NEOG 10-Q Quarter ended Feb. 28, 2019

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended February 28, 2019.

or

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 0-17988

Neogen Corporation

(Exact name of registrant as specified in its charter)

Michigan		38-2367843
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification Number)

620 Lesher Place

Lansing, Michigan 48912

(Address of principal executive offices, including zip code)

(517) 372-9200

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  ☒    NO  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    YES  ☒    NO  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (see definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act):

Large accelerated filer		☒		Accelerated filer		☐
Non-accelerated filer		☐		Smaller Reporting Company		☐
Emerging growth company		☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):    YES  ☐    NO  ☒

As of February 28, 2019, there were 52,120,422 shares of Common Stock outstanding.

NEOGEN CORPORATION AND SUBSIDIARIES

TABLE OF CONTENTS

				Page No.
PART I. FINANCIAL INFORMATION
Item 1.		Interim Consolidated Financial Statements (unaudited)			2
		Consolidated Balance Sheets – February 28, 2019 and May 31, 2018			2
		Consolidated Statements of Income – Three and nine months ended February 28, 2019 and 2018			3
		Consolidated Statements of Comprehensive Income – Three and nine months ended February 28, 2019 and 2018			4
		Consolidated Statement of Equity – Nine months ended February 28, 2019			5
		Consolidated Statements of Cash Flows – Nine months ended February 28, 2019 and 2018			6
		Notes to Interim Consolidated Financial Statements – February 28, 2019			7
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			18
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			25
Item 4.		Controls and Procedures			25
PART II. OTHER INFORMATION
Item 1.		Legal Proceedings			26
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			26
Item 6.		Exhibits			26
SIGNATURES					27
		CEO Certification
		CFO Certification
		Section 906 Certification

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PART I – FINANCIAL INFORMATION

Item 1. Interim Consolidated Financial Statements

Neogen Corporation and Subsidiaries

Consolidated Balance Sheet

(in thousands, except share and

per share amounts)

		February 28, 2019				May 31, 2018
		(Unaudited)				(Unaudited)
Assets
Current Assets
Cash and cash equivalents		$	93,576			$	83,074
Marketable securities (at fair value, which approximates cost)			153,104				127,736
Accounts receivable, less allowance of $1,700 and $1,550			80,011				79,086
Inventories			84,870				76,005
Prepaid expenses and other current assets			11,041				9,888
Total Current Assets			422,602				375,789
Net Property and Equipment			76,453				73,069
Other Assets
Goodwill			104,077				99,558
Other non-amortizable intangible assets			15,658				14,783
Amortizable customer-based intangibles, net of accumulated amortization of $27,184 and $24,579 at February 28, 2019 and May 31, 2018, respectively			30,007				31,841
Other non-current assets, net of accumulated amortization of $12,304 and $12,470 at February 28, 2019 and May 31, 2018, respectively			23,788				22,969
Total Assets		$	672,585			$	618,009
Liabilities and Equity
Current Liabilities
Accounts payable		$	18,952			$	20,750
Accrued compensation			5,391				6,065
Income taxes			—				165
Other accruals			9,925				11,708
Total Current Liabilities			34,268				38,688
Deferred Income Taxes			14,211				14,103
Other Non-Current Liabilities			4,190				5,043
Total Liabilities			52,669				57,834
Commitments and Contingencies (Note 8)
Equity
Preferred stock, $1.00 par value, 100,000 shares authorized, none issued and outstanding			—				—
Common stock, $0.16 par value, 120,000,000 shares authorized, 52,120,422 and 51,735,732 shares issued and outstanding at February 28, 2019 and May 31, 2018, respectively			8,339				8,278
Additional paid-in capital			217,274				202,572
Accumulated other comprehensive loss			(9,129	)			(9,746	)
Retained earnings			403,432				359,071
Total Stockholders’ Equity			619,916				560,175
Total Liabilities and Equity		$	672,585			$	618,009

See notes to interim consolidated financial statements.

2

Neogen Corporation and Subsidiaries

Consolidated Statements of Income (unaudited)

(in thousands, except per share amounts)

		Three Months Ended February 28,								Nine Months Ended February 28,
		2019				2018				2019				2018
Revenues
Product revenues		$	77,375			$	77,184			$	249,897			$	241,200
Service revenues			20,325				17,719				54,527				48,611
Total Revenues			97,700				94,903				304,424				289,811
Cost of Revenues
Cost of product revenues			41,902				40,283				132,157				124,520
Cost of service revenues			11,170				10,019				30,877				27,517
Total Cost of Revenues			53,072				50,302				163,034				152,037
Gross Margin			44,628				44,601				141,390				137,774
Operating Expenses
Sales and marketing			16,722				16,572				52,454				49,442
General and administrative			10,018				9,280				30,337				29,096
Research and development			3,249				2,836				9,235				8,901
Total Operating Expenses			29,989				28,688				92,026				87,439
Operating Income			14,639				15,913				49,364				50,335
Other Income
Interest income			1,335				524				3,290				1,322
Other income			649				844				807				1,913
Total Other Income			1,984				1,368				4,097				3,235
Income Before Taxes			16,623				17,281				53,461				53,570
Provision for Income Taxes			3,550				700				9,100				7,900
Net Income			13,073				16,581				44,361				45,670
Net (Income) Loss Attributable to Non-Controlling Interest			—				5				—				(70	)
Net Income Attributable to Neogen		$	13,073			$	16,586			$	44,361			$	45,600
Net Income Attributable to Neogen Per Share
Basic		$	0.25			$	0.32			$	0.86			$	0.89
Diluted		$	0.25			$	0.32			$	0.85			$	0.88

See notes to interim consolidated financial statements.

3

Neogen Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income (unaudited)

(in thousands)

		Three Months Ended February 28,								Nine Months Ended February 28,
		2019				2018				2019				2018
Net income		$	13,073			$	16,581			$	44,361			$	45,670
Other comprehensive income, net of tax: currency translation adjustments			3,105				1,163				617				1,900
Comprehensive income			16,178				17,744				44,978				47,570
Comprehensive (income) loss attributable to non-controlling interest			—				5				—				(70	)
Comprehensive income attributable to Neogen Corporation		$	16,178			$	17,749			$	44,978			$	47,500

See notes to interim consolidated financial statements.

