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*
Average Diluted Shares Outstanding*
*Restated for the years 2008–2009
2012
2011
2010
2009
2008
$
184,046 $
172,683 $
140,509 $
118,721 $
102,418
91,104
92,942
33,739
22,513 $
0.96 $
0.94 $
24,019
85,514
87,169
35,835
76,454
64,055
26,879
61,025
57,696
20,488
22,839 $
17,521 $
13,874 $
0.99 $
0.96 $
0.78 $
0.76 $
0.63 $
0.61 $
23,791
23,091
22,587
57,664
44,754
18,019
12,098
0.56
0.54
22,499
$
$
$
Total Revenues
Dollars in thousands
Net Income
Dollars in thousands
Total Assets
Dollars in thousands
$24,000
22,000
20,000
18,000
16,000
14,000
12,000
10,000
0
$190,000
160,000
130,000
100,000
70,000
40,000
0
2008
2009
2010
2011
2012
In thousands
May 31,
Financial Strength:
$260,000
240,000
220,000
200,000
180,000
160,000
140,000
120,000
0
2008
2009
2010
2011
2012
2008
2009
2010
2011
2012
2012
2011
2010
2009
2008
Cash and Marketable Securities
$
68,645 $
56,083 $
22,806 $
13,842 $
14,270
Working Capital
Total Assets
Long-Term Debt
Equity
123,962
251,600
–
219,054
104,705
219,662
–
68,987
62,520
180,233
142,176
–
–
54,495
126,357
–
188,978
153,053
128,679
111,248
1
To our stockholders, employees and friends:
We once again broke revenue records in FY 2012, but
did not show the double-digit growth at the top and
bottom lines as we have most years in the past. Al-
though conditions were difficult, we expanded our
infrastructure to capture the significant growth op-
portunities that lie ahead.
Financials solid
Total revenues for Neogen’s FY 2012 were $184 mil-
lion, a 7% increase from last year’s $172.7 million. The
fourth quarter was the 81st quarter in the past 86 we
have shown increasing revenues as compared to a year
earlier—a record spanning more than 21 years. Net
income for the year totaled $22.5 million compared
to last year’s $22.8 million. This equates to $0.94 per
share for 2012 as compared to $0.96 a year ago, when
an additional 228,000 outstanding shares are taken
into consideration.
Positive quarterly growth trend
A bit over a year ago it was becoming obvious to
management our existing infrastructure could not
sustain our five-year average compound annual sales
growth of 19%. While all the indicators were positive
for strong growth in our food safety and food security
markets, we were bound for a slowdown. The slow-
down occurred in early FY 2012 when revenue growth
dropped below double digits. By the fourth quarter,
we were back on track with revenue growth over 11%.
A number of our flagship product lines showed good
growth in that fourth quarter. Our general sanitation
monitoring products looked good all year and closed
the quarter up 22%. Our Soleris® technology, used to
rapidly detect spoilage organisms such as yeast and
t
n
e
m
e
g
a
n
a
m
m
o
r
f
e
g
a
s
s
e
m
A
2
Steven Quinlan, James Herbert and Lon Bohannon
mold, also increased 20% in the quarter. We also saw strong
growth in several product lines used to detect drug residues
in milk and meat.
Some of our legacy products also achieved strong growth,
such as Ideal veterinary instruments, led by an 18% increase
in detectable needle sales. We bought Ideal 27 years ago and
it continues as a flagship business for us with double-digit
growth for the past several years.
Despite challenging financial conditions in many major Euro-
pean countries, Neogen still derived 42% of its total revenues
from international sources. Our operations in Mexico, Brazil
and Scotland all reported significant increases. Though our
Chinese business can be unpredictable, we also recognized
revenue increases there, by expanding our marketing presence
in Shanghai and Beijing.
Infrastructure and personnel expanded
We accomplished a lot in the year that should position us
well for the years ahead. A new warehouse for our Wisconsin
Hacco operations will provide more effective production and
distribution of our rodenticide and disinfectant products. We
added a new 128,000 square foot building in Lexington, Ky.,
allowing us to expand our Animal Safety manufacturing op-
erations, and improve efficiency and cost. We acquired a beau-
tiful old 36,000 square foot manor house in Ayr, Scotland to
expand our Neogen Europe business that handles food safety
product distribution to 40 European countries. Several new
pieces of equipment will allow us to automate a number of
manufacturing processes and increase capacity.
Our biggest new investments for the fiscal year were in
personnel. During the year we hired approximately 100 new
employees, a 15% increase that now pushes total employment
to more than 750. An investment in additional senior
managers will allow us to be more effective and capture
additional market share.
Proven past
This year marks Neogen’s 30th birthday—a long way from our
humble beginning in 1982. We started with the tools of bio-
technology, an understanding of the hazards of food safety
and how animal health impacts the safety of animal protein
foods. Our knowledge of the markets and ability to adapt the
rapidly developing new science allowed us to build impressive
performance records. Since 2002, we have enjoyed an annual
compound growth rate of 16%.
Neogen’s mission in food and animal safety is every bit as
important as we expected 30 years ago. Even with all the
advances, the U.S. Centers for Disease Control and Prevention
estimates about 48 million Americans suffer from food related
illnesses each year.
As the need for more and higher quality food escalates, food
safety and security becomes ever more critical. The world’s
population of the year 2000 is estimated to double by 2050.
This growing population will demand higher quality food.
Many will be eating meat for the first time, as corn cakes and
boiled rice will no longer suffice, nor will rice milk as a substi-
tute for cow’s milk for babies in China. As the world’s popula-
tion grows, the demographics also will change. By 2050 it is
estimated that 70% of people will not produce their own food.
We will need to produce more food faster with fewer people
and the same land mass—intensifying the need for food and
animal safety.
Future is excellent
Over the past 30 years, Neogen has developed products that
not only help overcome the obstacles of food safety, but also
provide significant aids in expanding the needed quantities
of quality food. As examples, picture what now happens with
Neogen’s help. A rancher can pull a few strands of hair from
the tail of a newborn bull calf and send them to us for analysis.
We can predict how good of a herd sire the bull will be, or if he
might spread any unwanted genetic diseases. We can predict
how fast his steer calf prodigy will gain weight, how efficient
they will be in feed conversion, and give advice on the carcass
quality of those progeny in terms of size of the rib eye steak
and its tenderness.
We aid poultry producers with tests for eggs and the clean-
liness of their hatchery operations, helping them to produce
high quality day-old chicks with improved livability and re-
duced risk for carrying Salmonella. We supply global po-
tato producers with diagnostic tests, allowing them to guard
against diseases that can devastate yields and drive down the
quality of potato products.
Our diagnostic test kits can tell fishermen when it is safe to
harvest shellfish such as oysters and scallops from wild harvest
or aquaculture production.
We can tell seafood processors
whether fish such as tuna are
free from deadly toxins that
can result from improper stor-
age after harvest.
$220,000
200,000
Equity
Dollars in thousands
180,000
120,000
140,000
160,000
100,000
Guarding the processing
plant door
As food products leave farms,
ranches and waters, Neogen
successfully helps food pro-
cessors ensure the continu-
ing safety and quality of their
products. The manufacturers
of snack foods, pet food or ani-
mal feeds make certain their
corn supplies are not con-
taminated with harmful my-
cotoxins with our tests. Our sanitation monitoring products help
processors check that facilities were properly cleaned before food
processing begins. Major beverage companies around the world
use Neogen’s products to ensure filler heads in the bottling plants
have been adequately cleaned before beverages are filled. Dairy
processors use Neogen’s products to test raw milk to make certain
it does not contain veterinary drug residues. Neogen makes a mul-
titude of products that are used for in-process control at food and
beverage facilities to guard against pathogenic organisms such as
Salmonella or Listeria.
2008
2010
2012
2009
2011
0
Almost to the dinner plate
Neogen’s products also check finished goods at the last step be-
fore they reach consumers, including testing for spoilage organ-
isms and unintended food allergens that might find their way into
the food just before it goes into the bottle, can, or bag. Our tests
can even help the grocery delicatessen center make sure the meat
slicer was properly cleaned to help prevent the transfer of bacteria
each time it is used.
