A N N U A L R E P O R T 2 0 1 4
Strengthening the
global food chain
Dedicated to food and animal safety since 1982
The mission of
Neogen Corporation
is to be the leading company
in the development and marketing
of solutions for food and animal safety
Contents
Financial Highlights .......................................................... 1
A Message from Management .......................................... 2
Strengthening the Global Food Chain .................4
Management’s Discussion and Analysis of Financial
Condition and Results of Operations ................................ 10
Consolidated Balance Sheets .......................................... 17
Consolidated Statements of Income ................................ 18
Consolidated Statements of Comprehensive Income ......... 18
Consolidated Statements of Equity .................................. 19
Consolidated Statements of Cash Flows .......................... 20
Notes to Consolidated Financial Statements ..................... 21
Reports of Independent Registered
Public Accounting Firms ................................................. 30
Management’s Report on Internal Control
Over Financial Reporting ................................................. 31
Comparison of Five Year Cumulative Total Return
and Stock Profile Activity ................................................ 32
Financial Highlights
Amounts in thousands, except per share
Years Ended May 31
Operations:
Total Revenues
Food Safety Sales
Animal Safety Sales
Operating Income
2014
2013
2012
2011
2010
$
247,405 $
207,528 $
184,046 $
172,683 $
140,509
116,290
131,115
43,391
106,158
101,370
40,706
91,104
92,942
33,739
85,514
87,169
35,835
76,454
64,055
26,879
17,521
0.52
0.51
34,637
Net Income Attributable to Neogen
Basic Net Income Per Share*
Diluted Net Income Per Share*
$
$
$
28,158 $
27,190 $
22,513 $
22,839 $
0.77 $
0.76 $
0.76 $
0.75 $
0.64 $
0.62 $
0.66 $
0.64 $
Average Diluted Shares Outstanding*
37,267
36,491
36,029
35,687
*Restated for the years 2010–2013
Total Revenues
Dollars in thousands
Net Income
Dollars in thousands
Total Assets
Dollars in thousands
In thousands
Year Ended May 31
Financial Strength:
2014
2013
2012
2011
2010
Cash and Marketable Securities
$
76,496 $
85,369 $
68,645 $
56,083 $
22,806
Working Capital
Total Assets
Long-Term Debt
Equity
163,779
345,301
–
150,728
290,558
–
123,962
251,600
–
104,705
219,662
–
68,987
180,233
–
306,300
258,287
219,054
188,978
153,053
…and Neogen is also there.
Message
from Management
To our stockholders, employees and friends:
As we worked on this year’s Annual Report, we thought the mes-
sage might be Neogen’s continuing role in worldwide food security.
As we looked at all that is necessary to meet these challenges we
repeatedly said to ourselves—“and Neogen is already there.” I
think a reader of this report might be surprised to find all of the
places Neogen is helping to strengthen the global food chain.
Revenues for our 2014 fiscal year, which ended May 31, were
up 19% to $247.4 million—a $40 million increase. Net income
for the year was $28.2 million compared to the prior year’s $27.2
million. Adjusting for our three-for-two stock split in October, earn-
ings per share in the current year were $0.76 compared to $0.75
a year ago. Both revenues and net income were new all-time highs
for our 32-year-old company.
The fourth quarter was the 89th quarter in the past 94 quarters that
Neogen reported revenue increases as compared with the previ-
ous year. We believe this performance consistency over almost 24
years is important to Neogen investors.
This level of revenue growth has traditionally brought a strong in-
crease in net income commensurate with the top line growth. We
did not see the bottom line growth this year.
The big difference was our phenomenal 2013 year that made for
tough comparisons in the current year. In fiscal 2013 we achieved
a 21% increase in net income, as we took advantage of signifi-
cant mycotoxin outbreaks in the corn and grain crops in the U.S.,
which called for more testing; Europe and Brazil crops had similar
problems. In 2014, the crops were relatively clean. Our 2013 also
had significant sales of higher gross margin speciation tests due
to horse meat being found in ground beef; these sales tailed off in
the second half of 2014. Opportunistic business captured in 2013
in our small animal supplements line was retained in 2014, how-
ever, at lower levels. These higher margin revenues were replaced
with sales of other products, but at lower margins.
BIGGER MARKETS
Surveys show that in most countries food safety is one of the
biggest current and future concerns. Food security concerns
will also increase as the world population exceeds nine billion by
2050—about a two billion increase. However, perhaps the big-
gest story will be the increase in the global middle class that is
expected to grow to over three billion people by 2020. This popula-
tion will no longer be satisfied with a diet of plant-based starches,
but will demand higher quality food, and especially animal proteins
such as meat, milk, and eggs.
2
James Herbert and Steven Quinlan
Already, food and animal safety challenges are mounting. The con-
tinuous rise in product recalls due to contamination will certainly
increase the market-wide demand for our products. Some surveys
predict that the total global food testing market may exceed $19
billion within five years. Though government regulations will un-
doubtedly have some impact, the major reasons we see food and
animal testing increases today is increased producer responsibility.
As an example, the Food Safety Modernization Act, intended to
help the U.S. Food and Drug Administration exert more regulatory
jurisdiction, is still not in effect. The Bill passed with bipartisan
support in 2010, was signed into law in January 2011, and is still
not being implemented.
BIGGER TEAM
Neogen now has over 900 employees. This dedicated team has
been responsible for our growth, as they develop new products
and increase Neogen’s share of growing markets. Our growth this
year also came from three strategic acquisitions.
In July, we acquired the assets of SyrVet®, a strong veterinary in-
strument company that had competed with Neogen’s Ideal Instru-
ment products. They brought us products and customers we did
not have access to previously. In November, Neogen acquired the
assets of Prima Tech, which also brought some strong and unique
veterinary instrument products, as well as an efficient manufactur-
ing operation in North Carolina. These two acquisitions, coupled
with our existing market-leading Ideal products, put us in a strong
position to increase our share of the animal protein market.
In January, Neogen acquired Chem-Tech, an insecticide company
based in Iowa. This gave us another important piece of biosecu-
rity needs for animal protein production back inside the farm gate.
These insecticides joined our already growing line of cleaners and
disinfectants and rodenticides. We are excited about the opportu-
nities to grow this business.
BIGGER PRODUCT OFFERING
In addition to the acquisitions, Neogen also developed several im-
portant new products during the fiscal year. Many of these were in
Equity
Dollars in thousands
the category of consumable diagnostic test kits aimed at our current markets. New products from
our GeneSeek® animal genomics business will be important as they provide animal producers
with a scientific method to increase animal protein production. Our GeneSeek business increased
18% this year, and for the first time ever we analyzed over one million customer samples in our
laboratories. This led to the building of a new genomics laboratory in Lincoln, Nebraska, that we
believe is the top animal genomics laboratory in the U.S. This new facility will not only give us room
for expansion but will also reduce our costs.
New test kits coming from our research team in Scotland have us positioned as the top supplier of
diagnostic test kits to detect shellfish toxins. There are three important ones, but our new test de-
tects the toxin that causes paralytic shellfish poisoning—potentially the most deadly. These toxins
are the result of algal growth in ocean waters, and as ocean temperatures continue to increase,
there is increased risk for algal growth in waters where shellfish are produced.
Operating Income
Dollars in thousands
BIGGER GEOGRAPHICAL PRESENCE
Outside the U.S., Neogen uses over 100 indepen-
dent distributors to reach many of our customers in
123 countries. We have strategically acquired and
developed company-owned distribution in several important countries. Our Neogen Europe opera-
tion, headquartered in Ayr, Scotland, is responsible for food safety sales to end users in the UK,
Ireland, Germany, France, and Holland. That organization continues to show double-digit growth
with revenues this year up 24%. The Scotland team now numbers 130 people.
Mexico and Brazil are important pieces to our growth strategy since they will both show sharp
increases in growth of their middle class and at the same time have production capacities to con-
tinue as major suppliers of food in other parts of the world. Revenues in Brazil increased 39% and
revenues in Mexico 18% in the 2014 year.
Of course, when describing middle class population growth, one must look at China. Its middle class
today is around 160 million people, second only to the U.S., and is expected to increase to about
800 million by 2030. Though Neogen has been in China for several years, we embarked on a new
strategy by establishing our own facility and employees, and expect to grow rapidly through market
share increases and potential acquisitions.
BIGGER OPPORTUNITIES FOR SYNERGY
Neogen divides its business between food safety and animal safety. To a large degree,
animal safety is just food safety back inside the farm gate. The synergy of products and
services from these divisions continue to place Neogen as a universal supplier.
As is noted in the following pages, food’s stay on the dinner plate is but a tiny step in the
increasingly lengthy and complex global food chain. As we continue to serve that food
chain we are increasingly able to say, “And Neogen is also there.”
As we continue to grow our company through increased market share and new products,
we also have opportunities to increase our acquisition activity. With a strong balance sheet
and no borrowing we continue to look for opportunities that are synergistic with our mission
of providing solutions for food and animal safety. We have completed 26 acquisitions since
the year 2000 and all have been accretive at both the top line and the bottom line.
We will carefully look for the next acquisition that will allow us to continue saying,
“...and Neogen is also there.”
James L. Herbert
Chairman and CEO
Steven J. Quinlan
Vice President and CFO
3
Strengthening the
global food chain
Enhancing the quantity, quality
and safety of the food supply
Food’s short stay on the plate is but a final, tiny step in an increasingly
lengthy and complex global food chain that can link far-flung producers,
processors, distributors and retailers. The strength of the entire food
chain relies on the individual strength of each and every one of its links.
One weak link can result in low quality and potentially unsafe food products reaching con-
sumers, or not enough food being produced to meet the growing demand. One weak link
can have dire consequences for consumers—and the companies and their brands per-
ceived to be responsible for those consequences.
Neogen’s products and services strengthen the entire length of the global food chain. From
selecting the best breeding animals for ranchers, to ensuring the quality and safety of
livestock and crops on ranches and farms of all types, to ensuring the quality and safety of
aquaculture products harvested from our oceans, to ensuring the safe processing of the
endless variety of global foods and their delivery to consumers, Neogen is there to enhance
the quantity, quality, and safety of the global food supply.
On livestock ranches and farms, Neogen is there
VETERINARY GENOMICS
For beef and dairy products, the food chain begins with genomic testing to select the best
beef and dairy bulls and heifers to produce the next generation of calves. This selection
process can result in a more plentiful food supply that is safer, healthier and more environ-
mentally efficient to produce.
Neogen’s genomics business, including GeneSeek and Igenity, is the leading global pro-
vider of DNA testing for animal agribusiness and veterinary medicine. Neogen provides
4
everything from research and development to
final implementation of molecular solutions for
applications such as genetic improvement, dis-
ease management and identity management. For
example, cattle producers can use GeneSeek’s
technology to make desirable cattle traits occur
more frequently in the herd, and produce cattle
that are more feed efficient and high in milk pro-
duction.
Neogen’s veterinary genomic success led its
GeneSeek subsidiary to analyze more than one
million customer samples in its laboratory in the
past year for the first time in its 16-year history.
The success also led to Neogen opening a new
commercial genomics facility in May 2014 which
more than doubled the size of its previous facility,
with numerous improved operational efficiencies,
to meet growing demand.
ANIMAL HEALTHCARE PRODUCTS
Neogen offers farmers and ranchers veterinary
instruments,
supplements,
pharmaceuticals,
wound care, vaccines, topicals, and diagnostic
products to help ensure the health of the animals
within livestock facilities. Healthy animals require
less medication and are more resistant to disease.
The company maintains a leadership role in the
development of precision veterinary drug deliv-
ery instruments to help minimize drug residues
that might otherwise find their way into meat and
milk supplies. The company’s line of patented de-
tectable 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 supply agree-
ments with major farm and ranch retailers.
Neogen enhanced its veterinary instrument of-
ferings with its July 2013 acquisition of SyrVet
Incorporated, an important supplier to farm-
ers, ranchers, and veterinarians in more than
30 countries worldwide. SyrVet’s product line
ranges from animal handling products to sophis-
ticated supplies for artificial insemination, and
has earned the company significant shelf space
in major farm store suppliers throughout the U.S.
