NEOGEN CORPORATION The information in this Management's Discussion and Analysis of Financial Condition and Results of Operations contains both historical financial information and forward-looking statements. Neogen does not provide forecasts of future financial performance. While management is optimistic about the Company's long-term prospects, historical financial information may not be indicative of future financial results. Safe Harbor and Forward-Looking Statements Forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, are made throughout this Quarterly Report on Form 10-Q. For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words "believes," "anticipates," "plans," "expects," "seeks," "estimates," and similar expressions are intended to identify forward-looking statements. There are a number of important factors, including competition, recruitment and dependence on key employees, impact of weather on agriculture and food production, effects of the ongoing COVID-19 pandemic on our business, identification and integration of acquisitions, research and development risks, patent and trade secret protection, government regulation and other risks detailed from time to time in the Company's reports on file at theSecurities and Exchange Commission , that could causeNeogen Corporation's results to differ materially from those indicated by such forward-looking statements, including those detailed in this "Management's Discussion and Analysis of Financial Condition and Results of Operations." In addition, any forward-looking statements represent management's views only as of the day this Quarterly Report on Form 10-Q was first filed with theSecurities and Exchange Commission and should not be relied upon as representing management's views as of any subsequent date. While management may elect to update forward-looking statements at some point in the future, it specifically disclaims any obligation to do so, even if its views change. COVID-19 As we closely monitor the COVID-19 pandemic, our top priority remains protecting the health and safety of our employees. While operations continue in our locations around the world, many of our non-manufacturing and distribution employees continue to work remotely and travel remains limited. Safety guidelines and procedures, including social distancing, mask wearing and enhanced cleaning, have been developed for on-site employees and these policies are regularly monitored and updated by our internalEmergency Response Team . In the first half of fiscal 2022, the COVID-19 pandemic continued to impact our business operations and financial results. A number of our food safety diagnostic product lines have been negatively impacted due to decreased demand in many of our customers' businesses around the world, particularly those serving restaurants, bars and other institutional food service markets. Many of our markets across the world are recovering, but the pandemic has continued to adversely impact our customers and ultimately, our revenues. We have also experienced supply chain difficulties including vendor disruptions, border closures, shipping issues and significantly increased shipping costs; labor shortages and higher labor costs, as we have had to use staffing agencies and increase our base pay in many areas of the company to fill open positions; and restricted travel, which hinders our ability to connect with customers. During the current fiscal year, we have incurred less expense for travel, meals, trade shows and some other customer-facing marketing activities; some of these activities have resumed but have not yet returned to pre-pandemic levels. Higher spend on shipping and labor are offsetting these savings. Overall, the impact of COVID-19 remains uncertain and ultimately depends on the length and severity of the pandemic, inclusive of the introduction of new strains of the virus; the federal, state, and local government actions taken in response; vaccination rates and effectiveness; the impact of vaccination requirements; and the macroeconomic environment. We will continue to evaluate the nature and extent to which COVID-19 will impact our business, supply chain, including labor availability and attrition, consolidated results of operations, financial condition, and liquidity; we expect it to impact us through at least the end of our current fiscal year. 19
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Executive Overview
• Consolidated revenues were
2022, an increase of 13% compared to
of fiscal 2021. Organic sales growth in the second quarter of fiscal 2022
was 10%. For the six month period, consolidated revenues were
$258.8 million , an increase of 15% compared to $224.3 million in the same
period in the prior fiscal year. On a year to date basis, organic sales
rose 12%.
• Food Safety segment sales were
fiscal 2022, an increase of 17% compared to
period a year ago. Organic sales in this segment rose 11% for the
comparative period, with revenues from the acquisition of Megazyme
(
the segment. For the year to date, Food Safety segment sales were
period of the prior fiscal year; the organic sales increase was 10% for
the comparative period, with the Megazyme acquisition providing the
additional contribution to revenue.