Strengths for expansion
As in the past year, some of our future expansion will come from
new products, including 20 product launches scheduled for
FY 2013. Some of our growth will continue to come from increased
market share. Part of our market growth will come from new regu-
lations such as the Food Safety Modernization Act in the U.S., and
similar regulations on dockets in many other parts of the world.
As we move forward, Neogen will continue to expand its revenues
and earnings as we take advantage of our excellent future
opportunities.
James L. Herbert
Chairman and CEO
Lon M. Bohannon
President and COO
Steven J. Quinlan
Vice President and CFO
33
3
The World Health Organization (WHO) has stated its goal
of global food security will be reached “when all people at
all times have access to sufficient, safe, nutritious food to
maintain a healthy and active life.” Since its founding in 1982,
Neogen has supported the WHO’s goal through its mission
to be the leading company in the development and marketing
of solutions for food and animal safety.
Neogen is a pioneer in the development of rapid test kits to
easily and accurately detect threats to the food supply, and
has developed and marketed countless cutting-edge animal
healthcare products to minimize threats and maximize
yields inside the farm gate.
As Neogen enters its 30th year, its mission is more critical than
ever. Neogen understands its customers—and consumers—
face serious consequences if food products are contaminated
with any of a number of well-established or emerging threats,
including dangerous bacteria, natural toxins, spoilage
microorganisms, veterinary drug residues, unlabeled food
allergens, rodent filth, sanitation concerns, broken veterinary
needles or other contaminants. Consumers face equally dire
consequences if food producers are unable to keep pace
with the rapidly growing needs of the world’s expanding
population, jeopardizing global food security.
Neogen offers a vast array of products and services that
enhance the safety, quality and quantity of the global food
supply, every step of the way to the consumer.
4
Proven Past. Excellent Future. Veterinary genomics
Neogen’s GeneSeek® subsidiary is the leading commercial agricultural genetics labo-
ratory in the United States, employing cutting-edge genomic technology. GeneSeek
helps its customers speed genetic improvement efforts, as well as identify eco-
nomically important diseases inside the farm gate. The May 2012 acquisition of the
Igenity® animal genomics business from Merial adds Igenity’s extensive bioinformat-
ics system to identify the animal’s positive or negative traits to GeneSeek’s capabili-
ties. The Igenity program has commercialized the bioinformatics that will play an
important role in meeting the world’s
growing demands related to food se-
curity. Igenity results from these tests
allow cattle producers to make certain
that undesirable genetic traits are not
used in ongoing breeding programs.
Veterinary instruments and supplies
Neogen’s Ideal® Instruments subsid-
iary, founded in 1931, maintains a
leadership role in the development of
precision veterinary drug delivery in-
struments to help minimize drug resi-
dues that might otherwise find their
way into meat and milk supplies. The company’s line of patented detectable needles
greatly lessen the chance that a broken needle would ever arrive on a dinner plate.
Neogen also offers its veterinary products through a continuing program of insti-
tuting exclusive supply agreements with major farm and ranch retailers.
Mycotoxin tests
Neogen’s new Reveal® Q+ fully quantitative lateral flow tests for mycotoxins are
quick and easy, with results in just minutes. Just a simple test can help prevent
the adverse effects that mold toxins can cause if
they contaminate food and animal feed. Neogen’s
mycotoxin test kits provide screening and tests
for aflatoxin, deoxynivalenol (DON), fumonisin,
zearalenone, ochratoxin and T-2/HT-2 toxins.
Plant disease tests
Neogen’s Adgen brand plant disease diagnostics for
fruits, vegetables, and cereals such as wheat, detect
the early onset of disease, and allow for its effective
treatment before it can devastate healthy and profit-
able crops. The company’s plant diagnostics, manu-
factured at its Scotland-based Neogen Europe subsidiary, now include tests for
more than 250 different viral, bacterial and fungal plant pathogens.
Disinfectants and cleaning products
Neogen produces and markets a comprehensive line of preventative animal health
disinfectant and cleaner products to animal producers and veterinary clinics. Pre-
venting bacterial, viral, or fungal outbreaks before they occur is a critical goal in
>
food and animal safety.
1 9 8 2
Neogen is
founded;
James Herbert
named CEO
1 9 8 5
Develops
first rapid
mycotoxin test
Acquires Ideal
Instruments
1 9 8 7
Acquires
rights to
equine
botulism
vaccine
1 9 8 9
Initial public
offering (IPO)
1 9 9 2
Buys ELISA
Technologies
in Lexington,
Kentucky
1 9 9 4
Acquires
AMPCOR
Diagnostics,
Inc., and offers
rapid pathogen
tests for the
first time
5
Rodenticides
Neogen’s broad-based food and animal safety
mission was built with the understanding that
otherwise wholesome food and feed face nu-
merous safety challenges every step of its way to
the consumer. Rats and mice remain a serious
threat to food and feedstuffs, and also spread
disease. Neogen’s proven line of rodenticides is
used for effective control of rodent infestations
and often is a critical component of an overall
biosecurity plan.
Milk analysis
Neogen’s BetaStar® testing products detect the
beta-lactam group of antibiotics (e.g., penicillin,
ampicillin, amoxicillin, cefapirin, and ceftiofur)
in milk. Neogen’s expanding line of products
developed for the dairy industry also includes
BetaStar Combo—a single test that simultaneously
and easily detects beta-lactams and tetracyclines,
another common group of antibiotics.
Drug residue diagnostics
Neogen is a leader in the production of diag-
nostic kits for the detection of drugs in animals.
These kits are used extensively to ensure the in-
tegrity of animal racing, and to help protect con-
sumers from dangerous drug residues.
1 9 9 8
With FARRP,
develops first
rapid food
allergen test
(peanuts)
2 0 0 0
Acquires
Acumedia
dehydrated
culture media
Named to
Forbes’ 200
Best Small
Companies in
America
2 0 0 3
Acquires
Adgen, Ltd.
of the U.K.
Acquires
Hacco
rodenticides
and Hess
& Clark
disinfectants
from ConAgra
2 0 0 4
Develops
AccuPoint
Sanitation
Monitoring
System
Develops first
lateral flow
test reader
7
Seafood analysis
The June 2011 acquisition of the Vero-
Mara seafood testing laboratory based
in Oban, Scotland, extended the testing
products and services Neogen offers to
the seafood industry to include testing
services for the shellfish and salmon aquaculture industries. In addition to its labo-
ratory services, Neogen offers the seafood industry rapid, accurate tests for food-
borne pathogens, sanitation monitoring, histamine and shellfish toxins.
Foodborne pathogens
Neogen’s revolutionary new ANSR™ test system is the quickest and easiest testing
method to definitively detect pathogen DNA or RNA in food and environmental
samples—providing results in just minutes. Other commercially available molecu-
lar amplification tests require up to 3 hours. ANSR and a complementary line of
lateral flow tests for foodborne pathogens such as E. coli, Salmonella and Listeria,
represent important tools used by food producers and processors to prevent out-
breaks of dangerous bacteria.
General microbiology
Neogen’s Soleris® system rapidly detects microbial
contamination by monitoring the color differences
produced by changing pH, gas production, and
other reactions generated by microbial growth. The
Soleris system offers a wide array of rapid tests,
including: total viable count, coliforms, E. coli, yeast
and molds, and lactic acid bacteria. This test system
>
can help ensure the quality of foods that might
otherwise be jeopardized by the presence of spoilage
microorganisms.
Dehydrated culture media
Neogen’s Acumedia® subsidiary has been a premier
manufacturer of high quality dehydrated culture me-
dia (DCM) since 1978 for industrial, biotech, food
safety, and life science applications. Acumedia pro-
duces more than 200 different catalog formulations,
and more than 200 different customized formulations,
many of which play an important role in the control of
harmful pathogens.
