Neogen is there.
2015 Annual Report
Safety solutions from inside the farm gate to the dinner plate
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
Neogen is there ........................................................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 ................................................. 30
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
2015
2014
2013
2012
2011
$
283,074 $
247,405 $
207,528 $
184,046 $
172,683
131,479
151,595
53,118
116,290
131,115
43,391
106,158
101,370
40,706
91,104
92,942
33,739
Net Income Attributable to Neogen
Basic Net Income Per Share*
Diluted Net Income Per Share*
$
$
$
33,526 $
28,158 $
27,190 $
22,513 $
0.91 $
0.90 $
0.77 $
0.76 $
0.76 $
0.75 $
0.64 $
0.62 $
Average Diluted Shares Outstanding*
37,444
37,267
36,491
36,029
*Restated for the years 2011–2013 due to stock split
85,514
87,169
35,835
22,839
0.66
0.64
35,687
Total Revenues
Dollars in thousands
Net Income
Dollars in thousands
Total Assets
Dollars in thousands
$ 300,000
$ 35,000
250,000
200,000
150,000
100,000
30,000
25,000
20,000
15,000
$ 400,000
350,000
300,000
250,000
200,000
2011
2012
2013
2014 2015
2011
2012
2013
2014 2015
2011
2012
2013
2014
2015
In thousands
Year Ended May 31
Financial Strength:
2015
2014
2013
2012
2011
Cash and Marketable Securities
$
114,164 $
76,496 $
85,369 $
68,645 $
56,083
Working Capital
Total Assets
Long-Term Debt
Equity
205,739
392,181
–
163,779
345,301
–
150,728
290,558
–
123,962
251,600
–
104,705
219,662
–
350,963
306,300
258,287
219,054
188,978
Message from Management
To our stockholders, employees and friends:
Neogen is there. The theme for this year’s Annual Report tells our
story. We will be there from back inside the farm gate with our animal
safety products, through food processing to the dinner plate with our
food safety products. We will be there with disinfectants and rodenti-
cides for biosecurity, and with tests to detect pathogens and allergens
to stop unsafe food. We will be helping thousands of food processors
in the U.S., to the largest dairy processors in China. Neogen will be
there to continue to meet the financial expectations of our sharehold-
ers—and our employees.
Our revenues for the 2015 fiscal year increased 14% to over $283
million, up from a little over $247 million in Neogen’s previous fiscal
year. Net income for the year was up 19% from the previous year to
$33.5 million, or $0.90 per share. This compares to the prior year’s
$0.76 per share. As you would expect, revenues and income for the
2015 year established new all-time highs for our 33-year-old company.
On that same note, the fourth quarter of fiscal 2015 was the 93rd
of the past 98 quarters that Neogen reported revenue increases as
compared with the previous year—including all consecutive quarters
in the last 10 years. This record now spans 24 and one-half years.
Sometimes we feel it’s like our over 1,000 employees are saying,
“The record won’t get spoiled on my watch.”
In most every way, 2015 was another solid year financially for Neogen.
Our compounded growth rate in revenue for the five years previous to
this had been 16%. Our revenue growth rate for this year was 14%.
Our compounded growth rate in net income over the past five years
had been 15%—this year’s net income’s growth was 19%. Over the
past number of years we have worked to keep operating income as
a percentage of sales at around 20%. This year we got close again
2
at 18.8% and that’s not
much different than the
average of 19.1% in the
five preceding years.
$ 350,000
Equity
Dollars in thousands
200,000
250,000
300,000
It was a little more dif-
ficult to keep that steady
pace this year because
the winds of currency fluc-
tuations were in our face—
especially in the last half
of the year. The negative
the stronger
impact of
dollar on our comparative
revenues for the full year
was $3.6 million, and cur-
rency translation losses
included in other income
and expense were $1.1 million in 2015, making our 2015 results that
much more impressive. During the fiscal year, we increased our hedging
program to help mitigate a portion of the currency risks, although it is im-
portant to understand that we are lessening the negative currency impact,
not eliminating it.
150,000
2014
2015
2013
2012
2011
Our four-legged strategy for growth has been the same for the past num-
ber of years and continues to serve us well. Fortunately, we are in markets
which are growing, and in many cases, Neogen has increased our share
in these growing markets. Increasing our market share in our existing
markets is the first leg of our growth stool. We have accomplished this
by increasing our sales and marketing groups worldwide, both in number
and in capabilities, which we did again this past year. The second leg of
the growth stool has been the development of new products. Again this
Operating Income
Dollars in thousands
$ 55,000
50,000
45,000
40,000
35,000
30,000
2011
2012
2013
2014
2015
year we increased revenues and
bottom line with new products
that were developed internally.
Our worldwide research team of
more than 75 will continue to
increase research investments
as opportunities are identified.
A third leg of the stool has been
acquisitions. We have completed
29 since 2000 and all have been
accretive at both the top line and
bottom line. Fifteen years later,
the acquired products are still a
part of our portfolio.
In fiscal 2015 we acquired Bio-
Lumix, a competitor using much
the same rapid microbial testing
technology as our Soleris product
line. We are in the process of in-
tegrating those two businesses and revenues continue to grow nicely.
We furthered our Asia strategy this past year in both China and India. We had
begun our food safety distribution business in China, but still lacked the traction
to rapidly propel the business. In December we acquired our largest food safety
distributor in China and joined their group to ours. We have refined our strategy, our
customer base, and our product offering. You have heard us talk in the past about
food security and the need to work in those markets where the middle class had
the most rapid growth. Obviously, two countries with the most rapid growth are
China and India.
In June, we acquired Sterling Laboratories in India
and bolted it onto an Indian shell company we
already owned. This one will likely take a
little while to get traction. We are situated
in the right place on the southwest coast
where spices, fruits and vegetables,
and some seafood items are shipped
to export markets.
We did not do quite as well with the
fourth leg of the stool—expansion
of international sales. Though our in-
ternational businesses are good, we
weren’t able to grow them as fast as our
U.S. businesses—finishing the year with
international revenues accounting for 36.7%
of total revenues, compared to 38.8% in the prior
year. Our growth in this area was handicapped by
weaknesses in the six different currencies in which we operate.
Moving forward, our fiscal year 2016 looks pretty exciting. There will be a lot of
continued strong activity over on our Animal Safety side, primarily aimed at food
safety back inside the farm gate. “Raised without antibiotics” is a phrase you are
likely to hear more and more, as there is a significant portion of the population that
believes antibiotic resistant bacteria are the result of heavy antibiotic feeding to
food animals, and that residue then entering the human food chain. True or not, it
is going to get more attention,
and Neogen’s strong pro-
gram of biosecurity will
be there.
Similarly, a recent out-
break of avian influenza
wiped out over 10% of
the egg laying chicken
flock in the United States,
and also played havoc with
turkey production. Poultry vet-
erinarians believe the virus was
introduced by migratory birds as they moved from south to
north for summer nesting. The same biosecurity measures
that will be so critical in the “raised without antibiotics” pro-
gram will be the ones that will help protect the poultry indus-
try from reinfection. Neogen will be there with even more
cleaners, disinfectants, insecticides, and rodenticides.
We believe the factors that drove our animal genomic busi-
ness up 27% worldwide this year will continue next year.
More and more beef cattle and dairy producers are realizing
the importance of genomic selection of females that are go-
ing back into herds as replacements. As dairymen are now
able to select just the top 60 or 70% of their annual calf crop
for replacements, it has become very important to make sure
they are picking the best animals. The same is true for the
handful of primary poultry breeders in the world who control
virtually the entire breeding stock that will produce the meat
we will be eating next year. The ability to withstand stress
and disease will be more important to these poultry
breeding companies as their eventual customers
are trying to grow chickens without antibiotics,
and Neogen will be there.
The food safety market demands will con-
tinue to grow in several areas. At long last,
the Food Safety Modernization Act will in
fact see regulations come to market. The
first will actually go into effect in August
2015 and then a couple more near the end
of October. All of these will increase the need
for more food safety diagnostic tests—and
Neogen will be there.
The opportunities for synergistic acquisitions con-
tinue to be present. We may not be able to complete
any of them, but Neogen is there with good experience and
a strong balance sheet.
We continue to feel good about Neogen’s direction as we
move into 2016. The year ended with strong momentum,
and 2016 has started off well. The business has double-digit
organic growth goals for fiscal 2016 and as our markets
continue to demand innovative solutions to meet their food
safety and security needs, Neogen is there.