4

Neogen Corporation and Subsidiaries

Consolidated Statement of Equity (unaudited)

(in thousands)

		Common Stock								Additional Paid-in				Accumulated Other Comprehensive				Retained
		Shares				Amount				Capital				(Loss)				Earnings				Total
Balance at May 31, 2018			51,736			$	8,278			$	202,572			$	(9,746	)		$	359,071			$	560,175
Issuance of shares under share-based compensation plan			251				40				8,433				—				—				8,473
Issuance of shares under employee stock purchase plan			8				2				517				—				—				519
Net income for the three months ended August 31, 2018			—				—				—				—				15,237				15,237
Other comprehensive (loss)			—				—				—				(2,778	)			—				(2,778	)
Balance at August 31, 2018			51,995			$	8,320			$	211,522			$	(12,524	)		$	374,308			$	581,626
Issuance of shares under share-based compensation plan			87				14				4,093				—				—				4,107
Net income for the three months ended November 30, 2018			—				—				—				—				16,051				16,051
Other comprehensive income			—				—				—				290				—				290
Balance at November 30, 2018			52,082			$	8,334			$	215,615			$	(12,234	)		$	390,359			$	602,074
Issuance of shares under share-based compensation plan			78				12				4,146				—				—				4,158
Issuance of shares under employee stock purchase plan			10				1				640				—				—				641
Shares repurchased			(50	)			(8	)			(3,127	)			—				—				(3,135	)
Net income for the three months ended February 28, 2019			—				—				—				—				13,073				13,073
Other comprehensive income			—				—				—				3,105				—				3,105
Balance at February 28, 2019			52,120			$	8,339			$	217,274			$	(9,129	)		$	403,432			$	619,916

See notes to interim consolidated financial statements.

5

Neogen Corporation and Subsidiaries

Consolidated Statements of Cash Flows (unaudited)

(in thousands)

		Nine Months Ended February 28,
		2019				2018
Cash Flows From Operating Activities
Net Income		$	44,361			$	45,670
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization			13,028				12,682
Share-based compensation			4,137				3,692
Change in operating assets and liabilities, net of business acquisitions:
Accounts receivable			(898	)			(4,013	)
Inventories			(8,745	)			(3,859	)
Prepaid expenses and other current assets			(1,463	)			(7,316	)
Accounts payable, accruals and other changes			(7,455	)			(280	)
Net Cash From Operating Activities			42,965				46,576
Cash Flows From Investing Activities
Purchases of property, equipment and other non-current intangible assets			(11,877	)			(16,297	)
Proceeds from the sale of marketable securities			290,827				211,327
Purchases of marketable securities			(316,195	)			(255,348	)
Business acquisitions, net of cash acquired			(6,388	)			(468	)
Net Cash Used In Investing Activities			(43,633	)			(60,786	)
Cash Flows From Financing Activities
Exercise of stock options and issuance of employee stock purchase plan shares			13,752				18,916
Repurchase of common stock			(3,135	)			—
Net Cash From Financing Activities			10,617				18,916
Effect of Exchange Rate on Cash			553				(207	)
Net Increase In Cash and Cash Equivalents			10,502				4,499
Cash and Cash Equivalents, Beginning of Period			83,074				77,567
Cash and Cash Equivalents, End of Period		$	93,576			$	82,066

See notes to interim consolidated financial statements.

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NEOGEN CORPORATION AND SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. ACCOUNTING POLICIES

BASIS OF PRESENTATION AND CONSOLIDATION

The accompanying unaudited consolidated financial statements include the accounts of Neogen Corporation (“Neogen” or the “Company”) and its wholly owned subsidiaries and have been prepared in accordance with accounting principles generally accepted in the United States of America (generally accepted accounting principles) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included in the accompanying unaudited consolidated financial statements. All intercompany balances and transactions have been eliminated in consolidation. The results of operations for the three and nine month periods ended February 28, 2019 are not necessarily indicative of the results to be expected for the fiscal year ending May 31, 2019. For more complete financial information, these consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the fiscal year ended May 31, 2018.

Share and per share amounts reflect the December 29, 2017 4-for-3 stock split as if it took place at the beginning of the period

presented.

Recently Adopted Accounting Standards

Revenue Recognition

On June 1, 2018, we adopted ASU No. 2014-09—Revenue from Contracts with Customers (Topic 606). Refer to the Revenue Recognition section of Note 1 for further information.

Classification of Cash Receipts and Payments

In August 2016, the FASB issued ASU No. 2016-15—Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force). The amendments in ASU 2016-15 address eight specific cash flow issues and apply to all entities that are required to present a statement of cash flows under FASB Accounting Standards Codification (FASB ASC) 230, Statement of Cash Flows. The amendments in ASU 2016-15 are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. We adopted this ASU on June 1, 2018; the impact on our consolidated financial statements was immaterial.

Recent Accounting Pronouncements Not Yet Adopted

Leases

In February 2016, the FASB issued ASU No. 2016-02—Leases to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. The recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessor have not significantly changed from previous U.S. GAAP. This ASU is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2018. Modified retrospective application is required with certain practical expedients. We will adopt this ASU on June 1, 2019 and are currently in the process of evaluating our lessee and lessor arrangements to determine the impact of this pronouncement on our consolidated financial condition and results of operations. This evaluation includes a review of revenue through leasing arrangements as well as lease expenses, which primarily result from operating lease arrangements at most of our facilities.

Financial Instruments- Credit Losses

In June 2016, the FASB issued ASU No. 2016-13—Measurement of Credit Losses on Financial Instruments, which changes how companies measure credit losses on most financial instruments measured at amortized cost and certain other instruments, such as loans, receivables and held-to-maturity debt securities. Rather than generally recognizing credit losses when it is probable that the loss has been incurred, the revised guidance requires companies to recognize an allowance for credit losses for the difference between the

7

amortized cost basis of a financial instrument and the amount of amortized cost that the company expects to collect over the instrument’s contractual life. ASU 2016-13 is effective for fiscal periods beginning after December 15, 2019 and must be adopted as a cumulative effect adjustment to retained earnings. Early adoption is permitted. We do not believe adoption of this guidance will have an impact on our consolidated financial statements.