Food allergen detection
Neogen offers food allergen test kits to detect almond,
egg, gluten, hazelnut, casein, total milk, mustard,
peanut, sesame, shellfish, crustacea, soy, and walnut
residues. Neogen’s new Reveal 3-D food allergen tests
are simple, single-step test kits that require only mini-
mal training and equipment to help stop the accidental
contamination of non-allergenic foods with unlabeled
allergenic residues.
8
Sanitation monitoring
Neogen’s AccuPoint® 2 Sanitation Monitoring System
quickly and easily measures the ATP collected from
food contact surfaces or liquids as an indication of the
cleanliness of the surface or purity of the liquid. This
simple test system can help prevent the contamina-
tion of food products before they take the final steps
to the consumer.
Veterinary performance and
companion animal products
Neogen’s animal safety efforts extend to
both sides of the farm gate with safety solu-
tions also for performance and companion
animals. The company manufactures and
markets pharmaceuticals, vaccines and diag-
nostic products. The company’s ImmunoVet™
equine health line includes EqStim®, a prov-
en, safe immunostimulant, which boosts the
immune response of horses to help combat
respiratory ailments. Neogen’s BotVax® B
vaccine has protected thousands of horses
against Clostridium botulinum type B.
Additional rapid test kits
Neogen also offers a wide variety of other food safe-
ty and quality testing solutions, including those for
coliforms in water, pesticides, GMOs, ruminant by-
products, sulfites and meat speciation.
Neogen offers a vast array of products and services that
enhance the safety, quality and quantity of the global
food supply, every step of the way to the consumer.
2 0 0 5
Acquires dairy
antibiotic
testing
business from
UCB
2 0 0 6
Acquires
Soleris rapid
microbial test
system
Named to
NASDAQ’s
Global Select
Market
2 0 0 7
Acquires Kane
veterinary
products
2 0 0 8
Acquires line of
disinfectants
and cleaners
from DuPont
Neogen
exceeds
$100 million
in annual
revenue for the
first time
2 0 0 9
Named one of
Fortune’s “40
best stocks to
retire on”
2 0 1 0
Acquires
GeneSeek
geomics
laboratory
2 0 1 2
Acquires
Igenity
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 his-
torical financial information and forward-looking statements. Neogen Corporation management does not provide forecasts of future
financial performance. While management is optimistic about the Company’s long-term prospects, historical financial information
may not be indicative of future financial results.
Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without
limiting the foregoing, the words “believes,” “anticipates,” “plans,” “expects,” “seeks,” “estimates,” and similar expressions are intended to
identify forward-looking statements. There are a number of important factors, including competition, recruitment and dependence
on key employees, impact of weather on agriculture and food production, identification and integration of acquisitions, research and
development risks, patent and trade secret protection, government regulation and other risks detailed from time to time in the Com-
pany’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 ob-
ligation to do so, even if its views change.
Critical Accounting Policies and Estimates
The discussion and analysis of the Company’s financial condition and results of operations are based on the consolidated financial
statements that have been prepared in accordance with accounting principles generally accepted in the United States. The preparation
of these financial statements requires that management make estimates and judgments that affect the reported amounts of assets, li-
abilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, management evaluates
the estimates, including but not limited to 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 pe-
riod 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.
Accounts Receivable Allowance
Management attempts to minimize credit risk by reviewing customers’ credit history before extending credit and by monitoring credit
exposure on a regular basis. An allowance for possible losses on accounts receivable is established based upon factors surrounding
the credit risk of specific customers, historical trends and other information. 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
inventory taking into account the current condition of the asset as well as other known facts and future plans. The amount of reserve
required to record inventory at lower of cost or market may be adjusted as conditions change. Product obsolescence may be caused by
shelf-life expiration, discontinuance of a product line, replacement products in the marketplace or other competitive situations.
Goodwill and Other Intangible Assets
Management assesses goodwill and other non-amortizable intangible assets for possible impairment at least annually. Assessments
indicated no impairment of these assets existed in each of 2012, 2011 and 2010. In the event of changes in circumstances that indicate
the carrying value of these assets may not be recoverable, management will make an assessment at that time. Factors that could cause
an impairment review to take place would include:
• Significant underperformance relative to expected historical or projected future operating results.
• Significant changes in the use of acquired assets or strategy of the Company.
• Significant negative industry or economic trends.
10
Management’s Discussion and Analysis of Financial Condition and Results of Operations
When management determines that the carrying value of definite-lived intangible assets may not be recoverable based on the exis-
tence 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 discounted future cash flows of the reporting unit. If the carrying amounts of these assets are greater than the amount of
discounted 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 infor-
mation on the Company’s equity compensation plans, including inputs used to determine fair value of options is disclosed in Note 5
to the consolidated financial statements. ASC 718 requires that share options awarded to employees and shares of stock awarded to
employees under certain stock purchase plans be recognized as compensation expense based on their fair value at grant date. The fair
market value of options granted under the Company’s stock option plans was estimated on the date of grant using the Black-Scholes
option-pricing model using assumptions for inputs such as interest rates, expected dividends, volatility measures and specific employ-
ee 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 dif-
ferent 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 $184,046,000 in fiscal 2012 represented a 7% increase compared to revenue of $172,683,000 in fiscal 2011. Net income for
2012 was $22,513,000, or $0.94 per fully diluted share, compared to $22,839,000, or $0.96 per fully diluted share, in fiscal 2011. These
results were achieved in a challenging business environment, both domestically and internationally. The Company’s percentage of sales
from customers outside the United States was 42% of total revenues in each of 2011 and 2012. Cash flow from operations for 2012 was
$22,277,000, primarily a result of the profitability of the Company.
Consolidated gross margins decreased from 50.8% in 2011 to 50.2% in 2012, due primarily to shifts in product mix within the Com-
pany’s Animal Safety segment. Operating expenses as a percentage of revenues increased from 30.1% in 2011 to 31.9% in 2012, as the
Company made a significant investment in personnel, primarily in sales and marketing related functions, and other infrastructure
initiatives, which it believes should lead to increased market penetration and improved operating performance in future periods.
The acquisition of the VeroMara seafood testing business in June 2011 and the acquisition of the Igenity genetics testing business from
Merial in May 2012 helped to increase the Company’s product offerings and capabilities. The GeneSeek acquisition, made late in the
2010 fiscal year, continued to make a positive impact by adding revenues of over $18.5 million in 2012 from the $18.0 million in 2011.
On the international front, Neogen Europe recorded an 11% revenue increase in 2012, following a 27% gain in 2011. Sales were par-
ticularly strong in the UK, Germany and France, where the Company has a direct sales presence. Neogen Latinoamérica and Neogen
do Brasil continued to build out their sales infrastructure, and recorded revenue gains of 19.6% and 102.0%, respectively, in 2012 over
2011, albeit from a relatively small base.
Revenues
(Dollars in thousands)
Food Safety:
Natural Toxins, Allergens and Drug Residues
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
May 31, 2012
Increase/
(Decrease)
May 31, 2011
Increase May 31, 2010
Twelve Months Ended
$
45,671
24,677
20,756
91,104
8,190
2,772
26,491
36,997
18,492
92,942
$ 184,046
6%
11%
3%
7%
4%
16%
(6%)
21%
3%
7%
7%
$
43,108
22,268
20,138
85,514
7,902
2,392
28,226
30,629
18,020
87,169
$ 172,683
10%
14%
15%
12%
11%
3%
17%
7%
N/A
36%
23%
$
39,338
19,545
17,571
76,454
7,126
2,329
24,160
28,568
1,872
64,055
$ 140,509
11
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Year Ended May 31, 2012 Compared to Year Ended May 31, 2011
The Company’s Food Safety segment revenues grew by 7% overall in 2012, with increases in each major product category compared to
2011. Organic revenue growth was 6% in the segment, compared to the prior year. The increase in natural toxins, allergens and drug
residues of 6% in 2012 included strong contributions in drug residues revenues, primarily tests to determine the presence of antibiotics
in dairy animals, which increased 11% compared to 2011. Natural toxin revenue increased 1% in 2012 compared to 2011, as increased
aflatoxin test kit revenues, caused by abnormally warm and dry weather conditions in the 2011 growing season, offset year-over-year
declines in DON revenues resulting from an outbreak in the 2010 growing season which did not recur in fiscal year 2012. Allergen
product revenues increased by 6% compared to 2011, as increased worldwide concern over the presence of allergens in finished food
products positively affected sales.