James L. Herbert
Chairman and CEO
Richard E. Calk, Jr.
President and COO
Steven J. Quinlan
Vice President and CFO
3
Neogen’s products and services can be found almost
everywhere in the food system from back inside the farm
gate—all the way to the family dinner plate.
The World Health Organization recently reported there are
582 million cases of illness due to foodborne pathogens
annually,
including 351,000 deaths. The problem
worsens as the world food producers attempt to produce
food a great distance from the place it is consumed, and
at much higher speeds and on less land area. The race
to food security is being hampered by food safety.
Neogen is on farms and ranches, using genomics to help select
only the best breeding livestock animals, and then providing
quality products and services to provide the animals the best
care possible. Neogen is on farms and in aquaculture facilities
around the world to ensure crops, seafood, dairy products, and
other food commodities are safe and of the highest quality
before they enter the food supply.
Once food products leave their producers, Neogen’s tests kits
are at food processing facilities, distributors, retailers, and food
service providers, ensuring their safety every step of the way.
Neogen is there in over a hundred countries around
the world to help in both export and local consumption.
Yes, Neogen is there—and almost everywhere food is
produced, processed, or consumed.
4
While Neogen strives to extend the reach of its products to
improve food and animal safety throughout the world, the
company also takes pride in improving the communities it
calls home.
The company is headquartered and has a significant
presence in Lansing, Mich., and makes positive impacts
in its other home communities of Lexington, Ky.; Lincoln,
Neb.; Randolph, Wisc.; Kenansville, N.C.; Pleasantville, Ia.;
St. Joseph, Mich.; Ayr, Scotland; Indaiatuba, Brazil; Mexico
City, Mexico; Shanghai, China; and Cochin, India.
Neogen has been listed on the NASDAQ Stock Market since
1989 (symbol: NEOG), and is proud of its continuing inclusion
in NASDAQ’s top tier of companies, its Global Select Market.
NASDAQ’s Global Select Market has the highest initial listing
standards of any exchange in the world based on financial
and liquidity requirements, and includes approximately
1,200 companies of the approximately 3,200 companies
listed.
With both a state-of-the-art veterinary genomic laboratory
and comprehensive bioinformatics to interpret genomic test
results, Neogen offers animal owners and caregivers un-
paralleled identity and trait determination and analysis.
With just a tissue sample from a female day-old calf, for
example, Neogen can provide a cattle producer with DNA
test results that can predict that animal’s performance in
the herd on such traits as the ability to gain weight, milk
production, pregnancy rate, calving ease, and susceptibility
to disease. Neogen provides veterinary genomic solutions
for cattle, both beef and dairy, swine, sheep, dogs, horses,
and poultry.
5
Broken veterinary needles are a major
concern in the pork and beef industries
worldwide, and the imprecise delivery
of veterinary medicines and vaccines
are costly to animal producers, and
potentially dangerous to consumers
if drug residues remain in dairy and
meat products.
Neogen’s quality, proven veterinary
instruments repeatedly deliver precise
doses to help ensure food and animal
safety. The company’s D3® veterinary
needles are uniquely detectable in
standard meat industry metal detec-
tors, further ensuring the safety of the
meat supply.
Neogen’s broad-based food and animal safety mission was built with the under-
standing that otherwise wholesome food and feed face numerous safety chal-
lenges every step of its way to the consumer. Rats and mice remain a serious
threat to food and feedstuffs, eat food meant for animals, and spread disease.
Neogen’s proven line of rodenticides is used for effective control of rodent
infestations, and is often a critical component of an overall biosecurity plan.
The company’s Chem-Tech™ subsidiary provides highly effective insecticides
that utilize environmentally friendly technical formulas, several of which are ap-
proved for use in food establishments, and help stop the spread of disease
before it can start.
Chem-Tech’s Prozap® insecticide brand is well known in the large animal pro-
duction industry, and is particularly popular with dairy and equine producers.
Stopping a bacterial, viral, or fungal outbreak before it can start is a critical goal
in food and animal safety.
Neogen has broadened its cleaner and disinfectant portfolio to provide the high-
est quality chemistries for effective use in all types of premises. Animal facilities,
ranging from production livestock rearing to companion animal veterinary clin-
ics, benefit through the use of this diverse set of products.
6
Neogen’s comprehensive line of tests for mycotoxins (mold toxins) in grains
and animal feeds help protect the health of poultry, swine, and dairy cattle—
and the quality and safety of the food products derived from numerous
commodity grains. 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’s incredibly easy tests can deliver definitive, easy-to-interpret
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 indus-
tries, can obtain results in minutes, and reject contaminated ingredients.
The company’s seafood testing lab
extends the testing options Neogen
offers to the seafood industry to in-
clude testing services for the shellfish
and salmon aquaculture industries.
In addition to its laboratory services,
Neogen offers the seafood industry
rapid, accurate tests for foodborne
pathogens, sanitation monitoring, his-
tamine, and shellfish toxins.
Once food products leave their
producers, Neogen’s test kits
are at food processing facilities,
distributors, retailers, and food
service providers, ensuring their
safety every step of the way.
Neogen’s recently launched AccuPoint® Advanced
ATP (adenosine triphosphate) Hygiene Monitoring
System is the most sensitive and consistent hygiene,
or sanitation, monitoring test system available. An
ATP system provides a quick and easy gauge of a
facility’s cleanliness, and is easily customized for the
specific equipment, people, product, and processes
used in any food production facility.
ATP is the energy source in all living cells. Since vir-
tually all of the food and beverages produced were
once living, they contain ATP. Microbiological organ-
isms, like bacteria, yeast and mold, also contain ATP.
The amount of ATP detected, and where this ATP was
detected, signals company personnel of possible
trouble spots that may need to be resanitized prior to
the start of the food production cycle.
7
Neogen pioneered the development and marketing of rapid
diagnostic tests to detect food allergens, including gluten,
peanuts, milk, soy, eggs, and many others. The company’s
simplest food allergen tests screen samples in parts per
million in mere minutes.
Since 1998, Neogen’s simple tests have helped food
manufacturers around the world ensure that their products
do not contain any unlabeled food allergens—protecting
their food allergic consumers and businesses.
Neogen is a worldwide leader in providing rapid drug residue
tests to ensure the safety of meat and milk products, and
protect the integrity of animal racing. Neogen has a vast array
of drug residue tests used in food and animal safety markets,
and also for certain research and forensic applications.
Neogen’s products developed for the worldwide dairy
industry include a single test to simultaneously detect
dozens of antibiotic residues in milk. As the use of antibiotics
for the management of mastitis in dairy herds has grown in
the world, so has the need for a single test to simultaneously
detect multiple antibiotics.
Wherever food and animal
safety solutions are needed,
Neogen is there.
Neogen’s Soleris® and recently acquired BioLumix® rapid
microbial technologies are used by the world’s largest
food and nutraceutical 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 the five days for conventional
methods.
While product contaminated with spoilage organisms,
such as yeast and mold, do not carry consequences of the
severity of pathogen contamination, spoilage organisms
can drastically shorten product shelf-lives, and produce a
variety of unwanted effects.
8
Neogen’s tests for dangerous bacteria, in-
cluding Salmonella, Listeria, Listeria mono-
cytogenes, and E. coli O157:H7 provide
speed, accuracy, ease of use, and Neogen’s
dedicated staff of support microbiologists.
Neogen’s tests help food producers protect
their brands, and reputation, from possibly
the biggest risk they face in the market-
place—shipping products tainted with a
known pathogen.
Neogen’s comprehensive line of rapid food
safety diagnostics includes the ANSR® test
system—the quickest and easiest testing
method to definitively detect pathogen DNA
in food and environmental samples. ANSR
provides results in as little as 10 minutes;
other commercially available molecular am-
plification tests require up to three hours.
Neogen’s Acumedia® dehydrated culture media
are precisely blended to favor the growth of spe-
cific bacteria over all others. In the food industry,
the company’s products are used to detect dan-
gerous pathogens, and for beneficial use to grow
starter cultures for cheese, sausage, and yogurt.
In addition to the food industry, Acumedia products
are marketed to the pharmaceutical, clinical,
biotechnological, research, cosmetic, commercial
laboratory, and veterinary markets.
