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*
2011
2010
2009
2008
2007
$ 172,683
$ 140,509
$ 118,721
$ 102,418
$ 86,138
85,514
87,169
35,835
76,454
64,055
26,879
61,025
57,696
20,488
57,664
44,754
18,019
$ 22,839
$
$
0.99
0.96
$
$
$
17,521
$ 13,874
$ 12,098
0.78
0.76
$
$
0.63
0.61
$
$
0.56
0.54
$
$
$
47,165
38,973
13,504
9,125
0.44
0.43
21,243
Average Diluted Shares Outstanding*
23,791
23,091
22,587
22,499
*Restated for the years 2007–2009
Total Revenues
Dollars in thousands
Net Income
Dollars in thousands
Total Assets
Dollars in thousands
$180,000
150,000
120,000
90,000
60,000
30,000
0
2007
2008
2009
2010
2011
$24,000
22,000
20,000
18,000
16,000
14,000
12,000
10,000
0
2007
2008
2009
2010
2011
$220,000
200,000
180,000
160,000
140,000
120,000
100,000
80,000
0
2007
2008
2009
2010
2011
In thousands
May 31,
Financial Strength:
2011
2010
2009
2008
2007
Cash and Marketable Securities
$ 56,083
$ 22,806
$ 13,842
$ 14,270
$ 13,424
Working Capital
Total Assets
Long-Term Debt
Equity
104,705
219,662
–
68,987
62,520
180,233
142,176
–
–
54,495
126,357
–
188,978
153,053
128,679
111,248
41,060
105,284
–
91,945
1
To our stockholders, employees
and friends:
Our 2011 fiscal year was another record breaker for revenues, earn-
ings, cash flows and stock value. Although we encountered a number
of rough spots in the year, our team of more than 650 employees over-
came these difficulties as they continued to recognize that the tough-
est thing about success is continuing to be a success.
Continued Strong Earnings
Net income for FY 2011 increased 30% from the prior year to ap-
proximately $22.8 million. This equals $0.96 per share as compared
to last year’s $0.76. Our revenues for FY 2011 increased 23% to ap-
proximately $172.7 million, up from $140.5 million. We’re particu-
larly proud of our operating profit for the year, which increased 33%
to $35.8 million, or 20.8% of sales—our best ever.
The year also marked a continuation in performance consistency as
the fourth quarter was the 77th quarter in the past 82 in which we
have shown increased revenues as compared to the year earlier—a
record now spanning over 20 years.
Balance Sheet Strong
We continued our effective management of working capital during
the year. Even with the 23% increase in revenues, receivables and
inventories were up only 3%. Cost controls coupled with increased
revenues allowed us to increase our tangible assets by approximately
$39 million while only increasing liabilities by $3 million. The out-
standing performance for the
year resulted in an increase of
24% in equity.
Operating Income
Dollars in thousands
$40,000
35,000
30,000
25,000
20,000
15,000
We added $33.3 million to our
cash and marketable securi-
ties, now a total of $56.1 mil-
lion, and have no borrowings
against our bank line of credit.
We believe this cash reserve
could be helpful as we con-
sider the full range of growth
strategies moving forward.
Both Divisions
Solid
10,000
0
2007
2008
2010
2009
Our Animal Safety Division
enjoyed the greatest revenue
growth for the year, up 36%
to over $87 million. The
GeneSeek® animal genetics business contributed strongly to this growth,
but the division also achieved solid organic growth of over 12%.
2011
Food Safety Division revenues increased 12% for the year to approxi-
mately $85 million. Comparisons to a year earlier were difficult since
this division recorded a revenue increase of 25% in the prior year due
to unusually large sales of mycotoxin test kits.
James Herbert and Lon Bohannon
lergen product sales increased almost 45% in FY 2011. Our
tests to detect microorganism contamination such as E. coli
and Salmonella were up 15%. The AccuPoint® 2 testing sys-
tems used to monitor general sanitation had double-digit
growth.
Growth Strategy Continues
Neogen continued to utilize its proven four-point growth
strategy to achieve these FY 2011 results. Market share gain,
new product introduction, synergistic acquisitions and in-
ternational growth all contributed.
Analysis of the revenue growth shows revenue increases
in existing product lines were the best ever, leading us to
believe that we kept up with the total market growth and
gained in market share. Several new products and product
improvements were introduced during the year as Neogen
continues to build its R&D strengths.
Acquisition Integration Key
Since 2000, Neogen has made 19 acquisitions. During FY
2011 we fully integrated two very synergistic acquisitions
that were acquired in the prior year. GeneSeek was a sig-
nificant revenue and profit producer for the year and also
provided backbone activity for our R&D groups. The tools
used to analyze animal genomics can also help differentiate
bacterial pathogens—ultimately leading to quicker devel-
opment of user-friendly tests and allowing food processors
to obtain quicker test results.
This division is focused on the fastest growing market areas. Food al-
During the year we also completed integration of the
2
A Message from Management BioKits food safety product line acquired from Gen-Probe. That
business was moved from Wales to our expanded facilities in
Scotland and was a significant earnings producer since it has
been virtually a “bolt-on” to our Neogen Europe operations.
International Growth Continues
We believe that markets for food and animal safety products in-
ternationally will grow even faster than the domestic markets.
Sales for FY 2011 to customers outside the United States were
up 30% as compared to the prior year and accounted for 42% of
Neogen’s total revenues.
Neogen Europe continues to lead the charge in growing
international sales, achieving a sales increase of 27%. Our Neogen
Latinoamérica subsidiary in Mexico City, which sells both
Neogen’s Food Safety and Animal Safety products, completed
another successful year of revenue growth with sales up 38%.
Neogen do Brasil completed its first year of operation. Though a
significant number of necessary product registrations have been
completed for Brazil, other pending applications should expand
animal safety product sales in the country.
We increased our traction in China this year with a number of
our groups benefiting from sales increases. We shipped a sig-
nificant amount of disinfectant products to China; our plant
disease diagnostic tests used by Chinese plant quarantine agen-
cies continue to be well accepted; and our sanitation monitoring
products, along with several diagnostic products for the dairy
industry showed increased sales in the country.
Performance Rewarded
Neogen’s performance did not go unnoticed by the financial
markets. Early in the year Neogen stock was selling for $25 per
share and it climbed to the $40 range by year end. The compa-
ny’s market cap went over $1 billion for the first time; Forbes
named Neogen to its list of Best Small Companies for the ninth
year; and Fortune again named us one of the 100 Fastest Grow-
ing Companies.
Growing Global Demand
Though we take pride in the 2011 year, we are even more ex-
cited about the great opportunities that still lie ahead. We believe
that the global market for our products will highly correlate to
increases in global population, increases in worldwide urban-
ization, more occurrences in widespread news of foodborne ill-
nesses and death and more regulations on food safety.
Global population now stands at about 6.9 billion and is ex-
pected to rise to perhaps 9 billion by about 2050. Not only will
we need to feed 30% more people, but they will demand higher
quality food than we provide them today.
The trend toward urbanization will continue to be a bigger
concern. It is now estimated that for the first time, the majority
of people worldwide live in towns and cities. A study by the
United Nations shows that by 2050, 70% of the world’s popula-
Equity
Dollars in thousands
tion will be living in cities
and towns, and not produc-
ing their own food. Food
will have to be produced,
processed and transported
from rural food sources to
those urban tables.
$190,000
170,000
150,000
110,000
130,000
The worldwide food indus-
try will have to produce
more food quicker. Food
will be transported further
and pushed through tighter
distribution systems. Food
and animal safety are criti-
cal components of nearly
every one of these require-
ments. Companies
like
Neogen will play an ever increasing role in solving food safety
problems to allow the expanded production.
70,000
90,000
2008
2007
2009
2010
2011
0
Prediction Being Realized
Increasing pressure on food and animal safety is already being
realized. Animal producers worldwide are feeling the pressure
of reduced use of antibiotics to keep animals healthy. Particular-
ly in the European Union, testing for the presence of antibiotic
residues in meat products is increasing dramatically.
As the fruit and vegetable industry faces large food poisoning
outbreaks, it is being pressured to both implement rigorous
food safety practices and meet increased market demands. As a
leader in that industry said recently, “I think we’ve had enough
recalls now that we finally get it.”