Bacterial and general sanitation revenues increased in 2012 by 11% compared with 2011, marking continued double digit increases.
While sales of diagnostic test kits to detect pathogens such as E. coli, Listeria and Salmonella remained relatively flat with a 1% increase
in product revenues, Soleris microbial detection instruments and vials, designed to detect the presence of yeasts, molds and other con-
taminants in foods, increased by 16% compared to 2011. AccuPoint readers and device sales, used to detect the cleanliness of contact
surfaces in food preparation environments, achieved an 8% increase in product revenues over 2011. Continued market acceptance of
these products is strong.
Dehydrated culture media and other revenues increased by 3% in 2012, as declines in domestic traditional dehydrated culture media
were offset with increased international revenues, certain genomics revenues to a number of European customers and higher ship-
ping revenues.
Animal Safety revenues increased by 7% overall and included minimal revenues from the Igenity acquisition, which closed in May 2012.
On an organic basis, Animal Safety revenues increased 6% in comparison with fiscal year 2011. Life sciences and other revenues in-
creased 4% in 2012 with broad based increases from existing customers and new key accounts with increases in OEM reagent products
leading the increases.
Vaccine revenues increased by 16% compared with 2011, as effective marketing programs to animal practitioners resulted in continued
utilization of the Company’s equine vaccine products.
Rodenticide and disinfectant revenues decreased by 6% in comparison with 2011 following a year in which revenue increased by
17% due to a change in the law regarding product packaging for rodenticides, which went into effect on June 4, 2011. This law resulted
in strong sales of rodenticides in the second half of 2011, which the Company believes, pulled sales which might otherwise have oc-
curred in 2012, into 2011. The Company’s line of cleaners and disinfectants continued to be well accepted in the market, and increased
10% in 2012 compared to 2011. 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 21% for the year due to increased market penetration by several large distribu-
tors, both domestic and international, in 2012. Animal care products led the revenue increases at 27%, disposable gloves and apparel
increased by 25%, and Ideal Instruments product offerings, such as needles and syringe products, increased by 10% 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, increased 3% in 2012, compared to 2011. The
acquisition of the Igenity product in May of 2012 did not contribute significantly in the year, but is expected to contribute in the future.
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 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
international 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 sci-
ences and other revenues increased 11% in 2011 with broad based increases from existing customers and new key accounts.
12
Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 BioSentry line of cleaners and disinfectants
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.
Cost of Goods Sold
(Dollars in thousands)
Cost of Goods Sold
2012
Increase
2011
Increase
2010
$ 91,621
8%
$ 84,891
26%
$ 67,534
Cost of goods sold increased 8% in 2012 and 26% in 2011 in comparison with the prior years. This compares against revenue increases
of 7% and 23% in 2012 and in 2011, respectively. Expressed as a percentage of revenues, cost of goods sold was 50%, 49% and 48%
in 2012, 2011, and 2010, respectively. The increase in cost of goods sold, expressed as a percentage for 2011 compared to 2010, was
primarily the result of the GeneSeek product line, which has lower gross margins than the other product lines of the Company. The
increase in cost of goods sold, expressed as a percentage of sales, in 2012 compared to 2011 was due to product mix within the Animal
Safety segment.
Food Safety gross margins were 65%, 64% and 64% in 2012, 2011 and 2010, respectively. Changes in margins between periods relate
primarily to changes in product mix. Margins also benefitted in 2012 and in 2011 from the effects of efficiencies resulting from invest-
ments in manufacturing facilities and equipment.
Animal Safety gross margins were 36%, 37% and 38% in 2012, 2011 and 2010, respectively. The change in the margins from 2011 to 2012
was primarily due to product mix, as the decline in rodenticide revenues, which generally have a higher gross margin, were offset by
increases in cleaners and disinfectants, which are a lower margin product. The decline in gross margin percentage for 2011 compared
to 2010 was primarily the result of the GeneSeek product line, which has lower gross margins than the other product offerings in the
segment.
Operating Expenses
(Dollars in thousands)
Sales and Marketing
General and Administrative
Research and Development
2012
$ 35,026
17,024
6,636
Increase/
(Decrease)
2011
Increase
17%
13%
(3%)
$ 30,020
15,112
6,825
14%
12%
9%
2010
$ 26,350
13,488
6,258
Sales and marketing expenses increased by 17% in 2012 and by 14% in 2011, each compared with the prior year. As a percentage of sales,
sales and marketing expense increased to 19% in 2012 from 17% in 2011 and was 19% in 2010. The 2012 increase was due primarily
to a significant investment in sales and marketing personnel which the Company undertook beginning in 2011. This investment was
designed to improve the Company’s sales and marketing capabilities, increase market penetration and allow for continued expansion,
both domestically and internationally.
General and administrative expenses increased 13% in 2012 compared to 2011 and by 12% in 2011 compared to 2010. The increase
in 2012 resulted primarily from increased salaries due to increases in personnel necessary to support the growth of the Company,
increased amortization of customer based intangibles related to business acquired and legal fees related to the protection of the Com-
pany’s intellectual property. In 2011, the increase was primarily the result of administrative expenses absorbed from the acquisition of
GeneSeek in April 2010 and increases in personnel related expenses.
Research and development expenses decreased 3% in 2012 compared to 2011 and increased by 9% in 2011 in comparison with 2010.
As a percentage of revenue these expenses were 4% in both 2012 and 2011 and 5% in 2010. Although some fluctuation in research
and development expenses will occur across periods, management expects research and development expenses to approximate 3–5%
of revenues. Certain Company products require relatively less investment in research and development expenses. For those prod-
ucts requiring support by research and development, the Company estimates that it spends 8%–10% of revenues in its research and
development efforts.
13
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Operating Income
(Dollars in thousands)
Operating Income
2012
$ 33,739
Increase/
(Decrease)
(6%)
2011
$ 35,835
Increase
2010
33%
$ 26,879
During fiscal year 2012, the Company’s operating income decreased by 6% compared to 2011 and increased in 2011 by 33% when com-
pared to 2010. As a percentage of revenues it was 18%, 21% and 19% in 2012, 2011 and 2010 respectively. The decline in 2012 was due
primarily to the increases in selling, general and administrative expenses, which more than offset the higher gross margins resulting
from increased revenue. In 2011, the significant increase in sales and gross margins was greater than the increase in operating expenses.
In general, the Company has been successful in improving its operating income from revenue and gross margin growth from existing
products and acquisitions and through control of manufacturing, distribution and administrative costs.
Other Income (Expense)
(Dollars in thousands)
Other Income (Expense)
2012
$
224
Increase
2011
Increase
N/A
$
(596)
N/A
$
2010
442
Other income (expense) consists principally of royalty and license income, interest income from investing the Company’s excess cash
balances, the impact of foreign currency transactions, and other miscellaneous items. 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 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%.
In 2012, other income primarily consisted of royalty and licensing revenues totaling $329,000 in 2012, investment earnings of $107,000,
and $154,000 for the reversal of the secondary payment obligation relating to the GeneSeek acquisition, due to lower than projected
profitability for the year, offset by losses on foreign currency transactions totaling $531,000.
In 2011 other income included a charge of $787,000 related to an increase in the secondary payment obligation for the GeneSeek acqui-
sition due to the achievement of specified profitability levels, royalty and license income of $317,000, investment earnings of $95,000,
and gains from foreign currency transactions of $11,000.
In 2010, other income consisted of royalty and license income of $181,000, investment earnings of $81,000, and gains from foreign
currency transactions of $80,000.