Neogen’s products and services also include
safety solutions for performance and companion
animals. The company manufactures and mar-
kets 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 re-
spiratory ailments. The company’s BotVax® B has
protected thousands of horses against Clostridium
botulinum type B.
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-look-
ing statements. There are a number of important factors, including competition, recruitment and dependence on key employees, impact of weather
on agriculture and food production, identification and integration of acquisitions, research and development risks, patent and trade secret protection,
government regulation and other risks detailed from time to time in the Company’s reports on file at the Securities and Exchange Commission, that
could cause Neogen Corporation’s results to differ materially from those indicated by such forward-looking statements, including those detailed in
this “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
In addition, any forward-looking statements represent management’s views only as of the day this Report on Form 10-K was first filed with the Secu-
rities and Exchange Commission and should not be relied upon as representing management’s views as of any subsequent date. While management
may elect to update forward-looking statements at some point in the future, it specifically disclaims any obligation to do so, even if its views change.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The discussion and analysis of the Company’s financial condition and results of operations are based on the consolidated financial statements that
have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements
requires that management make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. On an ongoing basis, management evaluates the estimates, including but not limited to, those related
to receivable allowances, inventories and intangible assets. These estimates are based on historical experience and on various other assumptions
that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of
assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions
or conditions.
The following critical accounting policies reflect management’s more significant judgments and estimates used in the preparation of the consolidated
financial statements.
Revenue Recognition
Revenue from products and services is recognized when the product has been shipped or the service performed, the sales price is fixed and deter-
minable, and collection of any receivable is probable. To the extent that customer payment has been received before all recognition criteria are met,
these revenues are initially deferred and later recognized in the period that all recognition criteria have been met. Customer credits for sales returns,
pricing and other disputes, and other related matters (including volume rebates offered to certain distributors as marketing support) represent ap-
proximately 3% of reported net revenue for each period presented.
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 taking
into account the current condition of the asset as well as other known facts and future plans. The amount of reserve required to record inventory at
lower of cost or market may be adjusted as conditions change. Product obsolescence may be caused by shelf-life expiration, discontinuance of a
product line, replacement products in the marketplace or other competitive situations.
Goodwill and Other Intangible Assets
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 5 to 25 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.
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
10
Management’s Discussion and Analysis of Financial Condition and Results of Operations
the anticipated separately identifiable undiscounted cash flows over the remaining useful life of the asset indicate that the carrying amount of the
asset 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 estimated
on the date of grant using the Black-Scholes option-pricing model using assumptions for inputs such as interest rates, expected dividends, volatility
measures and specific employee exercise behavior patterns based on statistical data. Some of the inputs used are not market-observable and have
to be estimated or derived from available data. Use of different estimates would produce different option values, which in turn would result in higher
or lower compensation expense recognized.
To value options, several recognized valuation models exist. None of these models can be singled out as being the best or most correct one. The
model applied by the Company is able to handle some of the specific features included in the options granted, which is the reason for its use. If a
different model were used, the option values 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, including inputs
used to determine fair value of options, is disclosed in Notes 1 and 5 to the consolidated financial statements.
Income Taxes
The Company accounts for income taxes using the asset and liability method. Under this method, deferred income tax assets and liabilities are deter-
mined 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 represents the
change in net deferred income tax assets and liabilities during the year.
The Company’s foreign subsidiaries are comprised of Neogen Europe (wholly-owned subsidiary), Neogen Latinoamérica (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, 2015, unremitted earnings of the foreign subsidiaries were
$24,423,000.
RESULTS OF OPERATIONS
Executive Overview
Neogen Corporation had total revenue of $283.1 million in fiscal 2015, a 14% increase compared to fiscal 2014 revenues of $247.4 million. Net
income attributable to Neogen increased 19% to $33.5 million, or $0.90 per fully diluted share, compared to $28.2 million, or $0.76 per fully diluted
share, in fiscal 2014. Cash flow from operations for fiscal 2015 was $43.8 million compared to $21.7 million in fiscal 2014.
The Company’s Food Safety segment revenues were $131.5 million in fiscal 2015, a 13% increase compared to the prior fiscal year. Animal Safety
segment revenues increased $20.5 million, or 16%, to $151.6 million in fiscal 2015 as compared to fiscal 2014. Revenue increases were aided by
recent acquisitions the Company completed in fiscal 2014 and fiscal 2015, which added revenue totaling $17.1 million during the fiscal 2015 year.
Prior fiscal year acquisitions include SyrVet in July 2013, Prima Tech in November 2013, and Chem-Tech in January 2014. In fiscal 2015, the Company
acquired BioLumix (October 2014), a manufacturer and marketer of products to detect spoilage organisms in dietary supplements, nutraceuticals and
cosmetics. These products are complementary to the Company’s existing Soleris product line. Excluding revenues from these acquisitions, organic
sales growth for fiscal 2015 was 10% for the Food Safety segment and 6% for the Animal Safety segment, each compared to the prior fiscal year.
International sales were $103.9 million in fiscal 2015, an increase of 8% compared to the prior fiscal year. Sales growth in the Company’s interna-
tional operations was tempered due to the strength of the U.S. dollar, which rose during the year against all of the currencies in which the Company
conducts business. Neogen Europe had an increase of 9% for fiscal 2015 (11% in local currency), compared to the prior year, while Neogen do Brasil
revenues declined 3% for the year (but increased 12% in local currency). Neogen China increased revenues significantly in fiscal 2015, albeit off of a
small base. Neogen Latinoamérica recorded a revenue increase of 151% for the year (175% in local currency), benefitting from the transfer of certain
Animal Safety customers and revenues in Mexico and Central America from the Company’s sales personnel based in the U.S., in an effort to better
serve customers located in those geographic areas. After adjusting for the impact of the revenue transfer from Animal Safety to Food Safety at Neogen
Latinoamérica, overall organic sales growth for fiscal 2015 was 4% for the Food Safety segment and 10% for the Animal Safety segment.
Expressed as a percentage of total sales, international sales in fiscal 2015 were 36.7% compared to 38.8% in fiscal 2014. This decline as a percent-
age of sales was due in part to the strength of the U.S. dollar, which reduced comparative revenues in the local currency when converted to dollars;
international sales were negatively impacted by $3.6 million for fiscal 2015. The Chem-Tech acquisition, which was entirely domestic sales, and
lower volumes of drug residue test kits into Eastern Europe due to product launch delays, also reduced the overall proportion of international revenues.
Service revenue was $35.1 million in fiscal 2015, an increase of 27% compared to prior year revenues of $27.7 million. The increase for the year
11
Management’s Discussion and Analysis of Financial Condition and Results of Operations
was primarily due to increased sales of new proprietary genomic offerings developed for the beef and dairy cattle and pork industries for both do-
mestic and international customers, with particular strength in Europe. GeneSeek also benefitted from new ongoing business with a large customer
in the poultry industry and one-time research work in the canine industry.
Gross margins were 49.4% in fiscal 2015, versus 49.6% in fiscal 2014. The slight decrease was the result of lower margins on certain international
sales in the Food Safety segment resulting from adverse currency impacts caused by the strong U.S. dollar and product mix changes within Food
Safety, offset partially by improved product mix and efficiency gains in the Animal Safety segment. Operating expenses rose 9% in fiscal 2015
compared to 2014; expressed as a percentage of revenues operating expenses decreased from 32.0% in fiscal 2014 to 30.6% in fiscal 2015, as
the Company controlled its expense growth and continued to achieve efficiencies and savings with the successful integration of recent acquisitions
into its operations.
Revenues
Twelve Months Ended
(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, 2015
Increase/
(Decrease)
May 31, 2014
Increase/
(Decrease)
May 31, 2013
$
$
60,561
29,784
41,134
131,479
8,715
34,293
35,053
45,857
27,677
151,595
283,074
0%
20%
32%
13%
16%
21%
(1%)
25%
21%
16%
14%
$
$
60,358
24,866
31,066
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%
$
$
57,413
21,954
26,791
106,158
7,739
16,682
29,612
27,130
20,207
101,370
207,528
Year Ended May 31, 2015 Compared to Year Ended May 31, 2014
The Company’s Food Safety segment revenues were $131.5 million in fiscal 2015, a 13% increase compared to the prior year. Sales of Natural
Toxins, Allergens and Drug Residues were flat in fiscal 2015 as compared to the prior year. Natural toxin sales increased 5%, with strong sales of
DON test kits, up 28% due to outbreaks of this toxin in crops in Eastern Europe, Canada and the U.S. This increase was offset by a 15% decline in
aflatoxin test kits due to a difficult comparison to the prior year caused by high demand from aflatoxin outbreaks in Eastern Europe, and relatively
clean crops in the current fiscal year relative to that toxin.