Foodborne allergens continue to be the largest source of recalls
in the U.S. The animal feed industry is under more pressure to
monitor its products for adulterants since food safety problems
can be passed from the feed, through the animal, and to the din-
ner plate. As we concentrate more animals in smaller geograph-
ic areas, rodent control has become extraordinarily important to
limit the spread of pathogens.
We believe the title of this year’s annual report captures our
opportunity for the years ahead: Satisfying Growing Global
Demand.
James L. Herbert
Chairman and CEO
Lon M. Bohannon
President and COO
33
3
T he demand for safe and adequate food is a con-
stant across the world’s cultures, and political and
geographic boundaries. While tastes vary from
region to region, and some regional food production
and distribution systems struggle to satisfy hunger, the
demand remains the same everywhere: More safe, high
quality food.
Recent global population estimates for 2050 and beyond
by the United Nations and U.S. Census Bureau point
clearly to a staggering increase in the future global de-
mand for safe food. With a current world population
of close to 7 billion, the United Nations estimates the
world’s population could reach 9 billion in 2050 and as
high as 15.8 billion in 2100.
In the face of the growing global demand for safe food,
a recent study commissioned by the Food and Agricul-
ture Organization of the United Nations states that ap-
proximately one-third of all the food produced annually
for humans in the world (approximately 1.3 billion tons)
is lost or wasted before it is consumed. Food waste oc-
curs most often in industrialized countries when edible
foodstuffs become contaminated and must be destroyed.
In developing countries, food loss occurs mainly when
weaknesses in processing and distribution equipment
and systems lead to the loss of food.
Neogen stands poised with a diverse array of food and
animal safety solutions to continue to help satisfy the
growing global demand for safe food. From cattle ranches
in Brazil, to shellfish processors on the coast of Scotland,
corn farms in the United States, dairy farms in Belgium,
4
Satisfying Growing Global Demand melon producers in Mexico, livestock ranches in New
Zealand and everywhere in between, Neogen offers inno-
vative solutions to help ensure that more safe, high qual-
ity food reaches consumers.
To reach each of its worldwide customers and prospects
with expertise and experience, Neogen’s sales efforts are
divided by market segments. Neogen’s markets include:
Genomics
Neogen’s GeneSeek subsidiary is the leading global pro-
vider of DNA testing for animal agribusiness. GeneSeek
provides everything from research and development to
final implementation of molecular solutions for applica-
tions such as genetic improvement, disease management
and identity management. For example, cattle producers
can use GeneSeek’s technology to tailor breeding pro-
grams to produce more cattle that are more disease resis-
tant and higher in milk production—resulting in dairy
products that are safer, healthier and more environmen-
tally efficient to produce. The same genomic testing is
improving beef, pork and lamb production.
Neogen recently expanded the reach of GeneSeek tech-
nology with the development of the new NeoSEEK™
pathogen DNA detection method for E. coli strains—the
first food safety laboratory technology developed through
the close collaboration of Neogen’s food safety research
group and the GeneSeek research team. NeoSEEK pro-
vides next-day results from food samples through the
GeneSeek laboratory facilities for seven deadly E. coli
strains—O26, O45, O103, O111, O121, O145 and O157.
Like the better known and widely regulated E. coli
O157:H7 strain, these other six E. coli strains are known
food safety concerns, and produce Shiga toxins, which
>
are well known to cause severe illness.
5
Dairy & Beverage
Neogen’s worldwide dairy and beverage team targets
brewers, beverage, juice and water bottlers; wineries and
dairy processors. Neogen currently offers these indus-
tries tests to detect dairy antibiotic residues, water quality,
food allergens and bacteria, along with an ATP sanita-
tion monitoring system.
The unintended accidental and unscrupulous misuse of
antibiotics to treat illness in dairy cows poses known
threats to human health when the cows’ milk is con-
sumed, and interferes with the further processing of the
milk into cultured dairy products. Neogen’s quick and
easy dairy antibiotic tests allow farmers and dairy pro-
cessors to prevent milk with excessive levels of antibiotics
from reaching the marketplace.
Meat & Poultry
Neogen’s meat and poultry team targets processors of
beef, lamb, chicken, pork, eggs and turkey. The company
offers this market tests for foodborne bacteria, such as
E. coli, Salmonella, Listeria and Campylobacter, along
with sanitation and food allergen tests.
Nowhere is the use of Neogen’s testing products to pre-
vent dangerous food from reaching consumers more
evident than through the use of the company’s tests of
specific pathogenic bacteria. The company’s tests are
highly respected because of their speed, accuracy and
ease of use. For example, the company’s test for E. coli
O157:H7, of particular concern in ground beef, can de-
tect the pathogen in as little as 8 hours and before it en-
ters the food chain. Neogen’s dedicated staff of research
and technical support microbiologists is likely the largest
in the industry.
Neogen also offers Acumedia® dehydrated culture media
and diagnostics to worldwide biotechnology customers
who use culture media for varied reasons, including tra-
ditional bacterial testing. Acumedia’s current catalog of
products features approximately 200 items and numer-
ous custom manufactured items.
Aquaculture
Neogen targets the aquaculture industry with its
extensive line of rapid foodborne pathogen, sanitation
monitoring, histamine and shellfish toxin tests. The
company’s recently released rapid tests to detect naturally
occurring toxins in shellfish that cause amnesic shellfish
poisoning and diarrhetic shellfish poisoning will help
prevent these toxins from reaching consumers. Neogen’s
labs in Scotland continually monitor residues in large
numbers of finfish and shellfish.
Grocery Products
Neogen’s grocery product team targets manufacturers of
traditional grocery items, such as bakery goods, cereal
6
foods, natural foods, prepared meals, snacks, confections and pasta. Producers
of these grocery products use Neogen’s complete line of safety testing products,
including tests for dangerous bacteria, spoilage microorganisms, natural toxins,
food allergens and general sanitation levels.
Neogen’s testing products can not only directly prevent contaminated product
from being shipped to retailers and on to consumers, but they can also help
manufacturers establish sound manufacturing processes that minimize the risk
of product contamination. For example, a Neogen food allergen test can be used
as a verification tool that a company’s sanitation program has effectively cleaned
processing equipment when changing over from an allergen-containing prod-
uct to an allergen-free product.
Similarly, Neogen’s products for the detection of spoilage microorganisms (e.g.,
yeast and mold) can lengthen the shelf lives of food items by identifying prod-
ucts that contain excessive levels of the microorganisms, as well as helping to
improve manufacturing processes that led to that contamination.
Milling & Grain
Neogen’s milling and grain team targets producers and processors of feed and
grain, millers and malters, and regulatory personnel responsible to ensure the
safety and quality of the worldwide grain supply. Neogen offers this worldwide
market the most comprehensive line of tests for mycotoxins, ruminant by-prod-
ucts in feed, as well as tests for dangerous bacteria.
The effects of ingesting excessive amounts of mycotoxins (toxins produced by
molds growing on grains such as corn and wheat) range from chronic health
problems to death. In animals, mycotoxins have been shown to cause feed refus-
al, liver damage or cancer, decreased milk and egg production, blood disorders,
>
immune suppression and interference with reproductive efficiency.
7
The use of Neogen’s simple and quick mycotoxin tests en-
sures the safety and quality of grains destined directly for
human food and the wholesomeness of grains to be used
as animal feed.
Fruit & Vegetables
Neogen’s fruit and vegetable team targets producers
and processors of fruits and vegetables, including fresh,
canned and frozen varieties. As with meat and poultry
products, Neogen’s tests for specific foodborne bacteria
can be used in the fruit and vegetable industry to di-
rectly prevent contaminated food items from reaching
consumers.
Neogen’s Adgen brand plant disease diagnostics for fruits,
vegetables and cereals such as wheat, detect the early on-
set of disease, and allow for its effective treatment before
it can devastate healthy and profitable crops. The com-
pany’s plant diagnostics, offered primarily through its
Scotland-based Neogen Europe subsidiary, now includes
tests for more than 250 different viral, bacterial and fun-
gal plant pathogens.
