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*
2010
2009
2008
2007
2006
$ 140,509
76,454
64,055
26,879
$ 17,521
.78
$
$
.76
$ 118,721
$102,418
$ 86,138
$ 72,433
61,025
57,696
20,488
57,664
44,754
18,019
47,165
38,973
13,504
34,922
37,511
10,805
$ 13,874
$ 12,098
$ 9,125
$ 7,029
$
$
.63
.61
$
$
.56
.54
$
$
.44
.43
$
$
.38
.37
Average Diluted Shares Outstanding*
23,091
22,587
22,499
21,243
19,029
*Restated for the years 2006–2009
total Revenues
Dollars in thousands
net income
Dollars in thousands
total assets
Dollars in thousands
$18,000
$200,000
16,000
14,000
12,000
10,000
8,000
0
2006
2007
2008
2009
2010
180,000
160,000
140,000
120,000
100,000
0
2006
2007
2008
2009
2010
2006
2007
2008
2009
2010
$150,000
120,000
90,000
60,000
30,000
15,000
0
In thousands
May 31,
Financial Strength:
Cash and Cash Equivalents
Working Capital
Total Assets
Long-Term Debt
Stockholders’ Equity
2010
2009
2008
2007
2006
$ 22,806
68,987
180,233
–
153,053
$ 13,842
$ 14,270
$ 13,424
$ 1,959
62,520
142,176
–
54,495
126,357
–
41,060
105,284
–
128,679
111,248
91,945
26,252
88,290
9,955
65,424
1
To Our Stockholders, Employees, and Friends:
The 2010 fiscal year was another of those “never better” years for
Neogen as we set new records for revenues, earnings, cash flow,
synergistic acquisitions, and stock value. The year also leaves
us convinced that Neogen’s opportunities to continue providing
food and animal safety solutions have never been richer.
Credit for the year’s accomplishments should go to Neogen’s
more than 600 dedicated employees, who found ways to con-
tinue our growth despite perhaps the toughest financial times
to face our markets in 50 years.
Continued Strong Growth
Revenues for the year increased 18% to $140.5 million. Even
more noteworthy is the year’s net income results, which in-
creased 26% to $17.5 million, or to $0.76 per share compared
to $0.61 a year ago.
The year also marked a continuation of our performance consis-
tency as the fourth quarter was the 69th consecutive profitable
quarter from operations and the 73rd of the past 78 to show
revenue increases over the prior year—a record spanning over
19 years.
The exceptional 31%
increase in operating
profit compared
to
18% revenue increase
shows Neogen’s cost-saving initiatives and greater economies
of scale continue to provide increased shareholder return. This
year’s operating income of over 19% of sales edged us closer to
our goal of maintaining a 20% operating profit.
Strong Cash Flow
Our balance sheet continued to strengthen as we finished the
year with $22.8 million in cash, up $9 million from FY ‘09—
even though we made two acquisitions with available cash in
the year. Also noteworthy was a 19% increase in shareholder
equity at year-end as compared to the prior year.
Both Divisions Solid
Our Food Safety Division enjoyed a broad-based revenue in-
crease of 25% compared to the prior year and total revenues
reaching $76.5 million. Only 3% of this division’s growth was
non-organic, coming as a result of a mid-year acquisition. Cool,
wet weather across part of the U.S. corn belt also led to in-
creased demand for Neogen’s tests to detect mycotoxins.
Revenues from the Animal Safety Division grew 11% compared
to the prior year to $64 million, even though a majority of its
customers continued to feel the effects of the depressed pro-
tein market and tough worldwide financial situation.
Growth Strategy Continues
Neogen continued to utilize its proven four-point growth strat-
egy to achieve its FY ’10 results. Market share gain, new product
introduction, synergistic acquisitions, and international growth
all played a role in our outstanding year.
A number of new products or product improvements were in-
troduced during FY ’10. Investment in R&D activities increased
$1.7 million as compared to the prior year, but it is at still less
than 4.5% of revenues. Although some of the results of this
37% increase aided FY ’10 results, most of the impact will not
be felt until FY ’11 and beyond.
Acquisition Strategy Continues
A second facet of Neogen’s continued growth has been its abil-
ity to identify and successfully integrate synergistic businesses.
Over the past 10 years, Neogen has made 18 acquisitions, all of
which have been truly synergistic to our business and continue
to add to both revenue and profit growth.
In December, Neogen acquired the BioKits food safety product
line from GenProbe, Inc., which had a number of food allergy
tests not offered by Neogen. The acquisition also gave us an at-
tractive line of meat speciation tests used primarily to prevent
economic adulteration. Based in Deeside, Wales, the company
had good market positions in several European countries that
now add to our Scotland-based Neogen Europe operations. We
have now essentially integrated the BioKits operations by mov-
ing most of the manufacturing to Neogen’s Michigan-based op-
erations and the remainder to Scotland. The Wales operation
has been closed.
In April, we acquired the outstanding shares of GeneSeek, Inc.
of Lincoln, Neb., the leading commercial agricultural genet-
ics laboratory in the U.S. GeneSeek’s customers include many
of the world’s largest animal and plant breeders and animal
health companies. This acquisition considerably added to our
genomic capability, and is expected to speed the development
of food and animal diagnostic tests and intervention tools.
International Growth Continues
With currency translations neutral year over year, Neogen contin-
ued its international growth with 40% of revenues derived from
sources outside the U.S. Our Neogen Europe subsidiary record-
ed revenue increases of 24% as compared to the prior year. Its
revenue growth was broad-based throughout European Union
countries, with a good mix of food safety diagnostic products.
Our Mexico-based operations, Neogen Latinoamérica, contin-
ued to gain traction, and its food and animal safety revenues
will continue to be an important part of our international
growth. Sales of our cleaners, disinfectants, and rodenticides
showed strength in Mexico, Central and South America.
Though it has taken us a bit longer to obtain the registrations
required for our Neogen do Brazil operations, these require-
ments are in place and that operation should be poised for nice
growth in the coming year.
2
A Message from Management Market Growth Strong
The fourth segment of our growth strategy is to keep pace
with the worldwide food and animal safety market growth,
while increasing our market share. Growth in markets and
market share accounted for most of our FY ’10 growth.
As the worldwide demand for increased production of qual-
ity food continues, food safety concerns from inside the farm
gate to the dinner plate become a greater challenge. This has
caused many of our markets to increase despite the financial
circumstances faced by many of our customers. Our distribu-
tion into 118 countries last year has put us in a position to
help solve food and animal safety problems wherever they
might arise.
Performance Was Rewarded
Neogen’s performance during the past year did not go unheeded as our share price con-
tinued to increase. A 3-for-2 stock split in December rewarded loyal long-term investors,
allowing them to convert the added shares into a nice cash dividend or to hold for growth.
In fact, the share price increased over 25% in the seven months following the split.
During the year, Fortune Magazine once again named Neogen as one of the 100 fastest
growing small public companies in America, and also named us to its prestigious list of
one of the “40 stocks to retire on”. Forbes again named Neogen one of America’s best
small public companies—for the eighth time in 10 years.
Never Satisfied
Economists forecast that the world will need 30% more food by 2025. These demands
for increasing food supply, while reducing costs, will require larger production and pro-
cessing facilities. This means a larger concentration of animals in small areas, bigger and
higher speed processing plants, and faster distribution systems. All of these demands
increase the likelihood of food safety problems.
Regulatory requirements and intervention are being stepped up around the world. As an
example, the U.S. now requires that most egg-producing chickens be tested repeatedly
for Salmonella—only the second food product in our history to have mandated testing, the
other being milk. A similar requirement is beginning to develop as the USDA issued draft
guidelines for controlling E. coli on the farm, and the USDA is also now proposing the first-
ever standards for Campylobacter contamination in poultry.
A number of similar activities are taking place in most of the world’s developed regions,
particularly in the European Union. For example, more pressure is being placed to keep
drug residues out of meat and milk products because of concerns about antibiotic-resistant
bacteria.
We have new products in the R&D pipeline that should address many new concerns. At
the same time, expansion of our sales and marketing efforts should allow us to make
market share gains. Our balance sheet continues strong with significant cash, no borrow-
ing, and unused bank lines of credit. This should allow us to continue to take advantage
of acquisition opportunities as they are identified.
We believe the title of this Annual Report summarizes both the year we just completed, as
well as the year ahead: Never Better, Never Satisfied.
James L. Herbert
Chairman and CEO
Lon M. Bohannon
President and COO
Lon Bohannon and James Herbert
opeRating income
Dollars in thousands
$30,000
25,000
20,000
15,000
10,000
5,000
0
2006
2007
2008
2009
2010
stockHoldeRs’ equity
Dollars in thousands
$160,000
130,000
100,000
70,000
40,000
10,000
0
2006
2007
2008
2009
2010
3
S eemingly lost in the abun-
dance of bad news about
the global food supply is
the amazing success of the world’s
food producers, processors, and
distributors. Although the world’s
population has more than doubled
in the last 50 years, the world’s
food production has more than
kept pace. Today, even with a popu-
lation approaching 7 billion, the quantity, quality and
nutritional value of food available to the inhabitants
of our planet continues to improve year in and year out.