Federal and State Income Taxes
(Dollars in thousands)
Federal and State Income Taxes
2012
$ 11,450
Increase/
(Decrease)
(8%)
2011
$ 12,400
Increase
2010
27%
$
9,800
The tax provision was 34% of pretax income in 2012, 35% in 2011 and 36% in 2010. 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. At the end of 2011, the Company was under audit by the Internal Revenue Service for its 2009 fiscal year; in
2012 this audit was expanded to include the 2010 fiscal year as well. The audit concluded in late 2012 with a small favorable adjustment;
thus, amounts totaling $550,000 which had been reserved as uncertain tax positions were reversed, resulting in an effective tax rate of
33.7% for 2012. Absent this adjustment, the Company’s 2012 tax rate would have been 35.3%, compared to 35.2% in 2011 and 35.9%
in 2010.
Net Income and Net Income Per Share
(Dollars in thousands, except per share data)
Net Income
Net Income Per Share – Basic
Net Income Per Share – Diluted
2012
$ 22,513
$
$
0.96
0.94
Increase/
(Decrease)
(1%)
2011
Increase
2010
$ 22,839
$
$
0.99
0.96
30%
$ 17,521
$
$
0.78
0.76
Net income decreased by 1% in 2012 and increased by 30% in 2011 in comparison with the prior years. As a percentage of revenue,
net income was 12% in 2012, 13% in 2011 and 12% in 2010. All of the above factors contributed to the changes in net income for the
applicable years.
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 materi-
ally 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, 2012, the Company had $49,045,000 in cash and cash equivalents, $19,600,000 in marketable securities, working capital
of $123,962,000 and total equity of $219,054,000. The Company has a financing agreement with a bank providing for an unsecured
revolving line of credit of $12,000,000 which expires on August 31, 2013. There were no advances against this line of credit during 2012,
2011 and 2010 and no balance outstanding at May 31, 2012 and 2011. Cash increased $13,200,000 during 2012, marketable securities
decreased by $639,000, cash provided from operations was $22,277,000 and proceeds from stock option and employee stock purchase
plan exercises provided an additional $7,626,000 of cash. Additions to property and equipment and other non-current assets used cash
of $12,413,000.
Accounts receivable increased $7,204,000 or 25%, compared to May 31, 2011. This resulted primarily from increased sales and the
timing of those sales. Sales in the last two months of 2012 were $5,600,000 higher than the last two months of 2011. These accounts
are being actively managed and no losses thereon in excess of amounts reserved are currently expected. Days sales outstanding, a mea-
surement of the time it takes to collect receivables, increased from 57 days at May 31, 2011 to 60 days at May 31, 2012, primarily due
to extended terms granted to some of the large international distributors.
Inventory levels increased by 9% or $3,093,000 in 2012 as compared to 2011. Increases were due to higher sales volume and inventory
build in Lexington to accommodate the move from a rented production facility to the newly purchased warehouse and production fa-
cility and increased chip inventories at GeneSeek, the result of large bulk purchases to gain larger discounts. During 2012, the Company
continued programs aimed at improving inventory turnover and expects to maintain those programs into the future.
The Company completed construction of a warehouse in Randolph, Wisconsin in early 2012. It also purchased a 128,000 square foot
warehouse facility in Lexington, Kentucky in August 2011 for $4.9 million. These facilities are generally believed to be adequate to sup-
port their existing operations in the near term.
Neogen has been profitable from operations for its last 77 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 prod-
ucts currently under development or its plans to acquire additional businesses, technology and products that fit within the Company’s
strategic plan. Accordingly, the Company may be required to or may choose to issue equity securities or enter into other financing
arrangements for a portion of the Company’s future capital needs.
The Company is subject to certain legal and other proceedings in the normal course of business that, in the opinion of management,
has not had, and is not expected to 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
–
87
27,238
$ 27,325
Less than
one year
–
$
87
26,388
$ 26,475
$
1–3 years
–
–
850
$ 850
3–5 years
–
$
–
–
–
$
More than
5 years
–
$
–
–
–
$
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
Assets (In thousands)
Current Assets
Cash and cash equivalents
Marketable securities
Accounts receivable, less allowance of $800 and $800 at May 31, 2012 and 2011
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
$7,111 and $5,431 at May 31, 2012 and 2011
Other non-current assets, net of accumulated amortization of $3,578 and $2,789
at May 31, 2012 and 2011
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
Commitments and contingencies (note 7)
Equity
Preferred stock, $1.00 par value - shares authorized 100,000; none issued
and outstanding
Common stock, $0.16 par value - shares authorized 60,000,000; 23,619,761 and
23,290,604 shares issued and outstanding at May 31, 2012 and 2011
Additional paid-in capital
Accumulated other comprehensive loss
Retained earnings
Total Neogen Corporation and Subsidiaries Stockholders’ Equity
Non-controlling interest
Total Equity
Year ended May 31,
2012
2011
$ 49,045
19,600
35,652
34,992
1,328
3,324
143,941
1,439
20,657
27,508
1,410
590
51,604
21,671
29,933
53,052
5,270
10,826
$
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
8,578
77,726
$ 251,600
6,064
74,820
$ 219,662
$ 10,760
$
8,516
2,756
809
5,654
19,979
9,974
2,593
32,546
2,715
–
6,566
17,797
8,347
4,540
30,684
–
–
3,779
89,592
(1,227)
126,695
218,839
215
219,054
$ 251,600
3,727
81,248
(394)
104,064
188,645
333
188,978
$ 219,662
16
See accompanying notes to consolidated financial statements.
Neogen Corporation and Subsidiaries: Consolidated Statements of Income
(In thousands, except per share)
Net Sales
Cost of Goods Sold
Gross Margin
Operating Expenses
Sales and marketing
General and administrative
Research and development
Operating Income
Other Income (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,
2012
$ 184,046
91,621
92,425
2011
2010
$ 172,683
84,891
$ 140,509
67,534
87,792
72,975
35,026
17,024
6,636
58,686
33,739
107
329
154
(366)
224
33,963
11,450
$ 22,513
$
$
0.96
0.94
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
$
$
$
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, 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
22,105,329
$
3,537
$ 61,535
$
(430)
$ 63,611
426
$ 128,679
500,242
19,828
80
4
7,687
328
7,767
332
17,559
(38)
17,521
(1,246)
(1,246)
16,275
Balance, May 31, 2010
22,625,399
3,621
69,550
(1,676)
81,170
388
153,053
Exercise of options and
warrants, including
share based compensation
and $2,992 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
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
Exercise of options and
warrants, including
share based compensation
and $1,829 income tax
benefit
Issuance of shares under
Employee Stock Purchase
Plan
Comprehensive income:
Net income (loss) for 2012
Foreign currency
translation adjustments
Total comprehensive income
315,013
14,144
50
2
7,837
507
7,887
509
22,631
(118)
22,513
(833)
(833)
21,680
Balance, May 31, 2012
23,619,761
$
3,779
$ 89,592
$ (1,227)
$ 126,695
215
$ 219,054
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,
2012
$ 22,513
2011
2010
$
22,839
$
17,521
6,173
1,340
2,455
(1,829)
(7,204)
(3,093)
1,497
2,330
(1,905)
22,277
(12,413)
72,270
(71,631)
(4,011)
(15,785)
5,797
1,829
(750)
6,876
(167)
13,201
35,844
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
(5,431)
–
–
(20,302)
(25,733)
5,900
709
100
6,709
–
8,964
13,842
$ 49,045
$
35,844
$
22,806
$
6,445
$
9,863
$
6,283
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 and services 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 94% owned. Noncontrolling interest represents the noncontrolling owner’s proportionate share in the equity of the Com-
pany’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 pre-
sented.
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 ac-
counting principles, are excluded from net income and recognized directly as a component of equity. Accumulated other comprehen-
sive income (loss) consists solely of foreign currency translation adjustments.
Accounts Receivable and Concentrations of Credit Risk
Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of accounts receivable.
Management attempts to minimize credit risk by reviewing customers’ credit history before extending credit and by monitoring credit
exposure on a regular basis. An allowance for possible losses on accounts receivable is established based upon factors surrounding
the credit risk of specific customers, historical trends and other information. Collateral or other security is generally not required for
accounts receivable. 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, 2012. As of May 31, 2012 the
balance due from that customer was $3,785,000, approximately 10% of the total of all outstanding accounts receivable.
