# Neogen Corp: Form 10-Q for the period ended Feb 29, 2024

- Company: [Neogen Corp](/companies/neog.md) (CIK 711377)
- Form: 10-Q
- Filed: 2024-04-09
- Accepted by EDGAR: Apr 9, 2024, 16:01 ET
- Period: 2024-02-29
- Accession: 0000950170-24-042952
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/711377/000095017024042952/neog-20240229.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/711377/000095017024042952/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2024-02-29.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-12-01 to 2024-02-29 | $228.8m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months, 2023-06-01 to 2024-02-29 | $687.4m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2023-12-01 to 2024-02-29 | $111.9m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 9 months, 2023-06-01 to 2024-02-29 | $337.0m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2023-12-01 to 2024-02-29 | $116.9m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2023-06-01 to 2024-02-29 | $350.4m | us-gaap:GrossProfit |
| Research and development | 3 months, 2023-12-01 to 2024-02-29 | $4.9m | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 9 months, 2023-06-01 to 2024-02-29 | $17.3m | us-gaap:ResearchAndDevelopmentExpense |
| Operating income | 3 months, 2023-12-01 to 2024-02-29 | $12.0m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2023-06-01 to 2024-02-29 | $45.6m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2023-12-01 to 2024-02-29 | $10.5m | us-gaap:InterestExpense |
| Interest expense | 9 months, 2023-06-01 to 2024-02-29 | $31.4m | us-gaap:InterestExpense |
| Income tax | 3 months, 2023-12-01 to 2024-02-29 | −$3.8m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2023-06-01 to 2024-02-29 | −$3.9m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-12-01 to 2024-02-29 | −$2.0m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2023-06-01 to 2024-02-29 | −$4.0m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-12-01 to 2024-02-29 | −$0.01 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2023-06-01 to 2024-02-29 | −$0.02 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-12-01 to 2024-02-29 | −$0.01 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2023-06-01 to 2024-02-29 | −$0.02 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-12-01 to 2024-02-29 | 216,597,777 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2023-06-01 to 2024-02-29 | 216,438,643 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2023-06-01 to 2024-02-29 | $8.5m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2023-06-01 to 2024-02-29 | $87.2m | us-gaap:PaymentsToAcquireProductiveAssets |
| Cash and equivalents | at 2024-02-29 | $161.4m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2024-02-29 | $602.5m | us-gaap:AssetsCurrent |
| Total assets | at 2024-02-29 | $4.58bn | us-gaap:Assets |
| Current liabilities | at 2024-02-29 | $157.8m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2024-02-29 | $1.44bn | us-gaap:Liabilities |
| Long-term debt | at 2024-02-29 | $887.7m | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2024-02-29 | $2.5m | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2024-02-29 | $3.15bn | us-gaap:StockholdersEquity |
| Shares outstanding | at 2024-02-29 | 216,607,746 shares | dei:EntityCommonStockSharesOutstanding |

## Management's discussion and analysis

As filed, 40,140 characters.

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, including statements relating to management’s expectations regarding new product introductions; the adequacy of our sources for certain components, raw materials and finished products; and our ability to utilize certain inventory. 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. These forward-looking statements are intended to provide our current expectations or forecasts of future events; are based on current estimates, projections, beliefs, and assumptions; and are not guarantees of future performance. Actual events or results may differ materially from those described in the forward-looking statements. There are a number of important factors, including circumstances beyond our control at our transition manufacturing partner, competition, recruitment, retention, dependence on key employees, impact of weather on agriculture and food production, global business disruption caused by the Russia invasion in Ukraine and related sanctions and the conflict between Israel and Hamas, identification and integration of acquisitions, research and development risks, intellectual property protection, government regulation and other risks detailed from time to time in the Company’s reports on file at the Securities and Exchange Commission, that could cause Neogen Corporation’s results to differ materially from those indicated by such forward-looking statements, including those detailed in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

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

### TRENDS AND UNCERTAINTIES

In prior years, production was negatively impacted by broad supply chain challenges, labor market disruptions and other related impacts of the COVID-19 pandemic. Additionally, input cost inflation, including increases in certain raw materials, negatively impacted operating results. In fiscal 2023, these negative impacts steadily improved throughout the fiscal year. In fiscal 2024, despite a slowing of inflation rates, there remains economic headwinds of softening consumer demand and higher interest rates, coupled with ongoing geopolitical tension in certain regions.