Grain producers have escalated their production
through use of advancements in crop irrigation, pest
control, genetics, fertilization, harvesting, storage and
transportation. The advancements in the grain indus-
try have led directly to more plentiful, less-expensive
grain-based foods, superior value animal protein prod-
ucts that rely heavily on grain-based feeds, and a large
new ethanol fuel industry. Animal protein producers
have utilized similarly impressive advancements to
dramatically increase the quantity and quality of their
products.
By almost every objective, quantifiable measure, the
world’s available food supply has never been better.
But, the global food industry cannot be satisfied. Rising
populations and diminishing natural resources point to
difficult days ahead for sustaining the level of food pro-
duction growth needed to nourish future generations.
Highly efficient modern food production facilities can
also increase the potential for outbreaks of foodborne
diseases of a magnitude not previously possible.
Never Better. Never Satisfied. To address the growing concerns, numerous food safety
and animal safety initiatives have been undertaken by
such organizations as the U.S. Food and Drug Admin-
istration (FDA), U.S. Department of Agriculture (USDA),
European Food Safety Authority (EFSA), Health Canada,
and the World Health Organization (WHO).
In the United States, the current administration is now
considering how to upgrade the U.S. food safety sys-
tem to address the considerable challenges that lie
ahead. In summarizing the prevention-based approach
to food safety now under consideration, the Secretary
of Health and Human Services said: “Our farm-to-table
prevention approach acknowledges the complexity
and diversity of all the people and organizations in-
volved in food production.”
Neogen’s ability to support the food industry has never
been better, but like the industries it serves, Neogen
can’t afford to be satisfied. The increasingly plentiful
and higher quality food supply needed by future gen-
erations will require more, and better, food and animal
safety solutions.
Neogen’s expanding capabilities to provide unique so-
lutions for the food production and processing indus-
tries have never been better and now include:
well received by existing
customers.
Neogen now offers screen-
ing and quantitative food
allergen test kits to detect
almond, egg, gliadin/glu-
ten, hazelnut, casein, milk,
mustard, peanut, sesame,
shellfish, soy, lupine, and
walnut residues.
Reveal® 3-D allergen
tests (formerly
BioKits RAPID tests)
Since their introduction in 1998, Neogen’s rapid tests
for food allergens have set the standard for simple
and quick detection of these potentially dangerous
residues. Unfortunately, the unintentional inclusion
of food allergens into non-allergenic foods remains
a leading cause of food recalls and millions of food
allergic people worldwide face dire consequences
should they accidentally ingest a food allergen residue.
Detecting Mycotoxins
Neogen’s comprehensive line of tests for mycotoxins in
grains and animal feeds help protect the health of poul-
try, swine, and dairy cattle—and the quality and safety
of the food products derived from numerous commod-
ity grains. Mycotoxins have been
shown to have long-term ad-
verse health effects in humans,
and can kill livestock and pets if
ingested in sufficient quantities.
The company now offers tests for
six mycotoxins in several differ-
ent formats, including incredibly
Neogen Corporation’s food and animal safety mission, which was first developed 28
years ago, is built on an understanding of the complexity and diversity of everything
involved in addressing food safety from inside the farm gate to the food plate.
Detecting Food Allergens
Neogen’s December 2009 acquisition of BioKits food
allergen test kits added to the company’s already
market-leading position for rapid and accurate food
allergen diagnostics. The BioKits business added new
food allergen tests to Neogen’s existing product line
as well as a new user-friendly format that has been
easy tests that function like home pregnancy stick tests,
and can deliver definitive, easy-to-interpret results in as
little as five minutes. The almost immediate results pro-
vide grain elevator staff, and quality control personnel
in the food and feed industries with the solution they
need to help prevent contaminated ingredients from
entering the food chain.
Outbreaks in recent years, in-
cluding a large outbreak of vom-
itoxin (DON) in the 2009 U.S.
corn crop, show that testing for
mycotoxins remains as impor-
tant as ever, and that Neogen
stands as ready as ever to deliv-
er the leading testing products
and expertise needed by grain
producers and processors.
Detecting Drug Residues
Reveal® for DON SQ
A May 2009 acquisition of International Diagnostic
Systems Corp. (IDS) bolstered Neogen’s offerings of
test kits to detect drug residues in food and animal
feed, and to detect drugs in forensic and eventing ani-
mal applications.
Neogen remains a worldwide leader in providing rapid
drug residue tests to protect the integrity of animal
racing, and ensure the safety of meat and milk prod-
ucts. Neogen now has a vast array of drug residue tests
used in food and animal safety markets, and also for
certain research and forensic applications.
Neogen expanded
its
line of products devel-
oped for the worldwide
dairy industry to include
the quickest single test
simulta-
to
available
neously detect beta-
lactam and tetracycline
antibiotic
in
milk—BetaStar® Combo.
As the use of both tetracycline and beta-lactam antibi-
otics for the management of infections in dairy herds
has grown in certain regions of the world, so has the
need for a single test to simultaneously detect both
groups of antibiotics.
BetaStar® Combo kit
residues
Neogen has a number of ongoing projects aimed at
developing new tests to detect drug residues in food
and animal safety applications throughout the world.
Detecting Foodborne Pathogens
Neogen’s tests for dangerous bacteria, including
E. coli O157:H7, Salmonella, and Listeria, provide speed
and accuracy in simple to use formats for end users.
Neogen’s tests and dedicated staff of support microbi-
ologists help food producers protect their brands, and
reputation, from possibly the biggest risk they face in
the marketplace—shipping products tainted with a
life-threatening organism.
Regulatory requirements and intervention are increas-
ing in the U.S. and around the world to minimize the
risks from foodborne pathogens. As an example, a new
rule concerning Salmonella contamination in eggs re-
cently went into effect in the U.S. If a sample of shell
eggs test positive for Salmonella enteriditis, all eggs
from the production facility must be broken and pas-
teurized to kill any Salmonella organisms before they
may be legally marketed.
Regulatory agencies worldwide are also studying and
proposing new guidelines to further protect consum-
ers from food contaminated with dangerous patho-
gens, including actions being taken to test for addi-
tional pathogenic strains of E. coli, and the first-ever
standards for Campylobacter contamination in poultry.
Neogen has active research and development pro-
grams working in the area of pathogen detection, while
its Acumedia® dehydrated culture media subsidiary is
on the forefront of developing and optimizing growth
media for microorganisms. The company’s Center for
Microbiological Excellence near its corporate head-
quarters facilitates research and technical support for
its microorganism product lines.
Neogen has a number
of ongoing projects
aimed at developing
new tests to detect
drug residues in
food and animal
safety applications
throughout the world.
Detecting Spoilage Organisms
While product contaminated 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 effects.
Neogen’s Soleris® technology is now
used by hundreds of the world’s
largest food and nutraceutical man-
ufacturers to detect spoilage organ-
isms in a fraction of the time needed
for traditional testing methods. For
example, testers using Soleris can
measure a sample’s yeast and mold count in as little as
60 hours, compared to the five days for conventional
methods.
Soleris® test vials
The Soleris technology provides industry an economic
value added solution to help producers supply qual-
ity products more quickly and efficiently than can be
done with alternative test methods. Neogen is invest-
ing additional research funds in develop of new tests
for the unique and proprietary Soleris technology.
Sanitation Monitoring
Neogen’s October 2009
release of an improved
version of its already pop-
ular AccuPoint® ATP Sani-
tation Monitoring System
provided an even more
valuable tool to monitor
the effectiveness of the
sanitation programs for
producers and processors
in many different market
segments.
The new AccuPoint® 2
Sanitation Monitoring System
ATP (adenosine triphosphate) sanitation monitoring
systems have evolved into the current “gold standard”
for food and beverage production facilities to moni-
tor their sanitation efforts. Using an ATP system is an
easy and quick gauge of a facility’s cleanliness, and is
GeneSeek’s Agrigenomic services offer
cost-effective genotyping and analysis.
easily customized for the specific
equipment, people, product, and
processes used in any food facility.
The simplicity of Neogen’s ATP
monitoring system makes it a
valuable tool throughout the
food
food
service providers, caterers and
grocery delis, and manufacturers of soft drinks and
bottled water.
including
industry,
Using Genomics to Further Food and
Animal Safety
Neogen added to its genomic capability through its
April 2010 acquisition of GeneSeek, the leading com-
mercial agricultural genetics laboratory in the United
States.
GeneSeek employs cutting-edge technology in the
area of genomics. The technology utilizes high-reso-
lution DNA genotyping for identity and trait analysis
of a variety of important animal and agricultural plant
species through the use of single nucleotide polymor-
phism discovery and analysis. GeneSeek helps its cus-
tomers speed genetic improvement efforts, as well as
identify economically important diseases inside the
farm gate.
GeneSeek is not involved in cloning or the develop-
ment of transgenic animals. Instead, the results of its
technology allow the acceleration of natural selection
through selective breeding of traits such as disease
resistance and meat quality.
