulations and existing precedent, there can be no assurance that our tax positions will not be challenged by relevant tax authorities or that we would be successful in any such challenge. Income tax audits associated with the allocation of income and other complex issues may result in significant income tax adjustments that could negatively impact our future operating results.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 1B.
UNRESOLVED STAFF COMMENTS - NONE

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ITEM 2. PROPERTIES
ITEM 2.
PROPERTIES
Principal Manufacturing, Distribution and Administrative locations:
Location
Square Feet
Owned
Leased
Segment
U.S.
1,146,100
Corporate, Food Safety, Animal Safety
Canada
4,800
Animal Safety
United Kingdom
190,800
Food Safety
Ireland
39,000
Food Safety
Italy
1,000
Food Safety
UAE
1,100
Food Safety
Brazil
82,800
Food Safety
Mexico
33,580
Food Safety
Guatemala
1,700
Food Safety
Argentina
7,500
Food Safety
Uruguay
3,200
Food Safety
Chile
3,200
Food Safety
China
7,900
Food Safety
India
9,500
Food Safety
Australia
34,600
Animal Safety
Total
1,566,780
Our corporate headquarters are located in Lansing, Michigan, with administrative, sales, manufacturing and warehousing in other locations domestically and globally. These properties are in good condition, well-maintained, and generally suitable and adequate to support our business. For leased properties, we do not anticipate difficulty in renewing existing leases or in finding alternative facilities.

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ITEM 3. LEGAL PROCEEDINGS
ITEM 3.
LEGAL PROCEEDINGS
Neogen is subject to certain legal proceedings in the normal course of business that, in the opinion of management, should not have a material effect on our future results of operations or financial position. On March 6, 2020, the Company received an administrative subpoena from the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) regarding activities or transactions involving parties located in Iran. The Company subsequently conducted an internal investigation under the direction of outside legal counsel and disclosed information concerning certain genomic testing services provided to an unrelated U.S.-based party engaged in veterinary activities involving an Iranian party. The Company continues to cooperate with OFAC’s investigation and is currently examining whether certain of these activities may be eligible for OFAC General Licenses authorizing agricultural and veterinary activities. In addition to responding to the administrative subpoena, the Company has implemented additional compliance measures to prevent inadvertent dealings with restricted countries or parties. These measures further enhance the Company’s international trade compliance program, which is designed to assure that the Company does not conduct business directly or indirectly with any countries or parties subject to economic sanctions and export control laws of the U.S. and other applicable jurisdictions. Although it is too early to predict what action, if any, that OFAC will take, the Company does not currently have any reason to believe that OFAC’s pending investigation will have a meaningful impact on its operations, the results of operations for any future period, or its overall financial condition. In fiscal 2020, the Company took a charge to expense and recorded a reserve of $600,000 to provide for potential fines or penalties on this matter. At this time, the Company believes that it is adequately reserved for this issue.

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ITEM 4. MINE SAFETY DISCLOSURE
ITEM 4.
MINE SAFETY DISCLOSURES - NOT APPLICABLE
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Neogen Common Stock is traded on the NASDAQ Global Select Market under the symbol NEOG.
Holders
As of June 30, 2022, there were 215 stockholders of record of our common stock. The actual number of holders is greater than this number of holders and includes stockholders who are beneficial owners but whose shares are held in street name by brokers and other nominees.
Dividends
Neogen has never paid cash dividends on its Common Stock and does not expect to pay dividends in the foreseeable future.
Securities Authorized for Issuance under Equity Compensation Plan
Equity Compensation Plan Information
(shares in thousands)
Number of shares to be issued upon
exercise of outstanding options and
RSUs (1)
Weighted average
price of
outstanding options
and RSUs
Number of securities remaining available for future
issuance under equity compensation plans (excluding
securities reflected in first column) (2)
Equity compensation plans approved by shareholders
3,501
$ 32.42
5,386
Equity compensation plans not approved by shareholders
-
-
3,501
$ 32.42
5,386
(1) Outstanding options and RSUs as of May 31, 2022.
(2) Reflects shares available for future issuance as May 31, 2022 under our 2018 Omnibus Incentive Plan dated August 28, 2018 and approved by shareholders on October 4, 2018.
For additional information, see Note 5, Equity Compensation Plans, in the consolidated financial statements.
The graph below matches Neogen Corporation’s cumulative 5-Year
total shareholder return on common stock with the cumulative total returns of the NASDAQ Composite index and the NASDAQ Medical Equipment index. The graph tracks the performance of a $100 investment in our common stock and in each index (with the reinvestment of all dividends) from 5/31/2017 to 5/31/2022.
5/17
5/18
5/19
5/20
5/21
5/22
Neogen Corporation
100.00
159.50
118.71
150.04
194.47
111.49
NASDAQ Composite
100.00
121.34
122.84
158.05
230.68
204.09
NASDAQ Medical Equipment
100.00
127.47
113.54
125.55
180.52
123.62
S&P Life Sciences Tools & Services
100.00
119.37
145.59
178.60
247.39
247.97
The stock price performance included in this graph is not necessarily indicative of future stock price performance.

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ITEM 6. SELECTED FINANCIAL DATA
ITEM 6.
RESERVED

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K.
In addition, any forward-looking statements represent management’s views only as of the day this Form 10-K
was first filed with the Securities and Exchange Commission and should not be relied upon as representing management’s views as of any subsequent date. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if our views change.
TRENDS AND UNCERTAINTIES
During fiscal 2022, we experienced higher than expected input cost inflation, including higher transportation, supply chain and labor costs, that negatively impacted operating results. Pricing actions taken during fiscal 2022 mitigated some, but not all, of the inflationary pressures. Ongoing inflation may also have an impact on our customer’s purchasing decisions and order patterns. We estimate inflation will continue to affect us in fiscal 2023, although at this time it is impracticable to quantify the impact.
Although we have no operations in or direct exposure to Russia, Belarus and Ukraine, we have experienced intermittent shortages in materials and increased costs for transportation, energy and raw materials due, in part, to the negative impact of the Russia-Ukraine military conflict on the global economy. To date, our European operations and customer base have not been materially impacted by the conflict, however, as the conflict continues or worsens, it may impact our business, financial condition or results of operations in fiscal 2023.
As we continue to monitor the ongoing COVID-19
pandemic, our top priority remains protecting the health and safety of our employees, their families, and those in our communities. Safety guidelines and procedures have been developed for on-site
employees and these policies are regularly monitored and updated by our internal Emergency Response Team.
In fiscal 2022, COVID-19,
including new strains of the virus such as Delta and Omicron, continued to impact our business operations and financial results. A number of our food safety diagnostic product lines have been negatively impacted due to decreased demand in many of our customers’ businesses around the world, particularly those serving restaurants, bars and other institutional food service markets. Many of our markets across the world are recovering, but the pandemic has continued to adversely impact our customers and ultimately, our revenues. We have also experienced supply chain difficulties including vendor disruptions, border closures, shipping issues and significantly increased shipping costs; labor shortages and higher labor costs, as we have had to use staffing agencies and increase our base pay in many areas of the Company to fill open positions; and restricted travel, which hinders our ability to connect with customers.