Interest rates have risen sharply, particularly in fiscal 2023, as a way to combat inflation. This, subsequently, increased our borrowing costs and raised the overall cost of capital. While the frequent increases have largely subsided, the overall rate is significantly higher than in recent years, which increases interest expense on the unhedged portion of our Term Loan. In response to the historically high inflationary environment, we have taken pricing actions to mitigate the impacts on the business. We anticipate that the impact of inflation will continue to affect us for the remainder of fiscal year 2024, although at a continually decreasing rate compared to the prior two fiscal years. Beginning in the second quarter of the fiscal year, we implemented a new enterprise resource planning system and began the exit of our transition distribution agreements, which led to certain shipment delays and an elevated backlog of open orders, specifically in the Food Safety segment. Through our continued integration process, we expect our order fulfillment rates to improve to meet the needs of our customers in this improving end-market environment.

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, which began in February 2022, on the global economy. Our European operations and customer base have been negatively impacted by the conflict. Similarly, the military conflict between Israel and Hamas has increased overall geopolitical tensions. As the respective conflicts continue or worsen, they may further impact our business, financial condition or results of operations throughout the remainder of fiscal year 2024.

We continue to evaluate the nature and extent to which these issues impact our business, including consolidated results of operations, financial condition and liquidity. We expect these issues to continue to impact us for the remainder of fiscal year 2024 and into fiscal year 2025.

### Executive Overview

*(in thousands)*

| Consolidated | Three Months Ended February 29/28, 2024 | 2023 | % Change | Nine Months Ended February 29/28, 2024 | 2023 | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Revenues | $228,812 | $218,255 | 5% | $687,428 | $580,637 | 18% |
| Core Sales Growth\* |  |  | 6% |  |  | 2% |
| **Food Safety** |  |  |  |  |  |  |
| Revenues | $157,754 | $151,542 | 4% | $488,435 | $377,528 | 29% |
| Core Sales Growth\* |  |  | 6% |  |  | 3% |
| **Animal Safety** |  |  |  |  |  |  |
| Revenues | $71,058 | $66,713 | 7% | $198,993 | $203,109 | (2)% |
| Core Sales Growth\* |  |  | 7% |  |  | (2)% |
| % of International Sales | 46% | 50% |  | 49% | 47% |  |
| Net (Loss) Income | $(2,022) | $8,190 |  | $(4,006) | $(28,442) |  |
| (Loss) Earnings per Diluted Share | (0.01) | 0.04 |  | (0.02) | (0.16) |  |
| Cash from (for) Operations |  |  |  | 8,517 | (49,938) |  |

\* Refer to the non-GAAP financial measures section in this document.

- Food Safety core sales exclude revenues from the 3M FSD transaction (September 2022), the Thai-Neo Biotech acquisition (July 2022), the Corvium acquisition (February 2023) and excludes the change in currency rates. Core sales also exclude the discontinued dairy antibiotics test kits, 3M temperature indicator product lines and shellfish toxin test kits.
- Animal Safety core sales exclude the change in currency rates and the discontinued Thyrokare product line.

#### Service Revenue

Service revenue, which includes genomics testing and other laboratory services, was $26.6 million and $77.0 million, respectively, during the three and nine months ended February 29, 2024. Service revenue was $27.6 million and $79.8 million, respectively, during the three and nine months ended February 28, 2023. The decrease in the third quarter was primarily driven by customer attrition in the poultry market, partially offset by strength in genomics testing in the U.K. and China, and new business gained with our Neogen Analytics software as a service.

#### International Revenue

International sales were $104.6 million and $338.6 million during the three and nine months ended February 29, 2024, compared to $108.3 million and $275.7 million during the three and nine months ended February 28, 2023. The increase during the nine months ended February 29, 2024 was primarily due to $63.8 million in international sales related to the 3M FSD transaction during the first quarter of fiscal 2024. The decrease in sales in the third quarter as compared to the same period in the prior year was primarily due to lower sales of food safety products in Asia and Latin America due largely to product availability challenges.

### Revenues

*(in thousands)*

| Food Safety | Three Months Ended February 29/28, 2024 | 2023 | Increase / (Decrease)% |  |
| --- | ---: | ---: | ---: | ---: |
| Natural Toxins & Allergens | $19,738 | $19,198 | $540 | 3% |
| Bacterial & General Sanitation | 40,395 | 39,444 | 951 | 2% |
| Indicator Testing, Culture Media & Other | 81,168 | 77,955 | 3,213 | 4% |
| Rodent Control, Insect Control & Disinfectants | 10,136 | 9,550 | 586 | 6% |
| Genomics Services | 6,317 | 5,395 | 922 | 17% |
|  | 157,754 | 151,542 | 6,212 | 4% |
| **Animal Safety** |  |  |  |  |
| Life Sciences | $1,372 | $1,440 | $(68) | (5)% |
| Veterinary Instruments & Disposables | 17,976 | 15,428 | 2,548 | 17% |
| Animal Care & Other | 10,066 | 8,735 | 1,331 | 15% |
| Rodent Control, Insect Control & Disinfectants | 23,055 | 20,242 | 2,813 | 14% |
| Genomics Services | 18,589 | 20,868 | (2,279) | (11)% |
|  | 71,058 | 66,713 | 4,345 | 7% |
| **Total Revenues** | $228,812 | $218,255 | $10,557 | 5% |