Revenues for the Company’s test kits to detect allergens such as milk, gluten, soy, peanut, and egg, among others, in processed foods rose 18%, the
result of higher demand resulting from increased recalls due to inadvertent allergenic contamination and higher consumer awareness of the risks of
ingesting foods with allergenic components. Included within this category and partially offsetting the gains from allergen products were decreased
sales of meat speciation test kits, which declined 40% in fiscal 2015, due to lower levels of testing during the year and competitor entry into the
market. Sales of drug residue test kits were down 16% this year, primarily due to currency conversion and lower test kit volumes to customers in
Eastern Europe due to delays in the launch of a new product in that region.
Bacterial and General Sanitation revenues increased 20% in fiscal 2015, aided by $4.0 million in revenues from the October 1, 2014 BioLumix
acquisition. Excluding BioLumix sales, the increase was 4% over the prior year. The Soleris consumable product line, which consists primarily of
reagent vials used to detect spoilage organisms such as yeast and molds in foods, increased 10%, while sales of the recently-launched next genera-
tion AccuPoint environmental reader increased 35%. Ampoule media and filter sales increased 14% compared to the prior fiscal year; the Company
continues to gain new customers and market share, primarily in the beverage industry. Partially offsetting these gains was a 43% decline in Soleris
equipment sales due to difficult comparisons caused by prior year international placements, which did not repeat in the current fiscal year.
Dehydrated Culture Media and Other sales increased 32% in the current fiscal year. Within this product category, Acumedia sales increased 5% in
fiscal 2015. While sales of Acumedia products to food safety customers increased 10%, this was offset by flat sales to the traditional media market
due to lower demand and continuing credit issues at some significant customers. Sales in this category were led by genomics revenues to European
customers (included as Other revenues), which increased 57% due to market share gains for services and the sale of new proprietary product offer-
ings. Also included in this category were sales of Animal Safety products to customers in Mexico and Central America, transferred to the Company’s
Neogen Latinoamerica subsidiary which reports in through the Food Safety segment, to better serve customers in those locations.
The Company’s Animal Safety segment revenues were $151.6 million in fiscal 2015, a 16% increase over fiscal 2014. Life Sciences sales increased
16% in fiscal 2015 compared to the prior year, led by forensic kit sales to commercial labs to meet new testing requirements in Brazil for commercial
drivers. For the year, revenues of Veterinary Instruments and Disposables increased 21%. This product category benefitted from revenues from the
SyrVet and Prima Tech acquisitions from fiscal 2014, whose product lines were almost entirely veterinary instruments. Excluding these revenues,
organic growth in this category was 8% for fiscal 2015, led by sales of detectable needles, which continued to be a strong product line with growth
12
Management’s Discussion and Analysis of Financial Condition and Results of Operations
of 29% in fiscal 2015. Partially offsetting some of this growth was the transfer of customers and revenue in Mexico and Central America to Neogen
Latinoamerica, in order to more directly serve those customers.
Sales of Animal Care and Other products were relatively flat in fiscal 2015; on an organic basis, these sales were down 6%, partially due to the trans-
fer of some customers to Neogen Latinoamerica. Within this category in fiscal 2014, the Company recorded strong sales of a wound care product
caused by a supply disruption in the market. This product was available for sale from all competitors in fiscal 2015, and revenues for this product
declined. Additionally, sales of a distributed antibiotic declined due to supplier discontinuance of the product. Small animal supplements rose by $1.7
million in fiscal 2015, due to strong sales of the Company’s thyroid replacement offering for the canine market.
Rodenticides, Insecticides and Disinfectants sales increased 25% in fiscal 2015, largely the result of revenues gained from the Chem-Tech insecti-
cide business acquisition in January 2014. Excluding the contribution from this acquisition, the organic increase in this category was 4%. Rodenticide
sales increased 21%, primarily due to rodent infestations in the northwestern U.S. and the capture of new business. Partially offsetting this growth
was a 12% decrease in sales of cleaners and disinfectants, due to unusually high sales in the prior year caused by the porcine virus outbreak, pri-
marily in international markets.
DNA Testing revenues, excluding sales through Neogen Europe, Neogen do Brasil and Neogen China, which are reported elsewhere, increased 21%
in fiscal 2015 as compared to the prior year. Continuing improvements to a number of proprietary service offerings, primarily targeted at dairy and
beef cattle markets, helped the Company increase sales to existing customers and gain market share. Additionally, there were strong sales to a new
poultry customer in the current fiscal year.
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, in-
cluding 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 the prior 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 in-
creased 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 segment
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 revenues,
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 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
13
Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 operating 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 purchase
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 increased $660,000 in fiscal 2014, primarily due to the Company’s relationship
with a number of canine associations.
Cost of Revenues
(Dollars in thousands)
Cost of Revenues
2015
Increase
2014
Increase
2013
$ 143,389
15%
$ 124,807
27%
$ 98,034
Cost of revenues increased 15% in fiscal 2015 and 27% in fiscal 2014 in comparison with the prior years. This compares with revenue increases of
14% and 19%, respectively. Expressed as a percentage of revenues, cost of revenues was 51%, 50% and 47% in fiscal years 2015, 2014 and 2013,
respectively. For fiscal 2015, the strength of the U.S. dollar, which adversely impacted top line revenue with no corresponding decline in product cost,
had the largest impact on the slight decline in gross margins. For fiscal year 2014, the increase in cost of revenues, expressed as a percentage of
sales, and the corresponding decline in gross margin percentage was due to the overall shift in revenues towards Animal Safety products and product
mix shifts within each segment.
Food Safety gross margins were 60%, 63% and 64% in fiscal years 2015, 2014 and 2013, respectively. In fiscal 2015, the lower gross margins
resulted from the strength in the U.S. dollar, which resulted in lower revenues and gross margins when international sales, primarily in Europe, Mexico
and Brazil, were converted from local currencies to the dollar. All currencies the Company operates in weakened against the dollar in fiscal 2015,
and pressured margins. Additionally, a mix shift, the result of transferring revenues of lower gross margin Animal Safety products for customers in
Mexico and Central America to Neogen Latinoamerica, negatively impacted gross margins in Food Safety. In fiscal 2014, gross margins declined due
to a product mix shift, 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 margins.
Animal Safety gross margins were 40%, 38% and 41% in fiscal years 2015, 2014 and 2013, respectively. The improved margins in fiscal 2015
compared to fiscal 2014 reflect a mix shift towards higher margin products and efficiency gains made in a number of the segment’s operating units.
Rodenticides, which have higher than average gross margins within the segment, had a sales increase of 21% due to a rodent infestation in the
northwest U.S., and the Company’s small animal supplements product line experienced an increase of 23%, due to higher sales of the Company’s
higher margin thyroid replacement product. The decline in gross margins in 2014 compared to 2013 was largely the result of product mix shifts
within the segment during the year, and the impact from three acquisitions the Company made in 2014, which had gross margins which were lower
than the segment average.
Operating Expenses
(Dollars in thousands)
Sales and Marketing
General and Administrative
Research and Development
2015
Increase
2014
Increase
$ 51,757
25,233
9,577
11%
3%
15%
$ 46,432
24,449
8,326
14%
21%
7%
2013
$ 40,791
20,216
7,781
Sales and marketing expenses increased by 11% in fiscal 2015 and 14% in fiscal 2014, each compared with the prior year. As a percentage of
sales, sales and marketing expense was 18%, 19% and 20% in fiscal years 2015, 2014 and 2013, respectively. The Company continued to invest in
sales and marketing personnel in fiscal 2015; however, efficiencies of scale were achieved with the integration of recent acquisitions, resulting in a
lower rate of increase in expense than the increase in revenues. Salaries and commission expense were the largest increase in this category at 15%
in fiscal 2015 and 11% in fiscal 2014, reflecting the increase in personnel and revenue. Other significant increases were shipping expense, which
was 15% higher and was commensurate with the increase in revenues, and other personnel-related expenses, such as fringe benefits and travel.
General and administrative expenses increased 3% in fiscal 2015 compared to fiscal 2014 and by 21% in fiscal 2014 compared to fiscal 2013.