Food Service
Neogen’s food service efforts target fast food restaurants,
full-service restaurants, grocery stores, delis, institu-
tional suppliers and caterers. This market’s growing ac-
knowledgement of its role as the last critical safety link
in the food supply chain has led to a growing acceptance
and usage of food safety products, including Neogen’s
AccuPoint 2 sanitation monitoring system.
Professional Veterinary
Neogen uses its own experienced sales force, and a net-
work of distributors in the United States and 64 other
8
Neogen is uniquely positioned with
a vast array of food and animal
safety solutions, and expertise
and experience, to help satisfy the
growing global demand for ever
increasing amounts of safe food.
countries, to reach veterinarians and professional animal
caregivers primarily in the equine, beef, swine, poultry
and companion animal care businesses. Neogen offers
these businesses veterinary instruments, pharmaceuti-
cals, vaccines, rodenticides, disinfectants, topicals and
diagnostic products.
In an attempt to keep herds and flocks healthy, while
protecting consumers, producers have improved animal
management practices, and included veterinary supple-
ments, electrolytes and vitamins in animal diets. Healthy
animals require less medication and are more resistant
to disease. Neogen’s topicals and disinfectants also play a
significant role in improving both animal and food safety.
Farm & Ranch
Neogen’s farm and ranch team works directly with the
largest U.S. producers of dairy, pork, chicken and turkey
animals to provide specialized products. The products,
including rodenticides, cleaners and disinfectants, help
protect livestock from the spread of dangerous patho-
gens in large, modern integrated production facilities.
Rats and mice remain a serious threat to food and feed-
stuffs, and spread disease. Neogen’s proven line of roden-
ticides is used for effective control of rodent infestations
and is often a critical component of an overall bios-
ecurity plan. The effective use of Neogen’s cleaners and
disinfectants can stop disease-causing pathogens at the
farm from travelling to the processing plant, and then
throughout the food chain.
Retail Animal Care
Neogen uses a vast network of professional distributors
and retailers to supply animal owners and caregivers
with premium quality, yet affordable animal care prod-
ucts. Neogen offers the retail market rodenticides, vet-
erinary products targeted for use on smaller farms and
ranches, and a number of products used to treat and pro-
tect companion animals.
Companion Animal
Neogen’s companion animal teams market diagnostics
designed to ensure the safety of pet food from natural
toxins and bacterial pathogens, and animal care prod-
ucts for dogs, cats, horses and other companion animals.
The pet food safety diagnostics are primarily marketed
directly to pet food manufacturers, while the animal care
products are marketed through a combination of direct,
distributor and retailer sales.
Products for this market include Neogen’s BotVax® B vac-
cine, which has protected thousands of horses against
equine botulism, and a new genetic testing service that
enables dog owners to definitively determine a dog’s
pedigree.
Life Sciences
Products aimed at the life sciences market include test
kits that can be used to detect more than 200 drugs and/
or their metabolites. These tests are marketed to laborato-
ries and end users worldwide for the detection of abused
and therapeutic drugs in racing and food animals, and in
meat products
Neogen also supplies drug detection kits to the forensic
toxicology market for the analysis of urine, blood and
other types of forensic samples. Neogen’s proprietary
substrates for the life sciences market are also sold to di-
agnostic test kit producers throughout the world, in ad-
dition to being used in the manufacture of Neogen’s own
unique diagnostic test kits.
Neogen is uniquely positioned with a vast array of food
and animal safety solutions, and expertise and experi-
ence, to help satisfy the growing global demand for ever
increasing amounts of safe food.
9
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 per-
formance. 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 limit-
ing 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 employ-
ees, impact of weather on agriculture and food production, identification and integration of acquisitions, research and development risks,
patent and trade secret protection, government regulation and other risks detailed from time to time in the Company’s reports on file at
the Securities and Exchange Commission, that could cause Neogen Corporation’s results to differ materially from those indicated by such
forward-looking statements, including those detailed in this “Management’s Discussion and Analysis of Financial Condition and Results of
Operations.”
In addition, any forward-looking statements represent management’s views only as of the day this Report on Form 10-K was first filed with
the Securities and Exchange Commission and should not be relied upon as representing management’s views as of any subsequent date.
While management may elect to update forward-looking statements at some point in the future, it specifically disclaims any obligation to
do so, even if its views change.
Critical Accounting Policies and Estimates
The discussion and analysis of the Company’s financial condition and results of operations are based on the consolidated financial state-
ments 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, rev-
enues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, management evaluates the estimates,
including those related to receivable allowances, inventories and intangible assets. These estimates are based on historical experience and
on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.
The following critical accounting policies reflect management’s more significant judgments and estimates used in the preparation of the
consolidated financial statements.
Revenue Recognition
Revenue from sales of products and services is recognized when a purchase order has been received, the product has been shipped or the
service performed, the sales price is fixed and determinable, and collection of any receivable is probable. To the extent customer payment
is received before all recognition criteria has been met, these revenues are initially deferred and later recognized in the period that all rec-
ognition criteria has been met. 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 expo-
sure 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.
Once a receivable balance has been determined to be uncollectible, that amount is written off against the reserve for uncollectible accounts.
Inventory
A reserve for obsolete and slow moving inventory has been established and is reviewed at least quarterly based on an analysis of the inven-
tory 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 expira-
tion, 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 at least annually. Assessments indi-
cated no impairment of these assets existed in each of 2011, 2010 and 2009. In the event of changes in circumstances that indicate the carry-
ing value of these assets may not be recoverable, management will make an assessment at that time. Factors that could cause an impairment
review to take place would include:
• Significant under performance relative to expected historical or projected future operating results.
10
Management’s Discussion and Analysis of Financial Condition and Results of Operations
• 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 or more of the above indicators of impairment, the carrying value of the reporting unit’s net assets is compared to its fair value using
undiscounted future cash flows of the reporting unit. If the carrying amounts of these assets are greater than the amount of undiscounted
future cash flows, such assets are reduced to their estimated fair value.
Equity Compensation Plans
ASC 718 – Compensation – Stock Compensation addresses the accounting for share-based employee compensation. Further information
on the Company’s equity compensation plans, including inputs used to determine fair value of options is disclosed in Note 5 to the con-
solidated financial statements. ASC 718 requires that share options awarded to employees and shares of stock awarded to employees under
certain stock purchase plans are recognized as compensation expense based on their fair value at grant date. The fair market value of op-
tions granted under the Company’s stock option plans was estimated on the date of grant using the Black-Scholes option-pricing model
using assumptions for inputs such as interest rates, expected dividends, volatility measures and specific employee exercise behavior patterns
based on statistical data. Some of the inputs used are not market-observable and have to be estimated or derived from available data. Use of
different estimates would produce different option values, which in turn would result in higher or lower compensation expense recognized.
To value options, several recognized valuation models exist. None of these models can be singled out as being the best or most correct one.
The model applied by the Company is able to handle some of the specific features included in the options granted, which is the reason for its
use. If a different model were used, the option values would differ despite using the same inputs. Accordingly, using different assumptions
coupled with using a different valuation model could have a significant impact on the fair value of employee stock options. Fair value could
be either higher or lower than the ones produced by the model applied and the inputs used.
Results of Operations
Executive Overview
Revenue of $172,683,000 in fiscal 2011 represented a 23% increase compared to revenue of $140,509,000 in fiscal 2010. Net income for 2011
was $22,839,000, or $0.96 per fully diluted share, compared to $17,521,000, or $0.76 per fully diluted share, in fiscal 2010. Revenue, operat-
ing income and net income for the 2011 fiscal year each established new all-time highs. These results were achieved in a difficult business
environment, both domestically and internationally. The Company’s percentage of sales from customers outside the United States grew from
40% of total revenues in 2010 to 42% in 2011. Cash flow from operations for 2011 improved to $29 million, primarily a result of the profit-
ability of the Company and its ability, through the use of systems and procedures, to control its use of working capital.
Although there were no acquisitions during the fiscal year, the two acquisitions from the prior year performed strongly in helping to increase
revenues in 2011. Following a strong year in which allergen revenues increased by 50%, the BioKits acquisition pushed the food allergen
product line to a second outstanding growth year, increasing sales by more than 44% in 2011. The GeneSeek acquisition, made late in the
2010 fiscal year, made a positive impact by adding revenues of over $18 million in 2011 to the Company. Adding to the strong performance,
Neogen Europe recorded a 27% revenue gain in 2011, following a 24% gain in 2010.