• Animal Safety segment sales were
fiscal 2022, an increase of 10% compared to $57.5 million in the second
quarter of fiscal 2021. Organic sales in this segment also rose 10% in
the second quarter, with a minor contribution from the CAPInnovet
acquisition (September 2021 ). For the six month period, Animal Safety
segment sales were $129.0 million , an increase of 15%, compared to
rose 14%, with revenues from the StandGuard (
acquisitions contributing the difference.
• International sales in the second quarter of fiscal 2022 were 41% of
total sales compared to 39% of total sales in the second quarter offiscal 2021. For the year to date, fiscal 2022 international sales were
40% of total sales compared to 39% of total sales in the same period of
the prior year.
• Our effective tax rate in the second quarter was 16.2% compared to an
effective tax rate of 17.8% in the prior year second quarter; the fiscal
2022 year to date effective tax rate was 19.5% compared to 18.9% for the
same period a year ago.
• Net income for the quarter ended
share in the same period in the prior year. For the year to date, net
income was
year to date net income of
income was decreased by
due diligence related to our recently announced agreement to combine with
3M's Food Safety business.
• Cash provided from operating activities in the first six months of fiscal
2022 was $41.1 million , compared to $47.5 million in the first half of
fiscal 2021.
20
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International sales rose 20% in both the second quarter of fiscal 2022 and also
increased 20% for the year to date, each compared to the same respective periods
in the prior year. Excluding international sales of the Megazyme acquisition,
the increase was 14% for both the quarter and year to date periods. Revenue
changes, expressed in percentages, for the three and six month periods of fiscal
2022 compared to the same respective periods in the prior year are as follows
for each of our international locations:
Three Months Ended Six Months Ended
November 30, 2021 November 30, 2021
Revenue Revenue Revenue Revenue
% Inc (Dec) % Inc (Dec) % Inc (Dec) % Inc (Dec)
USD Local Currency USD Local Currency
U.K Operations (including
Neogen Italia) 20 % 14 % 13 % 6 %
Brazil Operations (5 )% (6 )% (10 )% (12 )%
Neogen Latinoamerica 13 % 10 % 18 % 10 %
Neogen Argentina 44 % 84 % 28 % 68 %
Neogen Uruguay (4 )% (2 )% 3 % 5 %
Neogen Chile 48 % 54 % 59 % 59 %
Neogen China 28 % 22 % 42 % 34 %
Neogen India (10 )% (9 )% 1 % 1 %
Neogen Canada 34 % 28 % 60 % 50 %
Neogen Australasia 29 % 27 % 38 % 33 %
Currency translations increased comparative revenues by approximately
$1.0 million in the second quarter of fiscal 2022 and $3.3 million for the year
to date, each compared to the same periods a year ago, primarily due to the
increased strength of the British pound and Mexican peso relative to the U.S.
dollar. Combined revenues at our U.K. operations increased 20% in the second
quarter; growth was led by strong cleaner and disinfectant sales into Asia , as
the African swine fever outbreak continues to drive demand, and new culture
media business with commercial laboratories in the U.K. that have adopted our
recently launched One Broth One Plate workflow. For the six month period,
revenues at our U.K. operations increased 13% as a large
non-recurring
prior year shipment of hand sanitizers to the U.K. government's health
organization affected growth in the first quarter.
Sales in Brazil decreased 5% in this year's second quarter, as an extended
drought led to a significantly reduced corn crop and the associated testing,
resulting in a large decrease in sales of aflatoxin test kits. For the six month
period, sales at our Brazilian operations decreased 10%, primarily due to the
reduced aflatoxin test kit sales and a large
non-recurring
insecticide sale to a government health organization in the first quarter of the
prior fiscal year. Neogen Latinoamerica sales rose 13% for the second quarter,
primarily due to increases in natural toxins test kits, environmental
sanitation, culture media and biosecurity products. Sales at Neogen China
increased 28% and 42% for the three and six month periods, respectively, from
new sales of Megazyme products and growth in genomics, as the commercial dairy,
swine and sheep markets have increased sampling volumes. The Neogen Australasia
location benefitted from increased genomics business with customers in the beef
and sheep markets.