14
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The increases in fiscal years 2015 and 2014, respectively, are primarily due to higher stock option expense and increased amortization of intangible
assets resulting from the Company’s recent acquisitions. Also contributing to the fiscal 2014 increase were increased salary and other personnel-
related expenses, primarily due to the integration of acquisitions from fiscal years 2013 and 2014. A $1.2 million, or 73%, decrease in legal expenses,
primarily related to a lawsuit that was settled in October 2014, partially offset the increase in this category for fiscal 2015.
Research and development expenses increased 15% in fiscal 2015 compared to fiscal 2014 and 7% in fiscal 2014 compared to fiscal 2013. In fiscal
2015, the increase in expense was primarily due to higher salaries, resulting from increased headcount needed to support the Company’s efforts,
and outside services and lab supplies, due to higher levels of commercialization activities. As a percentage of revenue, these expenses were 3% in
fiscal years 2015 and 2014 and 4% in fiscal 2013. The decline in expenditures, expressed as a percentage of revenue, is attributable to acquisi-
tions the Company completed in fiscal year 2014 with products which generally require relatively less investment in research and development. 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. On a consolidated basis, the Company expects to continue to spend 3% to 5%
of total revenue on research and development annually.
Operating Income
(Dollars in thousands)
Operating Income
2015
Increase
2014
Increase
2013
$ 53,118
22%
$ 43,391
7%
$ 40,706
The Company’s operating income increased by 22% in fiscal 2015 compared to fiscal 2014, and by 7% in fiscal 2014 compared to fiscal 2013.
Expressed as a percentage of revenues, it was 19%, 18% and 20% in fiscal years 2015, 2014 and 2013, respectively.
In fiscal 2015, the 22% increase in operating income was due to the 14% increase in revenues and lower increases in sales and marketing and
general and administrative expenses, partially offset by the slight reduction in gross margin expressed as a percentage of revenues. The Company
was able to increase revenues at a faster rate than expenses in these categories due to efficiencies of scale gained from recent acquisitions.
The increase in operating income of 7% in fiscal 2014 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.
Other Income (Expense)
(Dollars in thousands)
Other Income (Expense)
2015
$
(1,042)
Increase/
(Decrease)
2014
(189%)
$
(360)
Increase/
(Decrease)
(183%)
2013
$
435
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 2015, Other Income (Expense) primarily consisted of losses on foreign currency translations of $1,124,000, the result of the stronger U.S.
dollar during the year. In addition, the Company recognized interest income of $228,000, royalty income of $150,000 and net expense of $297,000
resulting from contingent consideration payments made during the year for prior year acquisitions. The contingent consideration adjustments con-
sisted of $241,000 of income for SyrVet, $454,000 of expense for Prima Tech, and $84,000 of expense for Chem-Tech; these adjustments were
the difference between the liability recorded at the initial purchase of each business and the actual payment made to the former owners, and were
based on the achievement of sales goals for the first twelve months of the Company’s ownership.
In fiscal 2014, Other Income (Expense) consisted primarily of losses on foreign currency translations of $717,000, partially offset by $231,000 in
royalty income and $115,000 in interest income.
In fiscal 2013, Other Income (Expense) 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 $114,000 of contingent consideration expense for the final year relating to the GeneSeek acquisition and losses on foreign currency
translations totaling $166,000.
Provision for Income Taxes
(Dollars in thousands)
Provision for Income Taxes
2015
$ 18,500
Increase
2014
Increase
2013
23%
$ 15,000
6%
$ 14,100
The effective tax rate was 36% of pretax income in fiscal 2015, 35% in fiscal 2014 and 34% in fiscal 2013. Differences in the tax rate from the 35%
statutory corporate rate were primarily due to the provision for state taxes, offset by tax credits related to manufacturing and research and develop-
ment activities. The effective tax rate increased slightly in 2015 due to the Company’s presence in additional states due to recent acquisitions and
a valuation allowance for deferred tax assets at Neogen do Brasil. The effective tax rate for fiscal 2014 was slightly higher than fiscal 2013 due to
the expiration of the credit for research and development activities as of December 31, 2013. This credit was eventually extended and was included
15
Management’s Discussion and Analysis of Financial Condition and Results of Operations
in the fiscal 2015 provision, however, the Company qualified for a lower credit than in previous years due to the addition of revenues from several
acquisitions with very little research and development expense.
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
2015
$ 33,526
0.91
$
0.90
$
Increase
19%
2014
$ 28,158
0.77
$
0.76
$
Increase
4%
2013
$ 27,190
0.76
$
0.75
$
Net income increased by 19% in fiscal 2015 and increased by 4% in fiscal 2014, each in comparison with the prior year. As a percentage of revenue,
net income was 12% in fiscal 2015, 11% in fiscal 2014 and 13% in fiscal 2013.
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, 2015, the Company had $66.1 million in cash and cash equivalents, $48.1 million in marketable securities and working capital of $205.7
million. For the year ended May 31, 2015, cash generated from operating activities was $43.8 million, double the $21.7 million generated in fiscal
2014; proceeds from stock option exercises provided an additional $8.6 million of cash. For the same period, additions to property and equipment
and business acquisitions used cash of $9.6 million and $6.6 million, respectively. The Company has a financing agreement with a bank providing
for an unsecured revolving line of credit of $12.0 million, which expires on September 1, 2017. There were no advances against this line of credit
during fiscal years 2015, 2014 and 2013, and no balance outstanding at May 31, 2015 and 2014.
Accounts receivable at May 31, 2015 increased $7.3 million, or 14%, compared to May 31, 2014, primarily due to the increase in revenues. Days
sales outstanding, a measurement of the time it takes to collect receivables, decreased slightly from 64 days at May 31, 2014 to 63 days at May 31,
2015. All customer accounts are actively managed and no losses in excess of amounts reserved are currently expected.
Inventory levels increased by $0.4 million or 1%, in fiscal 2015 compared to May 31, 2014. Throughout fiscal 2015, the Company focused on reduc-
ing inventory levels and improving inventory turnover, while identifying and rationalizing redundant product lines resulting from recent acquisitions.
Inventory turnover improved from 3.0 to 3.2 times per year.
Neogen has been profitable from operations for its last 89 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 commercialize
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, or may choose, to issue equity securities or enter into other financing arrangements for
a portion of the its 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 management,
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
–
894
49,390
$ 50,284
$
Less than
one year
–
424
49,390
$ 49,814
1–3 years
–
$
322
–
322
$
3–5 years
–
$
148
–
148
$
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
Assets (In thousands)
Current Assets
Cash and cash equivalents
Marketable securities
Accounts receivable, less allowance of $1,300 and $1,200 at May 31, 2015 and 2014
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
$14,446 and $11,915 at May 31, 2015 and 2014
Other non-current assets, net of accumulated amortization of $7,191 and $5,494
at May 31, 2015 and 2014
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; 37,128,269 and
36,732,313 shares issued and outstanding at May 31, 2015 and 2014
Additional paid-in capital
Accumulated other comprehensive income (loss)
Retained earnings
Total Neogen Corporation and Subsidiaries Stockholders’ Equity
Noncontrolling interest
Total Equity
Year ended May 31
2015
2014
$
66,061
48,103
59,208
51,601
1,991
4,231
231,195
2,296
26,925
46,794
2,691
783
79,489
35,016
44,473
70,119
9,020
24,170
$
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
13,204
116,513
$ 392,181
11,504
114,606
$ 345,301
2015
2014
$
13,691
$
13,396
4,142
1,275
6,348
25,456
13,711
2,051
41,218
4,357
–
7,214
24,967
12,155
1,879
39,001
–
–
5,941
131,906
(2,442)
215,569
350,974
(11)
350,963
$ 392,181
5,877
118,070
371
182,043
306,361
(61)
306,300
$ 345,301
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 (Income) Loss Attributable to Noncontrolling Interest
Net Income Attributable to Neogen
Net Income Attributable to Neogen Per Share
Basic
Diluted
Year ended May 31
2015
2014
2013
$ 247,940
$ 219,734
$ 184,134
35,134
283,074
121,455
21,934
143,389
139,685
51,757
25,233
9,577
86,567
53,118
228
150
(297)
(1,123)
(1,042)
52,076
118,500
33,576
(50)
27,671
247,405
23,394
207,528
107,167
17,640
124,807
122,598
46,432
24,449
8,326
79,207
43,391
115
231
38
(744)
(360)
43,031
15,000
28,031
127
84,045
13,989
98,034
109,494
40,791
20,216
7,781
68,788
40,706
144
364
(14)
(59)
435
41,141
14,100
27,041
149
$
33,526
$
28,158
$
27,190
$
$
0.91
0.90
$
$
0.77
0.76
$
$
0.76
0.75
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 (Income) Loss Attributable to Noncontrolling Interest
Year ended May 31
2015
2014
2013
$
33,576
$
28,031
$
27,041
(2,813)
(2,813)
30,763
(50)
1,743
1,743
29,774
127
(145)
(145)
26,896
149
Comprehensive Income Attributable to Neogen Corporation
$
30,713
$
29,901
$
27,045
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, 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
Net income (loss) for 2013
Other comprehensive loss
631,992
101
11,700
22,388
4
532
27,190
(149)
(145)
11,801
536
27,041
(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
Net income (loss) for 2014
Other comprehensive loss
629,826
101
17,522
18,466
3
613
28,158
(127)
1,743
17,623
616
28,031
1,743
Balance, May 31, 2014
36,732,313
5,877
118,070
371
182,043
(61)
$ 306,300
Exercise of options and
warrants, including
share-based compensation
and $2,475 income tax
benefit
Issuance of shares under
Employee Stock Purchase
Plan
Net income for 2015
Other comprehensive loss
376,364
19,592
61
3
13,115
721
33,526
50
(2,813)
13,176
724
33,576
(2,813)
Balance, May 31, 2015
37,128,269
$
5,941
$ 131,906
$
(2,442)
$ 215,569
$
(11)
$ 350,963
See accompanying notes to consolidated financial statements.
