NEOGEN CORP (NEOG)

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. 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, 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 are 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 that could cause Neogen’s results to differ materially from those indicated by such forward-looking statements, including many factors beyond our control. Factors that could cause actual results to differ from those contained within forward-looking statements include (without limitation) risks related to the integration of the 3M Food Safety business and the performance of acquired or transitioned businesses and technologies; execution risks associated with our manufacturing transitions (including Petrifilm) and related product qualifications, duplicate manufacturing costs, and ramp‑up activities; dependence on and qualification of third‑party suppliers, logistics partners and package delivery services, and the impact of disruptions or pricing increases; the timing, terms and outcome of portfolio actions (including the announced divestiture of the genomics business) and satisfaction of closing conditions; our ability to realize expected cost savings, transformation initiatives and operational efficiencies on the anticipated timelines; changes in customer demand, competitive dynamics, market acceptance and pricing; regulatory, legal, tax and trade developments (including tariffs, export/import restrictions, sanctions and other trade controls); risks associated with international operations and expansion into new geographies; cybersecurity incidents, data privacy or other systems failures or disruptions; currency fluctuations, inflation, interest rates and broader macroeconomic conditions; availability and cost of raw materials and other inputs; our ability to develop, launch and protect new products and intellectual property and to avoid third‑party claims; our reputation and relationships with customers and distributors, including the risk of customer loss; our ability to attract, retain and develop key personnel; compliance with anti‑bribery, anti-corruption and other compliance obligations; our substantial indebtedness and access to capital markets; outcomes of litigation and other legal or regulatory proceedings; changes in domestic and foreign laws and regulations, tax audits and changes in tax legislation; deterioration in profitability or cash flows and potential asset impairments; and other risks described under “Risk Factors” in our most recent Annual Report on Form 10‑K and in subsequent Quarterly Reports on Form 10‑Q and Current Reports on Form 8‑K, as filed with the U.S. Securities and Exchange Commission.

In addition, any forward-looking statements represent management’s views only as of the date 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. Except to the extent legally required to do so, we specifically disclaim any obligation to update forward-looking statements, even if our views change.

Trends and Uncertainties

In recent years, input cost inflation, including increases in certain raw materials, negatively impacted operating results. Although the rate of inflation has eased, we continued to face economic headwinds, including softening consumer demand, elevated interest rates, and ongoing geopolitical tensions in certain regions, such as eastern Europe and the Middle East.

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Elevated interest rates have led to higher borrowing costs and an increased overall cost of capital. In response to the historically high inflationary environment, we took pricing actions to mitigate the impacts on the business in prior fiscal years. Although the federal funds rate was reduced in recent fiscal years and we have refinanced our Term Loan and revolving line of credit, the overall interest rate we pay on our Credit Facilities remains higher than when the debt was incurred, which increases interest expense on the unhedged portion of our Term Loan.

Beginning in the first half of fiscal year 2024, we implemented a new enterprise resource planning system and exited our transition service agreements with 3M, which led to certain shipment delays and an elevated backlog of open orders, specifically in the Food Safety segment. At the conclusion of fiscal year 2024, order fulfillment issues were largely resolved, however, the impact of lost market share stemming from these fulfillment issues continued in fiscal year 2025. Also, in fiscal years 2025 and 2026, we experienced an elevated amount of inventory write-offs, due, in part, to expiration of certain inventory held at our international locations stemming from supply chain and distribution challenges in fiscal year 2024. Further, in fiscal year 2025, we experienced negative impacts from delays in restarting full production of our sample collection product line, which we relocated from 3M into a Neogen facility. In the second half of fiscal year 2025, production increased to the prior normal levels, but with significant production inefficiencies. These production inefficiencies have continued throughout fiscal year 2026, albeit with continued improvement in each successive quarter. Continued improvement is expected for the remainder of the current fiscal year.

With a change in administration in fiscal year 2025, there has been an economic policy shift towards increasing tariffs, which in turn has led and could lead to further retaliatory tariffs. These have increased, and may continue to increase our costs on materials imported into the U.S. and have also increased costs and negatively impacted sales from our international locations, which primarily sell U.S. manufactured products.

Within the Food Safety industry, the end market generally continues to experience a lower level of food production, largely due to the cumulative effect of the significant recent inflation, particularly in food prices. However, there have been signs of sequential improvement from prior quarters and expectations for growth in calendar year 2026. As a result, we expect steadily increasing growth rates in this market. Within Animal Safety, the end market has remained near cyclical lows. Because of our extensive and longstanding partnerships in the distribution channels, we are optimistic about potential future revenue growth in the segment, particularly as a result of our commercial teams leveraging these partnerships. However, in the third quarter of fiscal year 2026, we encountered a number of third-party supplier quality and manufacturing issues that detrimentally impacted the revenue in our Animal Safety segment. Some of these issues are related to manufacturing transitions at our suppliers associated with global tariffs. The Company has implemented a new, more rigorous, supplier qualification and quality program to address these challenges. It is anticipated that there will be continued impact into the beginning of fiscal year 2027 associated with these issues.

