Contents
Financial Highlights ..................................................................................................................................... 1
A Message from Management .....................................................................................................................2
A Mission that Matters .................................................................................................................................4
Management’s Discussion and Analysis of Financial Condition and Results of Operations ..........................10
Consolidated Balance Sheets .....................................................................................................................16
Consolidated Statements of Income ...........................................................................................................17
Consolidated Statements of Stockholders’ Equity .......................................................................................18
Consolidated Statements of Cash Flows .....................................................................................................19
Notes to Consolidated Financial Statements ...............................................................................................20
Management’s Report on Internal Control Over Financial Reporting ............................................................30
Report of Independent Registered Public Accounting Firm .........................................................................30
Report of Independent Registered Public Accounting Firm on Financial Statements ....................................31
Comparison of Five Year Cumulative Total Return & Stock Profile Activity ..................................................32
Stock Profile Activity ..................................................................................................................................32
Officers and Directors ................................................................................................................................33
2008 Annual Meeting .................................................................................................................................33
Financial HigHligHts
Amounts in thousands, except per share
Years Ended May 31,
Operations:
Total Revenues
Food Safety Sales
Animal Safety Sales
Operating Income
Net Income
Basic Net Income Per Share*
Diluted Net Income Per Share*
2008
2007
2006
2005
2004
$ 102,418
$
86,138
$ 72,433
$
62,756
$ 55,498
57,664
44,754
18,019
47,165
38,973
13,504
34,922
37,511
10,805
28,156
34,600
7,452
$
$
$
12,098
.84
.81
$
$
$
9,125
.66
.64
$
$
$
7,029
.57
.55
$
$
$
4,929
.41
.39
$
$
$
27,567
27,931
6,144
4,202
.35
.34
Average Diluted Shares Outstanding*
14,999
14,162
12,686
12,531
12,350
*Restated for the years 2004–2007
total Revenues
(DOLLARS IN ThOuSANDS)
net income
(DOLLARS IN ThOuSANDS)
total assets
(DOLLARS IN ThOuSANDS)
$120,000
100,000
80,000
60,000
40,000
20,000
0
2004
2005
2006
2007
2008
$14,000
12,000
10,000
8,000
6,000
4,000
0
2004
2005
2006
2007
2008
$130,000
110,000
90,000
70,000
50,000
30,000
0
2004
2005
2006
2007
2008
In thousands
May 31,
Financial Strength:
2008
2007
2006
2005
2004
Cash and Cash Equivalents
$
14,270
$
13,424
$
1,959
$
1,972
$
1,696
Working Capital
Total Assets
Long-Term Debt
Stockholders’ Equity
54,495
126,357
–
111,248
41,060
105,284
–
91,945
26,252
88,290
9,955
65,424
22,644
63,884
–
56,623
20,619
59,975
3,900
50,617
James Herbert
Chairman and CEO
International Revenue Impressive
As food and animal safety are now clearly worldwide concerns,
we believe that two-thirds of our total market potential lies out-
side the u.S. In FY ’08 we succeeded in growing international
revenues on pace with our u.S. sales, deriving 38% of our total
revenues from sales into approximately 100 countries.
Our Scotland-based Neogen Europe subsidiary continued to ex-
pand, with sales growth of 36%. A few days after year-end, Neogen
formed a new subsidiary in Mexico, Neogen Latinoamérica. We
expect this move will enable us to better penetrate the important
Mexican and Central American markets.
a message FRom management
To Our Stockholders, Employees, and Friends,
When we announced to the world 26 years ago that our mission
was to build a company to provide food and animal safety solu-
tions, few people could have foreseen the far-reaching impact of
that mission. Today, that mission matters more than ever to food
producers, processors, and consumers around the world.
As the importance of our mission has grown, we have succeeded
in building a company that continues to grow in importance to
our customers, stockholders, and employees. Neogen’s revenues
increased 19% for our 2008 fiscal year to surpass $100 million
for the first time, recording revenues of $102,418,000. The last
quarter was the 65th in the past 70 quarters that we recorded in-
creased revenues as compared with the previous year—a record
that now spans over 17 years.
Net income for the year was $12.1 million, a 33% increase com-
pared to last year’s $9.1 million. This equated to earnings per
share of $0.81 as compared to $0.64
last year.
Both Divisions Solid
Neogen manages its businesses as two divisions: Food Safety
and Animal Safety. however, the distinction is often blurred as a
significant portion of Animal Safety’s objectives could be viewed
as Food Safety back inside the farm gate.
Neogen’s Food Safety segment led the company’s FY ’08 rev-
enue increase with sales up 22% to $57.7 million. This growth
was spread across almost all product lines, and since there were
no acquisitions in the food safety area during the year, was en-
tirely organic.
Sales of Neogen’s Soleris™ optical microbial detection technol-
ogy had its second consecutive strong year with sales growth
of nearly 37%. This technology is enjoying widespread accep-
tance by customers in the dairy, meat, dressings, and nutraceuti-
cal markets to aid in rapid detection of spoilage organisms (e.g.,
yeast and mold).
Our Acumedia® subsidiary, which manufactures and markets de-
hydrated culture media used in the production of vaccines and to
detect microorganisms, also had an outstanding year with sales
Stock Dividend Declared
The strong growth over the past few years
allowed Neogen to reward shareholders
with a stock dividend that became effec-
tive last September. A 3-for-2 stock split
increased the total number of shares
by 4,700,000. At year-end, Neogen had
14,999,000 fully diluted shares.
Balance Sheet Strong
Neogen generated $7.9 million in cash
from operations during FY ’08. Even after
financing two acquisitions, the company
ended the year with $14.3 million in cash.
Neogen also continued its solid growth in
shareholder value, as shareholder equity
increased by 21% for the year.
opeRating income
(DOLLARS IN ThOuSANDS)
$21,000
18,000
15,000
12,000
9,000
6,000
3,000
0
2004
2005
2006
2007
2008
growth of 35%.
Detecting drug residues continues to be a
strong focus for the company, across our food
and animal safety divisions. Our group of dairy
antibiotic tests enjoyed another favorable year
with sales growth of 25%.
An independent study indicates that based
on the number of instruments sold during
the past three years, Neogen’s AccuPoint®
product
line has outpaced all of our
competitors—combined. AccuPoint is used
by many food processors and food retailers
to monitor general sanitation.
Revenues from the company’s Animal Safety
Division grew 15% in the 2008 fiscal year to
$44.8 million. In addition to this division’s sol-
id line of diagnostic test kits, it also produces
and markets a number of intervention prod-
ucts. These products range from injectable
vitamins and vaccines, to rodenticides and
disinfectants that are used to aid in animal safety back inside
the farm gate.
The division’s veterinary instrument group continued the steady
growth it has exhibited for the past several years. Animal Safety
growth was aided by the successful integration of two acquisi-
tions during the year that helped strengthen its position as the
major supplier of detectable hypodermic needles, and added bo-
vine hoof care and surgical products.
Growth Strategy Continues
Neogen’s growth strategy continues to be focused on developing
new products for our existing customer base, making strategic
acquisitions to provide new products, and gaining market share
from competitors. All were in play during FY ’08.
Early in the year, Neogen completed the acquisition of Kane
Enterprises, a South Dakota manufacturer and marketer of ani-
mal health products. As a “bolt-on” acquisition, Kane’s opera-
tions were relocated and integrated into Neogen’s existing manu-
facturing and marketing groups.
In December, Neogen acquired the assets of Rivard Instruments
of Winnipeg, Canada, settling lengthy patent litigation between
the two companies. The patents previously owned by the two
firms, but now owned entirely by Neogen,
protect the manufacturing and marketing
of detectable hypodermic needles specifi-
cally designed to reduce breakage during
animal injections. This acquisition now places
Neogen in a dominant position with patents
in more than 30 countries.
$120,000
In June, one month after ending FY ’08,
Neogen successfully acquired a disinfectant
and cleaner product line from DuPont. This
marked the 14th acquisition for Neogen in
the past seven years.
We expect these disinfectant and cleaning
products to provide meaningful sales during
FY ’09, and combined with our rodenticides,
strengthens our strategy of providing bio-
security solutions for the farm market.
R&D is Significant
100,000
80,000
60,000
40,000
20,000
As worldwide concern for both food and
animal safety grows, the opportunity for
new products becomes more pronounced.
Several new products were introduced by
Neogen’s R&D team during FY ’08, and a considerable number
of new projects were initiated. At year-end, Neogen announced
its intention to double its research and development efforts for FY
’09 by hiring 23 additional R&D scientists.
2004
0
2005
Milepost, Not a Goalpost
Though reaching the goal of over $100 million in revenue was an
important accomplishment, management views this achievement
as a milepost as we set a new goal to double those revenues. We
view this new goal with a great amount of confidence for several
reasons.
annual RepoRt 008
Lon Bohannon
President and COO
First, our mission is one that does matter, and is on target. Our
markets will continue to grow with some third party studies pro-
jecting food and animal safety opportunities to increase in the
double-digit range annually over the next five years. The second
confidence builder is the fact that the world has truly become
smaller. Consumer demand and better distribution logistics will
continue to draw the world’s consumers
and suppliers closer together—resulting
in even greater challenges for food safety.
stockHoldeRs’ equity
(DOLLARS IN ThOuSANDS)
Another confidence builder relates to pro-
duction economics. As food costs increase
around the world, there will be continual
pressure to reduce those production costs.
This is already resulting in larger produc-
tion units and extensive mechanization.
Over the past year, we have not only seen
consumers suffer injury because of poor
food quality, but we have seen a number of
food producers suffer significant financial
losses that threaten their very existence.
Another reason for our confidence is
based on our track record. We believe
Neogen has established traction with both
its products and marketing strategies.
Since 2000, the company has enjoyed a
compound annual growth rate of 20%.
With a trained and dedicated employee
group now approaching 500, and experi-
enced management staff providing stable
leadership, Neogen is distinctly positioned to capitalize on the
opportunities that lie ahead.
2008
2007
2006
It is easy to be confident about the future when you have a
mission that matters.