Neogen’s November 2013 acquisition of
Prima Tech Incorporated also strengthened the
company’s veterinary instrument line. Prima Tech
had become an important supplier of unique
veterinary instruments in the U.S. and Europe,
and its product line is designed around unique
and highly accurate devices used by farmers,
ranchers, and veterinarians to inject animals,
provide topical applications, and to use for oral
administration.
Neogen’s products
and services
strengthen the
entire length of the
global food chain.
5
ANIMAL FEED SAFETY
Neogen’s quick and simple diagnostics for toxins and bacterial pathogens can ensure the
safety of animal feed, and protect animal health. For example, Neogen’s mycotoxin (toxins
produced by molds growing on grains such as corn and wheat) tests can stop a problem
before it starts. In animals, mycotoxins have been shown to cause feed refusal, liver dam-
age or cancer, decreased milk and egg production, blood disorders, immune suppression
and interference with reproductive efficiency.
BIOSECURITY
food produced at
Enhancing the quantity and quality
livestock
of
operations often
relies upon
raising livestock in an environment
secure from biological threats—
enhancing the animals’ biosecurity.
As shown in a recent outbreak
of
epidemic
porcine
diarrhea virus (PEDv) that claimed
seven million
an
baby pigs in the U. S., lapses in
biosecurity can have devastating
consequences.
estimated
deadly
Neogen produces and markets a
comprehensive line of agricultural
biosecurity products, including ro-
denticides, insecticides, cleaners
and disinfectants, to help protect
livestock from the spread of dan-
gerous diseases in large, modern
facilities.
integrated production
In the past year, an independent
study proved two of Neogen’s disinfectants to be effective for use against PEDv in these
types of facilities.
Neogen’s January 2014 acquisition of Chem-Tech further strengthened the company’s
biosecurity offerings. Chem-Tech’s highly effective insecticides utilize environmentally
friendly technical formulas, and several are approved for use in food establishments and
warehouses (e.g., for use to control moths in cereal). The company’s Prozap® insecticide
brand is well known in the large animal production industry, and is particularly popular
with dairy producers.
In the Fields and Orchards, Neogen is there
Neogen enhances the quantity, quality and safety of food products from fields and or-
chards with its expertise and tests to rapidly detect toxins and diseases in field and
orchard crops.
Neogen is a global leader in the development, manufacture and
supply of innovative diagnostic products to detect a wide range
of important viral, bacterial and fungal plant pathogens. The
company’s tests detect more than 250 plant pathogens in criti-
cal crops, such as potatoes, corn, wheat, rice, apples and toma-
toes. (Among Neogen’s products is a rapid test for Phytophthora
infestans, commonly known as blight, which was responsible
for the 19th century Irish potato famine.) The use of Neogen’s
diagnostics allows growers to quickly diagnosis and treat plant
disease—before it can devastate the crop.
6
Neogen is also a leader in providing innovative diagnostic products
to grain and nut producers and processors for the detection of
mycotoxins, including aflatoxin and deoxynivalenol (DON). These
simple tests can help ensure the quality and safety of grain and nut
products destined to be used as human food, or as animal feed.
The company’s comprehensive line of rodenticides also enhances
the global food chain by protecting growing plants and harvested
food products from the devastating effects of rodents. Estimates
vary widely by crop and region, but as an example, the Food and
Agriculture Organization of the United Nations estimates that up
to 10% of Asia’s annual rice crop is eaten by rats while it is still
in the fields.
In Seafood Operations, Neogen is there
Neogen is also there to help ensure the safety and quality of food
harvested from oceans and other aquaculture environments. The
company offers the aquaculture industry its testing expertise, and
comprehensive lines of rapid foodborne pathogen, sanitation mon-
itoring, histamine, and shellfish toxin tests. Neogen’s proven tests
for histamine rapidly detect the presence of the toxin, which is a
critical concern in the tuna industry for the quality and safety of
its products.
In the past year, Neogen released a rapid test to detect a third
shellfish toxin, one that causes paralytic shellfish poisoning (PSP).
The test can be used in the field or in a lab, and is designed for use
by harvesters and processors to test mussels, scallops, oysters,
clams, and cockles. Neogen’s test for the PSP toxin adds to the
company’s shellfish toxin line, which also includes tests to detect
naturally occurring toxins that cause amnesic shellfish poisoning
(ASP) and diarrhetic shellfish poisoning (DSP).
Whether food
products originate
from a ranch, farm,
field, orchard, sea,
or other location,
Neogen’s products
and services continue
to help enhance their
quantity, quality and
safety throughout
their processing.
In Food Processing Plants,
Neogen is there
Whether food products originate from a ranch,
farm, field, orchard, sea, or other location,
Neogen’s products and services continue to
help enhance their quantity, quality and safety
throughout their processing—whether that
process is minimal or extensive.
DETECTING DRUG RESIDUES
Neogen remains a global leader in providing
rapid drug residue tests to ensure the safety
of meat and milk products. Neogen now has
a vast array of drug residue tests used in
food and animal applications, as well as for
certain research and forensic uses, and is at
the forefront of developing new tests to de-
tect emergent drugs that may be used and
abused throughout the world.
The company’s line of diagnostics developed
for the worldwide dairy industry includes a
test that simultaneously detects beta-lactam
7
DETECTING SPOILAGE ORGANISMS
While products contaminated with
spoilage organisms, such as yeast and
mold, do not carry consequences of
the severity of pathogen contamina-
tion, spoilage organisms can drasti-
cally shorten product shelf-lives, and
produce a variety of unwanted effects.
Neogen’s Soleris® technology is used
by the world’s largest food and nu-
traceutical manufacturers to detect
spoilage organisms in a fraction of
the time needed for traditional testing
methods. For example, testers using
Soleris can measure a sample’s yeast
and mold count in as little as 48 hours,
compared to five days for conventional
methods.
In the past year, Neogen introduced
its NeoFilm™ products, which are ex-
tremely simple microbial tests that
Neogen is uniquely
positioned with a
comprehensive line of
products and services, and
expertise and experience,
to help strengthen the
global food chain.
require only the inoculation of a fabric sample pad and an incuba-
tion period. The new tests were developed to offer advantages
over similar available testing products, such as greater visual
clarity and easier enumeration. NeoFilm tests are available for
coliforms, E. coli, yeast and mold, Staphylococcus aureus, and
aerobic bacteria.
DETECTING MYCOTOXINS
Neogen’s comprehensive line of tests for mycotoxins in grains
and animal feeds help protect the health of poultry, swine, and
dairy cattle—and the quality and safety of the food products for
human consumption derived from numerous commodity grains.
Mycotoxins have been shown to have long-term adverse health
effects in humans, and can kill livestock and pets if ingested in
sufficient quantities.
The company offers tests for six mycotoxins in several different
formats, including incredibly easy tests that function like home
pregnancy stick tests, and can deliver definitive, easy-to-interpret
and
tetracycline antibiotic
residues in milk—BetaStar®
Combo. As the use of both
tetracycline and beta-lactam
antibiotics for the manage-
ment of mastitis in dairy
herds has grown in certain
regions of the world, so has
the need for a single test to
simultaneously detect both
groups of antibiotics.
DETECTING FOOD
ALLERGENS
Since their introduction in
1998, Neogen’s rapid tests
for food allergens have set
the standard for simple and
these
quick detection of
potentially dangerous resi-
dues. While many consum-
ers would be unaffected by
the unintentional, unlabeled
inclusion of one of these food allergens in a product, millions of
food allergic people worldwide still face dire consequences should
they accidentally ingest a food allergen.
The unintentional inclusion of food allergens into non-allergenic
foods remains a leading cause of food recalls, and is the subject
of widespread global regulatory activity.
Neogen’s screening and quantitative food allergen products in-
clude tests to detect almond, egg, gliadin/gluten, hazelnut, milk,
mustard, peanut, sesame, shellfish, soy, and walnut residues. The
company’s simplest food allergen tests screen samples in parts
per million in mere minutes.
8
results in as little as two minutes. The almost
immediate results mean that grain elevator
staff, and quality control personnel in the
food and feed industries, can obtain results in
minutes, and reject contaminated ingredients
before they can even enter the food chain.
SANITATION MONITORING
The food industry’s work to produce the safest, highest quality products can
be undone by contamination of the products caused by residue that remains
after an incomplete cleaning and disinfection effort. The simplicity of Neogen’s
AccuPoint® 2 ATP (adenosine triphosphate) Sanitation Monitoring System
makes it a valuable tool throughout the food industry, including food service
providers, caterers and grocery delis, and manufacturers of soft drinks and
bottled water, to ensure effective sanitation programs.
Using an ATP system is an easy and quick gauge of a facility’s cleanliness, and
is easily customized for the specific equipment, people, product, and processes
used in any food production facility. In just seconds, the advanced system pro-
duces objective, recordable and traceable test results.
DETECTING FOODBORNE PATHOGENS
Protecting the global food chain from the presence of foodborne
pathogens is paramount, as pathogens such as Salmonella, Listeria
and E. coli O157:H7 carry serious consequences for consumers.
Neogen’s ANSR® test system is the quickest and easiest testing method
to definitively detect pathogen DNA in food and environmental samples—
providing results in as little as 20 minutes. Other commercially available
molecular amplification tests require up to 3 hours. The company’s
simple Reveal® line of pathogen tests are easy-to-use and interpret.
Neogen’s tests help food producers protect their brands, and reputation,
from possibly the biggest risk they face in the marketplace—shipping
products tainted with a known pathogen.
VERIFYING MEAT SPECIATION
To ensure the integrity of the global food chain, and address the growing
global concern of economic adulteration and food fraud, Neogen offers
simple tests to verify the species of a meat product. The company
was the leader in containing last year’s horse meat scandal. The meat
speciation tests can detect adulteration at as little as 1 percent of
mislabeled horse, beef, pig, poultry or sheep meat. Additional tests are
available for other species, including some species of fish.
Neogen is also here
LIFE SCIENCES
Products aimed at Neogen’s Life Sciences
market include its drug detection test kits.
Recently, Neogen added to
its more than 100 drug
detection tests that can
be used to detect more
than 300 drugs and/
or their metabolites.
Neogen also supplies
drug detection kits to the
forensic toxicology market for
the analysis of hair, urine, blood, and
other types of forensic samples.
The tests are sold by Neogen sales representa-
tives to laboratories and end users worldwide for
the detection of abused and therapeutic drugs in hu-
mans, racing and food animals, and in meat products.
ACUMEDIA® DEHYDRATED CULTURE MEDIA
Acumedia, a subsidiary of Neogen Corporation, has
been a premier manufacturer of high quality dehydrated
culture media (DCM) since 1978 for industrial, biotech,
food safety, and life science applications. Acumedia
produces over 225 different catalog formulations, and
well over 200 different customized formulations. The
company’s extensive experience, combined with a
commitment to quality, ensure the consistency of
our products. Through its highly flexible and modern
facilities, Acumedia routinely produces product volumes
necessary for large industrial applications, to
smaller volumes in specific custom formulations.
VETERINARY PERFORMANCE AND
COMPANION ANIMAL PRODUCTS
Neogen’s products and services
also include safety solutions for performance
and companion animals. The company
manufactures and markets pharmaceuticals,
vaccines, and diagnostic products for these
animals. Neogen’s equine health line includes
EqStim®, a proven, safe immunostimulant,
which boosts the immune response of horses
to help combat respiratory ailments. The
company’s BotVax® B has protected thousands
of horses against Clostridium botulinum type B.
Neogen also produces a number of products to
treat or protect small animals, such as
thyroid deficiency treatment options.
9
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The information in this Management’s Discussion and Analysis of Financial Condition and Results of Operations contains both historical financial
information and forward-looking statements. Neogen Corporation management does not provide forecasts of future financial performance. While
management is optimistic about the Company’s long-term prospects, historical financial information may not be indicative of future financial results.
Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the
foregoing, the words “believes,” “anticipates,” “plans,” “expects,” “seeks,” “estimates,” and similar expressions are intended to identify forward-
looking statements. There are a number of important factors, including competition, recruitment and dependence on key employees, impact of
weather on agriculture and food production, identification and integration of acquisitions, research and development risks, patent and trade secret
protection, government regulation and other risks detailed from time to time in the Company’s reports on file at the Securities and Exchange Com-
mission, 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 the Company’s Report on Form 10-K was first filed
with the Securities and Exchange Commission and should not be relied upon as representing management’s views as of any subsequent date.
While management may elect to update forward-looking statements at some point in the future, it specifically disclaims any obligation to do so,
even if its views change.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The discussion and analysis of the Company’s financial condition and results of operations are based on the consolidated financial statements that
have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial state-
ments requires that management make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses,
and related disclosure of contingent assets and liabilities. On an ongoing basis, management evaluates the estimates, including 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 consoli-
dated financial statements.
Revenue Recognition
Revenue from products and services is recognized when a purchase order has been received, the product has been shipped or the service per-
formed, 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 have been met, these revenues are initially deferred and later recognized in the period that all recognition criteria has been met.
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 doubtful accounts 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 to the allowance for doubtful 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 tak-
ing 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
Goodwill represents the excess of purchase price over fair value of tangible net assets of acquired businesses after amounts are allocated to
other identifiable intangible assets. 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 assets may be impaired. If the Company’s qualitative assessment concludes that it is more likely than not that an impairment
exists, or the Company skips the qualitative assessment, then the Company performs a quantitative assessment. 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.
10
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Long-lived Assets
Management reviews the carrying values of its long-lived assets to be held and used, including definite-lived intangible assets, for possible impair-
ment whenever events or changes in business conditions warrant such a review. The carrying value of a long-lived asset is considered impaired
when the anticipated separately identifiable undiscounted cash flows over the remaining useful life of the asset indicate that the carrying amount
of the assets may not be recoverable. In such an event, fair value is determined using discounted cash flows and if lower than the carrying value,
impairment is recognized through a charge to operations.
Equity Compensation Plans
Share options awarded to employees and shares of stock awarded to employees under certain stock purchase plans are recognized as compensa-
tion expense based on their fair value at grant date. The fair market value of options granted under the Company’s stock option plans was esti-
mated on the date of grant using the Black-Scholes option-pricing model using assumptions for inputs such as interest rates, expected dividends,
volatility measures and specific employee exercise behavior patterns based on statistical data. Some of the inputs used are not market-observable
and have to be estimated or derived from available data. Use of different estimates would produce different option values, which in turn would
result in higher or lower compensation expense recognized.
To value options, several recognized valuation models exist. None of these models can be singled out as being the best or most correct one. The
model applied by the Company is able to handle some of the specific features included in the options granted, which is the reason for its use. If
a different model were used, the option values could differ despite using the same inputs. Accordingly, using different assumptions coupled with
using a different valuation model could have a significant impact on the fair value of employee stock options. Fair value could be either higher or
lower than the ones produced by the model applied and the inputs used. Further information on the Company’s equity compensation plans, includ-
ing inputs used to determine fair value of options, is disclosed in Note 5 to the consolidated financial statements.
RESULTS OF OPERATIONS
Executive Overview
Neogen Corporation achieved total revenue of $247.4 million in fiscal 2014, a 19% increase compared to revenue of $207.5 million in fiscal 2013.
Net income attributable to Neogen for fiscal 2014 increased 4% to $28.2 million, or $0.76 per fully diluted share, compared to $27.2 million, or
$0.75 per fully diluted share, in fiscal 2013. Cash flow from operations for fiscal 2014 was $21.7 million compared to $26.6 million in fiscal 2013.
The Company’s Food Safety segment revenues were $116.3 million in fiscal 2014, up 10% compared to the prior year. Animal Safety segment
revenues increased $29.7 million, or 29%, to $131.1 million in fiscal 2014 as compared to fiscal 2013.
In fiscal 2014, the Company benefitted from recent acquisitions, which added revenue totaling $23.7 million during the year. The SyrVet acquisi-
tion in July 2013 helped Neogen gain market share, especially internationally, in needles and other veterinary instruments. Prima Tech, acquired
in November 2013, offered products complementary to Neogen’s existing product offerings with particular expertise and presence in medicine
delivery and marking systems in the poultry and swine markets. In January 2014 Neogen acquired Chem-Tech, a manufacturer of environmentally
friendly insecticides for the animal and food industries; this business has enhanced the Company’s biosecurity product portfolio for animal protein
producers.
Consolidated gross margins decreased from 52.8% in fiscal 2013 to 49.6% in fiscal 2014, due primarily to acquisitions in the Animal Safety seg-
ment, which has lower margins overall than the Food Safety segment. Additionally, fiscal 2013 gross margins were unusually high due to favorable
product mix within each of the Food Safety and Animal Safety segments. Operating expenses expressed as a percentage of revenues decreased
from 33.1% in 2013 to 32.0% in fiscal 2014, as the Company was able to successfully integrate recent acquisitions into its operations.
International sales were $96.1 million, or 38.8% of total sales, in fiscal 2014 compared to $83.2 million, or 40.1%, in fiscal 2013. Sales from
the Chem-Tech acquisition were all domestic, which contributed to the decline of international sales as a percentage of the total. Neogen Europe
recorded a revenue increase of 24% in fiscal 2014, led by genomics and forensics sales. Neogen Latinoamérica and Neogen do Brasil continued
to penetrate their markets, with increases of 18% and 39%, respectively, compared to the prior year.
Service revenue from DNA testing increased 18% from $23.4 million in fiscal 2013 to $27.7 million in fiscal 2014. The increase was driven by
successful commercialization of a number of proprietary service offerings introduced toward the end of the prior year, new service offerings devel-
oped specifically for some key breed associations and the completion of a number of large projects during the year.
11
Management’s Discussion and Analysis of Financial Condition and Results of Operations
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
Veterinary Instruments and Disposables
Animal Care and Other
Rodenticides, Insecticides and Disinfectants
DNA Testing
Total Revenues
May 31, 2014
Increase/
(Decrease)
May 31, 2013
Increase/
(Decrease)
May 31, 2012
Twelve Months Ended
$
$
60,336
24,866
31,088
116,290
7,528
28,412
35,547
36,702
22,926
131,115
247,405
5%
13%
16%
10%
(3%)
70%
20%
35%
14%
29%
19%
$
$
57,394
21,954
26,810
106,158
7,739
16,682
29,612
27,130
20,207
101,370
207,528
20%
6%
20%
17%
(6%)
(1%)
29%
2%
9%
9%
13%
$
$
47,993
20,676
22,435
91,104
8,190
16,808
22,961
26,491
18,492
92,942
184,046
Year Ended May 31, 2014 Compared to Year Ended May 31, 2013
The Company’s Food Safety segment revenues were $116.3 million in fiscal 2014, up 10% compared to fiscal 2013, with increases in each major
product category. Sales of Natural Toxins, Allergens and Drug Residues increased 5% in fiscal 2014 compared to the prior year. Allergen sales,
including meat speciation kits, increased 18%, as food product recalls caused by mislabeled products containing allergenic components helped
drive increased testing. Sales of test kits in the Drug Residue product line, which are used to detect the presence of antibiotics in dairy milk, rose
by 8% compared to the prior year, driven by increases in Europe and Brazil. Sales of Natural Toxins test kits declined 3% as strong sales of test
kits, readers and accessories in the prior year resulting from significant aflatoxin and DON outbreaks in both the U.S. and Europe did not repeat in
fiscal 2014, as crops in the U.S. were relatively clean.
Bacterial and General Sanitation revenues increased 13% in the current fiscal year compared to the prior year. Within this category, ampoule media
and filter sales increased 32% over the prior year as the Company increased market share in this product line particularly in the beverage industry.
The Soleris product line, which detects spoilage organisms such as yeast and mold, increased 17%, primarily due to gains in Europe, Mexico and
the domestic beverage market, while the AccuPoint line, designed to measure environmental cleanliness, increased 18%, both compared to the
prior year, due to focused marketing programs. Offsetting these gains, Pathogen sales were down 4% in fiscal 2014 compared to fiscal 2013,
due primarily to lower ANSR equipment sales.
Dehydrated Culture Media and Other revenues increased 16% over last year. Genomics service revenues and life sciences products sold through
Neogen Europe to European customers led the growth in this category. Sales of dehydrated culture media to Food Safety customers increased
by 20% compared to the prior year, led by strong performance in the U.S. commercial labs market as the Company secured new business at the
corporate level with several large labs. However, sales of Acumedia products to international distributors and domestic industrial customers only
increased 2%, with both sales groups having large revenue increases in the prior year.
The Company’s Animal Safety segment revenues were $131.1 million for the year ended May 31, 2014, an increase of $29.7 million, or 29%,
compared to the same period in the prior year. The segment benefitted from three acquisitions the Company completed during fiscal 2014; these
acquisitions and the two acquisitions completed in fiscal 2013 contributed $23.7 million in revenues in fiscal 2014. Organic growth for the seg-
ment was 6% in fiscal 2014.
Life Sciences product revenue declined by 3% in fiscal 2014 compared to fiscal 2013, primarily due to continuing weakness in racing kits rev-
enues, the result of fewer racetracks in the U.S., and consolidation of state testing labs. Additionally, approximately $700,000 in substrate business
was transferred to Neogen Europe in fiscal 2014, which reports through the Food Safety segment, to better support the customer base in Europe
with the Company’s sales and support staff located there. Offsetting these declines was a 21% increase in forensic kit sales, the result of new
business and increased volume from existing customers.
Veterinary Instruments and Disposables revenues were $28.4 million in fiscal 2014, an increase of 70% compared to fiscal 2013. This line
benefitted from the acquisitions of SyrVet in July 2013, and Prima Tech in November 2013; both of these businesses were focused on veterinary
instruments. Growth in this line excluding acquisitions was 4%. The Company’s patented line of detectable needles continued its consistent growth
history with an organic increase of 11%. Sales of shoulder gloves increased 17% organically, as the SyrVet acquisition helped the Company to gain
market share with a more robust product line. Sales of disposable syringes were down due to order timing from a large international customer. Also,
specialty needle sales were down 29%, due to a customer’s change in protocol which led to lower volumes of needle use.
Growth in Animal Care and Other products was 20% in fiscal 2014; organic growth was 4%, the remainder from acquisitions, primarily animal
marking products from Prima Tech, hoof and leg care items from SyrVet and veterinary antibiotics from Macleod. Within this product line, sales
12
Management’s Discussion and Analysis of Financial Condition and Results of Operations
of joint supplements for horses and dogs increased 94% due to market supply disruptions, while wound dressing revenues rose 28% as the
Company increased private label sales and gained market share. Vaccine sales for equine botulism Type B increased 10%, reversing two years
of declining sales as the equine market rebounded in fiscal 2014. These increases offset a 14% decline in sales of the Company’s canine thyroid
replacement products; the decline was the result of a difficult comparative year, as fiscal 2013 sales were extraordinarily high due to competitor
shutdowns. While the Company retained a portion of its increased market share from fiscal 2013, all competitors of this product line were operat-
ing for the entire year in fiscal 2014.
Sales of Rodenticides, Insecticides and Disinfectants, the Company’s biosecurity product offerings, rose 35% for the year. The Company’s pur-
chase of Chem-Tech, a manufacturer and marketer of insecticides in January 2014 provided $7.2 million of the $9.6 million increase. Organic
growth was 9% in this product line, with particular strength in the Company’s cleaners and disinfectants, up 22% for the year. These increases
resulted from a number of disease outbreaks during the year, such as avian influenza and porcine virus, which raised awareness of the necessity of
cleaning and disinfecting animal facilities. Offsetting these increases was a 4% decline in rodenticides, primarily due to adverse weather conditions
in the sugar cane industry in Puerto Rico, one of the Company’s key markets. Additionally, the Company’s evaluation of economic conditions and
risks in countries such as Venezuela resulted in lower credit limits for some customers in those countries, with lower resultant sales.