Combining the capabilities of Neogen and GeneSeek
is expected to speed the development of food and ani-
mal safety diagnostic tests, as well as speed the devel-
opment of novel intervention tools to help solve exist-
ing and emerging food and animal safety problems.
Controlling Rodents
Neogen’s broad-based food and animal safety mission
was built with the understanding that otherwise whole-
some food and feed supplies face numerous safety chal-
lenges while still in the field or inside the farm gate,
and during every step of its way to the consumer.
Neogen’s recent introduction of its fifth rodenticide
compound, Di-Kill™, added to its arrays of effective prod-
ucts to control rats and mice in and around buildings,
and grain storage facilities. The new rodenticide can be
used independently, or as part of Neogen’s rotational
baiting program to maximize its effectiveness by sys-
tematically varying the rodenticide offered to rodents.
Despite man’s best efforts, rats and mice remain a seri-
ous threat to the quantity and quality of food and feed-
stuffs, and are common vectors in the spread of dis-
ease. Neogen’s proven line of rodenticides is used for
effective control of rodent infestations and is often a
critical component of food safety inside the farm gate.
Producing Precision Veterinary Products
Today’s multi-national producers of poultry and live-
stock produce animals on a much larger scale than
ever before to help satisfy increasing demand. Neo-
gen’s Ideal® Instruments subsidiary, founded in 1931,
maintains a leadership role in the development of
precision veterinary drug delivery instruments to help
minimize drug residues that might otherwise find their
way into meat and milk supplies. Neogen’s line of pat-
ented detectable needles greatly lessen the chance
that a broken needle would ever arrive at the dinner
table in a roast, or similar thick cut of beef or pork.
Controlling
Animal Disease
High quality meat,
poultry and dairy
products
require
livestock
healthy
herds and flocks.
To provide consum-
ers the best meat,
poultry and dairy
products possible,
producers
have
improved animal
management practices, and included veterinary sup-
plements, electrolytes, and vitamins to the diets of ani-
mals. Healthy animals require less medication and are
more resistant to disease. Neogen’s
disinfectants and veterinary topicals
also play a significant role in improv-
ing both animal and food safety.
Neogen offers a comprehensive
line of rodenticides,
disinfectants and cleaners.
Neogen’s disinfectants and cleaners
broaden the company’s comprehen-
sive list of preventative products for
animal producers and veterinary clin-
ics. Especially in light of pork, turkey,
chicken, and dairy production units becoming larger
throughout the world, stopping a bacterial, viral, or
fungal outbreak before it can start is critical.
Satisfying the global demand for food in years to come
will require enhanced animal safety inside the farm gate,
increased agricultural output, and improved food safety
and security every step of the way from farm to fork.
Neogen’s animal safety ef-
forts extend to both sides
of the farm gate with
safety solutions for per-
formance and companion
animals. The
company
manufactures and markets
pharmaceuticals, vaccines,
and diagnostic products to
the worldwide animal safety market. The company’s
equine health products include
EqStim®, a proven, safe immuno-
stimulant, being used to boost
the immune response of horses
to help combat respiratory ail-
ments. Neogen’s BotVax® B has
protected thousands of horses
against Clostridium botulinum
type B.
Detectable D3
Needles™
The food industry’s ability to produce safe and plen-
tiful food, and Neogen’s ability to support the food
industry with unique solutions for food and animal
safety, has never been better. But, like the industry it
serves, Neogen is not content to rest on its laurels and
be satisfied with its success.
Neogen stands ready to help satisfy the increasing de-
mand for food with more, and better, food and animal
safety solutions.
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 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 Secu-
rities 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 be-
lieved 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 consoli-
dated 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 owner-
ship, 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 cus-
tomers, historical trends and other information, such as 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.
Goodwill and Other Intangible Assets
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 2010 and it was determined that no impairment exists. There was also no impairment indicated
for 2009 or 2008. 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 underperformance 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.
When management determines that the carrying value of definite-lived intangible assets may not be recoverable based on the existence of one
10
management’s discussion and analysis oF Financial condition and Results oF opeRations
or more of the above indicators of impairment, the carrying value of the definitive-lived intangible assets are compared to their value determined
by using undiscounted future cash flows. If the carrying amounts of these assets are greater than the amount of undiscounted future cash flows
expected to be generated by the assets, such assets are reduced to their estimated fair value.
Equity Compensation Plans
ASC 718 - Compensation – Stock Compensation, (ASC 718) requires that stock options awarded to employees and shares of stock awarded to em-
ployees 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 sta-
tistical 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.
Business Combinations
Accounting for business combinations requires our management to make significant estimates and assumptions, especially at the acquisition date
with respect to the valuation of intangible assets and the determination of the acquisition date fair value of liabilities arising from contingent
consideration. Further, contingent consideration classified as an asset or a liability is remeasured to fair value at each reporting date until the
contingency is resolved. Although we believe the assumptions and estimates we have made in the past have been reasonable and appropriate, they
are based in part on historical experience and information obtained from the management of the acquired companies and are inherently uncertain.
Examples of critical estimates in valuing certain of the intangible assets and contingent consideration liabilities we have acquired include but are
not limited to:
• Future expected cash flows from sales, other customer contracts and acquired developed technologies and patents;
• The acquired company’s brand and competitive position, as well as assumptions about the period of time the acquired brand will continue to be
used in the combined company’s product portfolio; and
• Discount rates.
Unanticipated events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates or actual results.
Results oF opeRations
executive overview
For the 2010 fiscal year the Company reported an 18% increase in revenues as compared to the prior fiscal year and a continuation of its record of
profitability. Revenues for 2010 were $140,509,000, up from $118,721,000. Net income per share was $0.76 in 2010, compared to $0.61 in the
prior year, adjusted for the stock split that took place in December 2009. Both revenues and net income for the 2010 year established new all-time
highs. These results came in a very difficult business environment. The Company’s business has shown continued resilience to the economic conditions
and despite the worldwide turmoil in economic and currency markets, the Company’s percentage of sales from customers outside the United States
approached 40% of total revenues. Cash flow from operations for 2010 improved to $28 million, as the Company has implemented procedures and
systems to better manage inventory and other current asset levels.
Neogen Europe recorded a 24% revenue gain, following a 26% gain in 2009. Two acquisitions were completed during the year that should be synergis-
tic to the existing product offerings. The BioKits acquisition pushed the food allergen product line to another outstanding growth year, with increasing
sales by more than 50%. The GeneSeek acquisition made late in the fiscal year is expected to have a positive impact on future revenues as revenues
of GeneSeek were approximately $12 million in the twelve months before purchase.
Consolidated gross margins increased 200 basis points in 2010 to 52% due to product mix and cost containment. Operating expenses as a percentage
of revenues remained unchanged from 2009 at 33% but operating margins increased as a result of improved gross margins.
The Company’s financial performance continued to gain increased notice in the investment community in the past year. It continued its inclusion in the
Russell 2000 Index, and was named to the Standard and Poor’s 600 Healthcare Index, Fortune’s “40 Stocks to Retire On”, Fortune’s Small Business 100,
and to Forbes Magazine’s annual list of the 200 Best Small Companies in America, for the fifth consecutive year and eighth time in the last 10 years.
11
management’s discussion and analysis oF Financial condition and Results oF opeRations
Revenues
(In thousands)
Food safety:
Natural Toxins, Allergens and Drug Residues
Bacterial and General Sanitation
Dry Culture Media and Other
animal safety:
Life Sciences and Other
Vaccine
Rodenticides and Disinfectants
Veterinary Instruments and Other
Total Revenues
Twelve Months Ended
may 31, 2010
Increase/
(Decrease)
May 31, 2009
Increase/
(Decrease)
May 31, 2008
$ 39,338
19,545
17,571
76,454
8,998
2,329
24,160
28,568
64,055
$ 140,509
28%
$
30,667
6%
$
29,036
5%
49%
25%
57%
6%
18%
(2% )
11%
18,539
11,819
61,025
5,730
2,207
20,491
29,268
57,696
10%
1%
6%
3%
–
99%
10%
29%
16,866
11,762
57,664
5,567
2,197
10,318
26,672
44,754
18%
$ 118,721
16%
$ 102,418
Year Ended May 31, 2010 Compared to Year Ended May 31, 2009
The Company’s Food Safety segment recorded a broad-based 2010 revenue increase of 25% to $76,454,000. Organic sales growth for this segment
was 22% in the year ended May 31, 2010.
The increase in Natural Toxins, Allergens and Drug Residues resulted from strong organic sales and the contributions of the BioKits food allergen
product line that was acquired in December 2009. The allergen product line had another outstanding year of growth, with sales increasing by 57%.
The dramatic increase in sales of each of Neogen’s allergen tests is attributable to the aforementioned acquisition and to food producers increasing
efforts to ensure that inadvertent allergenic ingredients do not contaminate non-allergenic foods. Sales of Food Safety’s oldest product line, its rapid
tests to detect natural toxins in grain, also saw significant improvement for the year, as tests for aflatoxin and deoxynivalenol (DON) improved by
40% compared to the prior year. Cool wet weather combined with an early frost experienced in the U.S. corn belt in 2009, led to sharp increases in
demand for tests to detect these toxins. However, continued worldwide interest in toxin levels in human food and animal feed has positively affected
sales. Dollar sales of tests to detect drug residues increased by 24% from the prior year, as worldwide concern continued to increase.