Overall, the impact of COVID-19
remains uncertain and ultimately depends on the length and severity of the pandemic, inclusive of the introduction of new strains of the virus; government actions taken in response; vaccination rates and effectiveness; the impact of vaccination requirements; extent of protection provided by prior viral infection; and the macroeconomic environment. We will continue to evaluate the nature and extent to which COVID-19
will impact our business, supply chain, including labor availability and attrition, consolidated results of operations, financial condition, and liquidity; we expect it to impact us through at least the end of our fiscal year ending May 31, 2023.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The discussion and analysis of our financial condition and results of operations are based on the consolidated financial statements that have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires that management make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, management evaluates the estimates, including but not limited to, those related to receivable allowances, inventories and intangible assets. These estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Though the impact of the COVID-19
pandemic to our business and operating results presents additional uncertainty, we continue to use the best information available to inform our critical accounting estimates. Actual results may differ from these estimates under different assumptions or conditions.
The following critical accounting policies reflect management’s more significant judgments and estimates used in the preparation of the consolidated financial statements.
Income Taxes
We account for income taxes using the asset and liability method. Under this method, deferred income tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and for tax credit carryforwards and are measured using the enacted tax rates in effect for the years in which the differences are expected to reverse. Deferred income tax expense represents the change in net deferred income tax assets and liabilities during the year. The determination of income subject to income tax in each tax paying jurisdiction requires us to apply transfer pricing guidelines for certain intercompany transactions.
Our tax rate is subject to adjustment over the balance of the year due to, among other things, income tax rate changes by governments; the jurisdictions in which our profits are determined to be earned and taxed; changes in the valuation of our deferred tax assets and liabilities; adjustments to our interpretation of transfer pricing standards; changes in available tax credits or other incentives; changes in stock-based compensation expense; changes in tax laws or the interpretation of such tax laws; and changes in U.S. generally accepted accounting principles.
Although we believe our tax estimates are reasonable and we prepare our tax filings in accordance with all applicable tax laws, the final determination with respect to any audit, and any related litigation, could be materially different from our estimates or from our historical income tax provisions and accruals. The results of an audit or litigation could have a material effect on operating results and/or cash flows in the periods for which that determination is made. In addition, future period earnings may be adversely impacted by litigation costs, settlements, penalties, and/or interest assessments.
Our wholly owned foreign subsidiaries are comprised of Neogen Europe, Quat-Chem Ltd, Abbott Analytical Limited, Delf (UK) Limited, Delf-Chem Solutions Limited, Megazyme Ltd, Megazyme IP, Neogen Italia S.r.l., Neogen do Brasil, Rogama Industria e Comercio Ltda, Neogen Latinoamérica, Neogen Guatemala, Neogen Argentina, Neogen Uruguay, Neogen Chile SpA, Neogen Bio-Scientific
Technology Co (Shanghai), Neogen Food and Animal Security (India), Neogen Canada, Neogen Canada Properties LLC and Neogen Australasia Pty Limited. Based on historical experience, as well as management’s future plans, earnings from these subsidiaries are expected to be re-invested
indefinitely for future expansion and working capital needs. Furthermore, our domestic operations have historically produced sufficient operating cash flow to mitigate the need to remit foreign earnings. On an annual basis, we evaluate the current business environment and whether any new events or other external changes might require a re-evaluation
of the decision to indefinitely re-invest
foreign earnings. It is not practicable to determine the income tax liability that would be payable if such earnings were not reinvested indefinitely.
Business Combinations and Contingent Consideration
We allocate the purchase price of acquired companies to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values. The estimates used to value the net assets acquired are based in part on historical experience and information obtained from management of the acquired company. We generally value the identifiable intangible assets acquired using a discounted cash flow model. The significant estimates used in valuing certain of the intangible assets include, but are not limited to: future expected cash flows of the asset, discount rates to determine the present value of the future cash flows, attrition rates of customers, royalty rates and expected technology life cycles. We also estimate the useful lives of the intangible assets based on the expected period over which we anticipate generating economic benefit from the asset.
Our estimates of fair value are based on assumptions believed to be reasonable at that time. If we made different estimates or judgments, it may result in material differences in the fair values of the net assets acquired.
Certain business combinations involve potential payment of future consideration that is contingent upon the achievement of certain product development milestones and/or contingent on the acquired business reaching certain performance milestones. We record contingent consideration at fair value at the date of acquisition based on the consideration expected to be transferred, estimated as the probability weighted future cash flows, discounted back to present value. The fair value of contingent consideration is measured using projected payment dates, discount rates, probabilities of payment and projected revenues (for revenue-based considerations); various methodologies can be used to determine fair value of contingent consideration, including Monte Carlo simulations, among others. Projected revenues are based on our most recent internal operational budgets and long-range strategic plans. The discount rate used is determined at the time of measurement in accordance with accepted valuation methodologies. Changes in projected revenues, probabilities of payment, discount rates and projected payment dates may result in adjustments to the fair value measurements. Contingent consideration is remeasured each reporting period using Level 3 inputs, and the change in fair value, including accretion for the passage of time, is recognized in other income (expense) in the consolidated statements of income. Contingent consideration payments made soon after the acquisition date are classified as investing activities in the consolidated statements of cash flows. Contingent consideration payments not made soon after the acquisition date that are related to the acquisition date fair value are reported as financing activities in the consolidated statements of cash flows, and amounts paid in excess of the original acquisition date fair value are reported as operating activities in the consolidated statements of cash flows.
RESULTS OF OPERATIONS
Executive Overview
(in thousands, except earnings per share)
%
Consolidated
Revenues
$ 527,159
$ 468,459
%
Organic Sales Growth
%
Food Safety
Revenues
$ 259,979
$ 234,244
%
Organic Sales Growth
%
Animal Safety
Revenues
$ 267,180
$ 234,215
%
Organic Sales Growth
%
% of International Sales
%
%
Effective Tax Rate
19.8 %
19.1 %
Net Income
$ 48,307
$ 60,882
(21 )%
Earnings per Diluted Share
$ 0.45
$ 0.57
Cash from Operations
$ 68,038
81,089
•
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:
Revenue
Change
USD
Revenue
Change
Local Currency
U.K. Operations (including Neogen Italia)
%
%
Brazil Operations
%
(2 )%
Neogen Latinoamerica
%
%
Neogen Argentina
%
%
Neogen Uruguay
%
%
Neogen Chile
%
%
Neogen China
%
(3 )%
Neogen India
%
%
Neogen Canada
%
%
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 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.