19
Neogen Corporation and Subsidiaries: Consolidated Statements of Cash Flows
(In thousands)
Cash flows from operating activities
Net income
Adjustments to reconcile net income to net cash provided from operating activities:
Depreciation and amortization
Deferred income taxes
Share-based compensation
Excess income tax benefit from the exercise of stock options
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
2015
2014
2013
$
33,576
$
28,031
$
27,041
10,649
496
4,450
(2,475)
(7,252)
319
3,264
412
353
43,792
(9,619)
93,662
(105,944)
(6,554)
(28,455)
8,558
2,475
–
11,033
(984)
25,386
40,675
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
$
66,061
$
40,675
$
50,032
$
10,454
$
9,956
$
8,986
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 Latinoamerica S.A.P.I. DE C.V. and Neogen do Brasil, which are each 90% owned as of May 31, 2015
and 2014, respectively. The Company made an additional capital contribution on December 31, 2013 which increased its ownership interest in
Neogen Latinoamerica 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 period 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. 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. No customer accounted for more than 10%
of accounts receivable at May 31, 2015. The activity in the allowance for doubtful accounts was as follows:
Year ended May 31 (In thousands)
Beginning balance
Provision
Recoveries
Write-offs
Ending balance
2015
1,200
337
92
(329)
1,300
$
$
$
2014
900
367
8
(75)
$
1,200
2013
800
193
24
(117)
900
$
$
Fair Value of Financial Instruments
The carrying amounts of the Company’s financial instruments other than cash equivalents and marketable securities, which include accounts receiv-
able 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 observability
of inputs used in valuation techniques as follows:
Level 1: Observable inputs such as quoted prices in active markets;
Level 2:
Level 3: Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and
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 maturities
of 90 days or less. Cash and cash equivalents were $66,061,000 and $40,675,000 at May 31, 2015 and 2014, respectively. The carrying value of
these assets approximates fair value due to the short maturity of these instruments and meet the Level 1 criteria. Cash held at foreign subsidiaries
was $13,277,000 and $10,234,000 at May 31, 2015 and 2014, respectively.
Marketable Securities
The Company has marketable securities held by banks or broker-dealers consisting of short-term domestic certificates of deposit of $26,109,000
and commercial paper rated at least A-2/P-2 with maturities between 91 days and one year of $21,994,000. Outstanding marketable securities at
May 31, 2015 were $48,103,000; there were $35,821,000 marketable securities outstanding at May 31, 2014. 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 approximates 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
2015
2014
$
21,605
$
21,515
3,972
26,024
3,681
25,982
$
51,601
$
51,178
The Company’s inventories are analyzed for slow moving, expired and obsolete items no less frequently than quarterly and the valuation allowance is
adjusted as required. The valuation allowance for inventory was $1,550,000 and $1,425,000 at May 31, 2015 and 2014, respectively.
Property and Equipment
Property and equipment is stated at cost. Expenditures for major improvements are capitalized while repairs and maintenance are charged to ex-
pense. 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 $6,318,000,
$5,383,000 and $4,417,000 in fiscal years 2015, 2014 and 2013, 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 5 to 25 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 earnings multiples of peer companies, such assets
are reduced to their estimated fair value and a charge is made to operations. The remaining weighted-average amortization period for customer-
based intangibles and other intangibles are both 12 years, respectively, at May 31, 2015 and May 31, 2014.
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.
22
Neogen Corporation and Subsidiaries: Notes to Consolidated Financial Statements
Reclassifications
Certain amounts in the fiscal 2014 and 2013 financial statements have been reclassified to conform to the fiscal 2015 presentation.
Stock Options
At May 31, 2015, 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 2015, 2014 and 2013, estimated on the date of grant using
the Black-Scholes option pricing model, was $11.91, $9.87 and $9.21, 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
2015
1.2%
0%
36.2%
2014
0.8%
0%
33.1%
4.0 years
4.0 years
2013
1.2%
0%
39.2%
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 performed, the sales price is fixed and deter-
minable, and collection of any receivable is probable. To the extent that customer payment has been received before all recognition criteria are met,
these revenues are initially deferred and later recognized in the period that all recognition criteria have been met. Customer credits for sales returns,
pricing and other disputes, and other related matters (including volume rebates offered to certain distributors as marketing support) represent ap-
proximately 3% of reported net revenue for each period presented.
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 $8,648,000, $7,497,000 and $6,856,000 in fiscal years
2015, 2014 and 2013, 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 deter-
mined 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 represents the
change in net deferred income tax assets and liabilities during the year.
The Company’s foreign subsidiaries are comprised of Neogen Europe (wholly-owned subsidiary), Neogen Latinoamerica (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, 2015, unremitted earnings of the foreign subsidiaries were
$24,423,000.
Research and Development Costs
Research and development costs, which consist primarily of compensation costs, administrative expenses and new product development, among
other items, are expensed as incurred.
23
Neogen Corporation and Subsidiaries: Notes to Consolidated Financial Statements
Advertising Costs
Advertising costs are expensed as incurred and totaled $1,371,000, $1,344,000 and $1,055,000 in fiscal years 2015, 2014 and 2013, respectively.
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 cal-
culations:
Year ended May 31 (In thousands, except per share),
2015
2014
2013
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
$ 33,526
$ 28,158
$ 27,190
36,953
491
37,444
$
$
0.91
0.90
36,511
756
37,267
$
$
0.77
0.76
35,768
723
36,491
$
$
0.76
0.75
At May 31, 2014 and 2013, 48,716 and 88,912 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. At May 31, 2015, the market price of the common stock exceeded
the option exercise price for all outstanding options; therefore, no shares were excluded from the computation.
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 reflect the retroactive capitalization of the 3-for-2 stock split.
New Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board issued a new standard on revenue recognition. The new standard outlines a single com-
prehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recogni-
tion 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 services. 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, 2017. Early adoption is not permitted. We are currently evaluating the impact of the adoption of this standard on our 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 assessment
as of the first day of the fourth quarter of fiscal years 2015, 2014 and 2013, 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, 2013
Goodwill acquired and/or adjusted
Balance, May 31, 2014
Goodwill acquired and/or adjusted
Balance, May 31, 2015
Food Safety
$ 16,696
–
$ 16,696
2,110
$ 18,806
Animal Safety
$ 42,795
8,699
$ 51,494
(181)
$ 51,313
Total
$ 59,491
8,699
$ 68,190
1,929
$ 70,119
At May 31, 2015, non-amortizable intangible assets included licenses of $569,000, trademarks of $7,227,000 and other intangibles of $1,224,000.
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.
The decrease in trademark values and goodwill in the Animal Safety segment from fiscal 2014 to fiscal 2015 was due to final valuation adjustments
from the Chem-Tech acquisition.