DNA Testing revenues, excluding sales through Neogen Europe and Neogen do Brasil, increased 14% in fiscal 2014 compared to fiscal 2013, due
primarily to continued strength in products introduced in the latter half of fiscal 2013, and new products for the detection of developmental defects
in cattle, introduced in fiscal 2014. The customizable nature of the new proprietary offerings allowed the Company to expand market share with
beef breed associations. Additionally, revenues for canine genotyping rose $660,000 in fiscal 2014, primarily due to the Company’s relationship
with a number of canine associations.
Year Ended May 31, 2013 Compared to Year Ended May 31, 2012
The Company’s Food Safety segment revenues were $106.2 million in fiscal 2013, 17% higher than fiscal 2012, with increases in each major
product category. Sales of Natural Toxins, Allergens and Drug Residues products increased 20% in fiscal 2013 compared to the prior year. The
increase was led by sales of aflatoxin test kits, readers, and accessories, resulting from an outbreak in the United States caused by unusually hot
and dry conditions. Additionally, cool wet growing conditions in Germany in fall 2012 contributed to an outbreak of deoxynivalenol, or DON, in the
small grains crop, and resulted in increased sales of the Company’s test kits to detect the toxin. Allergen test kit revenues continued to achieve
solid growth with an increase of 24% in fiscal 2013 compared to fiscal 2012. This product line had food allergen kit growth of 16% this year, and
also benefitted from a significant increase in demand for meat speciation testing in Europe in the second half of fiscal 2013, the result of the
discovery of mislabeled meat products. Originally, horse meat was found in products labeled as beef; further testing also found instances of pork
and other meat products in beef, as well as tilapia being sold as whitefish. These are all examples of economic adulteration of food, which has
become quite problematic within the food safety industry, and should result in higher ongoing levels of speciation testing in the future. Also in this
category, sales of Drug Residues products, primarily used to determine the presence of antibiotics in raw fluid milk from dairy animals, increased
3% compared to the prior year.
Sales of Bacterial and General Sanitation products increased 6% in fiscal 2013, compared with fiscal 2012. Within this category, General Sanita-
tion products, designed to measure environmental cleanliness, achieved growth of 7%; increased sales of filters and ampoule media products, the
result of increased penetration in the beverage segment, more than offset lower equipment sales to international markets. The Company’s line of
pathogen testing products grew by 3% in fiscal 2013; the new ANSR pathogen detection system gained traction during the latter half of the year,
assisted by a focused marketing program.
Dehydrated Culture Media and Other Sales increased 20% for the year. Contributions from genomics service revenues to European customers
resulting from increased sales staffing and the introduction of new service offerings, led the growth in the category. Sales of Acumedia products
to traditional markets in the U.S. were up 17% over a weak fiscal 2012. Additionally, customers affected by the aflatoxin and DON outbreaks
significantly increased purchases of miscellaneous lab supplies necessary for processing samples, which are recorded in this category.
Revenue for the Animal Safety segment was $101.4 million, an increase of 9% compared to fiscal 2012. The acquisitions of Igenity, Macleod
Pharmaceuticals and Scidera Genomics contributed $5.8 million to revenues in this segment in fiscal 2013.
Life Sciences and Other revenues decreased 6% in fiscal 2013 compared to fiscal 2012. Within this category, racing kits were down 18% due
to state lab closures and consolidations and the continued decline of the racing industry in the U.S. Food residues were down 28% due to lower
ractopamine kit sales from lost business in China as government laboratories there began purchasing kits made by Chinese manufacturers; further,
a large user of this kit ceased using ractopamine, a feed additive used to promote leanness in animals in its operations, and stopped buying the
Company’s kits. Partially offsetting these losses was a 4% increase in sales to the forensics market.
Veterinary Instruments and Disposables revenues were down 1% in fiscal 2013 compared to fiscal 2012. Sales of detectable needles increased
11% but were offset by the loss of business to a large customer during fiscal 2012.
Animal Care and Other revenues increased 29% compared to the prior year. Within this category, the Company benefitted from sales of the vet-
erinary antibiotic, Uniprim, acquired in the Macleod Pharmaceuticals purchase, and a 113% increase in the small animal supplements line due to
new business captured on canine thyroid replacement products. Partially offsetting these gains were a 27% decrease in vitamin supplements, due
13
Management’s Discussion and Analysis of Financial Condition and Results of Operations
to unusually high prior year sales caused by products coming off backorder and a decline in the number of cattle, and a 13% decrease in hoof
and leg care products, due to lower animal counts and difficult financial conditions in the dairy industry.
Rodenticide, Insecticides and Disinfectant revenues increased by 2% compared to fiscal 2012. Rodenticide sales increased 20% due to seasonal
conditions, new product formulations, marketing campaigns, and a prior year which was negatively affected by EPA labeling changes. Almost
entirely offsetting this increase was an 11% decrease in lower-margin sales of cleaners and disinfectants. The decrease was primarily due to
competition from lower-priced generics, particularly internationally, lack of disease outbreak for most of the year, which led to lower demand, and
timing of large international orders.
DNA Testing revenues increased 9% in fiscal 2013 compared to the prior year. The Company gained new business resulting from the Igenity and
Scidera Genomics acquisitions and had strong market acceptance of new products for cattle parentage testing in the latter half of the year.
Cost of Revenues
(Dollars in thousands)
Cost of Revenues
2014
Increase
2013
Increase
2012
$ 124,807
27%
$ 98,034
7%
$ 91,621
Cost of revenues increased 27% in fiscal 2014 and 7% in fiscal 2013 in comparison with the prior years. This compares with revenue increases
of 19% and 13%, respectively. Expressed as a percentage of revenues, cost of revenues was 50%, 47%, and 50% in fiscal years 2014, 2013 and
2012, respectively. The increase in cost of revenues, expressed as a percentage of sales, and the corresponding decline in gross margin percent-
age, in fiscal 2014 compared to fiscal 2013, is due to the overall shift in revenues towards Animal Safety products, and product mix shifts within
each segment. Animal Safety segment sales were 53% of overall sales in fiscal 2014, compared to 49% in fiscal 2013. The improvement in gross
margins, expressed as a percentage of sales, in fiscal 2013 compared to fiscal 2012, was due to a higher proportion of Food Safety revenues to
the overall total, and favorable product mix within both the Animal Safety and Food Safety segments.
Food Safety gross margins were 63%, 64% and 65% in fiscal years 2014, 2013 and 2012, respectively. The changes in margins between periods
relate primarily to changes in product mix. In fiscal 2014, the mix shift was primarily the result of lower sales of mycotoxin test kits, due to crops
that were largely free of the natural toxins aflatoxin and deoxynivalenol, which had contributed to strong sales of the Company’s mycotoxin test
kits in fiscal 2013. The lower mycotoxin revenues in fiscal 2014 were replaced with higher revenues in other product lines, such as dehydrated
culture media, which had lower gross margin percentages.
Animal Safety gross margins were 38%, 41% and 36% in fiscal years 2014, 2013 and 2012, respectively. The decrease in gross margin per-
centage in fiscal 2014 was due primarily to the three acquisitions completed this year, and product mix shifts within the segment during the year
resulting from lower sales of small animal supplements as a market supply disruption was resolved, and lower rodenticide revenues, which carry
relatively high gross margins within the segment, due to poor weather and difficult economic conditions in a number of international markets. Ad-
ditionally, margins in the agrigenomics business declined in fiscal 2014 as the result of the completion of a number of larger, lower margin projects,
inefficiencies caused by a spike in volume and excessive manual handling of samples. The gross margin improvement in fiscal 2013 compared
to fiscal 2012 was the result of a favorable shift in product mix resulting from higher sales in several higher margin product lines, including small
animal supplements, rodenticides and the Uniprim equine antibiotic.
Operating Expenses
(Dollars in thousands)
Sales and Marketing
General and Administrative
Research and Development
2014
Increase
2013
Increase
$ 46,432
24,449
8,326
14%
21%
7%
$ 40,791
20,216
7,781
16%
19%
17%
2012
$ 35,026
17,024
6,636
Sales and marketing expenses increased by 14% in fiscal 2014 and by 16% in fiscal 2013, each compared with the prior year. As a percentage
of sales, sales and marketing expense was 19%, 20% and 19% in fiscal years 2014, 2013 and 2012, respectively. The Company has continued
to add personnel to increase its sales and marketing capabilities worldwide, and the largest components of increases in this expense category are
salaries and commissions, which increased 11% in fiscal 2014 and 15% in fiscal 2013. Other significant increases in both fiscal years were for
royalties, based on increased sales of products requiring royalty payments, advertising and distributor marketing support, and shipping expenses,
both domestic and international.
General and administrative expenses increased 21% in fiscal 2014 compared to fiscal 2013 and by 19% in fiscal 2013 compared to fiscal 2012.
The increases in fiscal years 2014 and 2013, respectively, are primarily due to increased salary and other personnel related expenses, higher stock
option expense and increased amortization of intangible assets resulting from the Company’s recent acquisitions. The Company continues to make
investments in its information technology infrastructure, and recognized a 25% increase in depreciation expense in fiscal 2014, for computers,
servers and networking equipment, and additional license fees and support for the operating systems the Company deploys.
Research and development expenses increased 7% in fiscal 2014 compared to fiscal 2013 and by 17% in fiscal 2013 compared to fiscal 2012.
14
Management’s Discussion and Analysis of Financial Condition and Results of Operations
As a percentage of revenue, these expenses were 3% in fiscal 2014, and 4% in fiscal years 2013 and 2012. The decline in expenditures, ex-
pressed as a percentage of revenue, is attributable to the recent acquisitions the Company completed, which contributed $23.7 million in revenue,
with products which generally require relatively less investment in research and development. The Company continues to increase spending for
research and development; such expenditures have increased $1.7 million since fiscal 2012. For those products requiring support by research
and development, which are primarily Food Safety diagnostics products, the Company estimates that it spends 8–10% of revenues in its research
and development efforts and expects to continue to spend 3% to 5% of total revenue on research and development annually.
Operating Income
(Dollars in thousands)
Operating Income
2014
Increase
2013
Increase
2012
$ 43,391
7%
$ 40,706
21%
$ 33,739
The Company’s operating income increased by 7% in fiscal 2014 compared to fiscal 2013, and by 21% in fiscal 2013 compared to fiscal 2012.
Expressed as a percentage of revenues, it was 18%, 20% and 18% in fiscal years 2014, 2013 and 2012, respectively. The increase of 7% in
operating income was largely the result of the 19% increase in revenues; however, product mix shifts within both the Food Safety and Animal
Safety segments towards lower margin products, and the lower gross margins from the three acquisitions, resulted in a 320 basis point reduction
in the overall gross margin percentage, and was the primary reason operating income as a percentage of revenues declined from 20% in fiscal
2013 to 18% in fiscal 2014.
The increase in operating income in fiscal 2013 overall and expressed at a percentage of revenue, was driven by the 13% increase in revenues,
which when combined with improved gross margins compared to fiscal 2012, more than offset increased operating expenses for that year.
Historically, the Company has been successful in improving its operating income from revenue and gross margin growth from existing products
and acquisitions, while controlling manufacturing, distribution and administrative costs. During fiscal 2014, the Company continued to control
its overall operating expenses and grew its operating income; however, gross margin compression adversely impacted the rate of that growth to
below the rate of increase in revenues.
Other Income (Expense)
(Dollars in thousands)
Other Income (Expense)
2014
$
(360)
Decrease
(183%)
2013
$
435
Increase
2012
335%
$
100
Other Income (Expense) consists principally of royalty income, interest income from investing the Company’s excess cash balances, the impact of
foreign currency transactions, adjustments to contingent considerations and other miscellaneous items.
In fiscal 2014, Other Income (Expense) consisted primarily of losses on foreign currency translations of $717,000 most of which occurred in the
year’s first quarter, partially offset by $231,000 in royalty income and $115,000 in interest income.