REVENUES
Year Ended
(dollars in thousands)
May 31, 2022
Change
May 31, 2021
Change
May 31, 2020
Food Safety:
Natural Toxins, Allergens & Drug Residues
$ 79,395
%
$ 76,614
%
$ 76,207
Bacterial & General Sanitation
47,282
%
44,009
%
41,780
Culture Media & Other
75,278
%
61,245
%
47,847
Rodenticides, Insecticides & Disinfectants
35,691
%
32,219
%
28,890
Genomics Services
22,333
%
20,157
%
17,967
$ 259,979
%
$ 234,244
%
$ 212,691
Animal Safety:
Life Sciences
5,685
(1 %)
5,715
(10 %)
6,322
Veterinary Instruments & Disposables
63,938
%
48,128
%
42,941
Animal Care & Other
39,805
%
35,897
%
28,389
Rodenticides, Insecticides & Disinfectants
83,610
%
77,458
%
68,815
Genomics Services
74,142
%
67,017
%
59,012
$ 267,180
%
$ 234,215
%
$ 205,479
Total Revenue
$ 527,159
%
$ 468,459
%
$ 418,170
Year Ended May 31, 2022 Compared to Year Ended May 31, 2021
Food Safety:
Natural Toxins, Allergens
& Drug Residues -
Sales in this category increased 4% in fiscal 2022, with a 6% increase in sales of natural toxin test kits and a 9% increase in sales of our allergens product line partially offset by a 33% decrease in sales of drug residue test kits, as we are discontinuing sales of certain lower margin products due to competitive market pressure.
Bacterial
& General Sanitation -
Sales in this category increased 7% in fiscal 2022 compared to the prior year. Sales of our AccuPoint®
sanitation monitoring product line increased 12% aided by strong sales of our new reader. Sales of our Listeria Right Now™
product increased 25%, while sales of products to detect spoilage organisms in processed foods increased 4%.
Culture Media
& Other -
Sales in this category increased 23% in fiscal 2022 compared to fiscal 2021; excluding sales from the December 2020 acquisition of Megazyme, sales increased 11%. Sales of Neogen Culture Media products rose 16% as our new workflow, One Broth One Plate, continued to drive growth and increased sales to commercial labs in the U.K.; a large non-recurring
sale to a domestic vaccine manufacturer in the first quarter also contributed to the current year growth.
Rodenticides, Insecticides
& Disinfectants -
Revenues of products in this category sold through our Food Safety operations increased 11% in fiscal 2022 compared to fiscal 2021. Excluding revenues from the November 2020 acquisition of Delf and Abbott Analytical, the growth was 3%. The increase was primarily due to continued strength in sales of cleaners and disinfectants to Asia resulting from the African swine fever outbreak in that region increasing demand, and higher sales to a U.K.-based toll manufacturer.
Genomics Services -
Sales of genomics services sold through our Food Safety operations increased 11% in fiscal 2022 compared to the prior year, primarily due to increased beef business in Brazil and higher sample volumes from a large customer in China.
Animal Safety:
Life Sciences -
Sales in this category decreased 1% in fiscal 2022 compared to the same period in the prior year, primarily due to the loss of hair testing business with a large U.S. commercial laboratory that moved to a different testing platform.
Veterinary Instruments
& Disposables -
Revenues in this category increased 33% in fiscal 2022 compared to fiscal 2021, led by a large increase in sales of veterinary instruments, including needles and syringes, resulting from recently won private label business.
Animal Care
& Other -
Sales of these products increased 11% in fiscal 2022 compared to fiscal 2021; excluding the contribution of parasiticides from the September 2021 acquisition of CAPInnoVet, revenues in this category rose 6%. Growth in our biologics, small animal supplements and wound care product lines were partially offset by a large decline in sales of dairy supplies due to the June 2020 termination of an agreement under which we distributed these types of products for a large manufacturer of dairy equipment.
Rodenticides, Insecticides
& Disinfectants -
Sales in this category increased 8% in fiscal 2022, compared to the prior year. Insecticide sales increased 32%, led by strong demand in the farm and home channels, and cleaners and disinfectants sales rose 6%. These increases were partially offset by a 4% decline in rodenticide sales due to increased rodent pressure in the prior year, which resulted in a difficult comparison.
Genomics Services -
Sales in this category increased 11% in fiscal 2022 compared to fiscal 2021; excluding the December 2021 acquisition of Genetic Veterinary Sciences, the organic increase was 5%. The growth was led by increases in beef and sheep testing in Australia, due to improved market conditions, and higher sample volumes from domestic dairy and beef cattle and poultry customers. The increase was partially offset by a decline in domestic companion animal revenues due to a difficult comparison from strong prior year sales growth.
Year Ended May 31, 2021 Compared to Year Ended May 31, 2020
Food Safety:
The COVID-19
pandemic, which began in the second half of fiscal 2020, continued to cause difficult operating conditions in many of our key market segments in fiscal 2021. Shelter in place orders across the U.S. and in most of our international markets, the closure or reduced output of businesses due to quarantine and/or local legislation, disruption in the supply chain resulting from reduction in end-market
demand and shipping issues, and the inability of some markets to react quickly to these changes, each disrupted our revenues.
Natural Toxins, Allergens
& Drug Residues -
Sales in this category increased 1% in fiscal 2021, with a 6% increase in sales of natural toxin test kits and a 5% increase in our allergens product line partially offset by a 30% decrease in sales of drug residue test kits. Sales of drug residue test kits have continued to decline as we ended an exclusive distributor agreement in Europe and faced competitive pressure and lower demand due to poor economic conditions.
Bacterial
& General Sanitation -
Sales in this category increased 5% in fiscal 2021 compared to the prior year. Sales of products to detect spoilage organisms in processed foods increased 19% in fiscal 2021, resulting from sales of our new instrument (Soleris NG), which launched in the first quarter, and increased consumables sales from new instrument placements. Sales of our AccuPoint sanitation monitoring product line were flat as many customers were shut down or operating at reduced capacity for a portion of the year, resulting in use of less consumables. A next generation reader for this product line was launched late in the fourth quarter; there will be significant sales and marketing focus on this product line in fiscal 2022. Sales of test kits to detect pathogens decreased 2%, as lower sales of ANSR equipment were only partially offset by increases from our Listeria
Right Now test kit, which grew 21% in fiscal 2021.
Culture Media
& Other -
Sales in this category increased 28% in fiscal 2021 compared to fiscal 2020. Excluding sales from the December 2020 acquisition of Megazyme, sales increased 18%. This category includes sales of acquired inventory of non-Neogen
manufactured products from our new businesses in Italy and the South American southern cone countries; these sales are not expected to continue long-term. This category also includes sales of veterinary instruments transferred to our U.K. sales team in fiscal 2021. Sales of Neogen Culture Media increased 1% as new business gained in the U.S. from a COVID-19
vaccine manufacturer offset the loss of some business due to competitor pricing.
Rodenticides, Insecticides
& Disinfectants -
Revenues of products in this category sold through our Food Safety operations increased 12% in fiscal 2021 compared to fiscal 2020, due primarily to continued strength in cleaners and disinfectant sales in China resulting from increased demand due to the African swine fever outbreak in that country and the COVID-19
pandemic. We also benefitted from strong sales of hand and skin sanitizing products at our U.K.-based Quat-Chem location in the first quarter of this fiscal year.
Genomics Services -
Sales of genomics services sold through our Food Safety operations increased 12% in fiscal 2021 compared to the prior year, primarily due to higher sales in the Chinese porcine and bovine markets.