Comprehensive Income

Comprehensive income represents net income and any revenues, expenses, gains and losses that, under U.S. generally accepted accounting principles, are excluded from net income and recognized directly as a component of equity. Accumulated other comprehensive income (loss) consists solely of foreign currency translation adjustments.

Fair Value of Financial Instruments

The carrying amounts of our financial instruments other than cash equivalents and marketable securities, which include accounts receivable and accounts payable, approximate fair value based on either their short maturity or current terms for similar instruments. Fair value measurements are determined based upon the exit price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants exclusive of any transaction costs. We utilize a fair value hierarchy based upon the observability of inputs used in valuation techniques as follows:

Level 1: Observable inputs such as quoted prices in active markets;

Level 2: Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and

Level 3: Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

Cash and Cash Equivalents

Cash and cash equivalents consist of bank demand accounts, savings deposits, certificates of deposit and commercial paper with original maturities of 90 days or less. The carrying value of these assets approximates fair value due to the short maturity of these instruments and meets the Level 1 criteria.

Marketable Securities

The Company has marketable securities held by banks or broker-dealers at February 28, 2019, consisting of short-term domestic certificates of deposit and commercial paper rated at least A1/P1 (short-term) and A/A2 (long-term) with maturities between 91 days and two years. These securities are classified as available for sale. The primary objective of our short-term investment activity is to preserve capital for the purpose of funding operations, capital expenditures and business acquisitions; short-term investments are not entered into for trading or speculative purposes. These securities are recorded at fair value (that approximates cost) based on recent trades of similar securities or pricing models and therefore meet the Level 2 criteria. Interest income on these investments is recorded within Other Income on the consolidated statements of income.

ESTIMATES AND ASSUMPTIONS

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 disclosures of contingent assets and liabilities. On an ongoing basis, management evaluates the estimates, including, but not limited to, variable consideration related to revenue recognition, allowances for doubtful accounts, the market value of, and demand for, inventories, stock-based compensation, provision for income taxes and related balance sheet accounts, accruals, goodwill and other 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. Actual results may differ from these estimates under different assumptions or conditions.

There have been no significant changes to the critical accounting policies and estimates disclosed in our Annual Report on Form 10-K for the fiscal year ended May 31, 2018, except for the new revenue recognition standard the Company adopted effective June 1, 2018. See the below sections Revenue Recognition and Recently Adopted Accounting Standards for further information on revenue recognition.

There were no significant changes to the contractual obligations or contingent liabilities and commitments disclosed in our Annual Report on Form 10-K for the fiscal year ended May 31, 2018.

8

Accounts Receivable Allowance

Management attempts to minimize credit risk by reviewing customers’ credit history before extending credit and by monitoring credit exposure on a regular basis. An allowance for doubtful accounts receivable is established based upon factors surrounding the credit risk of specific customers, historical trends and other information. Collateral or other security is generally not required for accounts receivable. Once a receivable balance has been determined to be uncollectible, that amount is charged against the allowance for doubtful accounts.

Inventory

The reserve for obsolete and slow-moving inventory is reviewed at least quarterly based on an analysis of the inventory, considering the current condition of the asset as well as other known facts and future plans. The reserve required to record inventory at lower of cost or net realizable value is adjusted as conditions change. Product obsolescence may be caused by shelf-life expiration, discontinuance of a product line, replacement products in the marketplace or other competitive situations.

Goodwill and Other Intangible Assets

Goodwill represents the excess of purchase price over fair value of tangible net assets of acquired businesses after amounts are allocated to other identifiable intangible assets. Other intangible assets include customer relationships, trademarks, licenses, trade names, covenants not-to-compete and patents. Customer-based intangibles are amortized on either an accelerated or straight-line basis, reflecting the pattern in which the economic benefits are consumed, while all other amortizable intangibles are amortized on a straight-line basis; intangibles are generally amortized over 5 to 25 years. We review the carrying amounts of goodwill and other non-amortizable intangible assets annually, or when indications of impairment exist, to determine if such assets may be impaired by performing a quantitative assessment. If the carrying amounts of these assets are deemed to be less than fair value based upon a discounted cash flow analysis and comparison to comparable EBITDA multiples of peer companies, such assets are reduced to their estimated fair value and a charge is recorded to operations.

Long Lived Assets

Management reviews the carrying values of its long-lived assets to be held and used, including definite-lived intangible assets, for possible impairment whenever events or changes in business conditions warrant such a review. The carrying value of a long-lived asset is considered impaired when the anticipated separately identifiable undiscounted cash flows over the remaining useful life of the asset indicate that the carrying amount of the asset may not be recoverable. In such an event, fair value is determined using discounted cash flows and, if lower than the carrying value, impairment is recognized through a charge to operations.

Equity Compensation Plans

Share options awarded to employees and shares of stock awarded to employees under certain stock purchase plans are recognized as compensation expense based on their fair value at grant date. The fair market value of options granted under the Company stock option plans was estimated on the date of grant using the Black-Scholes option-pricing model with assumptions for inputs such as interest rates, expected dividends, volatility measures and specific employee exercise behavior patterns based on statistical data. Some of the inputs used are not market-observable and have to be estimated or derived from available data. Use of different estimates would produce different option values, which in turn would result in higher or lower compensation expense recognized. To value options, several recognized valuation models exist. None of these models can be singled out as being the best or most correct one. The model applied by us can handle most of the specific features included in the options granted, which is the reason for its use. If a different model were used, the option values could differ despite using the same inputs. Accordingly, using different assumptions coupled with using a different valuation model could have a significant impact on the fair value of employee stock options. Fair value could be either higher or lower than the number provided by the model applied and the inputs used. Further information on our equity compensation plans, including inputs used to determine the fair value of options, is disclosed in Note 5 to the unaudited 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 period.