Service revenue, which includes genomics testing and other laboratory services,
was $24.4 million in the second quarter of fiscal 2022, an increase of 9% over
prior year second quarter revenues of $22.5 million . For the six month period,
service revenue was $48.7 million , an increase of 11% over prior year revenues
of $43.9 million . The growth for both the quarter and year to date periods was
led by increases in revenues at our Australia , China , U.K. , Brazil and Canada
genomics operations; growth in our domestic operation was reduced by lower
volumes of companion animal samples, the result of difficult comparison from
large increases in the prior year.
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Revenues
Three Months Ended November 30,
Increase/
(in thousands) 2021 2020 (Decrease) %
Food Safety
Natural Toxins, Allergens & Drug Residues $ 21,028 $ 20,001 $ 1,027 5 %
Bacterial & General Sanitation 12,252 11,235 1,017 9 %
Culture Media & Other 19,935 14,215 5,720 40 %
Rodenticides, Insecticides & Disinfectants 8,232 7,059 1,173 17 %
Genomics Services 5,685 5,024 661 13 %
$ 67,132 $ 57,534 $ 9,598 17 %
Animal Safety
Life Sciences $ 1,309 $ 1,398 $ (89 ) (6 )%
Veterinary Instruments & Disposables 15,572 11,974 3,598 30 %
Animal Care & Other 10,849 9,371 1,478 16 %
Rodenticides, Insecticides & Disinfectants 18,269 18,471 (202 ) (1 )%
Genomics Services 17,386 16,252 1,134 7 %
$ 63,385 $ 57,466 $ 5,919 10 %
Total Revenues $ 130,517 $ 115,000 $ 15,517 13 %
Six Months Ended November 30,
Increase/
(in thousands) 2021 2020 (Decrease) %
Food Safety
Natural Toxins, Allergens & Drug Residues $ 41,432 $ 39,016 $ 2,416 6 %
Bacterial & General Sanitation 23,421 21,166 2,255 11 %
Culture Media & Other 37,981 26,387 11,594 44 %
Rodenticides, Insecticides & Disinfectants 15,882 15,888 (6 ) 0 %
Genomics Services 11,138 9,262 1,876 20 %
$ 129,854 $ 111,719 $ 18,135 16 %
Animal Safety
Life Sciences $ 2,672 $ 2,723 $ (51 ) (2 )%
Veterinary Instruments & Disposables 30,909 22,349 8,560 38 %
Animal Care & Other 20,068 17,029 3,039 18 %
Rodenticides, Insecticides & Disinfectants 40,418 38,385 2,033 5 %
Genomics Services 34,901 32,120 2,781 9 %
$ 128,968 $ 112,606 $ 16,362 15 %
Total Revenues $ 258,822 $ 224,325 $ 34,497 15 %
22-------------------------------------------------------------------------------- Food Safety Natural Toxins, Allergens & Drug Residues - Sales in this category increased 5% and 6% for the three and six month periods endedNovember 30, 2021 , respectively, compared to the same periods in the prior year. In the second quarter, sales of our natural toxin test kits rose 10% as higher sales in the domestic pet food market andEurope were partially offset by lower aflatoxin sales inBrazil , as a drought significantly reduced crop size and associated testing. Sales of allergen test kits rose 6% in the second quarter, while sales of our drug residue test kits declined 23% due to the termination of a European distribution agreement and competitive pressure within the marketplace. Bacterial & General Sanitation - Revenues in this category increased 9% and 11% for the second quarter and for the year to date, compared to the same periods in the prior year. In the second quarter, sales of products to detect spoilage organisms in processed foods increased 22%, resulting from sales of our new instrument which continued to gain market acceptance after launching over a year ago. Sales of our AccuPoint sanitation monitoring product line increased 8% in the second quarter as strong sales of our new reader partially offset lower sales of consumables due to supply issues. Sales of products to detect pathogens increased 3% in the second quarter. Culture Media & Other - Sales in this category increased 40% in the quarter endedNovember 30, 2021 compared to the second quarter in the prior year; for the six month period, sales increased 44%. Excluding sales from theDecember 2020 acquisition of Megazyme, Veterinary which are reported in this category, sales increased 17% and 19% for the three and six month periods, respectively. This category includes sales of instruments and other veterinary products at some of our international locations; these sales increased significantly over the prior year due to recovering markets and expanded market share. Sales of Neogen Culture Media products increased 11% in the second quarter as our new workflow, One Broth One Plate, continued to drive increased sales to commercial labs in theU.K. ; the growth was partially offset by a decline in domestic sales due to non-recurring business in the prior year. For the six month period, Neogen Culture Media sales increased 22%, due to strength in theU.K. and also a large domestic sale