Animal Safety:
Life Sciences -
Sales in this category decreased 10% in fiscal 2021 compared to the same period in the prior year, primarily the result of lower forensic drug test kit sales to large commercial labs in the U.S. as the COVID-19
pandemic created less demand for testing; a reduction in sales of products to the U.S. horse racing industry in the U.S. also contributed to the decline, as racing activity was down.
Veterinary Instruments
& Disposables -
Revenues in this category increased 12% in fiscal 2021 compared to fiscal 2020. Veterinary instruments sales increased 16% for the year, led by increases in detectable needles and syringes as we gained new customers and market share from a key competitor. Partially offsetting this increase was a 9% decline in protective wear sales, as gloves were on backorder for much of the current year due to COVID related demand.
Animal Care
& Other -
Sales of these products increased 26% in fiscal 2021 compared to fiscal 2020; this category includes sales of food safety products sold through our Australian operation, the result of a February 2020 acquisition of a distributor. Excluding these sales, revenues in this category increased 21%. Sales of our small animal supplements, vitamin injectables, and joint pain products benefitted from growth in veterinary markets, as the COVID-19
pandemic has led to an increase in pet ownership, particularly dogs and cats. Additionally, sales rose for our equine supplements and antibiotics, due to strong demand in these markets. This category also includes sales of our thyroid treatment for dogs, which became available for sale late in the fourth quarter. Partially offsetting these gains was a 49% decline in sales of dairy supplies due to the June 2020 termination of an agreement in which we distributed these products for a large manufacturer of dairy equipment.
Rodenticides, Insecticides
& Disinfectants -
Sales in this category increased 13% in fiscal 2021, compared to the prior year. Rodenticide sales increased 42% as rodent pressure in certain areas of the U.S. increased significantly. Insecticide sales rose 15%, due in part to our acquisition of the StandGuard product line for fly control on July 31, 2020; organic sales in this category increased 7%. Cleaners and disinfectants sales decreased 15% resulting from lower sales of water treatment products and the transfer of a product line to our U.K. operation; additionally, opportunistic sales of sanitizing products in the fourth quarter of the prior year, due to extremely high demand early in the COVID-19
pandemic, did not continue at those levels in fiscal 2021.
Genomics Services -
Sales in this category increased 14% in fiscal 2021 compared to fiscal 2020. The growth was led by strong increases to the U.S. and Australian companion animal markets, driven by increased pet adoption and higher consumer spending on pets during the COVID-19
pandemic. Gains in the commercial beef and beef association markets in the U.S., Canada and Australia also contributed to the growth, as well as the recent launch of a new high-density chip for white leg shrimp.
COST OF REVENUES
(in thousands)
Change
Change
Cost of Revenues
$ 284,146
%
$ 253,403
%
$ 221,891
Cost of revenues increased 12% in fiscal 2022 compared to fiscal 2021 and increased 14% in fiscal 2021 compared to fiscal 2020. This compares with revenue increases of 13% in fiscal 2022 and 12% in fiscal 2021. Expressed as a percentage of sales, cost of revenues was 53.9%, 54.1% and 53.1% in fiscal years 2022, 2021 and 2020, respectively. Gross margins were 46.1%, 45.9%, and 46.9% for fiscal years 2022, 2021, and 2020, respectively.
Fiscal 2022
- Our overall gross margin increased 20 basis points in fiscal 2022, primarily from a product mix shift to higher margin products in the Animal Safety segment. Partially offsetting this were higher raw material and freight costs within each segment, which resulted from continued supply chain disruptions, inflationary pressure, and ongoing issues related to COVID-19
and its variants across most of our markets. The Company has taken pricing actions where appropriate in response to these cost increases.
Fiscal 2021
- Our overall gross margin declined 100 basis points in fiscal 2021 as pressure on the worldwide supply chain caused by the COVID-19
pandemic resulted in increased overhead costs; in particular, freight costs on inventory purchases increased 53% in fiscal 2021 compared to the prior year. Additional cost increases resulted from personnel costs, in part from the increased volumes, but also due to labor
shortages, contracted services primarily related to our recently launched instruments, and higher health insurance costs domestically, as employees and their families utilized elective medical services postponed from the fourth quarter of fiscal 2020 due to COVID-19.
To a lesser extent, the shift in mix within the Food Safety segment towards products with lower gross margins negatively impacted the consolidated gross margin percentage.
Food Safety Gross Margins:
Food Safety gross margins were 50.2%, 49.2% and 51.4% in fiscal years 2022, 2021 and 2020, respectively.
Fiscal 2022 -
Food Safety margins increased 100 basis points in fiscal 2022, due to a product mix shift within the segment toward higher sales of diagnostic test kits in fiscal 2022; gross margin was also aided by a full year of sales of food quality products and enzymes from the Megazyme acquisition.
Fiscal 2021 -
Food Safety margins decreased 220 basis points in fiscal 2021, primarily due to higher sales of equipment such as the Soleris NG, which was launched in the current year and has lower gross margins than our diagnostic test kits, and cleaners and disinfectants sold through our China location, which reports through the Food Safety segment. We were also negatively impacted by increased freight, labor and other overhead costs throughout the segment.
Animal Safety Gross Margins:
Animal Safety gross margins were 42.1%, 42.6% and 42.3% in fiscal years 2022, 2021 and 2020, respectively.
Fiscal 2022 -
Animal Safety gross margins decreased by 50 basis points in fiscal 2022, primarily due to significant product cost increases and international freight charges. Negative mix effects occurred from lower sales of higher margin rodenticide products and companion animal services.
Fiscal 2021 -
Animal Safety gross margins increased by 30 basis points, primarily from strong sales of higher margin rodenticide and companion animal products and cost efficiencies; somewhat offsetting these gains, gross margin in this segment was negatively impacted by higher freight costs as rates to bring product into inventory rose significantly during the year, from both domestic and international sources.
OPERATING EXPENSES
(dollars in thousands)
Change
Change
Sales and Marketing
$ 84,604
%
$ 73,443
%
$ 69,675
General and Administrative
82,742
%
51,197
%
44,331
Research and Development
17,049
%
16,247
%
14,750
Total Operating Expense
$ 184,395
%
$ 140,887
%
$ 128,756
Overall operating expenses increased by 31% in fiscal 2022 and 9% in fiscal 2021, each compared to the prior year. Legal, consulting and other professional fees totaling $25.6 million were incurred in conjunction with due diligence, negotiation of terms and integration planning for our proposed business combination with 3M’s Food Safety business, which was announced on December 14, 2021. Excluding costs related to the 3M transaction, operating expenses were $158.8 million, an increase of 13% compared to the prior year.
Sales and Marketing:
Sales and marketing expenses increased by 15% in fiscal 2022 compared to fiscal 2021 and increased 5% in fiscal 2021 compared to the prior year. As a percentage of sales, sales and marketing expense was 16.0%, 15.7% and 16.7% in fiscal years 2022, 2021 and 2020, respectively.
Fiscal 2022
- The $11.2 million, or 15%, increase in sales and marketing expenses in fiscal 2022 resulted primarily from increases in employee compensation expenses such as salaries, bonuses, and commissions, and shipping expense, both reflecting the increase in revenues. Travel, meals and entertainment, and tradeshow expense were also higher, with customer-facing activities increasing significantly, the result of the easing of COVID-19 restrictions.