*(in thousands)*

| Food Safety | Nine Months Ended February 29/28, 2024 | 2023 | Increase / (Decrease)% |  |
| --- | ---: | ---: | ---: | ---: |
| Natural Toxins & Allergens | $63,116 | $61,236 | $1,880 | 3% |
| Bacterial & General Sanitation | 128,393 | 91,293 | 37,100 | 41% |
| Indicator Testing, Culture Media & Other | 246,812 | 179,293 | 67,519 | 38% |
| Rodent Control, Insect Control & Disinfectants | 32,180 | 29,502 | 2,678 | 9% |
| Genomics Services | 17,934 | 16,204 | 1,730 | 11% |
|  | 488,435 | 377,528 | 110,907 | 29% |
| **Animal Safety** |  |  |  |  |
| Life Sciences | $4,710 | $4,456 | $254 | 6% |
| Veterinary Instruments & Disposables | 47,845 | 46,534 | 1,311 | 3% |
| Animal Care & Other | 27,226 | 29,830 | (2,604) | (9)% |
| Rodent Control, Insect Control & Disinfectants | 65,694 | 63,121 | 2,573 | 4% |
| Genomics Services | 53,518 | 59,168 | (5,650) | (10)% |
|  | 198,993 | 203,109 | (4,116) | (2)% |
| **Total Revenues** | $687,428 | $580,637 | $106,791 | 18% |

### Food Safety

**Natural Toxins & Allergens –** Revenues in this category increased 3% during the three months ended February 29, 2024 compared to the same period in the prior year. Excluding currency impact and sales of drug residue test kits that were largely discontinued in fiscal 2023, core revenue in this category increased 5% primarily driven by sales of tree nut allergen test kits, as prior quarter domestic backlog was fulfilled, partially offset by lower natural toxin volumes due to shipping constraints. During the nine months ended February 29, 2024, revenues in this category increased 3% compared to the same period in the prior year. On a core growth basis, revenues increased 2% in the year-to-date period.

**Bacterial & General Sanitation –** Revenues in this category increased 2% and 41% during the three and nine months ended February 29, 2024, respectively, compared to the same periods in the prior year. On a core growth basis, revenues increased 3% and 5%, during the three and nine months ended February 29, 2024, respectively. The increase during both periods was driven primarily by strength in our general sanitation product lines and strong placements of Soleris® microbiological diagnostic equipment.

**Indicator Testing, Culture Media & Other –** Revenues in this category increased 4% and 38% during the three and nine months ended February 29, 2024, respectively, compared to the same periods in the prior year. Core growth was 7% during the quarter and 2% during the year-to-date period. The increase in the third quarter was due to higher volumes of indicators, partially offset by lower sales of culture media due to a large non-recurring sale of custom product in the prior year. For the nine months, higher volumes of indicators were partially offset by the non-recurring culture media sale and a first-quarter decline in sales of Megazyme food quality and nutritional analysis products, due to distributor ordering patterns.

**Rodent Control, Insect Control & Disinfectants –** Revenues in this category increased 6% and 9% during the three and nine months ended February 29, 2024, respectively, compared to the same periods in the prior year. During the quarter, core growth was 2%, driven by a large tender sale of insect control products in Brazil, as well as higher cleaner and disinfectant sales in China. On a year-to-date basis, core revenue increased 4%, driven primarily by insect control product sales in Brazil and strong cleaner and disinfectant sales in Europe in the first half of the fiscal year.

**Genomics Services –** Revenues of genomics services sold through our international Food Safety operations increased 17% and 11% during the three and nine months ended February 29, 2024, respectively, compared to the same periods in the prior year. Core growth in this category was 17% in the third quarter, driven by increased sales in Europe and new business in China. On a year-to-date basis, core growth was 9% for the same reasons.

### Animal Safety

**Life Sciences –** Revenues in this category decreased 5% and increased 6% during the three and nine months ended February 29, 2024, respectively, compared to the same periods in the prior year; core revenue was the same for both periods. During the quarter, lower sample volumes from forensic customers contributed to the decrease, while, for the year-to-date period, the increase was primarily driven by increased demand for substrates from manufacturers of diagnostic tests.