Bacterial and General Sanitation sales had a good year despite several products that require the customer to make a capital investment, including
AccuPoint® readers and Soleris® microbial detection instruments. Sales of these products slowed in 2009 and in 2010 due to the impact of the
economic downturn. However, sales of associated disposable AccuPoint samplers and Soleris vials continued strong growth—providing evidence of
the continued use and acceptance of these unique Food Safety products.
Dry Culture Media and Other increased significantly during the year as a result of the continued efforts of the sales and marketing staff in executing
their sales plan and in gaining and re-gaining new customers.
Revenues from the Company’s Animal Safety segment grew 11% in 2010 compared to the prior year. The successful integration of the acquired
DuPont line of disinfectants and cleaners, IDS drug residue diagnostics and GeneSeek, contributed significantly to Animal Safety’s revenue growth
for the year. Organic growth was 4% in a very difficult overall market.
Life Sciences and Other sales increased by 57% in 2010, primarily due to the successful integration of the IDS product line acquired in May 2009
and the GeneSeek acquisition in April 2010. Organic sales increases of the Life Sciences and Other products were limited as customers were affected
by the economic downturn.
Sales of Neogen’s veterinary biologics, which include an equine vaccine against botulism and immune stimulant products were up 6% for the year.
Sales of vitamin injectibles into the livestock market were up 13% over the prior year. Evidence of the synergistic nature of the IDS diagnostic tests
to pre-existing Neogen products was shown as we experienced an 18% increase in 2010 in same-store sales of tests to detect drug residues for
the forensic market.
Even though a number of the Animal Safety customers continue to feel the effects of a depressed animal protein market, this division did experience
strong increases in sales of a number of products. Sales of rodenticides into domestic markets increased 27% on a year over year basis. Sales into
international markets of the same products increased 25%, as Neogen continues to grow its market share and new products gain market acceptance.
Sales of Neogen’s line of cleaners and disinfectants also grew 10% in the year. The Company’s efforts to market its products as synergistic biosecurity
solutions are gaining more traction.
12
management’s discussion and analysis oF Financial condition and Results oF opeRations
Veterinary Instruments and Other sales decreased by 2% in 2010 in comparison with 2009 as many of these products are ultimately used by custom-
ers involved in the production of animal protein. This group of customers has been especially hit hard by the economic recession.
Year Ended May 31, 2009 Compared to Year Ended May 31, 2008
In 2009, sales of Natural Toxins, Allergens and Drug Residues increased by 6% in comparison with FY 2008. Increases from allergen product lines
were in excess of 40% and were the result of increased efforts by food producers to ensure that inadvertent allergenic ingredients do not con-
taminate non-allergen foods. Bacterial and General Sanitation products increased by 10% in FY 2009, as the AccuPoint ATP general sanitation test
continued to gain momentum, domestically and internationally.
Dry Culture Media and Other sales increased by 1% in FY 2009 as compared with FY 2008, as the Company focused their efforts on customer service
following a large increase in the prior year.
Within the Animal Safety segment, sales of Life Sciences and Other Products increased by 3% in 2009 in comparison with 2008. Increases in 2009
were due to new direct international customers and instrument placements for forensic customers, sales of substrates and diagnostic research kits.
Many of products in this category are sold into the worldwide eventing animal industry. These customers have been highly affected by the economic
downturn. Vaccine sales remained unchanged for the year due to the timing of purchases by key domestic and international distributor purchasers.
Sales of Hacco rodenticides and disinfectants increased by 99% in 2009, primarily based on the successful acquisition and integration of the DuPont
product lines.
Veterinary Instruments and Other sales increases were broad based in 2009 and included significant contributions in the disposables product lines,
experiencing large increases in the retail and integrator markets.
cost oF goods sold
(In thousands)
Cost of Goods Sold
2010
$ 67,534
increase
2009
Increase
2008
14%
$ 59,288
21%
$ 49,185
Cost of goods sold increased by 14% in 2010 and by 21% in 2009 in comparison with the prior year. This compares against a 18% and 16% increase
in revenues in 2010 and in 2009. Expressed as a percentage of revenues, cost of goods sold was 48%, 50% and 48% in 2010, 2009, and 2008
respectively. 2010 margins increased as a result of favorable product mix and cost containment.
Food Safety gross margins were 64%, 63% and 63% in 2010, 2009 and 2008, respectively. Changes in margins between periods relate primarily
to changes in product mix. Margins improved from 2009 from the effects of efficiencies resulting from investments in manufacturing facilities and
equipment.
Animal Safety gross margins were 38%, 37% and 38% in 2010, 2009 and 2008, respectively. Changes in margins between periods relate primarily
to product mix.
opeRating eXpenses
(In thousands)
Sales and Marketing
General and Administrative
Research and Development
2010
$ 26,350
13,488
6,258
increase
15%
17%
37%
2009
$ 22,906
11,484
4,555
Increase
11%
5%
25%
2008
$ 20,648
10,927
3,639
Sales and marketing expense categories increased by 15% in 2010 and by 11% in 2009 as compared with the prior year. As a percentage of sales,
sales and marketing expense remained at 19% in 2010 as compared to 19% in 2009 and 20% in 2008. Management plans to continue to expand
the Company’s sales and marketing efforts both domestically and internationally and currently expects related expenses to remain approximately
20% as expressed as a percentage of sales.
General and administrative expenses increased by 17% in 2010 and by 5% in 2009. These expenses have decreased from 11% to 10%, as a
percentage of sales, over the past three fiscal years. Dollar increases in 2010 and 2009 resulted primarily from the acquisitions as well as due to
increased levels of operations and added amortization related to businesses acquired. Percent decreases resulted from the fixed nature of many of
these expenses.
Research and development expenses increased by 37% in 2010 and 25% in 2009 in comparison with 2009 and 2008. As a percentage of revenue
these expenses were 4% in each of the years ended May 31, 2010, 2009 and 2008, respectively. Although some fluctuation in research and develop-
ment expenses will occur, management expects research and development expenses to approximate 4-6% of revenues over time. These expenses
13
management’s discussion and analysis oF Financial condition and Results oF opeRations
approximate 8% to 10% of revenues from products and product lines that are supported by research and development. Certain Company products
require relatively less investment in research and development expenses.
opeRating income
(In thousands)
Operating Income
2010
$ 26,879
increase
2009
Increase
2008
31%
$ 20,488
14%
$ 18,019
During fiscal year 2010 and 2009, the Company’s operating income increased by 31% and 14% as compared to the respective prior year. As a per-
centage of revenues it was 19%, 17% and 18% in 2010, 2009 and 2008 respectively. The Company has been successful in improving its operating
income in 2010 and 2009 from revenue and gross margin growth from existing products and acquisitions and from control of distribution and
administrative costs.
otHeR income (net)
(In thousands)
Other Income – Interest and Other (Net)
2010
$
442
(decrease)
(61%)
2009
$
1,136
Increase
137%
$
2008
479
Other income decreased by 61% in comparison with 2009 and increased by 137% in 2009 in comparison with 2008. Interest income is a result of
the Company’s increase in cash and cash equivalent cash position in the periods offset by decreased interest rates. The Company follows a very con-
servative investment philosophy that in the current market results in rates of less than 1%. Investment earnings were $81,000 in 2010, $258,000
in fiscal 2009 and $442,000 in 2008. In 2010 and in 2009 other income also included $181,000 and $429,000 in royalty income and $80,000 in
2010 and $355,000 in 2009 of gains from foreign currency transactions. In general no such other income was earned in 2008.
FedeRal and state income taXes
(In thousands)
Federal and State Income Taxes
2010
$ 9,800
increase
2009
Increase
2008
26%
$
7,750
21%
$
6,400
Expressed as a percentage of income before tax, the tax provision was 36% in 2010, 36% in 2009 and 35% in 2008. Fluctuations in the tax rate is
the result from an increase of the Company’s federal tax rate to 35%, the localities where income is earned in any year and tax credits. Other than
rate, the increase in the tax provision is primarily a function of the increase in pre-tax income of the Company.
net income and net income peR sHaRe
(In thousands, except per share)
2010
increase
2009
Increase
2008
Net Income
Net Income Per Share - Basic
Net Income Per Share - Diluted
$ 17,521
26%
$ 13,874
15%
$ 12,098
$
$
.78
.76
$
$
.63
.61
$
$
.56
.54
Net income and net income per share increased by 26% in 2010 and 15% in 2009 in comparison with the prior years. As a percentage of revenue,
net income was 12%, in each year. 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 in geographies outside of the U.S.;
14
management’s discussion and analysis oF Financial condition and Results oF opeRations
• 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, 2010, the Company had $22,806,000 in cash and cash equivalents, working capital of $68,987,000 and stockholders’ equity of
$153,053,000. In addition to cash and cash equivalents, a bank line with unused borrowings of $10,000,000 was available to support ongoing
operations or to make acquisitions.