In fiscal 2013, Other Income primarily consisted of royalty income totaling $364,000, interest income of $144,000, and $100,000 for the reversal
of the contingent consideration obligation relating to the Igenity acquisition, due to lower than projected sales for the first year. This was offset by
$113,000 of contingent consideration expense for the final year relating to the GeneSeek acquisition and losses on foreign currency transactions
totaling $166,000.
In fiscal 2012, Other Income primarily consisted of royalty income totaling $329,000, interest income of $107,000, and $154,000 for the reversal
of the contingent consideration 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.
Provision for Income Taxes
(Dollars in thousands)
Provision for Income Taxes
2014
$ 15,000
Increase
2013
Increase
2012
6%
$ 14,100
23%
$ 11,450
The tax provision was 35% of pretax income in fiscal 2014, 34% in fiscal 2013 and 34% in fiscal 2012. Fluctuations in the tax rate from the 35%
statutory corporate rate is primarily due to tax credits related to manufacturing and R&D activities partially offset by the provision for state taxes.
The effective tax rate increased slightly in fiscal 2014, due to the expiration of the credit for R & D activities as of December 31, 2013. The effec-
tive rate for fiscal 2013 was 34.3% compared to 33.7% in fiscal 2012. The fiscal 2012 rate was affected by a favorable adjustment of $550,000
due to the conclusion of an Internal Revenue Service audit through the Company’s 2010 fiscal year, which resulted in no additional taxes owing.
The favorable adjustment to income tax expense resulted in an effective tax rate of 33.7% for fiscal 2012. Absent the adjustment, the Company’s
fiscal 2012 tax rate would have been 35.5% compared to 34.9% in fiscal 2014 and 34.3% in fiscal 2013.
15
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Net Income and Net Income Per Share
(Dollars in thousands, except per share data)
Net Income Attributable to Neogen
Net Income Per Share – Basic
Net Income Per Share – Diluted
2014
$ 28,158
$
$
0.77
0.76
Increase
4%
2013
$ 27,190
$
$
0.76
0.75
Increase
21%
2012
$ 22,513
$
$
0.64
0.62
Net income increased by 4% in fiscal 2014 and increased by 21% in fiscal 2013 in comparison with the prior year. As a percentage of revenue,
net income was 11% in fiscal 2014, 13% in fiscal 2013 and 12% in fiscal 2012.
FUTURE OPERATING RESULTS
Neogen Corporation’s future operating results involve a number of risks and uncertainties. Actual events or results may differ materially from those
discussed in this report. Factors that could cause or contribute to such differences include, but are not limited to, the factors discussed below as
well as those discussed elsewhere in this report. Management’s ability to grow the business in the future depends upon its ability to successfully
implement various strategies, including:
• developing, manufacturing and marketing new products with new features and capabilities;
• expanding the Company’s markets by fostering increased use of Company products by customers;
• maintaining or increasing 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 product categories or create new products or services.
FINANCIAL CONDITION AND LIQUIDITY
On May 31, 2014, the Company had $40.7 million in cash and cash equivalents, $35.8 million in marketable securities, and working capital of
$163.8 million. The Company has a financing agreement with a bank providing for an unsecured revolving line of credit of $12.0 million which
was amended in May 2014 to extend the expiration to September 1, 2017. There were no advances against this line of credit during fiscal years
2014, 2013 and 2012, and no balance outstanding at May 31, 2014 and 2013. For the year ended May 31, 2014, cash generated from operating
activities was $21.7 million; proceeds from stock option activity provided an additional $14.9 million of cash. For the same period, additions to
property and equipment and business acquisitions used cash of $11.5 million and $39.3 million, respectively.
Accounts receivable at May 31, 2014 increased $13.2 million, or 34%, compared to May 31, 2013, primarily due to the increase in revenues.
Days sales outstanding, a measurement of the time it takes to collect receivables, increased from 57 days at May 31, 2013 to 64 days at May
31, 2014; the increase is due primarily to slower collections on international balances, and, to a lesser extent, the timing of revenues generated
in the last two months of each fiscal year. These accounts are being actively managed and no losses thereon in excess of amounts reserved are
currently expected.
Inventory levels increased by $12.9 million or 34%, in fiscal 2014 compared to May 31, 2013. Approximately $8.7 million of the increase resulted
from the three acquisitions the Company completed in fiscal 2014. The Company has instituted procedures to rationalize redundant product lines
resulting from the acquisitions and has renewed focus on programs aimed at minimizing inventory levels and improving inventory turnover.
Neogen has been profitable from operations for its last 85 quarters and has generated positive cash flow from operations during this period.
However, the Company’s cash on hand and current borrowing availability may not be sufficient to meet the Company’s cash requirements to com-
mercialize products currently under development or its potential 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 have not had, and, in the opinion of manage-
ment, are 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
–
1,093
44,282
$ 45,375
$
Less than
one year
–
470
44,282
44,752
$
1–3 years
–
$
528
–
528
$
3–5 years
–
$
95
–
95
$
New Accounting Pronouncements
See discussion of any New Accounting Pronouncements in Note 1 to Consolidated Financial Statements.
16
$
More than
5 years
–
–
–
–
$
Neogen Corporation and Subsidiaries: Consolidated Balance Sheets
Year ended May 31
Assets (In thousands)
Current Assets
Cash and cash equivalents
Marketable securities
Accounts receivable, less allowance of $1,200 and $900 at May 31, 2014 and 2013
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
$11,915 and $9,446 at May 31, 2014 and 2013
Other non-current assets, net of accumulated amortization of $5,494 and $4,222
at May 31, 2014 and 2013
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; 36,732,313 and
36,084,021 shares issued and outstanding at May 31, 2014 and 2013
Additional paid-in capital
Accumulated other comprehensive income (loss)
Retained earnings
Total Neogen Corporation and Subsidiaries Stockholders’ Equity
Non-controlling interest
Total Equity
2014
$
40,675
35,821
51,901
51,178
1,710
7,461
188,746
1,875
26,456
40,333
2,282
1,659
72,605
30,656
41,949
68,190
9,682
25,230
$
2013
50,032
35,337
38,737
38,315
1,462
4,564
168,447
1,669
22,779
33,060
1,021
1,561
60,090
25,745
34,345
59,491
6,660
12,345
11,504
114,606
$ 345,301
9,270
87,766
$ 290,558
$
13,396
$
9,212
4,357
–
7,214
24,967
12,155
1,879
39,001
3,227
165
5,115
17,719
12,449
2,103
32,271
–
–
5,877
118,070
371
182,043
306,361
(61)
306,300
$ 345,301
5,773
99,935
(1,372)
153,885
258,221
66
258,287
$ 290,558
See accompanying notes to consolidated financial statements.
17
Neogen Corporation and Subsidiaries: Consolidated Statements of Income
(In thousands, except per share)
Revenues
Product revenues
Service revenues
Total Revenues
Cost of Revenues
Cost of product revenues
Cost of service revenues
Total Cost of Revenues
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 Loss Attributable to Noncontrolling Interest
Net Income Attributable to Neogen
Net Income Attributable to Neogen Per Share
Basic
Diluted
Year ended May 31
2014
2013
2012
$ 219,734
$ 184,134
$ 164,910
27,671
247,405
23,394
207,528
19,136
184,046
$ 107,167
$
84,045
$
78,823
17,640
124,807
122,598
13,989
98,034
109,494
46,432
24,449
8,326
79,207
43,391
115
231
38
(744)
(360)
43,031
15,000
28,031
127
40,791
20,216
7,781
68,788
40,706
144
364
(14)
(59)
435
41,141
14,100
27,041
149
12,798
91,621
92,425
35,026
17,024
6,636
58,686
33,739
107
329
154
(490)
100
33,839
11,450
22,389
124
$
28,158
$
27,190
$
22,513
$
$
0.77
0.76
$
$
0.76
0.75
$
$
0.64
0.62
See accompanying notes to consolidated financial statements.
Neogen Corporation and Subsidiaries: Consolidated Statements of Comprehensive Income
(In thousands)
Net Income
Other Comprehensive Income (Loss), Net of Tax: Currency Translation Adjustments
Other Comprehensive Income (Loss
Comprehensive Income
Comprehensive Loss Attributable to Noncontrolling Interest
Year ended May 31
2014
2013
2012
$
28,031
$
27,041
$
22,389
1,743
1,743
29,774
127
(145)
(145)
26,896
149
(833)
(833)
21,556
124
Comprehensive Income Attributable to Neogen Corporation
$
29,901
$
27,045
$
21,680
See accompanying notes to consolidated financial statements.
18
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, May 31, 2011
34,935,905
$
5,589
$
79,386
$
(394)
$ 104,182
$ 339
$ 189,102
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
Other comprehensive loss
472,520
21,216
76
3
7,811
506
7,887
509
22,389
(833)
22,513
(124)
(833)
Balance, May 31, 2012
35,429,641
5,668
87,703
(1,227)
126,695
215
219,054
Exercise of options and
warrants, including
share-based compensation
and $3,113 income tax
benefit
Issuance of shares under
Employee Stock Purchase
Plan
Comprehensive income:
Net income (loss) for 2013
Other comprehensive loss
631,992
101
11,700
22,388
4
532
11,801
536
27,041
(145)
27,190
(149)
(145)
Balance, May 31, 2013
36,084,021
5,773
99,935
(1,372)
153,885
66
258,287
Exercise of options and
warrants, including
share-based compensation
and $4,757 income tax
benefit
Issuance of shares under
Employee Stock Purchase
Plan
Comprehensive income:
Net income (loss) for 2014
Other comprehensive loss
629,826
101
17,522
18,466
3
613
17,623
616
28,031
1,743
28,158
(127)
1,743
Balance, May 31, 2014
36,732,313
$
5,877
$ 118,070
$
371
$ 182,043
$
(61)
$ 306,300
See accompanying notes to consolidated financial statements.
19
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 stock options
Excess income tax benefit from the exercise of stock options
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
2014
2013
2012
$
28,031
$
27,041
$
22,389
9,180
(542)
3,686
(4,757)
(10,602)
(3,529)
(2,654)
1,970
885
21,668
(11,543)
91,207
(91,691)
(39,265)
(51,292)
14,851
4,757
–
19,608
659
(9,357)
50,032
7,411
287
3,064
(3,113)
(2,674)
(2,082)
(1,505)
(1,417)
(451)
26,561
(8,897)
67,039
(82,776)
(13,318)
(37,952)
9,533
3,113
(155)
12,491
(113)
987
49,045
6,173
1,340
2,455
(1,829)
(7,204)
(3,093)
1,497
2,330
(1,781)
22,277
(12,413)
72,270
(71,631)
(4,011)
(15,785)
5,797
1,829
(750)
6,876
(167)
13,201
35,844
$
40,675
$
50,032
$
49,045
$
9,956
$
8,986
$
6,445
See accompanying notes to consolidated financial statements.
20
Neogen Corporation and Subsidiaries: Notes to Consolidated Financial Statements
1. SUMMARY OF SIGNIFICANT 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. and Neogen do Brasil, which are both 90% owned as of May 31, 2014.
The Company made an additional capital contribution on December 31, 2013 which increased its ownership interest in Neogen Latinoamérica
from 60% to 90%. Noncontrolling interest represents the noncontrolling owner’s proportionate share in the equity of the Company’s majority
owned subsidiaries. The noncontrolling owner’s proportionate share in the income or losses of the Company’s majority owned subsidiaries is
subtracted from or added to, net income to calculate the net income attributable to Neogen Corporation.
All intercompany accounts and transactions have been eliminated in consolidation.
Share and per share amounts reflect the October 30, 2013 3-for-2 stock split as if it took place at the beginning of the periods presented.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ
from these estimates.
Comprehensive Income
Comprehensive income represents net income and any revenues, expenses, gains and losses that, under U.S. generally accepted accounting prin-
ciples, are excluded from net income and recognized directly as a component of equity. Accumulated other comprehensive income (loss) consists
solely of foreign currency translation adjustments.