to a vaccine manufacturer in the first quarter. Rodenticides, Insecticides & Disinfectants - Revenues in this category increased 17% in the second quarter of fiscal 2022 compared to the same period a year ago, due primarily to continued strength in cleaners and disinfectants intoAsia resulting from increased demand from the African swine fever outbreak in that region; there was also higher sales of rodenticides inMexico . For the year to date, sales were flat, with the previously discussed increases being offset by large non-recurring sales of hand sanitizers in theU.K. and insecticides inBrazil in the first quarter of the prior fiscal year. Genomics Services - Sales of genomics services sold through our international Food Safety operations increased 13% and 20% for the three and six month periods endedNovember 30, 2021 , respectively. The increase in the second quarter was from overall strength at our labs in theU.K. ,Brazil andChina as improved economic conditions in several markets have contributed to increased testing. Animal Safety Life Sciences - Sales in this category decreased 6% in the second quarter, compared to the same period in the prior year; for the year to date, the decrease in this product line was 2%. The decline in both periods was due primarily to the loss of hair testing business with a largeU.S. commercial laboratory that moved to a different testing platform. Veterinary Instruments & Disposables - Revenues in this category increased 30% for the three month period endedNovember 30, 2021 , led by a large increase sales of in veterinary instruments, including needles and syringes, resulting from recently won private label business; revenues increased 38% for the year to date. Animal Care & Other - Sales of these products increased 16% and 18% in the three and six month periods endedNovember 30, 2021 , respectively. Excluding the contribution of parasiticides from the September acquisition of CAPInnovet, revenues in this category increased 13% in the second quarter, primarily due to strength in equine and companion animal markets. Additionally, we continued to regain customers with our recently re-launched ThyroKare ™ product. Partially offsetting these gains was a decline in sales of dairy supplies of 67% and 76% for the quarter and year to date periods, respectively, due to theJune 2020 termination of an agreement in which we distributed these types of products for a large manufacturer of dairy equipment. 23
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Rodenticides, Insecticides
& Disinfectants - Revenues in this category decreased 1% for the three month period endedNovember 30, 2021 , resulting from a 14% decrease in rodenticide sales due to supply constraints and a non-outbreak year. Insecticide sales rose 46% in the quarter, led by growth in the StandGuard ® product line acquired inJuly 2020 . Cleaners and disinfectants sales decreased 2% due to a difficult prior year comparison that included a large non-recurring sale. Sales of these products for the year to date period increased 5%, as compared to a year ago, for the same reasons. Genomics Services - Sales in this category increased 7% and 9% in the second quarter and the year to date periods, each compared to the prior year. The growth in both periods was led by increases in beef and sheep testing inAustralia due to improved market conditions and higher sample volumes from domestic dairy and beef cattle and poultry customers. Growth in both the three and six month periods was partially offset by lower domestic companion animal revenues due to difficult prior year comparisons. Gross Margin Gross margin, expressed as a percentage of sales, was 46.4% in the second quarter of fiscal 2022 compared to 46.3% in the same quarter a year ago. The slight change in gross margin percentage is the result of a 30 basis point improvement in Food Safety gross margins, partially offset by a 20 basis point decline in gross margin percentage in the Animal Safety segment. The primary driver of the improved Food Safety gross margin percentage was incremental revenue from the Megazyme product line; these products generate higher gross margins than the average in this segment. In the Animal Safety segment, the slight decline in gross margin percentage was the result of lower sales of higher margin rodenticide products due to a lessening of vole pressure across the domestic market, and a reduction in genomics service revenues in the domestic companion animal markets. Within each segment, higher raw material and freight costs, resulting from continued supply chain issues across most of our markets, put downward pressure on gross margins. The company has taken pricing actions where