Cash and cash equivalents increased $8,964,000 during 2010. Cash provided from operations was $27,988,000 and stock option exercise proceeds
provided an additional $5,900,000 of cash. Additions to property and equipment and other non-current assets used cash of $5,431,000.
Accounts receivable increased $4,070,000 or 17% when compared to May 31, 2009. This resulted from increased sales, as a result of organic sales
growth and acquisitions offset by some decrease of average days outstanding. These accounts are being actively managed and no losses thereon in
excess of amounts reserved are currently expected. Days sales outstanding decreased from 60 days at May 31, 2009 to 59 days at May 31, 2010.
Inventory levels decreased by less than 1% or $47,000 in 2010 as compared to 2009. Despite higher levels of sales and acquisitions, management
was able to maintain a program to decrease inventory on hand while supplying the customers with shipments within 48 hours of placing an order.
The Company continued programs aimed at reducing inventory and expects to continue those programs into the future.
The Company has no construction in progress and facilities are generally believed to be adequate to support existing operations in the short run.
Neogen has been profitable from operations for its last 69 quarters and has generated positive cash flow from operations during the period. However,
the Company’s current funds may not be sufficient to meet the Company’s cash requirements to commercialize products currently under develop-
ment 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.
contRactual oBligations
The Company has the following contractual obligations due by period:
(In thousands)
Long-Term Debt
Operating Leases
Unconditional Purchase Obligations
Total
Less than
one year
1–3 years
3–5 years
More than
5 years
$
–
$
–
$
–
$
665
13,850
313
13,850
352
–
$
14,515
$
14,163
$
352
$
–
–
–
–
$
$
–
–
–
–
neW accounting pRonouncements
See discussion of any New Accounting Pronouncements in Note 1 to Consolidated Financial Statements.
15
neogen coRpoRation and suBsidiaRies: consolidated Balance sHeets
May 31,
(In thousands)
Assets
current assets
Cash and cash equivalents
Accounts receivable, less allowance of $600 at May 31, 2010 and 2009
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
Amortizable customer-based intangibles, net of accumulated amortization of $4,002
and $2,861 at May 31, 2010 and 2009
Other non-current assets, net of accumulated amortization of $1,822 and $1,663
at May 31, 2010 and 2009
total other assets
Liabilities and Equity
(In thousands, except share and per share)
current liabilities
Accounts payable
Accruals
Compensation and benefits
Federal income taxes
Other
total current liabilities
deferred income taxes
other long-term liabilities
total liabilities
equity
Preferred stock, $1.00 par value - shares authorized 100,000; none issued and outstanding
Common stock, $0.16 par value - shares authorized 30,000,000; 22,625,399 and 22,105,329
shares issued and outstanding at May 31, 2010 and 2009
Additional paid-in capital
Accumulated other comprehensive loss
Retained earnings
total neogen corporation and subsidiaries stockholders’ equity
Non-controlling interest
total equity
2010
2009
$
22,806
$
27,433
31,316
774
3,691
86,020
1,181
13,330
19,474
767
34,752
15,572
19,180
52,899
4,139
13,021
4,974
75,033
13,842
23,363
31,363
200
2,998
71,766
1,175
11,184
17,008
806
30,173
13,115
17,058
39,717
3,730
6,143
3,762
53,352
$ 180,233
$ 142,176
$
7,187
$
3,909
2,346
2,838
4,662
17,033
5,824
4,323
27,180
–
3,621
69,550
(1,676)
81,170
152,665
388
153,053
$ 180,233
2,519
667
2,151
9,246
2,725
1,526
13,497
–
3,537
61,535
(430)
63,611
128,253
426
128,679
$ 142,176
16
See accompanying notes to consolidated financial statements.
neogen coRpoRation and suBsidiaRies: consolidated statements oF income
(In thousands, except per share)
net sales
cost of goods sold
gross margin
operating expenses
Sales and marketing
General and administrative
Research and development
operating income
other income
Interest income
Royalty income
Other, net
income Before income taxes
provision for income taxes
net income
net income per share
Basic
Diluted
Year ended May 31,
2010
2009
2008
$ 140,509
$
118,721
$
102,418
67,534
72,975
26,350
13,488
6,258
46,096
26,879
81
181
180
442
27,321
9,800
59,288
59,433
22,906
11,484
4,555
38,945
20,488
248
429
459
1,136
21,624
7,750
49,185
53,233
20,648
10,927
3,639
35,214
18,019
442
–
37
479
18,498
6,400
$
17,521
$
13,874
$
12,098
$
$
0.78
0.76
$
$
0.63
0.61
$
$
0.56
0.54
See accompanying notes to consolidated financial statements.
17
neogen coRpoRation and suBsidiaRies: consolidated statements oF equity
Common Stock
(In thousands, except share)
Shares
Amount
Paid-In Capital
Additional
Accumulated
Other
Comprehensive
Income (Loss)
Retained
Earnings
Noncontrolling
Interest
Total Equity
Balance, June 1, 2007
21,031,209
$
3,365
$
50,577
$
386
$
37,617
$
– $
91,945
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
Balance, May 31, 2008
Exercise of options and
warrants, net of share
based compensation,
including $682,000
income tax benefit
Issuance of shares under
Employee Stock Purchase
Plan
Repurchase and retirement
of common stock
Noncontrolling interest
attributable to acquisition
of majority-owned
subsidiary
Comprehensive Income:
Net income (loss) for 2009
Foreign currency
translation adjustments
Total Comprehensive Income
Balance, May 31, 2009
Exercise of options and
warrants, net of share
based compensation,
including $709,000
income tax benefits
Issuance of shares under
Employee Stock Purchase
Plan
Comprehensive Income:
Net income (loss) for 2010
Foreign currency
translation adjustments
Total Comprehensive Income
724,440
116
6,827
21,767
3
224
12,098
35
6,943
227
12,098
35
12,133
21,777,416
3,484
57,628
421
49,715
–
111,248
382,782
19,815
(74,684)
62
3
(12)
4,523
295
(911)
4,585
298
(923)
448
13,874
(851)
13,023
448
(22)
13,896
(851)
22,105,329
3,537
61,535
(430)
63,611
426
128,679
500,242
19,828
80
4
7,687
328
7,767
332
17,559
(38)
17,521
(1,246)
(1,246)
16,275
Balance, may 31, 2010
22,625,399
$
3,621
$
69,550
$
(1,676)
$
81,170
$
388
$ 153,053
See accompanying notes to consolidated financial statements.
18
neogen coRpoRation and suBsidiaRies: consolidated statements oF casH FloWs
(In thousands)
Cash Flows from Operating Activities
Net income
Adjustments to reconcile net income to net cash provided from 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
Purchases of property, equipment and other noncurrent assets
Business acquisitions, net of cash acquired
Net Cash Used In Investing Activities
Cash Flows from Financing Activities
Exercise of options
Repurchase of common stock
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 and Cash Equivalents
Cash and Cash Equivalents at Beginning of Year
Cash and Cash Equivalents at End of Year
Supplement Cash Flow Information
Income taxes paid, net of refunds
Year ended May 31,
2010
2009
2008
$
17,521
$
13,874
$
12,098
4,435
(200)
2,237
(709)
(207)
(2,240)
64
390
3,008
3,689
27,988
(5,431)
(20,302)
(25,733)
5,900
–
709
100
6,709
8,964
13,842
3,890
1,550
1,967
(682)
–
(4,075)
(3,698)
(49)
(2,648)
856
10,985
(2,836)
(11,134)
(13,970)
2,916
(923)
682
(118)
2,557
(428)
14,270
3,516
450
1,892
(747)
253
(3,869)
(6,364)
(122)
1,666
(900)
7,873
(2,471)
(10,147)
(12,618)
5,060
–
747
(216)
5,591
846
13,424
$
22,806
$
13,842
$
14,270
$
6,283
$
7,386
$
7,475
See accompanying notes to consolidated financial statements.
19
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 (collectively, the Company), all of which
are wholly owned, with the exception of Neogen Latinoamerica S.A.P.I. DE C.V., which is 60% owned and Neogen do Brazil, which is 98% owned.
Noncontrolling interest represents the noncontrolling owner’s proportionate share in the equity of the Company’s majority owned subsidiaries. The
noncontrolling owner’s proportionate share in the income or losses of the Company’s majority-owned subsidiaries is included in other income, net
in the statements of income.
All intercompany accounts and transactions have been eliminated in consolidation.
Share and per share amounts reflect the December 15, 2009 3-for-2 stock split as if it took place at the beginning of the periods presented.
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 prin-
ciples, are excluded from net income and recognized directly as a component of stockholders’ equity. Accumulated other comprehensive income (loss)
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. One customer accounted for more than
10% of accounts receivable at May 31, 2010 and 2009. As of May 31, 2010 and 2009 the balance due from that customer was $2,608,000 or 10%
and $2,879,000 or 12%, respectively of the total of all outstanding accounts receivables.
The Company maintains a valuation allowance for accounts receivable of $600,000 at May 31, 2010 and May 31, 2009. Expenses related to un-
collectable accounts and allowance adjustments were $242,000, $199,000 and $54,000 in 2010, 2009 and 2008, respectively. Write-offs were
$242,000, $99,000 and $54,000 on May 31, 2010, 2009 and 2008, respectively.