Fiscal 2021
- The $3.8 million, or 5%, increase in sales and marketing expenses in fiscal 2021 resulted primarily from increases in employee compensation expenses such as salaries, bonuses, and commissions, reflecting the increase in sales for the year, as well as increased headcount as we returned to normal staffing levels. In addition, shipping costs rose in line with revenues, health insurance costs rose as employees and their families resumed receiving medical treatment and procedures which had been deferred in the fourth quarter of the prior fiscal year. Advertising and outside services also increased to support the launch of a number of new products during the year, most notably the Soleris NG and AccuPoint NG readers. Partially offsetting these increases was $3 million in decreased spending for travel and meals and entertainment for the year, the result of travel restrictions and reductions in face-to-face
sales activities in most of our markets for the majority of the year. Travel and in person customer meetings did begin to pick up in some geographic areas in the second half of fiscal 2021 as COVID-19
restrictions were eased.
General and Administrative:
General and administrative expenses rose 62% in fiscal 2022 compared to fiscal 2021 and by 15% in fiscal 2021 compared to fiscal 2020. Legal, consulting and other professional fees totaling $25.6 million were incurred in conjunction with due diligence, negotiation of terms and integration planning for our proposed transaction to combine with 3M’s Food Safety business. Excluding costs related to the 3M transaction, general and administrative expenses increased 12% compared to the prior year. As a percentage of sales, general and administrative expense was 15.7% (10.8% excluding 3M transaction costs), 10.9% and 10.6% in fiscal years 2022, 2021 and 2020, respectively.
Fiscal 2022 -
In fiscal 2022, we spent $25.6 million on strategic consulting, legal and other professional fees related to due diligence, negotiation of terms and integration planning for our proposed transaction to combine with 3M’s Food Safety business. Excluding these costs, the increase in general and administrative expense in fiscal 2022 was 12%. Other increases in the current year included compensation related costs due to increased headcount and improved operating performance, incremental amortization expenses (non-cash)
from recent acquisitions, higher levels of depreciation (non-cash)
and related software and licensing costs from continued investments in information technology infrastructure and applications.
Fiscal 2021 -
In fiscal 2021, we spent $3.1 million on strategic consulting, legal and other professional fees related to acquisition activity for businesses which we were ultimately not successful in acquiring. Excluding these costs, the increase in general and administrative expense in fiscal 2021 was 8%. Other increases in the current year included compensation increases due to increased headcount, including the addition of a number of senior management positions, incremental amortization expenses (non-cash)
resulting from recent acquisitions, and higher levels of depreciation (non-cash)
and related software and licensing costs from continued investments in information technology infrastructure and applications. Increases in this cost category resulting from the Megazyme acquisition totaled $957,000.
Research and Development:
Research and development expenses increased 5% in fiscal 2022 and 10% in fiscal 2021, each compared to the prior year. As a percentage of revenue, these expenses were 3.2% in fiscal year 2022, 3.5% in fiscal year 2021 and 3.5% in fiscal year 2020; we expect to spend between 3% and 4% of total revenue on research and development annually as we continue to make investments in our future growth.
Fiscal 2022 -
The 5% increase in research and development expenses in fiscal 2022 was primarily the result of increased compensation expense, resulting from scheduled annual increases and additional headcount, and increases in contracted services related to new product development. These increases were partially offset by a decrease in external reader development costs; these projects were completed in the prior fiscal year.
Fiscal 2021 -
The 10% increase in research and development expenses in fiscal 2021 was primarily the result of increased compensation expense, resulting from scheduled annual increases and additional headcount from the Megazyme acquisition, project expense relating to new product innovation, spending with outside partners on the new readers launched in this fiscal year, and testing and approval costs for new product development.
OPERATING INCOME
(dollars in thousands)
Change
Change
Operating Income
$ 58,618
(21 %)
$ 74,169
%
$ 67,523
Operating income decreased 21% in fiscal 2022 compared to fiscal 2021 and increased by 10% in fiscal 2021 compared to fiscal 2020. Excluding the $25.6 million in transaction costs associated with 3M’s Food Safety business, operating income increased 13% in fiscal 2022 compared to the prior year. Expressed as a percentage of revenues, operating income was 11.1% (16.0% excluding 3M transaction costs), 15.8% and 16.1% in fiscal years 2022, 2021 and 2020, respectively. Gross margins rose by $28.0 million, or 13% in fiscal 2022 compared to the prior fiscal year; this was more than offset by a $43.5 million increase in operating expenses (including $25.6 million of 3M transaction costs).
In fiscal 2021, gross margins rose by $18.8 million, or 10%; this increase was partially offset by an increase of $12.1 million, or 9%, in operating expenses, resulting in a $6.6 million, or 10%, increase in operating income compared to fiscal 2020.
OTHER INCOME (EXPENSE)
Other Income (Expense) for the previous three fiscal years consisted of the following:
(dollars in thousands)
Interest income (net of expense)
$ 1,267
$ 1,614
$ 5,992
Foreign currency transactions
(40 )
(541 )
(1,178 )
Licenses and settlements
-
(38 )
Magiar contingent consideration
-
-
Clarus contigent consideration
-
-
Livestock Genomics contingent consideration
(136 )
-
Other
(131 )
Total Other Income
$ 1,589
$ 1,099
$ 4,782
Interest income decreased by $347,000 in fiscal 2022 compared to fiscal 2021, due to lower interest rates in effect for most of the fiscal year. The loss from foreign currency translations in fiscal years 2022, 2021 and 2020 is the result of the changes in the value of foreign currencies relative to the U.S. dollar in countries in which we operate; the dollar strengthened against most of these currencies in all three years.
In fiscal 2022, we recorded adjustments totaling $220,000 for contingent consideration accruals related to acquisitions completed in prior years. In fiscal 2021, we received proceeds of $309,000 for a property loss settlement and recorded $300,000 of expense resulting from a legal settlement with a vendor. Additionally, adjustments to contingent consideration accruals in fiscal 2021 resulted in $148,000 of income. In fiscal 2020, we took a charge to expense and recorded a reserve of $600,000 to provide for potential fines or penalties resulting from an administrative subpoena issued by the U.S. Treasury Department’s Office of Foreign Asset Control. This was partially offset by a $483,000 gain resulting from a settlement with the Brazilian government related to sales taxes charged over several years, and proceeds received for a property loss settlement.
PROVISION FOR INCOME TAXES
(dollars in thousands)
Change
Change
Provision for Income Taxes
$ 11,900
(17 %)
$ 14,386
%
$ 12,830
Income tax expense for fiscal 2022 was $11.9 million, an effective tax rate of 19.8%, compared to income tax expense of $14.4 million in 2021, an effective tax rate of 19.1%. For fiscal 2020, income tax expense of $12.8 million represented an effective tax rate of 17.7%.
Differences from the U. S. statutory rate of 21% to our effective rate are primarily due to provisions in the U.S. Tax Act and the exercise of stock options. Please refer to Note 6 to the consolidated financial statements for more information.