Consolidated gross margins decreased from 51.9% in 2010 to 50.8% in 2011, due primarily to the impact of GeneSeek, which under its busi-
ness model, operates at lower historical gross margins than the Company’s other product lines, and to a lesser extent, product mix. Manage-
ment continued a strong cost containment program begun in 2010. Operating expenses as a percentage of revenues declined from 32.8% in
2010 to 30.1% in 2011 with increased utilization of fixed costs.
The Company’s financial performance continued to gain increased notice in the investment community in 2011. It continued its inclusion
in the Russell 2000 Index and the Standard & Poor’s 600 Healthcare Index. Neogen was also named to Fortune Magazine’s Fastest Growing
100 list and was again named to Forbes Magazine’s annual list of the Best Small Companies in America, for the sixth consecutive year and
the ninth time in the last 11 years.
11
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Revenues
(Dollars in thousands)
Food Safety:
Twelve Months Ended
May 31, 2011
Increase/
(Decrease)
May 31, 2010
Increase/
(Decrease)
May 31, 2009
Natural Toxins, Allergens and Drug Residues
$ 43,108
10%
$
39,338
Bacterial and General Sanitation
Dehydrated Culture Media and Other
Animal Safety:
Life Sciences and Other
Vaccine
Rodenticides and Disinfectants
Veterinary Instruments and Other
DNA Testing
Total Revenues
22,268
20,138
85,514
7,902
2,392
28,226
30,629
18,020
87,169
14%
15%
12%
11%
3%
17%
7%
N/A
36%
19,545
17,571
76,454
7,126
2,329
24,160
28,568
1,872
64,055
$ 172,683
23%
$ 140,509
28%
5%
49%
25%
24%
6%
18%
(2%)
11%
18%
$
30,667
18,539
11,819
61,025
5,730
2,207
20,491
29,268
–
57,696
$ 118,721
Year Ended May 31, 2011 Compared to Year Ended May 31, 2010
The Company’s Food Safety segment revenues grew by 12% overall in 2011, with increases in each major product category compared to 2010.
Organic revenue growth was 9% in the segment, compared to the prior year. The increase in Natural Toxins, Allergens and Drug Residues
of 10% in 2011 included strong contributions in Allergen revenues which increased 45% in comparison with 2010. Natural toxin revenue
was flat in 2011 compared with 2010, when cold and rainy conditions conducive to the production of the mycotoxin deoxynivalenol (DON)
in much of the United States resulted in sales increases of 40% for these test kits. Drug residue product related revenues increased by 5%
compared with 2010, as worldwide concern over residue and toxin levels in human food and animal feed positively affected sales.
Bacterial and General Sanitation revenues increased in 2011 by 14% compared with 2010. While sales of AccuPoint 2 readers and Soleris®
microbial detection instruments were relatively flat due to resistance toward the required initial capital investment for these units, sales of
the associated disposable AccuPoint samplers and Soleris vials from installed units remained strong.
Dehydrated Culture Media and Other revenues increased by 15% in 2011, with strong sales to traditional lab accounts and increased inter-
national revenues.
Animal Safety revenues increased by 36% overall and included a full year of DNA Testing revenues. On an organic basis, excluding revenues
resulting from the GeneSeek acquisition, Animal Safety revenues increased 12% in comparison with fiscal year 2010. Life Sciences and Other
revenues increased 11% in 2011 with broad based increases from existing customers and new key accounts.
Despite the difficult economic conditions in 2011, vaccine revenues increased by 3% compared with 2010, as animal practitioners continued
to utilize the Company’s products.
Rodenticide and Disinfectant revenues increased by 17% in comparison with 2010. The Company’s BioSentry® line of cleaners and disinfec-
tants continued to gain market share and increased by 26% in comparison with 2010. The product line continues to be a strong synergistic
fit as it is marketed with the Company’s full line of biosecurity solutions.
Veterinary Instruments and Other products increased 7% for the year due to improvements in animal protein markets in the second half of
the fiscal year. Ideal® Instruments product offerings, such as needles and syringe products, increased by 21% for the year, with broad based
increases in several other product groups.
DNA Testing revenues, resulting from the purchase of GeneSeek Inc. in April 2010, contributed over $18,000,000 in its first full year with
the Company.
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
12
Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 requires 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.
Dehydrated 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 retaining 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, International Diagnostics Systems (IDS) drug residue diagnostics and GeneSeek, con-
tributed 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 24% in 2010, primarily due to the successful integration of the IDS product line acquired in May
2009. 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.
Veterinary instrument and other sales decreased by 2% in 2010 in comparison with 2009 as many of these products are ultimately used by
customers involved in the production of animal protein. This group of customers has been especially hit hard by the economic recession.
Cost of Goods Sold
(Dollars in thousands)
Cost of Goods Sold
2011
Increase
2010
Increase
2009
$ 84,891
26%
$ 67,534
14%
$ 59,288
Cost of goods sold increased by 26% in 2011 and by 14% in 2010 in comparison with the prior year. This compares against a 23% and 18%
increase in revenues in 2011 and in 2010. Expressed as a percentage of revenues, cost of goods sold was 49%, 48% and 50% in 2011, 2010,
and 2009 respectively. The decline in 2011 gross margin percentage was primarily the result of the business model of GeneSeek, which has
lower gross margins than the other product lines of the Company.
Food Safety gross margins were 64%, 64% and 63% in 2011, 2010 and 2009, respectively. Changes in margins between periods relate pri-
marily to changes in product mix. Margins also improved in 2011 and in 2010 from the effects of efficiencies resulting from investments in
manufacturing facilities and equipment.
Animal Safety gross margins were 37%, 38% and 37% in 2011, 2010 and 2009, respectively. Changes in margins between periods relate pri-
marily to product mix. Excluding the results of the GeneSeek acquisition, margins in 2011 were 39%.
Operating Expenses
(Dollars in thousands)
Sales and Marketing
General and Administrative
Research and Development
2011
Increase
$ 30,020
15,112
6,825
14%
12%
9%
2010
$ 26,350
13,488
6,258
Increase
15%
17%
37%
2009
$ 22,906
11,484
4,555
Sales and marketing expenses increased by 14% in 2011 and by 15% in 2010, each compared with the prior year. As a percentage of sales,
13
Management’s Discussion and Analysis of Financial Condition and Results of Operations
sales and marketing expense decreased to 17% in 2011 from 19% in both 2010 and 2009. Management plans to continue to expand the
Company’s sales and marketing efforts both domestically and internationally and currently expects related expenses to grow over time to
approximately 20% of Company revenues.
General and administrative expenses increased by 12% in 2011 and by 17% in 2010. Increases in 2011 and 2010 resulted primarily from the
absorption of acquisitions, as well as increased levels of operations and added amortization related to businesses acquired. These expenses
have decreased from 10% to 9%, expressed as a percentage of sales, over the past three fiscal years. These declines have resulted from the
fixed nature of many of these expenses, combined with a significant increase in sales.
Research and development expenses increased by 9% in 2011 compared to 2010 and 37% in 2010 in comparison with 2009. As a percentage
of revenue these expenses were 4% in 2011, 5% in 2010 and 4% in 2009. Although some fluctuation in research and development expenses
will occur, management expects research and development expenses to approximate 4-6% of revenues. Certain Company products require
relatively less investment in research and development expenses. Research and development expenses approximate 8% to 10% of revenues
for products and product lines that are required to be supported by research and development.
Operating Income
(Dollars in thousands)
Operating Income
2011
$ 35,835
Increase
2010
33%
$ 26,879
Increase
31%
2009
$ 20,488
During fiscal year 2011 and 2010, the Company’s operating income increased by 33% and 31% compared to the respective prior year. As a
percentage of revenues it was 21%, 19% and 17% in 2011, 2010 and 2009 respectively. The Company has been successful in improving its
operating income in 2011 and 2010 from revenue and gross margin growth from existing products and acquisitions and from control of
manufacturing, distribution and administrative costs.