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On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the Tax Act) was signed into law making significant changes to the Internal Revenue Code. Changes include a federal corporate tax rate reduction from 35% to 21% for tax years beginning after December 31, 2017, the transition of U.S. international taxation from a worldwide tax system to a territorial system, and a one-time transition tax on the mandatory deemed repatriation of foreign earnings. The Tax Act also includes a provision to tax global intangible low taxed income (“GILTI”) of foreign subsidiaries, which became effective for us beginning June 1, 2018. In the fourth quarter of fiscal 2018, we recorded an estimated net charge of $4.8 million related to the Tax Act, due to the impact of the reduction in the tax rate on deferred tax assets and liabilities of $6.0 million, partially offset by $1.2 million of one-time transition tax on the deemed repatriation of foreign earnings. Due to the timing of the enactment and the complexity in applying the provisions of the Tax Act, these charges and benefits were recorded based on reasonable estimates and were subject to revisions as we completed our analysis of the Tax Act, collected and prepared necessary data, and interpreted any additional guidance issued by the Internal Revenue Service. Prior to December 22, 2018, immaterial adjustments to these provisions were recorded to income tax expense, within the measurement period under SAB 118.

Revenue Recognition

In May 2014, the FASB issued ASU No. 2014-09—Revenue from Contracts with Customers (Topic 606). The new standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard is designed to create greater comparability for financial statement users across industries and jurisdictions and also requires enhanced disclosures. In April 2016, the FASB issued Accounting Standards Update No. 2016-10—Revenue from Contracts with Customers (Topic 606), which amends and adds clarity to certain aspects of the guidance set forth in ASU 2014-09 related to identifying performance obligations and licensing. The guidance became effective for the Company on June 1, 2018. We adopted this standard using the full retrospective approach. This approach was chosen to provide appropriate comparisons against our prior year financial statements; accordingly, historical information for the year ended May 31, 2018, including interim periods therein, has been adjusted to conform to the new standard.

Prior to the adoption, we identified all revenue streams at each significant subsidiary and reviewed contracts to evaluate the impact of adopting the new standard on our revenue recognition policies, procedures and control framework and ultimately on our consolidated financial statements and related disclosures. In our review of contracts in each revenue stream, we noted no material impact in the implementation of the standard. We determined the impact of adopting the standard on our control framework and noted minimal, insignificant changes to our system and other controls processes.

Under Topic 606, the Company determines the amount of revenue to be recognized through application of the following steps:

•

Identification of the contract with a customer;

•

Identification of the performance obligations in the contract;

•

Determination of the transaction price;

•

Allocation of the transaction price to the performance obligations in the contract; and

•

Recognition of revenue when or as the Company satisfies the performance obligations.

Essentially all of our revenue is generated through contracts with our customers. A performance obligation is a promise in a contract to transfer a product or service to a customer. We generally recognize revenue at a point in time when all of our performance obligations under the terms of a contract are satisfied. With the adoption of Topic 606, revenue is recognized upon transfer of control of promised products and services in an amount that reflects the consideration the Company expects to receive in exchange for those products or services. The collectability of consideration on the contract is reasonably assured before revenue is recognized. To the extent that customer payment has been received before all recognition criteria are met, these revenues are initially deferred in other accruals on the balance sheet and the revenue is recognized in the period that all recognition criteria have been met. In certain situations, we provide rebates, marketing support, credits or incentives to select customers, which are accounted for as variable consideration when estimating the amount of revenue to recognize on a contract. Variable consideration reduces the amount of revenue that is recognized. These variable consideration estimates are updated at the end of each reporting period based on information currently available.

The performance obligations in our contracts are generally satisfied well within one year of contract inception. In such cases, we have elected the practical expedient to not adjust the promised amount of consideration for the effects of a significant financing component. We have elected to utilize the practical expedient to recognize the incremental costs of obtaining a contract as an expense when incurred because the amortization period for the prepaid costs that would otherwise have been deferred and amortized is one year or less. The Company accounts for shipping and handling for products as a fulfillment activity when goods are shipped. Revenue is recognized net of any tax collected from customers; the taxes are subsequently remitted to governmental authorities. The Company’s terms and conditions of sale generally do not provide for returns of product or reperformance of service except in the case of quality or warranty issues. These situations are infrequent; due to immateriality of the amount, warranty claims are recorded in the period incurred.

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We derive revenue from two primary sources — product revenue and service revenue.

Product revenue consists primarily of shipments of:

•

Diagnostic test kits, culture media and related products used by food producers and processors to detect harmful natural toxins, foodborne bacteria, allergens and levels of general sanitation;

•

Consumable products marketed to veterinarians retailers, livestock producers and animal health product distributors; and

•

Rodenticides, disinfectants and insecticides to assist in the control of rodents, insects and disease in and around agricultural, food production and other facilities.

Revenues for our products are recognized and invoiced when the product is shipped to the customer.

Service revenue consists primarily of:

•

Genomic identification and related interpretive bioinformatic services; and

•

Other commercial laboratory services.

Revenues for our genomics and commercial laboratory services are recognized and invoiced when the applicable laboratory service is performed and the results are conveyed to the customer.

Payment terms for products and services are generally 30 to 60 days.

The following table presents disaggregated revenue by major product and service categories for the three and nine months ended February 28, 2019 and 2018:

		Three Months Ended February 28,								Nine Months Ended February 28,
		2019				2018				2019				2018
		(in thousands)								(in thousands)
Food Safety
Natural Toxins, Allergens & Drug Residues		$	18,612			$	16,807			$	58,021			$	54,960
Bacterial & General Sanitation			9,519				8,992				30,807				27,435
Culture Media & Other			11,893				10,179				36,302				31,353
Rodenticides, Insecticides & Disinfectants			5,953				7,359				18,521				18,175
Genomics Services			5,136				3,976				13,395				10,887
		$	51,113			$	47,313			$	157,046			$	142,810
Animal Safety
Life Sciences		$	1,823			$	2,769			$	5,794			$	7,589
Veterinary Instruments & Disposables			10,682				10,630				32,769				32,804
Animal Care & Other			6,823				7,245				22,439				22,894
Rodenticides, Insecticides & Disinfectants			13,256				14,255				48,921				49,422
Genomics Services			14,003				12,691				37,455				34,292
		$	46,587			$	47,590			$	147,378			$	147,001
Total Revenues		$	97,700			$	94,903			$	304,424			$	289,811