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 consist of bank demand and savings deposits and short term domestic certificates of deposit with maturities of 90 days or
less. Cash equivalents were $13,987,000 and $5,344,000 at May 31, 2010 and 2009, respectively. The carrying value of these assets approximates
fair value.
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:
(In thousands)
Raw materials
Work-in-process
Finished and purchased goods
20
2010
$
11,815
1,958
17,543
2009
$
11,183
1,425
18,755
$
31,316
$
31,363
neogen coRpoRation and suBsidiaRies: notes to consolidated Financial statements
No less frequently than quarterly, inventory is analyzed for slow moving and obsolete inventory and the valuation allowance adjusted as required.
Write offs against the allowance are not separately identified. The valuation allowance for inventory was $1,000,000, $1,025,000 and $700,000
at May 31, 2010, 2009 and 2008.
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 39 years for buildings and improvements and three to five years for furniture, machinery and equipment. Depreciation expense was $2,734,000,
$2,560,000, and $2,360,000 in 2010, 2009 and 2008, respectively.
Goodwill and Other Intangible Assets
Goodwill represents the excess of purchase price over fair value of tangible net assets of acquired businesses after amounts allocated to other intan-
gible assets. In general, goodwill is amortizable for tax purposes over 15 years. 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 20 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 and comparison
to comparable EBITDA multiples of peer companies, such assets are reduced to their estimated fair value. The remaining weighted-average amorti-
zation period for customer based intangibles and other intangibles is 13 and 10 years respectively at May 31, 2010.
Long-lived Assets
Management reviews the carrying values of its long-lived assets for possible impairment whenever events or changes in business conditions indi-
cate 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.
Reclassifications
Certain amounts in the 2009 and 2008 financial statements have been reclassified to conform to the 2010 presentation.
Stock Options
At May 31, 2010, the Company had stock option plans that are described more fully in Note 5.
The weighted-average fair value per share of stock options granted during 2010, 2009 and 2008, estimated on the date of grant using the Black-
Scholes option pricing model, was $6.35, $5.44 and $4.61 respectively. The fair value of stock options granted was estimated using the following
weighted-average assumptions:
Year ended May 31,
Risk-free interest rate
Expected dividend yield
Expected stock price volatility
Expected option life
2010
2.0%
0%
37.8%
2009
2.9%
0%
32.8%
2008
4.6%
0%
34.2%
4.0 years
4.0 years
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 accelerated method over their requisite service periods which the Company has determined to be the
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 owner-
ship, 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 $4,494,000, $4,266,000 and $3,888,000 in 2010, 2009 and 2008, respectively.
21
neogen coRpoRation and suBsidiaRies: notes to consolidated Financial statements
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 foreign
subsidiaries because it is expected that such earnings will be reinvested overseas indefinitely. At May 31, 2010 unremitted earnings of the UK
subsidiary were $5,032,000.
Research and Development Costs
Research and Development costs are expensed as incurred.
Advertising Costs
Advertising costs are expensed as incurred and totaled $633,000, $603,000 and $424,000 in 2010, 2009 and 2008, 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 (In thousands, except per share),
2010
2009
2008
Numerator for basic and diluted net income per share
Net Income
Denominator - Denominator for basic net income per share
weighted average shares
Effect of dilutive stock options and warrants
Denominator for diluted net income per share
Net income per share:
Basic
Diluted
$ 17,521
$ 13,874
$ 12,098
22,425
666
23,091
$
$
0.78
0.76
22,003
584
22,587
21,711
788
22,499
$
$
0.63
0.61
$
$
0.56
0.54
In 2009, 417,000 options were excluded from the computations of net income per share as the option prices exceeded the average market price of
the common shares. No options were excluded in 2008 and 2010.
New Accounting Pronouncements
In June 2009, the FASB issued Statement of Financial Accounting Standard (“FAS”) No. 168 - The FASB Accounting Standards Codification and the
Hierarchy of Generally Accepted Accounting Principles - a replacement of FASB Statement No. 162” (codified in ASC 105). This standard establishes
the Accounting Standards Codification (“ASC” or Codification “) as the source of authoritative accounting principles recognized by FASB for all non-
governmental entities in the preparation of financial statements in accordance with GAAP. For SEC registrants, rules and interpretative releases of
the SEC under federal securities laws are also considered authoritative sources of GAAP. The FASB will not issue new standards in the form of State-
ments, FASB Staff Positions (“FSP”) or Emerging Issues Task Force (“EITF”) Abstracts. Instead, it will issue Accounting Standard Updates (“ASUs”). ASUs
will serve to update the Codification, provide background information about the guidance and provide the basis for conclusions on changes in the
Codification. The provisions of this standard were effective for financial statements issued for interim and annual periods ending after September
15, 2009. Accordingly, the Company began to use the new guidelines and numbering system prescribed by the Codification when referring to GAAP
for this period ended November 30, 2009. As the Codification was not intended to change or alter existing GAAP, it did not have any impact on our
consolidated financial results or financial position.
On June 1, 2009, the Company adopted ASC 805 Business Combinations (ASC 805). This standard intended to converge rulemaking and reporting
under U.S. Generally Accepted Accounting Principles (GAAP) with international accounting rules. ASC 805 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 noncontrolling interest in the acquiree, 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
22
neogen coRpoRation and suBsidiaRies: notes to consolidated Financial statements
effects of the business combination. The adoption of the standard had no material impact on the Company’s results of operations or financial posi-
tion at the date of adoption.
ASC 810 Consolidation (ASC 810) requires all entities to report non-controlling (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 an entity and noncon-
trolling interests. The Company was required to adopt the provisions of both ASC 805 and ASC 810 simultaneously on June 1, 2009. The standards
were adopted on June 1, 2009, and did not have a material impact on the Company’s results of operations or financial position. The presentation
and disclosure requirement were applied retrospectively.
Other recent ASU’s issued by the FASB and guidance issued by the SEC did not, or are not believed by management to, have a material effect on the
Company’s present or future consolidated financial statements.
2. goodWill and otHeR intangiBle assets
The Company follows the provisions of ASC 350 – Intangibles Goodwill and Other (ASC 350). ASC 350 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 ASC 350 as of the first
day of the fourth quarter of 2010 and determined that recorded amounts were not impaired and that no write-down was necessary.
The following table summarizes goodwill by business segment:
(In thousands)
Balance, June 1, 2008
Goodwill acquired
Balance, May 31, 2009
Goodwill acquired
Balance, may 31, 2010
Food Safety
$ 12,401
114
12,515
4,037
$ 16,552
Animal Safety
$ 18,216
8,986
27,202
9,145
$ 36,347
Total
$ 30,617
9,100
39,717
13,182
$ 52,899
At May 31, 2010, non-amortizable intangible assets included licenses of $554,000, trademarks of $2,361,000 and a customer relationship in-
tangible of $1,224,000. At May 31, 2009, non-amortizable intangible assets consisted of licenses of $554,000, trademarks of $1,952,000 and a
customer relationship intangible of $1,224,000.
Other amortizable intangible assets consisted of the following and are included in customer based intangible and other noncurrent assets within
the consolidated balance sheets:
(In thousands)
Licenses
Covenants not to compete
Patents
Customer relationship intangibles
Balance, May 31, 2010
Licenses
Covenants not to compete
Patents
Customer relationship intangibles
Balance, May 31, 2009
Gross Carrying
Amount
Less Accumulated
Amortization
$
1,505
50
3,750
17,023
$ 22,328
$
1,225
70
3,513
9,004
$
575
21
1,226
4,002
$
5,824
$
583
35
1,045
2,861
Net Carrying
Amount
$
930
29
2,524
13,021
$ 16,504
$
642
35
2,468
6,143
$ 13,812
$
4,524
$
9,288
Amortization expense for other intangibles totaled $1,701,000, $1,330,000 and $1,156,000 in 2010, 2009 and 2008, respectively. The esti-
mated amortization expense for each of the five succeeding years is as follows: $2,125,000 in 2011, $2,024,000 in 2012, $1,926,000 in 2013,
$1,780,000 in 2014, and $1,631,000 in 2015. The other amortizable intangible assets useful lives are 5 to 20 years for licenses, 5 years for cov-
enants not to compete, 5 to 17 years for patents, and 12 to 20 years for customer relationship intangibles. All definite lived intangibles are amortized
on a straight line basis with the exception of definite lived customer based intangibles which are amortized on an accelerated basis.
23
neogen coRpoRation and suBsidiaRies: notes to consolidated Financial statements
3. Business comBinations
The Consolidated Statements of Income reflect the results of operations for business acquisitions since the respective dates of purchase. All are
accounted for using the purchase method.
On August 24, 2007, Neogen Corporation purchased the net assets of Brandon, South Dakota based Kane Enterprises, Inc. Consideration for the
purchase, including additional net current assets of $800,000, 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 (estimated
useful lives of 5-15 years) 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 segment.