24
Neogen Corporation and Subsidiaries: Notes to Consolidated Financial Statements
Amortizable intangible assets consisted of the following and are included in customer based intangible and other noncurrent assets within the con-
solidated balance sheets:
(In thousands)
Licenses
Covenants not to compete
Patents
Customer relationship intangibles
Other product and service related intangibles
Balance, May 31, 2015
Licenses
Covenants not to compete
Patents
Customer relationship intangibles
Other product and service related intangibles
Balance, May 31, 2014
Gross
Carrying
Amount
$ 4,919
428
7,701
38,616
6,233
$ 57,897
$ 6,701
474
5,990
37,145
3,833
$ 54,143
Less
Accumulated
Amortization
$ 1,630
124
3,087
14,446
1,236
$ 20,523
$ 1,873
256
2,746
11,915
619
$ 17,409
Net Carrying
Amount
$ 3,289
304
4,614
24,170
4,997
$ 37,374
$ 4,828
218
3,244
25,230
3,214
$ 36,734
Amortization expense for intangibles totaled $4,331,000, $3,797,000 and $2,994,000 in fiscal years 2015, 2014, and 2013, respectively. The
estimated amortization expense for each of the five succeeding fiscal years is as follows: $4,323,000 in 2016, $4,186,000 in 2017, $3,949,000
in 2018, $3,329,000 in 2019 and $3,061,000 in 2020. The amortizable intangible assets useful lives are 5 to 20 years for licenses, 5 years for
covenants not to compete, 5 to 25 years for patents, 10 to 20 years for customer relationship intangibles and 5 to 20 years for other product and
service related intangibles, which primarily consist of product formulations. 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 acquisition method. Goodwill recognized in the acquisitions described below relates primarily to enhancing the Company’s
strategic platform for the expansion of available product offerings.
On October 1, 2012, the Company acquired all of the stock of Macleod Pharmaceuticals Inc., of Fort Collins, Colorado. Macleod was 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,
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. This business was relocated to Lexington, Kentucky in December 2014 and integrated
with the Company’s operations there, reporting within the Animal Safety segment. In October 2013, the Company paid $62,000 for contingent con-
sideration; 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 formerly based in Davis, California.
The company, formerly operated as MetaMorphix, Inc., or MMI Genomics, performed 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 estimated the contingent consideration liability to be $930,000, based on forecasted sales. The final purchase price alloca-
tion, 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. In August 2014, the Company paid $689,000 to the former owner
for contingent consideration based upon the achievement of sales targets; the remaining $241,000 of the accrual was reversed to Other Income.
25
Neogen Corporation and Subsidiaries: Notes to Consolidated Financial Statements
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 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 liabilities 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. In October 2014, the Company paid the former owners $600,000 and recorded an additional $454,000
for contingent consideration, based on achievement of defined sales targets, which was charged to Other Expense.
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 net sales formula. The Company estimated the contingent consideration liability to be $390,000, based
on forecasted sales. The final purchase price allocation included accounts receivable of $380,000, net inventory of $4,184,000, prepaid assets of
$100,000, property and equipment of $807,000, current liabilities of $184,000, contingent consideration liabilities of $390,000, intangible assets
of $8,327,000 (with an estimated life of 5-25 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. In February 2015, the
Company paid the former owners $474,000 and recorded an additional $84,000 for contingent consideration, based upon achievement of sales
targets, which was charged to Other Expense.
On October 1, 2014, the Company acquired all of the stock of BioLumix, Inc., a manufacturer and marketer of automated systems for the detection
of microbial contaminants located in Ann Arbor, Michigan. Consideration for the purchase was $4,514,000 in cash. The preliminary purchase price
allocation included accounts receivable of $499,000, other receivable of $178,000, net inventory of $421,000, prepaid assets of $48,000, property
and equipment of $159,000, current liabilities of $130,000, long-term liabilities of $813,000, intangible assets of $2,109,000 (with an estimated
life of 5-15 years) and the remainder to goodwill (non-deductible for tax purposes). These values are Level 3 fair value measurements. This business
has been relocated to Lansing, Michigan and integrated with the Company’s operations there, reporting within the Food Safety segment.
On December 8, 2014, the Company acquired the food safety and veterinary genomic assets of its Chinese distributor Beijing Anapure BioScientific
Co., Ltd. Consideration for the purchase was $2,040,000 in cash. The preliminary purchase allocation included inventory of $525,000, property and
equipment of $64,000, intangible assets of $20,000 (with an estimated life of five years) and the remainder to goodwill. These are Level 3 fair value
measurements. This business has been integrated into the Company’s subsidiary in China and reports within the Food Safety segment.
On June 1, 2015, subsequent to the end of the fiscal year, Neogen acquired the assets of Sterling Test House, a commercial food testing laboratory
based in India. Consideration for the purchase was $1,100,000 in cash. Due to the timing of the transaction, the preliminary allocation was not
complete at the time of filing.
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 expires on
September 1, 2017. There were no advances against this line of credit during fiscal years 2015, 2014 and 2013, and no balance outstanding at May
31, 2015, 2014 and 2013. Interest is at LIBOR plus 100 basis points (rate under the terms of the agreement was 1.19% at May 31, 2015). 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, 2015 and May 31, 2014.
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
26
Neogen Corporation and Subsidiaries: Notes to Consolidated Financial Statements
the date of grant. Remaining shares available for grant under stock option plans were 306,000, 805,000 and 1,227,000 at May 31, 2015, 2014
and 2013, respectively. Options vest ratably over three and five year periods and the contractual terms are generally five or ten years.
(In thousands, except for share price)
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)
Granted
Exercised
Forfeited
Outstanding at May 31, 2015 (639 exercisable)
Shares
2,314
459
(657)
(24)
2,092
512
(643)
(92)
1,869
536
(380)
(37)
1,988
$
Weighted-Average
Exercise Price
14.89
28.67
10.61
19.67
19.21
36.44
13.69
22.08
25.69
39.79
16.69
33.55
31.04
$
Weighted-Average
Grant Date Fair Value
4.63
$
9.21
3.43
6.07
6.00
9.87
4.28
6.65
7.62
11.91
5.17
9.45
9.20
$
The following is a summary of stock options outstanding at May 31, 2015:
(Options in thousands) Options Outstanding
Options Exercisable
Range of
Exercise Price
$ 5.45–22.91
22.92–28.26
28.27–32.37
32.38–38.03
38.04–43.67
Number
261
321
411
432
563
1,988
Average Remaining
Contractual Life (Years)
2.4
1.8
3.0
3.6
5.1
3.5
Weighted-Average
Exercise Price
17.10
$
23.17
28.67
36.07
39.90
31.04
$
Number
198
184
164
81
12
639
$
Weighted-Average
Exercise Price
16.58
23.22
28.67
36.07
41.60
24.50
$
The weighted average exercise price of shares that were exercisable at May 31, 2015 and 2014 was $24.50 and $18.91, respectively.
The aggregate intrinsic value of options outstanding and options exercisable was $31,204,000 and $14,201,000, respectively, at May 31, 2015,
$22,751,000 and $10,984,000 respectively, at May 31, 2014 and $35,778,000 and $16,557,000 respectively, at May 31, 2013. The aggregate
intrinsic value of options exercised during the year was $10,690,000 in fiscal 2015, $17,669,000 in fiscal 2014 and $12,519,000 in fiscal 2013.
Remaining compensation cost to be expensed in future periods for non-vested options was $13,567,000 at May 31, 2015, with a weighted average
expense recognition period of 2.9 years.