Restatement of Previously Issued Financial Statements

The Company has historically classified certain variable consideration components resulting from volume rebates, distributor support, and other marketing discounts as cost of revenues or sales and marketing expense in our consolidated financial statements of income. These amounts should have been classified as contra revenue in product or service revenues. The Company had determined in prior periods that the misstatements were clearly immaterial, individually and in the aggregate, to each of the reporting periods affected. The Company began properly classifying these items as contra revenues beginning in the three month period ended August 31, 2018, the first quarter of the Company’s current fiscal year, and has revised the prior year’s quarter and year to date periods to conform to the current period presentation. These immaterial adjustments had no impact on our operating income, income before taxes, net income or reported earnings per share, and no change to stockholders’ equity.

11

The effects of the revisions on the line items within our unaudited consolidated statements of income for the three and nine months ended February 28, 2018 are as follows:

		Three Months Ended												Nine Months Ended
		February 28, 2018												February 28, 2018
		As Previously Reported				Adjustments				As Revised				As Previously Reported				Adjustments				As Revised
		(in thousands)												(in thousands)
Revenues
Product revenues		$	78,142			$	(958	)		$	77,184			$	244,298			$	(3,098	)		$	241,200
Service revenues			17,750				(31	)			17,719				48,667				(56	)			48,611
Total revenues			95,892				(989	)			94,903				292,965				(3,154	)			289,811
Cost of revenues
Cost of product revenues			40,352				(69	)			40,283				124,785				(265	)			124,520
Cost of service revenues			10,019				—				10,019				27,517				—				27,517
Total cost of revenues			50,371				(69	)			50,302				152,302				(265	)			152,037
Gross margin			45,521				(920	)			44,601				140,663				(2,889	)			137,774
Operating expenses
Sales and marketing			17,492				(920	)			16,572				52,331				(2,889	)			49,442
Total operating expenses			29,608				(920	)			28,688				90,328				(2,889	)			87,439
Operating income			15,913				—				15,913				50,335				—				50,335

Presented below are the effects of the revisions on the line items within our previously issued consolidated statements of income for the years ended May 31, 2018 and 2017. Revised consolidated statements of income related to these periods are presented in this Form 10-Q and the Form 10-K to be filed in the succeeding period of this fiscal year.

		Year Ended												Year Ended
		May 31, 2018												May 31, 2017
		As Previously Reported				Adjustments				As Revised				As Previously Reported				Adjustments				As Revised
		(in thousands)												(in thousands)
Revenues
Product revenues		$	335,554			$	(4,266	)		$	331,288			$	306,512			$	(3,390	)		$	303,122
Service revenues			66,698				(56	)			66,642				55,082				73				55,155
Total revenues			402,252				(4,322	)			397,930				361,594				(3,317	)			358,277
Cost of revenues
Cost of product revenues			174,067				(342	)			173,725				156,568				(273	)			156,295
Cost of service revenues			37,933				—				37,933				33,058				—				33,058
Total cost of revenues			212,000				(342	)			211,658				189,626				(273	)			189,353
Gross margin			190,252				(3,980	)			186,272				171,968				(3,044	)			168,924
Operating expenses
Sales and marketing			70,909				(3,980	)			66,929				62,424				(3,044	)			59,380
Total operating expenses			120,058				(3,980	)			116,078				107,023				(3,044	)			103,979
Operating income			70,194				—				70,194				64,945				—				64,945

The revisions had no impact on our audited consolidated balance sheets as of May 31, 2018 and 2017 and no impact on our unaudited consolidated statements of equity or unaudited consolidated statements of cash flows for the three and nine month periods ended February 28, 2018.

12

2. INVENTORIES

Inventories are stated at the lower of cost, determined by the first-in, first-out method, or net realizable value. The components of inventories follow:

		February 28, 2019				May 31, 2018
		(in thousands)
Raw materials		$	38,944			$	36,702
Work-in-process			6,758				5,993
Finished and purchased goods			39,168				33,310
		$	84,870			$	76,005

3. NET INCOME PER SHARE

The calculation of net income per share attributable to Neogen Corporation follows:

		Three Months Ended February 28,								Nine Months Ended February 28,
		2019				2018				2019				2018
		(in thousands, except per share amounts)
Numerator for basic and diluted net income per share:
Net income attributable to Neogen		$	13,073			$	16,586			$	44,361			$	45,600
Denominator for basic net income per share:
Weighted average shares			52,071				51,537				51,849				51,253
Effect of dilutive stock options			401				700				599				761
Denominator for diluted net income per share			52,472				52,237				52,448				52,014
Net income attributable to Neogen per share:
Basic		$	0.25			$	0.32			$	0.86			$	0.89
Diluted		$	0.25			$	0.32			$	0.85			$	0.88

13

4. SEGMENT INFORMATION AND GEOGRAPHIC DATA

We have two reportable segments: Food Safety and Animal Safety. The Food Safety segment is primarily engaged in the development, production and marketing of diagnostic test kits, culture media and related products used by food producers and processors to detect harmful natural toxins, foodborne bacteria, allergens and levels of general sanitation. The Animal Safety segment is primarily engaged in the development, production and marketing of products dedicated to animal safety, including a complete line of consumable products marketed to veterinarians retailer, livestock producers and animal health product distributors; this segment also provides genomic identification and related interpretive bioinformatic services. Additionally, the Animal Safety segment produces and markets rodenticides, disinfectants and insecticides to assist in the control of rodents, insects and disease in and around agricultural, food production and other facilities.

Our international operations in the United Kingdom, Mexico, Brazil, China and India originally focused on selling the Company’s 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 and are reported through the Food Safety segment.

The accounting policies of each of the segments are the same as those described in Note 1.