Other Income (Expense)
(Dollars in thousands)
Other Income (Expense)
2011
$
(596)
Decrease
N/A
$
2010
442
Decrease
(61%)
2009
$
1,136
Other income decreased by $1,038,000 in 2011, from $442,000 income in 2010 to ($596,000) expense in 2011 and decreased by 61% in 2010
in comparison with 2009. Other Income decreased in 2011 primarily due to a charge of $787,000 to Other Expense related to an increase
in the secondary payment obligation for the GeneSeek acquisition. Interest income is a result of the Company’s increase in cash and cash
equivalents and marketable securities in the periods, offset by decreased interest rates. By investing only in certificates of deposit and high
quality A1P1 rated commercial paper maturing in one year or less, the Company follows a very conservative investment philosophy which,
in the current market, results in returns of less than 1%. Investment earnings were $95,000 in 2011, $81,000 in fiscal 2010 and $248,000 in
2009. Other income also included $317,000, $181,000 and $429,000 in royalty income in 2011, 2010 and 2009 and $11,000 in 2011, $80,000
in 2010 and $355,000 in 2009 of gains from foreign currency transactions.
Federal and State Income Taxes
(Dollars in thousands)
Federal and State Income Taxes
2011
$ 12,400
Increase
2010
27%
$
9,800
Increase
26%
2009
$
7,750
The tax provision was 35% of pretax income in 2011, 36% in 2010 and 36% in 2009. Fluctuations in the tax rate from the 35% corporate rate
is due to changes in the mix of the localities where income is earned in any year, stock option plan deductions as a result of exercise of shares
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
(Dollars in thousands, except per share data)
2011
Increase
2010
Increase
2009
Net Income
Net Income Per Share - Basic
Net Income Per Share - Diluted
$ 22,839
$
$
0.99
0.96
30%
$ 17,521
26%
$ 13,874
$
$
0.78
0.76
$
$
0.63
0.61
Net income increased by 30% in 2011 and 26% in 2010 in comparison with the prior years. As a percentage of revenue, net income was 13%
in 2011 and 12% in both 2010 and 2009. All of the above factors contributed to the increase in net income.
14
Management’s Discussion and Analysis of Financial Condition and Results of Operations
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.;
• 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, 2011, the Company had $35,844,000 in cash and cash equivalents, $20,239,000 in marketable securities, working capital of
$104,705,000 and total equity of $188,978,000. The Company has a financing agreement with a bank providing for an unsecured revolving
line of credit of $10,000,000 which matures on August 20, 2012. There were no advances against this line of credit during 2011, 2010 and
2009 and no balance outstanding at May 31, 2011 and 2010. Cash increased $13,038,000 during 2011, marketable securities increased by
$20,239,000, cash provided from operations was $28,843,000 and stock option exercise proceeds provided an additional $10,259,000 of cash.
Additions to property and equipment and other non-current assets used cash of $7,796,000.
Accounts receivable increased $1,201,000 or 4% when compared to May 31, 2010. 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, a measurement of the time it takes to collect
receivables, improved from 59 days at May 31, 2010 to 57 days at May 31, 2011.
Inventory levels increased by 2% or $678,000 in 2011 as compared to 2010. Despite the higher sales volumes, management was able to
maintain a program to control inventory levels while supplying customers with shipments within 48 hours of placing an order. During 2011,
the Company continued programs aimed at reducing inventory and expects to maintain those programs into the future.
The Company is constructing a building in Randolph, Wisconsin to meet its warehousing needs, with expected completion in the first
quarter of FY-2012. The Company has entered an agreement to purchase a 132,000 square foot warehouse facility in Lexington, Kentucky,
expected to close in August 2011. The facilities are generally believed to be adequate to support existing operations in the short run. Both
projects will be funded with available cash.
Neogen has been profitable from operations for its last 73 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 development or its plans to acquire additional businesses, technology and products that fit within the Company’s strategic plan. Ac-
cordingly, 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
$
–
$
–
$
443
42,881
356
41,681
$
43,324
$
42,037
$
–
87
700
787
$
$
–
–
500
500
$
$
–
–
–
–
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,
2011
2010
(In thousands)
Assets
Current Assets
Cash and cash equivalents
Marketable securities
Accounts receivable, less allowance of $800 and $600 at May 31, 2011 and 2010
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
Construction in progress
Less accumulated depreciation
Net Property and Equipment
Other Assets
Goodwill
Other non-amortizable intangible assets
Amortizable customer-based intangibles, net of accumulated amortization of $5,431
and $4,002 at May 31, 2011 and 2010
Other non-current assets, net of accumulated amortization of $2,789 and $1,822
at May 31, 2011 and 2010
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; 23,290,604 and 22,625,399
shares issued and outstanding at May 31, 2011 and 2010
Additional paid-in capital
Accumulated other comprehensive loss
Retained earnings
Total Neogen Corporation and Subsidiaries Stockholders’ Equity
Non-controlling interest
Total Equity
16
$
35,844
20,239
28,634
31,994
1,044
4,747
122,502
1,195
14,417
22,973
1,164
1,217
40,966
18,626
22,340
51,584
5,166
12,006
$
22,806
–
27,433
31,316
774
3,691
86,020
1,181
13,150
19,474
767
180
34,752
15,572
19,180
52,899
4,139
13,021
6,064
74,820
$ 219,662
4,974
75,033
180,233
$
$
8,516
$
7,187
2,715
–
6,566
17,797
8,347
4,540
30,684
–
3,727
81,248
(394)
104,064
188,645
333
188,978
$ 219,662
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
$
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 (Expense)
Interest income
Royalty income
Change in purchase consideration
Other, net
Income Before Income Taxes
Provision for Income Taxes
Net Income
Net Income Per Share
Basic
Diluted
Year ended May 31,
$
2011
172,683
84,891
87,792
$
2010
140,509
67,534
72,975
$
2009
118,721
59,288
59,433
30,020
15,112
6,825
51,957
35,835
95
317
(787)
(221)
(596)
35,239
12,400
22,839
0.99
0.96
$
$
$
26,350
13,488
6,258
46,096
26,879
81
181
–
180
442
27,321
9,800
17,521
0.78
0.76
$
$
$
22,906
11,484
4,555
38,945
20,488
248
429
–
459
1,136
21,624
7,750
13,874
0.63
0.61
$
$
$
See accompanying notes to consolidated financial statements.
17
Neogen Corporation and Subsidiaries: Consolidated Statements of Equity
(In thousands, except shares)
Shares
Amount
Common Stock
Accumulated
Other
Comprehensive
Income (Loss)
Additional
Paid-In Capital
Retained
Earnings
Noncontrolling
Interest
Total Equity
Balance, June 1, 2008
21,777,416
$
3,484
$
57,628
$
421
$
49,715
–
$
111,248
Exercise of options and
warrants, net of share
based compensation,
including $682
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, including
share based compensation
and $709 income tax
benefit
Issuance of shares under
Employee Stock Purchase
Plan
Comprehensive Income:
Net income (loss) for 2010
Foreign currency
translation adjustments
Total Comprehensive Income
Balance, May 31, 2010
Exercise of options and
warrants, including
share based compensation
and $632 income tax
benefit
Issuance of shares under
Employee Stock Purchase
Plan
Comprehensive Income:
Net income (loss) for 2011
Foreign currency
translation adjustments
Total Comprehensive Income
382,782
19,815
62
3
(74,684)
(12)
4,523
295
(911)
4,585
298
(923)
448
448
13,896
(22)
13,874
(851)
(851)
13,023
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
22,626,399
3,621
69,550
(1,676)
81,170
388
153,053
646,953
103
11,283
18,252
3
415
11,386
418
22,894
(55)
22,839
1,282
1,282
24,121
Balance, May 31, 2011
23,290,604
$
3,727
$
81,248
$
(394)
$
104,064
$
333
$
188,978
See accompanying notes to consolidated financial statements.