**Veterinary Instruments & Disposables –** Revenues in this category increased 17% and 3% during the three and nine months ended February 29, 2024 compared to the same periods in the prior year; core revenue increases were the same for both periods. The increase in the third quarter was driven by higher sales of detectable needles and syringes to our large veterinary distributors. For the year-to-date period, third quarter revenue increases were partially offset by inventory de-stocking with the same distributors in the first and second quarters.

**Animal Care & Other –** Revenues of these products increased 15% and decreased 9% the three and nine months ended February 29, 2024, respectively, compared to the same periods in the prior year. Core growth in this category, which excludes currency impact and the discontinued Thyrokare product line, increased 17% and decreased 7% during the three and nine months ended February 29, 2024, respectively. The increase within the quarter was primarily driven by relief of vitamin injectable backorders as well as distributor sales recovery. The decrease during the year-to-date period was driven by lower sales of small animal supplements and wound care products caused primarily by distributor ordering patterns.

**Rodent Control, Insect Control & Disinfectants –** Revenues increased 14% and 4% during the three and nine months ended February 29, 2024, respectively, compared to the same periods in the prior year; core revenue increases were the same for both periods. The revenue increase for the quarter was driven by success of marketing programs within insect control products and higher sales of domestic cleaners and disinfectants to combat avian influenza.

**Genomics Services –** Revenues in this category decreased 11% and 10% during the three and nine months ended February 29, 2024, respectively, compared to the same periods in the prior year. Core growth declined 10% during the quarter and 9% for the year-to-date. Core revenue in both periods was negatively impacted by customer attrition associated with a strategic shift in the business to focus primarily on large production animals.

### Gross Profit

Gross margin was 51.1% and 51.0% during the three and nine months ended February 29, 2024, respectively, compared to 49.5% and 48.7% during the three and nine months ended February 28, 2023, respectively. The increase in the third quarter was primarily due to increased sales of higher-margin products in our Food Safety segment. The increase in the year-to-date period was primarily due to incremental revenues from the FSD transaction, which generated gross margin higher than the legacy company average gross margin. Within each reporting segment, increased raw material costs continue to pressure gross margins in certain product lines. However, while inflation continues to impact the business, the rate of raw material price and freight costs changes have significantly declined throughout both the current and prior year comparative periods. Finally, pricing actions taken during these periods also mitigated the impact of cost increases.

### Operating Expenses

Operating expenses were $104.9 million and $304.8 million during the three and nine months ended February 29, 2024, respectively, compared to $92.3 million and $268.7 million for the same periods in the prior year. The increase during the three and nine months ended February 29, 2024 was primarily the result of costs added to accommodate the increased size and complexity of the Company following the FSD transaction, which were not in the prior year comparable period.

Sales and marketing expenses were $47.9 million and $138.5 million during the three and nine months ended February 29, 2024, respectively, compared to $38.6 million and $98.3 million during the three and nine months ended February 28, 2023, respectively. The increase was primarily driven by incremental costs resulting from the FSD transaction, including compensation and related expenses for the acquired sales and marketing teams and higher costs related to inefficiencies as we took over distribution from 3M.

General and administrative expenses were $52.1 million and $148.9 million during the three and nine months ended February 29, 2024, respectively, compared to $46.4 million and $151.4 million during the three and nine months ended February 28, 2023, respectively. Increases during the three months ended February 29, 2024 were primarily the result of additional personnel hired to accommodate the increased size and complexity of the organization, compensation increases, the issuance of share-based compensation grants, software license fees and other information technology infrastructure investments. The year-to-date decline was primarily the result of lower transaction fees and integration expenses compared to the prior year comparable period. These decreases were partially offset by the additional costs previously identified.

Research and development expense was $4.9 million and $17.3 million during the three and nine months ended February 29, 2024, respectively, compared to $7.3 million and $19.0 million in the same periods of the prior year. The decrease during the three and nine months ended February 29, 2024 is primarily the result of lower contracted services and employee costs, as we continue to integrate the FSD business and realize synergies in certain areas.

### Operating Income

Operating income was $12.0 million and $45.6 million during the three and nine months ended February 29, 2024 respectively, compared to an operating income of $15.7 million and $14.1 million during the three and nine months ended February 28, 2023, respectively. Decreases in operating income during the three months ended February 29, 2024 compared to the prior year quarter reflect increased operating expenses to accommodate the increased size and complexity of the Company. Operating income increased during the nine months ended February 29, 2024 compared to the prior year primarily due to incremental revenues and higher gross profits from the FSD transaction. The prior year also included transaction and integration costs of $55.8 million during the nine months ended February 28, 2023 compared to $12.1 million during the nine months ended February 29, 2024.