In fiscal year 2025, restructuring actions in our genomics business led to voluntary revenue attrition, following our strategic shift away from lower margin business. A portion of our genomics business also serves the companion animal market, which has been experiencing weakness recently, primarily due to the impact of continued inflation, a lower number of pet adoptions, and a higher level of customer in-sourcing. Additionally, in the second quarter of fiscal year 2026, management initiated a restructuring plan to right-size our cost base through a reduction of approximately 10% in global headcount, including both existing and planned positions, as well as additional non-labor cost reductions.

On March 2, 2026, we announced that we had entered into a definitive agreement to sell our Genomics business to Zoetis Inc. The transaction is subject to customary closing conditions and regulatory approvals. The Company expects the transaction to close by the end of the first half of its fiscal year 2027.

We continue to evaluate the nature and extent of these issues and their impact on our business, including consolidated results of operations, financial condition and liquidity. We expect these issues to continue to impact us in fiscal year 2026.

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Executive Overview

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K.

In addition, any forward-looking statements represent management’s views only as of the day this Form 10-K was first filed with the Securities and Exchange Commission and should not be relied upon as representing management’s views as of any subsequent date. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if our views change, except as required by law.

COMPANY OVERVIEW

Neogen Corporation and subsidiaries develop, manufacture and market a diverse line of products and services dedicated to food and animal safety. Our Food Safety segment consists primarily of diagnostic test kits and complementary products (e.g., culture media) sold to food producers and processors to detect dangerous and/or unintended substances in human food and animal feed, such as foodborne pathogens, spoilage organisms, natural toxins, food allergens, ruminant by-products, meat speciation, drug residues, pesticide residues and general sanitation concerns. The majority of the diagnostic test kits are disposable, single-use immunoassay and DNA detection products that rely on proprietary antibodies and RNA and DNA testing methodologies to produce rapid and accurate test results. Our line of food safety products also includes advanced software systems that help testers to objectively analyze and store their results and perform analysis on the results from multiple locations over extended periods.

Neogen’s Animal Safety segment is engaged in the development, manufacture, marketing and distribution of veterinary instruments, pharmaceuticals, vaccines, topicals, parasiticides, diagnostic products, rodent control products, insect control products and genomics testing services for the worldwide animal safety market. The majority of these consumable products are marketed through veterinarians, retailers, livestock producers and animal health product distributors.

TRENDS AND UNCERTAINTIES

In recent years, input cost inflation, including increases in certain raw materials, negatively impacted operating results. Although the rate of inflation has eased, we continued to face economic headwinds, related to consumer demand, elevated interest rates, and ongoing geopolitical tensions in certain regions, such as eastern Europe and the Middle East.

Elevated interest rates have led to higher borrowing costs and an increased overall cost of capital. In response to the historically high inflationary environment, we took pricing actions to mitigate the impacts on the business in prior fiscal years. Although the federal funds rate was reduced in recent fiscal years and we have refinanced our variable interest rate outstanding debt, the overall interest rate we pay on our outstanding debt remains higher than when the debt was incurred, which increases interest expense on the unhedged portion of our outstanding debt.

In fiscal years 2025 and 2026, we experienced an elevated amount of inventory write-offs, due, in part, to expiration of certain inventory held at our international locations stemming from supply chain and distribution challenges in fiscal year 2024. Further, in fiscal year 2025, we experienced negative impacts from delays in restarting full production of our sample collection product line, which we relocated from 3M into a Neogen facility. In the second half of fiscal year 2025, production increased to the prior normal levels, but with significant production inefficiencies. These production inefficiencies continued throughout fiscal year 2026, albeit with continued improvement in each successive quarter. Continued improvement is expected in fiscal year 2027.

With a change in administration in fiscal year 2025, there has been an economic policy shift towards increasing tariffs, which in turn has led and could lead to further retaliatory tariffs. These have increased, and may continue to increase our costs on materials imported into the U.S. and have also increased costs and negatively impacted sales from our international locations, which primarily sell U.S. manufactured products.