Common stock totaling 45,717 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 plans
give 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 19,592,
18,466 and 22,388 in fiscal years 2015, 2014 and 2013, 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
$
$
$
2015
45,156
6,920
52,076
2015
15,269
1,364
$
$
$
2014
37,568
5,463
43,031
2014
14,442
1,100
$
$
$
2013
37,407
3,734
41,141
2013
12,959
854
27
Neogen Corporation and Subsidiaries: Notes to Consolidated Financial Statements
Deferred
1,867
18,500
$
(542)
15,000
$
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
2015
18,227
(581)
854
18,500
$
$
2014
15,061
(574)
513
15,000
$
$
287
14,100
2013
14,400
(980)
680
14,100
$
$
$
Deferred income taxes reflect the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting pur-
poses and the amounts used for income tax purposes. Significant components of the Company’s deferred income tax liabilities and assets are as follows:
Year ended May 31 (In thousands),
Deferred income tax liabilities
Indefinite and long-lived assets
Prepaid expenses
Deferred income tax assets
Inventories and accounts receivable
Accrued liabilities and other
Net deferred income tax liabilities
2015
(15,906)
(431)
(16,337)
1,809
2,808
4,617
(11,720)
$
$
2014
(13,759)
(358)
(14,117)
1,471
2,201
3,672
(10,445)
$
$
The Company has no significant accrual for unrecognized tax benefits at May 31, 2015. 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 expenses annual costs of remediation which have ranged
from $47,000 to $56,000 per year over the past five years. The Company’s estimated liability for these costs is $916,000 at May 31, 2015 and
2014, 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 $2,189,000, $2,278,000 and $1,837,000 for fiscal years 2015, 2014 and 2013,
respectively. Some of these agreements provide for guaranteed minimum royalty payments to be paid each fiscal year by the Company for certain
technologies. Future minimum royalty payments are as follows: 2016 - $643,000, 2017 - $634,000, 2018 - $659,000, and 2019 - $659,000.
The Company leases office and manufacturing facilities under non-cancelable operating leases. Rent expense for fiscal years 2015, 2014 and 2013
was $736,000, $856,000 and $657,000, respectively. Future fiscal year minimum rental payments for these leases over their remaining terms are
as follows: 2016 - $424,000, 2017 - $161,000, 2018 - $161,000, 2019 - $85,200, and 2020 and later - $62,400.
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 compensa-
tion 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 $1,051,000, $954,000 and $863,000 in fiscal years 2015, 2014 and 2013, respectively.
9. SEGMENT INFORMATION
The Company has two reportable segments: Food Safety and Animal Safety. The Food Safety segment is primarily engaged in the development, pro-
duction 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 dis-
tributors; this segment also provides genomic 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 market-
28
Neogen Corporation and Subsidiaries: Notes to Consolidated Financial Statements
ing 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)
Fiscal 2015
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
Fiscal 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
Food Safety
Animal Safety
Corporate and
Eliminations (1)
$
$
124,021
7,458
131,479
30,265
4,620
145,576
4,216
111,545
4,745
116,290
28,009
4,181
105,607
5,999
$
$
123,919
27,676
151,595
26,034
6,029
144,161
5,403
108,189
22,926
131,115
18,571
4,999
173,643
5,544
$
$
–
–
–
(3,181)
–
102,444
–
–
–
–
(3,189)
–
66,051
–
$
$
Total
247,940
35,134
283,074
53,118
10,649
392,181
9,619
219,734
27,671
247,405
43,391
9,180
345,301
11,543
$
Fiscal 2013
Product revenues to external customers
184,134
23,394
Service revenues to external customers
207,528
Total revenues to external customers
40,706
Operating income (loss)
7,411
Depreciation and amortization
290,558
Total assets
Expenditures for long-lived assets
8,897
(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
81,163
20,207
101,370
15,858
3,537
121,908
2,851
102,971
3,187
106,158
27,366
3,874
93,079
6,046
–
–
–
(2,518)
–
75,571
–
$
$
$
includes the elimination of intersegment transactions and noncontrolling interests.
Revenues to customers located outside the United States amounted to $103,867,000 or 36.7% of consolidated revenues in fiscal 2015, $96,111,000
or 38.8 % in fiscal 2014 and $83,171,000 or 40.1% in fiscal 2013 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 consolidated 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, 2015 and 95% as
May 31, 2014.
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, 2015, 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 2015 or 2014. Shares purchased under
the program were retired.
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
August 2014
November 2014
February 2015
May 2015
Quarter Ended
$ 67,599
34,076
8,883
0.24
0.24
$ 68,455
34,208
7,806
0.21
0.21
$ 68,409
33,703
7,454
0.20
0.20
Quarter Ended
$ 78,611
37,698
9,384
0.26
0.25
August 2013
November 2013
February 2014
May 2014
$ 58,548
30,364
7,839
0.22
$ 59,599
29,491
6,207
0.17
$ 61,996
30,705
6,575
0.18
$ 67,262
32,038
7,537
0.20
29
Reports
Report of Independent Registered Public Accounting Firm
We have audited the accompanying consolidated balance sheets of Neogen Corporation and Subsidiaries (the Company) as of May 31, 2015 and
2014 and the related consolidated statements of income and comprehensive income, equity, and cash flows for the years then ended. 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 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 audits provide 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 Corpora-
tion and Subsidiaries at May 31, 2015 and 2014, and the results of their operations and their cash flows for the years then ended, 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, 2015, based on criteria established in Internal Control – Integrated Framework
(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated July 30, 2015 expressed
an unqualified opinion thereon.
BDO USA, LLP
Grand Rapids, Michigan • July 30, 2015
Report of lndependent Registered Public Accounting Firm
The Board of Directors and Stockholders of Neogen Corporation,
We have audited the accompanying consolidated statement of income, comprehensive income, equity, and cash flows for the year ended May 31,
2013 of Neogen Corporation and Subsidiaries (the Company). 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. 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated results of operations and cash flows
of Neogen Corporation and Subsidiaries for the year ended May 31, 2013, in conformity with U.S. generally accepted accounting principles.
Ernst & Young, LLP
Detroit, Michigan • July 30, 2013 – except for the stock split information presented in Note 1, as to which the date is July 30, 2014
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, 2015,
based on the framework in Internal Control – Integrated Framework (2013) 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, 2015.
The effectiveness of internal control over financial reporting as of May 31, 2015, 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.
30
Reports
Changes in Internal Control over Financial Reporting
No changes in our internal control over financial reporting were identified as having occurred during the quarter ended May 31, 2015 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 (the Company) internal control over financial reporting as of May 31, 2015, based on criteria
established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission
(the COSO criteria). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assess-
ment of the effectiveness of internal control over financial reporting, including 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 re-
porting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s
internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transac-
tions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and
(3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets
that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evalu-
ation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
In our opinion, Neogen Corporation and Subsidiaries maintained, in all material respects, effective internal control over financial reporting as of May
31, 2015, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance
sheets of Neogen Corporation and Subsidiaries as of May 31, 2015 and 2014, and the related consolidated statements of income and comprehen-
sive income, equity, and cash flows for the years then ended, and our report dated July 30, 2015 expressed an unqualified opinion thereon.
BDO USA, LLP
Grand Rapids, Michigan • July 30, 2015
31
Neogen Corporation and Subsidiaries: Comparison of Five Year Cumulative Total Return
and Stock Profile Activity
Neogen Corporation
NASDAQ Composite
NASDAQ Medical Equipment
$ 300
250
200
150
100
50
0
May 2010
May 2011
May 2012
May 2013
May 2014
May 2015
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, 2010 to May 31, 2015.
May 31 of:
2010
2011
2012
2013
2014
2015
Neogen Corporation
NASDAQ Composite
NASDAQ Medical Equipment
$ 100.00 $ 174.41 $ 151.46 $ 211.86 $ 220.48 $ 272.70
100.00
100.00
126.79
120.79
129.65
122.48
161.38
136.73
201.71
144.44
241.78
179.99
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, 2015
Fourth Quarter
$ 51.21
$ 42.37
Third Quarter
Second Quarter
First Quarter
51.63
44.65
45.06
43.08
39.23
36.78
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
Holders: As of July 30, 2015, there were approximately 298 stockholders of record of Common Stock that management believes represents
a total of approximately 11,000 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
Richard E. Calk, Jr.
President
Chief Operating Officer
Steven J. Quinlan
Vice President
Chief Financial Officer and Secretary
Edward L. Bradley
Vice President, Food Safety
Joseph A. Corbett
Vice President, Animal Safety Sales
and Operations
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
Dwight Schroedter
Vice President, Animal Safety Manufacturing
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 1, 2015
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
Ronald D. Green, Ph.D.
University of Nebraska–Lincoln
Senior Vice Chancellor for Academic Affairs
University of Nebraska
Vice President, Agriculture and
Natural Resources
University of Nebraska–Lincoln
Harlan Vice Chancellor, Institute of Agriculture
and Natural Resources
G. Bruce Papesh
Dart, Papesh & Co.
President
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
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
State of California
Former Secretary of Agriculture
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
Former U.S. Secretary of Agriculture
Former U.S. Trade Representative
Former CEO, Chicago Mercantile Exchange
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
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