The Company maintained a valuation allowance for accounts receivable of $800,000 at May 31, 2012 and $800,000 at May 31, 2011.
Expenses related to uncollectable accounts and allowance adjustments were $38,000, $430,000 and $242,000 in 2012, 2011 and 2010,
respectively. Write-offs were $38,000, $230,000 and $242,000 in 2012, 2011 and 2010, respectively.
Fair Value of Financial Instruments
The carrying amounts of the Company’s financial instruments other than cash equivalents and marketable securities, which include
accounts receivable, accounts payable, and accrued expenses, approximate fair value based on either their short maturity or current
terms for similar instruments.
Cash and Cash Equivalents
Cash and cash equivalents consist of bank demand accounts, savings deposits, certificates of deposit and commercial paper with
original maturities of 90 days or less. Cash equivalents were $49,045,000 and $35,844,000 at May 31, 2012 and 2011, respectively. The
carrying value of these assets approximates 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
commercial paper rated at least A-2/P-2 with maturities between 91 days and one year. Outstanding marketable securities at May 31,
2012 were $19,600,000; there were $20,239,000 marketable securities outstanding at May 31, 2011. These securities are classified as
held for sale. The primary objective 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. These are recorded at fair values based on
inputs, other than quoted prices in active markets, that are observable either directly or indirectly (Level 2).
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
Purchased finished goods
2012
$ 13,997
2,110
18,885
$ 34,992
2011
$ 12,125
2,192
17,677
$ 31,994
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 $1,100,000 and
$1,150,000 at May 31, 2012 and 2011, 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 ten years for furniture, fixtures, machinery and equipment.
Depreciation expense was $3,646,000, $3,185,000 and $2,734,000 in 2012, 2011 and 2010, 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 allo-
cated 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, covenants not-to-compete 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, or when indications of impairment exist, to determine if such as-
sets 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 7 years, respectively, at May 31, 2012 and 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 con-
ditions 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 discounted future cash flows over the remaining useful life of the assets. If the discounted 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 2011 and 2010 financial statements have been reclassified to conform to the 2012 presentation.
21
Neogen Corporation and Subsidiaries: Notes to Consolidated Financial Statements
Stock Options
At May 31, 2012, 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 2012, 2011 and 2010, estimated on the date of grant using
the Black-Scholes option pricing model, was $10.41, $8.66 and $6.35 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
2012
1.2%
0%
36.4%
2011
1.7%
0%
35.8%
4.0 years
4.0 years
2010
2.0%
0%
37.8%
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, representing the period of time that options granted are expected to be outstanding, is based on historical option exercise and em-
ployee termination data. The Company recognizes the cost of stock options using the accelerated method over their requisite service
periods which the Company has determined to be the vesting periods.
Revenue Recognition
Revenue from sales of products 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 recog-
nized 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; these expenses totaled $5,940,000, $5,211,000 and $4,494,000
in 2012, 2011 and 2010, respectively.
Income Taxes
The Company accounts for income taxes using the liability method. Under this method, deferred income tax assets and liabilities are
determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the
enacted tax rates in effect for the years in which the differences are expected to reverse. Deferred income tax expense represents the
change in net deferred income tax assets and liabilities during the year.
The Company’s foreign subsidiaries are comprised of Neogen Europe (wholly owned subsidiary), Neogen Latinoamérica (60% owned
by Neogen) and Neogen do Brasil (94% owned by Neogen). Based on historical experience as well as the Company’s future plans, earn-
ings 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, 2012 unremitted earnings of
the foreign subsidiaries were $9,609,000.
Research and Development Costs
Research and Development costs are expensed as incurred.
Advertising Costs
Advertising costs are expensed as incurred and totaled $993,000, $677,000 and $633,000 in 2012, 2011 and 2010, respectively.
22
Neogen Corporation and Subsidiaries: Notes to Consolidated Financial Statements
Net Income Per Share
Basic net income per share is based on the weighted average number of common shares outstanding during each year. Diluted earn-
ings per share is based on the weighted average number of common shares and dilutive potential common shares outstanding. The
Company’s dilutive potential common shares outstanding during the years result entirely from dilutive stock options and warrants. The
following table presents the net income per share calculations:
Year ended May 31 (In thousands, except per share),
2012
2011
2010
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
$ 22,513
$ 22,839
$ 17,521
23,466
553
24,019
$
$
0.96
0.94
23,007
784
23,791
$
$
0.99
0.96
22,425
666
23,091
$
$
0.78
0.76
In 2012, 52,300 and in 2011, 12,000 options 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
In June 2011, the FASB issued an accounting standards update titled Presentation of Comprehensive Income. This update eliminates
the current option to report other comprehensive income and its components in the statement of changes in equity. An entity can elect
to present items of net income and other comprehensive income in one continuous statement or in two separate consecutive state-
ments. Each component of net income and each component of other comprehensive income, together with totals for comprehensive
income and its two parts, net income and other comprehensive income, must be displayed under either alternative. The Company will
adopt the update in the first quarter of its fiscal 2013; the adoption will affect the presentation of its financial statements, but will not
have an impact on the results of the Company’s operations.
In September 2011, the FASB issued an accounting standards update titled Intangibles — Goodwill and Other: Testing Goodwill for
Impairment. This update gives the option of performing a qualitative assessment to determine whether it is more likely than not that
the fair value of a reporting unit is less than its carrying amount and, in some cases, skip the two-step impairment test. The Company
does not believe that the adoption of this update will have a material effect on the Company’s consolidated financial statements.
2. Goodwill and Other Intangible Assets
The Company follows the provisions of ASC 350 – Intangibles Goodwill and Other (ASC 350). ASC 350 prohibits the amortization
of goodwill and intangible assets with indefinite lives and requires that the Company evaluate these intangibles for impairment on an
annual basis. Management has completed the required annual impairment tests of goodwill and intangible assets with indefinite lives
as prescribed by ASC 350 as of the first day of the fourth quarter of 2012 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, 2010
Goodwill acquired
Balance, May 31, 2011
Goodwill acquired
Balance, May 31, 2012
Food Safety
$ 16,552
144
16,696
–
$ 16,696
Animal Safety
$ 36,347
(1,459)
34,888
1,468
$ 36,356
Total
$ 52,899
(1,315)
51,584
1,468
$ 53,052
At May 31, 2012, non-amortizable intangible assets included licenses of $555,000, trademarks of $3,491,000 and a customer relation-
ship intangible of $1,224,000. At May 31, 2011, non-amortizable intangible assets consisted of licenses of $555,000, trademarks of
$3,387,000 and a customer relationship intangible of $1,224,000.
23
Neogen Corporation and Subsidiaries: Notes to Consolidated Financial Statements
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, 2012
Licenses
Covenants not to compete
Patents
Customer relationship intangibles
Balance, May 31, 2011
Gross
Carrying
Amount
$ 3,814
282
4,497
17,937
$ 26,530
$ 2,606
282
5,099
17,437
$ 25,424
Less
Accumulated
Amortization
$ 1,066
127
1,951
7,111
$ 10,255
$
768
73
1,948
5,431
$ 8,220
Net Carrying
Amount
$ 2,748
155
2,546
10,826
$ 16,275
$ 1,838
209
3,151
12,006
$ 17,204
Amortization expense for intangibles totaled $2,537,000, $2,144,000 and $1,701,000 in 2012, 2011, and 2010, respectively. The esti-
mated amortization expense for each of the five succeeding years is as follows: $2,438,000 in 2013, $2,259,000 in 2014, $2,032,000 in
2015, $1,818,000 in 2016, and $1,725,000 in 2017. The amortizable intangible assets useful lives are five to 20 years for licenses, five
years for covenants not to compete, five to 20 years for patents, and 12 to 20 years for customer based intangibles. All definite lived
intangibles are amortized on a straight line basis with the exception of definite lived customer based intangibles which are amortized
on an accelerated basis.