NET INCOME AND INCOME PER SHARE
(dollars in thousands, except per share data)
Change
Change
Net Income
$ 48,307
(21 %)
$ 60,882
%
$ 59,475
Net Income Per Share-Basic
$ 0.45
$ 0.57
$ 0.57
Net Income Per Share-Diluted
$ 0.45
$ 0.57
$ 0.56
Net income decreased 21% in fiscal 2022 compared to fiscal 2021, due to $25.6 million of professional fees related to the 3M transaction. Excluding these costs and adjusting the tax rate accordingly, net income would have been $67.9 million, an increase of 12% compared to fiscal 2021.
Net income increased 2% in fiscal 2021 compared to fiscal 2020, primarily due to the $6.7 million increase in operating income. The increase in operating income was partially offset by lower other income and higher tax expense for the year.
NON-GAAP
FINANCIAL MEASURES
This report includes certain financial information of Neogen that differs from what is reported in accordance with GAAP. These non-GAAP
financial measures consist of EBITDA, Adjusted EBITDA and Adjusted EBITDA margin. These non-GAAP
financial measures are included in this report because management believes that they provide investors with additional useful information to measure the performance of Neogen, and because these non-GAAP
financial measures are frequently used by securities analysts, investors and other interested parties as common performance measures to compare results or estimate valuations across companies in Neogen’s industries.
EBITDA
We define EBITDA as net income before interest, income taxes, and depreciation and amortization. We present EBITDA as a performance measure because it may allow for a comparison of results across periods and results across companies in the industries in which Neogen operates on a consistent basis, by removing the effects on operating performance of (a) capital structure (such as the varying levels of interest expense and interest income), (b) asset base and capital investment cycle (such as depreciation and amortization) and (c) items largely outside the control of management (such as income taxes). EBITDA also forms the basis for the measurement of Adjusted EBITDA (discussed below).
Adjusted EBITDA
We define Adjusted EBITDA as EBITDA, adjusted for stock-based compensation and certain transaction fees and expenses. We present EBITDA because it provides an understanding of underlying business performance by excluding the following:
•
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; and
•
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
$ 48,307
$ 60,882
$ 59,475
Net Income margin %
9.2
%
13.0
%
14.2
%
Provision for income taxes
11,900
14,386
12,830
Interest income, net
(1,267 )
(1,614 )
(5,992 )
Depreciation and amortization
23,694
21,041
18,396
EBITDA
$
82,634
$
94,695
$
84,709
Stock-based compensation
7,154
6,437
6,468
Certain transaction fees and expenses
25,581
3,085
-
Adjusted EBITDA
$
115,369
$
104,217
$
91,177
Adjusted EBITDA margin %
21.9
%
22.2
%
21.8
%
EBITDA, ADJUSTED EBITDA AND ADJUSTED EBITDA MARGIN %
(dollars in thousands)
Change
Change
EBITDA
82,634
(13 %)
94,695
%
84,709
Adjusted EBITDA
115,369
%
104,217
%
91,177
Adjusted EBITDA Margin %
21.9 %
22.2 %
21.8 %
Adjusted EBITDA increased 11% in fiscal 2022 compared to fiscal 2021, due to revenue growth and improved gross margins. Adjusted EBITDA increased 14% in fiscal 2021 compared to fiscal 2020, the result of revenue growth and lower spending on travel and other customer-facing activities.
FUTURE OPERATING RESULTS
Neogen Corporation’s future operating results involve a number of risks and uncertainties. Actual events or results may differ materially from those discussed in this report. Factors that could cause or contribute to such differences include, but are not limited to, the factors discussed below as well as those discussed elsewhere in this report. Management’s ability to grow the business in the future depends upon our ability to successfully implement various strategies, including:
•
developing, manufacturing and marketing new products with new features and capabilities, and having those new products successfully accepted in the marketplace;
•
expanding our markets by fostering increased use of our products by customers;
•
maintaining or increasing gross and net operating margins in changing cost environments;
•
strengthening operations and sales and marketing activities in geographies outside of the U.S.;
•
developing and implementing new technology development strategies; and
•
identifying and completing acquisitions that enhance existing product categories or create new products or services, and successfully integrating completed acquisitions, including our previously announced proposed transaction to combine with 3M’s Food Safety business.
FINANCIAL CONDITION AND LIQUIDITY
On May 31, 2022, we had $44.5 million in cash and cash equivalents, $336.6 million in marketable securities, and net working capital of $549.0 million. For the year ended May 31, 2022, cash generated from operating activities was $68.0 million, compared to $81.1 million generated in fiscal 2021; proceeds from stock option exercises provided an additional $7.9 million of cash. For the same period, additions to property, equipment and other non-current
assets were $24.4 million and business acquisitions used cash of $38.7 million. We have a financing agreement with a bank providing for an unsecured revolving line of credit of $15.0 million, which expires on November 30, 2023. Upon close of the 3M Food Safety transaction, this credit facility will terminate and be replaced with a larger, revolving facility. There were no advances against this line of credit during fiscal years 2022, 2021 and 2020, and no balance outstanding at May 31, 2022 and 2021.
Net accounts receivable at May 31, 2022 were $99.7 million, compared to $91.8 million at May 31, 2021; the increase is primarily due to the increased sales in the fourth quarter of fiscal 2022 compared to the corresponding period a year ago. Our days sales outstanding, a measurement of the time it takes to collect receivables, improved to 62 days at May 31, 2022 compared to 66 days at May 31, 2021.
Inventory balances were $122.3 million at May 31, 2022, an increase of $21.6 million, or 21%, compared to $100.7 million at May 31, 2021, In addition to adding $1.7 million of acquired inventory in fiscal 2022, we also increased ordering quantities and inventory levels to overcome supply chain constraints and minimize delays to customers.
On December 13, 2021, Neogen, 3M, and Garden Spinco, a newly formed subsidiary of 3M created to carve out 3M’s Food Safety business announced that they had entered into a definitive agreement pursuant to which 3M would separate its Food Safety business and simultaneously combine it with Neogen in a Reverse Morris Trust transaction, which is intended to be tax-efficient to 3M and its shareholders for U.S. federal income tax purposes. Under the terms of the definitive agreements, at the completion of the transaction, Neogen will issue a number of shares to 3M shareholders such that 3M shareholders will receive approximately 50.1% of the combined company and existing Neogen shareholders will continue to own approximately 49.9% of the combined company. In connection with the transaction, 3M will also receive consideration valued at approximately $1 billion, subject to closing and other adjustments. The transaction is expected to close by the end of the third quarter calendar year 2022, subject to approval by Neogen shareholders and the satisfaction of other customary closing conditions.
On June 30, 2022, Garden Spinco entered into a credit agreement consisting of a five-year senior secured term loan facility in the amount of $650.0 million and a five-year senior secured revolving facility in the amount of $150.0 million (collectively, the “Credit Facilities”), which, subject to customary closing conditions, will be available in connection with the merger and related transactions. The Credit Facilities, together with the Notes below, when incurred, represent the financing contemplated in connection with the merger.