Segment information follows:

		Food Safety				Animal Safety				Corporate and Eliminations (1)				Total
		(in thousands)
As of and for the three months ended February 28, 2019
Product revenues to external customers		$	44,790			$	32,585			$	—			$	77,375
Service revenues to external customers			6,323				14,002				—				20,325
Total revenues to external customers			51,113				46,587				—				97,700
Operating income (loss)			8,339				7,338				(1,038	)			14,639
Total assets			204,570				221,335				246,680				672,585
As of and for the three months ended February 28, 2018 - Revised (2)
Product revenues to external customers		$	42,286			$	34,898			$	—			$	77,184
Service revenues to external customers			5,027				12,692				—				17,719
Total revenues to external customers			47,313				47,590				—				94,903
Operating income (loss)			8,258				8,493				(838	)			15,913
Total assets			188,075				215,371				192,155				595,601

(1)

Includes corporate assets, consisting principally of cash and cash equivalents, marketable securities, current and deferred tax accounts and overhead expenses not allocated to specific business segments. Also includes the elimination of intersegment transactions.

(2)

Revenues for the three months ended February 28, 2018 have been revised as discussed in Note 1. For the three months ended February 28, 2018, product revenues were reduced by $332,000 in the Food Safety segment and $626,000 in the Animal Safety segment; service revenues were unchanged in the Food Safety segment and were reduced by $31,000 in the Animal Safety segment.

14

		Food Safety				Animal Safety				Corporate and Eliminations (1)				Total
		(in thousands)
For the nine months ended February 28, 2019
Product revenues to external customers		$	139,979			$	109,918			$	—			$	249,897
Service revenues to external customers			17,067				37,460				—				54,527
Total revenues to external customers			157,046				147,378				—				304,424
Operating income (loss)			29,554				23,101				(3,291	)			49,364
For the nine months ended February 28, 2018 - Revised (2)
Product revenues to external customers		$	128,491			$	112,709			$	—			$	241,200
Service revenues to external customers			14,319				34,292				—				48,611
Total revenues to external customers			142,810				147,001				—				289,811
Operating income (loss)			25,704				27,691				(3,060	)			50,335

(1)

Includes the elimination of intersegment transactions.

(2)

Revenues for the nine months ended February 28, 2018 have been revised as discussed in Note 1. For the nine months ended February 28, 2018, product revenues were reduced by $1,130,000 in the Food Safety segment and $1,968,000 in the Animal Safety segment; service revenues were unchanged in the Food Safety segment and reduced by $56,000 in the Animal Safety segment.

The following table presents the Company’s revenue disaggregated by geographic location:

		Three Months ended February 28,								Nine Months Ended February 28,
		2019				2018				2019				2018
		(in thousands)								(in thousands)
Revenues by Geographic Location
Domestic		$	57,422			$	57,825			$	182,298			$	180,414
International			40,278				37,078				122,126				109,397
Total revenue			97,700				94,903				304,424				289,811

15

5. EQUITY COMPENSATION PLANS

Qualified and non-qualified options to purchase shares of common stock may be granted to directors, officers and employees of the Company under the terms of our stock option plans. These options are granted at an exercise price of not less than the fair market value of the stock on the date of grant. Options vest ratably over three and five year periods and the contractual terms are generally five or ten years. A summary of stock option activity during the nine months ended February 28, 2019 follows:

		Shares				Weighted- Average Exercise Price
Options outstanding June 1, 2018			2,497,124			$	42.63
Granted			526,750				62.92
Exercised			(418,598	)			30.76
Forfeited			(105,835	)			46.50
Options outstanding February 28, 2019			2,499,441				48.78

During the three and nine month periods ended February 28, 2019 and 2018, the Company recorded $1,306,000 and $1,026,000 and $4,137,000 and $3,692,000, respectively, of compensation expense related to its share-based awards.

The weighted-average fair value per share of stock options granted during fiscal years 2019 and fiscal 2018, estimated on the date of grant using the Black-Scholes option pricing model, was $14.91 and $14.44, respectively. The fair value of stock options granted was estimated using the following weighted-average assumptions.

		FY 2019				FY 2018
Risk-free interest rate			2.6	%			1.6	%
Expected dividend yield			0.0	%			0.0	%
Expected stock price volatility			27.0	%			27.2	%
Expected option life			3.5 years				4.0 years

The Company has an employee stock purchase plan that provides for employee stock purchases at a 5% discount to market price. The discount is recorded in administrative expense as of the date of purchase.

6. BUSINESS AND PRODUCT LINE ACQUISITIONS

The Consolidated Statements of Income reflect the results of operations for business acquisitions since the respective dates of purchase. All are accounted for using the acquisition method. Goodwill recognized in the acquisitions discussed below relates primarily to enhancing the Company’s strategic platform for the expansion of available product offerings.

On September 1, 2017, the Company acquired the assets of The University of Queensland Animal Genetics Laboratory, an animal genomics laboratory located near Brisbane, Australia. This acquisition is intended to accelerate the growth of the Company’s animal genomics business in Australia and New Zealand. Consideration for the purchase was $2,063,000; $468,000 was paid in cash on the acquisition date with the remainder due in annual installments over the next five years. The final purchase price allocation, based upon the fair value of these assets and liabilities determined using the income approach, included inventory of $19,000, equipment of $419,000, non-current liabilities of $1,629,000, intangible assets of $902,000 (with an estimated life of 5-15 years) and the remainder to goodwill (non-deductible for tax purposes). These values are Level 3 fair value measurements. The new business, renamed Neogen Australasia, continues to operate in its current location, reporting within the Animal Safety segment.

On August 1, 2018, the Company acquired the stock of Clarus Labs, Inc., a manufacturer of water testing products. Neogen has distributed Clarus’ Colitag water test to the food and beverage industries since 2004 and this acquisition gives the Company access to sell this product to new markets. Consideration for the purchase was $4,204,000 in cash and approximately $1.3 million of contingent consideration, due semiannually for the first five years, based on an excess net sales formula. The final purchase price allocation, based upon the fair value of these assets and liabilities determined using the income approach, included inventory of $32,000, machinery and equipment of $120,000, accounts payable of $53,000, contingent consideration accrual of $1,256,000, non-current deferred tax liability of $426,000, non-amortizable intangible assets of $878,000, intangible assets of $1,487,000 (with an estimated life of 5-15 years) and the remainder to goodwill (non-deductible for tax purposes). These values are Level 3 fair value measurements. In February 2019, $90,000 was paid to the former owners as contingent consideration from the accrual. Manufacturing of these products was moved to the Company’s Lansing, Michigan location in October 2018, reporting within the Food Safety segment.