Accounts Receivable and Concentrations of Credit Risk
Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of accounts receivable. Manage-
ment 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 doubtful accounts on accounts receivable is established based upon factors surrounding the credit risk of specific custom-
ers, 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 to the allowance for doubtful accounts. No customer accounted for more than
10% of accounts receivable at May 31, 2014. The activity in the allowance for doubtful accounts was as follows:
(In thousands)
Year ended May 31
Beginning balance
Provision
Recoveries
Write-offs
Ending balance
$
2014
900
367
8
(75)
$
1,200
2013
800
193
24
(117)
900
$
$
2012
800
91
12
(103)
800
$
$
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 and accounts payable, approximate fair value based on either their short maturity or current terms for similar instruments.
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 observ-
ability 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.
21
Neogen Corporation and Subsidiaries: Notes to Consolidated Financial Statements
Cash and Cash Equivalents
Cash and cash equivalents consist of bank demand accounts, savings deposits, certificates of deposit and commercial paper with original maturi-
ties of 90 days or less. Cash and cash equivalents were $40,675,000 and $50,032,000 at May 31, 2014 and 2013, respectively. The carrying
value of these assets approximates fair value due to the short maturity of these instruments and meet the Level 1 criteria.
Marketable Securities
The Company has marketable securities held by banks or broker-dealers consisting of short-term domestic certificates of deposit of $17,576,000
and commercial paper rated at least A-2/P-2 with maturities between 91 days and one year of $18,245,000. Outstanding marketable securities at
May 31, 2014 were $35,821,000; there were $35,337,000 marketable securities outstanding at May 31, 2013. These securities are classified as
available for sale. The primary objective of the Company’s short-term investment activity is to preserve capital for the purpose of funding operations,
capital expenditures and business acquisitions; short-term investments are not entered into for trading or speculative purposes. These securities
are recorded at fair value (that approximate cost) based on recent trades or pricing models and therefore meet the Level 2 criteria. Interest income
on these investments is recorded within Other Income on the income statement.
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:
Year ended May 31
(In thousands)
Raw materials
Work-in-process
Finished and purchased finished goods
2014
$
21,515
3,681
25,982
2013
$
16,587
3,583
18,145
$
51,178
$
38,315
The Company’s inventories are analyzed for slow moving and obsolete items no less frequently than quarterly and the valuation allowance is ad-
justed as required. The valuation allowance for inventory was $1,425,000 and $1,250,000 at May 31, 2014 and 2013, 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
$5,383,000, $4,417,000 and $3,646,000 in fiscal years 2014, 2013 and 2012, respectively.
Goodwill and Other Intangible Assets
Goodwill represents the excess of purchase price over fair value of tangible net assets of acquired businesses after amounts are allocated to
other identifiable intangible assets. 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 assets may be impaired. If the Company’s qualitative assessment concludes that it is more likely than not that an impairment
exists, or the Company skips the qualitative assessment, then the Company performs a quantitative assessment. 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 amortiza-
tion period for customer-based intangibles and other intangibles are both 12 years, respectively, at May 31, 2014 and May 31, 2013.
Long-lived Assets
Management reviews the carrying values of its long-lived assets to be held and used, including definite-lived intangible assets, for possible impair-
ment whenever events or changes in business conditions warrant such a review. The carrying value of a long-lived asset is considered impaired
when the anticipated separately identifiable undiscounted cash flows over the remaining useful life of the asset are less than the carrying value
of the asset. In such an event, fair value is determined using discounted cash flows and if lower than the carrying value, impairment is recognized
through a charge to operations.
Reclassifications
Certain amounts in the fiscal 2013 and 2012 financial statements have been reclassified to conform to the fiscal 2014 presentation.
22
Neogen Corporation and Subsidiaries: Notes to Consolidated Financial Statements
Stock Options
At May 31, 2014, 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 fiscal years 2014, 2013 and 2012, estimated on the date of grant using
the Black-Scholes option pricing model, was $9.87, $9.21 and $6.94, 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
2014
0.8%
0%
33.1%
2013
1.2%
0%
39.2%
4.0 years
4.0 years
2012
1.2%
0%
36.4%
4.0 years
The risk-free interest rate for periods within the expected life of options granted is based on the United States Treasury yield curve in effect at the
time of grant. Expected stock price volatility is based on historical volatility of the Company’s stock. The expected option life, representing the period
of time that options granted are expected to be outstanding, is based on historical option exercise and employee termination data. The Company
recognizes the fair value 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 products and services is recognized when the product has been shipped or the service has been performed, the sales price is fixed
and determinable, and collection of any resulting receivable is probable. To the extent customer payment is received before all recognition criteria
has been met, these revenues are initially deferred and later recognized in the period that all recognition criteria has been met. Where right of
return exists, allowances are made at the time of sale to reflect expected returns based on historical experience.
Shipping and Handling Costs
Shipping and handling costs that are charged to and reimbursed by the customer are recognized as revenues, while the related expenses incurred
by the Company are recorded in sales and marketing expense; these expenses totaled $7,472,000, $6,856,000 and $5,940,000 in fiscal years
2014, 2013 and 2012, respectively.
Income Taxes
The Company accounts for income taxes using the asset and 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 for tax credit carry forwards 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 rep-
resents 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 (90% owned Subsidiary),
Neogen do Brasil (90% owned Subsidiary) and Neogen China (wholly-owned subsidiary). Based on historical experience, as well as the Company’s
future plans, earnings from these subsidiaries are expected to be re-invested indefinitely for future expansion and working capital needs. Further-
more, 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 re-evaluation of the decision to indefinitely re-invest foreign earnings. At May 31, 2014, unremitted earnings of the foreign subsidiaries
were $18,262,000.
Research and Development Costs
Research and development costs are expensed as incurred.
Advertising Costs
Advertising costs are expensed as incurred and totaled $1,344,000, $1,055,000 and $1,001,000 in fiscal years 2014, 2013 and 2012,
respectively.
23
Neogen Corporation and Subsidiaries: Notes to Consolidated Financial Statements
Net Income Attributable to Neogen per Share
Basic net income per share is based on the weighted average number of common shares outstanding during each year. Diluted earnings per
share is based on the weighted average number of common shares and dilutive potential common shares outstanding. The Company’s dilutive
potential common shares outstanding during the years result entirely from dilutive stock options. The following table presents the net income per
share calculations:
Year ended May 31 (In thousands, except per share),
2014
2013
2012
Numerator for basic and diluted net income per share
Net income attributable to Neogen
Denominator for basic net income per share
weighted average shares
Effect of dilutive stock options
Denominator for diluted net income per share
Net income attributable to Neogen per share:
Basic
Diluted
$ 28,158
$ 27,190
$ 22,513
36,511
756
37,267
$
$
0.77
0.76
35,768
723
36,491
$
$
0.76
0.75
35,199
830
36,029
$
$
0.64
0.62
At May 31, 2014, 2013 and 2012, 48,716, 88,912 and 78,450 shares, respectively, were excluded from the computations of diluted net income
per share, as the option exercise prices exceeded the average market price of the common shares.
On October 30, 2013, the Company paid a 3-for-2 stock split effected in the form of a dividend of its common stock. All share and per share
amounts, with the exception of par value per share, have been adjusted to reflect the stock split as if it had taken place at the beginning of the
period presented. The common stock and additional paid-in capital accounts at May 31, 2013 and 2012 reflect the retroactive capitalization of
the 3-for-2 stock split.
New Accounting Pronouncements
In February 2013, the Financial Accounting Standards Board (FASB) further amended ASC 220, Comprehensive Income, with ASU 2013-02,
Comprehensive Income (Topic 220) – Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (amended ASC 220),
which was designed to improve the reporting of reclassifications out of accumulated other comprehensive income by requiring an entity to present
the effect of significant reclassifications out of accumulated other comprehensive income on the respective lines of net income. The impact of
adopting amended ASC 220 did not have a material impact on the consolidated financial statements.
In May 2014, the FASB issued a new standard on revenue recognition. The new standard outlines a single comprehensive model for entities to use
in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-
specific guidance. The core principle of the revenue model is that an entity should recognize revenue to depict the transfer of promised goods or
services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or ser-
vices. The standard is designed to create greater comparability for financial statement users across industries and jurisdictions and also requires
enhanced disclosures. The guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. Early
adoption is not permitted. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements.
2. GOODWILL AND OTHER INTANGIBLE ASSETS
Management has completed the annual impairment analysis of goodwill and intangible assets with indefinite lives using a quantitative assess-
ment as of the first day of the fourth quarter of fiscal years 2014, 2013 and 2012, respectively, and determined that recorded amounts were not
impaired and that no write-down was necessary.
The following table summarizes goodwill by reportable segment:
(In thousands)
Balance, May 31, 2012
Goodwill acquired
Balance, May 31, 2013
Goodwill acquired
Balance, May 31, 2014
24
Food Safety
16,696
–
$ 16,696
–
$ 16,696
Animal Safety
36,356
6,439
$ 42,795
8,699
$ 51,494
Total
53,052
6,439
$ 59,491
8,699
$ 68,190
Neogen Corporation and Subsidiaries: Notes to Consolidated Financial Statements
At May 31, 2014, non-amortizable intangible assets included licenses of $569,000, trademarks of $7,889,000 and other intangibles of
$1,224,000. At May 31, 2013, non-amortizable intangible assets included licenses of $569,000, trademarks of $4,867,000 and other intan-
gibles of $1,224,000.
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
Other product and service related intangibles
Balance, May 31, 2014
Licenses
Covenants not to compete
Patents
Customer relationship intangibles
Other product and service related intangibles
Balance, May 31, 2013
Gross
Carrying
Amount
$ 6,701
474
5,990
37,145
3,833
$ 54,143
$ 4,165
334
5,184
21,791
3,809
$ 35,283
Less
Accumulated
Amortization
$ 1,873
256
2,746
11,915
619
$ 17,409
$ 1,409
186
2,363
9,446
264
$ 13,668
Net Carrying
Amount
$ 4,828
218
3,244
25,230
3,214
$ 36,734
$ 2,756
148
2,821
12,345
3,545
$ 21,615
Amortization expense for intangibles totaled $3,797,000, $2,994,000 and $2,527,000 in fiscal years 2014, 2013, and 2012, respectively. The
estimated amortization expense for each of the five succeeding fiscal years is as follows: $4,158,000 in 2015, $3,916,000 in 2016, $3,770,000
in 2017, $3,552,000 in 2018 and $2,955,000 in 2019. The amortizable intangible assets useful lives are 5 to 20 years for licenses, 5 years for
covenants not to compete, 5 to 20 years for patents, and 12 to 20 years for customer relationship intangibles. All definite lived intangibles are
amortized on a straight line basis with the exception of definite lived customer relationship intangibles and product and service-related 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. Goodwill recognized in the acquisitions discussed below relates primarily to enhancing the Company’s
strategic platform for the expansion of available product offerings.
On June 21, 2011, the Company acquired the assets of VeroMara seafood testing laboratory for approximately $813,000 in cash and a poten-
tial contingent consideration payment of approximately $200,000 from its parent company, GlycoMar Ltd. Formerly based in Oban, Scotland,
VeroMara offered commercial testing for the shellfish and salmon aquaculture industries, including tests for shellfish toxins, general foodborne
pathogens, including E. coli, noroviruses, and salmon husbandry. The acquisition has been integrated into the Company’s Food Safety segment at
its Ayr, Scotland location.
On May 1, 2012, the Company purchased the assets of the Igenity animal genomics business from Merial Limited. Consideration for the purchase
was $3,200,000 in cash and included allocations of net current assets of $110,000, property and equipment of $340,000, $600,000 accrued
for contingent consideration, intangible assets of $2,036,000 and the remainder to goodwill (deductible for tax purposes). During 2012, the
Company paid $500,000 for data sets included in the contingent consideration. The allocation was generally based on the fair value of these as-
sets 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. In the past, GeneSeek Inc. (acquired by the Company in 2010) 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 was moved to GeneSeek’s operations in Lincoln, Nebraska, and operates as part of Neogen’s GeneSeek subsidiary, within the
Animal Safety segment. In May 2013, the Company reversed the remaining $100,000 of the contingent consideration accrual to Other Income, as
the business did not attain the revenue level stipulated for that year.