In July 2022 Garden SpinCo closed on an offering of $350.0 million aggregate principal amount of 8.625% senior notes due 2030 (the “Notes”) in a private placement at par. The Notes were initially issued by Garden SpinCo to 3M and were transferred and delivered by 3M to the selling securityholder in the offering, in satisfaction of certain of 3M’s existing debt. Garden SpinCo did not receive any proceeds from the sale of the Notes by the selling securityholder. Prior to the distribution of the shares of Garden SpinCo’s common stock to 3M stockholders, the Notes will be guaranteed on a senior unsecured basis by 3M. Upon consummation of such distribution, 3M will be released from all obligations under its guarantee. Upon the effectiveness of the merger, the Notes will be guaranteed on a senior unsecured basis by Neogen and certain wholly-owned domestic subsidiaries of Neogen.
In addition to the 3M transaction described above, our future cash on hand and borrowing capacity may not be sufficient to meet cash requirements to commercialize products currently under development or execute our future plans to acquire additional businesses, technology and products that fit within our strategic plan. Accordingly, we may be required, or may choose, to issue additional equity securities or enter into other financing arrangements for a portion of our future capital needs.
We are subject to certain legal and other proceedings in the normal course of business that have not had, and, in the opinion of management, are not expected to have, a material effect on our results of operations or financial position.
CONTRACTUAL OBLIGATIONS
As of May 31, 2022, we have the following contractual obligations due by period:
Less than
More than
(dollars in thousands)
Total
1 year
1-3 years
3-5 years
5 years
Long-Term Debt
$ -
$ -
$ -
$ -
$ -
Operating Leases
3,316
1,458
1,324
-
Unconditional Purchase Obligations (1)
85,781
83,031
2,750
-
-
$ 89,097
$ 84,489
$ 4,074
$
$ -
(1) 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
See discussion of any New Accounting Pronouncements in Note 1 to consolidated financial statements.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
We have interest rate and foreign exchange rate risk exposure but no long-term fixed rate investments or borrowings. Our primary interest rate risk is due to potential fluctuations of interest rates for short-term investments.
Foreign exchange risk exposure arises because we market and sell our products throughout the world. Revenues in certain foreign countries, as well as certain expenses related to those revenues, are transacted in currencies other than the U.S. dollar. Our operating results are exposed to changes in exchange rates between the U.S. dollar and the British pound sterling, the euro, the Mexican peso, the Brazilian real, the Chinese yuan, the Australian dollar and, to a lesser extent, the Indian rupee, the Canadian dollar, the Guatemalan quetzal, the Argentine peso, the Uruguayan peso and the Chilean peso; there is also exposure to a change in exchange rate between the British pound sterling and the euro. When the U.S. dollar weakens against foreign currencies, the dollar value of revenues denominated in foreign currencies increases. When the U.S. dollar strengthens, the opposite situation occurs. Additionally, previously invoiced amounts can be positively or negatively affected by changes in exchange rates in the course of collection. We use derivative financial instruments to help manage the economic impact of fluctuations in certain currency exchange rates. These contracts are adjusted to fair value through earnings.
Neogen has assets, liabilities and operations outside of the U.S., located in Scotland, England, Ireland, Italy, Brazil, Mexico, Guatemala, Argentina, Uruguay, Chile, China, India, Canada and Australia where the functional currency is the British pound sterling, euro, Brazilian real, Mexican peso, Guatemalan quetzal, Argentine peso, Uruguayan peso, Chilean peso, Chinese yuan, Indian rupee, Canadian dollar and Australian dollar, respectively, and also transacts business throughout Europe in the euro. Our investments in foreign subsidiaries are considered to be long-term. As discussed in ITEM 1A. RISK FACTORS, our financial condition and results of operations could be adversely affected by currency fluctuations.
The following table sets forth the potential loss in future earnings or fair values, resulting from hypothetical changes in relevant market rates or prices:
Risk Category
Hypothetical Change
May 31, 2022
Impact
(dollars in thousands)
Foreign Currency - Revenue
10% Decrease in exchange rates
$ 20,934
Earnings
Foreign Currency - Hedges
10% Decrease in exchange rates
Earnings
Interest Income
10% Decrease in interest rates
Earnings

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is submitted in a separate section of this report starting on page.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE-NONE

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ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9A.
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
An evaluation was performed under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15
(e) under the Securities Exchange Act of 1934) as of May 31, 2022. Based on and as of the time of such evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report to ensure that information required to be disclosed in the reports that are filed or submitted under the Securities and Exchange Act of 1934 is appropriately recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure the information required to be disclosed in the reports that are filed or submitted under the Securities Exchange Act of 1934 is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13-a-15(f)
and 15d-15(f).
Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, an evaluation was conducted as to the effectiveness of internal control over financial reporting as of May 31, 2022, based on the framework in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on that evaluation, management concluded that internal control over financial reporting was effective as of May 31, 2022. The effectiveness of internal control over financial reporting as of May 31, 2022 has been audited by BDO USA, LLP, an independent registered public accounting firm, as stated in its attestation report, which is included on the following page and is incorporated into this Item 9A by reference.
Changes in Internal Control over Financial Reporting
No changes in our internal control over financial reporting were identified as having occurred during the quarter ended May 31, 2022 that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting.
Report of Independent Registered Public Accounting Firm
Shareholders and Board of Directors
Neogen Corporation
Lansing, Michigan
Opinion on Internal Control over Financial Reporting
We have audited Neogen Corporation’s (the “Company’s”) internal control over financial reporting as of May 31, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO criteria”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of May 31, 2022, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheets of the Company as of May 31, 2022 and 2021, the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended May 31, 2022, and the related notes and schedules and our report dated July 27, 2022 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Item 9A, Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit of internal control over financial reporting in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ BDO USA, LLP
Grand Rapids, Michigan
July 27, 2022

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ITEM 9B. OTHER INFORMATION
ITEM 9B.
OTHER INFORMATION-NONE

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information regarding the Company and certain corporate governance matters appearing under the captions “Proposal 1 - Election of Directors,” “Information About the Board and Corporate Governance Matters,” and “Additional Information-Delinquent Section 16(a) Reports” is incorporated by reference to Neogen’s 2022 proxy statement to be filed within 120 days of May 31, 2022.
We have adopted a Code of Conduct that applies to our directors, executive officers and employees. This Code of Conduct is available on our website at https://www.Neogen.com/globalassets/pdfs/corporate-governance-sec-and-investor-information/codeofconduct.pdf
. We intend to satisfy the disclosure requirement regarding any amendment to, or a waiver from, a provision of the code of conduct for our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, by posting such information on our website.
Information About Our Executive Officers
The officers of Neogen serve at the discretion of the Board of Directors. The names and titles of our officers as of May 31, 2022 are set forth below.
Name
Position with the Company
Year Joined
the Company
John E. Adent
President & Chief Executive Officer
Robert S. Donofrio, Ph.D.
Vice President, Research & Development
Jerome L. Hagedorn
Vice President, North American Operations
Douglas E. Jones
Vice President & Chief Operating Officer
Jason W. Lilly, Ph.D.
Vice President, International Business
Julie L. Mann
Vice President & Chief Human Resources Officer
Steven J. Quinlan
Vice President & Chief Financial Officer
Amy M. Rocklin, Ph.D.