16

On September 4, 2018, the Company acquired the assets of Livestock Genetic Services, LLC, a Virginia-based company that specializes in genetic evaluations and data management for cattle breeding organizations. Livestock Genetic Services has been a long-time strategic partner of Neogen and the acquisition will enhance the Company’s in-house genetic evaluation capabilities. Consideration for the purchase was $1,100,000 in cash, with $700,000 paid at closing and $400,000 payable to the former owner on September 1, 2019, and approximately $385,000 of contingent consideration, payable over the next three years. The preliminary purchase price allocation, based upon the fair value of these assets and liabilities determined using the income approach, included office equipment of $15,000, contingent consideration accrual of $385,000, intangible assets of $860,000 (with an estimated life of 5-15 years) and the remainder to goodwill (deductible for tax purposes). These values are Level 3 fair value measurements. Services provided by this operation are now performed at the Company’s Lincoln, Nebraska location, reporting within the Animal Safety segment.

On January 1, 2019, the Company acquired the assets of Edmonton, Alberta-based Delta Genomics Centre, an animal genomics laboratory in Canada. Delta’s laboratory operations were renamed Neogen Canada and the acquisition is intended to accelerate growth of the Company’s animal genomics business in Canada. Consideration for the purchase was $1,485,000 in cash. The preliminary purchase price allocation, based upon the fair value of these assets and liabilities determined using the income approach, included inventory of $38,000, machinery and equipment of $371,000, unearned revenue liability of $125,000, intangible assets of $186,000 (with an estimated life of 5 to 10 years) and the remainder to goodwill (deductible for tax purposes). These values are Level 3 fair value measurements. Services provided by this operation continue to be performed in its current location, reporting within the Animal Safety segment.

7. LONG TERM DEBT

We have a financing agreement with a bank providing for a $15,000,000 unsecured revolving line of credit, which was amended on November 30, 2018 to extend the maturity from September 30, 2019 to September 30, 2021. There were no advances against the line of credit during fiscal 2018 and there have been none thus far in fiscal 2019; there was no balance outstanding at February 28, 2019. Interest on any borrowings is LIBOR plus 100 basis points (rate under the terms of the agreement was 3.58% at February 28, 2019). Financial covenants include maintaining specified levels of tangible net worth, debt service coverage, and funded debt to EBITDA, each of which the Company was in compliance with at February 28, 2019.

8. COMMITMENTS AND CONTINGENCIES

The Company is involved in environmental remediation and monitoring activities at its Randolph, Wisconsin manufacturing facility and accrues for related costs when such costs are determined to be probable and estimable. The Company expenses annual costs of remediation, which have ranged from $38,000 to $74,000 per year over the past five years. The Company’s estimated liability for these costs was $916,000 at February 28, 2019 and May 31, 2018, measured on an undiscounted basis over an estimated period of 15 years; $100,000 of the liability is recorded within current liabilities, and the remainder is recorded within other non-current liabilities on the consolidated balance sheets. During the second quarter of fiscal 2019, the Company’s environmental consultant performed an updated Corrective Measures Study on the Randolph site, per a request from the Wisconsin Department of Natural Resources. Based on the results of the study, the Company plans to continue the current remediation and monitoring program, with no changes proposed.

The Company is subject to certain legal and other proceedings in the normal course of business that, in the opinion of management, should not have a material effect on its future results of operations or financial position.

9. STOCK PURCHASE

In October 2018, the Company’s Board of Directors passed a resolution canceling the Company’s prior stock buyback program, which had been approved in December 2008, and authorized a new program to purchase, subject to market conditions, up to 3,000,000 shares of the Company’s common stock. In December 2018, the Company purchased 50,000 shares under the new program in negotiated and open market transactions for a total price, including commissions, of $3,134,727. Shares purchased under the program have been retired.

17

PART I – FINANCIAL INFORMATION

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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 our 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, 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 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.

18

Executive Overview

•

Consolidated revenues were $97.7 million in the third quarter of fiscal 2019, an increase of 3% compared to $94.9 million in the third quarter of fiscal 2018. Organic sales in the third quarter also increased 3%. For the nine month period, consolidated revenues were $304.4 million, an increase of 5% compared to $289.8 million in the same period in the prior fiscal year. On a year to date basis, organic sales increased 4%.

•

Food Safety segment sales were $51.1 million in the third quarter of the current fiscal year, an increase of 8% compared to $47.3 million in the same period of the prior year. Organic sales in this segment also increased 8%, with a minor contribution from the August 1, 2018 acquisition of Clarus Labs. For the year to date, Food Safety segment sales were $157.0 million, an increase of 10% compared to $142.8 million in the same period of the prior fiscal year; the organic sales increase was also 10%.

•

Animal Safety segment sales were $46.6 million in the third quarter of fiscal 2019, a decrease of 2% compared to $47.6 million in the third quarter of fiscal 2018. Organic sales in this segment decreased 3% in the third quarter, with minor contributions from the September 1, 2018 acquisition of Livestock Genetic Services and the January 1, 2019 acquisition of Delta Genomics. For the nine month period, Animal Safety segment sales were $147.4 million, flat compared to $147.0 million in the same period a year ago. Year to date organic sales decreased 1%, after excluding three months of the September 1, 2017 acquisition of Neogen Australasia, six months of the Livestock Genetic Services acquisition and two months of the Delta Genomics acquisition.

•

International sales in the third quarter of fiscal 2019 were 41% of total sales compared to 39% of total sales in the third quarter of fiscal 2018. For the year to date, fiscal 2019 international sales were 40% of total sales compared to 38% of total sales in the same period of the prior year.