appropriate in response to these cost increases. For the year to date, gross margin was 46.6% compared to 46.1% in the prior year, for the same reasons. Operating Expenses Operating expenses were$48.1 million in the second quarter, compared to$34.0 million in the same quarter of the prior year, an increase of$14.2 million , or 42%. Legal, consulting and other professional fees totaling$9.3 million were incurred in the second quarter in conjunction with due diligence and negotiation of terms for the proposed business combination with 3M's Food Safety business, which was announced onDecember 14, 2021 . Excluding costs related to the transaction, run rate operating expenses were$38.8 million , an increase of 14% compared to the prior year. For the six month period endedNovember 30, 2021 , excluding the$9.3 million in deal costs, operating expenses were$77.1 million , an increase of 18% compared to the prior year. Sales and marketing expenses increased$3.5 million , or 20%, in the second quarter, primarily due to increases in personnel related expenses, the result of higher sales volumes and headcount. Additionally, travel, trade shows and other customer facing activities have continued to rise, the result of easing of restrictions in a number of our markets due to the COVID-19 pandemic; for the year to date, sales and marketing expenses increased 22% compared to the same period last year. General and administrative expense increased$10.4 million in the second quarter, primarily the result of$9.3 million in legal, consulting and other professional fees resulting from due diligence efforts and negotiation of terms relating to the proposed transaction with 3M referenced above. Run rate general and administrative expenses rose$1.1 million , or 9%, due primarily to increases in salaries and bonuses resulting from improved operating performance and additional senior management hires, higher amortization expenses from the Megazyme and CAPInnovet acquisitions, increased stock based compensation expense and higher depreciation and license fees relating to information technology infrastructure and software. These increases were partially offset by$1 million in spending on strategic consulting, legal and other professional fees related to acquisition activity in the prior year second quarter for businesses which we were not ultimately successful in acquiring. Year to date, run rate general and administrative expenses increased 15%, for the same reasons. Research and development expense was$4.3 million in the second quarter, an increase of$270,000 , or 7%, compared to the same period in the prior year. The increase was primarily the result of incremental costs of personnel absorbed from the Megazyme acquisition and outside service costs for development spending on new products. For the year to date, research and development expenses increased 9% over the same period last year, for the same reasons. 24 -------------------------------------------------------------------------------- Operating Income Operating income was$12.5 million in the second quarter of fiscal 2022, compared to$19.2 million in the same period of the prior year; year to date operating income was$34.2 million compared to$38.1 million in the prior year. Expressed as a percentage of sales, operating income was 9.6% for the second quarter and 13.2% for the year to date, compared to 16.7% and 17.0%, respectively, for the same periods in the prior year. Adjusting for the$9.3 million in transaction costs resulting from the proposed 3M transaction, operating income was 16.7% in the second quarter and 16.8% for the year to date. Other Income Three Months Ended Six Months Ended November 30, November 30, (dollars in thousands) 2021 2020 2021 2020
Interest income (net of expense)
$ 1,277 Foreign currency transactions 167 (432 ) 15 (256 ) Insurance settlement - 309 - - Legal settlement - (300 ) - - LGS contingent consideration (135 ) - (135 ) - Other 210 (42 ) 141 (16 ) Total Other Income$ 459 $ 90 $ 441 $ 1,005 The decrease in interest income in the six month period of fiscal 2022 compared to the same period a year ago was the result of continued lower yields on our marketable securities balances. Other income or expense resulting from foreign currency transactions was the result of changes in the value of foreign currencies relative to theU.S. dollar in countries in which we operate. In the second quarter of the current fiscal year, we recorded a charge of$135,000 for additional contingent consideration in the final payment to the former owner of Livestock Genomic Services. Income Tax Expense Income tax expense in the second quarter of fiscal 2022 was$2.1 million , an effective tax rate of 16.2%, compared