### Other (Expense)/Income

*(in thousands)*

|  | Three Months Ended February 29/28, 2024 | 2023 | Nine Months Ended February 29/28, 2024 | 2023 |
| --- | ---: | ---: | ---: | ---: |
| Interest income | $1,612 | $640 | $5,265 | $2,163 |
| Interest expense | (18,285) | (17,460) | (54,773) | (38,007) |
| Foreign currency transactions | (1,107) | 243 | (3,642) | (6,287) |
| (Loss) gain on sale of minority interest | - | (1,516) | 74 | (1,516) |
| Contingent consideration adjustments | 200 | 300 | (250) | 300 |
| Other | (265) | (151) | (203) | (435) |
| **Total Other Expense** | $(17,845) | $(17,944) | $(53,529) | $(43,782) |

Interest expense recorded during the three and nine months ended February 29, 2024 was the result of debt incurred to fund the 3M transaction. In the first quarter of fiscal 2023, the Company had no debt outstanding. Interest income relates to earnings on our marketable securities and money market account portfolio. Higher balances in money market portfolios with higher yields drove the increase in interest income for the three and nine months ended February 29, 2024. Other (expense) income resulting from foreign currency transactions was the result of changes in the value of foreign currencies relative to the U.S. dollar in countries in which we operate.

### Provision for Income Taxes

Income tax benefit was $3.8 million and $3.9 million during the three and nine months ended February 29, 2024, respectively, compared to $10.5 million and $1.3 million during the three and nine months ended February 28, 2023, respectively. The net tax benefit for all comparison periods is primarily related to pre-tax losses due to amortization expense and interest expense from the FSD transaction.

The total amounts of unrecognized tax benefits that, if recognized, would affect the effective tax rate as of February 29, 2024 and May 31, 2023 are $1.9 million and $1.1 million, respectively. Increases in unrecognized tax benefits are primarily associated with the FSD transaction, including positions for transfer pricing and research and development credits.

### Net (Loss) Income

Net loss was $2.0 million and $4.0 million during the three and nine months ended February 29, 2024, respectively, compared to net income of $8.2 million and net loss of $28.4 million during the three and nine months ended February 28, 2023, respectively. The net loss during the three months ended February 29, 2024 compared to net income during the three months ended February 28, 2023 reflects additional expenses to accommodate the integration of the FSD business. The decrease in net loss during the nine months ended February 29, 2024 was primarily the result of higher transaction fees and integration costs in the prior year, which were $55.8 million during the nine months ended February 28, 2023.

### Non-GAAP Financial Measures

This report includes certain financial information for the Company that differs from what is reported in accordance with GAAP. These non-GAAP financial measures consist of core revenue growth, EBITDA, Adjusted EBITDA, Adjusted EBITDA margin, Adjusted Net Income and Adjusted Earnings per Share. 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 the Company, 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 industries the Company operates in.

#### Core revenue growth

We define core revenue growth as net sales for the period excluding the impacts of foreign currency translation rates, the first-year impacts of acquisitions and divestitures, where applicable, and net sales from discontinued product lines. We present core revenue growth because it allows for a meaningful comparison of results across periods without the volatility caused by foreign currency gains or losses, or the incomparability that would be caused by the impact of an acquisition or divestiture.

#### 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 share-based compensation and certain transaction fees and expenses. We present Adjusted EBITDA because it provides an understanding of underlying business performance by excluding the following:

- *Share-based compensation*. We believe it is useful to exclude share-based compensation to better understand the long-term performance of our core business and to facilitate comparison with the results of peer companies.
- *FX translation (gain)/loss on loan revaluation and other revaluation*. We exclude the revaluation impacts of foreign currency fluctuations on our intercompany loan balances that we initiated in conjunction with the FSD transaction and other non-hedged foreign currency fluctuations resulting from 3M agreements.
- *Certain transaction fees and integration costs.* We exclude fees and expenses related to certain transactions because they are outside of Neogen’s underlying core performance. These fees and expenses include deal related professional and legal fees and costs incurred to integrate acquired businesses.
- *Other one-time adjustments.* We exclude one-time adjustments recorded within operating income to better understand the long-term performance of our core business.

#### 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.

#### Adjusted Net Income

We define Adjusted Net Income as Net Income, adjusted for share-based compensation, FX translation gain/(loss) on loan revaluation, certain transaction fees and expenses, and other one-time adjustments, all of which are tax effected.