James L. herbert
Chairman and CEO
Lon M. Bohannon
President and COO
Today’s food and animal production
industries need innovative safety
solutions that can keep pace with their
growing production efficiencies.
a mission tHat matteRs.
The mission of Neogen Corporation is to be the dominant company in the development and marketing of solutions for food and animal safety.
W e live in an age of unprecedented global change.
Advances in science and technology have resulted
in dramatic improvements in food and animal production
efficiency. Veterinary science has succeeded in signifi-
cantly raising the quality of life for virtually all companion
animals. Worldwide food distribution systems are nothing
short of extraordinary in their ability to move products
around the world in just a few short days.
But, these same technological advances have also contrib-
uted to a growing problem of widespread contamination
associated with food and animal production. Gone are the
days when inadvertent contamination would be limited to
a small geographic region, adversely affecting a relative
few humans or animals. Each foodborne illness outbreak,
or accidental contamination of food or animal feed sup-
plies, can now impact thousands of humans or animals,
and carry an associated economic cost measured in the
millions of dollars.
Today’s recalls often affect vast amounts of product and
cover wide geographic territories, at times including mul-
tiple countries. In just one recall within the past year, a
staggering 143 million pounds of beef were recalled due
to the potential for E. coli contamination. Just over a year
ago, hundreds of brands of pet food, contaminated with
melamine, were recalled after being implicated in the death
of hundreds of pets. More recently, fresh-cut vegetables
contaminated with Salmonella have sickened more than
1,000 and cost tomato and pepper producers an estimated
hundreds of millions of dollars.
With today’s expanding population, and a strong motivation
to limit the cost of food and feed products, we simply can’t
go back to the days of solely eating locally produced foods
to limit the risk of these widespread outbreaks. Today’s
food and animal production industries need innovative
safety solutions that can keep pace with their growing pro-
duction efficiencies.
Neogen’s mission has uniquely positioned the company to
prosper providing the exact solutions needed for today’s
safety challenges that originate inside the farm gate, or
anywhere throughout the production and distribution
process.
Neogen’s mission matters now more than ever.
Disinfectants and cleaning products. Neogen’s com-
prehensive list of over 30 preventative disinfectants
and cleaning products offer poultry, swine and dairy
producers and veterinary clinics a one-stop source of
critical supplies. Stopping a bacterial, viral, or fungal
outbreak before it can start is a critical goal in food and
animal safety.
Rodenticides. Neogen’s proven line of rodenticides
is used for effective control of rodent infestations and
complements our disinfectants as a critical component
of an overall biosecurity program. Rats and mice re-
main a serious threat to compromise the quantity and
quality of food and feedstuffs, and are common vectors
in the spread of disease.
instruments and supplies. Neogen’s
Veterinary
Ideal® Instruments subsidiary, founded in 1931, main-
tains a leadership role in the development of precision
Disinfectants
Livestock and food
producers use Neogen’s
comprehensive line of
disinfectants and cleaners
to help eliminate the threat
of the spread of dangerous
bacteria, viruses and fungi.
neogen’s Food and animal
saFety solutions
BetaStar ®
Milk producers use Neogen’s
simple BetaStar tests to
protect consumers from the
hazards of excessive dairy
antibiotics in milk.
veterinary drug delivery instruments to help minimize
drug residues that might otherwise find their way into
meat and milk supplies. Neogen’s line of patented de-
tectable needles greatly lessen the chance that a broken
needle would ever arrive on a dinner plate in a beef or
pork roast. During 2008, Neogen continued to expand
market penetration with major farm and ranch retailers
and large animal production units through the addition
of more than 100 different products.
Veterinary performance and companion animal
products. Neogen’s animal safety efforts extend from
food animal to performance and companion animals.
The company manufactures and markets pharmaceu-
ticals, vaccines, and diagnostic products to the world-
wide animal safety market. The company’s equine
health line includes a proven, safe immunostimulant
used to boost the immune response of horses to help
combat respiratory ailments. One of our vaccines has
protected thousands of horses against botulism.
Drug residue diagnostics. Neogen is a leader in the
development of diagnostic tests for the detection of
drugs in animals, and animal products intended for
human consumption. These tests are used to ensure
the integrity of the animal racing industry, and protect
consumers from ingesting dangerous levels of drug
residues. For example, Neogen’s BetaStar® test protects
consumers from ingesting violative levels of antibiotics
in milk. Beta lactams are used in the dairy industry
to combat a common infection, bovine mastitis. The
company’s launch of its new test for the tetracyclines
group of dairy antibiotics adds to its leadership role.
Natural toxins diagnostics. Neogen’s venerable line
of tests for mycotoxins in grains and animal feeds
help protect the health of poultry, swine, and dairy
cattle—and the quality and safety of the food products
derived from numerous commodity grains. Neogen’s
broad line of innovative tests has earned more pres-
tigious third-party approvals than any of its competi-
tors. These simple and quick diagnostics, and their
Natural Toxins
Grain processors use Neogen’s
comprehensive line of natural
toxin test kits, including tests for
aflatoxin, DON and fumonisin,
to ensure that their food and
animal feed products do not
contain a dangerous level of
naturally occurring toxin.
AccuPoint ®
Food processors, both
large and small, use
Neogen’s AccuPoint
Sanitation Monitoring
System to ensure
that their production
facilities are clean—an
important safeguard
against contamination.
Soleris ™
Nutraceutical and food producers use
Neogen’s Soleris optical microbial
detection system to detect spoilage
microorganisms, such as yeast and
mold, to help protect the quality and
safety of their products.
precursors, have been used for more than 20 years to
protect the safety and quality of many products des-
tined for human or animal consumption.
Foodborne pathogen diagnostics. The company’s
tests for dangerous bacteria, including E. coli O157:h7,
Salmonella, and Listeria, are market leaders because
of their speed, accuracy, ease of use, and Neogen’s
dedicated support staff of microbiologists. Neogen’s
tests help food producers protect their brands, and
reputation, from possibly the biggest risk they face in
the marketplace—shipping products tainted with a
known pathogen.
Spoilage organism diagnostics. While product con-
taminated with spoilage organisms, such as yeast
and mold, do not carry consequences of the severity
of pathogen contamination, spoilage organisms can
drastically shorten product shelf-lives, and produce a
variety of unwanted food safety problems.
8
Acumedia®
Neogen’s Acumedia
dehydrated culture media
are precisely blended
to promote the growth
of specific bacteria
and detect dangerous
pathogens. Current
industry markets include
food and beverage,
pharmaceutical, clinical,
cosmetics, veterinary and
academic research.
Neogen’s Soleris technology is now used by 200 of the
world’s largest food and nutraceutical manufacturers
to detect spoilage organisms in a fraction of the time
needed for traditional testing methods.
Food allergen diagnostics. Since their introduction
10 years ago, Neogen’s rapid tests for food allergens
have set the standard for simple and quick detection
of these potentially dangerous residues. The company
has developed tests for milk, egg, peanut, almond, glia-
din, soy, and hazelnut. While many consumers would be
unaffected by the unintentional, unlabeled inclusion of
one of these food allergens in a product, millions of food
allergic people worldwide face dire consequences
should they accidentally ingest a food allergen residue.
Seafood diagnostics. Seafood producers rely on
Neogen’s rapid histamine and sulfites detection tests
to keep tainted product from reaching consumers.
histamine is produced in certain species, including tuna,
if they are not refrigerated properly following harvest.
Ingestion of high levels of histamine causes scombroid
poisoning, which can be fatal. Sulfites, which are used
on shrimp to keep them fresh, can cause a dangerous
allergic reaction if ingested in a sufficient quantity.
Traditional microbiology growth media. Neogen’s
Acumedia subsidiary is an internationally recognized
producer of growth media for the broad and varied de-
hydrated culture media marketplace. uses of Acumedia
vary from diagnostic testing, to the production of ben-
eficial microorganisms for industrial and commercial
applications.
Sanitation diagnostics. Neogen’s market-leading
AccuPoint sanitation monitoring system gives food
processors, food service, beverage industries and qual-
ity control professionals an invaluable tool. The test
requires minimal training, and just a few seconds, to
determine if a surface has been sufficiently cleaned to
minimize the risk for subsequent contamination.
Neogen’s mission has driven the
company to a remarkable record
of growth in its 26-year history.
As the world’s food and animal
producers continue their mission to
provide their customers with more
and better products, Neogen’s
mission to supply its customers
unique food and animal safety
solutions will matter even more
tomorrow than it does today.
D3 Detectable Needles™
Beef and pork producers use
Neogen’s uniquely strong and
detectable veterinary needles to
ensure that broken needles do
not reach the dinner table.
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 Corporation’s management 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.
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 Report on 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 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.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The discussion and analysis of the Company’s financial condition and results of operations are based on the consolidated financial
statements that have been prepared in accordance with accounting principles generally accepted in the united States. The preparation
of these financial statements requires that management make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, management evaluates
the estimates, including those related to receivable allowances, inventories and intangible assets. These estimates are based on historical
experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual
results may differ from these estimates under different assumptions or conditions.
The following critical accounting policies reflect management’s more significant judgments and estimates used in the preparation of the
consolidated financial statements.
Revenue Recognition
Revenue from sales of products is recognized at the time title of goods passes to the buyer and the buyer assumes the risks and rewards
of ownership, which is generally at the time of shipment. Where right of return exists, allowances are made at the time of sale to reflect
expected returns based on historical experience.
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 possible losses on accounts receivable is established based upon factors surrounding
the credit risk of specific customers, historical trends and other information, such as changes in overall changes in customer credit and
general credit conditions. Actual collections can differ from historical experience, and if economic or business conditions deteriorate
significantly, adjustments to these reserves could be required.
Inventory
A reserve for obsolescence is established based on an analysis of the inventory taking into account the current condition of the asset as
well as other known facts and future plans. The amount of reserve required to record inventory at lower of cost or market may be 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.
Valuation of Intangible Assets and Goodwill
Management assesses goodwill and other non-amortizable intangible assets for possible impairment on no less often than an annual
basis. This test was performed in the fourth quarter of fiscal 2008 and it was determined that no impairment exists. There was also no
impairment indicated for 2007 or 2006. In the event of changes in circumstances that indicate the carrying value of these assets may not
be recoverable, management will make an assessment at any time. Factors that could cause an impairment review to take place would
include:
• Significant under performance relative to expected historical or projected future operating results.