On December 3, 2007, Neogen Corporation purchased the net assets of Winnipeg, Manitoba based Rivard Instruments Inc. a manufacturer of veteri-
nary instruments. Consideration for the purchase was cash of $3,469,000. The allocation of the purchase price consisted of $468,000 in inventory,
$5,000 in fixed assets and $2,996,000 in goodwill and other intangible assets (estimated useful lives of 13-17 years). The acquisition has been
integrated into the Lexington, Kentucky operations and is a strong synergistic fit with the Company’s Animal Safety segment.
On June 3, 2008, Neogen Corporation formed a subsidiary in Mexico, Neogen Latinoamerica S.A.P.I. DE C.V. to acquire its former distributor. The new
business is 40% owned by Neogen Corporation’s former Mexican distributor in Mexico, with the remainder owned by Neogen. The new company will
distribute the Company’s food and animal safety products throughout Mexico. The consideration of $672,000 was allocated $462,000 to current
assets, $30,000 to fixed assets and the remainder to intangible assets (estimated useful lives of 10 years).
On June 30, 2008, Neogen Corporation purchased a disinfectant business from DuPont Animal Health Solutions. The products of this business are
used in animal health hygiene applications. Assets acquired include 14 different product formulations, associated registrations, patents, trademarks,
and other intangibles (estimated useful lives of 5-15 years). As a part of the acquisition, the Company obtained the right to distribute certain
other related DuPont products in North America. DuPont will distribute certain of the newly acquired Neogen products in certain international
markets. Consideration for the purchase was $7,000,000 and $5,193,000 was allocated to goodwill, $1,186,000 to customer based intangible and
$621,000 to trademarks and patents. This acquisition has been integrated into the Lexington, Kentucky, operations and is expected to be a strong
synergistic fit with Company’s Animal Safety segment.
On May 4, 2009, Neogen Corporation acquired International Diagnostics Systems Corporation (IDS), a St. Joseph, Michigan based developer, manu-
facturer and marketer of test kits to detect drug residues in food and animal feed, and drugs in forensic and animal samples. Consideration for the
purchase was $3,955,000. The allocation included net current assets of $498,000, deferred tax liabilities of $400,000 and goodwill and intangible
assets of $2,964,000 (estimated useful lives of 5-20 years) including customer related intangibles of $1,090,000. The acquisition is synergistic to
Animal Safety products and has been integrated therein.
On December 1, 2009, the Company purchased the BioKits food safety business of Gen-Probe, Incorporated. Consideration for the purchase approxi-
mated $6,500,000 in cash and the assumption of trade accounts payable of $175,000. The preliminary allocation of the purchase price included
net current assets of $770,000, fixed assets $163,000 and the remainder to goodwill and other intangible assets. The acquired business will be
integrated into Neogen’s Food Safety segment. Principal products include synergistic allergen test kits.
On April 1, 2010, Neogen Corporation acquired GeneSeek, Inc. of Lincoln, Nebraska, a leading commercial agricultural genetic laboratory. GeneSeek’s
technology employs high-resolution DNA genotyping for identity and trait analysis in a variety of important animal and agricultural plant species.
Consideration for the purchase was $13,800,000 in cash and secondary payment obligation of up to $7,000,000. Preliminary allocation of the pur-
chase price included accounts receivable of $1,923,000, inventory of $1,212,000, fixed assets of $847,000, current liabilities of $600,000, deferred
tax liabilities of $2,050,000, secondary payment related liabilities of $3,583,000, and the remainder to goodwill and other intangible assets (with
estimated lives of 5-20 years). The secondary payment was measured at fair value, which is considered a level 3 fair value measurement under ASC
820-Fair Value Measurement and Disclosure, as it was based on unobservable inputs and involves management’s judgment. The acquisition will be
integrated into the Animal Safety segment and is expected to be a strong synergistic fit.
4. long-teRm deBt
The Company has a financing agreement with a bank (nothing drawn at May 31, 2010 and 2009) providing for an unsecured revolving line of credit
of $10,000,000 that matures on August 20, 2012. Interest is at LIBOR plus 100 basis points (rate under the terms of the agreement was 1.34% at
May 31, 2010). Financial covenants include maintaining specified levels of tangible net worth, debt service coverage, and funded debt to EBITDA,
each of which the Company is in compliance with at May 31, 2010.
5. equity compensation plans
Qualified and non-qualified options to purchase shares of common stock may be granted to directors, officers and employees of the Company under
the terms of the Company’s stock option plans at an exercise price of not less than the fair market value of the stock on the date of grant. Remaining
24
neogen coRpoRation and suBsidiaRies: notes to consolidated Financial statements
shares available for grant under stock option plans were 687,000, 1,085,000 and 1,475,000 at May 31, 2010, 2009 and 2008, respectively. Options
vest ratably over three and five year periods and the contractual terms are generally five years.
(In thousands, except per share)
Outstanding at June 1, 2007 (1,032 exercisable)
Granted
Exercised
Forfeited
Outstanding at May 31, 2008 (777 exercisable)
Granted
Exercised
Forfeited
Outstanding at May 31, 2009 (833 exercisable)
Granted
Exercised
Forfeited
Outstanding at May 31, 2010 (728 exercisable)
Shares
2,271
584
(710)
(31)
2,114
417
(390)
(27)
2,114
426
(480)
(62)
1,998
Weighted-Average
Exercise Price
$
7.40
13.69
6.01
9.35
9.57
18.11
7.23
5.73
11.67
19.60
8.57
13.56
$
14.14
The following is a summary of stock options outstanding at May 31, 2010:
Options Outstanding
Options Exercisable
Range of Exercise Price
$ 2.45–4.94
Number (In thousands)
16
4.95–9.09
9.10–16.72
16.73–20.33
628
549
805
1,998
Average Remaining
Contractual Life
Weighted-Average
Exercise Price
Number (In thousands)
Weighted-Average
Exercise Price
1.53
2.39
3.35
3.91
3.26
$
$
4.24
8.52
13.82
18.93
14.14
16
420
215
77
728
$
$
4.24
8.38
13.90
18.19
10.96
The weighted-average exercise price of shares that were exercisable at May 31, 2009 and 2008 was $8.89 and $7.57, respectively. The weighted-
average grant-date fair value of options granted in 2010, 2009, and 2008 was $6.35, $5.44 and $4.61 respectively. The aggregate intrinsic value
of options outstanding and options exercisable was $23,119,000 and $10,740,000 respectively, at May 31, 2010, $7,850,000 and $4,855,000
respectively, at May 31, 2009 and $16,879,000, and $7,762,000 respectively, at May 31, 2008. The aggregate intrinsic value of options exercised
during the year was $6,554,000 in 2010 and $4,099,000 in 2009 and $6,783,000 in 2008. Remaining compensation cost to be expensed in future
periods for non-vested options was $2,680,000 at May 31, 2010, with a weighted average expense recognition period of 2.2 years.
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.
Shares
(In thousands)
Weighted-Average
Exercise Price
Outstanding warrants at June 1, 2007
Warrants exercised during the year
Outstanding warrants at May 31, 2008
Warrants exercised during the year
Warrants forfeited during the year
Outstanding warrants at May 31, 2009
Warrants exercised during the year
Warrants forfeited during the year
Outstanding warrants at May 31, 2010
121
(40)
81
(24)
(5)
52
(20)
(3)
29
$ 7.05
5.43
7.86
7.22
6.75
8.40
8.28
8.55
$ 8.48
25
neogen coRpoRation and suBsidiaRies: notes to consolidated Financial statements
Common stock totaling 90,860 of the 225,000 originally authorized shares are 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 compensa-
tion) 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
19,828, 19,815 and 21,767 in 2010, 2009 and 2008, respectively.
6. income taXes
The provision for income taxes consisted of the following:
Year ended May 31 (In thousands),
Current:
U.S. Taxes
Foreign
Deferred
2010
$
9,550
450
(200)
$
9,800
2009
5,700
500
1,550
7,750
$
$
2008
5,550
400
450
6,400
$
$
Deferred income taxes reflect the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting pur-
poses and the amounts used for income tax purposes. Significant components of the Company’s deferred income tax liabilities and assets are as follows:
Year ended May 31 (In thousands),
Deferred income tax liabilities
Indefinite and long-lived assets
Prepaids
Other
Deferred income tax assets
Inventories and accounts receivable
Acquired net operating loss carryforwards
Accrued liabilities and other
2010
2009
$
(7,479)
$
(4,079)
(454)
(151)
(8,084)
1,244
429
1,361
3,034
(229)
(451)
(4,759)
844
229
1,161
2,234
Net deferred income tax liabilities
$
(5,050)
$
(2,525)
The acquired net operating loss carryforwards resulted in a deferred tax asset of $429,000, of which $100,000 will expire in 2011 and $329,000
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 (In thousands),
Tax at U.S. statutory rates
Tax credits and other
Provisions for state income taxes, net of federal benefit
2010
9,600
(25)
225
9,800
$
$
2009
7,600
(180)
330
7,750
$
$
2008
6,374
(194)
220
6,400
$
$
The Company has no significant accrual for unrecognized tax benefits at May 31, 2010. Should the accrual of any interest or 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.