•

Our effective tax rate in the third quarter was 21.4% compared to an effective tax rate of 4.1% in the prior year third quarter; the fiscal 2019 year to date effective tax rate was 17.0% compared to the year to date effective tax rate of 14.7% in the prior fiscal year. The U.S. statutory rate is 21% in the current fiscal year and was 35% from June 1, 2017 until December 22, 2017, with the reminder of the prior fiscal year third quarter taxed at 21%. Differences from the statutory rate are primarily due to tax deductions resulting from stock option exercises, provisions included in the corporate tax reform, and state and local taxes. Additionally, the third quarter of the prior year included a favorable adjustment to income tax expense to adjust deferred tax balances due to the decrease in the U.S. statutory tax rate.

•

Net income for the quarter ended February 28, 2019 was $13.1 million, or $0.25 per diluted share, a decrease of 21% compared to $16.6 million, or $0.32 per share in the same period in the prior year. For the year to date, net income was $44.4 million, or $0.85 per diluted share, a decrease of 6% compared to prior year to date net income of $45.6 million, or $0.88 per share.

•

Cash provided from operating activities in the first nine months of fiscal 2019 was $43.0 million, compared to $46.6 million in the first three quarters of fiscal 2018.

Neogen’s results reflect an increase in international sales of 9% in the third quarter of fiscal 2019 and 12% for the year to date, each compared to the same respective period in the prior year. We continue to focus on increasing our presence and market share throughout the world, while also integrating recent international acquisitions into our product portfolio. Sales fluctuations in the three and nine month periods of fiscal 2019 compared to the same respective periods in the prior year are as follows for each of our international locations:

		Three Months Ended February 28, 2019								Nine Months Ended February 28, 2019
		Revenue % Increase/(Decrease) USD				Revenue % Increase/(Decrease) Local Currency				Revenue % Increase USD				Revenue % Increase Local Currency
Neogen Europe (including Lab M & Quat-Chem)			11	%			18	%			12	%			15	%
Neogen do Brasil (including Deoxi & Rogama)			(9	)%			5	%			10	%			31	%
Neogen Latinoamerica			19	%			22	%			12	%			17	%
Neogen China			9	%			15	%			6	%			9	%
Neogen India			94	%			115	%			86	%			104	%

19

Currency translations reduced revenues by approximately $2.5 million in the third quarter of fiscal 2019 compared to the same quarter a year ago, primarily due to increased strength of the U.S. dollar relative to the Brazilian real, the British pound, the Australian dollar and the Mexican peso. For the year to date, currency translations reduced revenues by approximately $5.8 million compared to the prior year.

The increase in revenues at Neogen Europe for the third quarter of fiscal 2019 was led by an 18% increase in sales of genomics services, primarily in the porcine and bovine markets; genomics sales increased 24% for the year to date. Neogen Europe continues to have strong sales of test kits to detect deoxynivalenol (DON) in grain, due to increased testing after a DON outbreak in France’s wheat crops in the fall of 2018. At Neogen do Brasil, sales of natural toxins test kits increased 36% and 64% for the three and nine months, respectively, both compared to the same periods a year ago, as we gained significant new business testing for the presence of aflatoxin in corn. Sales of forensic test kits increased significantly in the third quarter and year to date over the prior year periods due to business that shifted from U.S. labs to labs in Brazil and increased demand from commercial laboratories located in Brazil. Neogen Latinoamerica’s third quarter sales increase of 19% was led by a 64% increase in sales of AccuPoint sanitation monitoring products, due to increased market share.

Service revenue was $20.3 million in the third quarter of fiscal 2019, an increase of 15% over prior year third quarter revenues of $17.7 million, including minor contributions from the acquisitions of Livestock Genetics Services and Delta Genomics. For the nine month period, service revenue was $54.5 million, an increase of 12% over prior year revenues of $48.6 million. Year to date revenues were aided by the Livestock Genetics Services and Delta Genomics acquisitions and the September 2017 acquisition of Neogen Australasia. The growth was led by increases in sales of genomic services to the global beef markets, and porcine and bovine markets in Europe.

20

Revenues

		Three Months Ended February 28,
		2019				2018				Increase/ (Decrease)				%
		(in thousands)
Food Safety
Natural Toxins, Allergens & Drug Residues		$	18,612			$	16,807			$	1,805				11	%
Bacterial & General Sanitation			9,519				8,992				527				6	%
Culture Media & Other			11,893				10,179				1,714				17	%
Rodenticides, Insecticides & Disinfectants			5,953				7,359				(1,406	)			(19	)%
Genomics Services			5,136				3,976				1,160				29	%
		$	51,113			$	47,313			$	3,800				8	%
Animal Safety
Life Sciences		$	1,823			$	2,769			$	(946	)			(34	)%
Veterinary Instruments & Disposables			10,682				10,630				52				0	%
Animal Care & Other			6,823				7,245				(422	)			(6	)%
Rodenticides, Insecticides & Disinfectants			13,256				14,255				(999	)			(7	)%
Genomics Services			14,003				12,691				1,312				10	%
		$	46,587			$	47,590			$	(1,003	)			(2	)%
Total Revenues		$	97,700			$	94,903			$	2,797				3	%
		Nine Months Ended February 28,
		2019				2018				Increase/ (Decrease)				%
		(in thousands)
Food Safety
Natural Toxins, Allergens & Drug Residues		$	58,021			$	54,960			$	3,061				6	%
Bacterial & General Sanitation			30,807				27,435				3,372				12	%
Culture Media & Other			36,302				31,353				4,949				16	%
Rodenticides, Insecticides & Disinfectants			18,521				18,175				346				2	%
Genomics Services			13,395				10,887				2,508				23	%
		$	157,046			$	142,810			$	14,236				10	%
Animal Safety
Life Sciences		$	5,794			$	7,589			$	(1,795	)			(24	)%
Veterinary Instruments & Disposables			32,769				32,804				(35	)			0	%
Animal Care & Other			22,439				22,894				(455	)			(2	)%
Rodenticides, Insecticides & Disinfectants			48,921				49,422				(501	)			(1	)%
Genomics Services			37,455				34,292				3,163				9	%
		$	147,378			$	147,001			$	377				0	%
Total Revenues		$	304,424			$	289,811			$	14,613				5	%

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