• Significant changes in the use of acquired assets or strategy of the Company.
• Significant negative industry or economic trends.
0
management’s discussion and analysis oF Financial condition
and Results oF opeRations
When management determines that the carrying value of definite-lived intangible assets may not be recoverable based on the existence
of one or more of the above indicators of impairment, the carrying value of the reporting unit’s net assets is compared to its fair value
using projected discounted cash flows of the reporting unit using a discount rate commensurate with the risk inherent in the Company’s
current business model. If the carrying amounts of these assets are greater than their fair value, such assets are reduced by the estimated
shortfall of fair value to recorded value. Changes to the discount rate or projected cash flows used in the analysis can have a significant
impact on the results of the impairment test.
Equity Compensation Plans
Financial Accounting Standards Board Statement No. 123(R), “Share-Based Payment”, (SFAS 123(R)) addresses the accounting for
share-based employee compensation and was adopted by the Company on June 1, 2006 utilizing the modified retrospective transition
method. Further information on the Company’s equity compensation plans, including inputs used to determine fair value of options is
disclosed in Note 6 to the consolidated financial statements. SFAS 123(R) requires that 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’s stock option plans was estimated on the date of grant using
the Black-Scholes option-pricing model using 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 is able to handle some 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 would 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 ones produced by the model applied and the inputs used.
RESULTS OF OPERATIONS
Executive Overview
On an overall basis, the 2008 fiscal year had a 19% revenue increase in comparison with the fiscal year ended May 31, 2007, as a result
of revenue increases in both of the Company’s operating segments. A portion of the revenue increase came from the Company’s August
2007 acquisition of Kane Enterprises and the December 2007 acquisition of Rivard Instruments. Revenue from continuing product sales
increased by 13%. This continuing product growth came as a result of the further implementation of sales and marketing plans and
continuing recognition of the ease of use and beneficial results from the Company’s products. Gross margins increased by 25 basis points
to 52% for the year and net income was up 33% to $12,098,000. These increases resulted principally due to sales gains translating
to greater absorption of fixed costs, changes in product mix, the current year effect of reorganizations completed in past years and
continued strong control of costs. Operating expenses decreased from 36% to 34% of revenues in fiscal 2008.
REVENUES
(dollars in thousands)
Food Safety:
Natural Toxins, Allergens & Drug Residues
Bacterial & General Sanitation
Dry Culture Media & Other
Animal Safety:
Life Sciences & Other
Vaccine
Rodenticides & Disinfectants
Veterinary Instruments & Other
Total Revenues
May 31, 2008
Increase/(Decrease)
May 31, 2007
Increase/(Decrease)
May 31, 2006
Twelve Months Ended
$ 29,036
16,866
11,762
$ 57,664
$
5,567
2,197
10,318
26,672
44,754
$ 102,418
15%
$ 25,238
52%
$ 16,633
24%
42%
13,623
8,304
35%
10,115
2%
8,174
22%
$ 47,165
35%
$ 34,922
13%
$
4,922
6%
$
4,622
(25%)
(6%)
2,938
10,926
32%
20,187
15%
38,973
6%
3%
4%
4%
2,768
10,651
19,470
37,511
19%
$ 86,138
19%
$ 72,433
management’s discussion and analysis oF Financial condition
and Results oF opeRations
Within the Food Safety Segment, Natural Toxins, Allergens and Drug Residue sales were up 15% in fiscal year 2008 in comparison with
sales in 2007 following an increase of 52% in the prior year. FY 2008 increases were broad based and resulted from deeper market
penetration in both uS and International markets. A significant portion of the increase in this category in 2007 resulted from sales of
products acquired in December 2005. Exclusive of the dairy antibiotic testing products, Natural Toxins and Allergens revenues increased
in 2007 by 16% in comparison with the 2006 fiscal year. Increases in diagnostic test kit sales to detect naturally occurring toxins such
as aflatoxin continue to be realized due to superior technologies and marketing by the Company.
Sales of Bacterial and General Sanitation products, including the sales of products contributed by the acquisition of Centrus International
in February 2006, increased by 24% in fiscal year 2008 in comparison with fiscal year 2007 and increased by 35% from fiscal year 2007
to 2006. Sales of the AccuPoint ATP general sanitation test continued to gain momentum domestically and internationally throughout
fiscal year 2008 and 2007 following a move from an outside supplier of ATP product to a more user friendly and stable internally produced
product with improved margins. The Centrus acquisition added 40% to sales increases of existing products in fiscal year 2008.
Dehydrated culture media and other sales increased by 42% in 2008 and by 2% in 2007. The 2008 increase came as a result of increased
market penetration both domestically and internationally. The Company’s focus on customer service and resolution of customer operating
problems has resulted in sales increases in each fiscal year. Acumedia experienced gains in the sales for scientific related uses and
experienced gains within the products for detection of E. coli in water.
Within the Animal Safety Segment, sales of life science and other products increased by 13% in fiscal year 2008 in comparison with
2007 and by 6% in 2007 in comparison with the 2006 fiscal year. Increases in 2008 were due to new direct international customers
and instrument placements for forensic customers. Sales of forensic drug tests, TMB Substrates and diagnostic research kits each
contributed to the sales growth as the Company continues to add business from the existing customer base as well as by adding new
customers.
Vaccine product sales decreased by 25% in 2008 in comparison with 2007 after having experienced a 6% increase in fiscal 2007 in
comparison with 2006. This fluctuation was due to the timing of purchases by key domestic and international distributors.
Sales of hacco rodenticides and hess and Clark disinfectants decreased 6% in fiscal year 2008 following an increase of 3% in fiscal
2007. Rodenticide revenue decreases in 2008 were due to cyclical downturns in the rodenticide market. In general, mild and dry weather
conditions in the western united States have led to fewer infestations in 2008 and 2007. Internationally, sales of rodenticide products
were up 24%.
Veterinary instruments and other sales increased in 2008 by 32% and increased by 4% in 2007. Fiscal year 2008 increases in Ideal
Instrument veterinary product sales and sales of products obtained in the Kane acquisition were offset by declines in revenues related
to equine supplements, certain wound care and other products. In 2007 increases were driven by 9% increase in sales of veterinary
instruments.
COST OF GOODS SOLD
(dollars in thousands)
Cost of Goods Sold
2008
Increase
2007
Increase
2006
$ 49,185
18%
$ 41,575
17%
$ 35,427
Cost of goods sold increased by 18% in 2008 and by 17% in 2007 in comparison with the prior year. This compares against a 19%
increase in revenues in 2008 and in 2007. Expressed as a percentage of revenues, cost of goods sold was 48%, 48% and 49% in 2008,
2007, and 2006, respectively. Overall margins in 2006 were affected negatively by costs related to relocation of operating facilities then
located in Baltimore to Lansing.
Food Safety gross margins were 63%, 60% and 59% in 2008, 2007 and 2006, respectively. Changes in margins between periods
relate primarily to changes in product mix. Margins improved from 2007 as the effects of efficiencies resulting from investments in
manufacturing facilities and the change to automate the manufacture the ATP product.
Animal Safety gross margins were 38%, 41% and 43% in 2008, 2007 and 2006, respectively. Changes in margins between periods
relate primarily to product mix. Gross margins in this segment were also adversely affected by a fall in rodenticide margins resulting from
cost increases that have not yet been fully reflected in sales prices.
management’s discussion and analysis oF Financial condition
and Results oF opeRations
OPERATING EXPENSES
(dollars in thousands)
Operating Expenses:
Sales and Marketing
General and Administrative
Research and Development
2008
Increase
2007
Increase
2006
$
20,648
12%
$
18,463
17%
$
15,799
10,927
3,639
17%
10%
9,301
3,295
25%
10%
7,414
2,988
Sales and marketing expense categories increased by 12% in 2008 and by 17% in 2007 as compared with the prior year. As a percentage
of sales, sales and marketing expense declined to 20% in 2008 but was unchanged in 2007 when compared to 2006. Management plans
to continue to expand the Company’s sales and marketing efforts both domestically and internationally in the future and currently expects
related expenses to remain between 20% and 22% expressed as a percentage of sales.
General and administrative expenses increased by 17% in 2008 and by 25% in 2007. These expenses have remained between 10%
and 11% over the past three fiscal years. Increases in 2008 resulted primarily from the acquisitions as well as due to increased levels of
operations. Increases in 2007 were related to increase levels of operations, litigation costs surrounding the Company’s detectable needle
patents and added amortization related to business acquired.
Research and development expenses increased by 10% in 2008 and 2007 in comparison with 2007 and 2006. As a percentage of
revenue these expenses were 4% in each of the years ended May 31, 2008, 2007 and 2006, respectively. Although some fluctuation in
research and development expenses will occur, management expects research and development expenses to approximate 4% to 6% of
revenues over time. These expenses approximate 8% to 10% of revenues from products and product lines that are supported by research
and development. Certain Company products require relatively less in research and development expenses.
OPERATING INCOME
(dollars in thousands)
Operating Income
2008
Increase
2007
Increase
2006
$
18,019
33%
$
13,504
25%
$
10,805
During fiscal year 2008 and 2007, the Company’s operating income increased by 33% and 25% as to compared to the respective prior
year. As a percentage of revenues it was 18%, 16% and 15% in 2008, 2007 and 2006, respectively. The Company has been successful
in improving its operating income in 2008 and 2007 from revenue growth from existing products and acquisitions and from control of
manufacturing and distribution costs.
OTHER INCOME (NET)
(dollars in thousands)
Other Income – Interest and Other (Net)
2008
479
$
Increase
29%
$
2007
371
Increase
706%
$
2006
46
Other income increased by 29% in comparison with 2007 and increased by 706% in 2007 in comparison with 2006. Interest revenue and
expense is a result of the Company’s cash versus debt position in the periods. Investment earnings were $442,000 in 2008, $373,000
in fiscal 2007 and $80,000 in 2006. In 2006, the Company recognized grant income of $250,000 related to a grant from governmental
units located in various states which offset interest expense on outstanding debt.