On October 1, 2012, the Company acquired all of the stock of Macleod Pharmaceuticals Inc., of Fort Collins, Colorado. Macleod is the manufac-
turer of Uniprim, a leading veterinary antibiotic. The product is widely distributed throughout the U.S., and is also available in Canada through an
exclusive distribution agreement. Consideration for the purchase was $9,918,000 in net cash and $100,000 accrued for contingent consideration.
The final purchase price allocation, based upon the fair value of these assets determined using the income approach, included accounts receivable
of $353,000, inventory of $1,238,000, property and equipment of $300,000, current liabilities of $82,000, deferred tax liabilities of $2,054,000,
25
Neogen Corporation and Subsidiaries: Notes to Consolidated Financial Statements
contingent consideration payment liabilities of $100,000, intangible assets of $5,542,000 and the remainder to goodwill (non-deductible for tax
purposes). These values are Level 3 fair value measurements. Macleod operates as a subsidiary of Neogen Corporation, reporting within the
Animal Safety segment. In October 2013, the Company paid $62,000 for contingent consideration; the remaining $38,000 of the accrual was
reversed to Other Income.
On January 2, 2013, the Company acquired the assets of Scidera Genomics LLC, an animal genomics business based in Davis, California. The
company, formerly operated as MetaMorphix, Inc., or MMI Genomics, performs parentage testing and trait analysis primarily for the cattle and
canine industries. Consideration for the purchase was $3,400,000 in cash. The final purchase price allocation included current assets of $35,000,
property and equipment of $246,000, intangible assets of $1,570,000 and the remainder to goodwill (deductible for tax purposes). These values
are Level 3 fair value measurements. This business was relocated to the Company’s GeneSeek operation in Lincoln, Nebraska in 2013, and reports
within the Animal Safety segment.
On July 1, 2013, the Company acquired the assets of SyrVet Inc., a veterinary business based in Waukee, Iowa. SyrVet offered a product line similar
to Neogen’s Ideal Instruments line of veterinary instruments with a strong presence in Mexico and Latin America. Consideration for the purchase
was $10,012,000 in cash and up to $1,500,000 of a contingent consideration liability, due at the end of the first year, based on an excess net
sales formula. The Company has estimated the contingent consideration liability to be $930,000, based on forecasted sales. The final purchase
price allocation, based upon the fair value of these assets determined using the income approach, included accounts receivable of $747,000, net
inventory of $2,195,000, property and equipment of $556,000, current liabilities of $226,000, contingent consideration liabilities of $930,000,
non-amortizable trademarks of $790,000, intangible assets of $4,810,000 (with an estimated life of 15 years) and the remainder to goodwill
(deductible for tax purposes). These values are Level 3 fair value measurements. This business has been relocated to Lexington, Kentucky and
integrated with the Company’s current operations there, reporting within the Animal Safety segment.
On November 1, 2013, the Company acquired the assets of Prima Tech Incorporated, a veterinary instrument company based in Kenansville, North
Carolina. Prima Tech manufactures devices used by farmers, ranchers, and veterinarians to inject animals, provide topical applications, and to use
for oral administration. Prima Tech is also a supplier of products used in artificial insemination in the swine industry. Consideration for the purchase
was $12,068,000 in cash and up to $600,000 of contingent consideration, due at the end of the first year, based on an excess net sales formula.
The Company has estimated the contingent consideration liability to be $146,000 based on forecasted sales. The final purchase price allocation,
based upon the fair value of these assets determined using the income approach, included accounts receivable of $963,000, net inventory of
$2,796,000, property and equipment of $1,653,000, prepaid assets of $8,000, current liabilities of $1,840,000, contingent consideration li-
abilities of $146,000, non-amortizable trademarks of $1,500,000, intangible assets of $4,400,000 (with an estimated life of 5-15 years) and the
remainder to goodwill (deductible for tax purposes). These values are Level 3 fair value measurements. This business will continue to operate in
its current location and reports within the Animal Safety segment.
On January 2, 2014, the Company acquired all of the stock of Chem-Tech Ltd., a pest control manufacturing and distribution business located in
Pleasantville, Iowa. Consideration for the purchase was $17,185,000 in cash and up to $1,000,000 of a contingent consideration liability, due
at the end of the first year, based on an excess sales formula. The Company has estimated the contingent consideration liability to be $400,000,
based on forecasted sales. The preliminary purchase price allocation included accounts receivable of $380,000, net inventory of $4,096,000,
prepaid assets of $225,000, property and equipment of $682,000, current liabilities of $184,000, contingent consideration liabilities of $400,000,
non-amortizable trademarks of $662,000, intangible assets of $7,536,000 (with an estimated life of 15 years) and the remainder to goodwill
(deductible for tax purposes). These values are Level 3 fair value measurements. This business will continue to operate in its current location and
reports 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 up to $12,000,000 which was amended
on May 30, 2014, to extend the maturity from September 1, 2014 to September 1, 2017. There were no advances against this line of credit during
fiscal years 2014, 2013 and 2012, and no balance outstanding at May 31, 2014 and 2013. Interest is at LIBOR plus 100 basis points (rate under
the terms of the agreement was 1.15% at May 31, 2014). 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, 2014 and May 31, 2013.
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 805,000, 1,227,000 and 1,662,000 at May 31,
2014, 2013 and 2012, respectively. Options vest ratably over three and five year periods and the contractual terms are generally five or ten years.
26
Neogen Corporation and Subsidiaries: Notes to Consolidated Financial Statements
(In thousands, except for share price)
Outstanding at May 31, 2011 (764 exercisable)
Granted
Exercised
Forfeited
Outstanding at May 31, 2012 (863 exercisable)
Granted
Exercised
Forfeited
Outstanding at May 31, 2013 (749 exercisable)
Granted
Exercised
Forfeited
Outstanding at May 31, 2014 (577 exercisable)
Shares
Weighted-Average
Exercise Price
Weighted-Average
Grant Date Fair Value
2,361
474
(480)
(41)
2,314
459
(657)
(24)
2,092
512
(643)
(92)
1,869
$
$
$
11.85
23.06
8.29
11.08
14.89
28.67
10.61
19.67
19.21
36.44
13.69
22.08
25.69
$
$
$
3.81
6.94
2.93
3.59
4.63
9.21
3.43
6.07
6.00
9.87
4.28
6.65
7.62
The following is a summary of stock options outstanding at May 31, 2014:
(Options in thousands) Options Outstanding
Options Exercisable
Range of
Exercise Price
$ 5.45–16.12
16.13–22.91
22.92–28.26
28.27–32.37
32.38–41.65
Number
286
288
353
439
503
1,869
Average Remaining
Contractual Life (Years)
1.8
2.5
2.8
4.0
4.9
3.4
Weighted-Average
Exercise Price
11.70
$
19.32
23.17
28.67
36.44
25.69
$
Number
201
152
134
90
–
577
$
Weighted-Average
Exercise Price
11.14
19.57
23.28
28.67
–
18.91
$
The weighted average exercise price of shares that were exercisable at May 31, 2014 and 2013 was $18.91 and $14.21, respectively.
The aggregate intrinsic value of options outstanding and options exercisable was $22,751,000 and $10,984,000, respectively, at May 31, 2014,
$35,778,000 and $16,557,000 respectively, at May 31, 2013 and $25,617,000 and $12,855,000 respectively, at May 31, 2012. The aggregate
intrinsic value of options exercised during the year was $17,669,000 in fiscal 2014, $12,519,000 in fiscal 2013 and $8,226,000 in fiscal 2012.
Remaining compensation cost to be expensed in future periods for non-vested options was $4,096,000 at May 31, 2013, with a weighted aver-
age expense recognition period of 3.2 years.
Common stock totaling 65,309 of the 337,500 originally authorized shares are reserved for issuance under the terms of the 2002 Employee Stock
Purchase Plan. An additional 375,000 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
18,466, 22,388 and 21,216 in fiscal years 2014, 2013 and 2012, respectively.
6. INCOME TAXES
Income before income taxes by source consists of the following amounts:
Year ended May 31 (In thousands),
U.S. Taxes
Foreign
The provision for income taxes consisted of the following:
Year ended May 31 (In thousands),
Current
U.S. Taxes
Foreign
Deferred
2014
37,568
5,463
43,031
2014
14,442
1,100
(542)
15,000
$
$
$
$
2013
37,407
3,734
41,141
2013
12,959
854
287
14,100
$
$
$
$
2012
31,775
2,064
33,839
2012
9,520
587
1,343
11,450
$
$
$
$
27
Neogen Corporation and Subsidiaries: Notes to Consolidated Financial Statements
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
2014
15,061
(574)
513
15,000
$
$
2013
14,400
(980)
680
14,100
$
$
2012
11,900
(755)
305
11,450
$
$
Deferred income taxes reflect the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred income tax liabilities and assets are
as follows:
Year ended May 31 (In thousands),
Deferred income tax liabilities
Indefinite and long-lived assets
Prepaids
Deferred income tax assets
Inventories and accounts receivable
Accrued liabilities and other
Net deferred income tax liabilities
2014
(13,759)
(358)
(14,117)
1,471
2,201
3,672
(10,445)
$
$
2013
(13,953)
(333)
(14,286)
1,228
2,071
3,299
(10,987)
$
$
At the end of fiscal 2011, the Company was under audit by the Internal Revenue Service for its fiscal 2009 year; in fiscal 2012 this audit was
expanded to include the fiscal 2010 year as well. The audit concluded in late fiscal 2012 with a slight favorable adjustment; thus, amounts totaling
$550,000 which had been reserved as uncertain tax positions were reversed in the fourth quarter of fiscal 2012, resulting in an effective tax rate
of 33.7% for the year. Absent this adjustment, the Company’s fiscal 2012 tax rate would have been 35.5%, compared to 34.3% in fiscal 2013
and 34.9% in fiscal 2014.
The Company has no significant accrual for unrecognized tax benefits at May 31, 2014. 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 2011.
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 paying annual costs of remediation which
have ranged from $47,000 to $79,000 per year over the past five years. The Company’s estimated liability for these costs of $916,000 at May
31, 2014 and 2013, measured on an undiscounted basis over an estimated period of 15 years; $50,000 of the liability is recorded within current
liabilities and the remainder is recorded within other long term liabilities in the consolidated balance sheet.
The Company has agreements with unrelated third parties that provide for the payment of license fees and royalties on the sale of certain products.
Royalty expense under the terms of these agreements was $2,278,000, $1,837,000 and $1,371,000 for fiscal years 2014, 2013 and 2012,
respectively.
The Company has agreements with unrelated third parties that provide for guaranteed minimum royalty payments to be paid each fiscal year by
the Company for certain technologies, as follows: 2015 - $658,000; 2016 - $700,000; 2017 - $669,000; and 2018 - $769,000.
The Company leases office and manufacturing facilities under noncancelable operating leases. Rent expense for fiscal years 2014, 2013 and
2012 was $856,000, $657,000 and $495,000, respectively. Future fiscal year minimum rental payments for these leases over their remaining
terms are as follows: 2015 - $470,000; 2016 - $324,000; 2017 - $130,000; 2018 - $74,000; and 2019 and later - $96,000.
The Company is subject to certain legal and other proceedings in the normal course of business that, in the opinion of management, should 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 com-
pensation up to IRS limits, with the Company matching 100% of the first 3% of deferred compensation and 50% of the next 2% deferred. The
Company’s expense under this plan was $954,000, $863,000 and $760,000 in fiscal years 2014, 2013 and 2012, respectively.
28
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 is primarily engaged in the development,
production and marketing of 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 development, 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 and related interpretive bioinformatic services. Additionally, the Animal Safety
segment produces and markets rodenticides, disinfectants, and insecticides to assist in control of rodents, insects and disease in and around
agricultural, food production and other facilities.