#### Adjusted Earnings per Share

We define Adjusted Earnings per Share as Adjusted Net Income divided by diluted average shares outstanding.

These non-GAAP financial measures are presented for informational purposes only. Core Revenue Growth, EBITDA, Adjusted EBITDA, Adjusted EBITDA margin, Adjusted Net Income and Adjusted Earnings per Share 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, Adjusted EBITDA margin, Adjusted Net Income and Adjusted Earnings per Share 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.

A reader 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 (loss) income and EBITDA and Adjusted EBITDA and between net (loss) income margin % and Adjusted EBITDA margin % are as follows:

*(in thousands, except for percentages)*

|  | Three Months Ended February 29/28, 2024 | 2023 | Nine Months Ended February 29/28, 2024 | 2023 |
| --- | ---: | ---: | ---: | ---: |
| Net (loss) income | $(2,022) | $8,190 | $(4,006) | $(28,442) |
| Net (loss) income margin % | -0.9% | 3.8% | -0.6% | -4.9% |
| Income tax benefit | (3,800) | (10,450) | (3,900) | (1,250) |
| Depreciation and amortization | 29,650 | 27,471 | 87,853 | 59,938 |
| Interest expense, net | 16,673 | 16,820 | 49,508 | 35,844 |
| **EBITDA** | **$40,501** | **$42,031** | **$129,455** | **$66,090** |
| Share-based compensation | 3,679 | 2,812 | 9,829 | 7,311 |
| FX transaction loss (gain) on loan and other revaluation (1) | 638 | (697) | 1,350 | 5,092 |
| Certain transaction fees and integration costs | 5,451 | 2,890 | 12,090 | 55,754 |
| Restructuring (2) | 938 | — | 3,353 | — |
| Contingent consideration adjustments | (200) | (300) | 250 | (300) |
| ERP expense (3) | 1,701 | — | 3,904 | — |
| Discontinued product line expense | 33 | 3,633 | 53 | 3,633 |
| Loss (recovery) on sale of minority interest | — | 1,516 | (74) | 1,516 |
| Inventory step-up charge | — | (614) | — | 3,245 |
| **Adjusted EBITDA** | **$52,741** | **$51,271** | **$160,210** | **$142,341** |
| Adjusted EBITDA margin % | 23.0% | 23.5% | 23.3% | 24.5% |

(1) Net foreign currency transaction loss associated with the revaluation of non-functional currency intercompany loans established in connection with the 3M Food Safety transaction and other non-hedged foreign currency revaluation resulting from 3M agreements.

(2) Includes costs associated with consolidation of U.S. genomics labs.

(3) Non-capitalizable expenses related to ERP implementation.

Adjusted EBITDA increased $1.5 million during the three months ended February 29, 2024 and increased $17.9 million during the nine months ended February 29, 2024. Expressed as a percentage of revenue, adjusted EBITDA was 23.0% and 23.3% during the three and nine months ended February 29, 2024, respectively, compared to 23.5% and 24.5% during the three and nine months ended February 28, 2023, respectively. The lower Adjusted EBITDA margin was driven primarily by higher operating expenses compared to the prior-year periods, reflecting additions to accommodate the integration of the 3M FSD.

Reconciliation between net (loss) income and Adjusted Net Income and earnings per share and Adjusted Earnings per Share are as follows:

*(in thousands, except per share amounts)*

|  | Three Months Ended February 29/28, 2024 | 2023 | Nine Months Ended February 29/28, 2024 | 2023 |
| --- | ---: | ---: | ---: | ---: |
| Net (loss) income | $(2,022) | $8,190 | $(4,006) | $(28,442) |
| (Loss) earnings per diluted share | $(0.01) | $0.04 | $(0.02) | $(0.16) |
| Amortization of acquisition-related intangibles | 23,266 | 22,680 | 69,685 | 46,637 |
| Share-based compensation | 3,679 | 2,812 | 9,829 | 7,311 |
| FX transaction loss (gain) on loan and other revaluation (1) | 638 | (697) | 1,350 | 5,092 |
| Certain transaction fees and integration costs | 5,451 | 2,890 | 12,090 | 55,754 |
| Restructuring (2) | 938 | — | 3,353 | — |
| Contingent consideration adjustments | (200) | (300) | 250 | (300) |
| ERP expense (3) | 1,701 | — | 3,904 | — |
| Discontinued product line expense | 33 | 3,633 | 53 | 3,633 |
| Loss (recovery) on sale of minority interest | — | 1,516 | (74) | 1,516 |
| Inventory step-up charge | — | (614) | — | 3,245 |
| Other adjustments(4) | — | 1,514 | — | 5,864 |
| Estimated tax effect of above adjustments (5) | (7,046) | (15,095) | (21,446) | (24,864) |
| **Adjusted Net Income** | **$26,438** | **$26,529** | **$74,988** | **$75,446** |
| Adjusted Earnings per Share | $0.12 | $0.12 | $0.35 | $0.42 |

(1) Net foreign currency transaction loss associated with the revaluation of non-functional currency intercompany loans established in connection with the 3M Food Safety transaction and other non-hedged foreign currency revaluation resulting from 3M agreements.