FEDERAL AND STATE INCOME TAXES
(dollars in thousands)
2008
Increase
2007
Increase
2006
Federal and State Income Taxes
$
6,400
35%
$
4,750
24%
$
3,822
Federal and state income tax rates used in the computation of income tax expense in the periods remained comparable to those in the
prior year. Expressed as a percentage of income before tax, such rates were 35% in 2008, 34% in 2007 and 35% in 2006.
management’s discussion and analysis oF Financial condition
and Results oF opeRations
NET INCOME AND NET INCOME PER SHARE
(dollars in thousands)
Net Income
Net Income Per Share – Basic
Net Income Per Share – Diluted
2008
12,098
.84
.81
$
$
$
Increase
33%
2007
9,125
.66
.64
$
$
$
Increase
30%
2006
7,029
.57
.55
$
$
$
Net income increased by 33% in 2008 and 30% in 2007 in comparison with the prior year. As a percentage of revenue, net income was
12%, 11% and 10% in 2008, 2007 and 2006, respectively. All of the above factors contributed to the increase in net income.
FUTURE OPERATING RESULTS
Neogen Corporation’s future operating results involve a number of risks and uncertainties. Actual events or results may differ materially
from those discussed in this report. Factors that could cause or contribute to such differences include, but are not limited to, the factors
discussed below as well as those discussed elsewhere in this report. Management’s ability to grow the business in the future depends
upon its ability to successfully implement various strategies, including:
• developing, manufacturing and marketing new products with new features and capabilities;
• expanding the Company’s markets by fostering increased use of Company products by customers;
• maintaining gross and net operating margins in changing cost environments;
• strengthening sales and marketing activities outside of the u.S.;
• developing and implementing new technology development strategies; and
•
identifying and completing acquisitions that enhance existing businesses or create new business areas.
FINANCIAL CONDITION AND LIQUIDITY
On May 31, 2008, the Company had $14,270,000 in cash and cash equivalents, working capital of $54,495,000 and stockholders’
equity of $111,248,000. In addition to cash and security balances, a bank line with unused borrowings of $10,000,000 was available if
necessary to support ongoing operations or to make acquisitions.
Cash and cash equivalents increased $846,000 during 2008. Cash provided from operations was $7,873,000 and stock option exercise
proceeds provided an additional $5,060,000 of cash. Additions to property and equipment and other non-current assets used cash of
$2,471,000 including expenditures on automated equipment used in the production of Food Safety diagnostic test kits.
Accounts receivable increased $4,470,000 or 30% when compared to May 31, 2007. This resulted from increased sales, as a result
of organic sales growth and acquisitions and some lengthening of average days outstanding for certain international accounts. These
accounts are being actively managed and no losses there on are currently expected. Days sales outstanding increased from 54 days at
May 31, 2007 to 58 days at May 31, 2008.
Inventory levels increased 45% or $8,683,000 in 2008 as compared to 2007. The change in inventory came from increases related
to higher levels of sales, inventory of acquired companies, to new product introductions in food safety, increases to help provide for
inventory cost stability and to aid in assurance of supplies in tightening markets and overall effects of inflation on inventory values. The
Company has maintained a strategy of shipping inventory to many of its customers on a same day basis. Sufficient levels of inventory are
maintained to assure that this strategy can be achieved.
The company has no construction in progress and facilities are generally believed to be adequate to support existing operations in the
short run.
CONTRACTUAL OBLIGATIONS
The Company has the following contractual obligations due by period:
Total
Less than
one year
1–3 years
3–5 years
More than
5 years
Long-Term Debt
Operating Leases
$
– $
– $
– $
– $
1,130,000
327,000
506,000
297,000
unconditional Purchase Obligations
14,327,000
14,327,000
–
–
$ 15,457,000 $ 14,654,000 $
506,000 $
297,000 $
–
–
–
–
management’s discussion and analysis oF Financial condition
and Results oF opeRations
Neogen has been profitable from operations for its last 61 quarters and has generated positive cash flow from operations during that
period. however, the Company’s current funds may not be sufficient to meet the Company’s cash requirements to commercialize products
currently under development or its plans to acquire additional technology and products that fit within the Company’s mission statement.
Accordingly, the Company may be required to or may choose to issue equity securities or enter into other financing arrangements for a
portion of the Company’s future capital needs.
The Company is subject to certain legal and other proceedings in the normal course of business that, in the opinion of management, will
not have a material effect on its results of operations or financial position.
NEW ACCOUNTING PRONOUNCEMENTS
See discussion of any New Accounting Pronouncements in Note 1 to Consolidated Financial Statements.
neogen coRpoRation and subsidiaRies: consolidated balance sHeets
May 31,
Assets
Current Assets
Cash and cash equivalents
Accounts receivable, less allowance of $500,000 at May 31, 2008 and 2007
Inventories
Deferred income taxes
Prepaid expenses and other current assets
Total Current Assets
Property and Equipment
Land and improvements
Buildings and improvements
Machinery and equipment
Furniture and fixtures
Less accumulated depreciation
Net Property and Equipment
Other Assets
Goodwill
Other non-amortizable intangible assets
Customer based intangibles, net of accumulated amortization of
$1,988,000 and $1,215,000 at May 31, 2008 and 2007
Other non-current assets, net of accumulated amortization of
$1,373,000 and $1,290,000 at May 31, 2008 and 2007
Total Other Assets
Liabilities and Stockholders’ Equity
Current Liabilities
Accounts payable
Accruals
Compensation and benefits
Federal income taxes
Other
Total Current Liabilities
Deferred Income Taxes
Other Long-Term Liabilities
Total Liabilities
Stockholders’ Equity
Preferred stock, $1.00 par value - shares authorized 100,000; none issued and outstanding
Common stock, $0.16 par value - shares authorized 20,000,000; 14,518,277
and 14,020,806 shares issued and outstanding
Additional paid-in capital
Accumulated other comprehensive income
Retained earnings
Total Stockholders’ Equity
2008
2007
$
14,270,000
19,384,000
27,799,000
1,225,000
2,953,000
65,631,000
1,146,000
10,735,000
15,295,000
818,000
27,994,000
(11,105,000)
$ 13,424,000
14,914,000
19,116,000
787,000
2,857,000
51,098,000
1,057,000
10,196,000
14,000,000
745,000
25,998,000
(9,596,000)
16,889,000
16,402,000
30,617,000
3,435,000
24,448,000
3,181,000
6,139,000
6,182,000
3,646,000
43,837,000
3,973,000
37,784,000
$ 126,357,000
$ 105,284,000
$
6,505,000
$
4,507,000
2,025,000
302,000
2,304,000
11,136,000
2,329,000
1,644,000
15,109,000
1,737,000
1,377,000
2,417,000
10,038,000
1,441,000
1,860,000
13,339,000
–
–
2,323,000
58,789,000
421,000
49,715,000
2,243,000
51,699,000
386,000
37,617,000
111,248,000
91,945,000
$ 126,357,000
$ 105,284,000
See accompanying notes to consolidated financial statements.
neogen coRpoRation and subsidiaRies: consolidated statements
oF income
Year Ended May 31
Net Sales
Cost of Goods Sold
Gross Margin
Operating Expenses
Sales and marketing
General and administrative
Research and development
Operating Income
Other Income (Expense)
Interest income
Interest expense
Grant income and other
Income Before Income Taxes
Income Taxes
Net Income
Net Income Per Share
Basic
Diluted
2008
2007
2006
$ 102,418,000
49,185,000
$ 86,138,000
41,575,000
$ 72,433,000
35,427,000
53,233,000
44,563,000
37,006,000
20,648,000
10,927,000
3,639,000
18,463,000
9,301,000
3,295,000
15,799,000
7,414,000
2,988,000
35,214,000
31,059,000
26,201,000
18,019,000
13,504,000
10,805,000
442,000
–
37,000
479,000
373,000
(15,000)
13,000
371,000
80,000
(283,000)
249,000
46,000
18,498,000
6,400,000
13,875,000
4,750,000
10,851,000
3,822,000
$ 12,098,000
$
9,125,000
$ 7,029,000
$
$
0.84
0.81
$
$
0.66
0.64
$
$
0.57
0.55
See accompanying notes to consolidated financial statements.
neogen coRpoRation and subsidiaRies: consolidated statements
oF stockHoldeRs’ equity
Common Stock
Shares
Amount
Additional
Paid-in Capital
Other(1)
Retained
Earnings
Total
Stockholders’
Equity
Balance, June 1, 2005
12,220,517
$ 1,955,000
$ 33,069,000
$
136,000
$ 21,463,000
$ 56,623,000
Exercise of options and
warrants, net of share based
compensation, including
$328,000 income tax benefit
Issuance of shares under Employee
Stock Purchase Plan
Repurchase of common stock
Comprehensive income:
Net income for 2006
Foreign currency translation
adjustments
Total comprehensive income
232,179
38,000
1,664,000
16,297
(3,057)
3,000
(2,000)
147,000
(27,000)
1,702,000
150,000
(29,000)
7,029,000
7,029,000
(51,000)
(51,000)
6,978,000
Balance, May 31, 2006
12,465,936
1,994,000
34,853,000
85,000
28,492,000
65,424,000
Issuance of Common Stock
975,000
156,000
12,838,000
12,994,000
Exercise of options and
warrants, net of share based
compensation, including
$460,000 income tax benefit
Issuance of shares under Employee
Stock Purchase Plan
Comprehensive income:
Net income for 2007
Foreign currency translation
adjustments
Total comprehensive income
565,586
90,000
3,825,000
14,284
3,000
183,000
3,915,000
186,000
9,125,000
9,125,000
301,000
301,000
9,426,000
Balance, May 31, 2007
14,020,806
2,243,000
51,699,000
386,000
37,617,000
91,945,000
Exercise of options and
warrants, net of share based
compensation, including
$747,000 income tax benefit
Issuance of shares under Employee
Stock Purchase Plan
Comprehensive income:
Net income for 2008
Foreign currency translation
adjustments
Total comprehensive income
482,960
78,000
6,865,000
14,511
2,000
225,000
6,943,000
227,000
12,098,000
12,098,000
35,000
35,000
12,133,000
Balance, May 31, 2008
14,518,277
$ 2,323,000
$ 58,789,000
$
421,000
$ 49,715,000
$ 111,248,000
See accompanying notes to consolidated financial statements.