to$3.5 million , an effective tax rate of 17.8%, in the same period of the prior year. For the year to date, income tax expense was$6.8 million , an effective rate of 19.5%, in fiscal 2022 and$7.4 million , an effective rate of 18.9%, in fiscal 2021. For each period, the primary difference between the statutory rate of 21% and the effective rates recorded is the benefit resulting from the exercise of stock options; this benefit was$859,000 in the second quarter of fiscal 2022 compared to$1,060,000 in the second quarter of the prior year. For the year to date, the benefit was$874,000 in fiscal 2022 compared to$1,481,000 in fiscal 2021. The decrease in the effective tax rate for the second quarter was primarily due to lower taxable income resulting from fees related to the 3M combination. The increase in effective rate for the year to date period is the result of lower benefit from stock option exercises and a$548,000 charge to expense in the first quarter because theU.K. enacted a higher tax rate effective in 2023. Since our deferred tax balances at this operation are expected to reverse in the future at the higher tax rate, we were required to revalue them when the new rate was passed. Net Income Net income was$10.9 million in the second quarter of fiscal 2022, compared to$15.9 million in the same period in the prior year. The decline in earnings for this year's second quarter was the result of$9.3 million in legal, consulting and other professional fees from the intended transaction with 3M. Excluding those charges, net income rose 14% in the second quarter of fiscal 2021 compared to the same period in the prior year. For the year to date, net income was$27.9 million , a decrease of 12% compared to$31.7 million in the prior year; excluding the$9.3 million of expense, net income rose 11% year to date. Six month net income in fiscal 2022 was also negatively impacted by a higher effective tax rate. 25 -------------------------------------------------------------------------------- Financial Condition and Liquidity The overall cash, cash equivalents and marketable securities position of Neogen was$389.2 million atNovember 30, 2021 , compared to$381.1 million atMay 31, 2021 . Approximately$41.1 million was generated from operations during the first six months of fiscal 2022 and spent$26.9 million on acquisitions. Net cash proceeds of$6.6 million were realized from the exercise of stock options and issuance of shares under our Employee Stock Purchase Plan during the first six months of fiscal 2022. We spent$5.2 million for property, equipment and other non-current assets in the first half of fiscal 2022. Net accounts receivable balances were$92.5 million atNovember 30, 2021 , an increase of$700,000 , compared to$91.8 million atMay 31, 2021 . Days' sales outstanding, a measurement of the time it takes to collect receivables, were 63 days atNovember 30, 2021 , compared to 66 days atMay 31, 2021 and 61 days atNovember 30, 2020 . We have been carefully monitoring our customer receivables as the COVID-19 pandemic has spread across our global markets; to date, we have not experienced an appreciable increase in bad debt write offs. Net inventory was$107.1 million atNovember 30, 2021 , an increase of$6.4 million , compared to aMay 31, 2021 balance of$100.7 million . The two acquisitions completed in the second quarter added approximately$1.0 million to our inventory balance. Additionally, we have been increasing inventory levels recently in an effort to reduce freight costs and prevent backorders, as shipments are taking longer and some suppliers are requiring higher orders due to their supply constraints. Inflation and changing prices are not expected to have a material effect on operations, as management believes it will continue to be successful in offsetting increased input costs with price increases and/or cost efficiencies. Management believes that our existing cash and marketable securities balances atNovember 30, 2021 , along with available borrowings under our credit facility and cash expected to be generated from operations, will be sufficient to fund activities for the remainder of the current fiscal year. However, existing cash and borrowing capacity will be insufficient to meet cash requirements for our planned combination with the 3M Food Safety business, which is currently expected to close in the third quarter of calendar year 2022. The transaction will be funded by issuing equity securities to 3M's shareholders and borrowing approximately$1 billion in cash under an agreement with JPMorgan Chase. 26
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PART I - FINANCIAL INFORMATION
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