18
Neogen Corporation and Subsidiaries: Consolidated Statements of Cash Flows
(In thousands)
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
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
Proceeds from the sale of marketable securities
Purchases of marketable securities
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
Effect of Exchange Rate on Cash
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,
2011
22,839
$
2010
17,521
$
2009
13,874
$
5,329
2,253
2,237
(2,992)
(903)
(434)
499
1,196
(1,181)
28,843
(7,796)
40,076
(60,315)
–
(28,035)
10,259
2,992
(1,217)
12,034
196
13,038
22,806
4,435
(200)
2,237
(709)
(2,240)
64
390
3,008
3,482
27,988
3,890
1,550
1,967
(682)
(4,075)
(3,698)
(49)
(2,648)
856
10,985
(5,431)
(2,836)
–
–
(20,302)
(25,733)
5,900
709
100
6,709
–
8,964
13,842
–
–
(11,134)
(13,970)
2,916
(923)
682
(118)
2,557
–
(428)
14,270
$
35,844
$
22,806
$
13,842
$
9,863
$
6,283
$
7,386
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 markets a diverse line of products dedicated to food and animal safety.
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 Latinoamérica S.A.P.I. DE C.V., which is 60% owned and Neogen do Brasil, 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
principles, are excluded from net income and recognized directly as a component of equity. Accumulated other comprehensive income
(loss) consists solely of foreign currency translation adjustments.
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 expo-
sure 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.
Once a receivable balance has been determined to be uncollectible, that amount is written off against the reserve for uncollectible accounts.
One customer accounted for more than 10% of accounts receivable at May 31, 2010. As of May 31, 2010 the balance due from that customer
was $2,608,000, or 10% of the total of all outstanding accounts receivable.
The Company maintained a valuation allowance for accounts receivable of $800,000 at May 31, 2011 and $600,000 at May 31, 2010. Expenses
related to uncollectible accounts and allowance adjustments were $430,000, $242,000 and $199,000 in 2011, 2010 and 2009, respectively.
Write-offs were $230,000, $242,000 and $99,000 in 2011, 2010 and 2009, respectively.
Fair Value of Financial Instruments
The carrying amounts of the Company’s financial instruments other than cash equivalents and marketable securities, which include ac-
counts 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 accounts, savings deposits and certificates of deposit with original maturities of 90 days
or less. Cash equivalents were $35,844,000 and $22,806,000 at May 31, 2011 and 2010, respectively. The carrying value of these assets ap-
proximates fair value.
Fair Value Measurements
Fair value measurements are determined based upon the exit price that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants exclusive of any transaction costs. The Company utilizes a fair value hierarchy based upon
the observability of inputs used in valuation techniques as follows:
Level 1: Observable inputs such as quoted prices in active markets;
Level 2: Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and
Level 3: Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
20
Neogen Corporation and Subsidiaries: Notes to Consolidated Financial Statements
Marketable Securities
The Company has marketable securities held by banks or broker-dealers consisting of short-term domestic certificates of deposit and com-
mercial paper rated at least A-1/P-1 with maturities between 91 days and one year. Outstanding marketable securities at May 31, 2011 were
$20,239,000; there were no marketable securities outstanding at May 31, 2010. These securities are classified as held for sale. The primary ob-
jective of the Company’s short-term investment activity is to preserve capital for the purpose of funding operations; short-term investments
are not entered into for trading or speculative purposes. The fair values are based on quoted market prices for the marketable securities in
active markets with sufficient volume and frequency. (Level 1.)
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
2011
$
12,125
2,192
17,677
2010
$
11,815
1,958
17,543
$
31,994
$
31,316
No less frequently than quarterly, inventory is analyzed for slow moving and obsolete inventory and the valuation allowance is adjusted as
required. Write offs against the allowance are not separately identified. The valuation allowance for inventory was $1,150,000 and $1,000,000
at May 31, 2011 and 2010, respectively.
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
$3,185,000, $2,734,000 and $2,560,000 in 2011, 2010 and 2009, 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 are allocated
to other identifiable intangible 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 and a charge is made to operations. The remaining weighted-average amortization period for customer based
intangibles and other intangibles is 13 and 10 years, respectively, at May 31, 2011.
Long-lived Assets
Management reviews the carrying values of its long-lived assets for possible impairment whenever events or changes in business conditions
indicate that the carrying amount of the assets may not be recoverable. Impairment is first evaluated by comparing the carrying value of
the long-lived assets to undiscounted future cash flows over the remaining useful life of the assets. If the undiscounted cash flows are less
than the carrying value of the assets, the fair value of the long-lived assets is determined, and if lower than the carrying value, impairment
is recognized through a charge to operations.
Reclassifications
Certain amounts in the 2010 and 2009 financial statements have been reclassified to conform to the 2011 presentation.
21
Neogen Corporation and Subsidiaries: Notes to Consolidated Financial Statements
Stock Options
At May 31, 2011, the Company had stock option plans which are described more fully in Note 5.
The weighted-average fair value per share of stock options granted during 2011, 2010 and 2009, estimated on the date of grant using the
Black-Scholes option pricing model, was $8.66, $6.35 and $5.44 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
2011
1.68%
0%
35.8%
4.0 years
2010
2.0%
0%
37.8%
4.0 years
2009
2.9%
0%
32.8%
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, represent-
ing 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 Com-
pany has determined to be the vesting periods.
Revenue Recognition
Revenue from sales of products and services is recognized when a purchase order has been received, the product has been shipped or the
service has been performed, the sales price is fixed and determinable, and collection of any resulting receivable is probable. To the extent
customer payment is received before all recognition criteria has been met, these revenues are initially deferred and later recognized in the
period that all recognition criteria has been met. 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 $5,211,000, $4,494,000 and $4,266,000 in 2011, 2010 and 2009,
respectively.
Income Taxes
The Company accounts for income taxes using the liability method. Under this method, deferred income tax assets and liabilities are de-
termined 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.
The Company’s foreign subsidiaries are comprised of Neogen Europe (wholly-owned subsidiary), Neogen Latinoamérica (60% owned by
Neogen) and Neogen do Brasil (98% owned by Neogen). Based on historical experience as well as the Company’s future plans, earnings from
these subsidiaries are expected to be re-invested indefinitely for future expansion and working capital needs. Furthermore, the Company’s
domestic operations have historically produced sufficient operating cash flow, to mitigate the need to remit foreign earnings. On an annual
basis, the Company evaluates the current business environment and whether any new events or other external changes might require a
reevaluation of the decision to indefinitely re-invest foreign earnings. At May 31, 2011 unremitted earnings of the foreign subsidiaries were
$7,190,000.
Research and Development Costs
Research and Development costs are expensed as incurred.
Advertising Costs
Advertising costs are expensed as incurred and totaled $677,000, $633,000 and $603,000 in 2011, 2010 and 2009, 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:
22
Neogen Corporation and Subsidiaries: Notes to Consolidated Financial Statements
Year ended May 31 (In thousands, except per share),
2011
2010
2009
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
$ 22,839
$
17,521
$ 13,874
23,007
784
23,791
22,425
666
23,091
22,003
584
22,587
$
$
0.99
0.96
$
$
0.78
0.76
$
$
0.63
0.61
In 2011 and 2009, 12,000 and 417,000 options, respectively, were excluded from the computations of net income per share as the option
exercise prices exceeded the average market price of the common shares. No options were excluded in 2010.
New Accounting Pronouncements
Recent ASUs 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 good-
will 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 2011 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, May 31, 2009
Goodwill acquired
Balance, May 31, 2010
Goodwill valuation adjustments
Balance, May 31, 2011
Food Safety
$ 12,515
4,037
16,552
144
$ 16,696
Animal Safety
$ 27,202
9,145
36,347
(1,459)
$ 34,888
Total
$ 39,717
13,182
52,899
(1,315)
$ 51,584
At May 31, 2011, non-amortizable intangible assets included licenses of $555,000, trademarks of $3,387,000 and a customer relationship
intangible of $1,224,000. At May 31, 2010, non-amortizable intangible assets consisted of licenses of $554,000, trademarks of $2,361,000
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, 2011
Licenses
Covenants not to compete
Patents
Customer relationship intangibles
Balance, May 31, 2010
Gross Carrying
Amount
Less
Accumulated
Amortization
Net Carrying
Amount
$
2,606
282
5,099
17,437
$ 25,424
$
1,505
50
3,750
17,023
$ 22,328
$
$
$
768
73
1,948
5,431
8,220
575
21
1,226
4,002
$
5,824
$
1,838
209
3,151
12,006
$ 17,204
$
930
29
2,524
13,021
$ 16,504
23
Neogen Corporation and Subsidiaries: Notes to Consolidated Financial Statements
Amortization expense for other intangibles totaled $2,144,000, $1,701,000 and $1,330,000 in 2011, 2010 and 2009, respectively. The esti-
mated amortization expense for each of the five succeeding years is as follows: $2,435,000 in 2012, $2,135,000 in 2013, $1,977,000 in 2014,
$1,814,000 in 2015, and $1,618,000 in 2016. The other amortizable intangible assets useful lives are 5 to 20 years for licenses, 5 years for
covenants not to compete, 5 to 20 years for patents, and 12 to 20 years for customer based intangibles. All definite lived intangibles are am-
ortized on a straight line basis with the exception of definite lived customer based intangibles which are amortized on an accelerated basis.