(1) Other represents accumulated other comprehensive income.
8
neogen coRpoRation and subsidiaRies: consolidated statements
oF casH FloWs
Year Ended May 31
Cash Flows From Operating Activities
Net income
Adjustments to reconcile net income to net cash provided from
2008
2007
2006
$ 12,098,000
$
9,125,000
$
7,029,000
operating activities:
Depreciation and amortization
Deferred income taxes
Share based compensation
Excess income tax benefit from the exercise of stock options
Other
Changes in operating assets and liabilities, net of business
acquisitions:
Accounts receivable
Inventories
Prepaid expenses and other current assets
Accounts payable
Accruals and other changes
Net Cash From Operating Activities
Cash Flows used In Investing Activities
3,516,000
450,000
1,892,000
(747,000)
253,000
(3,869,000)
(6,364,000)
(122,000)
1,666,000
(900,000)
7,873,000
2,840,000
813,000
1,293,000
(460,000)
367,000
(1,798,000)
(1,490,000)
(553,000)
1,675,000
(1,654,000)
2,417,000
485,000
1,240,000
(328,000)
–
(1,346,000)
(671,000)
(930,000)
90,000
3,573,000
10,158,000
11,559,000
Purchases of property, equipment and other noncurrent assets
(2,471,000)
(4,704,000)
(2,692,000)
Business and product line acquisitions, net of cash acquired
Net Cash used In Investing Activities
(10,147,000)
(12,618,000)
–
(4,704,000)
(20,658,000)
(23,350,000)
Cash Flows From (used In) Financing Activities
Net proceeds from issuance of common stock
Exercise of options
Repurchase of common stock
Proceeds from long-term debt
Payments on long-term debt
Excess income tax benefit from the exercise of stock options
Increase (Decrease) in other long-term liabilities
Net Cash from Financing Activities
Net Increase (Decrease) In Cash
Cash and cash equivalents at beginning of year
–
5,060,000
12,994,000
2,441,000
–
–
–
747,000
(216,000)
5,591,000
–
–
(9,955,000)
460,000
71,000
–
1,524,000
(29,000)
14,640,000
(4,685,000)
328,000
–
6,011,000
11,778,000
846,000
11,465,000
13,424,000
1,959,000
(13,000)
1,972,000
Cash and cash equivalents at end of year
$ 14,270,000
$ 13,424,000
$
1,959,000
Supplemental Cash Flow Information
Income taxes paid, net of refunds
Interest paid
$
$
7,475,000
–
$
$
3,295,000
15,000
$
$
1,194,000
283,000
See accompanying notes to consolidated financial statements.
neogen coRpoRation and subsidiaRies: notes to consolidated
Financial statements
1. SUMMARY OF ACCOUNTING POLICIES
Nature of Operations
Neogen Corporation develops, manufactures, and sells a diverse line of products dedicated to food safety testing and animal health
applications.
Basis of Consolidation
The consolidated financial statements include the accounts of Neogen Corporation and its subsidiaries all of which are wholly owned
(collectively, the Company).
All intercompany accounts and transactions have been eliminated in consolidation.
Equity accounts have been adjusted to reflect 3-for-2 stock split as of the August 17, 2007 record date.
Use of Estimates
The preparation of financial statements in conformity with u.S. generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual
results could differ from these estimates.
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 stockholders’ equity. Accumulated other
comprehensive income consists solely of foreign currency translation adjustments.
Accounts Receivable and Concentrations of Credit Risk
Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of accounts receivable.
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 possible losses on 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. Only one customer accounted for more than 10% of accounts receivable at May 31, 2008 and 2007. As May 31, 2008 and
2007 the balance due from the customer was $2,536,000 or 12.8% and $1,312,000 and 8.5% respectively of the total of all outstanding
accounts receivables.
Fair Value of Financial Instruments
The carrying amounts of the Company’s financial instruments, including accounts receivable, accounts payable, and accrued expenses
approximate fair value based on either their short maturity or current terms for similar instruments.
Cash and Cash Equivalents
Cash and cash equivalents are used to support current operations and may be invested to take advantage of short-term investment
opportunities. The Company invests in only high quality, short-term investments with original maturity dates of less than 90 days. These
securities are considered to be available-for-sale marketable securities. however, there were no significant differences between cost and
estimated fair market value at May 31, 2008 and 2007. Additionally, since investments are short-term and carried to maturity, there were
no realized gains and losses in 2008, 2007 or 2006. Cash equivalents included short term high grade commercial paper and certificates
of deposit and amounted to $12,185,000 and $11,408,000 at May 31, 2008 and 2007, respectively.
Inventories
Inventories are stated at the lower of cost, determined on the first-in, first-out method, or market. The components of inventories were
as follows:
Raw materials
Work-in-process
Finished goods
0
2008
2007
$
10,278,000
$
7,884,000
598,000
16,923,000
390,000
10,842,000
$
27,799,000
$
19,116,000
neogen coRpoRation and subsidiaRies: notes to consolidated
Financial statements
Property and Equipment
Property and equipment is stated at cost. Expenditures for major improvements are capitalized while repairs and maintenance are
charged to expense. Depreciation is provided on the straight-line method over the estimated useful lives of the respective assets, which
are generally seven to thirty-nine years for buildings and improvements and three to five years for furniture, machinery and equipment.
Depreciation expense was $2,360,000, $1,901,000 and $1,779,000 in 2008, 2007 and 2006, respectively.
Goodwill and Intangible Assets
Goodwill represents the excess of purchase price over fair value of tangible net assets of acquired businesses after amounts allocated
to other intangible assets. Other intangible assets include customer relationships’ trademarks, licenses, trade names and patents.
Amortizable intangible assets are amortized on either an accelerated or a straight-line basis over five to twenty years. The Company
reviews the carrying amounts of goodwill and other non-amortizable intangible assets annually to determine if such assets may be
impaired. If the carrying amounts of these assets are deemed to be less than fair value based upon a discounted cash flow analysis, such
assets are reduced to their estimated fair value.
Long-lived Assets
Management reviews the carrying values of its long-lived assets for possible impairment whenever events or changes in business
conditions indicate that the carrying amount of the assets may not be recoverable. Impairment is first evaluated by comparing the carrying
value of the long-lived assets to undiscounted future cash flows over the remaining useful life of the assets. If the undiscounted cash
flows are less than the carrying value of the assets, the fair value of the long-lived assets is determined, and if lower than the carrying
value, impairment is recognized.
Reclassification
Certain amounts in the 2007 and 2006 financial statements have been reclassified to conform to the 2008 presentation.
Stock Options
At May 31, 2008, the Company had stock option plans, which are described more fully in Note 4. Effective June 1, 2006, the Company
adopted the provisions of Financial Accounting Standards Board (FASB) Statement No. 123 (revised), Share-Based Payment.
The weighted-average fair value per share of options granted during 2008, 2007 and 2006, estimated on the date of grant using the
Black-Scholes option pricing model, was $6.91, $5.69 and $4.25, respectively. The fair value of options granted was estimated using the
following weighted-average assumptions:
Risk-free interest rate
Expected dividend yield
Expected stock price volatility
Expected option life
2008
4.6%
0%
34.2%
4.0 years
2007
4.7%
0%
46.5%
4.0 years
2006
4.9%
0%
44.5%
4.0 years
The risk-free interest rate for periods within the expected life of options granted is based on the united States Treasury yield curve in
effect at the time of grant. Expected stock price volatility is based on historical volatility of the Company’s stock. The expected option life,
representing the period of time that options granted are expected to be outstanding, is based on historical option exercise and employee
termination data. The Company recognizes the cost of stock options using the straight-line method over their vesting periods.
Revenue Recognition
Revenue from sales of products is recognized at the time title of goods passes to the buyer and the buyer assumes the risks and rewards
of ownership, which generally is at the time of shipment. Where right of return exists, allowances are made at the time of sale to reflect
expected returns based on historical experience.
Shipping and Handling Costs
Shipping and handling costs that are charged to and reimbursed by the customer are recognized as sales, while the related expenses
incurred by the Company are recorded in sales and marketing expense and totaled $3,888,000, $3,426,000 and $3,223,000 in 2008,
2007 and 2006, respectively.
neogen coRpoRation and subsidiaRies: notes to consolidated
Financial statements
Research and Development
Research and development expenditures are charged to operations as incurred and amounted to approximately $3,600,000, $3,300,000
and $3,000,000 in 2008, 2007 and 2006, respectively.
Income Taxes
The Company accounts for income taxes using the 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 are measured using the
enacted tax rates in effect for the years in which the differences are expected to reverse. Deferred income tax expense represents the
change in net deferred income tax assets and liabilities during the year.
No provision has been made for united States federal income taxes that may result from future remittances of the undistributed earnings
of Neogen Europe, Ltd. because it is expected that such earnings will be reinvested overseas indefinitely.
Advertising Costs
Advertising costs are expensed as incurred and totaled $424,000, $393,000 and $364,000 in 2008, 2007, 2006, respectively.
Net Income Per Share
Basic net income per share is based on the weighted average number of common shares outstanding during each year. Diluted earnings
per share is based on the weighted average number of common shares and dilutive potential common shares outstanding. The Company’s
dilutive potential common shares outstanding during the years result entirely from dilutive stock options and warrants. The following table
presents the net income per share calculations:
Year ended May 31,
Numerator for basic and diluted net income per share
Net income
Denominator
2008
2007
2006
$ 12,098,000 $
9,125,000 $
7,029,000
Denominator for basic net income per share weighted
14,474,000
13,791,000
12,370,000
average shares
Effect of dilutive stock options and warrants
Denominator for diluted net income per share
Net income per share
Basic
Diluted
525,000
370,500
315,000
14,999,000
14,161,500
12,685,000
$
$
.84 $
.81 $
.66 $
.64 $
.57
.55
In 2006, approximately 150,000 options were excluded from the computations of net income per share as the result of option prices
exceeding the average market price of the common shares. No options were excluded in 2007 or 2008.