These segments are managed separately because they represent strategic business units that offer different products and require different mar-
keting strategies. The Company evaluates performance based on total sales and operating income of the respective segments. The accounting
policies of each of the segments are the same as those described in Note 1.
Segment information is as follows:
(In thousands)
2014
Product revenues to external customers
Service revenues to external customers
Total revenues to external customers
Operating income (loss)
Depreciation and amortization
Total assets
Expenditures for long-lived assets
2013
Product revenues to external customers
Service revenues to external customers
Total revenues to external customers
Operating income (loss)
Depreciation and amortization
Total assets
Expenditures for long-lived assets
Food Safety
Animal Safety
Corporate and
Eliminations (1)
$
$
111,545
4,745
116,290
28,009
4,181
105,607
5,999
102,971
3,187
106,158
27,366
3,874
93,079
6,046
$
$
108,189
22,926
131,115
18,571
4,999
173,643
5,544
81,163
20,207
101,370
15,858
3,537
121,908
2,851
$
$
–
–
–
(3,189)
–
66,051
–
–
–
–
(2,518)
–
75,571
–
$
$
Total
219,734
27,671
247,405
43,391
9,180
345,301
11,543
184,134
23,394
207,528
40,706
7,411
290,558
8,897
$
2012
Product revenues to external customers
Service revenues to external customers
Total revenues to external customers
Operating income (loss)
Depreciation and amortization
Total assets
Expenditures for long-lived assets
(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
164,910
19,136
184,046
33,739
6,173
251,600
12,413
74,450
18,492
92,942
12,039
2,673
106,987
7,780
–
–
–
(2,232)
–
82,386
–
90,460
644
91,104
23,932
3,500
62,227
4,633
$
$
$
includes the elimination of intersegment transactions and noncontrolling interests.
Revenues to customers located outside the United States amounted to $96,111,000 or 38.8% of consolidated revenues in fiscal 2014,
$83,171,000 or 40.1% in fiscal 2013 and $76,672,000 or 41.7% in fiscal 2012 and were derived primarily in various countries throughout
Europe, Canada, and the geographic areas of South and Central America and Asia. No customer represented revenues in excess of 10% of con-
solidated net sales in any of the three years. The United States based operations represent 95% of the Company’s long-lived assets as of May 31,
2014 and 95% as May 31, 2013.
10. STOCK REPURCHASE
In December 2008, the Company’s Board of Directors authorized a program to purchase, subject to market conditions, up to 1,125,000 shares of
the Company’s common stock. As of May 31, 2014, 112,026 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 fiscal years 2014 or 2013. Shares purchased
under the program were retired.
29
Neogen Corporation and Subsidiaries: Notes to Consolidated Financial Statements
11. SUMMARY OF QUARTERLY DATA (UNAUDITED)
(In thousands, except per share)
Total revenues
Gross margin
Net income attributable to Neogen
Basic net income per share
Diluted net income per share
(In thousands, except per share)
Total revenues
Gross margin
Net income attributable to Neogen
Basic net income per share
Diluted net income per share
Quarter Ended
August 2013
November 2013
February 2014
May 2014
$ 58,548
30,364
7,839
0.22
0.21
$ 59,599
29,491
6,207
0.17
0.17
$ 61,996
30,75
6,575
0.18
0.18
$ 67,262
32,038
7,537
0.20
0.20
Quarter Ended
August 2012
November 2012
February 2013
May 2013
$ 49,729
26,494
6,714
0.19
0.19
$ 50,737
27,306
6,793
0.19
0.18
$ 51,055
27,313
6,652
0.19
0.19
$ 56,007
28,381
7,031
0.19
0.19
Quarterly net income per share is based on weighted-average shares outstanding and potentially dilutive stock options for the specific period, and as a
result, will not necessarily aggregate to total net income per share as computed for the year as disclosed in the consolidated statements of income.
Reports
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders, Neogen Corporation, Lansing, Michigan
We have audited the accompanying consolidated balance sheet of Neogen Corporation and Subsidiaries (the Company) as of May 31, 2014 and the related con-
solidated statements of income, comprehensive income, equity, and cash flows for the year ended May 31, 2014. 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 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 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, assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Neogen Corporation at May
31, 2014, and the results of its operations and its cash flows for the year ended May 31, 2014, in conformity with accounting principles generally accepted in the
United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Neogen Corporation and Subsidiaries’
internal control over financial reporting as of May 31, 2014, based on criteria established in Internal Control – Integrated Framework (1992) issued by the Com-
mittee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated July 30, 2014 expressed an unqualified opinion thereon.
Grand Rapids, Michigan • July 30, 2014
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of Neogen Corporation
We have audited the accompanying consolidated balance sheets of Neogen Corporation and Subsidiaries (the Company) as of May 31, 2013, and the related
consolidated statements of income, comprehensive income, equity, and cash flows for the years ended May 31, 2013 and 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 and Sub-
sidiaries at May 31, 2013, and the consolidated results of their operations and their cash flows for each of the years ended May 31, 2013 and 2012, in conformity
with U.S. generally accepted accounting principles.
Detroit, Michigan • July 30, 2013 • Except for the effects of the stock split described in Note 1, as to which the date is July 30, 2014
30
Reports
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules
13-a-15(f) and 15d-15(f). Under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial
Officer, an evaluation was conducted as to the effectiveness of internal control over financial reporting as of May 31, 2014, based on the framework in Internal
Control – Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on that evaluation,
management concluded that internal control over financial reporting was effective as of May 31, 2014. The effectiveness of internal control over financial reporting
as of May 31, 2014, has been audited by BDO USA, LLP, an independent registered public accounting firm, as stated in its attestation report, which is included in
Item 8 and is incorporated into this Item 9A by reference.
No changes in our internal control over financial reporting were identified as having occurred during the quarter ended May 31, 2014 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
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders, Neogen Corporation, Lansing, Michigan
We have audited Neogen Corporation and Subsidiaries’ internal control over financial reporting as of May 31, 2014, based on criteria established in Internal Con-
trol – Integrated Framework (1992) 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, and testing and evaluating
the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial
reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transac-
tions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance
with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effective-
ness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
In our opinion, Neogen Corporation and Subsidiaries maintained, in all material respects, effective internal control over financial reporting as of May 31 2014,
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 sheet of
Neogen Corporation and Subsidiaries as of May 31, 2014 and the related consolidated statements of income, comprehensive income, equity, and cash flows for
the year ended May 31, 2014 and our report dated July 30, 2014 expressed an unqualified opinion thereon.
Grand Rapids, Michigan • July 30, 2014
31
Neogen Corporation and Subsidiaries: Comparison of Five Year Cumulative Total Return
and Stock Profile Activity
Neogen Corporation
NASDAQ Composite
NASDAQ Medical Equipment
$ 450
400
350
300
250
200
150
100
50
0
May 2009
May 2010
May 2011
May 2012
May 2013
May 2014
The graph matches Neogen Corporation’s cumulative 5-Year total shareholder return on common stock with the cumulative total returns of the NASDAQ
Composite index and the NASDAQ Medical Equipment index. The graph tracks the performance of a $100 investment in our common stock and in each
index (with the reinvestment of all dividends) from May 31, 2009 to May 31, 2014.
May 31 of:
2009
2010
2011
2012
2013
2014
Neogen Corporation
NASDAQ Composite
NASDAQ Medical Equipment
$ 100.00 $ 174.98 $ 305.17 $ 265.02 $ 370.71 $ 385.79
100.00
100.00
128.43
131.89
163.07
162.55
166.18
142.15
198.81
165.99
248.05
197.44
The stock price performance included in this graph is not necessarily indicative of future stock price performance.
Market Information
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 adjusted for the October 30, 2013 3-for-2 stock split affected in the form of a dividend,
as reported on the NASDAQ Stock Market.
Year Ended
High
Low
May 31, 2014
Fourth Quarter
$ 47.08
$ 36.31
Third Quarter
Second Quarter
First Quarter
50.88
50.87
39.44
39.44
36.13
35.25
May 31, 2013
Fourth Quarter
$ 37.82
$ 30.66
Third Quarter
Second Quarter
First Quarter
32.52
30.63
31.87
29.71
25.76
25.29
Holders: As of July 30, 2014, there were approximately 310 stockholders of record of Common Stock that management believes represents a total of
approximately 10,500 beneficial holders.
Dividends: Neogen has never paid any cash dividends on its Common Stock and does not anticipate paying any cash dividends in the foreseeable future.
32
Neogen Corporation Officers and Directors
OFFICERS
James L. Herbert
Chairman of the Board
Chief Executive Officer
Steven J. Quinlan
Vice President
Chief Financial Officer and Secretary
Edward L. Bradley
Vice President, Food Safety
Kenneth V. Kodilla
Vice President, Manufacturing
Jason W. Lilly, Ph.D.
Vice President, Corporate Development
Terri A. Morrical
Vice President, Animal Safety
Mark A. Mozola, Ph.D.
Vice President, Research and Development
Jennifer A. Rice, DVM, Ph.D.
Vice President
Senior Research Director
FORM 10-K AND THE COMPANY’S
CODE OF ETHICS
Copies of Form 10-K and the Company’s Code
of Ethics will be provided upon request without
charge to persons directing their request to:
Neogen Corporation
Attention: Investor Relations
620 Lesher Place
Lansing, MI 48912
ANNUAL MEETING
October 2, 2014
10:00 a.m.
University Club at Michigan State University
3435 Forest Road
Lansing, MI 48909
DIRECTORS
James L. Herbert
Neogen Corporation
Chairman of the Board
Chief Executive Officer
William T. Boehm, Ph.D.
Kroger Company
Former Senior Vice President
President’s Council of Economic Advisors
Former Senior Economist
Richard Crowder, Ph.D.
Virginia Tech University
Thornhill Professor of Agricultural Trade
Office of the U.S. Trade Representative
Former Chief Agricultural Trade Negotiator
A. Charles Fischer
Dow AgroSciences
Former President and CEO
G. Bruce Papesh
Dart, Papesh & Co.
President
Jack C. Parnell
Siller Brothers, Inc.
Chairman of the Board
Siller Helicopters, Inc.
Chairman of the Board
U.S. Department of Agriculture
Former Deputy Secretary
Former Acting Secretary
INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
BDO USA, LLP
200 Ottawa Avenue N.W.
Suite 300
Grand Rapids, MI 49503
STOCK TRANSFER AGENT
AND REGISTRAR
American Stock Transfer and Trust Co.
6201 15th Avenue
Brooklyn, NY 11219
Thomas H. Reed
Tom Reed & Associates
President
JBS Packerland
Former Senior Vice President
Michigan Livestock Exchange
Former President and CEO
MSU Board of Trustees
Former Chairman
Clayton K. Yeutter, Ph.D.
Hogan Lovells, LLP
Senior Advisor, International Trade
U.S. Department of Agriculture
Former Secretary
Former U.S. Trade Representative
DIRECTOR EMERITUS
Gordon E. Guyer, Ph.D.
Michigan State University
Former President
LEGAL COUNSEL
Lowe Law Firm, P.C.
2375 Woodlake Drive
Suite 380
Okemos, MI 48864
Fraser Trebilcock Davis & Dunlap, P.C.
124 W. Allegan, Suite 1000
Lansing, MI 48933
© Neogen Corporation, 2014. AccuPoint, Acumedia, ANSR, BetaStar, BotVax, EqStim, GeneSeek, Igenity, Prima Tech, Prozap, Reveal, SyrVet, Soleris and Uniprim are registered trademarks, and Chem-Tech, Ltd and NeoFilm are
trademarks of Neogen Corporation, 620 Lesher Place, Lansing, Michigan 48912 USA.
NC018-0814
Corporate Headquarters: 620 Lesher Place, Lansing, MI 48912 USA
800/234-5333 • 517/372-9200 • Fax 517/372-0108
neogen-info@neogen.com • www.neogen.com
NASDAQ: NEOG