(2) Includes costs associated with consolidation of U.S. genomics labs.

(3) Non-capitalizable expenses related to ERP implementation.

(4) Income tax benefit associated with non-deductible transaction costs that were recognized as expense in prior periods.

(5) Tax effect of adjustments is calculated using projected effective tax rates for each applicable item.

Adjusted Net Income decreased $0.1 million and $0.5 million, respectively, during the three and nine months ended February 29, 2024. The decreases are driven primarily by higher depreciation expense, partially offset by increases in Adjusted EBITDA.

### Financial Condition and Liquidity

The overall cash, cash equivalents and marketable securities position of Neogen was $168.4 million as of February 29, 2024, compared to $245.6 million as of May 31, 2023. Cash from operating activities was $8.5 million during the nine months ended February 29, 2024 compared to cash for operating activities of $49.9 million during the nine months ended February 28, 2023. The net inflow during the nine months ended February 29, 2024 was primarily the result of fewer transaction fees and lower net loss. Cash for investing activities was $11.8 million during the nine months ended February 29, 2024, which was primarily the result of purchases of property and equipment of $87.2 million, partially offset by proceeds from the sale of marketable securities of $75.3 million. Cash from investing activities was $194.2 million during the nine months ended February 28, 2023. Cash from financing activities was $2.0 million during the nine months ended February 29, 2024 compared to cash for financing activities of $118.3 million during the nine months ended February 28, 2023.

Net accounts receivable balances were $173.6 million as of February 29, 2024 compared to $153.3 million as of May 31, 2023. Days' sales outstanding, a measurement of the time it takes to collect receivables, was 65 days as of February 29, 2024, compared to 57 days as of May 31, 2023 and 62 days as of February 28, 2023.

As part of transition services agreements between the Company and 3M, related to the merger of the Food Safety business, 3M invoiced our customers for products that 3M manufactured and shipped on our behalf through

December 2023. We have completed the exit of distribution and back office-related service contracts and currently only have a contract manufacturing agreement in place with 3M for certain products. As of February 29, 2024, there were $5.5 million in customer receivables billed by 3M on our behalf, compared to $57.3 million as of May 31, 2023.

Net inventory was $182.4 million as of February 29, 2024, an increase of $48.6 million, compared to a May 31, 2023 balance of $133.8 million. The higher inventory levels are primarily the result of the Company now stocking FSD products manufactured by 3M.

We expect to spend approximately $130 million in capital expenditures in fiscal year 2024; $100 million of the total is related to our new building, systems implementation and related FSD integration projects.

### Debt and Liquidity

On September 1, 2022, Neogen, 3M, and Neogen Food Safety Corporation, a subsidiary of 3M created to carve out 3M’s Food Safety business, closed on the FSD transaction that previously was announced in December 2021, combining 3M’s Food Safety business with Neogen in a Reverse Morris Trust transaction.

In June 2022, Neogen Food Safety Corporation entered into a credit agreement consisting of a five-year senior secured term loan facility in the amount of $650 million and a five-year senior secured revolving facility in the amount of $150 million (collectively, the “Credit Facilities”), which became available in connection with the merger and related transactions. The loan facility was funded to Neogen Food Safety Corporation on August 31, 2022, and upon the effectiveness of the merger on September 1, 2022, became Neogen’s obligation through a non-cash transaction. Financial covenants include maintaining specified levels of funded debt to EBITDA and debt service coverage. The Credit Facilities, together with the Notes described below, represent the financing incurred in connection with the merger of the 3M FSD with Neogen. In accordance with the prepayment feature, the Company paid $100 million of the term loan facility’s principal in fiscal year 2023, in order to decrease the outstanding debt balance.

In July 2022, Neogen Food Safety Corporation closed on an offering of $350 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 Neogen Food Safety Corporation 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. Neogen Food Safety Corporation did not receive any proceeds from the sale of the Notes by the selling securityholder. Prior to the distribution of the shares of Neogen Food Safety Corporation’s common stock to 3M stockholders, the Notes were guaranteed on a senior unsecured basis by 3M. Upon consummation of such distribution, 3M was released from all obligations under its guarantee. Upon the effectiveness of the merger on September 1, 2022, the Notes became guaranteed on a senior unsecured basis by Neogen and certain wholly-owned domestic subsidiaries of Neogen through a non-cash transaction.