New Accounting Pronouncements
In December 2007, SFAS No. 141 “Business Combinations (revised 2007)” (SFAS 141(R)) was issued. The revision is intended to
converge rulemaking and reporting under u.S. Generally Accepted Accounting Principles (GAAP) with international accounting rules.
SFAS No. 160 “Noncontrolling Interests in Consolidated Financial Statements” an amendment of ARB No. 51 (SFAS 160) was also issued.
SFAS 141(R) establishes principles and requirements for how an acquirer in a business combination recognizes and measures in its
financial statements the identifiable assets acquired, the liabilities assumed, and any controlling interest; recognizes and measures the
goodwill acquired in the business combination or a gain from a bargain purchase; and determines what information to disclose to enable
users of the financial statements to evaluate the nature and financial effects of the business combination.
SFAS 160 requires all entities to report noncontrolling (minority) interests in subsidiaries as equity in the consolidated financial statements.
Its intention is to eliminate the diversity in practice regarding the accounting for transactions between and entity and noncontrolling
interests. The Company is required to adopt the provisions of both SFAS 141 (R) and SFAS 160 simultaneously at the beginning of fiscal
2010. Earlier adoption is prohibited. The Company is currently evaluating the provisions of these pronouncements.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (SFAS 157). This new standard establishes a framework
for measuring the fair value of assets and liabilities. This framework is intended to provide increased consistency in how fair value
determinations are made under various existing accounting standards which permit, or in some cases require, estimates of fair value
market value. SFAS 157 also expands financial statement disclosure requirements about a company’s use of fair value measurements,
neogen coRpoRation and subsidiaRies: notes to consolidated
Financial statements
including the effect of such measures on earnings. The Company is required to adopt this new accounting guidance at the beginning of
fiscal 2009. In November 2007, the FASB deferred the effective date until fiscal 2010 for nonfinancial assets and liabilities except those
items recognized or disclosed at fair value on an annual or more frequently recurring basis. While the Company is currently evaluating the
provisions of SFAS 157, the adoption is not expected to have a material impact on its consolidated financial statements.
In 2008 the FASB issued Statement No. 161, Disclosures about Derivative Instruments and hedging Activities. This Statement requires
enhanced disclosures about derivative instruments and hedging activities to enable investors to better understand a company’s use
of derivative instruments and their effect on a company’s financial position, financial performance, and cash flows. This Statement is
effective for the Company beginning on June 1, 2009. The Company is currently evaluating its impact.
GOODWILL AND OTHER INTANGIBLE ASSETS
The Company follows the provisions of SFAS No. 142, Goodwill and Other Intangible Assets. SFAS 142 prohibits the amortization of
goodwill and intangible assets with indefinite lives and requires that the Company evaluate these intangibles for impairment on an
annual basis. Management has completed the required annual impairment tests of goodwill and intangible assets with indefinite lives as
prescribed by SFAS 142 as of the first day of the fourth quarter of 2008 and determined that recorded amounts were not impaired and
that no write-down was necessary.
The following table summarizes goodwill by business segment:
Balance, June 1, 2006
Goodwill acquisition valuation adjustments
Balance, May 31, 2007
Goodwill acquired
Balance, May 31, 2008
Food Safety
Animal Safety
$
16,886,000
$
12,051,000
(4,489,000)
12,397,000
4,000
–
12,051,000
6,165,000
$
12,401,000
$
18,216,000
Non-amortizable intangible assets include licenses of $370,000, trademarks of $1,841,000, and customer relationship intangibles of
$1,224,000 at May 31, 2008.
Other amortizable intangible assets consisted of the following and are included in customer based intangible and other noncurrent assets
within the consolidated balance sheets:
Licenses
Covenants not to compete
Patents
Customer relationship intangibles
Balance, May 31, 2007
Licenses
Covenants not to compete
Patents
Customer relationship intangibles
Balance, May 31, 2008
Gross Carrying Amount
Less Accumulated
Amortization
Net Carrying Amount
$
1,117,000
$
482,000
$
635,000
260,000
2,622,000
7,397,000
249,000
559,000
1,215,000
11,000
2,063,000
6,182,000
$ 11,396,000
$
2,505,000
$
8,891,000
1,101,000
95,000
3,007,000
8,127,000
525,000
63,000
785,000
1,988,000
576,000
32,000
2,222,000
6,139,000
$ 12,330,000
$
3,361,000
$
8,969,000
Amortization expense for other intangibles totaled $1,156,000, $939,000 and $638,000 in 2008, 2007 and 2006, respectively. The
estimated amortization expense for each of the five succeeding years is as follows: $1,219,000 in 2009, $ 1,136,000 in 2010, $1,080,000
in 2011, $1,028,000 in 2012, and $976,000 in 2013. The other amortizable intangible assets useful lives are 5 to 20 years for licenses,
5 years for covenants not to compete, 5 to 17 years for patents, and 12 to 20 years for customer relationship intangibles.
neogen coRpoRation and subsidiaRies: notes to consolidated
Financial statements
2. BUSINESS AND PRODUCT LINE ACQUISITIONS
The Consolidated Statements of Income reflect the results of operations for business and product line acquisitions since the respective
dates of purchase. All are accounted for using the purchase method.
On August 24, 2007, Neogen Corporation purchased the operating assets of Brandon, South Dakota based Kane Enterprises, Inc.
Consideration for the purchase, including additional net current assets of $800,000 and subject to certain post closing adjustments,
consisted of $6,600,000 of cash. The allocation of the purchase price consisted of $600,000 in accounts receivables, $1,775,000
in inventory, $55,000 in fixed assets, $4,350,000 in goodwill and other intangible assets and $180,000 in assumed liabilities. The
acquisition has been integrated into the Lexington, Kentucky operations and is a strong synergistic fit with the Company’s Animal Safety
product line.
On December 3, 2007, Neogen Corporation purchased the operating assets of Winnipeg, Manitoba based Rivard Instruments Inc., a
manufacturer of veterinary instruments. Consideration for the purchase was cash of $3,469,000. The preliminary allocation of the
purchase price consisted of $468,000 in inventory, $5,000 in fixed assets, $2,996,000 in goodwill and other intangible assets. The
acquisition has been integrated into the Lexington, Kentucky operations and is a strong synergistic fit with the Company’s Animal Safety
product line.
On February 17, 2006, Neogen Corporation purchased the common stock of Centrus International, Inc., a wholly owned subsidiary of
Eastman Chemical Company, of Kingsport, Tennessee. Consideration consisted of $3,300,000 in cash. The allocation of the purchase
price included accounts receivable of $280,000, inventory of $270,000, fixed assets of $180,000, $860,000 of goodwill and $1,740,000
of other intangibles. Other intangibles include $1,640,000 of amortizable assets (customer based intangible and acquired patents) that
have been assigned thirteen to fifteen year lives and deferred tax assets of $300,000 related to net operating loss carry forwards and
assumed liabilities of $330,000. Centrus produces Soleris, a user-friendly, rapid optical testing system that accurately detects microbial
contamination and represents a synergistic fit with Neogen’s Food Safety solutions. Centrus unaudited sales in the 12 month period ended
December 31, 2005 (prior to the acquisition) were $2,800,000. Intangible assets in this transaction are not expected to be deducted
for tax purposes as amortized. During fiscal 2007 the Company completed the allocation of the purchase price to the individual assets
acquired and liabilities assumed, of Centrus International, Inc. which resulted in an increase of $104,000 and $1,641,000 to other
nonamortizable assets, respectively on the consolidated balance sheet and a decrease of $1,720,000 to goodwill compared to amounts
reported as of May 31, 2006. The goodwill, along with other assets and liabilities of Centrus International, Inc., are included in the
Company’s Food Safety segment.
On December 19, 2005, Neogen Corporation purchased certain assets of the dairy antibiotics business of uCB FD Bioproducts, a
division of Belgium based uCB Group. Consideration for the sale, including transaction costs of $500,000, was $17,100,000 in cash, and
post closing adjustments. The allocation of the purchase price, included $1,000,000 of accounts receivable, $2,900,000 of inventory,
$1,200,000 of fixed assets, $4,600,000 of goodwill and $7,400,000 of other intangibles. Other intangibles include $6,400,000 of
amortizable assets (distributor agreement and acquired patents) that have been assigned nine to eleven year lives. The dairy antibiotic
business is believed to be a strong synergistic fit into Neogen’s overall strategy of providing food and animal safety solutions. Intangible
assets in this transaction are expected to be deducted for tax purposes as amortized. During the third quarter of fiscal 2007 the Company
completed the allocation of the purchase price to the individual assets acquired and liabilities assumed, of uCB FD Bioproducts, which
resulted in an increase of $1,000,000 and $1,950,000 to other nonamortizable assets and other non-current assets, respectively on the
consolidated balance sheet and a decrease of $2,786,000 to goodwill compared to amounts reported as of May 31, 2006. The goodwill,
along with the other assets and liabilities of uCB FD Bioproducts, are included in the Company’s Food Safety segment.
3. LONG-TERM DEBT
The Company has a financing agreement with a bank (nothing drawn at May 31, 2008) providing for an unsecured revolving line of credit
of $10,000,000 that matures on December 1, 2009. Interest is at LIBOR plus 95 basis points (rate under the terms of the agreement was
3.46% at May 31, 2008), or Prime less 100 basis points (4.0% at May 31, 2008) at the Company’s option. Financial covenants include
maintaining specified funded debt to EBITDA and debt service ratios as well as specified levels of tangible net worth, all of which are
complied with at May 31, 2008.
neogen coRpoRation and subsidiaRies: notes to consolidated
Financial statements
4. 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 at an exercise price of not less than the fair market value of the stock on the date of grant under the terms of the Company’s
stock option plans. The number of shares initially authorized for issuance under the plans is 5,074,219. Remaining shares available for
grant under stock option plans were 983,000, 599,000 and 804,000 at May 31, 2008, 2007 and 2006, respectively. Options vest over
periods ranging from three to five years and option terms are generally five years.