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 December 1, 2009, the Company purchased the BioKits food safety allergen test kits business of Gen-Probe Incorporated. Con-
sideration for the purchase, which was determined through arm’s length negotiations, 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 management’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 observable 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 re-
mainder to goodwill (not deductible for tax purposes) and other intangible assets (with estimated lives of five to 20 years). The alloca-
tion 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 observable 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, mea-
sured 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 sec-
ondary 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. In 2012, the Company
reversed $154,000 of the secondary payment liability, based on a lower calculated second year payout than had been estimated at May
31, 2011 due to lower 2012 earnings. In May 2012, the second year payment of $1,263,000 was made to the former owners, and the
balance of the secondary liability recorded at May 31, 2012 was $1,495,000 for the third and final year of the agreement. The acquisition
has been integrated into the Animal Safety segment.
On June 21, 2011, Neogen Corporation acquired the assets of VeroMara seafood testing laboratory for approximately $813,000 in
cash and a potential secondary payment of approximately $200,000 from its parent company, GlycoMar Ltd. Based in Oban, Scotland,
VeroMara offers commercial testing for the shellfish and salmon aquaculture industries. VeroMara’s offerings include tests for shellfish
24
Neogen Corporation and Subsidiaries: Notes to Consolidated Financial Statements
toxins, general foodborne pathogens, including E. coli, noroviruses, and salmon husbandry. VeroMara recorded revenues of approxi-
mately $800,000 (U.S.) in its most recently completed fiscal year. The acquisition is expected to provide a strong synergistic fit for the
Company’s Food Safety segment and was integrated into the Company’s Scotland location.
On May 1, 2012, the Company purchased the assets of the Igenity animal genomics business from Merial Limited. Consideration
for the purchase, which was determined through arm’s length negotiations, was $3,200,000 in cash and included preliminary alloca-
tions of net current assets of $335,000, fixed assets of $340,000, $600,000 accrued for secondary consideration and intangible assets
of $3,125,000. 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 observable in the market and thus represent Level 3 fair value measure-
ments. In the past, GeneSeek conducted the genetic testing of samples for Igenity, and Igenity used the information with its extensive
bioinformatics system to identify the animal’s positive or negative traits. The Igenity business will be moved to GeneSeek’s operations
in Lincoln, Nebraska, and operate as part of Neogen’s GeneSeek subsidiary, within 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 $12,000,000 which matures
on September 1, 2013. There were no advances against this line of credit during 2012, 2011 and 2010 and no balance outstanding at
May 31, 2012 and 2011. Interest is at LIBOR plus 100 basis points (rate under the terms of the agreement was 1.24% at May 31, 2012).
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, 2012 and May 31, 2011.
5. Equity Compensation Plans
Qualified and non-qualified options to purchase shares of common stock may be granted to directors, officers and employees of the
Company under the terms of the Company’s stock option plans. These options are granted 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 1,108,000, 397,000
and 687,000 at May 31, 2012, 2011 and 2010, 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, 2009 (833 exercisable)
Granted
Exercised
Forfeited
Outstanding at May 31, 2010 (729 exercisable)
Granted
Exercised
Forfeited
Outstanding at May 31, 2011 (509 exercisable)
Granted
Exercised
Forfeited
Outstanding at May 31, 2012 (575 exercisable)
Shares
Weighted-Average
Exercise Price
Weighted-Average
Fair Value
2,114
426
(480)
(62)
1,998
293
(627)
(90)
1,574
316
(320)
(27)
1,543
$
11.67
19.60
8.57
13.56
14.14
28.50
9.83
18.22
17.77
34.59
12.44
16.62
$
3.98
6.35
3.04
4.54
4.72
8.66
3.98
5.84
5.71
10.41
4.39
5.39
$
22.34
$
6.95
The following is a summary of stock options outstanding at May 31, 2012:
Options Outstanding
Options Exercisable
Range of
Exercise Price
$ 4.23–16.04
16.05–19.17
19.18–19.94
19.95–33.92
33.93–40.58
Number
300,053
296,455
328,155
300,450
318,000
1,543,113
Average Remaining
Contractual Life
1.95
2.12
2.57
4.10
4.74
3.11
$
Weighted-Average
Exercise Price
11.29
17.99
19.55
27.66
34.70
22.34
$
Number
212,744
170,610
117,481
72,486
1,767
575,088
Weighted-Average
Exercise Price
10.35
$
17.84
19.55
26.58
40.47
16.59
$
The weighted-average exercise price of shares that were exercisable at May 31, 2012 and 2011 was $16.59 and $13.32, respectively. The
weighted-average grant-date fair value of options granted in 2012, 2011, and 2010 was $10.41, $8.66 and $6.35, respectively.
25
Neogen Corporation and Subsidiaries: Notes to Consolidated Financial Statements
The aggregate intrinsic value of options outstanding and options exercisable was $25,617,000 and $12,855,000 respectively, at May 31,
2012, $42,607,000 and $16,040,000 respectively, at May 31, 2011 and $23,119,000 and $10,740,000 respectively, at May 31, 2010. The
aggregate intrinsic value of options exercised during the year was $8,226,000 in 2012, $15,262,000 in 2011 and $6,554,000 in 2010. Re-
maining compensation costs to be expensed in future periods for non-vested options was $3,206,000 at May 31, 2012, with a weighted
average expense recognition period of 2.3 years.
The following table summarizes warrant activity with non-employees that were expensed at fair value upon grant. All warrants were
exercisable for common stock of the Company and expired in 2012.
(In thousands except for share price)
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
Warrants exercised during the year
Warrants forfeited during the year
Outstanding warrants at May 31, 2012
Shares
52
Weighted-Average
Exercise Price
$ 8.40
(20)
(3)
29
(20)
(2)
7
(2)
(5)
–
8.28
8.55
8.48
8.30
8.18
9.02
9.02
9.02
$
–
Common stock totaling 58,464 of the 225,000 originally authorized shares are reserved for issuance under the terms of the 2002 Em-
ployee Stock Purchase Plan. An additional 250,000 shares are also reserved for issuance under the terms of the 2011 Employee Stock
Purchase Plan. The plan gives eligible employees the option to purchase common stock at a 5% discount to the lower of the market
value of the stock at the beginning or end of each participation period. Total individual purchases in any year are limited to 10% of
compensation. Shares purchased by employees were 14,144, 18,252 and 19,828 in 2012, 2011 and 2010, 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
$
2012
9,520
587
1,343
$
2011
9,336
811
2,253
2010
$
9,550
450
(200)
$
11,450
$
12,400
$
9,800
Deferred income taxes reflect the tax effects of temporary differences between the carrying amounts of assets and liabilities for finan-
cial 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
Deferred income tax assets
Inventories and accounts receivable
Acquired net operating loss carryforwards
Accrued liabilities and other
2012
2011
$
(11,238)
$
(9,500)
(365)
(11,603)
1,149
19
1,789
2,957
(475)
(9,975)
1,041
195
1,436
2,672
Net deferred income tax liabilities
$
(8,646)
$
(7,303)
26
Neogen Corporation and Subsidiaries: Notes to Consolidated Financial Statements
The remaining acquired net operating loss carryforwards resulted in a deferred tax asset at May 31, 2012 of $19,000, 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
$
2012
11,900
(755)
305
$
2011
12,300
(145)
245
$
11,450
$
12,400
2010
9,600
(25)
225
9,800
$
$
At the end of 2011, the Company was under audit by the Internal Revenue Service for its 2009 fiscal year; in 2012 this audit was ex-
panded to include the 2010 fiscal year as well. The audit concluded in late 2012 with a slight favorable adjustment; thus, amounts total-
ing $550,000 which had been reserved as uncertain tax positions were reversed in the fourth quarter of 2012, resulting in an effective
tax rate of 33.7% for 2012. Absent this adjustment, the Company’s 2012 tax rate would have been 35.3%, compared to 35.2% in 2011
and 35.9% in 2010.
The Company has no significant accrual for unrecognized tax benefits at May 31, 2012. 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 2010.