26
neogen coRpoRation and suBsidiaRies: notes to consolidated Financial statements
7. commitments and contingencies
The Company is involved in environmental remediation and monitoring activities at its Randolph, Wisconsin manufacturing facility and accrues for
related costs when such costs are determined to be probable and estimable. The Company is currently expensing annual costs of remediation of ap-
proximately $90,000. The Company’s estimated liability for this expense of $916,000 at May 31, 2010 is recorded within other long term liabilities
in the consolidated balance sheet.
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 was $1,337,000, $1,184,000 and $1,231,000 for 2010, 2009 and 2008, respectively.
The Company leases office and manufacturing facilities under noncancelable operating leases. Rent expense for 2010, 2009 and 2008 was $428,000,
$336,000 and $326,000, respectively. Future minimum rental payments for these leases over the remaining terms are as follows: 2011 - $313,000;
2012 - $265,000; and 2013 - $87,000.
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.
8. 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 IRS
limits, 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
$622,000, $542,000 and $476,000 in 2010, 2009 and 2008, respectively.
27
neogen coRpoRation and suBsidiaRies: notes to consolidated Financial statements
9. 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 and provides genetic identification services.
Additionally, the Animal Safety segment produces and markets rodenticides and disinfectants to assist in control of rodents and disease 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 market-
ing 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.
Segment information is as follows:
(In thousands)
2010
Net sales to external customers
Operating income (loss)
Depreciation and amortization
Interest income
Income taxes (benefit)
Total assets
Expenditures for long-lived assets
2009
Net sales to external customers
Operating income (loss)
Depreciation and amortization
Interest income
Income taxes (benefit)
Total assets
Expenditures for long-lived assets
2008
Net sales to external customers
Operating income (loss)
Depreciation and amortization
Interest income
Income taxes (benefit)
Total assets
Expenditures for long-lived assets
Food Safety
Animal Safety
and Eliminations(1)
Total
Corporate
$
76,454
21,103
2,924
–
7,570
74,583
4,364
61,025
14,943
2,717
–
5,356
61,322
1,882
57,664
14,245
2,495
–
5,060
60,951
1,850
$
64,055
$
–
$
140,509
7,801
1,511
–
2,798
87,894
1,067
57,696
6,786
1,173
–
2,432
69,559
954
44,754
4,972
1,021
–
1,766
52,236
621
(2,025)
–
81
(568)
17,756
–
–
(1,241)
–
248
(38)
11,295
–
–
(1,198)
–
442
(426)
13,170
–
26,879
4,435
81
9,800
180,233
5,431
118,721
20,488
3,890
248
7,750
142,176
2,836
102,418
18,019
3,516
442
6,400
126,357
2,471
(1) Includes corporate assets, including cash and cash equivalents and current and deferred tax accounts, and overhead expenses not allocated to specific business segments.
Also includes the elimination of intersegment transactions and noncontrolling interests.
Sales to customers located outside the United States amounted to $56,031,000 or 40% of consolidated sales in 2010, $48,678,000 or 41% in
2009 and $39,333,000 or 38% in 2008 and were derived primarily in the geographic areas of Europe, Canada, South and Central America, and
Asia. Revenues from one Food Safety distributor customer were 10.3% in 2010 and 9.8% in 2009 of total revenues. No other customer represented
revenues in excess of 10% of consolidated net sales. The United States based operations represent 89% of the Company’s long-lived assets as of
May 31, 2010 and 2009.
28
neogen coRpoRation and suBsidiaRies: notes to consolidated Financial statements
10. stock RepuRcHase
In December 2008, the Company’s Board of Directors rescinded an existing program and authorized a new program to purchase, subject to market
conditions, up to 750,000 shares of the Company’s common stock. As of May 31, 2010, 74,684 cumulative shares have been purchased in negoti-
ated and open market transactions for a total price, including commissions, of approximately $923,000. There were no purchases in 2010 or 2008.
Shares purchased under the program were retired.
11. summaRy oF quaRteRly data (unaudited)
(In thousands, except per share data)
August 2009
November 2009
February 2010
May 2010
Quarter Ended
Net sales
Gross margin
Net income
Basic net income per share
Diluted net income per share
$ 32,347
17,270
4,395
.20
.19
$ 35,251
18,522
4,610
.21
.20
$ 33,833
17,461
3,881
.17
.17
$ 39,078
19,722
4,635
.20
.20
Quarter Ended
(In thousands, except per share data)
August 2008
November 2008
February 2009
May 2009
Net sales
Gross margin
Net income
Basic net income per share
Diluted net income per share
$ 28,805
14,804
3,733
.17
.17
$ 31,187
16,125
3,901
.18
.17
$ 27,840
$ 30,889
13,027
2,823
.13
.13
15,477
3,417
.15
.14
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 state-
ments of income.
29
RepoRts
management’s RepoRt on inteRnal contRol oveR Financial RepoRting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange
Act Rules 13-a-15(f) and 15d-15(f). Under the supervision and with the participation of the company’s management, including the Chief Executive
Officer and Chief Financial Officer, an evaluation was conducted as to the effectiveness of internal control over financial reporting as of May 31,
2010, based on the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on that evaluation, management concluded that internal control over financial reporting was effective as of May 31, 2010. The
effectiveness of internal control over financial reporting as of May 31, 2010, has been audited by Ernst and Young, LLP, an independent registered
public accounting firm, as stated in its attestation report, which is included in Item 8 and is incorporated into this Item 9A by reference.
Our assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of GeneSeek,
Inc., which are included in the consolidated financial statements of Neogen Corporation and Subsidiaries and constituted 11% and 10% of total
assets and net assets, as of May 31, 2010 and 1% and 4% of revenues and net income respectively, for the year then ended.
Changes in Internal Control over Financial Reporting
Except for the acquisition of GeneSeek, Inc., no changes in internal control over financial reporting were indentified as having occurred during the
quarter ended May 31, 2010 that have materially affected, or are reasonably likely to materially affect, internal control financial reporting.
James L. Herbert
Chairman and CEO
August 16, 2010
Richard R. Current
Vice President and CFO
RepoRt oF independent RegisteRed puBlic accounting FiRm
The Board of Directors and Shareholders of Neogen Corporation,
We have audited Neogen Corporation and subsidiaries’ internal control over financial reporting as of May 31, 2010, 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 and subsidiaries’ management is responsible for maintaining effective internal control over financial reporting, and for its as-
sessment 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 re-
porting 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 transac-
tions 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 evalu-
ation 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.
30
RepoRts
As indicated in the accompanying Management’s Report on Internal Control over Financial Reporting, management’s assessment of and conclusion
on the effectiveness of internal control over financial reporting did not include the internal controls of GeneSeek, Inc, which is included in the con-
solidated financial statements of Neogen Corporation and subsidiaries and constituted 11% and 10% of total and net assets, respectively, as of May
31, 2010 and 1% and 4% of revenues and net income, respectively, for the year then ended. Our audit of internal control over financial reporting of
Neogen Corporation and subsidiaries also did not include an evaluation of the internal control over financial reporting of GeneSeek, Inc.
In our opinion, Neogen Corporation and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of May
31, 2010, 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 and subsidiaries as of May 31, 2010 and 2009, and the related consolidated statements of income, equity, and cash
flows for each of the three years in the period ended May 31, 2010, and our report dated August 16, 2010 expressed an unqualified opinion thereon.
Grand Rapids Michigan • August 16, 2010
RepoRt oF independent RegisteRed puBlic accounting FiRm
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, 2010 and
2009, and the related consolidated statements of income, equity, and cash flows for each of the three years in the period ended May 31, 2010. 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 re-
quire 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 Corpo-
ration and subsidiaries at May 31, 2010 and 2009, and the consolidated results of their operations and their cash flows for each of the three years
in the period ended May 31, 2010, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of
Neogen Corporation and subsidiaries’ internal control over financial reporting as of May 31, 2010, 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 16, 2010
expressed an unqualified opinion thereon.
Grand Rapids Michigan • August 16, 2010
31
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
May 2006
May 2007
May 2008
May 2009
May 2010
$ 450
400
350
300
250
200
150
100
50
0
May 2005
*$100 invested on May 31, 2005 in stock or index, including reinvestment of dividends. Fiscal year ending May 31.
May 31 of:
Neogen Corporation
NASDAQ Composite
2005
2006
2010
$ 100.00 $ 140.88 $ 189.09 $ 272.86 $ 228.31 $ 399.50
111.25
100.00
106.43
129.36
124.31
87.50
2009
2008
2007
NASDAQ Medical Equipment
100.00
112.92
131.13
132.53
84.67
122.23
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 commis-
sions 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, 2010, there were approximately 369 stockholders of record of
Common Stock that management believes represents a total of approximately 5,420 beneficial holders.
Year Ended
High
low
may 31, 2010
Fourth Quarter
$ 27.39
$ 23.50
Third Quarter
Second Quarter
First Quarter
24.70
22.79
20.23
20.51
18.96
14.56
may 31, 2009
Fourth Quarter
$ 15.98
$ 11.00
Third Quarter
Second Quarter
18.37
21.30
13.11
12.73
First Quarter
19.00
14.80
32