The following is a summary of stock option plan activity:
Outstanding at June 1, 2005 (683,598 exercisable)
Granted
Exercised
Forfeited
Outstanding at May 31, 2006 (867,947 exercisable)
Granted
Exercised
Forfeited
Outstanding at May 31, 2007 (688,011 exercisable)
Granted
Exercised
Forfeited
Outstanding at May 31, 2008 (517,983 exercisable)
Shares
1,828,679
303,375
(258,855)
(31,041)
1,842,158
322,500
(636,018)
(14,939)
1,513,701
389,756
(473,189)
(20,791)
1,409,477
Weighted-Average
Exercise Price
$ 8.21
12.27
4.77
11.15
9.35
13.53
7.28
9.43
11.10
20.54
9.02
14.03
$ 14.36
The following is a summary of stock options outstanding at May 31, 2008:
Options Outstanding
Options Exercisable
Range of
Exercise Price
$
2.51–5.01
5.02–7.52
10.03–12.53
12.54–15.04
20.06–22.56
25.07
Number
11,020
26,673
573,176
412,602
369,006
17,000
Average Remaining
Contractual Life
(Years)
Weighted Average
Exercise Price
Number
Weighted Average
Exercise Price
1.84
$
3.79
3.17
4.01
4.44
9.37
3.55
6.95
11.34
13.56
20.33
25.07
14.36
11,020
$
26,673
336,491
143,799
–
–
3.55
6.95
11.00
13.59
–
–
517,983
$
11.35
$ 2.51–25.07
1,409,477
3.83
$
The weighted-average exercise price of shares that were exercisable at May 31, 2007 and 2006 was $9.72 and $7.88, respectively.
The aggregate intrinsic value of options outstanding and options exercisable was $7,900,000 and $5,500,000 at May 31, 2006,
$10,826,000 and $5,869,000 at May 31, 2007 and $16,879,000 and $7,762,000 at May 31, 2008. The aggregate intrinsic value of
options exercised during the year was $1,987,000 in FY 2006 and $6,547,000 in FY 2007 and $6,783,000 in FY 2008. Remaining
compensation cost for non-vested shares was $2,274,000 at May 31, 2008.
neogen coRpoRation and subsidiaRies: notes to consolidated
Financial statements
The following table summarizes warrant activity with non-employees that are expensed at fair value upon grant. All warrants are
exercisable for common stock of the Company and expire through 2012.
Outstanding warrants at June 1, 2005
Warrants exercised during the year
Warrants granted during the year
Warrants forfeited during the year
Outstanding warrants at May 31, 2006
Warrants exercised during the year
Warrants granted during the year
Warrants forfeited during the year
Outstanding warrants at May 31, 2007
Warrants exercised during the year
Warrants granted during the year
Warrants forfeited during the year
Outstanding warrants at May 31, 2008
Shares
72,938
(5,625)
16,500
(1,875)
81,938
(9,375)
12,000
(3,750)
80,813
(26,813)
–
–
54,000
Weighted-Average
Exercise Price
$ 8.77
3.67
11.74
3.67
9.69
6.99
13.53
9.43
10.58
8.14
–
–
$ 11.79
Common stock totaling 100,000 shares is reserved for issuance under the terms of the 2002 Employee Stock Purchase Plan. The plan
gives eligible employees the option to purchase common stock (total purchases in any year are limited to 10% of compensations) at 95%
of the lower of the market value of the stock at the beginning or end of each participation period. Shares purchased by employees were
14,511, 9,523 and 10,865 in 2008, 2007 and 2006, respectively.
5. INCOME TAXES
The provision for income taxes consisted of the following:
Year ended May 31,
Current:
u.S. Federal and foreign
State
Deferred
2008
2007
2006
$ 5,600,000
350,000
450,000
$
3,989,000 $
(52,000)
813,000
3,217,000
296,000
309,000
$ 6,400,000
$
4,750,000
$
3,822,000
Deferred income taxes reflect the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred income tax
liabilities and assets are as follows:
May 31,
Deferred income tax liabilities
Depreciation and amortization
Intangible assets and other
Deferred income tax assets
Inventories and accounts receivable
Acquired net operating loss carry forward
2008
2007
$
(3,066,000)
927,000
(2,139,000)
735,000
300,000
1,035,000
$
(2,339,000)
526,000
(1,813,000)
859,000
300,000
1,159,000
Net deferred income tax liabilities
$
(1,104,000)
$
(654,000)
neogen coRpoRation and subsidiaRies: notes to consolidated
Financial statements
Net operating loss carry forward resulting in a deferred tax asset of $300,000 will expire in 2019.
The reconciliation of income taxes computed at the u.S. federal statutory tax rate to income tax expense is as follows:
Year ended May 31,
2008
2007
2006
Tax at u.S. statutory rates
Tax credits and other
Provisions for state income taxes, net of federal benefit
$ 6,374,000
(194,000)
220,000
$
4,756,000
28,000
(34,000)
$ 3,698,000
(68,000)
192,000
$ 6,400,000
$
4,750,000
$ 3,822,000
The Company adopted the provisions of FASB Interpretation No. 48, Accounting for uncertainty in Income Taxes (“FIN 48”), on
June 1, 2007. The adoption of FIN 48 had no significant affect on the financial statements. The Company has no significant accrual
for unrecognized tax benefits at May 31, 2008. Should the accrual of any interest of penalties relative to unrecognized tax benefits be
necessary, such accruals will be reflected within income tax accounts. For the majority of tax jurisdictions, the Company is no longer
subject to u.S. federal, state and local or non u.S. income tax examinations by tax authorities for fiscal years before 2006.
6. 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. Remaining anticipated cost of remediation
through 2024 have been discounted at 4% and recorded within other long term liabilities in the consolidated balance sheet at its net
present value of $858,000 at May 31, 2008. Estimated payments over the succeeding five years are $90,000 annually, with $1,080,000
due thereafter.
The Company has agreements with unrelated third parties that provide for the payment of royalties on the sale of certain products. Royalty
expense under the terms of these agreements for was $1,231,000, $1,124,000 and $911,000 for 2008, 2007 and 2006, respectively.
The Company leases office and manufacturing facilities under noncancelable operating leases. Rent expense for 2008, 2007 and 2006
was $326,000, $346,000 and $239,000, respectively. Future minimum rental payments for these leases over the remaining terms are
as follows: 2009 - $327,000; 2010 - $282,000; 2011 - $224,000; 2012 - $172,000 and 2013 - $125,000.
The Company is subject to certain legal and other proceedings in the normal course of business that, in the opinion of management, will
not have a material effect on its future results of operations or financial position.
7. DEFINED CONTRIBUTION BENEFIT PLAN
The Company maintains a defined contribution 401(k) benefit plan covering substantially all employees. Employees are permitted to defer
up to 15% of compensation, with the Company matching 100% of the first 3% deferred and 50% of the next 2% deferred. The Company’s
expense under this plan was $476,000, $409,000 and $348,000 in 2008, 2007 and 2006, respectively.
8. SEGMENT INFORMATION
The Company has two reportable segments: Food Safety and Animal Safety. The Food Safety segment produces and markets diagnostic
test kits 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 production and marketing of products dedicated
to animal health, including a complete line of consumable products marketed to veterinarians and animal health product distributors.
Additionally, the Animal Safety segment produces and markets a line of rodenticides to assist in the control of rats and mice in and around
agricultural, food production and other facilities.
These segments are managed separately because they represent strategic business units that offer different products and require different
marketing strategies. The Company evaluates performance based on total sales and operating income of the respective segments. The
accounting policies of the segments are the same as those described in Note 1.
neogen coRpoRation and subsidiaRies: notes to consolidated
Financial statements
Segment information is as follows:
2008
Food Safety
Animal Safety
Corporate and
Eliminations (1)
Total
Net sales to external customers
$
57,664,000
$
44,754,000
$
–
$ 102,418,000
Operating income
Depreciation and amortization
14,245,000
2,495,000
4,972,000
1,021,000
Interest income
Interest expense
Income taxes
Total assets
Expenditures for long-lived assets
2007
–
–
5,060,000
60,951,000
1,850,000
–
–
1,766,000
52,236,000
621,000
(1,198,000)
18,019,000
–
442,000
–
3,516,000
442,000
–
(426,000)
6,400,000
13,170,000
126,357,000
–
2,471,000
Net sales to external customers
$
47,165,000
$
38,973,000
$
–
$
86,138,000
Operating income
Depreciation and amortization
9,619,000
1,952,000
4,845,000
888,000
Interest income
Interest expense
Income taxes
Total assets
Expenditures for long-lived assets
2006
–
–
3,383,000
55,426,000
3,692,000
–
–
1,704,000
39,104,000
1,012,000
(960,000)
–
373,000
15,000
(337,000)
13,504,000
2,840,000
373,000
15,000
4,750,000
10,754,000
105,284,000
–
4,704,000
Net sales to external customers
$
34,922,000
$
37,511,000
$
–
$
72,433,000
Operating income
Depreciation and amortization
6,753,000
1,593,000
6,083,000
824,000
Interest income
Interest expense
Income taxes
Total assets
Expenditures for long-lived assets
–
–
2,369,000
52,869,000
2,049,000
–
–
2,134,000
35,970,000
643,000
(2,031,000)
–
80,000
283,000
(681,000)
(549,000)
–
10,805,000
2,417,000
80,000
283,000
3,822,000
88,290,000
2,692,000
(1) Includes corporate assets, consisting of marketable securities, and overhead expenses not allocated to specific business segments. Also includes the elimination of
intersegment transactions and minority interests.
Sales to customers outside the united States amounted to $39,333,000 or 38% of consolidated sales in 2008 and $32,727,000 or 38%
of consolidated sales in 2007, $20,750,000 or 29% in 2006 and were derived primarily in the geographic areas of South and Central
America, Canada, Asia and Europe. Revenues from one Food Safety distributor customer were 11.9% in 2008 and 11.8% in 2007 of total
revenues. No other customer represented revenues in excess of 10% of consolidated net sales.