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 an-
nual 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, 2012 and 2011, measured on an undiscounted basis over an estimated period of 15 years,
is recorded within other long term liabilities in the consolidated balance sheet.
In August 2011 the company purchased a facility in Lexington, Kentucky for $4,950,000. This purchase provides the Company an ad-
ditional 128,000 square feet of office, production and warehouse space. Currently a large portion of the building is leased to outside
parties. Lease rental income is expected to be $191,000 for 2013, $183,000 for 2014 and $119,000 for 2015.
The Company has entered into an agreement to purchase an additional 36,000 square foot facility adjacent to the Company’s facility
on the campus of the Scottish Agricultural College in Ayr, Scotland for approximately $1.5 million. The purchase is expected to be
completed in the first half of fiscal year 2013.
The Company has agreements with unrelated third parties that provide for the payment of license fees and royalties on the sale of
certain products. License fees and royalty expense under the terms of these agreements was $1,371,000, $1,561,000 and $1,337,000 for
2012, 2011 and 2010, respectively.
The Company has agreements with unrelated third parties that provide for guaranteed minimum royalty payments for certain tech-
nologies, as follows: 2013–$250,000, 2014–$350,000, 2015–$500,000, and 2016 and later–$0.
The Company leases office and manufacturing facilities under noncancelable operating leases. Rent expense for 2012, 2011 and 2010
was $495,000, $477,000 and $428,000, respectively. Future minimum rental payments for these leases over their remaining terms are
as follows: 2012–$ 87,000; and 2013–$0.
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 $760,000, $733,000 and $622,000 in 2012, 2011 and 2010, 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; this
segment also 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 differ-
ent marketing strategies. The Company evaluates performance based on total sales and operating income of the respective segments.
The accounting policies of the segments are the same as those described in Note 1.
Segment information is as follows:
(In thousands)
2012
Net sales to external customers
Operating income (loss)
Depreciation and amortization
Interest income
Income taxes (benefit)
Total assets
Expenditures for long-lived assets
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
Food Safety
Animal Safety
Corporate and
Eliminations (1)
Total
$
91,104
$
$
–
$
184,046
23,932
3,500
–
7,795
62,227
4,633
85,514
24,305
3,251
–
8,410
78,373
4,908
76,454
21,103
2,924
–
7,570
74,583
4,364
$
$
92,942
12,039
2,673
–
3,589
106,987
7,780
87,169
13,342
2,078
–
4,617
90,832
2,888
$
$
$
64,055
$
7,801
1,511
–
2,798
87,894
1,067
(2,232)
–
107
66
82,386
–
–
(1,812)
–
95
(627)
50,457
–
–
(2,025)
–
81
(568)
17,756
–
33,739
6,173
107
11,450
251,600
12,413
$
172,683
35,835
5,329
95
12,400
219,662
7,796
$
140,509
26,879
4,435
81
9,800
180,233
5,431
(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 $76,672,000 or 41.7% of consolidated sales in 2012, $72,724,000 or
42.1% in 2011 and $56,031,000 or 39.9% in 2010 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 8.8% of total revenues in 2012, 9.7% in 2011 and
10.3% in 2010. No other customer represented revenues in excess of 10% of consolidated net sales in any of the three years. The United
States based operations represent 96% of the Company’s long-lived assets as of May 31, 2012 and 2011.
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, 2012, 74,684 cumulative shares have been purchased in negotiated and open
market transactions for a total price, including commissions, of approximately $923,000. There were no purchases in 2012 or 2011.
Shares purchased under the program were retired.
11. Summary of Quarterly Data (Unaudited)
(In thousands, except per share)
August 2011
November 2011
February 2012
May 2012
Quarter Ended
Net sales
Gross margin
Net income
Basic net income per share
Diluted net income per share
$ 45,697
22,977
6,004
0.26
0.25
$ 44,891
22,657
5,237
0.22
0.22
$ 44,912
22,892
5,244
0.22
0.22
Quarter Ended
$ 48,546
23,899
6,028
0.26
0.25
(In thousands, except per share)
August 2010
November 2010
February 2011
May 2011
Net sales
Gross margin
Net income
Basic net income per share
Diluted net income per share
$ 42,923
22,767
5,824
0.26
0.25
$ 43,931
22,488
6,110
0.27
0.26
$ 42,235
20,588
4,943
0.21
0.21
$ 43,594
21,949
5,962
0.26
0.25
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 dis-
closed 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 manage-
ment, including the Chief Executive Officer and Chief Financial Officer, an evaluation was conducted as to the effectiveness of inter-
nal control over financial reporting as of May 31, 2012, based on the framework in Internal Control – Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that evaluation, management concluded
that internal control over financial reporting was effective as of May 31, 2012. The effectiveness of internal control over financial
reporting as of May 31, 2012, has been audited by Ernst & Young, LLP, an independent registered public accounting firm, as stated
in its attestation report, which is included below.
Changes in Internal Control over Financial Reporting
No changes in our internal control over financial reporting were identified as having occurred during the year ended May 31, 2012
that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting.
James L. Herbert
Chairman and CEO
Steven J. Quinlan
Vice President and CFO
July 30, 2012
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, 2012, based on criteria established in
Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the
COSO criteria). Neogen Corporation’s management is responsible for maintaining effective internal control over financial reporting,
and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying “Management’s
Report on Internal Control Over Financial Reporting”. Our responsibility is to express an opinion on the company’s internal control
over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control
over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effec-
tiveness 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 ac-
counting 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 state-
ments in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being
made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a
material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projec-
tions of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of
>
changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
30
Reports
In our opinion, Neogen Corporation maintained, in all material respects, effective internal control over financial reporting as of
May 31, 2012, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Neogen Corporation as of May 31, 2012 and 2011, and the related consolidated statements of income,
equity, and cash flows for each of the three years in the period ended May 31, 2012, and our report dated July 30, 2012 expressed an
unqualified opinion thereon.
Grand Rapids Michigan
July 30, 2012
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, 2012 and
2011, and the related consolidated statements of income, equity, and cash flows for each of the three years in the period ended
May 31, 2012. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of
Neogen Corporation at May 31, 2012 and 2011, and the consolidated results of its operations and its cash flows for each of the three
years in the period ended May 31, 2012, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
effectiveness of Neogen Corporation’s internal control over financial reporting as of May 31, 2012, 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 30, 2012 expressed an unqualified opinion thereon.
Grand Rapids Michigan
July 30, 2012
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
$ 400
350
300
250
200
150
100
50
0
May 2007
May 2008
May 2009
May 2010
May 2011
May 2012
*$100 invested on May 31, 2007 in stock or index, including reinvestment of dividends. Fiscal year ending May 31.
May 31 of:
Neogen Corporation
NASDAQ Composite
NASDAQ Medical Equipment
2007
2012
$ 100.00 $ 144.30 $ 120.75 $ 211.28 $ 368.48 $ 320.00
2010
2011
2009
2008
100.00
100.00
94.87
103.40
70.94
66.73
86.49
96.83
113.35
119.06
112.60
117.06
The stock price performance included in this graph is not necessarily indicative of future stock price performance.
Stock Profile Activity
Neogen Common Stock is traded on the NASDAQ Global Select Market under the symbol “NEOG”. The following table
sets forth, for the fiscal periods indicated, the high and low sales prices for the Common Stock as reported on the NASDAQ
Stock Market. As of July 29, 2012, there were approximately 356 stockholders of record of Common Stock that management
believes represents a total of approximately 7,391 beneficial holders. Neogen has never paid any cash dividends on its Common
Stock and does not anticipate paying any cash dividends in the foreseeable future.
Year Ended
High
Low
May 31, 2012
Fourth Quarter
$ 39.88
$ 33.78
Third Quarter
36.16
30.14
Second Quarter
39.90
32.08
First Quarter
47.80
32.68
May 31, 2011
Fourth Quarter
$ 44.84
$ 36.80
Third Quarter
42.26
35.63
Second Quarter
37.58
30.73
First Quarter
29.91
25.06
32