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Within the Food Safety industry, the end market generally continues to experience a lower level of food production, largely due to the cumulative effect of the significant recent inflation, particularly in food prices. However, there have been signs of sequential improvement from prior quarters and expectations for growth in fiscal year 2027. As a result, we expect steadily increasing growth rates in this market. Within the Animal Safety industry, the end market has remained near cyclical lows. Because of our extensive and longstanding partnerships in the distribution channels, we are optimistic about potential future revenue growth in the segment, particularly as a result of our commercial teams leveraging these partnerships. However, in the third quarter of fiscal year 2026, we encountered a number of third-party supplier quality and manufacturing issues that detrimentally impacted the revenue in our Animal Safety segment. Some of these issues are related to manufacturing transitions at our suppliers associated with global tariffs. The Company has implemented a new, more rigorous, supplier qualification and quality program to address these challenges. In the fourth quarter of fiscal year 2026, we saw the majority of these supply issues improve.

In fiscal year 2025, restructuring actions in our genomics business led to voluntary revenue attrition, following our strategic shift away from lower margin business. A portion of our genomics business also serves the companion animal market, which has been experiencing weakness, primarily due to the impact of continued inflation, a lower number of pet adoptions, and a higher level of customer in-sourcing. Additionally, in the second quarter of fiscal year 2026, management initiated a restructuring plan to right-size our cost base through a reduction of approximately 10% in global headcount, including both existing and planned positions, as well as additional non-labor cost reductions.

In fiscal year 2027, we plan to execute a growth strategy focused on commercial excellence, innovation, and operational efficiency. Key initiatives include enhancing our global go-to-market capabilities, investing in research and development to expand and differentiate our product portfolio, and strengthening customer engagement to drive market share growth. These investments are expected to be supported by cost management and operational improvement initiatives designed to enhance profitability and fund continued reinvestment in the business.

On March 2, 2026, we announced that we had entered into a definitive agreement to sell our Genomics business to Zoetis, Inc. The transaction is subject to customary closing conditions and regulatory approvals, and the parties continue to work toward a closing by the end of the first half of fiscal year 2027. In July 2026, the Australian Competition and Consumer Commission (ACCC) and the New Zealand Commerce Commission (NZCC) each announced that they are moving their respective reviews of the Company’s proposed genomics divestiture into the second phase of review. The Company will continue to cooperate with the ACCC and the NZCC as they complete their respective review processes.

We continue to evaluate the nature and extent of these issues and their impact on our business, including consolidated results of operations, financial condition and liquidity. We expect these issues to continue to impact us in fiscal year 2027.

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RESULTS OF OPERATIONS

Historical Periods

Refer to Part II - Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Form 10-K for the fiscal year ended May 31, 2025 for discussion of the Results of Operations, Segment Results of Operations, and Financial Condition and Liquidity for the year ended May 31, 2025 compared to the year ended May 31, 2024, which is incorporated by reference herein.

Executive Overview

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Results of Operations

Revenues

Revenue decreased $24.3 million for fiscal year 2026 compared to the prior fiscal year 2025. The decrease was due to $55.6 million of discontinued product lines, primarily from the divestiture of our Cleaners and Disinfectants business partially offset by $14.0 million favorable foreign exchange and $17.3 million growth in the business. Business growth was primarily driven by higher sales of indicators, pathogen detection, and sample collection products.

Service Revenue

Service revenue, which consists primarily of genomics services provided to animal production and companion animal markets was $102.2 million in fiscal 2026, an increase of 5% compared to prior fiscal year revenue of $97.3 million. The increase was primarily driven by higher genomics revenue in bovine and integrated protein markets, partially offset by a decline in companion animal markets.

International Revenue

Neogen’s international revenues were $445.3 million in fiscal year 2026, compared to $448.7 million in fiscal 2025, a decrease of 1%. The decline was primarily due to the divestiture of our Cleaners and Disinfectants business. These decreases were partially offset by growth in our European and Asia Pacific regions and favorable foreign exchange.

GROSS MARGIN

Gross margin, expressed as a percentage of revenue, was 46.9% during fiscal year 2026 compared to 47.1% in the prior fiscal year. The decrease in margin was primarily due to volume decreases and duplicative costs as we prepare to manufacture Petrifilm products internally, partially offset by price increases and favorable foreign currency exchange.

OPERATING EXPENSES

Sales and Marketing:

Sales and marketing expenses were $166.6 million during fiscal year 2026, compared to $183.8 million during the prior fiscal year. The decrease was primarily due to lower outbound shipping costs, lower bad debt expenses, reduced costs associated with the divested Cleaners and Disinfectants business, and lower compensation costs associated with headcount reductions, partially offset by increased restructuring costs and one-time project costs.

General and Administrative:

General and administrative expenses were $245.1 million during f

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