9. GOVERNMENT GRANT
The Company received a $500,000 grant from Ingham County in fiscal 2005 that was restricted for the purchase of machinery and
equipment at its location in Lansing, Michigan. The grant was repayable in cash plus interest to the extent not offset by allowances for
new employees hired in Lansing over a period of 6 years. Grant monies received from the County for eligible purchases were initially
recognized as a long-term liability. The liability is reduced and other income was recognized for the allowances granted as eligible new
employees were hired. The Company recognized other income of $250,000 in 2006 related to the grant. As the grant was completed, no
income was recognized in 2008 or in 2007.
8
neogen coRpoRation and subsidiaRies: notes to consolidated
Financial statements
10. STOCk REPURCHASE
The Company’s Board of Directors has authorized the purchase of up to 1,250,000 shares of the Company’s common stock. As of
May 31, 2006, 892,885 cumulative shares had been purchased in negotiated and open market transactions for a total price, including
commissions, of approximately $5,226,000. There were no purchases in 2008 or 2007. Shares purchased under this buy-back program
were retired.
11. SUBSEQUENT EVENTS
On June 3, 2008, Neogen Corporation formed a new subsidiary in Mexico jointly with its long-time distributor, headquartered in Mexico
City. The new company will distribute the Company’s Food Safety and Animal Safety products throughout Mexico.
On July 1, 2008, Neogen Corporation purchased 14 different product formulations from DuPont Animal health Solutions. The products
are used for animal health and hygiene applications and are expected to be a synergistic fit for the existing Animal Safety product lines.
Total consideration for this purchase was $7,000,000. under certain circumstances related to future sales levels additional consideration
of up to $5,000,000 may be paid.
12. SUMMARY OF QUARTERLY DATA (UNAUDITED)
Net sales
Gross margin
Net income
Basic net income per share (1)
Diluted net income per share (1)
Net sales
Gross margin
Net income
Basic net income per share (1)
Diluted net income per share (1)
August 2006
November 2006
February 2007
May 2007
Quarter Ended
In thousands, except per share data
$
20,220
$
22,189
$
21,054
$
10,320
2,406
.18
.17
11,709
2,426
.18
.17
Quarter Ended
10,950
1,990
.14
.14
22,675
11,584
2,303
.16
.16
August 2007
November 2007
February 2008
May 2008
In thousands, except per share data
$
22,909
$
27,210
$
25,180
$
12,297
3,011
.21
.21
14,171
3,254
.23
.22
12,663
2,658
.19
.18
27,119
14,102
3,175
.22
.21
(1) Net income per share has been adjusted to reflect 3-for-2 stock split as of August 17, 2007.
Quarterly net income per share is based on weighted-average shares outstanding and potentially dilutive stock options and warrants for
the specific period, and as a result, will not necessarily aggregate to total net income per share as computed for the year as disclosed in
the consolidated statements of income.
RepoRts
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The Board of Directors and Stockholders of Neogen Corporation,
The management of Neogen Corporation is responsible for establishing and maintaining adequate internal control over financial reporting,
as such term is defined in Exchange Act Rules 13a-15(f). Neogen Corporation’s internal control system was designed to provide reasonable
assurance to the Company’s management and Board of Directors regarding the preparation and fair presentation of published financial
statements.
Neogen Corporation’s management assessed the effectiveness of the Company’s internal control over financial reporting as of May
31, 2008 under the supervision and with the participation of the Chief Executive Officer and the Chief Financial Officer. In making this
assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-
Integrated Framework. Based on that assessment, management believes that, as of May 31, 2008 the Company’s internal control over
financial reporting is effective.
James L. herbert
Chairman & CEO
August 1, 2008
Richard R. Current
Vice President & CFO
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of Neogen Corporation,
We have audited Neogen Corporation’s internal control over financial reporting as of May 31, 2008, based on criteria established in
Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO
criteria). Neogen Corporation’s management is responsible for maintaining effective internal control over financial reporting, and for its
assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal
Control Over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based
on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (united States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial
reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of
management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Neogen Corporation maintained, in all material respects, effective internal control over financial reporting as of May 31,
2008, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (united States), the
consolidated balance sheets of Neogen Corporation as of May 31, 2008 and 2007, and the related consolidated statements of income,
stockholders’ equity, and cash flows for each of the three years in the period ended May 31, 2008, and our report dated August 12, 2008
expressed an unqualified opinion thereon.
Grand Rapids, Michigan
August 12, 2008
0
RepoRts
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON FINANCIAL STATEMENTS
The Board of Directors and Stockholders of Neogen Corporation,
We have audited the accompanying consolidated balance sheets of Neogen Corporation and subsidiaries (the Company) as of May 31,
2008 and 2007, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the
period ended May 31, 2008. These financial statements are the responsibility of the Company’s management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (united States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of
Neogen Corporation and subsidiaries at May 31, 2008 and 2007, and the consolidated results of their operations and their cash flows for each
of the three years in the period ended May 31, 2008, in conformity with u.S. generally accepted accounting principles.
As discussed in Note 1, the Company adopted the Financial Accounting Standards Board statement No. 123 (R), Share-Based Payment
following the modified retrospective method. As a result, prior year financial statements have been restated.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (united States), the
effectiveness of Neogen Corporation’s internal control over financial reporting as of May 31, 2008, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated
August 12, 2008 expressed an unqualified opinion thereon.
Grand Rapids, Michigan
August 12, 2008
neogen coRpoRation and subsidiaRies: compaRison oF Five yeaR
cumulative total RetuRn and stock pRoFile activity
Comparison of Five Year Cumulative Total Return*
Among Neogen Corporation, The NASDAQ Composite Index,
and The NASDAQ Medical Equipment Index
Neogen Corporation
NASDAQ Composite
NASDAQ Medical Equipment
5/04
5/05
5/06
5/07
5/08
$350
300
250
200
150
100
50
0
5/03
*$100 invested on May 31, 2003 in stock or index, including reinvestment of dividends. Fiscal year ending May 31.
Neogen Corporation
NASDAQ Composite
NASDAQ Medical Equipment
5/03
5/04
5/05
5/06
5/07
5/08
$ 100.00
$ 118.84
$ 108.71
$ 153.15
$ 205.56
$ 296.62
100.00
100.00
126.84
143.86
132.55
156.39
142.34
173.03
171.47
199.29
165.82
198.31
The stock price performance included in this graph is not indicative of future stock price performance.
STOCk PROFILE ACTIVITY
The Company’s common stock is traded in the over-the-counter market and quoted in the NASDAQ National Market System under
the symbol NEOG. Price ranges reported are based on inter-dealer sale quotations, as reported by NASDAQ, without adjustments
for markups, markdowns, or commissions typically paid by retail investors, and may not represent actual transactions. No cash
dividends have ever been paid, and the Company does not currently anticipate paying cash dividends in the foreseeable future. As
of July 31, 2008, there were approximately 700 stockholders of record of Common Stock that management believes represents
a total of approximately 5,700 beneficial holders.
Year Ended
High
Low
May 31, 2007
First Quarter
$ 14.00
$ 11.65
Second Quarter
Third Quarter
Fourth Quarter
14.73
15.73
18.33
12.68
12.85
14.13
May 31, 2008
First Quarter
22.12
17.24
Second Quarter
27.93
20.20
Third Quarter
28.50
20.35
Fourth Quarter
$ 27.99
$ 23.89
NeogeN CorporatioN offiCers aNd direCtors
OFFICERS
James L. Herbert
Chairman of the Board
Chief Executive Officer
Lon M. Bohannon
President
Chief Operating Officer
Richard R. Current
Vice President
Chief Financial Officer & Secretary
Edward L. Bradley
Vice President, Food Safety
Kenneth V. Kodilla
Vice President
Manufacturing
Joseph M. Madden, Ph.D.
Vice President
Scientific Affairs
Anthony E. Maltese
Vice President
Corporate Development
Terri A. Morrical
Vice President
Animal Safety
Mark A. Mozola, Ph.D.
Vice President
Research and Development
Paul S. Satoh, Ph.D.
Vice President
Basic and Exploratory Research
DIRECTORS
James L. Herbert
Neogen Corporation
Chairman of the Board
Chief Executive Officer
Lon M. Bohannon
Neogen Corporation
President
Chief Operating Officer
Robert M. Book
Agrivista, Inc.
President
Elanco Products Company
Former Vice President
A. Charles Fischer
Dow AgroSciences
Former President & CEO
Gordon E. Guyer, Ph.D.
Michigan State University
Former President
G. Bruce Papesh
Dart, Papesh & Co.
President
Jack C. Parnell
Kahn, Soares & Conway
U.S. Department of Agriculture
Former Deputy Secretary
Thomas H. Reed
Packerland Packing Company
Special Assistant to the President
Clayton K. Yeutter, Ph.D.
Hogan & Hartson, LLP
Senior Advisor, International Trade
Former Secretary
U.S. Department of Agriculture
LEGAL COunCIL
Lowe Law Firm, P.C.
2375 Woodlake Drive
Suite 380
Okemos, MI 48864
Fraser Trebilcock Davis & Dunlap, P.C.
1000 Michigan National Tower
Lansing, MI 48933
InDEPEnDEnT REGISTERED PuBLIC
ACCOunTInG FIRM
Ernst & Young, LLP
171 Monroe Avenue NW
Suite 1000
Grand Rapids, MI 49503
FORM 10-K AnD THE COMPAnY’S
CODE OF ETHICS
Copies of Form 10-K and the Company’s
Code of Ethics will be provided upon request
without charge to persons directing their
request to:
Neogen Corporation
Attention: Investor Relations
620 Lesher Place
Lansing, MI 48912
STOCK TRAnSFER AGEnT AnD
REGISTRAR
American Stock Transfer & Trust Co.
6201 15th Avenue
Brooklyn, NY 11219
AnnuAL MEETInG
10:00 a.m.
October 9, 2008
University Club of Michigan State University
3435 Forest Road
Lansing, MI 48909
© Neogen Corporation, 2008. AccuPoint, Acumedia, BetaStar, Centrus, Ideal, Neogen, and Reveal are registered trademarks, and AccuScan, D3 Detectable Needles, and
Soleris are trademarks of Neogen Corporation, Lansing, Mich.
NE007-0808
33