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 June 3, 2008, Neogen Corporation formed a subsidiary in Mexico, Neogen Latinoamérica 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 distributes 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 busi-
ness 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 distributes 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 intangibles and $621,000 to trademarks and patents. This acquisition has been integrated into the Lexington, Kentucky,
operations and has been a strong synergistic fit with the Company’s Animal Safety segment.
On May 4, 2009, Neogen Corporation acquired International Diagnostics Systems Corporation (IDS), a St. Joseph, Michigan based developer,
manufacturer and marketer of test kits to detect drug residues in food and animal feed, and drugs in forensic and animal samples. Con-
sideration for the purchase was $3,955,000. The allocation included cash acquired of $493,000, net current assets of $691,000, fixed assets
of $300,000, deferred tax liabilities of $400,000, goodwill (not deductible for tax purposes) and intangible assets (estimated useful lives of
5-20 years) of $3,300,000 including customer based intangibles of $1,090,000. The acquisition has been integrated into the Animal Safety
segment.
On December 1, 2009, the Company purchased the BioKits food safety allergen test kits business of Gen-Probe Incorporated. Consideration
for the purchase approximated $6.5 million in cash. The final allocation of the purchase price included net current assets of $770,000, fixed
assets of $163,000 and intangible assets of $5,522,000. The valuation of the identifiable intangible assets acquired was based on manage-
ment’s estimates, currently available information and reasonable and supportable assumptions. The allocation was generally based on the
fair value of these assets determined using the income approach. These fair value measurements were based on significant inputs not ob-
servable in the market and thus represent Level 3 fair value measurements. The acquisition has been integrated into the Food Safety segment.
On April 1, 2010, Neogen Corporation acquired GeneSeek, Inc. of Lincoln, Nebraska, a leading commercial agricultural genetic labora-
tory. 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 $14,050,000 in cash and secondary payment obligations of up to $7,000,000.
The allocation of the purchase price included accounts receivable of $1,923,000, inventory of $1,512,000, fixed assets of $847,000, current
liabilities of $905,000, deferred tax liabilities of $2,530,000, secondary payment liabilities of $3,583,000, and the remainder to goodwill (not
deductible for tax purposes) and other intangible assets (with estimated lives of 5-20 years). The allocation was generally based on the fair
value of these assets determined using the income approach. These fair value measurements were based on significant inputs not observ-
able in the market and thus represent Level 3 fair value measurements. The secondary payment was based upon future operating results of
the GeneSeek business through 2013, and payable annually over a three year period, measured at fair value, and is considered a Level 3 fair
value measurement. The Company recorded a charge within other income (expense) of approximately $787,000 for the year ended May 31,
2011, representing the increase from its original estimate in fair value of the secondary payment liability. As of May 31, 2011, the balance
of the secondary payment liability recorded was approximately $4,370,000. A payment of $1,856,000 was made in June 2011 to the former
owners of GeneSeek, comprised of $1,537,000 for the first year contingent payment and an additional $319,000 for inventory purchased
post acquisition and settlement of other liabilities. The acquisition has been integrated into the Animal Safety segment.
4. Long-Term Debt
The Company has a financing agreement with a bank providing for an unsecured revolving line of credit of $10,000,000 which matures on
August 20, 2012. There were no advances against this line of credit during 2011, 2010 and 2009 and no balance outstanding at May 31, 2011
and 2010, other than letters of credit of $300,000 at May 31, 2011. Interest is at LIBOR plus 100 basis points (rate under the terms of the
agreement was 1.20% at May 31, 2011). Financial covenants include maintaining specified levels of tangible net worth, debt service coverage,
and funded debt to EBITDA, each of which the Company was in compliance with at May 31, 2011.
24
Neogen Corporation and Subsidiaries: Notes to Consolidated Financial Statements
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 Com-
pany 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 shares available for grant under stock option plans were 397,000, 687,000 and 1,085,000 at May 31, 2011, 2010 and 2009,
respectively. Options vest ratably over three and five year periods and the contractual terms are generally five years.
(In thousands, except for share price)
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 (729 exercisable)
Granted
Exercised
Forfeited
Outstanding at May 31, 2011 (509 exercisable)
Shares
2,114
417
(390)
(27)
2,114
426
(480)
(62)
1,998
293
(627)
(90)
1,574
Weighted-Average
Exercise Price
Weighted-Average
Fair Value
$
$
9.57
18.11
7.23
5.73
11.67
19.60
8.57
13.56
14.14
28.50
9.83
18.22
$
17.77
$
3.45
5.44
2.69
3.91
3.98
6.35
3.04
4.54
4.72
8.66
3.98
5.84
3.03
The following is a summary of stock options outstanding at May 31, 2011:
Range of
Exercise Price
$ 4.23–11.32
11.33–17.45
17.46–19.17
19.18–19.94
19.95–40.58
Options Outstanding
Number (In thousands)
281
326
311
347
309
1,574
Average Remaining
Contractual Life
2.19
2.63
2.53
3.56
5.16
3.23
Weighted-Average
Exercise Price
8.47
$
13.91
18.19
19.55
27.84
17.77
$
Options Exercisable
Number (In thousands)
208
131
101
60
9
509
Weighted-Average
Exercise Price
8.27
$
14.27
18.19
19.55
20.33
13.32
$
The weighted-average exercise price of shares that were exercisable at May 31, 2011 and 2010 was $13.32 and $10.96, respectively. The
weighted-average grant-date fair value of options granted in 2011, 2010, and 2009 was $8.66, $6.35 and $5.44 respectively.
The aggregate intrinsic value of options outstanding and options exercisable was $42,607,000 and $16,040,000 respectively, at May 31, 2011,
$23,119,000 and $10,740,000 respectively, at May 31, 2010 and $7,850,000 and $4,855,000 respectively, at May 31, 2009. The aggregate intrin-
sic value of options exercised during the year was $15,262,000 in 2011, $6,554,000 in 2010 and $4,099,000 in 2009. Remaining compensation
cost to be expensed in future periods for non-vested options was $2,604,000 at May 31, 2011, 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.
(In thousands except for share price)
Outstanding warrants at June 1, 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
Warrants exercised during the year
Warrants forfeited during the year
Outstanding warrants at May 31, 2011
Shares
81
(24)
(5)
52
(20)
(3)
29
(20)
(2)
7
Weighted-Average
Exercise Price
$ 7.86
7.22
6.75
8.40
8.28
8.55
8.48
8.30
8.18
$ 9.02
25
Neogen Corporation and Subsidiaries: Notes to Consolidated Financial Statements
Employee Stock Purchase Plan
Common stock totaling 109,112 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 compensation 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 18,252, 19,828 and 19,815 in 2011, 2010 and 2009, 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
$
2011
9,336
811
2,253
$
12,400
2010
9,550
450
(200)
9,800
$
$
2009
5,700
500
1,550
7,750
$
$
Deferred income taxes reflect the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred income tax liabilities
and assets are as follows:
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
$
2011
(9,500)
(475)
–
(9,975)
1,041
195
1,436
2,662
2010
$
(7,479)
(454)
(151)
(8,084)
1,244
429
1,361
3,034
Net deferred income tax liabilities
$
(7,303)
$
(5,050)
The acquired net operating loss carryforwards resulted in a deferred tax asset of $195,000, which 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
$
2011
12,300
(145)
245
$
12,400
2010
9,600
(25)
225
9,800
$
$
2009
7,600
(180)
330
7,750
$
$
The Company has no significant accrual for unrecognized tax benefits at May 31, 2011. 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. The Company is under audit by the Internal Revenue Service for its 2009 fiscal year.