Vice President, General Counsel & Corporate Secretary
Information concerning the officers of Neogen follows:
John E. Adent, age 54, joined Neogen as Chief Executive Officer on July 17, 2017 and was then named President on September 22, 2017. Prior to joining Neogen, Mr. Adent served as the Chief Executive Officer of Animal Health International, Inc., formerly known as Lextron, Inc., from 2004 to 2015, also serving as its President during that time. Animal Health International was sold to Patterson Companies, Inc. in 2015, and Mr. Adent served as the Chief Executive Officer of the $3.3 billion Animal Health Division of Patterson Animal Health from that period until his resignation on July 1, 2017. Mr. Adent began his career with management responsibilities for Ralston Purina Company, developing animal feed manufacturing and sales operations in China and the Philippines. When Ralston Purina spun off that business to Agribrands, he continued his management role in the European division in Spain and Hungary, serving as managing director of the Hungarian operations. He left Ralston Purina in 2004.
Dr. Robert S. Donofrio, age 49, joined Neogen in February 2016 as Director of Microbiology Research and Development, and was promoted to Director of Food Safety Research and Development in December 2016. In April 2018, Dr. Donofrio was named Vice President, Food Safety Research and Development and then named Vice President, Research and Development in September 2018. Prior to joining Neogen, he worked for 15 years at NSF International in various positions of increasing responsibility, including Director of Microbiology and Molecular Biology and Director of Applied Research, where he led efforts in grant research and method development with partners in academia, industry and government. At Neogen, Dr. Donofrio is responsible for our worldwide food safety and animal safety research activities.
Jerome L. Hagedorn, age 56, joined Neogen in April 2018 as Vice President, Food Safety Operations; in 2020, he was named Vice President, North American Operations. In the role, Mr. Hagedorn is responsible for the manufacturing, supply chain, shipping and warehousing, production engineering and quality systems for Neogen’s North American operations. Prior to joining Neogen, Mr. Hagedorn spent the past eight years as Vice President of Operations at Siemens Healthcare Diagnostics. At Siemens, he was responsible for multiple plant operations, including diagnostic instrument manufacturing and new product introduction. Prior to joining Siemens, Mr. Hagedorn held a variety of senior level positions over a 20 year career, including Director of Manufacturing at Bayer Healthcare in Indiana, Director of Lean Manufacturing at Invensys in Ohio, and Manager of Automated Manufacturing at Siemens Electronic Components in Mexico.
Douglas E. Jones, age 52, joined Neogen as Vice President & Chief Commercial Officer on August 17, 2020; in 2022, he was named Vice President & Chief Operating Officer. Prior to joining Neogen, Mr. Jones served as the President of the Companion Animal Division at Patterson Companies from 2016 to August 2020. Prior to joining Patterson, Mr. Jones served as the Head of Business Operations for the North American Merial Animal Health Division of Sanofi. Mr. Jones began his career as a management consultant with the North Highland Company and PriceWaterhouseCoopers, focusing on commercial transformation and strategy projects in the pharmaceutical, healthcare distribution and high-tech industries.
Dr. Jason W. Lilly, age 48, joined Neogen in June 2005 as Market Development Manager for Food Safety. In June 2009, he moved to the Corporate Development group. He was named Vice President of Corporate Development in December 2011, responsible for the identification and acquisition of new business opportunities for the Company. In January 2019, Dr. Lilly was named Vice President, International Business, responsible for Neogen’s operations outside of the U.S. and Canada; in April 2022, Dr. Lilly also assumed responsibility on an interim basis for the North American genomics business. Prior to joining Neogen, he served in various technical sales and marketing roles at Invitrogen Corporation.
Julie L. Mann, age 57, joined Neogen in 2017 as Director of Human Resources and was promoted to Senior Director of Human Resources in June 2019. In 2020, Ms. Mann was named Vice President & Chief Human Resources Officer, with responsibilities for people-focused programs and initiatives for Neogen’s worldwide employees. Ms. Mann has more than 30 years of experience focused on all aspects of strategic human resources including talent acquisition, compensation and benefits, employee development and employee relations. Prior to joining Neogen, Ms. Mann held the positions of Director, Talent Acquisition at Holland, a logistics company, and Director, People Services Consulting at Herman Miller.
Steven J. Quinlan, age 59, joined Neogen in January 2011 as Vice President & Chief Financial Officer and was also Corporate Secretary until March 2021. He is responsible for all internal and external financial reporting for Neogen, and manages the accounting, information technology, corporate purchasing, treasury and investor relations functions. Mr. Quinlan came to Neogen following 19 years at Detrex Corporation (1992-2010), the last eight years serving as Vice President-Finance, CFO and Treasurer. He was on the audit staff at the public accounting firm Price Waterhouse (now PricewaterhouseCoopers) from 1985-1989.
Amy M. Rocklin, Ph.D., age 50, joined Neogen in March 2021 as Vice President, General Counsel & Corporate Secretary. In this role, she is responsible for all legal and compliance matters and serves as the Corporate Secretary. Prior to joining Neogen, Dr. Rocklin was the Division Vice President, Corporate Law at Corning Incorporated, one of the world’s leading innovators in materials science. In her nearly ten years at Corning, she held multiple leadership positions within Corning’s Law Department, including Director of Law, M&A and Emerging Innovations. Before Corning, Dr. Rocklin held positions at Smiths Group plc and was in private practice at the law firm of Foley & Lardner LLP.

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ITEM 11. EXECUTIVE COMPENSATION
ITEM 11.
EXECUTIVE COMPENSATION
The information required by this Item, and pursuant to Regulation 14A of the Exchange Act, is incorporated by reference from the sections entitled “Compensation Discussion and Analysis”, “Compensation Committee Report”, “Executive Compensation”, “Information About the Board and Corporate Governance Matters-Compensation Committee Interlocks and Insider Participation”, “CEO Pay Ratio”, and “Compensation of Directors” in the Company’s definitive Proxy Statement to be filed within 120 days of May 31, 2022.

---

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT, AND RELATED STOCKHOLDER MATTERS
The information required by this Item, and pursuant to Regulation 14A of the Exchange Act, is incorporated by reference from the section entitled “Security Ownership of Certain Beneficial Owners, Directors and Management” in the Company’s definitive Proxy Statement to be filed within 120 days of May 31, 2022.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this Item, and pursuant to Regulation 14A of the Exchange Act, is incorporated by reference from the section entitled “Information about the Board and Corporate Governance Matters-Independent Directors,” “-Board Committees” and “-Certain Relationships and Related Party Transactions” in the Company’s definitive Proxy Statement to be filed within 120 days of May 31, 2022.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item, and pursuant to Regulation 14A of the Exchange Act, is incorporated by reference from the section entitled “Proposal 3 -
Ratification of the Appointment of the Company’s Independent Registered Public Accounting Firm” in the Company’s definitive Proxy Statement to be filed within 120 days of May 31, 2022.
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) (1) and (2) and (c). The response to this portion of ITEM 15 is submitted as a separate section of this report starting on page.
(a) (3) and (b). The Exhibits, listed on the accompanying Exhibit Index on page 40, are incorporated herein by reference.