In addition to the 3M transaction described above, our future cash generation and borrowing capacity may not be sufficient to meet cash requirements to fund the operating business, repay debt obligations, construct new manufacturing facilities, 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. However, we continuously monitor and forecast our liquidity situation in light of industry, customer and economic factors, and take the necessary actions to preserve our liquidity and evaluate other financial alternatives that may be available to us should the need arise. As a result, we believe that our cash flows from operations, cash on hand, and borrowing capacity will enable us to fund the operating business, repay debt obligations, construct new manufacturing facilities, commercialize products currently under development, and execute our strategic plans.

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.

## Market risk

As filed, 1,993 characters.

We have interest rate and foreign exchange rate risk exposure but no long-term fixed rate investments. Our primary interest rate risk is due to potential fluctuations of interest rates for our variable rate borrowings.

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. As such, our operating results are exposed to changes in exchange rates. 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. Our investments in foreign subsidiaries are considered long-term. As discussed in ITEM 1A. RISK FACTORS of our Annual Report on Form 10-K for the year ended May 31, 2023, 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:

*(in thousands)*

| Risk Category | Hypothetical Change | February 29, 2024 | Impact |
| --- | --- | ---: | --- |
| Foreign Currency—Revenue | 10% Decrease in exchange rates | $10,459 | Earnings |
| Foreign Currency—Hedges | 10% Decrease in exchange rates | 6,509 | Fair Value |
| Interest Income | 10% Decrease in interest rates | 488 | Earnings |
| Interest Expense | 10% Increase in interest rates | 2,305 | Earnings |

37

## Controls and procedures

As filed, 4,376 characters.

### Evaluation of Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and (ii) accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

An evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of February 29, 2024 was carried out under the supervision and with the participation of the Company’s management, including the President & Chief Executive Officer and Chief Financial Officer (“the Certifying Officers”). Based on the evaluation, the Certifying Officers concluded that the Company’s disclosure controls and procedures were not effective because of previously reported material weaknesses in our internal control over financial reporting, which we describe in Part II, Item 9A of our Annual Report on Form 10-K for the year ended May 31, 2023.

### Material Weaknesses

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our financial statements will not be prevented or detected on a timely basis.

As disclosed in Item 9A of our Annual Report on Form 10-K for the year ended May 31, 2023, management identified the following material weaknesses in internal controls over financial reporting during the year ended May 31, 2023: (1) information technology general controls ("ITGCs") in the areas of user access and change management over certain information technology systems that support the Company’s financial reporting process and the manual business process controls dependent on the affected ITGCs, (2) ineffective period-end invoice accrual controls, and (3) ineffective operation of management review controls related to the accounting, valuation and purchase price allocation of the Company’s acquisitions and associated goodwill.

### Ongoing Remediation Efforts to Address the Previously Identified Material Weaknesses

As previously disclosed in our Annual Report on Form 10-K for the year ended May 31, 2023, management concluded that our internal controls over financial reporting were not effective as of May 31, 2023. Management is in the process of enhancing, and will continue to enhance, the risk assessment process and design and implementation of internal controls over financial reporting. The remediation measures to correct the previously identified material weaknesses include enhancing the design and implementation of existing controls and creating new controls as needed to address identified risks and providing additional training to personnel including the appropriate level of documentation to be maintained to support internal controls over financial reporting.

As we continue to evaluate and work to improve our internal control over financial reporting, management may determine to take additional measures to strengthen controls or to modify the remediation plan described above. When fully implemented and operational, we believe the controls we have designed or plan to design will remediate the control deficiency that has led to the material weaknesses that we have identified. The previously identified material weaknesses will not be considered remediated until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.

### Changes in Internal Controls over Financial Reporting

Other than with respect to the remediation efforts described above in connection with the previously identified material weaknesses, no changes in our control over financial reporting were identified as having occurred during the quarter ended February 29, 2024 that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting.

## Risk factors

As filed, 367 characters.

This Form 10-Q should be read in conjunction with Part I Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended May 31, 2023. There have been no material changes in the risk factors described in our Annual Report on Form 10-K for the year ended May 31, 2023.

**Items 2, 3, and 4 are not applicable or removed or reserved and have been omitted.**

Filed Apr 9, 2024.
Source: SEC EDGAR, the filing index for accession 0000950170-24-042952. Last ingested by Listed: Oct 30, 2026, 15:36 ET. No prices; not investment advice.