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 which have ranged from $50,000 to $105,000 per year over the past five years. The Company’s estimated liability for these costs
of $916,000 at May 31, 2011 and 2010, measured on an undiscounted basis over an estimated period of 15 years, is recorded within other
long term liabilities in the consolidated balance sheet.
The Company entered into an agreement in May 2011 to purchase a facility in Lexington, Kentucky for $4,950,000; this transaction is
expected to close in August 2011. This purchase will provide the Company an additional 116,000 square feet of office, production and ware-
house space.
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 $1,561,000, $1,337,000 and $1,184,000 for 2011, 2010 and 2009, respectively.
The Company has agreements with unrelated third parties that provide for guaranteed minimum royalty payments for certain technologies,
as follows: 2012-$100,000, 2013-$250,000, 2014-$350,000, and 2015 and later-$500,000.
The Company leases office and manufacturing facilities under noncancelable operating leases. Rent expense for 2011, 2010 and 2009 was
$477,000, $428,000 and $336,000, respectively. Future minimum rental payments for these leases over their remaining terms are as follows:
2012 - $ 356,000; 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 $733,000, $622,000 and $542,000 in 2011, 2010 and 2009, 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 safety,
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
marketing strategies. The Company evaluates performance based on total sales and operating income of the respective segments. The ac-
counting policies of the segments are the same as those described in Note 1.
Segment information is as follows:
(In thousands)
2011
Net sales to external customers
Operating income (loss)
Depreciation and amortization
Interest income
Income taxes (benefit)
Total assets
Expenditures for long-lived assets
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
$
$
$
Food Safety
Animal Safety
and Eliminations(1)
Total
Corporate
85,514
24,305
3,251
–
8,410
78,373
4,908
76,454
21,103
2,924
–
7,570
74,583
4,364
61,025
14,943
2,717
–
5,356
61,322
1,882
$
87,169
13,342
2,078
–
4,617
90,832
2,888
$
–
$
(1,812)
–
95
(627)
50,457
–
172,683
35,835
5,329
95
12,400
219,662
7,796
$
64,055
$
–
$
140,509
7,801
1,511
–
2,798
87,894
1,067
(2,025)
–
81
(568)
17,756
–
$
57,696
$
–
$
6,786
1,173
–
2,432
69,559
954
(1,241)
–
248
(38)
11,295
–
26,879
4,435
81
9,800
180,233
5,431
118,721
20,488
3,890
248
7,750
142,176
2,836
(1) Includes corporate assets, including cash and cash equivalents, marketable securities, current and deferred tax accounts, and overhead expenses not allocated to specific business segments.
Also includes the elimination of intersegment transactions and noncontrolling interests.
Sales to customers located outside the United States amounted to $72,724,000 or 42% of consolidated sales in 2011, $56,031,000 or 40% in
2010 and $48,678,000 or 41% in 2009 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 9.7% in 2011, 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 96% of the
Company’s long-lived assets as of May 31, 2011 and 2010.
28
Neogen Corporation and Subsidiaries: Notes to Consolidated Financial Statements
10. Stock Repurchase
In December 2008, the Company’s Board of Directors authorized a program to purchase, subject to market conditions, up to 750,000 shares
of the Company’s common stock. As of May 31, 2011, 74,684 cumulative shares have been purchased in negotiated and open market transac-
tions for a total price, including commissions, of approximately $923,000. There were no purchases in 2011 or 2010. Shares purchased under
the program were retired.
11. Summary of Quarterly Data (Unaudited)
(In thousands, except per share)
August 2010
November 2010
February 2011
May 2011
Quarter Ended
Net sales
Gross margin
Net income
Basic net income per share
Diluted net income per share
$ 42,923
$ 43,931
$ 42,235
$ 43,594
22,767
5,824
0.26
0.25
22,488
6,110
0.27
0.26
Quarter Ended
20,588
4,943
0.21
0.21
21,949
5,962
0.26
0.25
(In thousands, except per share)
August 2009
November 2009
February 2010
May 2010
Net sales
Gross margin
Net income
Basic net income per share
Diluted net income per share
$ 32,347
$ 35,251
$ 33,833
$ 39,078
17,270
4,395
0.20
0.19
18,522
4,610
0.21
0.20
17,461
3,881
0.17
0.17
19,722
4,635
0.20
0.20
Quarterly net income per share is based on weighted-average shares outstanding and potentially dilutive stock options and warrants for
the specific period, and as a result, will not necessarily aggregate to total net income per share as computed for the year as disclosed in the
consolidated statements of income.
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 Rues 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, 2011, 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 report-
ing was effective as of May 31, 2011. The effectiveness of internal control over financial reporting as of May 31, 2011, has been audited by
Ernst & 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.
Changes in Internal Control over Financial Reporting
No changes in our internal control over financial reporting were indentified as having occurred during the quarter ended May 31, 2011 that
have materially affected, or are reasonably likely to materially affect, internal control financial reporting.
James L. Herbert
Chairman and CEO
Steven J. Quinlan
Vice President and CFO
July 29, 2011
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of Neogen Corporation,
We have audited Neogen Corporation’s internal control over financial reporting as of May 31, 2011, based on criteria established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria).
Neogen Corporation’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment
of the effectiveness of internal control over financial reporting included in the accompanying “Management’s Report on Internal Control
Over Financial Reporting”. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on
our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those stan-
dards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial re-
porting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides
a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations
of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthor-
ized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
30
Reports
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of
any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in condi-
tions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Neogen Corporation maintained, in all material respects, effective internal control over financial reporting as of May 31,
2011, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consoli-
dated balance sheets of Neogen Corporation as of May 31, 2011 and 2010, and the related consolidated statements of income, equity, and
cash flows for each of the three years in the period ended May 31, 2011, and our report dated July 29, 2011 expressed an unqualified opinion
thereon.
Grand Rapids Michigan
July 29, 2011
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 (the Company) as of May 31, 2011 and 2010, and
the related consolidated statements of income, equity, and cash flows for each of the three years in the period ended May 31, 2011. 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 stan-
dards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Neogen
Corporation at May 31, 2011 and 2010, and the consolidated results of its operations and its cash flows for each of the three years in the
period ended May 31, 2011, 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 effective-
ness of Neogen Corporation’s internal control over financial reporting as of May 31, 2011, based on criteria established in Internal Control-
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated July 29,
2011 expressed an unqualified opinion thereon.
Grand Rapids Michigan
July 29, 2011
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
$ 600
500
400
300
200
100
0
May 2006
May 2007
May 2008
May 2009
May 2010
May 2011
*$100 invested on May 31, 2006 in stock or index, including reinvestment of dividends. Fiscal year ending May 31.
May 31 of:
2006
2007
2008
2009
2010
2011
Neogen Corporation
NASDAQ Composite
NASDAQ Medical Equipment
$ 100.00 $ 134.22 $ 193.68 $ 162.06 $ 283.57 $ 494.56
100.00
121.55
100.00
113.35
118.74
120.40
83.47
76.54
106.84
108.99
135.48
133.83
The stock price performance included in this graph is not necessarily indicative of future stock price performance.
Stock Profile Activity
The Company’s common stock is traded in the over-the-counter market and quoted in the NASDAQ National Market System under the
symbol NEOG. Price ranges reported are based on inter-dealer sale quotations, as reported by NASDAQ, without adjustments for markups,
markdowns, or commissions typically paid by retail investors, and may not represent actual transactions. No cash dividends have ever been
paid, and the Company does not currently anticipate paying cash dividends in the foreseeable future. As of July 29, 2011, there were approxi-
mately 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, 2011
Fourth Quarter
$ 44.84
$ 36.80
Third Quarter
Second Quarter
First Quarter
42.26
37.58
29.91
35.63
30.73
25.06
May 31, 2010
Fourth Quarter
$ 27.39
$ 23.50
Third Quarter
Second Quarter
24.70
22.79
20.51
18.96
First Quarter
20.23
14.56
32